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[PalEx LOGO]
February 4, 2000
Dear PalEx Stockholder:
PalEx's board of directors has unanimously approved a merger of PalEx with
IFCO Systems N.V. in order to combine IFCO Systems' European and other round-
trip container operations and PalEx's North American pallet and industrial
container operations. Before PalEx can proceed with the merger, PalEx
stockholders must approve a merger agreement between IFCO Systems and PalEx
that will allow the merger to take place.
PalEx stockholders will receive merger consideration with a total value of
$9.00 for each of their shares of PalEx common stock. The merger consideration
may take the form of cash and/or ordinary shares of IFCO Systems valued at
their initial public offering price. You may make an election as to the amount
of cash and/or IFCO Systems ordinary shares you will receive by completing the
accompanying election form. IFCO Systems' initial public offering will be on
the Frankfurt Stock Exchange in Germany. The IPO will be completed on the same
day as the merger and immediately following the closing of the merger. The
total merger consideration for all of the shares of PalEx common stock is
limited to not less than 40% and not more than 49% in the form of cash and not
more than 60% and not less than 51% in the form of IFCO Systems ordinary
shares. At the time of the stockholders' meeting to vote on the merger
agreement, you will not know the IPO price of the IFCO Systems ordinary shares
or the number of IFCO Systems ordinary shares you will receive in the merger.
PalEx is very excited about the opportunities it sees in merging with IFCO
Systems and our board of directors urges you to vote for the merger proposal
described in the accompanying proxy statement/prospectus.
To vote your shares, you may use the enclosed proxy card or attend the
special stockholders' meeting on March 2, 2000.
Your vote is very important. To vote for the merger proposal, you must cast a
for vote by following the instructions stated on the enclosed proxy card or
given over the telephone. If you do not vote at all, it will, in effect, count
as a vote against the merger proposal.
This proxy statement/prospectus also constitutes a prospectus for IFCO
Systems with respect to the IFCO Systems ordinary shares to be issued to PalEx
stockholders under the merger agreement. Please read this proxy
statement/prospectus carefully for more detailed information on the merger.
Very truly yours,
Vance K. Maultsby, Jr.
Chief Executive Officer
PalEx, Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the IFCO Systems ordinary shares to
be issued in the merger or determined whether this proxy
statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense. This proxy statement/prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction where an offer or solicitation would be
illegal.
This proxy statement/prospectus is dated February 4, 2000, and is first being
mailed to PalEx stockholders on or about February 7, 2000.
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PALEX, INC.
6829 Flintlock Road
Houston, Texas 77040
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON MARCH 2, 2000
---------------
PalEx, Inc. will hold a special meeting of its stockholders on March 2, 2000,
at 10:00 a.m. Houston time at 6829 Flintlock Road, Houston, Texas, for the
following purposes:
1. To approve and adopt the Amended and Restated Agreement and Plan of
Reorganization, dated as of October 6, 1999, and effective as of March
29, 1999, as amended by Amendment No. 1 thereto dated as of January 31,
2000, among PalEx, IFCO Systems N.V., a public limited liability company
incorporated under the laws of the Netherlands ("IFCO Systems"), IFCO
Europe Beteiligungs GmbH, a limited liability company organized under
the laws of the Federal Republic of Germany ("IFCO Europe"), MTS
Okologistik GmbH, a limited liability company organized under the laws
of the Federal Republic of Germany ("MTS"), Schoeller International
Logistics Beteiligungsgesellschaft mbH (which will be renamed IFCO
International Network Beteiligungsgesellschaft mbH), a limited liability
company organized under the laws of the Federal Republic of Germany
("IFCO International" and, together with IFCO Europe and MTS, the "IFCO
Companies"), Schoeller Logistics Industries GmbH (formerly known as
Schoeller Packaging Systems GmbH), a limited liability company organized
under the laws of the Federal Republic of Germany ("Schoeller
Industries"), and Silver Oak Acquisition Corp., a corporation organized
under the laws of the State of Delaware ("Silver Oak"). The merger
agreement provides for, among other things: (a) the contribution of the
interests of Schoeller Industries and its affiliates in IFCO Europe,
MTS, and IFCO International to IFCO Systems, a new company formed for
purposes of the merger and related transactions; and (b) the merger of
PalEx with and into Silver Oak, a newly formed corporation and wholly
owned subsidiary of IFCO Systems. Silver Oak will be the surviving
corporation in the merger as a wholly owned subsidiary of IFCO Systems.
2. To act on any other matter that may be properly submitted to a vote at
the special meeting.
3. If necessary, to approve any postponements or adjournments of the
special meeting without further notice except by announcement at the
meeting being postponed or adjourned.
Only holders of record of PalEx common stock at the close of business on
January 21, 2000, are entitled to notice of, and to vote at, the special
meeting or any postponements or adjournments.
Our board of directors has unanimously approved the merger proposal and
recommends that you vote to approve and adopt the merger agreement, which is
described in detail in the accompanying proxy statement/ prospectus. Approval
and adoption of the merger agreement requires the affirmative vote of the
holders of record of a majority of the shares of PalEx common stock outstanding
and entitled to vote at the special meeting.
Schoeller Industries has obtained a voting agreement from some of our
stockholders who control approximately 29% of the shares of PalEx common stock
entitled to vote at the meeting. These stockholders have agreed to vote their
shares in favor of the merger agreement. PalEx has agreed to use its reasonable
efforts after the mailing of the proxy statement/prospectus to deliver an
additional voting agreement in favor of Schoeller Industries. Assuming this
additional voting agreement is delivered prior to the special meeting, the
total number of shares subject to the voting agreements and agreeing to vote
for approval of the merger agreement will be at least 51% of the outstanding
shares of PalEx common stock as of the record date.
BY ORDER OF THE BOARD OF DIRECTORS
Casey A. Fletcher
Secretary
Houston, Texas
February 4, 2000
To ensure that your shares are represented at the special meeting, PalEx
urges you to complete, date, and sign the enclosed proxy card and mail it
promptly in the postage-paid envelope provided. PalEx also encourages you to
return a signed proxy card whether or not you plan to attend the special
meeting in person. You may revoke your proxy at any time before it is voted by
delivering written notice of revocation to the Secretary of PalEx, by
delivering a later-dated proxy, or by attending the special meeting and voting
in person or withdrawing your proxy. You should also complete and return an
election form/letter of transmittal for your merger consideration, which is
being mailed to you separately. You may revoke or change an election only by
written notice to IFCO Systems on or before 5:00 p.m. New York time on March 1,
2000.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... iv
SUMMARY.................................................................... 1
The Companies............................................................ 1
The PalEx Special Stockholders' Meeting.................................. 3
The Merger and Related Transactions...................................... 3
The Merger Agreement..................................................... 6
Markets and Market Prices................................................ 8
Unaudited Comparative Per Share Data..................................... 9
Summary Financial Information............................................ 11
RISK FACTORS............................................................... 15
Risks Related to the Merger.............................................. 15
Risks Related to IFCO Systems or the IFCO Companies' Businesses.......... 16
Risks Related to PalEx's Business........................................ 18
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS....................... 20
THE PALEX SPECIAL MEETING.................................................. 22
General.................................................................. 22
Time and Place........................................................... 22
Purposes................................................................. 22
Record Date; Shares Entitled to Vote; Quorum............................. 22
Votes Required; Voting and Revocation of Proxies; Effect of Abstentions
and Non-Votes........................................................... 22
Voting Agreements........................................................ 23
Solicitation of Proxies.................................................. 23
THE MERGER................................................................. 24
Background of the Merger................................................. 24
PalEx's Reasons for the Merger........................................... 32
IFCO Companies' Reasons for the Merger................................... 34
Projections for PalEx and the IFCO Companies............................. 34
Recommendation of the PalEx Board of Directors........................... 35
Opinion of PalEx's Financial Advisor..................................... 35
Interests of Certain Persons in the Merger............................... 41
Appraisal Rights......................................................... 44
Accounting Treatment..................................................... 46
U.S. Federal Income Tax Consequences..................................... 46
Netherlands Tax Consequences............................................. 53
Regulatory Matters....................................................... 54
THE MERGER AGREEMENT....................................................... 55
General.................................................................. 55
Related Matters.......................................................... 55
The Merger............................................................... 56
Conversion of PalEx Shares............................................... 57
Treatment of PalEx Stock Options and Warrants............................ 61
Structure of IFCO Systems After the Merger............................... 61
No Solicitation Before the Merger; No Withdrawal or Modification of Rec-
ommendation............................................................. 62
PalEx Stockholder Approval............................................... 63
Voting Agreements........................................................ 63
Restrictions on Transfers of IFCO Systems Ordinary Shares................ 64
</TABLE>
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<TABLE>
<S> <C>
Additional Agreements................................................... 64
Representations and Warranties.......................................... 67
Conditions to Completion of the Merger.................................. 69
Extension and Waiver.................................................... 71
Termination of the Merger Agreement; Payment of a Termination Fee....... 71
Expenses................................................................ 72
Amendment............................................................... 72
Governing Law........................................................... 72
CONCURRENT TRANSACTIONS................................................... 73
The IPO................................................................. 73
Financing Transactions.................................................. 74
Purchase of Remaining Interest in U.S. Joint Venture.................... 74
CAPITALIZATION............................................................ 75
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS......................... 76
Basis of Presentation................................................... 76
Unaudited Pro Forma Combined Balance Sheet.............................. 77
Unaudited Pro Forma Combined Statement of Operations.................... 78
Notes to Unaudited Pro Forma Combined Financial Statements.............. 80
SELECTED FINANCIAL INFORMATION............................................ 86
IFCO Companies.......................................................... 86
PalEx................................................................... 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 90
IFCO Companies.......................................................... 90
PalEx................................................................... 101
INDUSTRY OVERVIEW......................................................... 110
Round-trip Systems...................................................... 110
Round-trip Containers................................................... 110
Pallets................................................................. 111
Industrial Containers or Steel Drums.................................... 111
BUSINESS.................................................................. 113
Overview................................................................ 113
Company Strengths....................................................... 113
Business Strategy....................................................... 114
History................................................................. 115
Systems and Services.................................................... 116
Expansion and Acquisitions.............................................. 120
Sales and Marketing..................................................... 121
Customers............................................................... 122
Suppliers and Raw Materials............................................. 123
Intellectual Property................................................... 124
Competition............................................................. 124
Employees............................................................... 126
Properties.............................................................. 126
Regulation.............................................................. 127
Legal Proceedings....................................................... 131
MANAGEMENT................................................................ 132
IFCO Systems............................................................ 132
IFCO Companies.......................................................... 134
PalEx................................................................... 136
</TABLE>
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<TABLE>
<S> <C>
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT............... 138
IFCO Systems............................................................ 138
PalEx................................................................... 138
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF THE IFCO COMPANIES...... 140
Supply Agreement........................................................ 140
Management Agreements................................................... 140
Loans and Guarantees.................................................... 141
Participating Rights.................................................... 141
Redeemable Participating Rights......................................... 142
Agreement with GE Capital and GE Erste.................................. 142
DESCRIPTION OF IFCO SYSTEMS SHARE CAPITAL................................. 143
General................................................................. 143
Dividends............................................................... 143
Voting Rights........................................................... 143
Adoption of Annual Accounts............................................. 144
Liquidation Rights...................................................... 144
Issues of Shares; Preemptive Rights..................................... 144
Repurchase and Cancellation of Shares................................... 144
Limitations on Right to Hold or Vote the Ordinary Shares................ 145
Obligations of Shareholders to Disclose Holdings........................ 145
COMPARISON OF RIGHTS OF HOLDERS OF PALEX COMMON STOCK AND IFCO SYSTEMS
ORDINARY SHARES.......................................................... 146
Authorized Capital Stock................................................ 146
Board of Directors...................................................... 146
Monetary Liability of Directors......................................... 147
Voting Rights........................................................... 147
Removal of Directors and Filling Vacancies on the Board of Directors.... 147
Special Meetings of Stockholders........................................ 147
Charter and Bylaw Amendments............................................ 148
SHARE CERTIFICATES AND TRANSFER........................................... 149
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS........ 149
ENFORCEABILITY OF CIVIL LIABILITIES....................................... 149
LEGAL MATTERS............................................................. 150
EXPERTS................................................................... 150
STOCKHOLDER PROPOSALS..................................................... 150
WHERE YOU CAN FIND MORE INFORMATION....................................... 150
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A--Amended and Restated Agreement and Plan of Reorganization..... A-1
APPENDIX B--Fairness Opinion of Batchelder & Partners, Inc................ B-1
APPENDIX C--Section 262 of the Delaware General Corporation Law........... C-1
APPENDIX D--Articles of Association of IFCO Systems (English transla-
tion).................................................................... D-1
</TABLE>
iii
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will I receive for my PalEx shares?
A: For each share of PalEx common stock, you will receive merger consideration
with a total value of $9.00, consisting of cash and/or ordinary shares of
IFCO Systems based upon your election and the elections of other PalEx
stockholders. If the total consideration PalEx stockholders elect is more
than 49% cash or more than 60% stock, then your election may be adjusted. If
you elect 49% or less cash or 60% or fewer shares, your election will not be
changed. If you elect more cash or more shares, then your election and the
elections of all stockholders above the limits will be proportionately
reduced, based upon the number of shares of PalEx common stock covered by
those elections, until the total cash consideration for all stockholders is
49% or the total share consideration is 60%. If you do not make an election,
you may receive all shares, all cash, or a combination of cash and shares
determined pursuant to the merger agreement.
Q: Will my shares be publicly traded?
A: Yes. Upon completion of the IPO, the IFCO Systems ordinary shares will be
listed on the Amtlicher Handel segment of the Frankfurt Stock Exchange.
PalEx stockholders will receive IFCO Systems ordinary shares in the merger
that will be listed on the Nasdaq National Market and may only be traded in
the United States in U.S. dollars.
Q: What will the effect of the IPO be on my shares?
A: The shares issued in the IPO will reduce the total percentage ownership of
the PalEx stockholders. IFCO Systems expects that after the IPO,
approximately 30% of the IFCO Systems ordinary shares will be held by new
investors from the IPO.
Q: What are the benefits to PalEx stockholders from the merger?
A: PalEx stockholders will receive cash and/or publicly traded shares in the
merger. Once the IPO is completed, PalEx stockholders who receive stock will
become shareholders in a leading provider of round-trip systems for
distribution of products. IFCO Systems and PalEx believe that by offering a
larger, international infrastructure, a broader range of services, and
access to more markets, the combined company resulting from the merger
offers all shareholders more growth potential than either PalEx or the IFCO
Companies would have as stand-alone companies. You should also note,
however, that if you receive IFCO Systems ordinary shares in the merger, the
new shares will have lower net income per share and lower book value per
share than your shares of PalEx common stock.
Q: Is the merger taxable?
A: Yes, but assuming the merger is a reorganization for tax purposes, the
merger will generally be taxable only to the extent you receive cash in the
merger and have gain on your shares of PalEx common stock.
Q: When do you expect to complete the merger?
A: IFCO Systems and PalEx expect to complete the merger in the first quarter of
2000. Because completion of the merger is tied to IFCO Systems' completion
of its IPO, however, IFCO Systems and PalEx cannot predict the exact timing.
Q: Does the merger depend upon completing an IPO for the new company?
A: Yes. The merger agreement requires the IPO to be completed on the same day
the merger is completed.
Q: Am I entitled to appraisal rights?
A: Yes. If you do not vote in favor of the merger, but the merger is approved
and completed, and you follow the appropriate procedures, you will be
entitled to exercise appraisal rights and to receive the appraised value of
your shares of PalEx common stock.
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Q: How do I vote?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your PalEx shares may be represented at the special meeting
of PalEx stockholders. You may also vote in person at the special meeting.
Q: May I change my vote?
A: Yes. You may change your vote by delivering written notice of revocation of
your proxy to the Secretary of PalEx, by delivering a later-dated proxy
card, or by attending the special stockholders' meeting and voting in person
or withdrawing your proxy.
Q: Should I send in my stock certificate now?
A: Yes. In order to make a valid election as to the form of merger
consideration, you must submit your share certificates or a guarantee of
delivery along with a completed election form/letter of transmittal by 5:00
p.m. New York time on March 1, 2000. The amount of cash and IFCO Systems
ordinary shares you will receive will be determined pursuant to the merger
agreement and the elections by other stockholders. After IFCO Systems and
PalEx complete the merger, IFCO Systems will send a letter of transmittal to
PalEx stockholders whose shares were converted in the merger, but who did
not previously submit their share certificates. The instructions
accompanying the letter of transmittal explain how to exchange your PalEx
common stock for the merger consideration.
Q: May I change my election?
A: Yes. You may revoke an election only by written notice to IFCO Systems'
exchange agent on or before 5:00 p.m. New York time on March 1, 2000.
Q: Whom may I call with questions?
A: If you have any questions about the merger or any related transactions or
would like copies of any of the documents IFCO Systems and PalEx refer to in
this proxy statement/prospectus, please call PalEx's Investor Relations
Department at 941-533-1148, extension 1530.
v
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SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. It does not contain all of the information that may be
important to you. You should read this entire proxy statement/prospectus
carefully. IFCO Systems and PalEx refer you to the merger agreement attached as
Appendix A for a more detailed description of the merger and the related
transactions. You should also read the other documents referred to in this
proxy statement/prospectus.
The Companies
IFCO Systems N.V.
Strawinskylaan 2001
NL-1077 ZZ
Amsterdam, The Netherlands
Telephone 31-20-546-
0255
When the merger with PalEx is completed, IFCO Systems will combine the IFCO
Companies' round-trip container, or RTC, systems with PalEx's pallet and
industrial container operations. Round-trip means that a container is used for
the flow of products through one whole distribution cycle and then is reused
multiple times. The IFCO Companies' operations are primarily in Europe, and
PalEx's operations are located in North America. IFCO Systems was formed for
purposes of the merger and the other transactions described in the merger
agreement, including the IPO of IFCO Systems ordinary shares on the Frankfurt
Stock Exchange. After the merger, IFCO Systems refers to the combined IFCO
Companies and PalEx and their subsidiaries.
IFCO Systems believes it will be a leading provider of round-trip systems
internationally, serving over 9,000 customers in 17 countries. IFCO Systems
believes it will:
. own and manage the largest pool of RTCs in Europe based on 1997 market
information;
. own and manage a rental pool of over 1.5 million pallets in Canada,
making it the second largest pallet rental pool owner and manager in
North America;
. be the largest provider of new and recycled pallets in North America
based on PalEx's pallet industry experience and industry information;
and
. be the largest provider of industrial container reconditioning services
in North America based on PalEx's 1998 volume and its estimate of the
total number of industrial containers reconditioned in the United States
each year using information obtained from the Reusable Industrial
Packaging Association.
On a pro forma basis for the merger, IFCO Systems' revenues were
approximately $516.2 million for the year ended December 31, 1998, and
approximately $451.1 million for the ten months ended October 31, 1999.
The IFCO Companies provide RTCs and related services to growers or
manufacturers in order to distribute goods to retailers. Retailers benefit from
improved product handling and automation capabilities, in-store display in
RTCs, improved space efficiency, and reduction of the amount of packaging for
transport. The IFCO Companies contract third parties to collect empty RTCs from
retailers for inspection and reconditioning by the IFCO Companies as necessary.
The RTCs are then reintroduced into the round-trip system for reuse on a just-
in-time basis. The IFCO Companies' RTCs, which are based on patented
technology, are made of plastic and are collapsible. The RTCs are available in
many different standardized sizes and structures depending on the goods to be
moved. They are designed to be stacked interchangeably regardless of size.
The IFCO Companies are IFCO Europe Beteiligungs GmbH, MTS Okologistik GmbH,
and Schoeller International Logistics Beteiligungsgesellschaft mbH, which will
be renamed IFCO International Network Beteiligungsgesellschaft mbH, and their
subsidiaries.
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The IFCO Companies started an RTC leasing pool in Europe in 1992. Currently
there are over 60 million IFCO RTCs in circulation. IFCO Europe's RTC pool now
serves over 4,000 growers supplying produce to approximately 15,000 supermarket
outlets throughout Western Europe. Currently, approximately 75 retailer groups
are using IFCO round-trip systems.
PalEx, Inc.
6829 Flintlock Road
Houston, Texas 77040
Telephone 713-332-6145
PalEx manufactures, sells, leases, and recycles wooden pallets in a wide
variety of shapes and sizes for the movement of various types of goods. PalEx
currently conducts its pallet operations from 60 facilities throughout the
United States and Canada. PalEx also reconditions industrial container
products, which include steel closed top drums, steel drums with fully
removable heads, plastic drums, and industrial bulk containers. PalEx's
industrial container group operates from 12 facilities in the United States.
Company Strengths
IFCO Systems believes that following the merger the combined company will
have the following strengths:
. leading provider of round-trip systems;
. systems approach to product flow;
. innovative patented technology and economic efficiencies;
. well-established partnerships with retailers and growers;
. geographic diversity; and
. experienced management team and strong strategic relationships.
Business Strategy
IFCO Systems' objective is to be the preeminent international provider of
round-trip systems through the implementation of the following strategy:
. expand into the United States;
. cross sell among businesses in the United States;
. further development of markets;
. further logistics systems opportunities; and
. continue to pursue strategic acquisitions and alliances worldwide.
2
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The PalEx Special Stockholders' Meeting
Time and Place; Purposes
The special meeting of PalEx stockholders will be held on March 2, 2000, at
10:00 a.m. Houston time at 6829 Flintlock Road, Houston, Texas. At the special
meeting, you will be asked to approve and adopt the merger agreement and act on
other matters properly brought before the special meeting.
Voting
You are entitled to vote at the special meeting if you owned shares of PalEx
common stock as of the close of business, 5:00 p.m. Houston time on January 21,
2000, the record date for the special meeting. PalEx stockholders will be
entitled to one vote at the special meeting for each share of PalEx common
stock they own.
Approval and adoption of the merger agreement by the PalEx stockholders will
require the affirmative vote of the holders of record of a majority of the
shares of PalEx common stock outstanding and entitled to vote at the special
meeting. For any matter other than the merger proposal, approval will require
the affirmative vote of a majority of the shares of PalEx common stock
represented in person or by proxy at the special meeting and entitled to vote
on the matter.
As of the record date, the directors and executive officers of PalEx and
their affiliates beneficially owned approximately 24.6% of the outstanding
shares of PalEx common stock, excluding options to purchase shares. The holders
of these shares or the persons with the right to vote these shares have told
PalEx that they presently intend to vote the shares for approval of the merger
agreement or have signed a voting agreement agreeing to do so.
Schoeller Logistics Industries GmbH has obtained a voting agreement from a
group of PalEx stockholders who own approximately 29% of the outstanding shares
of PalEx common stock as of the date of this proxy statement/prospectus,
including some of PalEx's directors and executive officers. These stockholders
have agreed to vote their shares in favor of the merger agreement at any
stockholders' meeting.
The Merger and Related Transactions
What Will Happen?
Immediately before an IPO of IFCO Systems ordinary shares, and on the same
day, PalEx will merge with and into Silver Oak Acquisition Corp., a newly
formed, wholly owned subsidiary of IFCO Systems. Silver Oak will survive the
merger as a wholly owned subsidiary of IFCO Systems and will change its name to
"PalEx, Inc." PalEx stockholders will receive merger consideration with a total
value of $9.00, consisting of cash and/or IFCO Systems ordinary shares pursuant
to elections by PalEx stockholders. The IPO is a condition to the closing of
the merger and must be completed on or before May 31, 2000. The IPO is
conditioned upon completion of the merger and a high yield financing.
At the same time as the closing of the IPO and the merger, IFCO Systems
intends to issue approximately 180.0 million euros, or approximately $175.6
million, of debt in the form of a high yield financing and enter into a new
senior credit facility. The completion of the high yield debt financing is
conditioned upon the completion of the merger, the IPO, and the new senior
credit facility. The IPO is also conditioned upon the completion of the high
yield debt financing and total proceeds to IFCO Systems from the IPO and the
high yield debt of at least $250.0 million.
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The following diagram illustrates the structure of IFCO Systems and its
subsidiaries after completion of the merger and the other transactions
described in the merger agreement, including the IPO. This diagram is only a
summary and does not precisely reflect all the legal and corporate entities or
their relationships to one another.
POST-MERGER AND POST-IPO STRUCTURE
[POST-MERGER AND POST-IPO STRUCTURE DIAGRAM APPEARS HERE]
4
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References in this proxy statement/prospectus to the IFCO Systems ordinary
shares to be issued to PalEx stockholders as part of the merger consideration,
upon the exchange of the 665,793 outstanding exchangeable shares of SMG
Corporation, PalEx's Canadian subsidiary, at the time of the merger or
following the merger, or upon the future exercise of outstanding options or
warrants converted as part of the merger, mean IFCO Systems ordinary shares
that will be listed on the Nasdaq National Market and may only be traded in the
United States in U.S. dollars. This type of shares is often used for the
trading of securities of Dutch corporations and is commonly referred to as New
York shares.
IFCO Systems and PalEx have attached the merger agreement as Appendix A to
this proxy statement/prospectus. IFCO Systems and PalEx urge you to read the
merger agreement carefully.
PalEx's Reasons for the Merger
The PalEx board of directors has unanimously approved the merger. During the
period of negotiations and various meetings of the board of directors, the
board of directors carefully considered a number of factors positive and
negative, including, among other factors favoring the merger, the:
. financial condition and results of operations of PalEx and the IFCO
Companies;
. market prices for the PalEx common stock;
. merger consideration to be received by PalEx stockholders including the
option to receive cash and/or IFCO Systems ordinary shares;
. strategic nature of the business combination; and
. growth opportunities for the combined company, especially in the United
States.
Opinion of Financial Advisors
PalEx's financial advisor is Batchelder & Partners, Inc. On September 27,
1999, Batchelder delivered its written opinion to PalEx's board of directors.
The opinion states that, as of that date, the consideration to be received by
the PalEx stockholders in the merger is fair to the PalEx stockholders from a
financial point of view. The opinion is subject to the assumptions,
qualifications, and limitations identified in the opinion. PalEx has attached
the opinion as Appendix B to this proxy statement/prospectus. PalEx encourages
you to read the opinion carefully.
Appraisal Rights of Dissenting Stockholders
If you do not vote in favor of the merger, but the merger is approved and
completed, and you follow the appropriate procedures under Delaware law, you
will be entitled to exercise appraisal rights and to receive the appraised
value of your shares of PalEx common stock instead of receiving the merger
consideration consisting of cash and/or IFCO Systems ordinary shares. We have
included as Appendix C to this proxy statement/prospectus a copy of Section 262
of the Delaware General Corporation Law, which governs your appraisal rights.
U.S. Federal Income Tax Consequences
PalEx has obtained an opinion of counsel that, assuming, among other things,
PalEx receives the private letter ruling it has requested from the IRS that the
merger qualifies for an exception to Section 367(a) of the Internal Revenue
Code, the merger should qualify as a reorganization for federal income tax
purposes. Assuming the merger qualifies as a reorganization, a PalEx
stockholder generally will recognize gain, if any, upon the merger only to the
extent the holder receives cash in the merger and will recognize loss only if
the holder receives only cash in the merger. Any gain recognized may be capital
gain or ordinary income, depending upon a number of factors. PalEx's obligation
to complete the merger is conditioned upon the private letter ruling having
been received and the opinion having been confirmed on the date of the merger.
5
<PAGE>
The Merger Agreement
What PalEx Stockholders Will Receive in the Merger
The merger agreement provides that each share of PalEx common stock will be
exchanged for consideration with a total value of $9.00 as follows:
. $9.00 cash; or
. the number of IFCO Systems ordinary shares calculated by dividing $9.00
by the IPO price expressed in U.S. dollars, which is a fraction referred
to as the exchange ratio; or
. a combination of cash and IFCO Systems ordinary shares.
The form of consideration will be determined by an election made by each
PalEx stockholder and the holders of the SMG exchangeable shares. The total
merger consideration for all the shares of PalEx common stock, including
consideration payable after the merger on exchange of SMG exchangeable shares,
however, is limited as follows:
. not less than 40% and not more than 49% of the shares may be exchanged
for cash; and
. not more than 60% and not less than 51% of the shares may be exchanged
for IFCO Systems ordinary shares.
An election form/letter of transmittal is being mailed to you separately.
Each PalEx stockholder should complete the election form/letter of transmittal
and send it and the PalEx stockholder's stock certificates to IFCO Systems'
exchange agent. Each holder of SMG exchangeable shares will also have the
opportunity to complete an election form for the amount of cash and/or IFCO
Systems ordinary shares to be received upon exchange of the SMG exchangeable
shares at the time of the merger or following the merger. On the election form,
the holder must indicate the number of shares to be exchanged for cash and the
number of shares to be exchanged for IFCO Systems ordinary shares.
The holders of SMG exchangeable shares are subject to the same election
provisions as PalEx stockholders, including deemed elections for non-electing
holders. If a holder exchanges SMG exchangeable shares for shares of PalEx
common stock, the holder will receive merger consideration pursuant to the
election procedures in the merger. A holder of SMG exchangeable shares after
the merger will be entitled to exchange its SMG exchangeable shares for cash
and/or IFCO Systems ordinary shares as fixed by the election procedures. The
election by holders of SMG exchangeable shares will be included in the
calculation of the limits on the composition of the total merger consideration.
PalEx intends to obtain amendments to SMG's articles of amalgamation and of the
support agreement with the holders of SMG exchangeable shares to provide for
exchange on the basis of the election procedures after the merger.
If a PalEx stockholder owns 10,000 shares immediately before the completion
of the merger, makes a complete and timely election, and PalEx stockholders
electing to receive stock will receive approximately 0.662 IFCO Systems
ordinary shares for each share of PalEx common stock based on an assumed IPO
price of $13.60, the following table shows examples of possible elections:
<TABLE>
<CAPTION>
Election Merger Consideration
--------------------- --------------------------------------------------
IFCO Systems
Cash Stock Cash Ordinary Shares
---- ----- ------- ---------------
<S> <C> <C> <C>
20% 80% $18,000 5,296
40% 60% $36,000 3,972
60% 40% $44,100(1) 3,376
</TABLE>
- --------
(1) If all the cash elections together comprise more than 49% of the total
merger consideration, this is the minimum amount of cash that would be paid
to the PalEx stockholder. The actual amount will depend on the elections by
other PalEx stockholders and the number of shares of PalEx common stock
covered by cash elections of more than 49%.
6
<PAGE>
Completed election forms must be received by IFCO Systems' exchange agent no
later than 5:00 p.m. New York time on March 1, 2000. If the exchange agent does
not receive a fully completed and signed election form, along with a completed
letter of transmittal and stock certificates for the shares covered by the
election form, for a holder by the election deadline, then that holder will be
deemed not to have made an election and will receive merger consideration
pursuant to the adjustment calculations made by the IFCO Systems exchange
agent. A non-electing holder will receive:
. all IFCO Systems ordinary shares if the total cash elections are more
than 49% of the total merger consideration;
. all cash if the total stock elections are more than 60% of the total
merger consideration; or
. in all other cases, cash to the extent of cash available under the total
cash limit and then stock if cash is not available.
7
<PAGE>
Markets and Market Prices
IFCO Systems
All of the outstanding IFCO Systems ordinary shares will be owned by
Schoeller Logistic Technologies Holding GmbH before the merger and the IPO.
Before the IPO, no public market exists for the IFCO Systems ordinary shares.
After completion of the IPO, the IFCO Systems ordinary shares will be listed on
the Frankfurt Stock Exchange and, with respect to the IFCO ordinary shares
issued to PalEx stockholders in the merger, in the form of New York shares on
the Nasdaq National Market.
IFCO Systems is currently a wholly owned subsidiary of Schoeller Industries,
but immediately prior to the merger will be a wholly owned subsidiary of
Schoeller Holding.
IFCO Systems is a newly formed company and has never declared or paid any
dividends. IFCO Systems has no plans to pay dividends in the foreseeable
future. In addition, IFCO Systems anticipates that any new senior credit
facility will include restrictions on its ability to pay dividends without the
consent of the lenders.
PalEx
The PalEx common stock has traded on the Nasdaq National Market since its
initial public offering on March 20, 1997, under the symbol "PALX." The
following table lists the high and low sales prices for PalEx's common stock
from March 20, 1997, through January 28, 2000. During 1997, PalEx changed its
fiscal year-end to the last Sunday of each December from a fiscal year ending
on November 30.
<TABLE>
<CAPTION>
Low High
------- -------
<S> <C> <C>
1997 fiscal year
Second quarter (March 20, 1997-June 1, 1997)................. $ 7.750 $10.250
Third quarter (June 2, 1997-August 31, 1997)................. $ 9.625 $14.250
Fourth quarter (September 1, 1997-December 28, 1997)......... $11.125 $15.875
1998 fiscal year
First quarter (December 29, 1997-March 29, 1998)............. $11.125 $15.000
Second quarter (March 30, 1998-June 28, 1998)................ $ 9.250 $13.375
Third quarter (June 29, 1998-September 27, 1998)............. $ 5.625 $ 9.875
Fourth quarter (September 28, 1998-December 27, 1998)........ $ 5.875 $ 9.750
1999 fiscal year
First quarter (December 28, 1998-March 28, 1999)............. $ 6.500 $11.000
Second quarter (March 29, 1999-June 27, 1999)................ $ 5.250 $ 9.125
Third quarter (June 28, 1999-September 26, 1999)............. $ 4.250 $ 6.375
Fourth quarter (September 27, 1999-December 26, 1999)........ $ 5.000 $ 8.000
2000 fiscal year
First quarter (December 27, 1999-January 28, 2000)........... $6.4375 $ 8.500
</TABLE>
On March 29, 1999, the last trading day before the announcement of the
signing of the merger agreement, the closing sale price for PalEx common stock
as reported by the Nasdaq National Market was $8.625. On January 28, 2000, the
closing sale price for PalEx common stock as reported by the Nasdaq National
Market was $8.25.
On the record date for the special meeting, PalEx had 157 holders of record
of its common stock and approximately 1,500 beneficial holders.
PalEx has not declared or paid any dividends on its common stock. PalEx's
senior credit facility includes restrictions on PalEx's ability to pay
dividends without the consent of the lenders.
8
<PAGE>
Unaudited Comparative Per Share Data
The following table shows information about the net income (loss) per share,
dividends per share, and book value per share of PalEx and similar information
reflecting the merger and other transactions, on a basis that IFCO Systems and
PalEx refer to as pro forma information. This information is based on the
combined historical financial information of the IFCO Companies and the
consolidated historical financial information of PalEx included in this proxy
statement/prospectus. The assumptions used in preparing the pro forma financial
information are discussed in the pro forma financial statements included in
this proxy statement/prospectus.
In presenting its comparative pro forma information, PalEx assumes that the
15 companies it acquired in 1998, which were accounted for as purchases, were
acquired on January 1, 1998, for purposes of combined net income per share.
PalEx made no acquisitions during the ten-month period ended October 24, 1999.
In presenting its comparative pro forma information, IFCO Systems assumes that
the merger occurred on January 1, 1998, for purposes of combined net (loss) per
share and as of October 31, 1999, for purposes of pro forma combined book value
per share.
PalEx stockholders will receive between 40% and 49% of the total merger
consideration in cash. The pro forma presentation shown below reflects the
effect on IFCO Systems's net (loss) per share and book value per share if the
total merger consideration is 40% or 49% cash. IFCO Systems and PalEx assume
that PalEx stockholders electing to receive cash for their common stock will
receive $9.00 for each share, while PalEx stockholders electing to receive IFCO
Systems ordinary shares will receive approximately 0.662 IFCO Systems ordinary
shares for each share of PalEx common stock based on assumptions regarding the
valuation of IFCO Systems before the IPO and the size of the IPO. These
assumptions are not necessarily indicative of the actual pre-IPO valuation, IPO
size, or IPO price per share. The actual number of IFCO Systems ordinary shares
that will be issued to PalEx stockholders will be determined based upon the
elections by PalEx stockholders.
This pro forma information, while helpful in illustrating the financial
characteristics of IFCO Systems after completion of the merger with PalEx, does
not attempt to predict or suggest future results.
The information in the following table is based on the combined historical
financial information of the IFCO Companies and the consolidated historical
financial information of PalEx included in this proxy statement/prospectus. In
addition, the assumptions used in preparing the pro forma financial information
are discussed in the pro forma financial statements included in this proxy
statement/prospectus.
IFCO Companies--Historical
<TABLE>
<CAPTION>
At and for the At and for the
year ended ten months ended
December 31, 1998 October 31, 1999
----------------- -------------------
<S> <C> <C>
Per share data:
Net (loss)............................. $ (.45) $ (.38)
Cash dividends declared................ -- --
Book value............................. $(1.54) $(1.77)
PalEx--Equivalent Pro Forma
<CAPTION>
At and for the At and for the ten-
fiscal year ended month period ended
December 27, 1998 October 24, 1999
----------------- -------------------
<S> <C> <C>
Per share data:
Net income............................. $ .48 $ .50
Cash dividends declared................ -- --
Book value............................. $ 7.02 $ 7.64
</TABLE>
9
<PAGE>
IFCO Systems--Pro Forma (1)
<TABLE>
<CAPTION>
At and for the
At and for the ten months
year ended ended
December 31, 1998 October 31, 1999
----------------- ----------------
<S> <C> <C>
Per share data:
Net (loss) ............................... $(.28) $(.16)
Cash dividends declared................... -- --
Book value................................ $6.09 $5.90
IFCO Systems--Pro Forma (2)
<CAPTION>
At and for the
At and for the ten months
year ended ended
December 31, 1998 October 31, 1999
----------------- ----------------
<S> <C> <C>
Per share data:
Net (loss) ............................... $(.26) $(.13)
Cash dividends declared................... -- --
Book value................................ $6.51 $6.33
</TABLE>
- --------
(1) Assumes PalEx stockholders elect to receive 49% of the total merger
consideration in cash.
(2)Assumes PalEx stockholders elect to receive 40% of the total merger
consideration in cash.
10
<PAGE>
Summary Financial Information
The following tables show summary combined historical financial information
for the IFCO Companies, pro forma financial information for IFCO Systems, and
consolidated historical financial information for PalEx. The summary combined
historical statement of operations data and other operating data for the IFCO
Companies for the two years ended December 31, 1998, is derived from the IFCO
Companies audited combined financial statements, which were audited by PwC
Deutsche Revision AG, independent accountants. The summary consolidated
historical statement of operations data and other operating data for PalEx for
the three years ended December 27, 1998, is derived from PalEx's audited
consolidated financial statements, which were audited by Arthur Andersen LLP,
independent certified public accountants. All other historical financial
information for the IFCO Companies and PalEx is unaudited. You should read this
summary historical financial information along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the combined
financial statements of the IFCO Companies and consolidated financial
statements of PalEx included in this proxy statement/prospectus. The IFCO
Companies' financial statements have been prepared in U.S. dollars and in
accordance with U.S. GAAP.
The summary pro forma financial information for IFCO Systems shows you how
IFCO Systems might have looked if the pre-merger transactions described in the
merger agreement, the merger, and the IPO and other concurrent transactions had
been completed as of January 1, 1998, for purposes of the statement of
operations data and other operating data and October 31, 1999, for purposes of
the balance sheet data. When reading the summary pro forma financial
information, you should also read the unaudited pro forma combined financial
statements included in this proxy statement/prospectus. The pro forma financial
statements were prepared using the purchase method of accounting, with the IFCO
Companies treated as the accounting acquirer. If IFCO Systems had actually
completed these transactions as of January 1, 1998, or at October 31, 1999, the
combined company might have performed differently. You should not rely on the
pro forma financial information as an indication of the results that IFCO
Systems would have achieved if the transactions had taken place earlier or the
future results that IFCO Systems will experience after completion of these
transactions.
The IFCO Companies/IFCO Systems
<TABLE>
<CAPTION>
IFCO Systems
IFCO Companies Historical Combined Pro Forma Combined
---------------------------------------------------------- -----------------------------
Year Ended Ten Months Ended
December 31, October 31, Year Ended
--------------------------------- ----------------------- December 31, Ten Months Ended
1996 1997 1998 1998 1999 1998 October 31, 1999
----------- -------- ----------- ----------- ----------- ------------ ----------------
(in thousands, except share and per share data)
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................. $122,959 $116,735 $ 134,721 $106,021 $ 126,399 $ 516,232 $ 451,100
Gross profit.............. 4,605 17,113 28,503 20,147 26,069 101,526 89,095
Income (loss) from
operations............... (12,058) (1,726) 2,686 2,123 3,672 19,679 21,416
Net interest cost......... (7,751) (7,928) (7,030) (6,024) (6,881) (23,432) (21,600)
Net (loss) applicable to
ordinary shares.......... $(19,542) $(11,210) $ (8,913) $ (8,119) $ (7,542) $ (10,939) $ (6,095)
Pro forma net (loss) per
ordinary share--basic and
diluted.................. $ (.45) $ (.38) $ (.28) $ (.16)
Shares used in computing
pro forma net
(loss) per ordinary
share--basic and
diluted.................. 20,000,000 20,000,000 38,683,118 38,683,118
Other Operating Data:
EBITDA and non-recurring
charges(1)............... $ 27,953 $ 24,369 $ 27,197 $ 19,528 $ 27,989 $ 71,402 $ 67,185
EBIT(1)................... $(11,791) $ (3,235) $ (1,673) $ (1,922) $ (517) $ 19,655 $ 21,337
Cash flows from:
operating activities(2).. $ 32,490 $ 59,938 $ 40,497 $ 33,420 $ 48,252 $ 49,632
investing activities(2).. $(43,221) $ (38,766) $(35,895) $ (40,104) $ (138,785) $ (46,700)
financing activities(2).. $ 5,029 $ (6,442) $ (5,469) $ (5,155) $ 102,006 $ (13,669)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
IFCO Companies IFCO Systems
Historical Pro Forma
Combined Combined
as of as of
October 31, October 31,
1999 1999
-------------- ------------
(in thousands)
(unaudited) (unaudited)
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit).......................... $(89,154) $(33,661)
Total assets....................................... 273,646 710,299
Total debt, including capital lease obligations.... 106,646 263,363
Total stockholders' equity......................... (35,307) 228,418
</TABLE>
- --------
(1) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents the IFCO Companies' combined net (loss) applicable to
ordinary shares and IFCO Systems' pro forma combined net (loss) applicable
to ordinary shares, in each case after exclusion of net interest costs and
income tax provisions. EBITDA and non-recurring charges represents the IFCO
Companies' EBIT and IFCO Systems' pro forma EBIT plus depreciation and
amortization charges and nonrecurring, one-time restructuring charges
related to the termination of PalEx's relationship with CHEP USA. EBIT and
EBITDA and non-recurring charges as presented are not necessarily
comparable with similarly titled measures presented by other companies. The
following table reflects the calculation of EBIT and EBITDA and non-
recurring charges:
<TABLE>
<CAPTION>
IFCO Systems
Pro Forma
IFCO Companies Historical Combined Combined
------------------------------------------------------ ------------------------
Year Ended Ten Months Ended Ten Months
December 31, October 31, Year Ended Ended
----------------------------- ----------------------- December 31, October 31,
1996 1997 1998 1998 1999 1998 1999
----------- -------- ------- ----------- ----------- ------------ -----------
(in thousands)
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net (loss) applicable to
ordinary shares........ $(19,542) $(11,210) $(8,913) $(8,119) $(7,542) $(10,939) $(6,095)
Income tax provision.... -- 47 210 173 144 7,162 5,832
Net interest cost....... 7,751 7,928 7,030 6,024 6,881 23,432 21,600
-------- -------- ------- ------- ------- -------- -------
EBIT.................. (11,791) (3,235) (1,673) (1,922) (517) 19,655 21,337
Depreciation and
amortization........... 39,744 27,604 28,870 21,450 28,506 48,194 45,848
Restructuring charges... -- -- -- -- -- 3,553 --
-------- -------- ------- ------- ------- -------- -------
EBITDA and non-
recurring charges.... $ 27,953 $ 24,369 $27,197 $19,528 $27,989 $ 71,402 $67,185
======== ======== ======= ======= ======= ======== =======
</TABLE>
(2) The IFCO Companies' historical combined cash flow information is not
available for the year ended December 31, 1996. IFCO Systems' pro forma
combined cash flows from operating, investing, and financing activities for
the year ended December 31, 1998, and the ten months ended October 31,
1999, have been calculated by adding the amounts in these categories from
the historical financial statements of the IFCO Companies and PalEx and do
not reflect any pro forma adjustments.
12
<PAGE>
PalEx
<TABLE>
<CAPTION>
Ten-Month
Fiscal Year Ended Period Ended
-------------------------------------- ------------------------
November 30, December 28, December 27, October 25, October 24,
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(in thousands, except share and per share data)
(unaudited)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues............... $ 145,030 $ 222,993 $ 319,691 $ 256,874 $ 320,433
Gross profit(1)........ 23,165 34,909 58,894 47,345 62,961
Income from
operations(1)......... 8,937 12,934 17,297 11,109 22,826
Net interest cost (2).. (1,065) (1,590) (8,206) (6,078) (10,660)
Net income............. $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
Net income per share--
basic................. $ .64 $ .43 $ .21 $ .13 $ .33
Net income per share--
diluted............... $ .64 $ .42 $ .21 $ .12 $ .33
Shares used in
computing net income
per share--basic...... 9,433,414 15,561,489 18,937,354 18,651,737 20,297,016
Shares used in
computing net income
per share--diluted.... 9,433,414 15,914,157 19,310,295 19,047,287 20,299,381
Other Operating Data:
EBITDA and non-
recurring charges(3).. $ 13,045 $ 19,933 $ 35,680 $ 27,677 $ 36,538
EBIT(3)................ $ 9,448 $ 13,066 $ 17,559 $ 11,348 $ 24,213
Cash flows from:
operating activities.. $ 12,116 $ 6,363 $ 13,596 $ 7,072 $ 16,212
investing activities.. $ (7,355) $ (13,756) $ (100,819) $ (91,383) $ (6,596)
from financing
activities........... $ (5,051) $ 11,976 $ 83,966 $ 78,942 $ (8,514)
</TABLE>
<TABLE>
<CAPTION>
October 24,
1999
--------------
(in thousands)
(unaudited)
<S> <C>
Balance Sheet Data:
Working (deficit)............................................... $(84,797)
Total assets.................................................... 299,617
Total debt...................................................... 147,181
Stockholders' equity............................................ 103,613
</TABLE>
- --------
(1) The results of operations for PalEx's year ended December 27, 1998, include
pre-tax charges of approximately $1.2 million for inventory revaluation
adjustment, approximately $0.9 million for restructuring costs and expenses
and approximately $1.4 million for plant closure costs and asset
abandonment loss related to the termination of PalEx's customer
relationship with CHEP USA. The results of operations for PalEx's ten-month
period ended October 25, 1998, include pre-tax charges of approximately
$1.7 million for inventory valuation adjustment and approximately $2.4
million for restructuring costs and expenses related to the termination of
PalEx's customer relationship with CHEP USA.
(2) Includes interest expense and other income (expense), net.
(3) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents PalEx's net income after exclusion of interest
expense and provision for income taxes. EBITDA and non-recurring charges
represents PalEx's EBIT plus depreciation and amortization charges, and
non-recurring, one-time restructuring charges related to the termination of
PalEx's relationship with CHEP USA, pooling expenses, and compensation
differential. EBIT and EBITDA and non-recurring charges as presented are
not necessarily comparable with similarly titled measures presented by
other companies. The following table reflects the calculation of EBIT and
EBITDA and non-recurring charges:
13
<PAGE>
<TABLE>
<CAPTION>
Ten-Month
Fiscal Year Ended Period Ended
-------------------------------------- -----------------------
November 30, December 28, December 27, October 25, October 24,
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income.............. $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
Provision for income
taxes.................. 1,833 4,704 5,105 2,676 5,402
Interest expense........ 1,576 1,722 8,468 6,317 12,047
------- ------- ------- ------- -------
EBIT................... 9,448 13,066 17,559 11,348 24,213
Depreciation and
amortization........... 3,597 5,847 11,665 7,974 12,325
Restructuring charge.... -- -- 3,553 5,452 --
Pooling expenses and
compensation
differential(4)........ -- 1,020 2,903 2,903 --
------- ------- ------- ------- -------
EBITDA and non-
recurring charges..... $13,045 $19,933 $35,680 $27,677 $36,538
======= ======= ======= ======= =======
</TABLE>
(4) Pooling expenses primarily represent financial advisory and legal fees
incurred by some of the pooled companies in connection with PalEx's
acquisition of those companies. Compensation differential is the difference
between previous owners' compensation before their companies were acquired
by PalEx and the amounts they contractually agreed to be paid afterward.
14
<PAGE>
RISK FACTORS
You should carefully consider all the information in this proxy
statement/prospectus, including the following risk factors, before making an
investment decision regarding the merger and the IFCO Systems ordinary shares.
The risks described below are the significant risks known to IFCO Systems, the
IFCO Companies, and PalEx. The business, financial conditions, or results of
operations of IFCO Systems, the IFCO Companies, or PalEx could be materially
adversely affected by any of the risks.
Risks Related to the Merger
The operational and financial benefits expected from the merger may not be
realized and shareholder value may be impaired
Schoeller Industries and PalEx entered into the merger agreement with the
expectation that the merger would produce substantial operational and financial
benefits for both the IFCO Companies and PalEx, including the use of PalEx's
North American infrastructure to accelerate the expansion of the IFCO
Companies' business in the United States. The integration of two large
companies, incorporated in different countries, with geographically dispersed
operations, and with significant differences in business plans, business
cultures, and compensation structures, presents significant challenges and will
require substantial attention from management. The diversion of management
attention and any difficulties encountered in the transition and integration
process could reduce revenues, increase levels of expenses, and impair
operating results of the combined company. In addition, IFCO Systems may not be
successful in using the PalEx North American locations in connection with the
IFCO Companies' U.S. business.
The merger may not be tax-free to PalEx or PalEx stockholders
PalEx is obligated to complete the merger only if it receives (1) the private
letter ruling it has requested from the U.S. Internal Revenue Service that the
merger qualifies for an exception to Section 367 of the Internal Revenue Code
and (2) tax opinions from its special U.S. tax counsel that provide, among
other things, that the merger should be treated as a reorganization for federal
income tax purposes. Assuming the merger is a reorganization:
. PalEx and IFCO Systems will not recognize gain or loss upon the merger;
. a PalEx stockholder will generally recognize any gain on the merger only
to the extent of any cash received; and
. any gain to the PalEx stockholders in the merger in excess of the cash
received will not be recognized.
Even with PalEx's receipt of the tax opinions, the IRS could take the position
that the merger is taxable, either because it disagrees with the opinions or
because one or more of the assumptions upon which the opinions are based are
incorrect. One key assumption is that the total fair market value of the IFCO
Systems ordinary shares received by PalEx stockholders, based on the high and
low sales prices of the shares on the date of the merger, will be no less than
42% of the total merger consideration paid to PalEx stockholders. This
valuation, however, cannot be determined until after completion of the merger
and the IPO. If the IRS were to take the position that the merger is taxable
and prevail, then PalEx would recognize gain from the merger as if it had sold
all of its assets in a fully taxable transaction and a PalEx stockholder would
recognize gain or loss in an amount equal to the difference between the
stockholder's basis in the shares of PalEx common stock surrendered in the
merger and the sum of the cash and the fair market value, as of the effective
time of the merger, of the IFCO Systems ordinary shares received in the merger.
After the merger, the value of the IFCO Systems ordinary shares received by
PalEx stockholders could decline below the IPO price
The exact number of IFCO Systems ordinary shares to be received by PalEx
stockholders in the merger will be based on the elections by PalEx stockholders
and the IPO price of the IFCO Systems ordinary shares.
15
<PAGE>
Following the merger, the value of the IFCO Systems ordinary shares received by
PalEx stockholders will depend on the market price of IFCO Systems ordinary
shares, which after the IPO could trade at a price significantly below the IPO
price. There has not previously been a public market for the IFCO Systems
ordinary shares.
The IFCO Systems ordinary shares will have a lower book value than the PalEx
shares and IFCO Systems will at least initially have a net loss per share
The book value of the IFCO Systems ordinary shares will be significantly
lower than the book value of the shares of PalEx common stock and, unlike
PalEx, IFCO Systems will lose money, at least initially.
Protecting shareholder rights may prove more difficult and costly than in a
Delaware corporation
IFCO Systems' corporate affairs are governed by its articles of association
and by the laws of the Netherlands. The rights of shareholders of IFCO Systems
and the responsibilities of directors on its board of directors, its officers,
and the experts named in this proxy statement/prospectus, some of whom may
reside outside of the United States, are different than those established under
the laws of Delaware or other U.S. jurisdictions. Therefore, IFCO Systems'
public shareholders may have more difficulty and be subject to higher costs in
protecting their interests in the face of actions by IFCO Systems' management,
board of directors, or controlling shareholders than they would as shareholders
of a corporation incorporated in Delaware or other U.S. jurisdictions. This may
include difficulty in effecting service of process within the United States
upon IFCO Systems or those persons, or enforcing, in courts outside of the
United States, judgments against IFCO Systems or those persons obtained in U.S.
courts and based upon the civil liability provisions of the federal securities
laws of the United States. Furthermore, since a substantial portion of the
assets of IFCO Systems will be located outside of the United States, any
judgment obtained in the United States against those persons or IFCO Systems
may not be collectible within the United States. Additionally, there may be
doubt as to the enforceability, in original actions in Dutch courts, of
liabilities based solely upon the federal securities laws of the United States.
Risks Related to IFCO Systems or the IFCO Companies' Businesses
IFCO Systems will be controlled by a limited number of shareholders, which
will limit the ability of the public shareholders to influence the affairs of
IFCO Systems
After completion of the merger and the IPO, and assuming PalEx stockholders
elect to receive 49% of the total merger consideration in cash, Christoph and
Martin Schoeller, through Schoeller Industries and/or affiliates and Schoeller
Holding, will beneficially own approximately 51.7% of the outstanding IFCO
Systems ordinary shares. The Schoellers will be able to influence the business,
policies, and affairs of IFCO Systems and may be able to block approval of any
proposed merger, combination, or sale of substantially all the assets. Because
they will have the largest beneficial ownership, the Schoellers may
legitimately seek to preserve their control and may not have the same interest
as smaller shareholders in pursuing strategic investments or business
combinations if the result would be a decrease in control or would cause IFCO
Systems no longer to exist as a separate entity.
Christoph Schoeller will not be devoting his full time to IFCO Systems, which
may impair its business prospects
Under the terms of a management agreement with IFCO Europe, Schoeller
Industries provides administrative and management services, but Christoph
Schoeller, who will be Chairman of the board of directors of IFCO Systems, will
not devote his full working time to the IFCO Companies. Because of other
Schoeller family business interests, Christoph Schoeller will continue to be
unable to devote his undivided attention to the operations and management of
IFCO Systems. This may impede the management and operations of IFCO Systems and
limit the growth prospects for the business.
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IFCO Systems' international operations may prove more difficult or costly than
its domestic operations
Since IFCO Systems will have significant operations outside of Germany and
the United States, it will be subject to the risks associated with cross-border
business transactions and activities. These risks principally relate to delayed
payments from customers in some countries or difficulties in the collection of
receivables generally. Political, legal, trade, or economic changes or
instability could limit or curtail IFCO Systems' business activities and
operations in Eastern Europe, Asia, and South America. Unexpected changes in
regulatory requirements, tariffs and other trade barriers, and price exchange
controls could limit operations and make the distribution of products
difficult. In addition, the uncertainty of the legal environment in these areas
could limit IFCO Systems' ability to effectively enforce its rights.
IFCO Systems will be dependent on extensive capital investment, which may not
be readily available
IFCO Systems' business plan calls for extensive capital investment. IFCO
Systems may be unable to obtain sufficient capital resources to finance its
operations. A lack of capital or an increase in the cost of capital may prevent
IFCO Systems from achieving its growth plans and its financial objectives.
IFCO Systems will be dependent on its relationships with a small number of
large retailers
IFCO Systems will be dependent on its relationships with a small number of
large retailers. The inability of IFCO Systems to maintain these relationships
or cultivate new relationships on similar terms will impair its ability to
remain competitive in the markets in which it will operate. The loss of one or
more of these relationships would have a negative impact on the revenues and
net income of IFCO Systems.
IFCO Systems' growth strategies may not be achieved
IFCO Systems expects to grow both internally and through acquisitions and
alliances. IFCO Systems expects to spend significant time and effort in
evaluating, completing, and integrating acquisitions. The systems, procedures,
and controls of IFCO Systems may not be adequate to support its operations as
it expands, including its expansion in the United States. Any future growth
also will impose significant additional responsibilities on its senior
management. To the extent IFCO Systems is unable to manage its growth
effectively, or is unable to attract and retain qualified management, IFCO
Systems' ability to grow or maintain its level of revenues and net income, or
to implement its business plan, could be materially limited.
The IFCO Companies' business models may not succeed in new markets
The IFCO Companies' business plans rely on duplicating their business models
in new markets, including the United States. The IFCO Companies' business
models may not be successfully duplicated in these new markets.
Weather conditions may reduce demand for IFCO Systems' services and products
IFCO Systems provides a significant portion of its services and products to
customers who ship agricultural products. Severe weather, particularly during
the harvesting seasons, may cause a reduction in demand from agricultural
customers, lowering IFCO Systems' revenues and net income. For example, a heavy
freeze that damages citrus or other produce crops could have a significant
negative impact on IFCO Systems' financial condition and results of operations.
IFCO Systems' operating results may fluctuate significantly due to seasonal
factors
IFCO Systems' businesses, including the businesses of both the IFCO Companies
and PalEx, will be subject to seasonal variations in operations and demand.
IFCO Systems' operations experience the greatest demand for RTCs, new pallets,
and reconditioned industrial containers during the citrus and produce
harvesting seasons, generally October through May, with significantly lower
demand from the citrus and produce industries in the summer months. Moreover,
yearly results can also fluctuate significantly, particularly for PalEx
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in the Southeast and Western regions of the United States. Fluctuations are the
result of the size of the citrus and produce harvests, which, in turn, largely
depend on the occurrence and severity of inclement weather. Accordingly, IFCO
Systems' performance, including the performance of both the IFCO Companies and
PalEx, in any particular quarter may not be indicative of the results that can
be expected for any other quarter or for the entire year.
IFCO Systems is in a highly competitive industry, which may limit its business
prospects
IFCO Systems faces competition in all geographic markets and each industry
sector in which it operates. IFCO Systems expects aggressive competition from
packaging industry companies, including CHEP, an international supplier of
pallets and other material handling products. The IFCO Companies face
aggressive competition from the traditional packaging industry. In addition,
relatively few barriers prevent entry into the traditional packaging and pallet
industries. The effect of this competition could reduce IFCO Systems' revenues,
limit its ability to grow, increase pricing pressure on its products, and
otherwise affect its financial results.
IFCO Systems may incur increased costs due to fluctuations in interest rates
and foreign currency exchange rates
As a consequence of the global nature of the combined businesses of the IFCO
Companies and PalEx, IFCO Systems will be exposed to increases in interest
rates and changes in foreign currency exchange rates, which may result in
decreased net income. IFCO Systems will seek to minimize these risks through
regular operating and financing activities and, when appropriate, through the
use of currency and interest rate hedges and similar financial instruments,
although these measures may not be implemented or be effective. IFCO Systems
will also be exposed to risks from changes in foreign currency exchange rates
as a result of its financial reporting in U.S. dollars.
Fluctuations in the exchange rate between the U.S. dollar and the euro will
affect the U.S. dollar equivalent of the euro price of IFCO Systems ordinary
shares traded on the Frankfurt Stock Exchange and, as a result, are likely to
affect the market price of the New York shares traded on the Nasdaq National
Market. These fluctuations will also affect the U.S. dollar amounts received by
holders of IFCO Systems ordinary shares on the conversion into U.S. dollars of
cash dividends, if any, paid in euros on the IFCO Systems ordinary shares.
Risks Related to PalEx's Business
PalEx's cost of goods sold may be subject to increases because of unmanageable
changes in the cost or availability of lumber, the largest raw material cost
for pallets
The largest component of PalEx's cost of goods sold is lumber, which is the
principal raw material used in the manufacture and repair of wooden pallets.
Any increase in the cost of lumber or decrease in the availability of lumber
will materially increase cost of goods sold resulting in decreased net income
unless there is a corresponding increase in the prices PalEx charges its
customers. PalEx, however, may be limited in how much of a cost increase, if
any, it is able to pass along to customers or how quickly it is able to pass
along a cost increase to customers. In addition, increases in prices may result
in a decrease in sales. The majority of the lumber used in the pallet industry
is hardwood, which is only grown in some regions of the United States.
If the demand for hardwood is greater than the supply, the price will
increase and PalEx's cost for lumber will increase. The factors affecting
supply and demand are outside PalEx's control, including:
. competing demand from other pallet manufacturers and other industries
that use similar grades and types of lumber;
. governmental limits on logging on public lands or for environmental
reasons; and
.governmental agreements limiting lumber imports into the United States or
Canada.
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Since hardwood is difficult to harvest in adverse weather, adverse weather
may also decrease the supply, resulting in price increases. PalEx may not be
able to secure adequate lumber supplies in the future at prices it considers
reasonable.
PalEx has relied on acquisitions for growth and it may not be able to continue
to make acquisitions or successfully operate acquired businesses
One of PalEx's principal growth strategies has been to acquire additional
pallet manufacturing and recycling and drum reconditioning companies. PalEx may
not be able to identify or acquire additional businesses or integrate and
manage those additional businesses successfully. Acquisitions may involve a
number of operational risks, including:
. integration of acquisitions into PalEx may not be successful or may not
be possible without substantial costs, delays, or other problems, in
either case reducing any positive impact on PalEx's revenues and net
income or actually decreasing net income;
.adverse short-term effects on reported operating results, which will
result in lower net income;
. diversion of management's attention from operations, which could result
in decreased net income or limit internal growth;
. dependence on retention, hiring, and training of key personnel, which
may impair PalEx's ability to integrate acquisitions successfully or may
prevent PalEx from seizing future growth opportunities, both internally
and through acquisitions; and
. increased goodwill, which must be amortized, currently at the rate of
approximately $4.4 million per year, thus reducing PalEx's net income.
In addition, PalEx could experience increased competition for acquisitions of
desirable companies, which could increase the amounts paid for acquisitions or
reduce the number of acquisition candidates, resulting in reduced growth
opportunities.
PalEx's markets for pallet manufacturing and recycling services and industrial
container reconditioning services are highly competitive, which may limit
PalEx's ability to grow or maintain profit margins and net income
The markets for pallet manufacturing and recycling services and drum
reconditioning services are highly fragmented and competitive. As a result,
competition on pricing is often intense. Competition for customers and
competitive pricing pressure holding down prices may limit PalEx's ability to
grow or maintain profit margins and net income.
PalEx's pallet manufacturing operations may also be subject to competition
from lumber mills, which could decrease PalEx's profitability
PalEx often competes with lumber mills in the sale of new pallets. These mill
competitors typically view pallet manufacturing as an opportunity to use the
lower grade lumber that would otherwise be waste. As a result, they are able to
manufacture and sell low-cost pallets. This depresses pallet prices overall,
which could decrease PalEx's profitability.
PalEx's pallet manufacturing and recycling operations are subject to
competition from larger competitors, which may limit PalEx's ability to grow or
maintain revenues and net income
Other companies with significantly greater capital and other resources than
PalEx, including CHEP, may enter or expand their operations in the pallet
manufacturing and recycling businesses in the future, which could place PalEx
in direct competition with these larger companies in the markets for new and
recycled pallets. Increased competition from CHEP or other large competitors
could reduce PalEx's revenues through loss of customers or competitive pricing
pressures. Decreases in revenues could have a corresponding effect on net
income.
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PalEx's pallet operations face competition from other pallet alternatives,
which could limit or decrease revenues
PalEx's new and recycled pallet operations face competition from pallet
leasing or other pallet systems providers, which are marketed as less expensive
or otherwise more favorable alternatives to new pallet purchasers. Pallet
leasing competes currently with new and recycled pallet sales to the grocery
and wholesale distribution industries and may expand into other industries in
the future. CHEP, with significantly greater resources than PalEx, is currently
the dominant pallet leasing company in the world. Other pallet systems may
include pallets fabricated from non-wooden components like plastic as cost-
effective, durable alternatives to wooden pallets. Increased competition from
pallet leasing companies or providers of other alternatives could make it more
difficult for PalEx to attract and retain customers or force PalEx to reduce
prices. As a result, revenue growth may be limited or may decrease with
corresponding effects on PalEx's net income.
PalEx has potential exposure to environmental liabilities, which may increase
costs and lower net income
PalEx's operations are subject to various environmental laws and regulations,
including those dealing with handling and disposal of waste products, fuel
storage, and air quality. As a result of past and future operations at PalEx's
subsidiaries' facilities, PalEx may be required to incur remediation costs and
other related expenses. In addition, although PalEx intends to conduct
appropriate due diligence with respect to environmental matters in connection
with future acquisitions, PalEx may not be able to identify or be indemnified
for all potential environmental liabilities relating to any acquired business.
A PalEx subsidiary currently has potential exposure to environmental
liabilities as a result of contaminations at the Zellwood Groundwater
Contamination Site in Orange County, Florida. For a description of the
potential exposure, see "Business--Regulation--Industrial Containers."
Environmental liabilities incurred by PalEx or its subsidiaries, if not covered
by adequate insurance or indemnification, will increase PalEx's costs and have
negative impact on its net income.
PalEx may not be able to negotiate with union employees and may be subject to
work stoppages
Approximately 300 employees of PalEx's container group are members of various
labor unions. If PalEx is unable to negotiate acceptable contracts with these
unions as existing agreements expire, strikes or other work stoppages by the
affected workers could occur and increased operating costs due to higher wages
or benefits paid to union members may result. If the unionized employees engage
in a strike or other work stoppage, or other employees become unionized, PalEx
could experience a significant disruption of its operations and higher ongoing
labor costs. This could result in decreased revenues and/or lower net income
than otherwise could have been achieved.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this proxy statement/prospectus discuss
future expectations, contain projections of results of operations or financial
condition of IFCO Systems, the IFCO Companies, or PalEx, or state other
forward-looking information. These statements may include statements for the
period following the merger. You can find many of these statements by looking
for words like believes, expects, anticipates, estimates, or similar
expressions used in this proxy statement/prospectus.
These forward-looking statements may be affected by known and unknown risks,
uncertainties, and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions that IFCO Systems, the IFCO Companies, and PalEx believe to be
reasonable.
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Risks and uncertainties include the following:
. the timely completion of the merger according to its terms, including
completion of the IPO;
. the ability of the combined company to effectively integrate their
operations and achieve their operational and growth objectives;
. the competitive nature of the container businesses;
. customer demand and business and economic cycles;
. the ability to finance capital expenditures and growth;
. changes in national or international politics and economics;
. currency exchange rate fluctuations; and
. changes in capital and financial markets, including the performance of
companies listed on the Frankfurt Stock Exchange or the Nasdaq National
Market.
Important factors that could cause actual results to be materially different
from the forward-looking statements are also disclosed in the "Risk Factors"
section and throughout this proxy statement/prospectus.
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THE PALEX SPECIAL MEETING
General
PalEx is furnishing this proxy statement/prospectus to you in connection with
the solicitation of proxies by the PalEx board of directors for use at the
special meeting of PalEx stockholders to be held on March 2, 2000. PalEx will
first mail this proxy statement/prospectus and accompanying form of proxy to
PalEx stockholders on or about February 7, 2000.
Time and Place
The special meeting will be held at 6829 Flintlock Road, Houston, Texas, on
March 2, 2000, starting at 10:00 a.m. Houston time.
Purposes
At the special meeting, you will be asked to:
1.approve and adopt the merger agreement;
2.act on any other matter that may be properly submitted to a vote at the
special meeting; and
3. if necessary, approve any postponements or adjournments of the special
meeting without further notice except by announcement at the meeting
being postponed or adjourned.
The PalEx board of directors has unanimously approved the merger agreement
and recommends that PalEx stockholders vote for approval and adoption of the
merger agreement.
Record Date; Shares Entitled to Vote; Quorum
The PalEx board of directors has fixed the close of business on January 21,
2000, as the record date for PalEx stockholders entitled to notice of and to
vote at the special meeting. As of the record date, there were 19,633,548
shares of PalEx common stock outstanding. PalEx stockholders will be entitled
to one vote for each share of PalEx common stock they own. The common stock is
PalEx's only class of outstanding voting securities.
The holders of a majority of the outstanding shares of PalEx common stock
entitled to vote at the special meeting must be present, either in person or by
proxy, to establish a quorum for business to be conducted at the special
meeting.
Votes Required; Voting and Revocation of Proxies; Effect of Abstentions and
Non-Votes
Delaware law requires the affirmative vote of the holders of record of at
least a majority of the shares of PalEx common stock outstanding and entitled
to vote at the special meeting for approval and adoption of the merger
agreement.
All shares of PalEx common stock represented by properly executed proxies
will be voted per the instructions indicated in the proxies. Any PalEx
stockholder who has previously delivered a properly executed proxy may revoke
the proxy at any time before it is voted. A proxy may be revoked either by:
. delivering to the Secretary of PalEx before the special meeting a written
revocation of the proxy;
. signing and returning a later dated proxy to the Secretary of PalEx; or
. attending the special meeting and voting in person, regardless of whether
a proxy has previously been given, or withdrawing your proxy. Mere
attendance at the special meeting, however, will not in and of itself
have the effect of revoking the proxy.
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All valid, unrevoked proxies will be voted as directed. In the absence of any
directions to the contrary, proxies will be voted in favor of each of the
proposals listed in the notice of special meeting.
If any other matters are properly presented for action at the special
meeting, the persons named in the proxy will have the discretion to vote on
those matters in their best judgment, unless authorization is withheld.
Votes cast by proxy or in person at the special meeting will be tabulated by
a judge of voting appointed for the special meeting, who will determine whether
or not a quorum is present. Abstentions will be treated as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. Abstentions will be included in vote totals and thus will have the same
effect on each proposal as a negative vote. If a proxy is returned by a broker
or other stockholder who does not have authority to vote, does not give
authority to a proxy to vote, or withholds authority to vote on one or more
proposals as to any shares, those shares will be considered present at the
meeting for purposes of determining a quorum. The failure to submit a proxy or
to vote at the special meeting, an abstention as to the merger proposal, or a
non-vote as to the merger proposal will each have the same effect as a vote
against the merger agreement.
A representative of Arthur Andersen LLP, PalEx's independent public
accountants, is expected to be present at the special meeting and will have the
opportunity to make a statement. The representative will be available to answer
appropriate questions from PalEx stockholders.
The matters to be considered at the special meeting are of great importance
to PalEx stockholders. PalEx urges you to read and carefully consider the
information presented in this proxy statement/prospectus, and to complete,
date, sign, and promptly return the enclosed proxy in the enclosed postage-paid
envelope.
Voting Agreements
As of the record date, the directors and executive officers of PalEx and
their affiliates beneficially owned approximately 24.6% of the outstanding
shares of PalEx common stock, excluding options to purchase shares. The holders
of these shares or the persons with the right to vote these shares have
indicated to PalEx their intent to vote the shares for approval of the merger
agreement or have signed a voting agreement obligating them to do so.
Schoeller Industries has obtained a voting agreement from a group of PalEx
stockholders who own approximately 29% of the outstanding shares of PalEx
common stock as of the date of this proxy statement/prospectus, including some
of PalEx's directors and executive officers. These stockholders have agreed to
vote their shares in favor of the merger agreement at any stockholders'
meeting. The voting agreement is effective until the earlier of completion of
the merger agreement, termination of the merger agreement, or May 31, 2000.
PalEx has agreed to use its reasonable efforts after the mailing of this proxy
statement/prospectus to deliver an additional voting agreement in favor of
Schoeller Industries, so that the total number of shares subject to the voting
agreements and agreeing to vote for approval of the merger agreement will be at
least 51% of the outstanding shares of PalEx common stock as of the record
date.
Solicitation of Proxies
Proxies will be solicited by mail. Proxies may also be solicited personally,
or by telephone, fax, or other means by the directors, officers, and employees
of PalEx. Directors, officers, and employees soliciting proxies will receive no
special or extra compensation, but may be reimbursed for related out-of-pocket
expenses. In addition to solicitation by mail, PalEx will make arrangements
with brokerage houses and other custodians, nominees, and fiduciaries to send
the proxy materials to beneficial owners. PalEx will, upon request, reimburse
these brokerage houses, custodians, and other persons for their reasonable out-
of-pocket expenses in doing so. PalEx and IFCO Systems will each pay one-half
of the expenses of printing and mailing this proxy statement/prospectus. PalEx
will pay for the other costs of soliciting proxies.
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THE MERGER
Background of the Merger
PalEx has regularly considered opportunities for acquisitions, other
strategic alliances, and raising capital. In May 1998, PalEx engaged Batchelder
& Partners, Inc., as its financial advisor to analyze and consider several
larger strategic and financial opportunities.
In June 1998, PalEx and GE Capital Services, Inc., began discussions
regarding possible joint strategic initiatives in the materials handling
industry. These discussions were initially between Sam Humphreys, the Chairman
of PalEx, and Nigel Andrews, an Executive Vice President of GE Capital
Services. These initial discussions took place at meetings in mid-June 1998 in
Stamford, Connecticut. In the course of these meetings, GE Capital Services
discussed its investment in the IFCO Companies. PalEx had previously become
familiar with the IFCO Companies and their operations in Europe and start-up
initiative in the United States. PalEx and GE Capital Services agreed to
schedule another meeting to discuss a possible initiative involving both GE
Capital Services and the IFCO Companies and to have in attendance the persons
at GE Capital Services responsible for its investment in the IFCO Companies and
representatives of the IFCO Companies.
In late June 1998, representatives of PalEx, Batchelder, GE Capital Services,
and the IFCO Companies met at GE Capital Services' offices in New York City to
discuss possible relationships, including a possible business combination. Sam
Humphreys and Vance Maultsby, PalEx's Chief Executive Officer, attended the
meeting on behalf of PalEx. Paul Gelburd and Scott Gould represented GE Capital
Services, and Christoph and Martin Schoeller represented the IFCO Companies.
On July 10, 1998, PalEx and Schoeller Industries entered into a Non-
Disclosure Agreement with respect to information to be provided by the IFCO
Companies to PalEx.
On August 6, 1998, at a meeting of the PalEx board of directors in Houston,
Texas, Sam Humphreys made a presentation to the board of directors about IFCO
Europe. Mr. Humphreys showed the board of directors marketing videos provided
by the IFCO Companies and described their businesses. He also discussed the
rationale for a strategic relationship between PalEx and IFCO Europe, including
their common experiences with shipping platforms and logistics operations,
common access to retailers' backdocks, and ability to cross-sell to each
other's customers, including the ability to take advantage of each other's
relationships with growers. The board of directors authorized PalEx's
management to continue its discussions and negotiations with respect to a
possible strategic business combination with IFCO Europe.
During August and September 1998, Sam Humphreys and Vance Maultsby spoke with
Christoph and Martin Schoeller and with representatives of GE Capital Services
on a periodic basis by telephone to continue discussions about a possible
business combination and develop proposed terms.
On September 11, 1998, Sam Humphreys and Vance Maultsby met with Christoph
and Martin Schoeller from the IFCO Companies and Paul Gelburd and Scott Gould
from GE Capital Services in New York City to continue discussions about a
possible business combination.
On October 1-2, 1998, Sam Humphreys and Vance Maultsby again met with the
Schoellers in New York City along with a representative of Batchelder. At this
meeting, the parties began more detailed discussions about the structure of a
business combination and PalEx provided the Schoellers with a preliminary term
sheet. The preliminary term sheet reflected the creation of a new holding
company, PalEx's merger with a holding company subsidiary, and ownership by
PalEx stockholders of a minority interest in the holding company. The actual
ownership interest to be received by the PalEx stockholders was to be
determined based on the due diligence investigations of each company. The
parties also discussed what they needed for purposes of due diligence
investigations.
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On October 6, 1998, Vance Maultsby sent a confidential memorandum to the
PalEx board of directors to update the board of directors on the status and
progress of discussions. He indicated that preliminary discussions involved the
formation of a new public holding company, with IFCO Europe and PalEx merging
into subsidiaries of the holding company for stock consideration. Based upon
the preliminary discussions, including the October 2, 1998, meeting, PalEx
stockholders would exchange their PalEx stock for a minority interest in the
new holding company. The valuation proposed to the Schoellers and GE Capital
Services at that time provided PalEx's stockholders with a combined interest in
the new company of 30-45%. The holding company would complete an IPO at the
same time as the merger. Mr. Maultsby indicated to the board of directors that
the exact consideration to be paid to PalEx's stockholders would likely be
subject to the value of the individual companies implied by the IPO valuation
and the completion of due diligence investigations by both parties. The other
principal term discussed was the interest in the new holding company acquiring
the minority interest in IFCO International's U.S. joint venture. Mr. Maultsby
informed the board that a detailed term sheet was being prepared.
On October 7, 1998, Mr. Maultsby had a conference call with the PalEx board
of directors to discuss these preliminary terms, answer questions, and hear
comments. A representative from Batchelder also participated in the call.
Representatives of PalEx and GE Capital Services met again in New York City
on October 8-9, 1998. Vance Maultsby, Edward Rhyne, PalEx's Vice President and
General Counsel, and Dinesh Lathi represented PalEx. Paul Gelburd and Scott
Gould attended the meeting on behalf of GE Capital Services. Frank Tofflinger,
Chief Financial Officer of Schoeller Industries, and a representative of King &
Spalding, U.S. counsel to the IFCO Companies, attended on behalf of the IFCO
Companies. The structure discussed at this meeting contemplated the possibility
of an IPO of a new holding company on the Neuer Markt segment of the Frankfurt
Stock Exchange. Following this meeting, on October 10, 1998, PalEx distributed
a revised term sheet to the Schoellers reflecting the discussions at the
October 2, 1998, meeting. In addition, the term sheet included a proposal that
the new holding company would acquire options to purchase IFCO International
and MTS.
On October 21, 1998, the PalEx board of directors had a conference call to
discuss the status of the proposed business combination with IFCO Europe.
On October 29, 1998, at a meeting of the PalEx board of directors in Houston,
Texas, Sam Humphreys summarized the status of the business combination
discussions with IFCO Europe and PalEx's due diligence investigations. After
further discussion about the proposed transaction, the PalEx board determined
that PalEx should continue pursuing the possible business combination. On the
same date, Baker Botts L.L.P., PalEx's counsel at the time and now PalEx's
special U.S. tax counsel, distributed a preliminary draft of a definitive
merger agreement to Edward Rhyne and King & Spalding. The preliminary draft
provided for PalEx stockholders to receive a minority stock interest in a new
holding company as merger consideration. The percentage ownership for PalEx
stockholders, as proposed, was contemplated as a range, to be agreed upon based
on continuing due diligence, but at that time tentatively set at 30% to 40%,
with the actual percentage to depend on the holding company's pre-IPO
valuation. The draft also contemplated IFCO International using reasonable
efforts to acquire the minority interest in IFCO International's U.S. joint
venture.
During the first week of November 1998, PalEx sent a team to the IFCO
Companies' headquarters in Pullach, Germany, for purposes of continuing PalEx's
due diligence and developing a financial model for the proposed business
combination. The PalEx team included Joseph Cruz, PalEx's President and Chief
Operating Officer, Philip Freeman, PalEx's Executive Vice President, Edward
Rhyne, Dinesh Lathi, representatives of Batchelder, and representatives of
Arthur Andersen in Germany.
On November 19-20, 1998, representatives of PalEx, GE Capital Services, and
the IFCO Companies again met in New York City to discuss the possible business
combination. Sam Humphreys, Vance Maultsby, Edward Rhyne, Dinesh Lathi, and
Fraser Campbell, President of PalEx's Canadian subsidiary, along with a
representative of Batchelder, represented PalEx. Scott Gould, Liz Masciopinto,
and Natalie Jenkins represented
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GE Capital Services and Jorgen Poulsen represented Transport International
Pool, an affiliate of GE Capital Services. Representatives of J.P. Morgan, as a
financial advisor to GE Capital Services, attended the meeting on behalf of GE
Capital Services. The Schoellers and Frank Tofflinger represented the IFCO
Companies. The primary focus of the meeting was continued due diligence with
respect to both operations and the integration of the businesses.
Sam Humphreys and Vance Maultsby again met with Paul Gelburd and Scott Gould
of GE Capital Services in New York City on November 20, 1998, to discuss the
structure of the proposed business combination. The parties continued to have
discussions in late November and early December 1998 regarding the structure of
the proposed business combination and the treatment of GE Capital Services'
interests in IFCO Europe.
On December 1, 1998, Sam Humphreys, Vance Maultsby, Christoph Schoeller, and
Paul Gelburd had a conference call to discuss management of the combined
company and open business points.
Sam Humphreys and Vance Maultsby met with Christoph and Martin Schoeller in
Puerto Rico on January 8-9, 1999, for further discussions regarding the desired
structure of the business combination.
On January 12, 1999, PalEx and Schoeller Industries entered into a
Confidentiality Agreement with respect to information to be provided by PalEx
to the IFCO Companies.
On January 26, 1999, the PalEx board of directors held a telephonic meeting
to review the status of the proposed business combination with IFCO Europe.
Casey Fletcher, PalEx's Chief Accounting Officer, Phil Freeman, Gregg Gibson of
Sonoma Pacific Company, a PalEx subsidiary, Vance Maultsby, and Edward Rhyne
also participated in the telephonic meeting. Sam Humphreys summarized for the
board the developments in the proposed transaction since the previous board
meeting. Mr. Humphreys outlined a proposed structure that would include not
only IFCO Europe, but also MTS and IFCO International, including IFCO
International's interests in Argentina and in joint ventures in Japan and the
United States. The intention was for the combined company to simultaneously
complete an IPO with a listing on the Neuer Markt. PalEx shareholders and the
Schoellers would each own 50% of the combined company, but General Electric
Erste Beteiligungs GmbH, a subsidiary of GE Capital Corporation, would continue
to own 24% of IFCO Europe and have an option to acquire the remaining 76% of
IFCO Europe. The proposed structure had been discussed in detail with the
Schoellers, but no terms had been negotiated with GE Capital regarding GE
Erste's and GE Capital's existing interests and options with respect to IFCO
Europe, IFCO International, and MTS. The proposed structure also contemplated
that the combined company would negotiate to purchase the interest in IFCO
International's U.S. joint venture, IFCO-U.S., L.L.C., not already owned by
IFCO International. The board of directors, along with management, voted to
continue negotiations and due diligence to determine whether a desirable
transaction could be structured.
On February 2-3, 1999, Joseph Cruz, Vance Maultsby, Edward Rhyne, Howe
Wallace, PalEx's Chief Human Resources Officer, and representatives of
Batchelder met in Tampa, Florida, with IFCO U.S. management and representatives
of the IFCO Companies to discuss due diligence issues regarding IFCO U.S.
In late February and early March 1999, the parties continued to discuss and
refine the structure of the proposed transaction.
On February 22-25, 1999, PalEx representatives traveled to the IFCO
Companies' headquarters in Pullach, Germany, to continue their due diligence
investigations and meet with representatives of Apax Partners & Co., the IFCO
Companies' financial advisor. Vance Maultsby, Edward Rhyne, and representatives
of Batchelder attended the meetings on behalf of PalEx. Martin and Christoph
Schoeller and Frank Tofflinger were the lead participants on behalf of the IFCO
Companies. The discussions covered various issues, including the structure of
the transaction, continuing due diligence investigations by both PalEx and the
IFCO Companies, corporate governance, and the timing of the transaction. Based
upon the understanding that IFCO Europe would purchase
26
<PAGE>
its shares held by GE Erste and that GE Capital and GE Erste would release all
options and other rights with respect to the IFCO Companies, the parties agreed
to a structure in which PalEx stockholders would receive 32% to 35% of the new
combined company depending on the trading prices of the new shares after the
IPO. The parties also agreed to target March 19, 1999, for execution of a
definitive agreement.
On March 2, 1999, Baker Botts prepared and distributed a summary term sheet
for the transaction. The term sheet showed PalEx stockholders receiving 32% to
35% of a new combined company prior to an IPO by the new company depending on
the trading prices of the new shares after the IPO.
On March 8-10, 1999, Sam Humphreys, Vance Maultsby, and Edward Rhyne met in
New York City with Christoph and Martin Schoeller, a representative of Apax,
and Paul Gelburd and Scott Gould to refine the structure of the business
combination and the operation of the businesses after completion of the
transaction. Following the meeting, Baker Botts sent a revised draft of the
merger agreement to Edward Rhyne and King & Spalding.
On March 16, 1999, Edward Rhyne had a conference call with a representative
of King & Spalding and a representative of Gardere & Wynne, L.L.P., PalEx's
counsel, to discuss the appropriate parties to the transaction, the structure
of the merger, including the formation of the new holding company, the draft
merger agreement, and outstanding due diligence issues. The attorneys agreed to
meet in New York City beginning on March 22, 1999, to negotiate and execute the
definitive agreement and address remaining due diligence issues.
On March 18, 1999, Gardere & Wynne sent a revised draft of the merger
agreement to King & Spalding reflecting miscellaneous changes from the initial
draft.
On March 22, 1999, Edward Rhyne and representatives of King & Spalding and
Gardere & Wynne began meeting in New York City to finalize the definitive
agreement.
On March 23, 1999, the PalEx board of directors reconvened a meeting in
Houston, Texas, that began on March 22, 1999, for the purpose of discussing the
proposed merger with the IFCO Companies and related transactions. Also
attending the reconvened meeting in person or by telephone were Casey Fletcher,
Phil Freeman, Gregg Gibson, Vance Maultsby, Edward Rhyne, Christoph and Martin
Schoeller, Howe Wallace, representatives of Batchelder, and a representative of
Baker Botts.
At the request of Sam Humphreys, Martin Schoeller made a detailed
presentation to the board of directors regarding the organization, operations,
and financial performance of and growth potential for IFCO Europe, MTS, and
IFCO International, including its joint ventures in Japan, the United States,
and Argentina. These three IFCO Companies would be contributed to the new
combined company, IFCO Systems. Edward Rhyne provided additional information to
the board of directors regarding a long-term supply agreement between the IFCO
Companies and other Schoeller entities. At the conclusion of Mr. Schoeller's
presentation, the directors had the opportunity to ask Mr. Schoeller questions
about the IFCO Companies.
A representative of Batchelder then discussed for the directors the Neuer
Markt, which was the stock market proposed for listing of the IFCO Systems
ordinary shares. He described the Neuer Markt's history, trading capabilities
in the United States, and initial listing criteria. After this presentation,
the Schoellers left the meeting.
Batchelder provided an overview of the proposed transaction structure and
terms and detailed presentation of both PalEx's and the IFCO Companies'
historical and projected financial results, and discussed Batchelder's
valuation materials. The directors had substantial opportunity to ask
Batchelder and Mr. Rhyne about the transaction and the financial information.
The board of directors discussed the proposed ownership interests in the new
company for PalEx's stockholders and the IFCO Companies' stockholders.
Batchelder then reviewed its proposed form of fairness opinion and answered
questions regarding the valuation methodologies it used in its fairness
analysis.
27
<PAGE>
After a detailed discussion of the fiduciary duties of directors under
Delaware law, the board of directors unanimously approved the proposed merger
transaction subject to a review of the definitive agreement to be distributed
later in the week. The board of directors agreed to hold a telephonic meeting
on March 28, 1999, to consider the terms of the definitive agreement relating
to the proposed transaction.
Beginning on March 24, 1999, Christoph and Martin Schoeller, Frank
Tofflinger, and a representative of Boesebeck Droste, the IFCO Companies'
German counsel, began meeting in New York City with Scott Gould to negotiate a
draft agreement between the IFCO Companies and GE Capital regarding GE
Capital's interests.
On March 25, 1999, Vance Maultsby, a representative of Batchelder, Christoph
and Martin Schoeller, Frank Tofflinger, and a representative of Boesebeck
Droste joined the meeting that began on March 22, 1999, in order to finalize
due diligence discussions, negotiate the merger agreement, and finalize the
draft agreement with GE Capital. Sam Humphreys joined that meeting on March 26,
1999.
The PalEx board of directors then held a telephonic meeting on March 28,
1999. Casey Fletcher, Phil Freeman, Gregg Gibson, Vance Maultsby, Edward Rhyne,
Howe Wallace, representatives of Batchelder, and a representative of Baker
Botts also participated in the meeting. A representative of Baker Botts
summarized the directors' fiduciary obligations in considering the merger
agreement. The board of directors considered the draft merger agreement and the
delivery of Batchelder's opinion dated March 28, 1999. Edward Rhyne and the
representatives of Batchelder discussed the terms of the draft merger agreement
in detail for the directors. After a detailed discussion by the directors, the
board of directors unanimously approved the merger agreement.
During the meetings and negotiations held on March 22-29, 1999, the parties
agreed to make various changes to the proposed merger agreement, including
adding or providing for:
. IFCO International and MTS as parties;
. IFCO Systems as a prospective party;
. description of proposed transaction with GE Capital and GE Erste;
. refinement of merger consideration calculation, including introduction
of PalEx 1999 performance as an element in the calculation;
. post-merger corporate governance;
. extension of representations and warranties to cover IFCO International,
MTS, and IFCO Systems in addition to IFCO Europe;
. voting agreement requirement;
. restrictions on share transfers by PalEx insiders;
. grant of IFCO Systems options based on outstanding PalEx stock options
to be converted in the merger;
. fixing a pre-IPO combined company valuation condition at $390 million;
and
. payment of a termination fees in specified situations.
At the continuing meetings in New York City, PalEx and the IFCO Companies and
their representatives completed the negotiation of the merger agreement. The
merger agreement was signed on March 29, 1999, and PalEx and the IFCO Companies
issued a joint press release on March 30, 1999, to announce the transaction.
Following execution of the merger agreement, King & Spalding engaged Dutch
legal counsel on behalf of the IFCO Companies. King & Spalding asked Dutch
legal counsel to review the merger agreement for compliance with Dutch law,
since it provided for IFCO Systems to be a Dutch company. Based on advice from
Dutch counsel, Gardere & Wynne and King & Spalding prepared a draft of an
amended and restated merger
28
<PAGE>
agreement to include necessary changes under Dutch law and make other,
technical corrections to the merger agreement. None of the revisions changed
the basic structure of the transaction.
During the process of preparing the proxy statement/prospectus,
representatives of Schoeller Industries and PalEx continued to discuss the
transaction and its structure.
On August 27, 1999, the PalEx board of directors held a telephonic meeting to
discuss the status of the merger. Casey Fletcher, Philip Freeman, Vance
Maultsby, Edward Rhyne, a representative of Batchelder, and a representative of
Gardere & Wynne also participated in the telephonic meeting. The directors
discussed delays in the transaction, which included a longer than expected
period to complete the conversion of the IFCO Companies' financial statements
to U.S. GAAP and to complete audit work, continuing negotiations by the IFCO
Companies for purchase of the minority interest in IFCO U.S., and delays with
respect to the proposed listing on the Neuer Markt. Preliminary meetings
between IFCO Systems and Neuer Markt officials indicated the need for further
information and presentations and that IFCO Systems' industry and business
might not be considered sufficiently technology-driven for purposes of the
Neuer Markt. As a result, IFCO Systems believed that obtaining a Neuer Markt
listing would be a longer process than originally thought, if a listing could
be obtained given the Neuer Markt's industry and business profile. The
directors believed these delays created the increasing likelihood that the
merger could not be completed by December 31, 1999, which was a condition to
the transaction under the original merger agreement. The directors also
received information (1) about the current performance of the stock of Neuer
Markt listed companies and (2) with respect to the characteristics and
valuations of companies listed on other trading segments of the Frankfurt Stock
Exchange if a Neuer Markt listing could not be obtained or was determined not
to be the best market for the IFCO Systems ordinary shares. The directors were
informed that the IFCO Systems ordinary shares could be listed on the other
segments of the Frankfurt Stock Exchange with greater certainty within the
desired time frame. Management then discussed with the board of directors the
need for additional capital to be used for capital expenditures and growth in
operations. The board of directors directed management to convey to Christoph
and Martin Schoeller its concern about being able to complete the transaction
in 1999 and the implications if the IFCO Systems ordinary shares were listed on
a trading segment of the Frankfurt Stock Exchange other than the Neuer Markt.
The board of directors also determined to meet in person the following week in
New York City, where discussions relating to the transaction were being held
with the Schoellers' representatives.
On September 2, 1999, the PalEx board of directors met in New York City to
obtain a further update about the merger and related matters. Casey Fletcher,
Philip Freeman, Gregg Gibson, Ted Grubbs (PalEx's Controller), Vance Maultsby,
Edward Rhyne, Howe Wallace, and a representative of Batchelder also attended
the meeting. The board of directors concluded that it was unlikely that the
merger could be completed by December 31, 1999, and that it was uncertain
whether the IFCO Systems ordinary shares would be approved for listing on the
Neuer Markt within a reasonable time. Because of the delay into 2000 and the
uncertainty of a Neuer Markt listing, the directors agreed that it was
necessary for management to focus on PalEx's interim capital requirements. By
the time of the meeting, negotiations with the IFCO Companies had been
proceeding for over a year. During that period, PalEx had delayed its own
additional financing efforts. The effect was a limitation on funds available
for capital expenditures and other growth, except for availability under
PalEx's senior credit facility. The directors believed that additional capital,
beyond the then current availability under the senior credit facility, was
needed to permit continued growth of PalEx's operations in the fourth quarter
of 1999 and the first quarter of 2000. The board of directors also determined
that, because of the uncertainties and delays in the Neuer Markt listing
process, it was advisable to proceed with a listing of the IFCO Systems
ordinary shares on the Amtlicher Handel segment of the Frankfurt Stock
Exchange. Batchelder made a presentation to the board of directors about the
structure of the Amtlicher Handel, its listing requirements, and company
performance and trading multiples on the trading segment. As a result of these
determinations, the board of directors believed it was prudent to delay the
initial filing of the proxy statement/prospectus with the SEC and to discuss a
restructuring of the transaction with the Schoellers.
Following this meeting of the board of directors, Sam Humphreys and Vance
Maultsby had discussions with Christoph and Martin Schoeller regarding the
transaction. On September 14, 1999, Sam Humphreys and
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<PAGE>
Vance Maultsby met with Christoph and Martin Schoeller in New York City to
discuss the merger status and its structure. Mr. Humphreys advised the
Schoellers of PalEx's concerns about the uncertainty of a Neuer Markt listing
of the IFCO Systems ordinary shares, the recent performance of Neuer Markt
shares, and the inability to complete the transaction in 1999. Mr. Humphreys
also discussed PalEx's need to address its financing issues and extend the
maturity of its senior credit facility.
As a result of these concerns, Mr. Humphreys informed the Schoellers that
PalEx's board of directors believed that the consideration to be received by
PalEx stockholders needed to be modified. Mr. Humphreys informed the Schoellers
of the board of directors' belief that PalEx's stockholders should receive 40%
of the stock of IFCO Systems outstanding immediately before the IPO. The
Schoellers countered by suggesting the consideration in the merger be changed
to provide PalEx's stockholders with consideration with a defined value of
$9.00 per share. The Schoellers believed this change would address the concerns
about the value of the interest in IFCO Systems received by PalEx stockholders
in the merger. In addition, the Schoellers offered to pay up to 50% of the
merger consideration in cash to address any immediate liquidity concerns of
PalEx's stockholders and concerns about the valuation of the IFCO Systems
ordinary shares to be issued in the transaction. Based on these discussions,
representatives of PalEx prepared a term sheet reflecting a revised transaction
structure and provided it to Christoph and Martin Schoeller on September 17,
1999. On September 19, 1999, Sam Humphreys, Vance Maultsby, and Edward Rhyne
had a conference call with Christoph and Martin Schoeller to discuss the terms
for a revised transaction structure to be presented to PalEx's board of
directors, which included, among other things, merger consideration in cash
and/or IFCO Systems ordinary shares with a total value of $9.00 for each share
of PalEx common stock, the removal of a Neuer Markt listing as a condition to
the transaction, securing interim financing for PalEx, and a new deadline of
May 31, 2000, for completing the merger. The parties also discussed the form of
consideration to be received by PalEx's stockholders, including:
. the requirement that the merger qualify as a tax-free reorganization to
PalEx's stockholders;
. the liquidity provided by a cash component;
. the likelihood of large PalEx stockholders being required by the IPO
underwriters to agree to hold their shares for an extended period after
the IPO; and
. the belief that many PalEx stockholders would desire to receive a larger
percentage of the consideration in the form of IFCO Systems ordinary
shares.
After further discussion, the parties agreed in principle that PalEx
stockholders would be able to receive IFCO Systems stock and/or cash in
exchange for their PalEx stock. They also agreed in principle for the total
consideration to be paid to PalEx's stockholders to be comprised of not less
than 40% cash and not less than 51% stock in IFCO Systems.
On September 20, 1999, the PalEx board of directors held a telephonic meeting
to discuss the revised transaction terms that had been discussed with the
Schoellers and to receive an update from PalEx's management regarding the
efforts to obtain interim financing. Casey Fletcher, Philip Freeman, Gregg
Gibson, Vance Maultsby, Edward Rhyne, Howe Wallace, a representative of
Batchelder, and a representative of Gardere & Wynne also participated in the
meeting. The board of directors authorized management to continue negotiations
with the Schoellers, proceed with preparation and negotiation of an amended and
restated merger agreement reflecting the new terms, and continue discussions
with of interim financing sources.
On September 22, 1999, Gardere & Wynne distributed a new draft of an amended
and restated merger agreement to King & Spalding reflecting the new terms.
Representatives of PalEx, Gardere & Wynne, and King & Spalding then met by
telephone on several occasions to finalize the wording of provisions of the
amended and restated merger agreement. These meetings primarily focused on
revising the language of the merger consideration provisions to reflect
accurately the new terms and to implement the election procedures, as well as
miscellaneous agreed changes consistent with the new terms.
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<PAGE>
On September 27, 1999, Edward Rhyne and the Schoellers negotiated open
business terms of the transaction during several conference calls. One of the
principal open items was whether the merger consideration should be fixed at
$9.00 per share or variable. The other principal open item was the issuance of
stock options to IFCO Systems personnel at the time of the merger. The parties
ultimately determined that the plan in the original merger agreement for
similar stock options to, and in proportionately the same numbers as, the
outstanding PalEx options to be converted in the merger was not workable. As a
substitute, the parties agreed that at the effective time of the merger IFCO
Systems would issue 300,000 options to each of the Schoellers and up to
1,000,000 options to employees of Schoeller Industries and its affiliates.
Later on September 27, 1999, the PalEx board of directors held another
telephonic meeting. Casey Fletcher, Philip Freeman, Edward Rhyne, Vance
Maultsby, Howe Wallace, a representative of Batchelder, and a representative of
Gardere & Wynne also participated in the meeting. The board of directors
received an update from management regarding the negotiation of the amended and
restated merger agreement. Management indicated that no material issues
remained outstanding with respect to the terms of the merger agreement.
Management also informed the board of directors that discussions were
continuing with possible sources of interim financing and the lenders in
PalEx's senior credit facility, but that nothing had been finalized. Finally,
Batchelder summarized its analysis of the revised merger structure and the
merger consideration proposed to be received by PalEx stockholders. A copy of
the analysis was sent to the directors after the meeting. Batchelder informed
the board of directors that it was issuing a new fairness opinion as of the
date of the meeting. The new fairness opinion reflected the revised terms of
the transaction and concluded that the merger consideration was fair to PalEx
stockholders from a financial point of view. Batchelder also formally withdrew
its original fairness opinion. Based upon this information and subject to
obtaining a commitment for interim financing, the board of directors
unanimously approved the amended and restated merger agreement.
The principal differences between the revised terms of the transaction and
the transaction addressed by Batchelder in its original fairness opinion are
highlighted in the following table:
<TABLE>
<CAPTION>
Original Revised
-------- -------
<S> <C>
. merger consideration of 32%-35% of IFCO . merger consideration with a fixed total
Systems ordinary shares depending on the value of $9.00 per share
trading prices after the IPO
. merger consideration in IFCO Systems . merger consideration in cash and/or IFCO
ordinary shares Systems ordinary shares per elections
. requirement for listing of IFCO Systems . requirement for listing of IFCO Systems
ordinary shares on the Neuer Markt ordinary shares on the Amtlicher Handel
segment of the Frankfurt Stock Exchange or Neuer
Markt segments of the Frankfurt Stock
Exchange
. IFCO Systems to issue stock options to . IFCO Systems to issue stock options for
IFCO Systems management on the vesting the purchase of 300,000 IFCO Systems
and exercise price terms equivalent to ordinary
the outstanding PalEx stock options and shares to each of the Schoellers and
in a number proportionate to the options to purchase up to 1,000,000
Schoellers' 68%-65% ownership shares to employees of Schoeller
Industries and its affiliates
. Pre-IPO combined company valuation of . Pre-IPO combined company valuation of
not less than $390.0 million not less than $400.0 million
. December 31, 1999, termination date . May 31, 2000, termination date
</TABLE>
Following the September 27 board meeting, Vance Maultsby continued to
negotiate interim financing.
On September 28, 1999, representatives of the IFCO Companies and PalEx began
meeting in Houston, Texas, to complete negotiation of the amended and restated
merger agreement and revise the draft proxy statement/prospectus to reflect the
revised transaction terms.
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<PAGE>
On October 4, 1999, the PalEx board of directors held another telephonic
meeting. Casey Fletcher, Philip Freeman, Gregg Gibson, Vance Maultsby, Edward
Rhyne, Howe Wallace, a representative of Batchelder, and a representative of
Gardere & Wynne also participated in the meeting. Vance Maultsby gave the
directors an update on the progress in obtaining interim financing. Mr.
Maultsby indicated that negotiations were continuing. The directors discussed
the desirability of adding a condition or a termination right to the merger
agreement with respect to obtaining the desired interim financing and any
necessary restructuring of PalEx's senior credit facility. The board of
directors confirmed approval of the amended and restated merger agreement on
that basis.
Following this meeting, representatives of Gardere & Wynne and King &
Spalding continued negotiation and preparation of the final terms of the
amended and restated merger agreement.
The amended and restated merger agreement was signed on October 6, 1999, and
PalEx and the IFCO Companies issued a joint press release on October 6, 1999,
to announce the revised terms of the transaction.
On January 31, 2000, IFCO Systems, PalEx, and the other parties to the merger
agreement executed amendment no. 1 to the merger agreement to provide for
technical corrections and to modify the corporate governance provisions to
provide for a single board of directors.
PalEx's Reasons for the Merger
The PalEx board of directors has unanimously approved the merger. During the
period of negotiations and various meetings of the board of directors, the
board of directors carefully considered a number of factors, including the
following material factors in favor of the merger:
(1) Financial Condition and Results of Operations. The PalEx board of
directors reviewed the historical and current financial condition, results
of operations, prospects, and businesses of PalEx and the IFCO Companies
before and after giving effect to the merger. The PalEx board of directors
determined that the combined company would have greater growth
opportunities than either of the separate companies.
(2) Market Prices. The PalEx board of directors reviewed the market
conditions and then current and historic market prices for the PalEx common
stock.
(3) Merger Consideration. The merger agreement is the result of arm's-
length negotiations between PalEx and Schoeller Industries and the
Schoellers and provides for the payment of cash and/or the issuance of IFCO
Systems ordinary shares in exchange for shares of PalEx common stock. PalEx
stockholders will receive a total value of $9.00 per share of PalEx Common
Stock in the form of cash and/or IFCO Systems ordinary shares valued at the
IPO price. The merger consideration represented a premium over the recent
market price per share of the PalEx common stock.
(4) Strategic Business Combination. The PalEx board of directors believes
that the merger will provide PalEx stockholders with cash and/or an
attractive investment in a combined company with growth opportunities that
will be uniquely positioned to provide global product flow technologies and
systems based upon a successful business model for RTCs in Europe and for
pallets and industrial containers in the United States.
(5) Growth Opportunities. The potential for expansion in the United
States of the IFCO Companies' fast-growing business using PalEx's extensive
North American network of locations gives the combined company significant
growth opportunities in global product flow technologies and systems.
(6) Need for Additional Capital. The PalEx board of directors believes it
will be easier for the combined company to raise capital than for PalEx
alone.
(7) Expanded Customer and Retailer Relationships. The merger is expected
to give both PalEx and the IFCO Companies access to the other party's
extensive customer and retailer relationships. The PalEx board of directors
believes the merger will present significant opportunities for cross-
selling among the combined company's businesses. These opportunities
include the expansion of the IFCO Companies' business in the United States
and the improvement of PalEx's relationships in the United States with
global retailers who already participate in the IFCO Companies' systems in
Europe and elsewhere.
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<PAGE>
(8) Operational Experience. The IFCO Companies operate a pooling system
for RTCs with experienced management in Europe. This operational expertise
and experience can be used to assist PalEx in the expansion of its shipping
platform and container management services and in offering RTC services to
U.S. customers and retailers.
(9) Competitive Strengths. The combination of the IFCO Companies and
PalEx will make the combined company stronger competitively than the two
groups separately. The merger may also make the combined company a larger
potential threat to competitors, who may increase their market activities
to combat the threat.
(10) Management. The merger brings together two experienced management
teams with entrepreneurial cultures.
(11) Fairness Opinion. Representatives of Batchelder made a presentation
to the PalEx board of directors on September 27, 1999, regarding valuation.
Batchelder delivered its opinion to the board of directors that, as of
September 27, 1999, the consideration to be received by PalEx stockholders
in the merger is fair to the PalEx stockholders from a financial point of
view.
(12) Tax-Free Transaction. The PalEx board of directors expects that the
merger will qualify as a tax-free reorganization. PalEx stockholders will
recognize gain, if any, on the merger only to the extent of the cash
received as merger consideration.
(13) Due Diligence Review. The PalEx board of directors reviewed the
results of the due diligence investigation of the IFCO Companies conducted
by PalEx's management and representatives.
In reviewing the proposed merger, the PalEx board of directors also
considered other factors, some of which may be viewed as negative with respect
to the merger:
(1) Limits on Merger Consideration. The merger agreement limits the
merger consideration to $9.00 per share and limits the total number of IFCO
Systems ordinary shares that may be issued to PalEx stockholders.
(2) Need for Additional Capital. In order to realize the growth potential
for the combined company, IFCO Systems will need to access a substantial
amount of additional capital beyond the anticipated net proceeds from the
IPO. This is likely to include the use of debt for borrowed money at the
time of the IPO and afterward.
(3) Projected Capital Needs in Excess of Cash Flows through
2003. Projections for the combined company showed capital needs greater
than cash flows from operations through the first three years, which places
additional pressure on IFCO Systems to secure additional capital.
(4) Relatively High Leverage. As a result of the high yield financing and
initial borrowings under a new senior credit facility at the time of the
merger and the IPO, IFCO Systems will have relatively high leverage. The
level of leverage is likely to increase as IFCO Systems reissues additional
amounts under the new senior credit facility or seeks other debt financing
to meet its capital needs.
(5) Implementation of IFCO Systems' Business Plan. The strategic benefits
of the merger and growth opportunities for the combined company will be
realized only if IFCO Systems is able to achieve its business plan,
including successful implementation of its European model of round-trip
systems in the United States and elsewhere. In addition, although the IFCO
Companies have substantial internal growth capability, they have not yet
achieved sustained profitability, which will be necessary to maintain and
increase long-term shareholder value.
(6) Dependence on Favorable Frankfurt Stock Exchange Valuation and
Completion of the IPO. The merger is conditioned upon a favorable
valuation of the combined company and completion of the IPO. It may not be
possible to obtain the required valuation or to complete the IPO.
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<PAGE>
(7) Control by Schoellers. Before and after the IPO, Christoph and Martin
Schoeller will effectively control IFCO Systems, even after any conversion
by GE Erste of its convertible debenture and will hold management
positions. As a result, the Schoellers will have substantial influence over
the affairs of IFCO Systems through their share ownership, the election of
members of the board of directors, as the principal supplier of RTCs, and
otherwise. Neither Christoph nor Martin Schoeller has previously led a
public company.
(8) Dependence on Consolidating Retail Base. The retail market served by
the IFCO Companies in Europe, including the grocery segment, is
consolidating and, therefore, the number of retailer groups is decreasing.
There is a similar trend in the United States. Given the IFCO Companies'
experience in Europe and continued successful relationships with retailer
groups, the PalEx board of directors determined this factor was not
material.
(9) Negative Cash Flow from IFCO Japan. IFCO International is a minority
owner of IFCO Japan, which is still in its startup phase of operation and
is currently generating negative cash flow. The PalEx board of directors
determined that this factor was not material since negative cash flow was
to be expected initially and because of the minority ownership.
In view of the wide variety of factors considered in its evaluation of the
merger, the PalEx board of directors did not find it practicable to attempt to
quantify, rank, or otherwise assign relative weights to specific factors
considered in reaching its decision. The PalEx board of directors reached a
general consensus that the merger was in the best interests of PalEx and the
PalEx stockholders. In considering these factors, individual members of the
board of directors may have given different weight to different factors.
IFCO Companies' Reasons for the Merger
The IFCO Companies' management boards have unanimously determined that the
merger is fair to and in the best interests of the IFCO Companies and its
shareholders. The material factors taken into account by IFCO Companies'
management boards in reaching their conclusions and formulating their
recommendation are set forth below:
. IFCO Systems could accelerate the roll-out of the IFCO Companies'
existing early-stage round-trip systems in the United States. The merger
with PalEx should enable the IFCO Companies to expand more rapidly using
PalEx's existing infrastructure of 72 facilities in the United States
and Canada.
. A combination of the flow of pallets and containers is expected to
unlock a significant cost-saving potential for the IFCO Companies and
their customers.
. IFCO Systems will be uniquely positioned to offer customers complete
backdock services, which includes initial product receiving and
container or pallet disposition operations on a retailer's back dock.
Having considered these advantages, the IFCO Companies' management boards
determined that a combination with PalEx represented a unique strategic
opportunity for the IFCO Companies and their shareholders, who could continue
to participate as shareholders in the combined company.
Projections for PalEx and the IFCO Companies
The following sets forth financial information and projections provided by
each of PalEx and the IFCO Companies to the other party for the fiscal years
ending December 31, 2000 through 2002. Each of PalEx and the IFCO Companies
developed their financial projections based on their best estimates of the
expected future performance at the time the projections were prepared. These
projections could change and are not necessarily indicative of the actual
performance at the time of the merger and the IPO, or the actual future
performance after the merger and the IPO, of PalEx, the IFCO Companies, or IFCO
Systems.
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<PAGE>
Neither IFCO Systems, PalEx, nor the IFCO Companies publicly disclose
financial projections in the ordinary course and do not intend to publish any
financial projections in the future. The following projections were not
prepared with a view to public disclosure. The projections were delivered to
PalEx's and the IFCO Companies' management in connection with each party's due
diligence investigation of the other party and preparation for the IPO. These
projections also were not prepared in accordance with generally accepted
accounting principles. Neither PalEx's nor the IFCO Companies' independent
accountants have examined, reviewed, or compiled any of the following
projections or expressed any conclusion or provided any other form of assurance
with respect to the projections and, accordingly, assume no responsibility for
the projections. These projections were not prepared with a view to compliance
with the guidelines established by the American Institute of Certified Public
Accountants regarding projections, which would require more complete
presentation of data than as shown below.
<TABLE>
<CAPTION>
PalEx (in millions):
2000 2001 2002
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................. $421 $540 $670
EBITDA.................................................... $ 47 $ 63 $ 87
EBIT...................................................... $ 32 $ 42 $ 60
Net income................................................ $ 7 $ 9 $ 16
<CAPTION>
IFCO Companies (in millions):
2000 2001 2002
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................. $199 $266 $340
EBITDA.................................................... $ 57 $ 74 $ 98
EBIT...................................................... $ 21 $ 27 $ 37
Net income................................................ $ 6 $ 10 $ 14
</TABLE>
Recommendation of the PalEx Board of Directors
The PalEx board of directors unanimously recommends that PalEx stockholders
vote for the approval and adoption of the merger agreement.
Opinion of PalEx's Financial Advisor
The PalEx board of directors retained Batchelder & Partners, Inc., to act as
a financial advisor to PalEx and the PalEx board of directors in connection
with the merger. The terms of the merger agreement, including the merger
consideration, were determined through negotiations between PalEx and the IFCO
Companies. Batchelder did not recommend the amount of consideration to be paid
to PalEx stockholders. Batchelder was retained based upon its experience and
expertise in transactions similar to the merger and its reputation in the
investment community. Batchelder is a nationally recognized investment banking
and financial advisory firm and, as part of its investment banking activities,
is regularly engaged in the valuation of businesses and their securities in
connection with merger transactions and other types of acquisitions,
dispositions, business combinations, private placements, and valuations for
corporate and other purposes.
At the September 27, 1999, meeting of the PalEx board of directors,
Batchelder delivered a presentation and oral fairness opinion to the PalEx
board of directors. Batchelder subsequently confirmed this opinion in writing
as of that date and has consented to the inclusion of this opinion, its
summary, and all references to Batchelder in this proxy statement/prospectus.
The opinion stated that, subject to the considerations set forth in its written
opinion, the consideration to be received by the holders of PalEx common stock
pursuant to the merger was fair to the holders of PalEx common stock from a
financial point of view. No limitations were imposed by PalEx on Batchelder
with respect to the investigations made or procedures followed in rendering its
opinion. However, Batchelder was not retained or requested to consider any
strategic or financial alternatives to the merger or to seek indications of
interest from other potential buyers in connection with rendering its opinion.
35
<PAGE>
The full text of Batchelder's opinion, dated September 27, 1999, which sets
forth the qualifications, assumptions made, matters considered, limitations on
the review undertaken in connection with the opinion, and circumstances where
the opinion should not be relied upon, is attached as Appendix B to this proxy
statement/prospectus and is incorporated by reference. Some of these
assumptions relate to future market conditions and other matters beyond the
control or influence of PalEx or IFCO Systems. Batchelder's original fairness
opinion presented to the PalEx board, dated March 28, 1999, was withdrawn as of
September 27, 1999, due to the material modifications made to the merger
agreement after the date of the original opinion.
The summary of Batchelder's opinion in this proxy statement/prospectus is
qualified in its entirety by the full text of its written opinion. PalEx urges
you to read the full written opinion carefully.
Batchelder's opinion does not constitute a recommendation to any holder of
PalEx common stock as to whether the stockholder should vote for or against the
merger agreement. Batchelder's opinion addresses only the financial fairness of
the merger consideration to be received by the stockholders of PalEx as of
September 27, 1999, and does not address any other aspect of the merger.
Batchelder's opinion states that it is not a report or valuation within the
meaning of Section 11 of the Securities Act, and Batchelder has not assumed
responsibility under the terms of its engagement for performing the level of
diligence or independent verification that would be required for Batchelder to
render a report or valuation within the meaning of the applicable provisions of
the Securities Act.
In connection with its opinion, Batchelder, among other things:
.reviewed publicly available and internal financial and other data of PalEx
and the IFCO Companies;
. reviewed the audited financial statements of PalEx for the years ended
November 30, 1996, December 28, 1997 and December 27, 1998, and
quarterly unaudited 1999 financial statements through June 27,1999, all
as filed with the SEC;
. reviewed the audited financial statements of the IFCO Companies for the
years ended December 31, 1996, 1997 and 1998, and internally generated,
unaudited financial statements of the IFCO Companies for interim
quarters through June 30, 1999;
. reviewed the financial terms and conditions of a draft amended and
restated merger agreement provided on September 24, 1999;
. reviewed publicly available information concerning the trading of, and
the trading market for, PalEx common stock;
. reviewed with investment bankers knowledgeable of the Frankfurt Stock
Exchange, who were identified to Batchelder by the IFCO Companies and by
PalEx, publicly available information concerning the trading market for
stocks listed on the Frankfurt Stock Exchange and estimates of implied
value ranges for the IFCO Systems ordinary shares;
. compared PalEx and IFCO Systems from a financial point of view with
other comparable companies in the materials handling and packaging and
logistics industries;
. considered the financial terms, as they relate to PalEx and to the
extent publicly available, of comparable recent business combinations of
companies in the materials handling and packaging industry;
. discussed with PalEx's management the prospects for, and business
challenges facing, PalEx without the merger;
. reviewed and discussed with management representatives of PalEx and the
IFCO Companies business and financial information regarding PalEx and
the IFCO Companies furnished to Batchelder, including financial
forecasts and related assumptions of PalEx and the IFCO Companies and
the operating synergies and strategic benefits they expect to result
from the merger;
. made inquires regarding, and discussed, the merger and the merger
agreement and other related matters with PalEx's legal counsel; and
. performed other analyses and examinations as Batchelder deemed
appropriate.
36
<PAGE>
In connection with its review, Batchelder did not assume any obligation to
verify independently this information and relied on its accuracy and
completeness in all material respects. With respect to the financial forecasts
provided to Batchelder by the managements of PalEx and the IFCO Companies,
including projections of synergies, Batchelder assumed that:
(1) the forecasts were reasonably prepared on bases reflecting the best
available estimates and judgments as to the future financial
performance of PalEx and the IFCO Companies;
(2) PalEx and the IFCO Companies will perform substantially in accordance
with these projections; and
(3) these projections provide a reasonable basis upon which Batchelder can
form its opinion.
With respect to the operating synergies and strategic benefits expected by
PalEx's management to result from the merger, PalEx advised Batchelder to
assume that these synergies and benefits will be substantially achieved.
Batchelder also assumed that there had been no material changes in PalEx's or
the IFCO Companies' assets, financial condition, results of operations,
business, or prospects since the dates of their last financial statements made
available to Batchelder. The managements of PalEx and the IFCO Companies
advised Batchelder, and Batchelder assumed, that they were not aware of any
facts or circumstances that would make the information reviewed by Batchelder
inaccurate or misleading in any material respect.
Batchelder relied on advice of PalEx's legal counsel and independent
accountants as to all legal and financial reporting matters with respect to
PalEx, the merger, and the merger agreement. Batchelder assumed that the merger
will be treated as a purchase of PalEx under Accounting Principles Board
Opinion No. 16 and that the merger will be treated as a tax-free reorganization
within the meaning of Section 368 of the U.S. Internal Revenue Code. Batchelder
also assumed that the merger will be completed in a manner that complies in all
respects with the applicable provisions of the Securities Act, the Securities
Exchange Act, and all other applicable federal and state statutes, rules, and
regulations, including applicable laws of Germany and the Netherlands.
In addition, Batchelder did not make an independent evaluation, appraisal, or
physical inspection of any of the assets or liabilities of PalEx or the IFCO
Companies, nor has Batchelder been furnished with any appraisals.
Batchelder's opinion is based on economic, monetary and currency exchange,
Nasdaq National Market and Frankfurt Stock Exchange, and other conditions as in
effect on, and the information made available to Batchelder as of, September
27, 1999. The opinion should not be relied upon if future facts and
circumstances are inconsistent with Batchelder's assumptions and, if
Batchelder's assumptions are not supported by facts and circumstances at the
time of the special meeting to vote on the merger agreement, Batchelder
reserves the right, and it would expect, to withdraw the opinion. Although
subsequent developments may affect its opinion, and except to the extent
provided below, Batchelder did not assume any obligation to update, revise, or
reaffirm its opinion.
Batchelder further assumed that the representations and warranties of each
party in the merger agreement are true and correct, that each party to the
merger agreement will perform all of the covenants and agreements required to
be performed by that party under the merger agreement, and that the merger will
be completed in accordance with the terms described in the merger agreement,
without any further amendment, and without waiver by PalEx of any of the
conditions to its obligations. Batchelder also assumed that in the course of
obtaining the necessary regulatory or other consents or approvals, contractual
or otherwise, for the merger, no restrictions, amendments, or modifications
will be imposed that will have a material adverse effect on the contemplated
benefits of the merger.
Batchelder expressed no opinion regarding the likelihood that IFCO Systems
will complete the IPO or the price at which the IFCO Systems ordinary shares
may trade at any time. However, because the value of the merger consideration
will depend upon whether the IPO occurs and its pricing, in order to deliver
its opinion as of September 27, 1999, Batchelder, at PalEx's instruction,
assumed for purposes of its opinion
37
<PAGE>
that concurrently with or immediately after the merger, IFCO Systems will
complete an IPO of sufficient size so that (1) an active and liquid trading
market in IFCO Systems ordinary shares will exist and (2) investment analysts
would cover IFCO Systems in their regular reports. Batchelder was unable to
assess the reasonableness of assumptions for any date after September 27, 1999,
related to initial public offerings for, and the trading of securities listed
on, the Frankfurt Stock Exchange and euro to U.S. dollar exchange rates, all of
which depend upon factors beyond any control or influence of the IFCO Companies
and PalEx. Batchelder's opinion should not be relied upon if future facts and
circumstances are inconsistent with its assumptions. If Batchelder's
assumptions are not supported by facts and circumstances at the time of the
special meeting of PalEx's stockholders, Batchelder reserves the right, and it
would expect, to withdraw its opinion.
Additionally, the market value of the merger consideration received in the
merger can be expected to change after completion of the merger as the trading
price of the IFCO Systems ordinary shares changes in the ordinary course or
otherwise of purchases and sales in the open market.
The following is a summary of the report presented by Batchelder to the PalEx
board of directors on September 27, 1999, in connection with its opinion dated
as of that date.
Comparable Public Company Analysis. Batchelder reviewed the trading multiples
of companies comparable to PalEx to assess the valuation of PalEx assuming it
traded at the mean or median multiples of its peers. Using public and other
information provided by PalEx, Batchelder calculated a range of implied values
for PalEx common stock based on a comparison of the last 12 months' revenues,
last 12 months' EBITDA, last 12 months' EBIT, last 12 months' net income, and
estimated 1999 net income of the following 16 publicly traded comparable
materials handling and packaging companies and 10 publicly traded comparable
logistics and transportation companies:
Comparable Materials Handling and Packaging Companies
. AEP Industries, Inc. . Ivex Packaging Corporation
. Artra Group, Inc. . Mobile Mini, Inc.
. Ball Corporation . Myers Industries, Inc.
. Bemis Co. . Owens-Illinois, Inc.
. BWAY Corporation . Silgan Holdings, Inc.
. Carmel Container Systems . Sonoco Products Company
. Crown Cork & Seal Company . Tuscarora Incorporated
. Greif Bros. Corporation . U.S. Can Corporation
Comparable Logistics and Transportation Companies
. Air Express International Corp. . Expeditors International of
. C.H. Robinson Worldwide, Inc. Washington
. Circle International Croup, Inc. . Fritz Companies, Inc.
. Corporate Express, Inc. . Hub Group, Inc.
. Eagle USA Airfreight, Inc. . Rollins Truck Leasing Corp.
. Ryder Systems, Inc.
The September 23, 1999, stock prices of the comparable companies resulted in
the following mean and median multiples of (1) aggregate value, which is
defined as equity value plus long-term debt, and (2) equity value:
<TABLE>
<CAPTION>
Mean Median
Multiple Multiple
-------- --------
<S> <C> <C>
Aggregate value/last 12 months' revenues................... 1.1x 0.8x
Aggregate value/last 12 months' EBITDA..................... 8.4x 6.9x
Aggregate value/last 12 months' EBIT....................... 14.2x 11.3x
Equity value/last 12 months' net income.................... 23.8x 16.9x
Equity value/1999 net income............................... 16.4x 14.6x
</TABLE>
38
<PAGE>
Batchelder applied the mean and median multiples for the comparable companies
to PalEx's applicable last twelve months' results as of June 30, 1999, and 1999
forecasts, and made adjustments by subtracting PalEx's long-term debt as of
June 30, 1999 ($143 million), where applicable, to determine the implied equity
value of PalEx. The resulting range of values for the implied equity value of
PalEx was $98 million to $249 million. Batchelder gave more weight to the
multiples of reported EBITDA, EBIT, and net income in this analysis. This
analysis indicated an implied equity value, which is defined as aggregate value
minus long-term debt, of PalEx of between $142.1 million and $182.7 million, or
between $7.00 and $9.00 per share of PalEx common stock. This value range was
on the low- to mid-end of the value that Batchelder assessed.
Comparable Transaction Analysis. In order to estimate the value per share of
PalEx common stock assuming PalEx were sold, Batchelder reviewed the
consideration paid in six merger and acquisition transactions in the packaging
and industrial container industry announced since January 1997. Batchelder
analyzed the consideration paid in these transactions as a multiple of (1)
aggregate value to the target companies' last 12 months' revenues, last 12
months' EBITDA, and last 12 months' EBIT and (2) equity value to the target
companies' last 12 months' net income. This analysis yielded the following mean
and median multiples:
<TABLE>
<CAPTION>
Mean Median
Multiple Multiple
-------- --------
<S> <C> <C>
Aggregate value/last 12 months' revenues................... 0.7x 0.6x
Aggregate value/last 12 months' EBITDA..................... 9.7x 4.6x
Aggregate value/last 12 months' EBIT....................... 18.8x 13.0x
Equity value/last 12 months' net income.................... 32.8x 14.6x
</TABLE>
Batchelder then applied the mean and median multiples to PalEx's June 30,
1999, last 12 months' revenues, last 12 months' EBITDA, last 12 months' EBIT,
and last 12 months' net income. The resulting range of values for the implied
equity value of PalEx was $48 million to $358 million. Batchelder gave more
weight to the value calculations based on last 12 months' EBITDA and last 12
months' net income in this analysis. This analysis indicated an implied equity
value of PalEx of between $121.8 million and $223.3 million, or between $6.00
and $11.00 per share. This value range was consistent with the overall value
per share of PalEx common stock that Batchelder assessed, although with a wider
range.
Premiums Paid Analysis. Batchelder reviewed the consideration paid in 146
U.S. acquisitions involving consideration of between $100 million and $300
million announced since January 1, 1998, excluding technology and biotechnology
transactions. Batchelder performed this analysis in order to determine the
average premium to stock price that PalEx stockholders may expect upon a change
of control transaction. Batchelder calculated the premiums paid in these
transactions over the applicable stock prices of the target companies one day,
one week, and 30 days before the announcement of the acquisitions and then
calculated both the mean and the median of the premiums as follows:
<TABLE>
<CAPTION>
Mean Median
Premium Paid Premium Paid
------------ ------------
<S> <C> <C>
1 day.............................................. 29.3% 24.3%
1 week............................................. 34.5% 30.2%
30 days............................................ 42.4% 39.6%
</TABLE>
Batchelder then applied the mean and median premiums to PalEx's closing stock
prices one day ($5.88), one week ($5.46), and 30 days ($5.54) before September
24, 1999. Based on this analysis, an application of the mean and median
premiums to the September 24, 1999, closing stock price of PalEx's common stock
indicated an assessed equity valuation range of $162.4 million to $182.7
million, or between $8.00 and $9.00 per share. This value range was consistent
with the range per share of PalEx common stock that was assessed by Batchelder.
No company or transaction used in the comparable company analysis, the
comparable transaction analysis, or the premiums paid analysis is identical to
PalEx or the combined company resulting from the merger.
39
<PAGE>
Accordingly, an evaluation of the results of these analyses is not simply a
mathematical calculation. It involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading value of the
companies being analyzed.
Discounted Cash Flow Analysis. In order to calculate an estimate of the value
of PalEx from a cash flow perspective, Batchelder performed a discounted cash
flow analysis using the financial forecasts for PalEx for 2000 through 2008
supplied by PalEx's management. First, Batchelder considered management's
estimate of the future stream of free cash flows that PalEx would produce
through 2008 and then calculated a range of PalEx terminal values at the end of
2008 by applying a range of EBITDA exit multiples from 7.0x to 9.0x to PalEx's
estimated EBITDA in 2008. The cash flow stream and terminal values were
discounted to present values using discount rates ranging from 12.0% to 16.0%,
which were chosen to reflect reasonable ranges of PalEx's estimated cost of
capital. PalEx management advised Batchelder that PalEx as a stand-alone
company most likely could not economically raise, in the near future, capital
via the public equity markets. As a result, the range of discount rates used
incorporates returns on capital that would likely include required equity
returns from the private equity markets. This analysis indicated an implied
equity value of PalEx of between $142.1 million and $182.7 million, or between
$7.00 and $9.00 per share. This range is consistent with the overall value per
share of PalEx common stock that Batchelder assessed.
The summary above is not a comprehensive description of all analyses and
examinations actually conducted by Batchelder in the preparation of its
opinion. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses and of the factors considered by Batchelder, without
considering all analyses and factors, would create an incomplete view of the
process underlying Batchelder's presentation to the PalEx board of directors.
In addition, Batchelder may have given some analyses more or less weight than
other analyses and may have deemed various assumptions more or less probable
than other assumptions. Accordingly, the ranges of valuations resulting from
any particular analysis described above should not be taken to be Batchelder's
or PalEx's view of the actual value of PalEx or the PalEx common stock. To the
contrary, Batchelder expressed no opinion on the actual value of PalEx, the
PalEx common stock, or the actual value of the merger consideration to be
received by PalEx stockholders in exchange for their PalEx common stock. Its
opinion, which is addressed and limited to the PalEx board of directors,
extends only to the opinion expressed by Batchelder that the value of the
merger consideration to holders of PalEx common stock, from a financial point
of view under the merger, based on facts and circumstances existing at the date
of the opinion and in reliance on material assumptions described in this
summary, is within the range of values that might fairly be ascribed to PalEx
common stock as of September 27, 1999, the date of Batchelder's opinion.
In performing its analyses, Batchelder made numerous assumptions with respect
to industry performance, general business and economic conditions, and other
matters, many of which are beyond the control of PalEx and the IFCO Companies.
The analyses performed by Batchelder are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than those suggested by these analyses. The analyses do not purport
to be appraisals or to reflect the prices at which a company might actually be
sold or the prices at which any securities may trade at any time in the future.
Batchelder used in its analyses various projections of future performance
prepared by the managements of PalEx and the IFCO Companies. The projections
are based on numerous uncertain variables and assumptions that are inherently
unpredictable. Accordingly, actual results could vary significantly from those
assumed in these projections.
The opinion of Batchelder and the presentation to the PalEx board of
directors summarized above were among the many factors taken into consideration
by the PalEx board of directors in determining whether to approve and to
recommend that PalEx stockholders approve the merger. Batchelder, however, does
not make any recommendation to holders of PalEx common stock or to any other
person or entity as to whether the stockholders should vote for or against the
merger agreement. Batchelder's opinion did not address the relative merits of
the merger, any alternatives to the merger, or PalEx's underlying business
decision to proceed with or effect the merger.
40
<PAGE>
Pursuant to the terms of its engagement, PalEx paid Batchelder a fee of
$300,000 upon presentation of its original fairness opinion, which would have
been payable regardless of the conclusions of the opinion. In consideration of
the financial advisory services provided to PalEx in connection with the
merger, immediately before completion of the merger Batchelder will receive
200,000 shares of PalEx common stock, but only if the merger is completed. Upon
completion of the merger, Batchelder will also vest in 250,000 previously
issued warrants for PalEx common stock with an exercise price of $11.375 per
share. In the merger, the shares of PalEx common stock will be exchanged for
and converted into cash and/or IFCO Systems ordinary shares, as Batchelder may
elect pursuant to the merger agreement. The warrants will be converted to
warrants to purchase IFCO Systems ordinary shares pursuant to the merger
agreement. In addition, PalEx has agreed to reimburse Batchelder for its out-
of-pocket expenses and to indemnify Batchelder and related parties against
specified liabilities, including liabilities under the federal securities laws.
In the past, Batchelder has provided financial advisory and investment banking
services to PalEx and has received customary fees for the rendering of these
services. From the time Batchelder was retained in May 1998, Batchelder has
received $350,000 in retainer fees from PalEx in addition to the fee for the
fairness opinion. Pursuant to the engagement letter between Batchelder and
PalEx, Batchelder is expected to continue its financial advisory services until
April 30, 2000.
Interests of Certain Persons in the Merger
In considering the recommendation of the PalEx board of directors to approve
the merger, PalEx stockholders should be aware that the PalEx directors and
executive officers have interests in the merger, which are discussed below.
Stock Ownership. All directors and executive officers of PalEx are beneficial
owners of PalEx common stock. Pursuant to the merger agreement, shares of PalEx
common stock held by directors and executive officers of PalEx will be
exchanged for cash and/or IFCO Systems ordinary shares on the same basis as for
other PalEx stockholders.
Change of Control Agreements. PalEx has written employment agreements with
nine executive officers or directors:
. A. Joseph Cruz, President and Chief Operating Officer;
. Casey A. Fletcher, Chief Accounting Officer and Secretary;
. Troy L. Fraser, director;
. Phillip M. Freeman, Executive Vice President;
. A.E. Holland, Jr., director, and President of Ridge Pallets, Inc., a
wholly owned subsidiary of PalEx;
. Vance K. Maultsby, Jr., Chief Executive Officer;
. Edward E. Rhyne, Vice President and General Counsel;
. Stephen C. Sykes, director, and President of Interstate Pallet Co., Inc.,
a wholly owned subsidiary of PalEx; and
. Elliot S. Pearlman, director, and President and Chief Executive Officer
of PalEx Container Systems, Inc.
The employment agreements of Casey Fletcher, Troy Fraser, A.E. Holland, Vance
Maultsby, Edward Rhyne, and Stephen Sykes contain provisions concerning a
change in control of PalEx, including the following:
. in the event five days' advance notice of the transaction giving rise to
the change in control is not received by PalEx and the officer or
director, the change in control will be deemed a termination of the
employment agreement by PalEx without cause, and the provisions of the
employment agreement governing a termination without cause will apply,
except that the severance amount otherwise payable, which is the base
salary for the greater of a year or the remaining employment term, will
be tripled and the provisions that restrict competition with PalEx will
not apply;
41
<PAGE>
. in any change of control situation, the officer or director may elect to
terminate his employment by giving five days' written notice prior to
the anticipated closing of the transaction giving rise to the change in
control, which will be deemed a termination of the employment agreement
by PalEx without cause, and the provisions of the employment agreement
governing a termination without cause will apply, except that the
severance amount otherwise payable will be doubled and the time period
during which the officer or director is restricted from competing with
PalEx will be shortened to two years; and
. the officer or director must be given sufficient time and opportunity to
elect whether to exercise all or any of his options to purchase PalEx
common stock, including any options with accelerated vesting under the
provisions of the stock option plan, so that, if he desires, the officer
or director may acquire PalEx common stock at or prior to the closing of
the transaction giving rise to the change in control.
The merger will constitute a change of control under these employment
agreements. Under the merger agreement, PalEx has agreed to use its reasonable
efforts to cause these six executive officers or directors and the nine other
employees with this type of employment agreement to waive any rights of
termination and rights to receive severance or other payments from PalEx in
connection with a change of control resulting from the merger. The change of
control waivers are a condition to completion of the merger.
Stock Options. Pursuant to the merger agreement, each option to purchase
PalEx common stock that is outstanding at the effective time of the merger will
automatically convert into an option to purchase a number of IFCO Systems
ordinary shares. The number of IFCO Systems ordinary shares will be equal to
the number of shares of PalEx common stock that could have been purchased under
the converted option multiplied by the exchange ratio under the merger
agreement. Upon exercise, cash will be paid instead of any fractional IFCO
Systems ordinary share. The exercise price per share will be equal to the per
share exercise price of the converted option divided by the exchange ratio.
With respect to qualified or incentive stock options, the conversion will be
made in a manner consistent with the applicable provisions of the U.S. Internal
Revenue Code. PalEx optionholders will also be given the alternative of
electing to exchange their options for new, fully vested options, exercisable
at the IPO price, to purchase the number of IFCO Systems ordinary shares that
represents the economic equivalent of a straight conversion into options to
purchase IFCO Systems ordinary shares as described above.
The merger will be a change of control event under the terms of PalEx's stock
option plan. As a result, all of the outstanding stock options will be fully
vested at the effective time of the merger and at the time of conversion into
new options to purchase IFCO Systems ordinary shares.
IFCO Systems has agreed to maintain an effective registration statement under
the Securities Act to cover the IFCO Systems ordinary shares issuable upon the
exercise of the new options and warrants resulting from this conversion, as
well as the new warrant issued to Batchelder. See "The Merger Agreement--
Treatment of PalEx Stock Options and Warrants."
The following table lists the directors and executive officers of PalEx who
are holders of options to purchase PalEx common stock, the number of shares of
PalEx common stock that may be purchased upon exercise of the options, and the
number of IFCO Systems ordinary shares that may be purchased upon exercise
after conversion pursuant to the merger agreement:
42
<PAGE>
<TABLE>
<CAPTION>
Shares of PalEx IFCO Systems Ordinary
Common Stock Shares Purchasable
Name Purchasable Upon Exercise After Conversion(1)
---- ------------------------- ---------------------
<S> <C> <C>
Tucker S. Bridwell............. 45,000 29,790
John E. Drury.................. 25,000 16,550
Sam Humphreys.................. 5,000 3,310
Vance K. Maultsby, Jr.......... 200,000 132,400
Elliot S. Pearlman............. 100,000 66,200
Edward E. Rhyne................ 200,000 132,400
</TABLE>
- --------
(1) Assuming PalEx stockholders will receive approximately 0.662 IFCO Systems
ordinary shares for each share of PalEx common stock in the merger.
In addition, under the merger agreement, as of the closing date of the
merger, IFCO Systems will issue options to purchase 300,000 IFCO Systems
ordinary shares to each of Christoph Schoeller, Martin Schoeller, and Sam
Humphreys as incentive compensation for their involvement in the business of
IFCO Systems. The exercise price for these options will be the IPO price. On or
after the closing date, IFCO Systems also shall be entitled to issue options to
purchase up to 1,000,000 IFCO Systems ordinary shares to employees of Schoeller
Industries or its affiliates. Christoph and Martin Schoeller are not eligible
to receive any of these options. In addition, no eligible employee may be
granted options for more than 100,000 shares. The exercise price for these
options will be the market value per IFCO Systems ordinary share on the date of
grant, which will be the IPO price if the options are granted on the closing
date of the merger and the IPO. Each of these options will be fully exercisable
on the date of grant.
In January 2000, PalEx granted options to purchase 200,000 shares of PalEx
common stock to Eckhard Pfeiffer, who will become a director of IFCO Systems
after the merger. The exercise price of the options is $7.00 per share, the
closing sale price of the PalEx common stock on the date of the grant. The
options will only be exercisable if the merger and the IPO are completed and if
Mr. Pfeiffer is an IFCO Systems director on the first anniversary of the
closing of the merger and the IPO. The options will be converted into options
to purchase IFCO Systems ordinary shares as part of the merger.
Assuming PalEx stockholders elect to receive 49% of the total merger
consideration in cash, after the merger and the IPO, there will be
approximately 38.7 million IFCO Systems ordinary shares outstanding.
Indemnification and Insurance. After the effective time of the merger, IFCO
Systems and the surviving corporation will each indemnify, to the fullest
extent permitted under applicable law, all present and former directors,
officers, employees, or agents of PalEx or any of its subsidiaries against
claims related to any action or omission in connection with the person's
service to PalEx before the effective time. IFCO Systems and the surviving
corporation will also indemnify these persons for claims arising out of or
related to the transactions contemplated by the merger agreement. This
indemnification obligation includes the payment of reasonable legal fees and
expenses and other reasonable expenses before the final resolution of the
claim. If necessary, the determination of whether a person's conduct complies
with Delaware law or the surviving corporation's charter or bylaws will be made
by independent legal counsel. If it is determined by any court with competent
jurisdiction that an indemnified person was not entitled to be indemnified,
then that person will be required to repay the amounts advanced or paid by IFCO
Systems or the surviving corporation.
For a period of six years after the effective time, IFCO Systems will
maintain the current PalEx policies of directors' and officers' liability
insurance or will maintain substitute policies that have at least the same
coverage and are otherwise materially the same as the current policies. IFCO
Systems' obligation is, however, limited to insurance coverage costing no more
than 130% of the previous year's cost.
Future Employment and Continued Compensation and Benefits. For at least two
years following the effective time of the merger, IFCO Systems will provide all
current and former employees of PalEx and its subsidiaries, including PalEx's
executive officers, with compensation and benefits that are at least generally
as
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favorable as the compensation and benefits they were entitled to receive
immediately before the effective time. This includes benefits pursuant to
retirement plans, medical plans, layoff policies, and deferred compensation
arrangements. In addition, time of service with PalEx or any of its
subsidiaries will be recognized for purposes of determining any benefit
eligibility, vesting, or accrual. IFCO Systems is not, however, required to
grant any stock options to any employee.
IFCO Systems will also honor each existing employment, severance, and
termination agreement between PalEx or any of its subsidiaries and any
director, executive officer, or employee. IFCO Systems will not unilaterally
amend any of these agreements for at least two years in any way that would
reduce or impair benefits payable to a covered employee.
IFCO Systems has agreed upon employment terms with Vance K. Maultsby, Jr., as
Executive Vice President, Strategy and Finance and Chief Financial Officer, and
Edward E. Rhyne, as Executive Vice President and General Counsel, after the
merger. The new employment terms will be effective upon completion of the
merger. For each officer, the initial term of employment will be three years.
Mr. Maultsby will have a base salary of $300,000 per year initially. He will
also be granted options to purchase 100,000 IFCO Systems ordinary shares at the
IPO price, which will vest over a three-year period. Mr. Rhyne will have a base
salary of $236,000 per year initially, which will increase to $250,000 on June
1, 2000. He will also be granted options to purchase 135,000 IFCO Systems
ordinary shares at the IPO price, which will vest over a three-year period.
Both officers will be eligible to participate in an executive bonus plan, which
has not yet been adopted. In addition, upon completion of the merger, each
officer will be entitled to a transaction completion bonus equal to one to two
times his base salary.
Appraisal Rights
PalEx is a Delaware corporation. Section 262 of the Delaware General
Corporation Law provides appraisal rights, or "dissenters' rights" to
stockholders of a Delaware corporation that is involved in a merger.
The following discussion is not a complete statement of the appraisal rights
under Section 262, but covers all material provisions. The full text of Section
262 is reprinted as Appendix C to this proxy statement/ prospectus. For
purposes of this discussion, all references here and in Section 262 to a
stockholder are to the PalEx stockholders of record immediately prior to the
effective time of the merger. A person having a beneficial interest in shares
of PalEx held of record in the name of another person, like a broker or
nominee, must act promptly to cause the record holder to follow the steps
summarized below properly and timely in order to perfect appraisal rights.
Stockholders who follow the specific procedures set forth in Section 262 will
be entitled to have their shares of PalEx common stock appraised by the
Delaware Court of Chancery and to receive payment of the fair value of their
shares, but without any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, as determined
by the Delaware Court of Chancery.
Under Section 262, where a merger agreement is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the special
meeting, not less than 20 days prior to the meeting, PalEx must notify each of
its stockholders entitled to appraisal rights that appraisal rights are
available and include in each notice a copy of Section 262. This proxy
statement/prospectus is that notice. Any stockholder who wishes to exercise
appraisal rights or wishes to preserve the right to do so should review the
following discussion and Appendix C carefully. Failure to properly and timely
comply with the procedures specified in Section 262 will result in the loss of
appraisal rights under Delaware law.
A stockholder wishing to exercise appraisal rights must deliver to PalEx,
before the vote on the approval and adoption of the merger agreement at the
special meeting, a written demand for appraisal of the shares of PalEx common
stock held by the stockholder. The stockholder must reasonably inform PalEx of
the identity of the stockholder as well as the stockholder's intention to
demand an appraisal of the fair value of the shares held. In addition, a
stockholder wishing to exercise appraisal rights or wishing to preserve the
right to do so must hold the shares of record on the date the written demand
for appraisal is made and must continue to hold the shares through the
effective time of the merger.
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Only a stockholder is entitled to assert appraisal rights for PalEx common
stock registered in the stockholder's name. A demand for appraisal should be
executed by or on behalf of the stockholder, fully and correctly, as the
stockholder's name appears on the stockholder's stock certificates. The demand
must state that the stockholder intends to demand appraisal of the shares of
PalEx common stock held by the stockholder.
If the shares of PalEx common stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian, or custodian, the demand should be
made in that capacity. If the shares of PalEx common stock are owned of record
by more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on
behalf of a stockholder of record. The agent must, however, identify the record
owner or owners and expressly disclose the fact that, in executing the demand,
the agent is agent for the owner or owners. A stockholder, such as a broker who
holds PalEx common stock as nominee for several beneficial owners, may exercise
appraisal rights with respect to the shares of PalEx common stock held for one
or more beneficial owners while not exercising appraisal rights with respect to
the PalEx common stock held for other beneficial owners. The written demand
should set forth the number of shares of PalEx common stock as to which
appraisal is sought. If no number of shares of PalEx common stock is expressly
mentioned, the demand will be presumed to cover all PalEx common stock held in
the name of the stockholder. Stockholders who hold their shares in brokerage
accounts or other nominee forms, and who wish to exercise appraisal rights, are
urged to consult with their brokers to determine the appropriate procedures for
the nominee to exercise appraisal rights.
All written demands for appraisal of PalEx common stock should be mailed or
delivered to PalEx at 6829 Flintlock Road, Houston, Texas 77040, Attention:
General Counsel, so they will be received before the vote on the approval and
adoption of the merger agreement at the special meeting.
Within ten days after the effective time of the merger, PalEx, as the
surviving corporation, must send a notice regarding the effectiveness of the
merger to each person who has satisfied the demand provisions of Section 262.
Within 120 days after the effective time, but not thereafter, PalEx, or any
stockholder entitled to appraisal rights under Section 262 and who has complied
with the demand procedures, may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the stockholder's
shares. PalEx is not under any obligation, and has no present intention, to
file a petition with respect to the appraisal of the fair value of the PalEx
common stock. Accordingly, stockholders must initiate all necessary action to
perfect their appraisal rights within the time period in Section 262.
Within 120 days after the effective time of the merger, any stockholder who
has complied with the requirements for exercise of appraisal rights will be
entitled to request in writing a statement from PalEx setting forth the total
number of shares of PalEx common stock not voted in favor of the merger and
with respect to which demands for appraisal have been received and the total
number of holders of those shares. The statement must be mailed to the
stockholder within ten days after the written request has been received by
PalEx or within ten days after expiration of the period for delivery of demands
for appraisal, whichever is later.
If a holder of record of PalEx common stock timely files a petition for
appraisal and serves a copy of the petition upon PalEx, PalEx will then be
obligated within 20 days to file with the Delaware Register in Chancery a duly
verified list containing the names and addresses of all stockholders who have
demanded an appraisal of their shares and with whom agreements as to the value
of their shares have not been reached. After notice to those stockholders as
required by the Delaware Court of Chancery, the Delaware Court of Chancery is
empowered to conduct a hearing on the petition to determine those stockholders
who have complied with Section 262 and who have become entitled to appraisal
rights. The Delaware Court of Chancery may require the stockholders who
demanded payment for their shares to submit their stock certificates to the
Delaware Register in Chancery for notation on the certificates of the pendency
of the appraisal proceeding. If any stockholder fails to comply, the Delaware
Court of Chancery may dismiss the proceedings as to the stockholder.
After determining the stockholders entitled to appraisal, the Delaware Court
of Chancery will appraise the fair value of their shares of PalEx common stock.
Stockholders considering seeking appraisal should be aware that:
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<PAGE>
. the fair value of their PalEx common stock as determined under Section
262 could be more than, the same as, or less than the value of the
consideration that they would otherwise receive in the merger if they did
not seek appraisal; and
. investment banking opinions as to fairness from a financial point of view
are not necessarily opinions as to fair value under Section 262. The
Delaware Supreme Court has stated that "proof of value by any techniques
or methods which are generally considered acceptable in the financial
community and otherwise admissible in court" should be considered in the
appraisal proceedings.
In addition, Delaware courts have decided that the statutory appraisal
remedy, depending on factual circumstances, may or may not be a stockholder's
exclusive remedy. The Delaware Court of Chancery will also determine the amount
of interest, if any, to be paid upon the amounts to be received by persons
whose shares of PalEx common stock have been appraised. The costs of the action
may be determined by the Delaware Court of Chancery and taxed upon the parties
as the Delaware Court of Chancery deems equitable. The Delaware Court of
Chancery may also order that all or a portion of the expenses incurred by any
stockholder in connection with an appraisal, including reasonable attorneys'
fees and the fees and expenses of experts utilized in the appraisal proceeding,
be charged pro rata against the value of all of the shares of PalEx common
stock entitled to appraisal.
Any stockholder who has duly demanded an appraisal in compliance with Section
262 will not, after the effective time of the merger, be entitled to vote the
shares of PalEx common stock subject to the demand for any purpose or be
entitled to the payment of dividends or other distributions on those shares,
except for dividends or other distributions payable to holders of record of
PalEx common stock as of a date prior to the effective time.
If any stockholder who demands appraisal under Section 262 fails to perfect,
or effectively withdraws or loses the right to appraisal, the stockholder's
shares of PalEx common stock will be converted into IFCO Systems ordinary
shares in accordance with the merger agreement. A stockholder will fail to
perfect, or will effectively lose, the right to appraisal if no petition for
appraisal is filed within 120 days after the effective time of the merger. A
stockholder may withdraw a demand for appraisal by delivering to PalEx a
written withdrawal of the demand for appraisal and an acceptance of the merger.
Any attempt to withdraw made more than 60 days after the effective time will,
however, require the written approval of PalEx. Once a petition for appraisal
is filed, the appraisal proceeding may not be dismissed as to any stockholder
without court approval.
Failure to follow the steps required by Section 262 for perfecting appraisal
rights may result in the loss of such rights. A stockholder will then be
entitled to receive only the consideration set forth in the merger agreement
for each share of PalEx common stock outstanding immediately prior to the
effective time of the merger and owned by the stockholder.
Accounting Treatment
The merger is intended to be treated under U.S. GAAP as a purchase of PalEx
by IFCO Systems for accounting and financial reporting purposes. Therefore, the
total consideration paid by IFCO Systems in connection with the merger will be
allocated to PalEx's assets and liabilities based on their fair values with any
excess being treated as goodwill.
U.S. Federal Income Tax Consequences
Scope of Discussion
The following discussion summarizes (1) the material U.S. federal income tax
consequences of the merger to U.S. holders, as defined below, of PalEx common
stock who exchange PalEx common stock for cash and/or IFCO Systems ordinary
shares in the merger and (2) the material U.S. federal income tax consequences
to U.S. holders of the ownership and disposition of IFCO Systems ordinary
shares. This discussion is based upon existing U.S. federal income tax law,
including legislation, regulations, administrative rulings, and court
decisions, as in effect on the date of this proxy statement/prospectus, all of
which are subject to change, possibly with retroactive effect. For purposes of
this discussion, a U.S. holder is a beneficial owner of stock that is:
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. an individual citizen or resident of the United States;
. a corporation created or organized in or under the laws of the United
States or of a state of the United States or the District of Columbia; or
. a partnership, trust, or estate treated, for U.S. federal income tax
purposes, as a domestic partnership, trust, or estate.
The discussion assumes that U.S. holders hold their PalEx common stock and
will hold the IFCO Systems ordinary shares that they will receive in the merger
as a capital asset. Tax consequences which are different from or in addition to
those described in this summary may apply to U.S. holders who are subject to
special treatment under U.S. federal income tax law, such as tax exempt
organizations, financial institutions, insurance companies, broker-dealers,
persons who hold their PalEx common stock as part of a hedge, straddle, wash
sale, synthetic security, conversion transaction, or other integrated
investment comprised of PalEx common stock and one or more other investments,
or persons who acquired their shares in compensatory transactions. This
discussion is limited to U.S. federal income tax considerations and does not
address other U.S. federal tax considerations or state, local, or foreign tax
considerations.
This summary is not a substitute for an individual analysis of the tax
consequences of the merger to a U.S. holder of PalEx common stock. Each U.S.
holder or non-U.S. holder should consult a tax advisor as to the U.S. federal
income tax consequences of the merger, including any such consequences arising
from the particular facts and circumstances of the U.S. holder or non-U.S.
holder, and as to any estate, gift, state, local, or foreign tax consequences
of the merger.
U.S. Federal Income Tax Consequences of the Merger to U.S. Holders
Private Letter Ruling. Since IFCO Systems is a foreign corporation for U.S.
federal tax purposes, U.S. holders of PalEx common stock would recognize their
entire gain, if any, on the merger even if the merger qualifies, as described
below under the heading "--Opinion of Counsel," as a reorganization under
Section 368(a) of the Internal Revenue Code, unless the merger also qualifies
for an exception to Section 367(a)(1) of the Internal Revenue Code. The
obligation of PalEx to complete the merger is conditioned on the receipt by
PalEx from the IRS of a private letter ruling that the merger qualifies for the
exception. PalEx currently expects that it will receive the private letter
ruling. If PalEx does not receive the private letter ruling, it may waive this
condition and proceed on the basis of an opinion of its special U.S. tax
counsel, Baker Botts L.L.P., that the merger should qualify for an exception to
Section 367(a)(1). However, the ability of Baker Botts to issue that opinion
would depend upon the facts and circumstances immediately before the completion
of the merger.
PalEx anticipates that the private letter ruling, if received, will require
that the value of the IFCO Systems ordinary shares outstanding immediately
before the merger must be at least equal to the sum of the cash and the value
of the IFCO Systems ordinary shares issued to PalEx stockholders in the merger.
PalEx anticipates that the IPO price will be used to value the IFCO Systems
ordinary shares for this purpose.
As discussed below, the obligations of PalEx and of IFCO Systems to complete
the transactions described in the merger agreement are subject to various
conditions, including that the pricing of the IPO imply a minimum market
valuation, assuming completion of the merger but before the IPO, of $400
million for the combined company based on the currency exchange rate as of the
IPO pricing date. PalEx expects that this condition will be satisfied. If it
is, the condition in the private letter ruling described above will also be
satisfied. Otherwise, under some circumstances, the condition in the private
letter ruling would not be satisfied. Under the merger agreement, PalEx and
IFCO Systems are entitled to waive the $400 million combined valuation
condition. However, in deciding whether to waive this condition, PalEx would
have to take into account whether the condition contained in the private letter
ruling is nevertheless satisfied, or, if not, whether the merger is in the best
interests of the PalEx stockholders even if U.S. holders of PalEx common stock
are required to recognize their entire gain, if any, on the merger.
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Opinion of Counsel. Assuming that the private letter ruling is received,
Baker Botts is of the opinion that the merger should be a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code, subject to the
assumptions and qualifications discussed above under the heading "--Scope of
Discussion" and the further assumptions that:
. the private letter ruling is not withdrawn or modified in any material
respect and any valuation requirement or other condition contained in
the private letter ruling will be satisfied;
. the representations made to Baker Botts by PalEx and IFCO Systems in
officers' certificates are accurate, will remain accurate through the
time of the merger, and, where they relate to events after the merger,
including the representation that PalEx will comply with all reporting
requirements in applicable Treasury regulations, will remain accurate
after the merger;
. the merger and related transactions will take place as described in the
merger agreement and this proxy statement/prospectus, and the
information in this proxy statement/prospectus is accurate in all
material respects and will be accurate in all material respects at the
time of the merger;
. the representations and warranties in the merger agreement are true and
will be true at the time of the merger, and the covenants, conditions,
and obligations in the merger agreement will be satisfied;
. any representations made in the officers' certificates of PalEx and IFCO
Systems or in the merger agreement "to the knowledge of" or similarly
qualified are accurate without that qualification.
. the terms of the SMG exchangeable shares will be revised to be
exchangeable for the same merger consideration as will be paid or issued
to the PalEx stockholders; as a result, the SMG exchangeable shares will
not be exchangeable for stock of the surviving corporation in the merger
or at any time after the merger;
. the IFCO Systems ordinary shares received by PalEx stockholders in the
merger will constitute less than 50% of the outstanding IFCO Systems
ordinary shares after the merger and before the IPO;
. the total fair market value, on the date of the merger, of the IFCO
Systems ordinary shares received by PalEx stockholders will be no less
than 42% of the sum of that total fair market value and the total amount
of cash paid to PalEx stockholders in the merger, including cash
payments to dissenters and instead of fractional IFCO Systems ordinary
shares; and
. the total consideration received by dissenters will not be materially
different from the product of $9.00 and the number of dissenting shares.
The merger agreement conditions the obligation of PalEx to complete the
merger upon (1) the opinion of Baker Botts not having been withdrawn or
modified in any material respect and (2) receipt of a second opinion of Baker
Botts, dated as of the date of the merger, reconfirming the conclusions above.
It is possible, however, that events arising after the second opinion is issued
and the merger is completed could cause an assumption underlying the opinions
not to be true and therefore cause the merger to fail to qualify as a
reorganization. In particular, if the average of the high and low selling
prices of IFCO Systems ordinary shares on the primary trading market on which
the IFCO Systems ordinary shares are listed on the date of the merger is
substantially lower than the IPO price, the merger may not qualify as a
reorganization if the total fair market value of the IFCO Systems ordinary
shares received by PalEx stockholders in the merger, determined at the average
selling price described above, is less than 42% of the sum of that total fair
market value and the total amount of cash received by PalEx shareholders in the
merger, including cash payments to dissenters and instead of fractional IFCO
Systems ordinary shares.
The opinion of Baker Botts will not be binding on the IRS or a court and will
not preclude the IRS or a court from adopting a contrary position.
Assuming the merger is a reorganization, it is the further opinion of Baker
Botts that, subject to the assumptions and qualifications discussed above under
the heading "--Scope of Discussion," the U.S. federal income tax consequences
of the merger to U.S. holders are as described below.
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Exchange of PalEx Common Stock Solely for Cash. A U.S. holder who exchanges
PalEx common stock solely for cash in the merger generally will recognize
capital gain or loss in an amount equal to the difference between the amount of
cash received by the U.S. holder and the adjusted tax basis of the U.S. holder
in the PalEx common stock surrendered. The capital gain or loss will be a long-
term capital gain or loss if the U.S. holder's holding period for the PalEx
common stock surrendered is more than one year. If, however, a U.S. holder
actually or constructively owns IFCO Systems ordinary shares after the merger,
including shares constructively owned as a result of constructive ownership of
shares of PalEx common stock that are exchanged for IFCO Systems ordinary
shares in the merger, the cash received by the U.S. holder may, under some
circumstances, be a dividend taxable as ordinary income. A U.S. holder will be
treated as constructively owning shares the U.S. holder has a right or option
to acquire and shares owned or subject to options held by related persons and
entities. U.S. holders should consult their tax advisors regarding the
likelihood and the effect of dividend treatment based on their particular
circumstances.
Exchange of PalEx Common Stock Solely for IFCO Systems Ordinary
Shares. Except as described below under the headings "--Special Rule for U.S.
Holders Who Will Be 5% Shareholders of IFCO Systems" and "--Cash in Lieu of
Fractional IFCO Systems Ordinary Shares," a U.S. holder who exchanges PalEx
common stock solely for IFCO Systems ordinary shares in the merger will not
recognize gain or loss on the exchange. The U.S. holder will have an adjusted
tax basis in the IFCO Systems ordinary shares received equal to the U.S.
holder's adjusted tax basis in the shares of PalEx common stock surrendered and
will have a holding period in the IFCO Systems ordinary shares received that
includes the U.S. holder's holding period in the shares of PalEx common stock
surrendered.
Exchange of PalEx Common Stock for Both IFCO Systems Ordinary Shares and
Cash. Except as described below under the headings "--Special Rules for U.S.
Holders Who Will Be 5% Shareholders of IFCO Systems" and "--Cash in Lieu of
Fractional IFCO Systems Ordinary Shares," a U.S. holder who exchanges PalEx
common stock in the merger for a combination of IFCO Systems ordinary shares
and cash will realize gain or loss equal to the difference between the fair
market value of the consideration received by the U.S. holder and the adjusted
tax basis of the U.S. holder in the PalEx common stock surrendered. The gain
will be recognized, however, only to the extent of the amount of cash received
by the U.S. holder. Any loss will not be recognized. Each share of PalEx common
stock, or block of shares acquired at the same price, will be treated as
exchanged for a pro rata portion of cash and IFCO Systems ordinary shares.
Any gain recognized will be treated as capital gain unless, as discussed
below, the receipt of the cash has the effect of the distribution of a dividend
for U.S. federal income tax purposes. In that case, the gain will be treated as
ordinary dividend income to the extent of the U.S. holder's ratable share of
PalEx's accumulated earnings and profits. Any capital gain will be long-term
capital gain if, as of the date of the merger, the holding period for the PalEx
shares exchanged is more than one year.
The exchange will not have the effect of a dividend with respect to a U.S.
holder if either the exchange is substantially disproportionate with respect to
the U.S. holder or the exchange otherwise results in a meaningful reduction in
the U.S. holder's interest in IFCO Systems.
The exchange would be substantially disproportionate with respect to the U.S.
holder if the U.S. holder's percentage interest in IFCO Systems, including IFCO
Systems ordinary shares constructively owned by the U.S. holder, immediately
after the merger is less than 80% of what the percentage interest would have
been if, hypothetically, all PalEx stockholders who receive cash in the merger,
including the U.S. holder, had instead received an equivalent amount of IFCO
Systems ordinary shares.
Whether an exchange would result in a meaningful reduction depends on the
particular U.S. holder's facts and circumstances. However, the exchange should
generally result in a meaningful reduction if:
. the U.S. holder's percentage interest in IFCO Systems, immediately after
the merger and including shares actually and constructively owned, is
minimal;
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. the U.S. holder exercises no control over corporate affairs of PalEx or
IFCO Systems; and
. the U.S. holder's percentage interest in IFCO Systems ordinary shares is
actually reduced from what the interest would have been if,
hypothetically, all PalEx stockholders who receive cash in the merger had
instead received an equivalent amount of IFCO Systems ordinary shares.
There are a number of uncertainties regarding how the calculations called for
by the substantially disproportionate and meaningful reduction tests should be
made. U.S. holders should consult their own tax advisors as to the possibility
that all or a portion of any cash received in exchange for their PalEx common
stock will be treated as a dividend and with respect to the consequences of
that treatment, including the eligibility of U.S. holders that are corporations
for a dividends received deduction and treatment of the dividend as an
extraordinary dividend under Section 1059 of the Code.
The U.S. holder's adjusted tax basis in the IFCO Systems ordinary shares
received in the merger will equal the U.S. holder's adjusted tax basis in the
PalEx common stock surrendered, decreased by the amount of cash received by the
U.S. holder and increased by the amount of gain recognized by the U.S. holder,
if any. The U.S. holder's holding period for the IFCO Systems ordinary shares
received in the merger will include the holding period of the PalEx common
stock surrendered.
Special Rules for U.S. Holders Who Will Be 5% Shareholders of IFCO Systems. A
U.S. holder who will actually or constructively own 5% or more of the total
voting power or the total value of all shares of IFCO Systems after the merger
will qualify for the nonrecognition treatment described above only if the U.S.
holder files an agreement with the IRS to recognize gain in the future under
some circumstances. Any U.S. holder who will be a 5% shareholder of IFCO
Systems after the merger should consult his or her own tax advisor concerning
the decision to file a gain recognition agreement and the procedures to be
followed in connection with the filing. A U.S. holder who is not a 5%
shareholder of IFCO Systems after the merger is not subject to any special
filing requirements under Section 367 of the Internal Revenue Code, but should
comply with the normal requirements applicable to any reorganization under
Section 368 of the Internal Revenue Code by attaching an information statement
to his or her return for the year in which the merger occurs in the form
required by the Treasury regulations under those provisions. A U.S. holder who
plans to purchase IFCO Systems ordinary shares in the IPO should consult his or
her tax advisor concerning whether those shares will be taken in account in
determining whether the U.S. holder is a 5% shareholder after the merger.
Cash in Lieu of Fractional IFCO Systems Ordinary Shares. No fractional IFCO
Systems ordinary shares will be issued in the merger. A U.S. holder of PalEx
common stock who receives IFCO Systems ordinary shares and cash in lieu of a
fractional IFCO Systems ordinary share in the merger will be treated as having
received that fractional IFCO Systems ordinary share in the merger and then as
having received the cash in a redemption of the fractional IFCO Systems
ordinary share. A U.S. holder who does not receive any other cash in the merger
probably will, based upon the current IRS advance ruling policy, recognize gain
or loss on the redemption. The gain or loss will be long-term capital gain or
loss if, as of the date of the merger, the holding period for the IFCO Systems
fractional share is more than one year. Cash paid to a U.S. holder who receives
other cash and IFCO Systems ordinary shares in the merger probably will have
the same character, i.e., dividend or capital gain or loss, as the other cash
received by the U.S. holder.
Consequences of Failure to Qualify as a Reorganization. If the merger does
not qualify as a reorganization under Section 368(a) of the Internal Revenue
Code:
. PalEx would recognize gain on the merger equal to the excess of:
. the sum of the fair market value on the merger date of the IFCO
Systems ordinary shares received by PalEx stockholders in the
merger, the total amount of cash received by PalEx stockholders in
the merger, and the amount of liabilities of PalEx assumed by the
surviving corporation in the merger; over
. PalEx's basis in its assets; and
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. a U.S. holder of PalEx common stock would recognize capital gain or loss
on the merger in an amount equal to the difference between the U.S.
holder's basis in the PalEx common stock surrendered and the sum of the
cash and the fair market value, as of the date of the merger, of the IFCO
Systems ordinary shares received in the merger.
Backup Withholding. Payments of cash to a U.S. holder surrendering shares of
PalEx common stock in the merger generally will be subject to information
reporting to the IRS. In addition, they generally will be subject to backup
withholding, whether or not the U.S. holder also receives IFCO Systems
ordinary shares in the merger, at a rate of 31% of the cash payable to the
U.S. holder, unless the U.S. holder furnishes the U.S. holder's taxpayer
identification number in the manner prescribed in applicable Treasury
Regulations, certifies that the number is correct, certifies as to no loss of
exemption from backup withholding, and meets other specified conditions.
Appropriate documentation for this purpose will be provided to U.S. holders
with the election form that will be sent to them by the exchange agent. Any
amounts withheld from payments to a holder under the backup withholding rules
will be allowed as a refund or credit against the U.S. holder's U.S. federal
income tax liability, provided the required information is furnished to the
IRS.
Consequences to U.S. Holders of Ownership and Disposition of IFCO Systems
Ordinary Shares
General. The following is a discussion of the material U.S. federal income
tax consequences to U.S. holders who receive IFCO Systems ordinary shares in
the merger of the ownership and disposition of those shares.
Distributions on and Sale of the IFCO Systems Ordinary Shares. U.S. holders
will be required to include in gross income as ordinary dividend income the
gross amount of any distribution paid on the IFCO Systems ordinary shares,
without reduction for Netherlands withholding tax, as discussed below, to the
extent that the distribution is paid out of IFCO Systems' current or
accumulated earnings and profits as determined for U.S. tax purposes. These
dividends generally will not be eligible for the dividends received deduction
that is allowed to U.S. corporate shareholders on dividends received from a
domestic corporation. Distributions in excess of those earnings and profits
will be applied first to reduce the U.S. holder's tax basis in the holder's
shares. To the extent that the distribution exceeds the U.S. holder's tax
basis, the excess will constitute gain from a sale or exchange of the shares.
IFCO Systems has stated that it does not intend to pay dividends any time in
the foreseeable future.
The amount of income recognized upon the receipt of Dutch guilders as a
dividend will be the U.S. dollar value of the guilders on the date of receipt,
regardless of whether the U.S. holder converts the payment into U.S. dollars.
Gain or loss, if any, recognized by a U.S. holder on the sale or disposition
of guilders will be ordinary income or loss.
Except as discussed below, a U.S. holder may elect annually either to deduct
Netherlands withholding tax on dividends against the holder's income or to
take the withholding taxes as a credit against the holder's U.S. federal
income tax liability, subject to U.S. foreign tax credit limitation and
election rules. Under current Dutch law, IFCO Systems under some circumstances
may be permitted to deduct and retain from amounts withheld from dividends a
portion of the amount that would otherwise be required to be remitted to the
taxing authorities in the Netherlands. This amount generally may not exceed 3%
of the total dividend distributed by IFCO Systems. If IFCO Systems has
withheld an amount from dividends paid to shareholders, which it then is not
required to remit to any taxing authority in the Netherlands, the amount in
all likelihood would not qualify as a creditable tax for U.S. federal income
tax purposes. IFCO Systems will endeavor to provide to U.S. holders
information concerning the extent to which it has applied the reduction
described above to dividends paid to U.S. holders.
IFCO Systems expects that, for foreign tax credit purposes, dividends paid
on the IFCO Systems ordinary shares will generally be foreign source income
and will be passive income or, in some cases, financial services income. Under
Section 904(g) of the Internal Revenue Code, however, dividends paid by a
foreign corporation that is treated as 50% or more owned by United States
persons may be treated as U.S.-source income for foreign tax credit purposes,
to the extent the foreign corporation itself has more than an insignificant
amount of U.S.-source income. It is possible that, after the merger and the
IPO, IFCO Systems may be treated as 50% or more owned by U.S. persons for
purposes of Section 904(g) of the Internal Revenue Code.
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A U.S. holder of IFCO Systems ordinary shares will generally recognize gain
or loss for U.S. federal income tax purposes upon the sale or exchange of the
shares in an amount equal to the amount realized from the sale or exchange
minus the U.S. holder's tax basis for such shares. Subject to the discussion
below under the heading "--Special Status of Some Corporations for U.S. Tax
Purposes," any gain or loss will be a capital gain or loss and, in the case of
an individual U.S. holder, any gain would be subject to U.S. federal income tax
at a maximum rate of 20% if the U.S. holder's holding period for the IFCO
Systems ordinary shares at the time of the sale or exchange exceeds one year.
Special Status of Some Corporations for U.S. Tax Purposes. For U.S. federal
income tax purposes, a foreign corporation like IFCO Systems is classified as a
passive foreign investment company for each taxable year in which either (1)
75% of more of its gross income is passive income, as defined for U.S. tax
purposes, or (2) on average for the taxable year, 50% or more in value of its
assets produce passive income or are held for the production of passive income.
For purposes of applying the foregoing tests, the foreign corporation is deemed
to own its proportionate share of the assets of and to receive directly its
proportionate share of the income of any other corporation of which the foreign
corporation owns, directly or indirectly, at least 25% by value of the stock.
While income from leasing is generally considered passive income, there is an
exception, under the Code and applicable Treasury regulations, for income from
property that is leased as a result of the performance of marketing functions
by the lessor when the marketing and servicing activities of the lessor in a
foreign country are indicative of the active conduct of a trade or business by
the lessor.
Classification of a foreign corporation as a passive foreign investment
company can have various adverse consequences to U.S. holders. These include
taxation of gain on a sale or other disposition of the stock of the corporation
at ordinary income rates and imposition of an interest charge on gain on or
distributions with respect to the stock. These consequences would not apply if
the U.S. holder elected to treat the foreign corporation as a qualified
electing fund for all taxable years during which the U.S. holder held stock of
the corporation and during which the corporation was a passive foreign
investment company. The general effect of a qualified electing fund election is
to require the U.S. holder to include in income the holder's pro rata share of
the income of the foreign corporation for each year in which the corporation is
classified as a passive foreign investment company, even if no dividend
distributions are received. U.S. holders of stock of a passive foreign
investment company may also make other elections that are not described here.
While no opinion of counsel has been requested or will be obtained, IFCO
Systems believes that it will not be a passive foreign investment company
following the merger and the IPO. However, the tests for determining passive
foreign investment company status are applied annually, and it is difficult
accurately to predict future income and assets relevant to this determination.
Accordingly, IFCO Systems cannot assure you that it will not become a passive
foreign investment company. If IFCO Systems should determine in the future that
it is a passive foreign investment company, it will endeavor to notify U.S.
holders and to provide them with the information required to make a qualifying
electing fund election, although there can be no assurance that it will be able
to do so in a timely and complete manner. U.S. holders should consult their own
tax advisers about the passive foreign investment company rules, including
qualified electing fund elections.
IFCO Systems would be a controlled foreign corporation if U.S. holders who
owned, actually or constructively, stock representing 10% or more of the voting
power of IFCO Systems collectively owned, actually or constructively, stock
representing more than 50% of the voting power or value of IFCO Systems. IFCO
Systems does not expect to be a controlled foreign corporation following the
merger and the IPO. If it nevertheless were a controlled foreign corporation,
that status would have no effect on any U.S. holder who at all times owned,
actually or constructively, stock representing less than 10% of the voting
power of IFCO Systems.
United States Information Reporting and Backup Withholding. Distributions of
dividends on IFCO Systems ordinary shares paid within the United States or
through some United States-related financial intermediaries are subject to
information reporting and may be subject to backup withholding at a 31% rate
unless the holder (1) is a corporation or other exempt recipient or (2)
provides a taxpayer identification number
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and certifies that no loss of exemption from backup withholding has occurred.
Information reporting requirements and backup withholding may also apply to the
cash proceeds of a sale of the IFCO Systems ordinary shares. Any withholding
would be in addition to the Netherlands dividend withholding discussed below.
Netherlands Tax Consequences
The following is a summary of the material tax consequences under the laws of
the Kingdom of the Netherlands to an owner of IFCO Systems ordinary shares who
is deemed to be a citizen or resident of the United States for purposes of the
relevant tax codes. This summary is not a complete analysis or listing of all
the possible tax consequences and does not address all tax considerations that
may be relevant to all categories of owners of IFCO Systems ordinary shares,
some of whom may be subject to special rules. This summary is based upon
current Netherlands tax law, which may change from time to time.
You should consult your own tax advisor with respect to the tax consequences
of the ownership and disposition of IFCO Systems ordinary shares based upon
your particular circumstances.
Netherlands Dividend Withholding Tax. Under Netherlands domestic law,
dividend distributions by IFCO Systems are generally subject to withholding tax
at a rate of 25%. These dividend distributions include dividends in cash or in
kind, constructive dividends, and liquidation and repurchase proceeds in excess
of recognized paid-in capital, as determined according to Dutch tax law. Stock
dividends are also subject to Netherlands withholding tax unless they are
distributed out of IFCO Systems' paid-in capital as recognized for Netherlands
tax purposes.
Under the treaty with the United States, however, dividends paid by IFCO
Systems to a resident of the United States are generally eligible for a
reduction of the 25% Netherlands withholding tax to 15%, or 5% if the
beneficial owner is a U.S. corporation owning at least 10% of the voting power
of IFCO Systems. To be eligible for the reduction, an IFCO Systems shareholder
must not have an enterprise or an interest in an enterprise that is, in whole
or in part, carried on through a permanent establishment or a permanent
representative in the Netherlands and to which the IFCO Systems ordinary shares
are attributable. The treaty with the United States provides for a complete
exemption for dividends received by exempt organizations and exempt pension
trusts.
Certification Procedure to Obtain the 15% Rate. A shareholder that claims the
reduced withholding or an exemption from withholding must first complete and
file a Form IB 92 U.S.A with the Netherlands tax authority. A copy should also
be filed with the IRS. In order to apply for the reduction or an exemption upon
the receipt of dividends, the shareholder should present the form to the payor.
If a person claims a refund, this form must be filed with the Netherlands tax
authority within three years after the end of the calendar year in which the
tax was levied. The person making the claim must describe the circumstances
that prevented applying for the reduction or exemption upon receipt of the
dividends. Qualifying U.S. exempt organizations or exempt pension trusts
subject to the 25% withholding rate must seek a full refund of the tax withheld
by using a Form IB 95 U.S.A.
Netherlands Income Tax and Corporate Income Tax. In general, a nonresident
shareholder will not be subject to Netherlands income tax, other than
withholding tax, with respect to dividends distributed by IFCO Systems on the
IFCO Systems ordinary shares. In addition, a non-resident shareholder is not
generally subject to Netherlands income or withholding tax on gain on the sale
or disposition of IFCO Systems ordinary shares to persons other than IFCO
Systems or its direct and indirect subsidiaries. These general rules are
applicable as long as the nonresident shareholder:
. does not carry on a business, in whole or in part, in the Netherlands
through a permanent establishment or a permanent representative to which
the IFCO Systems ordinary shares are attributable;
. does not carry out and has not carried out employment activities in the
Netherlands with which the holding of the IFCO Systems ordinary shares
is connected; and
. is not a resident or a deemed resident of the Netherlands for
Netherlands tax purposes.
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However, in some cases, Netherlands tax may be imposed on the dividends or
gains if the nonresident shareholder, alone or with related parties, holds a
substantial interest in IFCO Systems. In general a holder can only be taxed on
this basis if the holder has a substantial or deemed substantial interest in
IFCO Systems. In general, a substantial interest will exist if the nonresident
shareholder, alone or together with his or her spouse, holds either directly or
indirectly, a participation interest in, or right to acquire at least 5% of the
issued shares of any class of shares of IFCO Systems or holds, either directly
or indirectly, profit sharing rights representing entitlement to at least 5% of
the annual profit of IFCO Systems or of the liquidation proceeds. A deemed
substantial interest will be present if all or part of a substantial interest
has been disposed of, or is deemed to have been disposed of, under a roll-over
facility.
Under most tax treaties, the Netherlands may not impose tax on capital gains
realized upon the sale or disposition of shares by shareholders entitled to
treaty benefits unless additional conditions are met. Under the U.S. tax
treaty, the Netherlands may not impose tax on capital gains realized by a
shareholder that is a treaty beneficiary unless, in the case of an individual
shareholder:
. the shareholder, alone or with specified relatives, owns at least 25% of
any class of shares at the time of the sale or disposition; and
. the shareholder has, at any time during the previous five years, been a
resident of the Netherlands.
Netherlands Net Wealth Tax. A nonresident shareholder who is an individual is
not subject to Netherlands net wealth tax with respect to the IFCO Systems
ordinary shares, provided that the nonresident shareholder does not carry on a
business, in whole or in part, in the Netherlands through a permanent
establishment or a permanent representative to which the shares are
attributable. Corporations are not subject to Netherlands net wealth tax.
Netherlands Gift and Inheritance Tax. No Netherlands gift or inheritance tax
will arise as a result of the gift of the IFCO Systems ordinary shares by, or
on the transfer of the IFCO Systems ordinary shares at the death of, a
nonresident shareholder who is an individual, unless:
. the shareholder is a resident or a deemed resident of the Netherlands
for tax purposes; or
. the IFCO Systems ordinary shares are attributable to a permanent
establishment or a permanent representative of the shareholder in the
Netherlands. In some cases, an individual who was previously a resident
of the Netherlands may be deemed to continue to be a resident at the
time of the gift or death. Corporations are not subject to Netherlands
gift or inheritance tax.
Regulatory Matters
U.S. Antitrust Notification. The Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and related rules provide that some acquisition transactions, including
the merger, may not be completed until required information and materials have
been sent to the Antitrust Division of the U.S. Department of Justice and the
Federal Trade Commission. Required waiting periods must also expire or be
terminated. Schoeller Industries and PalEx filed the required information with
the Antitrust Division and the FTC on June 16, 1999, and received notice of
early termination on June 28, 1999. At any time before or after the effective
time of the merger, and even though the HSR Act waiting period has been
terminated, the Antitrust Division or the FTC could take action under the U.S.
antitrust laws as it deems necessary or advisable in the public interest,
including seeking to enjoin completion of the merger or seeking the transfer of
assets or businesses of PalEx or IFCO Systems. Private parties may also seek to
take legal action under antitrust laws.
German Antitrust Notification. The German Act Against Restraints of
Competition (Gesetz gegen Wettbewerbsbeschrankungen), which provides
ratification of specified transactions, including the merger, must be provided
to the Federal Cartel Office before completion of the merger. The Federal
Cartel Office may prohibit a merger only if it informs the notifying parties
within one month of receipt of the notification that it has entered into an in-
depth investigation of the matter. Schoeller Industries filed the notification
with the Federal Cartel Office on December 23, 1999, and received clearance for
the merger from Federal Cartel office on January 5, 2000. The decisions of the
Federal Cartel Office may be challenged in court by third parties.
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THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement, but
is not a description of all the terms of the merger agreement. A copy of the
merger agreement is attached as Appendix A to this proxy statement/prospectus
and is incorporated in this summary by reference. IFCO Systems and PalEx urge
you to read the full merger agreement.
General
The merger agreement provides for the merger of PalEx with and into Silver
Oak, a newly formed, wholly owned subsidiary of IFCO Systems. Silver Oak will
survive the merger as a wholly owned subsidiary of IFCO Systems and will change
its name to "PalEx, Inc." At the effective time of the merger, IFCO Systems
will become the owner of all of the outstanding common shares of IFCO Europe
and all the outstanding shares of IFCO International and MTS. Immediately
following the effective time of the merger IFCO Systems will complete its IPO.
Related Matters
Formation of IFCO Systems and Silver Oak. As provided by the merger
agreement, Schoeller Industries created IFCO Systems as a wholly owned
subsidiary, and IFCO Systems has formed Silver Oak as its wholly owned
subsidiary to participate in the merger. Schoeller Industries subsequently
contributed all of the outstanding IFCO Systems ordinary shares to Schoeller
Holding. Silver Oak has authorized capital stock of 100 shares of common stock,
par value $0.01 per share. Silver Oak has issued all of its authorized shares
to IFCO Systems.
Contribution of Shares of IFCO Europe, MTS, and IFCO International. Schoeller
Industries has contributed the single outstanding common share of IFCO Europe
and all of the outstanding shares of MTS to Schoeller Holding, which then
contributed the shares to IFCO Systems.
Gebruder Schoeller Beteiligungsverwaltungs GmbH, a German limited liability
company, previously owned all of the outstanding shares of IFCO International.
Gebruder Schoeller is owned by the shareholders of Schoeller Industries and
members of their families. Schoeller Industries caused Gebruder Schoeller to
contribute the IFCO International shares to Schoeller Holding, which then
contributed the shares to IFCO Systems.
Agreement with GE Capital and GE Erste. GE Erste owns the single outstanding
preferential share of IFCO Europe. Schoeller Industries, the shareholders of
Schoeller Industries, Schoeller Plast Industries GmbH, Gebruder Schoeller,
Schoeller KG, and IFCO Systems have entered into an Option Release and IPO-
Facilitation Agreement with GE Capital and GE Erste in connection with the
proposed merger and the IFCO Systems IPO. Pursuant to the Option Release
Agreement:
. GE Erste consented to the merger and the IPO;
. GE Erste agreed to contribute the IFCO Europe preferential share to IFCO
Systems for purposes of the merger and the IPO upon the request of GE
Capital or Schoeller Industries;
. GE Capital and GE Erste agreed, effective with the completion of the
merger and the IPO, to cancel and waive all options and other rights
they have under existing agreements to purchase shares of IFCO Europe,
IFCO International, or MTS; and
. GE Capital and GE Erste will have board observation rights with respect
to IFCO Systems.
In January 2000, GE Erste contributed the IFCO Europe preferential share to
Schoeller Holding, which then contributed the share to IFCO Systems. In
exchange for the contribution of the IFCO Europe preferential share, Schoeller
Holding issued to GE Erste a convertible debenture in the principal amount of
DM45.0 million, or approximately $22.5 million, with a 30-year term and bearing
5% interest per year. The convertible
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debenture is convertible by GE Erste into IFCO Systems ordinary shares held by
Schoeller Holding consisting of not more than 15.45% of the IFCO Systems
capital stock outstanding before completion of the merger and the IPO or into a
corresponding number of ordinary shares in Schoeller Holding. GE Erste may
require conversion of the debenture on demand at any time beginning six months
after the IPO. GE Erste's conversion of its debenture into IFCO Systems
ordinary shares after the merger will not dilute the ownership of the former
PalEx stockholders or the purchasers of shares in the IPO.
If at any time after the IPO the value of 15.45% of the IFCO Systems capital
stock outstanding before the merger and the IPO is less than DM45.0 million, or
approximately $22.5 million, plus the accrued interest under the debenture, GE
Erste may require payment of the full principal plus accrued interest from
Schoeller Holding. In that case, however, Schoeller Holding has the right,
instead of making payment in cash, to deliver IFCO Systems ordinary shares with
a value equal to DM45.0 million, or approximately $22.5 million, plus accrued
interest. GE Erste will continue to own the debenture or the ordinary shares
received on exercise for at least one year after the IPO. GE Erste will,
however, be able to sell the debenture or the ordinary shares after the IPO if
IFCO Systems makes a corporate acquisition or merger with a company or business
that does not comply with GE Capital's internal rules for affiliated companies.
In consideration of GE Capital's and GE Erste's release of options and other
rights, before the effective time of the merger IFCO Systems will issue a
promissory note to GE Capital for DM45.0 million, or approximately $22.5
million. The promissory note will provide for an initial payment of DM11.25
million, or approximately $5.6 million, out of the net proceeds that IFCO
Systems receives from the IPO. The balance of the principal will be payable in
five annual installments of 10%, 10%, 20%, 20%, and 40% beginning on December
31, 2001. For the first year after the completion of the merger and the IPO,
the promissory note will bear interest at an annual rate equal to the Euro
Interbank Offered Rate plus 2.75%. Accrued interest will be payable on the
first day of the second year. After the first year, the annual interest rate
will be 10% and will be payable each year on December 31. Payment of the
promissory note will be secured by a pledge of the IFCO Europe common share and
the IFCO International shares. The promissory note may be prepaid at any time
without prepayment penalty. In addition, Schoeller Industries has granted GE
Capital an option to purchase approximately 95,000 IFCO Systems ordinary shares
held by Schoeller Holding at the IPO price.
The Option Release Agreement is subject to the written consent of IFCO
Europe's lenders. These consents were obtained in January 2000. The Option
Release Agreement also requires that the IPO be completed by December 31, 2000.
IPO. The merger agreement provides that Schoeller Industries will use its
reasonable efforts, and cause IFCO Systems to use its reasonable efforts, to
complete the IPO. PalEx agreed to reasonably cooperate with Schoeller
Industries and IFCO Systems in connection with the IPO. Subject to the advice
of the managing underwriters for the IPO and market conditions on the stock
market on which the IFCO Systems ordinary shares are authorized for listing,
the parties intend for IFCO Systems to sell approximately 30% of the
outstanding IFCO Systems ordinary shares in the IPO, after giving effect to the
merger.
The Merger
Effective Time and Closing. The effective time of the merger will be
immediately upon filing of a certificate of merger with the Secretary of State
of the State of Delaware or at the later time agreed to by IFCO Systems and
PalEx and provided in the certificate of merger. The merger agreement provides
that the parties' intend to complete the merger:
. as soon as practicable after the contribution of the shares of IFCO
Europe, IFCO International, and MTS to IFCO Systems;
. as soon as practicable after the completion of the transactions in the
Option Release Agreement; and
. on the same day as, but immediately before, completion of the IPO.
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The closing of the merger will take place as soon as practicable following
the date the last of the conditions of IFCO Systems and PalEx are fulfilled or
waived or at another time agreed by IFCO Systems and PalEx.
Certificate of Incorporation and Bylaws. The merger agreement provides that
PalEx's certificate of incorporation in effect prior to the merger will be
amended to reflect the name change. As amended, the Silver Oak certificate of
incorporation will be the certificate of incorporation of the surviving
corporation. Silver Oak's bylaws in effect prior to the merger will be the
bylaws of the surviving corporation.
Directors and Officers. After the effective time of the merger, the directors
of the surviving corporation will be Christoph Schoeller, Martin Schoeller, and
Vance K. Maultsby, Jr. The officers of PalEx at the effective time of the
merger will be the officers of the surviving corporation.
Conversion of PalEx Shares
The merger agreement provides that at the effective time of the merger, and
without any action by PalEx stockholders, each issued and outstanding share of
PalEx common stock will be exchanged for consideration with a total value of
$9.00 as follows:
. $9.00 cash, without interest; or
. the number of IFCO Systems ordinary shares calculated by dividing $9.00
by the IPO price, which is a fraction referred to as the exchange ratio;
or
. a combination of cash and IFCO Systems ordinary shares.
Calculation of Merger Consideration. For purposes of calculating merger
consideration, the IPO price will be equal to the initial public offering price
per share of the IFCO Systems ordinary shares, as determined by IFCO Systems
and the managing underwriters for the IPO and which will be expressed in euros,
multiplied by the currency exchange rate for euros to U.S. dollars on the date
the initial public offering price is determined.
The form of consideration will be determined by an election made by each
PalEx stockholder. The total merger consideration for all the shares of PalEx
common stock, including consideration payable after the merger on exchange of
SMG exchangeable shares, however, is limited as follows:
. not less than 40%; and
. not more than 60% of the shares may be exchanged for IFCO Systems
ordinary shares;
. provided that if the holders together elect to receive more than 40% of
the total merger consideration in cash, then the amount of cash
consideration will be increased to up to 49% of the total merger
consideration.
Election Procedures. An election form/letter of transmittal is being mailed
to you separately. Each PalEx stockholder should complete the election
form/letter of transmittal and send it and the PalEx stockholder's stock
certificates to IFCO Systems' exchange agent. Each holder of SMG exchangeable
shares will also have the opportunity to complete an election form for the
amount of cash and/or IFCO Systems ordinary shares to be received upon exchange
of the SMG exchangeable shares after the merger. On the election form, the
holder must indicate the number of shares to be exchanged for cash and the
number of shares to be exchanged for IFCO Systems ordinary shares. Each holder
is entitled to receive not less than 40% of the merger consideration in cash
and not less than 60% in IFCO Systems ordinary shares, unless the maximum
amount of cash consideration is increased beyond 40% as discussed above.
Completed election forms must be received by IFCO Systems' exchange agent no
later than 5:00 p.m. New York time on March 1, 2000. If the exchange agent does
not receive a fully completed and signed election form, along with a completed
letter of transmittal and stock certificates for the shares of PalEx
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common stock covered by the election form, for a holder by the election
deadline, then that holder will be deemed not to have made an election and will
receive merger consideration as described below. In addition, PalEx
stockholders exercising their appraisal rights will be deemed to have made a
cash election.
Holders of shares of PalEx common stock or SMG exchangeable shares who make a
cash election for not more than 49% of their shares or who make a stock
election for not more than 60% of their shares will receive cash and IFCO
Systems ordinary shares. Holders who make a cash election for more than 49% of
their shares or who make a stock election for more than 60% of their shares may
have their cash or stock election adjusted downward if the elections by all the
holders together exceed either the cash or stock limits. Any adjustments will
be made by IFCO Systems' exchange agent pursuant to detailed provisions in the
merger agreement.
If the number of shares covered by cash elections exceeds 49%, then:
. all shares covered by stock elections and all shares for which there is
no election will be exchanged for IFCO Systems ordinary shares;
. all shares covered by cash elections that are held by each holder making
a cash election with respect to 49% or less of the total number of shares
for which the holder is making an election will be exchanged for cash;
and
. all shares covered by cash elections that are held by a holder making a
cash election with respect to more than 49% of the total number of shares
for which the holder is making an election will be exchanged for cash and
IFCO Systems ordinary shares based on adjustment formulas in the merger
agreement.
Applying these adjustment formulas, a holder of these cash election shares
will receive the following:
. cash equal to
.$9.00
.multiplied by a number, the First Cash Number, equal to
.49 x total number of shares held by the holder
. cash equal to
.$9.00
.multiplied by a number, the Second Cash Number, equal to the product of
the number of the -- First Cash Number
holder's cash
election shares
-------------------------------------------------------
total number of cash -- total First Cash
election shares held Number for all
by all holders holders electing
electing more than more than 49% cash
49% cash
and
(.49 x total number
of shares)
-- total number of cash -- total First Cash
election shares held Number for all
by all holders holders electing
electing not more more than 49% cash
than 49% cash
. a number of IFCO Systems ordinary shares equal to
.$9.00
------
IPO Price
. multiplied by the number of the holder's cash election shares less the
sum of the First Cash Number and the Second Cash Number
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<PAGE>
If the number of shares covered by elections for IFCO Systems ordinary
shares exceeds 60%, then:
. all shares covered by cash elections and all shares for which there is no
election will be exchanged for cash;
. all shares covered by stock elections that are held by each holder making
a stock election with respect to 60% or less of the total number of
shares for which the holder is making an election will be exchanged for
IFCO Systems ordinary shares; and
. all shares covered by stock elections that are held by a holder making a
stock election with respect to more than 60% of the total number of
shares for which the holder is making an election will be exchanged for
cash and IFCO Systems ordinary shares based on adjustment formulas in the
merger agreement.
Applying these adjustment formulas, a holder of these cash election shares
will receive the following:
. a number of IFCO Systems ordinary shares equal to
.$9.00
------
IPO price
.multiplied by a number, the First Stock Number, equal to
.60 x total number of shares held by the holder
. a number of IFCO System ordinary shares equal to
.$9.00
------
IPO price
.multiplied by a number, the Second Stock Number, equal to the product
of
the number of the -- First Stock Number
holder's stock
election shares
-------------------------------------------------------
total number of -- total First Stock
stock election Number for all
shares held by all holders electing
holders electing more than 60% stock
more than 60% stock
and
(.60 x total number
of shares)
-- total number of -- total First Stock
stock election Number for all
shares held by all holders electing
holders electing more than 60% stock
not more than 60%
stock
. cash equal to
.$9.00
. multiplied by the number of the holder's stock election shares less
the sum of the First Stock Number and the Second Stock Number
If the number of shares covered by cash elections is greater than or equal
to 40%, but less than or equal to 49%, then:
. all shares covered by stock elections will be exchanged for IFCO ordinary
shares;
. all shares covered by cash elections will be exchange for cash; and
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<PAGE>
. all shares for which there is no election will be exchanged for cash and
IFCO Systems ordinary shares based on adjustment formulas in the merger
agreement.
Applying these adjustment formulas, a holder of a non-election shares will
receive the following for each share for which there is no election:
. cash equal to the lesser of
.$9.00 or
.$9.00 x .49 x total number of
shares
--------------------------
total number of non-
election shares
. if the amount of cash calculated is less than $9.00, a number of IFCO
Systems ordinary shares equal to
.$9.00
------
IPO Price
.multiplied by
1 - .49 x total number of
shares
--------------------------
total number of non-
election shares
A PalEx stockholder or holder of SMG exchangeable shares may revoke an
election by written notice to IFCO Systems' exchange agent on or before 5:00
p.m. New York time on March 1, 2000. A holder may submit a new election form at
the time it revokes an earlier election or at any time after revoking an
earlier election but before the election deadline. If a new election is not
made, the holder will be deemed not to have made an election, and IFCO Systems'
exchange agent will retain the stock certificates tendered with the revoked
election form until the time shares are exchanged upon completion of the
merger. All election forms will automatically be revoked if the merger
agreement is terminated. If the merger agreement is terminated, the stock
certificates tendered will be promptly returned to the PalEx stockholder.
IFCO Systems' exchange agent will make binding determinations whether or not
an election has been properly made or revoked. The exchange agent will also
make all of the computations of the merger consideration based on the elections
and deemed elections and any required adjustments. These computations will be
binding on the PalEx stockholders and holders of SMG exchangeable shares.
Examples of Merger Consideration. A table illustrating examples of the number
of IFCO Systems ordinary shares that may be received by PalEx stockholders in
the merger based upon possible elections by PalEx stockholders is included in
the Summary.
Cancellation of Shares. Each share of PalEx capital stock, if any, owned by
IFCO Systems or any of its subsidiaries, held in treasury by PalEx, or owned by
any of PalEx's subsidiaries immediately before the effective time of the merger
will be canceled and retired.
Fractional Shares. No fractional IFCO Systems ordinary shares will be issued
in the merger. Instead, each PalEx stockholder that would otherwise be entitled
to receive a fractional share will receive an amount in cash equal to the value
of an IFCO Systems ordinary share multiplied by the fraction. The value of an
IFCO Systems ordinary share for this calculation will be the IPO price.
Exchange Procedures. Before the effective time of the merger, IFCO Systems
will appoint an independent bank, trust company, or other U.S. financial
institution to act as the exchange agent in connection with the merger.
Promptly after the effective time of the merger, the exchange agent will mail
to each PalEx stockholder of record immediately before the effective time, who
has not previously submitted a letter of transmittal and certificates with an
election form, a letter of transmittal and instructions for the stockholder to
use in surrendering its old PalEx certificates in exchange for certificates
representing whole IFCO Systems ordinary shares and cash instead of any
fractional share. After the effective time of the merger and until they are
surrendered, old PalEx certificates will represent only the right to receive
the merger consideration as described above. No dividends or distributions
declared or made after the effective time of the merger with respect to IFCO
Systems ordinary shares will be paid to the holder of any unsurrendered PalEx
certificate until after surrender of the certificate.
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After the effective time of the merger and after the exchange agent receives
an old PalEx certificate and a completed letter of transmittal, the exchange
agent will deliver to the stockholder on behalf of Silver Oak and IFCO Systems
the amount of cash and/or the number of whole IFCO Systems ordinary shares
issued by IFCO Systems against contribution of the shares of PalEx common stock
represented by the old PalEx certificate. The amount of cash and number of IFCO
Systems ordinary shares will be based upon the PalEx stockholder's election of
merger consideration and any required adjustments to the election. The exchange
agent will also deliver to the stockholder cash instead of any fractional IFCO
Systems ordinary share.
No transfers of shares of PalEx common stock will be made after the effective
time of the merger.
Treatment of PalEx Stock Options and Warrants
Pursuant to the merger agreement, each option or warrant to purchase PalEx
common stock that is outstanding at the effective time of the merger will
automatically be exchanged into an option or warrant to purchase a number of
IFCO Systems ordinary shares. The number of IFCO Systems ordinary shares will
be equal to the number of shares of PalEx common stock that could have been
purchased under the exchanged option or warrant multiplied by the exchange
ratio. Upon exercise, cash will be paid instead of any fractional IFCO Systems
ordinary share. The exercise price per share will be equal to the per share
exercise price of the converted option or warrant divided by the exchange
ratio. With respect to qualified or incentive stock options, the conversion
will be made in a manner consistent with the applicable provisions of the
Internal Revenue Code. PalEx optionholders will also be given the alternative
of electing to exchange their options for new, fully vested options,
exercisable at the IPO price, to purchase the number of IFCO Systems ordinary
shares that represents the economic equivalent of a straight conversion into
options to purchase IFCO Systems ordinary shares as described above.
The merger will be a change of control event under the terms of PalEx's stock
option plan. As a result, all of the outstanding stock options will be fully
vested at the effective time of the merger and at the time of conversion into
new options to purchase IFCO Systems ordinary shares.
IFCO Systems has agreed to maintain an effective registration statement under
the Securities Act to cover the IFCO Systems ordinary shares issuable upon the
exercise of the new options and warrants resulting from this conversion.
Structure of IFCO Systems After the Merger
Articles of Association. IFCO Systems and PalEx have agreed that the articles
of association of IFCO Systems at the effective time will be in the form they
reasonably agree upon. An English translation of the agreed upon articles of
association has been included as Appendix D to this proxy statement/prospectus.
Board of Directors. At the effective time of the merger, the board of
directors of IFCO Systems will consist of seven members as follows:
. Christoph Schoeller, Chairman;
. Martin A. Schoeller, Chief Executive Officer;
. Cornelius Geber;
. Sam W. Humphreys;
. Randall Onstead;
. Eckhard Pfeiffer; and
. Dr. Frank Tofflinger.
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<PAGE>
Executive Officers. At the effective time of the merger, IFCO Systems will
have five executive officers. The initial executive officers will be:
. Martin A. Schoeller, Chief Executive Officer
. A. Joseph Cruz, President, North America
. Vance K. Maultsby, Jr., Executive Vice President, Strategy and Finance
and Chief Financial Officer
. Edward E. Rhyne, Executive Vice President and General Counsel; and
. Howe Q. Wallace, Executive Vice President, Human Resources.
Headquarters. Following the effective time of the merger, IFCO Systems will
maintain its headquarters in Amsterdam, the Netherlands, and operations
headquarters in Munich, Germany, and Houston, Texas.
Language. Following the effective time of the merger, English will be the
official language for the management of IFCO Systems, except where Netherlands
law requires records or filings in the Dutch language.
Accounting Practices. Following the effective time of the merger, the books
and records of IFCO Systems will be maintained in accordance with U.S. GAAP in
addition to Netherlands GAAP.
No Solicitation Before the Merger; No Withdrawal or Modification of
Recommendation
No Solicitation by PalEx. Under the merger agreement, PalEx has agreed that
before the effective time of the merger neither it nor its subsidiaries will,
nor authorize or permit any of its representatives to, (1) solicit, initiate,
or knowingly encourage anyone to make a proposal for the acquisition of all or
a significant portion of PalEx's assets, business, or equity securities or (2)
participate in any discussions or negotiations regarding an acquisition
proposal. Prior to the PalEx stockholders' meeting, however, PalEx may respond
to an unsolicited proposal that did not otherwise result from a breach of its
no solicitation agreement, furnish information to the person or entity making
the proposal, and participate in discussions or negotiations regarding the
proposal. PalEx must first give written notice to Schoeller Industries and must
enter into an appropriate confidentiality agreement with the person or entity
making the proposal.
No Withdrawal or Modification of Recommendation by PalEx. PalEx has also
agreed that its board of directors or any board committee will not:
. withdraw, modify, or publicly propose to withdraw or modify the approval
or recommendation of the merger agreement;
. approve, recommend, or publicly propose to approve or recommend any
acquisition proposal as described above; or
. cause PalEx to enter into any nonbinding or binding acquisition agreement
with respect to any acquisition proposal.
Prior to the PalEx stockholders' meeting, however, the PalEx board of
directors may determine in its good faith judgment, after consulting with
outside legal counsel, that the failure to do any of these things with respect
to a superior acquisition proposal would breach or be inconsistent with the
board's fiduciary duties to PalEx stockholders. If the PalEx board of directors
makes this determination, it may withdraw or modify its approval or
recommendation of the merger agreement, approve, recommend, or propose to
approve or recommend the superior acquisition proposal, terminate the merger
agreement and, after termination, cause PalEx to enter into a binding agreement
with respect to the superior acquisition proposal. The PalEx board of directors
may not take any of these steps unless it first gives Schoeller Industries
written notice at least five business days in advance, stating the material
terms of the superior acquisition proposal and identifying the
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<PAGE>
person or entity making the proposal. In addition, PalEx may not terminate the
merger agreement and enter into any binding agreement until after its
stockholders' meeting has been held and the PalEx stockholders have failed to
approve and adopt the merger agreement.
A superior acquisition proposal is a proposal that:
. is unsolicited;
. did not otherwise result from a breach of PalEx's no solicitation
agreement;
. the PalEx board of directors determines in good faith, based on the
advice of Batchelder or other financial advisor with a nationally
recognized reputation, to be more favorable to PalEx stockholders than
the merger; and
. if needed, has financing committed or the PalEx board of directors
determines financing is reasonably capable of being obtained by the
person or entity making the proposal.
No Solicitation by Schoeller Industries, IFCO Systems, or Any IFCO
Company. In addition to the restrictions placed on PalEx regarding solicitation
of proposals, before the effective time of the merger neither Schoeller
Industries, IFCO Systems, nor any of the IFCO Companies or their subsidiaries
will, or authorize or permit any of their representatives to, solicit,
initiate, or knowingly encourage anyone to make a proposal for the acquisition
of all or a significant portion of any of their assets, business, or equity
securities. Schoeller Industries, IFCO Systems, the other IFCO Companies, and
their subsidiaries are not, however, prevented from making or soliciting a
proposal in response to or competitive with a superior acquisition proposal for
PalEx.
PalEx Stockholder Approval
Under the merger agreement, PalEx is required to use its reasonable efforts
to obtain stockholder approval. The date of the special meeting has been set
after consulting with Schoeller Industries and is intended to be before the
pricing date of the IPO, but not more than 45 days before the anticipated
closing date for the IPO.
PalEx, through the PalEx board of directors, has agreed to recommend to the
PalEx stockholders approval and adoption of the merger agreement. As described
above, there are situations in which the PalEx board of directors may determine
to withdraw or modify its approval or recommendation. In addition, the PalEx
board of directors may withdraw or modify its approval or recommendation if
Batchelder withdraws or materially modifies the fairness opinion and the PalEx
board of directors determines in good faith, after consulting with outside
legal counsel, that the failure to withdraw or modify the board's approval or
recommendation would breach or be inconsistent with the board's fiduciary
duties to PalEx stockholders. No withdrawal or modification of the PalEx board
of directors' approval or recommendation relieves PalEx of its obligation to
hold the stockholders' meeting.
Voting Agreements
At the time the merger agreement was signed, Schoeller Industries obtained a
voting agreement from ten beneficial holders of PalEx common stock. These
stockholders own approximately 29% of the outstanding shares of PalEx common
stock as of the date of this proxy statement/prospectus. Pursuant to the voting
agreement, these stockholders have agreed to vote their shares in favor of the
merger agreement at any stockholders' meeting. The voting agreement also limits
the stockholders' rights to transfer the shares, establish a voting trust, or
grant any proxy except for approval of the merger agreement. The voting
agreement does not restrict a stockholder who is also a director or officer of
PalEx from taking any action that may be necessary as a result of his position
as a director or officer.
Under the merger agreement, PalEx has agreed to use its reasonable efforts
after the mailing of this proxy statement/prospectus to deliver an additional
voting agreement in favor of Schoeller Industries from additional stockholders.
Assuming this additional voting agreement is delivered prior to the special
meeting, the total
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<PAGE>
number of shares subject to the voting agreements and agreeing to vote for
approval of the merger agreement will be at least 51% of the outstanding shares
of PalEx common stock as of the record date and sufficient to approve the
merger.
If the PalEx board of directors withdraws its recommendation for the merger
agreement, the voting agreements will, nevertheless, remain in effect and
require these stockholders to vote their shares in favor of the merger
agreement. The voting agreement is effective until the earlier of completion of
the merger, termination of the merger agreement, or May 31, 2000.
Restrictions on Transfers of IFCO Systems Ordinary Shares
Before the closing of the merger, IFCO Systems is required to enter into a
lockup agreement with each of Christoph Schoeller, Martin Schoeller, Schoeller
Industries, and Schoeller Holding. In addition, PalEx will use its reasonable
best efforts to deliver lockup agreements to IFCO Systems that have been
executed by 13 senior executives of PalEx and senior executives of PalEx's
subsidiaries. Each of the lockup agreements will restrict the transfer for two
years after the closing date of the IPO of all IFCO Systems ordinary shares
directly or indirectly owned, or entitled to be received, by these restricted
stockholders. The restriction period will terminate early for any of the PalEx
officers or senior executives whose employment with PalEx or a PalEx subsidiary
is terminated without cause or because of a breach by IFCO Systems, PalEx, or a
PalEx subsidiary. The restricted IFCO Systems ordinary shares may begin to be
sold during the restricted period as follows:
<TABLE>
<CAPTION>
Time After the IPO Closing Date Shares That May Be Sold
------------------------------- -----------------------
<S> <C>
one month......................... 20%
12 months......................... additional 15%
15 months......................... additional 15%
18 months......................... additional 15%
21 months......................... additional 15%
</TABLE>
As a result of this schedule, at any time beginning 24 months after the
closing date of the IPO, these IFCO Systems ordinary shares will no longer be
restricted from transfer.
Additional Agreements
Reasonable Efforts; Regulatory Matters. Each party has agreed to use all
reasonable efforts to take, or cause to be taken, all actions necessary in
order to complete the merger and the other transactions described in the merger
agreement. These efforts include obtaining all necessary consents and approvals
and making all necessary filings.
As part of these efforts, Schoeller Industries and PalEx specifically agreed
to make, and made, the appropriate filings under the HSR Act with the Antitrust
Division and the FTC and has made similar filings that may be required based
upon the laws of Germany. Schoeller Industries and PalEx do not anticipate the
need to make similar filings with any other country. Schoeller Industries and
PalEx will use all reasonable efforts to comply with all lawful requests of
these governmental authorities and will not extend any applicable waiting
period that would delay completion of the merger.
Business Before the Merger. The merger agreement generally provides that,
until the effective time of the merger, PalEx and its subsidiaries on the one
hand and each of the IFCO Companies and its subsidiaries on the other hand (1)
will take specific actions to maintain their businesses and (2) will not take
specified actions as listed below. The exceptions to these requirements are
other provisions of the merger agreement or a written agreement of Schoeller
Industries for PalEx or a written agreement of PalEx for the IFCO Companies.
Despite these requirements, the merger agreement clearly states that neither
party has the right to control or direct the other party's operations before
the effective time of the merger.
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Each of PalEx and the IFCO Companies will, and will cause its subsidiaries
to:
. conduct their businesses in the ordinary and usual course of business
consistent with past practice;
. use all reasonable efforts to preserve intact their business
organizations;
. use all reasonable efforts to keep available the services of their
current officers and key employees;
. use all reasonable efforts to preserve the goodwill and business
relationships with customers, suppliers, and others having business
relationships with them; and
. maintain insurance coverage with financially responsible carriers at
levels consistent with past practice.
They will also not take the following actions:
. change their corporate governing documents;
. change their capitalization, including declaring or paying any
dividends, except that PalEx may issue shares of its common stock on the
exercise of its outstanding options, warrants, exchangeable shares, or
convertible promissory notes and to Batchelder immediately prior to the
merger;
. incur, or become contingently liable on, any debt for borrowed money,
except for:
. borrowings in the ordinary course of business consistent with past
practice;
. for PalEx, borrowings to refinance existing indebtedness other than
its senior credit facility;
. for PalEx, borrowings of up to $150.0 million to refinance its
senior credit facility on terms generally no less favorable than the
terms of the senior credit facility on the date of the merger
agreement;
. for PalEx, the issuance in a private placement of senior
subordinated notes of up to $40.0 million; and
. for an IFCO Company, borrowings to refinance existing indebtedness;
. do anything or fail to do anything that would cause PalEx or its
stockholders to have to recognize gain or loss for U.S. federal income
tax purposes as a result of the merger;
. sell, transfer, or encumber any material assets or business other than:
. in the ordinary course of business; and
. for PalEx, pledges and grants of lien in connection with refinancing
its senior credit facility;
. materially change its employee compensation and benefits, including:
. entering into new employment or severance arrangements with, or
increasing the compensation of, directors, officers, or key
employees unless disclosed in writing to the other party prior to
signing the merger agreement;
. adopt or enter into any new employee benefit plan or arrangement
except as legally required; and
. for PalEx, materially increasing benefits or compensation expenses,
except for normal increases in the ordinary course of business;
. make or change any material tax election or make any material tax
agreement or settlement;
. acquire by merger or otherwise any business or entity or acquire any
material assets; and
. authorize or agree to do any of the listed actions.
Access to Information. PalEx and IFCO Systems have each agreed to provide
the other party and the other party's representatives with full access during
normal business hours to all the properties and records of it and its
subsidiaries. For IFCO Systems, this includes access by PalEx and its
representatives to the properties and records of IFCO U.S. and to the
underwriters and their representatives in connection with the IPO. Each
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<PAGE>
party will also promptly provide the other party with (1) a copy of any report
or filing made under securities laws or stock exchange regulations or filed in
connection with the merger agreement and (2) other information as reasonably
requested.
Employee Matters. For at least two years following the effective time of the
merger, IFCO Systems will provide all current and former employees of PalEx and
its subsidiaries with compensation and benefits that are at least generally as
favorable as the compensation and benefits they were entitled to receive
immediately before the effective time. This includes benefits pursuant to
retirement plans, medical plans, layoff policies, and deferred compensation
arrangements. In addition, time of service with PalEx or any of its
subsidiaries will be recognized for purposes of determining any benefit
eligibility, vesting, or accrual. IFCO Systems is not, however, required to
grant any stock options to any employee unless required pursuant to a separate
agreement.
IFCO Systems will also honor each existing employment, severance, and
termination agreement between PalEx or any of its subsidiaries and any
director, officer, or employee. IFCO Systems will not unilaterally amend any of
these agreements for at least two years in any way that would reduce or impair
benefits payable to a covered employee.
Waiver of Change of Control Payments. Some of PalEx's officers and key
employees have employment agreements that provide for severance payments upon a
change of control of PalEx. The merger will constitute a change of control
under these agreements. Pursuant to the merger agreement, PalEx has agreed to
use its reasonable efforts to cause the 15 employees with this type of
employment agreement to waive any rights of termination and rights to receive
severance or other payments from PalEx in connection with a change of control
resulting from the merger. Waivers by at least 11 of these employees is a
condition to IFCO Systems' obligations to complete the merger.
Stock Options to IFCO Systems Management. Under the merger agreement, as of
the closing date of the merger, IFCO Systems will issue options to purchase
300,000 IFCO Systems ordinary shares to each of Christoph Schoeller, Martin
Schoeller, and Sam Humphreys as incentive compensation for their involvement in
the business of IFCO Systems. The exercise price for these options will be the
IPO price. On or after the closing date, IFCO Systems also shall be entitled to
issue options to purchase up to 1,000,000 IFCO Systems ordinary shares to
employees of Schoeller Industries or its affiliates. Christoph and Martin
Schoeller are not eligible to receive any of these options. In addition, no
eligible employee may be granted options for more than 100,000 shares. The
exercise price for these options will be the market value per IFCO Systems
ordinary share on the date of grant, which will be the IPO price if the options
are granted on the closing date of the merger and the IPO. Each of these
options will be fully exercisable on the date of grant.
Indemnification and Insurance of PalEx Directors and Officers. After the
effective time of the merger, IFCO Systems and PalEx, as the surviving
corporation in the merger, will each indemnify, to the fullest extent permitted
under applicable law, all present and former directors, officers, employees,
and agents of PalEx or any of its subsidiaries against claims related to any
action or omission in connection with the person's service to PalEx before the
effective time. This indemnification obligation includes the payment of
reasonable legal fees and expenses and other reasonable expenses before the
final resolution of any claim. For six years after the effective time, IFCO
Systems will maintain the current PalEx policies of directors' and officers'
liability insurance or will maintain substitute policies that have at least the
same coverage and are otherwise materially the same as the current policies.
IFCO Systems' obligation is, however, limited to insurance coverage costing not
more than 130% of the previous year's cost.
Listing of IFCO Systems Ordinary Shares. IFCO Systems has agreed to use all
reasonable efforts to have the IFCO Systems ordinary shares to be issued in the
merger, or reserved for issuance upon the exercise of stock options or warrants
or the conversion or exchange of convertible or exchangeable securities,
authorized for listing on the Amtlicher Handel segment or on the Neuer Markt
segment of the Frankfurt Stock Exchange.
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IFCO Systems has also agreed to use all reasonable efforts to cause the New
York shares representing these IFCO Systems ordinary shares to be approved for
listing on the Nasdaq National Market.
Other Agreements. The merger agreement contains other mutual agreements of
the parties relating to:
. actions to be taken with respect to the intended tax treatment of the
merger;
. press releases or public announcements;
. notification of any event that would cause any representation or
warranty in the merger agreement to be untrue or materially inaccurate;
. notification of any material failure to perform an agreement or satisfy
a condition; and
.restrictions on related party transactions after the merger.
The parties have also agreed to the following:
. Schoeller Industries or its affiliates will transfer or license to IFCO
Systems all technology necessary for the business of IFCO Systems to the
extent possessed by Schoeller Industries or its affiliates;
. IFCO Systems and IFCO International will use their reasonable best
efforts to complete the purchase of the remaining interests of IFCO
U.S.; and
. PalEx will use its reasonable efforts to amend the documents governing
the SMG exchangeable shares to provide for exchange into the merger
consideration as provided in the merger agreement.
Representations and Warranties
Representations and Warranties of PalEx. The merger agreement includes
standard representations and warranties by PalEx to Schoeller Industries, which
must continue to be true and correct on the closing date of the merger, except
as otherwise provided in the merger agreement. These representations and
warranties are as to:
. corporate organization, standing, and foreign qualifications of PalEx
and its subsidiaries;
. capitalization of PalEx;
. ownership by PalEx of the shares of capital stock of its subsidiaries;
. power and authority of PalEx to execute the merger agreement and,
subject to approval of the merger agreement by PalEx's stockholders,
complete the merger;
. no violation, conflicts, breaches, or defaults of PalEx's certificate of
incorporation or bylaws, laws and regulations applicable to PalEx or its
subsidiaries, and instruments or agreements to which PalEx or its
subsidiaries are bound as a result of executing and delivering the
merger agreement or completing the merger;
. consents, required filings, or approvals needed for the merger;
. accuracy of statements and reports PalEx has filed with the SEC and of
PalEx's financial statements;
. absence of undisclosed liabilities;
. absence of identified changes or events since December 27, 1998;
. pending or threatened litigation;
. accuracy of information provided for this proxy statement/prospectus or
the registration statement;
. compliance with laws and regulations and possession and no violation of
all government permits necessary for the business of PalEx and its
subsidiaries;
. compliance by PalEx and its subsidiaries with their certificate or
articles of incorporation and bylaws and with agreements binding them;
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. environmental matters;
. tax matters;
. existence, terms, and compliance with applicable laws of PalEx's
employee benefit plans;
. labor matters;
. ownership of and rights to use intangible property;
. title of PalEx and its subsidiaries to their assets;
. insurance coverage maintained by PalEx and its subsidiaries;
. year 2000 computer systems and software compliance;
. no action taken that would prevent the merger from constituting a
qualified reorganization under Section 368(a) of the Internal Revenue
Code;
. stockholder approval necessary to approve the merger agreement;
. brokers and finders engaged by PalEx; and
. a fairness opinion delivered by Batchelder.
Representations and Warranties of the IFCO Companies. The merger agreement
also includes standard representations and warranties by each of the IFCO
Companies to PalEx, which must continue to be true and correct on the closing
date of the merger, except as otherwise provided in the merger agreement. These
representations and warranties are as to:
. corporate organization, standing, and foreign qualifications of each
IFCO Company and its subsidiaries;
. capitalization of each IFCO Company;
. ownership by each IFCO Company of the shares of capital stock or other
equity interests of its subsidiaries;
. power and authority of each IFCO Company to execute the merger agreement
and complete the merger;
. no violation, conflicts, breaches, or defaults with respect to each IFCO
Company's governing corporate documents, laws and regulations applicable
to each IFCO Company or its subsidiaries, and instruments or agreements
to which each IFCO Company or its subsidiaries are bound as a result of
executing and delivering the merger agreement or completing the merger;
. consents, required filings, or approvals needed for the merger;
. accuracy of each IFCO Company's financial statements;
. absence of undisclosed liabilities;
. liabilities and other obligations of each IFCO Company to Schoeller
Industries or any affiliate of Schoeller Industries;
. absence of identified changes or events since December 31, 1998;
. pending or threatened litigation;
. accuracy of information provided for this proxy statement/prospectus or
the registration statement;
. compliance with laws and regulations and possession and no violation of
all government permits necessary for the business of each IFCO Company
and its subsidiaries;
. compliance by each IFCO Company and its subsidiaries with their
memorandum or articles of association and with agreements binding them;
. environmental matters;
. tax matters;
. existence, terms, and compliance with applicable laws of each IFCO
Company's employee benefit plans;
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. labor matters;
. ownership of and rights to use intangible property;
. title of each IFCO Company and its subsidiaries to their assets;
. insurance coverage maintained by each IFCO Company and its subsidiaries;
. year 2000 computer systems and software compliance;
. no action taken that would prevent the merger from constituting a
qualified reorganization under Section 368(a) of the Internal Revenue
Code;
. brokers and finders engaged by each IFCO Company; and
. no ownership of shares of PalEx common stock.
Representations and Warranties of Schoeller Industries. The merger agreement
also includes standard representations and warranties by Schoeller Industries
to PalEx, which must continue to be true and correct on the closing date of the
merger, except as otherwise provided in the merger agreement. These
representations and warranties are as to:
. capitalization of Schoeller Industries;
. ownership and status of IFCO Companies' capital shares;
. corporate organization and standing and power and authority of Schoeller
Industries to execute the merger agreement and complete the merger;
. consents, required filings, or approvals needed for the merger;
. no violation, conflicts, breaches, or defaults of any governmental
requirement, Schoeller Industries governing corporate documents, laws
and regulations applicable to Schoeller Industries or its subsidiaries,
and instruments or agreements to which Schoeller Industries or its
subsidiaries are bound as a result of executing and delivering the
merger agreement or completing the merger;
. pending or threatened litigation;
. no brokers and finders engaged by Schoeller Industries;
. lack or waiver of preemptive rights or similar rights to acquire any
capital shares of the IFCO Companies or their subsidiaries;
. no ownership of shares of PalEx common stock; and
. net worth in excess of DM100.0 million, or approximately $49.9 million.
Conditions to Completion of the Merger
Joint Conditions. The merger agreement provides that the obligations of each
party to complete the transactions described in the merger agreement are
subject to the following conditions:
. IPO minimum valuation. The pricing of the IPO must imply a minimum
market valuation, assuming completion of the merger but before the IPO,
of $400.0 million for the combined company based on the currency
exchange rate as of the IPO pricing date.
. Merger and IPO closing. The closing of the merger and the IPO must occur
on the same day.
. PalEx stockholder approval. The merger agreement must have been approved
by the required vote of PalEx stockholders.
. Listing of IFCO Systems ordinary shares. The IFCO Systems ordinary
shares issuable in both the merger and the IPO, and the shares reserved
for issuance on the exercise of converted stock options and warrants,
must have been authorized for listing on the Amtlicher Handel or on the
Neuer Markt.
. Listing of New York shares. New York shares representing the IFCO
Systems ordinary shares issuable in the merger, and the shares reserved
for issuance on the exercise of converted stock options and warrants,
must have been authorized for listing on the Nasdaq National Market.
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<PAGE>
. Required consents. Each of PalEx and Schoeller Industries and IFCO
Systems must have obtained all required, material consents to the merger
and related transactions.
. Antitrust matters. The waiting period under the HSR Act and any similar
European government requirements must have expired or terminated, and
any necessary consents or approvals pursuant to any European government
requirements must have been obtained.
. Effectiveness of registration statement. The registration statement must
have become effective and there must be no stop order or pending stop
order to suspend its effectiveness.
. State securities laws compliance. IFCO Systems must have received all
necessary permits or authorizations for the merger and related
transactions under applicable state securities laws and they must be in
full force.
. No injunction. There must be no preliminary or permanent injunction,
order, or ruling by any court or governmental authority that prevents
completion of the merger.
. Law or government action. No law or regulation must have been enacted,
and no action must have been taken by any governmental authority, in the
United States, Germany, or the Netherlands that would prevent completion
of the merger or make it illegal.
PalEx's Conditions. The merger agreement also provides that the obligation of
PalEx to complete the merger is subject to the following conditions:
. Performance by IFCO Systems and Silver Oak. IFCO Systems and Silver Oak
must have performed in all material respects their agreements contained
in the merger agreement.
. Representations and warranties of IFCO Systems and Schoeller
Industries. The representations and warranties of IFCO Systems and
Schoeller Industries in the merger agreement must be true in all
material respects as of the date of the merger agreement and as of the
closing date of the merger.
. Tax ruling. PalEx must have received a private ruling from the IRS that
the PalEx stockholders qualify for an exception to Section 367(a)(1) of
the Internal Revenue Code with respect to the merger, and the tax ruling
must not have been withdrawn or materially modified.
. Tax opinion. On or before the date this proxy statement/prospectus is
mailed to PalEx stockholders, PalEx must have received an opinion from
Baker Botts to the effect that the merger should be treated as a
reorganization under the Internal Revenue Code and IFCO Systems should
be treated as a corporation with respect to the merger. As of the
closing date of the merger, the opinion must not have been withdrawn or
materially modified. PalEx must also have received a second tax opinion
from Baker Botts reconfirming the first tax opinion. In giving its
opinion, Baker Botts may rely on the IRS tax ruling.
. Contribution of shares. The contribution of shares to IFCO Systems from
Schoeller Industries and its affiliate must have been completed.
. GE transactions. The transactions contemplated in the Option Release
Agreement must have been completed, including GE Erste's contribution to
IFCO Systems of GE Subsidiary's preferential share in IFCO Europe.
. IPO closing. The closing of the IPO must not yet have occurred. In
addition, the closing date of the IPO must not be more than 45 days
after the date of the PalEx stockholders' meeting. If PalEx receives
outside legal advice that it must recirculate a supplemented proxy
statement/prospectus and resolicit proxies for the meeting and if
Schoeller Industries has received voting agreements covering at least
51% of the outstanding shares of PalEx common stock, PalEx is required
to hold a new stockholders' meeting and a new 45-day period will run
from the date of the new meeting.
. Purchase of IFCO U.S. IFCO Systems' agreement to purchase the remaining
interest in IFCO U.S. must not have been amended in any material respect
and must be in full force and effect.
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IFCO Systems' Conditions. The merger agreement also provides that the
obligations of IFCO Systems, Silver Oak, and Schoeller Industries to complete
the transactions described in the merger agreement are subject to the following
conditions:
. Performance by PalEx. PalEx must have performed in all material respects
its agreements contained in the merger agreement.
. Representations and warranties of PalEx. The representations and
warranties of PalEx in the merger agreement must be true in all material
respects as of the date of the merger agreement and as of the closing
date of the merger.
. Lockup agreements. IFCO Systems must have received a lockup agreement
from at least ten of the 13 identified officers and senior executives of
PalEx and its subsidiaries.
. Waivers of change of control payments. IFCO Systems must have received a
waiver from at least 11 of the 15 PalEx employees who have employment
agreements with change of control severance provisions.
Extension and Waiver
Prior to the effective time of the merger, the parties may extend the time
for performance of a party or waive compliance with any representation and
warranty, agreement, or condition in the merger agreement. Any extension or
waiver must be in writing and may be given at any time before the closing date
of the merger, whether before or after the approval of PalEx's stockholders has
been obtained.
Termination of the Merger Agreement; Payment of a Termination Fee
Rights of Schoeller Industries or PalEx to Terminate. At any time before the
closing of the merger, Schoeller Industries and PalEx may terminate the merger
agreement by mutual written consent. In addition, either Schoeller Industries
or PalEx may terminate the merger agreement if:
. the closing date of the IPO is not on or before May 31, 2000;
. as of the pricing date of the IPO, the IPO pricing as recommended by the
IPO managing underwriters implies a market valuation of IFCO Systems,
assuming completion of the merger but before the IPO, less than $400.0
million for the combined company based on the currency exchange rate on
the pricing date;
. the PalEx stockholders fail to approve and adopt the merger agreement at
the PalEx stockholders' meeting, provided that the PalEx board of
directors has not withdrawn or modified its approval or recommendation
of the merger agreement before the meeting;
. IFCO Systems does not obtain an authorization for listing on the
Amtlicher Handel or the Neuer Markt and that failure is not cured within
30 days after IFCO Systems receives notice;
. IFCO Systems' agreement to purchase the remaining interest in IFCO U.S.
is terminated for any reason;
. the representations and warranties of the other party contained in the
merger agreement fail to be true in all material respects as of the date
made and the facts giving rise to the failure have not been cured within
30 days after written notice is given to the other party;
. the other party fails to perform in any material respect its agreements
under the merger agreement and the failure is not cured within 30 days
after notice to the other party; or
. the merger is enjoined by a final, nonappealable order or ruling of a
court or governmental authority with jurisdiction, provided that the
order or ruling was not entered at the request of the party seeking
termination or its affiliates.
Rights of PalEx to Terminate. PalEx may also terminate the merger agreement
if:
. The PalEx board of directors, in compliance with the merger agreement,
withdraws or modifies its approval or recommendation of the merger
agreement before the PalEx stockholders' meeting because of a superior
acquisition proposal.
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<PAGE>
. The PalEx stockholders fail to approve and adopt the merger agreement at
the meeting.
. PalEx enters into a binding agreement with respect to the superior
acquisition proposal. If PalEx terminates the merger agreement on this
basis, it must pay Schoeller Industries a termination fee.
Rights of Schoeller Industries to Terminate. Schoeller Industries may also
terminate the merger agreement for the following reasons:
. The PalEx board of directors, in compliance with the merger agreement,
withdraws or modifies its approval or recommendation of the merger
agreement before the PalEx stockholders' meeting because of a superior
acquisition proposal or approves, recommends, or proposes to approve or
recommend a superior acquisition proposal.
. The PalEx board of directors, in compliance with the merger agreement,
withdraws or modifies its approval or recommendation of the merger
agreement before the PalEx stockholders' meeting because of a superior
acquisition proposal and the PalEx stockholders fail to approve and
adopt the merger agreement at the meeting. If Schoeller Industries
terminates the merger agreement on this basis, PalEx must pay Schoeller
Industries a termination fee.
. For any other reason, in its sole discretion, if at the time of
termination all the representations and warranties of the IFCO Companies
and Schoeller Industries are true in all material respects and the IFCO
Companies and Schoeller Industries are not in material breach of any
their agreements under the merger agreement. If Schoeller Industries
terminates the merger agreement on this basis, it must pay PalEx a
termination fee.
Effect of Termination. The merger agreement generally provides that if it is
terminated, the merger agreement will immediately be void and none of the
parties will have any further obligation, except for (1) payment of termination
fees, (2) the confidential treatment of information, and (3) payment of
expenses.
Payment of Termination Fee. If PalEx is obligated to pay Schoeller Industries
a termination fee for the reasons identified above, the termination fee will be
equal to 5% of PalEx's market capitalization on the date of termination.
PalEx's market capitalization will be determined by multiplying the closing
sale price per share reported by Nasdaq on the date of termination by the sum
of the number of shares of PalEx common stock and SMG exchangeable shares
outstanding on the date of termination.
If Schoeller Industries is obligated to pay PalEx a termination fee for the
single reason identified above, the termination fee will be DM12.0 million, or
approximately $6.0 million.
Expenses
Except as otherwise previously agreed by the parties or provided in the
merger agreement, each party is responsible for paying its own costs and
expenses related to the merger agreement and the transactions contemplated by
the merger agreement. Under the merger agreement, the parties have agreed that
Schoeller Industries and IFCO Systems on the one hand and PalEx on the other
hand will each pay one-half of the costs, expenses, and filing fees in
connection with (1) filing, printing, and mailing of this proxy
statement/prospectus and the registration statement and (2) the filings of
premerger notification and report forms under the HSR Act and similar European
government requirements. In addition, if the merger is completed, IFCO Systems
will be responsible for IFCO Systems' and PalEx's professional fees and
expenses and costs and expenses incurred by PalEx in connection with new,
interim financing to be obtained before the IPO.
Amendment
The parties to the merger agreement may not amend the merger agreement except
by action taken by their management boards, managing directors, and boards of
directors and then only by written amendment signed by each of the parties. The
merger agreement may be amended at any time before the closing date of the
merger, whether before or after the approval of PalEx's stockholders has been
obtained.
Governing Law
The merger agreement is generally governed by Delaware law. To the extent
required by the laws of the Netherlands, the share exchange for the merger will
be governed by the laws of the Netherlands.
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CONCURRENT TRANSACTIONS
The IPO
General
On the same day as, and directly following, the closing of the merger, IFCO
Systems will complete the IPO of IFCO Systems ordinary shares. The shares will
be listed on the Frankfurt Stock Exchange and, for shares sold to U.S.
investors, on the Nasdaq National Market. Approximately 11.8 million shares are
expected to be offered in the IPO. The initial public offering price of the
shares, and the number of shares offered, will be determined by the
underwriters for the IPO, in consultation with IFCO Systems, after the PalEx
special stockholders' meeting but before the closing of the merger, and will be
based on the market conditions prevailing at the time. Neither this proxy
statement/prospectus nor any of the information contained in this proxy
statement/prospectus is, or should be considered to be, an offer to sell shares
in the IPO. The offering of the shares in the IPO will be made to prospective
investors only by a separate prospectus. Assuming PalEx stockholders elect to
receive 49% of the total merger consideration in cash, upon completion of the
IPO there will be approximately 38.7 million IFCO Systems ordinary shares
outstanding. The IPO is a condition to the closing of the merger. The IPO is
conditioned upon the closing, on the same day, of the merger, and IFCO Systems'
high yield debt financing. In addition, the IPO is conditioned upon IFCO
Systems receiving total proceeds from the IPO and the high yield debt of at
least $250.0 million.
Listing
IFCO Systems has applied to list the IFCO Systems ordinary shares on the
Amtlicher Handel segment of the Frankfurt Stock Exchange, with registration in
SMAX, under the symbol "ife" and, for shares issued or sold to U.S. investors,
to be quoted on the Nasdaq National Market under the symbol "IFCO".
The Frankfurt Stock Exchange
The Frankfurt Stock Exchange is operated by Deutsche Borse AG and is the most
significant of the eight German stock exchanges. In 1999, it has accounted for
approximately 84% of the volume of traded shares in Germany. The total volume
of equities traded on the Frankfurt Stock Exchange in 1999 was approximately
4.0 trillion euros, based on the Frankfurt Stock Exchange's practice of
recording the sale and purchase components involved in any trade as separate
transactions, for both equity and debt instruments. In 1998, the Frankfurt
Stock Exchange was the fourth largest stock exchange in the world behind the
New York Stock Exchange, The Nasdaq Stock Market, and the London Stock Exchange
based on trading volume. As of December 30, 1999, 3,418 equity securities were
listed on the Frankfurt Stock Exchange.
The Frankfurt Stock Exchange has four basic segments:
. Amtlicher Handel, the Official Market;
. Geregelter Markt, the Regulated Market;
. Freiverkehr, the Over-the-Counter Segment; and
. Neuer Markt, the New Market.
Amtlicher Handel. The Amtlicher Handel is the first segment of the stock
exchange with all officially listed securities. The DAX is the index of the 30
most actively traded domestic Amtlicher Handel equities. As of January 7, 2000,
the DAX was 6,780.96.
SMAX. Due to the focus of investors on the large DAX values, on April 26,
1999, Deutsche Borse created the Small Caps Exchange, or SMAX, as an additional
segment, to improve the position of established small and medium-sized
companies from traditional industries. The requirements of the SMAX are a free
float of shares of at least 20%, one designated sponsor, acceptance of the
German take-over code, quarterly reporting, disclosure of share ownership of
board members and executive officers, and at least one analyst presentation per
year, to ensure transparency and high liquidity. Each equity listed on the SMAX
is required to
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have at least one designated sponsor who acts as financial intermediary
furnishing liquidity by, either voluntarily or on request, posting bid and
offer limits. The Frankfurt Stock Exchange believes this activity enhances
trading results in the narrowing of bid/offer spreads. Participation in SMAX
requires admission to trading on the Amtlicher Handel or the Regulated Market,
a less prominent market segment. A company listed on the SMAX cannot be
included on the DAX or listed on the Neuer Markt. As of January 7, 2000, 129
equities were listed on the SMAX with a weighted market capitalization of 14.0
billion euros.
Financing Transactions
At the same time as the completion of the merger and the IPO, IFCO Systems
plans to issue approximately 180.0 million euros, or approximately $175.6
million, of debt in the form of a high yield financing and enter into a new
senior credit facility. The completion of the high yield debt financing is
conditioned upon the completion of the merger, the IPO, and the new senior
credit facility. Neither this proxy statement/prospectus nor any of the
information contained in this proxy statement/prospectus is, or should be
considered to be, an offer to sell, or an invitation to participate in, any
future financings.
Purchase of Remaining Interest in U.S. Joint Venture
At the same time as, or within five days following, the completion of the
IPO, IFCO Systems has agreed to purchase the interest of Intertape Polymer
Group Inc. in IFCO-U.S., L.L.C., a joint venture between IFCO International and
Intertape. IFCO Systems will purchase Intertape's interest for approximately
$5.0 million in cash. In addition, IFCO International will repay debt owed by
IFCO U.S. to Intertape, which as of October 31, 1999, was approximately $25.5
million.
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CAPITALIZATION
The following table sets forth the IFCO Companies' historical combined
capitalization as of October 31, 1999, and IFCO Systems' capitalization on a
pro forma combined basis as of October 31, 1999. You should read this table
along with "Unaudited Pro Forma Combined Financial Statements" and the IFCO
Companies' financial statements included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
As of October 31, 1999
---------------------------
IFCO Companies IFCO Systems
Historical Pro Forma
Combined Combined
-------------- ------------
(in thousands)
(unaudited) (unaudited)
<S> <C> <C>
Cash and cash equivalents........................... $ 9,134 $ --
======== ========
Long-term debt (including current maturities):
Long-term debt (including related party loans).... $ 75,350 $ 22,682
Other long-term debt.............................. -- 189,324
Capital lease obligations......................... 31,296 31,296
Promissory note payable........................... -- 20,061
-------- --------
Total long-term debt............................ 106,646 263,363
Participating rights................................ 3,871 --
Redeemable participating rights..................... 1,477 --
Redeemable convertible preferred stock.............. 26,335 --
Stockholders' equity:
Common stock/paid-in capital...................... -- 273,742
Contributed share capital......................... 10,017 --
Retained (deficit)................................ (46,400) (46,400)
Other stockholders' equity........................ 1,076 1,076
-------- --------
Total stockholders' equity...................... (35,307) 228,418
-------- --------
Total capitalization............................ $103,022 $491,781
======== ========
</TABLE>
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The following unaudited pro forma combined financial statements give effect
to:
. the acquisitions by IFCO Systems of the outstanding capital stock of
PalEx, IFCO Europe, MTS, and IFCO International;
. the IPO and other concurrent transactions; and
. IFCO Systems' acquisition of the minority interest in IFCO U.S.
The acquisitions of PalEx will be accounted for using the purchase method of
accounting. The IFCO Companies have been identified as the accounting acquiror
for financial statement presentation purposes as their former shareholders will
represent the largest voting interest within IFCO Systems.
The unaudited pro forma combined balance sheet gives effect to the
acquisitions, the IPO, and other related and concurrent transactions as if they
had occurred on October 31, 1999. The unaudited pro forma combined statements
of operations give effect to these transactions as if they had occurred on
January 1, 1998.
IFCO Systems expects that the combination of the IFCO Companies and PalEx
will allow the companies to take advantage of synergies among their businesses,
including the use of PalEx's infrastructure in North America to expand the
rental pools of RTCs and pallets in North America. IFCO Systems cannot quantify
any advantages or additional costs of the combinations until completion of the
acquisitions. No estimates of any advantages or additional costs have been
included in the pro forma financial information.
The pro forma adjustments are based on preliminary estimates, available
information, and assumptions that IFCO Systems' management deems appropriate
and may be revised as additional information becomes available. IFCO Systems'
management, however, does not believe that there are any other material
identifiable intangible assets to which purchase price can be allocated. The
pro forma financial data do not represent what IFCO Systems' financial position
or results of operations would actually have been if the transactions in fact
had occurred on those dates and are not necessarily representative of IFCO
Systems' financial position or results of operations for any future periods.
The pro forma combined financial statements should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes of the IFCO
Companies and PalEx included in this proxy statement/prospectus.
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IFCO Systems N.V.
Unaudited Pro Forma Combined Balance Sheet
As of October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
IFCO IFCO
Systems Systems
IFCO Pro Forma Pro Forma
Companies PalEx Adjustments Combined
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents............. $ 9,134 $ 5,255 $ (14,389)b,c,d, $ --
e,f,g,h,i
Accounts receivable,
net..................... 81,509 51,068 6,114 e 138,691
Inventories.............. 3,838 27,535 -- 31,373
Other current assets..... -- 11,457 29 e 11,486
-------- -------- --------- --------
Total current assets.... 94,481 95,315 (8,246) 181,550
PROPERTY, PLANT AND
EQUIPMENT, net........... 162,772 75,239 11,687 e 249,698
GOODWILL AND OTHER
INTANGIBLE
ASSETS, net.............. 8,698 125,406 119,352 b,e,h 253,456
OTHER ASSETS.............. 7,695 3,657 14,243 a,d 25,595
-------- -------- --------- --------
Total assets............ $273,646 $299,617 $ 137,036 $710,299
======== ======== ========= ========
CURRENT LIABILITIES:
Current maturities of
long-term debt.......... $ 8,167 $145,030 $(153,197)e,f $ --
Current maturities of
capital lease
obligations............. 10,528 -- -- 10,528
Refundable deposits...... 70,820 -- 3,439 e 74,259
Accounts payable......... 76,533 11,232 -- e,g 87,765
Other current
liabilities............. 17,587 23,850 1,222 e 42,659
-------- -------- --------- --------
Total current
liabilities............ 183,635 180,112 (148,536) 215,211
ACCUMULATED LOSSES IN
EXCESS OF INVESTMENT IN
EQUITY ENTITIES.......... 5,684 -- (5,590)e 94
LONG-TERM DEBT AND RELATED
PARTY LOANS, net of
current maturities....... 67,183 2,151 (46,652)f 22,682
CAPITAL LEASE OBLIGATIONS,
net of current
maturities............... 20,768 -- -- 20,768
OTHER LONG-TERM DEBT...... -- -- 189,324 d 189,324
PROMISSORY NOTE PAYABLE... -- -- 20,061 h 20,061
OTHER LIABILITIES......... -- 13,741 -- 13,741
PARTICIPATING RIGHTS...... 3,871 -- (3,871)i --
REDEEMABLE PARTICIPATING
RIGHTS................... 1,477 -- (1,477)i --
REDEEMABLE CONVERTIBLE
PREFERRED STOCK.......... 26,335 -- (26,335)b --
STOCKHOLDERS' EQUITY:
Ordinary shares.......... -- 203 (203)a,b --
Paid-in capital.......... 10,017 79,107 184,618 b,c,d 273,742
Other stockholders'
equity.................. 1,076 (901) 901 b 1,076
Retained earnings
(deficit)............... (46,400) 25,204 (25,204)b (46,400)
-------- -------- --------- --------
Total stockholders'
equity................. (35,307) 103,613 160,112 228,418
-------- -------- --------- --------
Total liabilities and
stockholders' equity... $273,646 $299,617 $ 137,036 $710,299
======== ======== ========= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
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IFCO Systems N.V.
Unaudited Pro Forma Combined Statement of Operations
For the year ended December 31, 1998
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
PalEx
-----------------------------------------------
IFCO
Total Systems IFCO Systems
IFCO As Previously Purchase Pro Forma Pro Pro Forma Pro Forma
Companies Reported Acquisitions Adjustments Forma Adjustments Combined
--------- ------------- ------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $134,721 $319,691 $60,163 $ -- $379,854 $ 1,657 i $ 516,232
COST OF GOODS SOLD...... 106,218 259,562 45,389 (349)a 304,602 2,651 i 413,471
INVENTORY VALUATION
ADJUSTMENT............. -- 1,235 -- -- 1,235 -- 1,235
-------- -------- ------- ------- -------- ------- -----------
Gross profit........... 28,503 58,894 14,774 349 74,017 (994) 101,526
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 28,515 33,042 11,375 (1,239)a 43,178 1,719 i 73,412
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 383 3,334 -- 1,273b 4,607 4,208 e 9,198
POOLING EXPENSES........ -- 1,841 -- (1,841)a -- -- --
COMPENSATION
DIFFERENTIAL........... -- 1,062 -- (1,062)a -- -- --
RESTRUCTURING CHARGE.... -- 949 -- -- 949 -- 949
PLANT CLOSURE COSTS AND
ASSET ABANDONMENT
LOSS................... -- 1,369 -- -- 1,369 -- 1,369
OTHER OPERATING
(INCOME), net.......... (3,081) -- -- -- -- -- (3,081)
-------- -------- ------- ------- -------- ------- -----------
Income (loss)
from operations....... 2,686 17,297 3,399 3,218 23,914 (6,921) 19,679
NET INTEREST COST....... (7,030) (8,468) -- (2,925)c (11,393) (5,009)f,g,h,j (23,432)
OTHER INCOME (EXPENSE),
net.................... (2,997) 262 751 -- 1,013 1,960 i (24)
-------- -------- ------- ------- -------- ------- -----------
(Loss) income before
provision for income
taxes ................ (7,341) 9,091 4,150 293 13,534 (9,970) (3,777)
INCOME TAX PROVISION ... 210 5,105 -- 1,917d 7,022 (70) k 7,162
-------- -------- ------- ------- -------- ------- -----------
Net (loss) income...... $ (7,551) $ 3,986 $ 4,150 $(1,624) $ 6,512 $(9,900) $ (10,939)
======== ======== ======= ======= ======== ======= ===========
Net loss per share--
basic and diluted...... $ (.28)l,m
===========
Shares used in computing
net loss per share--
basic and diluted...... 38,683,118 m
===========
Calculation of EBITDA
and non-recurring
charges (n):
Net loss................ $ (10,939)
Provision for income
taxes.................. 7,162
Net interest cost....... 23,432
-----------
EBIT................... 19,655
Depreciation and
amortization........... 48,194
Restructuring charges... 3,553
-----------
EBITDA and non-
recurring charges..... $ 71,402
===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
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<PAGE>
IFCO Systems N.V.
Unaudited Pro Forma Combined Statement of Operations
For the ten months ended October 31, 1999
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
IFCO
Systems IFCO Systems
IFCO Pro Forma Pro Forma
Companies PalEx Adjustments Combined
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES................ $126,399 $320,433 $ 4,268 i $ 451,100
COST OF GOODS SOLD...... 100,330 257,472 4,203 i 362,005
-------- -------- ------- -----------
Gross profit........... 26,069 62,961 65 89,095
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 24,029 36,142 1,641 i 61,812
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 344 3,993 3,506 e 7,843
OTHER OPERATING
(INCOME), net.......... (1,976) -- -- (1,976)
-------- -------- ------- -----------
Income (loss)
from operations....... 3,672 22,826 (5,082) 21,416
NET INTEREST COST....... (6,881) (12,047) (2,672)f,g,h,j (21,600)
OTHER INCOME (EXPENSE),
net.................... (2,933) 1,387 1,467 i (79)
-------- -------- ------- -----------
(Loss) income before
provision for income
taxes ................ (6,142) 12,166 (6,287) (263)
INCOME TAX PROVISION ... 144 5,402 286 k 5,832
-------- -------- ------- -----------
Net (loss) income...... $ (6,286) $ 6,764 $(6,573) $ (6,095)
======== ======== ======= ===========
Net loss per share--
basic and diluted...... $ (.16)l,m
===========
Shares used in computing
net loss per share--
basic and diluted...... 38,683,118 m
===========
Calculation of EBITDA
and non-recurring
charges (n):
Net loss ............... $ (6,095)
Provision for income
taxes.................. 5,832
Net interest cost....... 21,600
-----------
EBIT................... 21,337
Depreciation and
amortization........... 45,848
-----------
EBITDA and non-
recurring charges..... $ 67,185
===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
79
<PAGE>
IFCO Systems N.V.
Notes to Unaudited Pro Forma Combined Financial Statements
1.GENERAL
The historical financial statements reflect the financial position and
results of operations of the IFCO Companies and PalEx and were derived from
their respective financial statements. The periods included in these financial
statements for the IFCO Companies and PalEx are as of October 31, 1999, and for
the year ended December 31, 1998, and the ten months ended October 31, 1999,
for the IFCO Companies and as of October 24, 1999, and for the year ended
December 27, 1998, and the ten-month period ended October 24 1999, for PalEx.
The financial statements of PalEx reflect adjustments to the year ended
December 27, 1998, to present the effect of acquisitions accounted for under
the purchase method, under the caption "Total Purchase Acquisitions," as if the
acquisitions were effective January 1, 1998.
2.THE MERGER AND CONCURRENT TRANSACTIONS
IFCO Systems will issue its ordinary shares in exchange for all the
outstanding capital stock of the IFCO Companies and between 51% and 60% of the
outstanding capital stock of PalEx. The following pro forma adjustments assume
that PalEx stockholders elect to receive 49% of the merger consideration in
cash. If PalEx stockholders were to elect to receive 40% of the merger
consideration in cash, rather than 49%, pro forma net (loss) would be
approximately $(10.0) million and pro forma net (loss) per share would be
$(.26) during the year ended December 31, 1998. Pro forma net (loss) would be
approximately $(5.2) million and pro forma net (loss) per share would be $(.13)
during the ten months ended October 31, 1999. The IFCO Companies have been
identified as the accounting acquiror and are the predecessors to IFCO Systems.
The acquisition of PalEx is accounted for using the purchase method of
accounting.
3.UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a. Reflects the issuance of 200,000 shares of PalEx common stock to PalEx's
financial advisor immediately prior to the IPO and the corresponding
reduction of paid-in capital as a transaction cost.
b. Reflects:
. the acquisition of PalEx for approximately $184.5 million consisting
of approximately 6.9 million IFCO Systems ordinary shares and
approximately $90.4 million in cash issued to PalEx stockholders;
. the contribution to IFCO Systems of the redeemable convertible
preferred stock of IFCO Europe previously held by GE Erste; and
. approximately 20.0 million IFCO Systems ordinary shares to the
shareholders of the IFCO Companies, which will be recorded at book
value. The acquisition price of PalEx is $9.00 under the terms of
the merger agreement. This adjustment reflects the election of the
PalEx shareholders to receive 49% of the value of their common stock
in cash, which represents the maximum percentage of cash PalEx
stockholders will receive. The number of IFCO Systems ordinary
shares issued to shareholders of the IFCO Companies and to PalEx
stockholders assumes an IPO valuation of approximately $13.60 per
ordinary share and makes assumptions regarding the valuation of IFCO
Systems before the IPO and before the distribution of 49% of the
value of PalEx in cash to PalEx's stockholders. These assumptions
are not necessarily indicative of the actual pre-IPO valuation, IPO
size, or IPO price per share.
c. Reflects the cash proceeds of approximately $143.3 million from the
issuance of approximately 11.8 million IFCO Systems ordinary shares, net
of estimated offering costs of approximately $16.7 million. Offering
costs consist principally of underwriting discounts and commissions,
accounting, advisory, and legal fees and printing expenses.
d. Reflects issuance of (Euro)180.0 million of long-term debt, translated
to approximately $189.3 million using the exchange rate as of October
29, 1999, of one euro = $1.0518, with interest payable at 10% per year,
net of related financing costs of approximately $14.2 million, including
the costs of refinancing the credit facilities of PalEx and the IFCO
Companies.
80
<PAGE>
e. Reflects the purchase of the remaining interest in IFCO U.S., a
subsidiary of IFCO International, for $5.0 million, and the
consolidation of the now wholly owned subsidiary.
f. Reflects the reduction of existing debt with the proceeds of the IPO and
the issuance of long-term debt.
g. Reflects the payment of approximately $25.5 million to the remaining
interest holder of IFCO U.S. in payment of that subsidiary's various
indebtedness to the remaining interest holder.
h. Reflects the issuance of a promissory note payable for approximately
$26.7 million, reduced by an approximate $6.7 million cash payment at
the closing, initially bearing interest at the Euro Interbank Offered
Rate (assumed to be 3.25% for pro forma adjustment purposes) plus 2.75%,
in exchange for the release of options and other rights previously
purchased by GE Capital and GE Erste. The allocation of the purchase
price for the rights and options to the assets and liabilities of IFCO
Systems has not yet been completed. As a result, the purchase price has
been preliminarily allocated to goodwill.
i Reflects the payment of approximately $5.3 million to retire, at book
value, the participating rights and the redeemable participating rights
of the IFCO Companies, which are held by related parties of the IFCO
Companies.
The following table summarizes the unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
Pro Forma
a b c d e f g h i Adjustments
---- -------- -------- -------- ------- --------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents.......... $-- $(90,401) $143,300 $175,081 $(4,968) $(199,849) $(25,517) $(6,687) $(5,348) $ (14,389)
Accounts receivable,
net.................. -- -- -- -- 6,114 -- -- -- -- 6,114
Inventories........... -- -- -- -- -- -- -- -- -- --
Other current assets.. -- -- -- -- 29 -- -- -- -- 29
---- -------- -------- -------- ------- --------- -------- ------- ------- ---------
Total current assets.. -- (90,401) 143,300 175,081 1,175 (199,849) (25,517) (6,687) (5,348) (8,246)
PROPERTY, PLANT AND
EQUIPMENT, net........ -- -- -- -- 11,687 -- -- -- -- 11,687
GOODWILL AND OTHER
INTANGIBLE ASSETS,
net................... -- 80,878 -- -- 11,726 -- -- 26,748 -- 119,352
OTHER ASSETS........... -- -- -- 14,243 -- -- -- -- -- 14,243
---- -------- -------- -------- ------- --------- -------- ------- ------- ---------
Total assets.......... $-- $ (9,523) $143,300 $189,324 $24,588 $(199,849) $(25,517) $20,061 $(5,348) $ 137,036
==== ======== ======== ======== ======= ========= ======== ======= ======= =========
CURRENT LIABILITIES:
Current maturities of
long-term debt....... $-- $ -- $ -- $ -- $21,102 $(153,197) $(21,102) $ -- $ -- $(153,197)
Current maturities of
capital lease
obligations.......... -- -- -- -- -- -- -- -- -- --
Refundable deposits... -- -- -- -- 3,439 -- -- -- -- 3,439
Accounts payable...... -- -- -- -- 4,415 -- (4,415) -- -- --
Other current
liabilities.......... -- -- -- -- 1,222 -- -- -- -- 1,222
---- -------- -------- -------- ------- --------- -------- ------- ------- ---------
Total current
liabilities.......... -- -- -- -- 30,178 (153,197) (25,517) -- -- (148,536)
ACCUMULATED LOSSES IN
EXCESS OF INVESTMENT
IN EQUITY ENTITIES.... -- -- -- -- (5,590) -- -- -- -- (5,590)
LONG-TERM DEBT AND
RELATED PARTY LOANS,
net of current
maturities............ -- -- -- -- -- (46,652) -- -- -- (46,652)
CONVERTIBLE NOTES
PAYABLE............... -- -- -- -- -- -- -- -- -- --
OTHER LONG-TERM DEBT... -- -- -- 189,324 -- -- -- -- -- 189,324
PROMISSORY NOTE
PAYABLE............... -- -- -- -- -- -- -- 20,061 -- 20,061
CAPITAL LEASE
OBLIGATIONS, net of
current maturities.... -- -- -- -- -- -- -- -- -- --
OTHER LIABILITIES...... -- -- -- -- -- -- -- -- -- --
PARTICIPATING RIGHTS... -- -- -- -- -- -- -- -- (3,871) (3,871)
REDEEMABLE
PARTICIPATING RIGHTS.. -- -- -- -- -- -- -- -- (1,477) (1,477)
REDEEMABLE CONVERTIBLE
PREFERRED STOCK....... -- (26,335) -- -- -- -- -- -- -- (26,335)
STOCKHOLDERS' EQUITY:
Ordinary shares....... 2 (205) -- -- -- -- -- -- -- (203)
Paid-in capital....... (2) 41,320 143,300 -- -- -- -- -- -- 184,618
Other stockholders'
equity............... -- 901 -- -- -- -- -- -- -- 901
Retained earnings..... -- (25,204) -- -- -- -- -- -- -- (25,204)
---- -------- -------- -------- ------- --------- -------- ------- ------- ---------
Total stockholders'
equity............... -- 16,812 143,300 -- -- -- -- -- -- 160,112
---- -------- -------- -------- ------- --------- -------- ------- ------- ---------
Total liabilities and
stockholders'
equity............... $-- $ (9,523) $143,300 $189,324 $24,588 $(199,849) $(25,517) $20,061 $(5,348) $ 137,036
==== ======== ======== ======== ======= ========= ======== ======= ======= =========
</TABLE>
81
<PAGE>
4.UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
PalEx
a. Adjusts the allocation of purchase price to inventory as it affects cost
of goods sold, adjusts compensation to the level the former owners of
companies acquired by PalEx agreed to receive as a result of the
acquisitions, reflects revisions of lease agreements with stockholders
of PalEx as a result of the purchase of some companies by PalEx, and
reflects pooling expenses incurred in conjunction with companies
acquired by PalEx.
b. Reflects additional amortization of goodwill resulting from PalEx's 1998
acquisitions accounted for as purchases, using a 30-year estimated life.
c. Reflects the net increase in interest expense attributed to incremental
borrowings resulting from PalEx's 1998 acquisitions accounted for as
purchases.
d. Reflects the incremental provision for federal and state income taxes
relating to the other PalEx income statement adjustments and for income
taxes on some of PalEx's 1998 purchase acquisitions that were previously
taxed as S Corporations.
IFCO Systems
e. Reflects the amortization of goodwill of approximately $4.2 million
during the year ended December 31, 1998, and approximately $3.5 million
during the ten months ended October 31, 1999, as a result of the
acquisition of PalEx, the purchase of the remaining interest in IFCO
U.S., and the acquisition of options and rights of GE Capital and GE
Erste. Goodwill will be amortized on the straight-line basis over a 30-
year estimated life.
f. Reflects interest expense reduction of approximately $17.1 million
during the year ended December 31, 1998, and approximately $15.7 million
during the ten months ended October 31, 1999, on approximately $222.3
million of historical debt assumed to be repaid using available cash on
hand and proceeds from the IPO and other long-term debt, reduced by cash
payments required under the terms of the merger agreement and other
concurrent transactions. The interest expense reduction is calculated
using a weighted average effective interest rate of approximately 7.7%
per year for the year ended December 31, 1998, and approximately 8.5%
per year for the ten months ended October 31, 1999.
g. Reflects additional interest expense incurred of approximately $18.9
million during the year ended December 31, 1998, and approximately $15.8
million during the ten months ended October 31, 1999, in conjunction
with the issuance of (Euro)180.0 million of long-term debt, translated
to approximately $189.3 million using the exchange rate as of October
29, 1999 of one euro = $1.0518, at an assumed interest rate of 10% per
year. The principal borrowing level and the interest rate under this
arrangement are based on management's current estimates.
h. Reflects additional interest expense of approximately $1.2 million
during the year ended December 31, 1998, and approximately $1.0 million
during the ten months ended October 31, 1999, incurred in conjunction
with the GE Capital promissory note, net of approximately $6.7 million
payment at the closing, of approximately $20.1 million at an assumed
interest rate of 6.0% per year.
i. Reflects the consolidation of the revenues and expenses of IFCO U.S. as
a wholly owned subsidiary, which occurs as a consequence of the purchase
of the remaining interest, the elimination of the previously recorded
loss accounted for under the equity method, and the elimination of
previously recorded interest expense as a result of IFCO Systems'
assumed repayment of all interest-bearing debt of IFCO U.S.
j. Reflects the amortization of loan costs associated with the issuance of
long-term debt and the refinancing of the credit facilities of PalEx and
the IFCO Companies.
k. Reflects the effect of income tax adjustments related to the pro forma
adjustments and considers the allocation of both reduced and additional
interest based on currently available tax planning
82
<PAGE>
information, the assumption that goodwill amortization resulting from
these transactions is non-deductible, and limited recognition of any tax
benefits that result from additional net operating loss carryforwards
created by pro forma adjustments.
l. Reflects the elimination of the accretion attributable to the redeemable
convertible preferred stock of IFCO Europe as a result of its
contribution by GE Erste to IFCO Systems, as well as the elimination of
the accretion attributable to the participating rights and the
redeemable participating rights of the IFCO Companies as a result of
their assumed retirement by IFCO Systems at their book values.
m. The shares used in calculating net (loss) per share--basic include
approximately 20.0 million ordinary shares issued by IFCO Systems in
exchange for the outstanding shares of the IFCO Companies, approximately
6.9 million ordinary shares issued in exchange for the outstanding
shares of PalEx and approximately 11.8 million ordinary shares issued in
the IPO. Net (loss) per share --diluted considers the equivalent shares
for unexercised stock options issued to PalEx employees and contemplated
to be issued to IFCO Systems employees and conversion of convertible
debt.
n. Pro forma EBIT and EBITDA and non-recurring charges are not presented as
alternative measure of operating results or cash flows from operations
as determined in accordance with generally accepted accounting
principles, but because they are accepted financial indicators of the
ability to incur and service debt on a pro forma combined basis. Pro
forma EBIT represents IFCO Systems' pro forma combined net (loss) after
exclusion of net interest costs and income tax provisions. Pro forma
EBITDA and non-recurring charges represents IFCO Systems' EBIT plus
depreciation and amortization charges, and non-recurring, one-time
restructuring charges related to the termination of PalEx's relationship
with CHEP USA. Pro forma EBIT and EBITDA and non-recurring charges as
presented are not necessarily comparable with similarly titled measures
presented by other companies.
83
<PAGE>
The following table summarizes the unaudited pro forma combined statement of
operations adjustments for the year ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Total
Pro Forma
Adjustments
a b c d PalEx e f g h i j k
------- ------- ------- ------- ----------- ------- ------- -------- ------- ------ ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $1,657 $ -- $--
COST OF GOODS
SOLD............. (349) -- -- -- (349) -- -- -- -- 2,651 -- --
INVENTORY
VALUATION
ADJUSTMENT....... -- -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------- ------- ------ ------- ----
Gross profit.... 349 -- -- -- 349 -- -- -- -- (994) -- --
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... (1,239) -- -- -- (1,239) -- -- -- -- 1,719 -- --
AMORTIZATION OF
GOODWILL AND
OTHER INTANGIBLE
ASSETS........... -- 1,273 -- -- 1,273 4,208 -- -- -- -- -- --
POOLING
EXPENSES......... (1,841) -- -- -- (1,841) -- -- -- -- -- -- --
COMPENSATION
DIFFERENTIAL..... (1,062) -- -- -- (1,062) -- -- -- -- -- -- --
RESTRUCTURING
CHARGE........... -- -- -- -- -- -- -- -- -- -- -- --
PLANT CLOSURE
COSTS AND ASSET
ABANDONMENT
LOSS............. -- -- -- -- -- -- -- -- -- -- -- --
OTHER OPERATING
INCOME, net...... -- -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------- ------- ------ ------- ----
Income (loss)
from
operations...... 4,491 (1,273) -- -- 3,218 (4,208) -- -- -- (2,713) -- --
NET INTEREST
COST............. -- -- (2,925) -- (2,925) -- 17,076 (18,932) (1,204) -- (1,949) --
OTHER INCOME
(EXPENSE), net... -- -- -- -- -- -- -- -- -- 1,960 -- --
------- ------- ------- ------- ------- ------- ------- -------- ------- ------ ------- ----
(Loss) income
before provision
for income
taxes........... 4,491 (1,273) (2,925) -- 293 (4,208) 17,076 (18,932) (1,204) (753) (1,949) --
INCOME TAX
PROVISION........ -- -- -- 1,917 1,917 -- -- -- -- -- -- (70)
------- ------- ------- ------- ------- ------- ------- -------- ------- ------ ------- ----
Net (loss)
income ......... $ 4,491 $(1,273) $(2,925) $(1,917) $(1,624) $(4,208) $17,076 $(18,932) $(1,204) $ (753) $(1,949) $ 70
======= ======= ======= ======= ======= ======= ======= ======== ======= ====== ======= ====
<CAPTION>
Total
Pro Forma
Adjustments
IFCO Systems
------------
<S> <C>
REVENUES......... $ 1,657
COST OF GOODS
SOLD............. 2,651
INVENTORY
VALUATION
ADJUSTMENT....... --
------------
Gross profit.... (994)
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 1,719
AMORTIZATION OF
GOODWILL AND
OTHER INTANGIBLE
ASSETS........... 4,208
POOLING
EXPENSES......... --
COMPENSATION
DIFFERENTIAL..... --
RESTRUCTURING
CHARGE........... --
PLANT CLOSURE
COSTS AND ASSET
ABANDONMENT
LOSS............. --
OTHER OPERATING
INCOME, net...... --
------------
Income (loss)
from
operations...... (6,921)
NET INTEREST
COST............. (5,009)
OTHER INCOME
(EXPENSE), net... 1,960
------------
(Loss) income
before provision
for income
taxes........... (9,970)
INCOME TAX
PROVISION........ (70)
------------
Net (loss)
income ......... $ (9,900)
============
</TABLE>
84
<PAGE>
The following table summarizes the unaudited pro forma combined statement of
operations adjustments for the ten months ended October 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Total
Pro Forma
Adjustments
e f g h i j k IFCO Systems
------- ------- -------- ------- ------- ------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $ -- $ -- $ -- $ -- $ 4,268 $ -- $ -- $ 4,268
COST OF GOODS SOLD...... -- -- -- -- 4,203 -- -- 4,203
------- ------- -------- ------- ------- ------- ----- -------
Gross profit........... -- -- -- -- 65 -- -- 65
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... -- -- -- -- 1,641 -- -- 1,641
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 3,506 -- -- -- -- -- -- 3,506
OTHER OPERATING INCOME,
net.................... -- -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- ----- -------
Income (loss) from
operations............ (3,506) -- -- -- (1,576) -- -- (5,082)
NET INTEREST COST....... -- 15,732 (15,777) (1,003) -- (1,624) -- (2,672)
OTHER INCOME (EXPENSE),
net.................... -- -- -- -- 1,467 -- -- 1,467
------- ------- -------- ------- ------- ------- ----- -------
(Loss) income before
provision for income
taxes................. (3,506) 15,732 (15,777) (1,003) (109) (1,624) -- (6,287)
INCOME TAX PROVISION.... -- -- -- -- -- -- 286 286
------- ------- -------- ------- ------- ------- ----- -------
Net (loss) income...... $(3,506) $15,732 $(15,777) $(1,003) $ (109) $(1,624) $(286) $(6,573)
======= ======= ======== ======= ======= ======= ===== =======
</TABLE>
85
<PAGE>
SELECTED FINANCIAL INFORMATION
IFCO Companies
The selected historical financial information presented below for, and as of
the end of, each of the years in the two years ended December 31, 1998, is
derived from the IFCO Companies' audited combined financial statements, which
were audited by PwC Deutsche Revision AG, independent accountants. The selected
historical financial information for, and as of the end of, the year ended
December 31, 1996, and for the ten months ended October 31, 1998 and 1999, is
derived from the IFCO Companies' unaudited combined financial statements. No
selected financial information has been presented as of and for the years ended
December 31, 1994 and 1995. Financial information for these years is
unavailable since no consolidated financial information for IFCO Europe was
prepared for these years. Further, financial information for these years has
been prepared for the individual entities in accordance with German GAAP, which
differs significantly from U.S. GAAP. In the IFCO Companies' opinion, the
historical financial information for the interim periods includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of this information. The results of operations for the
interim periods are not necessarily indicative of the results of operations
that may be expected for the full fiscal year. The selected historical
financial information is not necessarily indicative of the future results of
operations of IFCO Companies. You should read this selected historical
financial information along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations--IFCO Companies" and the
financial statements of the IFCO Companies included in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended December 31, October 31,
------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- --------- -------- ----------- -----------
(in thousands )
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues............... $122,959 $116,735 $134,721 $106,021 $126,399
Cost of sales.......... 118,354 99,622 106,218 85,874 100,330
-------- --------- -------- -------- --------
Gross profit........... 4,605 17,113 28,503 20,147 26,069
Selling, general and
administrative
expenses.............. 21,798 22,263 28,515 20,729 24,029
Amortization of
goodwill.............. 236 675 383 274 344
Other operating
(income), net......... (5,371) (4,099) (3,081) (2,979) (1,976)
-------- --------- -------- -------- --------
Income (loss) from
operations............ (12,058) (1,726) 2,686 2,123 3,672
Net interest cost...... (7,751) (7,928) (7,030) (6,024) (6,881)
Other income (expense),
net................... 267 (2,139) (2,997) (2,922) (2,933)
Income tax
(provision)........... -- (47) (210) (173) (144)
-------- --------- -------- -------- --------
Net (loss)............. $(19,542) $ (11,840) $ (7,551) $ (6,996) $ (6,286)
======== ========= ======== ======== ========
Other Operating Data:
EBITDA and non-
recurring charges(1).. $ 27,953 $ 24,369 $ 27,197 $ 19,528 $ 27,989
EBIT(1)................ $(11,791) $ (3,235) $ (1,673) $ (1,992) $ (517)
Cash flows from:
operating
activities(2)......... $ 32,490 $ 59,938 $ 40,497 $ 33,420
investing
activities(2)......... $ (43,221) $(38,766) $(35,895) $(40,104)
financing
activities(2)......... $ 5,209 $ (6,442) $ (5,469) $ (5,155)
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of
------------------------------ October 31,
1996 1997 1998 1999
----------- -------- -------- -----------
(in thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 14,231 $ 7,992 $ 23,642 $ 9,134
Receivables................... 95,970 93,397 74,462 81,509
Other current assets.......... 9,296 775 1,874 3,838
-------- -------- -------- --------
Total current assets......... 119,497 102,164 99,978 94,481
Property, plant and equipment,
net.......................... 128,661 134,776 172,437 162,772
Other long term assets........ 6,735 12,617 12,038 16,393
-------- -------- -------- --------
Total assets................. $254,893 $249,557 $284,453 $273,646
======== ======== ======== ========
Short-term loans.............. $ 48,943 $ 53,440 $ 500 $ 500
Short-term related party
loans........................ 26,612 23,298 2,618 2,254
Current maturities of long-
term debt.................... -- -- 4,912 5,413
Current maturities of capital
lease obligations............ 15,135 4,738 9,340 10,528
Refundable deposits........... 50,029 64,323 70,875 70,820
Accounts payable.............. 71,054 65,010 69,287 76,533
Accrued expenses and other
current liabilities.......... 21,661 12,294 7,303 11,591
Deferred income............... 4,347 4,660 6,573 5,996
Accumulated losses in excess
of investment in equity
entities..................... 1,267 3,136 4,472 5,684
Long-term debt, net of current
maturities................... 4,975 464 77,874 67,183
Capital lease obligations, net
of current maturities........ 5,913 7,971 26,867 20,768
-------- -------- -------- --------
Total liabilities............ 249,936 239,334 280,621 277,270
Participating rights.......... 5,419 3,956 4,274 3,871
Redeemable participating
rights....................... -- 1,256 1,544 1,477
Redeemable convertible
preferred stock.............. -- 25,001 28,887 26,335
Total stockholders' equity
(deficit).................... (462) (19,990) (30,873) (35,307)
-------- -------- -------- --------
Total liabilities and
stockholder's equity........ $254,893 $249,557 $284,453 $273,646
======== ======== ======== ========
</TABLE>
- --------
(1) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents the IFCO Companies' combined net (loss) applicable
to ordinary shares after exclusion of net interest costs and income tax
provisions (benefits). EBITDA and non-recurring charges represents the
IFCO Companies' EBIT plus depreciation and amortization charges and non-
recurring, one-time restructuring charges, if any. EBIT and EBITDA and
non-recurring charges as presented are not necessarily comparable with
similarly titled measures presented by other companies. The following
table reflects the calculation of EBIT and EBITDA and non-recurring
charges:
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended December 31, October 31,
----------------------------- -----------------------
1996 1997 1998 1998 1999
----------- -------- ------- ----------- -----------
(in thousands)
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net (loss) applicable to
ordinary shares........ $(19,542) $(11,210) $(8,913) $(8,119) $(7,542)
Income tax provision.... -- 47 210 173 144
Net interest cost....... 7,751 7,928 7,030 6,024 6,881
-------- -------- ------- ------- -------
EBIT................... (11,791) (3,235) (1,673) (1,922) (517)
Depreciation and
amortization........... 39,744 27,604 28,870 21,450 28,506
-------- -------- ------- ------- -------
EBITDA and non-
recurring charges..... $ 27,953 $ 24,369 $27,197 $19,528 $27,989
======== ======== ======= ======= =======
</TABLE>
(2) The IFCO Companies' historical combined cash flow information is not
available for the year ended December 31, 1996.
87
<PAGE>
PalEx
The selected historical financial information presented below for, and as of
the end of, each of the years in the five-year period ended December 27, 1998,
for each of the ten-month periods ended October 25, 1998, and October 24, 1999,
and as of October 24, 1999, is derived from PalEx's consolidated financial
statements. In PalEx's opinion, the historical financial information for the
interim periods includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of this information. The results
of operations for the interim periods are not necessarily indicative of the
results of operations that may be expected for the full fiscal year. The
selected historical financial information is not necessarily indicative of the
future results of operations of PalEx. You should read this selected historical
financial information along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations--PalEx" and the financial
statements of PalEx included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
Ten-Month
Fiscal Year Ended Period Ended
Fiscal Year Ended November 30, -------------------------- ------------------------
----------------------------------- December 28, December 27, October 25, October 24,
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ---------- ------------ ------------ ----------- -----------
(in thousands except share and per share data)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues............... $ 116,942 $ 125,707 $ 145,030 $ 222,993 $ 319,691 $ 256,874 $ 320,433
Cost of goods sold..... 99,207 105,195 121,865 188,084 259,562 207,850 257,472
Inventory valuation
adjustment(1) -- -- -- -- 1,235 1,679 --
---------- ---------- ---------- ----------- ----------- ----------- -----------
Gross profit........... 17,735 20,512 23,165 34,909 58,894 47,345 62,961
Selling, general and
administrative
expenses.............. 12,350 13,333 14,063 20,135 33,042 27,374 36,142
Amortization of
goodwill and other
intangible assets 76 76 165 820 3,334 2,186 3,993
Pooling expenses....... -- -- -- -- 1,841 1,841 --
Compensation
differential.......... -- -- -- 1,020 1,062 1,062 --
Restructuring
charge(1)............. -- -- -- -- 949 2,404 --
Plant closure costs and
asset abandonment
loss(1)............... -- -- -- -- 1,369 1,369 --
---------- ---------- ---------- ----------- ----------- ----------- -----------
Income from
operations............ 5,309 7,103 8,937 12,934 17,297 11,109 22,826
Net interest cost(2)... (854) (1,375) (1,065) (1,590) (8,206) (6,078) (10,660)
Provision for income
taxes................. 1,476 1,594 1,833 4,704 5,105 2,676 5,402
---------- ---------- ---------- ----------- ----------- ----------- -----------
Net income ............ $ 2,979 $ 4,134 $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
========== ========== ========== =========== =========== =========== ===========
Net income per share--
basic................. $ .32 $ .44 $ .64 $ .43 $ .21 $ .13 $ .33
Net income per share--
diluted............... $ .32 $ .44 $ .64 $ .42 $ .21 $ .12 $ .33
Shares used in
computing net income
per share-- basic..... 9,433,414 9,433,414 9,433,414 15,561,489 18,937,354 18,651,737 20,297,016
Shares used in
computing net income
per share--diluted.... 9,433,414 9,433,414 9,433,414 15,914,157 19,310,295 19,047,287 20,299,381
Other Financial Data:
EBITDA and non-recurring
charges(3)............. $ 7,480 $ 11,258 $ 13,045 $ 19,933 $ 35,680 $ 27,677 $ 36,538
EBIT(3)................. $ 5,309 $ 7,573 $ 9,448 $ 13,066 $ 17,559 $ 11,348 $ 24,213
Cash flows from:
operating activities... $ 5,824 $ 7,425 $ 12,116 $ 6,363 $ 13,596 $ 7,072 $ 16,212
investing activities... $ (9,240) $ (4,128) $ (7,355) $ (13,756) $ (100,819) $ (91,383) $ (6,596)
financing activities... $ 3,532 $ (3,747) $ (5,051) $ 11,976 $ 83,966 $ 78,942 $ (8,514)
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
November 30,
--------------------------- December 28, December 27, October 24,
1994 1995 1996 1997 1998 1999
----------- ------- ------- ------------ ------------ -----------
(in thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital
(deficit).............. $ 3,004 $ 6,613 $ 7,630 $ 35,705 $ 54,672 $(84,797)
Total assets............ 48,933 50,857 57,868 120,005 292,438 299,617
Total debt.............. 21,770 21,212 18,648 32,880 155,772 147,181
Stockholders' equity.... 16,956 19,400 24,443 67,437 95,280 103,613
</TABLE>
- --------
(1) The results of operations for PalEx's year ended December 27, 1998, include
pre-tax charges of approximately $1.2 million for inventory revaluation
adjustment, approximately $0.9 million for restructuring costs and expenses
and approximately $1.4 million for plant closure costs and asset
abandonment loss related to the termination of PalEx's customer
relationship with CHEP USA. The results of operations for PalEx's ten-month
period ended October 25, 1998, include pre-tax charges of approximately
$1.7 million for inventory valuation adjustment and approximately $2.4
million for restructuring costs and expenses related to the termination of
PalEx's customer relationship with CHEP USA.
(2) Includes interest expense and other income (expense), net.
(3) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents PalEx's net income after exclusion of interest
expense and provision for income taxes. EBITDA and non-recurring charges
represents PalEx's EBIT plus depreciation and amortization charges, and
non-recurring, one-time restructuring charges related to the termination of
PalEx's relationship with CHEP USA, pooling expenses, and compensation
differential. EBIT and EBITDA and non-recurring charges as presented are
not necessarily comparable with similarly titled measures presented by
other companies. The following table reflects the calculation of EBIT and
EBITDA and non-recurring charges:
<TABLE>
<CAPTION>
Ten-Month
Fiscal Year Ended Fiscal Year Ended Period Ended
November 30, --------------------------- -----------------------
--------------------------- December 28, December 27, October 25, October 24,
1994 1995 1996 1997 1998 1998 1999
----------- ------- ------- -------------- ------------ ----------- -----------
(in thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income.............. $2,979 $ 4,134 $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
Provision for income
taxes.................. 1,476 1,594 1,833 4,704 5,105 2,676 5,402
Interest expense........ 854 1,845 1,576 1,722 8,468 6,317 12,047
------ ------- ------- ------- ------- ------- -------
EBIT................... 5,309 7,573 9,448 13,066 17,559 11,348 24,213
Depreciation and
amortization........... 2,171 3,685 3,597 5,847 11,665 7,974 12,325
Restructuring charge.... -- -- -- -- 3,553 5,452 --
Pooling expenses and
compensation
differential(4)........ -- -- -- 1,020 2,903 2,903 --
------ ------- ------- ------- ------- ------- -------
EBITDA and non-
recurring charges..... $7,480 $11,258 $13,045 $19,933 $35,680 $27,677 $36,538
====== ======= ======= ======= ======= ======= =======
</TABLE>
(4) Pooling expenses primarily represent financial advisory and legal fees
incurred by some of the pooled companies in connection with PalEx's
acquisition of those companies. Compensation differential is the difference
between previous owners' compensation before their companies were acquired
by PalEx and the amounts they contractually agreed to be paid afterward.
89
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IFCO Companies
You should read the following discussion in conjunction with the IFCO
Companies' combined financial statements included in this proxy
statement/prospectus. In addition, you should read "Business" for more
information about the IFCO Companies.
Introduction
The IFCO Companies believe they own and manage the leading plastic round-trip
container, or RTC, pool in Europe based on 1997 market information. They also
have RTC operations in the United States, Japan, and Argentina. The IFCO
Companies currently have over 60 million RTCs in circulation.
The IFCO Companies' European perishables operations, which are owned by IFCO
Europe, accounted for 91.9% of the IFCO Companies' combined revenues during the
first ten months of 1998 and 92.2% of the IFCO Companies' combined revenues
during the first ten months of 1999. These operations are comprised of round-
trip systems for the movement of fruit and vegetables. The IFCO Companies
deliver RTCs to growers in order to transport produce to retailers. Retailers
benefit from decreased product handling, in-store display in RTCs, reduced
storage requirements, and reduction of waste disposal costs. Retailers return
the RTCs to the IFCO Companies for inspection and cleaning, repair, or
recycling as necessary. The RTCs are then reintroduced into the round-trip
system for multiple reuse. The RTCs are primarily used by producers of fresh
fruits and vegetables in exchange generally for a one-time use fee and a
deposit. The deposit paid by customers is transferred between the customer,
intermediary parties, and the retailer until the deposit is ultimately repaid
to the retailer upon the IFCO Companies' recollection of the RTC. The RTCs can
be folded into a small volume when empty, reducing transportation costs. The
RTCs are generally used between three and 12 times a year, depending on the
type of RTC, and are depreciated over periods ranging from eight to 15 years.
The IFCO Companies' RTCs are supplied by Schoeller Plast AG, an indirect 80%-
owned subsidiary of Schoeller Industries, under a long-term supply agreement.
The IFCO Companies' non-European perishables operations are owned through
IFCO International. IFCO International owns interests in round-trip systems
operations in the United States, Japan, and Argentina. The IFCO Companies have
a 33% minority ownership interest in the Japanese operations and a 51% economic
interest and 50% voting interest in the U.S. operations. Both of these
investments are accounted for under the equity method. IFCO Systems has an
agreement to acquire the remaining interest in the U.S. operations in
connection with the merger. These businesses are still developing and are
currently generating operating losses, although the IFCO Companies believe that
this business segment has the potential to generate profits once additional
market share is attained.
The IFCO Companies' dry good operations, which are owned by MTS, accounted
for 7.3% of the IFCO Companies' combined revenues during the first ten months
of 1998 and 6.2% of the IFCO Companies' combined revenues during the first ten
months of 1999. MTS operates round-trip systems for dry goods sold by retailers
such as the major grocery and department stores. The RTCs for dry goods are
individually identifiable by bar code, which enables the IFCO Companies to
accurately track their movements and invoice customers. The logistics of RTC
movement in the dry good operations are similar to the IFCO Companies' European
perishables operations. The IFCO Companies currently have three principal
customers in this business segment, two department stores, whose service
agreements extend through 2003, and the Deutsche Post AG, whose contract
extends to September 30, 2004. Deutsche Post AG, the German postal service is
one of the largest European transporters of parcels and letters.
IFCO Systems intends to report its results in accordance with U.S. GAAP. The
IFCO Companies, whose operations are located primarily in Europe, previously
reported their results under German GAAP. As a significant portion of its
revenues will be collected in currencies other than the U.S. dollar, IFCO
Systems' results of operations may be adversely affected by fluctuations in
currency exchange rates. For example, if the
90
<PAGE>
value of the Deutsch mark to the U.S. dollar goes down, the portion of IFCO
Systems revenues collected in Deutsch marks would appear smaller when converted
into U.S. dollars for purposes of reporting under U.S. GAAP.
Results of Operations
The following table sets forth selected financial data for the periods
presented for each of the IFCO Companies' business segments and the same data
as a percentage of its combined revenues. Functional currencies in the IFCO
Companies' markets have been converted to U.S. dollars at the average exchange
rate during each period presented. The effect of these fluctuations in exchange
rates can affect comparison of the results of operations between periods.
<TABLE>
<CAPTION>
For the Ten Months Ended
For the Year Ended December 31, October 31,
--------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- -------------- ---------------
(dollars in thousands)
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
European perishables.... $115,059 93.6% $106,863 91.5% $123,673 91.8% $97,420 91.9% $116,562 92.2%
Non-European
perishables............ 1,617 1.3 292 0.3 1,147 0.9 873 0.8 1,968 1.6
Dry good................ 6,711 5.5 9,580 8.2 9,901 7.3 7,728 7.3 7,869 6.2
Eliminations............ (428) (0.4) -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
122,959 100.0 116,735 100.0 134,721 100.0 106,021 100.0 126,399 100.0
Cost of sales:
European perishables.... 110,770 90.1 90,849 77.8 96,884 71.9 78,965 74.4 93,281 73.8
Non-European
perishables............ 1,360 1.1 219 0.1 717 0.5 482 0.5 1,437 1.1
Dry good................ 6,652 5.4 8,554 7.4 8,617 6.4 6,427 6.1 5,911 4.7
Eliminations............ (428) (0.3) -- -- -- -- -- -- (299) (0.2)
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
118,354 96.3 99,622 85.3 106,218 78.8 85,874 81.0 100,330 79.4
Total gross profit...... 4,605 3.7 17,113 14.7 28,503 21.2 20,147 19.0 26,069 20.6
Selling, general and
administrative
expenses:
European perishables.... 16,462 13.4 18,937 16.2 24,920 18.5 18,700 17.6 21,188 16.8
Non-European
perishables............ 2,362 1.9 1,718 1.5 1,629 1.2 832 0.8 2,194 1.7
Dry good................ 2,974 2.4 1,608 1.4 1,966 1.5 1,434 1.4 958 0.7
Eliminations............ -- -- -- -- -- -- (237) (0.2) (311) (0.2)
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
21,798 17.7 22,263 19.1 28,515 21.2 20,729 19.6 24,029 19.0
Goodwill amortization... 236 0.2 675 0.6 383 0.3 274 0.3 344 0.3
Other operating
(income), net.......... (5,371) (4.4) (4,099) (3.5) (3,081) (2.3) (2,979) (2.8) (1,976) (1.6)
Operating (loss) income:
European perishables.... (7,038) (5.7) 501 0.4 4,584 3.4 2,595 2.4 3,814 3.0
Non-European
perishables............ (2,105) (1.7) (1,645) (1.4) (1,216) (0.9) (431) (0.4) (1,420) (1.1)
Dry good................ (2,915) (2.4) (582) (0.5) (682) (0.5) (41) -- 1,278 1.0
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
(12,058) (9.8) (1,726) (1.5) 2,686 2.0 2,123 2.0 3,672 2.9
Other expenses, net..... (7,484) (6.1) (10,067) (8.6) (10,027) (7.4) (8,946) (8.4) (9,814) (7.8)
Income tax (provision)
benefit................ -- -- (47) -- (210) (0.2) (173) (0.2) (144) (0.1)
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Net loss................ $(19,542) (15.9)% $(11,840) (10.1)% $ (7,551) (5.6)% $(6,996) (6.6)% $ (6,286) 5.0%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
</TABLE>
Ten Months Ended October 31, 1999, Compared to Ten Months Ended October 31,
1998
Revenues. The IFCO Companies' combined revenues increased $20.4 million, or
19.2%, to $126.4 million in the first ten months of 1999 from $106.0 million in
the first ten months of 1998.
European Perishables Operations. Revenues from the European perishables
operations increased $19.2 million, or 19.6%, to $116.6 million in the first
ten months of 1999 from $97.4 million in the first ten months of 1998. This
increase was primarily attributable to an increase of 9.4% in the number of
RTCs used, in the round-trip systems for fresh produce, and to a higher number
of trips per RTC. This revenue increase was
91
<PAGE>
offset by a decrease of 2.4% related to changes in currency exchange rates
relative to the previous period. The increased use was also a result of the
IFCO Companies' establishing new retail partners, favorable harvests of citrus
fruit, and increased business from existing customers.
Non-European Perishables Operations. Revenues from the non-European
perishables operations increased $1.1 million, or 125.4%, to $2.0 million in
the first ten months of 1999 from $0.9 million in the first ten months of 1998,
as a result of increased volume in Argentina.
Dry Good Operations. Revenues from the dry good operations increased $0.2
million, or 1.8%, to $7.9 million in the first ten months of 1999 from $7.7
million in the first ten months of 1998, as a result of increased business with
MTS's major customer.
Cost of Sales and Gross Profit. The IFCO Companies' combined cost of sales
increased $14.4 million, or 16.8%, to $100.3 million in the first ten months of
1999 from $85.9 million in the first ten months of 1998. Gross profit as a
percentage of revenues increased 1.6% for the first ten months of 1999 compared
to the first ten months of 1998 primarily as a result of more favorable pricing
from transportation and washing vendors in the first ten months of 1999 as
compared to the first ten months of 1998.
European Perishables Operations. Cost of sales increased $14.3 million, or
18.1%, to $93.3 million in the first ten months of 1999 from $79.0 million in
the first ten months of 1998. The percentage increase in cost of sales was
lower than the percentage increase in related revenues for the same period
primarily as a result of more favorable pricing from transportation and washing
vendors in the first ten months of 1999 as compared to the first ten months of
1998. This was partially offset by increased costs incurred to expand the
business in Europe. The expansion costs were reduced by a $2.8 million
reimbursement from Schoeller Plast AG in accordance with a cost-sharing
agreement between the companies.
Non-European Perishables Operations. Cost of sales increased $0.9 million, or
198.1%, to $1.4 million in the first ten months of 1999 from $0.5 million in
the first ten months of 1998. The percentage increase in cost of sales was
higher than the percentage increase in related revenues for the same period due
to start-up activities in South American countries other than Argentina.
Dry Good Operations. Cost of sales decreased by $0.5 million, or 8.0%, to
$5.9 million in the first ten months of 1999 from $6.4 million in the first ten
months of 1998. Revenues increased slightly in the same period. The primary
reason for the decrease in cost of sales was a reduction of internal handling
costs by a change in operations.
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net. Selling, general and administrative expenses and other
operating income (expenses), net increased $4.3 million, or 24.2%, to $22.1
million in the first ten months of 1999 from $17.8 million in the first ten
months of 1998 and increased as a percentage of revenues to 17.4% in the first
ten months of 1999 from 16.7% in the first ten months of 1998. The increase as
a percentage of revenues was the result of costs of $2.8 million related to the
merger. This consists of $2.1 million, which the company has agreed to
reimburse Palex for its transaction costs, and $0.7 million for professional
advisory services. Without these costs, selling, general and administrative
expenses and other operating income (expenses), net as a percentage of revenues
would have decreased due to expenditures made in the first ten months of 1998
to prepare for the increase in business that the IFCO Companies anticipated in
1999.
Other Income and Expense. Interest expense decreased $0.1 million, or 0.1%,
to $7.3 million in the first ten months of 1999 from $7.4 million in the first
ten months of 1998. Interest income decreased $0.8 million, or 65.0%, to $0.5
million in the first ten months of 1999 from $1.3 million in the first ten
months of 1998. The net increase in interest costs was primarily a result of
the further reduction of receivables from related parties due to the
requirements under the IFCO Companies' credit facilities.
Primarily as a result of the foregoing, net loss decreased to $6.3 million in
the first ten months of 1999 from $7.0 million in the first ten months of 1998.
92
<PAGE>
Fiscal Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Revenues. The IFCO Companies' combined revenues increased $18.0 million, or
15.4%, to $134.7 million in 1998 from $116.7 million in 1997.
European Perishables Operations. Revenues from the European perishables
operations increased $16.8 million, or 15.7%, to $123.7 million in 1998 from
$106.9 million in 1997. This increase was primarily attributable to an increase
of 20.6% in the number of RTCs used in the round-trip systems for fresh
produce, and the number of trips per RTC. This volume increase was offset by a
2.8% decline in average prices that was primarily attributable to volume
discounting in the United Kingdom and a 1.6% decline related to changes in
currency exchange rates relative to the previous period. The increased use was
primarily a result of the IFCO Companies' establishing new retail partners,
favorable harvests of citrus fruit, and increased business from existing
customers.
Non-European Perishables Operations. Revenues from the non-European
perishables operations increased $0.8 million to $1.1 million in 1998 from $0.3
million in 1997, as a result of increased volume in Argentina.
Dry Good Operations. Revenues from the dry good operations increased $0.3
million, or 3.4%, to $9.9 million in 1998 from $9.6 million in 1997, as a
result of increased business with MTS's major customer.
Cost of Sales and Gross Profit. The IFCO Companies' combined cost of sales
increased $6.6 million, or 6.6%, to $106.2 million in 1998 from $99.6 million
in 1997, but gross profit as a percentage of revenues increased from 14.7% for
1997 to 21.2% for 1998. These margin gains are primarily a result of the
following:
. increased utilization of the IFCO Companies' reconditioning depots;
. the development of more internally operated cleaning facilities, as
opposed to contracting with third parties;
. decreased container breakage costs as a percentage of revenues,
primarily as a result of customer education initiatives; and
. decreased RTC trips between the various handling locations in the RTC
movement cycle.
European Perishables Operations. Cost of sales increased $6.1 million, or
6.6%, to $96.9 million in 1998 from $90.8 million in 1997. The percentage
increase in cost of sales was lower than the percentage increase in related
revenues for the same period primarily as a result of increasing economies of
scale.
Non-European Perishables Operations. Cost of sales increased $0.5 million, or
227.4%, to $0.7 million in 1998 from $0.2 million in 1997. The percentage
increase in cost of sales was lower than the percentage increase in related
revenues for the same period due to increasing stabilization of the start-up
organization in Argentina and increasing economies of scale.
Dry Good Operations. Cost of sales was substantially unchanged, both in
absolute terms and as a percentage of revenues.
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net. Selling, general and administrative expenses and other
operating income (expenses), net increased $7.2 million, or 40.0%, to $25.4
million in 1998 from $18.2 million in 1997 and increased as a percentage of
revenues to 18.9% in 1998 from 15.6% in 1997. The increase was due to
additional staff in electronic data processing, controlling, and logistic
management.
Other Income and Expense. Interest expense decreased $3.2 million, or 26.9%,
to $8.6 million in 1998 from $11.8 million in 1997. Interest income decreased
$2.3 million, or 58.7%, to $1.6 million in 1998 from $3.9 million in 1997. The
net reduction in interest costs was primarily a result of less average debt and
more favorable interest rates related to IFCO Europe's debt refinancing early
in 1998.
Primarily as a result of the foregoing, net loss decreased to $7.6 million in
1998 from $11.8 million in 1997.
93
<PAGE>
Fiscal Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Revenues. The IFCO Companies' combined revenues decreased $6.3 million, or
5.1%, to $116.7 million in 1997 from $123.0 million in 1996. The decrease
resulted primarily from the adverse impact of currency fluctuations in the
European perishables operations and marginally lower average prices,
notwithstanding unit increases in the European perishables operations.
European Perishables Operations. Revenues decreased $8.2 million, or 7.1%, to
$106.9 million in 1997 from $115.1 million in 1996. This decrease was primarily
attributable to a 1.6% decline in average prices. The decrease was partially
offset by increased volume of RTCs used for fresh produce. The increase in RTC
trips was a result of establishing new retail partners as well as increased
volume from existing customers.
Non-European Perishables Operations. Revenues decreased $1.3 million, or
81.9%, to $0.3 million in 1997 from $1.6 million in 1996, as a result of a
decrease in sales volume in Argentina. The decrease was primarily attributable
to a change in management, which caused a temporary interruption in the
business.
Dry Good Operations. Revenues increased $2.9 million, or 42.8%, to $9.6
million in 1997 from $6.7 million in 1996, as a result of significant volume
increases with its major customer.
Cost of Sales and Gross Profit. The IFCO Companies' combined cost of sales
decreased $18.8 million, or 15.8%, to $99.6 million in 1997 from $118.4 million
in 1996, and gross profit as a percentage of revenues increased from 3.7% for
1996 compared to 14.7% for 1997. These margin increases from 1996 to 1997 were
mainly driven by decreased breakage costs and increased RTC trips.
European Perishables Operations. Cost of sales decreased $20.0 million, or
18.0%, to $90.8 million in 1997 from $110.8 million in 1996. The decrease in
the cost of sales was, apart from currency translation effects, attributable to
a significant reduction in the number of broken RTCs of 2.8 million in 1997. In
addition, in 1996, IFCO Europe experienced high washing costs due to a
significant reorganization of washing activities. This was normalized in 1997,
resulting in a significant decrease in washing costs.
Non-European Perishables Operations. Cost of sales decreased $1.2 million, or
83.9%, to $0.2 million in 1997 from $1.4 million in 1996. The decrease was due
to a management change and the related reduction in revenues.
Dry Good Operations. Cost of sales increased $1.9 million, or 28.6%, to $8.6
million in 1997 from $6.7 million in 1996. The percentage increase was lower
than the percentage increase in related revenues for the same period due to
increasing economies of scale.
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net. Selling, general and administrative expenses and other
operating income (expenses), net increased $1.8 million, or 10.6%, to $18.2
million in 1997 from $16.4 million in 1996. During 1997, the IFCO Companies
increased infrastructure expenditures in various areas, including electronic
data processing and controlling, to support an anticipated significant growth
in revenues. Due to financing restrictions, however, the IFCO Companies were
required to postpone the efforts to increase revenues until 1998. With respect
to non-European perishables operations, fixed costs could not be reduced to
match the reduction in revenues resulting from the change in management in
Argentina.
Primarily as a result of the foregoing, net loss decreased to $11.8 million
in 1997 from $19.5 million in 1996.
Liquidity and Capital Resources
The IFCO Companies have historically financed their growth with medium-term
financing, the funds from which have been primarily used to fund their
investment in the RTC pools.
Cash Flows. Operating activities provided $33.4 million of cash in the first
ten months of 1999 compared to $40.5 million in the first ten months of 1998,
which represents a decrease of $7.1 million, or
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17.5%. This net decrease is due to several factors. During the first ten months
of 1998, the IFCO Companies reduced accounts receivable through increased
factoring activities, which led to additional positive cash flow of $17.7
million. In the first ten months of 1999, the IFCO Companies did not realize
any additional cash effect for factoring. Accounts receivable net of factoring
volume increased $18.7 million in the first ten months of 1999. During the same
period, accounts payable increased $17.4 million as the result of increased
business activity.
Operating activities provided $59.9 million of cash in 1998 compared to $32.5
million in 1997, which represents an increase of $27.4 million, or 84.5%. This
net increase is due to several factors. In 1997, the IFCO Companies experienced
an increase in accounts receivable of $11.6 million. In 1998, the IFCO
Companies reduced accounts receivable through increased factoring activities,
which led to additional positive cash flow of $2.2 million. In 1997, the IFCO
Companies decreased inventory by $7.4 million compared to a $1.6 million
increase in 1998. The IFCO Companies obtained additional liquidity through
factoring proceeds of $25.4 million in 1998. Accounts payable increased $5.1
million in 1997 and $10.9 million in 1998 due to higher sales volume in each
period.
Cash used in investing activities in the first ten months of 1999 was $40.1
million compared to $35.9 million in the first ten months of 1998, which
represents an increase of $4.2 million, or 11.7%. The majority of cash used in
both periods was for the purchase of RTCs and other property, plant, and
equipment. The investment in RTCs decreased by $4.3 million from $35.2 million
in the first ten months of 1998 to $30.9 million in the first ten months of
1999, mainly because of a lower average price for purchased RTCs due to the
product mix. In addition, for the first ten months of 1999, the IFCO Companies
recognized capitalized merger costs of $3.4 million.
Cash used in investing activities in 1998 was $38.8 million compared to $43.2
million in 1997, which represents a decrease of $4.4 million, or 10.3%. The
majority of cash used in both years was for the purchase of RTCs and other
property, plant, and equipment, which is the principal reason for the decrease
in cash used in investing activities. The investment in RTCs in 1998 was less
due to the decreased breakage of RTCs that the IFCO Companies experienced in
1998. Financial assets and property and equipment were also sold in 1998 and
contributed $2.9 million in cash.
Cash used in financing activities was $6.4 million in 1998 compared to cash
provided by financing activities of $5.0 million in 1997. The principal cause
for this shift to cash used in financing activities was a significant
refinancing of substantially all bank debt by the IFCO Companies in 1998, which
resulted in proceeds of $91.8 million from long-term bank borrowings and a more
significant decrease in short- and medium-term bank borrowings. In 1997, $24.9
million in proceeds were generated by the sale of redeemable convertible
preferred stock.
During 1997, GE Erste acquired a 24% interest in IFCO Europe by purchasing
redeemable convertible preferred stock for $24.9 million. The proceeds from
this capital contribution were primarily used to fund IFCO Europe's operations.
In connection with this initial investment in the European operations in 1997,
GE Erste received options to increase this investment to 49% and then up to
100% after specified dates had passed and criteria had been met. GE Erste also
received options to purchase up to 100% of IFCO International after specified
dates had passed and criteria had been met. In connection with these
transactions, GE Erste also received the right to require Schoeller Industries
to contribute 100% of its interests in MTS to IFCO Europe. As part of the
transactions related to the merger, GE Capital and GE Erste will contribute all
of their interests and release all of their rights to IFCO Systems. See "The
Merger Agreement--Related Matters--Agreement with GE Capital and GE Erste."
Credit Facilities. In 1998, IFCO Europe negotiated a new financing
arrangement with a lending syndicate for a total of DM181.0 million, or
approximately $90.3 million. The amount of credit available under the financing
arrangement was reduced in 1999 to DM160.5 million, or approximately $80.1
million. The credit facility consists of DM125.5 million, or approximately
$62.6 million, available under a Senior Facility Agreement and DM35.0 million,
or approximately $17.5 million, available under a Senior Subordinated Facility
Agreement.
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The Senior Facility Agreement consists of a DM64.0 million, or approximately
$31.9 million, fixed-term loan and two revolving credit facilities totaling
DM61.5 million, or approximately $30.7 million. All borrowings under the Senior
Facility Agreement, $53.2 million of which was outstanding as of October 31,
1999, contain principal reduction provisions, mature in 2004, and accrue
interest at EURIBOR plus 1.75%, or 4.61% as of October 31, 1999. Available
credit under the Senior Facility Agreement as of October 31, 1999, was $14.3
million.
Outstanding borrowings under the Senior Subordinated Agreement, which totaled
DM35.0 million, or approximately $17.5 million, as of October 31, 1999, accrue
interest at a rate of EURIBOR plus 2.75%, or 5.61% as of October 31, 1999. The
Senior Subordinated Agreement does not have scheduled principal reductions
until a balloon payment in 2005. The bank syndicate for the credit facilities
has consented to the scheduled IPO under the condition, that the lenders
receive a payment of DM40.0 million, or approximately $20.0 million, from the
IPO net proceeds to reduce by that amount the borrowings under the term loan
portion of Senior Facility Agreement. Additionally, at the time of the merger
and IPO, the available facility amount under the revolving credit portion of
the Senior Facility Agreement will be reduced by DM20.0 million, or
approximately $10.0 million, and any borrowings in excess of the reduced
revolving credit limit will be repaid from the IPO net proceeds or proceeds
from the planned debt financing. In addition, upon completion of the IPO, the
final maturity date of the Senior Facility Agreement term loan and revolver
will be accelerated to June 30, 2001, and the Senior Subordinated Agreement
repayment schedule will be modified to provide for semiannual principal
payments through September 30, 2005.
A significant portion of IFCO Europe's receivables and long-lived assets are
pledged as security against all outstanding borrowings under the Senior
Facility Agreement and Senior Subordinated Agreement, which also prohibit any
dilution of GE Erste's capital investment. The Senior Facility Agreement and
Senior Subordinated Agreement prohibit any payment of dividends as long as any
outstanding borrowings exist under either agreement, restrict IFCO Europe's
incurrence or assumption of other indebtedness and require IFCO Europe to
comply with non-financial and financial covenants, including funded debt and
interest expense to earnings before taxes, depreciation, interest, and
amortization ratios and cash flow ratios. As of October 31, 1999, and as of the
date of this proxy statement/prospectus, IFCO Europe was in compliance with, or
had obtained waivers for, each of the covenants contained in the Senior
Facility Agreement and the Senior Subordinated Agreement.
The Senior Facility Agreement and Senior Subordinated Agreement also permit
specified levels of receivable factoring. During 1994, IFCO Europe had entered
into a factoring agreement under which IFCO Europe could offer all of their
trade receivables to a factoring agent. Under the factoring agreement, the
sales price is the nominal value of the receivable less a factoring fee of 0.6%
of the nominal value of the factored receivables. The factoring agent has the
right to collect the receivables and bears the collection risk. The factoring
agent is required to remit 75% of the factored receivables to IFCO Europe. The
remainder, less the factoring charge, is held in an escrow account and is
remitted to IFCO Europe following collection. The interest rate on cash
advances relating to factored receivables is based on the three-month EURIBOR
rate plus 1.25%, or 4.11% as of October 31, 1999. IFCO Europe factored 20% of
its combined revenues and incurred factoring and interest charges under this
agreement of $2.6 million in 1998. During the first ten months of 1999, IFCO
Europe factored 40% of its combined revenues and incurred factoring and
interest charges of $3.4 million.
At October 31, 1999, the IFCO Companies had entered into $31.3 million of
capital leases.
To reduce its variable rate interest risk, IFCO Europe entered into an
interest rate cap agreement. As of October 31, 1999, this interest rate cap
covered $54.5 million of its outstanding debt and limited interest rates
applicable to those borrowings to 6.75% for $11.3 million of borrowings under
the Senior Facility Agreement and to 7.75% for $43.2 million of borrowings
under the Senior Subordinated Agreement. The costs of this agreement are
included in interest expense ratably over the term of the agreement.
Future Liquidity Needs. In addition to the IPO, IFCO Systems intends to
pursue other financing including further equity investment, the issuance of
notes, or syndicated bank facilities. At the same time as the completion of the
merger and the IPO, IFCO Systems plans to issue approximately 180.0 million
euros, or
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approximately $175.6 million, of debt in the form of a high yield financing and
enter into a new senior credit facility. See "Concurrent Transactions." IFCO
Systems believes that available cash and cash flow from operations, together
with the proceeds from the IPO, the high yield debt financing, and the new
senior credit facility will be adequate to repay a substantial portion of IFCO
Systems' debt and to meet IFCO Systems' liquidity needs for the foreseeable
future. IFCO Systems' ability to make scheduled payments of principal or
interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, will depend on its future performance. IFCO Systems' ability to
do so is subject to general economic, financial, competitive, legislative,
regulatory, and international and U.S. and European domestic political factors
and other factors that are beyond its control. IFCO Systems may not generate
sufficient cash flow from operations, that anticipated revenue growth and
operating improvements may not be realized or that future capital may not be
available in an amount sufficient, or on acceptable terms, to enable it to
service its indebtedness or to fund its other liquidity needs.
IFCO Systems anticipates that any new senior credit facility and the
indenture with respect to any high yield debt financing will contain a number
of significant covenants that, among other things, will restrict corporate and
business activities, including the ability of IFCO Systems to:
. dispose of assets;
. incur additional indebtedness;
. prepay other indebtedness:
. pay dividends;
. repurchase or redeem capital stock;
. enter into specified investments or create new subsidiaries;
. enter into sale and lease-back transactions;
. make specific types of acquisitions;
. engage in mergers or consolidations;
. create liens; or
. engage in certain transactions with affiliates.
In addition, under any new senior credit facility, IFCO Systems will likely be
required to comply with specified financial ratios and tests, including a
minimum net worth test, a fixed charge coverage ratio, an interest coverage
ratio, a leverage ratio, and a minimum EBITDA requirement.
Capital Expenditures. The IFCO Companies' aggregate capital expenditures were
$36.3 million for the first ten months of 1999, $40.2 million for 1998, and
$42.5 million for 1997. These capital expenditures were principally for the
purchase of RTCs. IFCO Systems anticipates that a planned expansion of the
European perishables RTC pool will require investments of $69.5 million in 2000
and $46.7 million in 2001. For the planned expansion of the non-European
perishables RTC pool, IFCO Systems projects capital expenditures of $0.5
million in 2000 and $1.3 million in 2001.
The IFCO Companies believe they will be able to finance operations and
scheduled debt repayments from operating cash flow and additional borrowings
under existing credit facilities. However, the planned increase in capital
expenditures for expansion of the non-European RTC pool will require financing
from other sources, like the IPO and the proposed concurrent financing
transactions.
Impact of Inflation
The results of the IFCO Companies' operations for the periods discussed have
not been materially affected by inflation.
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Foreign Currency Translation Effects
The functional currency of the IFCO Companies is the Deutsch mark. The IFCO
Companies have elected the U.S. dollar as their reporting currency and
consequently, assets, liabilities, revenues, and expenses are subject to
exchange rate fluctuations between the U.S. dollar and the Deutsch mark. For
the translation of the IFCO Companies' financial statements into U.S. dollars,
the exchange rate at the respective balance sheet date is used for assets and
liabilities and a weighted average exchange rate for the period for revenues,
expenses, gains, and losses. The following exchange rates for the translation
of the Deutsch mark into U.S. dollars were used:
<TABLE>
<CAPTION>
Weighted Rate at the
Period average rate(1) balance sheet date(2)
------ --------------- ---------------------
<S> <C> <C>
Year ended December 31, 1996..... 0.6631 0.6432
Year ended December 31, 1997..... 0.5757 0.5580
Ten Months ended October 31,
1998............................ 0.5638 0.6038
Year ended December 31, 1998..... 0.5685 0.6140
Ten Months ended October 31,
1999............................ 0.5500 0.5374
</TABLE>
- --------
(1) The average of the noon buying rates for the Deutsch mark by the Federal
Reserve Bank of New York, expressed as U.S. dollars per DM1.00, on the last
business day of each full month during the indicated period.
(2) The noon buying rate, expressed as U.S. dollars per DM1.00, as of the
indicated balance sheet date.
In this proxy statement/prospectus, approximate dollar amounts are provided
for euro-denominated amounts based on the noon buying rate on January 31, 2000,
of one euro = $0.9757. Approximate dollar amounts are provided for Deutsch-
mark-denominated amounts based on this euro rate and the fixed conversion rate
of one euro = DM1.95583, resulting in a rate of 0.4989 U.S. dollars for each
Deutsch mark.
Seasonality
The IFCO Companies' revenues vary depending on the fruit and vegetable
harvesting season in different countries. Historically a higher portion of
their sales and operating income has been recognized in the fourth quarter than
in the first quarter, which has historically been their weakest quarter.
Revenues in Germany and France, for example, are highest in summer and fall,
whereas revenues in Southern Europe reach a peak late in fall and throughout
winter. Seasonality also has an influence on pricing, as transportation costs
incurred during the winter to transport the IFCO Companies' RTCs from warmer
countries in Southern Europe are higher than the costs to transport the RTCs
from closer locations in Central Europe. The IFCO Companies accordingly charge
customers in these Southern European countries higher usage fees.
Related Party Supplier
In 1997, a subsidiary of IFCO Europe entered into a ten-year supply agreement
with Schoeller Plast Industries GmbH to provide the IFCO Companies with all of
its new RTCs. The supply agreement was later assigned to Schoeller Plast AG, an
indirect 80%-owned subsidiary of Schoeller Industries. Changes in pricing may
occur when Schoeller Plast AG's production costs vary by more that 15%. Under
the terms of the supply agreement, the IFCO Companies receive a fixed price per
kilogram for broken containers, which are taken back by Schoeller Plast AG. See
"Certain Relationships and Related Transactions of the IFCO Companies--Supply
Agreement."
Year 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruptions to various activities
and operations.
The IFCO Companies began addressing the year 2000 issue in 1997 by setting up
Project 2000, which is managed through interaction between the IFCO Companies'
internal electronic data processing department and
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the managing directors of the individual businesses. In addition to using these
internal resources, third parties are also assisting in renovating and testing
computer hardware and software and embedded systems. The IFCO Companies'
critical business operations are concentrated in the financial accounting and
inventory management systems, which, as discussed below, have been replaced by
a new comprehensive accounting system. These existing systems will serve as
backup systems after the successful implementation of the new system. The IFCO
Companies have no significant internally developed computer systems that need
to be updated. All locations of the IFCO Companies were examined for non-IT and
non-embedded systems. All third-party providers of computer systems and
services, including embedded systems, have been contacted. Approximately 80% of
the contacted vendors have responded to the IFCO Companies' requests.
Management believes that year 2000 issues, if any, with respect to the
remaining 20% of their contacted vendors will not have a material adverse
effect on the IFCO Companies' financial condition or results of operations.
The IFCO Companies have not to date, including since January 1, 2000,
experienced any disruptions to their manufacturing operations, systems, or
other processes due to year 2000 problems, nor are they aware of any material
disruptions to their manufacturing operations, systems, or other processes that
could occur because of year 2000 problems. The IFCO Companies could, however,
experience isolated failures at random locations due to year 2000 problems that
were previously undetected in some personal computers and related software or
in microprocessor-driven machinery. The IFCO Companies believe, however, that
they can compensate for any isolated failures, if they occur, by manual
intervention without any material adverse affect on the IFCO Companies'
financial condition and results of operations.
During 1999, the IFCO Companies completed the installation of a new computer
system. The system is a comprehensive "enterprise response program" based on
software developed and sold by SAP, a leading German developer of systems
applications. The system was installed and implemented by Siemens Business
Systems, a leading application installer in the electronic data processing
environment in Germany. Each of SAP and Siemens has represented to the IFCO
Companies that the new computer system is year 2000 compliant.
The IFCO Companies have developed contingency plans that are focused on
ensuring that daily and long-term work routines can be performed without
significant interruption in the event of year 2000 difficulties. The
contingency plans include performing some processes manually, repairing
affected systems, and changing suppliers as necessary. The IFCO Companies'
efforts in addressing the year 2000 issue would be expected to minimize, but
not eliminate, the risks of third party non-compliance. If the IFCO Companies
or a third party upon which they rely fail to adequately address the year 2000
issue, the resulting problems could disrupt the IFCO Companies' business.
Possible problems that could result in a worst case scenario include:
. incomplete or inaccurate accounting, recording, or processing of
revenues or other financial information;
. delays or failures in obtaining RTCs;
. incomplete or inaccurate accounting, recording, or processing of product
distribution to customers; and
. interruptions in product distribution.
In addition, there are not readily available substitute public utility
vendors for power, water, or telephone services, all of which are an integral
part of the IFCO Companies' operations. If any or all of the IFCO Companies'
utility vendors fail to deliver services due to their own year 2000 problems,
the financial condition and results of operations of the IFCO Companies would
be materially adversely affected.
Project 2000 cost approximately $500,000 through the end of 1999, of which
$430,000 was incurred through December 31, 1998. The IFCO Companies'
development of new operating systems and modification of existing systems have
not been subject to any delay caused in whole or in part by year 2000 efforts
and, therefore, management believes it should not have a material adverse
effect on the IFCO Companies' financial condition or results of operations.
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There are many risks associated with year 2000 issues, including the risk
that the IFCO Companies' computer systems will not operate as intended. The
systems, services, and products of the IFCO Companies and other third parties
may not be year 2000 compliant. Likewise, the IFCO Companies' compliance
schedule may not be met. Any significant unresolved issues related to the year
2000 compliance initiatives could result in an interruption in, or failure of,
normal business activities or operations, or the incurrence of unanticipated
damages or expenses related to the resolution of these issues or related
regulatory actions or legal liabilities, that could have a material adverse
effect on the IFCO Companies' results of operations or financial condition.
To the fullest extent permitted by law, this year 2000 discussion is a "Year
2000 Readiness Disclosure" within the meaning of the U.S. Year 2000 Information
and Readiness Disclosure Act, 15 U.S.C. Section 1.
Euro Currency
On January 1, 1999, conversion rates of the national currencies of eleven
European Union members, including Germany, were fixed against a common
currency, called the euro. Each participating country's currency is legal
tender during a transition period from January 1, 1999, until January 1, 2002,
after which only the euro will be used. The IFCO Companies have assessed their
internally developed and purchased applications to determine the changes needed
to process euro-denominated transactions. As a result, the IFCO Companies'
systems have been changed or will be changed to process euro-denominated
transactions. Additional costs associated with the transition period are
expected to be minimal and are not expected to have a material adverse effect
on the IFCO Companies' financial results. In the future, the IFCO Companies
will use the euro as its functional currency in connection with its new
electronic data processing systems.
Quantitative and Qualitative Disclosures About Market Risks
The IFCO Companies are exposed to two broad classes of risk: interest rate
risk and currency exchange rate fluctuations.
The IFCO Companies' exposure to interest rate risk relates primarily to their
variable rate debt. At October 31, 1999, the carrying value of their total
variable rate debt was $72.0 million. To help to reduce the IFCO Companies'
variable rate interest risk, the IFCO Companies have entered into an interest
rate cap agreement, which as of October 31, 1999, covers $54.5 million of their
outstanding debt and limits interest rates related to these borrowings to 6.75%
for $11.3 million of borrowings under the Senior Facilities Agreement and to
7.75% for $43.2 million of borrowings under the Senior Subordinated Agreement.
The following table shows interest sensitivities at the current borrowing level
of hypothetical changes in interest rates on the debt, net of any interest rate
differential received on the cap:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Change in interest rate in
percentage points from current
borrowing level............... -3% -1% +1% +3% +5% +10%
Increase (decrease) in net
interest expense (in
thousands).................... $(2,160) $(720) $720 $1,690 $2,041 $2,916
</TABLE>
The IFCO Companies are exposed to a degree of currency risk by virtue of
conducting a portion of its business in currencies other than the Deutsch mark.
The IFCO Companies' currency risk arises from foreign currency receivables as
well as from firm commitments to purchase services and supplies in the future
in currencies other than the Deutsch mark. Foreign currency transaction gains
and losses have not been material to the results of operations during the past
three years. The IFCO Companies' policy is not to use derivative financial
instruments to manage its exposure to fluctuations in foreign currency exchange
rates. The introduction of the euro should further reduce the IFCO Companies'
exposure to exchange rate fluctuations from their European operations.
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PalEx
You should read the following discussion in conjunction with PalEx's
consolidated financial statements included in this proxy statement/prospectus.
In addition, you should also read "Business" for more information about PalEx.
Introduction
PalEx's revenues are derived from:
. the manufacture and sale of new pallets;
. the reconditioning and repair of steel drums, leasing of intermediate
bulk containers, and provision of management services to users of steel
drums and intermediate bulk containers;
. the repair, remanufacture, and sale of recycled pallets and the provision
of pallet management services; and
. pallet and container leasing, retrieval, repair, and management services.
New pallet sales accounted for approximately 54% of PalEx's consolidated
revenues for the 1998 fiscal year, which ended December 27, 1998. A substantial
portion of the cost of a new pallet is lumber, and new pallet sales prices are
strongly influenced by the cost, availability, and type of lumber used. As a
result, changes in lumber prices can significantly impact PalEx's revenues and
margins. New pallet manufacturing is generally considered to be a mature
industry characterized by moderate growth rates.
The reconditioning and repair of steel drums accounted for approximately 27%
of PalEx's consolidated revenues for the 1998 fiscal year. The steel drum
reconditioning and repair industry has barriers to entry by new competitors,
including compliance with environmental standards and high capital
requirements. Consequently, competition is generally stable or declining in the
industry, which provides surviving industry participants with the opportunity
to acquire market share via pricing strategy or acquisitions.
The repair, remanufacture, and sale of recycled pallets and recycled pallet
management services accounted for approximately 17% of PalEx's consolidated
revenues for the 1998 fiscal year. These activities are more labor intensive
and require fewer raw materials than manufacturing new pallets. Recycling
operations generally generate higher gross profits as a percentage of revenues
than new pallet sales.
Canadian pallet leasing, retrieval, repair, and management services and
intermediate bulk container leasing in the United States accounted for
approximately 2% of PalEx's consolidated revenues for the 1998 fiscal year.
PalEx recognizes revenue upon the delivery of a product or service to a
customer. PalEx does not generally maintain significant finished goods
inventory. Cost of sales for pallets are predominantly variable, including the
cost of lumber, labor, fasteners, transportation, equipment maintenance, and
utilities. Fixed costs in pallet cost of sales include depreciation of
equipment, supervisory labor, and direct overhead. A significant number of
PalEx's pallet production employees are paid on a production or piecework
basis, which PalEx believes provides incentives for increased productivity.
Cost of sales for reconditioned steel drums contain higher fixed costs, a
reflection of the high capital requirements of the business. Fixed costs of
sales for reconditioned steel drums include depreciation, transportation, and
facility repairs. Variable costs to recondition steel drums include chemicals
and coatings, hardware, labor, and raw drums.
Although PalEx sells products to a broad range of industries, approximately
7% of PalEx's revenues for the 1998 fiscal year were attributable to the
agricultural industry in the Southeastern and Western regions of the United
States, with the citrus and produce industries constituting the largest
component of these revenues. Revenue associated with these industries is highly
seasonal, concentrated in the period from October through May. Moreover, severe
weather, particularly during the harvesting seasons, may cause a reduction in
demand from agricultural customers, adversely affecting PalEx's revenues and
results of operations. Adverse weather conditions may also affect PalEx's raw
material costs.
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Termination of CHEP USA Relationship
During the last quarter of 1997 and the first part of the first quarter of
1998, various members of PalEx's management had numerous discussions with
representatives of PalEx's then largest customer, CHEP USA, regarding numerous
issues affecting the profitability of the products PalEx manufactured for CHEP
USA and the pricing of new pallets, the uncertainty of CHEP USA production
requirements, the absence of fees for extra services provided to CHEP USA,
quality control, and the opening of new facilities that would be primarily
dedicated to performing services for CHEP USA. PalEx manufactured new, high-
grade pallets for CHEP USA, which in turn leased these pallets to its
customers. These pallets were part of a closed-loop materials handling and
management system that included recovery of the pallet from the end user,
aggregating them in PalEx-operated depots, where they were sorted, repaired,
and returned to CHEP USA's customers.
In addition, during this same period PalEx began renegotiating the prices
CHEP USA was being charged for new pallets to more accurately reflect
constantly changing lumber prices. After subsequent discussion and
communications, PalEx recognized that these issues would not be resolved to the
mutual satisfaction of CHEP USA and PalEx. Accordingly, PalEx notified CHEP USA
that effective on April 29, 1998, it would cease supplying CHEP USA with new
pallets and provided advance notice, generally, 10 to 60 days, under
contractual arrangements to discontinue repair and depot services for CHEP USA.
The termination of PalEx's relationship with CHEP USA adversely affected the
operations of some of PalEx's facilities in the Southeastern and Western United
States. PalEx developed a restructuring plan to close, curtail, or convert
operations at facilities related to CHEP USA production to alternative business
activities. As of December 27, 1998, three CHEP USA-related manufacturing
facilities had closed, one was sold, and two more were consolidated into one
facility. Two other CHEP USA-related facilities were converted to manufacture
non-CHEP USA products. PalEx also terminated approximately 400 production-
related employees at CHEP USA-related facilities during 1998.
During the 1998 fiscal year, approximately 8% of PalEx's consolidated
revenues were attributable to CHEP USA. Sales to CHEP USA for the year ended
November 30, 1996, were approximately 21% of consolidated revenues and for the
year ended December 28, 1997, were approximately 26% of consolidated revenues.
Results of Operations
Following the acquisition of the founding companies and PalEx's initial
public offering and during fiscal 1997, PalEx acquired five additional
companies. During the 1998 fiscal year, PalEx acquired a total of 19 companies.
Of the 1998 acquisitions, ten are engaged in the pallet business in the United
States, eight are engaged in the reconditioning and rebuilding of industrial
steel containers in the United States, and one, SMG Corporation, is engaged in
the rental of pallets in Canada.
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The following table lists PalEx's acquisitions through October 24, 1999:
<TABLE>
<CAPTION>
Date of
Company Acquired Acquisition
---------------- -----------
<S> <C>
Founding companies (1):
Fraser Industries, Inc....................................... 3/25/97
Ridge Pallets, Inc........................................... 3/25/97
Interstate Pallet Co., Inc................................... 3/25/97
Pooled companies (2):
Sheffield Lumber & Pallet Company, Inc....................... 8/1/97
Sonoma Pacific Company....................................... 8/1/97
New London Pallet Inc........................................ 10/14/97
Bay Area Pallet Company...................................... 10/31/97
Other 1997 fiscal year acquisitions (3):
Summers Pallet Manufacturing, Inc............................ 11/20/97
1998 pooled companies (4):
Acme Barrel Company, Inc..................................... 2/23/98
Western Container, Limited Liability Company................. 2/23/98
Drum Service Co. of Florida.................................. 2/27/98
Consolidated Container Corporation........................... 2/27/98
1998 purchased companies (5):
American Pallet Recyclers, Inc............................... 1/2/98
Consolidated Drum Reconditioning, Inc........................ 2/12/98
Capital Pallet, Incorporated................................. 3/18/98
Pallet Outlet Company, Inc................................... 3/20/98
Southern Pallets, Inc........................................ 3/25/98
Shipshewana Pallet Co., Inc.................................. 5/21/98
Gilbert Lumber Inc........................................... 6/11/98
Valley Pallets, Inc.......................................... 6/17/98
Duckert Pallet Co., Inc...................................... 7/14/98
Continental Pallet Company, Inc.............................. 7/27/98
McCook Drum & Barrel Co., Inc................................ 8/4/98
Isaacson Lumber Company...................................... 8/31/98
SMG Corporation.............................................. 9/11/98
Charlotte Steel Drum Corporation............................. 10/23/98
Atlas Container Company, Inc................................. 10/30/98
</TABLE>
- --------
(1) PalEx acquired the founding companies concurrently with the closing of its
initial public offering.
(2) PalEx acquired the pooled companies in the 1997 fiscal year following
PalEx's initial public offering. PalEx accounted for each of these
acquisitions as a pooling-of-interests.
(3) PalEx accounted for the 1997 acquisition of Summers as a purchase.
(4) PalEx acquired the 1998 pooled companies in the 1998 fiscal year and
accounted for each of these acquisitions as a pooling-of-interests.
(5) The 1998 purchased companies were acquired in the 1998 fiscal year and were
accounted for as purchases. PalEx sometimes refers to the 1998 purchased
companies, together with Summers, as the purchased companies.
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The following table sets forth selected financial data and that data as a
percentage of PalEx's revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Ten-Month Period Ended
-------------------------------------------------------------- --------------------------------------
November 30, 1996 December 28, 1997 December 27, 1998 October 25, 1998 October 24, 1999
----------------- ----------------- ----------------- ---------------- ----------------
(dollars in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 145,030 100.0% $ 222,993 100.0% $ 319,691 100.0% $ 256,874 100.0% $ 320,433 100.0%
Cost of goods sold...... 121,865 84.0 188,084 84.3 259,562 81.2 207,850 80.9 257,472 80.4
Inventory valuation
adjustment............. -- -- -- -- 1,235 0.4 1,679 0.7 -- --
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Gross profit............ 23,165 16.0 34,909 15.7 58,894 18.4 47,345 18.4 62,961 19.6
Selling, general and
administrative
expenses............... 14,063 9.7 20,135 9.0 33,042 10.3 27,374 10.7 36,142 11.3
Amortization of goodwill
and other intangible
assets................. 165 0.1 820 0.4 3,334 1.0 2,186 0.9 3,993 1.2
Compensation
differential........... -- -- 1,020 0.5 1,062 0.3 1,062 0.4 -- --
Pooling expenses........ -- -- -- -- 1,841 0.6 1,841 0.7 -- --
Restructuring charge.... -- -- -- -- 949 0.3 2,404 0.9 -- --
Plant closure costs and
asset abandonment
loss................... -- -- -- -- 1,369 0.4 1,369 0.5 -- --
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Income from operations.. 8,937 6.2 12,934 5.8 17,297 5.4 11,109 4.3 22,826 7.1
Interest expense........ (1,576) (1.1) (1,722) (0.8) (8,468) (2.7) (6,317) (2.5) (12,047) (3.7)
Other income (expense),
net.................... 511 0.3 132 0.1 262 0.1 239 0.1 1,387 0.4
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Income before income
taxes.................. 7,872 5.4 11,344 5.1 9,091 2.8 5,031 1.9 12,166 3.8
Income tax provision.... 1,833 1.2 4,704 2.1 5,105 1.6 2,676 1.0 5,402 1.7
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Net income.............. $ 6,039 4.2% $ 6,640 3.0% $ 3,986 1.2% $ 2,355 0.9% $ 6,764 2.1%
========== ======= ========== ======= ========== ======= ========= ====== ========= ======
</TABLE>
Ten-Month Period Ended October 24, 1999, Compared to Ten-Month Period Ended
October 25, 1998
Revenues increased 24.7% from approximately $256.9 million in the ten-month
period ended October 25, 1998, to approximately $320.4 million in the ten-month
period ended October 24, 1999. On April 29, 1998, PalEx notified its largest
customer, CHEP USA, that PalEx was terminating all existing agreements with
CHEP USA. Effective that date, PalEx ceased supplying CHEP USA with new pallets
and provided advance notice, generally ten to 60 days, under contractual
arrangements to discontinue repair and depot services to CHEP USA. The
termination of PalEx's relationship affected some of PalEx's facilities in the
Southeastern and Western United States. Revenues related to CHEP USA sales for
the ten-month period ended October 25, 1998, were approximately $26.1 million.
The increase in revenues for the ten-month period ended October 24, 1999,
compared to the ten-month period ended October 25, 1998, is primarily
attributable to the companies acquired as purchases and sales to new customers
that replaced sales previously made to CHEP USA.
Gross profit increased from approximately $47.3 million for the ten-month
period ended October 25, 1998, to approximately $63.0 million for the ten-month
period ended October 24, 1999, primarily as a result of increased volumes due
to the acquisition of the purchased companies. Gross profit as a percentage of
revenues increased from 19.1%, excluding the inventory valuation adjustment
resulting from the termination of the business relationship with CHEP USA, for
the ten-month period ended October 25, 1998, to 19.6% for the ten-month period
ended October 24, 1999, primarily due to higher margins from both recycled
pallet sales and new pallet manufacturing, which higher margins were partially
offset by lower gross margins in drum reconditioning and services and pallet
leasing in Canada. PalEx's gross profit as a percentage of revenues may
fluctuate as a result of competitive pricing in different market areas in which
it operates, continued changes to product mix, and changes in raw material
costs.
Selling, general and administrative expenses increased from approximately
$27.4 million, or 10.7% of revenues, in the ten-month period ended October 25,
1998 to $36.1 million, or 11.3% of revenues, in the ten-month period ended
October 24, 1999. This increase is generally attributable to the purchased
companies acquired during 1998, and to PalEx's continued efforts in organizing
and building its regional operating structure.
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The results of operations for the ten-month period ended October 25, 1998,
include approximately $1.8 million for pooling expenses and approximately $1.1
million for compensation differential related to the acquisition of Acme and
Western. Restructuring charges relating to PalEx's termination of its
relationship with CHEP USA were approximately $5.5 million during the ten
months ended October 25, 1999.
Amortization of goodwill and other intangible assets increased from
approximately $2.2 million for the ten-month period ended October 25, 1998, to
approximately $4.0 million for the ten-month period ended October 24, 1999.
This increase was due to the additional companies acquired as purchases.
Interest expense increased from approximately $6.3 million for the ten-month
period ended October 25, 1998, to approximately $12.1 million for the ten-month
period ended October 24, 1999, primarily as a result of the additional
borrowings related to the acquisitions of the 1998 purchased companies and
higher interest rates.
As a result of the foregoing, net income increased from approximately $2.4
million for the ten-month period ended October 25, 1998, to approximately $6.8
million for the ten-month period ended October 24, 1999.
Year Ended December 27, 1998, Compared to Year Ended December 28, 1997
Revenues increased approximately $96.7 million, or 43.4%, to approximately
$319.7 million from approximately $223.0 million. Revenues attributable to the
1998 purchased companies were approximately $94.7 million. Revenues for the
founding companies and the pooled companies and Summers, adjusted for the
comparable period in 1998 for which there were no revenues in 1997, decreased
approximately $23.0 million from 1997 to 1998. CHEP USA sales decreased
approximately $32.4 million from 1997 to 1998. Approximately $9.4 million of
the decrease in sales attributable to CHEP USA was replaced in 1998 after the
termination of PalEx's CHEP USA relationship with increased sales to other
customers.
Revenues from new pallet sales increased approximately $19.2 million and
revenues from recycled pallet sales increased approximately $47.5 million in
1998 over 1997. Revenues from pallet leasing and related services increased
approximately $4.6 million in 1998 over 1997. Revenues from reconditioned drum
sales increased approximately $25.4 million in 1998 over 1997. All of these
increases were primarily attributable to the addition of the revenues of the
1998 purchased companies.
Gross profit as a percentage of revenues increased to 18.4% for 1998 compared
to 15.7% for 1997. PalEx's consolidated sales mix now consists of a higher
percentage of sales of recycled pallets and reconditioned drums, which have
higher gross margins.
Selling, general and administrative expenses increased 64.1% to approximately
$33.0 million in 1998 from approximately $20.1 million in 1997 and were 10.3%
of revenues in 1998 and 9.0% of revenues in 1997. Approximately $10.5 million
of this increase was attributable to the acquisitions of the 1998 purchased
companies and approximately $2.4 million was associated with the costs of being
a public company.
The results of operations for 1998 included charges of approximately $1.8
million for pooling expenses and approximately $1.1 million for compensation
differential. Compensation differential is the difference between previous
owners' compensation before their companies were acquired by PalEx and the
amounts they contractually agreed to be paid afterward. There were no pooling
expenses for 1997. Compensation differential for 1997 was approximately $1.0
million.
Goodwill amortization increased in 1998 to approximately $3.3 million from
approximately $0.8 million because of the additional companies PalEx acquired
during 1998 that were accounted for as purchases.
The results of operations for 1998 include after-tax charges of approximately
$1.2 million for costs associated with the conversion or closure of facilities
and approximately $0.8 million for plant closure and asset abandonment losses
related to the termination of PalEx's relationship with CHEP USA.
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Interest expense increased in 1998 to approximately $8.5 million from
approximately $1.7 million in 1997. The increase in interest expense was
primarily attributable to the additional indebtedness incurred in conjunction
with the acquisitions of the 1998 Purchased Companies and the refinanced debt
of the 1998 pooled companies.
Federal and state income taxes have been provided on the earnings of Fraser,
the pooled companies, and the 1998 pooled companies for 1997 and on Ridge,
Interstate, and Summers from their dates of acquisition. The provision for
income taxes for 1997 also includes a charge of approximately $0.5 million,
representing deferred income taxes for Fraser at the time of PalEx's initial
public offering. This charge was not previously recorded because of Fraser's
status under Subchapter S of the Internal Revenue Code. PalEx's effective
income tax rate was 56.2% of pretax income for 1998, primarily due to
nondeductible amortization of goodwill and costs and expenses incurred in
conjunction with those companies acquired as poolings-of-interests.
As a result of the foregoing, net income for 1998 decreased approximately
$2.6 million to approximately $4.0 million from approximately $6.6 million in
1997.
Year Ended December 28, 1997, Compared to November 30, 1996
Revenues increased approximately $78.0 million, or 53.8%, to approximately
$223.0 million in 1997 from approximately $145.0 million in 1996. Of this
increase, approximately $45.4 million was attributable to the acquisition of
Ridge and Interstate and approximately $21.4 was attributable to an increase in
new pallet sales. Approximately $11.2 million of the increase was attributable
to an increase in unit sales of reconditioned drums.
Gross profit as a percentage of revenues remained relatively unchanged at
15.7% in 1997 compared to 16.0% in 1996. The slight decrease in gross profit
percentage was partially attributable to increased lumber costs during the
year. Gross margins for reconditioned drums were slightly lower due to market
driven price pressures.
Selling, general and administrative expenses increased 43.2% to approximately
$20.1 million in 1997 from approximately $14.1 million in 1996 and were 9.0% of
revenues in 1997 and 9.7% of revenues in 1996. The amount of increase was
primarily attributable to increased costs associated with being a public
company and the acquisitions of Ridge, Interstate, and Summers.
Goodwill amortization in 1997 is primarily attributable to the acquisition of
Ridge, Interstate, and Summers.
Interest expense increased to approximately $1.7 million in 1997 from
approximately $1.6 million in 1996 as a result of the increase in indebtedness
in 1997.
As a result of the foregoing, net income increased to approximately $6.6
million in 1997 from approximately $6.0 million in 1996.
Liquidity and Capital Resources
On March 25, 1997, PalEx completed its initial public offering, which
involved the sale of 3.0 million shares of its common stock at a price to the
public of $7.50 per share. The net proceeds to PalEx from its initial public
offering, after deducting underwriting discounts, commissions, and offering
expenses, were approximately $20.1 million. Of this amount, $3.4 million was
used to pay the cash portion of the purchase prices relating to the
acquisitions of the founding companies with the remainder being used to repay
indebtedness of the founding companies. On April 22, 1997, PalEx sold an
additional 450,000 shares of its common stock at a price to the public of $7.50
per share, which generated net proceeds to PalEx of $3.1 million after
underwriting discounts and commissions, pursuant to an over-allotment option
granted by PalEx to the underwriters in connection with its initial public
offering. The net proceeds were used to repay debt borrowed under PalEx's
senior credit facility.
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PalEx and members of a lending syndicate, which includes Bank One, Texas,
N.A., as a lender and administrative agent, are parties to an amended senior
credit facility dated as of September 26, 1999. The senior credit facility
provides PalEx with a revolving line of credit of up to $150.0 million, which
may be used for general corporate purposes, including acquisitions, the
repayment or refinancing of indebtedness of all acquisitions including future
acquisitions, capital expenditures, letters of credit, and working capital. The
senior credit facility will terminate and all amounts outstanding, if any, will
be due and payable on the earlier of June 30, 2000, or a change of control,
which will occur upon completion of the pending merger with IFCO Systems, which
is expected to close in the first quarter of 2000. Amounts outstanding under
the senior credit facility at October 24, 1999, are classified as current
liabilities.
Advances under the senior credit facility bear interest at a defined base
interest rate of Bank One plus a margin of 200 basis points. At PalEx's option,
advances may bear interest based on a designated LIBOR plus a margin of 400
basis points. The interest rate on the senior credit facility will increase by
50 basis points on March 31, 2000. Commitment fees of 50 basis points are
payable quarterly on the unused portion of the senior credit facility. The
senior credit facility contains a limit for standby letters of credit of $10.0
million. There were letter of credit commitments of approximately $3.8 million
outstanding under the senior credit facility as of October 24, 1999.
The senior credit facility prohibits the payment of dividends by PalEx,
restricts PalEx's incurrence or assumption of other indebtedness and
acquisitions, and requires PalEx to comply with financial covenants including
consolidated net worth, fixed charge coverage, and funded debt and senior debt
to earnings before interest, taxes, depreciation, and amortization ratios. The
approximate level of borrowings available under the senior credit facility as
of October 24, 1999 was $13.2 million. The senior credit facility is secured by
a lien on the real and tangible personal property of PalEx, a pledge of the
outstanding stock of each of PalEx's U.S. subsidiaries and 65% of the
outstanding stock of PalEx's Canadian subsidiary. The amounts due under the
senior credit facility are also guaranteed by PalEx's U.S. subsidiaries.
On November 10, 1999, PalEx entered into a note purchase agreement for CIBC
World Markets Corp. to acquire $25.0 million of PalEx's unsecured Senior
Subordinated Notes due September 30, 2000. Under the terms of the senior
subordinated notes, PalEx will pay interest at the greater of LIBOR plus 600
basis points and the rate on the senior credit facility plus 200 basis points.
The interest rate on the senior subordinated notes will increase by 50 basis
points on each of March 31, 2000, and June 30, 2000. PalEx was required to pay
a fee of approximately $0.8 million when the senior subordinated notes were
issued and will be required to pay a fee of approximately $0.6 million on June
30, 2000, if the senior subordinated notes have not been repaid as of that
date. If the senior subordinated notes are not repaid in full before September
30, 2000, the holders of the senior subordinated notes will be granted warrants
to purchase 5% of the then outstanding, fully diluted shares of PalEx common
stock. At CIBC's option, the holders may be paid a cash fee instead of the
warrants. Net proceeds from the issuance of the senior subordinated notes will
be used to pay down the amounts outstanding under the senior credit facility
and increase the amounts available thereunder.
Under the terms of the senior credit facility and the CIBC note purchase
agreement, capital expenditures are limited to $7.5 million for the fiscal
quarter ending December 26, 1999, $17.5 million for the fiscal quarter ending
March 26, 2000, and $25.0 million for the fiscal quarter ending June 25, 2000.
This is also a cumulative limitation.
PalEx issued approximately $10.0 million in subordinated convertible notes
payable to former owners of the 1998 Purchased Companies. The convertible
notes, which bear interest at rates ranging from 6% to 8%, include provisions
that allow conversion into shares of PalEx's common stock beginning on the
first anniversary date of the convertible notes at conversion prices ranging
from $10.78 to $15.86 per share. If the convertible notes are not converted,
they become due and payable on their second anniversary. At PalEx's option, the
convertible notes may be prepaid at any time following the conversion date.
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PalEx's liabilities under the senior credit facility mature on June 30, 2000,
and its liabilities under the subordinated notes mature on September 30, 2000.
PalEx intends to refinance these liabilities in connection with the completion
of the merger with IFCO Systems. However, PalEx cannot assure you the merger
with IFCO will be completed or completed before the maturity of these
liabilities. In either event, PalEx would have to extend the maturity dates
under the senior credit facility and the subordinated notes or obtain
additional or new financing to satisfy or refinance these liabilities. PalEx
cannot assure you that it could extend the maturity dates or obtain additional
or new financing or that it could do so on commercially favorable terms.
PalEx's failure to accomplish at least one of these objectives could have a
material adverse effect on its results of operations and financial condition.
PalEx's capital expenditures were $8.3 million for the ten-month period ended
October 24, 1999, $14.0 million for the year ended December 27, 1998, and $9.1
million for the year ended December 28, 1997. These expenditures were primarily
for additional and replacement pallet and drum manufacturing equipment. PalEx's
currently anticipated capital expenditures for additional and replacement
pallet and drum manufacturing equipment and pallet pool expenditures are $27.0
million during fiscal 2000 and $24.2 million during fiscal 2001.
Seasonality
The pallet manufacturing and crating business is subject to seasonal
variations in operations and demand. PalEx's third quarter is traditionally the
quarter with the lowest demand. PalEx has a significant number of agricultural
customers and typically experiences the greatest demand for new pallets from
these customers during the citrus and produce harvesting seasons, generally
October through May. Yearly results can fluctuate significantly in this region
depending on the size of the citrus and produce harvests, which, in turn,
largely depend on the occurrence and severity of freezing weather and changes
in rainfall. Adverse weather conditions may also affect PalEx's ability to
obtain adequate supplies of lumber at a reasonable cost. PalEx locations
serving predominantly manufacturing and industrial customers experience less
seasonality. PalEx's drum reconditioning segment is seasonally impacted in the
Southeastern and Western United States by the agricultural industries.
Reconditioned drum sales are strongest during a period generally beginning in
April and extending through September, with preseason production for this
period running from January through March.
Management believes that the effects of seasonality will diminish as PalEx
grows and expands its customer base both internally and through acquisition.
However, management believes the third quarter currently represents the
seasonally slow quarter of PalEx's fiscal year.
Year 2000 Issues
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruptions to various activities
and operations.
PalEx has conducted an evaluation of the actions necessary in order to ensure
that its computer systems will be able to function without disruption with
respect to the application of dating systems in the year 2000. The majority of
PalEx's information technology software with potential year 2000 concerns was
licensed from vendors that have either changed their product to remove the
effects of the year 2000 issue or have committed to have the necessary changes
made during 1999. PalEx has also conducted reviews and inquiries concerning
software used in the operation of PalEx's manufacturing equipment. PalEx's
operating businesses do not require extensive systems-oriented applications.
The pallet manufacturing business consists of harvesting, transporting,
cutting, assembling, and delivering finished wood products. The drum
reconditioning business consists of collecting, reconditioning, and delivering
empty steel containers. Isolated microprocessor-driven manufacturing equipment
involved in the pallet manufacturing and drum reconditioning processes have
either been conformed to year 2000 standards or are scheduled for conformity by
the vendor in 1999. PalEx has not experienced any disruptions to its
manufacturing operations, systems, or other processes to date, including since
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January 1, 2000, due to year 2000 problems, nor is it aware of any material
disruptions to its manufacturing operations, systems, or other processes that
could occur because of year 2000 problems. PalEx is also unaware of any
exposure to contingencies related to the year 2000 issue for the products it
has sold in the past. PalEx does not anticipate the loss of any revenues due to
the year 2000 issue.
As a result of its evaluations of the year 2000 issue, PalEx has upgraded and
replaced some of its information and other computer systems in order to be able
to operate without disruption after 1999. The costs of these actions were
approximately $100,000. Although PalEx is assessing the reliability of its year
2000 compliance, disruptions of the computer systems of banks, vendors,
customers, or other third parties, whose systems are outside PalEx's control,
could impair PalEx's ability to obtain necessary raw materials or to sell to or
service its customers. Disruption of PalEx's computer systems, or the computer
systems of its banks, vendors, or customers, as well as the cost of avoiding
any disruption, could have a material adverse effect upon PalEx's financial
condition and results of operations. It is also possible, based upon a worst
case scenario analysis, that PalEx could experience isolated failures at random
locations due to year 2000 problems that were previously undetected in some
personal computers and related software or in microprocessor-driven machinery.
PalEx believes, however, it can compensate for any isolated failures, if they
occur, by manual intervention without any material adverse affect on PalEx's
financial condition and results of operations.
PalEx has developed contingency plans with respect to different areas of its
operations. These plans are intended to allow PalEx to continue to operate if
there is a year 2000 failure. The contingency plans include performing some
processes manually, repairing affected systems, and changing suppliers as
necessary. PalEx's efforts in addressing the year 2000 issue can only minimize,
but cannot eliminate, the risks of third party non-compliance. If we or a third
party upon which we rely fail to adequately address the year 2000 issue, the
resulting problems could disrupt PalEx's business. Possible problems include:
. incomplete or inaccurate accounting, recording, or processing of revenues
or other financial information;
. delays or failures in obtaining raw materials and manufacturing supplies;
. incomplete or inaccurate accounting, recording, or processing of product
distribution to customers; and
. interruptions in product distribution.
PalEx, as part of its contingency plan, has initiated a formal communication
program with significant vendors to evaluate their year 2000 compliance, and is
assessing their responses to PalEx's year 2000 readiness questionnaire.
Approximately 46% of those vendors surveyed have responded to our inquiry
regarding their own year 2000 readiness. Of those vendors that have replied,
all have stated that their ability to supply PalEx will not be affected by year
2000 issues. However, if a significant vendor becomes unable to deliver
materials or services, PalEx has identified replacement vendors that can
provide substitute materials and services for many of the goods PalEx sells and
substitutes for many of the services it receives can be obtained from other
vendors. No single supplier accounts for more than approximately 3% of PalEx's
purchases, and PalEx does not currently foresee any significant impairment in
its ability to procure materials due to operational failures of vendors.
Management believes that year 2000 issues, if any, with respect to the vendors
surveyed who have not responded will not have a material adverse effect on
PalEx's financial condition or results of operations. However, PalEx cannot
assure timely compliance of vendors and may be adversely affected by failures
of significant vendors to supply products or services due to year 2000
compliance failures. In addition, there are not readily available substitute
public utility vendors for electricity, natural gas, water, or telephone
services, all of which are an integral part of PalEx's operations. If any or
all of PalEx's utility vendors fail to deliver services due to their own year
2000 problems, PalEx' financial condition and results of operations would be
materially adversely affected.
To the fullest extent permitted by law, this year 2000 discussion is a "Year
2000 Readiness Disclosure" within the meaning of the U.S. Year 2000 Information
and Readiness Disclosure Act, 15 U.S. C. Section 1.
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INDUSTRY OVERVIEW
Round-trip Systems
Traditionally, corrugated cardboard, wood, and steel containers have been
used for the packaging and handling of products. Growers and manufacturers have
purchased or constructed containers for one-time shipment of their products.
Recipients of containers have then removed the products from the containers for
display, sale, or further distribution. Generally, the recipients have then had
to dispose or arrange for disposal of the containers.
IFCO Systems believes that the traditional packaging and material handling
industry is now evolving into round-trip systems in order to make the flow of
goods more efficient. The development of round-trip systems has been driven by
retailer and customer preferences, cost-savings, and environmental sensitivity.
Round-trip systems bring the historically separate segments of packaging and
material handling into an integrated system by combining:
. logistics management;
. standardized round-trip containers, pallets, industrial containers, and
other material handling products;
. reconditioning and recycling services to reduce the amount of packaging
for transport; and
. information management for the flow of products.
Round-trip Containers
The traditional one-way cardboard or wood containers have been the primary
means of transporting grocery and dry goods products, including fresh fruits
and vegetables. Prior to 1992, there were few alternatives for retailers in the
produce industry to ship their products. Fruits and vegetables transported to
grocery retailers in corrugated cardboard boxes have been damaged frequently
because of collapsed or wet boxes.
Round-trip containers, or RTCs, are reusable plastic or metal crates or
trays, which are an alternative to a one-trip outer packaging case, including
corrugated boxes. RTCs were initially developed to transport fruits and
vegetables, but have been expanded to other product categories and sectors.
They are typically used within exchange pools or closed loop round-trip
systems. Exchange pools are cooperatives for the sharing and exchange of RTCs
from company to company. In a closed-loop round-trip system, RTCs are provided
by a company to growers or manufacturers, filled and transported to retailers,
returned to the provider when empty for inspection and cleaning, repair, or
recycling when necessary, and are then reused in the flow of goods.
There are two basic categories of RTCs: collapsible and non-collapsible. They
are usually based on ISO standard dimensions, including 600 mm x 400 mm or 400
mm x 300 mm, in varying heights, and are compatible with standard-sized
pallets. Containers full of products are stacked at various heights.
Collapsible containers have become popular with many retailers for fresh
produce because when folded flat they require less storage space.
Based on industry information, the estimated number of corrugated containers
manufactured in Europe is approximately 15 billion each year, with
approximately 10% used for perishables and approximately 30% used for dry
goods. In the United States, the estimated number of containers is
approximately 20 billion each year, with approximately 8% used for perishables
and 30% used for dry goods. In Europe, approximately 20% of perishables are now
being shipped in RTCs. In the United States, the use of RTCs is just beginning,
with an estimated 15 million RTCs now in use for transporting perishables.
The market for RTCs presents the possibility for significant growth because
of cost savings and more efficient distribution through:
. multiple reuse;
. improved load utilization and container handling;
. reduced product handling, reduced product damage, and longer shelf life;
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. more efficient temperature regulation;
. easier in-store display; and
. reduction of the amount of packaging for transport.
Pallets
A pallet is a platform, usually made of wood, that is used for storing and
shipping goods. Pallets are used in virtually all U.S. industries where
products are physically distributed, including the automotive, chemical,
consumer products, grocery, produce and food production, paper and forest
products, retail, and steel and metals industries. Pallets come in a wide range
of shapes and sizes. Although most pallets are made of wood, they may also be
made of steel, plastic, cardboard, molded wood fiber, and other materials to
satisfy smaller niche markets. The wooden pallet has traditionally been the
basis for the design of storage racks, warehouse storage areas, forklifts,
docks, and containers used for shipping goods.
PalEx believes that there are over 1,000 different sizes and specifications
of pallets used in North America. The grocery industry, which utilizes
approximately one-third of all new pallets produced, uses a standard size 48
inch x 40 inch pallet, although many other styles and specifications are also
manufactured for use in that industry. Other industries use pallets having
specifications that are appropriate for their particular needs. Based on
information supplied by industry sources, PalEx believes that over 90% of the
pallets used were of the traditional wooden type, fabricated from lumber and
metal fasteners.
Based on information supplied by industry sources, PalEx estimates that the
U.S. pallet industry generated revenues of approximately $5.6 billion in 1997
and is served by approximately 3,600 companies. PalEx believes, based on its
own experience in the industry, that most of these companies are small,
privately held entities operating in only one location and serving customers
within a limited geographic radius. Historically, the industry has been
composed of companies that manufacture new pallets and companies that repair
and recycle pallets. PalEx estimates, based on industry sources, that during
1998 approximately 400 million new wooden pallets were produced and
approximately 175 million wooden pallets were repaired or recycled. PalEx also
estimates there were approximately 1.9 billion pallets in circulation in the
United States in 1998. Increasingly, pallet companies are considering the
creation of pallet pools for leasing to customers and management of their
pallet needs.
The pallet industry has experienced significant changes and growth during the
past several years. These changes are due, among other factors, to the focus by
FORTUNE 1000 businesses on improving the logistical efficiency of their
manufacturing and distribution systems. This focus has caused many of these
businesses to attempt to reduce significantly the number of vendors serving
them in order to simplify their procurement and product distribution processes.
It also has prompted large manufacturers and distributors to outsource key
elements of processes that are not within their core operations and to develop
just-in-time procurement, manufacturing, and distribution systems. With the
adoption of these systems, expedited product movement has become increasingly
important and the demand for a high quality source of pallets has increased.
Freight on pallets assists movement through the supply chain, reducing costly
loading and unloading delays at distribution centers and warehouse facilities.
However, the use of low-quality or improperly sized pallets may increase the
level of product damage during shipping or storage.
These broad changes affecting U.S. industry have created significant demand
for higher quality pallets distributed through an efficient, more sophisticated
system. Environmental and cost concerns have also accelerated the trend toward
increased reuse or recycling of previously used pallets, further increasing the
importance of higher quality new pallets, which can be reused more often and
are easier to recycle than lower quality pallets.
Industrial Containers or Steel Drums
There are two basic types of steel drums--open top and closed top. Open top
drums are containers with a removable top that is fastened to the drum by a
locking ring. These drums are reconditioned in a thermal
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process that uses high temperature furnaces. Open top drums are generally used
for agricultural purposes and for viscous materials, including paints,
coatings, greases, and adhesives. Closed top drums are those in which the top
is an integral part of the drum's construction. Closed top drums are typically
used for solvents, resins, and most petroleum products. These drums are
reconditioned using a chemical washing process.
Companies that use steel drums can choose between new and reconditioned steel
drums. Reconditioned steel drums are previously used drums that are cleaned,
repaired, and refurbished and are a cost effective alternative to new drums.
Steel drums can typically be reconditioned and reused six to eight times and
can then be scrapped and recycled. Similar to many other recycling industries,
drum reconditioners return a useful product to the marketplace and solve a
major disposal problem that would otherwise severely burden industry and
municipalities.
According to the Reusable Industrial Packaging Association, there are
approximately 120 steel drum recyclers and reconditioners in North America.
Based on 1996 market information from this industry association, PalEx
estimates that steel drum recyclers and reconditioners process an estimated 40
million drums each year, which represents approximately $500 million in
revenues annually based on estimated reconditioning revenue per container.
Fifty-five gallon steel drums are part of the non-bulk industrial packaging
industry and are found in virtually every industrial facility. These drums are
used to transport and store products primarily for the petroleum, chemical,
coatings, agricultural, and food processing industries.
Steel drum reconditioners in the United States tend to be regionally located
in industrialized and agricultural areas. These companies are regionally
located because of the freight costs of shipping empty drums long distances.
Steel drums have traditionally been owned by the customers. Recently,
companies have begun offering integrated drum management services to manage
customers' drum usage.
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BUSINESS
Overview
When the merger with PalEx is completed, IFCO Systems will combine the IFCO
Companies' round-trip systems with PalEx's pallet and industrial container
operations. The IFCO Companies' operations are primarily in Europe, and PalEx's
operations are located in North America. The round-trip systems offer customers
and retailer groups a variety of services and products for the movement of many
types of goods.
The IFCO Companies provide RTCs and related services to growers or
manufacturers in order to distribute goods to retailers. Retailers benefit from
improved product handling and automation capabilities, in-store display in
RTCs, reduced storage requirements, and reduction of the amount of packaging
for transport. The IFCO Companies contract third parties to collect empty RTCs
from retailers for inspection and reconditioning by the IFCO Companies as
necessary.
The RTCs are then reintroduced into the round-trip system for multiple reuse
on a just-in-time basis. The IFCO Companies' RTCs, which are based on patented
technology, are made of plastic and are collapsible. The RTCs are available in
many different standardized sizes and structures depending on the goods to be
moved. They are designed to be stacked interchangeably regardless of size.
PalEx manufactures, sells, leases, and recycles wooden pallets in a wide
variety of shapes and sizes. PalEx also reconditions industrial container
products, which include steel closed top drums, steel drums with fully
removable heads, plastic drums, and industrial bulk containers.
IFCO Systems believes it will be a leading provider of round-trip systems
internationally, serving over 9,000 customers in 17 countries. IFCO Systems
believes it will:
. own and manage the largest pool of RTCs in Europe based on 1997 market
information;
. own and manage a rental pool of over 1.5 million pallets in Canada,
making it the second largest pallet rental pool owner and manager in
North America;
. be the largest provider of new and recycled pallets in North America
based on PalEx's pallet industry experience and of industry information;
and
. be the largest provider of industrial container reconditioning services
in North America based on PalEx's 1998 volume and its estimate of the
total number of industrial containers reconditioned in the United States
each year using information obtained from the Reusable Industrial
Packaging Association.
Company Strengths
IFCO Systems believes that following the merger the combined company will
have the following strengths:
. Leading Provider of Round-trip Systems. IFCO Systems will be a leading
provider of round-trip systems for the transport of fruits and
vegetables in Europe. In addition, IFCO Systems will have a rental pool
of over 1.5 million pallets in Canada and is positioned to expand its
pallet pooling services into the United States.
. Systems Approach to Product Flow. IFCO Systems will provide customers
and retailers with comprehensive systems to effectively manage the flow
of products throughout the distribution process. IFCO Systems will offer
solutions to its customers tailored to their product categories or
sectors. These solutions are expected to reduce costs, maintain product
quality and freshness, and increase the efficiency of the flow of goods.
The merger with PalEx will provide IFCO Systems with an existing North
American network of 72 distribution and maintenance facilities and
additional round-trip products--pallets and industrial containers. By
offering RTCs, pallets, and industrial containers and services from the
same sites in its extensive regional networks, IFCO Systems will have
the ability to manage complete shipping platform systems for customers
and retailers, which include production, distribution, display,
collection of RTCs from retailers' back docks after use, and cleaning
and reuse.
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. Innovative Patented Technology and Economic Efficiencies. IFCO Systems'
patented technology will allow it to provide user-friendly, stackable,
and collapsible RTCs. IFCO Systems' plastic RTCs will be competitive
with other plastic container alternatives. Most IFCO RTCs are
manufactured in a one-piece injection process, which reduces
manufacturing costs. IFCO RTCs are also stackable with other RTCs and
cardboard boxes. While some competitors offer RTCs that are collapsible,
based upon a comparison with CHEP's container, IFCO Systems' principal
competitor, IFCO Systems believes none are as fully and easily
collapsible as the IFCO RTCs. In addition, IFCO Systems' RTCs will offer
a significant economic advantage to retailers and growers and
manufacturers over corrugated and wood boxes for the following reasons:
. Multiple reuse--the containers are reusable, reducing the amount of
waste and disposal costs;
. Time savings--the time spent handling goods is reduced, both in
terms of product handling during distribution and direct placement
on the retail floor;
. Handling efficiency and space savings--the patented containers are
easier to handle for product loading and transport. After removal of
the product, RTCs are collapsible to the same height, minimizing the
amount of space a user needs to devote to handling and storing
containers;
. Reduction of product spoilage and waste--RTCs reduce spoilage and
waste, and promote longer shelf life, because RTCs are not subject
to water damage and there is less breakage and crushing during
distribution and display as compared to less durable corrugated
boxes;
. Energy efficiency--for produce, the open design of the RTCs allows
more efficient cooling through air circulation and better
temperature control; and
. Easier in-store display--products may be displayed in the RTCs
without any additional handling.
. Well-established Partnerships with Retailers and Growers. IFCO Systems
has established or will be developing relationships with many retailers
and growers. Retailers using IFCO Systems' products or services include,
for example, Metro in Germany, Migros in Switzerland, and Waitrose in
the United Kingdom. In many cases, retailers in Europe have begun to
require growers to use the IFCO Companies' RTCs. IFCO Systems is
developing relationships with Wal-Mart and H.E. Butt in the United
States, among others, and intends to expand its market share in the
United States.
. Geographic Diversity. IFCO Systems will have geographically diverse
operations with 62 locations in Europe, 11 locations in Japan, six
locations in Argentina, and 83 locations in North America, including
PalEx's 72 locations. Its decentralized facilities will provide IFCO
Systems with a competitive advantage and allow it to meet retailers'
needs in these regions. IFCO Systems believes it will also be positioned
to take advantage of transcontinental transport opportunities for the
movement of produce and other perishables from producing regions to
consuming regions.
. Experienced Management Team and Strong Strategic Relationships. IFCO
Systems' management team will have extensive experience in the
transportation, logistics, and packaging industries. PalEx brings to
IFCO Systems management with broad experience in transportation and
logistics operations, acquisitions, and knowledge of the U.S. market.
This management group understands and has experience integrating
acquired businesses into a common infrastructure. IFCO Systems also will
enter both major markets--Europe and North America--with established
local management personnel for day-to-day operations and expansion. In
addition, GE Capital will have a continuing relationship with IFCO
Systems because of its status as a noteholder and GE Erste's right to
become a direct or indirect holder of IFCO Systems ordinary shares. IFCO
Systems intends to use this continuing relationship to avail itself of
GE Capital's extensive experience and other relationships.
Business Strategy
IFCO Systems' objective is to be the preeminent international provider of
round-trip systems through the implementation of the following strategy:
. Expand into the United States. IFCO Systems believes the combination of
(1) the IFCO Companies comprehensive round-trip systems and high quality
RTCs and (2) PalEx's relationships with
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producers and retailers, knowledge of shipping platform and container
management services, and experience with North American distribution
channels will offer IFCO Systems a significant opportunity to expand the
combined company's round-trip systems business in the United States. In
Europe, the IFCO round-trip systems have become several large-scale
retailers' preferred alternative to conventional packaging and are
continuing to grow in popularity. IFCO Systems believes a similar
evolution will occur in the United States based upon comparable
opportunities and receptiveness among growers and retailers. Since IFCO
Systems will be able to benefit from the existing PalEx network of 72
supply and maintenance depots, this strategy is expected to reduce
expenditures on network infrastructure in the United States. These
expenditures are a significant part of start-up costs in the United
States.
. Cross Sell Among Businesses in the United States. Additional benefits of
expanding the IFCO round-trip systems in the United States are the
operating efficiencies and transportation savings as a result of
increased volume at common depot facilities. IFCO Systems believes that
it will be able to offer round-trip systems to U.S. pallet and
industrial container customers and retailers, pallet and industrial
container services to U.S. RTC customers and retailers, and
comprehensive shipping platform and management of backdock services to
both. Backdock services include the initial product receiving and
container or pallet disposition operations on a retailer's back dock.
. Further Development of Markets. IFCO Systems intends to continue its
expansion into other geographic and product markets with both existing
and new products and services.
. Dry Goods. IFCO Systems intends to continue expanding its round-trip
systems to the dry goods market. The dry goods market is
significantly larger than the produce market in both Europe and the
United States and remains largely unpenetrated by RTCs. IFCO Systems
believes the many advantages of RTCs will enable it to attract dry
goods manufacturers and retailers and provide it with additional
market share in geographic markets where it is already a leading
provider of RTCs for produce and other perishables.
. Worldwide. In the future, IFCO Systems intends to continue
expanding its round-trip systems to other geographic markets with an
initial emphasis on accelerating the growth of its developing
operations in Japan and Argentina.
. Further Logistics Systems Opportunities. Retailers, distributors, and
producers are focusing increasingly on cost-effective means of
transporting and effectively tracking their goods. IFCO Systems intends
to capitalize upon this trend by increasing and improving its array of
logistics services. IFCO Systems plans to continue development of a
number of services that are intended to grow its business profitably and
ensure its position as a leading provider of round-trip systems. One
example is the development of technology beyond traditional barcode
scanners that will allow its customers to record and transmit
electronically significantly more data about the location and movement
of RTCs and the products being transported in the RTCs.
. Continue to Pursue Strategic Acquisitions and Alliances Worldwide. IFCO
Systems believes that the fragmented nature of its industries provides
opportunities for both internal growth and growth through strategic
acquisitions. IFCO Systems intends to pursue both strategic acquisitions
and those that enable it to expand in selected geographic areas. In the
last two years, PalEx has successfully completed and integrated 24
acquisitions. In addition, IFCO Systems will consider joint ventures
that would give it access to new products, markets, or technologies.
History
The IFCO Companies
The IFCO Companies began the world's first round-trip systems business. The
business was initially founded in 1992 as IFCO International Fruit Container
Organization GmbH, an affiliate of Schoeller Industries, which later changed
its name to IFCO International Food Container Organization GmbH. Today, IFCO
GmbH is the operating company for IFCO Europe.
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Since 1992, the IFCO Companies have developed European-wide round-trip
systems for fresh fruit and vegetables. The IFCO Companies hold several
international patent rights on its RTCs.
Schoeller Industries is a family-owned business with its origins in the
paper, sugar, wood, and textile industries dating back to the eighteenth
century. In 1958, Alexander Schoeller invented, developed, and launched the
first plastic beverage crates for use in the German beverage market and plastic
moldings are still one of the Schoeller group's core businesses. In 1982
Alexander's sons, Christoph and Martin Schoeller, joined the group and, in
1992, were responsible for the design of the collapsible RTCs and the launch of
the IFCO Companies.
In 1994, IFCO International entered into a joint venture with Mitsubishi in
Japan, the IFCO Companies' first market entry outside of Europe. In 1996, IFCO
International also entered into a U.S. joint venture. In 1997, GE Capital
became an investor in IFCO Europe. In 1998, IFCO Europe was named one of
Europe's Top 500 Growth Companies by the Association of Dynamic Entrepreneurs
in Brussels, Belgium.
PalEx
PalEx was formed in January 1996 to create a national provider of pallets and
related services. Concurrently with the closing of its initial public offering
in March 1997, PalEx acquired three businesses engaged in pallet manufacturing
and recycling. Since that time, and through September 26, 1999, PalEx acquired
16 additional pallet companies, making it the largest producer of new pallets
and the largest pallet recycler in the United States. In the United States,
PalEx provides a broad variety of pallet products and related services,
including the manufacture and distribution of new pallets, the recycling of
pallets, including used pallet retrieval, repair, remanufacture, and secondary
marketing, and the processing and marketing of various wood-based by-products
derived from pallet recycling operations. In Canada, PalEx conducts pallet
rental and repair operations and pallet pooling management services through SMG
Corporation, a Canadian subsidiary. PalEx currently conducts its pallet
operations from 60 facilities in 18 states in the United States and seven
Canadian provinces.
In separate transactions in February 1998, PalEx acquired four leading steel
drums reconditioning companies, which formed the base for expanding its
operations into the industrial container management industry. As a result of
these acquisitions and three subsequent acquisitions through September 30,
1999, PalEx is now the largest reconditioner of industrial containers in North
America. PalEx's container group is also engaged in drum and intermediate bulk
container leasing operations. Its container group operates from 12 facilities
in ten states in the United States.
Systems and Services
Round-trip Containers
The IFCO round-trip systems provide a complete system for product flow that
minimizes waste and improves customer satisfaction and retailer profitability.
The IFCO round-trip systems include delivery of RTCs to producers when needed,
collection of empty containers from retailers, cleaning of containers, and
quality control. The producers are invoiced for the RTCs on a per use or a time
basis. After cleaning and any necessary repair, the RTCs are reintroduced into
the product distribution cycle.
Since the IFCO Companies started the RTC pool in Europe in 1992, they believe
they have become the leading supplier of RTCs in Europe. Currently there are
over 60 million IFCO RTCs in circulation. IFCO Europe's RTC pool now serves
over 4,000 growers supplying produce to approximately 15,000 supermarket
outlets throughout Western Europe.
Producers and retailers enjoy several advantages with the IFCO round-trip
systems compared to the use of traditional, disposable packaging, including
lower costs, better product protection, increased handling efficiency, more
efficient space utilization during transport, and less waste and environmental
impact. The IFCO Companies are able to maximize these benefits as a result of
experience with container pooling and transport and their network of container
depots, which is extensive in Europe and growing in other regions.
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The IFCO round-trip system is illustrated as follows:
[GRAPHIC OF IFCO SYSTEMS ROUND TRIP SYSTEM]
This system includes the following steps:
. producer faxes order for IFCO RTCs to an IFCO container depot;
. RTCs are delivered from the IFCO container depot to producer;
. producer receives an invoice for round-trip services, which include the
one-time use of RTCs on either a trip or time basis;
. producer also receives an invoice for a deposit for RTCs;
. computer tracking system generally monitors the flow of RTCs, but does
not currently track the location of each individual RTCs, except for
RTCs used in dry goods distribution;
. producer packs RTCs and ships them to retailer's distribution center or
retail outlet, depending on retailer;
. producer bills the deposit for the RTCs to retailer;
. retailer displays the products in the RTCs or removes the products for
display;
. IFCO contracts third parties to collect empty, collapsed RTCs from
retailer's distribution center or retail outlet, depending on retailer,
for return to an IFCO container depot;
. once RTCs are recollected, IFCO returns deposit to the retailer; and
. IFCO inspects and cleans, repairs, or recycles, as necessary, empty RTCs
at the IFCO container depot to make them ready for their next delivery
to a producer.
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The round-trip systems cover all of the steps in the flow of the goods from
delivery to return to depot, including:
. delivery to customer or first user;
. collection of empty containers from retailer;
. quality control;
. hygienic cleaning conforming to applicable health and safety guidelines;
. storage and delivery to the next customer; and
. optional tracking system.
The IFCO Companies invoice customers on a per trip basis in Europe, Japan,
and the United States and on a time basis in Argentina.
IFCO RTCs are extremely versatile. All IFCO RTCs are made of 100% recyclable
materials. They are light, yet strong enough to withstand the stresses of long
distance travel and handling and significantly reduce produce damage and loss.
They are compatible with automated packaging systems and provide an attractive
product presentation at the point of sale. The RTCs fold on average to one-
fourth of their original volume, dramatically reducing transport and storage
costs for empty RTCs.
Because the IFCO RTCs are made of durable plastic, the products packed in
RTCs have better protection for handling during transport and bad weather
conditions. The RTCs are better able to bear the stress of large loads as
compared to corrugated containers. This is especially true with produce and
other perishables, which have an increased chance of arriving at the point of
sale in prime condition. Produce is then ready for display with minimum
handling. Retailers have the option of using the RTCs for display purposes.
The IFCO RTCs move back and forth among countries based on where crops are
being harvested and the countries to which crops will be exported. For example,
if Spain were at peak harvest, RTCs from depots outside Spain would be shipped
directly to customers in Spain. In IFCO's European container pool, most packed
RTCs end up back in Germany, since Germany imports much more produce than it
grows domestically while other European countries tend to be net exporters. The
RTCs are generally used between three and 12 times per year, depending on the
type of RTC.
IFCO Europe initially developed RTCs for use with fresh produce. The IFCO
Companies subsequently developed RTC applications for other perishables like
fish, eggs, and bakery products. Other current applications for IFCO RTCs
include transport and display of food dry goods, bulk transport, postal
shipments, transport of products for department stores, and shipment protection
for appliances. IFCO RTCs include different sizes of containers in ISO standard
dimensions, including 600 mm x 400 mm and 400 mm x 300 mm. These different
sizes are stackable interchangeably whether erected or collapsed.
Pallets
PalEx offers new pallet manufacturing and pallet rental, repair,
remanufacture, and recycling services. Although new pallet manufacturing
accounts for a majority of PalEx's revenues, PalEx believes that rental pool,
repair, remanufacture, and recycling services present the greatest opportunity
for future growth.
New Pallet Manufacturing. The manufacturing process at its new pallet
facilities is generally the most capital intensive part of the pallet business,
with the majority of assembly and construction being automated. New pallets are
manufactured from an assortment of wood products, varying in type and quality,
with construction specifications being determined by the pallet's end use.
PalEx believes approximately 70% of the wood used in new pallets manufactured
in North America consists of hardwoods, including oak, poplar, alder, and gum,
with the balance consisting of pine or other softwoods.
PalEx uses sawing equipment that cuts large wood sections to specification.
The cut wood is then transported to assembly points where employees load the
side boards and deck boards into nailing machines that nail the pallets
together. After construction is completed, pallets are transported to a stacker
for shipment or
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storage. More customized or smaller orders may be manufactured by hand on
assembly tables by two laborers using pneumatic nailers. PalEx typically
manufactures pallets upon receipt of customer orders and generally does not
maintain a significant inventory of completed pallets.
New pallet manufacturing represented approximately 54% of PalEx's revenues
for the 1998 fiscal year ended December 27, 1998, and approximately 57% of
revenues for the ten-month period ended October 24, 1999. The ten-month period
in 1999 included, for the full period, revenues from a crate manufacturing
business acquired in August 1998.
Pallet Pooling and Reconditioning. Many new pallets are discarded by pallet
users after one trip. However, pallets can be recovered, repaired, if
necessary, and reused. Pallet repair and recycling operations begin with the
retrieval or purchase of used pallets from a variety of sources. The condition
and size of these pallets vary greatly. Once obtained, the pallets are sorted
by size and condition. A portion of the pallets may require no repair and can
be resold or returned immediately. Repairable pallets have their damaged boards
replaced with salvaged boards or boards from new stock inventoried at the
repair facility. Pallets that cannot be repaired are dismantled, and the
salvageable boards are recovered for use in repairing and building other
pallets. Unsalvageable boards may be ground into wood fiber, which PalEx sells
for use as landscaping mulch, fuel, animal bedding, gardening material, and
other uses. Despite recent increasing automation, pallet recycling remains a
labor intensive process.
Pallet pooling and reconditioning represented approximately 17% of PalEx's
revenues for the 1998 fiscal year and approximately 16% of revenues for the
first ten months of the 1999 fiscal year.
Industrial Containers
Drum Reconditioning. Although the drum reconditioning process varies slightly
throughout the industry, two basic processes are used to recondition steel
drums, depending on whether the drums to be reconditioned are closed top drums
or open top drums. Closed top drums have secure tops that are an integral part
of the drum's construction and have 2 inch and 3/4 inch head openings in the
top of the drum. A steel drum with a fully removable head is referred to as an
open top drum.
Closed top drums are typically used to transport and store oils, solvents,
and flowable resins. Closed top drums are reconditioned by cleaning the
interior of the drum at a series of high-pressure alkaline and acid flush-and-
rinse stations. Pneumatic machinery reshapes the drum by removing dents and
restoring chimes (the top and bottom lid seals). Pressure tests required by
U.S. Department of Transportation regulations are then performed to check each
drum for leakage. The old exterior coatings are stripped from the drums with an
alkaline solution and steel-shot blasting. Next, new decorative coatings are
applied and baked on to provide a new durable exterior finish. The thermal
treatment used on open top drums cannot be used on closed top drums unless the
drum heads are removed.
An open top drum is used for a number of agricultural and industrial
applications, including storing and shipping citrus products, berries,
foodstuffs, adhesives, and coatings. Open top drums are reconditioned using a
thermal process. This process involves passing drums through a furnace that is
heated to approximately 1,200 degrees Fahrenheit which vaporizes residual
materials inside the drums. Residual chemicals and compounds created from this
process are drawn into an afterburner and destroyed by temperatures approaching
1,850 degrees Fahrenheit. Steel-shot blasting then strips old finishes from
both the interiors and exteriors of drums. After this process, the drums pass
through a series of hydraulic and pneumatic equipment to restore each drum's
shape and integrity. Finally, new interior protective and exterior decorative
coatings are baked onto the drums.
When closed top drums contain residues that cannot be purged through the
standard procedures described above, the drums are converted to open top drums
by cutting off the heads of the drums. The drums are then reconditioned as open
top drums and are used as converted open top drums or reseamed and have new
heads installed so that they can be re-used as a slightly shorter closed top
drum.
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Waste separated from drums in the reconditioning process is packaged and
shipped to appropriate landfills or incinerated in accordance with strict
environmental controls. Worn out drums that can no longer be reconditioned are
subjected to reconditioning cleaning processes so that they are acceptable raw
material for scrap metal processors.
Like pallet recycling, drum reconditioning remains a labor intensive process
despite advances in reconditioning methods. Drum reconditioning represented
approximately 27% of PalEx's revenues for the 1998 fiscal year and
approximately 25% of revenues for the first ten months of the 1999 fiscal year.
Container Management. Container management is the process of providing a
combination of services related to a customer's pallet or drum usage, including
the manufacture, repair, retrieval, delivery, and storage of pallets or the
reconditioning, retrieval, delivery and storage of drums, as well as the
disposal of unusable pallets or drums and component parts. In a typical
arrangement, PalEx will contract with a customer to remove all pallets or drums
from a particular location and transport them to its repair or reconditioning
facility. The pallets or drums are sorted and repaired or reconditioned as
needed at a PalEx depot and sold to third parties, returned to either the
customer or its supplier or placed in storage and made available for return to
service. PalEx may contract with a customer to perform any or all of the
management services available. PalEx believes there are significant
opportunities to manage customers' entire shipping container and platform
requirements and that it is in a unique position to develop and offer these
services.
Expansion and Acquisitions
Round-trip Containers
IFCO International has interests in joint ventures in Japan and the United
States and has begun an operation in Argentina for the development and
operation of round-trip systems and RTC pools.
In Japan, IFCO International has a minority interest in a joint venture with
Mitsubishi, which began in 1995. The joint venture continues to encounter a
very fragmented market and strong cooperative controls.
In 1996, IFCO International entered into a joint venture with Intertape
Polymer Group, Inc., to form IFCO-U.S., L.L.C. IFCO U.S. has been successful in
attracting some large retailers to the IFCO system. It still faces high costs,
however, as it works to develop the necessary infrastructure to support an RTC
pool. Although Intertape controls the day-to-day operation of IFCO U.S., IFCO
International currently has a majority equity interest. Effective as of May 1,
1999, Intertape exercised its option to purchase an additional joint venture
interest in exchange for a promissory note to IFCO International for
approximately $3.2 million, increasing its equity interest to 49%. IFCO Systems
has agreed to purchase the Intertape interest in IFCO U.S. following or
concurrently with the completion of the IPO.
IFCO International entered the market in Argentina in mid-1998. The Argentine
operation began local production of RTCs in March 1999. It has had initial
success in attracting some major retailers to IFCO round-trip systems.
Pallets
Since its initial three acquisitions in connection with its initial public
offering in March 1997 and through December 1998, PalEx has purchased 16 pallet
companies in separate transactions. The total purchase price for these acquired
companies was approximately 5.2 million shares of PalEx common stock,
approximately $55.4 million in cash, and approximately $9.9 million principal
amount of convertible notes.
Industrial Containers
In February 1998, PalEx Container Systems, Inc., a wholly owned subsidiary of
PalEx, acquired five companies in separate transactions. Through December 1998,
PalEx Container Systems completed three
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additional acquisitions of reconditioning companies. The total purchase price
for these acquisitions consisted of approximately 4.5 million shares of PalEx
common stock and approximately $29.9 million in cash.
PalEx made no acquisitions during the first ten months of 1999.
Sales and Marketing
Round-trip Containers
The IFCO Companies currently maintain a broad range of customers located
throughout Europe, Japan, the United States, and Argentina. The IFCO Companies'
sales and marketing department is comprised of approximately 50 people and is
headquartered in Germany, with eight regional offices in Western Europe and one
in Argentina. The sales process is managed by direct salespersons, supplemented
with high-level discussions between the top management of the IFCO Companies
and the retail chains. The marketing and sales strategy focuses primarily on:
. developing and enhancing relationships with retailer groups;
. encouraging retailers to request their suppliers to use the IFCO round-
trip systems; and
. working closely with new and existing customers, whether growers or
manufacturers, to implement IFCO round-trip systems for the customer and
expand their use.
Because the IFCO Companies seek to generate the majority of their business
through retailers, their marketing strategy focuses on large retail chains. The
IFCO Companies' marketing objective is to convince retailers of the advantages
of the IFCO round-trip systems, which will then, in turn, lead the retailers to
encourage producers to use the IFCO round-trip systems. This marketing strategy
results in a well-defined target group of approximately 150 retail chains
worldwide as compared to a large and highly fragmented group of producers. The
current consolidation trend in the retail industry favors this marketing
strategy.
The IFCO Companies' pricing is different in each country and is based on the
distance between the customer and the retailer. Generally, pricing is reviewed
on a yearly basis, except if there are changes in raw materials or taxes or
other exceptional events occur.
The IFCO Companies place a significant emphasis on marketing. The IFCO
Companies maintain a large advertising presence in relevant industry
publications in order to increase their international profile and create a
strong brand name. Another successful marketing tool which the IFCO Companies
utilize is attendance at trade fairs, where the IFCO Companies market their
services to retailers and growers. Additionally, the IFCO Companies have a
comprehensive and regularly updated website and also produce an array of
product brochures and other marketing materials.
The future growth prospects for the IFCO Companies are largely dependent upon
an internationally recognized brand name which will expand their existing
customer base and further advance the acceptance of round-trip systems by the
retail sector.
Pallets and Industrial Containers
PalEx currently sells to pallet and industrial container customers within the
various geographic regions in which it conducts operations. Its primary sales
and marketing activities involve direct selling by its sales force and by
members of senior management to local and regional customers at the plant level
and to large accounts and target industries more broadly on a geographic basis.
Because pricing is a function of regional material and delivery costs, pricing
is established at the regional level.
Because many of its customers need pallets and/or container management
services on a national scale, PalEx continues the development and
implementation of its national sales and marketing plan to provide these
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services at many locations throughout the United States. PalEx seeks to
continue to develop a network of facilities that will allow these customers to:
. centralize purchases of new and recycled pallets, reconditioned drums,
and container management services;
. obtain convenient and dependable service and a consistent supply of
uniform quality pallets, reconditioned drums, and container management
services;
. achieve greater efficiencies in their shipping platform and container
use; and
. meet corporate recycling goals.
PalEx has developed relationships with several national customers and intends
to provide services to these and numerous other customers on a local, regional,
and national basis. The shipping platform and container management needs of
national companies are not uniform, and PalEx intends to tailor its national
programs for each customer. These programs include a combination of sourcing,
retrieving, repairing, and recycling pallets and drums according to individual
customer requirements.
Customers
Round-trip Containers
Although the direct customers of IFCO round-trip systems are producers, the
demand is driven mainly by the large retail chains and their product transport
requirements. The IFCO Companies' top twenty grower customers accounted for
approximately 16% of revenues for 1998. No grower customer accounted for more
than 5% of IFCO Europe's 1998 revenues, and IFCO Europe does not materially
rely on any single grower customer. The top ten retailer groups using IFCO RTCs
accounted for approximately 80% of the recollection of containers in 1998.
Currently, over 75 retailer groups are using IFCO round-trip systems,
including major retailers such as Tengelmann, Edeka, Rewe, and Metro in
Germany, Coop and Migros in Switzerland, and Waitrose in the United Kingdom. In
1998, the IFCO Companies added Coop of Switzerland as a new large retail chain
using IFCO RTCs. There has been a trend towards consolidation of grocery
retailers in Europe. For example, Allkauf and Kriegbaum were acquired by Metro,
and Wertkauf and Interspar were acquired by Wal-Mart in Germany. This trend is
expected to continue and has had a positive effect on the IFCO Companies as
they are able to obtain more volume through existing relationships.
Outside of Europe, the IFCO Companies' international operations are still
largely in the development stage. Major retailers in Japan using the IFCO
round-trip systems include Jusco, Coop Kobe, Odakyu, and Coop Tokyo. In the
United States, major retailers who have started to adopt the IFCO round-trip
systems include Wal-Mart, H.E. Butt, and Food Lion. In Argentina, the major
retailers now using the IFCO round-trip systems are Norte, Disco, Coto, Jumbo,
Unimark, and Toledo.
The IFCO Companies currently have three principal customers for their dry
good operations, two department stores, whose service agreements extend through
2003, and, Deutsche Post AG, whose contract extends to September 30, 2004.
Deutsche Post AG is one of the largest European transporters of parcels and
letters.
Pallets and Industrial Containers
PalEx seeks to efficiently serve large numbers of customers across diverse
markets and industries to provide a stable and diversified base for ongoing
sales of products and services in all operations.
PalEx customers include companies in the automotive, chemical, consumer
products, grocery, produce and food production, petroleum, paper and forest
products, retail, and steel and metals industries. They are both
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regional and national in scale. Because a significant part of its products and
services are sold to customers engaged in the produce and citrus industries,
PalEx's sales volumes in some regions tend to be seasonal.
Suppliers and Raw Materials
Round-trip Containers
Schoeller Plast AG manufactures the RTCs used by the IFCO Companies.
Schoeller Plast AG has production sites throughout Europe. In addition to
production capability, Schoeller Plast AG also conducts destructive and non-
destructive testing, as appropriate, on raw material and production samples for
quality control, new product testing, and product development.
In 1997, IFCO GmbH and Schoeller Plast Industries GmbH entered into a ten-
year supply agreement, which was later assigned to Schoeller Plast AG. In
addition to supplying crates, the supply agreement provides for Schoeller Plast
AG to develop and improve RTCs for IFCO GmbH. Schoeller Plast AG is also
required to transfer the related intellectual property rights to IFCO GmbH,
which is in turn required to purchase the manufactured products from Schoeller
Plast AG. Schoeller Plast AG is obligated to supply the containers to IFCO
GmbH, and IFCO GmbH is required to purchase them from Schoeller Plast AG. The
supply agreement establishes a price structure that changes periodically and is
subject to upward and downward adjustment based on increases and decreases of
more than 15% in raw material prices paid by Schoeller Plast AG. The supply
agreement was negotiated on an arms-length basis by GE Capital on behalf of
IFCO GmbH and on market terms. The supply agreement expires on December 31,
2007, and may, upon the request of IFCO GmbH, be renewed for an additional ten-
year period. For a more detailed description, see "Certain Relationships and
Related Transactions--Supply Agreement."
Pallets
The primary raw materials used in new pallet manufacturing are lumber and
plywood. PalEx has long-term relationships with its lumber and plywood vendors.
PalEx believes that these relationships, as well as its ability to pursue
larger volume purchases, will help to ensure adequate lumber supplies at
competitive prices in the future. During the 1998 fiscal year, PalEx purchased
lumber and plywood from over 120 vendors. One of these vendors accounted for
approximately 8% and another for approximately 5% of its total lumber purchases
during the 1998 fiscal year. PalEx does not believe that the loss of either of
these vendors would materially adversely affect its financial condition or
results of operations. PalEx intends to continue to pursue a strategy of
purchasing and upgrading low-grade and alternative sources of lumber as well as
exploiting pricing aberrations and market trends to take advantage of lower
prices in the marketplace as they occur.
Pallet prices are closely related to the changing costs and availability of
lumber, the principal raw material used in the manufacture and repair of wooden
pallets. Typically, lumber prices fall in oversupplied lumber markets, enabling
small pallet manufacturers with limited capital resources to procure lumber and
initiate production of low-cost pallets. This depresses pallet prices overall
and adversely affects PalEx's revenues and operating margins. While PalEx
believes that it will benefit from strong relationships with multiple lumber
suppliers, it cannot assure you that it will be able to secure adequate lumber
supplies in the future. Lumber supplies and costs are affected by many factors
outside its control, including governmental regulation of logging on public
lands, lumber agreements between Canada and the United States, and competition
from other industries that use similar grades and types of lumber. In addition,
adverse weather conditions may affect PalEx's ability to obtain adequate
supplies of lumber at a reasonable cost. In 1997, PalEx experienced higher
lumber costs resulting from high demand and the impact of wet weather on the
harvesting of hardwood timber in the southeast regions of the U.S.
PalEx attempts to take advantage of the price volatility of lumber by buying
additional quantities of lumber when prices are favorable and storing the
inventory for later use. PalEx also is able to buy low-quality lumber and
upgrade this lumber at its plants. Although PalEx had studied the broad use of
alternative materials, like plastic, for the manufacture of pallets, PalEx
believes that there is not currently an available alternative raw
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material that possesses the tensile strength, recyclability, and low cost of
wood. PalEx continues to evaluate alternatives to wood and are receptive to
their future use in pallet production.
PalEx sources the majority of its pallets for reconstruction from businesses
that use pallets and from trucking companies. Businesses that receive and ship
a significant amount of goods are generally good sources for used pallets.
Often the pallets they receive are damaged or do not meet their size or other
specifications for internal systems or shipping. As a result, these businesses
accumulate pallets that can be recycled. PalEx identifies these sources through
establishing relationships with pallet users and by direct solicitation,
telemarketing, and advertising. PalEx generally achieves timely pallet removal
by placing a trailer at a source that loads unwanted pallets onto the trailer.
PalEx then removes the load of pallets at the same time it delivers recycled
pallets to the pallet user. In some cases, PalEx is paid a tipping fee for
hauling away the used pallets or is allowed to take the pallets away at no
charge. In other cases, PalEx buys the used pallets.
Industrial Containers
PalEx sources the majority of drums to be reconditioned from customers to
which it provides reconditioning services. Customers usually own the drums they
use. The acquisition cost of used drums is highly dependent on the costs of
recollecting them, including transportation costs. Drum demand in some regions
of the United States has required more drums to be shipped outside of the
region than are shipped into the region. Consequently, the acquisition costs of
used drums, the primary raw materials for reconditioned drums, in these regions
are significantly higher since the used drum deficit must be replaced by
collecting and shipping used drums from over 250 miles away. The West Coast and
Southeast of the United States are regions that tend to be net exporters of
open top drums because of their emphasis on agriculture. The Midwest, on the
other hand, tends to be a significant accumulator of drums because of its
greater industrial content and usage of petroleum products, coatings, and
chemicals.
Intellectual Property
Round-trip Containers
The development and protection of proprietary technology is essential to the
IFCO Companies' business. Schoeller Plast conducts ongoing research and
development as part of its obligations under the supply agreement with IFCO
GmbH to create and improve the design of the IFCO Companies' products. These
efforts are conducted in collaboration with, and with input from, the IFCO
Companies. They have resulted in a number of innovative product designs and
improvements. The IFCO Companies have a policy of protecting their proprietary
technology with patents. The IFCO Companies file patent applications in the
countries in which they operate and have obtained several European and
international patents covering their products. The IFCO Companies believe the
loss of these patent rights would have a material adverse affect on their
businesses.
The IFCO Companies principal patents relate to their RTCs for perishables and
for dry goods. The principal patent for RTCs in the perishables segment
protects the IFCO Companies' rights to produce and use IFCO RTCs that consist
of one piece and are produced in one production step. The RTC consists of a
base and four sides with hinges that can be folded inward toward the base. The
patent expires in 2013. The principal patent in the dry goods segment protects
two main elements, a tray that can be used as the top or bottom and a
collapsible frame that holds the side walls. This patent expires in 2011.
Pallets and Industrial Containers
PalEx does not rely on patents or trademarks to any material degree in its
pallet or industrial container operations.
Competition
Round-trip Containers
The IFCO Companies believe that no other company has successfully challenged
their position in Europe with respect to round-trip systems. The IFCO Companies
do, however, anticipate more aggressive challenges. The principal competitive
factors are network economics, industry standards, and cost-savings. The IFCO
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Companies believe that when retailers select container systems, they want to be
able to choose in a competitive environment. The IFCO Companies also believe
the market position they have obtained is protected as a result of:
. their established relationships with customers and retailers, which are
maintained in part by the logistical services provided through IFCO
round-trip systems;
. more locations to service customers and retailers where the volume of
produce shipping from grower customers or to retailers creates the need;
and
. the advantages of initial market entry.
IFCO Europe's direct competitors in Europe include CHEP in many countries in
Europe, Europe Pool System BV in Germany, and Steco International Plastics
Logistic AG in Germany and Austria, plus four other RTC pools serving more
regional markets. These seven companies have begun development of competitive
container systems, but have limited customers and infrastructure at this time.
In addition, agricultural cooperatives and retailers have a limited impact with
their own reusable container systems.
The principal competition to the IFCO Companies still comes from companies
that are not providing round-trip systems, including manufacturers of
disposable containers made from paper or wood. The majority of fresh produce is
still packed in disposable containers.
The IFCO Companies are currently supplying RTCs for dry goods to only three
principal customers.
The IFCO Companies believe that neither the Japanese joint venture nor the
Argentine operations have any direct competitors other than the providers of
traditional corrugated packaging. In the United States, the IFCO Companies face
similar competitive pressures to those in Europe, except that CHEP has a more
significant presence overall in the United States than IFCO U.S. and represents
a competitive challenge.
Pallets
PalEx believes that the principal competitive factors in the pallet industry
are price, quality of services, and reliability. With approximately 3,600
industry participants, the pallet industry has been, and is expected to remain,
extremely fragmented and highly competitive. Though several companies have
attempted to establish national pallet operations, most of PalEx's competitors
are small, privately held companies that operate in only one location and serve
customers within a limited geographic area. Competition on pricing is often
intense and PalEx may face increasing competition from pallet leasing or other
pallet systems providers that market to new pallet purchasers as less expensive
alternatives. CHEP USA's pallet leasing system competes with new pallet sales
and recycling to the grocery and wholesale distribution industries and may
expand into other industries in the future. In addition, pallet manufacturing
and recycling operations are not highly capital intensive and the barriers to
entry in these businesses are minimal. Other smaller competitors may have lower
overhead costs and, consequently, may be able to manufacture or recycle pallets
at lower costs than PalEx. Other companies with significantly greater capital
and other resources than PalEx, including CHEP USA, may enter or expand their
operations in the pallet manufacturing and recycling businesses in the future,
which could change the competitive dynamics of the industry. In the past, PalEx
has competed, and will continue to compete, with lumber mills in the sale of
new pallets. These mill competitors typically view pallet manufacturing as an
opportunity to use the lower grade lumber that would otherwise be waste.
Industrial Containers
Drum reconditioning businesses generally compete with respect to three
criteria: price; manufacturing responsiveness; and delivery performance.
Customers typically give less than 24 hours' notice for a majority of their
orders. This practice requires reconditioners to maintain flexibility in their
manufacturing capacity across product lines, carry sufficient levels of
inventory to meet customer demands and develop distribution systems with rapid
pick-up and delivery capabilities. Although the primary competitive criterion
is price, the increasing movement toward just-in-time delivery increases the
importance of customer service.
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Transportation and regulatory requirements are also key competitive factors
in the drum reconditioning industry. Due to the high costs of transporting
drums, the competitive range of a reconditioning facility is approximately 250
miles. In each market in which PalEx has container operations, it faces local
competitors. In addition, drum reconditioning operations are subject to
significant regulatory oversight, which makes it difficult to open new
facilities. For instance, as previously discussed, open top drum reconditioning
operations require the use of large furnaces, which require regulatory permits
that are increasingly difficult to obtain. According to industry sources, less
than five new furnace permits have been granted to drum reconditioners in the
last ten years in the United States.
Employees
Round-trip Containers
As of January 1, 2000, the IFCO Companies had 517 full-time employees
internationally, including employees at container depots. The IFCO Companies
believe that their relationship with employees is satisfactory.
Pallets and Industrial Containers
At October 24, 1999, PalEx had 3,717 employees, approximately 700 of which
were employees of PalEx's container group. Approximately 300 employees of the
container group at three locations are covered by collective bargaining
agreements. PalEx believes that its relationship with its employees is
satisfactory.
At March 22, 1999, PalEx had approximately 3,600 employees, approximately 700
of which were employees of PalEx's container group. At March 15, 1998, PalEx
had approximately 2,800 employees, approximately 705 of which were employees of
PalEx's container group.
Properties
Round-trip Containers
At October 31, 1999, the IFCO Companies operated 62 container depots in
connection with its European operations. The European RTC depots, which are
leased, are located in the following countries:
Austria (3)
Belgium (2)
Cyprus (1)
Denmark (5)
France (14)
Germany (9)
Greece (1)
Italy (11)
Netherlands (1)
Norway (7)
Spain (3)
Switzerland (1)
Turkey (1)
United Kingdom (3)
Through IFCO International's interests in joint ventures outside of Europe,
IFCO round-trip systems operations are operated from 28 leased depot facilities
in the following countries:
Argentina (6)
Japan (11)
United States (11)
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Pallets and Industrial Containers
At November 22, 1999, PalEx operated 60 pallet facilities and 12 drum
reconditioning facilities in 24 states in the United States and seven Canadian
provinces. PalEx owns 25 of these facilities and leases 47. Most of PalEx's
facilities offer more than one pallet-related or drum-related service. The
corporate headquarters are located in Houston, Texas, and is leased. The chart
below summarizes the locations of PalEx's facilities as of November 22, 1999:
<TABLE>
<CAPTION>
Total Number of
Number Number of Number of Number of Drum Pallet
of New Pallet Recycling Reconditioning Leasing
State or Province Facilities Facilities Facilities Facilities Facilities
----------------- ---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Alberta.......... 2 2
Arizona.......... 2 1 1
Arkansas......... 3 2 1
British Colum-
bia............. 1 1
California....... 4 2 1 1
Colorado......... 1 1
Florida.......... 4 1 1 2
Georgia.......... 4 3 1
Illinois......... 2 2
Indiana.......... 1 1
Kansas........... 1 1
Maine............ 1 1
Manitoba......... 1 1
Minnesota........ 1 1
Mississippi...... 1 1
Missouri......... 1 1
New Brunswick.... 1 1
North Carolina... 6 5 1
Ohio............. 4 2 2
Oklahoma......... 1 1
Ontario.......... 2 2
Pennsylvania..... 2 2
Quebec........... 1 1
Saskatchewan..... 2 2
South Carolina... 1 1
Tennessee........ 3 2 1
Texas............ 13 4 9
Utah............. 1 1
Virginia......... 1 1
Washington....... 1 1
Wisconsin........ 3 3
</TABLE>
PalEx's interests in its owned and leased properties are pledged as security
for the repayment of amounts due under its senior credit facility. PalEx
believes that its properties are generally adequate for its present needs.
Further, PalEx believes that suitable additional or replacement space will be
available when required.
Regulation
Round-trip Containers
The IFCO Companies' businesses are subject to evolving environmental, health,
safety, and transportation laws and regulations. In Europe, these regulations
are administered by the respective government agencies and the European Union.
In the United States, they are administered by the U.S. Environmental
Protection Agency and various other federal, state, and local environmental,
zoning, health, and safety agencies.
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Pallets
All of PalEx's businesses are subject to evolving environmental, health,
safety, and transportation laws and regulations at the federal, state, and
local levels. These regulations are administered by the U.S. Environmental
Protection Agency and various other federal, state, and local environmental,
zoning, health, and safety agencies. Many of these agencies periodically
examine PalEx's operations to monitor compliance with these laws and
regulations.
Industrial Containers
PalEx's industrial container businesses are subject to extensive regulations
governing location, design, operations, monitoring, site maintenance, and
corrective actions. In order to construct and operate a furnace for open top
drum reconditioning, PalEx's container group must obtain and maintain one or
more construction or operating permits and licenses and applicable zoning
approvals. Obtaining the necessary permits and approvals is difficult, time-
consuming, and expensive. Maintaining the necessary permits also requires
significant effort. Once obtained, operating permits are subject to
modification and revocation by the issuing agency. In addition, many drums
received by PalEx's container group for reconditioning may have contained
products classified as a solid waste, a hazardous substance or a hazardous
waste by applicable laws or regulations. PalEx's container group must ensure
that these drums are "empty" as determined by EPA regulations at the time they
are received at its facilities. PalEx's container group does not accept drums
that are not empty because they are classified as hazardous wastes and must be
handled and disposed of in an expensive manner in accordance with stringent
regulatory requirements.
Compliance with current and future regulatory requirements may require PalEx,
as well as others in the steel drum reconditioning industry, to make
significant capital and operating expenditures from time to time. PalEx makes a
continuing effort to anticipate regulatory, political, and legal developments
that might affect operations, especially the operations of PalEx's container
group, but PalEx will not always be able to do so. PalEx cannot predict the
extent to which any legislation or regulation that may be enacted, amended,
repealed, interpreted, or enforced in the future may affect the operations of
PalEx's container group or other of PalEx's businesses. These actions could
adversely affect PalEx's operations or impact PalEx's financial condition or
earnings for one or more fiscal quarters or years.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions, to obtain injunctions, or to impose civil or
criminal penalties in case of violations. During the ordinary course of its
operations, PalEx's container group or other of PalEx's subsidiaries may from
time to time receive citations or notices of violations or orders from
governmental authorities. When PalEx receives citations or notices, PalEx's
subsidiaries will work with the authorities to address their concerns. Failure
to be in full compliance with applicable governmental requirements could lead
to civil or criminal penalties, curtailed operations, facility closures, or the
inability to obtain or retain necessary operating permits. In addition, PalEx's
subsidiaries could be responsible for the remediation of an off-site source
through their status as a transporter of certain chemicals.
As a result of changing government and public attitudes in the area of
environmental regulation and enforcement, PalEx anticipates that changing
requirements in health, safety, and environmental protection laws will require
PalEx's container group to continually modify or replace various facilities and
alter methods of operation at costs that may be substantial. PalEx's container
group incurs substantial expenditures in the operation of its businesses in
order to comply with the requirements of environmental laws. These expenditures
relate to waste stream containment and treatment, facility upgrades, and
corrective actions. The majority of these expenditures are made in the normal
course of PalEx's container group's businesses and neither materially adversely
affects PalEx's earnings nor places PalEx at any competitive disadvantage.
Although, to PalEx's knowledge, PalEx is currently in compliance in all
material respects with all applicable federal, state, and local laws, permits,
regulations, and orders affecting PalEx's operations where noncompliance would
result
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in a material adverse effect on PalEx's financial condition, results of
operations, or cash flows, PalEx cannot assure you that it will not have to
expend substantial amounts for environmental matters in the future.
PalEx's container group expects to grow in part by acquiring other existing
drum reconditioning operations. Although PalEx conducts due diligence
investigations of the past waste management practices and the environmental
condition of the businesses that PalEx's container group acquires, PalEx cannot
assure you that, through PalEx's investigation, PalEx will identify or quantify
all potential environmental problems or risks. As a result, PalEx's container
group may have acquired, or may in the future acquire, properties that have
environmental problems and related liabilities. PalEx seeks to mitigate these
risks by obtaining environmental representations and indemnities from the
sellers of the acquired businesses or by requiring remediation of known
environmental contamination before acquisition. PalEx cannot, however, assure
you that it will be able to rely on any of these actions if an environmental
liability exists.
Federal Statutes and Regulation. The primary U.S. federal statutes affecting
PalEx's businesses are summarized below. These statutes regulate the discharges
of hazardous substances and waste to the air and water and related permits, as
well as handling and disposal practices for solid and hazardous wastes.
The Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, and its implementing regulations establish a framework
for regulating the handling, transportation, treatment, and disposal of
hazardous and nonhazardous waste. They also require states to develop programs
to ensure the safe disposal of solid waste in landfills. Container residues may
be hazardous waste under the Resource Conservation and Recovery Act or the
corresponding state regulations and as such require special handling,
transporting, storing, and disposal of not only the residues but also the
containers. PalEx, as well as other entities with drum reconditioning
operations, could incur significant costs in complying with these regulations;
however, PalEx does not believe that the costs of complying with these
standards will have a material adverse effect on its operations.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, or CERCLA, among other things, provides for the cleanup of sites from
which there is a release or threatened release of a hazardous substance into
the environment and the recovery of natural resource damages. Courts have
interpreted CERCLA to impose strict, retroactive, joint and several liability
for the costs of cleanup and for damages to natural resources upon the present
and former owners or operators of facilities or sites from which there is a
release or threatened release of hazardous substances with limited defenses.
Generators of hazardous substances and transporters are also strictly liable.
As a practical matter, at sites where there are multiple responsible parties
for a cleanup, the costs of cleanup are typically allocated according to a
volumetric or other standard among the parties. Under the authority of CERCLA
and its implementing regulations, detailed requirements apply to the manner and
degree of remediation of facilities and sites where hazardous substances have
been or are threatened to be released into the environment. Also, CERCLA
imposes substantial penalties for failure to report the release of a hazardous
substance.
Liability under CERCLA is not dependent upon the intentional disposal of
hazardous wastes, as defined under the Resource Conservation and Recovery Act.
Liability can be imposed upon the release or threatened release, even as a
result of lawful, unintentional, and non-negligent action, of any one of more
than 700 hazardous substances, including very small quantities of these
substances. CERCLA requires the EPA to establish a National Priorities List of
sites at which hazardous substances have been or are threatened to be released
and which require investigation or cleanup. Because of the extremely broad
definition of hazardous substances, other industrial properties with which
PalEx's subsidiaries or their predecessors have been, or with which they may
become, associated as an owner or operator may subject PalEx's subsidiaries to
liability under CERCLA. Consequently, if there is a release or threatened
release of these substances into the environment from a site currently or
previously owned or operated by a subsidiary of PalEx, PalEx could be liable
under CERCLA for the cost of removing these hazardous substances at the site,
remediation of contaminated soil or groundwater, and damages to natural
resources, even if those substances were deposited at the facilities before
PalEx's subsidiaries acquired or operated them.
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The Federal Water Pollution Control Act of 1972, or Clean Water Act regulates
the discharge of pollutants into streams, rivers, lakes, or the ocean from a
variety of sources, including nonhazardous solid waste disposal sites. The
Clean Water Act also regulates storm water runoff and indirect discharge.
PalEx's subsidiaries are required to apply for and obtain discharge permits,
conduct sampling and monitoring, and, under some circumstances, reduce the
quantity of pollutants in those discharges. The Clean Water Act provides civil,
criminal, and administrative penalties for violations of its provisions.
The Clean Air Act provides for the federal, state, and local regulation of
the emission of air pollutants. These regulations impose emission limitations
and monitoring and reporting requirements on several of PalEx's operations,
including the operations of PalEx's container group's open top drum
reconditioning furnaces. The costs of compliance with the Clean Air Act
permitting and emission control requirements are not anticipated to have a
material adverse effect on PalEx.
State and Local Regulation. The states in which PalEx operates have their own
laws and regulations that may be more strict than comparable federal laws and
regulations governing hazardous and nonhazardous solid waste disposal, water
and air pollution, releases, and cleanup of hazardous substances and related
liability. The states also have adopted regulations governing the permitting
and operation of furnaces, including those used in the open top drum
reconditioning operations of PalEx's container group. PalEx's container group's
facilities and operations are likely to be subject to many, if not all, of
these types of requirements.
Environmental Proceedings. PalEx subsidiaries are currently parties to the
following judicial or administrative proceedings with respect to environmental
matters.
Zellwood Superfund Site. In February 1998, a wholly owned subsidiary of PalEx
acquired Drum Service Co. of Florida, a steel drum reconditioning company with
a facility in Florida. In 1982, Drum Service was notified by the EPA and the
Florida Department of Environmental Regulation that Drum Service had been
identified as a potentially responsible party with respect to the Zellwood
Groundwater Contamination Site in Orange County, Florida. The Zellwood Site was
designated a Superfund environmental clean-up site after the Florida Department
discovered arsenic contamination in a shallow monitoring well adjacent to the
site. The Drum Service facility is located on a portion of the 57 acres
constituting the Zellwood Site. PalEx believes that Drum Service and its former
shareholders were among approximately 25 entities and individuals identified as
potentially responsible parties by the EPA.
Between March 1990 and July 1996, the EPA issued various unilateral
administrative orders and notices to Drum Service and the other potentially
responsible parties regarding the Zellwood Site. Those orders and notices
demanded reimbursement from the potentially responsible parties of
approximately $2.0 million of the EPA's costs related to the Zellwood Site and
requested the potentially responsible parties to accept financial
responsibility for additional clean-up efforts. During that time, the EPA
estimated that the cost of the selected remedy for soil at the Zellwood Site
would be approximately $1.0 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 potentially responsible parties did not agree to the
EPA's demands or agree to fund any additional clean-up. In April 1997, the EPA
issued an order unilaterally withdrawing its previous order.
On June 12, 1998, a suit was filed by the EPA in United States District Court
in Orlando, Florida, against Drum Service and certain other potentially
responsible parties with respect to the Zellwood Site. The EPA is seeking
reimbursement of costs incurred at the Zellwood Site during the past 18 years
and a declaratory judgment for future response costs.
Drum Service has maintained comprehensive general liability insurance
coverage over the past 25 years and has notified various insurers of the EPA's
claims regarding the Zellwood Site. A number of those relevant insurance
policies did not contain an exclusion for pollution. Drum Service has notified
the insurers that issued these policies of the EPA's claims regarding the
Zellwood Site and the commencement of the lawsuit. In 1992, Drum Service
settled a claim with one insurer for an amount that covered a substantial
portion of the costs
130
<PAGE>
Drum Service had incurred at that time in dealing with the EPA and the Florida
Department. Drum Service has identified other umbrella liability policies for
which coverage may also be available and has been approached by the insurer
under two of those policies seeking a settlement. In addition, the former
shareholders of Drum Service have a written agreement with Drum Service and
PalEx to bear liabilities and expenses with respect to the Zellwood Site, to
the extent such liabilities and expenses exceed Drum Service's and PalEx's
insurance recoveries.
Drum Service is vigorously defending the lawsuit and intends to pursue its
insurance coverage with respect to losses and expenses incurred in connection
with the Zellwood Site. Although there can be no assurance as to any ultimate
liability of Drum Service under the EPA's lawsuit, the amount of recoveries
from other potentially responsible parties or the insurance coverage, or the
amount of insurance recoveries, PalEx believes that Drum Service's insurance
coverage, recoveries from other potentially responsible parties and the
obligations of Drum Service's former shareholders will be adequate to cover any
liability or expenses of Drum Service arising from the lawsuit. PalEx will
continue to determine the availability of additional insurance coverage for
this matter.
Legal Proceedings
Round-trip Containers
From time to time, any of the IFCO Companies may be a party to various legal
proceedings arising in the ordinary course of business. The IFCO Companies are
not currently a party to any material legal proceedings and are not aware of
any legal proceedings threatened against them that would have a material
adverse effect on their business. Since the beginning of the last two fiscal
years, the IFCO Companies have not been parties to litigation or similar
proceedings that had a significant effect on their financial condition.
Pallets
PalEx has from time to time been a party to litigation arising in the normal
course of its business. Most of that litigation involves claims for personal
injury or property damage incurred in connection with PalEx's operations. PalEx
believes that none of these actions will have a material adverse effect on its
financial condition or results of operations.
Industrial Containers
On June 12, 1998, a suit was filed by the EPA in United States District Court
in Orlando, Florida, against Drum Service and other potentially responsible
parties with respect to the Zellwood Site. The EPA is seeking reimbursement of
costs incurred at the Zellwood Site during the past 17 years and a declaratory
judgment for future response costs. See "--Regulation--Industrial Containers."
Since the beginning of the last two fiscal years, PalEx has not been a party
to litigation or similar proceedings that had a significant effect on its
financial condition.
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<PAGE>
MANAGEMENT
IFCO Systems
Responsibility for the management of IFCO Systems lies with its board of
directors. After the closing of the merger, the responsibility for the
management of IFCO Systems lies with its board of directors, consisting of A
members and B members. The area of responsibility of the B members covers in
particular the general course of affairs of the company and its enterprise. The
area of responsibility of the A members covers in particular the day- to-day
management of the company and its enterprise. The members of the board of
directors are appointed by the general meeting of shareholders. The A members
serve for an indefinite period of time. The B members shall resign no later
than upon the close of the annual shareholders meeting held in the fourth year
after the year of his last appointment. IFCO Systems can be represented by the
board of directors, by each A member individually, and by each B member acting
jointly with an A member. See "Description of IFCO Systems Share Capital."
The directors and executive officers of IFCO Systems before the merger are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dr. Willy von Becker.... 36 Director and Chief Financial Officer
Martin A. Schoeller..... 43 Director and Chief Executive Officer
Dr. Willy von Becker is a director and the Chief Financial Officer of IFCO
Systems prior to the merger. Dr. von Becker became a director upon the
formation of IFCO Systems on March 31, 1999. Dr. von Becker joined IFCO Europe
in April 1998 as its Corporate Controller, the position he currently holds.
From 1994 until 1998, Dr. von Becker worked as an independent consultant,
specializing in financial accounting, business process re-engineering, and
strategic business planning. He has acted as consultant on a number of national
and international projects for major companies in a variety of industries
including information technology, automotive, and textiles. From 1991 to 1993,
Dr. von Becker was a consultant with a Munich-based software company, R&S.
Martin A. Schoeller has been a Managing Director of IFCO Europe since
November 1997 and the sole Managing Director of IFCO International since May
1995. Mr. Schoeller became a director and the Chief Executive Officer of IFCO
Systems in January 2000. In 1992, Martin Schoeller co-founded IFCO GmbH and MTS
with his brother, Christoph Schoeller. In 1980, Martin Schoeller joined the
Schoeller group of companies and presently serves as one of its Managing
Directors. Initially, he managed a plastics plant, from 1980 to 1982. From 1982
through 1984, he was involved in international sales and licensing. From 1985
to 1988, Mr. Schoeller was focused on developing plant operations. From 1988
until 1992, Martin Schoeller developed several European production companies.
Mr. Schoeller presently serves as the Chairman of the European Association of
Dynamic Entrepreneurs, Europe's 500, in Germany.
The directors and executive officers of IFCO Systems after the merger will
be:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Christoph Schoeller..... 42 Chairman and B Director
Martin A. Schoeller..... 43 Chief Executive Officer and A Director
Cornelius Geber......... 47 B Director
Sam W. Humphreys........ 39 B Director
Randall Onstead......... 43 B Director
Eckhard Pfeiffer........ 58 B Director
Dr. Frank Tofflinger.... 39 B Director
A. Joseph Cruz.......... 53 President, North America
Vance K. Maultsby, Jr... 47 Executive Vice President, Strategy and Finance
and Chief Financial Officer
Edward E. Rhyne......... 39 Executive Vice President and General Counsel
Howe Q. Wallace......... 44 Executive Vice President, Human Resources
</TABLE>
132
<PAGE>
Christoph Schoeller has been a Managing Director of IFCO Europe since
November 1997. In 1992, he co-founded IFCO GmbH and MTS with his brother,
Martin Schoeller. Christoph Schoeller is responsible for advancing both IFCO
Europe's and MTS's market and product development and logistics network. In
1982, Mr. Schoeller joined the Schoeller group of companies, which are engaged
in plastics manufacturing and other activities, and presently serves as one of
its Managing Directors. From 1982 through 1984, he was involved in
international sales and licensing in the Eastern hemisphere. From 1985 to 1988,
Christoph Schoeller was focused on product development and build-up of the
sales organization. From 1988 until 1992, Mr. Schoeller developed Schoeller
Industries' sales and marketing organization. Mr. Schoeller is a member of the
supervisory board of Trans-o-flex Schnell-Lieferdienst AG, a logistics company,
and was formerly a member of the supervisory board of Danzas Holding AG, a
logistics company, until its merger with Deutsche Post AG.
Cornelius Geber has been the CEO of Kuhne & Nagel AG & Co, a worldwide
transport company, since 1996. From 1993 until 1998, Mr. Geber was a member of
the holding board of directors for Kuhne & Nagel International AG, a Swiss
holding company of the worldwide Kuhne & Nagel group. Mr. Geber has been a
member of the board of Friedrich Grohe AG, Hemer, a plumbing supply company,
since October 1999. Mr. Geber has also been the Head of the Board of Paul
Gunther Logistik AG, Hamburg, a German transport and logistics company, since
January 2000. Mr. Geber has been a senior consultant to the board of directors
of Deutsche Post AG, and a consultant to BC Partner's Hamburg, the largest
private equity investor group in Europe, since April 1999.
Sam W. Humphreys has been a director of PalEx since January 1996 and became
non-executive Chairman of the Board in March 1997 upon the closing of PalEx's
initial public offering. Mr. Humphreys is engaged in private equity and venture
capital investing. Through Main Street Merchant Partners II, L.P., a merchant
banking firm, and other investment partnerships, Mr. Humphreys has been
involved in the creation and development of numerous businesses during the
1990s and has served in executive management positions and the board of
directors of several of these businesses, including U.S. Delivery Systems,
Inc., the largest same-day local delivery company in the U.S.A.; Envirofil,
Inc., a solid-waste management company; C\\2\\ Media, Inc., a digital media
business; and e-CommLink, Inc., which provides Internet banking systems to
commercial banks.
Randall Onstead has been Chairman and Chief Executive Officer of Randall's
Food Markets, Inc., since 1998. From 1996 until 1998, Mr. Onstead was President
and Chief Executive Officer of Randall's. From 1986 until 1996, Mr. Onstead was
President and Chief Operating Officer of Randall's. Randall's is a retail
supermarket chain that had sales of over $2.7 billion in 1999.
Eckhard Pfeiffer is Chairman of Intershop Communications AG and Chairman of
Ricardo.de AG. From 1991 until 1999, Mr Pfeiffer was the President and Chief
Executive Officer of Compaq Computer Corporation, the largest global computer
systems manufacturer. Mr. Pfeiffer is a member of the board of directors of
General Motors Corporation, Hughes Electronics Corporation, and Bell Atlantic
Corporation and serves on the advisory board of Deutsche Bank AG. Mr. Pfeiffer
is a member of the board of trustees of Southern Methodist University and
serves on the executive board of Southern Methodist University's Cox School of
Business.
Dr. Frank Tofflinger has been a director of the Carlyle Group Europe, a
private equity group, based in Washington D.C., since January 2000. From July
1996 until December 1999, Dr Tofflinger was Managing Director of Schoeller
Industries. From December 1993 until June 1996, Dr. Tofflinger was Managing
Director of IMM Office Systems, a large European independent copy and facsimile
systems distribution and service organization.
A. Joseph Cruz became a director in February 1998 and President and Chief
Operating Officer of PalEx in November 1998. Mr. Cruz previously served as
President of PalEx Container Systems since PalEx's acquisition of Consolidated
Drum Reconditioning, Inc., or CDR, in February 1998. Prior to that acquisition
and since it was acquired by Mr. Cruz and Philip M. Freeman in 1986, Mr. Cruz
was a 50% owner of CDR and its Chief Executive Officer.
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<PAGE>
Vance K. Maultsby, Jr. has been Chief Executive Officer of PalEx since
December 1996. Mr. Maultsby served as PalEx's President from November 1996
until November 1998. From 1993 to 1996, Mr. Maultsby was a partner with Ernst &
Young LLP, where he managed the Dallas, Texas office of its Corporate Finance
Group. From 1989 to 1992, Mr. Maultsby was chief executive officer of Alemar
Financial Company, later named Alemar Cost Reduction, Inc., which provided
financial advisory services to a variety of industries. From 1985 to 1989, Mr.
Maultsby was an officer in the Corporate Finance Group for Stephens Inc., an
investment banking firm. Prior to the position with Stephens Inc., Mr. Maultsby
was a partner with KPMG Peat Marwick, served as the National Director of its
Petroleum Industry Practice, was co-director of its Southwest Area Mergers and
Acquisitions Advisory Practice and practiced public accounting for more than
five years. Mr. Maultsby is a Certified Public Accountant.
Edward E. Rhyne has been Vice President and General Counsel of PalEx since
June 1997. Prior to his employment with PalEx, Mr. Rhyne was a partner at
Gardere & Wynne, L.L.P., where he was engaged in the private practice of law as
a securities and mergers and acquisition lawyer for more than five years.
Howe Q. Wallace became the Chief Human Resource Officer of PalEx upon its
formation in 1997. He served in that same capacity for Ridge Pallets, one of
PalEx's founding companies since 1983. Mr. Wallace served on the board of
directors of the National Wooden Pallet and Container Association, or NWPCA,
from February 1995 to February 1998, and has been active in industry education
efforts.
IFCO Companies
The directors and executive officers of the IFCO Companies are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Jorg Augustin......... 49 Managing Director of IFCO Europe, IFCO GmbH,
IFCO International, and MTS
Dr. Willy von Becker.. 36 Corporate Controller of IFCO Europe
Gunter Gerland........ 51 Managing Director of IFCO GmbH, MTS, and IFCO
Logistics System GmbH
Dirk Grosgen.......... 34 Managing Director of IFCO Finance Consulting
GmbH
Klaus Hufnagel........ 37 Managing Director of MTS
Hans E. Maier......... 31 Managing Director of MTS
Gustaf Sandahl........ 39 Director Sales & Marketing of IFCO GmbH
Holger Schmidt........ 36 Managing Director of IFCO Finance
Christoph Schoeller... 42 Managing Director of IFCO Europe
Martin A. Schoeller... 43 Managing Director of IFCO Europe and IFCO
International
</TABLE>
Jorg Augustin has been a Managing Director and the Chief Financial Officer of
IFCO Europe and a Managing Director of IFCO GmbH, IFCO International, and MTS
since June 1999. From 1996 until 1998, Mr. Augustin was Chief Financial Officer
of ISS Holding GmbH. He served as Director Finance Europe Medical Products
Division of the NMC--Medical Division of W.R. Grace Inc. from 1994 to 1995. In
1991, he joined Digital-Kienzle GmbH, a manufacturer of electronic scales and
other equipment, as Manager Finance and Administration PCS, deputy and member
of the board of directors of PCS, a subsidiary of Digital-Kienzl. In 1993, Mr.
Augustin became responsible for business controls at Digital-Kienzle. Mr.
Augustin joined Texas Instruments in 1979 as Logistic Manager, became European
Controller of the MIS Division in 1981, and was promoted to Controller Germany
for Computers and Peripherals, Industrial Automation, Consumer Products,
Marcom, MIS, Metals and Controls in 1987.
134
<PAGE>
Gunter Gerland became a Managing Director of IFCO GmbH in December 1994, of
MTS in January 1995, and of IFCO Logistics Services GmbH in April 1997. Since
1994, Mr. Gerland has been responsible for personnel, finance, internal
controls, electronic data processing, and procurement at the Schoeller group's
logistics operation. From 1990 until 1994, he was head of logistics at the REWE
retailing group. In 1987, he was made head of logistics in Northern Germany at
COOP, a German food retailer, and served until 1990.
Dirk Grosgen became a Managing Director of IFCO Finance, the financial
services and advisory company for the IFCO Companies, in January 1999. He
joined IFCO Finance in July 1997 as head of the Controlling Department and is
responsible for group consolidation, group planning and monthly reporting,
annual financial statements, and contact with independent auditors. From 1995
until 1997, Mr. Grosgen worked for IMM Office, an office equipment retail
chain, as a Controller. He joined Arthur Andersen Stuttgart in 1991, first as
an assistant and later becoming a senior accountant.
Klaus Hufnagel has been recently appointed the Managing Director of MTS. Mr.
Hufnagel has, since 1997, been Director of Business Development for GE
Transport International Pool & Modular Space Europe, a provider of rental and
leasing products for the transportation and construction industry in all major
European countries. From 1995 until 1997, Mr. Hufnagel was Managing Partner and
executive board member of ERM Equity Research & Management AG, a private
equity, venture capital, and corporate finance consulting firm, which he co-
founded. From 1992 until 1995, Mr. Hufnagel was a Senior Manager of Equity
Investments at HKM Hypo Kapitalbeteiligungs-Management GmbH, a private equity
investment and management company.
Hans E. Maier joined MTS as a Managing Director in September 1998. From 1995
until September 1998, Mr. Maier was a director of Barkawi + Partners GmbH, a
consulting firm in Munich, where he had responsibility for projects within the
telecommunications industry, as well as for several projects for clients of the
Schoeller group of companies, in particular IFCO GmbH. From July 1992 to April
1995, he was with Roland Berger & Partner International Management Consultants.
He worked on assignments involving restructuring and corporate recovery,
mergers and acquisitions, and strategic advice for the service industry.
Gustaf Sandahl became Director Sales & Marketing of IFCO GmbH in 1999. Mr.
Sandahl joined the Schoeller group of companies in 1995. Initially, he was
responsible for the joint venture Schoeller Plast / Norsk Hydro in Norway. In
1996, he became a Managing Director of IFCO Scandinavia. From 1992 until 1995,
he was affiliated with MTP, a seafood transportation packaging company in
Bremerhaven, Germany, first as Manager of Sales and then, beginning in 1993, as
a Managing Director. From 1987 to 1992, Mr. Sandahl was Export Manager of
Danisco Pack, a leading Scandinavian manufacturer of packaging material.
Holger Schmidt became a Managing Director of IFCO Finance in June 1998. Mr.
Schmidt is responsible for accounting and treasury for IFCO Europe and MTS.
From 1996 until March 1998 he was the Head of the Finance and Controlling
Department at Telenet, a software company and subsidiary of Alcatel. Mr.
Schmidt joined Arthur Andersen in Munich in 1992, first as an assistant and
later advancing to senior accountant.
135
<PAGE>
PalEx
PalEx's executive officers and directors before the merger are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Tucker S. Bridwell...... 48 Director (1)(2)
A. Joseph Cruz.......... 53 President, Chief Operating Officer, and
Director
John E. Drury........... 55 Director (1)(2)
Casey A. Fletcher....... 45 Chief Accounting Officer and Secretary
Troy L. Fraser.......... 50 Director
Philip M. Freeman....... 55 Executive Vice President
A.E. Holland, Jr........ 52 President of Ridge Pallets, Inc. and Director
Sam W. Humphreys........ 39 Chairman of the Board and Director (1)(2)
Vance K. Maultsby, Jr... 47 Chief Executive Officer
Elliot S. Pearlman...... 58 President and Chief Executive Officer of
PalEx Container Systems, Inc., and Director
Edward E. Rhyne......... 39 Vice President and General Counsel
Stephen C. Sykes........ 55 President of Interstate Pallet Co., Inc., and
Director
</TABLE>
--------
(1) Member of the Audit Committee
(2)Member of the Compensation Committee
Tucker S. Bridwell became a director of PalEx in March 1997 upon the closing
of PalEx's initial public offering. Since October 1997, Mr. Bridwell has been
President of Mansefeldt Investment Corporation, a private investment firm. Mr.
Bridwell is also the President of Topaz Exploration Company, an oil and gas
exploration company, a position he has held since 1980. From 1992 until October
1997, Mr. Bridwell was the President of Fred Hughes Motors, Inc., which owned
ten new-car franchises in the Abilene, Texas area. From 1985 to 1992, Mr.
Bridwell was President of Ard Drilling Company, an oilfield drilling company,
and served as President of Texzona Corporation, a private investment company,
from 1979 to 1980. From 1976 to 1979, Mr. Bridwell was Tax Manager with Condley
& Company and was an accountant with Price Waterhouse from 1974 to 1976. Mr.
Bridwell is a Certified Public Accountant.
John E. Drury became a director of PalEx in March 1997 upon the closing of
PalEx's initial public offering. From May 1994 until August 1999, Mr. Drury was
the Chairman and Chief Executive Officer of Waste Management, Inc., the largest
solid waste company in North America. Waste Management was formerly known as
USA Waste Services, Inc. until July 1998. USA Waste was the surviving
corporation in a May 1994 merger with Envirofil, Inc. From February 1991
through April 1994, Mr. Drury was a Managing Director of Sanders Morris Mundy,
Inc., an investment banking firm. From 1982 through January 1991, Mr. Drury was
President and Chief Operating Officer of Browning-Ferris Industries, Inc., or
BFI, where he was responsible for the worldwide operations of BFI. Mr. Drury is
a partner in Main Street.
Casey A. Fletcher became Chief Accounting Officer and Secretary of PalEx in
March 1997 upon the closing of PalEx's initial public offering. From 1983 until
PalEx's initial public offering and its acquisition of Ridge Pallets, Inc., one
of PalEx's founding companies, Mr. Fletcher was Ridge's Controller and Chief
Financial Officer. Prior to his employment with Ridge, Mr. Fletcher was
associated with Arthur Young from 1976 to 1979. Mr. Fletcher is a Certified
Public Accountant.
Troy L. Fraser became a director of PalEx in March 1997 upon the closing of
PalEx's initial public offering and currently works on business development
projects for PalEx's pallet operations. Mr. Fraser served
136
<PAGE>
as PalEx's Chief Development Officer from March 1997 to November 1998. He was
President of Fraser Industries, Inc., one of PalEx's founding companies,
beginning in 1975 when he and his two brothers purchased Fraser from their
father, until PalEx's reorganization of its Texas subsidiaries in March 1999.
In 1988, Mr. Fraser was elected to the Texas House of Representatives where he
served three terms, and was named the National Republican Legislator of the
Year in 1991. In November 1996, Mr. Fraser was elected to the Texas State
Senate. In 1996, Mr. Fraser served as Vice President of the NWPCA and has
served for two terms on the NWPCA's board of directors.
Philip M. Freeman has been Executive Vice President since November 1998. Mr.
Freeman previously served as Chief Operating Officer of PalEx Container Systems
after PalEx's acquisition of CDR in February 1998. Prior to that acquisition,
and since it was acquired by Mr. Freeman and Mr. Cruz in 1986, Mr. Freeman was
a 50% owner of CDR and its Chief Operating Officer.
A. E. Holland, Jr. has been a director of PalEx since March 1997 upon the
closing of PalEx's initial public offering. Mr. Holland served as Chief
Operating Officer from March 1997 to November 1998. He has over 25 years of
experience in the pallet industry. Mr. Holland has been associated with Ridge
since 1969 and has served as President of Ridge since 1980. Mr. Holland has
served on the board of directors of the NWPCA and was President of the NWPCA
from 1990 to 1991. Mr. Holland has served the Florida Chamber of Commerce as
Treasurer, Chairman of the finance Committee and member of the State Strategic
Planning Committee.
Elliot S. Pearlman has been President and Chief Executive Officer of PalEx
Container Systems and a director of PalEx since PalEx acquired Acme Barrel
Company, Inc., in February 1998. Mr. Pearlman served as Acme's President and
Chief Executive Officer and was a principal stockholder from 1992 until PalEx's
acquisition of Acme. Mr. Pearlman serves as a director of the Association of
Container Reconditioners and served as chairman of this association in 1996 and
1997.
Stephen C. Sykes has been a director of PalEx since March 1997 upon the
closing of PalEx's initial public offering. Mr. Sykes founded Interstate Pallet
Co., Inc., one of PalEx's founding companies, in 1979 and has served as its
President and Chief Executive Officer from its inception. From 1974 to 1979,
Mr. Sykes was the Director of Transportation for the Virginia Division of Holly
Farms Poultry. Mr. Sykes has been an active member of the NWPCA since 1981 and
served as its President from 1992 to 1993.
137
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
IFCO Systems
Prior to the merger, all of the outstanding ordinary shares of IFCO Systems
will be owned by Schoeller Holdings. The shareholders of Schoeller Holding are
Schoeller Industries, which owns 75.95%, and Gebruder Schoeller, which owns
24.05%. Gebruder Schoeller is owned by the same individuals and entity that own
Schoeller Industries. The following table sets forth information immediately
prior to the merger with respect to the beneficial ownership of Schoeller
Industries ordinary shares, which constitutes the only outstanding class of
voting securities of Schoeller Industries. Except as indicated, beneficial
ownership includes the sole power to vote and to dispose of the securities in
question. Except as indicated below, none of the directors or executive
officers of Schoeller Industries owned any other IFCO Systems equity
securities.
<TABLE>
<CAPTION>
Beneficial Ownership
-----------------------
Name of Beneficial Owner Shares Percentage
------------------------ --------- ----------
<S> <C> <C>
Christoph Schoeller............................. 500,000(1) 50.0%
Martin A. Schoeller............................. 500,000(2) 50.0%
Andrea Schoeller................................ 95,000 9.5%
Schoeller KG.................................... 100,000 10.0%
All shareholders (3)............................ 1,000,000 100.0%
</TABLE>
- --------
(1) Includes 95,000 shares owned by Andrea Schoeller, Christoph Schoeller's
wife. Christoph Schoeller disclaims beneficial ownership of these shares.
(2) Includes 100,000 shares owned by Schoeller KG, which is beneficially owned
by Alexander Schoeller and Leopold Schoeller, the children of Martin
Schoeller. Martin Schoeller disclaims beneficial ownership of these shares.
(3) GE Erste is the holder of a convertible debenture of Schoeller Holding,
which, at the election of GE Erste, is convertible into 15.45% of the
outstanding shares of Schoeller Holding or of the IFCO Systems ordinary
shares held by Schoeller Holding. Conversion of the debenture into IFCO
Systems ordinary shares will not dilute the ownership of other shareholders
of IFCO Systems.
PalEx
The following table sets forth information as of December 31, 1999, with
respect to the beneficial ownership of PalEx common stock, which constitutes
PalEx's only outstanding class of voting securities, by:
. each person who, to PalEx's knowledge, beneficially owned more than 5%
of the common stock;
. each of PalEx's directors;
. PalEx's Chief Executive Officer and its four other most highly
compensated executive officers as of the end of the 1998 fiscal year for
services rendered to PalEx during the 1998 fiscal year and one former
executive officer who would have been among the most highly compensated
officers had he still been an executive officer at the end of the 1998
fiscal year; and
. all of PalEx's directors and executive officers as a group.
Except as indicated below, none of PalEx's directors or executive officers
owned any other PalEx equity securities.
Except as indicated, beneficial ownership includes the sole power to vote and
to dispose of the securities in question. If a person has the right to acquire
beneficial ownership of any shares by exercise of options within 60 days after
December 31, 1999, the shares are deemed beneficially owned by the listed
person and are deemed to be outstanding solely for the purpose of determining
the percentage of PalEx common stock that the listed person owns. These shares
are not included in the computations for any other person.
138
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Name of Beneficial Owner or Group Shares Percentage
--------------------------------- --------- ----------
<S> <C> <C>
Tucker S. Bridwell (1)............................... 50,000 *
A. Joseph Cruz (2)................................... 530,766 2.7%
John E. Drury (3).................................... 192,227 *
Casey A. Fletcher (4)................................ 322,783 1.6%
Troy L. Fraser (5)................................... 1,455,415 7.4%
Philip M. Freeman (2)................................ 530,766 2.7%
A. E. Holland, Jr . (6).............................. 318,583 1.6%
Sam W. Humphreys (7)................................. 455,000 2.3%
Vance K. Maultsby, Jr. (8)........................... 250,000 1.3%
Elliott S. Pearlman (9).............................. 1,248,967 6.3%
Edward E. Rhyne (10)................................. 200,000 1.0%
Stephen C. Sykes (11)................................ 384,528 2.0%
All directors and executive officers as a
group (12 persons).................................. 5,408,269 26.8%
</TABLE>
- --------
* Less than 1%.
(1) Includes options to purchase 45,000 shares.
(2) Includes 530,766 shares owned by CDRCO NW, L.L.C., a limited liability
company in which Mr. Cruz and Mr. Freeman each hold a 50% ownership
interest.
(3) Includes options to purchase 25,000 shares.
(4) Includes 2,200 shares which are owned by Mr. Fletcher's two sons. Mr.
Fletcher disclaims beneficial ownership of these shares.
(5) Includes 50,000 shares beneficially owned in Mr. Fraser's capacity as
trustee of the Fraser Profit Sharing Plan. Mr. Fraser disclaims beneficial
ownership of these shares.
(6) Includes 318,583 shares owned by the Holland Revocable Trust.
(7) Includes options to purchase 5,000 shares.
(8) Includes options to purchase 200,000 shares, assuming completion of the
merger.
(9) Includes an aggregate of 880,002 shares owned by the Elliot S. Pearlman
Living Trust dated November 7, 1992, 149,500 shares owned by the Elliot S.
Pearlman Living Trust dated July 2, 1996, 8,369 shares owned by ESP
Associates, L.P., and 4,000 shares owned by ESP Consulting Pension Plan.
Also includes options to purchase 100,000 shares, assuming completion of
the merger.
(10) Includes options to purchase 200,000 shares, assuming completion of the
merger.
(11) Includes 10,000 shares beneficially owned in Mr. Sykes' capacity as
trustee of the Interstate Profit Sharing Plan. Mr. Sykes disclaims
beneficial ownership of these shares.
139
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF THE IFCO COMPANIES
Supply Agreement
IFCO International Food Container Organization GmbH, a wholly owned
subsidiary of IFCO Europe, is a party to a supply agreement with Schoeller
Plast Industries GmbH, dated November 4, 1997. The supply agreement was later
assigned to Schoeller Plast AG, an indirect 80%-owned subsidiary of Schoeller
Industries. Schoeller Industries will not become part of IFCO Systems upon
completion of the merger and will remain under the control of Martin and
Christoph Schoeller. Under the supply agreement, Schoeller Plast AG has agreed
to supply collapsible plastic RTCs exclusively to IFCO GmbH, and IFCO GmbH has
agreed to purchase RTCs exclusively from Schoeller Plast AG. Schoeller Plast AG
has also agreed to provide ongoing research and development to improve
technology relating to the RTCs. All IFCO RTC technological developments are
assigned to IFCO GmbH under the supply agreement. The supply agreement also
includes an exclusive royalty-free license to Schoeller Plast AG with respect
to the manufacturing of the IFCO RTCs for IFCO GmbH.
The pricing of the RTCs purchased under the supply agreement is based upon
the type of RTC purchased. According to the terms of the supply agreement, IFCO
GmbH purchases the RTCs for cash, although, in the event that the average price
per RTC exceeds DM6.10, or approximately $3.04, IFCO GmbH may purchase the RTCs
by recording a payable, bearing interest at 7.59% per year, in favor of
Schoeller Plast AG for the aggregate cost of the RTCs purchased in excess of
DM6.10 per RTC. Additionally, IFCO GmbH has the option of requesting cost plus
pricing. Cost plus pricing would allow IFCO GmbH to purchase RTCs at Schoeller
Plast AG's actual cost of production plus an agreed amount or percentage for
Schoeller Plast AG's profit.
If IFCO GmbH desires to purchase additional, different, or improved products
from other suppliers, Schoeller Plast AG is entitled to deliver, within three
months, the products or any comparable products to IFCO GmbH, and IFCO GmbH is
required to purchase these products from Schoeller Plast AG under the terms and
conditions of the supply agreement. If, however, IFCO GmbH is unsuccessful in
marketing these products, Schoeller Plast AG may market the products on a non-
exclusive basis to third parties. Further, if Schoeller Plast AG offers the
products to any other customer at a price or on conditions more favorable than
those extended to IFCO GmbH, the parties shall renegotiate the terms and
conditions of the supply agreement.
The supply agreement expires on December 31, 2007, and may, upon the request
of IFCO GmbH, be renewed for an additional ten-year period. The supply
agreement may be terminated by either party at any time for cause. If the
supply agreement is terminated by IFCO GmbH for cause, Schoeller Plast AG is
prohibited from competing with IFCO GmbH for two years after that termination.
MTS may also become a party to the supply agreement whereby Schoeller Plast
AG will provide MTS with RTCs for dry goods.
In January 1999, IFCO GmbH entered into an additional agreement with
Schoeller Plast AG in which Schoeller Plast AG agreed to share higher initial
costs related to the strategic growth of the crate leasing and supply business
up to a maximum amount of DM6.0 million, or approximately $3.0 million, for the
year ended 1999. For the ten months ended October 31, 1999, Schoeller Plast AG
has reimbursed IFCO GmbH DM5.0 million, or approximately $2.5 million, which
has been recorded as a reduction of costs of goods sold. The additional
agreement terminated at the end of 1999, and after December 31, 1999, no
further costs related to the additional agreement will be reimbursed.
Management Agreements
Pursuant to a management agreement, dated as of January 2, 1997, Schoeller
Industries provides administrative and management services to IFCO Europe and
its subsidiaries, including management advice with respect to acquisition
activities and strategic alliances. In exchange for these services, IFCO Europe
and its subsidiaries pay Schoeller Industries an annual management fee, which
is paid monthly, that will not exceed DM1.5 million, or approximately $0.7
million, for each of the fiscal years 1999 and 2000. This management agreement
expires December 31, 2000, and may be extended from year to year if mutually
agreed upon.
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<PAGE>
Pursuant to a second management agreement, dated as of January 2, 1997,
Schoeller Industries provides administrative and management services to MTS,
including management advice with respect to acquisition activities and
strategic alliances. In exchange for these services, MTS pays Schoeller
Industries an annual management fee, which is paid monthly, that will not
exceed DM250,000, or approximately $125,000, for each of the fiscal years 1999
and 2000. This management agreement expires December 31, 2000, and may be
extended from year to year if mutually agreed upon. Each of the management
agreements will continue to be in effect upon completion of the merger,
although Schoeller Industries will not become part of IFCO Systems and will
remain under the control of Martin and Christoph Schoeller.
Loans and Guarantees
Martin Schoeller and Christoph Schoeller have, together, loaned IFCO
International $800,000 at an interest rate of 5% per annum. The loan became due
on December 31, 1998, and has been extended to December 31, 2000. The purpose
of the loan was to enable IFCO International to extend a loan of $800,000 to
IFCO U.S. The loan from IFCO International to IFCO U.S. bears interest at a
rate of 6% per year.
Additionally, pursuant to an agreement between Schoeller-U.S., Inc, and IFCO
U.S., Martin Schoeller and Christoph Schoeller have together loaned to IFCO
U.S. $375,000. The loans are to provide additional working capital to IFCO U.S.
The loans have an interest rate equivalent to the interest rate paid by IFCO
U.S. on loans to IFCO U.S. from Intertape and will be repaid upon the closing
of the merger and the IPO.
Martin Schoeller and Christoph Schoeller have each loaned IFCO International
an amount equal to 37.5 million yen, or 75.0 million yen in total, or
approximately $0.7 million, at an interest rate of 2.5% per year. The purpose
of the loan was to enable IFCO International to purchase capital stock in IFCO
Japan. The loan becomes due on December 31, 2000.
Additionally, Martin Schoeller and Christoph Schoeller have each loaned to
IFCO International DM100,000, or DM200,000 in total, or approximately $100,000,
at an interest rate of 5.0% per annum. The purpose of the loan was to provide
additional working capital to IFCO International and will be repaid upon the
closing of the merger and IPO.
Creditanstalt--Bankverein AG has extended a credit facility of DM1.5 million,
or approximately $0.7 million, to IFCO International. Of this amount, $500,000
is available to IFCO Argentina through Banco B.I. Creditanstalt S.A., an
affiliate of Creditanstalt. The credit facility has a variable interest rate
and became due on June 30, 1998, and has been extended to May 31, 2000. To
secure the DM1.5 million credit facility provided by Creditanstalt--Bankverein,
Alexander Schoeller & Co. Management Holding GmbH, a company owned by Alexander
Schoeller, and Alexander Schoeller & Co. GmbH Schweiz, also a company owned by
Alexander Schoeller, have each provided a guarantee of up to DM1.5 million in
favor of Creditanstalt.
Participating Rights
IFCO GmbH has issued to an 80%-owned subsidiary of Schoeller Industries
participating rights with a nominal value of DM10.0 million, or approximately
$5.0 million. The participating rights have no voting rights and may be
terminated by IFCO GmbH upon repayment of the nominal value. In the event of
IFCO GmbH's liquidation, the participating rights are repayable after all other
creditors and rank equally with the share capital. The participating rights
share in IFCO GmbH's profits, up to a maximum of $0.9 million per year, before
any other distribution may be made and in IFCO GmbH's losses in the amount of
10% per year until the balance is exhausted. If the participating rights have
been reduced from their nominal value by their share of losses, future profits
must first be used to restore them to their nominal value before any other
distributions may be made. IFCO GmbH intends to redeem these participating
rights at their book value at the closing of the IPO.
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<PAGE>
Redeemable Participating Rights
In 1996, IFCO International received DM2.0 million, or approximately $1.0
million, from Alexander Schoeller & Co. Management Holding GmbH, a company that
is wholly owned by the Schoellers. Each year that IFCO International recognizes
a profit under German GAAP, Alexander Schoeller & Co. is entitled to DM250,000,
or approximately $125,000 per year. This amount is cumulative, and any unpaid
balance due to IFCO International's lack of profit bears interest at 6.0% per
year. Alexander Schoeller & Co. does not participate in IFCO International's
losses and has no voting rights in IFCO International. The agreement is for an
unlimited duration and may be terminated by either party with a six-month
notice period. IFCO International intends to redeem these redeemable
participating rights at their book value at the closing of the IPO.
Agreement with GE Capital and GE Erste
GE Erste owns the single outstanding preferential share of IFCO Europe.
Schoeller Industries, the shareholders of Schoeller Industries, Schoeller Plast
Industries GmbH, Gebruder Schoeller, Schoeller KG, and IFCO Systems entered
into the Option Release and IPO-Facilitation Agreement with GE Capital and GE
Erste in connection with the proposed merger and the IPO, which provides for,
among other things, Schoeller Holding's issuance of a DM45.0 million, or
approximately $22.5 million, convertible debenture to GE Erste and IFCO
Systems' issuance of a promissory note to GE Capital for the same amount. In
addition, Schoeller Industries has granted GE Capital an option to purchase
approximately 95,000 IFCO Systems ordinary shares held by Schoeller Holding at
the IPO price. See "The Merger Agreement--Related Matters."
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DESCRIPTION OF IFCO SYSTEMS SHARE CAPITAL
IFCO Systems was incorporated under the laws of the Netherlands by deed dated
March 31, 1999. Material provisions of the articles of association of IFCO
Systems at the time the merger is completed, an English translation of which
has been included as Appendix D to this proxy statement/prospectus, and related
provisions of Netherlands law are summarized below. The summary covers the
material provisions of the articles of association, but is not a complete
statement of these provisions and is qualified in its entirety by reference to
Appendix D and applicable Netherlands law.
General
The authorized share capital of IFCO Systems is divided into 100,000,000
ordinary shares and 100,000,000 preference shares, each with a nominal value of
two euros per share. The ordinary shares will be in registered form. See "Share
Certificates and Transfer."
Dividends
Dividends may be paid out of annual profits shown in the annual accounts of
IFCO Systems as adopted by the shareholders at a general meeting of IFCO
Systems. At its discretion, however, and subject to statutory provisions, the
board of directors may distribute interim dividends on the ordinary shares
before the annual accounts for any financial year have been adopted at a
general meeting of shareholders. The board of directors may decide that all or
part of IFCO Systems' profits should be reserved and not be made available for
distribution to shareholders. Those profits that are not reserved will be
distributed to holders of ordinary shares, provided that the distribution does
not reduce shareholders' equity below the issued share capital increased by the
amount of reserves required by Netherlands law. Existing reserves that are
distributable in accordance with Netherlands law may be made available to the
general meeting of shareholders for distribution upon proposal by the board of
directors. The right to dividends and distributions will lapse if the dividends
or distributions are not claimed within five years following the day after the
date on which they were made available.
Voting Rights
Appointment of the Board of Directors of IFCO Systems. Members of the board
of directors of IFCO Systems are appointed by the general meeting of
shareholders.
General Meeting of Shareholders of IFCO Systems. General meetings of
shareholders will be held at least once a year, not later than six months after
the end of the fiscal year. Notices convening a general meeting will be mailed
to holders of registered shares at least 15 days before the annual meeting. In
order to attend, to address, and to vote at the general meeting of
shareholders, the holders of registered shares must notify IFCO Systems in
writing of their intention to attend the meeting. IFCO Systems does not solicit
from or nominate proxies for its shareholders and is exempt from the SEC's
proxy rules under the Exchange Act. However, shareholders and other persons
entitled to attend general meetings of shareholders may be represented by
proxies with written authority. See "Share Certificates and Transfer."
General meetings of shareholders may be held as often as deemed necessary by
the board of directors and must be held if one or more shareholders or other
persons entitled to attend the general meeting of shareholders, jointly
representing at least 10% of the issued share capital, make a written request
to that effect to the board of directors specifying in detail the business to
be considered.
Resolutions are adopted at general meetings of shareholders by a majority of
the votes cast (except where a different proportion of votes is required by the
articles of association or Netherlands law) in a meeting in which holders of at
least one-third of the issued shares are represented. Each share carries one
vote.
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Amendment of Articles of Association and Winding Up of IFCO Systems. A
resolution of the general meeting of shareholders to amend the articles of
association or to wind up IFCO Systems may only be approved if proposed by the
board of directors. A resolution to dissolve IFCO Systems must be approved by
at least three-fourths of the votes cast.
Adoption of Annual Accounts
IFCO Systems' annual Netherlands statutory accounts, together with a
certificate of the auditor in respect of the accounts, will be submitted to the
general meeting of shareholders for adoption. Adoption of IFCO Systems' annual
accounts by the general meeting of shareholders discharges the board of
directors from liability for the performance of its duties for the past fiscal
year to the extent apparent from the annual accounts. Under Netherlands law,
this discharge is not absolute and will not be effective as to matters not
disclosed to the shareholders.
Liquidation Rights
If IFCO Systems is dissolved and liquidated, the assets remaining after
payment of all debts and liquidation expenses are to be distributed
proportionally to holders of the ordinary shares.
Issues of Shares; Preemptive Rights
The board of directors of IFCO Systems has the power to issue shares if it
has been designated to do so by the shareholders at a general meeting. Pursuant
to IFCO Systems' articles of association, the board of directors is authorized
to issue shares or rights to obtain shares through February 1, 2005, up to a
total share capital of 50,000,000 ordinary shares and 50,000,000 preference
shares. A further designation of the board of directors may be effective for a
specified period up to five years and may be renewed. In the absence of a
designation, the shareholders at a general meeting have the power to adopt
resolutions to issue shares.
Holders of shares have a pro rata preemptive right of subscription to any
share of the same class issued for cash, which right may be limited or
eliminated. Shareholders have no pro rata preemptive subscription right with
respect to any shares issued for a contribution other than cash or in the case
of shares issued to employees of IFCO Systems or its group companies. If
designated for this purpose by the shareholders at a general meeting, the board
of directors has the power to limit or eliminate such rights. Pursuant to the
articles of association, the board of directors is authorized to limit or
eliminate shareholder preemptive rights through February 1, 2005. A further
designation may be effective for up to five years and may be renewed. In the
absence of a designation, the shareholders at a general meeting have the power
to limit or eliminate these rights.
These provisions apply equally to the issuances of rights to subscribe for
ordinary shares, but not to the issue of ordinary shares to any person
exercising any previously acquired right to subscribe for shares.
Repurchase and Cancellation of Shares
IFCO Systems may repurchase fully paid-up ordinary shares, subject to
compliance with Netherlands law requirements and provided the aggregate nominal
value of the ordinary shares acquired by IFCO Systems at any one time amounts
to no more than 10% of IFCO Systems' issued share capital. Ordinary shares
owned by IFCO Systems may not be voted or counted for quorum purposes. Any
repurchases are subject to the approval of the board of directors and the
authorization of shareholders at the general meeting of shareholders of IFCO
Systems. The authorization may not be for more than 18 months and must specify
the number of shares that may be repurchased.
Upon the proposal of the board of directors, the shareholders at a general
meeting have the power to cancel shares acquired by IFCO Systems or to reduce
the nominal value of the shares. Any proposal for cancellation or reduction of
nominal value is subject to general requirements of Netherlands law with
respect to reduction of share capital.
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Limitations on Right to Hold or Vote the Ordinary Shares
There are currently no limitations imposed by Netherlands law or by the
articles of association of IFCO Systems on the right of non-resident owners to
hold or vote the ordinary shares.
Obligations of Shareholders to Disclose Holdings
The Netherlands 1996 Act on Disclosure of Holdings in Listed Companies (Wet
melding zeggenschap in ter beurze genoteerde vennootschappen 1996) applies to
any person who, directly or indirectly:,
. acquires or disposes of an interest of voting rights and/or the capital
of a public limited company incorporated under Netherlands law;
. which has an official listing on a stock exchange within the European
Economic Area; and
. as a result of the acquisition or disposal the percentage of voting
rights or capital interest owned falls within a different percentage
range than the percentage that the person had ownership of immediately
prior to the acquisition or disposal. The percentage ranges are 0-5%, 5-
10%, 10-25%, 25-50%, 50-66 2/3%, and 66 2/3% and more.
The Holdings Disclosure Act requires the person to notify IFCO Systems as
well as the Securities Board of the Netherlands (Stichting Toezicht
Effectenverkeer) in writing immediately after the acquisition or disposal of
the triggering interest in the shares. Whenever the shares of a company subject
to the Holdings Disclosure Act are newly admitted to official listing on a
stock exchange within the European Economic Area, a disclosure obligation
arises for a person who knows or should know that his holding of capital
interest or voting rights amounts to 5% or more. This obligation must be
discharged within four weeks of the shares being admitted to listing.
Between five and nine days after receipt of the notification, the Securities
Board is required to disclose the information as notified to the public by
means of an advertisement in a newspaper distributed throughout the member
states of the European Economic Area in which the company is listed on a stock
exchange. At the request of the company made within three days after the
notification, the Securities Board may abstain from the disclosure if it finds
in its discretion that the disclosure would be in violation of the general
interest or if the company would suffer serious disadvantage from the
disclosure and nondisclosure could not lead to deception of the public with
respect to facts and circumstances essential for the assessment of the shares
issued by the company.
Noncompliance with the obligations of the Holding Disclosure Act constitutes
an economic offense. Also, a civil court may issue orders against any person
who fails to notify or incorrectly notifies in accordance with the Holdings
Disclosure Act, including suspension of the voting rights in respect of the
person's ordinary shares.
As of January 1, 1999, new regulations regarding insider trading under the
Dutch 1995 Act on the Supervision of the Securities Trade (Wet toezicht
effectenverkeer 1995) came into force. The new regulations provide, among other
things, for an additional notification duty for shareholders holding, directly
or indirectly, more than 25% of the capital in a listed company. These
shareholders are obliged to notify the Securities Board of the Netherlands of
any and all transactions they enter into with respect to securities of a
company in which they hold an interest of more than 25%. If a shareholder
holding more than 25% is a legal entity and not an individual, the obligation
is extended to the managing directors and supervisory directors of the legal
entity.
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COMPARISON OF RIGHTS OF HOLDERS OF
PALEX COMMON STOCK AND IFCO SYSTEMS ORDINARY SHARES
PalEx is incorporated under the laws of Delaware and IFCO Systems is
organized under the laws of the Netherlands. Upon completion of the merger, the
holders of PalEx common stock upon exchange of their shares will become holders
of IFCO Systems ordinary shares. Their rights as IFCO Systems shareholders will
be governed by the laws of the Netherlands and by the articles of association
of IFCO Systems. The following discussion is a comparison of the material
differences in the rights of the holders of PalEx common stock and IFCO Systems
ordinary shares.
Although it is not practical to compare all of the differences between the
PalEx certificate of incorporation and the PalEx bylaws and the IFCO Systems
articles of association, the following is a summary of material differences
that may significantly affect the rights of PalEx stockholders. For a more
detailed description of the terms of the IFCO Systems ordinary shares see
"Description of IFCO Systems Share Capital."
<TABLE>
<CAPTION>
PalEx IFCO Systems
----- ------------
<S> <C> <C>
Authorized Capital Stock The PalEx certificate of The IFCO Systems articles of
incorporation authorizes association provide for an
30,000,000 shares of PalEx authorized share capital of
common stock, par value $0.01 100,000,000 ordinary shares and
per share, and 5,000,000 shares 100,000,000 preference shares,
of PalEx preferred stock, par each with a nominal value of
value $0.01 per share. two euros per share.
Board of Directors The PalEx certificate of The IFCO Systems articles of
incorporation provides that the association provide for a board
number of directors comprising of directors, consisting of A
the PalEx board of directors members and B members. The area
shall be fixed by the PalEx of responsibility of the B
board of directors, but may not members covers in particular
consist of less than three and the general course of affairs
not more than 15 persons. The of the company and its
PalEx board of directors can enterprise. The area of
change the number of directors responsibility of the A members
without stockholder approval. covers in particular the day-
The PalEx board of directors to-day management of the
currently consists of eight company and its enterprise. The
directors. The term of office maximum number of members of
for each director is one year, the board directors shall be
and each term expires at the nine and the number of members
time of the annual meeting of shall be determined by the
the stockholders. general meeting of
shareholders. Effective as of
the closing date of the merger,
the board of directors will
consist of seven members. The A
members of the board of
directors are appointed for an
indefinite period of time. The
B members of the board of
directors shall resign no later
than upon the close of the
annual shareholders meeting
held in the fourth year after
the year of his last
appointment. The B members can
be reappointed immediately. The
remuneration of the A members
shall be determined by the B
members and the remuneration of
the B members shall be
determined by the A members.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PalEx IFCO Systems
----- ------------
<S> <C> <C>
Monetary Liability of The PalEx certificate of The articles of association of
Directors incorporation provides for the IFCO Systems provide for a
elimination of personal similar form of indemnification
monetary liability of directors of members of the board of
to the fullest extent directors; however, Netherlands
permissible under the Delaware law may limit indemnification
General Corporation Law. of directors of a company for
liabilities arising from their
actions as members of the board
of directors.
Voting Rights Each share of PalEx common Each ordinary share of IFCO
stock is entitled to one vote. Systems entitles the holder to
one vote. All shareholders'
resolutions are taken by
absolute majority of the votes
cast, unless a greater majority
is prescribed by the articles
of association or Netherlands
law. For all resolutions, a
quorum of one-third of the
issued share capital is
required.
Removal of Directors and The PalEx certificate of The members of the board of
Filling Vacancies on the incorporation provides that directors may be suspended and
Board of Directors directors may be removed only dismissed by a vote of
for cause by the affirmative shareholders at a general
vote of a majority of the meeting. Removal of members of
voting power of the outstanding the board of directors without
capital stock of PalEx entitled cause is possible, but may be
to vote at an election of contrary to the principles of
directors. The PalEx reasonableness and fairness
certificate of incorporation that are imposed under
provides that any vacancy, Netherlands law. Any removal
whether arising through death, without cause therefore could
resignation, or removal of a be declared null and void.
director, or through an
increase in the number of
directors, will be filled by a
majority vote of the remaining
directors then in office.
Special Meetings of Under the PalEx bylaws, a General meetings of
Stockholders special meeting of stockholders shareholders may be called and
may be called at any time by convened by the board of
the Chief Executive Officer. A directors. General meetings of
special meeting of the shareholders may also be called
stockholders may also be called by shareholders and/or other
by the Secretary at the written parties with meeting rights,
request, or by resolution jointly representing at least
adopted by the affirmative 10% of the issued share
vote, of a majority of the capital, if the board of
board of directors. directors has not complied with
the request of the shareholders
and/or other parties with
meeting rights to convene a
shareholders' meeting.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PalEx IFCO Systems
----- ------------
<S> <C> <C>
Charter and Bylaw The PalEx certificate of Any amendment of the articles
Amendments incorporation provides that the of association of IFCO Systems
affirmative vote of the holders requires a shareholders'
of 80% of the outstanding resolution that has been
capital stock entitled to vote proposed by the board of
in the election of directors is directors.
required to amend, modify, or
repeal any of the provisions
set forth in Articles FIFTH,
election and composition,
SIXTH, power and authority,
EIGHTH, limited liability, and
NINTH, voting requirements. The
PalEx bylaws provide that,
unless expressly stated in the
PalEx certificate of
incorporation, the directors
may amend the PalEx bylaws by
the affirmative vote of the
directors and without the vote
of the stockholders. The PalEx
bylaws provide further that
stockholders may amend the
PalEx bylaws with the vote of
80% of the total voting power
of all shares of stock of PalEx
entitled to vote in the
election of directors.
</TABLE>
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<PAGE>
SHARE CERTIFICATES AND TRANSFER
The IFCO Systems ordinary shares will be issuable in registered form only.
Registered shares issued to persons in the United States are referred to as New
York shares. Registered shares may consist of either New York shares registered
with Deutsche Bank AG, IFCO Systems' transfer agent and registrar in New York,
or other IFCO Systems ordinary shares registered in book-entry form in a
register kept by or on behalf of IFCO Systems in Amsterdam. New York shares
will be represented by certificates printed in English or, to the extent
possible, in book-entry form. IFCO Systems has applied to have the New York
shares quoted on the Nasdaq National Market and all other IFCO Systems ordinary
shares listed on the Frankfurt Stock Exchange. Only New York shares will be
traded on the Nasdaq National Market. All other IFCO Systems ordinary shares
will be traded on the Frankfurt Stock Exchange.
The transfer of registered shares requires an instrument intended for such
purpose and, except when IFCO Systems is a party to such transfer, the written
acknowledgement of the transfer by IFCO Systems or, in the case of New York
shares, the New York transfer agent and registrar in the name of IFCO Systems,
and in the case of New York shares, submission of any certificates to IFCO
Systems or the New York transfer agent and registrar.
IFCO Systems ordinary shares booked in the Amsterdam register may be
converted into New York shares. On presentation to the New York transfer agent
and registrar of New York shares for cancellation and when accompanied by the
appropriate request, the New York shares may be exchanged for IFCO Systems
ordinary shares registered in the Amsterdam register and vice versa.
Certificates for New York shares may be exchanged at the office of the New York
transfer agent and registrar for certificates of other authorized
denominations. A fee of up to $5.00 per 100 ordinary shares will be charged to
shareholders for the exchange of New York shares for registered shares at the
Amsterdam register and vice versa.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no limitations, either under the laws of the Netherlands
or in the articles of association of IFCO Systems, to the rights of non-
residents of the Netherlands to hold or vote ordinary shares. Cash
distributions, if any, payable in guilders or ordinary shares may be officially
transferred from the Netherlands and converted into any other currency without
Dutch legal restrictions, except that for statistical purposes any payments and
transactions must be reported by Deutsche Borse Clearing AG to the Dutch
Central Bank. Cash distributions, if any, on New York shares will be paid in
U.S. dollars, converted at the rate of exchange at the close of business on the
date fixed for that purpose by the board of directors in accordance with IFCO
Systems' articles of association. IFCO Systems has no current intention to pay
dividends on its ordinary shares in the foreseeable future. See "Description of
IFCO Systems Share Capital--Dividends" and "Share Certificates and Transfer."
ENFORCEABILITY OF CIVIL LIABILITIES
IFCO Systems is a public limited liability company incorporated under the
laws of the Netherlands. Upon completion of the merger and the IPO, some
members of the board of directors, some of the officers of IFCO Systems, and
some of the experts named in this proxy statement/prospectus will reside
outside of the United States. As a result, it may not be possible for investors
to effect service of process within the United States upon IFCO Systems or
those persons, or to enforce, in courts outside of the United States, judgments
against IFCO Systems or those persons obtained in U.S. courts and based upon
the civil liability provisions of the federal securities laws of the United
States. Furthermore, since a substantial portion of the assets of IFCO Systems
will be located outside of the United States, any judgment obtained in the
United States against those persons or IFCO Systems may not be collectible
within the United States. Additionally, there may be doubt as to the
enforceability, in original actions in Dutch courts, of liabilities based
solely upon the federal securities laws of the United States.
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<PAGE>
LEGAL MATTERS
The validity of the shares of IFCO Systems ordinary shares to be issued in
connection with the merger will be passed upon by Stibbe Simont Monahan Duhot
P.C., New York, New York. U.S. federal income tax consequences of the merger
will be passed upon for PalEx by its special U.S. tax counsel, Baker Botts
L.L.P., Houston, Texas.
EXPERTS
The combined financial statements of the IFCO Companies as of December 31,
1997 and 1998, and for each of the years then ended and the balance sheet of
IFCO Systems as of March 31, 1999, appearing in this proxy statement/prospectus
have been so included in reliance on the report of PwC Deutsche Revision AG,
independent accountants, given on the authority of that firm as experts in
auditing and accounting.
The financial statements of IFCO U.S. as of December 31, 1997 and 1998, and
for each of the years then ended, appearing in this proxy statement/prospectus
have been so included in reliance on the report (which contains an explanatory
paragraph relating to the company's ability to continue as a going concern as
described in Note 1 to the financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
auditing and accounting.
The consolidated financial statements of PalEx and its subsidiaries as of
November 30, 1996, December 28, 1997, and December 27, 1998, and for the years
ended November 30, 1995, November 30, 1996, December 28, 1997, and December 27,
1998, and the one-month period ended December 31, 1996, included in this proxy
statement/prospectus have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their reports dated February 27,
1998, and February 26, 1999, and are included in reliance upon the report of
that firm as experts in auditing and accounting.
STOCKHOLDER PROPOSALS
If the merger is not consummated, proposals of stockholders intended to be
presented at PalEx's 2000 annual meeting of stockholders must be received by
PalEx by April 30, 2000, for inclusion in PalEx's proxy materials relating to
each meeting. In the event the merger is consummated, there will not be a 2000
annual meeting of stockholders of PalEx.
WHERE YOU CAN FIND MORE INFORMATION
PalEx files annual, quarterly, and current reports, proxy statements, and
other information with the SEC. You may read and copy any reports, statements,
and other information filed by PalEx at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please feel free to
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. PalEx's SEC filings are also available to the public from commercial
document retrieval services and at the internet world wide web site maintained
by the SEC at www.sec.gov.
IFCO Systems filed a registration statement on Form F-4 to register with the
SEC the IFCO Systems ordinary shares to be issued to PalEx stockholders in the
merger. This proxy statement/prospectus is a part of that registration
statement and constitutes a prospectus of IFCO Systems, as well as being a
proxy statement of PalEx.
As allowed by the SEC rules, this proxy statement/prospectus does not contain
all the information you can find in the registration statement or the exhibits
to the registration statement. The registration statement and the exhibits are
also available at the SEC's public reference rooms, from commercial document
retrieval services, and at the SEC's web site.
150
<PAGE>
You should rely only on the information contained in this proxy
statement/prospectus to vote on the merger. Neither IFCO Systems nor PalEx has
authorized anyone to provide you with information that is different from what
is contained in this proxy statement/prospectus. This proxy
statement/prospectus is dated February 4, 2000.
151
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
IFCO Systems N.V.
Report of Independent Accountants........................................ F-2
Balance Sheet as of March 31 and October 31, 1999 (unaudited)............ F-3
Unaudited Interim Statement of Comprehensive Loss for the period from
April 1, 1999 to October 31, 1999....................................... F-4
Unaudited Interim Statement of Shareholders' Equity...................... F-5
Notes to the Financial Statements........................................ F-6
IFCO
Report of Independent Accountants........................................ F-8
Combined Balance Sheets as of December 31, 1997 and 1998 and October 31,
1999 (unaudited)........................................................ F-9
Combined Statements of Operations for the years ended December 31, 1997
and 1998 and the ten months ended October 31, 1998 and 1999 (unaudited)
........................................................................ F-10
Combined Statements of Comprehensive Loss for the years ended December
31, 1997 and 1998 and the ten months ended October 31, 1998 and 1999
(unaudited)............................................................. F-11
Combined Statements of Net Investment for the years ended December 31,
1997 and 1998 and the ten months ended October 31, 1998 and 1999
(unaudited)............................................................. F-12
Combined Statements of Cash Flows for the years ended December 31, 1997
and 1998 and the ten months ended October 31, 1998 and 1999
(unaudited)............................................................. F-13
Notes to the Combined Financial Statements............................... F-14
PalEx, Inc. and Subsidiaries
Report of Independent Certified Public Accountants....................... F-31
Consolidated Balance Sheets as of December 28, 1997, December 27, 1998,
and October 24, 1999 (unaudited)........................................ F-32
Consolidated Statements of Operations for the years ended November 30,
1996, December 28, 1997, and December 27, 1998, the one-month period
ended December 31, 1996, and the ten-month
periods ended October 25, 1998, and October 24, 1999 (unaudited)........ F-33
Consolidated Statements of Comprehensive Income for the years ended
November 30, 1996,
December 28, 1997, and December 27, 1998, the one-month period ended
December 31, 1996,
and the ten-month periods ended October 25, 1998, and October 24, 1999
(unaudited)............................................................. F-34
Consolidated Statements of Changes in Stockholders' Equity for the years
ended November 30, 1995, November 30, 1996, December 28, 1997, and
December 27, 1998, and the ten-month period ended October 24, 1999
(unaudited)............................................................. F-35
Consolidated Statements of Cash Flows for the years ended November 30,
1996, December 28, 1997, and December 27, 1998, the one-month period
ended December 31, 1996, and the ten-month
periods ended October 25, 1998, and October 24, 1999 (unaudited)........ F-36
Notes to Consolidated Financial Statements............................... F-37
IFCO-U.S., L.L.C.
Report of Independent Certified Public Accountants....................... F-57
Balance Sheets as of December 31, 1997 and 1998 and October 31, 1999
(unaudited)............................................................. F-58
Statements of Operations and Changes in Accumulated Members' Deficit for
the years ended December 31, 1997 and 1998 and the ten months ended
October 31, 1998 and 1999 (unaudited)................................... F-59
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and the ten months ended October 31, 1998 and 1999 (unaudited).......... F-60
Notes to Financial Statements and the ten months ended October 31, 1998
and 1999 (unaudited).................................................... F-61
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
of IFCO Systems N.V.
Burgermeister Rijnderstean 20
1185 MC Amsterdam, The Netherlands
In our opinion, the accompanying balance sheet presents fairly in all material
respects, the financial position of IFCO Systems N.V. ("the Company") at March
31, 1999, in conformity with generally accepted accounting principles in the
United States. The financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on the financial
statement based on our audit. We conducted our audit of the statement in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Dusseldorf, Germany
August 25, 1999
/s/ Betz /s/ Hartmann
F-2
<PAGE>
IFCO SYSTEMS N.V.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
March 31, October 31,
1999 1999
--------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $54,040 $52,590
======= =======
SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY
Common stock............................................. $54,040 $54,040
Accumulated other comprehensive loss..................... -- (1,450)
------- -------
Total shareholder's equity.............................. $54,040 $52,590
======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE>
IFCO SYSTEMS N.V.
UNAUDITED INTERIM STATEMENT OF COMPREHENSIVE LOSS
for the Period from April 1, 1999 to October 31, 1999
<TABLE>
<S> <C>
Net loss......................................................... $ --
Other comprehensive loss:
Foreign currency translation adjustment........................ (1,450)
-------
Comprehensive loss............................................... $(1,450)
=======
</TABLE>
F-4
<PAGE>
IFCO SYSTEMS N.V.
UNAUDITED INTERIM STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Comprehensive Shareholders'
Stock Loss Equity
------- ------------- -------------
<S> <C> <C> <C>
Original contribution on and balance at
March 31, 1999........................... $54,040 $ -- $54,040
Foreign currency translation adjustment... (1,450) (1,450)
------- ------- -------
BALANCE October 31, 1999.................. $54,040 $(1,450) $52,590
======= ======= =======
</TABLE>
F-5
<PAGE>
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
IFCO Systems N.V. was incorporated under the laws of the Netherlands on
March 31, 1999. On the incorporation date, $54,040 of cash was contributed by
Schoeller Packaging Systems GmbH ("SPS") in exchange for 5,000 ordinary shares
of common stock. The authorized share capital of IFCO Systems N.V. is divided
into 25,000 ordinary shares, with a nominal value of 10 euro per share. IFCO
Systems N.V. is a wholly owned subsidiary of SPS.
The accompanying financial statement has been prepared in accordance with
United States generally accepted accounting principles.
The unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the information therein.
2.SIGNIFICANT ACCOUNTING POLICIES
The functional currency is the euro. The Company has selected the United
States dollar ("US$") as its reporting currency. The financial statements of
the Company's operations which are not denominated in United States dollars are
translated using the exchange rate as of the balance sheet date for assets and
liabilities.
3.SUBSEQUENT EVENTS
IFCO Systems N.V. was formed pursuant to a definitive merger agreement
effective March 29, 1999 with PalEx, Inc. ("PalEx"). Under the terms of the
agreement, prior to the merger, IFCO Systems N.V. will form Silver Oak
Acquisition Corp. as its wholly owned subsidiary to participate in the merger.
Silver Oak Acquisition Corp. will have authorized capital stock of 100 shares
of common stock, par value $0.01 per share. Silver Oak Acquisition Corp. will
issue all of its authorized shares to IFCO Systems N.V.
Prior to the merger with PalEx, SPS will contribute the shares it owns of
IFCO Europe Beteiligungs GmbH ("IFCO Europe"), which is 76% owned by SPS, and
MTS Okologistik Verwaltungs GmbH ("MTS"), 100% owned by SPS, to IFCO Systems
N.V. In addition, Gebruder Schoeller Beteilungsverwaltungs GmbH ("GSB") will
contribute the shares of Schoeller International Logistics
Beteiligungsgesellschaft mbH ("SIL"), 100% owned by GSB, to IFCO Systems N.V.
Both SPS and GSB are owned by the same group of shareholders, the Schoeller
family. The merger with PalEx will occur on the same day as, but immediately
before, an initial public offering of shares in IFCO Systems N.V.
IFCO Europe is the holding company of IFCO International Food Container
Organisation GmbH ("IFCO GmbH"). IFCO Europe is involved in the organization
and administration of the purchase, distribution and leasing of reusable crate
systems in Germany and other European countries. IFCO Europe is 76% owned by
SPS, with a subsidiary of General Electric Capital Corporation ("GECC") holding
a preferred share representing 24%. In connection with its initial investment
of DM 45 million ($24.9 million) in IFCO Europe in 1997, GECC received options
to increase its investment in IFCO Europe to 49% and then up to 100% after
certain dates have passed and criteria have been met. GECC also received
options to purchase 100% of MTS and up to 100% of SIL after certain dates have
passed and criteria have been met. In connection with the merger agreement, a
debenture in the amount of DM 45 million ($27.6 million) will be issued to GECC
by a company controlled by the Schoeller family for GECC's preferred share in
IFCO Europe. This debenture will have a 30 year term and bear interest at 5%
per year. The debenture will be exchangeable for IFCO Systems N.V. ordinary
shares that are held by the Schoeller controlled issuer of the debenture after
a mandatory holding
F-6
<PAGE>
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
period. GECC's options to increase its investment in IFCO Europe, MTS and SIL
will be exchanged for a promissory note payable issued by IFCO Systems N.V. in
the amount of DM 45 million ($27.6 million), of which DM 11.25 million ($6.9
million) will be paid out of the proceeds from the initial public offering. The
balance will be paid over five years beginning on December 31, 2001. In the
first year the annual interest rate will be EURIBOR plus 2.75%, increasing to
10% in the second year.
MTS is a German company that is 100% owned by SPS and offers a reusable
packing system for dry goods sold primarily by retailers. MTS's business
processes are generally similar to those of IFCO Europe.
SIL, is a German company which is 100% owned by GSB and holds ownership
interests in reusable crate systems in the United States, Argentina and Japan.
The operation in Argentina is wholly owned by SIL and is consolidated within
SIL. SIL has a 50% voting interest in the operations in the United States
("IFCO-US") and a 33% ownership investment in the Japanese operations. SIL's
business processes are generally similar to those of IFCO Europe. In connection
with the merger agreement, the Company intends to purchase the remainder of
IFCO-US, giving it 100% ownership.
Prior to the merger with PalEx, SPS will change its name to Schoeller
Logistics Technologies GmbH and SIL will change its name to IFCO International
Network Beteiligungsgesellschaft mbH.
The closing of the merger is subject to the approval of shareholders of
PalEx, completion of the initial public offering of IFCO Systems N.V. and other
customary conditions. Under the current terms of the agreement, the
participating rights (see below) will remain outstanding. The transaction is
expected to be completed by the end of the first quarter of 2000.
Unaudited Subsequent Events
Effective November 4, 1999, SPS contributed its shares of IFCO Europe, which
is 76% owned by SPS, and MTS, 100% owned by SPS, to IFCO Systems N.V. In
addition, GSB contributed its shares of SIL, 100% owned by GSB, to IFCO Systems
N.V. effective November 4, 1999. Both SPS and GSB are owned by the same group
of shareholders, the Schoeller family.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Schoeller Packaging Systems GmbH
and Gebruder Schoeller Beteilungsverwaltungs GmbH
Zugspitzstrabe 15
82049 Pullach
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, comprehensive income, net investment and of
cash flows present fairly, in all material respects, the combined financial
position of IFCO Europe Beteiligungs GmbH and MTS Okologistik GmbH,
subsidiaries of Schoeller Packaging Systems GmbH, Pullach and Schoeller
International Logistics Beteiligungsgesellschaft mbH, a subsidiary of Gebruder
Schoeller Beteilungsverwaltungs GmbH, Munich (collectively "IFCO") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the years then ended, in conformity with generally accepted accounting
principles in the United States. These financial statements are the
responsibility of IFCO's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards in Germany, which are substantially consistent with those in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Dusseldorf, Germany
April 30, 1999
/s/ Betz /s/ Hartmann
(Betz) (Hartmann)
Wirtschaftsprufer Wirtschaftsprufer
F-8
<PAGE>
IFCO
COMBINED BALANCE SHEETS
(In thousands of US$)
<TABLE>
<CAPTION>
December 31,
------------------ October 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ 7,992 $ 23,642 $ 9,134
Receivables............ 93,397 74,462 81,509
Other.................. 775 1,874 3,838
-------- -------- --------
Total current assets.. 102,164 99,978 94,481
PROPERTY, PLANT AND
EQUIPMENT, net......... 134,776 172,437 162,772
OTHER ASSETS............ 12,617 12,038 16,393
-------- -------- --------
Total assets.......... $249,557 $284,453 $273,646
======== ======== ========
LIABILITIES AND NET
INVESTMENT
CURRENT LIABILITIES:
Short-term loans....... $ 53,440 $ 500 $ 500
Short-term related
party loans........... 23,298 2,618 2,254
Current maturities of
long-term debt........ -- 4,912 5,413
Current maturities of
capital lease
obligations........... 4,738 9,340 10,528
Refundable deposits.... 64,323 70,875 70,820
Accounts payable....... 65,010 69,287 76,533
Accrued expenses and
other current
liabilities........... 12,294 7,303 11,591
Deferred income........ 4,660 6,573 5,996
-------- -------- --------
Total current
liabilities.......... 227,763 171,408 183,635
ACCUMULATED LOSSES IN
EXCESS OF INVESTMENT IN
EQUITY ENTITIES........ 3,136 4,472 5,684
LONG-TERM DEBT, net of
current maturities..... 464 77,874 67,183
CAPITAL LEASE
OBLIGATIONS, net of
current maturities..... 7,971 26,867 20,768
COMMITMENTS AND
CONTINGENCIES
PARTICIPATING RIGHTS.... 3,956 4,274 3,871
REDEEMABLE PARTICIPATING
RIGHTS................. 1,256 1,544 1,477
REDEEMABLE CONVERTIBLE
PREFERRED STOCK........ 25,001 28,887 26,335
NET INVESTMENT:
Contributed share
capital............... 10,017 10,017 10,017
Accumulated deficit.... (29,945) (38,858) (46,400)
Accumulated other
comprehensive loss.... (62) (2,032) 1,076
-------- -------- --------
(19,990) (30,873) (35,307)
-------- -------- --------
Total liabilities and
net investment....... $249,557 $284,453 $273,646
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-9
<PAGE>
IFCO
COMBINED STATEMENTS OF OPERATIONS
(In thousands of US$)
<TABLE>
<CAPTION>
Year Ended Ten Months Ended
December 31, October 31,
------------------ -----------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES........................... $116,735 $134,721 $106,021 $126,399
COST OF SALES:
Depreciation and amortization
expense and crate breakage....... 26,929 28,487 21,176 28,162
Other costs of sales.............. 72,693 77,731 64,698 72,168
-------- -------- -------- --------
99,622 106,218 85,874 100,330
-------- -------- -------- --------
Gross profit..................... 17,113 28,503 20,147 26,069
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 22,263 28,515 20,729 24,029
AMORTIZATION OF GOODWILL........... 675 383 274 344
OTHER OPERATING (INCOME) EXPENSES,
net............................... (4,099) (3,081) (2,979) (1,976)
-------- -------- -------- --------
Income (loss) from operations.... (1,726) 2,686 2,123 3,672
INTEREST EXPENSE................... (11,815) (8,637) (7,355) (7,347)
INTEREST INCOME.................... 3,887 1,607 1,331 466
FOREIGN CURRENCY (LOSSES) GAINS.... 25 (188) (166) (690)
LOSSES FROM EQUITY ENTITIES........ (2,347) (2,726) (2,431) (1,632)
OTHER INCOME (EXPENSE), net........ 183 (83) (325) (611)
-------- -------- -------- --------
Loss before income taxes......... (11,793) (7,341) (6,823) (6,142)
INCOME TAX PROVISION............... (47) (210) (173) (144)
-------- -------- -------- --------
Net loss......................... (11,840) (7,551) (6,996) (6,286)
-------- -------- -------- --------
ACCRETION OF PREFERRED STOCK AND
PARTICIPATING RIGHTS.............. 630 (1,362) (1,123) (1,256)
Net loss applicable to common
stock........................... $(11,210) $ (8,913) $ (8,119) $ (7,542)
======== ======== ======== ========
Unaudited pro forma basic loss per
share (in US$).................... $ (.45) $ (.38)
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-10
<PAGE>
IFCO
COMBINED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands of US$)
<TABLE>
<CAPTION>
Year Ended Ten Months Ended
December 31, October 31,
----------------- -----------------------
1997 1998 1998 1999
-------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss............................. $(11,840) $(7,551) $(6,996) $(6,286)
Other comprehensive loss:
Foreign currency translation
adjustment......................... 317 (1,970) (1,663) 3,108
-------- ------- ------- -------
Comprehensive loss................... $(11,523) $(9,521) $(8,659) $(3,178)
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-11
<PAGE>
IFCO
COMBINED STATEMENTS OF NET INVESTMENT
(In thousands of US$)
<TABLE>
<CAPTION>
Accumulated
Contributed Other
Share Accumulated Comprehensive Net
Captial Deficit Loss Investment
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
BALANCE January 1, 1997...... $10,017 $(10,100) $ (379) $ (462)
Capital distribution, net of
tax......................... -- (8,635) -- (8,635)
Participating rights, net of
tax......................... -- 774 -- 774
Redeemable cumulative
participating rights, net of
tax......................... -- (144) -- (144)
Foreign currency adjustment.. -- -- 317 317
Net loss..................... -- (11,840) -- (11,840)
------- -------- ------- --------
BALANCE December 31, 1997.... $10,017 $(29,945) $ (62) (19,990)
Accretion of redeemable
convertible preferred stock,
net of tax.................. -- (1,274) -- (1,274)
Participating rights, net of
tax......................... -- 61 -- 61
Redeemable cumulative
participating rights, net of
tax......................... -- (149) -- (149)
Foreign currency adjustment.. -- -- (1,970) (1,970)
Net loss..................... -- (7,551) -- (7,551)
------- -------- ------- --------
BALANCE December 31, 1998.... $10,017 $(38,858) $(2,032) $(30,873)
Accretion of redeemable
convertible preferred stock,
net of tax (unaudited)...... -- (1,077) -- (1,077)
Participating rights, net of
tax (unaudited)............. -- (60) -- (60)
Redeemable cumulative
participating rights,
(unaudited)................. -- (119) -- (119)
Foreign currency adjustment
(unaudited)................. -- -- 3,108 3,108
Net loss (unaudited)......... -- (6,286) -- (6,286)
------- -------- ------- --------
BALANCE October 31, 1999..... $10,017 $(46,400) $ 1,076 $(35,307)
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-12
<PAGE>
IFCO
COMBINED STATEMENTS OF CASH FLOWS
(In thousands of US$)
<TABLE>
<CAPTION>
Year Ended Ten Months Ended
December 31, October 31,
----------------- -----------------------
1997 1998 1998 1999
-------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................ $(11,840) $(7,551) $(6,996) $(6,286)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation of property, plant and
equipment and crate breakage...... 26,929 28,487 21,176 28,162
Amortization of goodwill........... 675 383 274 344
Amortization of intangible assets
and debt issuance costs........... -- 664 228 38
Foreign exchange (gain)/loss....... (25) 188 166 690
(Profit)/loss on sale of property,
plant and equipment............... (2) -- -- 106
Losses from equity entities........ 2,347 2,726 2,431 1,632
Changes in operating assets and
liabilities--
Proceeds from factoring
arrangement....................... -- 25,435 19,883 28,004
Receivables........................ (11,588) 2,160 (2,186) (46,654)
Other assets, long term............ 243 112 586 (1,456)
Inventory.......................... 7,414 (1,621) (1,205) (2,293)
Prepaid expenses and other current
accounts.......................... 107 673 714 47
Accounts payable................... 5,076 10,933 251 17,435
Other current liabilities.......... 3,515 (7,791) (5,422) 1,334
Accrued liabilities................ 8,722 3,803 9,980 12,068
Deferred income.................... 917 1,337 617 249
-------- ------- ------- -------
Net cash provided by operating
activities....................... 32,490 59,938 40,497 33,420
-------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of crates................. (41,950) (38,098) (35,170) (33,054)
Purchase of property, plant and
equipment......................... (562) (2,097) (2,062) (3,021)
Purchase of other intangible
assets............................ (243) (33) -- (188)
Merger costs....................... -- -- -- (3,421)
Investment in equity entities...... (478) (1,390) (1,386) (420)
Proceeds from sale of property and
equipment......................... 448 106 -- --
Sale (purchase) of investments
carried at cost................... (436) 2,746 2,723 --
-------- ------- ------- -------
Net cash used in investing
activities....................... (43,221) (38,766) (35,895) (40,104)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of redeemable
convertible preferred stock....... 24,949 --
Payments on short term bank
borrowings........................ -- (51,254) (50,699) --
Payments on long term bank
borrowings........................ (3,502) (15,351) (15,221) (11,581)
Payments on related party loans.... -- (25,779) (25,616) (196)
Payments on capital lease
obligations....................... (14,214) (5,331) (4,589) (4,527)
Proceeds from short term bank
borrowings........................ 8,591 --
Proceeds from long term bank
borrowings........................ -- 91,756 90,764 11,010
Proceeds from related party loans.. 3,997 1,850 1,595 139
Payment for interest rate cap...... -- (202)
Debt issuance costs................ (6,621) (2,131) (1,703) --
Capital distribution to
shareholders...................... (8,635) -- -- --
Other.............................. 464 -- -- --
-------- ------- ------- -------
Net cash provided by (used in)
financing activities............. 5,029 (6,442) (5,469) (5,155)
-------- ------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS.......... (549) 920 589 (2,669)
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (6,251) 15,650 (278) (14,508)
CASH AND CASH EQUIVALENTS, beginning
of the period 14,243 7,992 7,992 23,642
-------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 7,992 $23,642 $ 7,714 $ 9,134
======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............. $ 6,772 $ 6,959 $ 5,841 $ 6,805
Cash paid for income taxes......... $ 47 $ 64 $ 64 $ 181
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Accretion of redeemable convertible
preferred stock................... -- $ 1,274 -- --
Redeemable cumulative participating
rights............................ $ 144 $ 149 -- --
Participating rights............... $ (774) $ (61) -- --
Purchase of containers on capital
leases............................ $ 8,465 $ 9,382 $ 4,228 $ 4,125
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-13
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(In thousands of US$ unless otherwise stated)
1.BUSINESS AND ORGANIZATION:
These combined financial statements represent the operations of IFCO Europe
Beteiligungs GmbH ("IFCO Europe") and MTS Okologistik Verwaltungs GmbH ("MTS"),
which are subsidiaries of Schoeller Packaging Systems GmbH, Pullach ("SPS"), as
well as the operations of Schoeller International Logistics
Beteiligungsgesellschaft mbH ("SIL"), a subsidiary of Gebruder Schoeller
Beteilungsverwaltungs GmbH, Munich ("GSB") (collectively "IFCO" or the
"Company"). The entities are involved in crate leasing and servicing
activities. SPS and GSB are wholly owned by the same group of shareholders, the
Schoeller family. IFCO Europe, MTS and SIL previously reported separately to
SPS and GSB respectively, and all costs relating to each entity were
historically billed through management charges. These costs include all general
corporate overheads, consisting of accounting, legal and technical services and
other general and administrative costs, and interest expense related to the
operations of IFCO Europe, MTS and SIL. All significant inter-company
transactions and balances between the combined companies have been eliminated.
Income taxes have been calculated on a separate return basis.
IFCO Europe was established in 1997 and is the holding company of IFCO
International Food Container Organisation GmbH ("IFCO GmbH"), a German company,
which was established in 1992. IFCO Europe is involved in the organization and
administration of the purchase, distribution and leasing of reusable crate
systems in Germany and other European countries. The crates are leased
primarily to producers of fresh fruit and vegetables in exchange for a one-time
usage fee. The producers' goods are transported in the crates to various
intermediaries and ultimately retailers for sale to consumers. IFCO Europe
delivers the empty crates to customers' bulk warehouses and collects the empty
crates from regional service points, where the crates are transported to the
Company's depots and cleaned for reuse. IFCO Europe is 76% owned by SPS, with a
subsidiary of General Electric Capital Corporation ("GECC") holding a preferred
share representing 24%. In connection with its initial investment of $24,949 in
IFCO Europe in 1997, GECC received options to increase its investment in IFCO
Europe to 49% and then up to 100% after certain dates have passed and criteria
have been met. GECC also received options to purchase 100% of MTS and up to
100% of SIL after certain dates have passed and criteria have been met.
MTS, a German company that is 100% owned by SPS, was established in 1992 and
offers a reusable packing system for dry goods sold primarily by retailers.
MTS's business processes are generally similar to those of IFCO Europe.
SIL, a German company which is 100% owned by GSB was established in 1994 to
hold ownership interests in reusable crate systems in the United States,
Argentina and Japan. The operation in Argentina is wholly owned and is
consolidated within SIL. SIL has a 50% voting interest in the operations in the
United States and a 33% ownership investment in the Japanese operations. SIL
has agreed to fund its proportionate share of losses of the operation in the
United States in excess of its capital investment. Both of these operations are
accounted for under the equity method. SIL's business processes are generally
similar to those of IFCO Europe.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Principles
The accompanying combined financial statements have been prepared in
accordance with United States generally accepted accounting principles.
Fiscal Year
All combined entities maintain their accounting records using a December 31
year-end.
F-14
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Inventory
Inventories are stated at the lower of cost or net realizable value. The cost
of inventories is determined using a weighted average cost method.
Property, Plant and Equipment
Property, plant, and equipment is carried at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is utilized for financial reporting
purposes.
Included in property, plant and equipment is the Company's crate rental pool,
which is being depreciated to estimated salvage value using the straight line
method over lives ranging from 8 to 15 years. The Company periodically reviews
its crate rental pool to ensure that all unusable crates are reduced to net
realizable value in accordance with the Company's crate supply contract. These
charges are considered breakage by the Company and are included in cost of
sales in the accompanying combined statements of operations.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions and major replacements or betterments that increase capacity or
extend useful lives are added to the cost of the asset. Upon sale or retirement
of property, plant and equipment, the cost and related accumulated depreciation
are eliminated from the respective accounts and the resulting gain or loss is
included in other income (expense), net, in the accompanying combined
statements of operations.
The Company follows the reporting requirements of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
SFAS No. 121 establishes the recognition and measurement standards related to
the impairment of long- lived assets. The Company periodically assesses the
realizability of its long-lived assets pursuant to the provisions of SFAS No.
121 and has determined that no impairments would have been recognized under
SFAS No. 121.
The Company follows the reporting requirements of SFAS No. 13 "Accounting for
Leases". Leases classified as capital leases are recognized as assets and
liabilities in the balance sheet at amounts equal to the fair value of the
leased property at the inception of the lease or, if lower, at the present
value of the minimum lease payments. Lease payments are apportioned between
imputed finance charge and the reduction of the outstanding liability. The
lease asset is depreciated during the period of expected used on a systematic
basis consistent with the depreciation policy for depreciable assets that are
owned.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of acquisition cost over the fair
market value of identified net assets acquired in business combinations
accounted for as purchases, is amortized using the straight-line method over 15
years.
The Company evaluates on a regular basis whether events and circumstances
have occurred that indicate that the carrying amount of goodwill and other
intangible assets may warrant revision. Management believes that there has been
no impairment of the goodwill and other intangible assets as reflected in the
Company's combined financial statements as of December 31, 1998.
Investments Carried at Cost
Entities where IFCO has less than 20% of the voting rights and over which
IFCO does not exercise significant influence are accounted for at cost, and are
included in other assets on the combined balance sheet. In 1997 this consisted
of one entity, APOLLO Verwaltungsgesellschaft mbH, Munchen, which was sold in
1998.
F-15
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Investment in Equity Entities
Entities over which IFCO has between 20% and 50% of the voting rights, and
over which IFCO exercises significant influence, are accounted for using the
equity method.
SIL's share of operating losses in the Japanese operations ("IFCO Japan") has
exceeded its capital investment, and accordingly the investment in IFCO Japan
has been reduced to zero. SIL has not recorded its proportionate share of IFCO-
Japan's losses in excess of its investment in IFCO Japan as SIL is under no
obligation, and has no intention, to fund IFCO-Japan's losses. IFCO Japan's
losses that have been recorded are included in losses from equity entities on
the combined statement of operations.
SIL's share of the operating losses in the operations in the United States
("IFCO-US") has exceeded its initial capital investment. SIL has recorded its
proportionate share of the losses in IFCO-US in excess of its investment as
accumulated losses in excess of investment in equity entities in the combined
balance sheet as SIL has agreed to fund its proportionate share of the losses.
The loss that has been recognized by SIL in respect of IFCO-US is recorded in
losses from equity entities on the combined statement of operations.
Participating Rights
The participating rights were originally issued to Schoeller Plast Industries
GmbH, Pullach, ("SPI"), a company wholly owned by SPS, in respect of IFCO GmbH
with a nominal value of DM 10.0 million. The rights have no voting rights and
are issued for an unlimited period and may be terminated by IFCO upon repayment
of the nominal value. In the event of IFCO GmbH's liquidation, it is repayable
after all other creditors and ranks equally with the share capital. The
participating rights share in IFCO GmbH's profits up to a maximum of $0.9
million per year, before any other distribution may be made, and in IFCO GmbH's
losses in the amount of 10% per year until the balance is exhausted. In the
event that the participating rights has been reduced from its nominal value by
its share of losses, future profits must first be used to restore it to its
nominal value before any other distributions may be made.
Redeemable Participating Rights
In 1996 SIL received DM 2 million ($1,228) from Alexander Schoeller & Co.
Management Holding GmbH ("Schoeller Management Holding"), a company which is
wholly owned by the Schoellers. Each year that SIL recognizes a profit under
German GAAP, Schoeller Management Holding is entitled to DM 250,000 ($154) per
annum. This amount is cumulative, and any unpaid balance due to SIL's lack of
profit bears interest at 6.0% per annum. Schoeller Management Holding does not
participate in SIL's losses, and has no voting rights in SIL. The agreement is
for an unlimited duration, and may be terminated by either party with a six
month notice period.
Income Taxes
The Company uses the liability method of accounting for income taxes, wherein
deferred tax assets and liabilities are recognized for future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to reverse. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance if,
based on the weight of the available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. As changes
in tax laws or rate are enacted, deferred tax assets and liabilities are
adjusted through income tax expense.
F-16
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Revenue Recognition
The majority of the Company's combined revenues are generated from crate
usage fees and are recognized over the Company's service obligation period,
which is complete when the customer's product is removed from the crates and
the crate is ready to be returned to the Company.
The Company also generates revenues from the lease of crates for specified
periods of time, which are recognized on a straight-line basis over the lease
term. Additionally, the Company generates revenues from the sales of broken
crates.
Refundable Deposits
The Company receives a deposit from its customers upon crate delivery that is
classified as a refundable deposit in the accompanying combined balance sheets.
This deposit is refunded by the Company when the crate is recollected.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments", and
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments", require the disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. The carrying value of the Company's long-term debt approximates fair
value due to variable interest rates. The carrying value of the Company's other
financial instruments also approximates fair value, except for the interest
rate cap of the Senior Facility Agreement. The cap uses a derivative financial
instrument, and as it is an integral part of the Senior Facility Agreement, it
cannot be reliably segregated and measured. There are no published price
quotations in active public securities markets and even though there are well-
established valuation models, the data inputs to these models does not come
from active markets.
Foreign Currency Transactions and Translation
Sales and purchases in foreign currency are measured using the exchange rate
at the day of the transaction. Foreign currency transaction gains and losses
are included in the Combined Statement of Operations.
The functional currency is the local currency of each subsidiary. The Company
has selected the United States dollar ("US$") as its reporting currency. The
financial statements of the Company's operations which are not denominated in
United States dollars are translated using the exchange rate as of the balance
sheet date for assets and liabilities and a weighted average exchange rate for
the reported amount of revenues, expenses, gains and losses during the
reporting period. The cumulative translation adjustment is recorded as a
separate component of shareholders' equity.
Use of Estimates
The preparation of combined financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the combined
financial statements and the reported amount of revenues and expenses during
the reporting period. Although the Company reviews all significant estimates
affecting its combined financial statements on a recurring basis and records
the estimated effect of any necessary adjustments prior to their publication,
actual results could differ from these estimates.
F-17
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Unaudited Pro Forma Loss Per Share
Unaudited pro forma basic loss per share has been computed using an estimate
of the number of ordinary shares that will be issued to the shareholders of the
Company upon formation of IFCO Systems N.V. This amount has been calculated as
20.0 million. The numerator used in the calculation of unaudited proforma basic
loss per share has been calculated using the net loss for the year plus
accretion on the redeemable convertible preferred stock, the redeemable
cumulative participating rights and the participating rights. The number of
shares used in calculating basic and diluted loss per share is the same, as the
conversion of the preferred stock would result in anti-dilution. See additional
discussion related to the formation of IFCO Systems N.V. in Note 12.
Recent Accounting Pronouncements
On May 19, 1999, the Financial Accounting Standards Board decided to delay
the effective date of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," to all fiscal quarter of all fiscal years beginning after
June 15, 2000. SFAS 133 requires that all derivative financial instruments be
recognized as either assets or liabilities on the balance sheet at their fair
values and that accounting for the changes in their fair values is dependent
upon the intended use of the derivatives and their resulting designations. The
new standard will supersede or amend existing standards that deal with hedge
accounting and derivatives. The Company has not determined the effect that
adopting this standard will have on its consolidated financial statements.
Interim Financial Statements
The unaudited combined consolidated interim financial statements included
herein have been prepared in accordance with United States generally accepted
accounting principles. These statements reflect all adjustments, consisting
only of normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the information contained therein. All
significant inter-company transactions and balances between the combined
companies have been eliminated.
3.PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful At December 31,
Lives in ------------------
Years 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Crates....................................... 8-15 $145,444 $188,848
Machinery and equipment...................... 4-10 5,783 7,631
Furniture and fixtures....................... 4-10 2,881 4,213
-------- --------
$154,108 $200,692
Less: Accumulated depreciation and
amortization................................ (19,332) (28,255)
-------- --------
$134,776 $172,437
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1998 was
$8,579 and $10,414, respectively. Of the total assets above, costs of $14,388
and $38,288, along with accumulated depreciation of $651 and $981, are held
under capital leases at December 31, 1997 and 1998, respectively.
F-18
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
4.DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts Receivable
The major components of accounts receivable are as follows:
<TABLE>
<CAPTION>
At December 31,
---------------- At October 31,
1997 1998 1999
------- ------- --------------
(unaudited)
<S> <C> <C> <C>
Trade (gross).................................. $71,946 $63,292 $68,582
Less: Allowance for doubtful accounts.......... (5,886) (6,079) (4,101)
Related party.................................. 14,396 7,538 8,678
Other.......................................... 12,941 9,711 8,350
------- ------- -------
$93,397 $74,462 $81,509
======= ======= =======
</TABLE>
Activity in the Company's allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Balance, beginning of the year................................... $5,460 $5,886
Write-offs....................................................... -- --
Additional provisions............................................ 426 193
------ ------
$5,886 $6,079
====== ======
</TABLE>
Other Assets
The major components of other assets are as follows:
<TABLE>
<CAPTION>
At December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Goodwill................................................... $ 3,805 $ 4,187
Debt issuance costs........................................ 6,417 9,364
Investment accounted for under the cost method............. 2,695 --
Other...................................................... 942 962
------- -------
$13,859 $14,513
Less: Accumulated amortization............................. (1,242) (2,475)
------- -------
$12,617 $12,038
======= =======
</TABLE>
Accounts payable
The major components of accounts payable are as follows:
<TABLE>
<CAPTION>
At December 31,
--------------- At October 31,
1997 1998 1999
------- ------- --------------
(unaudited)
<S> <C> <C> <C>
Trade......................................... $64,712 $65,525 $ 72,129
Related party................................. 298 3,762 4,404
------- ------- --------
$65,010 $69,287 $ 76,533
======= ======= ========
</TABLE>
F-19
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
5.DEBT:
Long-Term Debt
During 1998, IFCO Europe negotiated a new financing arrangement through a
lending syndicate under a Deutsch Mark ("DM") 146 million ($89,644) Senior
Facility Agreement ("SFA"), and a DM 35 million ($21,490) Senior Subordinated
Agreement ("SSA"). The proceeds from the SFA and SSA were primarily used to
reduce the Company's outstanding short-term borrowings.
The SFA consists of a DM 76 million ($46,664) fixed term loan and two
revolving credit facilities totaling DM 70 million ($42,980). All borrowings
under the SFA contain principal reduction provisions, mature in 2004 and accrue
interest at EURIBOR plus 1.75% (4.98% as of December 31, 1998). The SSA is due
in full in 2005. Outstanding borrowings under the SSA accrue interest at a rate
of EURIBOR plus 2.75% (5.98% as of December 31, 1998).
IFCO Europe borrowed DM 76 million ($46,664) under the SFA fixed term loan,
and repaid DM 4 million ($2,456) on December 31, 1998 as required by the debt
agreement. At December 31, 1998, borrowings under the SFA revolving credit
facility totaled DM 27 million ($16,578), leaving DM 43 million ($26,403)
available for future borrowings. The entire amount of the SSA was borrowed
during 1998, and was outstanding at December 31, 1998.
Substantially all of IFCO Europe's receivables and long-lived assets are
pledged as security against all outstanding borrowings under the SFA and SSA,
which also prohibit any dilution of GECC's capital investment. The SFA and SSA
prohibit the factoring of receivables in excess of DM 80 million ($49,122). The
SFA and SSA limit the amount of capital lease obligations that IFCO Europe may
enter into from January 1, 1999 onwards to DM 75 million ($46,052). The SFA and
SSA also prohibit the payment of dividends by IFCO Europe as long as any
outstanding borrowings exist under the SFA or SSA, restrict IFCO Europe's
incurrence or assumption of other indebtedness and require IFCO Europe to
comply with non-financial and financial covenants, including certain funded
debt and interest expense to earnings before taxes, depreciation, interest and
amortization ratios and certain cash flow ratios. IFCO Europe was in compliance
with, or had subsequently obtained waivers for, such covenants as of December
31, 1998.
To hedge its variable rate interest risk, IFCO Europe has entered into an
interest rate cap agreement, which as of December 31, 1998, covers $65,600 of
IFCO Europe's outstanding debt and limits interest rates applicable to those
borrowings to 6.75%. The costs of this agreement are included in interest
expense ratably over the agreement's life. The unamortized cost of the
agreement is included in other assets in the accompanying combined balance
sheets.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
At December
31,
------------- At October 31,
1997 1998 1999
----- ------- --------------
(unaudited)
<S> <C> <C> <C>
SFA term loan.................................. $ -- $44,208 $34,393
SFA credit facilities.......................... -- 16,578 18,808
SSA term loan.................................. -- 21,490 18,808
Other.......................................... 464 510 587
----- ------- -------
$ 464 $82,786 $72,596
Less: current maturities....................... -- (4,912) (5,413)
----- ------- -------
$ 464 $77,874 $67,183
===== ======= =======
</TABLE>
F-20
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
The maturities of long-term debt are as follows for the years ending December
31:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
1999................................................................. $ 4,912
2000................................................................. 6,036
2001................................................................. 7,368
2002................................................................. 12,894
2003................................................................. 12,894
Thereafter........................................................... 38,682
-------
$82,786
=======
</TABLE>
Short-Term Loans
Short-term loans in 1997 consisted of short-term notes with banks and other
third parties and were due on demand. These loans were repaid with the proceeds
from the SFA and SSA. There are no short-term loans at December 31, 1998.
Short-Term Related Party Loans
SPS and GSB, SPS's subsidiaries and SPS's direct owners have historically
provided working capital financing to the Company. Outstanding balances accrue
interest at rates ranging from 5.0% to 8.0%.
Related Party Loans
The balance in related party loans represents funding that has been provided
by companies under common control, and have due dates that extend beyond
December 31, 1999.
Receivable Factoring
Prior to May 1998, IFCO GmbH had an agreement whereby the trade accounts
receivable balances were used as collateral against borrowings from third
parties. Both the receivables and the funding were recorded on IFCO GmbH's
books. The administrative processes related to collecting the receivables was
performed by the third party acting as an agent for IFCO GmbH, for which IFCO
GmbH paid a fee.
In May 1998 the arrangement was altered to allow IFCO GmbH to factor up to
85% of accounts receivable balances that meet certain requirements as set forth
in the agreement. For the receivables accepted for factoring, the factoring
agent is required to remit between 60% and 80% of the unpaid amounts of
factored receivables to IFCO GmbH. The remainder, less a factoring charge, is
held in an escrow account and is remitted to IFCO GmbH following collection.
There is no risk of loss associated with the funds initially received by IFCO
GmbH, and these funds have been netted off against receivables. The risk of
loss on the balance held in the escrow account remains with IFCO GmbH, with the
factoring agent performing the administrative collection process for all
factored receivables. The balance held in the escrow account is included in
receivables on the combined balance sheet and at December 31, 1998 was $7,279.
The interest rate on cash advances relating to uncollected factored receivables
is based on the three-month EURIBOR rate plus 1.25% (4.48% as of December 31,
1998). IFCO GmbH factored approximately $25,435 of its combined receivables in
1998 and incurred approximately $2,629 in factoring and interest charges
relating to this agreement for the year ended December 31, 1998.
F-21
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Capital Lease Obligations
The Company has entered into leases with third parties principally for
plastic crates that are accounted for as capital leases. The future minimum
lease payments for assets under capital leases, together with the present value
of minimum lease payments, were as follows as of December 31:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
1999................................................................ $11,603
2000................................................................ 11,135
2001................................................................ 7,607
2002................................................................ 4,704
2003................................................................ 2,501
Thereafter.......................................................... 3,734
-------
Total future minimum lease payments................................. $41,284
Less amounts representing interest.................................. (5,077)
-------
Present value of future minimum lease payments...................... $36,207
=======
Current............................................................. $ 9,340
Non-current......................................................... 26,867
-------
Total............................................................... $36,207
=======
</TABLE>
6.REDEEMABLE CONVERTIBLE PREFERRED STOCK
IFCO Europe has outstanding, one share of preferred stock held by a
subsidiary of GECC. The holder of the preferred share shall be entitled to 16%
of the vote on all matters of which common stockholders are entitled to vote.
The other 84% of votes are held by the common stockholders. The holder of the
preferred share participates in 24% of the profits of IFCO Europe. However, the
preferred share has preference over the first DM 2,250 ($1,382) of profits
before any profits are distributed to the common stockholders.
The preferred share is convertible into common stock of IFCO Europe at any
time prior to September 30, 2004. The preferred stock is redeemable beginning
September 30, 2002, at the option of the holder for the original investment
amount. In addition to the original investment amount, the holder is entitled
to 5% annual interest on the purchase price minus any capital repaid to the
holder for the period starting at the day of the original investment and ending
on the date of redemption election, such interest amount being compounded at an
interest rate of 5% per year and being reduced by any dividends paid out to the
holder. The redemption amount outstanding on the redemption date is payable in
12 monthly installments, plus 5% interest beginning two years after the
redemption election date. In addition, the preferred stock is redeemable
subject to certain conditions at the option of the issuer in year 2003 at the
earliest. The redemption amount is calculated under similar terms as above.
In the event of liquidation or dissolution of the Company, the holder of the
preferred share shall have priority entitlement before distribution to other
shareholders to proceeds which are available for distribution to the
shareholders up to an amount of DM 45,000 ($27,630), plus preferential
dividends which have not been distributed, less any eventual distribution of
profits in excess of the preferential dividends.
In connection with the investment in the preferred share, GECC received
options to increase its investment in IFCO Europe to 49% and then up to 100%
after certain dates have passed and criteria have been met. In addition, GECC
received options to purchase 100% of MTS and up to 100% of SIL after certain
dates have passed and criteria have been met. Also in connection with the
investment, SPS has a put option to sell its interest in IFCO Europe to GECC
after certain dates have passed and criteria have been met.
F-22
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
7.INCOME TAXES:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------
1997 1998
------- ------
<S> <C> <C>
Loss before income taxes
Germany................................................... $ 8,227 $3,802
Foreign................................................... 3,217 3,539
------- ------
Total...................................................... $11,444 $7,341
======= ======
Income tax provision
Current
Germany................................................... $ -- $ --
Foreign................................................... (47) (210)
------- ------
Total current.............................................. $ (47) $ (210)
------- ------
Deferred
Germany................................................... $ -- $ --
Foreign................................................... -- --
------- ------
Total Deferred............................................. $ -- $ --
------- ------
Total provision ........................................... $ (47) $ (210)
======= ======
</TABLE>
The differences in income taxes provided and the amounts determined by
applying appropriate statutory tax rates to loss before income taxes result
from the following:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Tax benefit at statutory rate (48.8%)....................... $5,585 $3,582
Increase (decrease) resulting from:
Movement in valuation allowance............................ (3,693) (3,605)
Participating rights....................................... (378) (30)
Non deductible finance charges............................. (464) (348)
Goodwill amortisation...................................... (131) (118)
Other...................................................... (966) 309
------ ------
$ (47) $ (210)
====== ======
</TABLE>
F-23
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Deferred taxes result from temporary differences in the recognition of income
and expenses for financial reporting purposes and for tax purposes. Components
of the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Deferred income tax liabilities:
Accelerated depreciation................................. $57,893 $ 81,114
Other.................................................... 4,685 3,467
------- --------
Total deferred income tax liabilities..................... $62,578 $ 84,581
Deferred income tax assets:
Carryforward losses...................................... $61,422 $ 73,891
Interest on accretion.................................... -- 622
Capitalized crate cost................................... 6,181 17,679
Patent................................................... 3,676 3,596
Other..................................................... 3,018 6,164
------- --------
Total deferred income tax assets.......................... $74,297 $101,952
Valuation allowance....................................... (11,719) (17,371)
------- --------
Net deferred income tax assets............................ $62,578 $ 84,581
Deferred income tax assets, net........................... $ -- $ --
======= ========
</TABLE>
Current deferred tax assets, net are recorded in other current assets in the
accompanying combined balance sheets.
Income taxes payable at December 31, 1997 and 1998 was approximately $47 and
$146, respectively and are included in accrued liabilities in the accompanying
combined balance sheets.
As certain crate leases are capitalized for book purposes but are treated as
operating leases for tax purposes, the amount of expense recognized for book
and tax purposes differs, resulting in a deferred tax asset. Such asset will
reverse over the life of the lease.
At December 31, 1997 and 1998, the Company has net operating loss
carryforwards in Germany of approximately $115,453 and $135,275, respectively.
The loss carryforwards attributable to German operations do not expire. The
loss carryforwards attributable to foreign operations at December 31, 1997 and
1998 are $11,840 and $18,468, respectively. These operating loss carryforwards
expire in 2004 and 2005. These carryforwards are available to offset future
taxable income. A valuation allowance has been made by the Company to provide
for deferred tax assets. The valuation allowance is necessary as the specific
subsidiaries for which it is attributable have not made profits consistently,
thereby making it more likely than not that the asset will not be realized. The
amount of the valuation allowance is reviewed periodically and will be released
in the future if it becomes more likely than not that these carryforward losses
can be realised.
F-24
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Activity in the Company's valuation allowance for deferred tax assets
consists of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Balance, beginning of year................................ $ 5,497 $11,719
Increase (decrease) due to foreign exchange translation... (958) 1,485
Additions in the year due to subsidiary loss
carryforwards............................................ 7,180 4,167
------- -------
Balance, end of year...................................... $11,719 $17,371
======= =======
</TABLE>
The valuation allowance allocated by tax jurisdiction is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Germany:
Current...................................................... $ 300 $ 800
Long-term.................................................... 7,192 10,451
------- -------
$ 7,492 $11,251
Other:
Long-term.................................................... $ 4,227 $ 6,120
------- -------
Total........................................................ $11,719 $17,371
======= =======
</TABLE>
8.COMMITMENTS AND CONTINGENCIES:
Litigation
One of the Company's subsidiary's has been assessed a charge related to value
added tax by the Swiss government in the amount of approximately $2.0 million,
resulting from differing interpretations of the Company's crate activity in
Switzerland. The Company objects to the charge and is currently negotiating
with the tax authorities. The Company has accrued an amount that it believes to
be a probable liability.
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
such proceedings with certainty, in the opinion of the Company's management,
all such proceedings are adequately covered by insurance or, if not so covered,
should not materially result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
Leasing Arrangements
The Company also leases certain facilities and machinery under noncancellable
operating leases. Lease payments are accrued on a straight-line basis over the
term of the lease. Minimum future rental payments under these leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
1999................................................................. $ 4,094
2000................................................................. 3,605
2001................................................................. 2,700
2002................................................................. 1,603
2003................................................................. 1,504
Thereafter........................................................... 1,449
-------
$14,955
=======
</TABLE>
Rent expense under operating leases was approximately $2,335 and $4,442 for
the years ending December 31, 1997 and 1998, respectively.
F-25
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
9.RELATED PARTY TRANSACTIONS:
Crate Supply Contracts
IFCO Europe has historically purchased the majority of its crates through
single-year supply contracts with SPI. During 1997, the Company entered into a
ten-year supply agreement with SPI to provide all of the Company's plastic
crates. SPI will not provide plastic crates to other third parties. SPI unit
prices are a function of their weight, the price for granulate and the actual
quantity purchased by the Company. There is not a minimum purchase requirement.
Changes in pricing may occur when SPI's production costs vary by more than 15%,
as defined in the agreement. This supply agreement also states that the Company
is to receive a fixed price per kilogram for broken containers that are
recollected from the Company by SPI. During 1997 and 1998, the Company paid SPI
$45,472 and $46,397, respectively, for crates. Sales of broken containers from
the Company to SPI totaled $8,750 in 1997 and $9,438 in 1998, and are included
within revenues.
Management Fee
The Company has entered into a management contract expiring in November 2000
with SPS to provide management and administrative services to the Company. The
Company has recorded $769 and $576 in costs under this contract during fiscal
years 1997 and 1998, respectively, which are included in selling, general and
administrative costs in the accompanying combined statement of operations. The
current contract expires on December 31, 2000, and the total management fee
payable by the Company to SPS in 1999 and 2000 is DM 1.75 million ($995) per
annum.
Related Party Working Capital Financing
The Company has generated payables to and receivables from SPI, primarily as
a result of the purchase of crates from SPI and the subsequent sale of broken
crates to SPI. Additionally, the Company has recorded receivables and payables
from other related parties. The Company receives interest on its receivables
and accrues interest on its payables at 8%.
The Company has recorded net interest income (expense) from related parties
which principally consist of SPS and SPI of approximately ($1,266) and $215
during the fiscal years' 1997 and 1998, respectively.
Capital Distribution
During 1997, IFCO Europe purchased a patent for a type of plastic crate from
SPI for $8,635. The patent had been internally developed by SPI and had a
nominal carrying value. As this represented a transfer of assets under common
control, the amount paid for the patent has been treated as a capital
distribution, and IFCO Europe is carrying the patent at the nominal carrying
value.
Unaudited Related Party Transactions
In January 1999, the Company entered into an additional agreement with
Schoeller Plast AG, an indirect 80%-owned subsidiary of SPS, in which Schoeller
Plast AG agreed to share higher initial costs related to the strategic growth
of the crate leasing and supply business up to a maximum amount of DM 6 million
for the year ended 1999. For the ten months ended October 31, 1999, Schoeller
Plast AG has reimbursed the Company DM 5 million which has been recorded as a
reduction of cost of goods sold. The agreement terminated at the end of 1999
and subsequent to December 31, 1999, no further costs related to the additional
agreement will be reimbursed.
F-26
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
10.BUSINESS SEGMENTS:
The Company has three business segments, the European plastic crate
operations ("European perishables"), the dry good container operations ("Dry
good"), and the non-European plastic crate operations ("Non-European
perishables"). The European perishables and Non-European perishables segments
sell, repair/wash, lease and retrieve plastic crates primarily for use in
agricultural and industrial markets. The Dry good segment has a reusable
packing system for dry goods, primarily for use in agricultural and industrial
markets.
The accounting policies for the segments are the same as those described in
Note 2, Summary of Significant Accounting Policies. The Company evaluates the
performance of its reportable segments and allocates resources based on
operating profit.
F-27
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
As discussed in Note 2, Summary of Significant Accounting Policies,
accumulated loss in excess of investments in equity entities relates to the
amount shown in the combined balance sheet of a portion of IFCO-US's losses
recognized in excess of the carrying value of the investment in IFCO-US. Losses
from equity entities represents the portion of IFCO-US and IFCO Japan's losses
that the Company has recognized in the combined statements of operations.
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues................ $106,863 $ 9,580 $ 292 $ -- $116,735
Profit (loss) before
taxes ................. (7,338) (424) (4,031) -- (11,793)
Interest revenue........ 4,031 240 71 (455) 3,887
Interest expense........ (11,749) (244) (277) 455 (11,815)
Depreciation and crate
breakage............... (25,009) (1,783) (137) -- (26,929)
Amortization............ (675) -- -- -- (675)
Total assets............ 237,629 15,242 2,411 (5,725) 249,557
Net investment.......... (8,184) (3,003) (7,132) (1,671) (19,990)
Accumulated loss in
excess of investments
in equity entities..... -- -- (3,136) -- (3,136)
Losses from equity
entities............... -- -- (2,347) -- (2,347)
Capital expenditures.... (40,656) (1,783) (73) -- (42,512)
<CAPTION>
Year ended December 31, 1998
--------------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues................ $123,673 $ 9,901 $ 1,147 $ -- $134,721
Profit (loss) before
taxes.................. (2,644) (470) (4,227) -- (7,341)
Interest revenue........ 1,660 238 7 (298) 1,607
Interest expense........ (8,446) (133) (356) 298 (8,637)
Depreciation and crate
breakage............... (26,363) (1,917) (207) -- (28,487)
Amortization............ (383) -- -- -- (383)
Total assets............ 267,866 17,954 2,777 (4,144) 284,453
Net investment.......... (13,270) (3,812) (11,973) (1,818) (30,873)
Accumulated loss in
excess of investments
in equity entities..... -- -- (4,472) -- (4,472)
Losses from equity
entities............... -- -- (2,726) -- (2,726)
Capital expenditures.... (37,690) (2,122) (383) -- (40,195)
<CAPTION>
Ten months ended October 31, 1998 (unaudited)
--------------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 97,420 $ 7,728 $ 873 -- $106,021
Profit (loss) before
taxes.................. (3,501) 17 (3,339) -- (6,823)
Total assets............ 255,281 16,246 2,575 (4,461) 269,641
<CAPTION>
Ten months ended October 31, 1999 (unaudited)
--------------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues................ $116,562 $ 7,869 $ 1,968 -- $126,399
Profit (loss) before
taxes.................. (2,853) 502 (3,791) -- (6,142)
Total assets............ 260,777 14,392 6,068 (7,591) 273,646
</TABLE>
Eliminations for revenue and expense items above are made to eliminate
intercompany sales and expenses. Eliminations for total assets are made for
intercompany receivables and investments in other affiliated entities.
F-28
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
The Company's revenue by country, based on the location of the customer, is
as follows:
<TABLE>
<CAPTION>
Year ended Ten Months Ended
December 31, October 31,
----------------- -----------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Germany............................ $ 42,805 $ 48,383 $ 43,934 $ 51,785
Spain.............................. 20,914 23,727 15,683 14,844
Italy.............................. 14,746 18,369 14,428 15,462
France............................. 10,043 11,208 9,231 9,857
Other.............................. 28,227 33,034 22,745 34,451
-------- -------- -------- --------
Combined........................... $116,735 $134,721 $106,021 $126,399
======== ======== ======== ========
</TABLE>
The Company's long-lived assets by country are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Germany.................................................... $147,016 $183,888
Other...................................................... 377 587
-------- --------
Combined................................................... $147,393 $184,475
======== ========
</TABLE>
11.EQUITY ENTITIES:
IFCO-US is considered a significant investment accounted for under the equity
method given that losses from equity entities recorded by the Company in
respect of IFCO-US is approximately 27% of the total net loss before income
taxes, participating rights and minority interest of the Company. Summarized
financial data is as follows for IFCO-US:
<TABLE>
<CAPTION>
At December 31, At
------------------ October 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Total assets.................................... $ 10,187 $ 9,731 $ 21,017
Total liabilities............................... $(16,458) $(20,273) $(34,466)
Members' deficit................................ $ (6,271) $(10,542) $(13,449)
</TABLE>
Summarized income information for IFCO-US is as follows:
<TABLE>
<CAPTION>
Year ended Ten Months Ended
December 31, October 31,
------------------ -----------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue.......................... $ 919 $ 1,657 $ 1,157 $ 4,268
Gross margin (loss).............. (1,338) (994) (921) 64
Loss from operations............. (2,761) (2,713) (2,345) (1,577)
Net loss......................... (3,783) (4,272) (3,691) (2,907)
</TABLE>
12.SUBSEQUENT EVENT:
Effective March 29, 1999, the Company entered into a definitive merger
agreement with PalEx, Inc. ("PalEx") to merge their businesses. The combined
entity, to be named IFCO Systems N.V., will include the
F-29
<PAGE>
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Company and PalEx's North American pallet and industrial container operations.
The merger will also occur on the same day as, but immediately before, an
initial public offering of shares in IFCO Systems N.V.
IFCO Systems N.V. will initially be established as a subsidiary of SPS, and
IFCO Europe, MTS and SIL will be contributed to IFCO Systems N.V. Under the
terms of the agreement, PalEx will merge into a subsidiary of IFCO Systems N.V.
A debenture in the amount of DM 45 million ($27,631) will be issued to GECC
by a company controlled by the Schoeller family for GECC's preferred share in
IFCO Europe. This debenture will have a 30 year term and bear interest at 5%
per year. The debenture will be exchangeable for IFCO Systems N.V. ordinary
shares that are held by the Schoeller controlled issuer of the debenture after
a mandatory holding period. GECC's options to increase its investment in IFCO
Europe, MTS and SIL will be exchanged for a promissory note payable issued by
IFCO Systems N.V. in the amount of DM 45 million ($27,631), of which DM 11.25
million ($6,908) will be paid out of the proceeds from the initial public
offering. The balance will be paid over 5 years beginning on December 31, 2001.
In the first year the annual interest rate will be EURIBOR plus 2.75%,
increasing to 10% in the second year.
The Company intends to purchase the remainder of IFCO-US, giving it 100%
ownership.
Prior to the merger with PalEx, SPS will change its name to Schoeller
Logistics Technologies GmbH and SIL will change its name to IFCO International
Network Beteiligungsgesellschaft mbH.
The closing of the merger is subject to the approval of shareholders,
completion of the initial public offering of IFCO Systems N.V. and other
customary conditions. The transaction is expected to be completed by the end of
the first quarter of 2000.
Unaudited subsequent events
Effective November 4, 1999, Schoeller Packaging Systems GmbH ("SPS")
contributed its shares of IFCO Europe Beteiligungs GmbH ("IFCO Europe"), which
is 76% owned by SPS, and MTS Okologistik Verwaltungs GmbH ("MTS"), 100% owned
by SPS, to IFCO Systems N.V. In addition, Gebruder Schoeller
Beteilungsverwaltungs GmbH ("GSB") contributed its shares of Schoeller
International Logistics Beteilungsverwaltungs GmbH ("SIL"), 100% owned by GSB,
to IFCO Systems N.V. effective November 4, 1999. Both SPS and GSB are owned by
the same group of shareholders, the Schoeller family.
In connection with the merger, the Company has agreed to reimburse PalEx up
to a maximum amount of $2.3 million for costs incurred by PalEx related to the
merger. For the ten months ended October 31, 1999, the Company recorded
expenses of $2.1 million related to this agreement. These expenses are included
in selling, general and administrative expenses.
The bank syndicate for the credit facilities has consented to the scheduled
IPO under the condition, that the lenders receive a payment of DM40.0 million,
or approximately $21.1 million, from the IPO net proceeds to reduce by that
amount the borrowings under the term loan portion of Senior Facility Agreement.
Additionally, at the time of the merger and IPO, the available facility amount
under the revolving credit portion of the Senior Facility Agreement will be
reduced by DM20.0 million, or approximately $10.6 million, and any borrowings
in excess of the reduced revolving credit limit will be repaid from the net
proceeds of the initial public offering or proceeds from a debt financing. In
addition, if the IPO occurs, the final maturity date of the Senior Facility
Agreement term loan and revolver will be accelerated to June 30, 2001, and the
Senior Subordinated Agreement repayment schedule will be modified to provide
for semiannual principal payments through September 30, 2005.
F-30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of PalEx. Inc.:
We have audited the accompanying consolidated balance sheets of PalEx. Inc.
(a Delaware corporation) and subsidiaries as of December 28, 1997, and December
27, 1998, and the related consolidated statements of operations, comprehensive
income, changes in stockholders' equity and cash flows for the years ended
November 30, 1996, December 28, 1997, and December 27, 1998, and the one-month
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PalEx, Inc. and subsidiaries
as of December 28, 1997, and December 27, 1998, and the results of their
operations and their cash flows for the years ended November 30, 1996, December
28, 1997, and December 27, 1998, and the one month period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Tampa, Florida
February 26, 1999
F-31
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 28, December 27, October 24,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 7,448 $ 4,157 $ 5,255
Accounts receivable, net of allowances
of $617, $1,616 and $1,500............ 21,592 44,543 51,068
Inventories............................ 20,383 29,986 27,535
Deferred income taxes.................. 945 2,105 2,503
Prepaid expenses and other current
assets................................ 3,387 4,427 8,954
-------- -------- --------
Total current assets..................... 53,755 85,218 95,315
PROPERTY, PLANT AND EQUIPMENT, net....... 37,850 75,724 75,239
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of
$1,313, $4,648 and $8,464............... 27,974 128,568 125,406
OTHER ASSETS............................. 426 2,928 3,657
-------- -------- --------
Total assets............................. $120,005 $292,438 $299,617
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit......................... $ 1,150 $ -- $ --
Current maturities of long-term debt... 1,057 1,960 135,018
Current maturities of subordinated
convertible notes payable to related
parties............................... -- -- 10,012
Bank overdraft......................... -- 8,407 7,945
Accounts payable....................... 9,342 9,004 11,232
Accrued expenses....................... 5,094 10,646 13,910
Income taxes payable................... 1,407 529 1,995
-------- -------- --------
Total current liabilities................ 18,050 30,546 180,112
LONG-TERM DEBT, net of current
maturities.............................. 30,673 143,902 2,151
SUBORDINATED CONVERTIBLE NOTES PAYABLE TO
RELATED PARTIES, net of current
maturities.............................. -- 9,910 --
DEFERRED INCOME TAXES.................... 3,167 5,350 5,668
FOREIGN DEFERRED INCOME TAXES............ -- 3,957 4,512
OTHER LONG-TERM LIABILITIES.............. 678 3,493 3,561
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
30,000,000 shares authorized;
17,644,520, 20,289,091 and 20,299,341
shares outstanding.................... 176 203 203
Capital in excess of par value......... 54,107 79,030 79,107
Unearned compensation.................. (1,770) (1,770) (1,770)
Accumulated other comprehensive income
(loss):
Foreign currency translation
adjustment........................... -- (623) 869
Retained earnings........................ 14,924 18,440 25,204
-------- -------- --------
Total stockholders' equity............... 67,437 95,280 103,613
-------- -------- --------
Total liabilities and stockholders'
equity.................................. $120,005 $292,438 $299,617
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Ten-Month
One Month Period Ended
Year Ended Period Ended Year Ended Year Ended ----------------------
November 30, December 31, December 28, December 27, October October
1996 1996 1997 1998 25, 1998 24, 1999
------------ ------------ ------------ ------------ ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $ 145,030 $ 3,828 $ 222,993 $ 319,691 $ 256,874 $ 320,433
COST OF GOODS SOLD...... 121,865 3,121 188,084 259,562 207,850 257,472
INVENTORY VALUATION
ADJUSTMENT............. -- -- -- 1,235 1,679 --
--------- --------- ---------- ---------- ---------- ----------
Gross Profit............ 23,165 707 34,909 58,894 47,345 62,961
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 14,063 749 20,135 33,042 27,374 36,142
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 165 -- 820 3,334 2,186 3,993
POOLING EXPENSES........ -- -- -- 1,841 1,841 --
COMPENSATION
DIFFERENTIAL........... -- -- 1,020 1,062 1,062 --
RESTRUCTURING CHARGE.... -- -- -- 949 2,404 --
PLANT CLOSURE COSTS AND
ASSET ABANDONMENT
LOSS................... -- -- -- 1,369 1,369 --
--------- --------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 8,937 (42) 12,934 17,297 11,109 22,826
INTEREST EXPENSE........ (1,576) (25) (1,722) (8,468) (6,317) (12,047)
OTHER INCOME (EXPENSE),
NET.................... 511 1 132 262 239 1,387
--------- --------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES.................. 7,872 (66) 11,344 9,091 5,031 12,166
PROVISION FOR INCOME
TAXES.................. 1,833 -- 4,704 5,105 2,676 5,402
--------- --------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)....... $ 6,039 $ (66) $ 6,640 $ 3,986 $ 2,355 $ 6,764
========= ========= ========== ========== ========== ==========
Net income (loss) per
share--basic........... $ .64 $ (.01) $ .43 $ .21 $ .13 $ .33
========= ========= ========== ========== ========== ==========
Net income (loss) per
share--diluted......... $ .64 $ (.01) $ .42 $ .21 $ .12 $ .33
========= ========= ========== ========== ========== ==========
Shares used in computing
net income (loss) per
share--basic........... 9,433,414 9,433,414 15,561,489 18,937,354 18,651,737 20,297,016
========= ========= ========== ========== ========== ==========
Shares used in computing
net income (loss) per
share--diluted......... 9,433,414 9,433,414 15,914,157 19,310,295 19,047,287 20,299,381
========= ========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
One Month Ten-Month Ten-Month
Year Ended Period Ended Year Ended Year Ended Period Ended Period Ended
November 30, December 31, December 28, December 27, October 25, October 24,
1996 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $6,039 $(66) $6,640 $3,986 $2,355 $6,764
Other comprehensive
income (loss):
Foreign currency
translation
adjustment............. -- -- -- (623) (440) 1,492
------ ---- ------ ------ ------ ------
Comprehensive income
(loss)................. $6,039 $(66) $6,640 $3,363 $1,915 $8,256
====== ==== ====== ====== ====== ======
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
F-34
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------
Accumulated
Capital in Treasury Other
Stockholders' Excess Unearned Retained Stock Income Comprehensive
Shares Amount of Par Value Compensation Earnings (loss) Income (Loss) Total
------ ------------- ------------ ------------ -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 30,
1995................... 9,433 $ 94 $ 5,232 $(2,260) $16,834 $(876) $ -- $ 19,024
Distributions to
stockholders, net...... -- -- -- -- (2,229) -- -- (2,229)
Capital contributions
equal to the current
income taxes of S
corporations........... -- -- 1,329 -- -- -- -- 1,329
Shares released under
leveraged ESOP plan.... -- -- -- 280 -- -- -- 280
Net income.............. -- -- -- -- 6,039 -- -- 6,039
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, November 30,
1996................... 9,433 94 6,561 (1,980) 20,644 (876) -- 24,443
Issuance of common
stock:
Shares issued to profit
sharing plans.......... 143 1 800 -- -- -- -- 801
Public offering, net of
offering costs......... 3,450 35 23,529 -- -- -- -- 23,564
Acquisition of founding
companies.............. 4,087 41 17,228 -- -- -- -- 17,269
Acquisition of purchased
company................ 286 3 4,457 -- -- -- -- 4,460
Acquisition of pooled
company at inception... 245 2 92 -- 497 -- -- 591
Retire treasury shares.. -- -- -- -- (876) 876 -- --
Capital contributions... -- -- 231 -- -- -- -- 231
Capital contributions
equal to the current
income taxes of S
corporations........... -- -- 1,209 -- -- -- -- 1,209
Distributions to
stockholders, net...... -- -- -- -- (12,382) -- -- (12,382)
Net loss for the one-
month period ended
December 31, 1996...... -- -- -- -- (66) -- -- (66)
Adjustment to conform
year-end of pooled
companies.............. -- -- -- -- 467 -- -- 467
Shares released under
leveraged ESOP plan.... -- -- -- 210 -- -- -- 210
Net income, year ended
December 28, 1997...... -- -- -- -- 6,640 -- -- 6,640
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, December 28,
1997................... 17,644 176 54,107 (1,770) 14,924 -- -- 67,437
Issuance of common
stock:
Acquisition of purchased
companies.............. 2,639 27 25,502 -- -- -- -- 25,529
Exercise of stock
options................ 6 -- 49 -- -- -- -- 49
Purchase of minority
interest in pooled
company................ -- -- (751) -- -- -- -- (751)
Capital contribution.... -- -- 123 -- -- -- -- 123
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (623) (623)
Adjustment to conform
year end of pooled
companies.............. -- -- -- -- (470) -- -- (470)
Net income.............. -- -- -- -- 3,986 -- -- 3,986
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, December 27,
1998................... 20,289 $203 $79,030 $(1,770) $18,440 $ -- $(623) $ 95,280
Exercise of stock
options (unaudited).... 10 -- 77 -- -- -- -- 77
Foreign currency
translation adjustment
(unaudited)............ -- -- -- -- -- -- 1,492 1,492
Net income (unaudited).. -- -- -- -- 6,764 -- -- 6,764
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, October 24,
1999................... 20,299 $203 $79,107 $(1,770) $25,204 $ -- $ 869 $103,613
====== ==== ======= ======= ======= ===== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
One Month Ten-Month Period Ended
Year Ended Period Ended Year Ended Year Ended ------------------------
November 30, December 31, December 28, December 27, October 25, October
1996 1996 1997 1998 1998 24 , 1999
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM (unaudited) (unaudited)
OPERATING ACTIVITIES:
Net income (loss)....... $6,039 $(66) $ 6,640 $ 3,986 $ 2,355 $ 6,764
Net loss for Fraser for
the one month
transition period...... -- -- (66) -- -- --
Adjustment to conform
year-end of pooled
companies.............. -- -- 467 (470) (470) --
Unearned compensation... 280 -- 210 -- -- --
Cash acquired from
pooled company at
inception.............. -- -- 51 -- -- --
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization........... 3,597 99 5,847 11,665 7,974 12,325
(Gain) loss on sale of
property, plant and
equipment.............. 29 -- 400 1,135 1,430 (499)
Capital contributions
equal to the current
income taxes of S
corporations 1,329 -- 1,209 -- -- --
Deferred tax provision
(benefit).............. 134 -- (86) 1,082 53 483
Changes in operating
assets and liabilities
net of purchased
companies:
Accounts receivable..... (1,045) (387) (1,632) (7,349) (4,787) (6,394)
Inventories............. 282 (486) (5,458) 473 987 2,534
Prepaids and other
current assets......... (569) 80 (1,767) (386) (236) (4,522)
Other assets............ (1,173) 1 1,370 239 (1,173) (793)
Accounts payable........ 1,599 434 51 1,733 (1,766) 1,740
Accrued expenses........ 1,626 (402) (2,155) (837) 2,288 3,115
Income taxes payable.... 66 -- 1,135 (707) (1,407) 1,296
Deferred revenue........ (78) (2) 147 285 (192) 5
Other liabilities....... -- -- -- 2,747 2,016 158
------ ---- ------- -------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 12,116 (729) 6,363 13,596 7,072 16,212
------ ---- ------- -------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment.... (7,355) (92) (9,149) (13,987) (12,472) (8,331)
Proceeds from sale of
equipment.............. -- -- -- -- 1,661 1,735
Purchase of minority
interest in pooled
company................ -- -- -- (751) -- --
Adjustments to purchase
price of certain
Purchased Companies.... -- -- -- -- -- --
Cash paid for purchased
companies, net of cash
acquired............... -- -- (4,607) (86,081) (80,572) --
------ ---- ------- -------- ----------- -----------
Net cash used in
investing activities... (7,355) (92) (13,756) (100,819) (91,383) (6,596)
------ ---- ------- -------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net payments on lines
for credit............. (3,535) -- (365) (1,150) (1,150) --
Net proceeds (payments)
on notes payable to
related parties........ 555 -- (2,980) -- -- --
Proceeds from debt...... 6,801 821 32,787 170,675 155,075 43,033
Payments on debt........ (6,642) -- (28,648) (59,064) (74,278) (51,624)
Payments of acquired
indebtedness of
purchased companies.... -- -- -- (26,664) -- --
Net proceeds from
exercise of stock
options................ -- -- -- 46 46 77
Net proceeds from
issuance of common
stock.................. -- -- 23,564 -- -- --
Purchase of minority
interest in pooled
company................ -- -- -- -- (751) --
Other capital
contributions.......... -- -- -- 123 -- --
Distributions to
stockholders........... (2,230) -- (12,382) -- -- --
------ ---- ------- -------- ----------- -----------
Net cash provided by
(used in) financing
activities............. (5,051) 821 11,976 83,966 78,942 (8,514)
------ ---- ------- -------- ----------- -----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND
CASH EQUIVALENTS....... -- -- -- (34) (3) (4)
------ ---- ------- -------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (290) -- 4,583 (3,291) (5,372) 1,098
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 3,155 -- 2,865 7,448 7,448 4,157
CASH AND CASH
EQUIVALENTS, end of
period................. $2,865 $-- $ 7,448 $ 4,157 $ 2,076 $ 5,255
------ ---- ------- -------- ----------- -----------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for interest.. $1,703 $ 25 $ 1,710 $ 7,474 $ 5,977 $ 11,432
====== ==== ======= ======== =========== ===========
Cash paid for income
taxes.................. $1,008 $-- $ 1,835 $ 4,776 $ 4,512 $ 3,525
====== ==== ======= ======== =========== ===========
SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES
Convertible notes
payable issued in
business acquisitions.. $ -- $-- $ -- $ 9,910 $ 9,910 $ --
====== ==== ======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
PalEx, Inc. ("PalEx" or the "Company") was founded in January 1996 to create
a nationwide provider of pallet products and related services. On March 25,
1997, concurrently with the closing of PalEx's initial public offering (the
"Offering") of its common stock, par value $.01 per share (the "Common Stock"),
PalEx and separate wholly owned subsidiaries of PalEx acquired, in separate
transactions (the "Acquisitions"), the following three businesses: Fraser
Industries, Inc. ("Fraser"), Ridge Pallets, Inc. ("Ridge"), and Interstate
Pallet Co., Inc. ("Interstate"), collectively referred to as the "Founding
Companies." The consideration for the acquisitions of the Founding Companies
consisted of a combination of cash and Common Stock.
Subsequent to the acquisition of the Founding Companies and the Offering, and
during fiscal 1997, PalEx acquired 5 additional companies. Sheffield Lumber &
Pallet Company, Inc. ("Sheffield"), Sonoma Pacific Company ("Sonoma"), Bay Area
Pallet ("Bay Area") and New London Pallet ("New London") were accounted for as
poolings-of-interests (the "Pooled Companies"). The fifth acquisition, Summers
Pallet Manufacturing, Inc. ("Summers"), was accounted for as a purchase.
During fiscal 1998, the Company acquired 19 additional companies, 4 of which,
Acme Barrel Company, Inc. ("Acme"), Drum Service Co. of Florida ("DSF"),
Consolidated Container Corporation ("CCC") and Western Container, Limited
Liability Company ("Western"), were accounted for as poolings-of-interests (the
"1998 Pooled Companies"). The other 15 companies, Consolidated Drum
Reconditioning, Inc. ("CDR"), American Pallet Recyclers, Inc. ("APR"), Capital
Pallet, Incorporated ("Capital"), Pallet Outlet Company, Inc. ("POC"), Southern
Pallets, Inc. ("Southern"), Shipshewana Pallet Co., Inc. ("Shipshewana"),
Gilbert Lumber Inc. ("Gilbert"), Valley Pallets, Inc. ("Valley"), Duckert
Pallet Co., Inc. ("Duckert"), Continental Associated Investments
("Continental"), Isaacson Lumber Company ("Isaacson"), McCook Drum & Barrel
Co., Inc. ("McCook"), Charlotte Steel Drum ("CSD"), Atlas Drum ("Atlas") and
SMG Corporation ("SMG") were accounted for as purchases (the "1998 Purchased
Companies" and, together with Summers, the "Purchased Companies"). Eight of the
19 companies acquired in fiscal 1998 are engaged in the reconditioning and
rebuilding of industrial steel containers. SMG is engaged in the rental of
pallets in Canada.
The Company's headquarters are in Houston, Texas, with significant
manufacturing operations located in Arkansas, California, Florida, Georgia,
Illinois, North Carolina, Ohio, Pennsylvania, Texas and Wisconsin and pallet
leasing operations in 7 Canadian provinces. Sales are made throughout the
United States and Canada with significant concentrations in the southeastern,
midwestern and western regions of the United States serving primarily
agricultural and industrial customers. The Company's pallet leasing operations
serve six Canadian provinces. Revenues related to the agricultural customers
are highly seasonal, occurring primarily during the harvesting season.
Unless the context otherwise requires, all references herein to the Company
include PalEx, the Founding Companies, the Pooled Companies, the 1998 Pooled
Companies and the Purchased Companies.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Fraser has been identified as the accounting acquiror for financial statement
presentation purposes. The acquisitions of Ridge, Interstate and the Purchased
Companies were accounted for using the purchase method of accounting. The
allocations of the purchase price to the assets acquired and liabilities
assumed have been assigned and recorded based on estimates of fair value and
will be adjusted to reflect changes in the estimates of fair value, although
the Company does not believe those changes will be material. The accompanying
consolidated financial statements present Fraser combined with the Pooled
Companies and the 1998 Pooled
F-37
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Companies for all periods, and include Ridge, Interstate and the Purchased
Companies from their respective dates of acquisition. All significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to prior year consolidated financial
statements to conform with the current-year presentation.
The Pooled Companies previously reported on a calendar year-end. As such, the
accounts of these companies for their 1996 calendar year have been consolidated
with the accounts of PalEx as of and for the year ended November 30, 1996.
Acme, DSF and CCC previously reported on year-ends of April 30, October 31 and
November 30, respectively. The results of operations for Acme have been
conformed to the fiscal-year end of PalEx for 1997. Revenues and net loss for
the four month period ended April 30, 1997 were approximately $8,445,000 and
$467,000, respectively. Acme's net loss for the four-month transition period is
included as an adjustment to the consolidated statements of stockholders'
equity and cash flows for the year ended December 28, 1997. Acme's results of
operations for its year ended April 30, 1997 has been included in the Company's
consolidated statement of operations for the year ended November 30, 1996. The
results of operations included herein for the years ended November 30, 1996 and
December 28, 1997 include DSF and CCC for their respective twelve-month periods
ended October 31, 1996 and 1997 and November 30, 1996 and 1997. An adjustment
has been made to the accompanying consolidated statements of stockholders'
equity and cash flows for the year ended December 27, 1998, to reflect the net
loss for the transition periods of DSF and CCC. Revenues and net loss for DSF
and CCC for the transition period were approximately $3,075,000 and $470,000,
respectively.
Fiscal Year
During 1997, PalEx changed its year-end to the last Sunday in the calendar
year from November 30. Accordingly, it maintains its accounting records using a
52/53-week year ending on the last Sunday in December. Each quarter contains 13
weeks, unless otherwise noted. The accompanying consolidated financial
statements include the statement of operations and cash flows for the one-month
period ended December 31, 1996, representing the income and cash flows of
Fraser, the accounting acquiror, for this one-month transition period.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis or by specific identification. The cost of
finished goods inventory includes direct materials, direct labor and overhead.
Property, Plant and Equipment
Property, plant and equipment acquired in purchase business combinations is
recorded at fair value. Property, plant, and equipment acquired subsequently is
carried at cost. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. The Company's capital leases are insignificant. The
straight-line method of depreciation is utilized for substantially all assets
for financial reporting purposes, but accelerated methods are used for tax
purposes.
The Company's rental pool consists of a pallet rental pool at its Canadian
operations and industrial bulk containers at one of the drum operations. Where
the Company repairs its own pallets or reuses industrial
F-38
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
containers, cost includes materials plus direct labor and applicable overhead.
The rental pool is being depreciated to estimated salvage value using the
straight line method over lives ranging from 3 to 10 years, with a weighted
average useful life approximately 9 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions and major replacements or betterments that increase capacity or
extend useful lives are added to the cost of the asset. Upon sales or
retirement of property, plant and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net, in the accompanying
consolidated statements of operations.
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes
the recognition and measurement standards related to the impairment of long-
lived assets. The Company periodically assesses the realizability of its long-
lived assets pursuant to the provisions of SFAS No. 121 and has determined that
no impairments would have been recognized under SFAS No. 121, other than those
related to the termination of the Company's relationship with CHEP USA
("CHEP"), as discussed in Note 11.
Goodwill
Goodwill, which represents the excess of acquisition cost over the fair
market value of identified net assets acquired in business combinations
accounted for as purchases, is amortized using the straight-line method over 30
years. The Company evaluates on a regular basis whether events and
circumstances have occurred that indicate that the carrying amount of goodwill
may warrant revision. Management believes that there has been no impairment of
the goodwill as reflected in the Company's consolidated financial statements as
of December 27, 1998.
Income Taxes
The Company uses the liability method of accounting for income taxes, wherein
deferred tax assets and liabilities are recognized for future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to reverse. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
Deferred income taxes were not provided on the undistributed foreign earnings
of SMG because such earnings are expected to be reinvested indefinitely.
The stockholders of Fraser and three of the four Pooled Companies elected to
be taxed under the provisions of Subchapter S of the Internal Revenue Code
prior to their acquisition by the Company. Under these provisions, these
companies did not pay federal and certain state income taxes. Instead, these
companies' respective stockholders paid income taxes on their proportionate
shares of the companies' net earnings. The S Corporation status of Fraser and
the applicable Pooled Companies was terminated effective with the combination
with PalEx, and the Company is now subject to federal and state income taxes.
The Company recorded a charge to income tax expense of approximately $488,000
on March 25, 1997, representing income taxes at that date which were not
previously recorded because of Fraser's status under Subchapter S.
F-39
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of these consolidated financial statements, federal and state
income taxes have been provided for the net income of the applicable Pooled
Companies as if these companies had filed C Corporation tax returns for the
preacquisition periods. The current income tax expense of the applicable Pooled
Companies is reflected in the consolidated financial statements in the
provision for income taxes and as an increase to capital in excess of par
value.
Revenue Recognition
The Company recognizes revenue upon delivery of the product to the customer.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments", and
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments", require the disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. The carrying value of the Company's financial instruments approximates
fair value.
Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary are translated
to U.S. dollars using the exchange rate as of the balance sheet date for assets
and liabilities and a weighted average exchange rate for the reported amount of
revenues, expenses, gains and losses during the reporting period. The
cumulative translation adjustment is recorded as a separate component of
stockholders' equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Although the Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the estimated effect of any necessary adjustments
prior to their publication, actual results could differ from these estimates.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). The Company adopted SFAS No. 128
for the year ended December 28, 1997. Under SFAS No. 128, net income per
share--basic excludes dilution and is determined by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Net income per share--diluted reflects the
potential dilution that could occur if securities and other contracts to issue
common stock were exercised or converted into common stock. Net income per
share--diluted is computed similarly to fully diluted net income per share
under previous accounting rules.
Net income per share--basic and diluted was computed using 9,433,414 shares
(the aggregate number of shares attributable to Fraser and the shares issued in
acquisitions accounted for under the pooling-of-interests method) for the year
ended November 30, 1996 and the one-month transition period ended December 31,
1996. Net income per share--basic for the year ended December 28, 1997 was
computed using, in addition to the aforementioned shares, 6,128,075 weighted
average shares issued in consideration for the acquisition of Ridge, Interstate
and Summers, the shares issued pursuant to the Offering and overallotment
option, the shares issued to Main Street Capital Partners, L.P. and to PalEx
management, the shares issued to the profit sharing plans of the Founding
Companies and the shares issued in the acquisition of one of the 1998 Pooled
Companies, deemed to have been acquired at its date of inception in 1997.
F-40
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net income per share--basic for the year ended December 27, 1998 was computed
using 17,644,521 shares issued in consideration for the acquisition of the
Founding Companies, the Pooled Companies, the 1998 Pooled Companies and
Summers, the shares issued pursuant to the Offering and overallotment option,
shares issued to Main Street Capital Partners, L.P. and to PalEx management,
the shares issued to the profit sharing plans of the Founding Companies and
1,292,833 weighted average shares issued for the acquisition of the 1998
Purchased Companies and exercise of stock options.
Net income per share--diluted for the years ended December 28, 1997 and
December 27, 1998 includes 352,668 and 372,941 shares, respectively, for
unexercised stock options computed under the treasury method. The weighted
average shares for 1998 includes as common stock equivalents those shares of
the Company's Canadian subsidiary which are convertible on a share for share
basis into the common stock of the Company. The effect of the conversion of the
Company's outstanding convertible notes payable was anti-dilutive for the year
ended December 27, 1998, and therefore not included in the calculation of net
income per share--diluted.
The following stock options were outstanding as of the end of the fiscal
years but were not included in the computation of net income per share--diluted
because the options' exercise prices were greater than the average market price
of the common shares:
<TABLE>
<CAPTION>
Year ended December 27,
Year ended December 28, 1997 1998
-------------------------------- -------------------------
<S> <C> <C>
Number of options....... 292,000 1,056,000
Exercise price (range).. $11.38-$14.75 $10.25-$14.88
Expiration date
(range)................ August 1, 2007-December 10, 2007 June 6, 2007-May 21, 2008
</TABLE>
Concentrations of Risk
Materials
Pallet prices are closely related to the changing costs and availability of
lumber, the principal raw material used in the manufacture and repair of wooden
pallets. Lumber supplies and costs are affected by many factors including
weather, governmental regulation of logging on public lands, lumber agreements
between Canada and the United States and competition from other industries that
use similar grades and types of lumber.
Drum demand in certain regions of the United States has required more drums
to be shipped outside of the region than are shipped into the region.
Consequently, the acquisition costs of used drums, the primary raw materials
for reconditioned drums, in these regions are significantly higher since the
used drum deficit must be replaced by collecting and shipping used drums over
significant distances. The West Coast and Southeast are regions that tend to be
net exporters of open top drums because of their emphasis on agriculture. The
Midwest tends to be a significant accumulator of drums because of its greater
industrial content and usage of petroleum products, coatings and chemicals.
Markets
Markets for pallet manufacturing and pallet recycling are highly fragmented
and competitive. These markets are not capital-intensive and barriers to entry
in such businesses are minimal.
Markets for steel drum reconditioning are highly fragmented and competitive.
There are three significant barriers to entry in the steel drum reconditioning
industry: (i) regulatory permits for facilities and ongoing compliance
requirements, (ii) significant distribution barriers as a result of high
transportation costs for containers and (iii) capital-intensive nature of the
business.
F-41
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Vendors
During the year ended December 27, 1998, the Company purchased approximately
13% of its lumber from two vendors.
Customers
The Company seeks to efficiently serve large numbers of customers across
diverse markets and industries to provide a stable and diversified base for
ongoing sales of products and services in all of its operations.
Customers of the Company include companies in the automotive, chemical,
consumer products, grocery, produce and food production, petroleum, paper and
forest products, retail, and steel and metals industries and are both regional
and national in scale. Because a significant part of the Company's products and
services are sold to customers engaged in the produce and citrus industries,
the Company's sales volumes in certain regions tend to be seasonal.
On April 29, 1998 the Company notified its largest customer, CHEP, that PalEx
was terminating all its existing agreements with CHEP (also see Note 11). CHEP
operates a national pallet leasing program that provides 48" x 40" pallets
primarily to grocery and consumer products customers throughout the U.S. for a
daily fee. The Company manufactured and repaired pallets for CHEP and provided
a variety of logistical services with respect to CHEP's pallet leasing program,
including the storage and just-in-time delivery of pallets. Sales to CHEP were
approximately 21 percent, 26 percent and 8 percent of the Company's
consolidated revenues in 1996, 1997, and 1998, respectively.
The Company sold approximately $490,000 and $481,000 of lumber to a
corporation owned by a board director and two other employees during the fiscal
years 1997 and 1998, respectively. Management believes the sales prices
approximate those charged to unaffiliated third parties.
Recent Accounting Pronouncements
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes rules for the reporting of
comprehensive income and its components. The Company's comprehensive income
consists of net income and foreign currency translation adjustments and is
presented in the accompanying consolidated statements of comprehensive income.
The adoption of SFAS No. 130 had no impact on total stockholders' equity. The
Company had no other comprehensive income prior to 1998.
Segment Information
The Company operates in two business segments; pallet manufacturing and
recycling and steel drum reconditioning, and follows the reporting requirements
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (see Note 12).
Interim Financial Information
The interim financial statements as of October 24, 1999 and for the ten
months ended October 25, 1998 and October 24, 1999, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly
F-42
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
present the financial position, results of operations and cash flows with
respect to the interim financial statements have been included. Due to
seasonality and other factors, the results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
3.BUSINESS COMBINATIONS:
1997 Purchase Acquisitions
The acquisitions of Ridge, Interstate and Summers in 1997 were accounted for
as purchases and have been reflected in the Company's consolidated financial
statements from March 31, 1997 for Ridge and Interstate and from November 20,
1997 for Summers. The aggregate consideration paid in these transactions was
approximately $4.6 million in cash and 3,301,971 shares of commons stock with
an estimated fair value of approximately $21.7 million. The accompanying
consolidated balance sheet as of December 28, 1997 includes allocations of the
respective purchase prices of Ridge, Interstate and Summers. The allocations
resulted in approximately $25.2 million of goodwill, which represents the
excess of purchase price over the fair value of net assets acquired, as follows
(in thousands):
<TABLE>
<S> <C>
Goodwill........................................................... $ 25,241
Fair value of assets acquired...................................... 20,503
Liabilities assumed................................................ (19,408)
Fair value of common stock......................................... (21,729)
--------
Cash paid, net of cash acquired.................................... $ 4,607
========
1998 Purchase Acquisitions
The acquisitions of the 1998 Purchased Companies were accounted for as
purchases and have been reflected in the Company's financial statements from
the date of each respective acquisition. The aggregate consideration paid in
these transactions was approximately $85.5 million in cash, 2,638,571 shares of
common stock with an estimated fair value of approximately $25.5 million and
issuance of convertible notes payable to former shareholders of approximately
$9.9 million. The accompanying consolidated balance sheet as of December 27,
1998 includes allocations of the respective purchase prices of the 1998
Purchased Companies. The allocations resulted in approximately $103.9 million
in goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, as follows (in thousands):
Goodwill........................................................... $103,949
Fair value of assets acquired...................................... 62,602
Convertible notes payable issued................................... (9,910)
Liabilities assumed................................................ (45,597)
Fair value of common stock......................................... (25,532)
--------
Cash paid, net of cash acquired.................................... $ 85,512
========
</TABLE>
F-43
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Presentation
The following table sets forth unaudited pro forma statements of operations
data of the Company which reflects adjustments to the consolidated financial
statements to present the effect of the acquisitions of Ridge, Interstate and
the Purchased Companies as if the acquisitions were effective January 1, 1997
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 28, December 27,
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenues........................................... $379,534 $379,854
======== ========
Net Income......................................... $ 10,574 $ 6,512
======== ========
Net Income per share--diluted...................... $ .52 $ .32
======== ========
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to
adjustments to selling, general and administrative expenses for changes in the
compensation level of the owners of the acquired businesses, adjustments to
interest expense attributable to incremental borrowing levels and incremental
interest rate levels, amortization of goodwill and adjustment to the income tax
provisions based on pro forma operating results. Net income per share--diluted
assumes all shares had been outstanding for the periods presented, except for
shares issued pursuant to the over-allotment option and those shares issued to
the profit-sharing plans of the Founding Companies, which are included only
from their date of issuance.
The unaudited pro forma data presented above is not necessarily indicative of
actual results that might have occurred had the operations and management teams
of PalEx, the Founding Companies, the Pooled Companies, the 1998 Pooled
Companies and the Purchased Companies been combined at the beginning of each
period presented.
4.PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
Estimated Useful December 28, December 27,
Lives In Years 1997 1998
---------------- ------------ ------------
<S> <C> <C> <C>
Land............................. $ 3,273 $ 5,485
Machinery and equipment.......... 5-10 48,089 60,753
Rental assets.................... 3-10 -- 15,537
Buildings........................ 15-40 12,977 19,890
Furniture and fixtures........... 5-8 1,706 3,890
Tractors and trailers............ 5-6 10,636 18,122
-------- --------
76,681 123,677
Less: accumulated depreciation... (38,831) (47,953)
-------- --------
$ 37,850 $ 75,724
======== ========
</TABLE>
F-44
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5.DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
Balance at beginning of year..................... $ 253 $ 617
Additional charges to costs and expenses......... 227 394
Additional allowances from Purchased Companies... 165 843
Deductions for uncollectible accounts written
off............................................. (28) (238)
------- -------
Balance at end of year........................... $ 617 $ 1,616
======= =======
The major components of inventories are as follows (in thousands):
<CAPTION>
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
Raw materials.................................... $16,555 $23,174
Work-in-process.................................. 102 43
Finished goods................................... 3,726 6,769
------- -------
$20,383 $29,986
======= =======
Accrued expenses consist of the following (in thousands):
<CAPTION>
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
Accrued compensation and benefits................ $ 2,132 $ 2,762
Accrued taxes.................................... 756 1,503
Other accrued expenses........................... 2,206 6,381
------- -------
$ 5,094 $10,646
======= =======
</TABLE>
6.DEBT:
Credit Facility
On March 25, 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. ("Bank One"), which was amended on January 29, 1998, September 3,
1998 and November 10, 1998 (the "Credit Facility"). The Credit Facility
provided the Company with a revolving line of credit of up to $150.0 million
which could be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, the Pooled Companies,
the 1998 Pooled Companies and the Purchased Companies, future acquisitions,
capital expenditures, letters of credit and working capital.
Advances under the Credit Facility bore interest at designated variable rates
plus margins ranging from 0 to 25 basis points, depending on the ratio of the
Company's interest bearing debt to its pro forma trailing earnings before
interest, taxes, depreciation and amortization for the previous four quarters.
At the Company's option, the loans could bear interest based on a designated
London interbank offered rate ("LIBOR") plus a margin ranging from 75 to 200
basis points, depending on the ratio noted above. Commitment fees of 17.5 to 30
basis points are payable on the unused portion of the line of credit. The
Credit Facility contained a limit for standby letters of credit up to $10.0
million. There were letter of credit commitments of approximately $3.0 million
outstanding under the Credit Facility as of December 27, 1998. The Credit
Facility prohibited the
F-45
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
payment of dividends by the Company, restricted the Company's incurrence or
assumption of other indebtedness and required the Company to comply with
financial covenants, including fixed charge coverage, certain funded debt to
earnings before taxes, depreciation, interest, amortization and tangible assets
to liabilities ratios. The Company was in compliance with, or had obtained
waivers for, the covenants on December 27, 1998. The approximate level of
borrowings available under the Credit Facility as of December 27, 1998 was
approximately $5.5 million. The Company's U.S. subsidiaries guaranteed and the
outstanding stock of each of the Company's U.S. subsidiaries and 65% of the
outstanding stock of the Company's Canadian subsidiary was pledged to secure
the repayment of all amounts due under the Credit Facility.
The Credit Facility was amended on December 28, 1998 (the "Amended Credit
Facility"). The Amended Credit Facility provides the Company with a revolving
line of credit of up to $150.0 million, which may be used for general corporate
purposes, including acquisitions, the repayment or refinancing of indebtedness
of all acquisitions including future acquisitions, capital expenditures,
letters of credit and working capital. The Amended Credit Facility will
terminate and all amounts outstanding thereunder, if any, will be due and
payable on April 1, 2000.
Advances under the Amended Credit Facility bear interest at Bank One's base
interest rate, as defined, plus a margin of 50 basis points through March 31,
1999 and increasing by 50 basis points on that date and each quarter until
maturity. At the Company's option, such advances may bear interest based on a
designated LIBOR plus a margin of 275 basis points through March 31, 1999 and
increasing by 50 basis points on that date and each quarter until maturity.
Commitment fees of 50 basis points are payable on the unused portion of the
line of credit through March 31, 1999 and increase by 50 basis points on that
date and each quarter until maturity. The Amended Credit Facility contains a
limit for standby letters of credit of up to $10.0 million. The Amended Credit
Facility prohibits the payment of dividends by the Company, restricts the
Company's incurrence or assumption of other indebtedness and requires the
Company to comply with certain financial covenants including consolidated net
worth, fixed charge coverage, and funded debt and senior debt to earnings
before interest, taxes, depreciation and amortization ratios. The Amended
Credit Facility is secured by a lien on the real and tangible personal property
of the Company, as defined, a pledge of the outstanding stock of each of the
Company's U.S. subsidiaries and 65% of the outstanding stock of the Company's
Canadian subsidiary. The amounts due under the Amended Credit Facility are also
guaranteed by the Company's U.S. subsidiaries.
Convertible Notes Payable to Related Parties
The Company issued approximately $9.9 million in subordinated convertible
notes payable (the "Convertible Notes") to certain former owners of the 1998
Purchased Companies. The Convertible Notes, which bear interest at rates
ranging from six to eight percent, include provisions that allow conversion
into shares of the Company's Common Stock beginning on the first anniversary
date of the Convertible Notes (the "Conversion Date") at conversion prices
ranging from $10.78 to $15.86 per share. If the Convertible Notes are not
converted they become due and payable on their second anniversary. At the
Company's option, the Convertible Notes may be prepaid at any time following
the Conversion Date.
F-46
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
Advances under the Credit Facility, bearing
interest at rates ranging from 7.04% to 8.04 %
as of December 27, 1998........................ $24,000 $141,500
Industrial development revenue bonds, bearing
interest at a variable rate (6.20% at December
27, 1998), payable in annual installments of
$50 through maturity in 2008, secured by a
certificate of deposit and
bank letter of credit.......................... 550 500
Various notes payable, bearing interest at rates
ranging from 5.02% to 8.30% in 1997 and 7.00%
to 7.50% at December 27, 1998, with monthly
installments totaling approximately $31 and
maturity dates ranging
from 1999 until 2009, secured by certain
Company assets................................. 5,387 2,136
Variable rate note issued by the Acme ESOP (see
Note 10), guaranteed
by the Company, interest at 5.81% as of
December 27, 1998.............................. 1,770 1,700
Other notes payable............................. 23 26
------- --------
31,730 145,862
------- --------
Less-current maturities......................... (1,057) (1,960)
------- --------
$30,673 $143,902
======= ========
</TABLE>
Future maturities of long-term debt as of December 27, 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending December,
----------------------------
<S> <C>
1999............................................................... $ 1,960
2000............................................................... 141,865
2001............................................................... 329
2002............................................................... 316
2003............................................................... 308
Thereafter......................................................... 1,084
--------
$145,862
========
</TABLE>
7.INCOME TAXES:
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Federal
Current............................... $1,207 $3,944 $2,831
Deferred.............................. 143 (71) 892
------ ------ ------
1,350 3,873 3,723
------ ------ ------
Foreign
Current............................... -- -- 238
Deferred.............................. -- -- 184
------ ------ ------
-- -- 422
------ ------ ------
State
Current............................... 492 846 829
Deferred.............................. (9) (15) 131
------ ------ ------
483 831 960
------ ------ ------
$1,833 $4,704 $5,105
====== ====== ======
</TABLE>
F-47
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Tax at federal statutory rate of
35%................................ $2,755 $3,970 $3,182
Increase (decrease) resulting from:
State income taxes, net of federal
benefit........................... 353 547 624
Income taxed to Fraser
stockholders...................... (1,381) (172) --
Additional foreign income tax
provision......................... -- -- 74
Nondeductible items:
Goodwill amortization.............. -- 200 484
Pooling expenses................... -- 45 603
Other nondeductible items.......... 76 16 89
Other.............................. 30 98 49
------ ------ ------
$1,833 $4,704 $5,105
====== ====== ======
</TABLE>
Deferred taxes result from temporary differences in the recognition of income
and expenses for financial reporting purposes and for tax purposes. Components
of the Company's net deferred tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment............................ $(2,547) $(8,405)
Other............................................. (620) (902)
------- -------
Total deferred income tax liabilities.............. (3,167) (9,307)
------- -------
Deferred income tax assets:
Basis difference in inventory..................... -- 175
Allowance for doubtful accounts................... 111 654
Accruals and reserves............................. 834 1,276
------- -------
Total deferred income tax assets................... 945 2,105
------- -------
Net deferred income tax liabilities................ $(2,222) $(7,202)
======= =======
</TABLE>
8.COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
such proceedings with certainty, in the opinion of the Company's management,
all such proceedings are adequately covered by insurance or, if not so covered,
should not materially result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
Insurance
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy.
F-48
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is self-insured for certain medical claims up to $50,000 per
person per year. Provisions for expected future payments are accrued based on
the Company's estimate of its aggregate liability for all open and unreported
claims. Management believes the amount currently accrued is adequate to cover
all known and unreported claims as of December 27, 1998.
Operating Lease Agreements
The Company leases certain facilities and equipment. Minimum future rental
payments under noncancelable operating leases as of December 27, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
1999................................................................. $ 2,889
2000................................................................. 2,313
2001................................................................. 2,050
2002................................................................. 1,599
2003................................................................. 1,122
Thereafter........................................................... 1,543
-------
$11,516
=======
</TABLE>
Rent expense under operating leases was approximately $463,000, $1,445,000
and $2,995,000 for fiscal years 1996, 1997 and 1998, respectively. Rent expense
paid to related parties and included in the foregoing amounts was approximately
$227,000, $146,000 and $558,000 for fiscal years 1996, 1997 and 1998,
respectively. In June 1998, the company purchased property for $1,400,000 from
an officer/board director. Management believes that the purchase price
approximates market value.
Potential Environmental Liabilities
In February 1998, the Company acquired DSF, a steel drum reconditioning
company with a facility in Zellwood, Florida. DSF is a wholly-owned subsidiary
of the Company. In 1982, DSF was notified by the U.S. Environmental Protection
Agency (the "EPA") and the Florida Department of Environmental Regulation (the
"DER") that they believed that DSF might be a potentially responsible party
("PRP") regarding the Zellwood Groundwater Contamination Site in Orange County,
Florida (the "Zellwood Site"). The Zellwood Site was designated a "Superfund"
environmental clean-up site after the DER discovered arsenic contamination in a
shallow monitoring well adjacent to it. The DSF facility is a portion of the 57
acres constituting the Zellwood Site. The Company believes that DSF and its
former shareholders were among approximately 25 entities and individuals
identified as PRPs by the EPA.
Between March 1990 and July 1996, the EPA issued various unilateral
administrative orders and notices to DSF and various other PRPs. Those orders
and notices demanded reimbursement from PRPs of approximately $2 million of the
EPA's costs regarding the Zellwood Site and requested the PRPs to accept
financial responsibility for additional clean-up efforts. During that time, the
EPA estimated that the cost of the selected remedy for soil at the Zellwood
Site would be approximately $1 million and the cost of the selected remedy for
groundwater at the Zellwood Site would be approximately $5.1 million. DSF and
the other PRPs did not agree to the EPA's demands or agree to fund any
additional clean-up. In April 1997, the EPA issued an order unilaterally
withdrawing its previous orders.
On June 12, 1998 a suit was filed in the United States District Court for the
Middle District of Florida (Orlando Division) against DSF and certain other
PRPs with respect to the Zellwood Site (United States of America v. Drum
Service Co. of Florida, John Michael Murphy, Douglass Fertilizer & Chemical,
Inc., et, al., Civil No. 98-687-Civ-Orl-22C) (the "Zellwood Suit"). In this
lawsuit, the EPA is seeking reimbursement of costs incurred at the Zellwood
Site during the past 17 years and a declaratory judgment for future response
costs.
F-49
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DSF has maintained comprehensive general liability insurance coverage for
over 25 years, and a number of the policies providing such coverage did not
contain exclusions for environmental contamination. DSF has notified the
insurers that issued such policies of the EPA's claims regarding the Zellwood
Site and the commencement of the Zellwood Suit. In addition, the former
shareholders of DSF have agreed with DSF and the Company to bear liabilities
and expenses with respect to the Zellwood Site, to the extent such liabilities
exceed the Company's insurance recoveries.
DSF and several other PRPs are currently negotiating with the EPA to settle
the Zellwood Suit. DSF intends to vigorously defend the Zellwood Suit and
pursue its insurance coverage with respect to losses and expenses incurred in
connection with the Zellwood Site. Although there can be no assurance as to any
ultimate liability of DSF under the Zellwood Suit, the amount of recoveries
from other PRPs or the insurance coverage, or the amount of insurance
recoveries, the Company's management believes that DSF's insurance coverage,
recoveries from other PRPs and the obligations of DSF's former shareholders
will be adequate to cover any liability or expenses of DSF arising from the
Zellwood Suit. The accompanying consolidated balance sheet as of December 27,
1998 includes a $2.0 million receivable from a former shareholder of DSF and a
corresponding amount in other long-term liabilities.
In November 1998, Container Services Company ("CSC"), a subsidiary of PalEx
Container Systems, Inc. which acquired CDR, received notice from the EPA that
it had been identified as a de minimis PRP with respect to the Casmalia
Disposal Site in Santa Barbara County, California ("Casmalia Site"). The
Casmalia Site was a licensed hazardous waste disposal facility from 1974 to
1989. In 1989, the EPA refused to reissue Casmalia's RCRA permit on the grounds
that the operator of the site was in violation of the preexisting permit and
other environmental laws and regulations. As a result of the owner/operator
abandoning efforts to properly close and clean up the site, the EPA took
emergency action. There are approximately 10,000 generators who legally sent
(according to EPA estimates) approximately 4.5 billion pounds of waste to the
Casmalia Site. EPA estimates that the clean up of this site will cost
approximately $500 million and will take over 30 years to complete.
The EPA has entered in a partial settlement with 50 major PRPs and is
currently in negotiations with over 50 other major PRPs. In October 1998, the
EPA sent out general notices to 750 de minimis PRPs, including CSC. In
addition, it is expected that the EPA will send out several hundred additional
notice letters to de minimis PRPs. The EPA estimates that the original 750 de
minimis PRPs are responsible for an aggregate of about 10% of the volume of
waste shipped to the Casmalia Site.
Based on CSC's alleged contribution of waste to the Casmalia Site, the EPA
has offered to settle its claims against CSC for approximately $300,000, which
represents a 100% premium over EPA's estimate of CSC's proportionate share of
the estimated clean up costs. In return for settlement, CSC will be granted
contribution protection against lawsuits by other PRPs who contributed waste to
the Casmalia Site. CSC is currently reviewing EPA's settlement offer and
estimates of CSC's contribution of waste to the site. In addition, CSC has
joined a joint defense group of over 140 other de minimis PRPs for the primary
purpose of negotiating a reduction in, and the terms of, the EPA's settlement
offer. The Company has included such settlement amount as accrued expenses in
the accompanying consolidated balance sheet as of December 27, 1998.
Contingent Purchase Price
The Company is obligated under the terms of an agreement with the former
owners of one of the 1998 Purchased Companies to pay, in either cash or equal
amounts of cash and the Company's Common Stock, up to $6,000,000 based on the
subsidiary's post-acquisition earnings, as defined. Amounts due under this
contingency, if any, will be accrued as part of the purchase price when the
contingency is resolved in 1999 and 2000.
F-50
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment Agreements
The Company has entered into employment agreements with certain Company
officers and certain former owners of the companies acquired by PalEx. The
remaining commitment under the terms of these agreements as of December 27,
1998 is approximately $5.6 million, of which approximately $4.6 million is
payable in 1999 and approximately $1.0 million is payable in 2000. These
employment agreements expire on various dates through September 2000.
Warrant
On September 30, 1998, the Company issued a warrant for the purchase of up to
250,000 shares of its Common Stock for professional advisory services at an
exercise price of $11.375 per share. The warrant may be exercised in whole or
in part upon the consummation of certain defined transactions, none of which
had occurred as of December 27, 1998, and expires in May 2005.
9. STOCK OPTION PLAN:
On June 1, 1996, the Board of Directors and the stockholders of the Company
approved the 1996 Stock Option Plan, as amended (the "Stock Option Plan"). The
Stock Option Plan provides for the granting of stock options to directors,
executive officers, other employees and certain non-employee consultants of the
Company. The Company accounts for the Stock Option Plan under APB Opinion No.
25, and no compensation expense has been recognized. The Stock Option Plan,
which permits an amount equal to no more than 15% of the outstanding shares of
PalEx common stock to be issued as optioned shares, terminates in June 2006. In
general, the terms of the option awards (including vesting schedules) are
established by the Compensation Committee of the Company's Board of Directors.
The following table summarizes activity under the Stock Option Plan:
<TABLE>
<CAPTION>
Exercise
Shares Price
---------- ------------
<S> <C> <C>
Outstanding at November 30, 1996
Granted.......................................... 1,328,500 $7.50-$14.75
Exercised........................................ -- --
Forfeited and canceled........................... (7,000) $7.50
Outstanding at December 28, 1997.................. 1,321,500 $7.50-$14.75
Granted.......................................... 1,361,500 $5.88-$14.88
Exercised........................................ (6,500) $7.50
Forfeited and canceled........................... (65,850) $7.50-$13.50
Outstanding at December 27, 1998.................. 2,610,650 $5.88-$14.88
Weighted average fair value of options granted
during 1997...................................... $5.38
Weighted average fair value of options granted
during 1998...................................... $6.79
Weighted average remaining contractual life for
options issued in 1997........................... 8.33 years
Weighted average remaining contractual life for
options issued in 1998........................... 9.36 years
</TABLE>
At December 27, 1998, options for approximately 257,000 shares of common
stock were exercisable. Unexercised options expire ten years from the issue
date.
F-51
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
required by SFAS No. 123, "Accounting for Stock-Based Compensation" had been
applied (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended Year ended
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
Net income attributable to common stockholders... $6,640 $3,986
Pro forma adjustment............................. (775) (1,434)
------ ------
Pro forma net income attributable to common
stockholders.................................... $5,865 $2,552
Net income per share ("EPS")
Basic EPS as reported........................... $ .43 $ .21
Basic EPS pro forma............................. $ .38 $ .13
Diluted EPS as reported......................... $ .42 $ .21
Diluted EPS pro forma........................... $ .37 $ .13
</TABLE>
Fair value of the options was estimated at the date of grant using the Black-
Scholes option-pricing model using the following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1997 Options 1998 Options
------------ ------------
<S> <C> <C>
Risk free interest rate............................ 6.66% 5.39%
Dividend yield..................................... 0.00% 0.00%
Volatility factor.................................. 35.77% 41.99%
Weighted average expected life..................... 10 years 10 years
</TABLE>
A summary of stock options outstanding and exercisable as of December 27,
1998 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- ---------------------------------------------
Range of
exercise Number Weighted average Weighted average Number Weighted average
prices outstanding remaining life (years) exercise price exercisable exercise price
------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$5.88-$8.75 1,361,750 8.72 $ 7.51 181,750 $ 7.50
$8.88-$13.12 811,000 9.14 $11.73 29,100 $10.19
$13.13-$14.88 437,900 8.89 $14.23 46,580 $13.66
</TABLE>
10.EMPLOYEE BENEFIT PLANS:
The Company approved a defined contribution profit-sharing plan (the "Plan")
in March 1997, which qualifies under Section 401(k) of the Internal Revenue
Code. Eligible employees may contribute up to the lesser of 15% of their annual
compensation or the maximum amount permitted under Internal Revenue Service
regulations to their account. The Company matches the contributions of
participating employees on the basis of the percentages specified in the Plan.
The employee and Company matching contributions are invested at the direction
of the individual employee.
Certain of the Company's subsidiaries had defined contribution employee
benefit plans at the time of their acquisition by PalEx. Employer contributions
to the Plan and the other defined contribution plans for the Pooled Companies
and the 1998 Pooled Companies for all periods presented and for Ridge,
Interstate and the Purchased Companies from their respective dates of
acquisition were approximately $2,184,000, $1,134,000 and $768,000 for 1996,
1997 and 1998, respectively.
F-52
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1985, Acme established an employee stock ownership plan ("ESOP") for
Acme's eligible employees, as defined. The ESOP is a qualified plan exempt from
taxes under Internal Revenue Section 401(a). In May 1994, the ESOP purchased
3,400 shares of Acme common stock at $765 per share from a stockholder for
$2,601,000. The ESOP funded the purchase by issuing a variable rate note to a
commercial bank that was guaranteed by Acme. Upon completion of the acquisition
of Acme by PalEx, the shares of Acme stock in the ESOP were replaced with
shares of PalEx stock of equal value and the guaranty by Acme was replaced by a
letter of credit issued under the Credit Facility.
The Company accounts for the ESOP in accordance with Statement of Position
93-6, "Employers' Accounting for Employee Stock Ownership Plan" ("SOP 93-6").
Accordingly, the debt of the ESOP is recorded as long-term debt and the shares
pledged as collateral are reported as unearned compensation on the Company's
consolidated balance sheet. As shares are released, the Company reports
compensation expense equal to the current estimated market price of the shares.
In accordance with SOP 93-6, additional paid in capital is adjusted whenever
the market value of the shares released is more or less than the cost of the
shares released.
Contributions to the ESOP amounted to approximately $727,000 and $153,000 for
the years ended December 28, 1997 and December 27, 1998, respectively. These
contributions include interest paid by Acme or the Company of approximately
$122,000 and $83,000 for the years ended December 28, 1997 and December 27,
1998, respectively, on the loan used to purchase the ESOP shares. The balance
in unearned compensation of $1,770,000 at December 28, 1997 and December 27,
1998 results from the leveraged ESOP stock purchase less the deemed release of
shares at cost. At December 27, 1998, the ESOP contained 843,061 allocated
shares and 425,923 unallocated shares of the Company's common stock, for a
total of 1,268,984 shares.
The Company received a Private Letter Ruling from the Internal Revenue
Service in 1999 that allows the termination of the ESOP and the non-taxable
disposal of the PalEx shares in the ESOP. It is the Company's intent to use the
proceeds from the sale of the shares to repay the ESOP's indebtedness. Upon
termination of the ESOP and debt retirement, the ESOP will allocate the
remaining unallocated shares to the plan participants, resulting in a charge to
earnings by the Company and a corresponding increase to capital in excess of
par for the difference between the total value of the shares at the time of
their sale and the ESOP indebtedness. In anticipation of the termination of the
ESOP, no additional shares were allocated in 1998.
11.TERMINATION OF CHEP RELATIONSHIP
During the fourth quarter of 1997 and first quarter of 1998, Company
management had numerous discussions with representatives of its largest
customer, CHEP, regarding numerous issues affecting the profitability of the
products manufactured for CHEP by the Company and the pricing of new pallets,
the uncertainty of CHEP production requirements, the absence of fees for extra
services provided to CHEP, quality control and the opening of new facilities
that would be primarily dedicated to performing services for CHEP. The Company
manufactured new, high-grade pallets for CHEP, which in turn leased these
pallets to its customers. These pallets were part of a "closed-loop" materials
handling and management system that included recovery of the pallet from the
end user, aggregating them in Company operated depots where they were sorted,
repaired and returned to CHEP's customers.
In addition, the Company began renegotiating the prices CHEP was being
charged for new pallets to more accurately reflect constantly changing lumber
prices. Subsequent discussion and communications ensued until it became
apparent to Company management that the issues would not be resolved to the
mutual satisfaction of CHEP and the Company. Accordingly, CHEP was notified
that effective April 29, 1998, the Company would cease supplying CHEP with new
pallets and provided advance notice (generally, 10 to 60 days) under
contractual arrangements to discontinue repair and depot services for CHEP.
F-53
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The termination of the Company's relationship with CHEP affected the
operations of certain of the Company's facilities in the southeastern and
western United States. As a result, management formally adopted a restructuring
plan, which was approved by the Board of Directors, to close, curtail, or
convert operations to alternative business activities at facilities related to
CHEP production. There were eight CHEP-related manufacturing facilities that
were targeted for either closure, sale, consolidation or conversion to
alternative product lines. As of December 27, 1998, three facilities dedicated
to CHEP production have been closed, one was sold and two more were
consolidated into one facility. The other two facilities were converted to
manufacture non- CHEP products. The Company terminated approximately 400
production-related employees at CHEP related facilities during 1998.
Management determined that there were four categories of CHEP restructuring
costs, in accordance with Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-
3"): disputed accounts receivable; severance payments; lease cancellation fees
and penalties; and a valuation allowance to restate CHEP-related inventory at
its net realizable value.
The results of operations for the year ended December 27, 1998 include net
charges to continuing operations of approximately $1.2 million for an inventory
valuation adjustment to reduce CHEP-related inventory to net realizable value
and approximately $0.9 million for disputed accounts receivable, lease
cancellation fees and penalties and severance pay associated with the
termination of employees at CHEP related facilities. As of December 27, 1998,
all CHEP restructuring costs have been paid or incurred. Accordingly, there is
no remaining balance in accrued liabilities or inventory valuation allowance in
the accompanying consolidated balance sheet.
In addition, management determined that the termination of the CHEP
relationship also required the application of SFAS No. 121 and evaluated the
facts and circumstances with regard to the CHEP-related facilities and the
assets employed in the production of CHEP pallets. Accordingly, the results of
operations for the year ended December 27, 1998 include a charge of
approximately $1.4 million for plant closure and asset abandonment costs for
the CHEP facilities noted above. The charge includes approximately $0.9 million
for abandoned leasehold improvements and approximately $0.5 million to value
pallet production machinery and equipment at its net realizable value. The
abandoned and impaired assets had a book value of approximately $1.8 million
prior to the revaluation. The net realizable value of these assets was
determined based on management's estimates of current market value for similar
types of manufacturing equipment used in the pallet production process. There
have been no changes in the estimates used nor corresponding adjustments to the
charges previously taken. The Company is attempting to sell the machinery and
equipment as soon as possible. Depreciation expense on these assets for the
period from their impairment date until December 27, 1998 would have been
approximately $109,000.
Management reviewed the recoverability and possible impairment of goodwill
related to the subsidiaries which operated the CHEP facilities and determined
that no goodwill adjustments were necessary due to the potential for replacing
CHEP business with other customers.
Management believes that all CHEP-related restructuring was complete as of
December 27, 1998.
12.BUSINESS SEGMENTS:
The Company has two business segments, one operating in the pallet industry
and the other in the steel drum reconditioning industry. The pallet segment
produces, recycles, sells, repairs, leases and retrieves wooden pallets in the
United States and Canada primarily for use in agricultural and industrial
markets. The drum segment reconditions steel drums in the United States,
primarily for use in agricultural and industrial markets. There were no
significant intercompany sales between the two segments for the fiscal years
1996, 1997 or 1998.
F-54
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's business segments are managed separately because they require
different technology and marketing strategies. The accounting policies for the
segments are the same as those described in Note 2, Summary of Significant
Accounting Policies. The Company evaluates the performance of its reportable
segments based on income before corporate overhead charges, interest expense,
non-recurring expenses, goodwill amortization and income taxes.
<TABLE>
<CAPTION>
Pallet Drum Consolidated
-------- ------- ------------
<S> <C> <C> <C>
Year Ended December 27, 1998
Revenues..................................... $234,120 $85,571 $319,691
Segment earnings contribution................ 15,286 11,743 27,029
Depreciation and amortization................ 9,085 2,223 11,308
Total Assets................................. 255,363 37,075 292,438
Capital Expenditures......................... 9,428 4,523 13,951
Year Ended December 27, 1997
Revenues..................................... $162,848 $60,145 $222,993
Segment earnings contribution................ 15,402 (152) 15,250
Depreciation and amortization................ 4,607 951 5,558
Total Assets................................. 96,562 23,443 120,005
Capital Expenditures......................... 7,683 1,466 9,149
Year Ended December 27, 1996
Revenues..................................... $ 96,047 $48,983 $145,030
Segment earnings contribution................ 8,409 693 9,102
Depreciation and amortization................ 2,165 1,267 3,432
Total Assets................................. 37,129 20,739 57,868
Capital Expenditures......................... 4,063 3,292 7,355
</TABLE>
Segment earnings contribution is reconciled to consolidated income before
provision for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Total earnings contribution for
reportable segments............... $ 9,102 $ 15,250 $ 27,029
Unallocated amounts:
Corporate expenses................ -- 1,496 4,080
Interest expense.................. 1,576 1,722 8,468
Goodwill amortization............. -- 593 2,977
Restructuring charge.............. -- -- 949
Plant closure and asset
abandonment loss................. -- -- 1,369
Other income (expense)............ 346 (95) (95)
-------- -------- --------
Income before provision for income
taxes............................. $ 7,872 $ 11,344 $ 9,091
======== ======== ========
The Company's revenue by country, based on the location of the customer, is
as follows:
<CAPTION>
Year Ended Year Ended Year Ended
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
United States...................... $145,030 $222,993 $314,967
Canada............................. -- -- 4,724
-------- -------- --------
Consolidated....................... $145,030 $222,993 $319,691
======== ======== ========
</TABLE>
F-55
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's long-lived assets by country are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
United States...................................... $66,250 $176,063
Canada............................................. -- 31,157
------- --------
Consolidated....................................... $66,250 $207,220
======= ========
</TABLE>
Earnings contribution for the Drum segment for the year ended December 27,
1998 includes charges of approximately $1.8 million for pooling expenses and
compensation differential (the difference between previous owners' and
officers' compensation before the acquisitions and the amounts to which they
have contractually agreed) of approximately $1.1 million. There were no pooling
expenses for the year ended December 28, 1997. Compensation differential was
approximately $1.0 million for the year ended December 28, 1997.
Earnings contribution for the Pallet segment for the year ended December 27,
1998 includes an inventory valuation adjustment of approximately $1.2 million.
13.QUARTERLY FINANCIAL RESULTS (UNAUDITED):
Summarized quarterly financial data for 1998 and 1997 is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
Quarter
-------------------------------
First Second Third Fourth
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended December 27, 1998
Revenues.................................... $68,970 $83,362 $77,912 $89,447
Gross profit................................ 12,600 14,086 15,380 16,828
Net income.................................. 1,160 169 1,177 1,480
Net income per share--basic................. .06 .01 .06 .08
Net income per share--diluted............... .06 .01 .06 .08
<CAPTION>
Quarter
-------------------------------
First Second Third Fourth
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended December 28, 1997
Revenues.................................... $39,797 $63,866 $57,583 $61,747
Gross profit................................ 5,960 10,919 8,603 9,427
Net income.................................. 1,342 2,618 785 1,895
Net income per share--basic................. .12 .15 .05 .11
Net income per share--diluted............... .12 .15 .04 .11
</TABLE>
The results of operations for the first and second quarters of 1998 include
charges of approximately $1.6 and $0.2 million, respectively, for pooling
expenses. The results of operations for the second quarter of 1998 includes a
pre-tax charge of approximately $5.0 million related to the termination of the
CHEP relationship (see Note 11). The results of operations for the third
quarter of 1998 includes a pre-tax charge of approximately $1.4 million for
plant closure and asset abandonment costs, offset by a pre-tax credit to the
CHEP restructuring charge of approximately $0.9 million, for a net third
quarter pre-tax charge of approximately $0.5 million. The results of operations
for the fourth quarter of 1998 include a pre-tax credit of approximately $1.9
million related to revisions in management's estimates of the CHEP
restructuring charge.
F-56
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members of IFCO-U.S., L.L.C.:
In our opinion, the accompanying balance sheets and the related statements of
operations and changes in accumulated members' deficit, and of cash flows
present fairly, in all material respects, the financial position of IFCO-U.S.,
L.L.C. (the "Company") at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The Company is a limited liability corporation with two members and, as
disclosed in the notes to the financial statements, has extensive transactions
and relationships with its members and their affiliates. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's negative cash flow from operations, excess
liabilities over assets and debt in default raise substantial doubt about its
ability to continue as a going concern without significant financial support
from its members.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, Florida
September 3, 1999
F-57
<PAGE>
IFCO-U.S., L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------- October 31,
1997 1998 1999
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS:
Cash................................. $ 8,030 $ 10,487 $ 32,316
Receivables, net of allowance for
doubtful accounts of $25,000,
$50,000 and $75,000................. 1,050,391 2,376,495 4,443,294
Related party receivables............ 2,095,216 95,749 4,824,018
Crate rental pool, net............... 5,427,486 5,299,773 10,394,471
Crates held for transfer to related
party............................... 243,569 611,107 145,427
Equipment and furniture, net......... 1,362,199 1,296,018 1,148,420
Other assets......................... -- 40,883 28,609
----------- ------------ ------------
$10,186,891 $ 9,730,512 $ 21,016,555
=========== ============ ============
LIABILITIES AND MEMBERS' DEFICIT:
Accounts payable and accrued
expenses............................ $ 455,109 $ 616,945 $ 1,077,028
Related party payables............... 1,942,965 3,120,816 4,538,374
Refundable deposits.................. 1,016,899 2,014,188 3,438,997
Installment loan..................... -- -- 144,492
Related party debt................... 13,042,632 14,521,444 25,267,426
----------- ------------ ------------
16,457,605 20,273,393 34,466,317
=========== ============ ============
Commitments and contingencies (Notes
1, 6 and 7)
MEMBERS' DEFICIT:
Class A voting membership interests,
$.40 par value; 1,000 shares
authorized.......................... 400 400 400
Class B non-voting membership
interests, $.40 par value; 1,500
shares authorized................... 600 600 600
Accumulated deficit.................. (6,271,714) (10,543,881) (13,450,762)
----------- ------------ ------------
Total members' deficit.............. (6,270,714) (10,542,881) (13,449,762)
----------- ------------ ------------
$10,186,891 $ 9,730,512 $ 21,016,555
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
IFCO-U.S., L.L.C.
STATEMENTS OF OPERATIONS AND CHANGES IN ACCUMULATED MEMBERS' DEFICIT
<TABLE>
<CAPTION>
Ten-Month
Year Ended Period Ended
December 31, October 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ------------ ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Rental revenues......... $ 919,427 $ 1,657,424 $ 1,156,754 $ 4,267,790
----------- ------------ ----------- ------------
Cost of revenues:
Rental logistics cost.. (1,254,538) (1,646,080) (1,289,533) (2,725,341)
Crate depreciation..... (499,098) (679,324) (482,568) (1,358,141)
Equipment
depreciation.......... (49,140) (132,763) (112,101) (120,000)
Loss on related party
crate transfers....... (454,445) (193,238) (193,238) --
----------- ------------ ----------- ------------
Total cost of revenues.. (2,257,221) (2,651,405) (2,077,440) (4,203,482)
----------- ------------ ----------- ------------
Gross margin (loss)... (1,337,794) (993,981) (920,686) 64,308
Selling, general and
administrative
expenses............... (1,423,417) (1,719,353) (1,424,015) (1,641,457)
----------- ------------ ----------- ------------
Loss from operations.. (2,761,211) (2,713,334) (2,344,701) (1,577,149)
Interest expense........ (1,033,872) (1,382,946) (1,168,975) (1,343,271)
Other income (expense),
net.................... 12,031 (175,887) (177,043) 13,539
----------- ------------ ----------- ------------
Net loss................ (3,783,052) (4,272,167) (3,690,719) (2,906,881)
Beginning accumulated
deficit................ (2,488,662) (6,271,714) (6,271,714) (10,543,881)
----------- ------------ ----------- ------------
Ending accumulated
deficit................ $(6,271,714) $(10,543,881) $(9,962,433) $(13,450,762)
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
IFCO-U.S., L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Ten-Month
Year Ended Period Ended
December 31, October 31,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net cash provided by (used
in) operating activities:
Net loss................... $(3,783,052) $(4,272,167) $(3,690,719) $(2,906,881)
Adjustments to reconcile
net loss to cash provided
by operating activities:
Depreciation.............. 557,934 826,042 726,885 1,511,471
Provision for doubtful
accounts receivable...... 25,000 25,000 25,000 25,000
Transfer of crates to
related parties,
excluding freight and
duty..................... 219,141 106,343 106,343 (193,148)
Loss on disposition of
equipment and furniture.. -- 198,547 198,547 --
Decrease (increase) in
receivables.............. (595,894) (1,351,104) (503,403) (2,091,799)
Decrease (increase) in
related party
receivables.............. (1,969,647) 1,999,467 2,015,877 (1,575,269)
Decrease (increase) in
other assets............. 58,577 (40,883) (101,998) 12,274
Increase (decrease) in
accounts payable and
accrued expenses......... 94,552 161,836 364,063 460,083
Increase (decrease) in
related party accounts
payable.................. 1,069,925 1,177,851 857,623 1,417,558
Increase (decrease) in
refundable deposits...... 561,991 997,289 328,302 1,424,809
----------- ----------- ----------- -----------
Net cash used in operating
activities................ (3,761,473) (171,779) 326,520 (1,915,902)
----------- ----------- ----------- -----------
Net cash provided by (used
in) investing activities:
Purchases of furniture and
equipment................. (683,066) (279,084) (322,277) (5,732)
Proceeds from crate
transfers to related
parties................... 1,790,551 1,128,973 1,039,908 1,695,809
----------- ----------- ----------- -----------
Net cash provided by
investing activities...... 1,107,485 849,889 717,631 1,690,077
----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities:
Proceeds from issuance of
related party debt........ 4,504,285 1,682,585 1,282,320 2,896,664
Payment of installment
debt...................... -- -- -- (182,695)
Payment of related party
debt...................... (1,854,456) (2,358,238) (2,317,612) (2,466,315)
----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities.. 2,649,829 (675,653) (1,035,292) 247,654
----------- ----------- ----------- -----------
Net increase (decrease) in
cash:
Cash equivalents at the
beginning of the period... (4,159) 2,457 8,859 21,829
Cash at the end of the
period.................... 12,189 8,030 8,030 10,487
----------- ----------- ----------- -----------
$ 8,030 $ 10,487 $ 16,889 $ 32,316
=========== =========== =========== ===========
Supplemental cash flow
information:
Interest paid............. 270,000 289,000 $ 231,500 $ 247,500
Non-cash investing and
financing activities:
</TABLE>
During 1997 and 1998, the Company had crate purchases of approximately
$1,854,000 and $2,154,000, respectively. These crate purchases have been
financed with notes payable from related parties.
During the ten-month periods ended October 31, 1998 and 1999, the Company had
crate purchases of approximately $1,352,000 and $7,280,000, respectively. These
crates purchases have been financed with notes payable to related parties.
During the ten-month period ended October 31, 1999, the Company was assigned a
$3,153,000 member receivable in exchange for a member loan of $3,153,000 (Note
1).
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
IFCO-U.S., L.L.C. (the "Company" or "IFCO-US") is a limited liability
company. The Company's members are Schoeller-U.S., Inc. ("SIL-US") and Polymer
International Corporation ("PIC"). SIL-US is a wholly-owned subsidiary of
Schoeller International Logistics Beteiligungsgesellschaft mbH ("SIL") and PIC
is a wholly-owned subsidiary of Intertape Polymer Group Inc. ("IPG"). The
Company owns and manages a rental plastic container pool in the United States.
These collapsible, reusable plastic containers ("crates") offer produce
retailers and growers economic and environmental advantages over disposable
packaging alternatives. The crates are leased primarily to growers of fresh
fruit and vegetables in exchange for a one-time usage fee. The growers' goods
are transported in the crates to various intermediaries and ultimately
retailers for sale to consumers. The Company delivers the empty crates to
customers' bulk warehouses and collects the empty crates from regional service
points, where the crates are transported to the Company's depots and cleaned
for reuse.
The nature of the Company's business is such that short-term obligations are
typically met by cash flow generated from long-term assets. Consequently, the
accompanying balance sheet is presented on an unclassified basis.
The Company is currently trying to establish the plastic crate rental concept
to the produce distribution market in the United States. As such, the Company
is in a start-up business phase and will continue to realize net losses until
its sales and gross margins increase high enough to cover variable and fixed
operating costs. The Company's negative cash flow from operations, excess
liabilities over assets and related party debt in default raise substantial
doubt about its ability to continue as a going concern without significant
financial support from its members. The accompanying financial statements have
been prepared on a going concern basis, which contemplates continuity of
operations and the realization of assets and liquidation of liabilities in the
ordinary course of business.
On September 2, 1999, PIC and SIL-US entered into a Membership Interest and
Share Purchase Agreement (the "Purchase Agreement") which management believes
provides the framework for the continued funding for the Company's operations.
Upon execution of the agreement, PIC purchased from SIL 36.25% of the
outstanding shares in SIL-US (the "Polymer Shares") for a note payable of
$3,153,000 (the "Polymer Note"). Effective October 1, 1999, SIL assigned the
Polymer Note to the Company. As a result of the assignment, the Company
recorded a receivable from PIC and a payable to SIL for $3,153,000. Interest on
the Polymer Note and interest on an additional $3,153,000 of existing PIC debt
will be waived until March 31, 2000.
PIC also agreed to sell, subject to certain conditions including consummation
of a merger between IFCO Systems and PalEx, Inc. (the "PalEx Merger") and a
related initial public offering of IFCO Systems (the "IPO") no later than March
31, 2000, its entire 20% interest in IFCO-US (the "Polymer Interest") and the
Polymer Shares to IFCO Systems N.V. for approximately $10,657,500, plus all
outstanding indebtedness which was approximately $17,976,000 as of April 30,
1999 ($24,391,000 as of October 31, 1999). Such amount will be reduced by the
cancellation of the Polymer Note in the amount of $3,153,000, and $2,500,000
and certain other indebtedness.
Commencing September 10, 1999, and on the first business day of each month
thereafter until the earlier of the consummation of the PalEx Merger and IPO or
March 1, 2000, SIL-US and PIC shall each make a loan to the Company in the
amount of $75,000.
The Purchase Agreement may be terminated by mutual consent of the parties, if
there is a material breach of any representation, warranty or covenant, or if
the PalEx Merger and IPO are not consummated by March 31, 2000. If the PalEx
Merger and IPO have not occurred by March 31, 2000, SIL-US shall make a
F-61
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
member loan to the Company for half of the IPG debt, less SIL-US's existing
debt. In such event, SIL-US and IPG agree to proportionately fund the future
cash and operating and financial requirements of IFCO-US in accordance with the
IFCO-US budget. If SIL fails to timely fund its proportionate share of such
cash requirements, then PIC shall have an option to purchase SIL-US' 80%
membership interest in IFCO-US for $11,092,500 together with redelivery of the
Polymer Shares, less $2,500,000, plus any indebtedness of IFCO-US to SIL or its
Affiliates, and the Polymer Note shall mature and be paid in full. If IPG fails
to timely fund its proportionate share of such cash requirements, then SIL
shall have an option to purchase the Polymer Interest and the Polymer Shares
for $10,657,500, plus any indebtedness of IFCO-US to IPG or its affiliates. In
the event that neither option has been exercised by December 31, 2002, the
exercise price of such options shall be adjusted to the fair market value of
the Company at such time.
The Company's continuation as a going concern is dependent on its members
ability to fulfill the obligations under the terms as described above and
ultimately to obtain profitability and to generate sufficient cash flows, on a
timely basis, to meet its obligations. The financial statements do not include
any adjustments relating to recoverability and classifications of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
These interim financial statements as of October 31, 1999 and for the ten
months ended October 31, 1998 and 1999, are unaudited and reflect all
adjustments, consisting of normal recurring accruals which, in the opinion of
management, are necessary for a fair presentation of the information contained
therein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of the significant accounting policies followed in the preparation
of the Company's financial statements is set forth below:
Crates
The Company depreciates its crate pool using the straight line method over a
15 year life. Additionally, the Company accrues additional depreciation for
estimated crate breakage at a rate of 4.5% of the crate purchase price on a per
trip basis. The Company periodically reviews its crate rental pool to ensure
that all unusable crates are reduced to net realizable value.
Expenditures for repairs are charged to expense as incurred. Upon transfer or
retirement of crates, the cost and related accumulated depreciation are
eliminated from the respective accounts.
The gains and losses from related party crate transfers are included within
cost of revenues. The cost of related party crate transfers includes the net
book value of the asset sold and any direct costs associated with the
transfers.
Equipment and Furniture
Equipment and furniture are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated useful
lives of the related assets. Machinery and equipment are depreciated from 5-10
years and furniture and fixtures are depreciated over 5 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions and major replacements or betterments that increase capacity or
extend useful lives are added to the cost of the asset.
F-62
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company is a limited liability company which is treated as a partnership
for federal and state tax purposes. As such, the income or loss generated by
the Company is taxable to its members. Therefore, no provision for income taxes
is recorded by the Company.
Revenue Recognition
The majority of the Company's revenues are generated from crate rental fees.
Revenue is recognized over the Company's service obligation period. The service
obligation period is complete when the customer's product is removed from the
crates and the crate is ready to be returned to the Company. The Company
accrues for the cost of returning crates to the rental pool.
The Company records a two-dollar per crate deposit receivable and an
offsetting refundable deposit liability for each crate delivered. Deposits are
refundable upon proof of crate shipment by the customer.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
requires the disclosure of the fair value of financial instruments, both assets
and liabilities recognized and not recognized on the balance sheet, for which
it is practicable to estimate fair value. The carrying amounts reported in the
accompanying balance sheets for accounts receivable, accounts payable and
accrued expenses, related party payables, and refundable deposits approximate
fair value because of their short term nature. It is not practicable for the
Company to reasonably estimate the fair market value of the long term debt due
to the related party nature of the debt, absence of a quoted market rate for
the debt or debt with similar characteristics and complexities surrounding
maturity dates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Although the Company reviews all significant estimates affecting its financial
statements on a recurring basis and records the estimated effect of any
necessary adjustments, actual results could differ from these estimates.
Advertising Expense
The Company expenses the cost of advertising as incurred. The Company
incurred approximately $80,000 and $295,000 in advertising costs for the year
ended December 31, 1997 and 1998, respectively.
Start-up and organization costs
The Company has expensed all start-up and organization costs when incurred.
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" requires that long-lived assets to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. The Company believes that there is no impairment of its long-lived
assets, primarily rental crates.
F-63
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. The Company performs
credit evaluation procedures on its customers and the Company's rental invoices
are primarily on 14-day terms. Historically, the Company has not incurred
significant credit related losses, however, an allowance for potential credit
losses is maintained. Risk may exist in the Company's business and accounts
receivable as approximately 36% and 29% of the Company's customers are located
in California and Florida, respectively. As the Company's customers are in the
produce industry, the Company's sales volumes in certain regions tend to be
seasonal and subject to weather and other naturally occurring conditions.
During each of the years ended December 31, 1997 and 1998, the Company had
one customer each year that accounted for more than 10% of total revenues. DNE
International accounted for approximately 12% of revenues during fiscal year
ended December 31, 1997. Fresh From Texas accounted for 14% of revenues during
fiscal year ended December 31, 1998.
3. RECEIVABLES:
Receivables consisted of the following as of:
<TABLE>
<CAPTION>
December 31, October 31, 1999
----------------------- -----------------
1997 1998
---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Trade--Rental receivables.......... $ 206,648 $ 523,339 $ 1,176,791
Trade--Deposit receivables......... 862,383 1,903,156 3,336,784
Less: Allowance for doubtful
accounts.......................... (25,000) (50,000) (75,000)
Other receivables.................. 6,360 -- 4,719
---------- ----------- ------------
$1,050,391 $ 2,376,495 $ 4,443,294
========== =========== ============
Related party receivables consisted of the following as of:
<CAPTION>
October 31,
December 31, 1999
----------------------- ------------
1997 1998
---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Crate transfer receivable.......... $ -- $ 95,749 $ 1,671,018
Polymer Note receivable............ -- -- 3,153,000
---------- ----------- ------------
$ -- $ 95,749 $ 4,824,018
========== =========== ============
4. CRATE RENTAL POOL, NET
Crate rental pool, net consisted of the following as of:
<CAPTION>
October 31,
December 31, 1999
----------------------- ------------
1997 1998
---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Crate rental pool.................. $6,149,627 $ 6,367,117 $ 12,357,527
Less: accumulated depreciation..... (722,141) (1,067,344) (1,963,056)
---------- ----------- ------------
Crate rental pool, net............. $5,427,486 $ 5,299,773 $ 10,394,471
========== =========== ============
</TABLE>
Crate depreciation expense for the years ended December 31, 1997 and 1998 was
$499,098 and $679,324, respectively.
F-64
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. EQUIPMENT AND FURNITURE:
Equipment and furniture consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Machinery and equipment.............................. $1,405,317 $1,444,451
Furniture and fixtures............................... 18,538 25,040
---------- ----------
1,423,855 1,469,491
Less: accumulated depreciation....................... (61,656) (173,473)
---------- ----------
Equipment and furniture, net......................... $1,362,199 $1,296,018
========== ==========
</TABLE>
Equipment and furniture depreciation expense for the years ended December 31,
1997 and 1998 was $58,836 and $146,718, respectively.
6. RELATED PARTY DEBT:
Indebtedness consists of the following as of:
<TABLE>
<CAPTION>
October 31,
December 31, 1999
----------------------- ------------
1997 1998
----------- -----------
(unaudited)
<S> <C> <C> <C>
U.S. prime rate advances from PIC........ $ 4,465,882 $ 4,353,392 $ 2,171,720
0% advances from PIC..................... -- 800,000 4,165,281
U.S. prime rate + 6% related party notes
payable in default from IFCO
Manufacturing........................... 860,807 1,339,883 2,573,042
10% related party notes payable from IFCO
Manufacturing .......................... 6,315,943 5,828,169 10,642,102
U.S. prime rate PIC member loan.......... 1,400,000 1,400,000 1,550,000
0% SIL-US member loan.................... -- 800,000 4,165,281
----------- ----------- ------------
$13,042,632 $14,521,444 $ 25,267,426
=========== =========== ============
</TABLE>
The maturities of indebtedness are as follows for the years ending December
31:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
1999.......................................................... $ 4,463,992
2000.......................................................... 1,647,699
2001.......................................................... 811,159
2002.......................................................... 245,201
2003.......................................................... --
Thereafter.................................................... 7,353,393
-----------
$14,521,444
===========
</TABLE>
Advances from PIC
PIC has advanced funds to the Company for operating cash flow purposes. Under
the terms of the operating agreement between SIL-US and PIC, advances from
members accrue interest at the U.S. prime rate as published in the Wall Street
Journal ("U.S. prime rate"), which was 8.5% and 7.75% at December 31, 1997 and
1998, respectively.
In May 1998, PIC agreed to waive interest charges on the first $800,000 of
its advances to the Company (see discussion of member loans).
F-65
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Related Party Note Payables
The Company purchases its crates from IFCO Manufacturing, Inc. ("IFCO
Manufacturing"), a wholly-owned subsidiary of IPG. The Company finances crate
purchases with a three year note payable with IFCO Manufacturing. The notes
accrue interest at 10%, with interest becoming payable on a semi-annual basis.
One third of the principal of each note becomes due after every 12 months. The
Company is currently in default on a portion of its principal and interest
payments on its manufacturing note payables. Upon default, the notes and
interest due began accruing additional interest at the default interest rate
which is the US prime rate + 6% (14.5% and 13.75% at December 31, 1997 and
1998, respectively). Substantially all of the Company's receivables and long-
lived assets are pledged as collateral for all outstanding notes payable under
the crate supply agreement with IFCO Manufacturing.
Member Loans
The Company has a member loan with PIC for $1.4 million, which accrues
interest at the U.S. prime rate. The funds were provided to the Company during
1995 and 1996 to fund start-up and organization costs. In accordance with the
February 16, 1995 operating agreement between PIC and SIL-US, repayment of the
loan by the Company shall be at such times as the Company can repay the loan
when considering its future cash or requirements as contemplated in the
operating agreement. At the time the Company has sufficient operating capital
from profits, the entire principal and interest remaining outstanding shall
then become due and payable in semi-annual installments of principal together
with all accumulated interest until all amounts due and owing are paid in full.
As of December 31, 1998, no principal or interest payments have been made.
During May of 1998, SIL-US agreed to fund the Company's cash flow deficits
with an $800,000 interest free loan. The SIL-US loan was funded in cash and
does not have a stated maturity date. In conjunction with the SIL-US loan, PIC
agreed to waive interest charges on the first $800,000 of advances.
7. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. In the opinion of the Company's management, all
such proceedings are adequately covered by insurance or, if not so covered,
will not materially result in any liability which would have a material adverse
effect on the financial position, liquidity or results of operations of the
Company.
Leasing Arrangements
The Company leases certain facilities and machinery under non-cancelable
operating leases. Additionally, the Company sub-leases office space from a
wholly-owned subsidiary of IPG. The Company's rent expense under the related
party sub-lease was $46,000 and $47,000 for the years ended December 31, 1997
and 1998, respectively. Lease payments are accrued on a straight-line basis
over the term of the lease. Minimum future rental payments under these leases
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
1999............................................................. $275,619
2000............................................................. 276,416
2001............................................................. 185,173
2002............................................................. 7,000
--------
744,208
========
</TABLE>
F-66
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense under operating leases was approximately $46,000 and $155,000
for the years ending December 31, 1997 and 1998, respectively.
8. MEMBERS' EQUITY:
SIL-US and PIC each own 500 shares of the Class A voting membership
interests. Additionally, SIL-US owns 100% of the 1,500 shares of the Class B
non-voting membership interests. All shares participate equally in the sharing
of the Company's profits/losses and distributions.
9. OTHER RELATED PARTY TRANSACTIONS:
Related Party Receivables and Payables
All of the Company's related party receivables are the result of crate
transfers. The Company's related party payables are related to services
provided by related parties in connection with export crate rentals under the
export servicing agreement, crate deposits, royalties, and other miscellaneous
payables. The related party payables are composed of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
Crate deposits........................................... $ 152,400 $ 266,421
Reconditioning fees...................................... 297,257 574,672
Crate purchases.......................................... 317,735 22,608
Royalties................................................ 24,117 63,709
Interest payable......................................... 795,105 1,558,525
Interest payable in default.............................. 356,351 634,881
---------- ----------
$1,942,965 $3,120,816
========== ==========
</TABLE>
Crate Supply Agreement
During 1996, the Company entered into a five-year supply agreement with IPG
(through its wholly-owned subsidiary IFCO Manufacturing) to provide all of the
Company's plastic crates. The agreement specifies that the Company must
purchase all crates from IPG and IPG is prohibited from selling crates to other
customers. Crate prices are determined by a formula based upon raw material
weight, the price for granulate and the actual quantity purchased by the
Company. The agreement does not call for a minimum purchase requirement. During
1997 and 1998, the Company purchased approximately $1,854,000 and $2,154,000,
respectively, for crates supplied by IFCO Manufacturing. These crate purchases
are financed through notes with IFCO Manufacturing.
System Licensing Agreement
In 1996, SIL and the Company entered into a ten-year licensing agreement.
Under the agreement, the Company shall owe SIL a royalty commission equal to 3%
of domestic crate rentals which are payable every quarter. For the years ended
December 31, 1997 and 1998, the Company recorded royalty commission expenses of
$19,123 and $45,484, respectively.
Export Servicing Agreement
Some of the Company's customers use the crates to ship produce to
international markets. In conjunction with its export rental program, the
Company has a service agreement with IFCO-GmbH, a related party, whereby, IFCO-
GmbH has agreed to collect, sort, wash, and include the crates within the
European operations rental pool. Under the agreement, the Company records an
amount equal to 80% of the export rental revenue as an expense payable to IFCO-
Europe as consideration for the services.
F-67
<PAGE>
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Export rental revenue was approximately $273,000 and $306,000 for the years
ended December 31, 1997 and 1998, respectively.
Related Party Crate Transfers
Under the terms of the export servicing agreement discussed above, the
Company transfers ownership of crates shipped to Europe to related parties upon
completion of the export rental period at the net book value of the crates.
In 1997 and 1998, the Company agreed to transfer certain excess crates to
related parties. These transfers were not related to the export servicing
agreement. For the years ended December 31, 1997 and 1998, the Company
recognized losses of $454,000 and $193,000 on the transfer of crates to related
parties which have been included within cost of revenues.
Management
IPG employees oversee the daily management of the Company. The Company's
controller and assistant controller share responsibilities with other companies
owned by IPG, including IFCO Manufacturing. Their salaries are charged to the
Company based upon the estimated time spent working on Company business. All
significant business decisions are determined by the Company's Board of
Directors, which is composed of two members from SIL-US and two members from
PIC.
IPG has provided various management, accounting and administrative services
to the Company. Wherever appropriate and practical, the costs associated with
these services have been allocated and/or directly charged to the Company.
However, the costs of some services such as credit, collections, treasury
management, marketing and information systems management have not been
allocated to the Company and the Company's financial statements do not reflect
amounts associated with such services.
The significant services that have been allocated to the Company include:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Employee benefits............................................ $ 35,000 $ 45,000
Leased vehicles for salesman travel.......................... 40,000 60,000
Telecommunications expenses.................................. 15,000 23,000
-------- --------
$ 90,000 $128,000
======== ========
</TABLE>
10. EMPLOYEE BENEFITS:
The Company's employees are eligible to participate in IPG's 401(k) defined
contribution plan. The Company may make a discretionary match of up to 6% of
the participant's salary to the participant's account. Additionally, the
Company may make profit sharing distributions to the participants based upon
IPG's financial performance. Contributions for the years ended December 31,
1997 and 1998 were $12,000 and $24,000, respectively.
F-68
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
(as amended by Amendment No. 1)
Dated as of October 6, 1999
and effective as of
March 29, 1999
by and among
IFCO Systems N.V.,
IFCO Europe Beteiligungs GmbH,
MTS Okologistik Verwaltungs GmbH,
Schoeller International Logistics Beteiligungsgesellschaft mbH,
Schoeller Packaging Systems GmbH,
Silver Oak Acquisition Corp.
and
PalEx, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
ARTICLE I
<C> <S> <C>
NON-MERGER TRANSACTIONS............................. A-1
SECTION 1.1. Ownership of IFCO................................... A-1
SECTION 1.2. Formation of Merger Sub............................. A-2
SECTION 1.3. Corporate Authorizations............................ A-2
SECTION 1.4. Contribution of Shares.............................. A-2
General Electric; Contribution of IFCO Europe
SECTION 1.5. Preferred Share..................................... A-2
SECTION 1.6. Initial Public Offering of IFCO Ordinary Shares..... A-2
ARTICLE II
THE MERGER.......................................... A-2
SECTION 2.1. Appointment of Exchange Agent....................... A-2
SECTION 2.2. The Merger.......................................... A-3
SECTION 2.3. Effective Time...................................... A-3
SECTION 2.4. Effects of the Merger............................... A-3
SECTION 2.5. Closing............................................. A-3
ARTICLE III
CONVERSION OF SHARES IN THE MERGER.................. A-4
SECTION 3.1. Conversion of PalEx Capital Stock................... A-4
SECTION 3.2. Conversion of Merger Sub Shares..................... A-6
SECTION 3.3. Election of Merger Consideration.................... A-6
SECTION 3.4. Share Exchange...................................... A-9
SECTION 3.5. Dissenting Shares................................... A-10
SECTION 3.6. Exchange of Shares.................................. A-10
SECTION 3.7. No Fractional Shares................................ A-12
SECTION 3.8. Closing of PalEx's Transfer Books................... A-12
SECTION 3.9. Modification of Share Exchange Procedures........... A-12
ARTICLE IV
IFCO GOVERNANCE AFTER THE EFFECTIVE TIME............ A-12
SECTION 4.1. IFCO Governance after Effective Time................ A-12
SECTION 4.2. Corporate and Operational Headquarters.............. A-12
SECTION 4.3. Language............................................ A-12
SECTION 4.4. U.S. GAAP........................................... A-12
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX............. A-13
SECTION 5.1. Organization and Qualification...................... A-13
SECTION 5.2. Capitalization...................................... A-13
SECTION 5.3. Subsidiaries........................................ A-14
SECTION 5.4. Authority; Non-Contravention; Approvals............. A-14
Reports and Financial Statements; Accounting and
SECTION 5.5. Other Systems....................................... A-15
SECTION 5.6. Absence of Undisclosed Liabilities.................. A-16
SECTION 5.7. Absence of Certain Changes or Events................ A-16
SECTION 5.8. Litigation.......................................... A-16
SECTION 5.9. Registration Statement and Proxy Statement.......... A-17
SECTION 5.10. No Violation of Law................................. A-17
</TABLE>
A-i
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this
"Agreement"), dated as of October 6, 1999 (the "Execution Date") and effective
as of March 29, 1999 (the "Effective Date"), is by and among IFCO Systems N.V.,
a public limited liability company incorporated under the laws of The
Netherlands ("IFCO"), IFCO Europe Beteiligungs GmbH, a limited liability
company organized under the laws of the Federal Republic of Germany ("IFCO
Europe"), MTS Okologistik Verwaltungs GmbH, a limited liability company
organized under the laws of the Federal Republic of Germany ("MTS"), Schoeller
International Logistics Beteiligungsgesellschaft mbH, a limited liability
company organized under the laws of the Federal Republic of Germany ("SIL"),
Schoeller Packaging Systems GmbH, a limited liability company organized under
the laws of the Federal Republic of Germany ("SPS"), Silver Oak Acquisition
Corp., a corporation organized under the laws of the State of Delaware ("Merger
Sub") and PalEx, Inc., a corporation organized under the laws of the State of
Delaware ("PalEx").
W I T N E S S E T H:
WHEREAS, SPS owns 76% of the capital shares of IFCO Europe and 100% of the
capital shares of MTS, and an affiliate of SPS owns 100% of the capital shares
of SIL;
WHEREAS, IFCO is a wholly owned Subsidiary of SPS and/or its affiliates
(IFCO, IFCO Europe, SIL and MTS, being collectively referred to herein as the
"IFCO Companies" and SPS desires to contribute the capital shares SPS owns of
IFCO Europe and MTS, and to cause the capital shares of SIL to be contributed,
to IFCO upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, the managing directors of SPS and the Board of Directors of PalEx
have approved the merger of PalEx with and into Merger Sub on the terms and
subject to the conditions set forth in this Agreement (the "Merger");
WHEREAS, the parties hereto intend that the Merger will close immediately
prior to the closing of an initial public offering in Europe by IFCO of
ordinary shares of IFCO ("IFCO Ordinary Shares");
WHEREAS, the parties hereto intend the Merger to qualify as a tax-free
reorganization under Section 368(a) of the U.S. Internal Revenue Code of 1986,
as amended (the "Code"), and the regulations thereunder, and this Agreement is
hereby adopted as a plan of reorganization for purposes of Section 368(a) of
the Code and the regulations thereunder; and
WHEREAS, capitalized terms used in this Agreement, which are listed in Annex
A hereto together with the paragraph or the Section in which they are defined,
shall have the respective meanings set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements this Agreement contains, the parties
hereto, intending to be legally bound, agree as follows:
ARTICLE I
NON-MERGER TRANSACTIONS
SECTION 1.1. Ownership of IFCO. Except as otherwise provided in this
Agreement, SPS or Schoeller Logistics Holdings GmbH, a limited liability
company organized under the laws of the Federal Republic of Germany ("Schoeller
Holdings"), which is wholly owned by SPS and/or its affiliates, will own 100%
of the IFCO Ordinary Shares from inception and prior to the IPO Closing Date.
SPS has delivered a copy of the Articles of Association of IFCO to PalEx. SPS
will consult with PalEx in advance with respect to any amendments to the
Articles of Association of IFCO prior to the Merger and the IPO and will
promptly deliver copies of any such amendments to PalEx.
A-1
<PAGE>
SECTION 1.2. Formation of Merger Sub. SPS has caused IFCO to incorporate
Merger Sub pursuant to the General Corporation Law of the State of Delaware
(the "DGCL") to be a constituent company in the Merger. Merger Sub has
authorized capital stock consisting of 100 shares, par value $0.01 per share
(the "Merger Sub Capital Stock"), all of which is issued and outstanding and
held by IFCO, subject to the provisions of Section 2.1.
SECTION 1.3. Corporate Authorizations. SPS shall cause IFCO and Merger Sub to
obtain all necessary corporate authorizations with respect to this Agreement
and the transactions contemplated hereby.
SECTION 1.4. Contribution of Shares. On or before the Closing Date but prior
to the Effective Time and the completion of the IPO, SPS shall contribute the
IFCO Europe Share and the MTS Shares to IFCO and shall cause its affiliate
Gebruder Schoeller Beteiligungsverwaltungs GmbH, a limited liability company
organized under the laws of the Federal Republic of Germany ("Gebr.
Schoeller"), to contribute the SIL Shares to IFCO, either directly or through
SPS.
SECTION 1.5. General Electric; Contribution of IFCO Europe Preferred Share.
(a) SPS and its affiliates, Martin Schoeller, Christoph Schoeller, Andrea
Schoeller, Schoeller KG, Schoeller Plast Industries GmbH, Gebr. Schoeller and
IFCO have entered into that certain Option Release and IPO-Facilitation
Agreement with General Electric Capital Corporation ("GE Capital") and General
Electric Erste Beteiligungs GmbH ("GE GmbH"), which was notarized under German
law on May 27, 1999 (the "Option Release Agreement"), pursuant to which GE GmbH
and any affiliates thereof shall (i) give any required consent with respect to
the Merger and the IPO, (ii) provide for the release, to be effective as of the
Closing Date, of any options of GE to purchase capital shares of IFCO Europe,
SIL or MTS pursuant to the Investment Agreement and the termination of the
Investment Agreement and (iii) provide for the contribution of the IFCO Europe
Preferred Share as described in Section 1.5(b). SPS and such affiliates shall
complete, or cause to be completed, to the extent within their respective power
to complete, the conditions precedent in (S) 8.1 of the Option Release
Agreement.
(b) On or before the Closing Date and prior to the Effective Time, SPS shall
use its reasonable efforts to cause GE GmbH to contribute to IFCO the IFCO
Europe Preferred Share held by GE GmbH in exchange for a convertible debenture
(the "Convertible Debenture") to be issued by Schoeller Holdings to which SPS
and/or its affiliates shall have previously contributed all the outstanding
IFCO Ordinary Shares. The Convertible Debenture shall be convertible into
outstanding shares of Schoeller Holdings or outstanding IFCO Ordinary Shares
representing, indirectly or directly, 15.45% of the issued and outstanding IFCO
Ordinary Shares immediately prior to the Effective Time.
SECTION 1.6. Initial Public Offering of IFCO Ordinary Shares. SPS shall use
its reasonable efforts, and shall cause IFCO to use all reasonable efforts, to
pursue with reasonable diligence the completion of and to complete the IPO.
PalEx agrees to reasonably cooperate with SPS and IFCO in connection with the
IPO. The parties acknowledge that they currently anticipate, subject to the
advice and recommendations of the underwriters in connection with the IPO and
market conditions on the Listing Market, that the number of IFCO Ordinary
Shares offered in the IPO will constitute approximately 30% of the issued and
outstanding IFCO Ordinary Shares after giving effect to the IPO and the
transactions contemplated by this Agreement.
ARTICLE II
THE MERGER
SECTION 2.1. Appointment of Exchange Agent. As promptly as possible following
the Effective Date IFCO shall appoint a United States bank or trust company or
other independent financial institution in the United States reasonably
satisfactory to IFCO and PalEx to act as exchange agent for the Share Exchange
and the delivery of the Aggregate Merger Consideration to former stockholders
of PalEx (the "Exchange Agent"). IFCO and PalEx shall enter into an Exchange
Agent Agreement with the Exchange Agent in form and
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substance reasonably satisfactory to IFCO and PalEx, which shall set forth the
duties, responsibilities and obligations of the Exchange Agent consistent with
the terms of this Agreement.
SECTION 2.2. The Merger. On the terms and subject to the conditions of this
Agreement and in accordance with the DGCL, at the Effective Time, PalEx will
merge with and into Merger Sub and the separate existence of PalEx thereupon
will cease. Merger Sub will be the surviving corporation in the Merger and is
hereinafter sometimes referred to as the "Surviving Corporation." The corporate
existence of Merger Sub, with all its property, rights, privileges, franchises,
powers and objects, shall continue unaffected and unimpaired by the Merger and,
as the Surviving Corporation, it shall be governed by the laws of the State of
Delaware and succeed to all property, rights, privileges, franchises, powers,
objects, debts, liabilities and duties of PalEx in accordance with Section
259(a) of the DGCL.
SECTION 2.3. Effective Time. The Merger will become effective immediately
when a certificate of merger, in a form reasonably acceptable to IFCO and PalEx
and prepared and executed in accordance with the relevant provisions of the
DGCL (the "Certificate of Merger"), is filed with the Secretary of State of the
State of Delaware or, if agreed by IFCO and PalEx, at such time thereafter as
may be provided in the Certificate of Merger (the "Effective Time"). Merger Sub
will file the Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with the DGCL as soon as practicable after the
consummation of the transactions described in Sections 1.4 and 1.5 and in
accordance with Section 2.5. The parties acknowledge that it is their mutual
desire and intent to consummate the transactions contemplated by this Agreement
as soon as practicable after the Execution Date and to effect the Merger after
the consummation of the transactions described in Sections 1.4 and 1.5 and
immediately prior to the completion of the IPO on the IPO Closing Date.
Accordingly, they will, subject to the provisions hereof and to the fiduciary
duties of their respective managing directors, Supervisory Boards, Management
Boards, Boards of Directors or equivalent bodies, use all reasonable efforts to
consummate, as soon as practicable, the transactions contemplated by this
Agreement in accordance with Section 2.5.
SECTION 2.4. Effects of the Merger.
(a) The Merger shall have the effects set forth in Sections 259, 260 and
261 of the DGCL.
(b) At the Effective Time, the Certificate of Incorporation of Merger Sub
as in effect immediately prior to the Effective Time shall be amended to change
the name of the Surviving Corporation to "PalEx, Inc." As so amended, such
Certificate of Incorporation will be the Certificate of Incorporation of the
Surviving Corporation after the Effective Time, and thereafter may be amended
in accordance with its terms and as the DGCL provides.
(c) The Bylaws of Merger Sub as in effect immediately prior to the
Effective Time will be the Bylaws of the Surviving Corporation after the
Effective Time, and thereafter may be amended in accordance with their terms
and as the Certificate of Incorporation of the Surviving Corporation and the
DGCL provide.
(d) The directors of the Surviving Corporation from and after the Effective
Time will be Christoph Schoeller, Martin Schoeller and Vance K. Maultsby, Jr.,
each of whom will serve until his successor is duly elected or appointed and
qualified, or until his earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and Bylaws.
(e) The officers of PalEx immediately prior to the Effective Time will
serve as the officers of the Surviving Corporation from and after the Effective
Time until their respective successors are duly appointed and qualified, or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and Bylaws.
SECTION 2.5. Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement, consistent with Section 2.3, will take place at
a location mutually agreeable to IFCO and PalEx as promptly as practicable
following the date on which the last of the conditions set forth in Article X
is fulfilled or waived, or at such other time as IFCO and PalEx shall agree.
This Agreement refers to the date on which the Closing occurs as the "Closing
Date."
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ARTICLE III
CONVERSION OF SHARES IN THE MERGER
SECTION 3.1. Conversion of PalEx Capital Stock.
(a)At the Effective Time, by virtue of the Merger and without any action
on the part of any holder of any capital stock of PalEx:
(i)each share of common stock, par value $0.01 per share, of PalEx
("PalEx Common Stock") issued and outstanding immediately prior to the
Effective Time (other than PalEx Treasury Shares to be canceled in
accordance with clause (ii) of this Section 3.1(a)) will, subject to
Sections 3.5 and 3.7, be exchanged for and converted into the right to
receive consideration with a value equal to $9.00 in the form of cash,
IFCO Ordinary Shares or a combination thereof as follows: (A) $9.00
(the "Merger Price" in cash, without any interest thereon (the "Cash
Consideration"); or (B) a fraction of IFCO Ordinary Shares calculated
by dividing $9.00 by the IPO price, rounded to the fourth decimal place
(such fraction being referred to herein as the "Exchange Ratio" and the
number of IFCO Ordinary Shares being referred to herein as the "Stock
Consideration") (the Cash Consideration and/or the Stock Consideration
being referred to herein, collectively, as the "Merger Consideration"
and the aggregate of such consideration provided in exchange for all
shares of PalEx Common Stock being referred to herein as "Aggregate
Merger Consideration"), which shall be determined pursuant to an
election or deemed non-election by the holder thereof as set forth in
Section 3.3 and which shall be subject to the limitations set forth in
this Section 3.1 on the Aggregate Merger Consideration; notwithstanding
the foregoing, prior to IFCO's transfer of the cash and issuance of the
IFCO Ordinary Shares to the Exchange Agent pursuant to Section 3.4 for
the account of the former holders of PalEx Common Stock in the Share
Exchange (as defined in Section 3.4), each such holder shall, in
addition to his, her or its right to receive the Merger Consideration,
or, in the event of the holders of Dissenting Shares, if any, in
addition to his, her or its right to receive the consideration as
described in Section 3.5, have an ownership interest in the Surviving
Corporation identical in all respects to his, her or its ownership
interest in PalEx immediately prior to the Effective Time (the
"Ownership Interest");
(ii)each share of capital stock of PalEx, if any, owned by IFCO or
any of its Subsidiaries or held in treasury by PalEx or any of its
Subsidiaries immediately prior to the Effective Time (collectively,
"PalEx Treasury Shares") will be canceled and retired and will cease to
exist and no IFCO Ordinary Shares or other consideration will be
delivered or deliverable in exchange therefor;
(iii)subject to and as more fully provided in Section 9.6, each
unexpired option or warrant to purchase PalEx Common Stock which is
outstanding at the Effective Time, whether or not then exercisable,
automatically and without any action on the part of the holder thereof
will be exchanged into an option or warrant to purchase a number of
IFCO Ordinary Shares equal to the number of shares of PalEx Common
Stock which could be purchased under such option or warrant multiplied
by the Exchange Ratio, at a price per IFCO Ordinary Share equal to the
per share exercise price of such option or warrant divided by the
Exchange Ratio, which price shall at least be equal to the nominal
value of an IFCO Ordinary Share;
(iv) subject to Section 9.19, each SMG Exchangeable Share (as defined
in Section 5.2(a)) issued and outstanding immediately prior to the
Effective Time will, subject to Section 3.7, and from and after the
Effective Time be exchangeable for and convertible into the right to
receive the same Merger Consideration that would have been received if
such SMG Exchangeable Share had been exchanged for a share of PalEx
Common Stock immediately prior to the Effective Time (the "SMG Exchange
Consideration"); provided that the Surviving Corporation shall pay to
IFCO an amount equal to the cash actually paid by IFCO in any such
exchange and the nominal value of the IFCO Ordinary Shares issued by
IFCO in any such exchange or take such other steps as may be necessary
and appropriate under the law of The Netherlands to evidence
consideration for such cash and shares;
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(v) each PalEx Convertible Note (as defined in Section 5.2(a)) which
is outstanding at the Effective Time, whether or not then exercisable,
automatically and without any action on the part of the holder thereof
shall be convertible into a number of IFCO Ordinary Shares equal to the
number of shares of PalEx Common Stock which could be received upon
conversion of such PalEx Convertible Note multiplied by the Exchange
Ratio, at a price per IFCO Ordinary Share equal to the per share
conversion price of such PalEx Convertible Note divided by the Exchange
Ratio, which price shall at least be equal to the nominal value of an
IFCO Ordinary Share; provided that the Surviving Corporation shall pay
to IFCO an amount equal to the nominal value of the IFCO Ordinary
Shares issued by IFCO in the conversion of any Convertible Note or take
such other steps as may be necessary and appropriate under the law of
The Netherlands to evidence consideration for such shares.
(b) The Aggregate Merger Consideration, together with the SMG Exchange
Consideration, the cash payable to holders of Dissenting Shares pursuant to
Section 3.5, and the cash payable in lieu of fractional shares pursuant to
Section 3.7, shall be comprised of (i) not less than 40% of the shares of PalEx
Common Stock and SMG Exchangeable Shares being exchanged for and converted into
Cash Consideration (the "Cash Election Number") and (ii) not more than 60% of
the Shares of PalEx Common Stock and SMG Exchangeable Shares being exchanged
for and converted into stock consideration (the "Stock Election Number");
provided, however, that if the Record Holders elect pursuant to Section 3.3 to
receive a greater amount of Cash Consideration than the Cash Election Number,
then the Cash Election Number shall be increased to up to 49% of the shares of
PalEx Common Stock and SMG Exchangeable Shares being exchanged for and
converted into Cash Consideration (the "Adjusted Cash Election Number").
(c) All IFCO Ordinary Shares issuable in the Merger will be deemed for all
purposes to have been issued by IFCO at the Effective Time.
(d) For purposes of this Section 3.1 and as otherwise used in this
Agreement, the following terms have the meanings assigned to them below:
"Currency Exchange Rate" means, as of any specified day the rate at which
one Euro would be translated into United States Dollars using the currency
cross rate for late New York trading in Euros, as published in the Wall
Street Journal, Eastern Edition, on such specified day.
"IPO" means the first time IFCO issues and sells IFCO Ordinary Shares in
a primary underwritten offering.
"IPO Closing Date" means the date on which IFCO first receives payment
for the IPO Shares.
"IPO Pricing Date" means the date on which IFCO and the underwriters
named in the underwriting agreement relating to the IPO agree in that
underwriting agreement (or in a related pricing agreement) to the initial
public offering price per share of IFCO Ordinary Shares, subject to the
terms and conditions of the underwriting agreement, the "Initial Offering
Price").
"IPO Price" means the product of (i) the Initial Offering Price and (ii)
the Currency Exchange Rate for the IPO Pricing Date.
"IPO Shares" means the number of IFCO Ordinary Shares IFCO sells in the
IPO.
"Subsidiary" means, with respect to any party, any corporation, limited
liability company, partnership, joint venture or other entity, whether
incorporated or unincorporated, of which: (i) such party or any other
Subsidiary of such party is a general partner; or (ii) at least a majority
of the securities or other equity interests having by their terms ordinary
voting power to elect a majority of the members of the Supervisory Board,
Management Board, managing directors, Board of Directors or any similar
governing body of such entity is, directly or indirectly, owned or
controlled by such party or by any one or more of its Subsidiaries, or by
such party and any one or more of its Subsidiaries.
(e) for purposes of this Section 3.1 and as otherwise used in this Agreement,
references to IFCO Ordinary Shares to be issued to holders of PalEx Common
Stock as part of the Merger Consideration or to be issued
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from and after the Effective Time as provided in this Section 3.1 shall mean
New York shares representing such IFCO Ordinary Shares.
SECTION 3.2. Conversion of Merger Sub Shares. At the Effective Time, by
virtue of the Merger and without any action on the part of IFCO, each share of
Merger Sub Capital Stock will convert into one fully paid and nonassessable
share of common stock, par value $0.01 per share, of the Surviving Corporation.
SECTION 3.3 Election of Merger Consideration.
(a) Election. Each record holder of shares of PalEx Common Stock (other than
PalEx or any of its Subsidiaries) as of the record date (the "Record Date") for
the PalEx Stockholders' Meeting (each a "PalEx Record Holder"), each record
holder of SMG Exchangeable Shares as of the Record Date (each an "SMG Holder")
and Batchelder & Partners, Inc. ("Batchelder" and, together with the PalEx
Record Holders and the SMG Holders, the "Record Holders"), to which PalEx has
agreed to issue 200,000 shares of PalEx Common Stock immediately prior to the
Effective Time, pursuant to the agreement with Batchelder described in Section
5.22, will be entitled, with respect to the Record Holder's shares, to make an
unconditional election (an "Election") on or prior to the Election Date to
determine the form of the Merger Consideration to be received with respect to
such shares. Subject to the adjustment procedures Section 3.3 (e), each Record
Holder (or the beneficial owner of the shares through appropriate and customary
documentation and instructions) shall specify as part of the Election (i) the
number of shares of PalEx Common Stock or SMG Exchangeable Shares owned by such
Record Holder (or in the case of Batchelder, to be owned) that such Record
Holder desires to be exchanged for and converted into (or, with respect to SMG
Exchangeable Shares, exchangeable for and convertible into) Cash Consideration
(a "Cash Election") and (ii) the number of shares of PalEx Common Stock or SMG
Exchangeable Shares owned by such Record Holder that such Record Holder desires
to be exchanged for and converted into (or, with respect to SMG Exchangeable
Shares, exchangeable for and convertible into) Stock Consideration (a "Stock
Election").
(b) Form of Election. A form of election in such form as PalEx and IFCO shall
mutually agree (the "Election Form") and a Letter of Transmittal, shall be
mailed by PalEx with the Proxy Statement to each Record Holder. The Election
Form shall be used by each Record Holder to make an Election as provided for in
Section 3.3(a). Each completed and signed Election Form shall be accompanied
by, for each PalEx Record Holder, (i) the certificate or certificates for all
of the shares of PalEx Common Stock covered by such Election Form (or (A)
customary affidavits and indemnification regarding the loss or destruction of
such certificate or certificates or (B) an appropriate guarantee of delivery of
such certificate or certificates, as set forth in the instructions accompanying
the Letter of Transmittal, from a member of any registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company in the United States, provided such
certificate or certificates are in fact delivered to the Exchange Agent by the
time required for such guarantee of delivery, and, provided further, that
failure to deliver such certificate or certificates covered by such guarantee
of delivery shall invalidate an otherwise properly made Election) and (ii) a
completed and duly executed Letter of Transmittal. Record Holders who hold
shares of PalEx Common Stock or SMG Exchangeable Shares as nominees, trustees
or in other representative capacities (a "Representative") may submit multiple
Election Forms, provided that such Representative certifies that each such
Election Form covers all the shares of PalEx Common Stock held by such
Representative for a particular beneficial owner. "Election Date" shall mean
5:00 p.m., Houston, Texas time, on the business day immediately preceding the
PalEx Stockholders' Meeting.
(c) Failure To Make an Election. If a Record Holder fails to deliver a fully
completed and signed Election Form to the Exchange Agent by the Election Date,
together with the certificate or certificates for the shares of PalEx Common
Stock to which the Election Form relates and a completed and duly executed
Letter of Transmittal, but has not exercised its or his rights as a dissenting
stockholder pursuant to Section 3.5, such Record Holder shall be deemed not to
have made an Election and shall receive Merger Consideration as provided in
Section 3.3(e) (a "Non-Election"). Regardless of any Election Form received by
the Exchange Agent, holders of Dissenting Shares pursuant to Section 3.5 shall
be deemed to have made a Cash Election.
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(d) Subsequent Holders. If a Record Holder transfers shares of PalEx Common
Stock or SMG Exchangeable Shares after the Record Date but before the close of
business on the business day immediately preceding the Election Date (the
"Transferred Shares"), the new holder of the Transferred Shares (the
"Subsequent Holder") shall be entitled to revoke, in accordance with the
procedures in Section 3.3(f), any Election made by such Record Holder with
respect to the Transferred Shares and, if desired, to make a new Election, in
accordance with the procedures in Section 3.3(b), with respect to the
Transferred Shares. PalEx and IFCO shall make available, or shall cause the
Exchange Agent to make available, one or more separate Election Forms to any
Subsequent Holder upon such Subsequent Holder's or PalEx's request to the
Exchange Agent. PalEx shall provide to the Exchange Agent all information
reasonably necessary for it to perform as specified in this Section 3.3(d).
(e) Adjustment Procedures.
(i) If the sum of the aggregate number of shares of PalEx Common Stock
and SMG Exchangeable Shares covered by Cash Elections and represented by
cash payable in lieu of fractional shares pursuant to Section 3.7 (the
"Cash Election Shares"), exceeds the Adjusted Cash Election Number, then:
(A) all shares of PalEx Common Stock and SMG Exchangeable Shares
covered by Stock Elections (the "Stock Election Shares") and all shares
of PalEx Common Stock and SMG Exchangeable Shares covered by Non-
Elections (the "Non-Election Shares") shall be exchanged for and
converted into (or, with respect to SMG Exchangeable Shares,
exchangeable for and convertible into) the right to receive IFCO
Ordinary Shares;
(B) all Cash Election Shares held by each Record Holder making a Cash
Election with respect to 49% or less of the total number of shares for
which an Election is made by such Record Holder, Dissenting Shares and
shares represented by cash payable in lieu of fractional shares
pursuant to Section 3.7 (collectively, the "Unadjusted Cash Election
Shares") shall be exchanged for and converted into (or, with respect to
SMG Exchangeable Shares, exchangeable for and convertible into) the
right to receive cash; and
(C) the Cash Election Shares held by a Record Holder (an "Adjusted
Cash Record Holder") making a Cash Election with respect to greater
than 49% of the total number of shares for which an Election is made by
such Adjusted Cash Record Holder (the "Adjusted Cash Election Shares")
shall be exchanged for and converted into (or, with respect to SMG
Exchangeable Shares, exchangeable for and convertible into) the right
to receive the sum of
(1) an amount in cash, without interest, equal to the product of
(x) the Cash Consideration,
(y) .49 and
(z) the total number of shares of PalEx Common Stock and SMG
Exchangeable Shares held by such Adjusted Cash Record
Holder (the product of (y) and (z) being referred to herein
as the "First Cash Adjustment Number"),
(2) an amount in cash, without interest, equal to the product of
(x) the Cash Consideration,
(y) a fraction, the numerator of which shall be the total
number of Adjusted Cash Election Shares held by such
Adjusted Cash Record Holder less the First Cash Adjustment
Number and the denominator of which shall be the total
number of Adjusted Cash Election Shares held by all
Adjusted Cash Record Holders less the total First Cash
Adjustment Number for all Adjusted Cash Record Holders, and
(z) the Adjusted Cash Election Number less the sum of the
number of all the Unadjusted Cash Election Shares and the
total First Cash Adjustment Number for all Adjusted Cash
Record Holders (the product of (y) and (z) being referred
to herein as the "Second Cash Adjustment Number") and
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(3) a number of IFCO Ordinary Shares equal to the product of
(x) the Stock Consideration and
(y) the total number of Adjusted Cash Election Shares held by
such Adjusted Cash Record Holder, less the First Cash
Adjustment Number and less the Second Cash Adjustment
Number.
(ii) If the Stock Election Shares exceed the Stock Election Number, then:
(A) all Cash Election Shares and Non-Election Shares shall be
exchanged for and converted into (or, with respect to SMG Exchangeable
Shares, exchangeable for and convertible into) the right to receive
cash;
(B) all Stock Election Shares held by each Record Holder making a
Stock Election with respect to 60% or less of the total number of
shares for which an Election is made by such Record Holder
(collectively, the "Unadjusted Stock Election Shares") shall be
exchanged for and converted into (or, with respect to SMG Exchangeable
Shares, exchangeable for and convertible into) the right to receive
IFCO Ordinary Shares; and
(C) the Stock Election Shares held by a Record Holder (an "Adjusted
Stock Record Holder") making a Stock Election with respect to greater
than 60% of the total number of shares for which an Election is made by
such Adjusted Stock Record Holder (the "Adjusted Stock Election
Shares") shall be exchanged for and converted into (or, with respect to
SMG Exchangeable Shares, exchangeable for and convertible into) the
right to receive the sum of
(1) a number of IFCO Ordinary Shares equal to the product of
(x) the Stock Consideration,
(y) .60 and
(z) the total number of shares of PalEx Common Stock and SMG
Exchangeable Shares held by such Adjusted Stock Record
Holder (the product of (y) and (z) being referred to herein
as the "First Stock Adjustment Number"),
(2) a number of IFCO Ordinary Shares equal to the product of
(x) the Stock Consideration,
(y) a fraction, the numerator of which shall be the total
number of Adjusted Stock Election Shares held by such
Adjusted Stock Record Holder less the First Stock
Adjustment Number and the denominator of which shall be the
total number of Adjusted Stock Election Shares held by all
Adjusted Stock Record Holders less the total First Stock
Adjustment Number for all Adjusted Stock Record Holders,
and
(z) the Stock Election Number less the sum of the number of
all the Unadjusted Stock Election Shares and the total
First Stock Adjustment Number for all Adjusted Stock Record
Holders (the product of (y) and (z) being referred to
herein as the "Second Stock Adjustment Number") and
(3) an amount in cash, without interest, equal to the product of
(x) the Cash Consideration and
(y) the total number of Adjusted Stock Election Shares held by
such Adjusted Stock Record Holder, less the First Stock
Adjustment Number and less the Second Stock Adjustment
Number.
(iii) If the Cash Election Shares are greater than or equal to the Cash
Election Number, but less than or equal to the Adjusted Cash Election
Number, then:
(A) all Stock Election Shares shall be exchanged for and converted
into (or, with respect to SMG Exchangeable Shares, exchangeable for and
convertible into) the right to receive IFCO Ordinary Shares;
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(B) all Cash Election Shares shall be exchanged for and converted
into (or, with respect to SMG Exchangeable Shares, exchangeable for and
convertible into) the right to receive cash; and
(C) each Non-Election Share shall be exchanged for and converted into
(or, with respect to the SMG Exchangeable Shares, exchangeable for and
convertible into) the right to receive
(1) an amount in cash equal to the lesser of
(x) the Cash Consideration or
(y) the product of (i) the Cash Consideration and (ii) a
fraction (the "Non-Election Fraction"), the numerator of which
shall be the Adjusted Cash Election Number less the Cash
Election Shares and the denominator of which shall be the total
number of Non-Election Shares, and
(2) if the amount calculated pursuant to clause (1) above is less
than the Cash Consideration, a number of IFCO Ordinary Shares equal
to the product of
(x) the Stock Consideration and
(y) a fraction equal to one minus the Non-Election Fraction.
(iv) For purposes of subsections (i)(C) and (ii)(C) of this Section
3.3(e), (A) the sum of the amounts in cash pursuant to clauses (1) and (2)
of subsection (i)(C) and clauses (1) and (2) of subsection (ii) (C),
respectively, shall be rounded to the nearest whole cent and (B) the number
of IFCO Ordinary Shares pursuant to clause (3) of each of subsections
(i)(C) and (ii)(C) shall be rounded to the fourth decimal place. For
purposes of subsection (iii)(C) of this Section 3.3(e), (A) the product of
the amount in cash pursuant to clause (1) thereof and the total number of
Non-Election Shares held by a Record Holder shall be rounded to the nearest
whole cent and (B) the product of the number of IFCO Ordinary Shares
pursuant to clause (2) thereof and the total number of Non-Election Shares
held by a Record Holder shall be rounded to the fourth decimal place.
(f) Revoking Election Forms. Any Election Form may be revoked by the Record
Holder submitting it, or by a Subsequent Holder of Transferred Shares to which
it relates, only by written notice received by the Exchange Agent on or before
the Election Date. If an Election Form is revoked by a Record Holder, the
Record Holder may make a new Election in accordance with the procedures in
Section 3.3(b). If an Election Form is revoked and a new Election Form is not
so made, the Record Holder shall be deemed to have made a Non-Election and the
Exchange Agent shall retain the certificate or certificates for the shares
submitted with the revoked Election Form for exchange and conversion at the
Effective Time. All Election Forms shall be automatically revoked if SPS or
PalEx terminate this Agreement or SPS and PalEx notify the Exchange Agent in
writing that the Merger has been abandoned. If the Merger is abandoned, the
certificate or certificates for the shares of PalEx Common Stock tendered by a
PalEx Record Holder with such Election Form and to which such Election Form
relates shall be promptly returned to the PalEx Record Holder submitting the
same.
(g) Election Determinations. The determination of the Exchange Agent shall be
binding as to whether or not an Election has been properly made or revoked
pursuant to this Section 3.3 and when an Election or revocation of an Election
was received. If the Exchange Agent reasonably determines in good faith that
any Election was not timely and properly made by a Record Holder, such Record
Holder shall be deemed to have made a Non-Election. IFCO shall have the
discretion to cause the Exchange Agent, or delegate the discretion to the
Exchange Agent, to disregard immaterial defects in Election Forms. The Exchange
Agent shall also make all computations as to the proration of the merger
consideration as contemplated in this Section 3.3, and any such computation
shall be conclusive and binding on the Record Holders and any Subsequent
Holders.
SECTION 3.4. Share Exchange. Upon the terms and subject to the conditions of
this Agreement, as of the Effective Time, IFCO will duly issue the IFCO
Ordinary Shares that form part of the Aggregate Merger Consideration to the
Exchange Agent for the account of the former stockholders of PalEx, and
Exchange Agent
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will contribute, for the account of the former stockholders of PalEx, all of
the Ownership Interests in the Surviving Corporation to IFCO as a contribution
in kind (the "Share Exchange") to pay up such IFCO Ordinary Shares. At the
Effective Time, the obligation to effect the Share Exchange shall be
unconditional and irrevocable.
SECTION 3.5. Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, shares of PalEx Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by any stockholder
who is entitled to appraisal rights pursuant to Section 262 of the DGCL, who,
on a timely basis, makes and perfects a demand for appraisal of such shares in
accordance with all requirements and provisions of Section 262 of the DGCL, and
who does not effectively withdraw or lose the right to such appraisal
(collectively, "Dissenting Shares"), shall not be converted as described in
Section 3.1, but shall, from and after the Effective Time, represent only the
right to receive from the Surviving Corporation such consideration as may be
determined to be due to such stockholder with respect to such Dissenting Shares
pursuant to Section 262 of the DGCL; provided, however, that Dissenting Shares
held by any stockholder who, after the Effective Time, withdraws his demand for
appraisal or loses his right of appraisal with respect to those shares, in
either case pursuant to Section 262 of the DGCL, shall forthwith be converted
into the right to receive the consideration specified in Section 3.1, without
interest pursuant to a cash election (without regard to any proration).
SECTION 3.6. Exchange of Shares.
(a)Exchange Fund. As of the Effective Time, IFCO will provide to the Exchange
Agent the IFCO Ordinary Shares required to effect exchanges for stock pursuant
to Sections 3.1 and 3.3 and this Section 3.6, and the Surviving Corporation
will provide the Exchange Agent with a sufficient amount of cash to effect
exchanges for cash pursuant to Sections 3.1 and 3.3 and this Section 3.6 and to
fund the payment of cash in lieu of fractional shares pursuant to Section 3.7
(all of which is collectively referred to herein as the "Exchange Fund").
(b)Exchange Procedures. Promptly after the Effective Time, the Exchange Agent
will mail to each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented outstanding shares of PalEx
Common Stock (the "Old PalEx Certificates"), who is entitled to receive Merger
Consideration with respect to each such share pursuant to Section 3.1(a), (i) a
letter of transmittal (which will specify that delivery of Old PalEx
Certificates will be effected, and risk of loss and title to the Old PalEx
Certificates will pass, only on actual delivery of the Old PalEx Certificates
to the Exchange Agent) and (ii) instructions for use in effecting the surrender
of the Old PalEx Certificates in exchange for certificates representing IFCO
Ordinary Shares (collectively, "Letter of Transmittal"), unless such record
holder shall have submitted a Letter of Transmittal together with an Election
Form pursuant to Section 3.3. Upon surrender of an Old PalEx Certificate to the
Exchange Agent, together with a duly executed letter of transmittal and such
other documents as the Exchange Agent may reasonably require, the holder of
that Old PalEx Certificate shall be entitled to receive in exchange therefor
(x) if applicable, a certificate in the name of the holder representing that
number of whole IFCO Ordinary Shares into which the shares of PalEx Common
Stock theretofore represented by the Old PalEx Certificate so surrendered will
have been converted pursuant to Sections 3.1(a) and 3.3 and (y) if applicable,
a certified or bank cashiers check payable in U.S. dollars to such holder an
amount equal to the sum of (A) the amount of cash into which such shares of
PalEx Common Stock will have been converted pursuant to Sections 3.1(a) and
3.3, (B) cash in lieu of fractional IFCO Ordinary Shares into which the shares
of PalEx Common Stock theretofore represented by such Old PalEx Certificate
will have been converted pursuant to Sections 3.1(a) and Section 3.3 and (C)
the payment of any dividends and distributions pursuant to Section 3.6(d), and
the Old Palex Certificate so surrendered shall be canceled.
(c)Transfer or Other Taxes. If any certificate for IFCO Ordinary Shares is to
be issued in a name other than that in which the Old PalEx Certificate
surrendered in exchange therefor is registered, it will be a condition of that
exchange that the person requesting such exchange will pay any applicable
transfer or other taxes required by reason of that issuance.
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(d)Dividends; Distributions. IFCO shall not declare or pay any dividends on
or before the Effective Time. No dividends or other distributions declared or
accrued with respect to IFCO Ordinary Shares after the Effective Time will be
paid to the holder of any unsurrendered Old PalEx Certificate, with respect to
which the IFCO Ordinary Shares shall have been issued in the Merger. All such
dividends or other distributions shall be paid by IFCO to the Exchange Agent
(on behalf of holders of unsurrendered Old Pal Ex Certificates) and shall be
included in the Exchange Fund, in each case until such Old PalEx Certificates
shall be surrendered as provided herein, but (i) upon that surrender there
shall be paid, to the person in whose name the certificates representing those
IFCO Ordinary Shares shall be issued and registered the amount of dividends or
other distributions theretofore paid with respect to such IFCO Ordinary Shares
as of any date subsequent to the Effective Time but prior to that surrender and
(ii) at the appropriate payment date or as soon as practicable thereafter,
there shall be paid to that person the amount of dividends or other
distributions with a record date, or which have accrued, after the Effective
Time but prior to that surrender, but which are not payable until a date after
that surrender, which are payable with respect to whole IFCO Ordinary Shares,
subject in any case to any applicable abandoned property, escheat and similar
laws. No interest will be payable on any such dividends or distributions
pursuant to this Section 3.6 or any payment for fractional shares pursuant to
Section 3.7.
(e)Lost, Stolen or Destroyed Certificates. If any Old PalEx Certificate has
been lost, stolen or destroyed, on the making of an affidavit of that fact by
the person claiming ownership of that Old PalEx Certificate, IFCO and the
Surviving Corporation will issue in exchange for that lost, stolen or destroyed
Old PalEx Certificate the IFCO Ordinary Shares, cash and other property
deliverable in respect thereof determined in accordance with this Article III.
When authorizing any such issuance, either IFCO or the Surviving Corporation
may, in its discretion and as a condition precedent to that issuance to any
person, require that person to give IFCO and the Surviving Corporation such
indemnity as it may reasonably direct as protection against any claim that may
be made against IFCO or the Surviving Corporation with respect to the PalEx
Certificate alleged to have been lost, stolen or destroyed.
(f)Final Settlement. From and after the Effective Time, the holders of Old
PalEx Certificates shall cease to have any rights with respect to such shares
except as otherwise provided herein or by applicable law. All rights to receive
cash in lieu of fractional shares, if any, and cash and/or IFCO Ordinary Shares
in which shares of PalEx Common Stock shall have been converted pursuant to
this Article III shall be deemed to have been paid or issued, as the case may
be, in full satisfaction of all rights pertaining to such shares of PalEx
Common Stock.
(g)Termination of Exchange Fund. Any portion of the Exchange Fund that
remains undistributed to the holders of the Old PalEx Certificates one year
after the Effective Time shall be delivered by the Exchange Agent to a
depositary bank designated by IFCO, upon demand, whereupon such depositary bank
shall hold the Exchange Fund on behalf of holders of unsurrendered Old PalEx
Certificates, and any holders of Old PalEx Certificates who have not heretofore
complied with this Section 3.6 shall thereafter look only to IFCO or such
depositary bank for payment of their claim for Merger Consideration for each
share of PalEx Common Stock evidenced by such Old PalEx Certificates and any
dividends or distributions with respect to IFCO Ordinary Shares and IFCO shall
cause the depositary bank to satisfy such claim. Such depositary bank shall
maintain an office in the City of New York where holders of Old PalEx
Certificates may comply with this Article III.
(h)Withholding Taxes. Each of the Exchange Agent and IFCO shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any holder of Old PalEx Certificates and from dividends, if
any, payable pursuant to Section 3.6(d) such amounts as it is required to
deduct and withhold with respect to the making of such payment under the Code
or any provision of state, local or non-U.S. tax law. To the extent that
amounts are so withheld by the Exchange Agent or IFCO, as the case may be, such
withholdings shall be treated for all purposes of this Agreement as having been
paid to the holder of the Old PalEx Certificate in respect of which such
deduction and withholding was made by the Exchange Agent or IFCO, as the case
may be.
(i) Liability. None of the Exchange Agent, IFCO or the Surviving Corporation
shall be liable to any holder of shares of PalEx Common Stock or IFCO Ordinary
Shares, as the case may be, for such shares (or
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dividends or distributions with respect thereto) or cash in lieu of fractional
IFCO Ordinary Shares delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
SECTION 3.7. No Fractional Shares. Notwithstanding any other provision of
this Agreement, no certificates or scrip for fractional IFCO Ordinary Shares
will be issued in the Merger and no holder of an Old PalEx Certificate entitled
to receive a fractional IFCO Ordinary Share in the Merger but for this Section
3.7 will be entitled to any dividend or other distribution with respect to that
fractional share or have any rights of a holder of IFCO Ordinary Shares by
reason of that fractional share. In lieu of any such fractional shares, each
holder of shares of PalEx Common Stock who would otherwise have been entitled
to receive a fraction of an IFCO Ordinary Share on surrender of Old PalEx
Certificates for exchange pursuant to this Article III will be entitled to
receive from the Exchange Agent an amount in cash (without interest) equal to
the value of an IFCO Ordinary Share, calculated based upon the IPO Price,
multiplied by such fraction. The Surviving Corporation shall provide the
Exchange Agent with sufficient cash to make such payments to the holders of Old
PalEx Certificates in cash, without interest, on the surrender of the Old PalEx
Certificates.
SECTION 3.8. Closing of PalEx's Transfer Books. At and after the Effective
Time, holders of Old PalEx Certificates will cease to have any rights as
stockholders of PalEx, except for the right to receive cash and/or IFCO
Ordinary Shares (and dividends or other distributions, if any, thereon)
pursuant to Sections 3.1, 3.3 and 3.6, and the right to receive cash as payment
for and in lieu of fractional shares pursuant to Section 3.7. At the Effective
Time, the stock transfer books of PalEx will be closed and no transfer of
shares of PalEx Common Stock which were outstanding immediately prior to the
Effective Time thereafter will be made.
SECTION 3.9. Modification of Share Exchange Procedures. The parties agree to
revise the share exchange procedures set forth in Article II and III as may be
necessary and appropriate to comply with the laws of the jurisdiction in which
IFCO is organized, provided that the economic effect of the share exchange
procedures shall not be changed.
ARTICLE IV
IFCO GOVERNANCE AFTER THE EFFECTIVE TIME
SECTION 4.1. IFCO Governance after Effective Time. IFCO and PalEx agree that,
after the Effective Time, and without the intention to interfere with the
rights and powers of IFCO's shareholders meeting or its Board of Directors,
they will recommend to their respective shareholders and Board of Directors the
following:
(a) The Articles of Association of IFCO and any other applicable corporate
governance documents of IFCO as may be required by the laws of the jurisdiction
in which it is organized, in each case, following the Effective Time, shall be
in the form reasonably agreed on between IFCO and PalEx.
(b) Notwithstanding the foregoing, the Board of Directors of IFCO (the "IFCO
Board of Directors") shall consist of seven members. The initial members of the
IFCO Board of Directors shall be Martin Schoeller, Christoph Schoeller, Sam
Humphreys, Dr. Frank Tofflinger, Eckhard Pfeiffer, Randall Onstead, and
Cornelius Geber. The initial Chairman shall be Christoph Schoeller.
SECTION 4.2. Corporate and Operational Headquarters. Following the Effective
Time, IFCO shall maintain its primary headquarters in Amsterdam, The
Netherlands, and shall initially maintain two regional corporate and
operational headquarters: one located at the current headquarters of IFCO
Europe in Munich, Germany; and one located at the current headquarters of PalEx
in Houston, Texas.
SECTION 4.3. Language. Following the Effective Time, English shall be the
official language for the management of IFCO, except where Dutch law requires
records or filings in the Dutch language.
SECTION 4.4. U.S. GAAP. Following the Effective Time, the books and records
of IFCO shall be maintained in accordance with U.S. GAAP, in addition to The
Netherlands generally accepted accounting principles to the extent required
under Dutch law.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX
PalEx represents and warrants to SPS that, except as set forth in the
disclosure schedule dated as of the Effective Date and signed by an authorized
officer of PalEx (the "PalEx Disclosure Schedule") and the supplemental
disclosure schedule dated as of the Execution Date and signed by an authorized
officer of PalEx and delivered to SPS on or before the second business day
after the Execution Date in a form reasonably satisfactory to SPS (the "PalEx
Supplemental Disclosure Schedule") (provided, however, that any exception set
forth in the PalEx Supplemental Disclosure Schedule with respect to any matter
or event occurring or arising after the Execution Date, which has or could
reasonably be expected to have a PalEx Material Adverse Effect, shall not have
the effect of modifying these representations and warranties or the exceptions
set forth in the PalEx Disclosure Schedule), each of which exceptions will
specifically identify the relevant Section hereof to which it relates, all of
the following representations and warranties in this Article V are as of the
Effective Date (or such other date stated therein), and will be, on the Closing
Date and immediately prior to the Effective Time, true and correct:
SECTION 5.1. Organization and Qualification. PalEx is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. PalEx is qualified to do business and is in good standing in
each jurisdiction in which the properties it owns, leases or operates or the
nature of the business it conducts makes that qualification necessary, except
where the failure to be so qualified and in good standing will not, when taken
together with all other such failures, reasonably be expected to have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of PalEx and its
Subsidiaries, taken as a whole (a "PalEx Material Adverse Effect"). True,
accurate and complete copies of PalEx's Certificate of Incorporation and
Bylaws, in each case as in effect on the Effective Date, including all
amendments thereto, have heretofore been delivered or made available to SPS.
SECTION 5.2. Capitalization.
(a) As of the Effective Date, the authorized capital stock of PalEx consists
of 30,000,000 shares of PalEx Common Stock and 5,000,000 shares of preferred
stock, par value $.01 per share ("PalEx Preferred Stock"). As of March 26,
1999, (i) 19,578,609 shares of PalEx Common Stock were issued and outstanding,
all of which were validly issued and are fully paid, nonassessable and free of
preemptive rights, (ii) no shares of PalEx Preferred Stock were issued and
outstanding, (iii) no shares of PalEx Common Stock and no shares of PalEx
Preferred Stock were held in the treasury of PalEx, (iv) 2,581,400 shares of
PalEx Common Stock were issuable pursuant to options granted under PalEx's 1996
Stock Option Plan, (v) 250,000 shares of PalEx Common Stock were reserved for
issuance pursuant to a warrant issued by PalEx to Batchelder, (vi) 703,346
shares of PalEx Common Stock were reserved for issuance on conversion of
convertible promissory notes in the aggregate principal amount outstanding of
approximately $9,900,000 (the "PalEx Convertible Notes") and (vii) 720,732
shares of PalEx Common Stock were reserved for issuance to the former
shareholders of SMG Corporation ("SMG") in exchange for exchangeable shares of
SMG Corporation (the "SMG Exchangeable Shares").
(b) Except as set forth in Section 5.2(a) or as disclosed in the PalEx SEC
Reports, as of the Effective Date there are no outstanding subscriptions,
options, calls, contracts, commitments, understandings, contractual
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement and also including any rights plan or other anti-takeover agreement
(collectively, "Stock Commitments"), obligating PalEx or any Subsidiary of
PalEx to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of the capital stock of PalEx or obligating PalEx or any
Subsidiary of PalEx to grant, extend or enter into any such agreement or
commitment. Except as contemplated pursuant to this Agreement, there are no
voting trusts, proxies or other agreements or understandings (collectively,
"Voting Arrangements") to which PalEx or any Subsidiary of PalEx or, to the
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knowledge of PalEx, any director or executive officer of PalEx is a party or is
bound with respect to the voting of any shares of capital stock of PalEx.
SECTION 5.3. Subsidiaries. Each direct and indirect Subsidiary of PalEx is
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has the requisite power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. Each Subsidiary of PalEx is qualified to do business
and is in good standing in each jurisdiction in which the properties it owns,
leases or operates or the nature of the business it conducts makes such
qualification necessary, except where the failure to be so qualified and in
good standing would not, when taken together with all such other failures with
respect to all Subsidiaries of PalEx, have a PalEx Material Adverse Effect. All
the outstanding shares of capital stock of each corporate Subsidiary of PalEx
are validly issued, fully paid, nonassessable and free of preemptive rights and
are owned directly or indirectly by PalEx free and clear of any liens, security
interests, charges, claims or other encumbrances (each, a "Lien"), except that
those shares are pledged to secure the indebtedness outstanding under the
Credit Agreement between PalEx and Bank One, Texas, N.A. (the "PalEx Credit
Facility"). There are no Stock Commitments or Voting Arrangements relating to
the issuance, sale, voting, transfer, ownership or other rights with respect to
any shares of capital stock of any corporate Subsidiary of PalEx, including any
right of conversion or exchange under any outstanding security, instrument or
agreement.
SECTION 5.4. Authority; Non-Contravention; Approvals.
(a) PalEx has full corporate power and authority to enter into this
Agreement and, subject to the PalEx Stockholders' Approval and the PalEx
Required Regulatory Approvals, to consummate the transactions contemplated
hereby. The Board of Directors of PalEx has at a meeting duly called and held
and at which a quorum was present and acting throughout, by the requisite
affirmative vote of the directors of PalEx, (i) determined that the Merger is
in the best interests of PalEx and its stockholders and (ii) approved this
Agreement and the Merger. No other corporate proceedings on the part of PalEx
are necessary to authorize the execution and delivery of this Agreement or,
except for the PalEx Stockholders' Approval, the consummation by PalEx of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by PalEx and, assuming the due authorization, execution and delivery
hereof by the other parties hereto, constitutes a valid and legally binding
agreement of PalEx, enforceable against PalEx in accordance with its terms,
except as that enforceability may be subject to (y) any applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally and (z) general
equitable principles.
(b) The execution and delivery of this Agreement by PalEx do not violate,
conflict with or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under or result in the creation of any Lien on any of the properties or assets
of PalEx or any of its Subsidiaries under any of the terms, conditions or
provisions of (i) the charter, bylaws or other similar governing documents of
PalEx or any Subsidiary of PalEx, (ii) any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
governmental or regulatory authority, body or court (each, a "Governmental
Requirement") applicable to PalEx or any of its Subsidiaries or any of their
respective properties or assets or (iii) any note, bond, mortgage, indenture,
deed of trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which PalEx or any of its
Subsidiaries is now a party or by which PalEx or any of its Subsidiaries or any
of their respective properties or assets may be bound or affected. The
consummation by PalEx of the transactions contemplated hereby will not result
in any violation, conflict, breach, termination, acceleration or creation of
Liens under any of the terms, conditions or provisions described in clauses (i)
through (iii) of the preceding sentence, subject (A) in the case of the terms,
conditions or provisions described in clause (ii) above, to obtaining (prior to
the Effective Time) the PalEx Required Regulatory Approvals and the PalEx
Stockholders' Approval and (B) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the
Effective Time) consents required from commercial lenders, lessors or other
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third parties as specified in the PalEx Disclosure Schedule or PalEx
Supplemental Disclosure Schedule. Excluded from the foregoing sentences of this
Section 5.4(b), insofar as they apply to the terms, conditions or provisions
described in clauses (ii) and (iii) of the first sentence of this Section
5.4(b), are such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of Liens as would not, singly or in the aggregate,
have a PalEx Material Adverse Effect, materially impair the ability of PalEx to
perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby.
(c) Except for (i) the filings by PalEx required by the U.S. Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and
comparable antitrust notice or filing requirements imposed by the European
Union or the laws of the jurisdiction in which IFCO is organized (the "European
Governmental Requirements"), and the expiration or termination of the
applicable waiting periods with respect thereto, (ii) the filing of the Proxy
Statement and the Registration Statement with the U.S. Securities and Exchange
Commission (the "SEC") pursuant to the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the U.S. Securities Act of 1933, as amended
(the "Securities Act"), and the declaration of the effectiveness of the
Registration Statement by the SEC and filings with various state "blue sky" or
securities authorities, and such other compliance with the Exchange Act and the
rules and regulations thereunder as may be required in connection with this
Agreement and the transactions contemplated hereby, and (iii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware in
connection with the Merger (the filings referred to in clauses (i) through
(iii) and the related approvals of the applicable governmental or regulatory
bodies or authorities collectively being the "PalEx Required Regulatory
Approvals"), no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority (each, a "Regulatory Approval") is necessary for the execution and
delivery of this Agreement by PalEx or the consummation by PalEx of the
transactions contemplated hereby, other than such Regulatory Approvals as, if
not made or obtained, as the case may be, would not, singly or in the
aggregate, render that consummation unlawful, void or voidable in whole or in
any part or have a PalEx Material Adverse Effect.
SECTION 5.5. Reports and Financial Statements; Accounting and Other Systems.
(a) Since March 20, 1997, PalEx has filed with the SEC all material forms,
statements, reports and documents (including all exhibits, post-effective
amendments and supplements) required to be filed by it under each of the
Securities Act, the Exchange Act and the respective rules and regulations
thereunder, all of which, as amended if applicable, complied when filed in all
material respects with all applicable requirements of the appropriate act and
the rules and regulations thereunder. PalEx has previously delivered or made
available to SPS copies (including all exhibits, post-effective amendments and
supplements) of (i) all reports, including quarterly reports, and registration
statements filed by PalEx with the SEC since March 20, 1997 (other than
registration statements filed on Form S-8) and (ii) PalEx's Annual Report on
Form 10-K for the fiscal year ended December 27, 1998 as filed with the SEC on
March 29, 1999 (the documents referred to in clauses (i) and (ii) referred to
collectively as the "PalEx SEC Reports"). The PalEx SEC Reports are identified
in the PalEx Disclosure Schedule or PalEx Supplemental Disclosure Schedule. As
of their respective dates, the PalEx SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated financial
statements of PalEx and its Subsidiaries included in such reports
(collectively, the "PalEx Financial Statements") have been prepared in
accordance with U.S. generally accepted accounting principles ("U.S. GAAP")
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) and fairly present the financial position of PalEx and its
consolidated Subsidiaries as of the dates thereof and the results of their
operations and their cash flows for the periods then ended, subject, in the
case of the unaudited interim financial statements, to normal year-end and
audit adjustments and any other adjustments described therein.
(b) Each of PalEx and its Subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with U.S. GAAP and to
maintain accountability for assets, (iii) access to assets is permitted only in
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accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
SECTION 5.6. Absence of Undisclosed Liabilities. Except as disclosed in the
PalEx SEC Reports or as heretofore disclosed to SPS in writing with respect to
acquisitions or potential transactions or commitments, neither PalEx nor any of
its Subsidiaries had at December 27, 1998, or has incurred since that date, any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of any nature, except: (a) liabilities, obligations or contingencies that (i)
are accrued or reserved against in the PalEx Financial Statements or reflected
in the notes thereto, (ii) were incurred after December 27, 1998 in the
ordinary course of business and consistent with past practices or (iii) arises
from disclosures set forth on the PalEx Disclosure Schedule or PalEx
Supplemental Disclosure Schedule; (b) liabilities, obligations or contingencies
that (i) would not, singly or in the aggregate, have a PalEx Material Adverse
Effect or (ii) have been discharged or paid in full prior to the Effective
Date; (c) liabilities and obligations that (i) are of a nature not required to
be reflected in the consolidated financial statements of PalEx and its
Subsidiaries prepared in accordance with U.S. GAAP consistently applied and
(ii) were incurred in the ordinary course of business; and (d) liabilities and
obligations under this Agreement.
SECTION 5.7. Absence of Certain Changes or Events. Except as disclosed in the
PalEx SEC Reports, since December 27, 1998, the business of PalEx and its
Subsidiaries has been conducted in the ordinary course consistent with past
practices and there has not been:
(a) any event, occurrence, development or state of circumstances or facts
which has had or is reasonably likely to have, individually or in the
aggregate, a PalEx Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of PalEx or its
Subsidiaries, or any repurchase, redemption or other acquisition by PalEx or
any of its Subsidiaries of any outstanding shares of capital stock or other
securities of, or other ownership interests in, PalEx or any of its
Subsidiaries, except for the SMG Exchangeable Shares;
(c) any making of any material loan, advance or capital contributions to or
investment in any person other than loans, advances or capital contributions to
or investments in its Subsidiaries other than advances under the PalEx Credit
Facility and indebtedness incurred in the ordinary course and consistent with
past practices in connection with equipment purchases;
(d) any material change in the method of accounting or accounting practice
of PalEx or its Subsidiaries, other than changes required by U.S. GAAP; or
(e) any (i) grant of any severance or termination pay except as
contemplated by Section 9.7(d) to (A) any employee of PalEx or any of its
Subsidiaries other than ordinary course grants in amounts consistent with past
practices or (B) any director or officer of PalEx or any of its Subsidiaries,
(ii) increase in benefits payable under any existing severance or termination
pay policies or employment agreements, (iii) entering into of any employment,
deferred compensation or other similar agreement (or any amendment to any such
existing agreement) with any director or officer of PalEx or any of its
Subsidiaries or (iv) increase in compensation, bonus or other benefits payable
to directors or officers, other than, with respect to each of clauses (i)-(iv),
in the ordinary course consistent with past practices, which do not, in the
aggregate, have a Material Adverse Effect.
SECTION 5.8. Litigation. Except as disclosed in the PalEx SEC Reports, there
are no claims, suits, actions or proceedings pending or, to the knowledge of
PalEx, threatened against, relating to or affecting PalEx or any of its
Subsidiaries, before any court, any governmental department, commission,
agency, instrumentality or authority or any arbitrator or mediator (each, a
"Court"), which seek to restrain or enjoin the consummation of the Merger or
which could reasonably be expected, either alone or in the aggregate with all
such claims, actions or proceedings, to have a PalEx Material Adverse Effect.
Except as disclosed in the PalEx SEC Reports, neither PalEx nor any of its
Subsidiaries is subject to any Governmental Requirement of any Court which
prohibits or restricts the consummation of the transactions contemplated hereby
or would have a PalEx Material Adverse Effect.
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SECTION 5.9. Registration Statement and Proxy Statement. None of the
information to be supplied by PalEx or its Subsidiaries for inclusion in (a)
the Registration Statement on Form F-4 to be filed under the Securities Act
with the SEC by IFCO in connection with the Merger for the purpose of
registering the IFCO Ordinary Shares to be issued in the Merger (the
"Registration Statement") or (b) the proxy statement/prospectus to be included
in the Registration Statement and distributed in connection with the meeting of
the stockholders of PalEx to vote on this Agreement and the Merger (the "Proxy
Statement") will, in the case of the Proxy Statement or any amendments thereof
or supplements thereto, at the time of the mailing of the Proxy Statement and
any amendments thereof or supplements thereto, and at the time of that meeting
of the stockholders of PalEx or, in the case of the Registration Statement, as
amended or supplemented at the time it becomes effective and at the time of
such meeting, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. The Proxy Statement will, as of its mailing date, comply
as to form in all material respects with all applicable Governmental
Requirements, except that no representation is made by PalEx with respect to
information supplied or omitted by the IFCO Companies, Merger Sub or SPS for
inclusion therein.
SECTION 5.10. No Violation of Law. Except as disclosed in the PalEx SEC
Reports, neither PalEx nor any of its Subsidiaries is in violation of, or has
been given notice or been charged with any violation of, any Governmental
Requirement (including, without limitation, any applicable environmental law,
ordinance or regulation), except for violations which, singly or in the
aggregate, could not reasonably be expected to have a PalEx Material Adverse
Effect. Without limiting the generality of the foregoing, neither PalEx nor any
of its Subsidiaries, nor, to the knowledge of PalEx, any director, officer,
agent, stockholder, employee or other person associated with or acting on
behalf of PalEx or any of its Subsidiaries has (a) used any corporate funds for
any unlawful contribution, gift, entertainment or other unlawful expense
relating to any political activity, (b) made any direct or indirect unlawful
payment to any government official or employee from corporate funds or (c) made
any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment. Except as disclosed in the PalEx SEC Reports, as of the Effective
Date, to the knowledge of PalEx, no investigation or review by any governmental
or regulatory body or authority is pending or threatened, nor has any
governmental or regulatory body or authority indicated an intention to conduct
the same, other than, in each case, those the outcome of which, as far as
reasonably can be foreseen, will not, singly or in the aggregate, have a PalEx
Material Adverse Effect. PalEx and its Subsidiaries have all permits, licenses,
franchises, variances, exemptions, orders, authorizations, consents and
approvals (each, a "Permit") necessary to conduct their businesses as presently
conducted (collectively, the "PalEx Permits"), except for Permits the absence
of which, singly or in the aggregate, would not have a PalEx Material Adverse
Effect. Neither PalEx nor any of its Subsidiaries is in violation of the terms
of any PalEx Permit, except for delays in filing reports or violations that,
singly or in the aggregate, would not have a PalEx Material Adverse Effect.
SECTION 5.11. Compliance with Agreements. Except as disclosed in the PalEx
SEC Reports, neither PalEx nor any of its Subsidiaries is in breach or
violation of or in default in the performance or observance of any term or
provision of, and no event has occurred which, with lapse of time or action by
a third party, could result in a default under, (a) the charter, bylaws or
similar governing documents of PalEx or any of its Subsidiaries or (b) any
contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which PalEx or any of its
Subsidiaries is a party or by which any of them is bound or to which any of
their property is subject, other than, in the case of clause (b) of this
Section 5.11, breaches, violations and defaults that, singly or in the
aggregate, would not have a PalEx Material Adverse Effect.
SECTION 5.12. Environmental Matters. Except as disclosed in the PalEx SEC
Reports with respect to the Zellwood Groundwater Contamination Site in Orange
County, Florida, and the Casmalia Site in Santa Barbara County, California, (a)
PalEx and its Subsidiaries have conducted their respective businesses in
material compliance with all applicable Governmental Requirements relating to
(i) the protection of human health and safety, (ii) the protection of the
environment or (iii) hazardous or toxic substances or wastes, pollutants or
contaminants (collectively, "Environmental Laws"), (b) there is no claim
pending under any
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Environmental Law or, to the knowledge of PalEx, threatened against PalEx or
any of its Subsidiaries, except for those that, if determined adversely to
PalEx or any of its Subsidiaries would not, singly or in the aggregate, have a
PalEx Material Adverse Effect, (c) there are no past or present actions,
activities, circumstances, events or incidents, including releases of any
material into the environment, that would reasonably be expected to form the
basis of any claim against PalEx or any of its Subsidiaries, except for an such
claims that, if determined adversely to PalEx or any of its Subsidiaries, would
not, singly or in the aggregate, have a PalEx Material Adverse Effect, and (d)
neither PalEx nor any of its Subsidiaries is liable for any costs or
liabilities related to compliance with Environmental Laws (including any
capital or operating expenditures required for cleanup, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties), except for such costs and liabilities that, as far as can
reasonably be foreseen, will not, singly or in the aggregate, have a PalEx
Material Adverse Effect.
SECTION 5.13. Taxes.
(a) PalEx and its Subsidiaries have duly filed with the appropriate
governmental or other taxing authorities all Tax Returns required to be filed
by them for all periods ending on or prior to the Effective Time, other than
those Tax Returns the failure to file which, singly or in the aggregate, would
not have a PalEx Material Adverse Effect, and those filed Tax Returns are true,
correct and complete in all material respects. PalEx and its Subsidiaries have
duly paid in full or made adequate provision for the payment of all Taxes for
all past and current periods. The liabilities and reserves for Taxes reflected
in PalEx's balance sheet included in the latest PalEx SEC Report are adequate
to cover all Taxes for all periods ending at or prior to the date of that
balance sheet and there is no liability for Taxes for any period beginning
after such date other than Taxes arising in the ordinary course of business.
There are no material Liens for Taxes on any property or asset of PalEx or any
Subsidiary thereof, except for Liens for Taxes not yet due. There are no
unresolved issues of law or fact arising out of a notice of deficiency,
proposed deficiency or assessment from the IRS or any other taxing authority
with respect to Taxes of PalEx or any of its Subsidiaries which, if decided
adversely, singly or in the aggregate, would have a PalEx Material Adverse
Effect. Neither PalEx nor any of its Subsidiaries has waived any statute of
limitations in respect of Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency other than waivers and extensions that are no
longer in effect. Neither PalEx nor any of its Subsidiaries is a party to any
agreement providing for the allocation or sharing of Taxes with any entity that
is not, directly or indirectly, a wholly owned corporate Subsidiary of PalEx
other than agreements the consequences of which are fully and adequately
reserved for in the PalEx Financial Statements. Neither PalEx nor any of its
corporate Subsidiaries has, with regard to any assets or property held,
acquired or to be acquired by any of them, filed a consent to the application
of Section 341(f) of the Code.
(b) For purposes of this Agreement, the term "Taxes" (i) means all taxes,
including, without limitation, income, gross receipts, excise, property, sales,
withholding, social security, occupation, use, service, license, payroll,
franchise, transfer and recording taxes, fees and charges, windfall profits,
severance, customs, import, export, employment or similar taxes, charges, fees,
levies or other assessments imposed by the Federal Republic of Germany, the
United States, or any state, local or foreign government or subdivision or
agency thereof, whether computed on a separate, consolidated, unitary, combined
or any other basis, and (ii) includes any interest, fines, penalties or
additional amounts and any interest in respect of any additions, fines or
penalties attributable or imposed or with respect to any such taxes, charges,
fees, levies or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" means any return,
report, rendition or other document or information required to be supplied to a
taxing authority in connection with Taxes.
SECTION 5.14. Employee Benefit Plans; ERISA.
(a)Except as disclosed in the PalEx SEC Reports, at the Effective Date, PalEx
and its Subsidiaries do not maintain or contribute to or have any obligation or
liability to or with respect to any employee benefit plans, policies, programs,
arrangements or practices (such plans, policies, programs, arrangements or
practices of PalEx and its Subsidiaries being referred to as the "PalEx
Plans"), including employee benefit plans within
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the meaning set forth in Section 3(3) of the U.S. Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or other similar material
arrangements for the provision of benefits (including any multi-employer plan
within the meaning of Section 3(37) of ERISA (a "Multi-Employer Plan") or any
multiple employer plan within the meaning of Section 413(c) of the Code (a
"Multiple Employer Plan")) with respect to which PalEx or its Subsidiaries has,
individually or in the aggregate, any material unfunded liabilities. Neither
PalEx nor any of its Subsidiaries maintains or has any liability with respect
to any Multiple Employer Plan. Neither PalEx nor any of its Subsidiaries has
any obligation to create or contribute to any PalEx Plan not disclosed in the
PalEx SEC Reports or to amend any PalEx Plan so disclosed to increase benefits
or contributions thereunder, except as required under the terms of the PalEx
Plans or existing collective bargaining agreements or to comply with applicable
law and neither PalEx or any Subsidiaries has, individually or in the
aggregate, any material unfunded liability under any of the PalEx Plans that is
not disclosed in the PalEx SEC Reports.
(b)Except as disclosed in the PalEx SEC Reports, (i) there have been no
prohibited transactions within the meaning of Section 406 or 407 of ERISA or
Section 4975 of the Code ("Prohibited Transactions") with respect to any of the
PalEx Plans that could result in penalties, taxes or liabilities which, singly
or in the aggregate, could have a PalEx Material Adverse Effect, (ii) there is
no outstanding material liability, whether measured alone or in the aggregate,
under Title IV of ERISA with respect to any of the PalEx Plans, (iii) neither
the Pension Benefit Guaranty Corporation nor any plan administrator has
instituted proceedings to terminate any of the PalEx Plans subject to Title IV
of ERISA other than in a standard termination described in Section 4041(b) of
ERISA (a "Standard Termination"), (iv) none of the PalEx Plans has incurred any
accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the Code (an "AFD")), whether or not waived, as of the last day of the
most recent fiscal year of each of the PalEx Plans ended prior to the Effective
Date, (v) the current present value of all projected benefit obligations under
each of the PalEx Plans subject to Title IV of ERISA did not, as of its latest
valuation date, exceed the then current value of the assets of such plan
allocable to such benefit liabilities by more than the amount, if any,
disclosed in the PalEx SEC Reports as of December 27, 1998, based on reasonable
actuarial assumptions that are currently and consistently utilized for such
PalEx Plan, (vi) each of the PalEx Plans has been operated and administered in
all material respects in accordance with applicable laws during the period of
time covered by the applicable statute of limitations or any other period that
could have a PalEx Material Adverse Effect, (vii) each of the PalEx Plans that
is intended to be qualified within the meaning of Section 401(a) of the Code (a
"Qualified Plan") has been operated and administered in accordance with the
requirements for a Qualified Plan and has been determined by the U.S. Internal
Revenue Service (the "IRS") to be a Qualified Plan and that determination has
not been modified, revoked or limited by failure to satisfy any condition
thereof or by a subsequent amendment thereto or a failure to amend, except that
it may be necessary to make additional amendments retroactively to maintain the
status of such PalEx Plans as Qualified Plans and the period for making any
such necessary retroactive amendments has not expired, (viii) with respect to
Multi-Employer Plans, neither PalEx nor any of its Subsidiaries has made or
suffered a complete withdrawal or a partial withdrawal, as such terms are
respectively defined in Sections 4203, 4204 and 4205 of ERISA (a "Complete or
Partial Withdrawal") and, to the knowledge of PalEx, no event has occurred or
is expected to occur which presents a material risk of a Complete or Partial
Withdrawal, (ix) to the knowledge of PalEx, there are no material pending,
threatened or anticipated claims involving any of the PalEx Plans other than
claims for benefits in the ordinary course, (x) PalEx and its Subsidiaries have
no current material liability under Title IV of ERISA and PalEx does not
reasonably anticipate that any such liability will be asserted against PalEx or
any of its Subsidiaries and (xi) no act, omission or transaction (individually
or in the aggregate) has occurred with respect to any PalEx Plan that has
resulted or could result in any material liability (direct or indirect) of
PalEx or any Subsidiary of PalEx under Section 409 or 502(c)(i) or (l) of ERISA
or Chapter 43 of Subtitle (A) of the Code. Neither PalEx nor any of its
Subsidiaries is required to provide security to a PalEx Plan pursuant to
Section 401(a)(29) of the Code.
(c)There are no agreements that will or may provide payments to any officer,
employee, stockholder or highly compensated individual which will be "parachute
payments" under Code Section 280G that are nondeductible to PalEx or to its
Subsidiaries or subject to tax under Code Section 4999.
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SECTION 5.15. Labor Controversies. Except as disclosed in the PalEx SEC
Reports, (a) there are no significant controversies pending or, to the
knowledge of PalEx, threatened between PalEx or any of its Subsidiaries and any
representative of any of their employees, except for such controversies as,
singly or in the aggregate, could not reasonably be expected to have a PalEx
Material Adverse Effect, (b) neither PalEx nor any of its Subsidiaries is a
party to, or bound by, any material collective bargaining agreement or other
material contract, agreement, arrangement or understanding with a labor union
or labor organization, (c) to the knowledge of PalEx, there are no
organizational efforts presently being made involving any of the presently
unorganized employees of PalEx or any of its Subsidiaries, except for such
organizational efforts as, singly or in the aggregate, could not reasonably be
expected to have a PalEx Material Adverse Effect and (d) since December 27,
1998, there has not been any adoption or amendment in any material respect by
PalEx or any of its Subsidiaries of any material collective bargaining
agreement or other contract, agreement, arrangement or understanding with a
labor union or labor organization. Each of PalEx and its Subsidiaries is in
compliance with all laws regarding employment, employment practices, terms and
conditions of employment and wages, except for such noncompliance that, singly
or in the aggregate, could not reasonably be expected to have a PalEx Material
Adverse Effect.
SECTION 5.16. Intangible Property. PalEx and its Subsidiaries possess or have
adequate rights to use all material trademarks, trade names, patents, service
marks, brand names, computer programs, databases, industrial designs and
copyrights necessary for the operation of their respective businesses
(collectively, the "PalEx Intangible Property"), except where the failure to
possess or have adequate rights to use such properties could not, singly or in
the aggregate, reasonably be expected to have a PalEx Material Adverse Effect.
To the knowledge of PalEx, the use of the PalEx Intangible Property by PalEx or
its Subsidiaries does not, in any material respect, conflict with, infringe on,
violate or interfere with or constitute an appropriation of any right, title,
interest or goodwill of any other person or entity in any intellectual property
right, trademark, trade name, patent, service mark, brand name, computer
program, database, industrial design, copyright or any pending application
therefor, and there have been no claims made to that effect, and neither PalEx
nor any of its Subsidiaries has received any notice of any such claim or
otherwise knows that any of the PalEx Intangible Property is invalid or
conflicts with the asserted rights of any other person or entity or has not
been used or enforced or has been failed to be used or enforced in a manner
that would result in the abandonment, cancellation or unenforceability of any
of the PalEx Intangible Property, except for any such conflict, infringement,
violation, interference, claim, invalidity, abandonment, cancellation or
unenforceability that, singly or in the aggregate, could not reasonably be
expected to have a PalEx Material Adverse Effect.
SECTION 5.17. Title to Assets. PalEx and each of its Subsidiaries has good
and marketable title in fee simple to all its real property and good title to
all its leasehold interests and other properties, as reflected in the most
recent balance sheet included in the PalEx Financial Statements, except for
properties and assets that have been disposed of in the ordinary course of
business since the date of that balance sheet, free and clear of all Liens of
any nature whatsoever, except (a) any Lien for current taxes, payments of which
are not yet delinquent, (b) such imperfections in title and easements and
encumbrances, if any, as are not substantial in character, amount or extent and
do not materially detract from the value or interfere with the present use of
the property subject thereto or affected thereby, or otherwise materially
impair the business operations of PalEx or any of its Subsidiaries (as
presently conducted) or (c) as disclosed in the PalEx SEC Reports, and except
for such matters which, singly or in the aggregate, could not reasonably be
expected to have a PalEx Material Adverse Effect. All leases under which PalEx
or any of its Subsidiaries leases any real or personal property are in good
standing, valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event which,
with notice or lapse of time or both, would become a default other than
failures to be in good standing, valid and effective and defaults under such
leases which, singly or in the aggregate, will not have a PalEx Material
Adverse Effect.
SECTION 5.18. Insurance. PalEx and its Subsidiaries maintain insurance
coverage reasonably adequate for the operation of their respective businesses
(taking into account the cost and availability of such insurance).
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SECTION 5.19. Year 2000. All computer systems and computer software used by
PalEx or any of its Subsidiaries (a) recognize or are being adapted so that,
prior to December 31, 1999, they shall recognize the advent of the year 2000
without any adverse change in operation associated with such recognition, (b)
can correctly recognize or are being adapted so that they can correctly
recognize and manipulate date information relating to dates before, on or after
January 1, 2000, including but not limited to accepting date input, performing
calculations on dates or portion of dates and providing date output, and the
operation and functionality of such computer systems and such computer software
will not be adversely affected by the advent of the year 2000 or any
manipulation of data featuring information relating to dates before, on or
after January 1, 2000, and (c) can suitably interact with other computer
systems and computer software in a way that does not compromise (i) its ability
to correctly recognize the advent of the year 2000 or (ii) its ability to
correctly recognize and manipulate date information relating to dates before,
on or after January 1, 2000 (the operations of clauses (a), (b) and (c)
together, "Millennium Functionality"), except in each case for such computer
system and computer software, the failure of which to achieve Millennium
Functionality, individually or in the aggregate, is not reasonably likely to
have a PalEx Material Adverse Effect. To the knowledge of PalEx, as of the
Effective Date, the costs of the adaptions necessary to achieve Millennium
Functionality are not reasonably likely to have a PalEx Material Adverse
Effect.
SECTION 5.20. Reorganization. Neither PalEx nor, to the knowledge of PalEx,
any of its affiliates has taken or agreed or intends to take any action or has
any knowledge of any fact or circumstance that would prevent the Merger from
constituting a reorganization qualifying under the provisions of Section 368(a)
of the Code. For purposes of this Agreement, "affiliate" means, as to any
specified person or entity, any other person or entity that, directly or
indirectly through one or more intermediaries or otherwise, controls, is
controlled by or is under common control with the specified person or entity
(as used in this definition, "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a person or entity (whether through ownership of capital stock, by
contract or otherwise)).
SECTION 5.21. PalEx Stockholders' Approval. The affirmative vote of
stockholders of PalEx required for approval and adoption of this Agreement is a
majority of the outstanding votes entitled to be cast by holders of PalEx
Common Stock entitled to vote thereon and is the only vote of holders of any
class or series of PalEx capital stock necessary to approve and adopt this
Agreement and the transactions contemplated hereby.
SECTION 5.22. Brokers and Finders. Except for the fees and expenses payable
to Batchelder, which fees are reflected in its agreement with PalEx (a copy of
which has been delivered to SPS), PalEx has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of PalEx to pay any finder's fees, brokerage or agent commissions or
other like payments (each, a "Transaction Fee") in connection with the
transactions contemplated hereby. Except for the fees and expenses paid or
payable to Batchelder, there is no claim for payment by PalEx of any
Transaction Fee in connection with the negotiations leading to this Agreement
or the consummation of the transactions contemplated hereby.
SECTION 5.23. Opinion of Financial Advisor. Batchelder has rendered a written
opinion to the Board of Directors of PalEx as of the Execution Date to the
effect that the Merger Consideration is fair from a financial point of view to
the stockholders of PalEx (the "Fairness Opinion").
ARTICLE VI
REPRESENTATIONS AND WARRANTIESOF IFCO COMPANIES
Each of the IFCO Companies represents and warrants to PalEx with respect to
such IFCO Company that, except as set forth in the disclosure schedule dated as
of the Effective Date and signed by an authorized officer of each of the IFCO
Companies (the "IFCO"), and the supplemental disclosure schedule dated as of
the Execution Date and signed by an authorized officer of each of the IFCO
Companies and delivered to PalEx on
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or before the second business day after the Execution Date in a form reasonably
satisfactory to PalEx (the "IFCO Supplemental Disclosure Schedule") (provided,
however, that any exception set forth in the IFCO Supplemental Disclosure
Schedule with respect to any matter or event occurring or arising after the
Execution Date, which has or could reasonably be expected to have a IFCO
Material Adverse Effect, shall not have the effect of modifying these
representations and warranties or the exceptions set forth in the IFCO
Disclosure Schedule), each of which exceptions will specifically identify the
relevant Section hereof to which it relates, all of the following
representations and warranties in this Article VI are as of the Effective Date
(or such other date stated therein), and will be, on the Closing Date and
immediately prior to the Effective Time, true and correct:
SECTION 6.1. Organization and Qualification. Such IFCO Company (other than
IFCO) is a private company duly organized, validly existing and in good
standing under the laws of the Federal Republic of Germany. As of the execution
date, IFCO is a non-trading, public limited company duly organized, validly
existing and in good standing under the laws of The Netherlands. Such IFCO
Company (other than IFCO) has, and IFCO has as of the Execution Date the
requisite power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted. Such IFCO
Company (other than IFCO) is, and IFCO as of the Execution Date, qualified to
do business and in good standing in each jurisdiction in which the properties
it owns, leases or operates or the nature of the business it conducts makes
that qualification necessary, except where the failure to be so qualified and
in good standing will not, when taken together with all other such failures,
reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of the IFCO Companies and their Subsidiaries, taken as a whole (an
"IFCO Material Adverse Effect"). True, accurate and complete copies of the
Memorandum and Articles of Association of such IFCO Company (other than IFCO),
as in effect on the Effective Date, and of IFCO as in effect on the Execution
Date, including all amendments thereto, have heretofore been delivered or made
available to PalEx.
SECTION 6.2. Capitalization.
(a) As of the Execution Date, (i) SPS and/or its affiliates own all of the
IFCO Ordinary Shares which have been validly issued and be fully paid,
nonassessable and free of preemptive rights, (ii) no IFCO Ordinary Shares will
be held in the treasury of IFCO and (iii) there will be no outstanding options
or warrants to purchase IFCO Ordinary Shares other than (A) shares of stock
reserved for issuance pursuant to the agreement described in Section 6.21 and
(B) as contemplated in this Agreement and the transactions contemplated hereby.
(b) As of the Effective Date, (i) SPS owns one common share of IFCO Europe
in the nominal amount of DM 3,040,000.00 (76%) (the "IFCO Europe Share") and GE
GmbH owns one preferential share of IFCO Europe in the nominal amount of DM
960,000.00 (24%) (the "IFCO Europe Preferred Share") of the total share capital
of DM 4,000,000.00, which shares were validly issued fully paid, nonassessable
and free of preemptive rights, (ii) no IFCO Europe Shares and no IFCO Europe
Preferred Shares are held in the treasury of IFCO Europe and (iii) there are no
outstanding options or warrants to purchase IFCO Europe Shares or IFCO
Preferred Shares other than (A) options granted to GE Capital or GE GmbH
(together with GE Capital, "GE") and SPS pursuant to the Investment Agreement,
(B) a pledge of share capital of IFCO Europe to be granted to GE to secure
future indebtedness, all as contemplated in the Option Release Agreement, (C) a
pledge of share capital of IFCO Europe granted as security for payment of
indebtedness of SPS, granted to WeHaCo Kapitalbeteiligungsgesellschaft Mbh
("WeHaCo") and Provinzial Beteiligungsgesellschaft Mbh ("Provinzial") pursuant
to Deed 1543/1997 of the notary Dr. Rolf Jauch of Stuttgart dated November 4/5,
1997 (the "WeHaCo/Provinzial Deed") and (D) as set forth in Section 6.3 of the
IFCO Disclosure Schedule.
(c) As of the Effective Date, (i) Gebr. Schoeller (all of the share capital
of which is owned by Martin Schoeller, Christoph Schoeller, Andrea Schoeller
and children of Martin Schoeller), Martin Schoeller and Christoph Schoeller
collectively own six shares of SIL in the total nominal amount of DM 50,000.00
(the "SIL Shares") representing the total share capital of SIL, all of which
were validly issued and are fully paid, nonassessable and free of preemptive
rights, (ii) no SIL Shares are held in the treasury of SIL and (iii) there are
no outstanding options or warrants to purchase SIL Shares other than pursuant
to the Investment Agreement.
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(d) As of the Effective Date, (i) SPS owns three shares of MTS in the
nominal amounts of DM 5,000.00, DM 5,000.00 and DM 40,000.00 (the "MTS Shares")
of the total share capital of DM 50,000.00, all of which were validly issued
and are fully paid, nonassessable and free of preemptive rights, (ii) no MTS
Shares are held in the treasury of MTS and (iii) there are no outstanding
options or warrants to purchase MTS Shares other than (A) options granted
pursuant to the Investment Agreement and to WeHaCo and (B) a pledge of share
capital of MTS granted as security for payment of indebtedness of MTS to WeHaCo
and Provinzial pursuant to the WeHaCo/Provinzial Deed.
(e) Except as otherwise set forth in this Section 6.2, as of the Effective
Date there are no outstanding Stock Commitments obligating such IFCO Company or
any of its Subsidiaries (nor will there be prior to the Merger with respect to
Merger Sub) to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of the capital stock of such IFCO Company or obligating
such IFCO Company or any Subsidiaries to grant, extend or enter into any such
agreement or commitment other than pursuant to the Investment Agreement, the
Option Release Agreement and this Agreement. There are no Voting Arrangements
to which such IFCO Company or any Subsidiaries or, to the knowledge of such
IFCO Company, any of its directors or executive officers is a party or is bound
with respect to the voting of any shares of capital stock of an IFCO Company
other than pursuant to the (i) Operating Agreement dated February 16, 1995 (the
"IPG Agreement") between IFCO U.S. and Intertape Polymer Group Inc. ("IPG"),
(ii) a joint venture arrangement with Mitsubishi Chemical and MKV (the
"Mitsubishi Agreement") and (iii) the Investment Agreement. The IFCO Ordinary
Shares issued to stockholders of PalEx in the Merger will be at the Effective
Time duly authorized, validly issued, fully paid and nonassessable and free of
preemptive rights.
SECTION 6.3. Subsidiaries. Each direct and indirect Subsidiary of such IFCO
Company (other than IFCO) and each other company or entity in which such IFCO
Company owns, directly or indirectly, a minority equity interest (including,
without limitation, IFCO Japan (each an "IFCO Minority Subsidiary") and each
direct and indirect Subsidiary of IFCO as of the Execution Date, is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has the requisite power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. When formed, Merger Sub will be a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Each such Subsidiary and IFCO Minority Subsidiary is, and Merger Sub
will be when formed, qualified to do business and in good standing in each
jurisdiction in which the properties it owns, leases or operates or the nature
of the business it conducts makes such qualification necessary, except where
the failure to be so qualified and in good standing would not, when taken
together with all such other failures with respect to all such Subsidiaries and
IFCO Minority Subsidiaries, have an IFCO Material Adverse Effect. All the
outstanding shares of capital stock of each such Subsidiary (other than Merger
Sub) and IFCO Minority Subsidiary that is a corporation are validly issued,
fully paid, nonassessable and free of preemptive rights and, except as provided
in the IFCO Disclosure Schedule or IFCO Supplemental Disclosure Schedule, and
with respect to the IFCO Minority Subsidiaries, as to only those shares
actually owned by such IFCO Company, are owned directly or indirectly by IFCO
Europe, SIL or MTS, free and clear of any Liens. When formed, all the
outstanding shares of Merger Sub Capital Stock will be validly issued, fully
paid, nonassessable and free of preemptive rights. Merger Sub will be formed
solely to participate in the Merger and will engage in no activities except
those incident to the Merger. Except as provided in Article III or as set forth
in the IFCO Disclosure Schedule or IFCO Supplemental Disclosure Schedule, there
are, and will be, no Stock Commitments or Voting Arrangements relating to the
issuance, sale, voting, transfer, ownership or other rights with respect to any
shares of capital stock of any such Subsidiary or IFCO Minority Subsidiary that
is a corporation, including any right of conversion or exchange under any
outstanding security, instrument or agreement other than pursuant to the
Investment Agreement, the IPG Agreement, the Mitsubishi Agreement and any
voting arrangements pursuant to any of the agreements disclosed in Section 6.3
of the IFCO Disclosure Schedule or IFCO Supplemental Disclosure Schedule.
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SECTION 6.4. Authority; Non-Contravention; Approvals.
(a) Such IFCO Company has full corporate power and authority to enter into
this Agreement and, subject to the IFCO Required Regulatory Approvals, to
consummate the transactions contemplated hereby. This Agreement has been, or
will be in the case of IFCO, approved by the Registered Managers, Management
Board, Board of Directors or equivalent body of such IFCO Company, and no other
corporate proceedings on the part of such IFCO Company are necessary to
authorize the execution and delivery of this Agreement or the consummation by
such IFCO Company of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by such IFCO Company and, assuming the due
authorization, execution and delivery hereof by the other parties hereto,
constitutes a valid and legally binding agreement of such IFCO Company,
enforceable against it in accordance with its terms, except as that
enforceability may be subject to (i) any applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles.
(b) Except as provided in the IFCO Disclosure Schedule or IFCO Supplemental
Disclosure Schedule, the execution and delivery of this Agreement by such IFCO
Company does not, and will not in the case of IFCO does not as of the Execution
Date, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under or result in the creation of any Lien on any of the
properties or assets of such IFCO Company or any of its Subsidiaries or IFCO
Minority Subsidiaries under any of the terms, conditions or provisions of (i)
the memorandum and articles of association, charter or bylaw or other similar
governing documents of such IFCO Company or any Subsidiary or IFCO Minority
Subsidiary thereof, (ii) any Governmental Requirement applicable to such IFCO
Company or any of its Subsidiaries or IFCO Minority Subsidiaries or any of
their respective properties or assets or (iii) any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind to which such
IFCO Company or any of its Subsidiaries or IFCO Minority Subsidiaries is now a
party or by which such IFCO Company or any of its Subsidiaries or IFCO Minority
Subsidiaries or any of their respective properties or assets may be bound or
affected. The consummation by the IFCO Companies of the transactions
contemplated hereby will not result in any violation, conflict, breach,
termination, acceleration or creation of Liens under any of the terms,
conditions or provisions described in clauses (i) through (iii) of the
preceding sentence, subject (A) in the case of the terms, conditions or
provisions described in clause (ii) above, to obtaining (prior to the Effective
Time) the IFCO Required Regulatory Approvals and (B) in the case of the terms,
conditions or provisions described in clause (iii) above, to obtaining (prior
to the Effective Time) consents required from commercial lenders, lessors or
other third parties as specified in the IFCO Disclosure Schedule or IFCO
Supplemental Disclosure Schedule. Excluded from the foregoing sentences of this
Section 6.4(b), insofar as they apply to the terms, conditions or provisions
described in clauses (ii) and (iii) of the first sentence of this Section
6.4(b), are such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of Liens as would not, singly or in the aggregate,
have an IFCO Material Adverse Effect, materially impair the ability of the IFCO
Companies to perform their obligations hereunder or prevent the consummation of
any of the transactions contemplated hereby.
(c) Except for (i) the filings by SPS required by the HSR Act and
comparable European Governmental Requirements, including, without limitation,
filings with the German Federal Kartel Office, and the expiration or
termination of the applicable waiting periods with respect thereto, (ii) the
filing of the Proxy Statement and the Registration Statement with the SEC
pursuant to the Exchange Act and the Securities Act, and the declaration of the
effectiveness of the Registration Statement by the SEC and filings with various
state "blue sky" or securities authorities, (iii) filings with, and approval
of, the Listing Market and (iv) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware in connection with the Merger
(the filings referred to in clauses (i) through (iv) and the related Regulatory
Approvals collectively being the "IFCO Required Regulatory Approvals"), no
Regulatory Approval is necessary for the execution and delivery of this
Agreement by such IFCO Company or the consummation by such IFCO Company of the
transactions contemplated hereby, other than such Regulatory Approvals as, if
not made or obtained, as the case may be,
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would not, singly or in the aggregate, render that consummation unlawful, void
or voidable in whole or in any part or have an IFCO Material Adverse Effect.
SECTION 6.5. Reports and Financial Statements; Accounting and Other Systems.
(a) Each of IFCO Europe, SIL and MTS has previously delivered or made
available to PalEx copies of the audited financial statements of such IFCO
Company and its consolidated Subsidiaries as of December 31, 1995, 1996 and
1997 and for its fiscal years then ended, and the unaudited interim financial
statements of each such IFCO Company and its consolidated Subsidiaries as of
September 30, 1997 and 1998 and the nine months then ended (collectively, the
"IFCO German GAAP Financial Statements"). The IFCO German GAAP Financial
Statements have been prepared in accordance with German generally accepted
accounting principles ("German GAAP") applied on a consistent basis (except as
may be indicated therein or in the notes thereto) and, except as disclosed in
the IFCO Disclosure Schedule or IFCO Supplemental Disclosure Schedule, fairly
present the financial position of each such IFCO Company and its consolidated
Subsidiaries as of the dates thereof and the results of their operations and
their cash flows for the periods then ended, subject, in the case of the
unaudited interim financial statements, to normal year-end and audit
adjustments and any other adjustments described therein.
(b) IFCO Europe, SIL and MTS has delivered or made available to PalEx, on
or before copies of the audited financial statements of such combined IFCO
Companies and their consolidated Subsidiaries as of December 31, 1998 and for
their fiscal years then ended (the "IFCO U.S. GAAP Financial Statements" and,
together with the IFCO German GAAP Financial Statements, the "IFCO Financial
Statements"). The IFCO U.S. GAAP Financial Statements have been prepared in
accordance with U.S. GAAP applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and, except as disclosed in the IFCO
Disclosure Schedule or IFCO Supplemental Disclosure Schedule, fairly present
the financial position of such combined IFCO Companies and their consolidated
Subsidiaries as of the date thereof and the results of their operations and
their cash flows for the period then ended.
(c) Such IFCO Company and its Subsidiaries and IFCO Minority Subsidiaries
maintains, or in the case of IFCO will maintain, a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with German GAAP and, with
respect to the IFCO Minority Subsidiaries, generally accepted accounting
principles in their respective
jurisdictions, and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
SECTION 6.6. Liabilities.
(a) Absence of Undisclosed Liabilities. Except as heretofore disclosed to
PalEx in writing in English with respect to acquisitions or potential
transactions or commitments or as disclosed in the IFCO Disclosure Schedule or
IFCO Supplemental Disclosure Schedule, neither such IFCO Company nor any of its
Subsidiaries or IFCO Minority Subsidiaries had at December 31, 1998, or has
incurred since that date, any liabilities or obligations (whether absolute,
accrued, contingent or otherwise) of any nature, except: (a) liabilities,
obligations or contingencies that (i) are accrued or reserved against in the
IFCO Financial Statements or reflected in the notes thereto, (ii) were incurred
after December 31, 1998 in the ordinary course of business and consistent with
past practices or (iii) arises from disclosures set forth on the IFCO
Disclosure Schedule or IFCO Supplemental Disclosure Schedule; (b) liabilities,
obligations or contingencies that (i) would not, singly or in the aggregate,
have an IFCO Material Adverse Effect or (ii) have been discharged or paid in
full prior to the Execution Date; (c) liabilities and obligations that (i) are
of a nature not required to be reflected in the consolidated financial
statements of an IFCO Company and its Subsidiaries prepared in accordance with
U.S. GAAP and, with respect to the IFCO Minority Subsidiaries generally
accepted accounting principles in their respective jurisdiction consistently
applied and (ii) were incurred in the ordinary course of business; and (d)
liabilities and obligations under this Agreement or the Option Release
Agreement.
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(b) Affiliate Liabilities and Obligations. The net liabilities and
obligations of IFCO Europe, SIL and MTS (the "Logistics Group") to SPS or any
affiliate of SPS (the "Intercompany Debt") as of the Effective Date does not
exceed, in the aggregate, the amounts shown as of December 31, 1998 in the IFCO
Financial Statements. The Logistics Group agrees to provide to PalEx, not later
than 30 days after the Execution Date, a schedule of the Intercompany Debt
showing the amount and nature of each Intercompany Debt for each IFCO Company
in the Logistics Group as of a recent date. The IFCO Disclosure Schedule or
IFCO Supplemental Disclosure Schedule set forth the fees payable or to be paid
in the future by each IFCO Company, Subsidiary of an IFCO Company or IFCO
Minority Subsidiary to SPS or any affiliate thereof.
(c)Funding Obligations for IFCO Minority Subsidiaries. Except as disclosed on
Schedule 6.6(c), none of the IFCO Companies has any obligation to make any
additional capital contribution or otherwise provide additional funding to any
IFCO Minority Subsidiary.
SECTION 6.7. Absence of Certain Changes or Events. Except as disclosed in the
IFCO Financial Statements or in the IFCO Disclosure Schedule or IFCO
Supplemental Disclosure Schedule, since December 31, 1998 the business of such
IFCO Company and its Subsidiaries and IFCO Minority Subsidiaries has been
conducted in the ordinary course consistent with past practices and there has
not been:
(a)any event, occurrence, development or state of circumstances or facts
which has had or is reasonably likely to have, individually or in the
aggregate, an IFCO Material Adverse Effect;
(b)any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of such IFCO Company
or its Subsidiaries or IFCO Minority Subsidiaries, or any repurchase,
redemption or other acquisition by such IFCO Company or any of its Subsidiaries
or IFCO Minority Subsidiaries of any outstanding shares of capital stock or
other securities of, or other ownership interests in, any IFCO Company or any
of its Subsidiaries or IFCO Minority Subsidiaries other than in the ordinary
course and which does not have a Material Adverse Effect and is consistent with
past practices;
(c)any making of any material loan, advance or capital contributions to or
investment in any person other than loans, advances or capital contributions to
or investments in its Subsidiaries or IFCO Minority Subsidiaries;
(d)any material change in the method of accounting or accounting practice of
such IFCO Company or its Subsidiaries or IFCO Minority Subsidiaries, other than
changes required by German GAAP or U.S. GAAP; or
(e)any (i) grant of any severance or termination pay to (A) any employee of
an IFCO Company or any of its Subsidiaries other than ordinary course grants in
amounts consistent with past practices or (B) any director or officer of an
IFCO Company or any of its Subsidiaries or IFCO Minority Subsidiaries,
(ii) increase in benefits payable under any existing severance or termination
pay policies or employment agreements, (iii) entering into of any employment,
deferred compensation or other similar agreement (or any amendment to any such
existing agreement) with any director or officer of an IFCO Company or any of
its Subsidiaries or IFCO Minority Subsidiaries or (iv) increase in
compensation, bonus or other benefits payable to directors or officers other
than, with respect to each of clauses (i)-(iv), in the ordinary course of
business consistent with past practices, which do not, in the aggregate, have a
Material Adverse Effect.
SECTION 6.8. Litigation. Except as disclosed in the IFCO Financial Statements
or in the IFCO Disclosure Schedule or IFCO Supplemental Disclosure Schedule,
there are no claims, suits, actions or proceedings pending or, to the knowledge
of such IFCO Company, threatened against, relating to or affecting any IFCO
Company or any of its Subsidiaries or IFCO Minority Subsidiaries, before any
Court, which seek to restrain or enjoin the consummation of the Merger or which
could reasonably be expected, either alone or in the aggregate with all such
claims, actions or proceedings, to have an IFCO Material Adverse Effect. Except
as disclosed in the IFCO Financial Statements, no IFCO Company or any of its
Subsidiaries or IFCO Minority Subsidiaries is subject to any Governmental
Requirement of any Court which prohibits or restricts the consummation of the
transactions contemplated hereby or would have an IFCO Material Adverse Effect.
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SECTION 6.9. Registration Statement and Proxy Statement. None of the
information to be supplied by such IFCO Company or its Subsidiaries or IFCO
Minority Subsidiaries for inclusion in (a) the Registration Statement or the
Proxy Statement will, in the case of the Proxy Statement or any amendments
thereof or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments thereof or supplements thereto, and at the time of
the meeting of the stockholders of PalEx to be held for the purpose of voting
on this Agreement and the Merger or, in the case of the Registration Statement,
as amended or supplemented at the time it becomes effective and at the time of
such meeting, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. The Proxy Statement will, as of its mailing date, comply
as to form in all material respects with all applicable Governmental
Requirements, except that no representation is made by such IFCO Company with
respect to information supplied or omitted by PalEx for inclusion therein.
SECTION 6.10. No Violation of Law. Except as disclosed in the IFCO Financial
Statements, neither such IFCO Company nor any of its Subsidiaries or IFCO
Minority Subsidiaries is in violation of, or has been given notice or been
charged with any violation of, any Governmental Requirement (including, without
limitation, any applicable environmental law, ordinance or regulation), except
for violations which, singly or in the aggregate, could not reasonably be
expected to have an IFCO Material Adverse Effect. Without limiting the
generality of the foregoing, neither such IFCO Company nor any of its
Subsidiaries or IFCO Minority Subsidiaries, nor, to the knowledge of such IFCO
Company, any director, officer, agent, shareholder, employee or other person
associated with or acting on behalf of such IFCO Company or any of its
Subsidiaries or IFCO Minority Subsidiaries has (a) used any corporate funds for
any unlawful contribution, gift, entertainment or other unlawful expense
relating to any political activity, (b) made any direct or indirect unlawful
payment to any government official or employee from corporate funds or (c) made
any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment. Except as disclosed in the IFCO Financial Statements or in the IFCO
Disclosure Schedule or IFCO Supplemental Disclosure Schedule, as of the
Effective Date, to the knowledge of such IFCO Subsidiary, no investigation or
review by any governmental or regulatory body or authority is pending or
threatened, nor has any governmental or regulatory body or authority indicated
an intention to conduct the same, other than, in each case, those the outcome
of which, as far as reasonably can be foreseen, will not, singly or in the
aggregate, have an IFCO Material Adverse Effect. Such IFCO Company and its
Subsidiaries and IFCO Minority Subsidiaries have all Permits necessary to
conduct their businesses as presently conducted (collectively, the "IFCO
Permits"), except for Permits the absence of which, singly or in the aggregate,
would not have an IFCO Material Adverse Effect. Neither such IFCO Company nor
any of its Subsidiaries is in violation of the terms of any IFCO Permit, except
for delays in filing reports or violations that, singly or in the aggregate,
would not have an IFCO Material Adverse Effect.
SECTION 6.11 Compliance with Agreements. Except as disclosed in the IFCO
Financial Statements or in the IFCO Disclosure Schedule or IFCO Supplemental
Disclosure Schedule, neither such IFCO Company nor any of its Subsidiaries or
IFCO Minority Subsidiaries is in breach or violation of or in default in the
performance or observance of any term or provision of, and no event has
occurred which, with lapse of time or action by a third party, could result in
a default under, (a) the memorandum and articles of association, charter,
bylaws or other similar governing documents of such IFCO Company or any of the
Subsidiaries or IFCO Minority Subsidiaries thereof or (b) any contract,
commitment, agreement, indenture, mortgage, loan agreement, note, lease, bond,
license, approval or other instrument to which such IFCO Company or any of its
Subsidiaries or IFCO Minority Subsidiaries is a party or by which any of them
is bound or to which any of their property is subject, other than, in the case
of clause (b) of this Section 6.11, breaches, violations and defaults that,
singly or in the aggregate, would not have an IFCO Material Adverse Effect.
SECTION 6.12. Environmental Matters. Except as disclosed in the IFCO
Financial Statements, (a) such IFCO Company and its Subsidiaries and IFCO
Minority Subsidiaries have conducted their respective businesses in material
compliance with all applicable Environmental Laws, (b) there is no claim
pending under any Environmental Law or, to the knowledge of such IFCO Company,
threatened against it or any of its
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Subsidiaries or IFCO Minority Subsidiaries, except for those that, if
determined adversely to the IFCO Company or any of its Subsidiaries or IFCO
Minority Subsidiaries would not, singly or in the aggregate, have an IFCO
Material Adverse Effect, (c) to the knowledge of such IFCO Company, there are
no past or present actions, activities, circumstances, events or incidents,
including releases of any material into the environment, that would reasonably
be expected to form the basis of any claim against such IFCO Company or any of
its Subsidiaries or IFCO Minority Subsidiaries, except for an such claims that,
if determined adversely to such IFCO Company or any of its Subsidiaries or IFCO
Minority Subsidiaries, would not, singly or in the aggregate, have an IFCO
Material Adverse Effect, and (d) neither such IFCO Company nor any of its
Subsidiaries or IFCO Minority Subsidiaries is liable for any costs or
liabilities related to compliance with Environmental Laws (including any
capital or operating expenditures required for cleanup, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties), except for such costs and liabilities that, as far as can
reasonably be foreseen, will not, singly or in the aggregate, have an IFCO
Material Adverse Effect.
SECTION 6.13. Taxes. Such IFCO Company and its Subsidiaries and to the
knowledge of such IFCO Company, the IFCO Minority Subsidiaries have duly filed
with the appropriate governmental or other taxing authorities all Tax Returns
required to be filed by them for all periods ending on or prior to the
Effective Time, other than those Tax Returns the failure to file which, singly
or in the aggregate, would not have an IFCO Material Adverse Effect, and those
filed Tax Returns are true, correct and complete in all material respects. Such
IFCO Company and its Subsidiaries and to the knowledge of such IFCO Company,
the IFCO Minority Subsidiaries have duly paid in full or made adequate
provision for the payment of all Taxes for all past and current periods. Except
as provided in the IFCO Disclosure Schedule or IFCO Supplemental Disclosure
Schedule, the liabilities and reserves for Taxes reflected in the most recent
IFCO balance sheet included in the IFCO Financial Statements are adequate to
cover all Taxes for all periods ending at or prior to the date of that balance
sheet and there is no liability for Taxes for any period beginning after such
date other than Taxes arising in the ordinary course of business. There are no
material Liens for Taxes on any property or asset of such IFCO Company or any
Subsidiary or to the knowledge of such IFCO Company, the IFCO Minority
Subsidiary thereof, except for Liens for Taxes not yet due. Except as provided
in the IFCO Disclosure Schedule or IFCO Supplemental Disclosure Schedule, there
are no unresolved issues of law or fact arising out of a notice of deficiency,
proposed deficiency or assessment from any taxing authority with respect to
Taxes of such IFCO Company or any of its Subsidiaries or to the knowledge of
such IFCO Company, the IFCO Minority Subsidiaries which, if decided adversely,
singly or in the aggregate, would have an IFCO Material Adverse Effect. Neither
such IFCO Company nor any of its Subsidiaries or to the knowledge of such IFCO
Company, the IFCO Minority Subsidiaries has waived any statute of limitations
in respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency other than waivers and extensions that are no longer
in effect. Neither such IFCO Company nor any of its Subsidiaries or, to the
knowledge of such IFCO Company, IFCO Minority Subsidiaries is a party to any
agreement providing for the allocation or sharing of Taxes with any entity that
is not, directly or indirectly, a wholly owned corporate Subsidiary or IFCO
Minority Subsidiary of an IFCO Company other than agreements the consequences
of which are fully and adequately reserved for in the IFCO Financial
Statements. Neither such IFCO Company nor any of its corporate Subsidiaries or,
to the knowledge of such IFCO Company, IFCO Minority Subsidiaries has, with
regard to any assets or property held, acquired or to be acquired by any of
them, filed a consent to the application of Section 341(f) of the Code.
SECTION 6.14. Employee Benefit Plans and Arrangements.
(a)With respect to operations in jurisdictions other than the United States,
all employee benefit plans or arrangements of such IFCO Company and its
Subsidiaries and IFCO Minority Subsidiaries are in compliance with all
applicable law, except where the failure to be in compliance, singly or in the
aggregate, would not have an IFCO Material Adverse Effect.
(b)With respect solely to operations in the United States, and except as
disclosed in the IFCO Financial Statements, to the knowledge of such IFCO
Company, at the Effective Date, (i) such IFCO Company and its
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Subsidiaries and IFCO Minority Subsidiaries do not maintain or contribute to or
have any obligation or liability to or with respect to any material employee
benefit plans, policies, programs, arrangements or practices (such plans,
policies, programs, arrangements or practices of such IFCO Company and its
Subsidiaries and IFCO Minority Subsidiaries being referred to as the "IFCO
Plans"), including employee benefit plans within the meaning set forth in
Section 3(3) of ERISA or other similar material arrangements for the provision
of benefits (excluding any Multi-Employer Plan or any Multiple Employer Plan),
(ii) neither such IFCO Company nor any of its Subsidiaries or IFCO Minority
Subsidiaries has any obligation to create or contribute to any IFCO Plan not
disclosed in the IFCO Financial Statements or to amend any IFCO Plan so
disclosed to increase benefits or contributions thereunder, except as required
under the terms of the IFCO Plans or existing collective bargaining agreements
or to comply with applicable law, (iii) there have been no Prohibited
Transactions with respect to any of the IFCO Plans that could result in
penalties, taxes or liabilities which, singly or in the aggregate, could have
an IFCO Material Adverse Effect, (iv) except for premiums due, there is no
outstanding material liability, whether measured alone or in the aggregate,
under Title IV of ERISA with respect to any of the IFCO Plans, (v) neither the
Pension Benefit Guaranty Corporation nor any plan administrator has instituted
proceedings to terminate any of the IFCO Plans subject to Title IV of ERISA
other than in a Standard Termination, (vi) the current present value of all
projected benefit obligations under each of the IFCO Plans subject to Title IV
of ERISA did not, as of its latest valuation date, exceed the then current
value of the assets of such plan allocable to such benefit liabilities by more
than the amount, if any, disclosed in the IFCO Financial Statements as of
December 31, 1998, based on reasonable actuarial assumptions currently utilized
for such IFCO Plan, (vii) each of the IFCO Plans has been operated and
administered in all material respects in accordance with applicable laws during
the period of time covered by the applicable statute of limitations, (viii)
each of the IFCO Plans that is intended to be a Qualified Plan has been
determined by the IRS to be a Qualified Plan and that determination has not
been modified, revoked or limited by failure to amend, except that it may be
necessary to make additional amendments retroactively to maintain the status of
such IFCO Plans as Qualified Plans, and the period for making any such
necessary retroactive amendments has not expired, (ix) with respect to Multi-
Employer Plans, neither such IFCO Company nor any of its Subsidiaries or IFCO
Minority Subsidiaries has made or suffered a Complete or Partial Withdrawal
and, to the knowledge of such IFCO Company, no event has occurred or is
expected to occur which presents a material risk of a complete or Partial
Withdrawal, (x) to the knowledge of such IFCO Company, there are no material
pending, threatened or anticipated claims involving any of the IFCO Plans other
than claims for benefits in the ordinary course, (xi) such IFCO Company and
Subsidiaries and IFCO Minority Subsidiaries have no current material liability
under Title IV of ERISA and such IFCO Company does not reasonably anticipate
that any such liability will be asserted against such IFCO Company or any of
its Subsidiaries or IFCO Minority Subsidiaries and (xii) no act, omission or
transaction (individually or in the aggregate) has occurred with respect to any
IFCO Plan that has resulted or could result in any material liability (direct
or indirect) of such IFCO Company or any Subsidiary or IFCO Minority Subsidiary
under Section 409 or 502(c)(i) or (l) or ERISA or Chapter 43 of Subtitle (A) of
the Code. To the knowledge of such IFCO Subsidiary, neither such IFCO Company
nor any of its Subsidiaries or IFCO Minority Subsidiaries is required to
provide security to an IFCO plan pursuant to Section 401(a)(29) of the Code.
(c) With respect solely to operations in the United States, and to the
knowledge of such IFCO Company, there are no agreements that will or may
provide payments to any officer, employee, stockholder or highly compensated
individual which will be "parachute payments" under Code Section 280G that are
nondeductible to such IFCO Company or subject to tax under Code Section 4999
for which such IFCO Company or any of its Subsidiaries or Minority IFCO
Subsidiaries would have withholding liability.
SECTION 6.15. Labor Controversies. Except as disclosed in the IFCO Financial
Statements, (a) there are no significant controversies pending or, to the
knowledge of such IFCO Company, threatened between such IFCO Company or any of
its Subsidiaries and any representative of any of their employees, except for
such controversies as, singly or in the aggregate, could not reasonably be
expected to have an IFCO Material Adverse Effect, (b) neither such IFCO Company
nor any of its Subsidiaries is a party to, or bound by, any material collective
bargaining agreement or other material contract, agreement, arrangement or
understanding
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with a labor union or labor organization, (c) to the knowledge of such IFCO
Company, there are no material organizational efforts presently being made
involving any of the presently unorganized employees of such IFCO Company or
any of its Subsidiaries, except for such organizational efforts as, singly or
in the aggregate, could not reasonably be expected to have an IFCO Material
Adverse Effect and (d) since December 31, 1998, there has not been any adoption
or amendment in any material respect by such IFCO Company or any of its
Subsidiaries of any material collective bargaining agreement or other contract,
agreement, arrangement or understanding with a labor union or labor
organization. Such IFCO Company and its Subsidiaries is in compliance with all
laws regarding employment, employment practices, terms and conditions of
employment and wages, except for such noncompliance that, singly or in the
aggregate, could not reasonably be expected to have an IFCO Material Adverse
Effect.
SECTION 6.16. Intangible Property. Such IFCO Company and its Subsidiaries and
IFCO Minority Subsidiaries possesses or has adequate rights to use all material
trademarks, trade names, patents, service marks, brand names, computer
programs, databases, industrial designs and copyrights or representations or
expressions of any thereof or registration or application therefor by such IFCO
Company and its Subsidiaries and IFCO Minority Subsidiaries necessary for the
operation of its business (collectively, the "IFCO Intangible Property"),
except where the failure to possess or have adequate rights to use such
properties could not, singly or in the aggregate, reasonably be expected to
have an IFCO Material Adverse Effect. To the knowledge of such IFCO Company,
the use of the IFCO Intangible Property by such IFCO Company or its
Subsidiaries does not, in any material respect, conflict with, infringe on,
violate or interfere with or constitute an appropriation of any right, title,
interest or goodwill of any other person or entity in any intellectual property
right, trademark, trade name, patent, service mark, brand name, computer
program, database, industrial design, copyright or any pending application
therefor, and there have been no claims made to that effect, and neither such
IFCO Company nor any of its Subsidiaries has received any notice of any such
claim or otherwise knows that any of the IFCO Intangible Property is invalid or
conflicts with the asserted rights of any other person or entity or has not
been used or enforced or has been failed to be used or enforced in a manner
that would result in the abandonment, cancellation or unenforceability of any
of the IFCO Intangible Property, except as previously disclosed to PalEx or for
any such conflict, infringement, violation, interference, claim, invalidity,
abandonment, cancellation or unenforceability that, singly or in the aggregate,
could not reasonably be expected to have an IFCO Material Adverse Effect.
SECTION 6.17. Title to Assets. Except as provided in the IFCO Disclosure
Schedule or IFCO Supplemental Disclosure Schedule, such IFCO Company and its
Subsidiaries and IFCO Minority Subsidiaries has good and marketable title to
all real property reflected in the IFCO Financial Statements to be owned by it
and good title to all its leasehold interests and other properties as reflected
in the most recent balance sheet included in the IFCO Financial Statements,
except for such properties and assets that have been disposed of in the
ordinary course of business since the date of that balance sheet, free and
clear of all Liens of any nature whatsoever, except (a) any Lien for current
taxes, payments of which are not yet delinquent, (b) such imperfections in
title and easements and encumbrances, if any, as are not substantial in
character, amount or extent and do not materially detract from the value or
interfere with the present use of the property subject thereto or affected
thereby, or otherwise materially impair the business operations of such IFCO
Company or any of its Subsidiaries or IFCO Minority Subsidiaries (as presently
conducted), (c) liens incurred in the ordinary course of business or (d) as
disclosed in the IFCO Financial Statements and except for such matters which,
singly or in the aggregate, could not reasonably be expected to have an IFCO
Material Adverse Effect. Except as provided in the IFCO Disclosure Schedule or
IFCO Supplemental Disclosure Schedule, all leases under which such IFCO Company
or any of its Subsidiaries or IFCO Minority Subsidiaries leases any real or
personal property are in good standing, valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any
existing default or event which, with notice or lapse of time or both, would
become a default other than failures to be in good standing, valid and
effective and defaults under such leases which, singly or in the aggregate,
will not have an IFCO Material Adverse Effect.
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SECTION 6.18. Insurance. Such IFCO Company and its Subsidiaries or, to the
knowledge of such IFCO Company, the IFCO Minority Subsidiaries maintains
insurance coverage reasonably adequate for the operation of their respective
businesses (taking into account the cost and availability of such insurance).
SECTION 6.19. Year 2000. All computer systems and computer software used by
such IFCO Company or any of its Subsidiaries are being converted to SAP, which
conversion is expected to be complete by December 31, 1999. Upon completion of
the conversion, such computer systems and computer software are reasonably
expected to have Millennium Functionality, except in each case for such
computer system and computer software, the failure of which to achieve
Millennium Functionality, individually or in the aggregate, is not reasonably
likely to have an IFCO Material Adverse Effect. To the knowledge of such IFCO
Company, as of the Effective Date, the aggregate additional external costs of
the adaptions necessary to achieve Millennium Functionality for all of the IFCO
Companies are not reasonably likely to exceed DM 5,000,000.
SECTION 6.20. Reorganization. Neither such IFCO Company nor, to its
knowledge, any of its affiliates has taken or agreed or intends to take any
action or has any knowledge of any fact or circumstance that would prevent the
Merger from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code.
SECTION 6.21. Brokers and Finders. Except for the fees and expenses payable
to APAX Partners & Co., which fees are reflected in its agreement with such
IFCO Company (a copy of which has been delivered to PalEx), such IFCO Company
has not entered into any contract, arrangement or understanding with any person
or firm which may result in the obligation of such IFCO Company to pay any
Transaction Fee in connection with the transactions contemplated hereby. Except
for the fees and expenses paid or payable to APAX Partners, Inc., there is no
claim for payment by such IFCO Company of any Transaction Fee in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.
SECTION 6.22. Ownership of PalEx Common Stock. Neither such IFCO Company nor
any of its Subsidiaries or IFCO Minority Subsidiaries beneficially owns any
shares of PalEx Common Stock as of the Effective Date.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF SPS
SPS represents and warrants to PalEx, except as set forth in the IFCO
Disclosure Schedule or IFCO Supplemental Schedule, all the following
representations and warranties in this Article VII are as of the Effective Date
(or such other date stated therein), and will be, on the Closing Date and
immediately prior to the Effective Time, true and correct:
SECTION 7.1. Capitalization. As of the Effective Date, Martin Schoeller,
Christoph Schoeller, Andrea Schoeller and Schoeller KG own all of the
outstanding shares of SPS, and there are no Stock Commitments or Voting
Arrangements with respect to the shares of SPS that could cause the first
clause of this sentence no longer to be true and correct.
SECTION 7.2. Ownership and Status of IFCO Companies Capital Stock. SPS is the
record and beneficial owner of (a) 76% of the IFCO Europe Shares and (b) 100%
of the MTS Shares. Gebr. Schoeller GmbH, Martin Schoeller and Christoph
Schoeller are the record and beneficial owners of 100% of the SIL Shares. At
the time of the formation of IFCO, SPS will be the record and beneficial owner
of 100% of the IFCO Ordinary Shares.
SECTION 7.3. Organization; Power and Authority; Approval. SPS is a private
company duly organized, validly existing and in good standing under the laws of
the Federal Republic of Germany and has the full power and authority to execute
and deliver this Agreement and to perform its obligations hereunder. This
Agreement has been approved by the Managers of SPS, and no other corporate
proceedings on the part of
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SPS are necessary to authorize the execution and delivery of this Agreement or
the consummation by SPS of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by SPS, and assuming the due
authorization, execution and delivery hereof by PalEx, constitutes the legal,
valid and binding obligation of SPS, enforceable against SPS in accordance with
its terms, except as that enforceability may be subject to (a) any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (b)
general equitable principles. SPS has obtained or will obtain by closing, in
accordance with all applicable Governmental Requirements and its charter
documents, all third-party approvals and has taken or will have taken by the
Closing Date all actions necessary for the authorization, execution and
delivery by SPS of, and performance by SPS of its obligations under, this
Agreement.
SECTION 7.4. No Conflicts or Litigation. Upon receipt of all of the necessary
consents contemplated under Section 6.4, SPS's execution, delivery and
performance of this Agreement do not and will not (a) violate or conflict with
any Governmental Requirement, or (b) breach or constitute a default under any
agreement or instrument to which SPS is a party or by which it or any IFCO
Ordinary Shares SPS owns is bound or violate SPS's charter documents except
such violations, conflicts, breaches or defaults which would not, singly or in
the aggregate, be reasonably expected to have a Material Adverse Effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of SPS and its Subsidiaries taken as a whole. Other than
as disclosed in Section 6.8 of the IFCO Disclosure Schedule or IFCO
Supplemental Disclosure Schedule, no litigation is pending or, to the knowledge
of SPS, threatened to which SPS is or may become a party which (i) questions or
involves the validity or enforceability of any of SPS's obligations hereunder,
(ii) impairs the value of the IFCO Companies, taken as a whole, which would
have an IFCO Material Adverse Effect or (iii) seeks (or reasonably may be
expected to seek) (A) to prevent or delay the consummation of the transactions
contemplated by this Agreement or (B) damages in connection with such
consummation.
SECTION 7.5. No Brokers. SPS has not, directly or indirectly, in connection
with this Agreement or the transactions contemplated hereby (a) employed any
broker, finder or agent or (b) agreed to pay or incurred any obligation to pay
any broker's or finder's fee, any sales commission or any similar form of
compensation.
SECTION 7.6. Preemptive and Other Rights; Waiver. Except as contemplated in
this Agreement or pursuant to the Investment Agreement, the Option Release
Agreement or the preferred dividend certificate (Genusschein) with respect to
IFCO International Food Container Organization GmbH for DM 10,000,000.00, SPS
either (a) does not own or otherwise have any preemptive or other similar right
of any kind (including any right of first offer or refusal) to acquire any IFCO
Ordinary Shares or any other capital shares of an IFCO Company or any capital
shares or equity interests of a Subsidiary of an IFCO Company or an IFCO
Minority Subsidiary, or (b) hereby irrevocably waives each right of that type
SPS does own or otherwise has.
SECTION 7.7. Ownership of PalEx Common Stock. Neither SPS nor any of its
Subsidiaries or affiliates beneficially owns any shares of PalEx Common Stock
as of the Effective Date.
SECTION 7.8. Net Worth. SPS has a net worth (stock capital plus reserves and
shareholders loans) in excess of DM 100,000,000.
ARTICLE VIII
CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME
SECTION 8.1. Conduct of Business by PalEx Pending the Effective Time. Except
as otherwise contemplated by this Agreement or disclosed in Section 8.1 of the
PalEx Disclosure Schedule or PalEx Supplemental Disclosure Schedule, from the
Effective Date and continuing until the Effective Time or earlier termination
of this Agreement, unless SPS otherwise agrees in writing (which agreement
shall not be unreasonably withheld or delayed), PalEx will, and will cause its
Subsidiaries to:
(a) conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
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(b) not (i) amend or propose to amend the charter, bylaws or other similar
governing documents of PalEx or any of its Subsidiaries, (ii) split, combine or
reclassify (whether by stock dividend or otherwise) their outstanding capital
stock, (iii) declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise, except for the payment of dividends or
distributions by wholly owned Subsidiaries of PalEx to PalEx or (iv) issue,
deliver, sell, pledge or otherwise encumber any shares of its capital stock,
any other voting securities or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting securities or
convertible securities, other than, in accordance with the terms thereof, the
issuance of PalEx Common Stock as set forth in Section 5.2;
(c) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary
course of business consistent with past practice, (B) borrowings to refinance
existing indebtedness (other than under the PalEx Credit Facility) on terms
reasonably acceptable to IFCO, (C) borrowings of up to $150,000,000 to
refinance existing indebtedness under the PalEx Credit Facility on terms no
less favorable in the aggregate than the terms of the PalEx Credit Facility as
of the Effective Date or (D) the issuance of senior subordinated notes in a
private placement or in an aggregate amount not to exceed $40,000,000, (ii)
redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock or any options, warrants or rights to acquire any of its capital
stock or any security convertible into or exchangeable for its capital stock,
(iii) take or fail to take any action which action or failure to take action
would cause PalEx or its stockholders (except to the extent that any
stockholders receive cash in lieu of fractional shares and except to the extent
of stockholders in special circumstances that require them to recognize gain or
loss notwithstanding the application of Section 354 of the Code) to recognize
gain or loss for federal income tax purposes as a result of the consummation of
the Merger or would otherwise cause the Merger not to qualify as a
reorganization under Section 368(a) of the Code or (iv) sell, pledge, dispose
of or encumber any material assets or businesses other than (A) sales or other
dispositions in the ordinary course of business and (B) pledges and grants of
Liens to extend, refinance, renew, replace or restructure the indebtedness
outstanding under the PalEx Credit Facility;
(d) use all reasonable efforts to preserve intact their respective business
organizations and goodwill, keep available the services of their respective
current officers and key employees and preserve the goodwill and business
relationships with customers, suppliers and others having business
relationships with them;
(e) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees,
except as disclosed by PalEx to SPS in writing prior to the Effective Date;
(f) except for normal increases in the ordinary course of business consistent
with past practice that, in the aggregate, do not materially increase benefits
or compensation expenses of PalEx or its Subsidiaries, increase the
compensation of any director, officer or pay any benefit or amount not required
by a plan or arrangement as in effect on the Effective Date to any such person;
(g) not adopt, enter into or amend any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, health-care,
employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law;
(h) use commercially reasonable efforts to maintain with financially
responsible insurance companies insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are consistent
with past practice;
(i) not make, change or revoke any material Tax election or make any material
agreement or settlement regarding Taxes with any taxing authority;
(j) acquire (i) by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, joint venture, association or other business
organization or divisions thereof or (ii) any assets that are material,
individually or in the aggregate, to PalEx; and
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(k) authorize or contract or agree to do any of the foregoing.
SECTION 8.2. Conduct of Business by IFCO Pending the Effective Time. Except
as otherwise contemplated by this Agreement, the Option Release Agreement or
disclosed in Section 8.2 of the IFCO Disclosure Schedule or IFCO Supplemental
Disclosure Schedule, from the Effective Date and continuing until the Effective
Time or earlier termination of this Agreement, unless PalEx otherwise agrees in
writing (which agreement shall not be unreasonably withheld or delayed), IFCO
will, and will cause its Subsidiaries and its IFCO Minority Subsidiaries to the
extent of its direct or indirect control thereof) to:
(a)conduct their respective businesses in the ordinary and usual course of
business and consistent with past practice;
(b)not (i) amend or propose to amend the memorandum and articles of
association, charter, bylaws or other similar governing documents of IFCO or
any of its Subsidiaries or IFCO Minority Subsidiaries, (ii) split, combine or
reclassify (whether by stock dividend or otherwise) their outstanding capital
stock or (iii) declare, set aside or pay any dividend or distribution payable
in cash, stock, property or otherwise, except for the payment of dividends or
distributions by wholly owned Subsidiaries of IFCO to IFCO; provided, however,
that IFCO may, subject to Section 1.1 amend its Articles of Association in
contemplation of the IPO, including, without limitation, an amendment to
increase the authorized capital stock of IFCO;
(c)not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary
course of business or (B) borrowings to refinance existing indebtedness on
terms reasonably acceptable to PalEx, (ii) redeem, purchase, acquire or offer
to purchase or acquire any shares of its capital stock or any options, warrants
or rights to acquire any of its capital stock or any security convertible into
or exchangeable for its capital stock, (iii) take or fail to take any action
which action or failure to take action would cause PalEx or its stockholders
(except to the extent that any stockholders receive cash in lieu of fractional
shares and except to the extent of stockholders in special circumstances that
require them to recognize gain or loss notwithstanding the application of
Section 354 of the Code) to recognize gain or loss for federal income tax
purposes as a result of the consummation of the Merger or would otherwise cause
the Merger not to qualify as a reorganization under Section 368(a) of the Code
or, (iv) sell, pledge, dispose of or encumber any material assets or businesses
other than sales or other dispositions in the ordinary course of business;
(d)use all reasonable efforts to preserve intact their respective business
organizations and goodwill, keep available the services of their respective
current officers and key employees and preserve the goodwill and business
relationships with customers, suppliers and others having business
relationships with them;
(e)not enter into or amend any employment, severance, special pay arrangement
with respect to termination of employment or other similar arrangements or
agreements with any directors, officers or key employees, except in the
ordinary course and consistent with past practice and except as disclosed by
IFCO to PalEx in writing prior to the Effective Date;
(f)not adopt, enter into or amend any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, health-care,
employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law;
(g)use commercially reasonable efforts to maintain with financially
responsible insurance companies insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are consistent
with past practice;
(h)not make, change or revoke any material Tax election or make any material
agreement or settlement regarding Taxes with any taxing authority;
(i)acquire (i) by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, joint venture, association or other business
organization or divisions thereof or (ii) any assets that are material,
individually or in the aggregate, to IFCO; and
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(j)authorize or contract or agree to do any of the foregoing.
SECTION 8.3. Control of PalEx's Operations. Nothing in this Agreement gives
to SPS or IFCO, directly or indirectly, rights to control or direct PalEx's
operations prior to the Effective Time. Prior to the Effective Time, PalEx will
exercise, consistent with the terms and conditions of this Agreement, complete
control and supervision of its operations.
SECTION 8.4. Control of IFCO's Operations. Nothing in this Agreement gives to
PalEx, directly or indirectly, rights to control or direct SPS's or IFCO's
operations prior to the Effective Time. Prior to the Effective Time, IFCO will
exercise, consistent with the terms and conditions of this Agreement, complete
control and supervision of its operations.
SECTION 8.5. No Solicitation.
(a)After the Effective Date and prior to the Effective Time or earlier
termination of this Agreement, neither PalEx nor any of its Subsidiaries will,
and each of them will not authorize or permit any of its officers, directors or
employees, or any attorney, accountant, investment banker, financial advisor or
other agent retained by it, to (i) solicit, initiate or knowingly encourage
(including by way of furnishing material nonpublic information), or take any
other action designed to facilitate any inquiries or the making of, any
proposal that constitutes a PalEx Acquisition Proposal or (ii) participate in
any discussions or negotiations in respect of a PalEx Acquisition Proposal;
provided, however, that, at any time prior to the PalEx Stockholders Meeting,
PalEx may, in response to a PalEx Acquisition Proposal, which was not solicited
by it and which did not otherwise result from a breach of this Section 8.5(a),
and subject to providing prior written notice of its decision to take such
action to SPS (the "PalEx Notice") and compliance with Section 8.5(b),
following delivery of the PalEx Notice (x) furnish information with respect to
PalEx and its Subsidiaries to any person making a PalEx Acquisition Proposal
pursuant to a confidentiality agreement containing provisions substantially
similar to the Confidentiality Agreement and (y) participate in discussions or
negotiations regarding such PalEx Acquisition Proposal. For purposes of this
Agreement, "PalEx Acquisition Proposal" means any inquiry, proposal or offer
from any person relating to any direct or indirect acquisition or purchase of a
business that constitutes all or a significant portion of the net revenues, net
income or assets of PalEx and its Subsidiaries, taken as a whole, or all or a
significant portion of any class of equity securities of PalEx or any of it
Subsidiaries, any tender offer or exchange offer that if consummated would
result in any person beneficially owning all or a significant portion of any
class of equity securities of PalEx or any of its Subsidiaries or any merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving PalEx or any of its Subsidiaries, other than
the transactions contemplated by this Agreement.
(b)Except as expressly permitted by this Section 8.5 and subject to the
requirements of the PalEx Board of Directors to call the PalEx Stockholders
Meeting in accordance with Section 9.4(a), neither the Board of Directors of
PalEx nor any committee thereof shall (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to IFCO, the approval or
recommendation by such Board of Directors or such committee of this Agreement,
(ii) approve or recommend, or propose publicly to approve or recommend, any
PalEx Acquisition Proposal or (iii) cause PalEx to enter into any letter of
intent, agreement in principle, acquisition agreement or other similar
agreement related to any PalEx Acquisition Proposal (each a "PalEx Acquisition
Agreement"). Notwithstanding the foregoing, in the event that prior to the
PalEx Stockholders Meeting the Board of Directors of PalEx determines in its
good faith judgment, after consultation with outside counsel, that failure to
take any of the foregoing actions with respect to a PalEx Superior Proposal
would result in a breach of, or be inconsistent with the exercise of, its
fiduciary duties to PalEx stockholders under applicable law, the Board of
Directors of PalEx may (subject to the terms of this and following sentences of
this Section 8.5(b)) withdraw or modify its approval or recommendation of this
Agreement, approve or recommend, or propose to approve or recommend, such PalEx
Superior Proposal, terminate this Agreement and concurrently with or after such
termination cause PalEx to enter into any binding PalEx Acquisition Agreement
with respect to such PalEx Superior Proposal; provided, however, (A) in each
case, at any time after 11:59 p.m.
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on the fifth business day following SPS's receipt of written notice advising
SPS that the Board of Directors of PalEx is prepared to accept a PalEx Superior
Proposal, specifying the material terms and conditions of such PalEx Superior
Proposal and identifying the person making such PalEx Superior Proposal and (B)
in the case of termination of this Agreement and entering into any binding
PalEx Acquisition Agreement, only at a time that is after the PalEx
Stockholders Meeting to be held in respect of this Agreement, and at which
meeting the stockholders of PalEx failed to approve and adopt this Agreement.
For purposes of this Agreement, a "PalEx Superior Proposal" means any PalEx
Acquisition Proposal (1) which was not solicited by PalEx and which did not
otherwise result from a breach of Section 8.5(a), (2) the terms of which the
Board of Directors of PalEx determines in its good faith judgment (based on the
advice of Batchelder or other financial advisor of nationally recognized
reputation) to be more favorable to PalEx's stockholders than the Merger and
(3) for which financing, to the extent required, is then committed or which, in
the good faith judgment of the Board of Directors of PalEx, is reasonably
capable of being obtained by such third party.
(c)After the Effective Date and prior to the Effective Time or earlier
termination of this Agreement, none of IFCO, any of its Subsidiaries, the other
IFCO Companies or SPS will, and each of them will not authorize or permit any
of its officers, directors or employees, or any attorney, accountant,
investment banker, financial advisor or other agent retained by it, to solicit,
initiate or knowingly encourage (including by way of furnishing material
nonpublic information), or take any other action designed to facilitate any
inquiries or the making of, any acquisition proposal or any proposal or offer
from any person relating to any direct or indirect acquisition or purchase of a
business that constitutes all or a significant portion of the net revenues, net
income or assets of the IFCO Companies or any of their Subsidiaries, taken as a
whole, or all or a significant portion of any class of equity securities of any
IFCO Company or any of their Subsidiaries, or all or any substantial part of
the outstanding capital stock of PalEx or IFCO, any tender offer or exchange
offer that if consummated would result in any person beneficially owning all or
a significant portion of any class of equity securities of any IFCO Company or
any of their Subsidiaries or PalEx, or any merger, consolidation, business
combination recapitalization, liquidation, dissolution or similar transaction
involving an IFCO Company or any of their Subsidiaries, other than the
transactions contemplated by this Agreement; provided, however, that IFCO, any
of its Subsidiaries, the other IFCO Companies or SPS will not be precluded from
making or soliciting a proposal or offer in response to and in competition with
a PalEx Superior Proposal.
(d)Nothing contained in this Section 8.5 shall prevent PalEx's Board of
Directors from taking and disclosing to PalEx's stockholders a position
contemplated by Exchange Act Rule 14e-2.
ARTICLE IX
ADDITIONAL AGREEMENTS
SECTION 9.1. Access to Information.
(a)PalEx will, and will cause its Subsidiaries to, afford to IFCO, and its
accountants, counsel, financial advisors and other representatives (the "IFCO
Representatives"), and IFCO will, and will cause its Subsidiaries to, afford to
PalEx and its accountants, counsel, financial advisors and other
representatives (the "PalEx Representatives"), full access, during normal
business hours throughout the period from the Effective Date and continuing
until the Effective Time, to all their respective properties, books, contracts,
commitments and records (and IFCO will provide or cause to be provided to the
PalEx Representatives access to all the properties, books, contracts,
commitments and records of IFCO U.S., L.L.C., a Delaware limited liability
company ("IFCO U.S.") and to the underwriters and their agents or
representatives in connection with IPO, and, during such period, PalEx and IFCO
will furnish promptly to one another (i) a copy of each report, schedule and
other document filed or received by either of them pursuant to the requirements
of securities laws or stock exchange regulations of the United States, any
state or foreign country or filed by either of them with the SEC in connection
with the transactions contemplated by this Agreement and (ii) such other
information concerning their respective businesses, properties and personnel as
IFCO or PalEx, as the case may be, reasonably requests; provided, however, that
no investigation pursuant to this Section 9.1 will amend or modify any
representations or warranties made herein or the conditions to the obligations
of the respective parties to
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consummate the transactions contemplated by this Agreement. IFCO will hold,
will cause its Subsidiaries to hold and will use its reasonable best efforts to
cause the IFCO Representatives to hold, and PalEx will hold, will cause its
Subsidiaries to hold and will use its reasonable best efforts to cause the
PalEx Representatives to hold, in strict confidence all nonpublic documents and
information furnished to IFCO or to PalEx, as the case may be, in connection
with the transactions contemplated by this Agreement, except that (y) IFCO and
PalEx may disclose such information as may be necessary in connection with
seeking the IFCO Required Regulatory Approvals, the PalEx Required Regulatory
Approvals and the PalEx Stockholders' Approval and (z) each of IFCO and PalEx
may disclose any information that applicable law or judicial or administrative
order requires it to disclose.
(b)If this Agreement terminates in accordance with its terms, each party
hereto will (i) promptly return all nonpublic written material provided to it
by any other party hereto pursuant to this Section 9.1, (ii) not retain any
copies, extracts or other reproductions, in whole or in part, of that written
material and (iii) will destroy or cause to be destroyed all documents,
memoranda, notes and other writings under its control and prepared by it or on
its behalf on the basis of the nonpublic information in that material
(collectively, "Analyses") (and IFCO and PalEx will use their respective
reasonable best efforts to cause their advisors and representatives to destroy
the Analyses under their control), and that destruction (and reasonable best
efforts) will be certified in writing by an authorized officer supervising that
destruction.
(c)PalEx will promptly advise IFCO in writing of any change or the occurrence
of any event after the Effective Date having, or which, insofar as can
reasonably be foreseen, in the future may have, any PalEx Material Adverse
Effect. IFCO will promptly advise PalEx in writing of any change or the
occurrence of any event after the Effective Date having, or which, insofar as
can reasonably be foreseen, in the future may have, any IFCO Material Adverse
Effect or any material adverse effect on or material impairment of the IPO and
shall keep PalEx reasonably apprised as to the status of the IPO.
SECTION 9.2. Registration Statement and Proxy Statement.
(a)As soon as reasonably practicable following the Execution Date, (i) PalEx
and IFCO will prepare and file a preliminary Proxy Statement with the SEC, (ii)
IFCO will prepare and file the Registration Statement with the SEC as soon as
reasonably practicable following the receipt of and response to comments, if
any, from the SEC with respect to the preliminary Proxy Statement, and (iii)
IFCO will make appropriate filings and obtain necessary approvals to effect the
IPO. Each of IFCO and PalEx will use all reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after the filing thereof. IFCO will also take any action
required to be taken under applicable state blue sky or securities laws in
connection with the issuance of IFCO Ordinary Shares pursuant hereto. IFCO and
PalEx will promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by either
of them in connection with the preceding sentences of this Section 9.2. Each of
IFCO and PalEx agrees that the information it provides for use in the Proxy
Statement and the Registration Statement will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. PalEx shall mail a
copy of the Proxy Statement to record holders of the SMG Exchangeable Shares at
the same time the Proxy Statement is mailed to PalEx stockholders.
(b)PalEx shall use reasonable efforts to cause to be delivered to IFCO
letters of Arthur Andersen LLP, independent public accountants, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to IFCO and PalEx, in form and substance
reasonably satisfactory to IFCO and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement.
(c)IFCO shall use reasonable efforts to cause to be delivered to PalEx
letters of PricewaterhouseCoopers, independent public accountants or its
affiliates, dated a date within two business days before the date on which the
Registration Statement shall become effective and addressed to PalEx and IFCO,
in form and substance reasonably satisfactory to PalEx and customary in scope
and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement.
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SECTION 9.3. Corrections to the Proxy Statement and Registration
Statement. Prior to the date the PalEx Stockholders' Approval has been
obtained, each of PalEx and IFCO will correct promptly any information provided
by it to be used specifically in the Proxy Statement and Registration Statement
that has become false or misleading in any material respect and will take all
steps necessary to file with the SEC and have declared effective or cleared by
the SEC any amendment of or supplement to the Proxy Statement or the
Registration Statement so as to correct the same and to cause the Proxy
Statement as so corrected to be disseminated to the stockholders of PalEx, in
each case to the extent required by applicable law.
SECTION 9.4. PalEx Stockholders' Approval.
(a) PalEx will, as promptly as practicable following the date on which the
Registration Statement becomes effective under the Securities Act, duly call
and give notice of a meeting of its stockholders (the "PalEx Stockholders'
Meeting") for the purpose of obtaining the PalEx Stockholder' Approval and,
subject to Section 9.4(b), will use its reasonable efforts to obtain
stockholder approval and adoption of this Agreement in accordance with the
Certificate of Incorporation and Bylaws of PalEx, the applicable provisions of
the DGCL and the Exchange Act (and the rules and regulations thereunder) and
the applicable rules of the Nasdaq National Market ("Nasdaq") (the "PalEx
Stockholders' Approval"). PalEx will convene and hold the PalEx Stockholders'
Meeting, in consultation with SPS, as soon as practicable following the date on
which the Registration Statement becomes effective under the Securities Act,
prior to the IPO Pricing Date and not more than 45 days before the anticipated
IPO Closing Date.
(b) PalEx will, through its Board of Directors, recommend to its stockholders
approval and adoption of this Agreement, except that the PalEx Board of
Directors may withdraw or modify its approval or recommendation of this
Agreement (i) in compliance with the requirements of Section 8.5(b) or (ii)
upon any withdrawal or material modification of the Fairness Opinion and the
determination by the Board of Directors of PalEx in its good faith judgment,
after consultation with outside counsel, that failure to take such action would
result in a breach of, or be inconsistent with, the exercise of its fiduciary
duties to PalEx stockholders under applicable law; provided, however, that such
withdrawal or modification shall not relieve PalEx of its obligation to call,
give notice of, convene and, in consultation with SPS, hold the PalEx
Stockholders' Meeting as provided in Section 9.4(a).
SECTION 9.5. Exchange Listings.
(a) IFCO will use all reasonable efforts to effect, as applicable, at or
before the Effective Time, authorization for listing on the Amtlicher Handel
segment or on the Neuer Markt segment of the Frankfurt Stock Exchange (the
"Listing Market"), of, as applicable, (i) IFCO or (ii) on official notice of
issuance, the IFCO Ordinary Shares to be issued pursuant to the Merger or to be
reserved for issuance on exercise of stock options or warrants or the
conversion or exchange of convertible or exchangeable securities as
contemplated hereby.
(b) IFCO will use all reasonable efforts to cause, at or before the Effective
Time, New York shares representing the IFCO Ordinary Shares issuable in the
Merger, and those to be reserved for issuance upon exercise of the IFCO
Options, conversion of the PalEx Convertible Notes and exchange of the SMG
Exchangeable Shares, to be approved for listing on Nasdaq, subject to official
notice of issuance.
SECTION 9.6. Options and Warrants. Prior to the Effective Time, IFCO and
PalEx will take such action as may be necessary to cause each unexpired and
unexercised option and each unexpired and unexercised warrant to purchase
shares of PalEx Common Stock (each a "PalEx Option") to be automatically
converted at the Effective Time into an option or warrant, as applicable (each
an "IFCO Option"), to purchase a number of IFCO Ordinary Shares equal to the
number of shares of PalEx Common Stock that could have been purchased under the
PalEx Option multiplied by the Exchange Ratio, at a price per IFCO Ordinary
Share equal to the option exercise price determined pursuant to the PalEx
Option divided by the Exchange Ratio and otherwise subject to the same terms
and conditions as the PalEx Option; provided, however, that in the case of any
option to which Section 421 of the Code applies by reason of its qualification
under any of Sections 422-24
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of the Code, the option price, the number of IFCO Ordinary Shares purchasable
pursuant to such option and the terms and conditions of exercise of such option
shall be determined in order to comply with Section 424(a) of the Code; and
provided further, that the number of IFCO Ordinary Shares that may be purchased
on exercise of such IFCO Option shall not include any fractional share and, on
exercise of such IFCO Option, a cash payment shall be made for any fractional
share based on the closing price of a IFCO Ordinary Share on the Listing Market
on the second trading day immediately preceding the date of exercise. The date
of grant of a substituted IFCO Option will be the date on which the
corresponding PalEx Option was granted. At the Effective Time, except to the
extent otherwise required by the existing stock option agreements, all
references to PalEx in the stock option agreements covering outstanding PalEx
Options will be deemed to refer to IFCO. IFCO will assume all PalEx's
obligations with respect to PalEx Options as so amended and will, from and
after the Effective Time, make available for issuance on exercise of the IFCO
Options all IFCO Ordinary Shares covered thereby and maintain an effective
registration statement under the Securities Act which covers (a) those shares
and (b) the warrant issued to Batchelder (if not exercised).
SECTION 9.7. Employee Matters.
(a) In general, and subject to the specific provisions of this Section 9.7,
and consistent with past practices of the IFCO Companies and PalEx, IFCO will
seek to attract and retain superior quality executive, managerial, technical
and administrative personnel in every market in which it conducts activities
(directly or through its Subsidiaries) and will generally implement
compensation and benefit plans and policies necessary to achieve this
objective.
(b) For at least two years following the Effective Time (such period, the
"Initial Period"), IFCO will provide or cause to be provided to current and
former employees of PalEx and its Subsidiaries compensation and benefits that
are at least as favorable in the aggregate as the compensation and benefits
they were entitled to receive immediately prior to the Effective Time
(including, without limitation, benefits, if any, pursuant to pension plans,
savings plans, medical plans and programs, layoff policies, deferred
compensation arrangements and retiree benefit plans policies and arrangements);
provided, that nothing contained in this Section 9.7(b) shall be construed as
any commitment with respect to continued employment, each such employee (not
otherwise party to an employment agreement) remaining an employee at will; and
provided, further, that such benefits shall not be deemed to include any right
to receive or expectation of receiving grants of stock options; and provided,
further, with respect to employees who are subject to collective bargaining
agreements, all benefits shall be provided in accordance with the applicable
collective bargaining or other labor agreements. IFCO shall honor, and shall
cause its Subsidiaries to honor, pursuant to their terms, all employee benefit
obligations to current and former employees and directors of PalEx.
(c) From and after the Effective Time, IFCO shall, and shall cause its
Subsidiaries to, recognize service with PalEx and PalEx's Subsidiaries prior to
the Effective Time for all purposes (including, without limitation, eligibility
to participate, vesting, benefit accrual, eligibility to commence benefits and
severance) under any benefit plans of IFCO or its Subsidiaries in which the
particular employee or former employee of PalEx (or any of its Subsidiaries)
participates; provided, however, that the foregoing shall not result in any
duplication of benefits.
(d) Except as otherwise expressly provided in this Agreement, from and after
the Effective Time, IFCO shall honor, and shall cause its Subsidiaries to
honor, in accordance with its terms, each existing employment, severance and
termination agreement between PalEx or any of its Subsidiaries on the one hand
and any officer, director or employee of any such company on the other hand. To
the extent that any such employment, severance or termination agreement can be
unilaterally amended by PalEx (or any of its Subsidiaries), IFCO agrees not to
amend, and to cause its Subsidiaries not to amend, any such plan or agreement
prior to the second anniversary of the Effective Time in a manner that will
reduce or otherwise impair the benefits that would be payable to any employee
pursuant to such plan or agreement who is covered thereby.
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(e) Waiver of Certain PalEx Employment Agreement Change of Control
Provisions. PalEx shall use its reasonable efforts to cause the PalEx employees
set forth on Exhibit A attached hereto to, as soon as practicable following the
Effective Date, waive any rights of termination and rights to receive severance
or other payments that such PalEx employees may have in connection with a
change of control of PalEx as set forth in their respective PalEx employment
agreement, resulting from the transactions contemplated by this Agreement
(collectively, the "PalEx Employee Waivers").
SECTION 9.8. Agreement to Cooperate.
(a) Subject to the terms and conditions herein provided and subject to the
fiduciary duties of the respective Board of Directors or equivalent body of
PalEx and IFCO, each of the parties hereto will use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using its reasonable efforts to obtain all necessary or appropriate
waivers, consents or approvals of third parties required in order to preserve
material contractual relationships of PalEx and its Subsidiaries, all necessary
or appropriate waivers, consents and approvals to effect all necessary
registrations, filings and submissions and to lift any injunction or other
legal bar to the Merger (and, in such case, to proceed with the transactions
contemplated by this Agreement as expeditiously as possible).
(b) Without limitation of the foregoing, each of SPS and PalEx undertakes and
agrees to file as soon as practicable after the Effective Date (i) a
Notification and Report Form under the HSR Act with the U.S. Federal Trade
Commission (the "FTC") and the Antitrust Division of the U.S. Department of
Justice (the "Antitrust Division") and (ii) such notices and filings as may be
required pursuant to comparable European Governmental Requirements. Each of SPS
and PalEx will (y) use its reasonable efforts to comply as expeditiously as
possible with all lawful requests of the FTC or the Antitrust Division, or the
applicable authorities pursuant to the comparable European Governmental
Requirements, for additional information and documents and (z) not extend any
waiting period under the HSR Act or pursuant to comparable European
Governmental Requirements or enter into any agreement with the FTC or the
Antitrust Division, or the applicable authorities pursuant to the comparable
European Governmental Requirements, not to consummate the transactions
contemplated by this Agreement, except with the prior written consent of the
other.
SECTION 9.9. Reorganization. It is the intention of the parties hereto that
the Merger will qualify as a reorganization described in Section 368(a) of the
Code. None of the parties hereto (nor any of their respective Subsidiaries)
will take or omit to take any action (whether before, at or after the Effective
Time) that would cause the Merger not to be so treated. The parties will
characterize the Merger as such a reorganization for purposes of all Tax
Returns and other filings. PalEx shall timely comply with all reporting
requirements contained in Section 1.367(a)-3(c)(6) of the Treasury Regulations.
SECTION 9.10. Public Statements. SPS and PalEx will consult with each other
on any press releases or public announcements pertaining to this Agreement or
the transactions contemplated hereby and will not issue any such press release
or make any such public announcement without the mutual agreement of PalEx and
SPS as to the content of such release or announcement, except as may be
required by applicable law or by obligations pursuant to any listing agreement
with any national securities exchange (including, for this purpose, Nasdaq), in
which case the party proposing to issue such press release or make such public
announcement will use its reasonable best efforts to consult in good faith with
the other parties before issuing any such press release or making any such
public announcement.
SECTION 9.11. Notification of Certain Matters. Each of PalEx and SPS agrees
to give prompt notice to each other of, and to use their respective reasonable
best efforts to prevent or promptly remedy, (a) the occurrence or failure to
occur, or the impending or threatened occurrence or failure to occur, of any
event whose occurrence or failure to occur would be likely to cause any of its
representations or warranties in this Agreement to be untrue or inaccurate in
any material respect at any time from the Effective Date to the Effective Time
and (b) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder.
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SECTION 9.12. Directors' and Officers' Indemnification.
(a) After the Effective Time, each of IFCO and the Surviving Corporation
will, to the fullest extent permitted under applicable law, indemnify and hold
harmless each present and former director, officer, employee and agent of PalEx
or any of its Subsidiaries (each, together with such person's heirs, executors
or administrators, an "Indemnified Party" and, collectively, the "Indemnified
Parties") against any costs or expenses (including attorneys' fees), judgments,
fines, losses, claims, damages, liabilities and amounts paid in settlement in
connection with any actual or threatened claim, action, suit, proceeding or
investigation (each, whether civil, criminal, administrative or investigative,
a "Claim"), arising out of, relating to or in connection with any action or
omission in connection with such person serving as an officer, director,
employee or agent of PalEx occurring prior to the Effective Time (including,
without limitation, acts or omissions in connection with such person's serving
as an officer, director or fiduciary of any entity if such service was at the
request or for the benefit of PalEx) or arising out of or pertaining to the
transactions contemplated by this Agreement. In the event of any such actual or
threatened Claim (whether arising before or after the Effective Time), (i)
PalEx or IFCO and the Surviving Corporation, as the case may be, will pay the
reasonable fees and expenses of counsel selected by the Indemnified Parties,
which counsel must be reasonably satisfactory to IFCO, promptly after
statements therefor are received, and will pay all other reasonable expenses in
advance of the final disposition of that Claim, (ii) IFCO and the Surviving
Corporation will cooperate and use all reasonable efforts to assist in the
vigorous defense of any such Claim and (iii) to the extent any determination is
required to be made with respect to whether an Indemnified Party's conduct
complies with the standards set forth under the DGCL and the Surviving
Corporation's charter or bylaws, that determination will be made by independent
legal counsel acceptable to IFCO, the Surviving Corporation and the Indemnified
Party; provided, however, that neither IFCO nor the Surviving Corporation will
be liable for any settlement effected without its written consent (which
consent will not to be unreasonably withheld or delayed) and, provided,
further, that if IFCO or the Surviving Corporation advances or pays any amount
to any person under this Section 9.12(a) and it is thereafter finally
determined by a Court of competent jurisdiction that such person was not
entitled to be indemnified hereunder for all or any portion of such amount,
that person must repay such amount or such portion thereof, as the case may be,
to IFCO or the Surviving Corporation, as the case may be. The Indemnified
Parties as a group may not retain more than one law firm to represent them with
respect to each Claim unless there is, under applicable standards of
professional conduct, a potential conflict on any significant issue between the
positions of any two or more Indemnified Parties.
(b) In the event the Surviving Corporation or IFCO or any of their successors
or assigns (i) consolidates with or merges into any other person and is not to
be the continuing or surviving corporation or entity of that consolidation or
merger or (ii) transfers all or substantially all its properties and assets to
any person, then and in each such case IFCO and the Surviving Corporation will
cause proper provisions to be made so that the successors and assigns of the
Surviving Corporation or IFCO assumes the obligations set forth in this Section
9.12.
(c) For a period of six years after the Effective Time, IFCO will cause to be
maintained in effect the current policies of directors' and officers' liability
insurance maintained by PalEx and its Subsidiaries (provided that IFCO may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions that are no less advantageous in any material
respect to the Indemnified Parties and which coverages and amounts must be no
less than the coverages and amounts provided at that time for IFCO's directors
and officers) with respect to matters rising before the Effective Time;
provided, however, in no event shall IFCO be required to maintain such
insurance with comparable coverage if the cost of such insurance is more than
130% of the cost of such insurance in the prior year, but in such case IFCO
shall purchase as much coverage as possible for such amount.
(d) IFCO will pay all reasonable expenses, including reasonable attorneys'
fees, that may be incurred by any Indemnified Party in enforcing the indemnity
and other obligations provided in this Section 9.12, and IFCO will advance
expenses as incurred to the fullest extent permitted by applicable law,
provided the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to indemnification hereunder.
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(e) The rights of each Indemnified Party hereunder will be in addition to any
other rights such Indemnified Party may have under indemnification agreements
with PalEx, the Certificate of Incorporation or Bylaws of PalEx, under the DGCL
or otherwise. The provisions of this Section 9.12 will survive the consummation
of the Merger and expressly are intended to benefit each of the Indemnified
Parties.
SECTION 9.13. Voting Agreement. As of the Execution Date and at the request
of SPS, a Voting Agreement in favor of SPS in the form of Exhibit B to this
Agreement (the "Voting Agreement") has been delivered by the stockholders of
PalEx listed on Schedule A to the Voting Agreement. As soon as practicable
after the mailing of the Proxy Statement to the PalEx Stockholders, PalEx will
use its reasonable efforts to deliver to SPS an additional Voting Agreement in
favor of SPS substantially in the form of Exhibit A (the "Additional Voting
Agreement") from additional stockholders of PalEx, such that the number of
outstanding shares of PalEx Common Stock held by the stockholders executing the
Voting Agreement and Additional Voting Agreement, as of the Record Date, and
subject thereto shall constitute not less than 51% of the outstanding shares of
PalEx Common Stock as of the Record Date.
SECTION 9.14. Restrictions on Transfer of Shares by Certain
Shareholders. Prior to the Closing Date, IFCO shall have entered into a lockup
agreement (each a "Lockup Agreement") with each of (a) Martin Schoeller,
(b) Christoph Schoeller, (c) SPS and (d) Schoeller Holdings. Further, PalEx
will use its reasonable best efforts to deliver to IFCO Lockup Agreements
executed by the officers and senior executives of PalEx and senior executives
of PalEx's Subsidiaries listed on Exhibit C to this Agreement (the "Management
Shareholders" and together with Martin and Christoph Schoeller, the "Restricted
Shareholders"). Each Lockup Agreement shall restrict the transfer of 100% of
the IFCO Ordinary Shares held, to be held or entitled to be received by the
Restricted Shareholder as of the Effective Time for a period of two years
beginning on the IPO Closing Date, (unless, with respect to a Management
Shareholder, the employment of the Management Shareholder by IFCO, PalEx or a
Subsidiary of PalEx is earlier terminated without cause or as a result of a
breach by IFCO, PalEx or a Subsidiary of PalEx of any employment agreement with
the Management Shareholder), subject to the ability of the Restricted
Shareholder to transfer his IFCO Ordinary Shares in the following amounts and
periods: (a) 20% at any time beginning one month after the IPO Closing Date,
(b) an additional 15% beginning 12 months after the IPO Closing Date, (c) an
additional 15% at any time beginning 15 months after the IPO Closing Date, (d)
an additional 15% at any time beginning 18 months after the IPO Closing Date
and (e) an additional 15% at any time beginning 21 months after the IPO Closing
Date. IFCO shall not waive any such restriction except upon an affirmative vote
of the independent directors on the Board of Directors (or equivalent body) of
IFCO.
SECTION 9.15. Related Party Transaction. From and after the Effective Time,
none of IFCO or any Subsidiary of IFCO or IFCO Minority Subsidiary shall enter
into any transaction with any affiliate thereof (other than an IFCO Company,
Subsidiary of an IFCO Company or an IFCO Minority Subsidiary), including any
transaction to purchase from or sell to any such affiliate, any goods or
services, unless such transaction is approved by the disinterested directors on
the Board of Directors (or equivalent body) of IFCO.
SECTION 9.16. Additional IFCO Option.
(a) As of the Closing Date, IFCO shall issue options to purchase 300,000 IFCO
Ordinary Shares at an exercise price per share equal to the IPO Price to each
of Christoph Schoeller, Martin Schoeller, and Sam W. Humphreys as incentive
compensation for their involvement in the business of IFCO following the
Closing Date.
(b) On or after the Closing Date, IFCO shall be entitled to issue options to
purchase up to an aggregate of 1,000,000 IFCO Ordinary Shares, at an exercise
price per share equal to (i) the IPO Price, if the date of grant is the Closing
Date or (ii) the closing price per share of the IFCO Ordinary Shares as
reported by the Listing Market on the date of grant, if the date of grant is
after the Closing Date, to employees of SPS or its affiliates other than
Christoph Schoeller and Martin Schoeller, provided that no individual employee
shall be granted options for more than 100,000 IFCO Ordinary Shares.
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(c) Options granted by IFCO pursuant to this Section 9.16 shall vest and
become immediately exercisable on the date of grant.
SECTION 9.17. Technology Transfer. SPS covenants that, to the extent SPS or
its affiliates possess any material trademarks, trade names, patents, service
marks, brand names, computer programs, databases, industrial designs and
copyrights "know-how", or representations or expressions thereof or
registration or applications therefor (collectively, the "Technology"), which
are necessary for the operation of the businesses of the IFCO Companies, the
Subsidiaries of the IFCO Companies or IFCO Minority Subsidiaries, but which
have not been transferred to or licensed to an IFCO Company, a Subsidiary of an
IFCO Company or an IFCO Minority Subsidiary, then SPS shall, or shall use its
reasonable efforts to cause its affiliates to, (a) transfer any such Technology
to IFCO or (b) license such Technology to IFCO pursuant to a perpetual,
royalty-free license to the fullest extent permitted under applicable law. If
any such license shall be, or any license existing as of the Effective Date is,
non-exclusive, then SPS shall not thereafter enter into a new license, and
shall use its reasonable efforts to cause its affiliates not to enter into a
new license, with respect to such Technology to any party that competes with
the IFCO Companies.
SECTION 9.18. Reservation of Right to Revise Transaction. If the
implementation and mechanics of the transactions contemplated by this Agreement
prove not to be operable or optimal as determined only by mutual agreement of
the parties, including, without limitation, (x) the jurisdiction in which IFCO
is organized, (y) the issuance to U.S. holders of PalEx Common Stock of
American Depositary shares evidenced by American Depositary Receipts or similar
security, representing the IFCO Ordinary Shares to be issued to the PalEx
Stockholders, and (z) the treatment of the PalEx Options under the laws of the
jurisdiction in which IFCO is organized, the parties will use their reasonable
best efforts to change the method or any component of effecting the business
combination between PalEx and IFCO contemplated hereby, and each party will
cooperate in such efforts, including, if necessary, to provide for a different
form of transaction to effect the business combination of PalEx and IFCO;
provided, that no such change shall (a) alter or change the amount or kind of
consideration to be received by holders of PalEx Common Stock, (b) adversely
affect the tax treatment to PalEx, IFCO or their respective stockholders as a
result of the transactions contemplated hereby, (c) materially delay receipt of
any material approval referred to in this Agreement or the consummation of the
transactions contemplated hereby, (d) impose material additional covenants, (e)
alter or change the conditions to Closing or (f) materially alter or change the
termination rights.
SECTION 9.19. SMG Exchangeable Shares. PalEx shall use its reasonable efforts
to amend the Articles of Association of SMG and that certain Support Agreement
dated as of September 11, 1998 between PalEx, 131530 Ontario Inc. and The
Ronald Doering Family Trust, Save-On Pallets Ltd., 1271478 Ontario Limited,
1296288 Ontario Limited, 1271477 Ontario Limited, Rollem Holdings Limited,
Worden A. Teasdale, Clint Sharples and Cosimo Fiorenza to provide, from and
after the Effective Time, for the exchange of each SMG Exchangeable Share for
the Merger Consideration that would have been received if such SMG Exchangeable
Share had been exchanged for shares of PalEx Common Stock immediately prior to
the Effective Time.
SECTION 9.20. IFCO U.S. IFCO and SIL shall use their reasonable best efforts
to cause the transactions contemplated by that certain Membership Interest and
Share Purchase Agreement dated as of August 31, 1999 (the "IFCO U.S.
Agreement") by and among Polymer International Corp., IFCO, IPG, IFCO
Manufacturing Inc., SIL and Schoeller - U.S., Inc. to be consummated on the
Closing Date.
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ARTICLE X
CONDITIONS
SECTION 10.1. Conditions to Each Party's Obligations. The respective
obligations of each party to effect the transactions contemplated by this
Agreement will be subject to the fulfillment at or prior to the Closing Date of
the following conditions:
(a) the IPO shall have been priced on a basis that implies that the market
equity valuation of IFCO prior to the IPO, but on a combined basis as if the
other transactions contemplated by this Agreement, including the Merger, had
been consummated (the "Market Equity Valuation"), is not less than $400,000,000
based on the Currency Exchange Rate on the IPO Pricing Date, and the Closing
and the closing of the IPO shall occur on the same day;
(b)this Agreement and the Merger shall have been approved and adopted by the
requisite vote of the stockholders of PalEx under applicable law and listing
requirements;
(c)the IFCO Ordinary Shares issuable in the IPO and the IFCO Ordinary Shares
issuable in the Merger and those to be reserved for issuance on exercise of
stock options and warrants or on conversion or exchange of outstanding
convertible or exchangeable securities or IFCO as applicable, shall have been
authorized for listing on the Listing Market;
(d)PalEx, on one hand, and SPS and IFCO, on the other hand, shall have
obtained all consents set forth, respectively, in Section 5.4(b) of the PalEx
Disclosure Schedule or PalEx Supplemental Disclosure Schedule and in Section
6.4(b) of the IFCO Disclosure Schedule or IFCO Supplemental Disclosure
Schedule, except for such consents the failure of which to obtain would not,
singly or in the aggregate, have, respectively, a PalEx Material Adverse Effect
or an IFCO Material Adverse Effect, materially impair the ability,
respectively, of PalEx or SPS and IFCO to perform its obligations hereunder or
prevent the consummation of any of the transactions contemplated hereby;
(e)the waiting period applicable to the consummation of the transactions
contemplated by this Agreement under the HSR Act and pursuant to the European
Governmental Requirements shall have expired or been terminated and any
necessary consents or approvals required pursuant to the European Governmental
Requirements shall have been obtained;
(f)the Registration Statement shall have become effective in accordance with
the provisions of the Securities Act, no stop order suspending that
effectiveness shall have been issued and remain in effect and there shall be no
pending proceeding for that purpose instituted by the SEC or any other
regulatory authority;
(g)IFCO shall have received all state securities law or "blue sky" permits
and authorizations necessary to carry out the transactions contemplated hereby,
such permits and authorizations shall be in full force and effect and no
action, suit, proceeding or investigation seeking to revoke or suspend the
effectiveness of any such permit or authorization shall have been initiated and
be continuing or shall have been threatened and be unresolved;
(h)no preliminary or permanent injunction or other order, decree or ruling by
any Court which prevents consummation of the Merger shall have been issued and
remain in effect (each party agreeing to use its reasonable efforts to have any
such injunction, order, decree or ruling lifted); and
(i)no action shall have been taken, and no statute, rule or regulation shall
have been enacted, by any government or governmental agency in the United
States, the Federal Republic of Germany or The Netherlands which would prevent
the consummation of the Merger or make the consummation of the Merger illegal.
SECTION 10.2. Conditions to Obligation of PalEx. Unless waived by PalEx, the
obligation of PalEx to effect the Merger will be subject to the fulfillment at
or prior to the Closing Date of the following additional conditions:
(a)IFCO and Merger Sub shall have performed in all material respects their
respective agreements contained in this Agreement required to be performed on
or prior to the Closing Date and the representations
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and warranties of the IFCO Companies and SPS contained in this Agreement shall
be true and correct in all material respects on and as of the date made and on
and as of the Closing Date as if made at and as of such date (except, in each
case, to the extent that such representations and warranties speak as of an
earlier date), and PalEx shall have received a certificate of the President or
a Vice President of each of the IFCO Companies and SPS to that effect;
(b)PalEx shall have received a private ruling from the IRS that the
stockholders of PalEx qualify for an exception to Section 367(a)(1) of the Code
under U.S. Treasury Regulation Section 1.367(a)-3(c)(9)(i) with respect to the
Merger (the "Tax Ruling" and such Tax Ruling shall not have been withdrawn or
modified in any material respect;
(c)(i) On or before the date the Proxy Statement is first mailed to the
stockholders of PalEx, Baker & Botts, L.L.P., special counsel to PalEx, shall
have rendered a written opinion, reasonably satisfactory to both PalEx and SPS,
to the Board of Directors of PalEx as of the date rendered to the effect that,
if the Merger and the other transactions contemplated by this Agreement are
consummated in accordance with the terms of this Agreement, (A) the Merger
should be a "reorganization" within the meaning of Section 368(a) of the Code
and (B) IFCO should be treated as a corporation under Section 367(a)(1) of the
Code with respect to the Merger (the "Tax Opinion"), (ii) as of the Closing
Date, the Tax Opinion shall not have been withdrawn or modified in any material
respect, and (iii) a second written opinion of Baker & Botts, L.L.P.,
reconfirming the Tax Opinion and dated as of the Closing Date, reasonably
satisfactory to both PalEx and SPS, shall have been rendered to PalEx provided
that in rendering the Tax Opinions such counsel may (y) rely upon the Tax
Ruling (or, in the case of the Original Tax Opinion, may assume the Tax Ruling
will be received and will not have been withdrawn or modified in any material
respect prior to the Merger) and (z) receive and rely on representations of
fact contained in certificates of PalEx and IFCO and provided further that the
Tax Opinions shall not address the tax consequences applicable to any
stockholder of PalEx who, immediately after the Merger, will be a "five percent
transferee shareholder" with respect to IFCO within the meaning of U.S.
Treasury Regulation Section 1.367(a)-3(c)(5).
(d)SPS shall have contributed the IFCO Europe Shares and the MTS Shares, and
SPS shall have caused Gebr. Schoeller to contribute the SIL Shares (either
directly or through SPS), to IFCO on or before the Effective Time;
(e)The transactions contemplated by the Option Release Agreement shall have
been consummated, including, without limitation, that GE GmbH shall have
exchanged the IFCO Europe Preferred Share for the Convertible Debenture on or
before the Effective Time.
(f)The closing of the IPO shall not have occurred;
(g)New York shares representing the IFCO Ordinary Shares issuable in the
Merger, and those to be reserved for issuance on exercise of the IFCO Options,
conversion of the PalEx Convertible Notes and exchange of the SMG Exchangeable
Shares, shall have been authorized for listing on Nasdaq;
(h)The IPO Closing Date shall not be more than 45 days after the PalEx
Stockholders' Meeting, provided that if (i) PalEx shall have received advice
from its outside legal counsel that it will be necessary to recirculate the
Proxy Statement, as appropriately supplemented, and resolicit proxies for a new
PalEx Stockholders' Meeting, and (ii) SPS shall have received Voting Agreements
and Additional Voting Agreements for not less than 51% of the outstanding PalEx
Common Stock, then PalEx shall be required to convene and hold a new PalEx
Stockholders' Meeting and a new 45-day period for purposes of this condition
shall run from the date of the new PalEx Stockholders' Meeting; and
(i)The IFCO U.S. Agreement shall not have been amended in any material
respect, except in accordance with Section 9.20, and shall be in full force and
effect.
SECTION 10.3. Conditions to Obligations of IFCO, Merger Sub and SPS. Unless
waived by IFCO, Merger Sub and SPS, the obligations of IFCO, Merger Sub and SPS
to effect the transactions
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<PAGE>
contemplated by this Agreement will be subject to the fulfillment at or prior
to the Closing Date of the following additional conditions:
(a)that PalEx shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of PalEx contained in this
Agreement shall be true and correct in all material respects on and as of the
date made and on and as of the Closing Date as if made at and as of such date
(except, in each case, to the extent that such representations and warranties
speak as of an earlier date and IFCO shall have received a Certificate of the
President or of a Vice President of PalEx to that effect;
(b)that IFCO shall have received a Lockup Agreement executed by not less than
75% of the Management Stockholders; and
(c)PalEx shall have obtained at least eleven of the PalEx Employee Waivers as
set forth in Section 9.7(e) hereto.
ARTICLE XI
TERMINATION, AMENDMENT AND WAIVER
SECTION 11.1. Termination. This Agreement may be terminated at any time prior
to the Closing Date, whether before or after the PalEx Stockholders' Approval
has been obtained, by the mutual written consent of SPS and PalEx or as
follows:
(a)SPS or PalEx will have the right to terminate this Agreement:
(i)if the IPO Closing Date is not on or before May 31, 2000;
(ii) if, as of the IPO Pricing Date based on the price of the IFCO
Ordinary Shares for the IPO as recommended by the managing underwriters
representing IFCO, after consultation with IFCO and PalEx, the IPO pricing
implies a Market Equity Valuation less than $400,000,000 based on the
Currency Exchange Rate on the IPO Pricing Date, except as provided in
Section 11.1(d);
(iii) if the stockholders of PalEx fail to approve and adopt this
Agreement at the PalEx Stockholders' Meeting, or any postponement or
adjournment thereof, at which a vote on such matters was taken, provided
that the PalEx Board of Directors shall not have withdrawn or modified its
approval or recommendation of this Agreement prior to the PalEx
Stockholders' Meeting;
(iv) if IFCO does not obtain authorization from a Listing Market for
listing of IFCO or the IFCO Ordinary Shares, as applicable, and such
failure to obtain authorization is not cured within 30 days of IFCO's
receipt of actual notice thereof; or
(v) if the IFCO U.S. Agreement is terminated for any reason.
(b)PalEx will have the right to terminate this Agreement:
(i) if the representations and warranties of the IFCO Companies or SPS
shall fail to be true and correct in all material respects on and as of the
date made or, except in the case of any such representations and warranties
made as of a specified date, on and as of any subsequent date as if made at
and as of such subsequent date, and the facts giving rise to such failure
shall not have been cured, or could not be cured, in all material respects
within 30 days after written notice of such failure is given to SPS by
PalEx;
(ii) if either IFCO or SPS (A) fails to perform in any material
respect any of its material covenants in this Agreement and (B) does not
cure such default in all material respects within 30 days after notice of
such default is given to SPS by PalEx;
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(iii) if the Merger is enjoined by a final, nonappealable order,
decree or ruling issued by a Court of competent jurisdiction or some other
governmental body or regulatory authority having jurisdiction, provided
that such order, decree or ruling was not entered at the request or with
the support of PalEx or affiliates thereof, and if PalEx shall have used
reasonable efforts to prevent the entry of such order, decree or ruling;
(iv) subject to payment of the PalEx Termination Fee pursuant to
Section 11.3(a) , if the PalEx Board of Directors (in compliance with the
requirements of Section 8.5(b)) withdraws or modifies its approval or
recommendation of this Agreement prior to the PalEx Stockholders' Meeting
because of a PalEx Superior Proposal, the stockholders of PalEx fail to
approve and adopt this Agreement at the PalEx Stockholders' Meeting, or any
postponement or adjournment thereof, at which a vote on such matters was
taken, and PalEx (in compliance with the requirements of Section 8.5(b))
enters into a binding PalEx Acquisition Agreement with respect to the PalEx
Superior Proposal; or
(v) on or before December 31, 1999, if PalEx shall not have (i) issued
senior subordinated notes in a private placement in an aggregate amount not
less than $25,000,000, (ii) extended the maturity date of the PalEx Credit
Facility such that the maturity date of the PalEx Credit Facility is on or
after the date that the parties reasonably anticipate at the time of such
extension as the Closing Date, and (iii) entered into an amendment of the
PalEx Credit Facility with the lenders thereunder to restructure the
financial covenants thereof such that PalEx has availability under the
PalEx Credit Facility, including the amount of outstanding principal
indebtedness thereunder, up to the full amount thereof of $150,000,000, or
obtained alternative financing with an effect on PalEx reasonably
equivalent to the foregoing (collectively, the "Interim Financing").
(c)SPS shall have the right to terminate this Agreement:
(i) if the representations and warranties of PalEx shall fail to be
true and correct in all material respects on and as of the date made or,
except in the case of any such representations and warranties made as of a
specified date, on and as of any subsequent date as if made at and as of
such subsequent date, and the facts giving rise to such failure shall not
have been cured, or could not be cured, in all material respects within 30
days after written notice of such failure is given to PalEx by SPS;
(ii) if PalEx (A) fails to perform in any material respect any of its
material covenants in this Agreement and (B) does not cure such default in
all material respects within 30 days after notice of such default is given
to PalEx by SPS;
(iii) if the Merger is enjoined by a final, nonappealable order,
decree or ruling issued by a Court of competent jurisdiction or some other
governmental body or regulatory authority having jurisdiction, provided
that such order, decree or ruling was not entered at the request or with
the support of SPS, any IFCO Company, or affiliates thereof and if IFCO and
SPS shall have used reasonable efforts to prevent the entry of such order,
decree or ruling;
(iv) if the PalEx Board of Directors (in compliance with the
requirements of Section 8.5(b)) withdraws or modifies its approval or
recommendation of this Agreement prior to the PalEx Stockholders' Meeting
because of a PalEx Superior Proposal or approves or recommends, or propose
to approve or recommend, a PalEx Superior Proposal;
(v) if the PalEx Board of Directors (in compliance with the
requirements of Section 8.5(b)) withdraws or modifies its approval or
recommendation of this Agreement prior to the PalEx Stockholders' Meeting
because of a PalEx Superior Proposal and the stockholders of PalEx fail to
approve and adopt this Agreement at the PalEx Stockholders' Meeting, or any
postponement or adjournment thereof, at which a vote on such matters was
taken; or
(vi) for any other reason, in its sole discretion, upon payment of the
IFCO Termination Fee pursuant to Section 11.3(b), provided that at the time
of termination (A) all representations and warranties of the IFCO Companies
and SPS are true and correct in all material respects and (B) the IFCO
Companies and SPS shall not be in material breach of their respective
covenants.
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(d)If the Market Equity Valuation is less than $400,000,000 as of the first
attempted IPO Pricing Date, then neither SPS or PalEx shall have the right to
terminate pursuant to Section 11.1(a)(ii), but instead SPS and PalEx agree that
IFCO may have a second attempt to price the IPO at any time within the 90 days
thereafter and Section 11.1(a)(ii) shall then be applicable with respect to
such second attempted IPO Pricing Date; provided, however, that if IFCO fails
to have a second attempted IPO Pricing on or before the end of such 90-day
period, then either SPS or PalEx may terminate this Agreement at the end of
such 90-day period on the basis of Section 11.1(a)(ii) as modified by this
Section 11.1(d).
SECTION 11.2. Effect of Termination. In the event of termination of this
Agreement by either SPS or PalEx pursuant to the provisions of Section 11.1,
this Agreement will forthwith become void and there will be no further
obligation on the part of SPS, IFCO, Merger Sub or PalEx (except that this
Section 11.2, Section 11.3, the second sentence of Section 9.1(a) and Sections
9.1(b) and 12.1 will survive the termination). Nothing in this Section 11.2
will relieve any party from liability for any willful or intentional breach of
this Agreement.
SECTION 11.3. Termination Fee.
(a)If (i) PalEx terminates this Agreement pursuant to Section 11.1(b)(iv) or
(ii) SPS terminates this Agreement pursuant to Section 11.1(c)(v), then PalEx
shall promptly, but in no event later than two business days, after the date of
termination, pay or cause to be paid to SPS the PalEx Termination Fee, payable
by wire transfer of same day funds to such account as SPS may designate in
writing to PalEx. PalEx acknowledges that the agreements contained in this
Section 11.3(a) are an integral part of the transactions contemplated by this
Agreement and that, without these agreements, SPS would not enter into this
Agreement.
(b)If SPS terminates this Agreement pursuant to Section 11.1(c)(vi), then SPS
shall promptly, but in no event later than two business days, after the date of
termination, pay or cause to be paid to PalEx the IFCO Termination Fee, payable
by wire transfer of same day funds to such account as PalEx may designate in
writing to SPS. SPS acknowledges that the agreements contained in this Section
11.3(b) are an integral part of the transactions contemplated by this Agreement
and that, without these agreements, PalEx would not enter into this Agreement.
(c)If PalEx or SPS fails promptly to pay or cause to be paid a Termination
Fee when due pursuant to this Section 11.3, and, in order to obtain such, the
non-terminating party (SPS or PalEx) commences a suit that results in a
judgment against the terminating party for the Termination Fee, the terminating
party shall pay to such non-terminating party its costs and expenses (including
reasonable attorneys' fees and expenses) in connection with such suit, together
with interest on the amount of the Termination Fee from, and at the prime rate
of Citibank, N.A. (or, if unavailable such other money center bank
headquartered in New York, New York, as selected by such non-terminating party
(the "Prime Rate") by written notice to the terminating party) in effect on,
the date payment of the Termination Fee was required to be made.
(d)The "PalEx Termination Fee" shall mean an amount, not to exceed
$10,000,000, equal to (i) 5% of (ii) the market capitalization of PalEx on the
date of termination, as determined by multiplying the closing sale price per
share of the PalEx Common Stock as reported by Nasdaq on such date by sum of
the number of shares of PalEx Common Stock and SMG Exchangeable Shares
outstanding on the date of termination. The "IFCO Termination Fee" (with the
PalEx Termination Fee, each a "Termination Fee") shall mean an amount equal to
DM 12,000,000.
SECTION 11.4. Extension; Waiver. At any time prior to the Effective Time,
the parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto and (c) waive compliance with any of the
agreements or conditions contained herein. Notwithstanding the foregoing, no
failure or delay by any party hereto in exercising any right hereunder shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right hereunder. Any agreement on the part of a party hereto to any such
extension or waiver will be valid only if set forth in an instrument in writing
signed on behalf of that party.
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ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1. Payment of Expenses. Except as otherwise previously agreed by
the parties, each party hereto shall pay its own costs and expenses incident to
preparing for entering into and carrying out this Agreement and the
consummation (a) of the transactions contemplated hereby, whether or not these
transactions shall be consummated, except that each of SPS and IFCO, on the one
hand, and PalEx, on the other hand, shall bear and pay one-half of the costs
and expenses incurred in connection with (i) the filing, printing and mailing
of the Proxy Statement and Registration Statement (including SEC filing fees)
and (ii) the filings of the premerger notification and report forms under the
HSR Act and the European Governmental Requirements (including filing fees), and
(b) if the Merger is completed (i) fees and expenses incurred by IFCO or PalEx
for professional services, including, without limitation, financial advisors,
accountants, and attorneys, and whether paid or to be paid in cash or in the
form of securities, (ii) costs and expenses, whether paid or to be paid in cash
or in the form of securities, incurred by PalEx prior to the Closing in
connection with the Interim Financing, including additional financing to the
level as contemplated in Section 8.1(c)(i)(D), shall be borne by IFCO Systems
following the Effective Time.
SECTION 12.2. Non-Survival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement will survive the Effective Time. This Section 12.2
shall not limit any covenant or agreement hereunder of any party hereto which
by its terms contemplates performance after the Effective Time.
SECTION 12.3. Notices. All notices and other communications required or
permitted hereunder must be in writing (except as this Agreement otherwise
specifies) and will be deemed to be delivered and received if personally
delivered or if delivered by telex, telegram, facsimile or courier service,
when actually received by the party to whom notice is sent, addressed to the
appropriate party or parties, at the address of such party or parties set forth
below (or at such other address as such party may designate by written notice
to all other parties in accordance herewith):
(i)If to IFCO or Merger Sub, to:
IFCO
Zugspitzstrasse 15
82049 Pullach
Germany
Attention: Martin and Christoph Schoeller
Telecopy: 011-49-897-449-1298
with a copy (which shall not constitute notice) to:
King & Spalding
1185 Avenue of the Americas
New York, New York 10036-4003
Attention: Stephen M. Wiseman, Esq.
Telecopy: (212) 556-2222
(ii)If to PalEx, to:
Palex, Inc.
6829 Flintlock Road
Houston, Texas 77040
Attention: Edward Rhyne, Esq.
Telecopy: (713) 332-6146
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with a copy (which shall not constitute notice) to:
Gardere & Wynne, L.L.P.
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Attention: Randall G. Ray, Esq.
Facsimile: (214) 999-4667
SECTION 12.4. Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (a) constitutes
the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof, including, without limitation, that
certain Agreement and Plan of Reorganization dated as of March 29, 1999 by and
among IFCO Europe, MTS, SIL, SPS and PalEx; provided, that the provisions of
that certain Non-Disclosure Agreement dated July 10, 1998, between PalEx and
SPS, that certain Confidentiality Agreement dated January 12, 1999, between
PalEx and SPS concerning confidentiality and related matters (collectively, the
"Confidentiality Agreement") and any previous agreement with respect to
expenses will remain in effect, and (b) is not intended to confer on any other
person any rights or remedies hereunder, except as Sections 9.6, 9.7 and 9.12
provide.
SECTION 12.5. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder may be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior written consent of
the other parties hereto.
SECTION 12.6. Severability. If any term or provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions be consummated as originally
contemplated to the fullest extent possible.
SECTION 12.7. Interpretation. The headings contained in this Agreement are
included for convenience of reference only and do not affect in any way the
meaning or interpretation of this Agreement. In this Agreement, unless a
contrary intention appears, (a) the words "herein," "hereof" and "hereunder"
and other words of similar import refer to this Agreement as a whole and not to
any particular Article, Section or other subdivision, (b) reference to any
Article or Section means that Article or Section hereof, (c) the word
"including" (and, with correlative meaning, the word "include") means
including, without limiting the generality of any description preceding such
word, and (d) the words "shall" and "will" are used interchangeably and have
the same meaning. Whenever the context so requires, as used in this Agreement,
the singular number includes the plural and vice versa, and a reference to one
gender includes the other gender and the neuter. Whenever any representation
and warranty is made herein by a party hereto and is qualified by the words "to
the knowledge of" that party (or phrases with similar wording or effect), such
representation and warranty shall be deemed to be made to the actual knowledge
of the senior management (vice presidents or comparable positions and higher
offices) of that party. No provision of this Agreement shall be interpreted or
construed against any party hereto solely because such party or its legal
representative drafted such provision.
SECTION 12.8. Governing Law. TO THE EXTENT REQUIRED BY THE LAW OF THE
JURISDICTION IN WHICH IFCO IS ORGANIZED, THE DELIVERY OR CONTRIBUTION OF IFCO
ORDINARY SHARES AS PART OF THE SHARE EXCHANGE SHALL BE GOVERNED BY AND EFFECTED
IN ACCORDANCE WITH SUCH LAWS. IN ALL OTHER RESPECTS, THIS AGREEMENT SHALL BE
GOVERNED, INCLUDING VALIDITY, INTERPRETATION AND
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EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED
AND TO BE PERFORMED WHOLLY WITHIN THAT STATE.
SECTION 12.9. Arbitration. All disputes arising in connection with the
present contract shall be finally settled under the Rules of Conciliation and
Arbitration of the International Chamber of Commerce by three arbitrators
appointed in accordance with the said Rules. Each party shall nominate one
arbitrator for confirmation by the competent authority under the Rules
("Appointing Authority"). Both arbitrators shall agree on the third arbitrator
within 30 days. Should the two arbitrators fail to agree on the third
arbitrator within the above time limit, he shall be appointed by the Appointing
Authority. The seat of arbitration shall be London, England. The arbitrators
shall allocate among the parties, in accordance with the equities of the
resolution of the dispute, the costs and expenses (including reasonable
attorneys' fees and expenses of the parties) incurred in connection with the
arbitration proceedings.
SECTION 12.10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed to be an original, but all of which
will constitute one and the same agreement, it being understood that all
parties need not sign the same counterpart. Facsimile transmission of any
signed original document and/or retransmission of any signed facsimile
transmission will be deemed the same as delivery of an original. At the request
of any party, the parties will confirm facsimile transmission by signing a
duplicate original document.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, SPS and PalEx have caused this Agreement to be signed by
their respective officers and attested to as of the date first written above.
IFCO SYSTEMS N.V.
/s/ Willy von Becker /s/ Jurgen
Benz
By: ______________________________________
Willy von Becker Jurgen Benz
Name: ____________________________________
Managing Directors
Title: ___________________________________
IFCO EUROPE BETEILIGUNGS GMBH
/s/ Martin Schoeller /s/ Christoph
Schoeller
By: ______________________________________
Martin Schoeller Christoph
Schoeller
Name: ____________________________________
Managing Directors
Title: ___________________________________
MTS OKOLOGISTIK VERWALTUNGS GMBH
/s/ Gunter Gerland /s/ Jorg Augustin
By: ______________________________________
Gunter Gerland Jorg Augustin
Name: ____________________________________
Managing Directors
Title: ___________________________________
SCHOELLER INTERNATIONAL LOGISTICS
BETEILIGUNGSGESELLSCHAFT MBH
/s/ Martin Schoeller /s/ Jorg
Augustin
By: ______________________________________
Martin Schoeller Jorg Augustin
Name: ____________________________________
Managing Directors
Title: ___________________________________
SCHOELLER PACKAGING SYSTEMS GMBH
/s/ Martin Schoeller /s/ Christoph
Schoeller
By: ______________________________________
Martin Schoeller Christoph
Schoeller
Name: ____________________________________
Managing Directors
Title: ___________________________________
SILVER OAK ACQUISITION CORP.
/s/ Egbert von Cramm
By: ______________________________________
Egbert von Cramm
Name: ____________________________________
President
Title: ___________________________________
PALEX, INC.
/s/ Edward Rhyne
By: ______________________________________
Edward Rhyne
Name: ____________________________________
Vice President
Title: ___________________________________
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<PAGE>
ANNEX A
LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
Section or
Defined Term Paragraph
- ------------ ----------
<S> <C>
AFD............................................................. 5.14(b)
Additional Voting Agreement..................................... 9.13
Adjusted Cash Election Number................................... 3.1(b)
Adjusted Cash Election Shares................................... 3.3(e)(i)(C)
Adjusted Cash Record Holder..................................... 3.3(e)(i)(C)
Adjusted Stock Election Shares.................................. 3.3(e)(ii)(C)
Adjusted Stock Record Holder.................................... 3.3(e)(ii)(C)
affiliate....................................................... 5.20
Aggregate Merger Consideration.................................. 3.1(a)(i)
Agreement....................................................... First paragraph
Alternate Case Consideration.................................... 3.1(c)
Analyses........................................................ 9.1(b)
Antitrust Division.............................................. 9.8(b)
Appointing Authority............................................ 12.9
Batchelder...................................................... 3.3(a)
Cash Consideration.............................................. 3.1(a)(i)
Cash Election................................................... 3.3(a)
Cash Election Number............................................ 3.1(b)
Cash Election Shares............................................ 3.3(e)(i)
Certificate of Merger........................................... 2.3
Claim........................................................... 9.12(a)
Closing......................................................... 2.5
Closing Date.................................................... 2.5
Code............................................................ Fifth recital
Complete or Partial Withdrawal.................................. 5.14(b)
Confidentiality Agreement....................................... 12.4
control......................................................... 5.20
Convertible Debenture........................................... 1.5(b)
Court........................................................... 5.8
Currency Exchange Rate.......................................... 3.1(d)
DGCL............................................................ 1.2
Dissenting Shares............................................... 3.5
Effective Date.................................................. First paragraph
Effective Time.................................................. 2.3
Election........................................................ 3.3(a)
Election Date................................................... 3.3(b)
Election Form................................................... 3.3(b)
Environmental Laws.............................................. 5.12
ERISA........................................................... 5.14(a)
European Governmental Requirements.............................. 5.4(c)
Exchange Act.................................................... 5.4(c)
Exchange Agent.................................................. 2.1
Exchange Fund................................................... 3.6(a)
Exchange Ratio.................................................. 3.1(a)(i)
Execution Date.................................................. First paragraph
Fairness Opinion................................................ 5.23
First Cash Adjustment Number.................................... 3.3(e)(i)(C)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section or
Defined Term Paragraph
- ------------ ----------
<S> <C>
First Stock Adjustment Number..................... 3.3(e)(ii)(C)
FTC............................................... 9.8(b)
GE................................................ 6.2(b)
GE Capital........................................ 1.5(a)
GE GmbH........................................... 1.5(a)
Gebr. Schoeller................................... 1.4
German GAAP....................................... 6.5(a)
Governmental Requirement.......................... 5.4(b)
HSR Act........................................... 5.4(c)
IFCO.............................................. First paragraph
IFCO Board of Directors........................... 4.1(c)
IFCO Companies.................................... Second recital
IFCO Disclosure Schedule.......................... First paragraph of Article VI
IFCO Europe....................................... First paragraph
IFCO Europe Preferred Share....................... 6.2(b)
IFCO Europe Share................................. 6.2(b)
IFCO Financial Statements......................... 6.5(b)
IFCO German GAAP Financial Statements............. 6.5(a)
IFCO Intangible Property.......................... 6.16
IFCO Material Adverse Effect...................... 6.1
IFCO Minority Subsidiary.......................... 6.3
IFCO Option....................................... 9.6
IFCO Ordinary Shares.............................. Fourth recital
IFCO Permits...................................... 6.10
IFCO Plans........................................ 6.14(b)
IFCO Representatives.............................. 9.1(a)
IFCO Required Regulatory Approvals................ 6.4(c)
IFCO Supplemental Disclosure Schedule............. First Paragraph of Article VI
IFCO Termination Fee.............................. 11.3(d)
IFCO U.S.......................................... 9.1(a)
IFCO U.S. Agreement............................... 9.20
IFCO U.S. GAAP Financial Statements............... 6.5(b)
Indemnified Parties............................... 9.12(a)
Indemnified Party................................. 9.12(a)
Initial Offering Price............................ 3.1(d)
Initial Period.................................... 9.7(b)
Intercompany Debt................................. 6.6(b)
Interim Financing................................. 11.1(b)(v)
Investment Agreement.............................. 6.2(b)
IPG............................................... 6.2(e)
IPG Agreement..................................... 6.2(e)
IPO............................................... 3.1(d)
IPO Closing Date.................................. 3.1(d)
IPO Price......................................... 3.1(d)
IPO Pricing Date.................................. 3.1(d)
IPO Shares........................................ 3.1(d)
IRS............................................... 5.14(b)
Letter of Transmittal............................. 3.6(b)
Lien.............................................. 5.3
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section or
Defined Term Paragraph
- ------------ ----------
<S> <C>
Listing Market..................................... 9.5(a)
Lockup Agreement................................... 9.14
Logistics Group.................................... 6.6(b)
Management Shareholders............................ 9.14
Market Equity Valuation............................ 10.1(a)
Merger............................................. Third recital
Merger Consideration............................... 3.1(a)(i)
Merger Price....................................... 3.1(a)(i)
Merger Sub......................................... First paragraph
Merger Sub Capital Stock........................... 1.2
Millennium Functionality........................... 5.19
Mitsubishi Agreement............................... 6.2(e)
MTS................................................ First paragraph
MTS Shares......................................... 6.2(d)
Multi-Employer Plan................................ 5.14(a)
Multiple Employer Plan............................. 5.14(a)
Nasdaq............................................. 9.4(a)
Non-Election....................................... 3.1(c)
Non-Election Fraction.............................. 3.3(e)(iii)(C)
Non-Election Shares................................ 3.3(e)(i)(A)
Old PalEx Certificates............................. 3.6(b)
Option Release Agreement........................... 1.5(a)
PalEx.............................................. First paragraph
PalEx Acquisition Agreement........................ 8.5(b)
PalEx Acquisition Proposal......................... 8.5(a)
PalEx Common Stock................................. 3.1(a)(i)
PalEx Convertible Notes............................ 5.2(a)
PalEx Credit Facility.............................. 5.3
PalEx Disclosure Schedule.......................... First paragraph of Article V
PalEx Employee Waivers............................. 9.7(e)
PalEx Financial Statements......................... 5.5(a)
PalEx Intangible Property.......................... 5.16
PalEx Material Adverse Effect...................... 5.1
PalEx Notice....................................... 8.5(a)
PalEx Option....................................... 9.6
PalEx Permits...................................... 5.10
PalEx Plans........................................ 5.14(a)
PalEx Preferred Stock.............................. 5.2(a)
PalEx Record Holder................................ 3.3(a)
PalEx Representatives.............................. 9.1(a)
PalEx Required Regulatory Approvals................ 5.4(c)
PalEx SEC Reports.................................. 5.5(a)
PalEx Stockholders' Approval....................... 9.4(a)
PalEx Stockholders' Meeting........................ 9.4(a)
PalEx Superior Proposal............................ 8.5(b)
PalEx Supplemental Disclosure Schedule............. First paragraph of Article V
PalEx Termination Fee.............................. 11.3(d)
PalEx Treasury Shares.............................. 3.1(a)(ii)
Permit............................................. 5.10
Prime Rate......................................... 11.3(c)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section or
Defined Term Paragraph
- ------------ ----------
<S> <C>
Prohibited Transactions......................................... 5.14(b)
Provinzial...................................................... 6.2(b)
Proxy Statement................................................. 5.9
Qualified Plan.................................................. 5.14(b)
Record Date..................................................... 3.3(a)
Record Holders.................................................. 3.3(a)
Registration Statement.......................................... 5.9
Regulatory Approval............................................. 5.4(c)
Representative.................................................. 3.3(b)
Restricted Shareholders......................................... 9.14
Schoeller Holdings.............................................. 1.1
SEC............................................................. 5.4(c)
Second Cash Adjustment Number................................... 3.3(e)(i)(C)
Second Stock Adjustment Number.................................. 3.3(e)(ii)(C)
Securities Act.................................................. 5.4(c)
Share Exchange.................................................. 3.4
SIL............................................................. First paragraph
SIL Shares...................................................... 6.2(c)
SMG............................................................. 5.2(a)
SMG Exchange Consideration...................................... 3.1(a)(iv)
SMG Exchangeable Shares......................................... 5.2(a)
SMG Holder...................................................... 3.3(a)
SPS............................................................. First paragraph
Standard Termination............................................ 5.14(b)
Stock Commitments............................................... 5.2(b)
Stock Consideration............................................. 3.1(a)(i)
Stock Election.................................................. 3.3(a)
Stock Election Number........................................... 3.1(b)
Stock Election Shares........................................... 3.3(e)(i)(A)
Subsequent Holder............................................... 3.3(d)
Subsidiary...................................................... 3.1(d)
Surviving Corporation........................................... 2.2
Tax Opinion..................................................... 10.2(c)(i)
Taxes........................................................... 5.13(b)
Tax Return...................................................... 5.13(c)
Tax Ruling...................................................... 10.2(b)
Technology...................................................... 9.17
Termination Fee................................................. 11.3(d)
Transaction Fee................................................. 5.22
Transferred Shares.............................................. 3.3(d)
Unadjusted Cash Election Shares................................. 3.3(e)(i)(B)
Unadjusted Stock Election Shares................................ 3.3(e)(ii)(B)
U.S. GAAP....................................................... 5.5(a)
Voting Agreement................................................ 9.13
Voting Arrangements............................................. 5.2(b)
WeHaCo.......................................................... 6.2(b)
WeHa Co./Provinzial Deed........................................ 6.2(b)
</TABLE>
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<PAGE>
APPENDIX B
Batchelder & Partners, Inc.
11975 El Camino Real, Suite 300
San Diego, California 92130
September 27, 1999
Board of Directors
PalEx, Inc.
1360 Post Oak Blvd.
Suite 800
Houston, TX 77056
Gentlemen:
PalEx, Inc., a Delaware corporation traded on the Nasdaq National Market
("Seller"), and Schoeller Packaging Systems GmbH, a private company organized
under the laws of the Federal Republic of Germany ("Schoeller"), along with
certain affiliates of Schoeller, intend to execute an Amended and Restated
Agreement and Plan of Reorganization dated as of October , 1999 and effective
as of March 29, 1999 (as so amended, the "Merger Agreement"). The Merger
Agreement calls for the formation by Schoeller of a private company formed
under the laws of The Netherlands ("IFCO Systems"). Schoeller will contribute
all of the outstanding shares of IFCO Europe GmbH, Schoeller International
Logistics Beteiligungsgesellschaft mbH, and MTS Okologistik Verwaltungs GmbH
(collectively, "IFCO") to IFCO Systems. IFCO Systems will form Merger Sub, a
Delaware corporation. Seller will merge with and into Merger Sub at the merger
date (the "Merger"), with Merger Sub surviving such Merger, and whereupon
Seller shall cease to exist. Immediately after the Merger, IFCO Systems will
effect an initial public offering ("IPO") of its ordinary shares (the "IFCO
Systems Common Stock") on the Frankfurt Stock Exchange.
As more fully described in the Merger Agreement, each outstanding share of
the Seller's common stock, $.01 par value per share ("Seller Common Stock"),
will be exchanged for $9.00 per share (the "Consideration") in the form of cash
and/or IFCO Systems Common Stock, as described below. Forty percent of the
aggregate Consideration will be in the form of cash and 60% will be in the form
of IFCO Systems Common Stock valued at the IPO price. If PalEx shareholders
elect to receive a greater percentage of cash, then up to 49% of the aggregate
Consideration will be in the form of cash and no less than 51% will be in the
form of IFCO Systems Common Stock. Further, the Merger is subject to several
conditions, including the receipt of an opinion from Seller's tax counsel that
the Merger qualifies as a tax-free reorganization, all as more fully described
in the Merger Agreement.
You have asked for our opinion as to whether the Consideration to be received
by the stockholders of Seller pursuant to the Merger is fair to such
stockholders from a financial point of view, as of the date hereof. We are
acting as financial advisor to the Seller in connection with the Merger
(although in so acting, we are not entering into an agency or other fiduciary
relationship with the Seller, its Board or stockholders or any other person)
and will receive a fee from the Seller for our services, a significant portion
of which is contingent upon the consummation of the Merger. In addition, the
Seller has agreed to indemnify us for certain liabilities arising out of our
engagement. We have, in the past, provided financial advisory services to the
Seller and may continue to do so and have received, and may receive, fees for
the rendering of such services.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available and internal financial and other data with respect
to Seller and IFCO, including the financial statements for recent years (the
last audited IFCO and PalEx financial statements provided to Batchelder were as
of December 31, 1998) and interim periods to June 30, 1999 and certain other
relevant financial and operating data relating to Seller and IFCO made
available to us from published sources and from the internal records of Seller
and IFCO; (ii) reviewed the financial terms and conditions of the Merger
Agreement; (iii) reviewed certain publicly
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available information concerning the trading of, and the trading market for,
Seller Common Stock; (iv) reviewed with investment bankers knowledgeable of the
Frankfurt Stock Exchange, who were provided by each of IFCO and Seller, certain
publicly available information concerning the trading market for stocks listed
on the Frankfurt Stock Exchange and estimates of implied value ranges for the
IFCO Systems Common Stock; (v) compared Seller from a financial point of view
with certain other companies in the materials handling and packaging, and
logistics industries which we deemed to be relevant; (vi) considered the
financial terms, as they relate to the Seller and to the extent publicly
available, of selected recent business combinations of companies in the
materials handling and packaging industry which we deemed to be comparable, in
whole or in part, to the Merger; (vii) discussed with Seller's management the
prospects for, and business challenges facing, Seller absent the Merger; (viii)
reviewed and discussed with representatives of the management of Seller and
IFCO certain information of a business and financial nature regarding Seller
and IFCO, furnished to us by them, including financial forecasts and related
assumptions of Seller and IFCO and the operating synergies and strategic
benefits expected to result from the Merger; (ix) made inquires regarding, and
discussed, the Merger and the Merger Agreement and other matters related
thereto with Seller's counsel; and (x) performed such other analyses and
examinations as we deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its
accuracy and completeness in all material respects. With respect to the
financial forecasts for Seller and IFCO provided to us by their respective
managements, upon their advice and with your consent we have assumed for
purposes of our opinion that the forecasts, including projections of synergies,
have been reasonably prepared on bases reflecting the best available estimates
and judgements of their respective managements at the time and through the date
hereof as to the future financial performance of Seller and IFCO, that Seller
and IFCO will perform substantially in accordance with such projections, and
that such projections provide a reasonable basis upon which we can form our
opinion. With respect to the operating synergies and strategic benefits
expected by Seller's management to result from the Merger, you have advised us
to assume that such synergies and benefits will be achieved substantially in
accordance with such expectations. You have advised us and we have assumed,
that there have been no material changes in Seller's or IFCO's assets,
financial condition, results of operations, business or prospects since the
respective dates of their last financial statements made available to us. The
respective managements of Seller and IFCO have advised us and we have assumed
that they are not aware of any facts or circumstances that would make the
information reviewed by us inaccurate or misleading. We have relied on advice
of the counsel and the independent accountants to Seller as to all legal and
financial reporting matters with respect to Seller, the Merger and the Merger
Agreement. You have informed us, and we have assumed without verification and
with your consent, that the Merger will be treated as a Purchase of Seller
under Accounting Principles Board Opinion No. 16 and that the Merger will be
treated as a tax-free reorganization with respect to stockholders of Seller
receiving IFCO Systems Common Stock within the meaning of Section 368 of the
U.S. Internal Revenue Code of 1986, as amended. We have assumed that the Merger
will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934 and all other applicable
federal and state statutes, rules and regulations including applicable German
and Netherlands law. In addition, we have not assumed responsibility for making
an independent evaluation, appraisal or physical inspection of any of the
assets or liabilities (contingent or otherwise) of Seller or IFCO, nor have we
been furnished with any such appraisals. At your instruction, we did not
solicit other third party indications of interest in acquiring all or any part
of the Seller. We have assumed that the final form of the Merger Agreement will
be substantially similar to the last draft reviewed by us. Finally, our opinion
is based on economic, monetary and currency exchange, Nasdaq National Market
and Frankfurt Stock Exchange and other conditions as in effect on, and the
information made available to us as of, the date hereof. Accordingly, although
subsequent developments may affect this opinion, and except as specifically
provided below, we do not assume any obligation to update, revise or reaffirm
this opinion.
We have further assumed with your consent that the representations and
warranties of each party in the Merger Agreement are true and correct, that
each party to the Merger Agreement will perform all of the covenants and
agreements required to be performed by such party under the Merger Agreement,
and that the
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Merger will be consummated in accordance with the terms described in the Merger
Agreement, without any further amendments thereto, and without waiver by Seller
of any of the conditions to its obligations thereunder. We have also assumed
that in the course of obtaining the necessary regulatory or other consents or
approvals (contractual or otherwise) for the Merger, no restrictions,
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
We are not expressing (and cannot express) an opinion regarding the
likelihood that IFCO Systems will complete the IPO or the price at which the
IFCO Systems Common Stock may trade at any future time. However, because the
Merger depends significantly upon whether the IPO occurs and its pricing, in
order to deliver our opinion as of this date we must, and you have instructed
us to, assume for purposes of this opinion that concurrently with, or
immediately after, the Merger, IFCO Systems will consummate an IPO of
significant size. As described above, we have relied upon the financial
forecasts provided to us. In addition, we are unable to assess the
reasonableness of assumptions for any date after the date hereof related to
initial public offerings for, and the trading of securities listed on, the
Frankfurt Stock Exchange, and Euro to U.S. dollar exchange rates, all of which
depend upon factors beyond any control or influence of Schoeller, IFCO and
Seller. This opinion should not be relied upon if future facts and
circumstances are inconsistent with our assumptions, and if our assumptions are
not supported by facts and circumstances at the time of the meeting of Seller's
stockholders to vote on the Merger, we reserve the right, and we would expect,
to withdraw this opinion. Additionally, the market value of the Consideration
received in the Merger can be expected to change after consummation of the
Merger as the trading price of IFCO Systems Common Stock changes in the
ordinary course (or otherwise) of purchases and sales in the open market. You
acknowledge that the Merger Agreement as originally executed on March 29, 1999
has been materially amended. Accordingly, the opinion we delivered to you on
March 28, 1999 is no longer relevant, and, therefore, it is withdrawn. This
opinion replaces our earlier opinion in full.
Based upon the foregoing and in reliance thereon, it is our opinion that the
Consideration to be received by the stockholders of Seller pursuant to the
Merger is fair to such stockholders from a financial point of view, as of the
date hereof.
This opinion is directed to the board of directors of Seller for use only in
connection with its consideration of the Merger and is not a recommendation to
any stockholder as to how such stockholder should vote with respect to the
Merger or otherwise. Further, this opinion addresses only the financial
fairness of the Consideration to be received by the stockholders of the Seller
as of the date hereof, and it does not address any other aspect of the Merger
including, without limitation, the relative merits of the Merger, any
alternatives to the Merger or Seller's underlying business decision to proceed
with or effect the Merger. This opinion may not be used or referred to by
Seller, or quoted or disclosed to any person in any manner, without our prior
written consent, provided, however, we consent to its inclusion in any proxy
statement or registration statement with respect to the Merger. In furnishing
this opinion, we do not admit that we are experts within the meaning of the
term "experts" as used in the Securities Act and the rules and regulations
promulgated thereunder, nor do we admit that this opinion constitutes a report
or valuation within the meaning of Section 11 of the Securities Act.
Very truly yours,
/s/ Batchelder & Partners, Inc.
_____________________________________
Batchelder & Partners, Inc.
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APPENDIX C
DELAWARE CODE ANNOTATED
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
(S) 262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share"
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to
subsection (g) of (S) 251), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S)
264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2)Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
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constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceedings.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to
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the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest maybe simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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APPENDIX D
AMENDMENT TO THE ARTICLES OF ASSOCIATION
On this day, the [ ] two thousand, appeared before me, Hajo Bart Hendrik
Kraak, civil law notary in Amsterdam:
[ ]
The appearing person declared:
- that of the company with limited liability: IFCO Systems N.V., with
official seat in Amsterdam, having its office at 1077 ZZ Amsterdam,
Strawinskylaan 2001, and filed with the Trade Register of the Chamber of
Commerce and Industry in Amsterdam under number 34113177 the articles of
association were last amended by deed executed on [ ] before a [H.B.H.
Kraak], civil law notary in Amsterdam, in respect of which amendment the
Minister of Justice on [ ] under number N.V. 1.070.445 has advised that
no objections have been apparent;
- that the sole shareholder of the company resolved to amend the articles
of association of the company integrally;
- that furthermore a decision was made to authorize the appearing person
to execute the deed of amendment to the articles of association;
- that the resolutions mentioned above are evidenced by a shareholders
resolution which will be annexed to this deed.
Consequently the appearing person declared that the articles of association
of the company are hereby amended as follows:
DEFINITIONS
ARTICLE 1
In these Articles of Association the following definitions apply:
a. Articles of Association shall mean: the articles of association of the
Company;
b. The Company shall mean: IFCO Systems N.V., registered in Amsterdam;
c. The Board of Directors shall mean: the board of management of the
Company;
d. General Meeting shall mean: both the body formed by shareholders and
others with voting rights as well as the meeting of shareholders and others
with voting rights;
e. Annual Meeting shall mean: the General Meeting with the purpose of
considering and approving the Annual Accounts, the annual report and any
other documents required by law;
f. Subsidiary shall mean:
1. a legal entity in which the Company or one or more of its
Subsidiaries, whether or not pursuant to an agreement with other
persons entitled to vote, can jointly or by itself exercise more than
half of the voting rights at the general meeting;
2. a legal entity, of which the Company or one or more of its
Subsidiaries are member or shareholder and, whether or not pursuant to
an agreement with other persons entitled to vote, can jointly or by
itself appoint or remove from office more than half of the members of
the board of management, even if all the persons entitled to vote cast
their votes;
3. a company acting under its own name in which the Company or one or
more of its Subsidiaries, as partner is or are fully liable for the
debts towards creditors;
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g. Group Company shall mean: a legal entity or a company which is
associated with the Company in a group;
h. Distributable reserves shall mean: that part of the Company's
shareholders' equity which is in excess of the paid-up and called-up part
of the capital, increased by the reserves which are required by law and by
virtue of these Articles of Association;
i. Annual Accounts shall mean: the balance sheet, the profit and loss
account and the explanatory notes to these accounts.
NAME AND SEAT
ARTICLE 2.
1. The name of the Company is: IFCO Systems N.V.
2. Its registered seat is in Amsterdam.
3. The Company may have branch offices and branch establishments elsewhere,
both at home and abroad.
OBJECTS
ARTICLE 3.
The object of the Company is to participate in and to manage, control and
finance other enterprises, to provide security for debts of subsidiaries and
group companies of the Company and of third parties, to enter into agreements
concerning the indemnification of its managing directors and to undertake all
that which is connected to the foregoing or in furtherance thereof, all in the
widest sense of the words.
CAPITAL AND SHARES
ARTICLE 4.
1. The authorized capital amounts to four hundred million Euro (EURO
400,000,000.--).
2. It is divided into two hundred million shares, each with a nominal value of
two Euros (EURO 2.--), consisting of one hundred million ordinary shares
and one hundred million preference shares.
Where these Articles of Association refer to shares and shareholders, these
shall be understood to refer to the aforementioned classes and holders
thereof, unless the contrary is indicated.
3. The preference shares are registered shares and are numbered consecutively.
Share certificates thereof shall not be issued.
The ordinary shares shall be registered shares.
4. If a share belongs to more than one person, the collectively entitled
parties may only have themselves represented vis-a-vis the Company by one
person.
SHARE CERTIFICATES
ARTICLE 5.
1. To the extent the Company is listed on one or more stock exchanges, ordinary
registered shares shall be available:
- in the form of an entry in the share register without issue of a share
certificate;
- shares of this type are referred to in these Articles of Association as
type I registered shares;
- and--should the Board of Directors so decide--also in the form of an
entry in the shareholders register with issue of a certificate, which
certificate shall consist of a main part without dividend coupon;
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- shares of this type and share certificates relating thereto are
referred to in these Articles as type II registered shares and type II
share certificates.
2. The Board of Directors can decide that the registration of type I registered
shares may only take place for one or more quantities of shares--which
quantities are to be specified by the said Board--at the same time.
3. Type II share certificates shall be available in such denominations as the
Board of Directors shall determine.
4. All share certificates shall be signed by or on behalf of two Members of
the Board of Directors;
the signatures may be effected by printed facsimile.
Furthermore, type II share certificates shall, and all other share
certificates may, be countersigned by one or more persons designated by the
Board of Directors for that purpose.
5. All share certificates shall be identified by numbers and/or letters.
6. The Board of Directors can determine that for the trade at foreign
exchanges share certificates shall be issued complying with the
requirements set by said foreign exchange(s) and not provided with any
dividend sheet.
7. The expression "share certificate" as used in these Articles shall include
a share certificate in respect of more than one share.
DUPLICATES
ARTICLE 6.
1. Upon written request from a shareholder, missing or damaged share
certificates, or parts thereof, may be replaced by new certificates or by
duplicates bearing the same numbers and/or letters, provided the applicant
proves his title and, in so far as applicable, his loss to the satisfaction
of the Board of Directors, and further subject to such conditions as the
Board of Directors may deem fit.
2. In appropriate cases, at its own discretion, the Board of Directors may
stipulate that the identifying numbers and/or letters of missing documents
be published three times, at intervals of at least one month, in at least
three newspapers to be indicated by the Board of Directors announcing the
application made;
in such a case new certificates or duplicates may not be issued until six
months have expired since the last publication, always provided that the
original documents have not been produced to the Board of Directors before
that time.
3. The issue of new certificates or duplicates shall render the original
document invalid.
SHAREHOLDERS REGISTER
ARTICLE 7.
1. Notwithstanding the provisions of the law in respect of registered shares, a
register shall be kept by or on behalf of the Company, which register shall
be regularly updated and, at the discretion of the Board of Directors, may,
in whole or in part, be kept in more than one copy and at more than one
place.
If the listing of the shares of the Company on a stock exchange or a
regulated over the counter market in a country or countries other than the
Netherlands so requires, part or parts of the share register may be kept in
such country or countries.
2. Each shareholder's name, his address and such further data as the Board of
Directors deems desirable, whether at the request of a shareholder or not,
shall be entered in the register.
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3. The form and the contents of the shareholders register shall be determined
by the Board of Directors with due regard to the provisions of paragraphs 1
and 2 of this Article.
The Board of Directors may determine that the records shall vary as to
their form and contents according to whether they relate to type I
registered shares or to type II registered shares.
4. Upon request a shareholder shall be given free of charge a declaration of
what is stated in the register with regard to the shares registered in his
name, which declaration may be signed by one of the specially authorized
persons to be appointed by the Board of Directors for this purpose.
5. The provisions of the last four paragraphs shall equally apply to rights of
usufruct or pledge on one or more registered shares, with the proviso that
the other data required by law must be entered in the register.
CONVERSION
ARTICLE 8.
1. Subject to the provisions of Article 5, the holder of type I registered
shares may, upon his request and at his option, have one or more type II
registered shares entered in the shareholders register for the same nominal
amount and have issued to him one or more type II shares certificates.
2. Subject to the provisions of Article 5, the holder of type II registered
shares registered in his name may, after lodging the type II share
certificates with the Company, upon his request and at his option, have one
or more type I registered shares entered in the shareholders register for
the same nominal amount.
A shareholder who requests that type I registered shares are registered in
his name may require that such shares are also registered in his name in a
register held outside of the Netherlands as provided in Article 7 paragraph
1.
3. The holder of one or more share certificates may, after lodging the share
certificates with the Company, upon his request and at his option have
issued to him one or more share certificates, of the same type, and for the
same nominal amount, each for as many shares as he requests, subject however
to the provisions of Article 5, paragraphs 3.
4. A request as mentioned in this Article shall, if the Board of Directors so
requires, be made on a form obtainable from the Company free of charge,
which shall be signed by the applicant.
TRANSFER OF SHARES
ARTICLE 9.
1. The transfer of a registered share shall be effected either by service upon
the Company of the instrument of transfer or by written acknowledgement of
the transfer by the Company.
2. Where a transfer of a type II registered share is effected by service in
writing of an instrument of transfer on the Company, the Company shall, at
the discretion of the Board of Directors, either endorse the transfer on the
share certificate or cancel the share certificate and issue to the
transferee one or more new share certificates registered in his name to the
same nominal amount.
3. The Company's written acknowledgement of a transfer of a type II registered
share shall, at the discretion of the Board of Directors, be effected either
by endorsement of the transfer on the share certificates or by the issue to
the transferee of one or more new share certificates registered in his name
to the same nominal amount.
4. The provisions of the foregoing paragraphs of this Article shall equally
apply to the allotment of registered shares in the event of a judicial
partition of any community of property or interests, the transfer of a
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registered share as a consequence of a judgement execution and the creation
of limited rights in rem on a registered share.
5. The submission of requests and lodging of documents referred to in Articles
5 to 9 inclusive shall be made at an address to be indicated by the Board
of Directors.
Different addresses may be indicated for the different classes and types of
shares and share certificates among which in any case an address in
Amsterdam.
6. The Company is authorized to charge amounts to be determined by the Board
of Directors not exceeding cost price to those persons who request any
services to be carried out by virtue of Articles 5 to 9 inclusive, provided
that a number of shares, which number shall be determined by the Board of
Directors, will be combined without cost in one share certificate, which
share certificate at request of the shareholder may again without cost, be
divided in simple share certificates or in share certificates which
represent a different number of shares, which number shall be determined by
the Board of Directors.
ISSUE OF SHARES
ARTICLE 10.
1. The General Meeting or the Board of Directors, if designated thereto by the
General Meeting, shall resolve on further issues of shares; if the Board of
Directors has been designated thereto, the General Meeting may not, as long
as such designation is valid, resolve on further issues.
2. The General Meeting or, as the case may be, the Board of Directors shall
determine the price and further conditions of issue, with due observance of
the other relevant provisions in these Articles of Association.
3. If the Board of Directors is designated as authorized to resolve on the
further issue of shares, it shall be determined by the General Meeting when
such designation is made, how many and what class of shares may be issued.
When such designation is made, the duration of the designation, which shall
not exceed five years, shall also be stipulated.
The designation can be renewed each time for a period of no more than five
years.
Unless otherwise stipulated when the designation is made, said designation
cannot be withdrawn.
4. If a resolution of the General Meeting pertaining to an issue or to the
designation of the Board of Directors, as referred to above, is to be
valid, it shall require a prior or simultaneous positive resolution from
each group of holders of shares of the same class whose rights are affected
by the issue.
5. Within eight days after a resolution of the General Meeting on an issue or
on a designation of the Board of Directors as referred to above, the Board
of Directors shall submit a full text thereof at the office of the Trade
Register. The Board of Directors shall notify the office of the Trade
Register of each issue of shares within eight days thereafter, stating the
number and class thereof.
6. The provisions in paragraphs 1 to 5, inclusive, of this Article shall apply
accordingly to the granting of rights to take shares but shall not apply to
the issue of shares to a person who is exercising a previously acquired
right to subscribe for shares.
7. Shares shall not be issued below par value, without prejudice to the
provisions in article 80, paragraph 2 of Book 2 of the Dutch Civil Code.
On the issue of an ordinary share, at least the nominal amount shall be
paid up thereon, as well as, in the event the share is taken for a higher
amount, the difference between such amounts.
8. Upon the issue of preference shares it may be stipulated that a part of the
nominal amount, not exceeding three-fourths of the nominal amount, must be
paid up only if and when requested by the Company.
9. Payment shall be made in cash insofar as another form of payment has not
been agreed upon, without prejudice to the provisions in article 80b of
Book 2 of the Dutch Civil Code.
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Payment may only be made in foreign currency with the permission of the
Company and, furthermore, with due observance of the provisions in article
80a paragraph 3 of Book 2 of the Dutch Civil Code.
10. The Board of Directors is authorized to effect legal transactions as
referred to in article 94, paragraph 1 of Book 2 of the Dutch Civil Code
without prior approval of the General Meeting.
PRE-EMPTIVE RIGHT
ARTICLE 11.
1. Subject to the provisions in the third sentence of article 96a, paragraph 1
of Book 2 of the Dutch Civil Code, each holder of ordinary shares shall have
a pre-emptive right to ordinary shares to be issued in proportion to the
aggregate nominal amount of his ordinary shares.
2. When shares are issued, there shall be no pre-emptive rights towards shares
to be issued against any payment other than in cash.
3. With due observance of this Article, the General Meeting or, as the case may
be, the Board of Directors shall resolve, when the resolution in respect of
issue is passed, on the manner and time-frame within which the pre-emptive
right may be exercised.
4. The Board of Directors shall announce an issue with pre-emptive right and
the time-frame within which such may be exercised in the manner as provided
in Article 22.
5. The pre-emptive rights may be exercised for a period of at least two weeks
after the day of announcement.
6. The pre-emptive right may be limited or excluded by resolution of the
General Meeting.
In the proposal thereto, the reasons for the proposal and the choice of the
intended price of issue shall be explained in writing.
The pre-emptive right may also be limited or excluded by the Board of
Directors, if the Board of Directors has been designated by resolution of
the General Meeting for a specific period of no more than five years as
authorized to limit or exclude the pre-emptive right; such designation is
only possible if the Board of Directors has also been designated previously
or simultaneously as referred to in Article 10, paragraph 1. The
designation can be renewed each time for a period not in excess of five
years; the authority granted thereby may only be exercised with the issue
of shares to which the Board of Directors has competently resolved.
Unless otherwise stipulated in the designation, it may not be withdrawn.
7. A resolution of the General Meeting on the limitation or exclusion of the
pre-emptive right or on the designation as referred to in the previous
paragraph shall require a majority of at least two-thirds of the votes
cast, if less than half the issued capital is present or represented at the
meeting.
The Board of Directors shall deposit a full text of such resolution at the
office of the Trade Register.
8. In case rights to subscribe for ordinary shares are to be granted, holders
of ordinary shares shall have a pre-emptive right;
the provisions stipulated above in this Article shall apply accordingly.
Shareholders shall not have a pre-emptive right on shares to be issued to a
person exercising a previously acquired right to subscribe for shares.
OWN SHARES
ARTICLE 12.
1. Upon any issue of shares the Company may not subscribe for shares in its own
capital.
2. The Company may only acquire pursuant to a proposal of the Board of
Directors fully paid-up shares in its own capital for no consideration or
under universal title or if:
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a. the distributable reserves are at least equal to the price of
acquisition;
b. the nominal amount of the shares in its capital to be acquired,
already held or held in pledge by the Company or a Subsidiary does not
exceed one-tenth of the issued capital;
c. the authorization for such acquisition has been granted by the General
Meeting. Such authorization shall be valid for no more than eighteen
months.
The General Meeting shall determine in its authorization the number of
shares which may be acquired, the manner in which they may be acquired and
the maximum and minimum to be observed in respect of the price of
acquisition.
For the validity of such acquisition shall be decisive the extent of the
Company's shareholders' equity according to the last-adopted balance sheet,
minus the price for the acquisition on the shares in the capital of the
Company and distributions from profits or reserves to others, which the
Company and its Subsidiaries became indebted for after the date of the
balance sheet.
If a financial year has expired for a period in excess of six months
without the Annual Accounts having been adopted, then acquisition other
than under universal title in accordance with this paragraph 2 shall not be
allowed.
The authorization referred to here shall not be required, insofar as the
Company acquires own shares, listed on an official price list of a stock
exchange, in order to transfer such by virtue of an arrangement applicable
to employees of the Company or of a Group Company to such employees.
3. Neither the Company nor any of its Subsidiaries may extend loans, give
security, grant a price guarantee, guarantee in any other way or, severally
or in any other way, bind itself in addition to or for other persons with a
view to subscribing for or acquiring shares in the Company.
This prohibition shall, however, not apply in the event mentioned in
article 98c paragraph 2 of Book 2 of the Dutch Civil Code.
4. Alienation of shares held by the Company in its own capital shall only be
effected pursuant to a resolution of the Board of Directors.
With the resolution in respect of alienation, the conditions of such
alienation shall also be determined.
5. No votes can be cast at a General Meeting on a share owned by the Company or
a Subsidiary thereof.
Usufructuaries and pledgees of shares which are owned by the Company and
its Subsidiaries, are not, however, excluded from exercising their voting
right if the right of usufruct or the right of pledge was created before
the share was held by the Company or a Subsidiary.
The Company or a Subsidiary cannot cast votes on a share in respect of
which it has a right of usufruct or a right of pledge.
6. In determining to which extent shareholders cast votes, are present or
represented, or to which extent the share capital is supplied or is
represented, shares in respect of which the law provides that no votes may
be cast shall not be taken into account.
7. A Subsidiary may not for its own account subscribe for shares in the
capital of the Company, nor have such done.
The acquisition of such shares may only be effected directly or indirectly
by Subsidiaries for their own account under specific title insofar as the
Company may, pursuant to the provisions laid down in the preceding
paragraphs of this Article, acquire shares in its own capital.
A Subsidiary may not,
a. after it has become a Subsidiary; or
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b. after the company of which it is a Subsidiary has been converted into
a company with limited liability ("Naamloze Vennootschap"); or
c. after it has as a Subsidiary acquired shares in the capital of the
Company for no consideration or under universal title,
for a period in excess of three years hold or cause to be held for its own
account shares in excess of one-tenth of the issued capital together with
the Company and its other Subsidiaries.
CAPITAL REDUCTION
ARTICLE 13.
1. The General Meeting may, at the proposal of the Board of Directors, resolve
on reduction of the issued capital by cancelling shares or by reducing the
nominal amount of shares by means of an amendment of the Articles of
Association.
In this resolution, the shares to which the resolution pertains shall be
indicated and the execution of the resolution shall be laid down.
2. A resolution to cancel shares can relate only to shares which are held by
the Company or to all outstanding preference shares.
3. Reduction of the amount of shares without repayment of capital and without
release from the obligation to pay calls shall be effected in proportion to
all the shares of one and the same class.
4. Partial repayment of capital on shares or release from the obligation to
pay calls shall only be possible in proportion to all the shares or to all
the preference shares exclusively.
5. The pro-rata requirements mentioned in paragraphs 3 and 4 of this Article
may be deviated from with the approval of all the shareholders concerned.
6. A resolution in respect of capital reduction shall require a majority of at
least two-thirds of the votes cast, if less than half the issued capital is
represented at the meeting.
7. The convocation of a meeting in which a resolution is to be passed as
referred to in this Article shall state the purpose of the capital
reduction and the manner of execution.
8. The Company is obliged to publish the resolutions referred to in this
Article in conformity with the provisions of the law.
A resolution to reduce the issued capital shall not come into force as long
as creditors of the Company may oppose the same in conformity with the
relevant provisions of the law.
RIGHT OF USUFRUCT, RIGHT OF PLEDGE
ARTICLE 14.
1. A right of usufruct or pledge may be created on a share.
In that event, the voting right shall accrue to the shareholder or the
usufructuary or the pledgee, if this has been provided for at the time of
creation of the right of usufruct or pledge.
2. The shareholder who has no voting right and the usufructuary or pledgee who
does have a voting right shall have the rights granted by law to holders of
depositary receipts for shares issued with the cooperation of a company.
3. The rights referred to in paragraph 2 do not accrue to the usufructuary or
pledgee who has no voting rights.
4. A right of pledge may also be created without acknowledgement by or
notification to the Company.
In that event article 239 of Book 3 of the Dutch Civil Code shall apply
accordingly, in which case acknowledgement by or notification of the
Company shall replace the notification referred to in paragraph 3 of that
Article.
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MANAGEMENT
ARTICLE 15.
1. The Company shall be managed by a Board of Directors, consisting of A
Members and B Members. The maximum number of Members of the Board of
Directors shall be nine and the number of Members shall be determined by the
General Meeting, with the understanding that there shall be at least one A
Member.
Only natural persons may be a Member of the Board of Directors.
2. The Members of the Board of Directors shall be appointed by the General
Meeting.
3. The General Meeting may suspend and dismiss the Members of the Board of
Directors.
4. Even after having been extended, a suspension shall not last for more than
three months.
If no decision has been reached after that time on the lifting of the
suspension or the removal from office, the suspension shall cease to exist.
5. The B Members of the Board of Directors shall determine the remuneration and
other conditions of employment of the A Members of the Board of Directors.
The A Members of the Board of Directors shall determine the remuneration of
the B Members of the Board of Directors.
6. The field of activity (werkkring) of the B Members regards in particular the
general course of affairs of the company and its enterprise. The field of
activity of the A Members regards in particular the day to day management of
the Company and its enterprise.
7. A Member of the Board of Director may give a power-of-attorney to one of the
other Members of the Board of Director by means of a signed document, sent
by post or by fax, to represent him at the Board of Directors' meetings and
to vote in his place. However a Member of the Board of Directors is not
allowed to cast more than two proxy votes.
8. The Board of Directors appoints a chairman (the "Chairman") from among its
members and a chief executive officer (the "Chief Executive Officer") from
among its A members.
9. The Board of Directors shall meet whenever a Member of the Board of
Directors shall so require.
It shall pass resolutions by an absolute majority of votes cast by all
Managing Directors in office.
Blank votes shall be considered null and void.
The Board of Directors may establish rules pertaining to the decision-
making process of the Board of Directors.
10. The Board of Directors may decide to institute committees to which powers
can be delegated by the Board of Directors by virtue of the regulations,
without prejudice to the statutory duties of the Board of Directors.
11. The Board of Directors is authorized to appoint officials who may represent
the Company and to grant to such persons any title and powers as it seems
appropriate.
12. A B member of the Board of Directors shall resign no later than upon the
close of the annual shareholders meeting held in the fourth year after the
year of his last appointment. Without prejudice to the provisions of the
first sentence, he can then be reappointed immediately. The Board of
Directors shall draw up a roster of resignation for its B members.
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REPRESENTATION
ARTICLE 16.
1. The Company shall be represented by the Board of Directors except to the
extent otherwise provided by law.
In addition, the authority to represent the Company is vested:
--in each A Member of the Board of Directors individually; and
--in a B Member of the Board of Directors acting jointly with an A Member
of the Board of Directors.
2. In all events of the Company having a conflict of interest with one or more
Members of the Board of Directors, the Company shall continue to be
represented in the manner described in paragraph 1 above.
In all events in which the Company has a conflict of interest with a Member
of the Board of Directors in his private capacity, the board resolution
regarding that relevant legal act requires the prior approval of the
General Meeting.
Failure to obtain the approval defined in the present paragraph shall not
affect the Board of Directors or the authority of the Members of the Board
of Directors to represent the Company.
3. If a Member of the Board of Directors is absent or prevented from acting,
the remaining Members of the Board of Directors or the remaining Member of
the Board of Directors shall be charged with the management of the Company.
If the sole Member of the Board of Directors or all the Members of the
Board of Directors are absent or prevented from acting, the person to be
designated for that purpose by the General Meeting shall be charged with
the management of the Company until the situation of absence or other
prevention has ceased to exist in respect of at least one Member of the
Board of Directors.
INDEMNIFICATION, LIMITED LIABILITY
ARTICLE 17.
1. The Company shall indemnify any person who is or was a member of the Board
of Directors and who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of the Company) by reason of the fact that he is or was a
member of the Board of Directors or proxyholder (procuratiehouder), officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a member of the Board of Directors or proxyholder
(procuratiehouder), officer, employee, trustee or agent of another company,
a partnership, joint venture, trust or other enterprise or entity, including
with respect to employee benefit plans maintained or sponsored by the
Company or for the benefit of its or any of its group companies' employees
or consultants, (each an "Indemnitee"), against any and all liabilities
including all expenses (including attorneys' fees), judgements, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful or
outside of his mandate.
The termination of any action, suit or proceeding by a judgement, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, in and of itself, create a presumption that the
person did not act in good faith and not in a manner which he reasonably
could believe to be in or not opposed to the best interests of the Company,
and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
2. No indemnification pursuant to paragraph 1 of this Article shall be made in
respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for gross negligence or wilful misconduct in the
performance of his duty to the Company, unless and only to the extent that
the court in
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which such action or proceeding was brought or any other court having
appropriate jurisdiction shall determine upon application that, despite the
adjudication of liability but in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnification
against such expenses which the court in which such action or proceeding was
brought or such other court having appropriate jurisdiction shall deem
proper.
3. Expenses (including attorneys' fees) incurred by an Indemnitee in defending
a civil or criminal action, suit or proceeding may be paid by the Company in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of an Indemnitee to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Company as authorized in this Article.
Such expenses incurred by Indemnitees may be so advanced upon such terms
and conditions as the Board of Directors decides.
4. The indemnification provided for by this Article shall not be deemed
exclusive of any other right to which a person seeking indemnification or
advancement of expenses may be entitled under the laws of the Netherlands as
from time to time amended or under any by-laws, agreement, resolution of the
shareholders meeting of shareholders or of the disinterested Members of the
Board of Directors or otherwise, both as to actions in his official capacity
and as to actions in another capacity while holding such position, and shall
continue as to a person who has ceased to be a member of the Board of
Directors or proxyholder (procuratiehouder), officer, employee, trustee or
agent and shall also inure to the benefit of the heirs, executors,
administrators and the estate of such a person.
The Company may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of
expenses to any Indemnitee to the fullest extent of the provisions of this
Article 17 with respect to the indemnification and advancement of expenses
of Indemnitees.
5. The Company may purchase and maintain insurance on behalf of any Indemnitee,
whether or not the Company would have the power to indemnify him against
such liability under the provisions of this Article.
6. Whenever in this Article reference is made to the Company, this shall
include, in addition to the resulting or surviving company also any
constituent company (including any constituent company of a constituent
company) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had the power to indemnify its members
of the board of management or members of the supervisory board, or
proxyholders (procuratiehouder), officers, employees and agents, so that any
person who is or was a member of the supervisory board, member of the board
of management, or proxyholder (procuratiehouder), officer, employee or agent
of such constituent company, or is or was serving at the request of such
constituent company as a member of the supervisory director, member of the
managing board, or proxyholder (procuratiehouder), officer, employee,
trustee or agent of another company, a partnership, joint venture, trust or
other enterprise or entity, shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
company as he would have with respect to such constituent company if its
separate existence had continued.
7. No person shall be personally liable to the Company or its shareholders for
monetary damages for breach of fiduciary duty as a member of the Board of
Directors; provided, however, that the foregoing shall not eliminate or
limit the liability of a member of the Board of Directors (1) for any breach
of such individual's duty of loyalty to the Company or its shareholders, (2)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) for any transaction from which
the member of the Board of Directors derived an improper personal benefit or
(4) for personal liability which is imposed by Dutch law, as from time to
time amended.
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8. No amendment, repeal or modification of this Article 17 shall adversely
affect any right or protection of any person entitled to indemnification or
advancement of expenses under this Article 17 prior to such amendment,
repeal or modification.
FINANCIAL YEAR, ANNUAL ACCOUNTS, ANNUAL REPORT AND PUBLICATION
ARTICLE 18.
1. The financial year shall be equal to the calendar year.
2. Each year, within five months after the close of the financial year--
subject to extension of this period by the General Meeting on the grounds
of circumstances of an exceptional nature by at most six months--the Board
of Directors shall draw up the Annual Accounts.
Within this period the Board of Directors shall also submit the annual
report.
The Annual Accounts shall be signed by all the Members of the Board of
Directors.
If the signature of one or more of them is missing, mention thereof shall
be made and the reason therefor stated.
3. The Board of Directors shall submit the Annual Accounts to the General
Meeting.
4. From the day the Annual Meeting has been convened until the close of that
meeting, the documents referred to in paragraph 2 of this Article shall,
together with the information to be added pursuant to article 392 of Book 2
of the Dutch Civil Code, be deposited at the Company's offices and in
Amsterdam at the place to be mentioned in the convocation for inspection by
all shareholders and each of them may obtain copies thereof at no cost.
5. The General Meeting shall adopt the Annual Accounts.
The adoption of the Annual Accounts shall discharge the Members of the
Board of Directors for their Management, insofar as such management is
apparent from the Annual Accounts.
6. The Annual Accounts may not be adopted by the General Meeting if they have
been unable to ascertain to their satisfaction the statement of the auditor
referred to in Article 19, paragraph 1, which must be attached to the
Annual Accounts, unless the other information included mentions of a legal
ground why the statement is lacking.
7. The Company shall procure the publication of the documents and information
referred to in this Article, if and insofar as and in the manner as
prescribed in articles 394 et seq. of Book 2 of the Dutch Civil Code.
AUDITOR
ARTICLE 19.
1. The General Meeting shall give, without prejudice to any relevant statutory
provisions, an auditor ("register accountant") or another expert as referred
to in article 393 of Book 2 of the Dutch Civil Code or an organization in
which such experts are working together, the instruction to examine and
audit the Annual Accounts.
That expert shall report on his audit to the Board of Directors and shall
lay down the result of his audit in a report, stating whether the Annual
Accounts give a true and fair view of the financial position of the
Company.
2. If the General Meeting fails to appoint an auditor then the Board of
Directors shall be competent to do so.
3. The General Meeting or the party who gave the instruction, shall at all
times be authorized to cancel the instruction mentioned in this Article.
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PROFITS
ARTICLE 20.
1. The Company may make distributions to the shareholders and to other persons
entitled to the profits only up to a sum not exceeding the amount of the
distributable reserves.
2. Profits shall be distributed after adoption of the Annual Accounts showing
such is allowed.
3. Each year, the Board of Directors shall determine which part of the
profits--the positive balance of the profit and loss account--shall be
reserved.
4. From the profits remaining after reservation according to the above, a
dividend shall be distributed on the preference shares equal to the average
rate of Euribor plus two calculated over the amounts paid on such shares,
the average being taken over the number of days this rate applied over the
financial year concerned.
5. The balance then remaining shall be distributed as a dividend on ordinary
shares.
6. In calculating the profit appropriation, the shares held by the Company in
its own capital shall not count, unless a usufruct has been created on these
shares.
7. Insofar as profit is available in the Company, the Board of Directors may
resolve on payment of an interim dividend on account of the expected
dividend, provided always that the provisions laid down in paragraph 1 of
this Article have been satisfied, such to be shown by an interim balance
sheet as referred to in article 105 paragraph 4 of Book 2 of the Dutch Civil
Code.
8. The General Meeting may, following a proposal of the Board of Directors,
resolve to make distributions to the holders of ordinary shares from one or
more reserves which need not be maintained pursuant to the law or to these
Articles of Association.
The provisions of the paragraphs 1, 2, 7 and 9 apply accordingly.
9. The resolutions to distribute (interim) dividends may entail that (interim)
dividends will be wholly or partly distributed not in cash, but in the form
of shares in the Company or in a Subsidiary.
10. The (interim) dividend shall be made payable on a day to be determined by
the Board of Directors.
11. (Interim) dividends which have not been collected within five years after
they became payable shall be forfeited to the Company.
ANNUAL MEETING
ARTICLE 21.
The Annual Meeting shall be held within six months after the close of the
financial year, for the purpose of:
a. the discussion of the Annual Accounts and of the other information
referred to in article 392 of Book 2 of the Dutch Civil Code, except in
case extension has been granted for the preparation of the Annual Accounts
pursuant to article 101 of Book 2 of the Dutch Civil Code;
b. adoption of the Annual Accounts, unless an extension as referred to in
paragraph a. of this article has been granted;
c. delivery of the written report made by the Board of Directors on the
state of the Company's affairs and the management conducted during the past
financial year, unless an extension as referred to in a. above has been
granted;
d. effecting all such things as furthermore prescribed by the law;
e. dealing with all such further items of business as stated in the
convocation of the meeting.
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CONVOCATION
ARTICLE 22.
1. All convocations for the General Meeting and all announcements,
notifications and communications to shareholders and other parties with
meeting rights shall be effected by means of letters sent to the addresses
as recorded in the register referred to in Article 7, without prejudice to
the relevant provisions of the law.
2. The convocation shall be effected no later than on the fifteenth day before
the day of the meeting.
3. In the convocation the agenda shall be given or it shall be communicated
that shareholders and other parties with meeting rights may inspect the
agenda at the offices of the Company, without prejudice to the relevant
provisions of the law.
4. Insofar as all documents which must be available for inspection by
shareholders and other parties with meeting rights have not been included in
the convocation, these documents shall be made available at the offices of
the Company and, if the Company is listed on a stock exchange, with such
paying agent as referred to in the rules relating to securities of such
stock exchange, to be designated in the convocation for shareholders and
other parties with meeting rights at no cost.
OTHER GENERAL MEETINGS
ARTICLE 23.
1. Other General Meetings shall be held whenever the shareholders and other
parties with meeting rights shall be called and convened for that purpose by
the Board of Directors.
2. If one or more shareholders and/or other parties with meeting rights,
jointly representing at least one-tenth of the issued capital, have
requested the Board of Directors in writing to call and convene a General
Meeting, at the same time specifying the items of the agenda, and the Board
of Directors has not complied with such request in such a way that the
General Meeting can be held within six weeks following such request, they
shall be authorized to call such meeting themselves.
PLACE, CHAIRMANSHIP, MINUTES
ARTICLE 24.
1. General Meetings shall be held in Amsterdam, Schiphol (Haarlemmermeer), The
Hague, Maastricht, Nijmegen or in Venlo, at a location to be stated in the
convocation.
2. General Meetings shall be presided over by the Chairman of the Board of
Directors;
if the Chairman is absent, the member of the Board of Directors designated
by the Board of Directors shall preside and if such member is absent, the
Meeting itself shall choose its chairman.
3. Minutes shall be kept of the business transacted at the meeting.
The minutes shall be acknowledged, in evidence whereof the chairman and the
person who took the minutes shall sign them.
Minutes need not be taken of the business transacted if a notarial record
is made.
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ACCESS
ARTICLE 25.
1. All Members of the Board of Directors, shareholders and other parties with
meeting rights or their authorized agents--the latter with due observance of
the provisions of Article 26--shall be entitled to attend the General
Meeting, to address the meeting and, insofar as they have voting rights, to
cast their vote thereat.
In order to exercise that right holders of ordinary registered shares,
usufructuaries and pledgees of registered shares with the rights granted by
law under article 88 casu quo article 89 of Book 2 of the Dutch Civil Code
to holders of depositary receipts issued with the cooperation of a company
must express their desire to do so to the Company in writing, such no later
than at the time and place mentioned in the convocation and also--insofar
as it concerns type II registered shares- stating the indentifying number
of the share certificate.
2. The time referred to in the previous paragraph cannot be set earlier than
on the seventh day before the day of the meeting.
3. If the voting right on a share accrues to the usufructuary or the pledgee
instead of to the shareholder, the shareholder shall also be authorised to
attend the General Meeting and address it, provided that, where ordinary
registered shares are concerned, the Company has been notified of the
intention to attend the meeting in accordance with paragraph 1, or where
ordinary registered shares are concerned, the deposition prescribed in
paragraph 1 has taken place.
4. The chairman of the meeting shall decide on access to the meeting by others
than those who are entitled thereto by law.
POWER OF ATTORNEY
ARTICLE 26.
Shareholders and other parties with meeting rights may have themselves
represented by written power of attorney. The Company shall be notified hereof
in accordance with the provisions of Article 25, paragraph 1 of the Articles of
Association.
VOTES
ARTICLE 27.
1. Each person entitled to vote or his representative must sign the attendance
list.
2. Each share confers the right to cast one vote.
3. Insofar as the law or these Articles of Association do not prescribe a
greater majority, resolutions are passed by an absolute majority of the
votes cast.
Resolutions of the General Meeting can only be adopted validly in a meeting
in which no less than one-third of the issued capital is represented.
A new meeting as referred in article 120 paragraph 3 of Book 2 of the Dutch
Civil Code cannot be convened.
4. All votes shall be oral votes.
However, the chairman may resolve to have votes cast by ballot.
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In the event of an election of persons, a person with voting rights present
at the meeting may also require that the votes be cast by ballot.
Voting by ballot shall be effected with closed, unsigned ballot papers.
5. If the votes are tied the drawing of lots shall decide if it concerns an
election of persons and the motion shall be defeated if it concerns an item
of business.
6. Blank votes and invalid votes shall count as not having been cast.
7. The Board of Directors shall keep records of the resolutions passed.
The notes shall be deposited at the offices of the Company for inspection
by shareholders and other persons with meeting rights who shall if so
requested be furnished with a transcript or extract of these notes at no
more than the cost price.
AMENDMENT OF ARTICLES OF ASSOCIATION AND LIQUIDATION
ARTICLE 28.
1. A resolution of the General Meeting to amend the Articles of Association or
to dissolve the Company may only be taken at the proposal of the Board of
Directors.
2. The full proposal shall be deposited for inspection by the shareholders and
other parties with meeting rights at the offices of the Company and in
Amsterdam at a location to be mentioned in the convocation as of the day of
convocation to the General Meeting until the conclusion thereof;
the transcripts of this proposal shall be made available for the
shareholders and other parties with meeting rights at no cost.
3. A resolution to dissolve the Company may only be taken in a General Meeting
with a majority of no less than three-fourths of the votes cast.
4. Upon the dissolution of the Company the liquidation shall be effected by
the Board of Directors.
5. During the liquidation the provisions of these Articles of Association
shall remain in full force as much as possible.
6. The balance of the liquidation shall be distributed as follows:
a. to the holders of preference shares, the amount paid on such shares;
b. the remaining balance shall be distributed to the holders of ordinary
shares in proportion to everyone's nominal possession of said shares.
7. The books and records of the Company shall be kept for ten years after the
completion of the liquidation by the party designated for that purpose by
the General Meeting.
PROVISIONAL CLAUSES
ARTICLE 29.
The Board of Directors shall be authorized to resolve on issues of shares and
limitation or exclusion of the pre-emptive right, as well as to grant the right
to subscribe for shares.
The authority of the Board of Directors to adopt such a resolution pertains
to all shares not yet issued up to a total issued share capital of fifty
million ordinary shares and fifty million preference shares.
The authority referred to herein shall end on the 1 February two thousand and
five subject to the possibility of extension as stipulated in Article 10 and
Article 11 of these Articles of Association.
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FINAL STATEMENTS.
Finally the appearing person declared:
- that the issued capital amounts to [ ]
that on [ ] under number N.V. 1.070.445 the Minister of Justice
has--according to the certificate attached to this deed--advised that
no objections to the present amendment to the articles of association
have been apparent.
This deed was executed today in Amsterdam.
The substance of this deed was stated and explained to the appearing person.
The appearing person declared not to require a full reading of the deed, to
have taken note of the contents of this deed and to consent to it.
Subsequently, this deed was read out in a limited form, and immediately
thereafter signed by the appearing person and myself, civil-law notary, at
[ ].
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