AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1996
REGISTRATION NO. 333-3968
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
(Name of business issuer in its charter)
MINNESOTA
(State or other jurisdiction of
incorporation or organization)
2448
(Primary Standard Industrial
Classification Code Number)
41-1751716
(I.R.S. Employer
Identification No.)
2665 LONG LAKE ROAD
SUITE 120
ROSEVILLE, MINNESOTA 55113
(612) 635-0661
(Address and telephone number of principal executive offices
and place of business)
JEFFERY E. OTTO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
2665 LONG LAKE ROAD, SUITE 120
ROSEVILLE, MINNESOTA 55113
(612) 635-0661
TELECOPY (612) 635-0680
(Name, address and telephone number of agent for service)
COPIES TO:
KENNETH L. CUTLER, ESQ. WILLIAM T. DOLAN, ESQ.
DORSEY & WHITNEY LLP JOSEPH T. KINNING, ESQ.
PILLSBURY CENTER SOUTH BRIGGS AND MORGAN
220 SOUTH SIXTH STREET 2400 IDS CENTER
MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402
(612) 340-2740 (612) 334-8621
TELECOPY (612) 340-8738 TELECOPY (612) 334-8650
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement for the stock offering. [ ]
If this Form is a post-effective amendment filing pursuant to Rule 462(c) under
the Securities Act, check the following box and list this Securities Act
registration statement number of the earlier effective registration statement
for the stock offering. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED AMOUNT TO PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) OFFERING PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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Common Stock, $.01 par value 3,162,500 shares $5.00 $15,812,500 $5,453
</TABLE>
(1) Includes 412,500 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K Showing Location in
Prospectus of Part I Items of Form S-1
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ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside and Inside Front Cover Pages; Underwriting;
Outside Back Cover Page
9. Description of Securities to be Registered Dividend Policy; Description of Capital Stock; Shares
Eligible for Future Sale
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to Registrant Outside and Inside Front Cover Page; Prospectus Summary;
The Company; Risk Factors; Use of Proceeds; Dividend
Policy; Capitalization; Dilution; Selected Consolidated
Financial Data; Unaudited Pro Forma Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal Shareholders;
Description of Capital Stock; Shares Eligible for Future
Sale; Financial Statements; Outside Back Cover Page
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not Applicable
</TABLE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED , 1996
PROSPECTUS
[LOGO] 2,750,000 Shares
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC.
COMMON STOCK
All of the 2,750,000 shares of Common Stock of Pallet Recycling Associates of
North America, Inc. (the "Shares") offered hereby (the "Offering") are being
offered by Pallet Recycling Associates of North America, Inc. (the "Company"
or "PRANA"). Prior to this Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $4.00 and $5.00 per share. See
"Underwriting" for information relating to the method of determining the
initial public offering price. Application has been made to have the Common
Stock approved for listing on the Nasdaq SmallCap Market under the proposed
symbol "PRNA" and on the Boston Stock Exchange under the proposed symbol
"PRN".
THE COMMON STOCK OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
ON PAGE 6 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
</TABLE>
(1) The Company has agreed to pay John G. Kinnard and Company, Incorporated,
as representative of the several Underwriters (the "Representative"), its
accountable expenses in connection with this Offering in an amount not to
exceed $65,000, of which $15,000 has been paid. The Company has also
agreed to sell to the Representative, for a nominal purchase price, a
five-year warrant to purchase up to 275,000 shares of the Common Stock,
exercisable at 120% of the Price to the Public. In addition, the Company
has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $650,000
(including the Representative's accountable expenses referenced in note 1
above). See "Underwriting."
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 412,500 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The Shares are being offered by the several Underwriters subject to prior
sale, withdrawal, cancellation or modification of the offer without notice,
to delivery to and acceptance by the Underwriters and to certain other
conditions. It is expected that delivery of the Shares of Common Stock will
be made on or about , 1996 in Minneapolis, Minnesota. See
"Underwriting."
JOHN G. KINNARD AND COMPANY, INCORPORATED
The date of this Prospectus is ______________, 1996
[Pictures and related text]
The Company has federally registered its trademark PRANA and the associated
design.
The Company intends to furnish to its shareholders annual reports containing
audited financial statements and interim reports containing unaudited
financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET,
IN THE OVER-THE COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, (i) ALL INFORMATION HEREIN
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION (412,500
SHARES) OR THE REPRESENTATIVE'S WARRANT (275,000 SHARES), (ii) ALL SHARE AND
PER SHARE DATA HAVE BEEN ADJUSTED TO GIVE EFFECT TO A 1-FOR-8 REVERSE STOCK
SPLIT WITH RESPECT TO THE COMMON STOCK AND A 1-FOR-2 REVERSE STOCK SPLIT WITH
RESPECT TO THE PREFERRED STOCK, EACH APPROVED BY THE COMPANY'S SHAREHOLDERS
ON APRIL 4, 1996 AND (iii) THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK INTO COMMON STOCK ON A 1-FOR-1 BASIS AS OF THE CLOSING OF
THIS OFFERING. SEE "UNDERWRITING."
THE COMPANY
Pallet Recycling Associates of North America, Inc. ("PRANA" or the "Company")
was founded in 1993 to create a national network of pallet recycling
companies to service the pallet needs of manufacturing, distribution,
transportation and retailing companies that use pallets to move goods
throughout North America. The Company has expanded rapidly through
acquisitions from a single operation based in Saint Paul, Minnesota to a
network of 15 companies (the "Subsidiaries") operating from 23 locations in
17 states. The Company has also signed agreements to acquire two additional
pallet recycling companies operating from three locations in two states.
These acquisitions are expected to close upon completion of this Offering
using a portion of the proceeds therefrom (the "Pending Acquisitions"). The
Company believes its achievement of critical mass, access to greater capital
resources and its ability to add a tradeable security to the consideration it
offers acquisition candidates will enhance its ability to make further
acquisitions.
Pallet recycling services involve retrieving pallets and repairing or
rebuilding and selling the pallets. The Company believes that the market for
pallet recycling services had annual sales in excess of $2 billion in 1995.
According to Company estimates there are more than two billion pallets in
circulation in the United States today. According to the THE PALLET
ENTERPRISE, an industry trade publication, respondents to an annual pallet
recycling survey reported average sales growth of approximately 32% in 1994,
13% in 1995 and are anticipating growth of 17% in 1996. The Company believes
this growth is being driven by a number of factors including: (i) recycled
pallets are 25% to 35% less expensive than new pallets; (ii) the wood in
recycled pallets has lost moisture over time and is, therefore, lighter and
stronger; (iii) overall demand for pallets has continued to rise and (iv)
recycled pallets offer several environmental benefits, including companies
sending fewer pallets to landfills. The Company believes that it is currently
the largest supplier of pallet recycling services in North America;
nevertheless, it estimates that its market share, based on the Company's pro
forma combined net sales for 1995, is less than three percent.
The pallet recycling industry is highly fragmented. According to industry
sources, there are an estimated 3,000 independent pallet recycling businesses
in the United States, substantially all of which operate in only one city or
town. The Company believes that the pallet recycling industry is
consolidating and that this consolidation is being driven by the demands of
large multi-location companies for a company such as PRANA to offer a
national network to manage the sourcing, retrieval and repair of pallets. Due
to the fragmentation of the pallet recycling industry, national and regional
companies must currently contract with numerous independent pallet recycling
operations in order to meet their pallet recycling needs, which is often
expensive and time consuming. It is common for businesses that use pallets
(i.e., a manufacturer or distributor) to ship goods on a pallet and never
receive the pallet back, nor receive any value for the pallet. As a result,
many of these businesses view pallets as a shipping expense rather than a
reusable asset. The Company believes a national network of pallet recyclers
would improve the level of service, reduce the complexity of managing the
sourcing, retrieval and repair of pallets for these multi-location companies
and will enable pallet users to view pallets as an asset to be retained
rather than an expense to be incurred. Through its Subsidiaries the Company
serves over 1,000 customers, including numerous multi-national companies such
as Motorola Inc., GAF Materials Corporation and 3M. The Company currently has
agreements to serve twelve customers on a regional and national basis and
plans to continue to add to its list of national customers.
The Company's objective is to build upon its current position to become the
dominant provider of pallet recycling services in North America. Its
strategies to achieve this objective include: (i) rapidly expanding its
network, primarily through acquisitions; (ii) driving internal growth; (iii)
establishing and expanding relationships with large national customers; (iv)
managing pallet supply and demand across regions and (v) providing superior
value and service to its customers.
The Company was incorporated on March 2, 1993 in the State of Minnesota and
its principal executive offices are located at 2665 Long Lake Road, Suite
120, Roseville, Minnesota 55113. The Company's telephone number is (612)
635-0661.
THE OFFERING
COMMON STOCK OFFERED 2,750,000 Shares
COMMON STOCK OUTSTANDING AFTER THIS 6,264,716 Shares(1)
OFFERING
USE OF PROCEEDS To complete Pending Acquisitions, to
finance additional acquisitions, to
repay outstanding indebtedness, to
increase working capital and for
other general corporate purposes. See
"Use of Proceeds."
PROPOSED NASDAQ SMALLCAP MARKET PRNA
SYMBOL
PROPOSED BOSTON STOCK EXCHANGE
SYMBOL PRN
(1) Excludes: (i) 2,000,000 shares of Common Stock reserved for issuance
under the Company's 1995 Long-Term Incentive and Stock Option Plan (the
"Stock Option Plan"), of which options to purchase 495,000 shares of
Common Stock were outstanding as of August 30, 1996; (ii) 592,593 shares
of Common Stock issuable upon conversion of the Convertible Subordinated
Debentures (the "Convertible Debentures") (assuming a conversion price of
$3.38 per share); (iii) 554,491 shares of Common Stock issuable upon
exercise of outstanding warrants and (iv) up to 275,000 shares of Common
Stock issuable upon exercise of the Representative's warrant. Includes
the conversion of all outstanding Preferred Stock into Common Stock on a
one-for-one basis upon completion of the Offering and the issuance of
250,000 shares of Common Stock issuable in connection with the
consummation of the Pending Acquisitions. See "Management -- Stock Option
Plan," "Description of Capital Stock" and "Underwriting."
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, OPERATING DATA AND FOOTNOTES)
<TABLE>
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YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
PRO FORMA PRO FORMA
1993(1) 1994 1995 1995(2) 1995 1996 1996(2)
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STATEMENT OF OPERATIONS DATA:
Net sales $ -- $9,844 $30,004 $ 44,800 $12,263 $18,424 $ 22,231
Gross profit -- 2,808 6,064 9,917 2,583 4,273 5,508
Selling, general and
administrative expenses:
Operating subsidiaries -- 1,481 3,776 5,570 1,597 2,858 3,320
Corporate 196 1,337 2,725 2,725 1,197 1,595 1,595
Amortization expense 1 35 344 781 102 320 460
Goodwill write-off -- -- 539 539 -- -- --
Operating profit (loss) (197) (45) (1,320) 302 (313) (500) 133
Other income (expense), net 12 (32) (568) (613) (126) (741) (539)
Loss before income taxes (185) (77) (1,888) (311) (439) (1,241) (406)
Income tax benefit (expense) -- (49) 75 (369) 20 (70) 16
Net loss $(185) $ (126) $(1,813) $ (680) $ (419) $(1,311) $ (390)
Net loss per share $ (0.19) $ (0.11)
Weighted average shares
outstanding(3) 3,650,301 3,650,301
OPERATING DATA:
Number of locations at
period end -- 11 21 26 11 23 26
</TABLE>
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DECEMBER 31, JUNE 30, 1996
PRO FORMA
1993 1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5)
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BALANCE SHEET DATA:
Working capital (deficit) $751 $ 94 $(3,407) $(4,775) $(6,944) $ 3,141
Total assets 901 7,878 17,448 22,352 25,286 32,204
Total debt and capital leases
(including current
maturities) -- 3,285 10,422 13,200 14,693 10,876
Stockholders' equity 798 2,624 3,452 5,229 6,354 17,089
</TABLE>
(1) Period from March 2, 1993 (date of inception) to December 31, 1993.
(2) Gives effect to (i) the acquisition of all Subsidiaries and the
completion of the Pending Acquisitions, as if such transactions had been
made on January 1, 1995, (ii) the sale of the Shares offered hereby and
(iii) all other pro forma adjustments set forth in "Pro Forma Financial
Data."
(3) Pro forma weighted average shares outstanding includes: (i) 1,081,292
shares of Common Stock outstanding as of December 31, 1995 and June 30,
1996; (ii) 2,183,424 shares of Preferred Stock outstanding as of December
31, 1995 and June 30, 1996, which shares will be converted to shares of
Common Stock on a 1-for-1 basis upon completion of the Offering; (iii)
250,000 shares of Common Stock to be issued as consideration for the
Pending Acquisitions and (iv) 135,585 shares of Common Stock equivalents
related to stock options and warrants.
(4) Gives effect to (i) the completion of the acquisition of all Subsidiaries
and the completion of the Pending Acquisitions, as if such transactions
had been completed as of June 30, 1996 and (ii) all other pro forma
adjustments set forth in "Pro Forma Financial Data."
(5) Gives effect to: (i) the completion of the acquisition of all
Subsidiaries and the completion of the Pending Acquisitions, as if such
transactions had been completed as of June 30, 1996; (ii) all other pro
forma adjustments set forth in "Pro Forma Financial Data," and (iii) the
sale of the shares offered hereby.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
LIMITED OPERATING HISTORY; NET LOSSES
The Company was incorporated on March 2, 1993 and began operations on January
1, 1994. The Company had a net loss of approximately $1.8 million during the
twelve months of operations ended December 31, 1995 and a working capital
deficit of approximately $4,775,000 as of June 30, 1996. Prior to January 1,
1994, the Company had no operations or revenues. Accordingly, the Company's
operations are subject to all of the risks inherent in the establishment of a
new business enterprise, including the lack of operating history. Future
revenues and profits, if any, will depend upon various factors, including the
quality of operations, the acceptance of the Company's services and general
economic conditions. There can be no assurance that the Company can operate
profitably or that it will successfully implement its acquisition strategy,
in which case the Company will continue to be dependent on the revenues of
the Subsidiaries. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
ACQUISITION RISKS
The Company intends to acquire additional pallet recycling companies
throughout North America as part of its strategy to establish a national
pallet recycling network. There can be no assurance that the Company will be
able to make additional acquisitions or make such acquisitions on terms that
are favorable to the Company. Locating and negotiating additional acquisition
prospects involves considerable management time and Company expense which may
affect the Company's ability to manage successfully its day-to-day
operations. In addition, integration of the acquired companies into the
Company's national network also involves considerable management time and
Company expense. There can be no assurance that the Company will successfully
integrate the acquired companies into its national network or that the
benefits of establishing the national network, such as national sales
contracts and economies of scale, will ever be realized. See "Business --
Acquisition Strategy."
The Company currently has signed acquisition agreements for the two Pending
Acquisitions. The Pending Acquisitions are expected to close upon the
consummation of this Offering using a portion of the proceeds therefrom.
There can be no assurance that either of the Pending Acquisitions will be
completed. In consummating the Pending Acquisitions or other acquisitions,
the Company relies upon certain representations, warranties and indemnities
made by the sellers in each acquisition, as well as its own due diligence
investigation. There can be no assurance that such representations and
warranties will be true and correct or that the Company's due diligence will
uncover all material adverse facts relating to the operations and financial
condition of the pallet recycling companies acquired. Any material
misrepresentations could have a material adverse effect on the Company's
financial condition and results of operations. See "Use of Proceeds" and
"Business -- Pending Acquisitions."
NEED FOR ADDITIONAL CAPITAL TO IMPLEMENT ACQUISITION STRATEGY
The Company intends to finance further acquisitions by using cash and shares
of the Company's Common Stock. In the event potential acquisition candidates
are unwilling to accept the Company's Common Stock or the Company chooses not
to employ its Common Stock as a part of the consideration for the purchase of
such acquisition candidates, the Company may be required to utilize more of
its cash resources, if available, in order to continue its acquisition
strategy. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain the necessary capital through
additional debt or equity financings. There can be no assurance that the
Company will be able to obtain such financing if and when it is needed or
that, if available, such financing will be on terms acceptable to the
Company. The Company believes that cash generated from operations, borrowing
capacity under credit facilities and the proceeds from this Offering will be
sufficient to fund its ongoing operations, the Pending Acquisitions,
additional acquisitions and budgeted capital expenditures through 1996. If
the Company is unable to obtain additional financing when needed, it may be
unable to fully implement its acquisition strategy. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Acquisition
Strategy."
NEED FOR PROMISSORY NOTE EXTENSION; LONG-TERM DEBT COVENANT NON-COMPLIANCE;
GOING CONCERN UNCERTAINTY
The Company currently has promissory notes with a principal balance of
approximately $800,000 made with private investors which are due and payable.
The Company is currently negotiating extensions of the maturity dates of such
promissory notes. There can be no assurance that the Company will be able to
negotiate such extensions with the noteholders. The failure of the Company to
obtain such extensions could have an adverse effect on the Company's financial
condition and results of operations.
The Company currently is out of compliance with certain covenants of its
long-term debt agreements. Approximately $4,300,000 of the outstanding long-term
debt is callable and has therefore been classified as current. The Company is
currently negotiating with its primary lender to amend the covenants. There can
be no assurance that the Company will be able to negotiate such an amendment.
The failure of the Company to obtain an amendment could have an adverse effect
on the Company's financial condition and results of operations.
The report of the independent auditors on the Company's Financial Statements
contains an explanatory paragraph concerning the Company's ability to continue
as a going concern. See Notes 10 and 17 to the Company's Consolidated Financial
Statements for a description of the factors related to going concern issues and
management's plans regarding operating losses and liquidity. The Company
believes that upon the successful completion of this Offering, it will have the
cash resources to meet its current obligations.
RAPID EXPANSION; MANAGEMENT OF GROWTH; INTERNAL CONTROLS
The Company is undergoing a period of rapid growth which the Company believes
will continue for the foreseeable future. The growth of the Company has
occurred in all phases of its business, including the number of Subsidiaries,
the number of employees and the scope and geographic location of its
operations. This growth has resulted in, and is expected to continue to
create, new and increased responsibilities for management personnel and added
pressures on the Company's operational and financial systems. The Company's
ability to manage future growth effectively and to accomplish its overall
goals will depend on its ability to hire or successfully promote and retain
qualified personnel. If the Company is unable to manage its growth
effectively or to hire or promote and retain qualified personnel, the
Company's business and results of operations could be materially adversely
affected. Additionally, the Company's rapid growth will continue to place an
emphasis on its internal controls, in particular its information systems. The
Company's ability to successfully integrate the accounting and financial
reporting activities, among other activities, of its Subsidiaries will depend
on its ability to continue developing and implementing internal controls.
COMPETITION
It is anticipated that the Company's current products and services will
compete for sales with well-established companies including, but not limited
to, those in the new and recycled pallet industries as well as those that
rent or lease pallets. There can be no assurance that pallet leasing services
will not capture market share from pallet recycling companies. The Company
competes with other pallet recycling companies for its supply of pallets to
recycle. There can be no assurance that the Company will be able to compete
successfully with other pallet recycling companies in obtaining an adequate
supply of pallets or, in doing so, at prices that will allow the Company to
operate profitably. The majority of the pallets recycled by the Company are
made of wood and as such are also subject to competition from pallets
fabricated from other materials, including steel, plastic, cardboard and
molded wood fiber, and may be subject to competition from pallets fabricated
from other materials developed in the future.
Other companies may also attempt to establish a national pallet recycling
company and thus compete with the Company in the identification and
acquisition of existing pallet recycling companies. Companies which attempt
to establish national recycling companies will also compete with the Company
for national account customers. The Company's current and potential
competitors may have substantially greater resources than the Company and
there can be no assurance that the Company will be able to compete
successfully with such competitors.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company is highly dependent on each of its executive officers and on a
limited number of other key management personnel. The Company's future
success will also depend, in part, on its ability to attract and retain
highly qualified personnel. There can be no assurance that the Company will
be successful in hiring or retaining qualified personnel. The loss of key
personnel, or inability to hire and retain qualified personnel, could have an
adverse effect on the Company's business, financial condition and results of
operations. The Company does not have key-person life insurance on any of its
personnel. See "Management."
CONTROL BY MANAGEMENT
Immediately after the closing of the Offering, the directors and executive
officers of the Company will own beneficially approximately 20% of the
Company's outstanding Common Stock. Accordingly, these shareholders may be
able substantially to influence the outcome of shareholder votes as to
matters on which they may be in agreement. See "Principal Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE
The availability for sale of certain shares of Common Stock held by existing
shareholders of the Company after this Offering could adversely affect the
market price of the Common Stock. Of the 6,264,716 shares of Common Stock to
be outstanding following this Offering, the 2,750,000 Shares being offered by
the Company hereby will be freely tradeable without restrictions or
additional registration under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 3,514,716 shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. Of these 3,514,716 shares, 1,985,012 will be freely
tradeable upon the effective date of this Offering, subject to restrictions
imposed by Rule 144 and the remaining 1,529,704 will be eligible for resale
under Rule 144 after expiration of applicable holding periods, subject to
restrictions imposed by Rule 144. In connection with this Offering, all
executive officers and directors and five percent shareholders of the Company
have agreed not to offer, sell or otherwise dispose of a total of
approximately 1,580,335 shares held by them for a period of 365 days after
the effective date of this Offering, without the prior written consent of the
Representative. In addition, certain other shareholders of the Company have
agreed not to offer, sell or otherwise dispose of a total of 1,888,256 shares
(the "Lock-up Shares") held by them for a period of 180 days. Of the Lock-up
Shares, 472,064 will be eligible for resale between 181 days and 270 days
after the effective date of this Offering, and 472,064 additional shares will
be eligible for resale between 271 and 365 days after the effective date of
this Offering. All shares held by the Company's executive officers, directors
and five percent shareholders and all Lock-up Shares will be eligible for
resale 366 days after the effective date of this Offering, subject to any
restrictions under Rule 144. Sales of a substantial amount of the currently
outstanding shares of Common Stock in the public market may adversely affect
the market price of the Common Stock and the ability of the Company to raise
additional capital by occurring at a time when it would be beneficial for the
Company to sell securities. See "Description of Capital Stock," "Shares
Eligible for Future Sale" and "Underwriting."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; STOCK PRICE
VOLATILITY
Prior to this Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market for
the Common Stock will develop or be sustained after this Offering. In the
event the market for the Company's Common Stock is thinly traded,
shareholders may not be able to sell a significant amount of Common Stock at
the price quoted or at all. The initial public offering price for the Shares
has been determined by negotiation between the Company and the Representative
and may bear no relationship to the market price of the Shares subsequent to
this Offering. Following this Offering, the market price for the Common Stock
may be highly volatile depending on various factors, including the general
economy, stock market conditions, announcements by the Company, its
competitors, and fluctuations in the Company's operating results. See
"Underwriting."
ANTI-TAKEOVER PROVISIONS
The Board of Directors, without any action by the Company's shareholders, has
the authority to issue up to 5,000,000 shares of authorized but undesignated
preferred stock and to fix the powers, preferences, rights and limitations of
any such preferred shares or any class or series thereof, without shareholder
approval. Persons acquiring preferred stock could have preferential rights
with respect to voting, liquidation, dissolution or dividends over existing
shareholders. The Company is subject to certain provisions of the Minnesota
Business Corporation Act which limit the voting rights of shares acquired in
"control share acquisitions" and restrict certain "business combinations."
Such provisions, as well as the ability to issue undesignated preferred
shares, could have the effect of deterring or delaying a takeover or other
change in control of the Company and could deny shareholders the receipt of a
premium on their Common Stock and could have a depressive effect on the
market price of the Company's Common Stock. The Board of Directors is divided
into three classes of directors elected for staggered three year terms. Such
staggered terms may affect the ability of the holders of the Common Stock to
effect a change in control of the Company. See "Description of Capital
Stock."
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on its capital stock since its
inception and does not intend to pay any dividends in the foreseeable future.
Moreover, the Company's Convertible Subordinated Debentures (the "Convertible
Debentures") prohibit payment of cash dividends on the Company's capital
stock. See "Description of Capital Stock -- Convertible Subordinated
Debentures."
DILUTION
Investors in this Offering will incur immediate and substantial dilution in
the net tangible book value of the shares of approximately $3.74 per share
from the initial public offering price. Additional dilution could result from
the exercise of certain options and warrants. See "Dilution."
POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET AND MARKET ILLIQUIDITY
While the Company's Common Stock is expected to meet the current Nasdaq
SmallCap Market initial listing requirements, there can be no assurance that
such securities will meet the continued listing requirements. Under current
criteria for continued inclusion on the Nasdaq SmallCap Market, (i) the
Company will have to maintain at least $4,000,000 in total assets and
$2,000,000 in total shareholders' equity, (ii) the minimum bid price of the
Common Stock will have to be $3.00 per share, (iii) there must be at least
1,000,000 shares in the public float valued at $1,000,000 or more, (iv) the
Common Stock must have at least two active market makers, and (v) the Common
Stock must be held by at least 300 holders. In the event that the Company
fails to meet the requirements for continued listing on the Nasdaq SmallCap
Market, the market for the Common Stock would be adversely affected.
APPLICABILITY OF THE "PENNY STOCK RULES"
If, during the time in which the Common Stock is quoted on the Nasdaq
SmallCap Market, the Common Stock is priced below $5.00 per share, and is
delisted from the Nasdaq SmallCap Market, trading of the Common Stock will be
subject to certain federal regulations governing "penny stocks" (the "Penny
Stock Rules"). The Penny Stock Rules require brokers to confirm certain
information regarding purchasers of Common Stock and to meet certain other
requirements when executing trades. If the Common Stock becomes subject to
the Penny Stock Rules, it may be more difficult for shareholders to sell
their shares.
DILUTION
The net tangible book value of the Company's Common Stock as of June 30, 1996
was approximately ($3,605,000) or $(1.10) per share. "Net tangible book
value" represents the tangible assets less total liabilities of the Company
and "net tangible book value per share" was determined by dividing the net
tangible book value of the Company by the number of shares of Common Stock
and Preferred Stock (assuming a one-to-one conversion of outstanding shares
of Preferred Stock to shares of Common Stock) outstanding on June 30, 1996.
Net tangible book value dilution represents the difference between the per
share offering price and the adjusted net tangible book value per share,
adjusted to give effect to the sale of the Common Stock. Without giving
effect to any other exercise or conversion events relating to the Common
Stock, as a result of the sale by the Company of 2,750,000 shares of Common
Stock at an assumed initial public offering price of $4.50 per share
(resulting in net proceeds of approximately $10,735,000 after deducting
estimated expenses of this Offering and underwriting discounts payable by the
Company), the pro forma net tangible book value of the Company as of June 30,
1996 would have been approximately $6,265,000 or $0.76 per share. This
represents an immediate increase in the net tangible book value per share to
the existing shareholders of $1.86 and there will be an immediate net
tangible book value dilution of $3.74 to new investors, as illustrated by the
following table:
<TABLE>
<CAPTION>
Assumed initial public offering price per share $4.50
<S> <C> <C>
Net tangible book value per share at June 30, 1996 $(1.10)
Consummation of Pending Acquisitions (0.59)
Increase value per share attributable to the
Offering 2.45
Pro forma net tangible book value per share after
this Offering $0.76
Dilution to purchasers of shares offered hereby $3.74
</TABLE>
The following table summarizes, as of June 30, 1996, the total number of
shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share paid by existing shareholders and by the
new investors who purchase shares of Common Stock pursuant to the Offering at
an assumed initial public offering price of $4.50 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing Shareholders(2) 3,514,716 56.1% $ 9,849,248 44.3% $2.80
New Investors 2,750,000 43.9% $12,375,000 55.7% $4.50
Total 6,264,716 100.0% $22,224,248 100.0%
</TABLE>
(1) Excludes: (i) 2,000,000 shares of Common Stock reserved for issuance
under the Company's Stock Option Plan, of which options to purchase
495,000 shares of Common Stock were outstanding as of August 30, 1996;
(ii) 592,593 shares of Common Stock issuable upon conversion of the
Convertible Debentures (assuming a conversion price of $3.38 per share);
(iii) 554,491 shares of Common Stock issuable upon exercise of
outstanding warrants and (iv) up to 275,000 shares of Common Stock
issuable upon exercise of the Representative's warrant. Includes the
issuance of 250,000 shares of Common Stock issuable in connection with
the consummation of the Pending Acquisitions. See "Management -- Stock
Option Plan," "Description of Capital Stock," and "Underwriting."
(2) Consists of shares of Common Stock and Preferred Stock convertible into
shares of Common Stock on a one-for-one basis, including shares of Common
Stock to be issued in connection with the consummation of the Pending
Acquisitions using a portion of the proceeds from this Offering. See
"Description of Capital Stock -- Preferred Stock" and "Business --
Pending Acquisitions."
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered hereby
are estimated to be $10,735,000 ($12,375,000 if the Underwriter's
over-allotment option is exercised in full) after deducting the underwriting
discount and estimated offering expenses payable by the Company. The Company
currently intends to apply these proceeds approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Complete pending acquisitions $ 2,890,000
Repayment of outstanding debt 3,817,000
Additional acquisitions, working capital and general corporate
purposes 4,028,000
Total $10,735,000
</TABLE>
Approximately $2.9 million of the net proceeds of the Offering are intended
to be used to complete the Pending Acquisitions, including the retirement of
$605,000 of indebtedness owed to a shareholder of one of the Pending
Acquisitions.
The Company intends to use approximately $3.8 million of the proceeds of the
Offering to repay outstanding debt. Approximately $2.3 million of the
proceeds of the Offering will be used to repay promissory notes, due and
payable between July 15, 1996 and December 13, 1997, under loan commitments
entered into with individual investors. Amounts outstanding under such
promissory notes are general, unsecured obligations of the Company and bear
interest at the rate of 10% per annum. The proceeds of such notes were used
to acquire the assets and business of Blue Light Pallet Company and form
PRANA Las Vegas, Inc. and for working capital and general corporate purposes.
The Company also intends to use approximately $1.5 million of the proceeds of
the Offering to repay secured notes (the "Secured Notes") under loan
commitments entered into with individual investors. Amounts outstanding under
the Secured Notes are secured obligations of the Company, bear interest at a
rate of 11.25% per annum and are due and payable on the earlier of (i) April
23, 1997 or (ii) the closing of the Company's initial public offering or a
private sale for cash by the Company of at least $1,500,000 of the Company's
equity or debt ("Qualified Financing"). The proceeds of the Secured Notes
were used to complete the acquisition of the assets and business of Metroplex
Wood Products, Ltd. and for working capital and general corporate purposes.
See "Description of the Term Loan and Other Outstanding Indebtedness."
The Company intends to use the remaining $4.0 million for additional
acquisitions, working capital and general corporate purposes. Proceeds of
this Offering that are not immediately required for the purpose described
above will be invested in short-term certificates of deposit, money market
funds or other short-term interest-bearing investments. The Company
anticipates that the net proceeds of this Offering will be sufficient to
satisfy the Company's cash requirements through 1996.
DIVIDEND POLICY
The Company has not declared or paid any dividends on its Common Stock since
its inception. The Company currently intends to retain all earnings for the
business and does not anticipate paying any cash dividends in the foreseeable
future. Moreover, the Company's Convertible Debentures prohibit payment of
cash dividends on the Company's capital stock. See "Description of Capital
Stock -- Convertible Subordinated Debentures."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996: (i) on an actual basis; (ii) on a pro forma basis to reflect the
acquisition of the Subsidiaries and the consummation of the Pending
Acquisitions and (iii) on a pro forma basis as adjusted to give effect to (x)
the acquisition of the Subsidiaries and the consummation of the Pending
Acquisitions and (y) the sale by the Company of the 2,750,000 shares of
Common Stock offered hereby at an assumed initial offering price of $4.50 per
share, less underwriting discounts, commissions and estimated offering
expenses, and the application of the net proceeds therefrom. This table
should be read in conjunction with the historical financial statements and
the pro forma combined financial statements of the Company, and the related
notes to each thereof appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996(1)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of debt $ 8,359 $ 8,449 $ 5,282
Long-term debt and capital leases (less current
maturities) 4,841 6,244 5,594
Stockholders' equity:
Preferred Stock, par value $.01 per share, 5,000,000
shares authorized, 2,183,424 shares issued, 0 shares
issued
as adjusted (2) 22 22 0
Common Stock, par value $.01 per share, 20,000,000 shares
authorized, 1,081,292 shares issued, 6,264,716 shares
issued
as adjusted (2) 11 14 63
Additional paid in capital 8,632 9,754 20,462
Accumulated deficit (3,436) (3,436) (3,436)
Total stockholders' equity 5,229 6,354 17,089
Total capitalization $10,070 $12,598 $22,683
</TABLE>
(1) Excludes: (i) 2,000,000 shares of Common Stock reserved for issuance
under the Company's Stock Option Plan of which options to purchase
495,000 shares of Common Stock were outstanding as of August 30, 1996;
(ii) 592,593 shares of Common Stock issuable upon conversion of the
Convertible Debentures (assuming a conversion price of $3.38 per share);
(iii) 554,491 shares of Common Stock issuable upon exercise of
outstanding warrants and (iv) up to 275,000 shares of Common Stock
issuable upon exercise of the Representative's warrant. Includes the
issuance of 250,000 shares of Common Stock issuable in connection with
the consummation of the Pending Acquisitions. See "Management -- Stock
Option Plan," "Description of Capital Stock," and "Underwriting."
(2) The shares have been adjusted to give effect to: (i) a 1-for-8 reverse
stock split with respect to the Common Stock and a 1-for-2 reverse stock
split with respect to the Preferred Stock, each approved by the Company's
shareholders on April 4, 1996 and (ii) the conversion of all outstanding
shares of Preferred Stock into Common Stock on a 1-for-1 basis as of the
closing of this Offering.
SELECTED FINANCIAL DATA
The following Selected Financial Data as of and for the years ended December 31,
1993(1), 1994 and 1995 have been derived from the Company's financial statements
which were audited by KPMG Peat Marwick LLP, independent public accountants. The
Selected Financial Data for the six months ended June 30, 1995 and 1996 (except
pro forma amounts) have been derived from unaudited consolidated financial
statements that appear elsewhere in the Prospectus. These unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations for the periods
presented. The pro forma Statements of Operations Data and pro forma Balance
Sheet Data are provided for informational purposes only and do not purport
to represent what the Company's results of operations and financial condition
would have been had the acquisitions of the Subsidiaries and the Pending
Acquisitions occurred as of the dates indicated or to project the Company's
results of operations or financial condition for any future period. The Selected
Financial Data and the operating data set forth below should be read in
conjunction with the financial statements and notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Pro Forma Financial Information" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
PRO FORMA PRO FORMA
1993(1) 1994 1995 1995(2) 1995 1996 1996(2)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ -- $9,844 $30,004 $44,800 $12,263 $18,424 $22,231
Cost of sales -- 7,036 23,940 4,883 9,680 14,151 16,723
Gross profit -- 2,808 6,064 9,917 2,583 4,273 5,508
Selling, general and administrative
expenses:
Operating subsidiaries -- 1,481 3,776 5,570 1,597 2,858 3,320
Corporate 196 1,337 2,725 2,725 1,197 1,595 1,595
Amortization expense 1 35 344 781 102 320 460
Goodwill writeoff -- -- 539 539 -- -- --
Total selling, general and
administrative expenses 197 2,853 7,384 9,615 2,896 4,773 5,375
Operating profit (loss) (197) (45) (1,320) 302 (313) (500) 133
Interest expense -- (67) (687) (741) (180) (732) (532)
Other income, net 12 35 119 128 54 (9) (7)
Loss before income taxes (185) (77) (1,888) (311) (439) (1,241) (406)
Income tax benefit (expense) -- (49) 75 (369) 20 (70) 16
Net loss $(185) $ (126) $(1,813) $ (680) $ (419) $(1,311) $(390)
Pro forma net loss per share $(0.19) $(0.11)
Weighted average shares outstanding(3) 3,650,301 3,650,301
OPERATING DATA:
Number of locations at period end -- 11 21 26 11 23 26
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
PRO FORMA
1993 1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $751 $ 94 $(3,407) $(4,775) $(6,944) $ 3,141
Total assets 901 7,878 17,448 22,352 25,286 32,204
Total debt and capital leases
(including
current maturities) -- 3,285 10,422 13,200 14,693 10,876
Stockholders' equity 798 2,624 3,452 5,229 6,354 17,089
</TABLE>
(1) Period from March 2, 1993 (date of inception) to December 31, 1993.
(2) Gives effect to (i) the acquisition of all Subsidiaries and the
completion of the Pending Acquisitions, as if such transactions had been
made on January 1, 1995, (ii) the sale of the Shares offered hereby and
(iii) all other pro forma adjustments set forth in "Pro Forma Financial
Data."
(3) Pro forma weighted average shares outstanding includes: (i) 1,081,292
shares of Common Stock outstanding as of December 31, 1995 and June 30,
1996; (ii) 2,183,424 shares of Preferred Stock outstanding as of December
31, 1995 and June 30, 1996, which shares will be converted to shares of
Common Stock on a 1-for-1 basis upon completion of the Offering; (iii)
250,000 shares of Common Stock to be issued as consideration for the
Pending Acquisitions and (iv) 135,585 shares of Common Stock equivalents
related to stock options and warrants.
(4) Gives effect to (i) the completion of the acquisition of all Subsidiaries
and the completion of the Pending Acquisitions, as if such transactions
had been completed as of June 30, 1996 and (iii) all other adjustments
set forth in "Pro Forma Financial Data."
(5) Gives effect to: (i) completion of the acquisition of all Subsidiaries
and the completion of the Pending Acquisitions, as if such transactions
had been completed as of June 30, 1996; (ii) all other pro forma
adjustments set forth in "Pro Forma Financial Data" and (iii) the sale of
the shares offered hereby.
PRO FORMA FINANCIAL DATA
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The unaudited pro forma financial statements give effect to: (i) the
consummation of the Pending Acquisitions, the 1996 acquisitions and the sale
of the Secured Notes in April 1996 and (ii) the completion of this Offering
and the application of the estimated net proceeds therefrom (collectively,
the "Pro Forma Transactions"). The unaudited pro forma statements of
operations for the year ended December 31, 1995 and the six month period
ended June 30, 1996 give effect to the Pro Forma Transactions as if each had
occurred as of the beginning of the respective periods. The unaudited pro
forma balance sheet as of June 30, 1996 gives effect to the Pro Forma
Transactions as if each had occurred as of that date. See "Use of Proceeds."
In the opinion of the Company's management, all adjustments necessary to
present fairly such pro forma financial statements have been made based on
the proposed terms and structure of the Pro Forma Transactions. The Company
anticipates, however, that changes in the composition of the assets to be
acquired and the liabilities to be assumed in connection with the Pending
Acquisitions will occur due to changes in the ordinary course of business of
the companies to be acquired in connection with the Pending Acquisitions;
however, the terms of the agreements relating to the Pending Acquisitions
provide that operations of these companies are to continue in the ordinary
course of business until the date of acquisition. Therefore, the Company
believes any related change in adjustments will not be material to the pro
forma financial statements.
The unaudited pro forma financial information is provided for informational
purposes only and does not purport to represent what the Company's results of
operations or financial position would have been had the Pro Forma
Transactions occurred on any of the dates set forth above or to project the
Company's results of operations for any future period.
The unaudited pro forma financial information should be read in connection
with the accompanying notes and the historical financial statements and notes
thereto of the Company and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRANA AND SUBSIDIARIES PRO FORMA
1996 PRANA AND
ACQUISITIONS(1) 1996
METROPLEX ACQUISITIONS
DIAMOND WOOD PRO FORMA
PRANA PALLET PRODUCTS ADJUSTMENTS SUBTOTAL
<S> <C> <C> <C> <C> <C>
Net sales $18,424 $99 $470 $ -- $18,993
Cost of sales 14,151 73 317 -- 14,541
Gross profit 4,273 26 153 -- 4,452
Selling, general and administrative
expenses:
Operating subsidiaries 2,858 8 25 (12)(2) 2,879
Corporate 1,595 -- -- -- 1,595
Amortization expense 320 -- -- 53(4) 373
Total selling, general and
administrative expenses 4,773 8 25 41 4,847
Operating profit (loss) (500) 18 128 (41) (395)
Other income (expense)
Interest expense (732) -- (1) (15)(5) (748)
Other (9) -- -- -- (9)
Total other income (expense) (741) -- (1) (15) (757)
Net income (loss) before income taxes (1,241) 18 127 (56) (1,152)
Income tax benefit (expense) (70) 419(6) 349
Net income (loss) $(1,311) $ (803)
</TABLE>
WIDE TABLE CONTINUED FROM ABOVE
<TABLE>
<CAPTION>
PENDING ACQUISITIONS
PENDING
ACQUISITIONS SUBTOTAL PRO FORMA
INDY PALLET PRO FORMA PENDING OFFERING PRO FORMA
PALLET OUTLET ADJUSTMENTS ACQUISITIONS ADJUSTMENTS AS ADJUSTED
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,096 $2,142 $ -- $3,238 $ -- $22,231
Cost of sales 775 1,407 -- 2,182 -- 16,723
Gross profit 321 735 -- 1,056 -- 5,508
Selling, general and administrative
expenses:
Operating subsidiaries 192 265 (16)(2) 441 -- 3,320(3)
Corporate -- -- -- -- -- 1,595
Amortization expense -- -- 87 (4) 87 -- 460
Total selling, general and
administrative expenses 192 265 71 528 -- 5,375
Operating profit (loss) 129 470 (71) 528 -- 133
Other income (expense)
Interest expense (36) (18) (48)(5) (102) 318 (5) (532)
Other -- 2 -- 2 -- (7)
Total other income (expense) (36) (16) (48) (100) 318 (539)
Net income (loss) before income taxes 93 454 (119) 428 318 (406)
Income tax benefit (expense) (206)(6) (206) (127)(6) 16
Net income (loss) $ 222 $ 191 $ (390)
</TABLE>
(1) Represents the results of operations for the 1996 acquisitions for the
period from January 1, 1996 to the date of acquisition.
(2) Reflects the net reduction in compensation expense as a result of the
negotiation of compensation agreements with certain employees of the 1996
acquisitions and the Pending Acquisitions.
(3) Includes depreciation expense of $411,000.
(4) Reflects (i) amortization expense of $87,000 on $3.5 million of goodwill
capitalized in connection with the completion of the Pending Acquisitions
assuming an initial public offering price of $4.50 per share; (ii)
additional amortization expense of $14,000 to reflect amortization of
goodwill for the period prior to acquisition for the 1996 acquisitions and
(iii) amortization expense of $39,000 on $3,088,000 of goodwill for the
period from January 1, 1996 to April 4, 1996 capitalized in connection with
the Company's reverse stock splits of its Common Stock and Preferred Stock
completed April 4, 1996.
(5) Reflects (i) additional interest expense of $15,000 on $690,000 in notes
payable, at 8% interest rates, related to the 1996 acquisitions for the
period prior to the date of acquisition; (ii) additional interest expense
of $48,000 related to notes payable of $1.2 million, with interest at 8%,
related to the Pending Acquisitions; (iii) the reduction of interest
expense of $116,000 resulting from the reduction of debt of $2.3 million,
at an interest rate of 10%, from the net proceeds of the Offering; (iv)
the reduction of interest expense of $32,000 resulting from the repayment
of $1.5 million of Secured Notes, at an interest rate of prime plus 3%
from the net proceeds of the Offering; (v) the reduction of interest
expense of $134,000 resulting from the reduction of an interest rate of
21% to 10% on $2.6 million of existing debt outstanding and (vi) the
reduction of interest expense of $36,000, at an interest rate of 12%,
resulting from the repayment of $605,000 of debt of one of the Pending
Acquisitions from the proceeds of the Offering.
(6) Reflects adjustment to calculate the provision for income taxes on the
pro forma combined results at an effective statutory rate of 40% of net
income before nondeductible goodwill expense and acquisition costs.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRANA AND SUBSIDIARIES PRO FORMA
1995 ACQUISITIONS(1) 1996 ACQUISITIONS
AMERICAN
CENTURY
(PRANA B&B
OKLAHOMA PALLET PALLET METROPLEX
PRANA CITY) SUPPLY SUPPLY OTHER DIAMOND WOOD
Net sales $30,004 $476 $767 $3,538 $675 PALLET PRODUCTS
<S> <C> <C> <C> <C> <C> <C> <C>
Cost of sales 23,940 345 415 3,042 612 $999 $2,136
Gross profit 6,064 131 352 496 63 753 1,595
Selling, general and 246 541
administrative expenses:
Operating subsidiaries 3,776 89 172 534 76 165 66
Corporate 2,725 -- -- -- -- -- --
Amortization expense 344 -- -- -- -- -- --
Goodwill write-off 539 -- -- -- -- -- --
Total selling, general and
administrative expenses 7,384 89 172 534 76 165 66
Operating profit (loss) (1,320) 42 180 (38) (13) 81 475
Other income (expense)
Interest expense (687) (1) (5) (40) (5) (6) (2)
Other 119 (2) -- 4 -- -- 1
Total other income
(expense) (568) (3) (5) (36) (5) (6) (1)
Net income (loss) before
income taxes (1,888) 39 175 (74) (18) 75 474
Income tax benefit (expense) 75
Net income (loss) $(1,813)
</TABLE>
WIDE TABLE CONTINUED FROM ABOVE
<TABLE>
<CAPTION>
PENDING
ACQUISITIONS
PRANA AND
1995 AND
1996 PENDING PRO PRO
ACQUISITIONS ACQUISITIONS SUBTOTAL FORMA FORMA
PRO FORMA INDY PALLET PRO FORMA PENDING OFFERING AS
ADJUSTMENTS SUBTOTAL PALLET OUTLET ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ADJUSTED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ -- $38,595 $2,732 $3,473 $ -- $6,205 $ -- $44,800
Cost of sales -- 30,702 1,858 2,323 -- 4,181 -- 34,883
Gross profit -- 7,893 874 1,150 -- 2,024 -- 9,917
Selling, general and
administrative expenses:
Operating subsidiaries (209)(2) 4,669 409 557 (65)(2) 901 -- 5,570(3)
Corporate -- 2,725 -- -- -- -- -- 2,725
Amortization expense 263 (4) 607 -- -- 174 (4) 174 -- 781
Goodwill write-off -- 539 -- -- -- -- -- 539
Total selling, general and
administrative expenses 54 8,540 409 557 109 1,075 -- 9,615
Operating profit (loss) (54) (647) 465 593 (109) 949 -- 302
Other income (expense)
Interest expense (72)(5) (818) (70) (20) (96)(5) (186) 263 (5) (741)
Other -- 122 2 4 -- 6 -- 128
Total other income
(expense) (72) (696) (68) (16) (96) (180) 263 (613)
Net income (loss) before
income taxes (126) (1,343) 397 577 (205) 769 263 (311)
Income tax benefit (expense) 39 (6) 114 (377)(6) (377) (106)(6) (369)
Net income (loss) (1,229) $ 392 $ 157 $ (680)
</TABLE>
(1) Represents the results of operations for the 1995 acquisitions for the
period from January 1, 1995 to the date of acquisition.
(2) Reflects the net reduction in compensation for the period prior to
acquisition as a result of the elimination of certain positions and the
negotiation of compensation arrangements relating to the Pending
Acquisitions and the Subsidiaries.
(3) Includes depreciation expense of $774,000.
(4) Reflects (i) amortization expense of $174,000 on $3.5 million of goodwill
capitalized in connection with the completion of the Pending Acquisitions
assuming an initial public offering price of $4.50 per share; (ii)
additional amortization expense of $52,000 to reflect amortization of
goodwill for the period prior to acquisition for the 1995 acquisitions;
(iii) amortization expense of $57,000 on $1.1 million of goodwill
capitalized in connection with the acquisitions completed subsequent to
December 31, 1995 and (iv) amortization expense of $154,000 on $3,088,000
of goodwill capitalized in connection with the Company's reverse stock
splits of its Common Stock and Preferred Stock completed subsequent to
December 31, 1995.
(5) Reflects (i) interest expense of $17,000 for the four months prior to
acquisition on a $500,000 note payable, at an interest rate of 10%,
entered into by a Subsidiary immediately prior to its acquisition by the
Company; (ii) interest expense of $55,000 on a $690,000 in notes payable
at an interest rate of 8% entered into in connection with the
acquisitions of Subsidiaries during 1996; (iii) interest expenses of
$96,000 on a $1.2 million note payable, at an interest rate of 8%,
relating to a Pending Acquisition; (iv) the reduction of interest expense
of $56,000 resulting from the repayment of $560,000 in debt at an
interest rate of 10% and outstanding for substantially all of 1995, from
the net proceeds of the Offering; (v) the reduction of interest expense
of $58,000 resulting from the reduction of debt of 1.8 million, at an
interest rate of 10% and outstanding for approximately four months in
1995, from the net proceeds of the Offering; (vi) the reduction of
interest expense of $79,000 resulting from the reduction of an interest
rate of 21% to 10% on $2.1 million of existing debt outstanding for an
average of four months in 1995 and (vii) reduction of interest expense of
$70,000, at an interest rate of 12%, resulting from the repayment of
$605,000 in debt of one of the Pending Acquisitions from the net proceeds
of the Offering.
(6) Reflects adjustment to calculate the provision for income taxes on the
pro forma combined results at an effective statutory rate of 40% of net
income before nondeductible goodwill expense and acquisition costs.
PRO FORMA BALANCE SHEET
JUNE 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PENDING PRO FORMA OFFERING PRO FORMA
PRANA ACQUISITIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS(1) AS ADJUSTED
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 152 $ 255 $(2,890)(2) $(2,483) $ 6,918 $ 4,435
Accounts receivable 3,828 634 -- 4,462 -- 4,462
Inventories 2,714 146 -- 2,860 -- 2,860
Prepaid expenses and deposits 167 34 -- 201 -- 201
Total current assets 6,861 1,069 (2,890) 5,040 6,918 11,958
Net property, plant & equipment 5,692 1,179 -- 6,871 -- 6,871
Other Assets:
Goodwill, net 8,198 -- 3,473 (3) 11,671 -- 11,671
Other 1,601 103 -- 1,704 -- 1,704
Total other assets 9,799 103 3,473 13,375 -- 13,375
ASSETS $22,352 $2,351 $ 583 $25,286 $ 6,918 $32,204
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 2,175 65 -- 2,240 -- 2,240
Current maturities of LTD
and notes payable 8,359 695 (605)(4) 8,449 (3,167) 5,282
Accrued liabilities 867 147 -- 1,014 -- 1,014
Deferred income taxes 235 -- 46 (6) 281 -- 281
Total current liabilities 11,636 907 (559) 11,984 (3,167) 8,817
Long-term liabilities:
Long-term debt (less current
portion) 4,841 203 1,200 (5) 6,244 (650) 5,594
Deferred income taxes 646 -- 58 (6) 704 -- 704
Total long-term liabilities 5,487 203 1,258 6,948 (650) 6,298
Stockholders' equity:
Preferred stock 22 -- -- 22 (22) --
Common stock 11 18 (15)(7) 14 49 63
Additional paid-in capital 8,632 -- 1,122 (7) 9,754 10,708 20,462
Retained earnings (3,436) 1,223 (1,223)(7) (3,436) -- (3,436)
Stockholders' equity 5,229 1,241 (116) 6,354 10,735 17,089
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $22,352 $2,351 $ 583 $25,286 $ 6,918 $32,204
</TABLE>
(1) Reflects (i) proceeds of $10,735,000 from the sale of 2,750,000 shares of
Common Stock, net of the underwriting discounts and offering expenses, (ii)
payment of $3,817,000 of current and long-term debt of the Company with the
proceeds of the Offering and (iii) the conversion of 2,183,424 shares of
Preferred Stock to Common Stock in connection with the Offering.
(2) Reflects the payment of $2,890,000 to consummate the Pending Acquisitions
including estimated acquisition costs and the repayment of $605,000 in
debt.
(3) Reflects goodwill of $3,473,000 for the Pending Acquisitions assuming an
initial public offering price of $4.50 per share.
(4) Reflects the repayment of $605,000 of debt of one of the Pending
Acquisitions with the proceeds of the Offering.
(5) Reflects the addition of a $1,200,000 note payable entered into in
connection with a Pending Acquisition.
(6) Reflects the establishment of deferred tax liabilities related to the
Pending Acquisitions.
(7) Reflects (i) the elimination of the equity accounts of the Pending
Acquisitions and (ii) the issuance of 250,000 shares of Common Stock with
a market value of approximately $1,125,000 to consummate the Pending
Acquisitions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS MEMORANDUM.
GENERAL
The Company was founded in 1993 to create a national network of pallet
recycling companies to service the pallet needs of manufacturing,
distribution, transportation and retail companies that use pallets to move
goods throughout North America. The pallet recycling industry is highly
fragmented. Recognizing an opportunity to consolidate a fragmented industry,
the Company began acquiring pallet recycling companies in 1994.
Due to limited financial resources early in its history, the Company's
initial acquisition strategy included acquiring pallet recycling companies
primarily in stock-for-stock exchanges. The Company employed this strategy
throughout 1994 and into early 1995. Due in part to the Company's
acquisitions in 1994 and early 1995, the Company was able to: (i) create
critical mass, (ii) establish itself as a leader in the consolidation of the
pallet recycling industry (iii) attract an increasing number of acquisition
candidates, (iv) begin to implement a national account strategy and (v)
access greater financial resources. As a result, the Company modified its
acquisition strategy by acquiring pallet recycling companies for a
combination of cash, seller notes and stock. The Company employed this
strategy to acquire pallet recycling companies for the remainder of 1995 and
continues to employ this strategy in 1996. The Company believes its ability
to add a tradeable security to the consideration it offers acquisition
candidates will enhance its ability to make further acquisitions.
All of the Company's acquisitions have been accounted for under the purchase
method of accounting. Therefore, the financial results of each acquired
subsidiary are included in the Company's consolidated financial results from
the date of acquisition. As a result, the historical consolidated financial
results of the Company are not necessarily directly comparable.
The Company's net sales are derived from: (i) the sale of recycled and to a
lesser degree new wooden pallets; (ii) the repair of wooden pallets for a
fee; (iii) the brokering of wooden pallets and (iv) the sale of various
by-products from wooden pallets. The sale of recycled pallets and the repair
of pallets for a fee account for approximately 80% of total net sales. Net
sales are recognized upon delivery to the customer.
Selling, general and administrative expenses are comprised of subsidiary and
corporate operating expenses. Operating expenses include goodwill
amortization attributable to the acquisition of the Subsidiaries under the
purchase method of accounting. Goodwill is generally recognized at the
corporate level and is amortized using the straight-line method over a term
of twenty years.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net sales for
the fiscal years ended December 31, 1993, 1994 and 1995 and the six month
periods ended June 30, 1995 and 1996, as well as for the fiscal year ended
December 31, 1995 and the six month period ended June 30, 1996 on a pro forma
basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
PRO FORMA PRO FORMA
1993(1) 1994 1995 1995 1995 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales N/A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales N/A 71.5 79.8 77.9 78.9 76.8 75.2
Gross profit N/A 28.5 20.2 22.1 21.1 23.2 24.8
Selling, general and
administrative expenses:
Operating subsidiaries N/A 15.0 12.6 12.4 13.0 15.5 14.9
Corporate N/A 13.6 9.1 6.1 9.8 8.7 7.2
Amortization expense N/A 0.4 1.1 1.7 0.8 1.7 2.1
Goodwill writeoff N/A -- 1.8 1.2 -- -- --
Total selling, general and
administrative expenses N/A 29.0 24.6 21.4 23.6 25.9 24.2
Operating profit (loss) N/A (0.5) (4.4) 0.7 (2.5) (2.7) 0.6
Interest expense N/A (0.7) (2.3) (1.7) (1.5) (4.0) (2.4)
Other income, net N/A 0.4 0.4 0.3 0.4 0.0 0.0
Loss before income taxes N/A (0.8) (6.3) (0.7) (3.6) (6.7) (1.8)
Income tax benefit (expense) N/A (0.5) 0.3 (0.8) 0.2 (0.4) 0.1
Net loss N/A (1.3) (6.0) (1.5) (3.4) (7.1) (1.7)
</TABLE>
(1) Period from March 2, 1993 (date of inception) to December 31, 1993. Data
as a percent of net sales is not applicable ("N/A") as the Company had no
net sales for the period.
PRO FORMA RESULTS OF OPERATIONS
The pro forma financial results reflect the combined results of operations as
if each Subsidiary was owned at the beginning of the periods presented. The
Company believes this presentation provides a more meaningful representation
of the financial results and liquidity of the Company for the periods
presented compared to the historical results of operations and incorporates
the effects of all acquisitions for the entire periods presented, including
the impact of the Pending Acquisitions and this Offering.
FOR THE SIX MONTHS ENDED JUNE 30, 1996
NET SALES. Pro forma net sales were $22.2 million for the six months ended
June 30, 1996. Pro forma net sales for the Subsidiaries for the period were
$19.0 million. Pro forma net sales for the Pending Acquisitions were $3.2
million for the period, or 14.6% of pro forma net sales.
GROSS PROFIT. Pro forma gross profit for the six months ended June 30, 1996 was
$5.5 million or 24.8% of pro forma net sales as compared to 23.2% for the actual
six months ended June 30, 1996. This change is attributable to the inclusion of
the Pending Acquisitions and the full inclusion of two Subsidiaries acquired in
early 1996 which yield higher gross profit margins than the Subsidiaries owned
for the entire period. Pro forma gross profit for the Subsidiaries for the six
months ended June 30, 1996 was $4.5 million or 23.4% of pro forma net sales. Pro
forma gross profit for the Pending Acquisitions for the same period was $1.1
million or 32.6% of pro forma net sales. The Company believes these results in
part demonstrate the achievement of a critical mass necessary to attract and
acquire higher performing companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma selling, general and
administrative expenses were $5.4 million or 24.2% of pro forma net sales for
the six months ended June 30, 1996. As a percent of pro forma net sales, this
represents a decrease from 25.9% for the actual six months ended June 30, 1996.
Selling, general and administrative expenses are comprised of operating expenses
at both the subsidiary and corporate levels and amortization expense. Pro forma
selling, general and administrative expenses at the operating subsidiary level
for the Subsidiaries and the Pending Acquisitions for the six months ended June
30, 1996 were $3.3 million or 14.9% of pro forma net sales. This amount reflects
a reduction in compensation at the subsidiary level of $28,000 for the six
months ended June 30, 1996 as a result of the elimination of certain positions
and the negotiation of compensation arrangements in connection with the 1995 and
1996 acquisitions and the Pending Acquisitions. As a percent of pro forma net
sales, these expenses were similar to the results for the actual six months
ended June 30, 1996. Pro forma selling, general and administrative expenses at
the operating subsidiary level for the Subsidiaries were $2.9 million or 15.2%
of pro forma net sales for the six months ended June 30, 1996. Pro forma
selling, general and administrative expenses for the Pending Acquisitions were
$441,000 or 13.6% of pro forma net sales. As a percent of pro forma net sales,
these expenses are higher for the Subsidiaries than such expenses for the
Pending Acquisitions due to higher operating expenses at Pallet Supply, Inc. and
Pallet City, Inc. due to the regional infrastructure at these Subsidiaries
necessary to manage their numerous locations. Pro forma selling, general and
administrative expenses at the corporate level were $1.6 million or 7.2% of pro
forma net sales. The percentage decrease from 8.7% for the actual six months
ended June 30, 1996 is attributable to allocating corporate expense over a
higher base of net sales. Amortization expense was $460,000 or 2.1% of pro forma
net sales which includes $291,000 of goodwill amortization reflecting
adjustments to include the amortization of goodwill for the 1996 acquisitions
and the Pending Acquisitions for the entire period and amortization of goodwill
resulting from consideration incurred as a result of the reverse stock splits
(see Note 16 of the Company's financial statements).
INTEREST EXPENSE AND OTHER INCOME, NET. Pro forma interest expense and other
income, net was $539,000 or 2.4% of pro forma net sales for the six months ended
June 30, 1996. This represents a combination of the interest expense of the
Company and the Pending Acquisitions plus interest expense on notes issued for
acquisitions in 1996 and the Pending Acquisitions as if the notes were issued
for the entire period. This interest expense is offset by the elimination of
interest on debt which will be repaid or refinanced upon consummation of the
Offering.
INCOME TAX EXPENSE. Pro forma income tax expense has been estimated as a benefit
of $16,000 for the six months ended June 30, 1996. This amount reflects an
effective tax rate of 40% of pre-tax loss before amortization of nondeductible
goodwill and other nondeductible amortization costs. Several of the businesses
acquired by the Company were non-taxable entities (primarily S-corporations).
Upon acquisition, these entities were converted to a taxable C-corporation
status. Deferred taxes were recorded accordingly upon acquisition by the
Company. Furthermore, one of the Pending Acquisitions is a S-corporation. Pro
forma income tax expense related to these businesses for the six months ended
June 30, 1996 have also been estimated at 40% of pre-tax income before
amortization of nondeductible goodwill and other nondeductible amortization
costs as if these businesses were taxable entities for the full fiscal six month
period.
FOR THE YEAR ENDED DECEMBER 31, 1995
NET SALES. Pro forma net sales were $44.8 million for 1995. Pro forma net
sales for the Subsidiaries for 1995 were $38.6 million. Pro forma net sales
of the Pending Acquisitions were $6.2 million for the period, or
approximately 13.9% of pro forma net sales.
GROSS PROFIT. Pro forma gross profit for the Subsidiaries and the Pending
Acquisitions for 1995 was $9.9 million or 22.1% of pro forma net sales. The
increase in pro forma gross profit as a percent of net sales to 22.1% from 20.2%
for the year ended 1995 is attributable to the inclusion of the Pending
Acquisitions and two Subsidiaries acquired in early 1996 which have higher,
gross profit percentages than the Subsidiaries owned in 1995. Pro forma gross
profit for the Subsidiaries for 1995 was $7.9 million or 20.5% of pro forma net
sales. Pro forma gross profit for the Pending Acquisitions for 1995 was $2.0
million or 32.6% of the Pending Acquisitions' pro forma net sales. The Company
believes these results in part demonstrate the achievement of a critical mass
necessary to attract and acquire higher performing companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma selling, general and
administrative expenses were $9.6 million or 21.4% of pro forma net sales for
1995. As a percent of net sales, this represents a decrease from 24.6% of net
sales for 1995. Selling, general and administrative expenses are comprised of
operating expenses at both the subsidiary and corporate levels and amortization
expense. Pro forma selling, general and administrative expenses at the operating
subsidiary level for the Subsidiaries and the Pending Acquisitions for 1995 were
$5.6 million or 12.4% of net sales. This amount reflects a reduction in
compensation at the operating subsidiary level of $274,000 for 1995 as a result
of the elimination of certain positions and the negotiation of compensation
arrangements in connection with the 1995 and 1996 acquisitions and the Pending
Acquisitions. Pro forma selling, general and administrative expenses for the
Subsidiaries were $4.7 million or 12.1% of the pro forma net sales for 1995.
Pro forma selling, general and administrative expenses for the Pending
Acquisitions were $901,000 or 14.5% of pro forma net sales. As a percent of pro
forma net sales, pro forma selling, general and administrative expenses for the
Pending Acquisitions is higher than such expenses for the Subsidiaries due to
the transfer of certain Subsidiary managers' compensation from the operating
subsidiary level to the corporate level. Pro forma selling, general and
administrative expenses at the corporate level were $2.7 million or 6.1% of pro
forma net sales. The percentage decrease from 9.1% for 1995 is attributable to
allocating corporate expense over a higher base of net sales. Amortization
expense was $781,000 or 1.7% of pro forma net sales which includes $619,000 of
goodwill amortization reflecting adjustments to reflect the amortization of
goodwill for all 1995 acquisitions, the 1996 acquisitions and the Pending
Acquisitions for the entire year and amortization of goodwill resulting from
consideration incurred as a result of the reverse stock splits (see Note 16 of
the Company's financial statements). The Company also took a one-time charge to
1995 earnings in the amount of $539,000 or 1.2% of pro forma net sales due to
the write-off of goodwill pertaining to two Subsidiaries which are performing
below the Company's expectations due to, in one case the loss of a low-cost
supply of pallets in early 1995 and in the second case, the slow development of
recycling operations of another Subsidiary primarily involved in pallet
brokerage prior to acquisition.
INTEREST EXPENSE AND OTHER INCOME, NET. Pro forma interest expense and other
income, net was $613,000 or 1.4% of pro forma net sales for 1995. This
represents a combination of the interest expense of the Company and the Pending
Acquisitions plus interest expense on notes issued for acquisitions in 1995 and
1996 and for the Pending Acquisitions as if the notes were issued for all of
1995. This interest expense is offset by the elimination of interest expense on
debt which will be repaid or refinanced upon consummation of the Offering.
INCOME TAX EXPENSE. Pro forma income tax expense has been estimated at
$369,000 for 1995. This amount reflects an effective tax rate of 40% of
pre-tax income before amortization of nondeductible goodwill and other
nondeductible acquisition costs. For future periods, the Company and the
Pending Acquisitions will file as a consolidated group for federal income tax
purposes. Several of the businesses acquired by the Company were non-taxable
entities (primarily S-corporations). Upon acquisition, these entities were
converted to a taxable C-corporation status. Deferred taxes were recorded
accordingly upon acquisition by the Company. Furthermore, one of the Pending
Acquisitions is a S-corporation. Pro forma income tax expense related to
these businesses for the year ended December 31, 1995 have also been
estimated at 40% of pre-tax income before amortization of nondeductible
goodwill and other nondeductible amortization costs as if these businesses
were taxable entities for the full fiscal year.
HISTORICAL CONSOLIDATED RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
NET SALES. Net sales increased from $12.3 million for the six months ended June
30, 1995 to $18.4 million for the six months ended June 30, 1996. The increase
of $6.1 million or 50.2% over the comparable period is primarily attributable to
an increase of $5.5 million in net sales due to the full contribution from
Subsidiaries acquired during the six months ended June 30, 1995 and a
contribution from Subsidiaries acquired after June 30, 1995. Growth in sales
for Subsidiaries operating throughout both six month periods ended June 30, 1995
and 1996 was approximately $600,000 or 6%.
GROSS PROFIT. Gross profit increased from $2.6 million for the six months
ended June 30, 1995 to $4.3 million for the six months ended June 30, 1996.
Gross profit as a percent of sales increased from 21.1% of sales to 23.2%
primarily as a result of higher gross margin contribution as a percent of
sales from the Subsidiaries acquired after March 31, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $2.9 million for the six months ended
June 30, 1995 to $4.8 million for the six months ended June 30, 1996. As a
percent of net sales, selling, general and administrative expenses increased
from 23.6% to 25.9% for the periods. Selling, general and administrative
expenses are comprised of operating expenses at both the subsidiary and
corporate levels and amortization expense which includes goodwill amortization.
The percentage increase is attributable to an increase in Subsidiary expense and
amortization expense as a percent of sales, offset slightly by a decrease in
corporate expense as a percent of sales. Selling, general and administrative
expenses for the Subsidiaries increased from $1.6 million for the six months
ended June 30, 1995 to $2.9 million for the six months ended June 30, 1996. As a
percent of net sales, these expenses increased from 13.0% to 15.5% for the
respective periods. The increase is primarily attributable to the addition of
Pallet Supply Company, Inc. which was acquired in June 1995 and has a higher
percentage of selling, general and administrative costs to sales than other
Subsidiaries and due to decreased sales at two Subsidiaries without a
commensurate decrease in administrative expense.
Corporate selling, general and administrative expenses increased from $1.2
million for the six months ended June 30, 1995 to $1.6 million for the six
months ended June 30, 1996. The increase is attributable to higher expenses in
the first six months of 1996 reflecting the Company's decision to enhance its
corporate infrastructure and from approximately $100,000 in previously
capitalized acquisition costs which were expensed in connection with the
expiration of an acquisition agreement as of June 30, 1996. As a percent of net
sales, corporate selling, general and administrative expenses decreased from
9.8% for the six months ended June 30, 1995 to 8.7% for the six months ended
June 30, 1996 as net sales increased at a greater rate than corporate selling,
general and administrative expense.
INTEREST EXPENSE AND OTHER INCOME, NET. Interest expense and other income,
net increased from $126,000 for the six months ended June 30, 1995 to
$741,000 for the six months ended June 30, 1996. The increase is attributable
to interest expense relating to additional debt incurred at both the
corporate and subsidiary levels to fund both operations and the acquisition
of pallet recycling companies.
INCOME TAX EXPENSE. The Company recorded an income tax benefit of $20,000 for
the six months ended June 30, 1995 compared to an income tax expense of
$70,000 for six months ended June 30, 1996. The expense for 1996 is primarily
attributable to estimated state income taxes. Consistent with the accounting
treatment for the years ended December 31, 1994 and 1995 (see following
commentary), no tax benefit has been recorded for the six months ended June
30, 1995 and 1996 related to net operating loss carryforwards. See "-- Net
Operating Loss Carryforwards."
FOR THE PERIOD FROM MARCH 2, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
The Company was formed in March 1993 and had no meaningful operations during
the period ended December 31, 1993. As a result, no meaningful comparisons
can be made between the year ended December 31, 1994 and the period ended
December 31, 1993.
NET SALES. Net sales increased from $0.0 in 1993 to $9.8 million in 1994 and
$30.0 million in 1995. The increase of approximately 205% from 1994 to 1995
is primarily attributable to the inclusion of $9.0 million in net sales in
1995 from acquisitions completed during 1995, 1994 acquisitions being
included for a full year in 1995 and internal growth. Net sales increased by
10.8% from 1994 to 1995 at Subsidiaries owned for all of 1995 that were
acquired during 1994.
GROSS PROFIT. Gross profit increased from $0.0 in 1993 to $2.8 million in
1994 and $6.1 million in 1995. Gross profit as a percent of net sales
decreased from 28.5% in 1994 to 20.2% in 1995 due to: (i) a change in the
sales mix attributable to the acquisitions of two Subsidiaries engaged in
lower margin new pallet manufacturing, in addition to pallet recycling, one
of which was also involved in other facets of the pallet business including
lower margin pallet brokerage and saw milling; (ii) an increase in material
costs at one Subsidiary due to the loss of a low cost supply of pallets and
(iii) a higher ratio of fixed costs to net sales at two start-up pallet
recycling facilities as they initiated operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $200,000 in 1993 to $2.9 million in
1994 and $7.4 million in 1995. As a percent of net sales, selling, general
and administrative expenses were 29.0% in 1994 and 24.6% in 1995. Selling,
general and administrative expenses are comprised of operating expenses at
both the subsidiary and corporate levels, amortization expense and a goodwill
write-off in 1995. The percentage decrease is attributable to both a decrease
in operating Subsidiary expenses and corporate expenses as a percent of net
sales. Selling, general and administrative expenses for the Subsidiaries
increased from $1.5 million in 1994 to 3.8 million in 1995. As a percent of
net sales, these expenses decreased from 15.0% in 1994 to 12.6% in 1995. The
decrease is attributable to: (i) the inclusion of certain Subsidiaries
acquired during 1995; (ii) the full inclusion of certain Subsidiaries
acquired during 1994 that carried lower administrative expenses than
companies owned during the majority of 1994 and (iii) the elimination and
consolidation of certain Subsidiary expenses. Selling, general and
administrative expenses for corporate increased from $1.3 million in 1994 to
$2.7 million in 1995. The increase is attributable to the Company's
investment in corporate infrastructure to support the acquisition,
assimilation and management of a national network of pallet recycling
companies. As a percent of net sales, corporate selling, general and
administrative expenses decreased from 13.6% in 1994 to 9.1% in 1995 due to
allocating corporate expense over a higher base of net sales. The Company
also took a one-time charge to 1995 earnings in the amount of $539,000 or
1.8% of pro forma net sales due to the write-off of goodwill pertaining to
two Subsidiaries which are performing below the Company's expectations due
to, in one case the loss of a low-cost supply of pallets in early 1995 and in
the second case, the slow development of recycling operations of another
Subsidiary primarily involved in pallet brokerage prior to acquisition.
INTEREST EXPENSE AND OTHER INCOME, NET. Interest expense and other income,
net resulted in a net expense of $12,000 in 1993 compared to $32,000 in 1994
and $568,000 in 1995. The change from 1993 to 1994 was a result of increased
interest expense due to debt assumed in acquisitions. The increase in 1995
over 1994 is attributable to increases in interest expense due to corporate
borrowings to fund operations and additional debt assumed or arising from
financing acquisitions during 1995.
INCOME TAX EXPENSE. No income tax provision was recorded in 1993. The Company
recorded income tax expense of $49,000 in 1994 compared to an income tax
benefit of $75,000 in 1995. The 1995 income tax benefit resulted from a
deferred benefit of approximately $112,000 which was offset by current state
tax expense of $37,000. The deferred tax benefit was due primarily to a
change in the deferred tax asset valuation allowance. No tax benefit has been
recorded related to net operating loss carryforwards for the years ended
December 31, 1994 and 1995. The Company has recorded a full valuation
allowance as of December 31, 1994 and 1995 for deferred tax assets related to
net operating loss carryforwards ($113,400 and $385,800, respectively). The
limited operating history of the Company coupled with the generation of
losses each year since inception has raised sufficient uncertainty regarding
the future utilization of the net operating loss carryforwards. Furthermore,
future profitability is dependent upon a number of factors which the Company
has yet to demonstrate. Due to these uncertainties, management believes it is
prudent to maintain a full valuation allowance related to these assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has financed its acquisitions primarily through
stock-for-stock exchanges and to a limited extent through the issuance of
debt. The Company has financed operations and met capital expenditure
requirements from cash flow from operations, the private sale of Common Stock
and from borrowings. The Company's primary long-term capital requirements are
derived from its acquisition strategy and the implementation of systems and
equipment to improve the efficiency of its operations.
Total working capital decreased from a surplus of $94,000 as of December 31,
1994, to a deficit of $2.2 million as of December 31, 1995 and then decreased to
a deficit of $4.8 million as of June 30, 1996. As of December 31, 1995, current
liabilities increased $6.1 million as compared to December 31, 1994, due
primarily to a $4.8 million increase in current maturities of debt incurred to
fund both operations and the acquisition of five pallet recycling companies and
a $1.1 million increase in accounts payable resulting from the acquisition of
the five additional companies. Current assets increased $3.8 million as of
December 31, 1995 as compared to December 31, 1994 due primarily to a net
increase in accounts receivable and inventory resulting from the acquisition of
additional pallet recycling companies. As of June 30, 1996 current liabilities
increased $2.4 million from December 31, 1995 to June 30, 1996, due primarily to
a $2.1 million increase in current maturities of debt including $1.5 million in
Secured Notes issued in April 1996. Current assets decreased slightly resulting
from a decrease in cash of $581,000 offset by increases in inventory and
accounts receivable due to the acquisitions of Diamond Pallet, Inc. and
Metroplex Wood Products.
The Pending Acquisitions, prior to pro forma adjustments, had working capital of
$162,000 due to the classification of $605,000 of shareholder debt associated
with Indy Pallet Company, Inc. as short term debt. The closing of the Pending
Acquisitions are dependent upon the completion of this Offering. As of June 30,
1996 working capital on a pro forma basis is $7.9 million higher than on an
actual basis due primarily to a net increase in cash of $4.3 million and a
decrease in current maturities of debt of $3.1 million.
Net capital expenditures were $40,000 in 1993, $474,000 in 1994, $1,084,000
in 1995 and $419,000 for the six months ended June 30, 1996. The increases
relate primarily to the purchase of equipment at the Company's expanding base
of pallet recycling operations.
In March 1995, the Company issued through a private placement $2 million
aggregate principal amount of its Convertible Debentures. In August 1995,
PRANA Holdings, Inc. ("PRANA Holdings"), a wholly owned subsidiary of the
Company, entered into the Term Loan and Security Agreement (the "Term Loan")
with Norwest Bank Minnesota, National Association ("Norwest"). Under the Term
Loan, the Company may borrow up to $2.6 million for acquisition and working
capital purposes. As of June 30, 1996, the Company had borrowed $2.6 million
under the Term Loan. During the third and fourth quarters of 1995, the
Company issued an additional $1.7 million aggregate principal amount of
unsecured promissory notes to fund working capital requirements. Such notes
are to be repaid from the proceeds of this Offering. In December 1995,
certain of the company's Subsidiaries entered into secured lending facilities
(the "Secured Credit Facilities") with Norwest Credit, Inc. ("Norwest
Credit"). The aggregate amount that may be borrowed under the Secured
Facilities is $3.2 million. As of June 30, 1996, the Subsidiaries had
outstanding $2.3 million under the Secured Credit Facilities. In April 1996,
the Company issued $1.5 million of Secured Notes to fund the acquisition of a
Subsidiary and to fund working capital requirements. Such Secured Notes are
to be repaid from the proceeds of this Offering. See "Description of the
Company's Securities -- Convertible Subordinated Debentures," "Description of
the Term Loan and Certain Other Outstanding Indebtedness" and "Certain
Transactions."
The Company believes that cash generated from operations, borrowing capacity
under its credit facilities and the proceeds from this Offering will satisfy the
Company's projected working capital requirements at least through the end of
1996, although actual capital needs may change, particularly as a result of
future acquisitions. The Company is currently out of compliance with certain
covenants of its long-term debt. See "Risk Factors - Need for Promissory Note
Extension; Long-Term Debt Current Non-Compliance; Going Concern Uncertainty" and
Notes 10 and 17 of the Company's Consolidated Financial Statements.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995 the Company had net operating loss carryforwards for
federal income tax purposes of approximately $965,000. If not utilized to
offset future taxable income, these carryforwards will begin to expire in
2008. See note 11 of notes to financial statements.
SEASONALITY AND QUARTERLY RESULTS
The last six months of the year generally have slightly higher net sales than
the first six months of the year, and the third quarter generally has the
highest net sales due in part to the shipment of seasonal items. Seasonality
also varies slightly by region. Quarterly results may be materially affected
by the timing of acquisitions and the timing and magnitude of acquisition
assimilation costs. Therefore, the operating results for any three month
period are not necessarily indicative of the results that may be achieved for
any subsequent fiscal quarter or for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations.
BUSINESS
GENERAL
PRANA was founded in 1993 to create a national network of pallet recycling
companies to service the pallet needs of manufacturing, distribution,
transportation and retailing companies that use pallets to move goods
throughout North America. The Company has expanded rapidly through
acquisitions from a single operation based in Saint Paul, Minnesota to a
network of 15 companies (the Subsidiaries) operating from 23 locations in 17
states. The Company has also signed agreements to acquire two additional
pallet recycling companies operating from three locations in two states (the
Pending Acquisitions). These acquisitions are expected to close upon
completion of this Offering using a portion of the proceeds therefrom. The
Company believes its achievement of critical mass, access to greater capital
resources and its ability to add a tradeable security to the consideration it
offers acquisition candidates will enhance its ability to make further
acquisitions.
Pallet recycling services involve retrieving pallets and repairing or
rebuilding and selling the pallets. The Company believes that the market for
pallet recycling services had annual sales in excess of $2 billion in 1995.
According to Company estimates there are more than two billion pallets in
circulation in the United States today. According to THE PALLET ENTERPRISE
respondents to an annual pallet recycling survey reported average sales
growth of approximately 32% in 1994, 13% in 1995 and are anticipating growth
of 17% in 1996. The Company believes this growth is being driven by a number
of factors including: (i) recycled pallets are 25% to 35% less expensive than
new pallets; (ii) the wood in recycled pallets has lost moisture over time
and is, therefore, lighter and stronger; (iii) overall demand for pallets has
continued to rise and (iv) recycled pallets offer several environmental
benefits, including companies sending fewer pallets to landfills. The Company
believes that it is currently the largest supplier of pallet recycling
services in North America; nevertheless, it estimates that its market share,
based on the Company's pro forma combined net sales for 1995, is less than
three percent.
The pallet recycling industry is highly fragmented. According to industry
sources, there are an estimated 3,000 independent pallet recycling businesses
in the United States, substantially all of which operate in only one city or
town. The Company believes that the pallet recycling industry is
consolidating and that this consolidation is being driven by the demands of
large multi-location companies for a company such as PRANA to offer a
national network to manage the sourcing, retrieval and repair of pallets. Due
to the fragmentation of the pallet recycling industry, national and regional
companies must currently contract with numerous independent pallet recycling
operations in order to meet their pallet recycling needs, which is often
expensive and time consuming. It is common for businesses that use pallets
(i.e., a manufacturer or distributor) to ship goods on a pallet and never
receive the pallet back, nor receive any value for the pallet. As a result,
many of these businesses view pallets as a shipping expense rather than a
reusable asset. The Company believes a national network of pallet recyclers
would improve the level of service, reduce the complexity of managing the
sourcing, retrieval and repair of pallets for these multi-location companies
and will enable pallet users to view pallets as an asset to be retained
rather than an expense to be incurred. Through its Subsidiaries the Company
serves over 1,000 customers, including numerous multi-national companies such
as Motorola, Inc., GAF Materials Corporation and 3M. The Company currently
has agreements to serve twelve customers on a regional and national basis and
plans to continue to add to its list of national customers.
The Company's objective is to build upon its current position to become the
dominant provider of pallet recycling services in North America. Its strategies
to achieve this objective include: (i) rapidly expanding its network, primarily
through acquisitions; (ii) driving internal growth; (iii) establishing and
expanding relationships with large national customers; (iv) managing pallet
supply and demand across regions and (v) providing superior value and service to
its customers.
PRANA's founder, Chairman and Chief Executive Officer, Jeffery Otto, is also the
founder of the International Association of Pallet Recyclers, an industry trade
organization, with over 120 member companies, which recently merged into the
National Wooden Pallet and Container Association. Under Mr. Otto's leadership,
the Company has assembled a strong management team with experience in pallet
recycling, acquisitions, integration of acquired companies, management controls,
sales and marketing.
INDUSTRY OVERVIEW
The United States pallet industry is estimated by the Company to have
exceeded $5.5 billion in sales in 1995. The industry is generally comprised
of companies that manufacture new pallets and companies that recycle pallets.
The Company estimates that the size of the new pallet and recycled pallet
markets were in excess of $3.5 billion and $2 billion, respectively, in 1995.
Currently the pallet industry is highly fragmented in both the new and
recycled segments of the market with numerous independent businesses
operating on a localized basis.
A pallet is a platform, usually made of wood, that is used for storing and
shipping goods. Pallets are used in industries that require mass distribution
of products, including the food, chemical, printing, automotive, paper and
fiber, consumer products, general retailing and steel and other metals
businesses. Industry sources estimate that during 1995 approximately 450
million new wooden pallets were produced. The Company estimates there are
more than two billion pallets in circulation in the United States today.
Pallets come in a wide range of shapes and sizes and are primarily made of
wood, but may also be made from steel, plastics, cardboard and molded wood
fiber to satisfy smaller niche markets. The Company believes that over 90
percent of the pallets used are of the traditional wooden type, fabricated
from lumber and nails. The wooden pallet has traditionally been the basis for
the design of storage racks, warehouse storage areas, forklifts, docks and
containers used in shipping goods.
The new pallet manufacturing industry and the pallet recycling industry have
traditionally been viewed as two separate and distinct industries, but some
crossover has occurred. The new pallet industry is mature, well developed and
highly automated. In contrast, the pallet recycling industry is relatively
new in its development, labor intensive and generally not very automated.
According to industry sources the recycled pallet industry consists of over
3,000 companies, some of which are primarily engaged in recycling used
pallets but may also manufacture new pallets. According to THE PALLET
ENTERPRISE, respondents to an annual pallet survey experienced average sales
growth of approximately 32% in 1994, 13% in 1995 and are anticipating growth
of 17% in 1996. The Company believes growth in the pallet recycling industry
is being driven by the following factors: (i) recycled pallets are generally
25% to 35% less expensive than new pallets; (ii) recycled pallets are
generally both lighter and stronger than new pallets (since the wood in
recycled pallets has lost moisture and become more rigid); (iii) demand for
pallets is escalating due to the increased use of modern inventory control
and product delivery practices such as "just-in-time" inventory management,
companies shifting from "floor loading" to pallet loading and handling of
materials and products, and companies implementing automated material
handling systems which require pallets; (iv) companies seeking to outsource
activities which are outside their core business, such as pallet recycling
and (v) environmental benefits, including the reduction of trees harvested to
manufacture new pallets and the reduction of pallets a company would
otherwise send to landfills, which enables companies to meet environmental
directives.
STRATEGY
PRANA's primary objective is to build upon its current position to become the
dominant provider of pallet recycling services in North America. The
Company's strategy to achieve its primary objective consists of the following
key elements:
RAPIDLY EXPAND ITS NETWORK, PRIMARILY THROUGH ACQUISITIONS. The Company
seeks to acquire profitable pallet recycling operations in strategic regions
in the United States. PRANA believes it is the first company to pursue
aggressively the establishment of a national pallet recycling network. The
Company believes this national network will give PRANA competitive
advantages, including greater resources and an ability to provide services on
a national scale.
DRIVE GROWTH AT EXISTING OPERATIONS. The Company believes that it will be
able to increase sales and improve operating margins as a result of: (i)
realized efficiencies resulting from a national pallet recycling network;
(ii) economies of scale that result in reduced raw material, transportation,
disposal and overhead costs; (iii) leveraging technological improvements and
management efficiencies on a national scale; (iv) standardization of
operations and plant utilization; (v) improved management systems and
controls and (vi) more efficient sourcing and pricing strategies.
ESTABLISH AND EXPAND RELATIONSHIPS WITH LARGE NATIONAL CUSTOMERS. The
Company has established relationships with many national companies, and
continues to strengthen and increase the number of these relationships.
PRANA's national network will enable these national companies to centralize
the purchasing of recycled pallets, obtain convenient and dependable service,
secure a consistent supply of quality pallets and access an outlet for
unwanted pallets.
MANAGE PALLET SUPPLY AND DEMAND ACROSS REGIONS. In general, the demand for
recycled pallets exceeds current supplies on a national basis; however, there
are regional imbalances. In certain geographic areas, incoming shipments of
goods exceed outgoing shipments, resulting in an excess supply of pallets.
The opposite may also occur, resulting in a shortage of pallets for
recycling. The Company believes that its national network will allow it to
better match the supplies of pallets available for recycling with the demand
for pallets by shipping whole pallets, partially dismantled pallets and
"tear-down" lumber from areas with an excess supply of pallets and lower
prices to areas with a shortage of pallets and higher prices.
PROVIDE SUPERIOR VALUE AND SERVICE TO ITS CUSTOMERS. The Company believes
that its national network will enable it to provide complete pallet
management services and reduce its customers' overall cost of pallet
ownership and management. The Company believes its national network, along
with the services its provides, will enable the pallet user to view pallets
as an asset to be retained rather than an expense to be incurred. In order to
service certain of its customers' entire pallet requirements certain of the
Company's Subsidiaries also manufacture new pallets.
ACQUISITION STRATEGY
PRANA intends to continue to implement an aggressive acquisition program to
establish a national network of pallet recycling companies. The Company will
generally target as acquisition candidates pallet recycling companies in
large metropolitan areas of North America, but will also target specific
acquisition candidates in key markets necessary to serve national account
customers. In order to establish a presence in smaller, yet strategic markets
the Company intends to acquire pallet recycling companies that operate in
such markets.
The Company's acquisition strategy has resulted in several operating
efficiencies which the Company believes will increase as future acquisitions
are made, including: (i) the ability to purchase goods and services,
including equipment, supplies and insurance, at lower cost; (ii) reduced
freight expense as customers and sources of pallets are served from closer
locations; (iii) the transfer of pallets, lumber and equipment within the
network to the location with the highest and best use and (iv) pooled
technical expertise enabling the Company to develop the most efficient
operational unit processes.
The Company believes it is an attractive acquiror of pallet recycling
companies due to: (i) the benefits afforded by an association with a national
network of pallet recyclers, including an enhanced ability to attract the
pallet recycling business of large national companies; (ii) the potential for
increased profitability as a result of economies of scale, including greater
buying power; (iii) the Company's financial strength and visibility as a
public company and (iv) the Company's intention to allow, when appropriate,
local management to remain involved in the operations of acquired companies.
The Company believes that the ability to add a tradeable security to the
consideration it offers its acquisition candidates will also enhance its
ability to acquire companies.
The Company has developed a systematic process for identifying and acquiring
pallet companies which includes a standard acquisition agreement. The
Company's acquisition criteria include strategic geographic location, annual
sales in excess of $1 million, historical and projected profitability, a
diverse customer and supply base and capable, committed management who intend
to stay with the acquired business. In order to assure the services of
qualified management at the Subsidiary level, PRANA may enter into employment
contracts and noncompete agreements with the prior owners and/or key
employees of the acquired companies. Acquisitions have generally been made by
merging the acquired company into a wholly-owned subsidiary of the Company in
a tax free stock-for-stock exchange.
In conducting its acquisition activities to date, PRANA has gathered and
assembled data with respect to numerous pallet recycling companies and
believes it is well positioned to continue to aggressively pursue its
acquisition strategy. The Company's acquisition strategy will be executed by
members of the management team, several of whom have extensive experience in
acquiring and integrating businesses. See "Management."
PRANA's primary focus is the pallet recycling industry. However, the Company
also may consider acquiring new pallet manufacturers in order to meet
customer needs and to assist in integrating the technology of new pallet
operations into pallet recycling operations.
PALLET MANAGEMENT
The primary business of the Company is coordinating the acquisition and
recycling of pallets. Acquiring or "sourcing" pallets is a critical element
in successful pallet recycling operations. The Company sources the majority
of its pallets from businesses that use pallets and from trucking companies.
Businesses that receive and ship a significant amount of goods are generally
good sources for used pallets. Often the pallets they receive are damaged or
do not meet their size or other specifications for internal systems or
shipping. As a result, these businesses accumulate pallets that can be
recycled. The Company identifies these sources through establishing
relationships with pallet users, and by direct solicitation, telemarketing
and advertising. The Company generally achieves timely pallet removal by
placing a trailer at a source which loads unwanted pallets onto the trailer.
The Subsidiary then removes the load of pallets at the same time it delivers
recycled pallets to the company. In some cases, the recycler is paid a
tipping fee for hauling away the used pallets or is allowed to take the
pallets away at no charge, and, in other cases, the recycler buys the
pallets.
The Company believes trucking companies will be a growing source of pallets
both at "truck stop" depots and at sites where truckers clear their trailers.
Landfills and waste management haulers represent another source of pallets to
recycle as a significant number of pallets are discarded in landfills each
year.
The Company's Subsidiaries are currently shipping pallets and lumber within
its network and the Company expects these activities will accelerate. The
Company believes that its ability to ship pallets throughout its network will
enhance its ability to effectively service national customers.
An important element of maintaining access to pallet supplies and managing
customer pallet needs will be the Company's ability to use its network of
Subsidiaries to supply recycled pallets for first use (i.e., for storing and
shipping goods), retrieve pallets at the point at which they are to be reused
(i.e., after unloading the shipped goods) and then insure that the pallet or
some value is returned to the original user of the pallet (i.e., "close the
loop"). It is common for businesses that use pallets (i.e., a manufacturer or
distributor) to ship goods on a pallet and never receive the pallet back,
either directly or through an exchange program, nor receive any value for
that pallet. As a result, many of these businesses view pallets as a shipping
expense rather than a reusable asset. It is generally uneconomical for these
businesses to retrieve the pallets they use for a variety of reasons,
including wide dispersion, distance and freight costs. Attempts have been
made to "close the loop," by compelling truck drivers to exchange pallets;
however, the trucking industry has generally been unsuccessful in these
attempts.
RECYCLING OPERATIONS
The Company's Subsidiaries are generally located in industrial areas and near
trucking centers. Some operations are located on customers' sites and are
dedicated to serving only those customers. The Company believes it can
enhance the performance of its existing Subsidiary operations and future
acquisitions through plant optimization, automation and standardization. The
Company seeks to identify the best practices in its Subsidiary operations and
implement them in all appropriate locations.
The typical pallet recycling operations of the Company's Subsidiaries involve
the following five steps:
RETRIEVE. Flatbed trucks or trailers from a Subsidiary pick up
pallets from various pallet sources. Pallets received from a source
are typically of a number of different sizes and are of a broad range
of conditions.
TRANSPORT AND SORT. The retrieved pallets are hauled back to the
Subsidiary facility and sorted by size and condition. A portion of the
retrieved pallets require no repair and can be resold or returned
immediately. The pallets that can be repaired are separated from those
that cannot be repaired.
DISMANTLE. The pallets that cannot be repaired are dismantled and
the salvageable boards are recovered for use in repairing and building
other pallets. The remaining damaged boards are typically ground into
wood fiber, which is sold as landscaping mulch, fuel, animal bedding
and for other uses.
REPAIR. The pallets that can be repaired, are repaired by
replacing damaged boards with salvaged boards or boards from new stock
inventoried at the facility. In certain instances, the Subsidiaries
enter into repair contracts with businesses that use pallets whereby
the Subsidiary is engaged for a fee to repair and return pallets to
the business or repair pallets on site.
DISTRIBUTE. The repaired pallets are either sold and delivered or,
in the case of pallets recycled under repair contracts, returned.
Despite recent increases in the level of automation, pallet recycling remains
a labor intensive business. A significant challenge in the industry is
employee turnover, particularly among workers who fabricate pallets. The
Company is undertaking measures to reduce employee turnover, such as
automating physically demanding tasks, offering employee benefit programs,
improving working conditions, enhancing employee practices and providing job
training. The Company's national network will provide both laborers and
managers the opportunity for advancement in a national organization and the
potential for relocation, if desired. PRANA has developed incentive
compensation programs for Subsidiary managers and is developing and training
managers, primarily by promoting people from within its Subsidiaries, who can
manage an acquired company or, if necessary, a start-up operation.
SALES AND MARKETING
The Company's Subsidiaries aggressively market their pallet recycling
services and promote the growth in the use of recycled pallets. Through its
Subsidiary, the Company sells to local, regional and national companies.
Subsidiary sales are conducted typically by the Subsidiary's president or
general manager; however, certain larger Subsidiaries have dedicated sales
personnel. The primary sales and marketing activities involve direct selling,
developing relationships with trucking companies and directory (yellow page)
advertising in local and regional directories. In addition, pricing is
established at the Subsidiary level. The Company believes there is an
opportunity to improve Subsidiary margins by analyzing individual customer
contributions and optimizing pricing at each location.
The Company has also developed and is executing a national sales and
marketing plan to provide pallet recycling services to large national
companies that require such services at many locations throughout the United
States. The Company's national network will allow these companies to: (i)
centralize their purchasing of recycled pallets; (ii) obtain convenient and
dependable service and a consistent supply of uniform quality pallets; (iii)
achieve greater efficiencies in their pallet use and (iv) meet corporate
recycling goals. The Company is conducting its national sales and marketing
effort through its corporate office. The Company has developed relationships
with several national customers, including Motorola Inc., GAF Materials
Corporation and 3M, and intends to service these and numerous other
customers' needs on a local, regional and national basis. The pallet needs of
national companies are not uniform and the Company intends to tailor its
national programs for each customer. These programs include a combination of
sourcing, retrieving, repairing and recycling pallets according to individual
customer requirements.
MANAGEMENT INFORMATION AND CONTROLS
The Company centralizes accounting and financial reporting activities at its
corporate office, while basic accounting activities are conducted at the
Subsidiary level. The Company recently upgraded the information systems
hardware and software at its corporate headquarters to meet current and
perceived needs for financial reporting and internal management control
information and other necessary information. The Company believes this system
enhances its ability to: (i) monitor each Subsidiary; (ii) prepare both
operations and capital asset budgets and budget variances; (iii) assimilate
newly acquired operations into its network through standard reporting
mechanisms; (iv) implement operational and productivity measurements and
benchmarking and (v) conduct individual customer profitability analyses. The
Company anticipates that this system will fulfill its information and control
requirements at least through 1997.
PRINCIPAL BUSINESS UNITS
SUBSIDIARIES
Since inception PRANA has acquired 14 pallet recycling Subsidiaries and
formed one start up pallet recycling Subsidiary. The following table sets
forth the location and date of acquisition for each Subsidiary.
<TABLE>
<CAPTION>
NAME DATE ACQUIRED LOCATIONS
<S> <C> <C>
Otto Packaging, Inc. January 1, 1994 St. Paul, MN
BVS, Inc. February 1, 1994 Phoenix, AZ (2 locations)
Harris Supply Company, Inc. April 1, 1994 Orlando, FL
Pallet City, Inc. June 1, 1994 Buffalo, Rochester, Amherst
and Syracuse, NY
Pallet Exchange of Kansas City, Inc. August 22, 1994* Kansas City, KS
Pallet Source, Inc. December 1, 1994 Mansfield, AR
Hurt's Pallet & Sales, Inc. December 1, 1994 Summitville, IN
Quality Pallet, Inc. December 1, 1994 Green Bay, WI
PRANA Oklahoma City, Inc. (formerly April 1, 1995 Oklahoma City, OK
American Century Pallet Company, Inc.)
B&B Pallet Supply Company May 5, 1995 Springfield, MO
PRANA Denver, Inc. May 15, 1995 Denver, CO
(formerly Skid Row Pallet)
Pallet Supply Company, Inc. June 1, 1995 Memphis, TN, Indianola, MS,
Little Rock, AR, Hanceville
and Birmingham, AL
PRANA Las Vegas, Inc. October 30, 1995 Las Vegas, NV
(formerly Blue Light Pallet Company)
Diamond Pallet, Inc. February 15, 1996 Stockton, CA
PRANA Fort Worth, Inc. April 25, 1996 Fort Worth, TX
(formerly Metroplex Wood Products, Ltd.)
</TABLE>
*Date of organization by the Company.
PENDING ACQUISITIONS
As of the date hereof, the Company has signed acquisition agreements to
complete the Pending Acquisitions. The Pending Acquisitions will be
consummated using the proceeds of this Offering. The following table sets
forth the name and location of the Pending Acquisitions:
<TABLE>
<CAPTION>
NAME LOCATIONS
<S> <C>
Indy Pallet Company, Inc. Indianapolis, IN
Pallet Outlet Company, Inc. Biglerville and York, PA
</TABLE>
ON-SITE REPAIR AND RECYCLING OPERATIONS
The Company also has on-site repair and recycling operations at customer
locations in Cullman, Alabama, Syracuse, New York, New Albany, Mississippi
and Phoenix, Arizona (two).
COMPETITION
The business of providing pallet recycling services is highly competitive in
each of the markets in which the Company operates. Each Subsidiary competes
in the markets it serves with other pallet recycling companies as well as new
pallet companies and companies that rent or lease pallets. Additionally,
firms that do not presently compete with the Company or its Subsidiaries may
enter their markets. The Company and its Subsidiaries also compete with other
pallet recycling companies for supplies of pallets to recycle.
The Company will compete with other companies that may try to establish a
national pallet recycling company. Currently, the Company is aware that
Pallet Pallet Inc., located in Canada, is attempting to establish a national
pallet company engaged in manufacturing new pallets, brokering new and
recycled pallets and recycling pallets. If other companies attempt to
establish a national pallet recycling company, the Company could compete with
such companies in the acquisition of existing pallet recycling companies.
Set forth below is a brief description of the principal competitors of PRANA.
CHEP, INC., a large international pallet leasing company based in
Australia, leases pallets to large companies on a national and
international basis, including companies located in North America. CHEP
entered the United States market in the late 1980s and has built an
extensive customer base in the grocery industry. CHEP generally operates
as a third party management company that contracts with new pallet
manufacturers for its supply of new pallets and with pallet recyclers for
repair of its pallets.
PALLET PALLET INC. is a Canadian company whose shares trade on the
Toronto Stock Exchange under the ticker symbol "PLT-T." PRANA believes
that this company desires to create an integrated distribution network of
new and recycled pallets, reusable containers, packaging equipment, and
related supplies. PRANA believes that Pallet Pallet's strategy differs
from the Company's strategy as Pallet Pallet has generally acquired
companies that manufacture new pallets, broker new and used pallets and
recycle used pallets while the Company's primary focus is on pallet
recycling.
PALLET MANAGEMENT SYSTEMS, INC. is a company whose shares trade on the
Florida local over-the-counter market under the ticker symbol "PALT."
Pallet Management Systems has pallet recycling operations in Florida, New
England and Virginia. Pallet Management Systems' largest operations is
Abbell Industries, a new pallet manufacturer based in Virginia. Pallet
Management Systems may expand its pallet operations beyond its existing
territories and attempt to become a national pallet recycling company.
BROMLEY PALLET RECYCLERS, which also operates as Suncoast Pallet
Corporation, is a privately owned pallet recycling company based in Tampa,
Florida. Bromley is developing a pallet recycling network in the
southeastern region of the United States. Bromley offers its customers
service in the areas of pallet recycling, repairs and disposal. Bromley
has publicly stated that its objective is to be a regional pallet
recycling company.
FACILITIES AND EQUIPMENT
PRANA's corporate headquarters are located in Roseville, Minnesota. The
Company leases approximately 5,000 square feet of office space at this
location pursuant to a lease expiring in 2000. The lease provides for rent of
approximately $8,300 per month. Each Subsidiary leases the plants at which it
conducts its pallet recycling operations under various terms.
The Company owns or leases the pallet recycling equipment at each of its
locations, including specialized saws for dismantling pallets and cutting
wood, machines for disassembling and renailing pallets and equipment and
systems for moving and lifting pallets. In addition, the Company owns and
operates transportation equipment used in its operations including
semitractors and trailers.
EMPLOYEES
As of August 30, 1996, the Company had 13 full-time employees at its
corporate office and approximately 525 full and part-time employees at its
Subsidiary locations. The Company anticipates that it will need to hire
additional personnel, primarily in the areas of accounting and general
administrative support, but has built much of the infrastructure necessary to
accommodate its growth. None of the Company's employees is a member of a
collective bargaining unit, and the Company's management believes employee
relations are good.
LEGAL PROCEEDINGS
From time to time, the Company and its Subsidiaries have become involved in
various claims or lawsuits incident to the operation of its businesses,
including claims arising from accidents. Management believes that none of
these actions will have a material adverse effect on the financial condition
or results of operations of the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Jeffery E. Otto 50 Director, Chairman and Chief Executive Officer
Bruce C. Faulken 45 President and Chief Operating Officer
Edward R. Van 63 Vice President, Operations
Clarence A. Johnson 45 Vice President, Chief Financial Officer
Randy L. Hines 37 Vice President and Treasurer
Terry T. Stewart 47 Vice President, Corporate Development and Secretary
William L. Alvey 70 Director
Robert C. Klas 66 Director(1)(2)
Reynold P. Flom 73 Director(1)(2)
Thomas S. Schreier 59 Director(1)(2)
Donald J. Matre 30 Director
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
JEFFERY E. OTTO founded PRANA in 1993 and has served as a director and its
Chief Executive Officer since inception. In 1977, Mr. Otto founded Otto
Packaging, Inc., a St. Paul, Minnesota based pallet recycling company. Mr.
Otto and his wife, as the sole owners of Otto Packaging, sold Otto Packaging
to PRANA in 1994. Prior to founding Otto Packaging, Mr. Otto held various
sales positions in the industrial packaging business. Mr. Otto is the founder
and past president of the International Association of Pallet Recyclers, the
only pallet recycling industry trade association in the United States, which
recently merged into the National Wooden Pallet and Container Association.
BRUCE C. FAULKEN joined PRANA in 1994 and served as General Counsel and then
as Vice President of Development and General Counsel prior to becoming
President and Chief Operating Officer in 1996. From 1987 to 1994, Mr. Faulken
practiced law as a solo practitioner. From 1984 to 1987, Mr. Faulken
practiced law with Ross, Faulken and Rosenblatt, a law firm of which he was a
founding partner. From 1976 to 1984, Mr. Faulken practiced law with the law
firm of Doherty, Rumble and Butler.
EDWARD R. VAN has been PRANA's Vice President of Operations since 1994. In
1981, Mr. Van co-founded BVS, Inc., a pallet recycling business in Phoenix,
Arizona, and has served as its President since its inception. Mr. Van, an
owner of BVS, sold BVS to PRANA in 1994.
CLARENCE A. JOHNSON joined PRANA in 1995 and has served in various capacities
including acquisitions, operations and finance. Mr. Johnson has served as
Vice President, Chief Financial Officer since 1996. From 1985 to 1995, Mr.
Johnson was an independent consultant working in operations management and
corporate finance. From 1974 to 1984, Mr. Johnson worked for ECOLAB INC. in
marketing and the general management of various business units acquired by
the company through its Commercial Development Division.
RANDY L. HINES joined PRANA in 1995 as Director of Corporate Development
prior to becoming Vice President and Treasurer in 1996. From 1992 to 1995,
Mr. Hines was Vice President of Corporate Finance for Principal Financial
Securities, Inc. (formerly Craig-Hallum) ("Principal Financial"). From 1987
to 1992, Mr. Hines was a Vice President in private placements with Washington
Square Capital, Inc. He is a Chartered Financial Analyst.
TERRY T. STEWART joined PRANA in 1995, as Director of Acquisitions prior to
becoming Vice President, Corporate Development and Secretary. From 1992 to
1995, Mr. Stewart was Vice President of Corporate Finance for Principal
Financial. Previously, Mr. Stewart founded and was President of Biowaste
Services, Inc., a medical waste disposal company which he sold to a public
company in that industry. Mr. Stewart was also a Regional Market Development
Manager for Browning Ferris Industries, Inc. from 1980 to 1983 where he was
responsible for the acquisition of solid waste disposal and collection
companies in ten states and a portion of Canada.
WILLIAM L. ALVEY has served as a director since 1993. From 1993 to 1995 Mr.
Alvey served as the Company's Vice President of Acquisitions. From 1981 to
1992, Mr. Alvey was the President and Chief Executive Officer of A&H, Inc., a
company engaged in managing a bond shed warehouse and providing employment
services. Before joining PRANA, Mr. Alvey spent approximately 25 years in the
trucking industry.
ROBERT C. KLAS has served as a director since 1993. Mr. Klas is currently
Chairman of TapeMark Company, a privately-held company engaged in
manufacturing pressure sensitive labels and medical products. Mr. Klas is
also Chairman of WTC Industries, Inc., a publicly held company engaged in the
manufacturing of water purification products.
REYNOLD P. FLOM has served as director since 1993. In 1981, Dr. Flom founded
Datron Corporation, a holding company engaged in the veterinary supply, real
estate rental and rehabilitation center businesses. Dr. Flom has been a
director of Datron Corporation since its inception. Dr. Flom also founded
Financial Analysis, Inc., a management services company, for which he has
been a director since 1981. Dr. Flom is also the Treasurer of Healthcare
Group Inc. which provides workers' compensation insurance in the health care
field.
THOMAS S. SCHREIER has served as a director since 1996. Mr. Schreier served
as the Company's Chief Financial Officer from January 1994 through August
1995. From 1967 to 1992, Mr. Schreier was a partner in Schreier, Kosbab,
Cornell, Kahler & Co., a public accounting firm which he founded.
DONALD J. MATRE has served as a director since 1995. In 1990, Mr. Matre
founded Pallet City, Inc., which PRANA acquired in 1994. Mr. Matre is the
President of Pallet City and is responsible for its day-to-day operations
The Company's Board of Directors has a Compensation Committee. Members of the
Compensation Committee are Messrs. Flom and Klas. The Compensation Committee
was established to review and approve officer salaries and other compensation
and benefit programs and to determine officer bonuses. The Compensation
Committee also administers and makes grants under the Company's Stock Option
Plan.
The Bylaws of the Company, as amended, provide for a Board of Directors with
staggered terms. One third of the total number of directors will be elected
at each annual meeting of shareholders, for a term of three years. Each of
the Company's directors holds office until the next annual meeting of
shareholders and until their respective successors shall have been elected
and qualified or until their earlier death, resignation or removal.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total annual
compensation paid or accrued by the Company to or for the account of the
Chief Executive Officer and each other of the executive officers of the
Company whose total cash compensation for the fiscal year ended December 31,
1995 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2)
<S> <C> <C> <C>
Jeffery E. Otto 1995 $157,500 $11,506
Chairman and Chief Executive Officer
Bruce C. Faulken 1995 98,077 9,650
President and Chief Operating Officer
Edward R. Van 1995 113,918 8,756
</TABLE>
Vice President, Operations
(1) Salary increases for Mr. Otto are determined by the Board of Directors;
however, pursuant to the employment agreement between the Company and Mr.
Otto, such increases are required to be no less than 5% of Mr. Otto's
salary in the immediately preceding year.
(2) Bonuses paid in 1995 were determined based upon performance criteria
related to the Company's acquisition strategy.
COMPENSATION OF DIRECTORS
The Company does not pay any annual retainer or meeting fees to its
directors. The Company reimburses all of the directors for their
out-of-pocket expenses in connection with performing their duties as
directors of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into written employment agreements with members of
its management, including Jeffery Otto, Bruce Faulken, Edward Van, Clarence
Johnson, Randy Hines, Terry Stewart and William Alvey. Upon expiration, each
such agreement provides for automatic renewal for a period of one year unless
either party gives thirty days advance notice to the other party of its
desire to terminate the agreement.
The employment agreement with Mr. Otto expires December 31, 2000 and provides
for a base salary of $150,000 with annual increase of not less than 5%. The
agreement contains provisions for termination, life insurance, the proceeds
of which are to be used by the Company under certain circumstances to fund
redemptions of the Company's stock from the employee's estate, bonus, paid
vacation and other benefits, as well as for annual increases in base salary.
The employment agreement with Mr. Faulken expires December 31, 1997 and
provides for a base salary of $100,000. The agreement contains provisions for
termination, covenants not to compete, stock options, bonus, paid vacation
and other benefits.
The employment agreement with Mr. Van expires February 20, 1998 and provides
for a base salary of $80,000. The agreement contains provisions for
termination, life insurance, the proceeds of which are to be used by the
Company under certain circumstances to fund redemptions of the Company's
stock from the employee's estate, bonus, paid vacation and other benefits.
The employment agreement with Mr. Johnson expires December 31, 1997 and
provides for a base salary of $96,000. The agreement contains provisions for
termination, covenants not to compete, stock option, bonus, paid vacation and
other benefits.
The employment agreement with Mr. Hines expires December 31, 1997 and
provides for a base salary of $75,000. The agreement contains provisions for
termination, covenants not to compete, stock option, bonus, paid vacation and
other benefits.
The employment agreement with Mr. Stewart expires December 31, 1997 and
provides for a base salary of $75,000. The agreement contains provisions for
termination, covenants not to compete, stock option, bonus, paid vacation and
other benefits.
The employment agreement with Mr. Alvey expires December 31, 1996 and
provides for a base salary of $70,000. The agreement contains provisions for
termination, covenants not to compete, bonus, paid vacation and other
benefits.
The employment agreements with Messrs. Otto and Van do not include covenants
not to compete; however, Messrs. Otto and Van are subject to covenants not to
compete contained in the agreements pursuant to which PRANA acquired the
pallet recycling companies previously owned by them (Otto Packaging, Inc. and
BVS, Inc., respectively) in exchange for shares of Preferred Stock of the
Company. Under such agreements not to compete, Messrs. Otto and Van are each
prohibited from competing with the Company directly or indirectly within the
continental United States or Canada for a period of five years from the date
of such agreements or for one year after their termination of employment by
PRANA, whichever date is later.
In addition to the employment agreements described above, the Company has
entered into a number of other employment agreements with its employees at
the corporate and Subsidiary levels.
STOCK OPTION PLAN
The Company is authorized to grant options to purchase up to 2,000,000 shares
under its Stock Option Plan to employees and other representatives of the
Company and its Subsidiaries. Such plan has been approved by the Board of
Directors and the Company's shareholders. As of August 30, 1996 the Company
has outstanding options to purchase 495,000 shares of Common Stock under the
Stock Option Plan at an exercise price of $3.60 per share. The Stock Option
Plan provides that executive officers, other employees and consultants of the
Company may receive options to purchase Common Stock. The Stock Option Plan
provides for the grant of both incentive stock options intended to qualify
for preferential tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended, and nonqualified stock options that do not qualify for
such treatment. Only employees are eligible for the grant of incentive stock
options. The exercise price of all options granted under the Stock Option
Plan must equal or exceed the fair market value of the Common Stock at the
time of grant. The Stock Option Plan also provides for grants of stock
appreciation rights, restricted stock awards and performance awards. The
Stock Option Plan is administered by the Compensation Committee of the Board
of Directors of the Company, which determines the persons who are to receive
options to purchase shares of the Company's Common Stock, the exercise price,
the number of shares of Common Stock subject to each option and other terms
of the option and whether the option is an incentive stock option or a
non-qualified stock option.
CERTAIN TRANSACTIONS
On April 4, 1996 the Company's shareholders approved a 1-for-8 reverse stock
split with respect to Common Stock and a 1-for-2 reverse stock split with
respect to Prefered Stock. All share and per share data contained in this
Prospectus have been adjusted to give effect to such splits.
The Company was incorporated in March 1993 in Minnesota. In December 1993,
the Company completed a private placement of 250,000 shares of its Common
Stock at a price of $4.00 per share and received gross proceeds from the
offering of $1,000,000. The shares of Common Stock sold in such private
placement were offered and sold on behalf of the Company solely by its
officers and directors. The Company paid no selling commission to such
officers or directors or to any other person in connection with such private
placement.
In January 1994, the Company entered into an Amended and Restated Agreement
and Plan of Reorganization, among the Company, PRANA St. Paul, Inc., a wholly
owned subsidiary of the Company, Otto Packaging, Inc. and Jeffery E. Otto and
Judy M. Otto (the "Ottos"). Mr. Otto is the Chairman and Chief Executive
Officer of the Company. Pursuant to such agreement, the Company acquired all
of the outstanding capital stock of Otto Packaging, Inc. in exchange for
shares of the Company's Preferred Stock. The agreement contains terms and
conditions generally contained in the Company's acquisition agreements. The
Ottos have also entered into a building lease with Otto Packaging, Inc.
Payments by the Company to the Ottos amounted to approximately $175,000
during 1995 and $170,000 during 1994. The Company believes that its lease
rates are no less favorable than those that would be obtained from unrelated
third parties. See "Business -- Acquisition Strategy" and "-- Principal
Business Units."
In February 1994, the Company entered into an Amended and Restated Agreement
and Plan of Reorganization, among the Company, PRANA Phoenix, Inc., a wholly
owned subsidiary of the Company, BVS, Inc. and Orville Roberts, Thomas
Shepard and Edward Van. Mr. Van is a Vice President of the Company. Pursuant
to such agreement, the Company acquired all of the outstanding capital stock
of BVS, Inc. in exchange for shares of the Company's Preferred Stock. The
agreement contains terms and conditions generally contained in the Company's
acquisition agreements. See "Business -- Acquisition Strategy" and "--
Principal Business Units."
In May 1994, the Company entered into an Agreement and Plan of
Reorganization, among the Company, Pallet City, Inc. and Donald J. Matre,
Ronald J. Matre, Ronald A. Matre, Thomas R. Matre and Tracy Matre-Waring. Mr.
Donald J. Matre is a five percent shareholder of the Company. Pursuant to
such agreement, the Company acquired all of the outstanding capital stock of
Pallet City, Inc. in exchange for shares of the Company's Preferred Stock.
The agreement contains terms and conditions generally contained in the
Company's acquisition agreements. See "Business - Acquisition Strategy" and "
- - Principal Business Units."
In September 1994, Robert Klas, a Director of the Company, entered into a
loan commitment with the Company pursuant to which Mr. Klas agreed to lend
the Company upon its request $300,000 on an unsecured basis. Amounts borrowed
from Mr. Klas by the Company are evidenced by promissory notes payable in
full two years from the date of the borrowing and carrying an interest rate
of 10 percent per annum. As consideration for entering into such loan
commitment, the Company issued warrants to purchase 750 shares of Common
Stock to Mr. Klas at an exercise price of $20.00 per share. In addition, for
each $10,000 borrowed by the Company under such loan commitment, the Company
is required to issue warrants to Mr. Klas to purchase 125 shares of the
Company's Common Stock at a purchase price of $20.00 per share. If the
Company has not paid the principal amount on any promissory note delivered
under such loan commitments by the first anniversary date of such note, then
the Company is required to issue warrants to the lender to purchase 125
shares of the Company's Common Stock at a purchase price of $20.00 per share
for each $10,000 in principal amount remaining unpaid on such date. Mr. Klas
has loaned the Company $300,000 under such loan commitment and received
warrants to purchase 8,250 shares of the Company's Common Stock at the price
of $20.00 per share. In exchange for Mr. Klas extending the maturity date of
his loan, the Company issued Mr. Klas a warrant to purchase 33,000 shares of
the Company's Common Stock at an exercise price of $6.40 per share.
In November 1994, Thomas Schreier, a director of the Company, entered into a
loan commitment with the Company pursuant to which Mr. Schreier agreed to
lend the Company $150,000 on an unsecured basis. Amounts borrowed by the
Company were evidenced by a promissory note which carried an interest rate of
10 percent per annum. Such Promissory note was paid in full by the Company in
January 1996. As consideration for entering into such loan commitment, the
Company issued a warrant to purchase 375 shares of Common Stock at an
exercise price of $20.00 per share. In addition, for each $10,000 borrowed by
the Company under such loan commitment, the Company issued a warrant to
purchase 125 shares of Common Stock at a purchase price of $20.00 per share.
Mr. Schreier received warrants to purchase 2,250 shares of the Company's
Common Stock at $20.00 per share.
In June 1995, the Company entered into an Agreement and Plan of
Reorganization, among the Company, Pallet Supply Company, Inc. and James J.
Doyle, Lisa B. Doyle, Dawn Christine Crenshaw, Lisa Ann Chayer, James J.
Doyle II, Gregory B. Crenshaw, Tabitha Doyle Barkley, Terri Leigh Doyle and
Clay Barkley. Mr. Doyle is a five percent shareholder of the Company.
Pursuant to such agreement, the Company acquired all of the outstanding
capital stock of Pallet Supply Company, Inc. in exchange for shares of the
Company's Preferred Stock. The agreement contains terms and conditions
generally contained in the Company's acquisition agreements. See "Business -
Acquisition Strategy" and " - Principal Business Units."
Pursuant to offers of employment with the Company, the Company has issued
options to purchase shares of the Common Stock to the following employees.
The option holders are not entitled to vote, receive dividends, or exercise
any of the rights of holders of shares of Common Stock for any purpose until
such options have been duly exercised and payment of the exercise price has
been made.
<TABLE>
<CAPTION>
EXERCISE PRICE
NAME POSITION OPTIONS PER SHARE
<S> <C> <C> <C>
Bruce Faulken President and Chief Operating Officer 77,049 $3.60
Clarence Johnson Chief Financial Officer 49,719 3.60
Randy Hines Vice President and Treasurer 61,783 3.60
Terry Stewart Vice President, Corporate Development and Secretary 49,719 3.60
</TABLE>
In connection with the Company's acquisitions of Subsidiaries made through
December 1, 1994, the Company issued shares of separate series of its Class
One Preferred Stock, the terms of which include the unwind provision (the
"Unwind Provision"). The Unwind Provision entitled the former shareholders of
the Subsidiary who received shares of a separate series of Class One
Preferred Stock in the merger to unwind the acquisition and regain ownership
of the Subsidiary in the event that the Company did not complete an initial
public offering of its Common Stock registered under the Securities Act prior
to June 30, 1996 under certain conditions. For various reasons the Company
determined that it would be in its best interests to obtain the agreement of
the holders of shares of Class One Preferred Stock to waive the Unwind
Provision. In August 1995, in connection with the Class One Preferred
Stockholders' agreement to waive the Unwind Provision, the Company offered to
such holders, as consideration for the waiver, either (i) the payment of
$50,000 in cash per series to be distributed pro rata among the holders of
the applicable series of Class One Preferred Stock (i.e., $50,000 to be
distributed to the former owners of the Subsidiary) ("Cash Redemption") in
addition to continued ownership of all shares of Class One Preferred Stock
held prior to the waiver or (ii) the redemption of a number of shares of each
series of Class One Preferred Stock equal to the net worth of the Subsidiary
at the time of the acquisition ("Redemption") divided by $10. The Company
provided the holders of Class One Preferred Stock agreeing to waive their
unwind rights with a further option to take the payment due from the Company
in the form of a promissory note maturing one year from the date of issuance
(in each case August 8, 1995) and bearing interest at the rate of 10 percent
per annum payable quarterly, together with warrants to purchase the Company's
Common Stock with an exercise price $32.00 per share. The waivers of the
Unwind Provision obtained by the Company are not subject to any expiration
date. The following table summarizes the consideration paid by the Company
for the waiver of the Unwind Provision:
<TABLE>
<CAPTION>
CASH PAYMENT REDEMPTION
<S> <C>
Otto Packaging, Inc.(1) BVS, Inc.(3)
Harris Supply Company, Inc.(2) Pallet City, Inc.(4)
Pallet Source, Inc. Quality Pallet, Inc.(5)
Hurt's Pallet & Sales, Inc.
</TABLE>
(1) Jeffery Otto, a director and officer of the Company, and his wife Judy
received the $50,000.
(2) Payment of the $50,000 was made in the form of a promissory note from the
Company in addition to a warrant to purchase 3,438 shares of the Company's
Common Stock.
(3) Edward Van, an officer of the Company, and former owner of BVS, Inc.,
received $352,725 in exchange for the redemption of 35,273 shares of
Class One Preferred Stock.
(4) Payment of the $467,000 was made in the form of a promissory note from
the Company in exchange for redemption of 46,700 shares of Class One
Preferred Stock in addition to a warrant to purchase 32,109 shares of the
Company's Common Stock. Of the total consideration paid to Pallet City,
Inc., Donald Matre, a five percent shareholder of the Company and former
owner of Pallet City, Inc., received payment in the form of a $214,820
promissory note from the Company in exchange for redemption of 21,482
shares of Class One Preferred Stock in addition to a warrant to purchase
14,769 shares of the Company's Common Stock.
(5) Payment of the $318,018 was made in the form of a promissory note from
the Company in exchange for the redemption of 31,802 shares of Class One
Preferred Stock in addition to a warrant to purchase 21,844 shares of the
Company's Common Stock.
Prior to the Company's acquisition of Pallet Supply, Inc., Pallet Supply,
Inc. spun off one of its divisions, Machine Specialists, Inc. to James Doyle,
a former owner of Pallet Supply, Inc. (the "Spin-Off"). Machine Specialists,
Inc. manufactures equipment for the new and recycled pallet industry. Under
the terms of the Spin-Off, the Company loaned Machine Specialists $300,000 on
a subordinated basis. Amounts outstanding under this loan bear interest at
the prime rate as published from time to time in The Wall Street Journal.
Amounts due in respect of principal and interest under the loan are payable
in eight quarterly installments beginning July 1, 1998, and any unpaid
principal, together with accrued interest, is payable in full on July 1,
2000.
James J. Doyle has also entered into four separate building lease agreements
with Pallet Supply Co., Inc. Payments by the Company to Mr. Doyle with
respect to all four leases amounted to approximately $113,050 during 1995.
The Company believes that its lease rates are no less favorable than those
that would be obtained from unrelated third parties. On May 1, 1996, Mr.
Doyle entered into a one-year employment agreement with the Company. Such
employment agreement automatically renews for additional one-year terms
unless either party terminates the agreement. The employment agreement
provides for an annual base salary of $50,000 plus commissions for
acquisitions consummated by the Company for which Mr. Doyle provided
services. The employment agreement contains provisions for termination, paid
vacation and other benefits.
All future material transactions with and loans to directors, officers or
stockholders holding more than 5% of the Company's outstanding Common Stock,
or affiliates of any such persons, will be (i) made for bona fide business
purposes, (ii) on terms no less favorable than could be obtained from an
unaffiliated third party, and (iii) approved by a majority of the independent
outside members of the Company's Board of Directors who do not have an
interest in the transactions or loans.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock and Preferred Stock (assuming a
one-for-one conversion of shares of Preferred Stock to shares of Common
Stock) as of the date of this Offering, and as adjusted to reflect the sale
of Common Stock being offered by the Company for (i) each director and named
executive officers in the summary compensation table of the Company, (ii) all
directors and executive officers of the Company as a group, and (iii) each
person or entity known by the Company to own beneficially 5% or more of the
Company's Common Stock. Unless otherwise indicated, the person or entity
listed in the table is the beneficial owner of the shares and has sole voting
and investment power with respect to such shares.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
SHARES
SHARES OWNED
BENEFICIALLY BEFORE
NAME OF BENEFICIAL OWNER AND POSITION OWNED(1) OFFERING AFTER OFFERING
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS(2):
Jeffery E. Otto(3) 546,330 16.7% 8.7%
Edward Van(4) 339,460 10.4 5.4
William L. Alvey(5) 100,000 3.1 1.6
Reynold P. Flom(6) 62,500 1.9 *
Bruce C. Faulken(7) 56,199 1.7 *
Robert C. Klas(8) 53,750 1.6 *
Thomas S. Schreier(9) 39,730 1.2 *
All Directors and Officers as a
group
(includes 10 persons)(10) 1,266,710 38.8 20.2
OTHER 5% OR MORE SHAREHOLDERS:
James J. Doyle(11) 326,371 10.0 5.2
Donald J. Matre(12) 197,797 6.1 3.2
</TABLE>
*Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common
Stock subject to options or warrants currently exercisable or
exercisable prior to June 1, 1996 are deemed outstanding for computing
the beneficial ownership percentage of the person holding such options
but are not deemed outstanding for computing the beneficial ownership
percentage of any other person.
(2) The address for each director and officer of the Company is 2665 Long
Lake Road, Suite 120, Roseville, Minnesota 55113.
(3) Includes 97,978 shares owned by Mr. Otto's wife and 15,000 shares owned
by Mr. Otto's children. Mr. Otto disclaims beneficial ownership of these
shares.
(4) Includes 4,854 shares issuable pursuant to currently exercisable
options.
(5) Includes 50,000 shares owned by Mr. Alvey's wife. Mr. Alvey disclaims
beneficial ownership of these shares.
(6) Includes 12,500 shares owned by Mr. Flom's wife. Mr. Flom disclaims
beneficial ownership of these shares.
(7) Includes 56,199 shares issuable pursuant to currently exercisable
options.
(8) Includes 41,250 shares issuable pursuant to currently exercisable
warrants.
(9) Includes 22,480 shares issuable pursuant to currently exercisable
options and 2,250 shares issuable pursuant to currently exercisable
warrants.
(10) See notes (3), (4), (5), (6), (7), (8) and (9) above. Includes an
additional 66,875 shares of Common Stock issuable pursuant to currently
exercisable options and warrants.
(11) Mr. Doyle's address is 321 St. Paul Street, Memphis, Tennessee 38126.
(12) Mr. Matre's address is 310 Grand Island Boulevard, P.O. Box 911,
Tonawanda, New York 14151. Includes 11,706 shares issuable pursuant to
currently exercisable warrants.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description does not purport to be complete and is qualified in
its entirety by this reference to the Company's Amended and Restated Articles
of Incorporation (the "Articles"), a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of 25,000,000 shares of
capital stock, par value $.01 per share, of which 20,000,000 are Common Stock
and 5,000,000 are Preferred Stock.
On April 4, 1996 the Company's shareholders approved a 1-for-8 reverse stock
split with respect to Common Stock and a 1-for-2 reverse stock split with
respect to Prefered Stock. All share and per share data contained in this
Prospectus have been adjusted to give effect to such splits. As of August 30,
1996, there were 1,081,292 shares of Common Stock issued and outstanding held
by 74 holders of record and 2,183,424 shares of Class One through Class Three
Preferred Stock (the "Preferred Stock") issued and outstanding, held by 32
holders of record.
Concurrent with the completion of this Offering, all outstanding shares of
Preferred Stock will be converted into shares Common Stock on a one-for-one
basis. All rights and privileges of the Preferred Stock will terminate upon
completion of this Offering and all such shares of converted Preferred Stock
will have the same rights and privileges as Common Stock. Upon completion of
this Offering there will be 6,264,716 shares of Common Stock outstanding and
no shares of Preferred Stock will be outstanding.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share on
all matters which shareholders may vote on at all meetings of shareholders.
All shares of the Company's Common Stock now outstanding are fully paid and
nonassessable. The holders of shares of the Company's Common Stock have equal
ratable rights to dividends with other holders of shares of Common Stock from
funds legally available therefore, when, as and if declared by the Board of
Directors of the Company. The holders of shares of the Company's Common Stock
are entitled to share ratably with other holders of shares of Common Stock in
all of the assets of the Company available for distribution to the holders of
the Common Stock upon liquidation, dissolution or winding up of the affairs
of the Company. The holders of shares of Common Stock do not have preemptive,
subscription or conversion rights and there are no redemption or sinking fund
provisions applicable thereto.
The holders of the Common Stock do not have cumulative voting rights, which
means that the holders of more than 50% of the outstanding shares of Common
Stock voting for the election of directors can elect all of the directors of
the Company to be elected, if they so choose. In such event, the holders of
the remaining shares will not be able to elect any of the Company's
directors.
The payment by the Company of dividends, if any, in the future rests within
the discretion of the Board of Directors and will depend, among other things,
upon the Company's earnings, its capital requirements and its financial
condition, as well as other relevant factors, including any limitations on
dividend payments set forth in agreements governing the Company's
outstandingindebtedness. See "-- Convertible Subordinated Debentures" and
"Description of the Term Loan and Certain Other Outstanding Indebtedness --
Term Loan."
PREFERRED STOCK
Upon conversion of the Preferred Stock to be effected concurrent with the
completion of this Offering as described above, no shares of the Company's
preferred stock will be outstanding. The Company is authorized to issue
5,000,000 shares of preferred stock with such designation, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in control of
the Company. Such transactions could be made more difficult to accomplish
even if favorable to the interests of the shareholders. The Company is not
aware of any person seeking to gain control of the Company.
CONVERTIBLE SUBORDINATED DEBENTURES
In connection with a private placement completed in the first quarter of
1995, the Company issued $2,000,000 aggregate principal amount of 10.25%
Convertible Debentures due March 31, 1998 through a placement agent. The
Convertible Debentures bear interest at the rate of 10.25%, payable quarterly
until maturity on March 31, 1998. The entire principal of the Convertible
Debentures is due and payable March 31, 1998. The Convertible Debentures are
unsecured, general obligations of the Company and are subordinate in right of
payment to all Senior Debt (as defined in the Convertible Debentures) of the
Company and to liabilities that are secured by specific assets and payment
streams of the Company. The Convertible Debentures do not contain
restrictions on the creation of Senior Debt or secured obligations of the
Company. Unless previously redeemed, the Convertible Debentures will be
convertible, at any time prior to maturity at the option of the holder, into
Common Stock of the Company at a conversion price equal to the lesser of (a)
75% of the offering price per share in an underwritten initial public
offering by the Company of shares of its Common Stock or (b) in the event no
such offering occurs or the offering price in such offering is greater than
$10.00 per share, $7.50 per share, subject to adjustment. The Convertible
Debentures are redeemable, in whole or in part, at the option of the Company
upon 30 days written notice, upon payment of the principal amount of,
together with accrued but unpaid interest on, the Convertible Debentures to
be redeemed; provided that such redemption is permitted only if the Company
has closed an initial public offering of its Common Stock, the shares of its
Common Stock are listed or admitted for quotation on a national securities
exchange or quotation system and the closing price of such shares as reported
or quoted is greater than three times the offering price of such shares in
the initial public offering for a period of twenty or more consecutive days.
Events of default nder the Convertible Debentures include failure to pay
interest and principal when due; certain events of receivership, insolvency,
bankruptcy and reorganization; and failure to perform the covenants contained
in the Convertible Debentures after notice and opportunity to cure. The
Convertible Debentures contain covenants, among others, that restrict the
Company from selling substantially all of its assets or changing its business
in any material respect; prohibit mergers or acquisitions, except in the
ordinary course of business; and prohibit the payment of cash dividends in
respect of the Company's Common Stock or Preferred Stock and the repurchase
of its Common Stock.
OPTIONS AND WARRANTS
The Company has issued warrants to purchase shares of the Company's Common
Stock in connection with certain loans made to the Company in the aggregate
principal amount of $710,000. Such warrants are exercisable at any time and
allow the holder thereof to purchase 16,525 shares of the Company's Common
Stock at a purchase price of $20.00 per share. In connection with certain of
these loans in the aggregate principal amount of $200,000 the Company issued
to the agent a warrant to purchase 250 shares of the Common Stock of the
Company at an exercise price of $36.00 per share. See "Certain Transactions"
and "Description of the Term Loan and Certain Other Outstanding
Indebtedness."
Pursuant to the Stock Option Plan, the Company has outstanding options to
purchase 495,000 shares of the Company's Common Stock at an exercise price of
$3.60 per share.
In connection with the private placement of the Company's Convertible
Debentures, the Company issued to the agent for such private placement,
warrants to purchase up to 6,667 shares of Common Stock at an exercise price
of $36.00 per share, subject to adjustment under certain circumstances. In
connection with an amendment to the agency agreement, the Company issued the
agent a warrant to purchase 30,000 shares of the Company's Common Stock at an
exercise price the greater of (i) 100% of the per share price in the
Company's next Qualified Financing or (ii) $5.00 per share. See "--
Convertible Subordinated Debentures".
The Company has issued warrants to purchase shares of its Common Stock in
connection with certain loans to the Company in the aggregate principal
amount of $1.8 million. Such warrants are exercisable at any time and allow
the holders thereof to purchase 28,123 shares of Common Stock at an exercise
price of the lesser of (i) $24.00 per share or (ii) 60% to 67% of the
offering price in an initial public offering of the Company's Common Stock.
In connection with obtaining the agreement of the holders of the Company's
Class One Preferred Stock to waive their rights to unwind the acquisition
pursuant to which such Class One Preferred Stock was issued, the Company
issued to holders of certain series of Class One Preferred Stock warrants to
purchase up to a total of 14,347 shares of the Company's Common Stock at an
exercise price of $32.00 per share See "Certain Transactions."
The Company has issued warrants to purchase 19,563 shares of its Common Stock
in connection with assistance in obtaining financing through various means.
Such warrants are exercisable at any time and allow the holder to purchase
shares of Common Stock at exercise prices the lesser of (i) $20 to $24 per
share or (ii) 50% to 100% of the offering price in an initial public
offering.
The Company has issued warrants to purchase 300,000 shares of its Common
Stock in connection with the Secured Notes. The warrants are exercisable at a
per share price equal to the greater of (i) 75% of the per share price of
Common Stock at the Company's next Qualified Financing or (ii) $5.00 per
share. In connection with the placement of the Secured Notes the Company
issued the agent a warrant to purchase 30,000 shares of the Company's Common
Stock at an exercise price the greater of (i) 100% of the per share price in
the Company's next Qualified Financing or (ii) $5.00 per share.
The Company has issued warrants to purchase 109,016 shares of its Common
Stock in connection with extending the maturity dates on certain outstanding
debt at an exercise price of the lesser of (i) $6.40 per share or (ii) 80% of
the per share offering price in an initial public offering of the Company's
Common Stock.
No holders of the options and warrants described above are entitled, on
account of their ownership of options or warrants, to vote, receive
dividends, or exercise any of the rights of holders of shares of Common Stock
for any purpose until such options or warrants have been duly exercised and
payment of the purchase or exercise price has been made.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Articles of Incorporation and Amended
Bylaws and the provisions of the Minnesota Business Corporation Act, which
govern the actions of the Company, provide that present officers and
directors of the Company shall be indemnified against certain liabilities and
expenses which any of them may incur as a result of being, or having been, an
officer or director of the Company. Indemnification is contingent upon
certain conditions being met, including, that the indemnified person: has not
been previously indemnified by another party for the same matter; has acted
in good faith; has received no improper personal benefit and in the case of a
criminal proceeding, has no reason to believe that the conduct complained of
was unlawful and reasonably believed that the conduct complained of was in
the best interest of the Company, or in certain circumstances, reasonably
believed that the conduct complained was not opposed to the best interests of
the Company.
PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION
AND AMENDED BYLAWS AND MINNESOTA BUSINESS CORPORATION ACT
The existence of authorized but unissued preferred stock, described above,
and certain provisions of the Company's Amended and Restated Articles of
Incorporation and Amended Bylaws and Minnesota law, described below, could
have an anti-takeover effect. These provisions are intended to provide
management flexibility, to enhance the likelihood of continuity and stability
in the composition of the Company's Board of Directors and in the policies
formulated by the Board and to discourage an unsolicited takeover of the
Company if the Board determines that such a takeover is not in the best
interests of the Company and its shareholders. However, these provisions
could have the effect of discouraging some attempts to acquire the Company
which would deprive the Company's shareholders of opportunities to sell their
shares of Common Stock at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than
the Company, and other than in connection with certain mergers and exchanges
to which the Company is a party) resulting in the beneficial ownership of 20
percent or more of the voting stock then outstanding. Section 302A.671
requires approval of any such acquisitions by a majority vote of the
shareholders of the Company prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days
after the acquiring person has failed to give a timely information statement
to the Company or the date the shareholders voted not to grant voting rights
to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder which purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share
acquisition date.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Norwest
Bank Minnesota, N.A.
DESCRIPTION OF THE TERM LOAN
AND CERTAIN OTHER OUTSTANDING INDEBTEDNESS
TERM LOAN
On August 8, 1995, the Company, through its wholly owned subsidiary PRANA
Holdings, entered into the Term Loan with Norwest. Pursuant to the Term Loan,
PRANA Holdings may borrow from Norwest up to $2.6 million through the
issuance of notes to Norwest. All amounts due under the Term Loan are
guaranteed by the Company. As of the date hereof, PRANA Holdings had borrowed
$2.6 million under the Term Loan. All principal borrowed under the Term Loan
is due February 28, 1998, unless the payment of principal outstanding is
accelerated pursuant to the terms of the Term Loan. Amounts outstanding under
the Term Loan bear interest at a floating rate per annum equal to the base
rate publicly announced from time to time by Norwest plus 3 percent. The
interest so calculated is payable monthly and upon termination, acceleration
or prepayment in full of the Term Loan. Amounts outstanding under the Term
Loan also accrue interest at the rate (the "Accrual Rate") of 9 percent per
annum compounded monthly. Such interest is due and payable upon termination,
acceleration or prepayment in full of the Term Loan.
Pursuant to the Term Loan, the Company granted Norwest an option to purchase
a warrant exercisable for shares of Common Stock of the Company. Under such
option, Norwest may elect, under certain events, to designate amounts of
interest accrued under the Term Loan pursuant to the Accrual Rate for
conversion into a warrant to purchase shares of Common Stock of the Company.
If Norwest exercises such option, the Company will issue to Norwest, for a
nominal purchase price, a warrant to purchase a number of shares of Common
Stock of the Company equal to (i) the amount of Accrual Interest so
designated by Norwest divided by (ii) a price per share equal to (x) the
price at which the Company sold shares of its Common Stock in a public
offering or its most recent private placement or (y) in the event that the
Company sells convertible securities in such a public offering or private
placement, the price at which such convertible securities are convertible
into shares of Common Stock of the Company. Any amounts of Accrual Interest
so designated by Norwest for the purchase of shares of Common Stock under the
warrant are not required to be paid by PRANA Holdings.
PRANA Holdings may prepay amounts outstanding under the Term Loan at any
time. PRANA Holdings is required to make mandatory prepayments of the amounts
outstanding under the Term Loan out of Excess Cash Flow (as defined in the
Term Loan) and in certain other events. Norwest has waived the provision of
the Term Loan requiring mandatory prepayment of the amount outstanding under
the Term Loan upon completion of an initial public offering by the Company.
Events of default under the Term Loan include, failure to pay interest or
principal when due; failure to perform the covenants and agreements in the
Term Loan; certain events of receivership, insolvency, bankruptcy and
reorganization; default in the payment of indebtedness under other
borrowings; and certain changes in the ownership of the issued and
outstanding Common Stock of PRANA Holdings and other events customary in
these transactions. The Term Loan contains such covenants that are customary
in bank lending transactions of this type, including, among others, covenants
relating to maintenance of a debt service coverage ratio and net book worth;
ownership of stock of subsidiaries; prohibitions on liens; restrictions on
the incurrence of indebtedness and guaranties; restrictions on investments;
restrictions on dividends; prohibitions on asset sales, mergers and
acquisitions and sale and leaseback transactions; limitations on salaries and
management fees; and a limitation on the ability of PRANA Holdings to make
upstream transfers of cash to the Company.
The obligations of PRANA Holdings under the Term Loan are secured by a pledge by
PRANA Holdings of, among other things, its equipment, general intangibles,
inventory, receivables, certain specified notes payable and the shares of the
Subsidiaries owned by PRANA Holdings. The Company is currently out of compliance
with certain covenants of its long-term debt. See "Risk Factors - Need for
Promissory Note Extension; Long-Term Debt Current Non-Compliance; Going Concern
Uncertainty" and Notes 10 and 17 of the Company's Consolidated Financial
Statements.
CERTAIN OTHER OUTSTANDING INDEBTEDNESS
The Company has issued promissory notes under loan commitments entered into
from time to time with individual investors. In certain instances, the
Company has engaged placement agents to locate such investors and, in certain
instances, the Company has entered into such loan commitments with officers
and directors of the Company. To date, the Company has outstanding a total of
$2.3 million aggregate principal amount of promissory notes under such loan
commitments. Amounts outstanding under such promissory notes are general,
unsecured obligations of the Company. All of such promissory notes bear
interest at the rate of 10 percent per annum. Such promissory notes have
maturity dates of either one year or two years from the date of issuance. In
connection with the issuance of promissory notes under the loan commitments,
the Company has issued to the holders of the promissory notes warrants to
purchase shares of the Company's Common Stock. Under certain of such loan
commitments, the Company is obligated to issue additional warrants to
purchase shares of its Common Stock in the event the Company does not pay the
principal amount due under the related promissory note by certain specified
dates. See "Certain Transactions" and "Description of Capital Stock --
Options and Warrants."
Certain of the Company's Subsidiaries have entered into the Secured Credit
Facilities with Norwest Credit. The aggregate amount that may be borrowed
under the Secured Credit Facilities is $3.2 million. Amounts outstanding
under the Secured Credit Facilities bear interest at a floating rate equal to
the prime rate publicly announced by Norwest plus 1.25% to 1.75%. Amounts
outstanding under the Secured Credit Facilities are secured by the assets of
the Subsidiary parties and are guaranteed by the Company and its other
Subsidiaries. The Secured Credit Facilities terminate on February 28, 1998.
The Company has issued $1.5 million in Secured Notes. The Secured Notes are
due and payable on the earlier of (i) April 23, 1997 or (ii) the closing date
of the Company's next Qualified Financing. The Secured Notes bear interest at
11.25% per annum. In connection with the issuance of the Secured Notes the
Company granted to investors warrants to purchase 300,000 shares of the
Company's Common Stock exercisable at a price equal to the greater of (i) 75%
of the per share price of Common Stock at the Company's next Qualified
Financing or (ii) $5.00 per share.
UNDERWRITING
The Underwriters named below, for which John G. Kinnard and Company,
Incorporated is acting as representative (the "Representative"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the 2,750,000 shares of Common Stock
offered hereby. The number of Shares that each Underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
<S> <C>
John G. Kinnard and Company, Incorporated
Total 2,750,000
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the Shares offered hereby, if any are purchased.
The obligation of the Underwriters to purchase the Shares is several and not
joint, meaning that, subject to the terms of the Underwriting Agreement, each
Underwriter is obligated to purchase only the number of Shares set forth
opposite its name, and that its civil liability under the Securities Act may
be limited to the public offering price of such Shares.
The Underwriters propose to offer the shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other brokers and dealers. After
the initial public offering, the Price to Public, concession and reallowance
may be changed by the Representative.
The Company has granted the Underwriters an option exercisable within 30 days
after the date of this Prospectus, to purchase up to an additional 412,500
shares of Common Stock at the Price to Public, less the Underwriting Discount
shown on the cover page of this Prospectus. The Underwriters may exercise
such option only for the purpose of covering any over-allotments in the sale
of the Shares offered hereby.
The Company has agreed to reimburse the Representative for accountable
expenses which are incurred by the Representative in connection with the
Offering. Such accountable expenses, which will include legal fees and
disbursements of counsel to the Representative, may not exceed $65,000. The
Company has paid the Representative $15,000 as an advance against such
accountable expenses. The Underwriting Agreement provides the Representative
the right to act as sole agent for the Company in connection with future
financings or certain corporate transactions until (i) the closing of the
Company's first public offering of Common Stock following completion of this
Offering or (ii) three years from the date of the Underwriting Agreement.
The Company has agreed to sell to the Representative, for nominal
consideration, a warrant to purchase up to 275,000 shares of Common Stock
(the "Representative's Warrant"). The Representative's Warrant may be
exercised in whole or in part commencing twelve months after the date of this
Prospectus and for a period of four years thereafter, at an exercise price
equal to 120% of the Price to Public. During the term of the Representative's
Warrant, it may not be transferred, sold, assigned or hypothecated except to
persons who are both officers and stockholders of the Representative. The
Representative's Warrant contains anti-dilution provisions providing for
appropriate adjustments on the occurrence of certain events, and contains
customary demand and participatory registration rights. Any profits realized
by the Representative upon the sale of such warrant or the securities
issuable upon exercise thereof may be deemed to constitute additional
underwriting compensation.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In April 1996, the Representative acted as the agent of the Company for the
placement of the Secured Notes. In connection therewith the Representative
received a five-year warrant to purchase 30,000 shares of Common Stock. This
warrant contains customary demand and participatory registration rights.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriters and their controlling persons against civil
liabilities in connection with the Offering, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Securities and Exchange
Commission (the "Commission"), such indemnification is against public policy
as expressed in such Act and is therefore unenforceable.
Each of the executive officers and directors and five percent shareholders of
the Company have agreed, for a period of 365 days from the effective date of
this Offering, not to offer, sell or otherwise dispose of approximately
1,580,335 shares of the Common Stock without the prior written consent of the
Representative. Additionally, certain other shareholders of the Company have
agreed, for a period of 180 days from the effective date of this offering, not
to offer, sell or otherwise dispose of the Lock-up Shares. 472,064 of the
Lock-up Shares will be available for resale between 181 days and 270 days after
the effective date of the Offering and 472,064 of the Lock-up Shares will be
available for resale between 271 days and 365 days after the effective date of
this Offering.
Prior to this Offering, there has been no public trading market for the
Common Stock. The initial public offering price of the Shares has been
determined by negotiations between the Company and the Representative. Among
the factors considered in such negotiations were the prevailing market
conditions, estimates of the business potential of the Company, the results
of operations of the Company in recent periods and other factors deemed to be
relevant. The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and the Representative's Warrant and does not purport
to be a complete statement of their terms and conditions. The Underwriting
Agreement and the Representative's Warrant have been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
SHARES ELIGIBLE FOR FUTURE SALE
At the date of this Prospectus, the Company has outstanding 1,081,292 shares
of Common Stock and 2,183,424 shares of Preferred Stock (concurrent with the
completion of this Offering, all outstanding shares of Preferred Stock will
be converted into shares of Common Stock on a one-for-one basis). In
addition, as of such date, the Company had 495,000 shares reserved for
issuance upon exercise of options granted under the Company's Stock Option
Plan, 554,497 shares of Common Stock issuable upon exercise of outstanding
warrants and 592,593 shares of Common Stock reserved for issuance upon
exercise of the Convertible Debentures. Of the 6,264,716 shares to be
outstanding after the Offering, the 2,750,000 Shares sold to the public
hereby will be freely tradeable without restrictions or registration under
the Securities Act. The remaining 3,514,716 shares were issued and sold by
the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Of the 3,514,716 shares, 1,985,012
shares will be freely tradeable upon the effective date of this Offering,
subject to restrictions imposed by Rule 144, and 1,529,704 shares will be
eligible for resale under Rule 144 after expiration of applicable holding
periods, subject to restrictions imposed by Rule 144. These shares were
purchased at prices substantially below the Price to Public. Therefore,
investors in this Offering will experience immediate and substantial dilution
in their investment in the Shares. See "Dilution."
In general, Under Rule 144 a person (or persons whose sales are aggregated)
who beneficially owns shares last acquired privately from the Company or an
affiliate of the Company at least two years previously and affiliates of the
Company who beneficially own shares last acquired (whether or not such shares
were acquired privately) from the Company or an affiliate of the Company at
least two years previously, is entitled to sell within any three-month period
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock or the average weekly
trading volume in the Company's Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of
current public information about the Company. A person who has not been an
affiliate of the Company at any time during the three months preceding a
sale, and who beneficially own shares last acquired from the Company or an
affiliate of the Company at least three years previously is entitled to sell
all such shares under Rule 144 without regard to any of the limitations of
the Rule.
In addition, Rule 144A under the Securities Act, as currently in effect, in
general permits unlimited resales of certain restricted securities of any
issuer provided that the purchaser is an institution that owns and invests on
a discretionary basis at least $100 million in securities or is a registered
broker-dealer that owns and invests $10 million in securities. Rule 144A
allows the existing stockholders of the Company to sell their shares to such
institutions and registered broker-dealers without regard to any volume or
other restrictions. Unlike under Rule 144, restricted securities sold under
Rule 144A to nonaffiliates do not lose their status as restricted securities.
In connection with this Offering, all executive officers, directors and five
percent shareholders of the Company have agreed not to offer, sell or
otherwise dispose of the shares of Common Stock (approximately 1,580,335
shares) for a period of 365 days after the effective date of this Offering,
without the prior written consent of the Representative. Additionally,
certain other shareholders have agreed not to offer, sell or otherwise
dispose of the Lock-up Shares for a period of 180 days following the
effective date of this Offering. Of the Lock-up Shares, 472,064 shares will
be eligible for resale between 181 days to 270 days after the effective date
of this Offering, 472,064 additional shares will be eligible for resale
between 271 days to 365 days after the effective date of this Offering. All
of the shares held by the executive officers, directors and five percent
shareholders of the Company and all Lock-up Shares will be eligible for
resale 366 days after the effective date of this Offering, subject to any
restrictions under Rule 144. The Company cannot predict the effect, if any,
that sales of restricted securities or the availability of such securities
for sale could have on the market price, if any, prevailing from time to
time. Nevertheless, sales of substantial amounts of the Company's securities,
including the securities offered hereby, could adversely affect prevailing
market prices of the Company's securities and the Company's ability to raise
additional capital by occurring at a time when it would be beneficial for the
Company to sell securities.
ADDITIONAL MATTERS
The Company intends to file a registration statement under the Securities Act
to register shares of Common Stock reserved for issuance pursuant to the
Company's Stock Option Plan. However, such registration statement will not be
filed until 365 days following the effective date of this Offering without
the prior written consent of the Representative. Such shares will thereafter
be available for sale in the public market upon vesting of such shares except
to the extent that the holders thereof are affiliates of the Company, in
which case the limitations of Rule 144 (other than the holding period) will
apply.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters will be passed upon for the Underwriters by Briggs & Morgan,
Professional Association, Minneapolis, Minnesota.
EXPERTS
The financial statements of the Company, certain of the Company's
Subsidiaries, and companies defined as the "Pending Acquisitions," included
in this Prospectus and elsewhere in the Registration Statement have been
audited by either KPMG Peat Marwick LLP or Schutta Nelson & Zembal, Ltd.,
both independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firms as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the December 31, 1995 consolidated
financial statements of Pallet Recycling Associates of North America, Inc.
contains an explanatory paragraph that states that the Company has incurred net
losses since its inception date, has defaulted on the payment of certain notes,
and is not in compliance with certain terms of its long-term debt agreements.
The combination of these events has put the Company in a working capital deficit
position, which raises substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock, reference is hereby made to such Registration
Statement and the exhibits and schedules thereto, copies of which may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street N.W., Washington,
DC 20549, and at its regional offices at 7 World Trade Center, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2551. Copies of such materials may also be obtained from the
Public Reference Section of the Commission, Washington, DC 20549, upon
payment of the fees prescribed by the Commission. The summaries in this
Prospectus of additional information included in the Registration Statement
or any exhibit thereto are qualified in their entirety by reference to such
information or exhibit.
The Company intends to distribute to its shareholders annual reports
containing audited financial statements and interim reports containing
unaudited financial information.
The Company has federally registered its trademark PRANA and the associated
design.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
Independent Auditors' Report F-5
Consolidated Balance Sheets as of December 31, 1994 and 1995 F-6
Consolidated Statements of Operations for the period from March 2, 1993 (date of inception)
to December 31, 1993, the years ended December 31, 1994 and 1995 and the six-month periods
ended June 30, 1995 and 1996 (unaudited) F-7
Consolidated Statements of Stockholders' Equity (Deficit) for the period from March 2, 1993
(date of inception) to December 31, 1993, the years ended December 31, 1994 and 1995 and the
six-month period ended June 30, 1996 (unaudited) F-8
Consolidated Statements of Cash Flows for the period from March 2, 1993 (date of inception)
to December 31, 1993 and the years ended December 31, 1994 and 1995 and the six-month
periods ended June 30, 1995 and 1996 (unaudited) F-9
Notes to Financial Statements F-10
OTTO PACKAGING, INC.
Independent Auditor's Report F-24
Balance Sheets as of December 31, 1993 and 1992 F-25
Statements of Earnings for the years ended December 31, 1993 and 1992 F-26
Statements of Changes in Stockholders' Equity for the years 1991, 1992 and 1993 F-27
Statements of Cash Flows for the years ended December 31, 1993 and 1992 F-28
Notes to Financial Statements F-29
Independent Auditor's Report on Additional Information F-32
Schedule I -- Supplementary Information on Operations F-33
BVS, INC.
Independent Auditors' Report F-34
Balance Sheets as of January 31, 1993 and 1994 F-35
Statements of Earnings for the years ended January 31, 1993 and 1994 F-36
Statements of Stockholders' Equity for the years ended January 31, 1993 and 1994 F-37
Statements of Cash Flows for the years ended January 31, 1993 and 1994 F-38
Notes to Financial Statements F-39
HARRIS SUPPLY COMPANY, INC.
Independent Auditors' Report F-41
Balance Sheets as of June 30, 1992, 1993 and March 31, 1994 F-42
Statements of Operations for the years ended June 30, 1992, 1993 and the nine-month
period ended March 31, 1994 F-43
Statements of Stockholders Equity for the years ended June 30, 1992, 1993 and the
nine-month period ended March 31, 1994 F-44
Statements of Cash Flows for the years ended June 30, 1992, 1993 and the nine-month
period ended March 31, 1994 F-45
Notes to Financial Statements F-46
PALLET CITY, INC.
Independent Auditors' Report F-50
Balance Sheets as of September 30, 1992 and 1993 and May 31, 1994 F-51
Statements of Operations and Retained Earnings for the years ended September 30, 1992 and
1993 and the eight-month period ended May 31, 1994 F-52
Statements of Cash Flows for the years ended September 30, 1992 and 1993
and the eight-month period ended May 31, 1994 F-53
Notes to Financial Statements F-54
PALLET SOURCE, INC.
Independent Auditors' Report F-57
Balance Sheets as of December 31, 1992 and 1993 and November 30, 1994 F-58
Statements of Operations and Retained Earnings (Accumulated Deficit)
for the years ended December 31, 1992 and 1993 and the eleven-month
period ended November 30, 1994 F-59
Statements of Cash Flows for the years ended December 31, 1992 and 1993 and the
eleven-month period ended November 30, 1994 F-60
Notes to Financial Statements F-61
HURT'S PALLET AND SALES, INC.
Independent Auditors' Report F-64
Balance Sheets as of December 31, 1992 and 1993 and November 30, 1994 F-65
Statements of Operations and Retained Earnings (Accumulated Deficit)
for the years ended December 31, 1992 and 1993 and the eleven-month
period ended November 30, 1994 F-66
Statements of Cash Flows for the years ended December 31, 1992 and 1993
and the eleven-month period ended November 30, 1994 F-67
Notes to Financial Statements F-68
QUALITY PALLET, INC.
Independent Auditors' Report F-72
Balance Sheets as of December 31, 1992 and 1993 and November 30, 1994 F-73
Statements of Earnings for the years ended December 31, 1992 and 1993
and the eleven-month period ended November 30, 1994 F-74
Statements of Stockholders' Equity for the years ended December 31, 1992 and 1993
and the eleven-month period ended November 30, 1994 F-75
Statements of Cash Flows for the years ended December 31, 1992 and 1993
and the eleven-month period ended November 30, 1994 F-76
Notes to Financial Statements F-77
AMERICAN CENTURY PALLET, INC.
Independent Auditors' Report F-80
Balance Sheets as of December 31, 1993 and 1994 and March 31, 1995 F-81
Statements of Operations for the years ended December 31, 1993 and 1994
and the three-month period ended March 31, 1995 F-82
Statement of Stockholders' Equity for the years ended December 31, 1993 and 1994
and the three-month period ended March 31, 1995 F-83
Statements of Cash Flows for the years ended December 31, 1993 and 1994
and the three-month period ended March 31, 1995 F-84
Notes to Financial Statements F-85
B & B PALLET SUPPLY COMPANY
Independent Auditors' Report F-90
Balance Sheet as of December 31, 1992, 1993 and 1994, and May 5, 1995 F-91
Statements of Operations and Retained Earnings for the years ended December 31, 1992, 1993
and 1994, and the period from January 1, 1995 to May 5, 1995 F-92
Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994,
and the period from January 1, 1995 to May 5, 1995 F-93
Notes to Financial Statements F-94
PALLET SUPPLY COMPANY, INC.
Independent Auditors' Report F-97
Balance Sheet as of December 31, 1992, 1993, 1994 and May 31, 1995 F-98
Statements of Operations for the years ended December 31, 1992, 1993 and 1994
and the five-month period ended May 31, 1995 F-99
Statements of Stockholders' Equity for the years ended December 31, 1992, 1993
and 1994 and the five-month period ended May 31, 1995 F-100
Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994
and the five-month period ended May 31, 1995 F-101
Notes to Financial Statements F-102
DIAMOND PALLET, INC.
Independent Auditors' Report F-106
Balance Sheets as of June 30, 1994 and 1995 and February 15, 1996 F-107
Statements of Operations and Retained Earnings for the years ended June 30, 1994 and 1995
and seven and one-half month period ended February 15, 1996 F-108
Statements of Cash Flows for the years ended June 30, 1994 and 1995 and
seven and one-half month period ended February 15, 1996 F-109
Notes to Financial Statements F-110
METROPLEX WOOD PRODUCTS
Independent Auditors' Report F-114
Balance Sheets as of December 31, 1993, 1994 and 1995 F-115
Statements of Operations and Equity for the years ended December 31, 1993, 1994 and 1995 F-116
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 F-117
Notes to Financial Statements F-118
INDY PALLET COMPANY, INC. AND SPECIALTY PALLET COMPANY, INC.
Independent Auditors' Report F-120
Combined Balance Sheets as of December 31, 1993, 1994 and 1995
and June 30, 1996 (unaudited) F-121
Combined Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and the six-month periods ended June 30, 1995
and 1996 (unaudited) F-122
Combined Statement of Stockholders' Equity (Deficit) for the years ended December 31, 1993,
1994, and 1995 and the six-month period ended June 30, 1996 (unaudited) F-123
Combined Statement of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the six-month periods ended June 30, 1995
and 1996 (unaudited) F-124
Notes to Combined Financial Statements F-125
PALLET OUTLET COMPANY, INC.
Independent Auditors' Report F-129
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited) F-130
Statements of Operations and Retained Earnings for the years ended December 31, 1993, 1994
and 1995 and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-131
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995
and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-132
Notes to Financial Statements F-133
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pallet Recycling Associates of North America, Inc.:
We have audited the accompanying consolidated balance sheets of Pallet
Recycling Associates of North America, Inc. and subsidiaries as of December
31, 1994 and 1995 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from March 2, 1993 (date
of inception) to December 31, 1993 and for the years ended December 31, 1994
and 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pallet
Recycling Associates of North America, Inc. and subsidiaries as of December
31, 1994 and 1995 and the results of their operations and their cash flows
for the period from March 2, 1993 (date of inception) to December 31, 1993
and for the years ended December 31, 1994 and 1995, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company has incurred net losses since its
inception date. As discussed in notes 10 and 17, the Company has defaulted on
the payment of notes with a principal balance of approximately $800,000 as of
August 30, 1996. Additionally, the Company is not in compliance with certain
terms of its long-term debt agreements. The outstanding balance related to these
agreements amounts to approximately $4,300,000 as of August 30, 1996. As a
result of the covenant violations, the holder of the debt may, after notice,
declare the entire amount of such indebtedness due and payable immediately. The
combination of the above events has put the Company in a working capital deficit
position. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in note 17. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 9, 1996, except as to notes 10, 17, 14, 16(c)(iii), 15,
16(a),16(c)(ii), 16(b), and 16(c)(i), which are as of August 30, 1996, August
30, 1996, August 19, 1996, June 25, 1996, June 7, 1996, April 25, 1996, April
23, 1996, April 4, 1996, and March 4, 1996, respectively
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents $ 441,843 $ 733,682 $ 152,462
Accounts receivable, less allowance for doubtful accounts of
$13,546, $30,273 and $30,273 (unaudited) as of December 31,
1994 and 1995 and June 30, 1996, respectively 1,624,977 3,521,089 3,828,086
Inventories (note 4) 1,009,885 2,605,397 2,714,088
Refundable income tax 0 40,061 2,368
Prepaid expenses 98,446 105,459 164,871
Total current assets 3,175,151 7,005,688 6,861,875
Property and equipment, net (notes 5 and 12) 2,827,824 5,436,503 5,691,506
Goodwill, net of accumulated amortization of $30,002, $180,267
and $331,265 (unaudited) as of December 31, 1994 and 1995 and
June 30, 1996, respectively (notes 2 and 3) 1,800,752 3,790,747 8,197,894
Other assets, net of accumulated amortization of $4,299,
$170,148
and $339,633 (unaudited) as of December 31, 1994 and 1995
and June 30, 1996, respectively 74,763 1,215,549 1,600,296
$7,878,490 $17,448,487 $22,351,571
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 917,829 $ 2,057,063 $ 2,174,964
Demand notes payable (note 7) 282,535 900,318 376,682
Current maturities of notes payable to related parties (note 6) 60,000 160,000 0
Current maturities of long-term debt (note 10) 335,826 5,107,859 7,898,331
Current maturities of capital lease obligations (note 12) 53,147 79,072 83,852
Current maturities of deferred payment obligations (note 2) 703,893 0 0
Accrued liabilities (note 8) 358,041 650,673 866,831
Income taxes payable 91,917 0 0
Deferred income taxes (note 11) 278,000 237,500 235,000
Total current liabilities 3,081,188 9,192,485 11,635,660
Notes payable to related parties (note 6) 450,000 300,000 300,000
Long-term debt, less current maturities (note 10) 428,263 1,801,674 2,428,843
Subordinated debentures (note 9) 0 2,000,000 2,000,000
Capital lease obligations, less current maturities (note 12) 136,177 73,425 112,788
Deferred payment obligations (note 2) 835,018 0 0
Deferred income taxes (note 11) 324,000 629,200 645,600
Stockholders' equity (notes 2, 14, 15 and 16):
Preferred stock, $.01 par value. Authorized 5,000,000 shares;
1,485,009, 2,183,424 and 2,183,424 (unaudited) shares issued
and outstanding as of December 31, 1994 and 1995 and
June 30, 1996, respectively 14,850 21,834 21,834
Common stock, $.01 par value. Authorized 20,000,000 shares;
1,025,000, 1,081,292 and 1,081,292 (unaudited) shares issued
and outstanding as of December 31, 1994 and 1995 and
June 30, 1996, respectively 10,250 10,813 10,813
Additional paid-in capital 2,909,817 5,543,449 8,631,601
Accumulated deficit (311,073) (2,124,393) (3,435,568)
Total stockholders' equity 2,623,844 3,451,703 5,228,680
Commitments (notes 12, 13, 14, 15, and 16)
$7,878,490 $17,448,487 $22,351,571
</TABLE>
See accompanying notes to consolidated financial statements.
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 2, 1993 SIX-MONTH
(DATE OF PERIODS ENDED
INCEPTION) YEARS ENDED DECEMBER 31, JUNE 30,
TO DECEMBER 31,
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $ 0 $9,843,791 $30,003,509 $12,263,024 $18,424,246
Cost of sales 0 7,035,909 23,939,773 9,680,073 14,150,818
Gross profit 0 2,807,882 6,063,736 2,582,951 4,273,428
Selling, general, and
administrative expenses:
Operating subsidiaries 0 1,481,120 3,775,742 1,596,924 2,858,469
Corporate 196,241 1,337,029 2,725,196 1,196,892 1,594,921
Amortization expense 1,185 34,747 344,388 101,796 320,483
Goodwill write-off (note 3) 0 0 538,331 0 0
Total selling, general,
and
administrative expenses 197,426 2,852,896 7,383,657 2,895,612 4,773,873
Operating loss (197,426) (45,014) (1,319,921) (312,661) (500,445)
Other income (expense):
Interest income 12,506 12,540 12,803 10,013 584
Interest expense (12) (67,322) (687,095) (180,315) (731,762)
Gain (loss) on sale of
assets 0 15,087 (7,424) (11,419) 1,371
Other 0 7,568 113,317 55,874 (10,734)
Total other income
(expense) 12,494 (32,127) (568,399) (125,847) (740,541)
Loss before income taxes (184,932) (77,141) (1,888,320) (438,508) (1,240,986)
Income tax expense (benefit)
(note 11) 0 49,000 (75,000) (20,000) 70,189
Net loss $ (184,932) $ (126,141) $(1,813,320) $ (418,508) $(1,311,175)
Net loss per share $ (.18) $ (.06) $ (.58) $ (.15) $ (.39)
Weighted average shares and
common share equivalents
outstanding 1,054,133 1,945,071 3,118,379 2,837,494 3,400,301
</TABLE>
See accompanying notes to consolidated financial statements.
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Initial common stock issued for
cash in 1993 at $.01 per share 0 $ 0 750,000 $ 7,500 $ (1,500) $ 0 $ 6,000
Common stock issued for cash in
April through October 1993 at
$4.00 per share, net of placement
costs of $22,586 0 0 250,000 2,500 974,914 0 977,414
Net loss 0 0 0 0 0 (184,932) (184,932)
Balances as of December 31, 1993 0 0 1,000,000 10,000 973,414 (184,932) 798,482
Common stock issued for cash at
$4.00 per share 0 0 25,000 250 99,750 0 100,000
Preferred stock issued for
acquisitions of companies 1,485,009 14,850 0 0 1,836,653 0 1,851,503
Net loss 0 0 0 0 0 (126,141) (126,141)
Balances as of December 31, 1994 1,485,009 14,850 1,025,000 10,250 2,909,817 (311,073) 2,623,844
Common stock issued for
acquisition of company 0 0 56,292 563 584,869 0 585,432
Preferred stock issued for
acquisition of companies 690,915 6,909 0 0 2,018,838 0 2,025,747
Preferred stock issued as down
payment for acquisition 7,500 75 0 0 29,925 0 30,000
Net loss 0 0 0 0 0 (1,813,320) (1,813,320)
Balances as of December 31, 1995 2,183,424 21,834 1,081,292 10,813 5,543,449 (2,124,393) 3,451,703
Additional paid-in capital
resulting from a disproportionate
stock split 0 0 0 0 3,088,152 0 3,088,152
Net loss 0 0 0 0 0 (1,311,175) (1,311,175)
Balances as of June 30, 1996
(unaudited) 2,183,424 $21,834 1,081,292 $10,813 $8,631,601 $(3,435,568) $ 5,228,680
</TABLE>
See accompanying notes to consolidated financial statements.
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 2, 1993
(DATE OF
INCEPTION) YEARS ENDED DECEMBER 31,
TO DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(184,932) $(126,141) $(1,813,320)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss (gain) on sale of property and equipment 0 (15,087) 7,424
Depreciation 2,007 152,665 449,996
Amortization 1,185 34,747 344,388
Goodwill write-off 0 0 538,331
Deferred income taxes 0 (26,428) (116,000)
Changes in operating assets and liabilities:
Accounts receivable (4,770) (253,863) (739,535)
Inventories 0 (352,509) (1,104,280)
Prepaid expenses (5,590) (48,958) 26,421
Accounts payable 32,463 264,099 392,198
Accrued liabilities 69,865 (123,624) 130,916
Income taxes payable/refundable 0 104,291 (131,978)
Net cash used in operating activities (89,772) (390,808) (2,015,439)
Cash flows from investing activities:
Proceeds from sale of property and equipment 0 38,013 130,947
Purchase of property and equipment (40,161) (474,440) (1,083,978)
Proceeds from sale of marketable securities 0 530,100 0
Purchase of marketable securities (530,100) 0 0
Increase in other assets (10,263) (64,816) (566,648)
Cash paid and other costs incurred in acquisitions
of companies, net of cash acquired 0 (132,234) (506,899)
Net cash used in investing activities (580,524) (103,377) (2,026,578)
Cash flows from financing activities:
Cash payments for debt issuance costs 0 0 (459,927)
Proceeds from demand notes payable 0 62,957 275,760
Payments on demand notes payable 0 (2,763) (364,265)
Proceeds from notes payable to related parties 0 515,000 20,414
Payments on notes payable to related parties 0 0 (86,967)
Proceeds from issuance of long-term debt 0 134,086 5,634,561
Principal payments on long-term debt 0 (167,537) (1,165,560)
Proceeds from subordinated debentures 0 0 2,000,000
Principal payments on capital lease obligations 0 (18,833) (174,631)
Payments on deferred payment obligations 0 0 (1,345,529)
Net proceeds from issuance of common stock 983,414 100,000 0
Net cash provided by financing activities 983,414 622,910 4,333,856
Net increase (decrease) in cash and cash equivalents 313,118 128,725 291,839
Cash and cash equivalents:
Beginning of period 0 313,118 441,843
End of period $313,118 $441,843 $733,682
Supplemental disclosures of cash flow information:
Cash paid during period for interest $12 $56,521 $460,450
Cash paid during period for income taxes 0 45,719 85,478
Supplemental schedule of non-cash investing and
financing activities:
Equipment acquired under capital lease 0 96,218 99,560
Common stock issued for acquisition of companies 0 0 585,432
Preferred stock issued for acquisition of companies 0 1,851,503 2,025,747
Preferred stock issued as down payment for
acquisition of company 0 0 30,000
Deferred payment obligations incurred in
acquisition of companies 0 1,538,911 641,636
Long-term debt incurred in acquisition of companies 0 0 211,020
Long-term debt incurred to repay deferred payment
obligations 0 0 835,018
Goodwill as a result of a stock split 0 0 0
Goodwill as a result of the purchase of puts and
registration rights through the issuance of debt 0 0 0
</TABLE>
WIDE TABLE CONTINUED FROM ABOVE
<TABLE>
<CAPTION>
SIX-MONTH
PERIODS ENDED
JUNE 30,
1995 1996
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(418,508) $(1,311,175)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss (gain) on sale of property and equipment 11,419 12,985
Depreciation 179,919 308,453
Amortization 101,796 320,483
Goodwill write-off 0 0
Deferred income taxes 63,500 0
Changes in operating assets and liabilities:
Accounts receivable (638,461) (256,111)
Inventories (275,789) 58,822
Prepaid expenses (6,995) (53,087)
Accounts payable 380,311 (151,216)
Accrued liabilities (49,279) 195,318
Income taxes payable/refundable (188,989) 37,693
Net cash used in operating activities (841,076) (837,835)
Cash flows from investing activities:
Proceeds from sale of property and equipment 67,680 77,913
Purchase of property and equipment (551,625) (418,568)
Proceeds from sale of marketable securities 0 0
Purchase of marketable securities 0 0
Increase in other assets (338,938) (370,386)
Cash paid and other costs incurred in acquisitions
of companies, net of cash acquired (419,317) (770,815)
Net cash used in investing activities (1,242,200) (1,481,856)
Cash flows from financing activities:
Cash payments for debt issuance costs 0 (258,847)
Proceeds from demand notes payable 12,042 0
Payments on demand notes payable (42,011) (523,636)
Proceeds from notes payable to related parties 93,998 0
Payments on notes payable to related parties 0 (160,000)
Proceeds from issuance of long-term debt 335,174 3,192,275
Principal payments on long-term debt (185,224) (465,041)
Proceeds from subordinated debentures 2,000,000 0
Principal payments on capital lease obligations (38,955) (46,280)
Payments on deferred payment obligations (50,000) 0
Net proceeds from issuance of common stock 0 0
Net cash provided by financing activities 2,125,024 1,738,471
Net increase (decrease) in cash and cash equivalents 41,748 (581,220)
Cash and cash equivalents:
Beginning of period 441,843 733,682
End of period $483,591 $152,462
Supplemental disclosures of cash flow information:
Cash paid during period for interest $84,754 $505,356
Cash paid during period for income taxes 90,274 32,307
Supplemental schedule of non-cash investing and
financing activities:
Equipment acquired under capital lease 16,000 61,261
Common stock issued for acquisition of companies 585,432 0
Preferred stock issued for acquisition of companies 2,013,747 0
Preferred stock issued as down payment for
acquisition of company 0 0
Deferred payment obligations incurred in
acquisition of companies 641,636 0
Long-term debt incurred in acquisition of companies 85,000 690,407
Long-term debt incurred to repay deferred payment
obligations 0 0
Goodwill as a result of a stock split 0 3,088,152
Goodwill as a result of the purchase of puts and
registration rights through the issuance of debt 0 236,882
</TABLE>
See accompanying notes to consolidated financial statements.
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO JUNE 30, 1996 DATA)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Pallet Recycling Associates of North America, Inc. and subsidiaries (the
Company) was incorporated in March 1993 with the intent of forming a national
pallet recycling company through the acquisition of pallet recycling
companies throughout the United States. During 1994, the Company acquired
seven pallet recycling companies and started one other production facility.
During 1995, the Company acquired two pallet recycling companies and acquired
the assets of four additional pallet recycling operations.
The Company builds, refurbishes, and distributes wooden pallets for use in a
variety of industries. The Company's headquarters are in Roseville, Minnesota
with twenty production facilities located in fifteen states. The Company
sells its products on an unsecured basis primarily to customers in a wide
range of businesses, generally within a 150-mile radius of its production
facilities. The Company's ability to collect the amounts due from customers
is affected by economic conditions within these areas.
CONSOLIDATION
The consolidated financial statements include the accounts of Pallet
Recycling Associates of North America, Inc., its wholly-owned subsidiary
PRANA Holdings, Inc., and its thirteen wholly-owned subsidiaries after
elimination of all significant intercompany accounts and transactions.
REVENUE RECOGNITION
The Company recognizes sales and the related cost of sales on the accrual
basis of accounting at the time the new, recycled, or repaired pallets or
pallet by-products are shipped to or picked up by customers. Brokerage pallet
sales are recognized when shipments are received by the customers.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over estimated lives as
follows:
Leasehold improvements 4-10 years
Furniture and fixtures 3-7 years
Equipment 7-15 years
Transportation equipment 5-10 years
GOODWILL
Goodwill represents the amount paid in excess of the fair market value of
assets acquired of purchased businesses and is amortized using the
straight-line method over a term of 20 years.
RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
The Company has adopted Statement of Accounting Standards No. 121 (SFAS No.
121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, for purposes of determining and measuring
impairment of certain long-lived assets to be held and used in the business
(see note 3).
The Company reviews its property and equipment, identifiable intangibles and
goodwill related to those assets to be held and used in the business for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company considers a
history of operating losses within an individual operating company in excess
of one year since being acquired by the Company as the primary indicator of
potential impairment. The Company considers an asset to be impaired if a
forecast of undiscounted future operating cash flows related to an individual
operating company is less than its carrying amount. If an asset is determined
to be impaired, the loss is measured as the amount by which the carrying
amount of the net asset exceeds its fair value. An estimate of fair value is
based on the best information available, which is generally determined by
estimating the present value of expected future cash flows using the
Company's incremental borrowing interest rate as the discount rate.
OTHER ASSETS
Other assets consist primarily of deposits, non-compete agreements, debt
issuance costs and capitalized acquisition costs related to the pending
acquisitions.
The non-compete agreements are amortized using the straight-line method over
the term of the non-compete agreements.
Debt issuance costs are amortized using the straight-line method over the
length of the agreements. In 1995, the Company capitalized approximately
$460,000 of debt issuance costs. The unamortized balance as of December 31,
1995 is approximately $331,000.
Capitalized acquisition costs consist primarily of legal and accounting costs
related to the pending acquisitions (see note 15). These costs are included
as part of the purchase price upon the closure of the related acquisition. In
the event that a pending acquisition is not finalized, these costs will be
expensed in the period it becomes probable that the acquisition will not
occur.
PREFERRED STOCK
On February 18, 1994, the Company designated 1,485,009 shares of the
Company's common stock as preferred stock to be issued in series
alphabetically (Class One Preferred Stock). On April 12, 1995, the Company
designated 687,916 of the Company's common stock as Class Two Preferred
Stock. Class One (all series) and Class Two Preferred Stock have the same
features including a par value of $.01 per share, are entitled to one vote on
all matters voted on by common stockholders, have preference over common
stock in the event of liquidation of the Company and are automatically
converted to one share of the Company's common stock upon completion of an
initial public offering.
On September 27, 1995, the Company designated 2,827,075 shares of the
Company's common stock as Class Three Preferred Stock. The preferred stock
has a par value of $.01 per share, is entitled to one vote on all matters
voted on by common stockholders, and is automatically converted to one share
of the Company's common stock upon completion of an initial public offering.
The Class Three Preferred Stock has a $.10 per share preference over common
stock in the payment of any cash dividends by the Company and has a $10.00
per share preference over common stock in the receipt of cash or other
property upon the complete liquidation of the Company.
The number of outstanding preferred shares is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
<S> <C> <C>
Class One 1,485,009 1,485,009
Class Two 0 687,915
Class Three 0 10,500
1,485,009 2,183,424
</TABLE>
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to 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 enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET LOSS PER SHARE
Net loss per share is determined by dividing the net loss by the weighted
average number of shares of common share, preferred share and common share
equivalents outstanding. Common share equivalents result, under Securities
and Exchange Commission rules, from shares sold or options and warrants
granted within 12 months prior to the date of an initial public offering at
per share prices less than that of the initial public offering (assumed to be
$4.50 per share). Accordingly, 135,585 shares related to options and warrants
granted have been treated as common share equivalents for all periods
presented on the consolidated statements of operations. Preferred shares are
included in the weighted average shares outstanding as they automatically
convert to an equal number of common shares upon completion of an initial
public offering.
The following is a summary of the weighted average common and preferred
shares outstanding and common share equivalents:
<TABLE>
<CAPTION>
PERIOD FROM MARCH 2, 1993 YEAR ENDED
(DATE OF INCEPTION) TO DECEMBER 31
DECEMBER 31, 1993 1994 1995
<S> <C> <C> <C>
Weighted average shares outstanding 918,548 1,809,486 2,982,794
Common share equivalents 135,585 135,585 135,585
1,054,133 1,945,071 3,118,379
</TABLE>
ACCOUNTING 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash equivalents approximates market due to the
short-term nature of the investments. The carrying value of debt approximates
market, as the substantial majority of debt carries interest rates that
approximate market.
UNAUDITED FINANCIAL INFORMATION
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of June 30, 1996
and the results of operations and cash flows for the six-month periods ended
June 30, 1995 and 1996, as presented in the accompanying unaudited interim
financial statements.
(2) ACQUISITIONS
1994
In 1994, the Company acquired seven companies summarized as follows:
<TABLE>
<CAPTION>
ACQUISITION TYPE DATE ACQUIRED
<S> <C> <C>
Otto Packaging, Inc. Stock purchase January 1, 1994
BVS, Inc. Stock purchase February 1, 1994
Harris Supply Company Stock purchase April 1, 1994
Pallet City, Inc. Stock purchase June 1, 1994
Quality Pallet, Inc. Stock purchase December 1, 1994
Pallet Source, Inc. Stock purchase December 1, 1994
Hurt's Pallet & Sales, Inc. Stock purchase December 1, 1994
</TABLE>
All of the acquisitions have been accounted for by the purchase method and,
accordingly, the aggregate acquisition costs have been allocated to the net
assets acquired based on the fair values of such assets at the acquisition
date. In connection with these acquisitions, the Company issued 1,485,009
shares of Series A through Series G Preferred Stock, which were independently
valued. A summary of the purchase price paid, net assets acquired, and
goodwill recorded on the acquisitions is as follows:
<TABLE>
<CAPTION>
<S> <C>
Preferred shares issued $ 1,851,503
Cash paid and other acquisition costs, net of cash
acquired 132,234
Deferred payment obligations 1,538,911
Total purchase price and acquisition costs 3,522,648
Net assets acquired (1,691,894)
Goodwill $ 1,830,754
</TABLE>
Net assets acquired consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable $1,366,344
Inventories 657,376
Prepaid expenses 43,898
Refundable income taxes 12,374
Property and equipment 2,397,871
Other assets 2,316
Accounts payable (621,267)
Notes payable to banks (222,341)
Notes payable to related party (45,000)
Accrued liabilities (411,800)
Capital lease obligations (111,909)
Long-term debt (747,540)
Deferred tax liabilities (628,428)
$ 1,691,894
</TABLE>
Certain companies acquired were non-taxable S-corporations. Upon acquisition,
these entities were converted to a taxable C-corporation status. Accordingly,
deferred taxes were recorded upon acquisition by the Company and included in
the above summary of net assets acquired.
1995
During 1995, the Company acquired two pallet recycling companies in stock
acquisitions and acquired the assets of four additional pallet recycling
operations, summarized as follows:
<TABLE>
<CAPTION>
ACQUISITION TYPE DATE ACQUIRED
<S> <C> <C>
American Century Pallet Company, Inc. Asset purchase April 1, 1995
Woodgo Enterprises, Inc. Asset purchase April 1, 1995
B&B Pallet Supply Company, Inc. Stock purchase May 5, 1995
Skid Row Pallet (a division of Falcon Manufacturing) Asset purchase May 15, 1995
Pallet Supply Company, Inc. Stock purchase June 1, 1995
Blue Light Pallet Company Asset purchase October 30, 1995
</TABLE>
All of the acquisitions have been accounted for by the purchase method and,
accordingly, the aggregate acquisition costs have been allocated to the net
assets acquired based on the fair values of such assets at the acquisition
date. In connection with these acquisitions, the Company issued 687,915
shares of its Class Two Preferred Stock, 3,000 shares of its Class Three
Preferred Stock, and 56,292 shares of its Common Stock, which were
independently valued. A summary of the purchase price paid, net assets
acquired, and goodwill recorded on the acquisitions is as follows:
<TABLE>
<CAPTION>
<S> <C>
Class Two Preferred Stock issued $ 2,013,747
Class Three Preferred Stock issued 12,000
Common Stock issued 585,432
Note issued 211,020
Cash paid and other acquisition costs,
net of cash acquired 506,899
Deferred payment obligations 641,636
Total purchase price and acquisition
costs 3,970,734
Net assets acquired (1,263,809 )
Goodwill $ 2,706,925
</TABLE>
Net assets acquired consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable $1,156,577
Inventories 491,232
Prepaid expenses 33,434
Property and equipment 2,013,508
Noncompete agreements 250,000
Accounts payable (747,036)
Notes payable to banks (706,288)
Notes payable to related party (16,553)
Long-term debt (630,405)
Accrued liabilities (161,716)
Capital lease obligations (38,244)
Deferred tax liabilities (380,700)
$ 1,263,809
</TABLE>
Certain companies acquired were non-taxable S-corporations. Upon acquisition,
these entities were converted to a taxable C-corporation status. Accordingly,
deferred taxes were recorded upon acquisition by the Company and included in
the above summary of net assets acquired.
The following summarized, unaudited pro forma results of operations for the
years ended December 31, 1994 and 1995 assume the acquisitions occurred as of
the beginning of the respective years:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Net sales $19,396,000 $ 35,460,000
Net income (loss) 205,000 (1,371,000)
Net income (loss) per share .11 (.44)
</TABLE>
(3) IMPAIRMENT OF GOODWILL
As described in note 1, the Company has adopted SFAS No. 121. A charge of
$538,331 was recorded in 1995 which represented the unamortized goodwill
balances related to two operating companies acquired on December 1, 1994.
These companies have incurred continuing operating losses since acquisition
and are expected to incur future operating losses. The charge recorded in
1995 represents the expected non-recovery of the goodwill related to these
companies, determined by using the estimated discounted future cash flows of
these companies' operations. Considerable management judgment is necessary to
estimate discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $ 482,385 $ 961,886 $1,002,014
Finished goods 527,500 1,643,511 1,712,074
$1,009,885 $2,605,397 $2,714,088
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
<S> <C> <C>
Leasehold improvements $ 213,119 $ 475,572
Furniture and fixtures 164,009 412,705
Equipment 1,861,550 3,833,759
Transportation equipment 742,634 1,314,403
2,981,312 6,036,439
Less accumulated depreciation (153,488) (599,936)
$2,827,824 $5,436,503
</TABLE>
(6) NOTES PAYABLE TO RELATED PARTIES
The Company had seven unsecured notes payable to related parties totaling
$510,000 as of December 31, 1994 with interest rates ranging from 10% to 11%.
The Company has four unsecured notes payable to related parties totaling
$460,000 as of December 31, 1995, of which $160,000 is due in 1996 and
$300,000 is due in 1997. Interest on these notes payable is 10% and is
payable quarterly.
(7) DEMAND NOTES PAYABLE
The Company has a demand note payable totaling $212,957 and $250,000 as of
December 31, 1994 and 1995, respectively. Interest on the note payable is 1%
above the prime interest rate and is payable monthly. The note is secured by
substantially all assets of a certain subsidiary of the Company.
The Company also has demand notes payable totaling $69,578 and $650,318 as of
December 31, 1994 and 1995, respectively, with various short-term maturities.
Interest on these notes payable ranges from 8% to 11% and is payable monthly.
$500,000 of the notes payable in 1996 are personally guaranteed by the former
owner of one of the Company's subsidiaries and the remaining notes are
secured by equipment of certain subsidiaries of the Company.
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
<S> <C> <C>
Accrued compensation and related taxes $234,960 $343,856
Accrued interest 10,811 237,456
Other 112,270 69,361
$358,041 $650,673
</TABLE>
(9) SUBORDINATED DEBENTURES
The Company has $2,000,000 of convertible, subordinated debentures
outstanding as of December 31, 1995. The debentures bear interest at 10.25%,
payable quarterly, and are convertible at any time prior to maturity at the
option of the holder into the Company's common stock at a conversion price
equal to the lesser of 75% of the offering price in an initial public
offering or $7.50. The debentures are redeemable at the option of the Company
prior to March 31, 1998 only if the Company has completed an initial public
offering of its common stock, the shares of its common stock are listed or
admitted for quotation on a national securities exchange or quotation system,
and the closing price of such shares is greater than three times the offering
price of such shares in the initial public offering for a period of twenty or
more consecutive days. The entire principal amount of the debentures is due
and payable on March 31, 1998, unless the debentures are previously redeemed
or converted. The debentures also contain a covenant which prohibits the
Company from the payment of a cash dividend in respect to the Company's
common or preferred stock.
(10) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
<S> <C> <C>
Note payable to bank in monthly installments of $7,287 including
interest at 8.75%, final installment due June 1997, secured by
substantially all
assets of one of the Company's subsidiaries $ 190,526 $ 116,115
Note payable to bank in monthly installments of $3,709 plus interest at
9.05%, final installment due June 1997, secured by funds, deposits, and
other property of one of the Company's subsidiaries 68,171 28,200
Note payable to bank in monthly installments of $4,798 including
interest at 9.40%, final installment due November 1998, secured by all
funds,
deposits, and other property of one of the Company's subsidiaries 0 97,883
Note payable to an individual with principal plus interest at 7% due
in January 1996, secured by substantially all the equipment of
one of the Company's subsidiaries 0 126,020
Note payable to an individual in monthly installments of $2,075
including interest at 8%, final installment due April 1999 0 72,655
Note payable to an individual in monthly installments of $714
including interest at 10%, final installment due July 2000 0 31,242
Notes payable to individuals with maturity dates ranging from July 1996
through January 1997, with interest at 10% payable annually 50,000 1,967,000
Financing agreement with the Company's primary lender with a line of credit of
$2,600,000, principal balance due February 1998, interest payable monthly at
the bank's base rate plus 3%. The line also contains a provision whereas
interest accrues at 9% and is convertible into warrants to purchase the
Company's common stock. The number of warrants to be granted equals the total
accrued interest at the date of an initial public offering of the Company's
common stock divided by the offering price per share. The warrants expire five
years from the date of issue 0 2,117,817
Notes payable to bank in monthly installments of $27,249 plus
interest at the bank's base rate plus 1.75%, final balloon installment
of $354,237 plus interest due December 1998, secured by receivables,
inventory and fixed assets of certain subsidiaries 0 1,392,813
Notes payable to individuals with interest payable quarterly at 10% and
principal due August 1996 0 835,018
Other notes payable to banks in monthly installments totaling $5,557
including interest ranging from 7.25% to 16%, expiring through
September 1999, secured by certain assets of the operating subsidiaries 163,865 124,770
Notes paid during 1995 291,527 0
764,089 6,909,533
Less current portion (335,826) (5,107,859)
$ 428,263 $ 1,801,674
</TABLE>
Maturities of long-term debt as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ending December 31
1996 $ 5,107,859
1997 1,602,827
1998 169,207
1999 24,809
2000 4,831
$ 6,909,533
</TABLE>
In addition to the $2,600,000 line of credit listed in the above table, the
Company has lines of credit with its primary lender totaling $1,850,000,
interest payable monthly at the bank's base rate plus 1.25%. These lines of
credit are secured by receivables, inventory, fixed assets, and general
intangibles of certain subsidiaries. Amounts borrowed under these lines were
$84,813 as of December 31, 1995.
The terms of the lines of credit contain, among other provisions,
requirements for maintaining certain financial ratios, net worth and net
income levels, and limitations on capital expenditures, cash transfers, and
related party receivables.
The Company failed to meet certain covenants related to the above financing
agreements. On April 23, 1996, the Company's bank waived all prior covenant
violations, canceled the covenants and amended the finance agreements to
establish new covenants. The new covenants established requirements for the
Company to maintain certain financial ratios, net worth and net income
levels, and limitations on capital expenditures, cash transfers and related
party receivables. As of the most recent debt covenant compliance date, the
Company was out of compliance with several of the new covenants (See Note 17).
As of August 30, 1996, the Company was in default on $800,000 of notes payable
to individuals (See Note 17).
(11) INCOME TAXES
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
December 31, 1994:
Federal $ 0 $ 27,000 $ 27,000
State 9,000 13,000 22,000
$ 9,000 $ 40,000 $ 49,000
December 31, 1995:
Federal 0 (95,000) (95,000)
State 37,000 (17,000) 20,000
$37,000 $(112,000) $(75,000)
</TABLE>
The provision for income taxes varied from the expected federal statutory
rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31
<S> <C> <C>
1994 1995
Expected federal tax recovery using statutory
rate of 34% $(26,000) $(642,000)
Increase (reduction) in taxes resulting from:
Change in valuation allowance 39,800 231,500
Nondeductible acquisition costs 41,000 39,600
Goodwill amortization 10,000 59,500
Goodwill write-off 0 183,000
State taxes, net of federal benefit 15,000 13,400
Other (30,800) 40,000
$ 49,000 $ (75,000)
</TABLE>
As of December 31, 1995, the Company had a net operating loss carryforward of
approximately $965,000. If not utilized to offset future taxable income, this
carryforward will begin to expire in 2008.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
<S> <C> <C>
Deferred tax assets:
Accounts payable $ 106,400 $ 0
Net operating loss carryforward 113,400 385,800
Inventories 0 52,800
Other 10,900 32,300
230,700 470,900
Less valuation allowance (113,400) (385,800)
117,300 85,100
Deferred tax liabilities:
Accounts receivable (246,300) 0
Inventories (97,600) 0
Property and equipment (354,900) (866,700)
Other (20,500) (85,100)
(719,300) (951,800)
Net deferred tax liabilities $(602,000) $(866,700)
</TABLE>
The Company has recorded a valuation allowance with respect to the net
operating loss carryforward reflected as a deferred tax asset due to the
uncertainty of its ultimate realization.
(12) LEASES
The Company has several capital leases with monthly payments totaling $7,652
including imputed interest ranging from 2.87% to 14.60%. These leases have
various expiration dates through October 2000. In addition, the Company has
several operating leases. Minimum lease commitments as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
OPERATING
CAPITAL RELATED PARTIES OTHER
<S> <C> <C> <C>
1996 $ 90,402 $ 553,556 $ 768,511
1997 47,334 566,464 637,896
1998 26,295 563,567 388,513
1999 3,667 561,086 289,594
2000 2,444 566,240 97,605
Thereafter 0 2,192,496 188,000
170,142 $5,003,409 $2,370,119
Less amounts representing interest (17,645)
152,497
Less current maturities (79,072)
$ 73,425
</TABLE>
Capital leases included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
<S> <C> <C>
Cost $201,236 $203,393
Less accumulated depreciation (2,767) (10,619)
$198,469 $192,774
</TABLE>
Rent expense is as follows:
<TABLE>
<CAPTION>
RELATED PARTIES OTHER TOTAL
<S> <C> <C> <C>
1993 $ 0 $ 12,462 $ 12,462
1994 214,000 401,555 615,555
1995 438,675 928,894 1,367,569
</TABLE>
(13) EMPLOYMENT COMMITMENTS
The Company has entered into employment agreements with members of its
management and key employees at its subsidiaries. The commitments under these
employment agreements as of December 31, 1995, are summarized as follows:
<TABLE>
<CAPTION>
SUBSIDIARIES'
MANAGEMENT EMPLOYEES TOTAL
<S> <C> <C> <C>
1996 $1,114,500 $ 744,409 $1,858,909
1997 542,500 669,441 1,211,941
1998 432,692 550,120 982,812
1999 422,500 314,005 736,505
2000 321,516 57,800 379,316
Thereafter 400,000 52,891 452,891
$3,233,708 $2,388,666 $5,622,374
</TABLE>
(14) STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN
The Pallet Recycling Associates of North America, Inc. 1995 Long-term
Incentive and Employee Stock Option Plan (Option Plan) allows for the grant
of options to officers and employees of the Company and its subsidiaries to
purchase common shares at an exercise price not less than 100% of fair market
value on the dates of grant. The Option Plan also provides for grants of
stock appreciation rights, restricted stock awards, and performance awards.
Outstanding options as of December 31, 1995, consisted of 145,250 options
with exercise prices ranging from $4.00-$20.00.
On August 30, 1996, the Company canceled all outstanding options that existed as
of December 31, 1995 and re-issued new options. After re-issuance the
outstanding options can be summarized as follows:
<TABLE>
<CAPTION>
TOTAL EXERCISE
SHARES OPTIONS OPTIONS OUTSTANDING PRICE PER
YEAR OF GRANT GRANTED EXPIRED EXERCISED OPTIONS SHARE
<C> <C> <C> <C> <C> <C>
1996 495,000 0 0 495,000 $3.60
</TABLE>
The above options vest from 1996 to 1998.
WARRANTS
In connection with certain loans to the Company made or to be made pursuant
to loan commitments, or the private placement of the Company's promissory
notes, the Company has issued and may issue in the future warrants to
purchase shares of the Company's common stock. Outstanding warrants issued as
of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
EXERCISE
TOTAL WARRANTS WARRANTS OUTSTANDING PRICE PER EXPIRATION
YEAR OF GRANT GRANTED EXPIRED EXERCISED WARRANTS SHARE DATE
<S> <C> <C> <C> <C> <C> <C>
1994 7,500 750 0 6,750 $ 20.00 1997
1995 7,775 625 0 7,150 $ 20.00 1998
1995 6,917 0 0 6,917 $ 36.00 1998
1995 14,347 0 0 14,347 $ 32.00 1998
1995 27,394 0 0 27,394 Lesser of 1998
$24.00 or
60% of initial
public
offering price
63,933 1,375 0 62,558
</TABLE>
At various dates from January 1, 1996 through June 25, 1996, the Company
granted warrants to purchase an additional 491,933 shares of common stock as
follows:
<TABLE>
<CAPTION>
OUTSTANDING
WARRANTS EXERCISE PRICE PER SHARE EXPIRATION DATE
<S> <C> <C>
2,625 $ 20.00 1999
12,500 Initial public offering price 1999
60,000 Greater of $5.00 or 100% of the price in the Company's 2001
next Qualified Financing (initial public offering of
common stock or private sale of at least $1,500,000 of
the Company's equity or debt) (See note 16(c)(ii))
300,000 Greater of $5.00 or 75% of the price in the 2001
Company's next Qualified Financing (See note
16(c)(ii))
729 Lesser of $24.00 or 67% of initial public 1999
offering price
7,063 Lesser of $20.00 or 50% of initial public 2000
offering price
109,016 Lesser of $6.40 or 80% of initial public offering 2001
price (See note 16(c)(iii))
</TABLE>
(15) COMMITMENTS
On October 26, 1995, the Company entered into an agreement to purchase all of
the outstanding stock of Indy Pallet Company, Inc. (together with Specialty
Pallet Company, Inc., the Pending Acquisition), a pallet recycling company
located in Indianapolis, Indiana. The sales agreement has closed into escrow,
pending funding by the Company. To complete the transaction funding of the
escrow agreement must be completed prior to October 31, 1996.
On June 7, 1996, the Company entered into an agreement to purchase all of the
outstanding stock of Pallet Outlet Company, Inc., a pallet recycling company
with locations in Biglerville and York, Pennsylvania. The sales agreement has
closed into escrow, pending funding by the Company.
As of June 30, 1996, an agreement the Company had entered into with Pallet
Factory, Inc. to purchase all of their outstanding stock expired. The
stockholders of Pallet Factory, Inc., decided not to extend the existing
agreement. As is the Company's policy, approximately $100,000 of acquisition
related costs, including accounting and legal fees, which had been capitalized
in anticipation of completion of the purchase, were expensed as corporate
selling and administrative costs.
The Company is obligated to pay approximately $2,890,000, issue 250,000
shares of common stock and issue $1,200,000 in debt to consummate the above
transactions. The Company must also repay $605,000 in stockholder debt
related to the above transactions.
(16) SUBSEQUENT EVENTS
(a) ACQUISITIONS
On February 15, 1996, the Company purchased all of the outstanding
stock of Diamond Pallet, Inc., a pallet recycling company located in
Stockton, California, in exchange for cash and notes payable. The notes
are payable to the former owners of Diamond Pallet, Inc. in monthly
installments of $3,861 including interest at 8%, with the final
installment due in February, 2001. The notes are secured by all of the
equipment of Diamond Pallet, Inc.
On April 25, 1996, the Company purchased the equipment and inventory
of Metroplex Wood Products (a sole proprietorship), a pallet recycling
company located in Fort Worth, Texas, in exchange for cash and notes
payable. These notes are payable in monthly installments of $10,138
including interest at 8%, with the final installment due in April 2001.
The note is secured by the equipment and inventory purchased.
The Company paid approximately $725,000 in cash and issued notes of
approximately $690,000 to complete the above acquisitions.
(b) STOCKHOLDERS' EQUITY
Dollar, share, and per share amounts in the accompanying financial
statements have been adjusted retroactively, where appropriate, to reflect
a 1-for-8 common stock split and a 1-for-2 preferred stock and stock
warrant split effected on April 4, 1996, as approved by the board of
directors on March 29, 1996.
As a result of the disproportionate stock split between the common and
preferred shares, additional goodwill and additional paid-in capital of
approximately $3,088,000 was recorded on April 4, 1996. The
disproportionate stock split effectively resulted in additional
consideration being given to the previous owners of certain businesses
that were acquired by the Company in 1994 and 1995 through the issuance of
preferred stock. The additional goodwill will be amortized over the
remaining lives of the original goodwill generated from individual
businesses that were acquired through the issuance of preferred stock.
(c) FINANCING
(i) On March 4, 1996, the Company has signed a letter of intent with
an underwriter to conduct an initial public offering during 1996.
The Company is obligated to pay the expenses of the underwriter
relating to this anticipated offering.
(ii) The Company completed a private debt placement on April 23, 1996
for $1,500,000. The debt carries an interest rate of prime plus
3% and matures on April 23, 1997 or upon the completion of an
initial public offering or other qualified offering. The Company
issued 360,000 warrants of the Company's common stock in
connection with this private debt placement (See note 14).
(iii) Through June 25, 1996, the Company obtained agreements to extend
the term of notes aggregating $1,485,018 for a period of one
year. The Company issued 109,016 warrants to purchase the
Company's common stock in connection with these agreements (See
note 14).
(17) GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. The Company has
had recurring net losses since inception. As discussed in note 10, the Company
is in default on the payment of notes to individuals with a principal balance of
approximately $800,000 as of August 30, 1996, and is not in compliance with
certain covenant terms contained in its long-term debt agreements with its
primary lender. The outstanding balances related to these agreements were
approximately $4,300,000 as of August 30, 1996. As a result of these events, the
indebtedness is classified as current and as a result the Company has a working
capital deficit.
The Company has filed for an initial public offering of its common stock.
Proceeds from the offering, if completed, will be used to complete the pending
acquisitions, repay outstanding debt including the notes to individuals as to
which the Company is in default, additional acquisitions, working capital, and
general corporate purposes. The Company's management believes that the net
proceeds of the offering, cash generated from operations, and borrowing capacity
under credit facilities will be sufficient to satisfy the Company's operating
cash requirements for the foreseeable future. Additionally, management is
working with its individual debt holders to extend their notes. As of August 30,
1996, management has been successful in extending approximately $1,485,000 of
approximately $3,152,000 in notes payable to individuals which have due dates
between July of 1996 and April of 1997. Management is in discussions with the
Company's primary lender to amend the loan covenants. No demand for payment has
been made for any of the indebtedness for which the Company is in default or for
which the Company is currently out of compliance.
INDEPENDENT AUDITOR'S REPORT
To The Stockholders
Otto Packaging, Inc.
St. Paul, Minnesota
We have audited the accompanying balance sheets of Otto Packaging, Inc.
(an S corporation) as of December 31, 1993 and 1992, and the related statements
of earnings, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Otto Packaging, Inc. as of
December 31, 1993 and 1992, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
SCHUTTA, NELSON & ZEMBAL, LTD.
Certified Public Accountants
February 4, 1994
OTTO PACKAGING, INC.
BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
ASSETS
(NOTES 3 AND 5)
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Current assets:
Cash $ 75,842 $ 88,030
Accounts receivable:
Trade, less allowance for uncollectible accounts of
$1,500 at
December 31, 1993 146,331 157,677
Other 5,475 5,113
Inventory 32,557 28,494
Prepaid expenses 17,328 26,841
Total current assets 277,533 306,155
Other assets:
Cash value of life insurance 14,998
Leasehold improvements and equipment, at cost:
Leasehold improvements 99,363 99,363
Furniture and equipment 56,176 64,918
Factory equipment 336,721 325,585
Vehicles/trailers 300,778 334,525
793,038 824,391
Less accumulated depreciation and amortization 446,548 396,875
346,490 427,516
$624,023 $748,669
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 55,408 $ 42,289
Related party (note 2) 12,500 11,000
Accrued salaries and payroll taxes 10,105 19,548
Sales tax payable 867 563
Current portion of long-term debt (note 5) 122,440 128,009
Total current liabilities 201,320 201,409
Long-term debt, less current portion (note 5) 177,385 295,244
Commitments (notes 3 and 7)
Stockholders' equity:
Common stock--$100 par value; 250 shares authorized; 10
shares issued and outstanding 1,000 1,000
Paid-in-capital 590 590
Retained earnings 243,728 250,426
245,318 252,016
$624,023 $748,669
</TABLE>
See notes to financial statements.
OTTO PACKAGING, INC.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1992 AND 1993
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Net sales $1,799,470 $1,690,863
Cost of sales 1,251,045 1,171,331
Gross margin 548,425 519,532
Operating expenses 479,775 448,706
Income from operations 68,650 70,826
Other income (expense):
Interest expense --
net (27,774) (29,174)
Other (2,451) 4,475
(30,225) (24,699)
Net earnings $ 38,425 $ 46,127
</TABLE>
See notes to financial statements.
OTTO PACKAGING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
<S> <C> <C> <C> <C>
Balances at December 31, 1991 200 $1,000 $590 $245,169
Net earnings 46,127
Distributions (40,870)
Balances at December 31, 1992 200 1,000 590 250,426
Net earnings 38,425
Distributions (45,123)
Balances at December 31, 1993 200 $1,000 $590 $243,728
</TABLE>
See notes to financial statements.
OTTO PACKAGING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 38,425 $ 46,127
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization 82,987 83,820
Net decrease in receivables, inventories and
prepaids 16,434 9,220
Net increase (decrease) in payables and accrued
expenses 5,480 (37,620)
Loss on disposal of assets 3,016 371
Cash surrender value (3,492) (3,437)
Net cash flow provided by operating activities 142,850 98,481
Cash flows from investing activities:
Capital expenditures (17,077) (164,819)
Proceeds from asset disposals 12,100 37,107
Net cash used in investing activities (4,977) (127,712)
Cash flows from financing activities:
Proceeds from long-term borrowings 5,074 154,688
Repayment of long-term debt (128,502) (141,193)
Stockholder distributions (26,633) (40,870)
Net cash used in financing activities (150,061) (27,375)
Net decrease in cash and cash equivalents (12,188) (56,606)
Cash and cash equivalents:
Beginning of year 88,030 144,636
End of year $ 75,842 $ 88,030
</TABLE>
See notes to financial statements.
OTTO PACKAGING, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY:
The Company acquires and refurbishes used wooden pallets for resale.
CONCENTRATION OF CREDIT RISK:
Most of the Company's business activity consists of customers located within
Minnesota. Collateral is generally not required. The Company specifically
charges-off potential credit losses and such losses have been within
management's expectations.
The Company invests its excess cash deposits with local financial
institutions. The Company has not experienced losses related to these
deposits.
INVENTORY:
Inventory consists primarily of rebuilt and refurbished wooden pallets.
Inventory is valued at average acquisition cost plus average refurbishing and
overhead costs which approximates lower of cost or market.
DEPRECIATION AND AMORTIZATION:
Equipment and vehicles are being depreciated using the straight line method
over lives of 5-7 years. Leasehold improvements are being amortized over an
estimated life of thirty-one and one-half years.
INCOME TAXES:
The Company, with consent of its Stockholders, has elected under the Internal
Revenue Code to be an S Corporation. In lieu of corporation income taxes, the
stockholders of an S Corporation are taxed on their proportionate share of
the Company's taxable income. Therefore, no provision or liability for
Federal and State income taxes has been included in the financial statements.
Effective with the approval of the Company's plan of reorganization (see Note
4) on January 1, 1994, the Stockholders terminated the election to be treated
as an S Corporation.
STATEMENT OF CASH FLOWS:
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
(2) RELATED PARTY TRANSACTIONS:
The Company leases its shop, office and storage facilities under an annual
lease from a partnership consisting of the Company's Stockholders. Under the
lease agreement, the Company is responsible for payment of maintenance,
insurance and all other occupancy costs. Total payments made to the
partnership for rent under this agreement included in the statement of
earnings aggregated $139,740 and $132,010 for the years ended December 31,
1993 and 1992, respectively.
(3) LINE OF CREDIT:
The Company has a $50,000 line of credit (subject to a borrowing base -- as
defined) with a bank available until June 5, 1994. Interest on advances under
the line of credit are at 1.5% over the bank prime rate (as defined).
Performance under the agreement is secured by inventory, equipment, accounts
receivable and general intangibles, and is personally guaranteed by the
Stockholders. The line of credit is also subject to the same minimum
financial statement requirements, covenants, and restrictions required under
the Term Loan Agreement (see Note 5). At December 31, 1993, the Company was
in compliance with or obtained waivers for all such covenants. There were no
borrowings under the line of credit during the year ended December 31, 1993.
(4) SUBSEQUENT EVENT:
The Stockholders approved a plan of reorganization on December 31, 1993, to
merge the Company with PRANA St. Paul, Inc., a Minnesota Corporation. The
Company is to be the surviving entity of the merger (effective January 1,
1994) and will be a wholly-owned subsidiary of Pallet Recycling of North
America, Inc.
(5) LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31
1993 1992
<S> <C> <C>
Promissory note, interest at 1.5% over the bank prime rate, due in
monthly installments of $8,100 (including interest), until June
1996(1) $ 180,623 $ 260,433
Promissory note, interest at 2% over the bank prime rate, due in
monthly installments of $1,000 (plus interest) until May 1997(1) 41,000 53,000
Installment note, 8%, due in monthly installments of $771
(including interest), until November 1997 (secured by vehicle)(2) 31,040 37,458
Installment note, interest at 2% over the bank prime rate, due in
monthly installments of $625 (plus interest) until December 1996(2) 21,955 29,375
Installment notes, 2.9%-11.5%, (secured by vehicles and equipment) 25,207 42,987
299,825 423,253
Less current portion (122,440) (128,009)
$ 177,385 $ 295,244
</TABLE>
(1) Provisions of the Term Loan Agreement require the Company to meet certain
annual minimum financial ratios, covenants and restrictions. At December
31, 1993, the Company was in compliance with or obtained waivers for all
such covenants. The notes are secured by a security agreement and
personally guaranteed by the President/Stockholder of the Company.
(2) Performance under the note is personally guaranteed by the
President/Stockholder of the Company.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1994 $122,440
1995 128,188
1996 36,051
1997 13,146
$299,825
</TABLE>
(6) SUPPLEMENTARY STATEMENT OF CASH FLOWS INFORMATION:
Supplementary cash flow information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
1993 1992
<S> <C> <C>
Cash paid for:
Interest $28,846 $31,956
</TABLE>
NONCASH TRANSACTION:
Effective December 31, 1993, the Company assigned its interest in a life
insurance policy with a cash surrender value of $18,490 to the Stockholders.
(7) COMMITMENTS:
The Company entered into lease agreements for certain factory equipment and a
vehicle requiring various monthly payments through December 1995. Minimum
payments under the noncancellable operating lease agreements are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1994 $7,120
1995 5,496
</TABLE>
Rent expense under these operating lease agreements aggregated approximately
$19,000 and $12,000 for the years ended December 31, 1993 and 1992,
respectively.
(8) MAJOR CUSTOMERS:
During the years ended December 31, 1993 and 1992, sales to two customers
were approximately 25.8% and 22.8%, respectively, of net sales.
INDEPENDENT AUDITOR'S REPORT ON ADDITIONAL INFORMATION
To The Stockholders
Otto Packaging, Inc.
St. Paul, Minnesota
Our report on our audits of the basic financial statements of Otto Packaging,
Inc. for 1993 and 1992 appears on page 1. Those audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The supplementary information on operations on page 11 is presented
for purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
SCHUTTA, NELSON & ZEMBALL, LTD.
Certified Public Accountants
February 4, 1994
OTTO PACKAGING, INC.
SCHEDULE I -- SUPPLEMENTARY INFORMATION ON OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1993 1992
<S> <C> <C>
Cost of sales:
Materials $ 188,989 $ 80,419
Wages and benefits 546,497 565,162
Depreciation 57,671 57,630
Building rent 133,600 126,070
Manufacturing
overhead 324,288 342,050
$1,251,045 $1,171,331
Operating expenses:
Depreciation $ 25,316 $ 26,190
Building rent 6,140 5,940
Wages and benefits 286,677 271,926
Professional fees 17,924 26,147
Other 143,718 118,503
$ 479,775 $ 448,706
</TABLE>
See Independent Auditor's Report on Supplementary Information.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
BVS, Inc.:
We have audited the accompanying balance sheets of BVS, Inc. as of January
31, 1993 and 1994, and the related statements of earnings, stockholders'
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BVS, Inc. as of January 31,
1993 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 7, 1994
BVS, INC.
BALANCE SHEETS
January 31, 1993 and 1994
Assets
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Current assets:
Cash $ 1,210 $ 2,519
Trade accounts receivable 133,920 242,071
Inventories 129,843 160,656
Prepaid expenses 9,561 10,983
Refundable income taxes 0 2,974
Total current assets 274,534 419,203
Property and equipment at cost:
Furniture and fixtures 7,315 12,169
Equipment 184,195 249,279
Transportation equipment 92,986 163,485
Construction in progress 0 94,188
284,496 519,121
Less accumulated depreciation 117,308 164,823
Net property and equipment 167,188 354,298
Total assets $441,722 $773,501
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,357 $ 34,654
Stockholder note payable 15,000 0
Accrued liabilities 10,136 16,054
Income taxes payable 1,260 0
Deferred income taxes 103,000 149,000
Total current liabilities 136,853 199,708
Deferred income taxes 41,000 69,900
Stockholders' equity:
Common stock--no par value; 1,000,000 shares
authorized; 1,111 and 1,070 shares issued and
outstanding as of January 31, 1993 and 1994,
respectively 2,000 1,926
Retained earings 261,869 501,967
Total stockholders' equity 263,869 503,893
Commitments and contingencies (note 3)
Total liabilities and stockholder' equity $441,722 $773,501
</TABLE>
See accompanying notes to financial statements.
BVS, INC.
STATEMENTS OF EARNINGS
Years ended January 31, 1993 and 1994
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Net sales $1,571,841 $2,673,150
Cost of sales 1,237,369 1,862,163
Gross profit 334,472 810,987
Operating expenses:
Selling 42,377 73,094
General and administrative 175,878 278,367
Total operating expenses 218,255 351,461
Operating income 116,217 459,526
Other income (expense):
Interest expense (1,532) (1,119)
Loss on sale of equipment (2,492) 0
Miscellaneous, net 9,392 2,449
Total other income 5,368 1,330
Earnings before income
taxes 121,585 460,856
Provision for income taxes 49,591 186,679
Net earnings $ 71,994 $ 274,177
</TABLE>
See accompanying notes to financial statements.
BVS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended January 31, 1993 and 1994
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C>
Balance, January 31, 1992 1,111 $2,000 $189,875 $191,875
Net income 0 0 71,994 71,994
Balance, January 31, 1993 1,111 2,000 261,869 263,869
Net income 0 0 274,177 274,177
Repurchase of stock at $833 per
share (41) (74) (34,079) (34,153)
Balance, January 31, 1994 1,070 $1,926 $501,967 $503,893
</TABLE>
See accompanying notes to consolidated financial statements.
BVS, INC.
STATEMENTS OF CASH FLOWS
Years ended January 31, 1993 and 1994
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 71,994 $ 274,177
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 28,774 47,515
Loss on sale of equipment 2,492 0
Deferred income taxes 46,100 74,800
Changes in operating assets and liabilities:
Trade accounts receivable (35,497) (108,151)
Inventories (53,768) (30,813)
Prepaid expenses 244 (1,422)
Accounts payable (8,266) 27,297
Accrued liabilities 1,068 5,918
Income taxes payable/refundable 2,881 (4,234)
Net cash provided by operating activities 56,022 285,087
Cash flows from investing activities:
Proceeds from sale of equipment 10,000 0
Purchases of property and equipment (68,299) (234,625)
Net cash used in investing activities (58,299) (234,625)
Cash flows from financing activities:
Net principal payments on stockholder note
payable 0 (15,000)
Purchase of common stock 0 (34,153)
Net cash used in financing activities 0 (49,153)
Net increase (decrease) in cash (2,277) 1,309
Cash at beginning of year 3,487 1,210
Cash at end of year $ 1,210 $ 2,519
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 1,589 $ 1,200
Cash paid during the year for income taxes 610 116,113
</TABLE>
See accompanying notes to financial statements.
BVS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1993 AND 1994
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
BVS, Inc. (the Company) builds, refurbishes and distributes wooden pallets
for use in a variety of industries. The Company is located in Phoenix,
Arizona and sells its products on an unsecured basis to customers throughout
the Southwestern United States. The Company's ability to collect the amounts
due from customers is affected by regional economic conditions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures 7 years
Equipment 5-7 years
Transportation equipment 7 years
</TABLE>
INCOME TAXES
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under Statement
No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to 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 enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Adoption of Statement No. 109 had an immaterial effect on the
Company's 1994 financial position and results of operations.
The Company is on the cash basis of accounting for income tax purposes.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Raw materials $ 80,210 $ 83,239
Finished goods 49,633 77,417
$129,843 $160,656
</TABLE>
(3) OPERATING LEASES
The Company leases its corporate office and production facility from a third
party under an operating lease expiring November 1994. Rent expense for this
lease was $63,965 and $68,553 in 1993 and 1994, respectively. The Company's
future obligation under the lease is $47,610 at January 31, 1994.
(4) INCOME TAXES
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES.
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
1993:
Federal $ 1,824 $39,900 $ 41,724
State 1,667 6,200 7,867
$ 3,491 $46,100 $ 49,591
1994:
Federal $ 86,140 $65,100 $151,240
State 25,739 9,700 35,439
$111,879 $74,800 $186,679
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the net deferred tax liability as of January 31, 1994 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax asset:
Accrual to cash differences $ 20,800
Deferred tax liabilities:
Accrual to cash differences 182,700
Depreciation 38,000
Other 19,000
239,700
Net deferred tax liability $218,900
</TABLE>
No valuation allowance for the deferred tax asset was necessary as of January
31, 1994. The character of the deferred tax asset is such that it can be
realized through carryback to prior tax periods or offset against future
taxable income.
The provision for income taxes varied from the expected federal statutory
rate as follows:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Expected federal tax expense using statutory rate of 34% $41,339 $156,691
Increase (reduction) in taxes resulting from:
State income taxes, net of federal income tax benefit 7,295 27,651
Other 957 2,337
$49,591 $186,679
</TABLE>
(5) RELATED PARTY TRANSACTIONS
The Company had a note payable to one of its stockholders in the amount of
$15,000 as of January 31, 1993. The demand note bears interest at 12% and was
paid in 1994. Interest expense related to this note was $1,532 and $1,119 for
1993 and 1994, respectively.
(6) SUBSEQUENT EVENT
Effective February 1, 1994, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling of North America, Inc., a Minnesota
corporation.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Harris Supply Company, Inc.:
We have audited the accompanying balance sheets of Harris Supply Company,
Inc. as of June 30, 1992, 1993, and March 31, 1994, and the related
statements of operations, stockholder's equity and cash flows for the years
ended June 30, 1992 and 1993 and the nine-month period ended March 31, 1994.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Harris Supply Company, Inc.
as of June 30, 1992, 1993, and March 31, 1994, and the results of its
operations and its cash flows for the years ended June 30, 1992 and 1993 and
the nine-month period ended March 31, 1994, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 20, 1995
HARRIS SUPPLY COMPANY, INC.
BALANCE SHEETS
JUNE 30, 1992, 1993, AND MARCH 31, 1994
Assets
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Current assets:
Cash $ 30,014 $ 26,465 $ 12,326
Trade accounts receivable 92,700 151,512 122,375
Inventories 29,892 40,922 37,494
Prepaid expenses 150 150 0
Refundable income taxes 0 1,944 600
Total current assets 152,756 220,993 172,795
Property and equipment at cost:
Building 11,706 11,706 11,706
Equipment 147,270 171,023 173,250
Transportation equipment 123,170 103,317 88,601
282,146 286,046 273,557
Less accumulated depreciation 140,414 165,389 170,600
Net property and equipment 141,732 120,657 102,957
Total assets $294,488 $341,650 $275,752
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 11,696 $ 35,714 $ 16,328
Current maturities of long-term debt 19,391 6,411 3,008
Due to stockholder 0 0 15,127
Stockholder note payable 45,000 45,000 45,000
Accrued liabilities 6,708 19,358 20,540
Income taxes payable 2,499 0 0
Deferred income taxes 0 0 3,900
Total current liabilities 85,294 106,483 103,903
Long-term debt, net current maturities 11,764 6,855 4,582
Defered income taxes 0 0 7,900
Stockholder's equity:
Common stock--$1.00 par value; 7,500 shares
authorized; 3,500 shares issued and outstanding
as of June 30, 1992, 1993, and March 31, 1994 3,500 3,500 3,500
Additional paid-in capital 172,496 207,496 218,149
Retained earnings (accumulated deficit) 56,434 52,316 (62,282)
Treasury stock, at cost (35,000) (35,000) 0
Total stockholder's equity 197,430 228,312 159,367
Commitments and contingencies (notes 3 and 5)
Total liabilities and stockholder's equity $294,488 $341,650 $275,752
</TABLE>
See accompanying notes to financial statements.
HARRIS SUPPLY COMPANY, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1992, 1993,
AND THE NINE-MONTH PERIOD ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net sales $1,477,390 $1,180,629 $926,928
Cost of sales 1,055,490 805,536 641,134
Gross profit 421,900 375,093 285,794
Operating expenses:
Selling, general and
administrative 433,584 375,629 335,114
Operating loss (11,684) (536) (49,320)
Other income (expense):
Interest expense (10,703) (3,423) (3,509)
Miscellaneous, net 2,340 1,059 159
Total other expense (8,363) (2,364) (3,350)
Loss before income taxes (20,047) (2,900) (52,670)
Provision for income taxes 2,400 1,218 11,800
Net loss $ (22,447) $ (4,118) $(64,470)
</TABLE>
See accompanying notes to financial statements.
HARRIS SUPPLY COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1992, 1993,
AND THE NINE-MONTH PERIOD ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TREASURY STOCK
PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1991 7,469 $ 7,469 $162,496 $ 92,035 0 $(35,000) $227,000
Distributions 0 0 0 (13,154) 0 0 (13,154)
Capital contribution 0 0 10,000 0 0 0 10,000
Repurchase of stock at
$1.00 per share (3,969) (3,969) 0 0 0 0 (3,969)
Net loss 0 0 0 (22,447) 0 0 (22,447)
Balance, June 30, 1992 3,500 3,500 172,496 56,434 0 (35,000) 197,430
Capital contribution 0 0 35,000 0 0 0 35,000
Net loss 0 0 0 (4,118) 0 0 (4,118)
Balance, June 30, 1993 3,500 3,500 207,496 52,316 0 (35,000) 228,312
Distributions 0 0 0 (15,128) 0 0 (15,128)
Capital contribution 0 0 10,653 0 0 0 10,653
Retirement of treasury
stock 0 0 0 (35,000) 0 35,000 0
Net loss 0 0 0 (64,470) 0 0 (64,470)
Balance, March 31, 1994 3,500 $ 3,500 $218,149 $(62,282) 0 $ 0 $159,367
</TABLE>
See accompanying notes to consolidated financial statements.
HARRIS SUPPLY COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1992, 1993,
AND THE NINE-MONTH PERIOD ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(22,447) $ (4,118) $(64,470)
Adjustments to reconcile net loss to net cash
provided (used in) by operating activities:
Depreciation 42,431 40,937 31,035
(Gain) loss on sale of equipment 0 (2,508) 8,858
Deferred income taxes 0 0 11,800
Changes in operating assets and liabilities:
Trade accounts receivable 49,944 (58,812) 29,137
Inventories 10,047 (11,030) 3,428
Prepaid expenses 3,970 0 150
Accounts payable (15,768) 24,018 (19,386)
Accrued liabilities (49,439) 12,650 1,182
Income taxes payable/refundable 25 (4,443) 1,344
Net cash provided by (used in) operating
activities 18,763 (3,306) 3,078
Cash flows from investing activities:
Proceeds from sale of equipment 0 6,882 0
Purchases of property and equipment (12,220) (39,243) (22,193)
Net cash used in investing activities (12,220) (32,361) (22,193)
Cash flows from financing activities:
Principal payments on long-term debt (32,574) (2,882) (5,676)
Proceeds from stockholder advances 0 0 15,127
Capital contributions from stockholders 10,000 35,000 10,653
Distributions to stockholders (13,154) 0 (15,128)
Purchase of common stock (3,969) 0 0
Net cash provided by (used in) financing
activities (39,697) 32,118 4,976
Net decrease in cash (33,154) (3,549) (14,139)
Cash at beginning of period 63,168 30,014 26,465
Cash at end of period $ 30,014 $ 26,465 $ 12,326
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 10,703 $ 3,423 3,509
Cash paid (refunded) during the period for
income taxes 2,375 5,661 (1,344)
Suplemental schedule of non-cash investing and
financing activities:
Debt retired in exchange for transportation
equipment 0 15,007 0
Treasury stock retired against common stock 0 0 35,000
</TABLE>
See accompanying notes to financial statements.
HARRIS SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1992, 1993, AND MARCH 31, 1994
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Harris Supply Company, Inc. (the Company) builds, refurbishes and distributes
wooden pallets for use in a variety of industries. The Company is located in
Orlando, Florida and sells its products on an unsecured basis to customers
throughout the Southeastern United States. The Company's ability to collect
the amounts due from customers is affected by regional economic conditions.
MERGER
Effective March 1, 1994, Ropco, Inc. (Ropco) was merged into the Company and
500 shares of the Company's common stock were issued in exchange for all of
the outstanding common stock of Ropco. The merger was accounted for as a
pooling of interests, and accordingly, the accompanying financial statements
have been restated to include the accounts and operations of Ropco for all
periods prior to the merger. Separate results of the combining entities for
the years ended June 30, 1992 and 1993, and the nine months ended March 31,
1994 are as follows:
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net sales:
Harris $1,477,390 $1,180,629 $ 926,928
Ropco 875,356 879,502 575,667
Less intercompany (875,356) (879,502) (575,667)
$1,477,390 1,180,629 926,928
Net income (loss):
Harris 7,305 4,942 (44,133)
Ropco (29,752) (9,060) (20,337)
$ (22,447) $ (4,118) $ (64,470)
</TABLE>
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Building 15 years
Equipment 5-7 years
Transportation equipment 7 years
</TABLE>
INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under Statement No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to 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 enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Adoption of Statement No. 109 increased the provision for
income taxes by $11,800 in 1994 and reduced stockholder's equity.
As discussed above, effective March 1, 1994, Ropco was merged into Harris.
Prior to the merger, Ropco was incorporated under Subchapter S of the
Internal Revenue Code. Accordingly, the results of Ropco's operations passed
through to its stockholder's individual return and Ropco paid no federal
income taxes.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31,
1992 1993 1994
<S> <C> <C> <C>
Raw materials $17,098 $23,259 $25,123
Finished goods 12,794 17,663 12,371
$29,892 $40,922 $37,494
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31,
1992 1993 1994
<S> <C> <C> <C>
Note payable to stockholder in monthly installments of
$282 including interest at 6%, due August 1995 $ 0 $ 9,731 $ 7,590
Note payable to bank in monthly installments of $523
including interest at 10.68% secured by transportation
equipment, paid in full in December 1993 9,107 3,535 0
Note payable to bank in monthly installments of $791
including interest at 11.32%, secured by transportation
equipment, paid in full in September 1992 16,288 0 0
Note payable to bank in monthly installments of $474
including interest at 12.58% secured by transportation
equipment, paid in full in November 1992 2,299 0 0
Note payable to bank in monthly installments of $406
including interest at 13.24% secured by transportation
equipment, paid in full in September 1992 1,193 0 0
Note payable to bank in monthly installments of $468
including interest at 12.21% secured by transportation
equipment, paid in full in November 1992 2,268 0 0
31,155 13,266 7,590
Less current maturities (19,391) (6,411) (3,008)
$ 11,764 $ 6,855 $ 4,582
</TABLE>
Maturities of long-term debt as of March 31, 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ending March 31:
1995 $3,008
1996 3,193
1997 1,389
$7,590
</TABLE>
(4) INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES.
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
1992:
Federal $2,400 $ 0 $ 2,400
1993:
Federal 1,218 0 1,218
1994:
Federal 0 11,800 11,800
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the net deferred tax liability as of March 31, 1994 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Accounts receivable $ 3,600
Accrued expenses 5,700
9,300
Deferred tax liabilities:
Inventories (13,200)
Depreciation (7,900)
(21,100)
Net deferred tax liability $(11,800)
</TABLE>
No valuation allowance for the deferred tax assets was necessary as of March
31, 1994. The character of the deferred tax assets is such that it can be
offset against anticipated future taxable income.
The provision for income taxes varied from the expected federal statutory
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH
JUNE 30 PERIOD ENDED
MARCH 31,
1992 1993 1994
<S> <C> <C> <C>
Expected federal tax recovery using statutory
rate of 34% $(6,816) $ (986) $(17,908)
Increase (reduction) in taxes resulting from:
Effects of S-Corp losses 10,116 3,080 27,978
Other (900) (876) 1,730
$ 2,400 $1,218 $ 11,800
</TABLE>
(5) Related Party Transactions
The Company had an 11% demand note payable to one of its stockholders in the
amount of $45,000 as of June 30, 1992, 1993, and March 31, 1994. The Company
also had a long-term note payable to one of its stockholders in the amount of
$9,731 and $7,590 as of June 30, 1993 and March 31, 1994, respectively.
Interest expense related to these notes was $4,956, $5,505 and $4,112 for
1992, 1993 and 1994, respectively. In addition, the Company owed one of its
stockholders $15,127 at March 31, 1994 for operating advances.
The land and building is owned personally and leased to the Company for
$2,500 per month with a lease term of four years commencing March 1, 1994.
Therefore, the building and land is not included on the balance sheet of
Harris Supply.
The minimum annual lease commitments at March 31, 1994 under this lease is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
<S> <C>
1995 $30,000
1996 30,000
1997 30,000
1998 30,000
</TABLE>
(6) SUBSEQUENT EVENT
Effective April 1, 1994, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling Associates of North America, Inc., a
Minnesota corporation.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pallet City, Inc.:
We have audited the accompanying balance sheets of Pallet City, Inc. as of
September 30, 1992 and 1993 and May 31, 1994, and the related statements of
operations and retained earnings, and cash flows for the years ended
September 30, 1992 and 1993, and the eight-month period ended May 31, 1994.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pallet City, Inc. as of
September 30, 1992 and 1993, and May 31, 1994 and the results of its
operations and its cash flows for the years ended September 30, 1992 and 1993
and the eight-month period ended May 31, 1994, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 24, 1995
PALLET CITY, INC.
BALANCE SHEETS
SEPTEMBER 30, 1992 AND 1993 AND MAY 31, 1994
ASSETS
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Current assets:
Cash $ 3,399 $ 421 $ 37,908
Trade accounts receivable, net of allowance for
doubtful accounts of $14,000 in 1994 259,822 335,583 373,234
Inventories 51,683 62,564 103,958
Prepaid expenses 0 6,528 10,655
Total current assets 314,904 405,096 525,755
Property and equipment at cost:
Leasehold improvements 153,662 161,662 169,012
Machinery and equipment 231,297 459,247 590,385
Office furniture and equipment 22,527 22,527 22,527
407,486 643,436 781,924
Less accumulated depreciation (73,348) (112,039) (149,229)
Net property and equipment 334,138 531,397 632,695
Total assets $649,042 $ 936,493 $1,158,450
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 2,253 $ 21,156 $ 0
Note payable to bank 20,886 10,213 150,000
Current maturities of long-term debt 34,470 33,558 70,088
Current maturities of capital lease obligations 13,501 68,756 0
Accounts payable 77,304 122,030 209,497
Accrued liabilities 20,211 29,099 35,248
Total current liabilities 168,625 284,812 464,833
Long-term debt, less current maturities 36,330 9,772 159,912
Capital lease obligations, less current
maturities 28,897 96,319 0
Stockholders' equity:
Common stock--no par value; 100 shares
authorized; 100 shares issued and outstanding 41,000 41,000 41,000
Retained earnings 374,190 504,590 492,705
Total stockholders' equity 415,190 545,590 533,705
Commitments and contingencies (notes 3 and 6)
Total liabilities and stockholders' equity $649,042 $ 936,493 $1,158,450
</TABLE>
See accompanying notes to financial statements.
PALLET CITY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED SEPTEMBER 30, 1992 AND 1993
AND THE EIGHT-MONTH PERIOD ENDED MAY 31, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net sales $2,039,902 $2,940,491 $2,560,458
Cost of sales 1,580,983 2,344,254 1,659,531
Gross profit 458,919 596,237 900,927
Operating expenses:
Selling, general and administrative 442,334 408,914 658,938
Operating income 16,585 187,323 241,989
Other expense:
Interest expense 17,897 17,047 15,126
Miscellaneous 0 0 1,142
Total other expense 17,897 17,047 16,268
Net income (loss) (1,312) 170,276 225,721
Retained earnings -- beginning of
period 378,701 374,190 504,590
Stockholder distributions (3,199) (39,876) (237,606)
Retained earnings -- end of period $ 374,190 $ 504,590 $ 492,705
</TABLE>
See accompanying notes to financial statements.
PALLET CITY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1992 AND 1993
AND THE EIGHT-MONTH PERIOD ENDED MAY 31, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,312) $ 170,276 $ 225,721
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 31,336 38,691 37,190
Changes in operating assets and liabilities:
Trade accounts receivable 65,065 (75,761) (37,651)
Inventories (19,175) (10,881) (41,394)
Prepaid expenses 4,073 (6,528) (4,127)
Bank overdraft 2,253 18,903 (21,156)
Accounts payable 49,255 44,726 87,467
Accrued liabilities 7,596 8,888 6,149
Net cash provided by operating activities 139,091 188,314 252,199
Cash flows from investing activities:
Purchases of property and equipment (59,566) (79,464) (138,488)
Cash flows from financing activities:
Proceeds from (payments on)
note payable to bank (8,583) (10,673) 139,787
Proceeds from long-term debt 0 9,683 77,879
Net principal payments on
stockholder note payable (13,769) 0 0
Principal payments of long-term debt (42,911) (37,153) (30,123)
Principal payments of capital lease obligations (7,664) (33,809) (26,161)
Stockholder distributions (3,199) (39,876) (237,606)
Net cash used in financing activities (76,126) (111,828) (76,224)
Net increase (decrease) in cash 3,399 (2,978) 37,487
Cash at beginning of period 0 3,399 421
Cash at end of period $ 3,399 421 37,908
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 17,897 $ 17,047 $ 15,126
Supplemental disclosure of non-cash investing
and financing activities:
Equipment acquired with capital lease
obligations $ 28,800 $ 156,486 $ 0
Capital lease obligations refinanced
to long-term debt 0 0 138,914
</TABLE>
See accompanying notes to financial statements.
PALLET CITY, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1992 AND 1993 AND MAY 31, 1994
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Pallet City, Inc. (the Company) builds, refurbishes and distributes wooden
pallets for use in a variety of industries. The Company has operating
facilities in both the Buffalo and Rochester, New York areas and sells its
products on an unsecured basis to customers primarily in the Western and
Central New York area. The Company's ability to collect the amounts due from
customers is affected by regional economic conditions.
MERGER
Effective May 31, 1994, Ertam Enterprises, Inc. (Ertam) was merged into the
Company. The merger was accounted for as a pooling of interests, and
accordingly, the accompanying financial statements have been restated to
include the accounts and operations of Ertam for all periods prior to the
merger. Separate results of the combining entities for the years ended
September 30, 1992 and 1993 and the eight months ended May 31, 1994 are as
follows:
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net sales:
Pallet City $2,024,473 $2,920,788 $2,514,670
Ertam 77,429 304,703 272,788
Less intercompany (62,000) (285,000) (227,000)
$2,039,902 $2,940,491 $2,560,458
Net income (loss):
Pallet City $ (3,631) $ 172,254 $ 225,836
Ertam 2,319 (1,978) (115)
$ (1,312) $ 170,276 $ 225,721
</TABLE>
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Building improvements 7-31.5 years
Machinery and equipment 5-7 years
Office furniture and equipment 5-7 years
</TABLE>
INCOME TAXES
The Company has elected to be taxed as an S corporation under the provisions
in the Internal Revenue Code. Accordingly, the Company's taxable income
(loss) is passed through to its stockholders to be included in their
individual income tax returns.
As discussed above, effective May 31, 1994, Ertam was merged into Pallet
City. Prior to the merger, Ertam was incorporated under Subchapter C of the
Internal Revenue Code. Accordingly, the results of Ertam's operations were
subject to income taxes. Income taxes were not material to Ertam as it had
minimal net income for financial and income tax purposes.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 MAY 31,
1992 1993 1994
<S> <C> <C> <C>
Raw materials $15,505 $18,769 $ 19,341
Finished goods 36,178 43,795 84,617
$51,683 $62,564 $103,958
</TABLE>
(3) NOTE PAYABLE TO BANK
The Company has a $200,000 line of credit agreement with its bank. Interest
is payable monthly at 1% above the bank's base rate. The note is secured by
substantially all assets and is due on demand. Outstanding balances on the
note were $20,886, $10,213, and $150,000 at September 30, 1992 and 1993, and
May 31, 1994, respectively.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 MAY 31,
1992 1993 1994
<S> <C> <C> <C>
Note payable to bank in monthly installments of $7,287
including interest at 8.75%, secured by inventory, accounts
receivable and equipment, due June 1997 $ 0 $ 0 $230,000
Note payable to bank in monthly installments of $1,250 plus
interest at prime plus 2.25%, secured by inventory, accounts
receivable and equipment, paid in full in 1994 39,772 24,772 0
Note payable to bank in monthly installments of $996 including
interest at 12% secured by inventory, accounts receivable and
equipment, paid in full in 1994 20,832 8,875 0
Notes payable to banks for various vehicles and transportation
equipment paid in full in 1994 10,196 9,683 0
70,800 43,330 230,000
Less current maturities (34,470) (33,558) (70,088)
$ 36,330 $ 9,772 $159,912
</TABLE>
Maturities of long-term debt as of May 31, 1994 are as follows:
<TABLE>
<CAPTION>
Twelve months ended May 31:
<S> <C>
1995 $ 70,088
1996 76,473
1997 83,439
$230,000
</TABLE>
(5) CAPITAL LEASE OBLIGATIONS
Capital lease obligations consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 MAY 31,
1992 1993 1994
<S> <C> <C> <C>
Capital lease obligations paid in full in 1994 $ 42,398 $165,075 0
Less current maturities
(13,501) (68,756) 0
$ 28,897 $ 96,319 0
</TABLE>
Machinery and equipment includes equipment under capital lease as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 MAY 31,
1992 1993 1994
<S> <C> <C> <C>
Machinery and equipment $53,795 $210,281 0
Less accumulated depreciation (4,727) (13,031) 0
$49,068 $197,250 0
</TABLE>
(6) OPERATING LEASES
The Company leases certain facilities and manufacturing equipment under
noncancelable operating leases. Future minimum obligations under operating
leases as of May 31, 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ending May 31:
1995 $ 96,017
1996 87,723
1997 48,457
1998 26,688
1999 26,688
Thereafter 13,344
$298,917
</TABLE>
Total rent expense under operating leases was $15,516, $23,290, and $56,149
in 1992, 1993 and 1994, respectively.
(7) RELATED PARTY TRANSACTIONS
The Company conducts some of its operations in facilities leased from related
parties under a month-to-month oral lease agreement. Lease payments to
related parties were approximately $14,100, $14,100, and $9,400 in 1992, 1993
and 1994, respectively.
The shareholders of the Company are also the shareholders of Ertam, a related
party which provides transportation services to the Company. Total payments
made to Ertam for transportation services were $62,000, $285,000 and $227,000
in 1992, 1993 and 1994, respectively.
(8) SUBSEQUENT EVENT
Effective June 1, 1994, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling Associates of North America, Inc., a
Minnesota corporation.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pallet Source, Inc.:
We have audited the accompanying balance sheets of Pallet Source, Inc. as of
December 31, 1992 and 1993, and November 30, 1994 and the related statements
of operations and retained earnings (accumulated deficit), and cash flows for
the years ended December 31, 1992 and 1993, and the eleven-month period ended
November 30, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pallet Source, Inc. as of
December 31, 1992 and 1993 and November 30, 1994, and the results of its
operations and its cash flows for the years ended December 31, 1992 and 1993
and the eleven-month period ended November 30, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 28, 1995
PALLET SOURCE, INC.
BALANCE SHEETS
DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994
ASSETS
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Current assets:
Trade accounts receivable $153,514 $344,172 $166,567
Advances to stockholders 0 0 3,065
Inventories 45,901 63,320 72,994
Prepaid expenses 1,668 3,167 4,932
Total current assets 201,083 410,659 247,558
Property and equipment at cost:
Buildings 64,070 157,514 0
Furniture and fixtures 8,935 8,935 9,498
Equipment 37,808 138,097 219,124
Transportation equipment 67,373 100,951 136,677
178,186 405,497 365,299
Less accumulated depreciation (24,485) (40,883) (64,630)
Net property and equipment 153,701 364,614 300,669
Total assets $354,784 $775,273 $548,227
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 37,888 $ 43,928 $ 30,237
Accounts payable 183,202 375,850 164,132
Notes payable 72,798 169,969 72,341
Current maturities of long-term debt 37,172 33,481 13,023
Current maturities of capital lease obligations 3,062 12,918 23,983
Accrued liabilities 12,451 24,189 31,745
Total current liabilities 346,573 660,335 335,461
Long-term debt, less current maturities 13,926 41,904 33,953
Capital lease obligations, less current
maturities 11,218 29,815 62,052
Other long-term obligation 0 0 150,000
Stockholders' equity:
Common stock--no par value; 2,000 shares
authorized; 100 shares issued and outstanding 300 300 300
Retained earnings (accumulated deficit) (17,233) 42,919 (33,539)
Total stockholders' equity (deficit) (16,933) 43,219 (33,239)
Commitments and contingencies (notes 3 and 4)
Total liabilities and stockholders' equity $354,784 $775,273 $548,227
</TABLE>
See accompanying notes to financial statements.
PALLET SOURCE, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
YEARS ENDED DECEMBER 31, 1992 AND 1993
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net sales $2,699,262 $3,264,485 $2,682,897
Cost of sales 2,372,162 2,666,562 2,044,262
Gross profit 327,100 597,923 638,635
Operating expenses:
Selling, general and administrative 286,726 507,928 630,223
Operating income 40,374 89,995 8,412
Other income (expense):
Interest expense (8,961) (13,652) (26,202)
Loss on sale of fixed assets 0 (818) (7,504)
Miscellaneous, net 0 3,286 3,100
Total other expense (8,961) (11,184) (30,606)
Net income (loss) 31,413 78,811 (22,194)
Retained earnings (accumulated deficit)
beginning of period (4,512) (17,233) 42,919
Distributions (44,134) (18,659) (54,264)
Retained earnings (accumulated deficit)
end of period $ (17,233) $ 42,919 $ (33,539)
</TABLE>
See accompanying notes to financial statements.
PALLET SOURCE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992 AND 1993
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 31,413 $ 78,811 $ (22,194)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 17,139 32,482 43,809
Loss on sale of equipment 0 818 7,504
Changes in operating assets and liabilities:
Trade accounts receivable (931) (190,658) 177,605
Inventories (25,479) (17,419) (9,674)
Prepaid expenses (1,587) (1,499) (1,765)
Bank overdraft 13,623 6,040 (13,691)
Accounts payable 30,212 192,648 (211,718)
Accrued liabilities 6,186 11,738 7,556
Net cash provided by (used in) operating activities 70,576 112,961 (22,568)
Cash flows from investing activities:
Proceeds from sale of equipment 0 5,700 4,018
Purchases of property and equipment (52,142) (228,565) (148,259)
Net cash used in investing activities (52,142) (222,865) (144,241)
Cash flows from financing activities:
Proceeds from notes payable 72,798 184,589 107,809
Principal payments of notes payable (28,710) (87,418) (32,537)
Proceeds from long-term debt 28,588 67,615 31,345
Principal payments of long-term debt (18,896) (43,328) (26,836)
Principal payments of capital lease obligations (2,825) (4,926) (15,498)
Proceeds from other long-term obligations 0 0 150,000
Repayments of advances from stockholders (25,255) 0 0
Advances to stockholders 0 0 (3,065)
Distributions to stockholders (44,134) (6,628) (44,409)
Net cash provided by (used in) financing
activities (18,434) 109,904 166,809
Net change in cash 0 0 0
Cash at beginning of period 0 0 0
Cash at end of period $ 0 $ 0 $ 0
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 8,692 $ 12,725 $ 26,598
Supplemental schedule of non-cash investing and
financing activities:
Equipment traded in for new equipment $ 0 $ 21,565 $ 6,000
Capitalized lease obligations for equipment 17,105 33,379 58,800
Land and building sold in exchange for assumption of
debt 0 0 205,818
Transportation equipment distributed to stockholder 0 12,031 9,855
</TABLE>
See accompanying notes to financial statements.
PALLET SOURCE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Pallet Source, Inc. (the Company) builds, refurbishes and distributes wooden
pallets for use in a variety of industries. In addition, the Company acts as
a broker in transferring pallets between nonrelated companies. The Company is
located in Mansfield, Arkansas and sells its products on an unsecured basis
to customers in the area. The Company's ability to collect the amounts due
from customers is affected by regional economic conditions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Building 10-30 years
Furniture and fixtures 5-7 years
Equipment 7 years
Transportation equipment 5-10 years
</TABLE>
INCOME TAXES
The Company is an S corporation and, accordingly, is not subject to federal
or state income taxes. The Company's taxable income (loss) is included in the
individual tax returns of its stockholders.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Raw materials $18,147 $49,035 $43,423
Finished goods 27,754 14,285 29,571
$45,901 $63,320 $72,994
</TABLE>
(3) NOTES PAYABLE
The Company has several demand notes payable to its bank with interest rates
ranging from 8% to 9%. The notes are secured by property and equipment and
had outstanding balances of $72,798, $169,969 and $72,341 as of December 31,
1992 and 1993 and November 30, 1994, respectively.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Note payable to bank in monthly installments of $815,
including interest at 8%, final payment due July 1997,
secured by transportation equipment $ 0 $ 30,372 $ 23,408
Note payable in monthly installments of $509 including
interest at 8.5%, final payment due July 1999, secured
by transportation equipment 0 0 23,190
Note payable to bank in monthly installments of $723
plus
interest at 8%, paid in full in 1994 0 24,595 0
Note payable to bank in monthly installments of $349
including interest at 8%, paid in full in 1994 14,728 10,865 0
Note payable to bank in monthly installments
paid in full in 1993 19,746 0 0
Various notes payable to banks 16,624 9,553 378
51,098 75,385 46,976
Less current maturities (37,172) (33,481) (13,023)
$ 13,926 $ 41,904 $ 33,953
</TABLE>
Maturities of long-term debt as of November 30, 1994 are as follows:
<TABLE>
<CAPTION>
Twelve months ending November 30:
<S> <C>
1995 $13,023
1996 13,544
1997 11,410
1998 5,540
1999 3,459
$46,976
</TABLE>
(5) CAPITAL LEASE OBLIGATIONS
The Company has several capital leases with monthly payments totaling $2,760
including imputed interest at 7.8% to 12.5%. The leases have various
expiration dates through July 1999. Minimum lease commitments under
capitalized lease obligations as of November 30, 1994 are as follows:
<TABLE>
<CAPTION>
Twelve months ending November 30:
<S> <C>
1995 $ 33,117
1996 32,012
1997 16,401
1998 15,711
1999 10,474
107,715
Less amounts representing interest (21,680)
86,035
Less current maturities (23,983)
$ 62,052
</TABLE>
Capital leases included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Cost $17,105 $55,689 $114,539
Less accumulated depreciation (2,055) (6,643) (14,627)
$15,050 $49,046 $ 99,912
</TABLE>
(6) RELATED PARTY TRANSACTIONS
On November 30, 1994, the Company sold its buildings with book value of
$209,891, net of accumulated depreciation, to one of its stockholders in
exchange for the stockholder assuming notes payable and debt of $205,818. The
Company recorded a loss of $4,073 on this transaction and entered into a
five-year lease on the property with the stockholder. Minimum future payments
under this lease are as follows:
<TABLE>
<CAPTION>
Twelve months ending November 30:
<S> <C>
1995 $ 30,000
1996 30,000
1997 30,000
1998 30,000
1999 30,000
$150,000
</TABLE>
(7) SUBSEQUENT EVENT
Effective December 1, 1994, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling Associates of North America, Inc.
(PRANA), a Minnesota corporation. The acquisition agreement contains a
provision that allows the former stockholders to rescind the agreement if
certain conditions are not met prior to June 30, 1996. In addition, as part
of this agreement, PRANA advanced $150,000 to the Company in November 1994 in
anticipation of the transaction closing. This amount is shown on the November
30, 1994 financial statements as another long-term obligation and was
reclassified to equity on December 1, 1994 when the acquisition became
effective.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hurt's Pallet and Sales Inc.:
We have audited the accompanying balance sheets of Hurt's Pallet and Sales
Inc. as of December 31, 1992 and 1993, and November 30, 1994, and the related
statements of operations and retained earnings (accumulated deficit) and cash
flows for the years ended December 31, 1992 and 1993 and the eleven-month
period ended November 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hurt's Pallet and Sales Inc.
as of December 31, 1992 and 1993, and November 30, 1994, and the results of
its operations and its cash flows for the years ended December 31, 1992 and
1993 and the eleven-month period ended November 30, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 17, 1995
HURT'S PALLET AND SALES INC.
BALANCE SHEETS
DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994
ASSETS
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Current assets:
Cash $ 26,785 $ 22,954 $ 47,554
Trade accounts receivable, less allowance
for doubtful accounts of $1,100, $0,
and $2,042, respectively 43,749 49,435 71,703
Inventories 41,264 46,794 82,374
Prepaid expenses 2,306 0 0
Deferred tax assets 23,200 41,800 8,800
Total current assets 137,304 160,983 210,431
Property and equipment at cost:
Land (note 6) 8,500 8,500 0
Building (note 6) 161,244 161,244 0
Furniture and fixtures 5,979 5,219 5,219
Equipment 164,663 230,160 277,674
Transportation equipment 96,734 99,115 99,115
437,120 504,238 382,008
Less accumulated depreciation 146,747 132,020 155,551
Net property and equipment 290,373 372,218 226,457
Other assets 3,688 2,847 2,316
Total assets $431,365 $536,048 $439,204
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68,861 $111,010 $ 34,674
Current maturities of long-term debt 72,186 115,857 28,231
Current maturities of capital lease obligations 17,768 6,748 6,330
Due to stockholder 24,074 19,074 19,074
Accrued liabilities 50,525 54,492 50,964
Income taxes payable 4,305 3,972 55,505
Total current liabilities 237,719 311,153 194,778
Long-term debt, less current maturities 242,539 203,054 20,575
Capital lease obligations, less current
maturities 4,016 9,841 3,511
Deferred tax liabilities 6,500 19,300 29,400
Stockholders' equity:
Common stock -- no par value; 1,000 shares
authorized; 800 shares issued and outstanding 1,000 1,000 1,000
Retained earnings (accumulated deficit) (60,409) (8,300) 189,940
Total stockholders' equity (deficit) (59,409) (7,300) 190,940
Commitments and contingencies (notes 3 and 4)
Total liabilities and stockholders' equity $431,365 $536,048 $439,204
</TABLE>
See accompanying notes to financial statements.
HURT'S PALLET AND SALES INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
YEARS ENDED DECEMBER 31, 1992 AND 1993
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net sales $1,765,635 $2,126,434 $1,816,484
Cost of sales 1,502,677 1,796,514 1,306,003
Gross profit 262,958 329,920 510,481
Operating expenses:
Selling, general and administrative 193,948 224,170 188,200
Operating income 69,010 105,750 322,281
Other income (expense):
Interest expense (32,712) (33,679) (21,395)
Gain (loss) on sale of fixed assets 1,798 (13,482) 12,737
Miscellaneous, net 474 663 (296)
Total other expense (30,440) (46,498) (8,954)
Income before income taxes 38,570 59,252 313,327
Provision for income taxes 9,105 7,143 115,087
Net income 29,465 52,109 198,240
Accumulated deficit beginning of period (89,874) (60,409) (8,300)
Retained earnings (accumulated deficit)
end of period $ (60,409) $ (8,300) $ 189,940
</TABLE>
See accompanying notes to financial statements.
HURT'S PALLET AND SALES INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992 AND 1993
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 29,465 $ 52,109 $ 198,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 1,294 1,294 531
Depreciation 43,606 54,399 54,279
(Gain) loss on sale of equipment (1,798) 13,482 (12,737)
Deferred tax assets and liabilities 4,800 (5,800) 43,100
Changes in operating assets and liabilities:
Trade accounts receivable 5,904 (5,686) (22,268)
Inventories (7,665) (5,530) (35,580)
Prepaid expenses (2,306) 2,306 0
Other assets 150 (453) 0
Accounts payable 8,064 42,149 (76,336)
Accrued liabilities 6,087 3,967 (3,528)
Income taxes payable 4,305 (333) 51,533
Net cash provided by operating activities 91,906 151,904 197,234
Cash flows from investing activities:
Proceeds from sale of equipment 8,000 16,700 0
Purchases of property and equipment (29,765) (151,968) (50,029)
Net cash used in investing activities (21,765) (135,268) (50,029)
Cash flows from financing activities:
Proceeds from long-term debt 15,000 84,000 0
Principal payments of long-term debt (49,651) (79,814) (115,857)
Principal payments of capital lease obligations (15,761) (19,653) (6,748)
Repayments of stockholder advances 0 (5,000) 0
Net cash used in financing activities (50,412) (20,467) (122,605)
Net increase (decrease) in cash 19,729 (3,831) 24,600
Cash at beginning of period 7,056 26,785 22,954
Cash at end of period $ 26,785 $ 22,954 $ 47,554
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 37,873 $ 36,326 $ 23,180
Cash paid during the period for income taxes 0 13,276 20,454
Supplemental schedule of non-cash investing and
financing activities:
Finished goods inventory exchanged for raw
materials inventory $363,443 $ 519,108 $ 408,328
Equipment traded in for new equipment 0 6,135 0
Capitalized lease obligations for equipment 14,250 14,458 0
Land and building sold in exchange for
assumption of debt 0 0 154,248
</TABLE>
See accompanying notes to financial statements.
HURT'S PALLET AND SALES INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Hurt's Pallet and Sales Inc. (the Company) builds, refurbishes and
distributes wooden pallets for use in a variety of industries. The Company is
located in Summitville, Indiana and sells its products on an unsecured basis
to customers in the area. The Company's ability to collect the amounts due
from customers is affected by regional economic conditions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Building 31.5 years
Furniture and fixtures 7 years
Equipment 5-7 years
Transportation equipment 3-7 years
</TABLE>
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Under Statement
No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to 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 enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. All statements presented reflect the provisions of Statement
No. 109.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Raw materials $30,279 $40,827 $64,512
Finished goods 10,985 5,967 17,862
$41,264 $46,794 $82,374
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Note payable to bank in monthly installments of $1,875
including interest at 2.5% above prime rate,
final installment due September 1995, secured by equipment $ 0 $ 35,489 $ 17,792
Note payable in monthly installments of $637
including interest at 10%, final installment
due September 1998 0 10,883 6,742
Note payable to bank in monthly installments of $452
including interest at 10%, final installment due March
1996,
secured by equipment 0 30,000 24,272
Note payable due in monthly installments of $1,556
including interest at prime rate, assumed by
stockholder in 1994 100,000 72,301 0
Note payable to bank in monthly installments of $2,400
including interest at 2.75% above prime rate, assumed by
stockholder in 1994 131,588 113,375 0
Notes payable, paid in full 83,137 56,863 0
314,725 318,911 48,806
Less current maturities (72,186) (115,857) (28,231)
$242,539 $ 203,054 $ 20,575
</TABLE>
Maturities of long-term debt as of November 30, 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ended November 30:
1995 $28,231
1996 7,811
1997 6,673
1998 6,091
$48,806
</TABLE>
(4) CAPITALIZED LEASE OBLIGATIONS
Included in property and equipment are several capitalized lease obligations
as follows:
<TABLE>
<CAPTION>
DECEMBER 31 NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Cost $54,483 $68,941 $68,941
Accumulated depreciation 23,817 33,457 41,904
$30,666 $35,484 $27,037
</TABLE>
Minimum lease commitments under capitalized lease obligations as of November
30, 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ending November 30:
1995 $ 6,958
1996 3,624
10,582
Less amounts representing interest (741)
$ 9,841
</TABLE>
(5) INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
December 31, 1992:
Federal $ 4,237 $ 2,200 $ 6,437
State 68 2,600 2,668
$ 4,305 $ 4,800 $ 9,105
December 31, 1993:
Federal $ 7,210 $(6,800) $ 410
State 5,733 1,000 6,733
$12,943 $(5,800) $ 7,143
November 30, 1994:
Federal $56,487 $37,800 $ 94,287
State 15,500 5,300 20,800
$71,987 $43,100 $115,087
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability as of November 30, 1994 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Accounts receivable $ 795
Prepaid expenses 4,155
Accrued liabilities 27,050
32,000
Deferred tax liabilities:
Inventories 23,200
Depreciation 29,400
52,600
Net deferred tax
liability $20,600
</TABLE>
No valuation allowance for the deferred tax asset was necessary as of
November 30, 1994. The character of the deferred tax asset is such that it
can be offset against future anticipated taxable income.
The provision for income taxes varied from the expected federal statutory
rate as follows:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEARS ENDED PERIOD ENDED
DECEMBER 31 NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Expected federal tax recovery using statutory
rate of 34% $13,114 $ 20,145 $106,531
Increase (reduction) in taxes resulting from:
Effects of graduated rates (7,328) (10,333) 0
Effects of changes in effective tax rates 0 (7,200) 0
State taxes, net of federal benefit 1,761 4,444 13,728
Other 1,558 87 (5,172)
$ 9,105 $ 7,143 $115,087
</TABLE>
(6) RELATED PARTY TRANSACTIONS
The Company paid $117,000, $99,300, and $11,000 in trucking expenses in 1992,
1993 and 1994, respectively, to another company with common ownership. In
addition, the Company owed its stockholders $24,074 at December 31, 1992, and
$19,074 at December 31, 1993 and November 30, 1994 for operating advances.
On November 30, 1994, the Company sold its land and building totaling
$141,002, net of accumulated depreciation, to one of its stockholders in
exchange for the stockholder assuming company debt of $154,248. The Company
recorded a gain of $13,246 on this transaction and entered into a ten-year
lease of the property with the stockholder. Minimum future payments under
this lease are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ending November 30:
1995 $ 48,000
1996 48,000
1997 48,000
1998 48,000
1999 48,000
Thereafter 240,000
$480,000
</TABLE>
(7) SUBSEQUENT EVENT
Effective December 1, 1994, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling Associates of North America, Inc.
(PRANA), a Minnesota corporation. The acquisition agreement contains a
provision that allows the former shareholders to rescind the agreement if
certain conditions are not met prior to June 30, 1996.
(8) SIGNIFICANT CUSTOMERS
Sales to the Company's four largest customers represents 67%, 57%, and 65% of
total sales for the years ended December 31, 1992 and 1993 and the
eleven-month period ended November 30, 1994, respectively.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Quality Pallet, Inc.:
We have audited the accompanying balance sheets of Quality Pallet, Inc. as of
December 31, 1992 and 1993 and November 30, 1994, and the related statements
of earnings, stockholders' equity and cash flows for the years ended December
31, 1992 and 1993 and the eleven-month period ended November 30, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quality Pallet, Inc. as of
December 31, 1992 and 1993 and November 30, 1994, and the results of its
operations and its cash flows for the years ended December 31, 1992 and 1993
and the eleven-month period ended November 30, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 13, 1995
QUALITY PALLET, INC.
BALANCE SHEETS
DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994
ASSETS
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 27,891 $ 36,744 $126,942
Trade accounts receivable, less allowance
for doubtful accounts of $0, $4,512,
and $9,314 respectively 113,445 150,095 235,523
Inventories 48,802 134,981 167,343
Prepaid expenses 4,146 8,289 0
Note receivable from related party 0 114,335 0
Total current assets 194,284 444,444 529,808
Property and equipment at cost:
Building and improvements 1,829 1,829 6,440
Equipment 51,333 154,311 196,657
Transportation equipment 14,954 22,303 22,303
68,116 178,443 225,400
Less accumulated depreciation (38,358) (28,016) (56,169)
Net property and equipment 29,758 150,427 169,231
Total assets $224,042 $594,871 $699,039
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,792 $ 21,646 $ 59,873
Accrued liabilities 13,211 76,312 172,672
Current portion of long-term debt 0 30,763 54,275
Total current liabilities 27,003 128,721 286,820
Long-term debt, net of current portion 0 74,680 94,201
Stockholders' equity:
Common stock--no par value; 9,000 shares
authorized; 9,000 shares issued and
outstanding
as of December 31, 1992 and 1993 and
November 30, 1994 105,598 105,598 105,598
Retained earnings 91,441 285,872 212,420
Total stockholders' equity 197,039 391,470 318,018
Commitments (note 7)
Total liabilities and stockholders' equity $224,042 $594,871 $699,039
</TABLE>
See accompanying notes to financial statements.
QUALITY PALLET, INC.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1992 AND 1993
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net sales $804,796 $1,387,011 $2,921,131
Cost of sales 489,622 932,418 2,204,354
Gross profit 315,174 454,593 716,777
Operating expenses:
Selling, general and
administrative 167,986 241,060 619,539
Operating income 147,188 213,533 97,238
Other income (expense):
Interest expense 0 (1,587) (9,773)
Interest income 0 658 5,969
Miscellaneous, net 58 31,827 4,339
Total other income 58 30,898 535
Net earnings $147,246 $ 244,431 $ 97,773
</TABLE>
See accompanying notes to financial statements.
QUALITY PALLET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992 AND 1993
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C>
Balance, December 31, 1991 9,000 $105,598 $ 46,695 $ 152,293
Distributions 0 0 (102,500) (102,500)
Net earnings 0 0 147,246 147,246
Balance, December 31, 1992 9,000 105,598 91,441 197,039
Distributions 0 0 (50,000) (50,000)
Net earnings 0 0 244,431 244,431
Balance, December 31, 1993 9,000 105,598 285,872 391,470
Distributions 0 0 (171,225) (171,225)
Net earnings 0 0 97,773 97,773
Balance, November 30, 1994 9,000 $105,598 $ 212,420 $ 318,018
</TABLE>
See accompanying notes to financial statements.
QUALITY PALLET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992 AND 1993
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 147,246 $ 244,431 $ 97,773
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 8,904 18,723 29,625
Gain on sale of equipment 0 (2,284) (2,220)
Changes in operating assets and liabilities:
Trade accounts receivable (72,521) (36,650) (85,428)
Inventories (47) (86,179) (32,362)
Prepaid expenses (490) (4,143) 8,289
Accounts payable 13,792 7,854 38,227
Accrued liabilities 10,863 63,101 96,360
Net cash provided by operating activities 107,747 204,853 150,264
Cash flows from investing activities:
Proceeds from sale of equipment 0 8,553 8,000
Purchases of property and equipment (6,700) (145,661) (54,209)
Net cash used in investing activities (6,700) (137,108) (46,209)
Cash flows from financing activities:
(Issuance) repayment of stockholder
note receivable 0 (114,335) 114,335
Distributions to stockholders (102,500) (50,000) (171,225)
Principal payments of long-term debt 0 (11,397) (133,467)
Proceeds from long-term debt 0 116,840 176,500
Net cash used in financing activities (102,500) (58,892) (13,857)
Net increase (decrease) in cash (1,453) 8,853 90,198
Cash at beginning of period 29,344 27,891 36,744
Cash at end of period $ 27,891 $ 36,744 $ 126,942
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 0 $ 1,587 $ 9,773
</TABLE>
See accompanying notes to financial statements.
QUALITY PALLET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Quality Pallet, Inc. (the Company) builds, refurbishes and distributes wooden
pallets for use in a variety of industries. The Company is located in
Seymour, Wisconsin and sells its products on an unsecured basis to customers
throughout the Midwestern United States. The Company's ability to collect the
amounts due from customers is affected by regional economic conditions.
CASH EQUIVALENTS
Cash equivalents consist of short-term investments in money market funds with
an expected maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Building improvements 1-10 years
Equipment, furniture and fixtures 5-7 years
Transportation equipment 5 years
</TABLE>
INCOME TAXES
The Company is an S corporation and, accordingly, is not subject to federal
or state income taxes. The Company's taxable income is included in the
individual tax returns of its stockholders.
(2) ACCOUNTS RECEIVABLE
Trade accounts receivable consist principally of amounts due from customers
for pallet purchases and are reflected as follows:
<TABLE>
<CAPTION>
DECEMBER 31 NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Accounts receivable $113,445 $154,607 $244,837
Less:
Allowance for doubtful
accounts 0 (4,512) (9,314)
$113,445 $150,095 $235,523
</TABLE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Raw materials $24,967 $ 98,301 $106,670
Finished goods 23,835 36,680 60,673
$48,802 $134,981 $167,343
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 NOVEMBER 30,
1992 1993 1994
<S> <C> <C> <C>
Note payable to bank in monthly installments of $2,000, including
interest at 7.5%, paid in full March 1994 $0 $ 80,309 $ 0
Note payable to bank in monthly installments of $472, including
interest at 7.93%, paid in full March 1994 0 16,139 0
Capital lease for forklift, payable in monthly installments of
$666, including interest at 5.97% through February 1995 0 8,995 1,988
Note payable to bank in monthly installments of $3,600, including
interest at 7.5%, due July 1997 0 0 102,875
Note payable to bank in monthly installments of $1,600, including
interest at 8.0%, due June 1997 0 0 43,613
0 105,443 148,476
Less current portion 0 (30,763) (54,275)
$0 $ 74,680 $ 94,201
</TABLE>
Maturities of long-term debt as of November 30, 1994 are as follows:
<TABLE>
<CAPTION>
Twelve months ending November 30:
<S> <C>
1995 $ 54,275
1996 57,152
1997 37,049
$148,476
</TABLE>
(5) PROFIT SHARING PLAN
In December 1993, the Company adopted a profit sharing plan (the Plan) which
covers substantially all employees. The Company makes annual contributions of
15% of all eligible employees' wages to the Plan in accordance with the Plan
agreement. Profit sharing expense was approximately $19,000 and $47,000 for
the year ended December 31, 1993 and the eleven months ended November 30,
1994, respectively.
(6) RELATED PARTY TRANSACTIONS
The Company had a note receivable from B&B ENTERPRISES in the amount of
$114,335 as of December 31, 1993. An additional $19,864 was added to the note
in January of 1994. The note bears interest at 7%. Interest income related to
this note was $658 and $5,969 in 1993 and 1994, respectively. In September of
1994, the Company forgave the remaining note receivable principal balance of
approximately $116,000. The forgiveness was treated as distributions to
shareholders.
The Company paid fees of approximately $58,000 in 1992, $112,000 in 1993, and
$275,000 in 1994 to a Corporation which had officers and stockholders in
common. The related Corporation provided freight services to the Company.
In July 1992, the Company entered into an agreement with B&B ENTERPRISES to
lease the corporate office and production facility. The Company paid rent
payments of approximately $13,500 in 1992, $27,000 in 1993, and $55,000 in
1994, respectively.
In July 1992, the Company entered into an agreement with a Corporation which
had officers and stockholders in common to sublease corporate office space.
Rental income related to this sublease was $600, $1,200, and $2,050 for 1992,
1993 and 1994, respectively.
(7) SUBSEQUENT EVENTS
Effective November 30, 1994, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling of North America, Inc., a Minnesota
Corporation.
On December 1, 1994, the Company renegotiated the terms of its facility
lease. The operating lease, which expires November 30, 2004, calls for
monthly payments of $12,500. On December 1, 1995 and on the same day of each
succeeding year thereafter during term of the lease, monthly lease payment is
increased by 5%.
Future minimum lease payments for the noncancelable operating lease as of
November 30, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1994 $ 150,000
1995 157,500
1996 165,000
1997 172,500
1998 180,000
Remainder 1,012,500
Total minimum obligations $1,837,500
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Century Pallet, Inc.:
We have audited the accompanying balance sheets of American Century Pallet,
Inc. as of December 31, 1993 and 1994, and March 31, 1995, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1993 and 1994 and the three-month period ended March 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Century Pallet,
Inc. as of December 31, 1993 and 1994, and March 31, 1995, and the results of
its operations and its cash flows for the years ended December 31, 1993 and
1994, and the three-month period ended March 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 8, 1996
AMERICAN CENTURY PALLET, INC.
BALANCE SHEETS
DECEMBER 31, 1993 AND 1994, AND MARCH 31, 1995
ASSETS
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Current assets:
Cash $ 43,158 $ 21,314 $109,269
Restricted cash (note 2) 0 0 10,000
Trade accounts receivable 91,007 160,777 133,551
Other receivables 10,932 10,205 12,293
Inventories (note 3) 73,027 66,789 47,429
Prepaid expenses 4,780 4,153 2,119
Deferred income taxes (note 5) 3,476 3,802 14,998
Income taxes refundable 0 16,408 0
Total current assets 226,380 283,448 329,659
Property and equipment at cost:
Furniture and fixtures 1,844 1,844 1,844
Equipment 50,372 60,973 60,973
Transportation equipment 77,870 72,370 74,284
130,086 135,187 137,101
Less accumulated depreciation 36,979 45,404 49,858
Net property and equipment 93,107 89,783 87,243
Total assets $319,487 373,231 416,902
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note 4) $ 16,280 $ 0 $ 0
Current maturities of capital lease
obligations (note 6) 7,476 7,476 7,476
Notes payable--related party (note 7) 0 10,000 0
Accounts payable 39,119 39,276 51,465
Accrued liabilities (note 8) 14,642 22,780 25,035
Income taxes payable (note 5) 0 0 16,094
Total current liabilities 77,517 79,532 100,070
Capital lease obligations, less current
maturities
(note 6) 16,757 12,542 11,380
Deferred income taxes (note 5) 7,567 17,821 17,337
Stockholders' equity:
Common stock $1 par value: 16,500 shares
authorized; 16,500 shares issued and
outstanding at Decem ber 31, 1993, 11,000
shares issued and outstanding as of December
31, 1994 and
March 31, 1995 16,500 11,000 11,000
Retained earnings 201,146 252,336 277,115
Total stockholders' equity 217,646 263,336 288,115
Commitments (note 6)
Total liabilities and stockholders' equity $319,487 $373,231 $416,902
</TABLE>
See accompanying notes to financial statements.
AMERICAN CENTURY PALLET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994, AND
THE THREE-MONTH PERIOD ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Net sales $1,658,764 $1,964,102 $475,930
Cost of sales 1,423,639 1,496,570 344,858
Gross profit 235,125 467,532 131,072
Operating expenses:
Selling, general and administrative 247,007 335,519 89,075
Operating income (loss) (11,882) 132,013 41,997
Other income (expense):
Interest expense (2,708) (3,261) (707)
Gain (loss) on sale of equipment 354 1,320 (686)
Miscelleaneous 0 (2,446) (1,515)
Total other income (expense) (2,354) (4,387) (2,908)
Income (loss) before income taxes (14,236) 127,626 39,089
Income tax expense (benefit) (note
5) (5,811) 36,936 14,310
Net income (loss) $ (8,425) $ 90,690 $ 24,779
</TABLE>
See accompanying notes to financial statements.
AMERICAN CENTURY PALLET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994, AND
THREE-MONTH PERIOD ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
RETAINED
SHARES AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C>
Balance, December 31, 1992 16,500 $16,500 $209,571 $226,071
Net loss 0 0 (8,425) (8,425)
Balance, December 31, 1993 16,500 16,500 201,146 217,646
Purchase of common stock (note
7) (5,500) (5,500) (39,500) (45,000)
Net income 0 0 90,690 90,690
Balance, December 31, 1994 11,000 11,000 252,336 263,336
Net income 0 0 24,779 24,779
Balance, March 31, 1995 11,000 $11,000 $277,115 $288,115
</TABLE>
See accompanying notes to financial statements
AMERICAN CENTURY PALLET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994, AND
THE THREE-MONTH PERIOD ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,425) $ 90,690 $ 24,779
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 18,553 21,511 5,311
(Gain) loss on sale of equipment (354) (1,320) 686
Deferred income taxes (5,811) 9,928 (11,680)
Changes in operating assets and liabilities:
Trade accounts receivable 39,843 (69,770) 27,226
Other receivables (1,083) 727 (2,088)
Inventories (12,481) 6,238 19,360
Prepaid expenses (842) 627 2,034
Accounts payable 3,907 156 12,189
Accrued liabilities (11,292) 8,138 2,255
Income taxes payable 0 (16,408) 32,502
Net cash provided by operating activities 22,015 50,517 112,574
Cash flows from investing activities:
Investment in restricted cash
money market account 0 0 (10,000)
Proceeds from sale of equipment 8,455 10,735 58
Purchase of property and equipment (26,317) (27,601) (3,515)
Net cash used in investing activities (17,862) (16,866) (13,457)
Cash flows from financing activities:
Proceeds from long-term debt 16,280 (16,280) 0
Principal payments of long-term debt (9,278) 0 0
Principal payments of capital lease obligations (2,820) (4,215) (1,162)
Proceeds from notes payable to stockholders 0 56,050 70,050
Repayments of notes payable to stockholders 0 (56,050) (80,050)
Purchase of common stock (note 7) 0 (35,000) 0
Net cash provided by (used in)
financing activities 4,182 (55,495) (11,162)
Net increase (decrease) in cash 8,335 (21,844) 87,955
Cash at beginning of period 34,823 43,158 21,314
Cash at end of period $ 43,158 $ 21,314 $109,269
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 2,709 $ 3,261 $ 707
Cash paid (refunded) during the period
for income taxes 0 43,416 (6,512)
Supplemental schedule of non-cash investing and
financing activities:
Purchase of common stock financed by
note from stockholder $ 0 $ 10,000 $ 0
Equipment purchased under capital lease 27,053 0 0
</TABLE>
See accompanying notes to financial statements.
AMERICAN CENTURY PALLET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994, AND MARCH 31, 1995
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
American Century Pallet, Inc. (the Company) builds, refurbishes and
distributes wooden pallets for use in a variety of industries. The Company is
located in Oklahoma City, Oklahoma and sells its products on an unsecured
basis to customers in that area. The Company's ability to collect the amounts
due from customers is affected by regional economic conditions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures 7 years
Equipment 7 years
Transportation equipment 5 years
</TABLE>
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under Statement No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to 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 the enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
ACCOUNTING 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying value of debt approximates market, as the substantial majority
of debt carries interest rates that approximate market.
(2) RESTRICTED CASH BALANCES
As part of the acquisition agreement (see note 9), the Company was required
to invest $10,000 in a money market account to cover costs associated with
the acquisition. The Company is prevented by the agreement from using the
account for activities not related to the acquisition.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Raw materials $12,054 $19,349 $13,660
Finished goods 60,973 47,440 33,769
$73,027 $66,789 $47,429
</TABLE>
(4) NOTES PAYABLE TO THIRD PARTIES
The Company had a note payable to its bank due in a single payment upon
maturity plus interest at 7.9% secured by transportation equipment. The
outstanding balance was $15,273 as of December 31, 1993. The note was paid in
1994.
The Company also had a note payable to a third party payable in monthly
installments of $407 including interest at 7.5% secured by transportation
equipment. The outstanding balance was $1,007 as of December 31,1993. The
note was paid in 1994.
(5) INCOME TAXES
Components of income tax expense (benefit) for the years ended December 31,
1993 and 1994 and the three-month period ended March 31, 1995 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
December 31, 1993:
Federal $ 0 $ (4,940) $(4,940)
State 0 (871) (871)
$ 0 $ (5,811) $(5,811)
December 31, 1994:
Federal $21,195 $ 8,439 $29,634
State 5,813 1,489 7,302
$27,008 $ 9,928 $36,936
March 31, 1995:
Federal $21,907 $ (9,828) $11,979
State 4,083 (1,752) 2,331
$25,990 $(11,680) $14,310
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability as of December 31, 1993 and 1994,
and March 31, 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable $ 5,251 $ 0 $ 160
Inventories 0 0 1,265
Accounts payable 0 132 6,868
Accrued liabilities 2,251 4,805 12,053
Capital lease obligations 9,693 8,007 7,542
Deferred tax assets 17,195 12,944 27,888
Deferred tax liabilities:
Restricted cash 0 0 4,000
Other receivables 0 172 0
Inventories 3,600 0 0
Prepaid expenses 426 963 1,348
Depreciation 17,260 25,828 24,879
Deferred tax liabilities 21,286 26,963 30,227
Net deferred tax liability $ 4,091 $14,019 $ 2,339
</TABLE>
Income tax expense (benefit) varies from the expected federal statutory rate
as follows:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1993 1994 1995
<S> <C> <C> <C>
Expected federal tax recovery using rate of 34% $(4,840) $43,393 $13,290
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit (971) 1,445 1,020
Effect of graduated rates 0 (7,902) 0
$(5,811) $36,936 $14,310
</TABLE>
(6) LEASES
The Company leases equipment under a capital lease with monthly payments of
$623 including imputed interest at approximately 14% through May 1998. The
Company also leases various equipment under operating leases with monthly
payments totaling $1,852 expiring through January 2004.
The Company also leases its operating facility from a related party with
monthly payments of $2,250 through March, 2000. Minimum lease commitments as
of March 31, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING
THIRD RELATED
CAPITAL PARTY PARTY
<S> <C> <C> <C>
Twelve months ended March 31:
1996 $ 7,476 $22,230 $ 27,000
1997 7,476 20,101 27,000
1998 7,476 7,418 27,000
1999 1,247 0 27,000
2000 0 27,000
23,675 $49,749 $135,000
Less amounts representing
interest (4,819)
18,856
Less current maturities (7,476)
$11,380
</TABLE>
Capital leases included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1993 1994 1995
<S> <C> <C> <C>
Cost $27,053 $27,053 $27,053
Accumulated depreciation (1,932) (5,797) (6,763)
$25,121 $21,256 $20,290
</TABLE>
Total rent expense under operating leases was $35,721, $59,560 and $17,014 of
which $34,200, $34,200 and $8,700 were paid to related parties for the years
ended December 31, 1993 and 1994, and the three-month period ended March 31,
1995, respectively.
(7) RELATED PARTY TRANSACTIONS
The Company had short term advances from its shareholders in the amount of
$0, $56,050 and $70,050 during the years ended December 31, 1993 and 1994,
and the three-month period ended March 31, 1995, respectively. The Company
repaid the advances during the period they were received.
Effective December 31, 1994, the Company purchased 5,500 shares of common
stock for $45,000. $35,000 was paid in cash and a $10,000 note payable was
issued to the former stockholder and paid in 1995.
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1993 1994 1995
<S> <C> <C> <C>
Payroll and payroll taxes $ 5,658 $12,424 $11,713
Workers compensation insurance payable 3,018 2,239 3,015
Real estate and property taxes payable 1,689 2,453 713
Sales tax payable 3,741 5,151 0
Accrued legal fees 0 0 9,500
Other 536 513 94
$14,642 $22,780 $25,035
</TABLE>
(9) SUBSEQUENT EVENT
Effective April 24, 1995, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling Associates of North America, Inc.
(PRANA), a Minnesota corporation.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
B & B Pallet Supply Company:
We have audited the accompanying balance sheets of B & B Pallet Supply
Company as of December 31, 1992, 1993, 1994, and May 5, 1995, the related
statements of operations and retained earnings, and cash flows for the years
ended December 31, 1992, 1993, and 1994, and the period from January 1, 1995
to May 5, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of B & B Pallet Supply Company
as of December 31, 1992, 1993, 1994, and May 5, 1995, and the results of its
operations and its cash flows for the years ended December 31, 1992, 1993,
and 1994, and the period from January 1, 1995 to May 5, 1995, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 9, 1995
B & B PALLET SUPPLY COMPANY
BALANCE SHEETS
DECEMBER 31, 1992, 1993, AND 1994, AND MAY 5, 1995
ASSETS
<TABLE>
<CAPTION>
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Current assets:
Cash $ 159,670 $ 323,972 $ 412,871 $ 34,788
Marketable securities 9,190 33,326 26,456 29,498
Trade accounts receivable, less allowance for
doubtful accounts obligations of $1,000, $3,000,
$2,000 and $3,000, respectively 124,356 179,248 226,820 217,335
Inventories 36,559 15,283 93,667 78,792
Prepaid expenses 25,670 3,999 4,143 6,726
Other current assets 0 0 0 2,800
Total current assets 355,445 555,828 763,957 369,939
Property and equipment at cost:
Land (note 8) 38,600 8,600 75,468 0
Building (note 8) 118,182 118,182 242,216 0
Fixtures and equipment 142,519 190,538 257,604 266,863
Transportation equipment 136,861 145,834 145,834 133,311
436,162 463,154 721,122 400,174
Less accumulated depreciation (202,233) (269,906) (312,639) (295,610)
Net property and equipment 233,929 193,248 408,483 104,564
Other assets 3,285 3,285 3,285 485
Total assets $ 592,659 $ 752,361 $1,175,725 $ 474,988
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 204 $ 2,484 $ 7,329 $ 8,467
Current maturities of long-term debt 100,000 2,589 12,496 1,666
Current maturities of capital lease obligations 0 4,247 3,004 5,208
Accrued liabilities 13,919 11,492 15,952 22,740
Deferred revenue 41,377 55,723 49,969 20,224
Total current liabilities 155,500 76,535 88,750 58,305
Long-term debt, less current maturities 0 5,140 188,568 1,680
Capital lease obligations, less current
maturities 0 6,030 3,743 0
Stockholders' equity:
Common stock -- $1 par value; 30,000 shares
authorized; 1,000 shares issued and outstanding 1,000 1,000 1,000 1,000
Net unrealized loss on marketable
equity securities 0 0 (13,189) (10,147)
Retained earnings 436,159 663,656 906,853 424,150
Total Stockholders' equity 437,159 664,656 894,664 415,003
Commitments (note 7)
Total liabilities and stockholders' equity $ 592,659 $ 752,361 $1,175,725 $ 474,988
</TABLE>
See accompanying notes to financial statements.
B & B PALLET SUPPLY COMPANY
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1992, 1993, 1994, AND
THE PERIOD FROM JANUARY 1, 1995 TO MAY 5, 1995
<TABLE>
<CAPTION>
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Net sales $1,240,709 $1,558,310 $2,014,710 $ 766,946
Cost of sales 719,677 887,895 1,222,320 415,160
Gross profit 521,032 670,415 792,390 351,786
Operating expenses:
Selling, general, and administrative 403,922 400,864 490,088 171,720
Operating income 117,110 269,551 302,302 180,066
Other (income) expense:
Interest expense (income) (1,566) (5,157) (5,512) 4,728
(Gain) loss on sale of fixed assets 0 5,000 (36,228) 0
(Gain) loss on sale of marketable
securities, net (81) 9,190 0 0
Miscellaneous, net (2,871) (7,479) (2,396) 0
Total other expense (income) (4,518) 1,554 (44,136) 4,728
Net income 121,628 267,997 346,438 175,338
Retained earnings -- beginning of
period 314,531 436,159 663,656 906,853
Stockholder distributions 0 (40,500) (103,241) (658,041)
Retained earnings -- end of period $ 436,159 $ 663,656 $ 906,853 $ 424,150
</TABLE>
See accompanying notes to financial statements.
B & B PALLET SUPPLY COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993, 1994, AND
THE PERIOD FROM JANUARY 1, 1995 TO MAY 5, 1995
<TABLE>
<CAPTION>
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 121,628 $ 267,997 $ 346,438 $ 175,338
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 49,226 67,673 67,008 19,011
(Gain) loss on sale of property and
equipment 0 5,000 (36,228) 0
(Gain) loss on sale of marketable securities (81) 9,190 0 0
Changes in operating assets and liabilities:
Trade accounts receivable (63,374) (54,892) (47,572) 9,485
Inventories (24,870) 21,276 (78,384) 14,875
Prepaid expenses 7,371 21,671 (144) (2,583)
Other assets (2,800) 0 0 0
Accounts payable (8,081) 2,280 4,845 1,138
Accrued liabilities (844) (2,427) 4,460 6,788
Deferred revenue 41,377 14,346 (5,754) (29,745)
Net cash provided by operating
activities 119,552 352,114 254,669 194,307
Cash flows from investing activities:
Proceeds from sale of property and equipment 0 25,000 182,434 0
Purchases of property and equipment (109,766) (44,008) (428,449) (26,899)
Purchases of marketable securities (9,109) (33,326) (6,319) 0
Net cash used in investing activities (118,875) (52,334) (252,334) (26,899)
Cash flows from financing activities:
Proceeds from long-term debt 100,000 8,067 200,000 0
Principal payments of long-term debt (121,729) (100,338) (6,665) (3,515)
Principal payments of capital lease
obligations 0 (2,707) (3,530) (1,539)
Stockholder distributions 0 (40,500) (103,241) (540,437)
Net cash (used in) provided by financing
activities (21,729) (135,478) 86,564 (545,491)
Net increase (decrease) in cash (21,052) 164,302 88,899 (378,083)
Cash at beginning of period 180,722 159,670 323,972 412,871
Cash at end of period $ 159,670 $ 323,972 $ 412,871 $ 34,788
Supplemental schedule of non-cash investing and
financing activities:
Change in unrealized holding losses in
marketable securities $ 0 $ 0 $ (13,189) $ 3,042
Land and building distributed to
stockholders 0 0 0 117,604
Capitalized lease obligations for equipment 0 12,984 0 0
Land and building sold in exchange for
assumption of debt 0 0 0 194,203
</TABLE>
See accompanying notes to financial statements.
B & B PALLET SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993, 1994, AND MAY 5, 1995
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
B & B Pallet Supply Company (the Company) builds, refurbishes, and
distributes wooden pallets for use in a variety of industries. The Company is
located in Ozark, Missouri and sells its products on an unsecured basis to
customers in the area. The Company's ability to collect the amounts due from
customers is affected by regional economic conditions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under an accelerated depreciation method over the
estimated useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Building 31.5 years
Fixtures and equipment 5-7 years
Transportation equipment 3-7 years
</TABLE>
MARKETABLE SECURITIES
Marketable securities consist of available-for-sale investments in marketable
equity securities and are recorded at fair value. Unrealized holding gains
and losses are excluded from earnings and are reported as a separate
component of stockholders' equity until realized.
INCOME TAXES
The Company is an S corporation and, accordingly, is not subject to federal
or state income taxes. The Company's taxable income is included in the
individual tax returns of its stockholders.
(2) MARKETABLE SECURITIES
The amortized cost, gross unrealized holding losses, and fair value of
marketable securities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 MAY 5,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Amortized cost $9,190 $33,326 $ 39,645 $ 39,645
Gross unrealized holding losses 0 0 (13,189) (10,147)
Fair value $9,190 $33,326 $ 26,456 $ 29,498
</TABLE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 MAY 5,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Raw materials $16,127 $11,076 $64,130 $55,263
Finished goods 20,432 4,207 29,537 23,529
$36,559 $15,283 $93,667 $78,792
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 MAY 5,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Note payable to bank in install-ments of $250,
including interest at 7.25%, through June 1996 $ 0 $ 7,729 $ 4,246 $ 3,346
Note payable to bank in monthly installments of $1,804,
including interest at 7.05%, paid in full May 1995 0 0 196,818 0
Note payable to bank in interest only payments at 2.7%
paid in full in July 1993 100,000 0 0 0
100,000 7,729 201,064 3,346
Less current maturities (100,000) (2,589) (12,496) (1,666)
$ 0 $ 5,140 $188,568 $ 1,680
</TABLE>
Maturities of long-term debt as of May 5, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ended May 5:
1996 $1,666
1997 1,680
1998 0
1999 0
2000 and thereafter 0
$3,346
</TABLE>
(5) ACCOUNTS RECEIVABLE
Trade accounts receivable consist principally of amounts due from customers
for pallet purchases and are reflected as follows:
<TABLE>
<CAPTION>
DECEMBER 31 MAY 5,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Accounts receivable $125,356 $181,248 $229,820 $220,335
Less allowance for doubtful accounts (1,000) (2,000) (3,000) (3,000)
$124,356 $179,248 $226,820 $217,335
</TABLE>
(6) CAPITALIZED LEASE OBLIGATIONS
Included in property and equipment is one capitalized lease obligation as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 MAY 5,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Cost $0 $13,651 $13,651 $13,651
Less accumulated depreciation 0 (1,950) (5,293) (6,089)
$0 $11,701 $ 8,358 $ 7,562
</TABLE>
Minimum lease commitments under capitalized lease obligations as of May 5,
1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Twelve months ending May 5, 1996 $5,366
Less amounts representing interest (158)
$5,208
</TABLE>
(7) OPERATING LEASES
The Company leases certain tractor trailers under a cancelable operating
lease agreement. The Company leases trailers on an as-needed basis at $200
per month. No future minimum obligations exist under these operating leases
as of May 5, 1995.
Total rent expense under operating leases was $14,400, $21,600, $32,800, and
$21,800 for the years ended December 31, 1992, 1993, and 1994 and the period
from January 1, 1995 to May 5, 1995, respectively.
(8) RELATED PARTY TRANSACTIONS
On May 5, 1995, the Company sold its building and land with book value of
$311,807, net of accumulated depreciation, to its stockholders in exchange
for the stockholders assuming notes payable and debt of $194,203. The Company
recorded a distribution of $117,604 on this transaction and agreed to lease
the building from the stockholders. Minimum future payments under this lease
are as follows:
<TABLE>
<CAPTION>
Twelve months ending May 5:
<S> <C>
1996 $ 40,000
1997 40,000
1998 40,000
1999 40,000
2000 40,000
$200,000
</TABLE>
(9) SUBSEQUENT EVENT
On May 22, 1995, the Company entered into an Acquisition Agreement, whereby
the Company was acquired by, and became a wholly owned subsidiary of, Pallet
Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation
effective as of the close of business on May 5, 1995. As part of this
agreement, the Company distributed cash dividends to the former stockholders
related to a $500,000 note payable with a bank entered into on May 10, 1995.
The note bears interest at 9% with interest only installments of $3,750 due
monthly. The note payable is due on the earlier of demand or May 10, 1996.
The $500,000 distribution was reclassified to equity when the acquisition
became effective.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pallet Supply Company, Inc.:
We have audited the accompanying balance sheets of Pallet Supply Company,
Inc. as of December 31, 1992, 1993, and 1994 and May 31, 1995, and the
related statements of operations, stockholders' equity, and cash flows for
the the years ended December 31, 1992, 1993, and 1994 and the five-month
period ended May 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pallet Supply Company, Inc.
as of December 31, 1992, 1993, and 1994 and May 31, 1995, and the results of
its operations and its cash flows for the years ended December 31, 1992,
1993, and 1994 and for the five-month period ended May 31, 1995 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 29, 1995
PALLET SUPPLY COMPANY, INC.
BALANCE SHEETS
DECEMBER 31, 1992, 1993, 1994 AND MAY 31, 1995
ASSETS
<TABLE>
<CAPTION>
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Current assets:
Cash $ 0 $ 0 $ 14,790 $ 0
Trade accounts receivable, less allowance for
doubtful accounts of $10,000, $12,500, $15,000, and
$15,000, respectively 428,594 624,506 692,684 727,341
Other receivables 4,308 4,143 3,237 24,245
Inventories (note 2) 208,710 256,043 287,318 256,545
Prepaid expenses 24,253 3,490 0 14,909
Total current assets 665,865 888,182 998,029 1,023,040
Property and equipment at cost:
Leasehold improvements 32,644 103,011 127,213 153,924
Furniture and fixtures 36,307 39,457 52,832 54,782
Equipment 626,412 1,101,017 1,215,817 1,207,338
Transportation equipment 355,982 422,909 390,008 361,129
1,051,345 1,666,394 1,785,870 1,777,173
Less accumulated depreciation (404,458) (577,247) (754,673) (833,509)
Net property and equipment 646,887 1,089,147 1,031,197 943,664
Assets of discontinued machine division (note 7) 45,377 73,746 182,662 0
Total assets $1,358,129 $2,051,075 $2,211,888 $1,966,704
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 54,915 $ 164,363 $ 0 $ 53,779
Accounts payable 331,339 499,701 645,424 664,566
Notes payable (note 3) 143,791 466,845 100,000 160,000
Advances from stockholder (note 6) 76,866 82,845 52,832 16,553
Current maturities of long-term debt (note 4) 167,977 231,046 657,041 595,528
Current maturities of capital lease obligations (note 5) 27,327 39,735 8,042 7,556
Accrued liabilities 43,363 73,342 100,838 59,151
Total current liabilities 845,578 1,557,877 1,564,177 1,557,133
Long-term debt, less current maturities (note 4) 106,859 50,137 40,701 31,531
Capital lease obligations, less current maturities (note
5) 24,923 22,222 14,180 6,624
Stockholders' equity (note 1):
Common stock 2,000 2,000 2,000 2,000
Treasury stock (30,000) (30,000) 0 0
Retained earnings 408,769 448,839 590,830 369,416
Total stockholders' equity 380,769 420,839 592,830 371,416
Commitments and contingencies (notes 3, 4, 5, and 6)
Total liabilities and stockholders' equity $1,358,129 $2,051,075 $2,211,888 $1,966,704
</TABLE>
See accompanying notes to financial statements.
PALLET SUPPLY COMPANY, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND THE FIVE-MONTH PERIOD ENDED MAY 31, 1995
<TABLE>
<CAPTION>
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Net sales $5,652,737 $7,176,573 $9,532,690 $3,537,566
Cost of sales 4,590,581 6,007,061 7,898,520 3,042,328
Gross profit 1,062,156 1,169,512 1,634,170 495,238
Operating expenses:
Selling, general, and
administrative 981,512 994,923 1,255,213 533,794
Operating income (loss) 80,644 174,589 378,957 (38,556)
Other income (expense):
Interest expense (52,739) (47,176) (94,684) (40,407)
Loss on sale of fixed assets 0 0 (6,748) (1,824)
Miscellaneous, net (50,446) (16,680) (20,638) 5,971
Total other expense (103,185) (63,856) (122,070) (36,260)
Income (loss) from continuing
operations (22,541) 110,733 256,887 (74,816)
Loss from operation of
discontinued
Machine Division (note 7) (6,515) (70,663) (84,896) 0
Net income (loss) $ (29,056) $ 40,070 $ 171,991 $ (74,816)
</TABLE>
See accompanying notes to financial statements.
PALLET SUPPLY COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND THE FIVE-MONTH PERIOD ENDED MAY 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TREASURY STOCK
AMOUNT EARNINGS AMOUNT TOTAL
<S> <C> <C> <C> <C>
Balance, January 1, 1992 $2,000 $ 437,825 $(30,000) $ 409,825
Net loss 0 (29,056) 0 (29,056)
Balance, December 31, 1992 2,000 408,769 (30,000) 380,769
Net income 0 40,070 0 40,070
Balance, December 31, 1993 2,000 448,839 (30,000) 420,839
Retirement of treasury
stock 0 (30,000) 30,000 0
Net income 0 171,991 0 171,991
Balance, December 31, 1994 2,000 590,830 0 592,830
Distribution (note 7) 0 (146,598) 0 (146,598)
Net loss 0 (74,816) 0 (74,816)
Balance, May 31, 1995 $2,000 $ 369,416 $ 0 $ 371,416
</TABLE>
See accompanying notes to financial statements.
PALLET SUPPLY COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND THE FIVE-MONTH PERIOD ENDED MAY 31, 1995
<TABLE>
<CAPTION>
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (29,056) $ 40,070 $ 171,991 $(74,816)
Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:
Depreciation 161,988 177,865 225,226 96,693
Loss on sale of equipment 0 0 6,748 1,824
Changes in operating assets and liabilities:
Trade accounts receivable (38,400) (195,912) (68,178) (34,657)
Other receivables (1,900) 165 906 (21,008)
Inventories (34,241) (47,333) (31,275) 30,773
Prepaid expenses (24,253) 20,763 3,490 (14,909)
Accounts payable 143,910 168,362 145,723 19,142
Accrued liabilities (31,862) 29,979 27,496 (41,687)
Net cash provided by (used in) operating
activities 146,186 193,959 482,127 (38,645)
Cash flows from investing activities:
Proceeds from sale of equipment 0 0 10,000 36,300
Purchases of property and equipment (123,650) (572,085) (184,024) (47,284)
Net change in assets of discontinued operations (45,377) (28,369) (108,916) 36,064
Net cash provided by (used in) investing
activities (169,027) (600,454) (282,940) 25,080
Cash flows from financing activities:
Net change in bank overdraft 34,823 109,448 (164,363) 53,779
Proceeds from notes payable 99,480 466,845 100,000 60,000
Principal payments of notes payable 0 (143,791) (466,845) 0
Proceeds from long-term debt 227,668 260,075 647,604 0
Principal payments of long-term debt (118,149) (253,728) (231,045) (70,683)
Principal payments of capital lease obligations (204,656) (38,333) (39,735) (8,042)
Repayments of advances from stockholder (16,325) 5,979 (30,013) (36,279)
Net cash provided by (used in) financing
activities 22,841 406,495 (184,397) (1,225)
Net increase (decrease) in cash 0 0 14,790 (14,790)
Cash at beginning of period 0 0 0 14,790
Cash at end of period $ 0 $ 0 $ 14,790 $ 0
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 45,238 $ 39,784 $ 85,832 $ 39,044
Supplemental schedule of non-cash
investing and financing activities:
Equipment traded in for new equipment $ 45,281 $ 11,262 $ 55,106 $ 0
Capitalized lease obligations for equipment 50,316 48,040 0 0
Retirement of treasury stock 0 0 30,000 0
Assets of discontinued operations distributed
to stockholder 0 0 0 146,598
</TABLE>
See accompanying notes to financial statements.
PALLET SUPPLY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993, AND 1994 AND MAY 31, 1995
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Pallet Supply Company, Inc. (the Company) builds, refurbishes, and
distributes wooden pallets for use in a variety of industries. The Company is
located in Memphis, Tennessee with additional facilities in Little Rock,
Arkansas; Hanceville, Alabama; Birmingham, Alabama; and Indianola,
Mississippi and sells its products on an unsecured basis to customers in
those areas. The Company's ability to collect the amounts due from customers
is affected by regional economic conditions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements 10-31.5 years
Furniture and fixtures 3-5 years
Equipment 5-10 years
Transportation equipment 5-7 years
</TABLE>
INCOME TAXES
The Company is an S corporation and, accordingly, is not subject to federal
or state income taxes. The Company's taxable income is included in the
individual tax returns of its stockholders.
STOCKHOLDERS' EQUITY
Common stock of the Company consists of Class A voting no-par common stock
with four shares authorized, issued, and outstanding and Class B nonvoting
no-par common stock with 100,000 shares authorized; 84,486 shares issued and
outstanding.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Raw materials $123,173 $120,423 $135,309 $171,740
Finished goods 85,537 135,620 152,009 84,805
$208,710 $256,043 $287,318 $256,545
</TABLE>
(3) NOTES PAYABLE
The Company has a $300,000 line of credit agreement with its bank. Interest
is payable monthly at 1.25% above the bank's base rate. The note is secured
by accounts receivable and inventory and is due on demand. Additionally, the
outstanding balance of the line must be zero for sixty consecutive days at
any time during the year. Outstanding balances on the note were $100,000 and
$160,000 at December 31, 1994 and May 31, 1995, respectively. The Company has
maintained line of credit agreements with other institutions in the past with
similar terms. Outstanding balances on those notes were $143,791 and $466,845
at December 31, 1992 and December 31, 1993, respectively.
(4) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31 MAY 31,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Note payable to bank in monthly installments of
$10,616, plus interest at 1.25% above the bank's
prime rate, final payment due December 1999,
secured by substantially all assets of the Company $ 0 $ 0 $ 639,755 $ 586,358
Note payable in monthly installments of $361,
including interest at 9.75%, final payment due
December 1996, secured by equipment 0 0 7,848 6,433
Note payable in monthly installments of $714,
including interest at 10%, final payment
due July 2000 45,360 41,178 36,530 34,268
Note payable to bank in monthly installments of
$1,550, plus interest at 1.50% above the bank's
prime rate, paid in full in 1995 41,826 23,226 3,076 0
Note payable to bank in monthly installments of
$320, plus interest at 1.50% above the bank's
prime rate, paid in full in 1995 8,570 4,730 566 0
Note payable to bank in monthly installments of
$1,993, plus interest at 1.50% above the bank's
prime rate, paid in full in 1995 59,792 35,876 9,967 0
Note payable in monthly installments of $3,800,
including interest at 1.5% above the bank's
prime, paid in full in 1994 0 174,325 0 0
Note payable in monthly installments of $1,100,
including interest at 1.5% above the bank's
prime, paid in full in 1993 28,740 0 0 0
Note payable in monthly installments of $1,334,
including interest at 1.5% above the bank's
prime, paid in full in 1993 32,833 0 0 0
Various notes payable to banks, all were paid in
full
prior to 1995 57,715 1,848 0 0
274,836 281,183 697,742 627,059
Less current maturities (167,977) (231,046) (657,041) (595,528)
$ 106,859 $ 50,137 $ 40,701 $ 31,531
</TABLE>
Maturities of long-term debt as of May 31, 1995 are as follows:
<TABLE>
<CAPTION>
Twelve months ending May 31:
<S> <C>
1996 $595,528
1997 8,370
1998 6,542
1999 7,227
2000 7,984
Thereafter 1,408
$627,059
</TABLE>
(5) LEASES
The Company has several capital lease obligations with monthly payments
totaling $939 including imputed interest rates ranging from 6.1% to 8.9%. The
leases have various expiration dates through May 1997. In addition, the
Company has several operating leases. Minimum lease commitments as of May 31,
1995 as are follows:
<TABLE>
<CAPTION>
OPERATING
RELATED
CAPITAL PARTY OTHER
<S> <C> <C> <C>
Twelve months ending May 31:
1996 $ 8,112 $ 193,800 $30,000
1997 6,858 193,800 12,500
1998 0 161,400 0
1999 0 161,400 0
2000 0 161,400 0
Thereafter 0 712,850 0
$14,970 $1,584,650 $42,500
Less amounts representing interest (790)
14,180
Less current maturities (7,556)
$ 6,624
</TABLE>
Capital leases included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1992 1993 1994 1995
<S> <C> <C> <C> <C>
Cost $105,485 $121,160 $121,160 $121,160
Less accumulated (43,244) (61,300) (84,488) (92,083)
$ 62,241 $ 59,860 $ 36,672 $ 29,077
</TABLE>
(6) RELATED PARTY TRANSACTIONS
The Company's stockholder advanced the Company $76,866, $82,845, $52,832, and
$16,553 as of December 31, 1992, 1993, and 1994 and May 31, 1995,
respectively. In addition, the Company leases certain properties from its
stockholders. Rent expense on these leases was $139,846, $148,183, $192,200,
and $58,500 for 1992, 1993, 1994, and 1995, respectively.
(7) DISCONTINUED MACHINE DIVISION
Effective December 31, 1994, the Company discontinued its machine division
and in January 1995, distributed $146,598 of assets of the machine division
to a stockholder.
The assets and liabilities of the discontinued machine division have been
reclassified on the balance sheet from the previously reported classification
to separately identify them as net assets related to discontinued operations.
These net assets consist of net working capital, net property, plant and
equipment, and other assets less related liabilities.
The results of the machine division have been reported separately as a
component of discontinued operations in the statements of operations. Prior
year financial statements have been restated to present the machine division
as a discontinued operation. Summarized results on the machine division are
as follows:
<TABLE>
<CAPTION>
FIVE-MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
1992 1993 1994 MAY 31, 1995
<S> <C> <C> <C> <C>
Net sales $31,720 130,843 451,132 0
Loss from operation of discontinued machine division (6,515) (70,663) (84,896) 0
</TABLE>
(8) SUBSEQUENT EVENT
Effective June 1, 1995, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling Associates of North America, Inc.
(PRANA), a Minnesota corporation. As part of the agreement, the Company
distributed cash dividends to the former stockholders on August 18, 1995,
totaling $591,636.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Diamond Pallet, Inc.:
We have audited the accompanying balance sheets of Diamond Pallet, Inc. as of
June 30, 1994 and 1995 and February 15, 1996 and the related statements of
operations and retained earnings and cash flows for the years ended June 30,
1994 and 1995 and for the seven and one-half month period ended February 15,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diamond Pallet, Inc. as of
June 30, 1994 and 1995 and February 15, 1996, and the results of its
operations and its cash flows for the years ended June 30, 1994 and 1995 and
the seven and one-half month period ended February 15, 1996, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 1, 1996
DIAMOND PALLET, INC.
BALANCE SHEETS
JUNE 30, 1994 AND 1995 AND FEBRUARY 15, 1996
ASSETS
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Current assets:
Cash $ 0 $ 5,961 $ 44,133
Trade accounts receivable 76,347 88,554 56,719
Advances to stockholders (note 8) 24,805 21,500 18,000
Inventories (note 2) 29,317 24,303 36,539
Prepaid expenses 7,158 5,899 6,325
Deferred income taxes (note 6) 44,800 20,200 2,500
Total current assets 182,427 166,417 164,216
Equipment at cost (notes 5 and 7):
Transportation equipment 81,624 81,624 81,624
Other equipment 137,605 139,668 139,032
219,229 221,292 220,656
Less accumulated depreciation 100,563 119,696 130,520
Net equipment 118,666 101,596 90,136
Total assets $301,093 $268,013 $254,352
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt (note 3) $ 37,285 $ 3,182 $ 90
Current maturities of long-term debt (note 5) 13,636 9,332 14,497
Current maturities of capital lease obligations (note 7) 4,263 3,087 5,034
Accounts payable 39,065 20,455 3,365
Accrued liabilities (note 4) 32,222 14,683 15,691
Income taxes payable (note 6) 800 9,240 149
Total current liabilities 127,271 59,979 38,826
Long-term debt, less current maturities (note 5) 32,793 23,461 8,964
Capital lease obligations, less current maturities (note
7) 18,760 15,673 10,639
Deferred income taxes (note 6) 11,400 14,100 12,400
Stockholders' equity:
Common stock no par value; 1,000 shares authorized;
100 shares issued and outstanding 1,000 1,000 1,000
Retained earnings 109,869 153,800 182,523
Total stockholders' equity 110,869 154,800 183,523
Commitments (note 7)
Total liabilities and stockholders' equity $301,093 $268,013 $254,352
</TABLE>
See accompanying notes to financial statements.
DIAMOND PALLET, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED JUNE 30, 1994 AND 1995 AND
SEVEN AND ONE-HALF MONTH PERIOD ENDED FEBRUARY 15, 1996
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net sales $1,352,491 $1,048,125 $573,838
Cost of sales 1,151,742 810,715 420,622
Gross profit 200,749 237,410 153,216
Operating expenses:
Selling, general, and administrative 156,498 149,516 98,792
Operating income 44,251 87,894 54,424
Other income (expense):
Interest expense (8,929) (7,423) (2,572)
Gain on disposal of equipment 12,633 0 0
Total other income (expense) 3,704 (7,423) (2,572)
Income before income taxes 47,955 80,471 51,852
Provision for income taxes (note 6) 21,900 36,540 23,129
Net income 26,055 43,931 28,723
Retained earnings, beginning of
period 83,814 109,869 153,800
Retained earnings, end of period $ 109,869 $ 153,800 $182,523
</TABLE>
See accompanying notes to financial statements.
DIAMOND PALLET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994 AND 1995 AND
SEVEN AND ONE-HALF MONTH PERIOD ENDED FEBRUARY 15, 1996
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 26,055 $ 43,931 $ 28,723
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 22,268 19,133 11,460
Gain on sale of equipment (12,633) 0 0
Deferred income taxes 21,100 27,300 16,000
Changes in operating assets and liabilities:
Trade accounts receivable 2,298 (12,207) 31,835
Inventories 28,228 5,014 (12,236)
Prepaid expenses (821) 1,259 (426)
Accounts payable (84,233) (18,610) (17,090)
Accrued liabilities 2,290 (17,539) 1,008
Income taxes payable 0 8,440 (9,091)
Net cash provided by operating activities 4,552 56,721 50,183
Cash flows from investing activities:
Proceeds from disposal of equipment 17,877 0 0
Purchases of equipment (8,813) (2,063) 0
Net cash provided by (used in) investing
activities 9,064 (2,063) 0
Cash flows from financing activities:
Net payments on short-term debt (4,715) (34,103) (3,092)
Principal payments of long-term debt (13,168) (13,636) (9,332)
Principal payments of capital lease obligations (1,977) (4,263) (3,087)
Repayments of advances to stockholders 0 3,305 3,500
Net cash used in financing activities (19,860) (48,697) (12,011)
Net increase (decrease) in cash (6,244) 5,961 38,172
Cash at beginning of period 6,244 0 5,961
Cash at end of period $ 0 $ 5,961 $ 44,133
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 8,929 7,423 2,572
Cash paid during the period for income taxes 800 800 16,220
Supplemental schedule of non-cash investing
and financing activities:
Equipment acquired under capital lease $ 25,000 $ 0 $ 0
</TABLE>
See accompanying notes to financial statements.
DIAMOND PALLET, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1994 AND 1995 AND FEBRUARY 15, 1996
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Diamond Pallet, Inc. (the Company) builds, refurbishes, and distributes
wooden pallets for use in a variety of industries. The Company is located in
Stockton, California and sells its products on an unsecured basis to
customers in the area. The Company's ability to collect the amounts due from
customers is affected by regional economic conditions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Transportation equipment 5-10 years
Other equipment 7-15 years
</TABLE>
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under
Statement No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to 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
the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement No. 109, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
ACCOUNTING 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying value of debt approximates market, as the substantial majority
of debt carries variable market interest rates.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30 FEBRUARY 15,
1994 1995 1996
<S> <C> <C> <C>
Raw materials $18,272 $14,762 $25,579
Finished goods 11,045 9,541 10,960
$29,317 $24,303 $36,539
</TABLE>
(3) SHORT-TERM DEBT
The Company has a $75,000 line of credit agreement with its bank. Interest is
payable at 2.75% above the prime rate. The note is secured by substantially
all assets and is due on demand. Outstanding balances on this line of credit
were $37,285, $3,182 and $90 as of June 30, 1994 and 1995, and February 15,
1996, respectively.
(4) ACCRUED LIABILITIES
Accrued liabilities as of June 30, 1995 and 1994 and February 15, 1996 were
as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Payroll and payroll taxes $10,148 $ 9,717 $13,456
Compensated absences 928 804 302
Insurance 2,587 1,497 440
Repairs and maintenance 8,543 0 0
Sales tax 10,016 2,665 1,493
$32,222 $14,683 $15,691
</TABLE>
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30 FEBRUARY 15,
1994 1995 1996
<S> <C> <C> <C>
Note payable to bank in monthly installments of $464,
including interest at 9.9%, final payment due August
1997,
and secured by automobile $15,123 $10,879 $ 7,808
Note payable to bank in monthly installments of $783
including interest at the bank's prime rate plus 2.75%,
final payment due October 1997, and guaranteed by
two stockholders 31,306 21,914 15,653
46,429 32,793 23,461
Less current maturities 13,636 9,332 14,497
$32,793 $23,461 $ 8,964
</TABLE>
Maturities of long-term debt as of February 15, 1996 are as follows:
<TABLE>
<CAPTION>
Twelve months ending February 15:
<S> <C>
1997 $14,497
1998 8,964
$23,461
</TABLE>
(6) INCOME TAXES
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
June 30, 1994:
Federal $ 0 $16,700 $16,700
State 800 4,400 5,200
$ 800 21,100 21,900
June 30, 1995:
Federal 7,493 20,200 27,693
State 1,747 7,100 8,847
$9,240 27,300 36,540
February 15, 1996:
Federal 3,650 14,000 17,650
State 3,479 2,000 5,479
$7,129 $16,000 $23,129
</TABLE>
<TABLE>
<CAPTION>
JUNE 30 FEBRUARY 15,
1994 1995 1996
<S> <C> <C> <C>
Deferred tax assets:
Inventory $ 8,500 $ 7,800 $ 0
Investment 9,300 9,000 9,000
Accounts payable 1,500 0 1,000
Accrued liabilities 12,200 4,500 5,900
Capital lease obligations 9,900 8,000 6,700
Net operating losses 36,700 4,300 0
Miscellaneous credits 0 9,500 0
78,100 43,100 22,600
Deferred tax liabilities:
Accounts receivable (6,800) (1,600) (1,700)
Prepaid expenses (3,000) (2,500) (2,700)
Depreciation (34,900) (31,100) (28,100)
Accounts payable 0 (1,800) 0
(44,700) (37,000) (32,500)
$ 33,400 $ 6,100 $ (9,900)
</TABLE>
The provision for income taxes varied from the expected federal statutory
rate as follows:
<TABLE>
<CAPTION>
SEVEN AND ONE-HALF
MONTH PERIOD ENDED
1994 1995 FEBRUARY 15, 1996
<S> <C> <C>
Expected federal tax recovery using rate of 34% $16,305 $27,360 $17,630
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit 4,316 7,242 4,667
Other 1,279 1,938 832
$21,900 $36,540 $23,129
</TABLE>
(7) LEASES
The Company leases equipment under a capital lease with monthly payments of
$531 including imputed interest at 10% through January 1999. The Company also
leases its operating facility with monthly payments of $1,200 through
December 1996 and $1,000 through December 1997. Minimum lease commitments as
of February 15, 1996 are as follow:
<TABLE>
<CAPTION>
CAPITAL OPERATING
<S> <C> <C>
Twelve months ending February 15:
1997 $ 6,377 $14,000
1998 6,377 10,000
1999 5,314 0
18,068 $24,000
Less amounts representing interest (2,395)
15,673
Less current maturities 5,034
$10,639
</TABLE>
Capital leases included in equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30 FEBRUARY 15,
1994 1995 1996
<S> <C> <C> <C>
Cost $25,000 $25,000 $25,000
Accumulated depreciation 972 2,639 3,819
$24,028 $22,361 $21,181
</TABLE>
Total rent expense under operating leases was $27,228, $25,842, and $12,963
for the years ended December 31, 1994 and 1995 and for the seven and one-half
month period ended February 15, 1996, respectively.
(8) RELATED PARTY TRANSACTIONS
The Company had advances to one of its stockholders in the amount of $24,805,
$21,500, and $18,000 as of June 30, 1994 and 1995 and February 15, 1996,
respectively. No interest was charged on these advances.
(9) SUBSEQUENT EVENT
Effective February 16, 1996, the Company was acquired by, and became a wholly
owned subsidiary of, Pallet Recycling Associates of North America, Inc., a
Minnesota corporation.
INDEPENDENT AUDITORS' REPORT
Metroplex Wood Products:
We have audited the accompanying balance sheets of Metroplex Wood Products as
of December 31, 1993, 1994, and 1995, and the related statements of
operations and equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Metroplex Wood Products as
of December 31, 1993, 1994, and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 16, 1996
<TABLE>
<CAPTION>
METROPLEX WOOD PRODUCTS
BALANCE SHEETS
ASSETS
DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Current assets:
Cash $ 0 $ 0 $ 1,876
Trade accounts receivable 350,397 360,045 224,490
Employee advances 0 0 4,535
Inventories 88,592 97,997 140,278
Prepaid expenses 155 1,164 1,217
Total current assets 439,144 459,206 372,396
Property and equipment at cost:
Furniture and fixtures 0 0 2,990
Equipment 63,664 78,789 78,789
Transportation equipment 0 13,581 21,727
63,664 92,370 103,506
Less accumulated depreciation (13,528) (25,607) (41,310)
Net property and equipment 50,136 66,763 62,196
Total assets $489,280 $525,969 $434,592
LIABILITIES AND EQUITY
Current liabilities:
Checks issued in excess of cash
balance $ 58,621 $ 26,723 $ 0
Current maturities of long-term debt 9,244 9,735 4,599
Accounts payable 2,040 29,884 19,777
Accrued liabilities 1,334 5,599 8,413
Total current liabilities 71,239 71,941 32,789
Long-term debt, less current maturities 24,614 14,879 10,280
Equity 393,427 439,149 391,523
Total liabilities and equity $489,280 $525,969 $434,592
</TABLE>
See accompanying notes to financial statements.
METROPLEX WOOD PRODUCTS
STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Net sales $1,197,422 $1,873,833 $2,135,788
Cost of sales 554,045 1,285,626 1,594,990
Gross profit 643,377 588,207 540,798
Operating expenses:
Selling, general, and
administrative 14,321 42,368 66,292
Operating income 629,056 545,839 474,506
Other income (expense):
Interest expense (2,781) (3,769) (2,135)
Miscellaneous, net 0 0 1,297
Total other expense (2,781) (3,769) (838)
Net income 626,275 542,070 473,668
Equity -- beginning of year 179,841 393,427 439,149
Draws by owner (412,689) (496,348) (521,294)
Equity -- end of year $ 393,427 $ 439,149 $ 391,523
</TABLE>
See accompanying notes to financial statements.
METROPLEX WOOD PRODUCTS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 626,275 $ 542,070 $ 473,668
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 5,525 12,079 15,703
Changes in operating assets and liabilities:
Trade accounts receivable (218,882) (9,648) 135,555
Employee advances 0 0 (4,535)
Inventories (64,330) (9,405) (42,281)
Prepaid expenses (155) (1,009) (53)
Accounts payable (1,436) 27,844 (10,107)
Accrued liabilities (453) 4,265 2,814
Net cash provided by
operating activities 346,544 566,196 570,764
Cash flows from investing activities:
Purchases of property and equipment (35,458) (28,706) (11,136)
Net cash used in investing activities (35,458) (28,706) (11,136)
Cash flows from financing activities:
Checks issued in excess of cash balances 58,621 (31,898) (26,723)
Proceeds from long-term debt 23,247 0 0
Principal payments of long-term debt (7,460) (9,244) (9,735)
Draws by owner (412,689) (496,348) (521,294)
Net cash used in financing activities (338,281) (537,490) (557,752)
Net increase (decrease) in cash (27,195) 0 1,876
Cash at beginning of year 27,195 0 0
Cash at end of year $ 0 $ 0 $ 1,876
Supplemental disclosures of
cash flow information:
Cash paid during the year for interest $ 2,781 $ 3,769 $ 2,135
</TABLE>
See accompanying notes to financial statements.
METROPLEX WOOD PRODUCTS
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Metroplex Wood Products (the Company) builds, refurbishes, and distributes
wooden pallets for use in a variety of industries. The Company is located
near Fort Worth, Texas and sells its products on an unsecured basis to
customers in the area. The Company's ability to collect the amounts due from
customers is affected by regional economic conditions.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures 3-5 years
Equipment 5-7 years
Transportation equipment 5 years
</TABLE>
INCOME TAXES
The Company is a sole proprietorship and, accordingly, is not subject to
federal or state income taxes. The Company's taxable income is included in
the individual tax returns of its owner.
EQUITY
The Company is a sole proprietorship for which the owner received
compensation in the form of draws on equity. Accordingly, there is no
compensation expense related to management of the Company.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Raw materials $50,392 $57,108 $ 73,071
Finished goods 38,200 40,889 67,207
$88,592 $97,997 $140,278
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Note payable in monthly installments of $495, including interest
at 10.50%, final payment due November 1998 $22,752 $19,021 $14,879
Note payable in monthly installments of $515, including interest
at 18.67%, paid in 1995 10,240 5,593 0
Other 866 0 0
33,858 24,614 14,879
Less current maturities (9,244) (9,735) (4,599)
$24,614 $14,879 $10,280
</TABLE>
Maturities of long-term debt as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 4,599
1997 5,106
1998 5,174
$14,879
</TABLE>
(4) SUBSEQUENT EVENT
On April 25, 1996, essentially all of the Company's assets were purchased by
Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota
corporation.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Indy Pallet Company, Inc. and Specialty Pallet Company, Inc.:
We have audited the accompanying combined balance sheets of Indy Pallet
Company, Inc. and Specialty Pallet Company, Inc. as of December 31, 1993,
1994, and 1995, and the related combined statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Indy Pallet
Company, Inc. and Specialty Pallet Company, Inc. as of December 31, 1993,
1994, and 1995, and the results of their operations and cash flows for the
years then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 26, 1996
INDY PALLET COMPANY, INC. AND
SPECIALTY PALLET COMPANY, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash $ 9,899 $ 0 $ 76,337 $ 47,822
Trade accounts receivable 161,834 204,110 150,278 202,813
Employee receivables 1,280 5,314 3,790 0
Inventories (note 2) 64,144 67,172 70,360 59,458
Prepaid expenses 2,467 1,366 1,446 22,198
Total current assets 239,624 277,962 302,211 332,291
Equipment at cost (notes 3 and 4):
Equipment 293,544 329,160 327,298 327,298
Transportation equipment 198,646 201,084 200,565 254,577
492,190 530,244 527,863 581,875
Less accumulated depreciation 167,008 155,030 162,223 (174,045)
Net equipment 325,182 375,214 365,640 407,830
Non-compete agreement, net of accumulated
amortization of $0, $22,222 and $33,332 (unaudited)
as of December 31, 1994 and 1995 and June 30, 1996,
respectively (note 6) 0 133,334 111,112 100,002
Deposits 3,100 3,100 3,100 3,100
Total assets $567,906 $ 789,610 $782,063 $ 843,223
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 0 $ 7,433 $ 0 $ 0
Current maturities of long-term debt (note 3) 41,863 32,191 22,500 15,000
Current maturities of capital lease obligations
(note 4) 0 1,533 1,015 590
Notes payable-related parties (note 6) 82,722 497,887 573,482 553,049
Advances from stockholder (note 6) 30,000 33,000 51,369 36,062
Accrued stockholder distributions 109,122 158,131 0 0
Accounts payable 55,680 50,613 13,494 24,594
Accrued liabilities 42,324 46,322 99,083 105,902
Total current liabilities 361,711 827,110 760,943 735,196
Long-term debt, less current maturities (note 3) 54,690 22,500 0 0
Capital lease obligations, less current maturities
(note 4) 0 1,015 0 0
Notes payable-related parties (note 6) 8,940 31,370 6,708 0
Stockholders' equity (deficit) (note 5):
Capital stock 13,000 8,000 8,000 8,000
Retained earnings (accumulated deficit) 129,565 (100,385) 6,412 100,027
Total stockholders' equity (deficit) 142,565 (92,385) 14,412 108,027
Commitments and contingencies (note 4)
Total liabilities and stockholders' equity
(deficit) $567,906 $ 789,610 $782,063 $ 843,223
</TABLE>
See accompanying notes to combined financial statements.
INDY PALLET COMPANY, INC. AND
SPECIALTY PALLET COMPANY, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $2,591,829 $2,849,638 $2,731,843 $1,524,468 $1,096,099
Cost of sales 1,682,226 1,983,406 1,858,331 1,020,464 774,585
Gross profit 909,603 866,232 873,512 504,004 321,514
Operating expenses:
Selling, general, and
administrative 527,065 530,900 408,668 206,768 191,668
Operating income 382,538 335,332 464,844 297,236 129,846
Other income (expense):
Interest expense (25,671) (22,813) (70,413) (35,322) (36,231)
Loss on sale of equipment 0 0 (5,073) 0 0
Miscellaneous, net (26) 6,659 6,740 (11,534) 0
Total other expense, net (25,697) (16,154) (68,746) (46,856) (36,231)
Net income $ 356,841 $ 319,178 $ 396,098 $ 250,380 $ 93,615
</TABLE>
See accompanying notes to combined financial statements.
INDY PALLET COMPANY, INC. AND
SPECIALTY PALLET COMPANY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
CAPITAL (ACCUMULATED
STOCK DEFICIT) TOTAL
<S> <C> <C> <C>
Balance, December 31, 1992 $13,000 $ 41,846 $ 54,846
Distributions to stockholders 0 (269,122) (269,122)
Net income 0 356,841 356,841
Balance, December 31, 1993 13,000 129,565 142,565
Distributions to stockholders 0 (287,462) (287,462)
Redemption of stock (note 6) (5,000) (261,666) (266,666)
Net income 0 319,178 319,178
Balance, December 31, 1994 8,000 (100,385) (92,385)
Distributions to stockholders 0 (289,301) (289,301)
Net income 0 396,098 396,098
Balance, December 31, 1995 8,000 6,412 14,412
Net income (unaudited) 0 93,615 93,615
Balance, June 30, 1996
(unaudited) $ 8,000 $ 100,027 $ 108,027
</TABLE>
See accompanying notes to financial statements.
INDY PALLET COMPANY, INC. AND
SPECIALTY PALLET COMPANY, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 356,841 $ 319,178 $ 396,098 $ 250,380 $ 93,615
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 43,171 48,784 77,742 56,587 38,870
Loss on sale of equipment 0 0 5,073 0 0
Changes in operating assets and liabilities:
Trade accounts receivable (47,652) (42,276) 53,832 (29,306) (52,535)
Employee receivables 3,394 (4,034) 1,524 5,314 3,790
Inventories (2,877) (3,028) (3,188) 27,397 10,902
Prepaid expenses (726) 1,101 (80) (22,545) (20,752)
Deposits 354 0 0 0 0
Accounts payable 14,272 (5,067) (37,119) 30,718 11,100
Accrued liabilities (52,579) 3,998 52,761 25,234 6,819
Net cash provided by operating activities 314,198 318,656 546,643 334,319 91,808
Cash flows from investing activities:
Purchases of equipment (55,755) (95,616) (69,950) (16,094) (69,950)
Proceeds from sale of equipment 0 0 18,931 0 0
Net cash used in investing activities (55,755) (95,616) (51,019) (16,094) (69,950)
Cash flows from financing activities:
Bank overdraft 0 7,433 (7,433) 0 0
Proceeds from long-term debt 9,457 0 0 0 0
Principal payments of long-term debt (42,512) (41,862) (32,191) (16,749) (7,500)
Payments of capital lease obligations 0 (652) (1,533) (735) (425)
Proceeds of notes payable-related parties 22,610 89,558 536,385 (182,490) 0
Principal payments of notes payable --
related parties (35,451) (51,963) (485,452) 0 0
Advances from stockholders 20,000 3,000 18,369 0 (51,369)
Distributions to stockholders (257,150) (238,453) (447,432) 0 0
Net cash used in financing activities (283,046) (232,939) (419,287) (199,974) (50,373)
Net increase (decrease) in cash (24,603) (9,899) 76,337 128,251 (28,515)
Cash at beginning of period 34,502 9,899 0 0 76,337
Cash at end of period $ 9,899 $ 0 $ 76,337 $ 128,251 $ 47,822
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 26,505 $ 22,799 $ 18,371 $ 9,610 $ 4,231
Supplemental schedule of non-cash investing and
financing activities:
Equipment acquired under capital lease $ 0 $ 3,200 $ 0 $ 0 $ 0
Redemption of stock through issuance of notes
payable -- related parties 0 266,666 0 0 0
Non-compete agreement acquired through issuance
of notes payable -- related party 0 133,334 0 0 0
</TABLE>
See accompanying notes to combined financial statements.
INDY PALLET COMPANY, INC. AND
SPECIALTY PALLET COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Indy Pallet Company, Inc. and Specialty Pallet Company, Inc. (collectively,
the Company) build, refurbish and distribute wooden pallets for use in a
variety of industries. The Company is located in Indianapolis, Indiana and
sells its products on an unsecured basis to customers in the area. The
Company's ability to collect the amounts due from customers is affected by
regional economic conditions.
Specialty Pallet Company, Inc. is wholly owned by the sole stockholder of
Indy Pallet Company, Inc.
PRINCIPLES OF COMBINATION
The combined financial statements of the Company include the accounts of Indy
Pallet Company, Inc. and Specialty Pallet Company, Inc. after elimination of
all significant intercompany accounts and transactions.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment 7-15 years
Transportation equipment 5-10 years
</TABLE>
INCOME TAXES
Indy Pallet Company, Inc. is incorporated under Subchapter S of the Internal
Revenue Code, and as such is not subject to federal or state income taxes.
The Company's taxable income is included in the individual tax returns of its
stockholders.
Specialty Pallet Company, Inc. is incorporated under Subchapter C of the
Internal Revenue Code. Accordingly, the results of Specialty Pallet Company,
Inc.'s operations were subject to income taxes. Income taxes were not
material to Specialty Pallet Company, Inc. as it had minimal net income for
financial and income tax purposes.
ACCOUNTING 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying value of debt approximates market, as the substantial majority
of debt carries interest rates that approximate market.
UNAUDITED FINANCIAL INFORMATION
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of June 30, 1996
and the results of operations and cash flows for the six-month periods ended
June 30, 1995 and 1996, as presented in the accompanying unaudited interim
financial statements.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Raw materials $ 6,605 $ 6,605 $ 6,605 $ 6,605
Finished goods 57,539 60,567 63,755 52,853
$64,144 $67,172 $70,360 $59,458
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Note payable to third party in monthly installments
of $1,010 including interest at 10.25%, paid in 1994,
and secured by automobile $ 8,810 $ 0 $ 0
Note payable to bank in monthly installments of
$307 including interest at 9%, paid in 1995, and
secured by automobile 7,743 4,691 0
Note payable to bank in monthly installments of
$2,500 plus interest at prime plus 2%, final payment
due August 1996, and secured by machinery 80,000 50,000 22,500
96,553 54,691 22,500
Less current maturities 41,863 32,191 22,500
$54,690 $22,500 $ 0
</TABLE>
(4) LEASES
The company leases equipment under a capital lease with monthly payments of
$153 including interest imputed at approximately 16% through July, 1996. The
Company also leases its operating facility with monthly payments of $4,099
through May, 1999. The Company also leases various trailers on a monthly
basis for payments totaling $1,500. Minimum lease commitments as of December
31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
<S> <C> <C>
Twelve months ending December 31:
1996 $1,071 $ 49,185
1997 0 49,185
1998 0 49,185
1999 0 20,494
1,071 $168,049
Less amounts representing interest 56
$1,015
</TABLE>
Capital lease included in equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Cost $0 $3,200 $3,200
Accumulated depreciation 0 187 828
$0 $3,013 $2,372
</TABLE>
Total rent expense under operating leases was $58,747, $63,586 and $69,465
for the years ended December 31, 1993, 1994 and 1995, respectively.
(5) CAPITAL STOCK
The capital stock of the Company is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Indy Pallet Company, Inc. $10,000 $5,000 $5,000
Specialty Pallet Company, Inc. 3,000 3,000 3,000
$13,000 $8,000 $8,000
</TABLE>
Indy Pallet Company, Inc.'s capital stock represents common stock, no par
value, in which 1,000 shares have been authorized. As of December 31, 1993,
1994, and 1995, 200 shares, 100 shares, and 100 shares, respectively, were
issued and outstanding. Management intends to merge the capital stock of
Specialty Pallet Company, Inc. with Indy Pallet Company in 1996.
(6) RELATED PARTY TRANSACTIONS
The Company had advances from a stockholder in the amount of $30,000,
$33,000, and $51,369 as of December 31, 1993, 1994, and 1995, respectively.
No interest was charged on these advances.
Effective December 31, 1994, the Company redeemed 100 shares of Indy Pallet
Company, Inc. common stock by purchasing all the shares of a 50% owner for
$266,666. The Company also entered into a non-compete agreement with the
former shareholder for a period of six years. The non-compete agreement was
recorded as an asset in the amount of $133,334 as of December 31, 1994 and
1995. The Company issued a note payable to the former shareholder at December
31, 1994 in connection with these transactions in the amount of $400,000.
Notes payable-related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1993 1994 1995
<S> <C> <C> <C>
Notes payable to stockholder in connection with
equipment purchases, in monthly installments
totaling $3,739 including interest ranging from
8.75% to 13.75%, paid in 1993 and 1994, and
unsecured $46,662 $ 4,530 $ 0
Note payable to former stockholder in connection with
stock redemption and non-compete agreement, due on
demand without interest, and unsecured 0 400,000 0
Note payable to former stockholder, due on demand
with interest payable at 12%, paid in 1995, and
unsecured 22,500 22,500 0
Note payable to stockholder, due on demand with
interest payable at 12%, and unsecured 0 0 497,500
Note payable to stockholder, due on demand with
interest payable at 12%, and unsecured 22,500 22,500 22,500
Notes payable to stockholder in connection with
equipment purchases, in monthly installments
totaling $7,063 including interest at 12.5%, expiring
through June 1997, and unsecured 0 79,727 60,190
91,662 529,257 580,190
Less current maturities 82,722 497,887 573,482
$ 8,940 $ 31,370 $ 6,708
</TABLE>
Maturities of notes payable-related parties as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Twelve months ending December 31:
<S> <C>
1996 $573,482
1997 6,708
$580,190
</TABLE>
(7) SIGNIFICANT EVENT
On October 26, 1995, the Company entered into an acquisition agreement with
Pallet Recyclers of North America, Inc. (PRANA), a Minnesota corporation. The
acquisition agreement closes the Company into escrow and the Company will
become a wholly owned subsidiary of PRANA if PRANA completes an initial
public offering by October 31, 1996.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pallet Outlet Company, Inc.:
We have audited the accompanying balance sheets of Pallet Outlet Company,
Inc. as of December 31, 1994 and 1995, and the related statements of
operations and retained earnings, and cash flows for each of the fiscal years
in the three-year period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pallet Outlet Company, Inc.
as of December 31, 1994 and 1995, and the results of their operations and
cash flows for each of the fiscal years in the three-year period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 30, 1996
PALLET OUTLET COMPANY, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash $ 72,796 $ 178,929 $ 207,306
Trade accounts receivable 253,923 342,351 431,301
Advances to related parties (note 6) 0 45,623 0
Inventories (note 2) 46,775 69,404 86,755
Prepaid expenses 20,000 20,000 11,000
Total current assets 393,494 656,307 736,362
Equipment, at cost (notes 4 and 5):
Transportation equipment 197,318 406,235 394,587
Other equipment 338,729 470,304 614,669
536,047 876,539 1,009,256
Less accumulated depreciation 116,739 180,466 237,921
Net equipment 419,308 696,073 771,335
Total assets $812,802 $1,352,380 $1,507,697
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note 4) $ 39,312 $ 90,870 $ 50,614
Current maturities of capital lease obligations (note 5) 32,515 45,600 38,947
Advances from related parties (note 6) 30,507 0 0
Accounts payable 32,282 67,143 41,160
Accrued liabilities (note 3) 33,391 43,293 41,066
Total current liabilities 168,007 246,906 171,787
Long-term debt, less current maturities (note 4) 62,324 143,887 167,349
Capital lease obligations, less current maturities (note
5) 32,528 46,429 36,039
Stockholders' equity:
Capital stock--no par value; 10,000 shares authorized,
issued and outstanding 10,000 10,000 10,000
Retained earnings 539,943 905,158 1,122,522
Total stockholders' equity 549,943 915,158 1,132,522
Commitments (note 5)
Total liabilities and stockholders' equity $812,802 $1,352,380 $1,507,697
</TABLE>
See accompanying notes to financial statements.
PALLET OUTLET COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $1,560,555 $2,472,071 $3,472,801 $1,481,631 $2,141,513
Cost of sales 1,174,604 1,653,988 2,323,284 964,256 1,407,224
Gross profit 385,951 818,083 1,149,517 517,375 734,289
Operating expenses:
Selling, general, and administrative 268,226 419,099 557,322 210,753 264,955
Operating income 117,725 398,984 592,195 306,622 469,334
Other income (expense):
Interest expense (15,714) (16,894) (19,504) (8,531) (18,057)
Gain (loss) on disposal of equipment (2,205) (4,200) (13,267) (6,346) 12,000
Miscellaneous (note 5) (14,803) 13,720 17,191 (4,376) (9,971)
Total other income (expense) (32,722) (7,374) (15,580) (19,253) (16,028)
Net income 85,003 391,610 576,615 287,369 453,306
Retained earnings, beginning of
period 63,330 148,333 539,943 539,943 905,158
Distributions to stockholders 0 0 (211,400) (164,245) (235,942)
Retained earnings, end of period $ 148,333 $ 539,943 $ 905,158 $ 663,067 $1,122,522
</TABLE>
See accompanying notes to financial statements.
PALLET OUTLET COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 85,003 $ 391,610 $ 576,615 $ 287,369 $ 453,306
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 36,896 56,149 84,707 34,072 57,455
(Gain) loss on disposal of equipment 2,205 4,200 13,267 6,346 (12,000)
Changes in operating assets and liabilities:
Trade accounts receivable (6,003) (173,594) (88,428) (55,700) (88,950)
Inventories (15,573) (14,642) (22,629) (11,226) (17,351)
Prepaid expenses (15,000) (5,000) 0 9,000 9,000
Accounts payable 23,559 (8,207) 34,861 5,906 (25,983)
Accrued liabilities 6,170 (2,961) 9,902 8,902 (2,227)
Net cash provided by operating activities 117,257 247,555 608,295 284,669 373,250
Cash flows from investing activities:
Purchases of equipment (94,136) (170,112) (345,238) (139,850) (122,217)
Proceeds from disposal of equipment 3,000 3,000 30,000 13,000 12,000
Net cash used in investing activities (91,136) (167,112) (315,238) (126,850) (110,217)
Cash flows from financing activities:
Proceeds from long-term debt 19,000 90,900 197,880 47,204 65,000
Principal payments of long-term debt (87,480) (53,023) (64,759) (11,795) (81,794)
Payments of capital lease obligations (18,676) (27,436) (32,515) (20,664) (27,543)
Net change in related party advances 67,148 (34,445) (76,130) (30,507) 45,623
Distributions to stockholders 0 0 (211,400) (164,245) (235,942)
Net cash used in financing activities (20,008) (24,004) (186,924) (180,007) (234,656)
Net increase (decrease) in cash 6,113 56,439 106,133 (22,188) 28,377
Cash at beginning of period 10,244 16,357 72,796 72,796 178,929
Cash at end of period $ 16,357 $ 72,796 $ 178,929 $ 50,608 $ 207,306
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 15,714 $ 16,894 $ 19,504 $ 8,531 $ 18,057
Supplemental schedule of non-cash investing and
financing activities:
Equipment acquired on credit $ 0 $ 0 $ 6,250 $ 0 $ 0
Equipment acquired under capital lease 54,888 28,000 59,500 14,000 10,500
</TABLE>
See accompanying notes to financial statements.
PALLET OUTLET COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Pallet Outlet Company, Inc., (the Company) builds, refurbishes, and
distributes wooden pallets for use in a variety of industries. The Company is
located in Biglerville, Pennsylvania and sells its products on an unsecured
basis to customers in the area. The Company's ability to collect the amounts
due from customers is affected by regional economic conditions.
REVENUE RECOGNITION
The Company recognizes sales and the related cost of sales on the accrual
basis of accounting at the time the new, recycled, or repaired pallets or
pallet by-products are shipped to or picked up by customers. Brokerage pallet
sales are recognized when shipments are received by the customers.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
DEPRECIATION
Depreciation is computed under the straight-line method over the estimated
useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Transportation equipment 5-10 years
Other equipment 7-15 years
</TABLE>
INCOME TAXES
During 1993, the Company was taxed under Subchapter C of the Internal Revenue
Code and was subject to federal and state income tax. Income tax expense for
the year ended December 31, 1993 was approximately $12,000 and was included
in miscellaneous expense.
Effective January 1, 1994, the Company elected to be taxed under Subchapter S
of the Internal Revenue Code, and as such is not subject to federal or state
income taxes. The Company's taxable income is included in the individual tax
returns of its stockholders.
ACCOUNTING 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The book value of financial instruments shown on the Company's balance sheet
approximates fair market value.
UNAUDITED FINANCIAL INFORMATION
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of June 30, 1996
and the results of operations and cash flows for the six-month periods ended
June 30, 1995 and 1996, as presented in the accompanying unaudited interim
financial statements.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $24,805 $36,806 $45,981
Finished goods 21,969 32,598 40,774
$46,775 $69,404 $86,755
</TABLE>
(3) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
<S> <C> <C>
Payroll and related
taxes $26,917 $41,580
Sales and other taxes 6,474 1,713
$33,391 $43,293
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
<S> <C> <C>
Note payable to Pennsylvania Loan Fund with
monthly payments of $554 including interest at
5%, secured by assets of the stockholders and
maturing August 1999 27,198 22,244
Notes payable to banks with monthly payments
totaling $9,586 including interest ranging from
7% to 9%, secured by various equipment and
maturing through August 2000 74,438 212,513
101,636 234,757
Less current maturities (39,312) (90,870)
$ 62,324 $143,887
</TABLE>
Maturities of long-term debt as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Twelve months ending December 31:
<S> <C>
1996 $ 90,870
1997 60,632
1998 36,441
1999 27,122
2000 19,702
$234,757
</TABLE>
(5) LEASES
The Company leases forklifts under capital leases for monthly payments
totaling $776 including interest imputed at approximately 12% and expiring in
1996. The Company also leases several trailers under capital leases for
payments totaling $4,341 including interest imputed ranging from
approximately 5% to 15% and expiring through March 1999.
In October 1995, the Company began leasing a warehouse located in York,
Pennsylvania for monthly payments of $10,000 through October 2000. A portion
of the warehouse is subleased to a third party through October 1996 for
monthly payments of $10,150.
Minimum lease commitments as of December 331, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
<S> <C> <C>
Twelve months ending December 31:
1996 $ 56,124 $148,680
1997 32,765 148,680
1998 19,278 148,680
1999 1,000 134,383
2000 0 90,000
109,167 $670,423
Less amounts representing
interest (17,138)
92,029
Less current maturities (45,600)
$ 46,429
</TABLE>
Capital leases included in equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
<S> <C> <C>
Cost $93,890 $144,390
Accumulated
depreciation 12,634 22,298
$81,256 $122,092
</TABLE>
Total rent expense under third party operating leases was $0, $8,586, and
$51,755 for the years ended December 31, 1993, 1994, and 1995, respectively.
Total rental income under the sublease was $30,450 and was included in
miscellaneous income for the year ended December 31, 1995.
(6) RELATED PARTY TRANSACTIONS
The Company leases its main operating facility from a partnership owned by
the two stockholders of the Company (the Partnership). The lease is on a
month-to-month basis and consists of payments on Partnership debt secured by
the facility and surrounding property totaling approximately $4,000. Total
rent expense under this lease was $30,384, $41,415, and $48,624 for the years
ended December 31, 1993, 1994, and 1995, respectively.
The Company has also paid for renovations to the property on behalf of the
Partnership. These expenditures were recorded as building repairs and
maintenance and were $36,351, $107,314, and $152,491 for the years ended
December 31, 1993, 1994, and 1995, respectively.
In connection with the above transactions the Company also recorded amounts due
to and from both the Partnership and its stockholders. Total advances to these
related parties were $45,623 as of December 31, 1995. Total advances from these
related parties were $30,507 as of December 31, 1994.
(7) RETIREMENT PLAN
During 1995, the Company established a savings retirement plan for all
eligible employees under Section 401(k) of the Internal Revenue Code. An
employee becomes eligible after one year of service and attaining age 21. The
plan allows employees to defer up to 15% of their compensation, on a pretax
basis. The Company contributes an additional 25% of the employees'
contribution. The Company's contribution to the plan for 1995 was $3,770.
(8) SUBSEQUENT EVENT
On June 7, 1996, the Company entered into an acquisition agreement with
Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota
corporation. Under the terms of the agreement, the Company will become a
wholly owned subsidiary of PRANA upon completion of an initial public
offering.
PRANA LOCATIONS
[MAP]
<TABLE>
<CAPTION>
Recycling Operations Pending Acquisitions Corporate Headquarters On-site Locations
<S> <C> <C> <C>
Stockton Memphis St. Paul Syracuse
Las Vegas Lynchburg
Phoenix Cullman, AL
Denver New Albany
Fort Worth Phoenix
Oklahoma City
Kansas City
St. Paul
Springfiled
Mansfield
Little Rock
Indianola
Memphis
Green Bay
Jackson
Nashville
Indianpolis
Summitville
Lexington
Knoxville
Hanceville
Birmingham
Orlando
Buffalo
Rochester
Syracuse
York
Biglerville
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES
TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 6
Dilution 10
Use of Proceeds 11
Dividend Policy 11
Capitalization 12
Selected Financial Data 13
Pro Forma Financial Data 14
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 18
Business 25
Management 32
Certain Transactions 36
Principal Shareholders 39
Description of Capital Stock 40
Description of the Term Loan and
Certain Other Outstanding
Indebtedness 44
Underwriting 46
Shares Eligible for Future Sale 48
Legal Matters 49
Experts 49
Additional Information 49
Index to Financial Statements F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,750,000 SHARES
[LOGO] PRANA
PALLET RECYCLING
ASSOCIATES OF
NORTH AMERICA, INC.
COMMON STOCK
PROSPECTUS
JOHN G. KINNARD AND COMPANY,
INCORPORATED
____________ , 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
distribution of the Common Stock registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses
except for the Securities and Exchange Commission registration fee, the NASD
filing fee, and the Nasdaq application fee are estimated.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee $ 5,453
NASD filing fee 2,015
Nasdaq application fee 10,000
Printing expenses 75,000
Legal fees and expenses 200,000
Accounting fees and expenses 150,000
Transfer Agent and Registrar fees 3,000
Blue Sky fees and expenses (including legal fees) 38,000
Miscellaneous 166,532
Total $650,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect
to the Company, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys fees and disbursements, incurred by the person in connection with
the proceeding with respect to the same acts or omissions if such person (1)
has not been indemnified by another organization or employee benefit plan for
the same judgments, penalties or fines; (2) acted in good faith; (3) received
no improper personal benefit, and statutory procedure has been followed in
the case of any conflict of interest by a director; (4) in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and (5) in the case of acts or omissions occurring in the person's
performance in the official capacity of director or, for a person not a
director, in the official capacity of officer, board committee member or
employee, reasonably believed that the conduct was in the best interests of
the Company, or, in the case of performance by a director, officer or
employee of the company involving service as a director, officer, partner,
trustee, employee or agent of another organization or employee benefit plan,
reasonable believed that the conduct was not opposed to the best interests of
the Company. In addition, Section 302A.521, subd. 3, requires payment by the
Company, upon written request, of reasonable expenses in advance of final
disposition of the proceeding in certain instances. A decision as to required
indemnification is made by a disinterested majority of the Board of Directors
present at a meeting at which a disinterest quorum is present, or by a
designated committee of the Board, by special legal counsel, by the
shareholders, or by a court.
Provisions regarding indemnification of officers and directors of the Company
are contained in the Company's Amended and Restated Articles of Incorporation
(Exhibit 3.1 to this Registration Statement) and the Company's Amended Bylaws
(Exhibit 3.2 to this Registration Statement), each of which are incorporated
herein by reference.
Under Section 6(b) of the Underwriting Agreement filed as Exhibit 1.1 hereto,
the Underwriters agreed to indemnify, under certain conditions, the Company,
its directors, certain of its officers and persons who control the Company
within the meaning of the Securities Act of 1933, as amended, against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since April 10, 1993, the Company has had the following sales of its
securities:
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK AND COMMON
STOCK ISSUABLE
BY
PURCHASERS OR CLASS OF PURCHASER DATE CONVERSION CONSIDERATION EXEMPTION
<S> <C> <C> <C> <C>
Executive Officers and Directors of the
Company 4/93 750,000 $ 6,000 +
Various accredited investors, 8
unaccredited investors including
officers and directors of the Company 4/93-10/93 250,000 $1,000,000 +
Acquisition of Otto Packaging, Inc. 1/94 145,955 $ 181,976 +
Acquisition of BVS, Inc. 2/94 334,704 $ 417,308 +
Various accredited investors, including
an officer of the Company 3/94-8/94 145,955 $ 100,000 +
Acquisition of Harris Supply
Company, Inc. 4/94 91,000 $ 113,458 +
Acquisition of Pallet City, Inc. 6/94 398,355 $ 496,667 +
Acquisition of Pallet Source, Inc. 12/94 162,500 $ 202,604 +
Acquisition of Hurt's Pallet & Sales,
Inc. 12/94 104,281 $ 130,017 +
Acquisition of Quality Pallet, Inc. 12/94 248,215 $ 309,473 +
Various accredited investors 3/95 $2,000,000* $2,000,000 +
Acquisition of PRANA Oklahoma City, Inc. 4/95 125,000 $ 366,497 +
Acquisition of B&B Pallet Supply Company 5/95 204,705 $ 600,190 +
Acquisition of Pallet Supply, Inc. 8/95 414,504 $1,635,700 +
Pending Acquisition -- down payment 9/95 7,500 $ 30,000 +
Acquisition of PRANA Las Vegas, Inc. 10/95 3,000 $ 8,796 +
</TABLE>
* aggregate principal amount of 10.25% Convertible Subordinated Debentures
+ All issuances of capital stock and warrants to purchase capital stock have
been made by the Company in reliance upon Section 4 (2) of the Securities
Act of 1933, as amended. The Company has relied upon such exemption
because it believed that each of the purchasers had such knowledge and
experience in financial and business matters that it, he or she, as the
case may be, was capable of evaluating the merits and risks of the
prospective investment. With respect to all of such issuances the
Company's imprinted a legend on the certificates representing such
securities restricting their transfer.
From 9/94-4/95 the Company issued warrants to purchase 18,150 shares of
Common Stock to various accredited investors relating to unsecured notes in
the amount of $710,000.+
In March 1995, the Company issued warrants to purchase 6,667 shares of Common
Stock to the agent of the Convertible Subordinated Debentures.+
From 7/95-1/96 the Company issued warrants to purchase 27,394 shares of
Common Stock to various accredited investors relating to unsecured notes in
the amount of $1,757,000.+
In June 1995, the Company issued warrants to purchase 2,500 shares of Common
Stock to the agent of the unsecured notes.+
In July 1995, the Company issued warrants to purchase 14,347 shares of Common
Stock to various noteholders of acquired companies relating to the repurchase
of certain shares.+
In April 1995, pursuant to Rule 506 of Regulation D, the Company issued
warrants to purchase 300,000 shares of Common Stock to various accredited
investors relating to the Secured Notes in the amount of $1,500,000 and
30,000 shares of Common Stock to the agent of the Secured Notes.
In June 1996, in connection with an amendment to an agency agreement, the
Company issued a warrant to purchase 30,000 shares of Common Stock.+
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
<S> <C> <C>
1.1 Form of Underwriting Agreement Filed herewith
3.1 Amended and Restated Articles of Incorporation of the Company Previously filed
3.2 Amended Bylaws of the Company Previously filed
4.1 Specimen form of the Company's Common Stock Certificate Filed herewith
4.2 1995 Long-Term Incentive and Stock Option Plan and form of Option Agreement Previously filed
5.1 Opinion of Dorsey & Whitney LLP Filed herewith
10.1 Lease Agreement dated as of January 1, 1994 between Jeffery E. and Judy M. Otto
and Otto Packaging, Inc. Previously filed
10.2 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply
Co., Inc. Previously filed
10.3 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply
Co., Inc. Previously filed
10.4 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply
Co., Inc. Previously filed
10.5 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply
Co., Inc. Previously filed
10.6 Lease Agreement dated as of February 9, 1995 between the Company and Everest Investments
IV Previously filed
10.7 Employment agreement dated April 1, 1996 between the Company and Bruce C. Faulken Filed herewith
10.8 Employment Agreement dated January 1, 1994 between the Company and Jeffery E. Otto Previously filed
10.9 Employment Agreement dated April 1, 1996 between the Company and Clarence A. Johnson Filed herewith
10.10 Employment Agreement dated February 1, 1994 between the Company and Edward R. Van Previously filed
10.11 Employment Agreement dated April 1, 1996 between the Company and Randy Hines Filed herewith
10.12 Employment Agreement dated April 1, 1996 between the Company and Terry Stewart Filed herewith
10.13 Employment Agreement dated January 1, 1994 between the Company and William L. Alvey Previously filed
10.14 Operating Agreement dated as of August 8, 1995 between the Company, SUTA, L.L.C.
and James J. Doyle Previously filed
10.15 Loan Commitment Agreement dated September 6, 1994 between the Company and Robert
Klas, Sr. Previously filed
10.16 Loan Commitment Agreement dated as of January 1, 1996 between the Company and Gerald
J. Lynam Previously filed
10.17 Subordinated Convertible Debenture dated as of August 8, 1995 between the Company
and Machine Specialists, Inc. Previously filed
10.18 Agreement dated July 1, 1995 between the Company, Pallet City, Inc., and Donald
J. Matre, Ronald J. Matre, Ronald A. Matre, Thomas R. Matre and Tracy Matre-Waring Previously filed
10.19 Agreement dated August 8, 1995 between the Company, Otto Packaging, Inc. and Jeffery
E. Otto and Judy M. Otto Previously filed
10.20 Agreement dated August 4, 1995 between the Company, BVS, Inc. and Orville Roberts,
Theodore Shepard and Edward Van Previously filed
10.21 Agreement dated August 4, 1995 between the Company, Hurt's Pallet & Sales, Inc.
and Robert F. Jarvis and Judith A. Jarvis Previously filed
10.22 Agreement dated July 1, 1995 between the Company, Harris Supply Company and Charles
S. Harris Previously filed
10.23 Agreement dated August 4, 1995 between the Company, Pallet Source, Inc. and George
Gustafson Previously filed
10.24 Agreement dated August 1, 1995 between the Company, Quality Pallet, Inc. and James
W. Brill and Terry L. Brill Previously filed
10.25 Employment Agreement dated May 1, 1996 between the Company and James J. Doyle Filed herewith
10.26 Term Loan and Security Agreement dated August 8, 1995 between PRANA Holdings, Inc.
and Norwest Bank Minnesota, National Association, as amended on April 23, 1996 Filed herewith
10.27 Form of Credit and Security Agreement between various of the Company's Subsidiaries
and Norwest Credit, Inc., as amended Filed herewith
21 Subsidiaries of the Registrant Previously filed
23.1 Consent of Dorsey & Whitney LLP Included in
Exhibit 5.1
23.2 Report and Consent of KPMG Peat Marwick LLP Filed herewith
23.3 Consent of Schutta Nelson & Zembal, Ltd. Filed herewith
24 Powers of Attorney Set forth on the
Signature Page
Previously Filed
</TABLE>
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned thereto duly authorized, in the City of
Roseville, Minnesota on September 5, 1996.
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC.
By /S/ JEFFERY OTTO
Jeffery E. Otto, Chairman of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities indicated on September 5, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/S/ JEFFERY E. OTTO Chairman of the Board of Directors and
Jeffery E. Otto Chief Executive Officer (principal executive officer)
BRUCE C. FAULKEN* President and Chief Operating Officer
(principal executive officer)
/S/ CLARENCE JOHNSON Vice President, Chief Financial Officer
Clarence Johnson (principal financial officer)
/S/ STEVEN R. RASMUSSEN Controller (principal accounting officer)
Steven R. Rasmussen
WILLIAM M. ALVEY* Director
REYNOLD P. FLOM* Director
ROBERT C. KLAS* Director
/S/ THOMAS S. SCHREIER Director
Thomas S. Schreier
DONALD J. MATRE* Director
*By: /S/ JEFFERY E. OTTO
Jeffery E. Otto
Attorney-in-Fact
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Amended Bylaws of the Company
4.1 Specimen form of the Company's Common Stock Certificate
4.2 1995 Long-Term Incentive and Stock Option Plan and form of Option Agreement
5.1 Opinion of Dorsey & Whitney LLP
10.1 Lease Agreement dated as of January 1, 1994 between Jeffery E. and Judy M. Otto and
Otto Packaging, Inc.
10.2 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc.
10.3 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc.
10.4 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc.
10.5 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc.
10.6 Lease Agreement dated as of February 9, 1995 between the Company and Everest Investments IV
10.7 Employment agreement dated April 1, 1996 between the Company and Bruce C. Faulken
10.8 Employment Agreement dated January 1, 1994 between the Company and Jeffery E. Otto
10.9 Employment Agreement dated April 1, 1996 between the Company and Clarence A. Johnson
10.10 Employment Agreement dated February 1, 1994 between the Company and Edward R. Van
10.11 Employment Agreement dated April 1, 1996 between the Company and Randy Hines
10.12 Employment Agreement dated April 1, 1996 between the Company and Terry Stewart
10.13 Employment Agreement dated January 1, 1994 between the Company and William L. Alvey
10.14 Operating Agreement dated as of August 8, 1995 between the Company,
SUTA, L.L.C. and James J. Doyle
10.15 Loan Commitment Agreement dated September 6, 1994 between the Company and
Robert Klas, Sr.
10.16 Loan Commitment Agreement dated as of January 1, 1996 between the Company and
Gerald J. Lynam
10.17 Subordinated Convertible Debenture dated as of August 8, 1995 between the Company and Machine
Specialists, Inc.
10.18 Agreement dated July 1, 1995 between the Company, Pallet City, Inc., and Donald J. Matre,
Ronald J. Matre, Ronald A. Matre, Thomas R. Matre and Tracy Matre-Waring
10.19 Agreement dated August 8, 1995 between the Company, Otto Packaging, Inc. and
Jeffery E. Otto and Judy M. Otto
10.20 Agreement dated August 4, 1995 between the Company, BVS, Inc. and Orville Roberts,
Theodore Shepard and Edward Van
10.21 Agreement dated August 4, 1995 between the Company, Hurt's Pallet & Sales, Inc. and Robert F.
Jarvis and Judith A. Jarvis
10.22 Agreement dated July 1, 1995 between the Company, Harris Supply Company and
Charles S. Harris
10.23 Agreement dated August 4, 1995 between the Company, Pallet Source, Inc. and George Gustafson
10.24 Agreement dated August 1, 1995 between the Company, Quality Pallet, Inc. and
James W. Brill and Terry L. Brill
10.25 Employment Agreement dated May 1, 1996 between the Company and James J. Doyle
10.26 Term Loan and Security Agreement dated August 8, 1995 between PRANA Holdings, Inc. and Norwest
Bank Minnesota, National Association, as amended on April 23, 1996
10.27 Form of Credit and Security Agreement between various of the Company's Subsidiaries and Norwest
Credit, Inc., as amended
21 Subsidiaries of the Registrant
23.1 Consent of Dorsey & Whitney LLP
23.2 Report and Consent of KPMG Peat Marwick LLP
23.3 Consent of Schutta Nelson & Zembal, Ltd.
24 Powers of Attorney
</TABLE>
2,750,000 SHARES
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__________, 1996
John G. Kinnard and Company, Incorporated
As Representative of the Several Underwriters
Kinnard Financial Center
920 Second Avenue South
Minneapolis, MN 55402
Dear Sirs:
Pallet Recycling Associates of North America, Inc. (the "Company")
proposes to issue and sell One Million Five Hundred Fifty Thousand (2,750,000)
shares of Common Stock, $.01 par value (the "Common Stock"), of the Company
subject to the terms and conditions stated herein, to the several underwriters
named in Schedule I hereto (the "Underwriters") for whom you are acting as
representative (the "Representative"), which 2,750,000 shares are herein called
the "Firm Shares." In addition, solely to cover overallotments in connection
with the sale of the Firm Shares, the Company proposes, subject to the terms and
conditions stated herein, to grant to the Underwriters an option to purchase an
additional number of shares not exceeding 412,500. The shares subject to the
option are herein called the "Option Shares." The Firm Shares and any Option
Shares purchased pursuant to this Underwriting Agreement are herein called the
"Shares." As used in this Agreement, the term "Underwriter" includes any party
substituted for an Underwriter under Section 9 hereof.
As Representative, you have advised the Company (i) that you are
authorized to enter into this Underwriting Agreement on behalf of the
Underwriters, and (ii) that the Underwriters are willing, acting severally and
not jointly, to purchase the numbers of the Firm Shares, aggregating in total
2,750,000 shares, set forth opposite their respective names in Schedule I, plus
their pro rata portion of the Option Shares purchased if you elect to exercise
the overallotment option in whole or in part for the accounts of the
Underwriters.
The Company hereby confirms its agreement to issue to the
Representative a warrant for the purchase of 275,000 shares of the Company's
Common Stock as described in Section 5 hereof (the "Representative's Warrant"),
contingent upon the purchase by the Underwriters of the Firm Shares. The shares
issuable upon exercise of the Representative's Warrant are referred to as the
"Warrant Shares."
1. Representations and Warranties of the Company.
The Company represents and warrants to and agrees with each of
the Underwriters as follows:
(a) A registration statement on Form S-1 with respect to the
Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder
and has been filed with the Commission under the 1933 Act. Copies of
the registration statement as amended to date have been delivered by
the Company to the Representative. Such registration statement and all
prospectuses included as a part thereof, all financial statements
included therein, and all schedules and exhibits thereto, as amended at
the time when the registration statement shall become effective, is
herein referred to as the "Registration Statement," and the term
"Prospectus" as used herein shall mean the final prospectus included as
a part of the Registration Statement on file with the Commission when
it becomes effective (except that if a prospectus is filed by the
Company pursuant to Rules 424(b) and 430A under the 1933 Act, the term
"Prospectus" as used herein shall mean the prospectus so filed pursuant
to Rules 424(b) and 430A). The term "Preliminary Prospectus" as used
herein means any prospectus used prior to the Effective Date (as
defined in Section 4(a) hereof) and included as a part of the
Registration Statement, including any prospectus filed with the
Commission pursuant to Rule 424(a).
(b) When the Registration Statement shall become effective and
at all times subsequent thereto up to each closing date, the
Registration Statement and Prospectus and all amendments thereof and
supplements thereto, will comply in all material respects with the
provisions of the 1933 Act and the Rules and Regulations. The
Commission has not issued any order preventing or suspending the use of
any Preliminary Prospectus, issuing a stop order with respect to the
offering of the Shares or requiring the recirculation of a Preliminary
Prospectus. When the Registration Statement shall become effective and
when any post effective amendment thereto shall become effective, the
Registration Statement (as amended, if the Company shall have filed
with the Commission any post effective amendments thereto) 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 light of the circumstances under which they were
made, not misleading. When the Registration Statement shall become
effective and at all times subsequent thereto up to each closing date,
the Prospectus (as amended or supplemented, if the Company shall have
filed with the Commission any amendment thereof or supplement thereto)
will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that
none of the representations and warranties in this Subsection 1(b)
shall apply to statements in, or omissions from, the Registration
Statement or the Prospectus or any amendment thereof or supplement
thereto, which are based upon and conform to information furnished to
the Company by the Underwriters in writing specifically for use in the
preparation of the Registration Statement or the Prospectus or any such
amendment or supplement. There is no contract or other document of the
Company of a character required by the 1933 Act or the Rules and
Regulations to be described in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement, that has
not been described or filed as required.
(c) The Company has no subsidiaries and is not affiliated with
any other company or business entity in any material respect, except as
disclosed in the Prospectus.
(d) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota, with full corporate power and authority, to own, lease
and operate its properties and conduct its business as described in the
Registration Statement and Prospectus. The Company is duly qualified to
do business as a foreign corporation in good standing in each
jurisdiction in which the ownership or lease of its properties, or the
conduct of its business, requires such qualification and in which the
failure to be qualified or in good standing would have a material
adverse effect on the business of the Company. The Company has all
necessary authorizations, approvals and orders of and from all
governmental regulatory officials and bodies to own its properties and
to conduct its business as described in the Registration Statement and
Prospectus and is conducting its business in substantial compliance
with all applicable laws, rules and regulations of the jurisdictions in
which it is conducting business.
(e) The Company holds all licenses, certificates and permits
from state, federal and other regulatory authorities necessary for the
conduct of its business as described in the Registration Statement and
Prospectus. There is not now pending, issued or outstanding, or to the
knowledge of the Company threatened, any investigation, Order to Show
Cause, Notice of Violation, Notice of Apparent Liability or Notice of
Forfeiture or similar action, suit or proceeding, or any complaint
against the Company or any of its properties.
(f) The Company is not in violation of its Amended and
Restated Certificate of Incorporation or Amended Bylaws. The Company is
not in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any bond, debenture, note
or other evidence of indebtedness or in any contract, indenture,
mortgage, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which the Company or
any of its properties are bound, which default would have a material
adverse effect on the business, prospects, profits or condition of the
Company. To the best of the Company's knowledge, the Company is not in
violation of any law, order, rule, regulation, writ, injunction or
decree of any government, governmental instrumentality or court,
domestic or foreign, which violation would have a material adverse
effect on the business, prospects, profits or condition of the Company.
(g) The Company has full requisite power and authority to
enter into this Agreement. This Agreement has been duly authorized,
executed and delivered by the Company and will be a valid and binding
agreement on the part of the Company, enforceable in accordance with
its terms, if and when this Agreement shall have become effective in
accordance with Section 8, except as enforceability may be limited by
the application of bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally and by judicial limitations
on the right of specific performance, and except as the enforceability
of the indemnification or contribution provisions hereof may be
affected by applicable federal or state securities laws. The
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a material breach or violation
of any of the terms and provisions of or constitute a material default
under (i) any indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note, agreement or other evidence of indebtedness, lease,
contract or other agreement or instrument to which the Company is a
party or by which the property of the Company is bound, (ii) the
Company's Amended and Restated Certificate of Incorporation or Amended
Bylaws, or (iii) any statute or any order, rule or regulation of any
court, governmental agency or body having jurisdiction over the
Company. To the best of the Company's knowledge, no consent, approval,
authorization or order of any court, governmental agency or body is
required for the consummation by the Company of the transactions on its
part herein contemplated, except such as may be required under the 1933
Act or under state securities laws.
(h) Except as is otherwise expressly stated in the
Registration Statement or Prospectus, there are no actions, suits or
proceedings pending before any court or governmental agency, authority
or body to which the Company is a party or of which the business or
property of the Company is the subject which might result in any
material adverse change in the condition (financial or otherwise),
business or prospects of the Company, materially and adversely affect
its properties or assets, or prevent consummation of the transactions
contemplated by this Agreement. To the best of the Company's knowledge,
no such actions, suits or proceedings are threatened.
(i) The authorized and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the
Prospectus. The outstanding Common Stock of the Company is duly
authorized and validly issued, fully paid and nonassessable. The Shares
conform in substance to the description thereof contained in the
Registration Statement and Prospectus. The Shares to be sold by the
Company hereunder have been duly authorized and, when issued and
delivered pursuant to this Agreement, will be validly issued, fully
paid and nonassessable and will conform to the description thereof
contained in the Prospectus. No preemptive rights or similar rights of
any security holders of the Company exist with respect to the issuance
and sale of the Shares by the Company or exercise of the
Representative's Warrant. Except as disclosed in the Prospectus, the
Company has no agreement with any security holder which gives such
security holder the right to require the Company to register under the
1933 Act any securities of any nature owned or held by such person
either in connection with the transactions contemplated by this
Agreement or after a demand for registration by such holder, or
otherwise. Upon payment for and delivery of the Shares to be sold by
the Company pursuant to this Agreement, the Underwriters will acquire
good and marketable title to such Shares, free and clear of all liens,
encumbrances or claims. The form of certificate evidencing the Shares
will comply as to form with all applicable provisions of the laws of
the State of Minnesota.
(j) The Representative's Warrant and the Warrant Shares have
been duly authorized. The Representative's Warrant, when issued and
delivered to the Representative, will constitute a valid and binding
obligation of the Company in accordance with its terms, except as
enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of
creditors generally and by judicial limitations on the right of
specific performance. The Warrant Shares when issued in accordance with
the terms of this Agreement and pursuant to the Representative's
Warrant, will be validly issued, fully paid and nonassessable, and
subject to no preemptive rights or similar rights on the part of any
person or entity. A sufficient number of shares of Common Stock of the
Company have been reserved for issuance by the Company upon exercise of
the Representative's Warrant.
(k) KPMG Peat Marwick LLP, whose report appears in the
Prospectus, is a firm of independent accountants within the meaning of
the 1933 Act and the Rules and Regulations. The consolidated financial
statements of the Company, together with the related notes, forming
part of the Registration Statement and Prospectus (the "Financial
Statements") fairly present the financial position and the results of
operations of the Company at the dates and for the respective periods
to which they apply. The Financial Statements filed with the Commission
as part of the Registration Statement have been prepared in accordance
with generally accepted accounting principles, consistently applied
throughout the periods involved, except as may be otherwise stated
therein.
(l) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and at any
closing date, except as is otherwise disclosed in the Registration
Statement or Prospectus, there has not been:
(i) any material adverse change in the capital stock or
long-term debt (including any capitalized lease
obligation), or material increase in the short-term
debt of the Company;
(ii) any issuance of options, warrants, convertible
securities or other rights to purchase the capital
stock of the Company;
(iii) any material adverse change, or any development
involving a material adverse change, in or affecting
the business, prospects, properties, management,
financial position, stockholders' equity, results of
operations or general condition of the Company;
(iv) any material transaction entered into by the Company;
(v) any material obligation, direct or contingent,
incurred by the Company, except obligations incurred
in the ordinary course of business that, in the
aggregate, are not material; or
(vi) any dividend or distribution of any kind declared,
paid or made on the Company's capital stock.
(m) Except as is otherwise disclosed in the Registration
Statement or Prospectus, the Company has good and marketable title to
all of the property, real and personal, described in the Registration
Statement or Prospectus as being owned by the Company, free and clear
of all liens, encumbrances, equities, charges or claims, except as do
not materially interfere with the uses made and to be made by the
Company of such property or as disclosed in the Financial Statements.
Except as is otherwise disclosed in the Registration Statement or
Prospectus, the Company has valid and binding leases to the real and
personal property described in the Registration Statement or Prospectus
as being under lease to the Company, except as to those leases which
are not material to the Company or the lack of enforceability of which
would not materially interfere with the use made and to be made by the
Company of such leased property.
(n) The Company has filed all required federal and state
income and franchise tax returns and paid all taxes shown as due
thereon, except insofar as failure to file all required state income
and franchise tax returns would not materially and adversely effect its
business, profits or financial condition. The Company has no knowledge
of any tax deficiency which either has been or might be asserted
against it which would materially and adversely affect the Company's
business or properties.
(o) No labor disturbance by the employees of the Company
exists or, to the best of the Company's knowledge, is imminent which
could reasonably be expected to have a material adverse effect on the
conduct of the business, operations, financial condition or income of
the Company.
(p)(i) The Company owns or possesses adequate rights to use
all copyrights, patents, trademarks, intellectual
property, and proprietary rights or information
reasonably necessary for the conduct of its present
or intended business as described in the Prospectus.
There are no pending legal, governmental or
administrative proceedings relating to copyrights,
trademarks, intellectual property or proprietary
rights or information to which the Company is a party
or of which any property of the Company is subject.
No such proceedings are, to the best of the Company's
knowledge, threatened or contemplated against the
Company by any governmental agency or authority or
others.
(ii) The Company has not received any notice of conflict
with asserted rights of others.
(iii) To the Company's knowledge, the Company does not
infringe upon the rights or claimed rights of any
person under or, with respect to, any of the
intangible rights referred to in Section 1.(p)(i)
above. Except as disclosed in the Prospectus, the
Company is not obligated or under any liability
whatsoever to make any payments by way of royalties,
fees or otherwise to any owner of, licensor of, or
other claimant to, any patent, trademark, trade name,
copyright or other intangible asset, with respect to
the use thereof or in connection with the conduct of
its business or otherwise. To the best of the
Company's knowledge, the Company is not using any
confidential information or trade secrets of any
other party.
(q) The Company intends to apply the proceeds from the sale of
the Shares by it to the purposes and substantially in the manner set
forth in the Prospectus.
(r) The Company does not have a defined benefit pension plan
or other pension benefit plan which is subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended.
(s) To the best of the Company's knowledge, no person is
entitled, directly or indirectly, to compensation from the Company or
the Underwriters for services as a finder in connection with the
transactions contemplated by this Agreement.
(t) The conditions for use of a registration statement on Form
S-1 for the distribution of the Shares have been satisfied with respect
to the Company.
(u) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its
directors, officers, stockholders, or others) which has constituted or
is designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation, as defined in the Securities
Exchange Act of 1934 (the "1934 Act") or otherwise, of the price of any
security of the Company to facilitate the sale or resale of the Common
Stock.
(v) The Company has not sold any securities in violation of
Section 5 of the 1933 Act.
(w) The Company maintains insurance, which is in full force
and effect, of the types and in amounts which are adequate for its
business and in line with the insurance maintained by similar companies
and businesses.
(x) Except as disclosed by the Company in writing to the
Representative, each of the officers, directors and all stockholders
who beneficially own 163,000 or more shares of the outstanding Common
Stock of the Company (determined on a pre-stock split basis) have
entered into a written agreement with the Representative which provides
that for 360 days following the Effective Date, such person will not,
without the Representative's prior written consent, sell, transfer or
otherwise dispose of, or agree to sell, transfer or otherwise dispose
of, other than by gift to donees who agree to be bound by the same
restriction or by will or the laws of descent, any of his or her Common
Stock, or any options, warrants or rights to purchase Common Stock or
any shares of Common Stock received upon exercise of any options,
warrants or rights to purchase Common Stock, which are beneficially
held by such persons during such 360-day period except pursuant to the
terms of such written agreement.
(y) The Company is not engaged in any negotiations regarding
any form of business combination with any other entity.
(z) The Company's application for designation of the Shares on
the National Association of Securities Dealers Automated Quotations
National Market System (the "NASDAQ National Market") has been
approved.
(aa) To the best of the Company's knowledge, there are no
affiliations with the National Association of Securities Dealers, Inc.
(the "NASD") among the Company's officers, directors or five percent or
greater security holders, except as set forth in the Registration
Statement or as otherwise disclosed in writing to the Representative.
2. Purchase, Sale, Delivery and Payment.
(a) On the basis of the representations, warranties, and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company agrees to sell to each of the
Underwriters, and the Underwriters agree, severally and not jointly, to
purchase, at a purchase price equal to ________________________ ($____)
per share, the respective amount of Firm Shares set forth opposite such
Underwriter's name in Schedule I hereto. The Underwriters will
collectively purchase all of the Firm Shares if any are purchased.
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth,
the Company hereby grants an option to the Underwriters to purchase an
aggregate of up to 412,500 Option Shares at the same purchase price as
the Firm Shares for use solely in covering any overallotments made by
the Underwriters in the sale and distribution of the Firm Shares. The
option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the Effective Date (as defined in
Section 4(a) hereof) upon notice (confirmed in writing) by the
Representative to the Company setting forth the aggregate number of
Option Shares as to which the Underwriters are exercising the option
and the date on which certificates for such Option Shares are to be
delivered. Option Shares shall be purchased severally for the account
of each Underwriter in proportion to the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto. The
option granted hereby may be canceled by the Representative upon notice
to the Company as to the Option Shares for which the option is
unexercised at any time prior to expiration of the 30-day period.
(c) The Company will deliver the Firm Shares to the
Representative at the offices of Briggs and Morgan, Professional
Association, 2400 IDS Center, Minneapolis, Minnesota 55402, unless some
other place is agreed upon, at 10:00 A.M., Minneapolis time, against
payment of the purchase price at the same place, on the third full
business day after trading of the Shares has commenced, or such earlier
time as may be agreed upon by the Representative and the Company such
time and place being herein referred to as the "First Closing Date."
(d) The Company will deliver the Option Shares being purchased
by the Underwriters to the Representative at the above-referenced
offices of Briggs and Morgan, Professional Association, set forth in
Section 2(c) above, unless some other place is agreed upon, at 10:00
A.M., Minneapolis time, against payment of the purchase price at the
same place, on the date determined by the Representative which shall
not be earlier than two nor later than three full business days after
the exercise of the option as set forth in Section 2(b), or at such
other time not later than ten full business days thereafter as may be
agreed upon by the Representative and the Company, such time and date
being herein referred to as the "Second Closing Date."
(e) Certificates for the Shares to be delivered will be
registered in such names and issued in such denominations as the
Underwriters shall request at least two business days prior to the
First Closing Date or the Second Closing Date, as the case may be. The
certificates will be made available to the Underwriters in definitive
form for the purpose of inspection and packaging at least 24 hours
prior to each respective closing date.
(f) Payment to the Company for the shares shall be made by
wire transfer to an account designated by it or by certified or
official bank check or check, payable in immediately available funds,
payable to the order of the Company.
(g) The Underwriters will make an offering of the Shares
directly to the public (which may include selected dealers who are
members in good standing of the NASD or foreign dealers not eligible
for membership in the NASD but who have agreed to abide by the
interpretation of the NASD's Board of Governor's with respect to
free-riding and withholding) as soon as the Underwriters deem
practicable after the Registration Statement becomes effective at the
public offering price set forth in Section 2(a) above, subject to the
terms and conditions of this Agreement and in accordance with the
Prospectus. Concessions from the public offering price may be allowed
selected dealers who are members of the NASD as the Underwriters
determine and the Underwriters will furnish the Company with such
information about the distribution arrangements as may be necessary for
inclusion in the Registration Statement. It is understood that the
public offering price and concessions may vary after the public
offering. The Underwriters shall offer and sell the Shares only in
jurisdictions in which the offering of Shares has been duly registered
or qualified, or is exempt from registration or qualification, and
shall take reasonable measures to effect compliance with applicable
state securities laws.
(h) It is understood that the Representative, individually and
not as a Representative, may (but shall not be obligated to) make
payment on behalf of any Underwriter or Underwriters for the Shares to
be purchased by such Underwriter or Underwriters. No such payment by
the Representative shall relieve such Underwriter or Underwriters from
any of its or their other obligations hereunder.
(i) On the First Closing Date, the Company shall issue and
deliver to you the Representative's Warrant against payment by you of
the purchase price therefor of $50.
3. Further Agreements of the Company.
The Company hereby covenants and agrees with the Underwriters as
follows:
(a) The Company will use its best efforts to cause the
Registration Statement and any subsequent amendments thereto to become
effective as promptly as possible. It will notify you promptly, after
the Company shall receive notice thereof, of the time when the
Registration Statement, or any subsequent amendment thereto, has become
effective or any supplement to the Prospectus has been filed. It will
notify you promptly upon its obtaining knowledge of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for
that purpose and will use its best efforts to prevent the issuance of
any stop order and, if a stop order is issued, to obtain as soon as
possible the withdrawal or lifting thereof. The Company will promptly
prepare and file at its own expense with the Commission any amendments
of, or supplements to, the Registration Statement and the Prospectus
which may be necessary in connection with the distribution of the
Shares by the Underwriters. All arrangements for the printing of the
Registration Statement, the Prospectus and any related offering
materials shall be subject to your reasonable approval. During the
period when a Prospectus relating to the Shares is required to be
delivered under the Act, the Company will promptly file any amendments
of, or supplements to, the Registration Statement and the Prospectus
which may be necessary to correct any untrue statement of a material
fact or any omission to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The Company will notify you promptly of any
request by the Commission for any amendment of, or supplement to, the
Registration Statement or the Prospectus or for any additional
information. The Company will not file any amendment of, or supplement
to, the Registration Statement or Prospectus, whether prior to or after
the Effective Date, which shall not previously have been submitted to
you and your counsel a reasonable time prior to the proposed filing or
to which you shall have reasonably objected.
(b) The Company will cooperate with the Representative and its
counsel in connection with the registration or qualification of the
Shares for sale under the securities laws of such jurisdictions as the
Representative and the Company may mutually designate, and the Company
will file such consents to service of process or other documents
necessary or appropriate in order to effect such qualification or
registration. In each jurisdiction in which the Shares shall have been
qualified or registered as above provided, the Company will continue
such qualifications or registrations in effect for so long as may be
required for purposes of the distribution of the Shares and make and
file such statements and reports in each year as are or may be
reasonably required by the laws of such jurisdiction to permit
secondary trading of the same; provided, however, that in no event
shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action
which would subject it to the service of process in suits, other than
those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
(c) The Company will make generally available to its security
holders an earnings statement (which need not be audited), in a form
complying with Rule 158 under the 1933 Act, as soon as practicable and
in any event not later than 45 days after the end of its fiscal quarter
in which occurs the first anniversary date of the Effective Date,
meeting the requirements of Section 11(a) of the 1933 Act covering a
period of at least 12 consecutive months beginning after the Effective
Date.
(d) The Company will furnish to you, as soon as available,
copies of the Registration Statement (one of which will be signed and
which shall include all exhibits), each Preliminary Prospectus, the
Prospectus and any amendments or supplements to such documents
including any prospectus prepared to permit compliance with Section
10(a)(3) of the 1933 Act, all in such quantities as you may from time
to time reasonably request. The Company specifically authorizes the
Underwriters and all dealers to whom any of the Shares may be sold by
the Underwriters to use and distribute copies of such Preliminary
Prospectuses and Prospectuses in connection with the sale of the Shares
as and to the extent permitted by the federal and applicable state
securities laws.
(e) For as long as the Company has more than 100 beneficial
owners and is otherwise required to file periodic reports in compliance
with the Securities Exchange Act of 1934, the Company will mail as soon
as practicable to the holders of its Common Stock substantially all of
the following documents, which documents shall be in compliance with
this Section if they meet the requirements of Section 12 of the 1934
Act:
(i) within forty-five days after the end of the first
three quarters of each fiscal year, two copies of the
quarterly unaudited statement of profit and loss and
quarterly unaudited balance sheets of the Company and
any material subsidiaries; and
(ii) within ninety days after the close of each fiscal
year, two copies of the Company's balance sheet and
the related statements of operations, stockholders'
equity and cash flows, together with notes to the
financial statements and a report thereon by a
nationally recognized firm of independent
accountants.
(f) During the five-year period commencing with the Effective
Date and for as long as the Company has more than 100 beneficial
owners, the Company will furnish to the Representative (i) concurrently
with furnishing such reports to its stockholders, the reports described
in Section 3(e) hereof, (ii) as soon as they are available, copies of
all other reports (financial or otherwise) mailed to security holders;
and (iii) as soon as they are available, copies of all reports and
financial statements furnished to or filed by the Company with the
Commission, the NASD, any securities exchange or any state securities
commission or division. During such period, the foregoing financial
statements shall be on a consolidated basis to the extent that the
accounts of the Company and any subsidiary or subsidiaries are
consolidated and shall be accompanied by similar financial statements
for any significant subsidiary which is not so consolidated.
(g) The Company will not, without the prior written consent of
the Representative, sell or otherwise dispose of any capital stock of
the Company (other than pursuant to currently outstanding options and
warrants) within 180 days after the Effective Date.
(h) Subject to the proviso set forth below, the Company shall
be responsible for and pay all costs and expenses incident to the
performance of its obligations under this Agreement including, without
limiting the generality of the foregoing, (i) all costs and expenses in
connection with the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits),
Preliminary Prospectuses, the Prospectus and any amendments thereof or
supplements to any of the foregoing; (ii) the issuance and delivery of
the Shares, including taxes, if any; (iii) the cost of all certificates
representing the Shares; (iv) the fees and expenses of the Transfer
Agent for the Shares; (v) the fees and disbursements of counsel for the
Company; (vi) all fees and other charges of the independent public
accountants of the Company; (vii) the costs of furnishing and
delivering to the Underwriters and dealers participating in the
offering copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectuses, the Prospectus and any amendments
of, or supplements to, any of the foregoing; (viii) the NASD filing
fee; (ix) all accountable fees and expenses of counsel for the
Representative incurred in qualifying the Shares for sale under the
laws of such jurisdictions upon which the Representative and the
Company may agree (including filing fees); and (x) the accountable
expenses, not to exceed $65,000, of the Representative including but
not limited to fees and expenses of the Representative's counsel
(excluding the fees and expenses described in (ix) above), costs and
expenses of conducting a due diligence investigation of the Company and
due diligence meetings, and tombstone advertisements. The
Representative acknowledges receipt of a $15,000 advance against the
$65,000 accountable expense allowance referred to in the preceding
sentence. In the event this Agreement is terminated pursuant to Section
8 below, the Company shall remain obligated to pay the Representative
its actual accountable out-of-pocket expenses, not to exceed $65,000,
plus any fees and expenses described in (ix) above.
(i) The Company will not take, and will use its best efforts
to cause each of its officers and directors not to take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Shares.
(j) For a period of at least three years after the Effective
Date, the Company will continue to file with the Commission all reports
and other documents as may be required by Section 13 or 15(d) of the
1934 Act.
(k) Upon completion of this offering, the Company will use its
best efforts to maintain its quotation of the Common Stock in the
NASDAQ National Market or any national securities exchange for a period
of at least three years.
(l) The Company will apply the net proceeds from the sale of
the Shares to be sold by it substantially in the manner set forth under
"Use of Proceeds" in the Prospectus.
(m) The Company will prepare and file with the Commission
reports on Form SR in accordance with the 1933 Act and the Rules and
Regulations and will supply copies of the Form SR, and any amendments
or supplements thereto, to the Representative and its counsel within
five days of their filing with the Commission.
(n) During the period ending 365 days from the Effective Date,
the Company agrees that it will prior to the issuance of any press
release affecting a material part of the Company's business, furnish
copies thereof to you for your information, but not requiring your
review or approval, before the time of the release.
(o) Prior to or as of either Closing Date, the Company shall
have performed each condition to closing required to be performed by
the Company pursuant to Section 4 hereof.
(p) The Company will furnish the Representative and its
counsel, Briggs and Morgan, Professional Association, with all
documents pertaining to the Company as either shall reasonably request,
and the Company shall make available for consultation any person
connected with the Company's business as the Representative or Briggs
and Morgan, Professional Association, may reasonably deem necessary in
furtherance of the Representative's due diligence examination of the
Company.
(q) The Company hereby grants the Representative the right to
act as sole selling agent, managing underwriting, or financial
representative for the Company in the event the Company proposes to
engage an agent in order to execute (i) a private offering of its
equity or debt securities, (ii) an underwritten public offering of its
equity or debt securities, or (iii) a corporate transaction such as a
recapitalization, a merger and/or an acquisition, for the completion of
which the Company proposes to engage a financial representative to act
on its behalf. If it is reasonably determined by the Representative and
the Company that it would be in the best interest of the Company for
there to be more than one selling agent, underwriter or financial
representative, then the Representative shall cooperate with the
Company in taking such actions as shall be reasonably appropriate to
add such other selling agent, managing underwriter or financial
representative in addition to the Representative, and the
Representative will participate on no less than an equal basis with
such selling agent, underwriter or financial representative to
facilitate the successful completion of the private offering,
underwritten public offering or other corporate transaction. The right
of first refusal provided hereby shall expire upon the earlier to occur
of (i) the closing of the Company's first registered, underwritten
public offering of its common stock following completion of this
offering, or (ii) three years after the date of this Underwriting
Agreement. Notwithstanding anything else contained herein, the right of
first refusal provided hereby shall not apply to sales of the Company's
equity or debt securities to existing holders of the Company's equity
or debt securities; provided, however, that no agent is used to
facilitate such sales.
4. Conditions of the Underwriters' Obligations.
The respective obligations of the Underwriters to purchase and pay for
the Shares as provided herein shall be subject to the accuracy of the
representations and warranties of the Company in the case of the Firm Shares as
of the date hereof and the First Closing Date (as if made on and as of the First
Closing Date), and in the case of the Option Shares, as of the date hereof and
the Second Closing Date (as if made on and as of the Second Closing Date), to
the performance by the Company of its obligations hereunder, and to the
satisfaction of the following additional conditions on or before the First
Closing Date in the case of the Firm Shares and on or before the Second Closing
Date in the case of the Option Shares:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. Minneapolis time, on the first full business day
following the date of this Agreement, or such later date as shall be
consented to in writing by you (the "Effective Date"). No stop order
suspending the effectiveness thereof shall have been issued and no
proceeding for that purpose shall have been initiated or, to the
knowledge of the Company or you, threatened by the Commission or any
state securities commission or similar regulatory body. Any request of
the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to the reasonable satisfaction of the Underwriters and
their legal counsel.
(b) The Representative shall not have advised the Company that
the Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, contains any untrue statement of a fact which is
material or omits to state a fact which is material and is required to
be stated therein or is necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that this Section 4(b) shall not apply
to statements in, or omissions from, the Registration Statement or
Prospectus or any amendment thereof or supplement thereto, which are
based upon and conform to written information furnished to the Company
by any of the Underwriters specifically for use in the preparation of
the Registration Statement or the Prospectus, or any such amendment or
supplement.
(c) Subsequent to the Effective Date, there shall not have
occurred any change, or any development involving a prospective change,
which materially and adversely affects the business or properties of
the Company and which, in the reasonable opinion of the Representative,
materially and adversely affects the market for the Shares.
(d) The Representative shall have received the opinion of
Dorsey & Whitney, LLP., counsel for the Company, dated as of such
respective closing dates and reasonably satisfactory in form and
substance to the Representative and its counsel, substantially to the
effect that:
(i) The Company (A) has been duly incorporated and is
validly existing as a corporation in good standing
under the laws of the State of Minnesota, and (B) has
the requisite corporate power to own, lease and
operate its properties and conduct its businesses as
described in the Prospectus.
(ii) The number of authorized and the number of issued and
outstanding shares of capital stock of the Company is
as set forth in the Prospectus under the caption
"Capitalization," and all issued and outstanding
capital stock of the Company has been duly authorized
and is validly issued, fully paid and nonassessable.
To the best knowledge of such counsel after due
inquiry, the Company has not granted and is not
required to grant any preemptive rights, contractual
or otherwise, to securities holders of the Company
with respect to the issuance or sale of the Shares by
the Company pursuant to this Agreement. To the best
knowledge of such counsel after due inquiry, no
rights to require registration of shares of Common
Stock or other securities of the Company because of
the filing of the Registration Statement exist other
than those which have been waived. The Shares,
Representative's Warrant and Warrant Shares conform
as to matters of law in all material respects to the
description of these securities made in the
Prospectus, and such description accurately sets
forth the material legal provisions thereof required
to be set forth in the Prospectus.
(iii) The Company duly, properly and timely delivered
notice to each shareholder of the Company which was
entitled to receive such notice for the Company's
special meeting of shareholders on April 4, 1996 in
accordance with Minnesota law. Each action voted on
at such special meeting was duly approved in
accordance with Minnesota law.
(iv) The Shares have been duly authorized and, upon
delivery to the Underwriters against payment
therefor, will be validly issued, fully paid and
nonassessable.
(v) The certificates evidencing the Shares comply as to
form with the applicable provisions of the laws of
the State of Minnesota.
(vi) The Representative's Warrant has been duly
authorized, executed and delivered by the Company and
is the valid and binding obligation of the Company,
enforceable in accordance with its terms, except as
enforceability may be limited by the application of
bankruptcy, insolvency, moratorium or other laws of
general application affecting the rights of creditors
generally and by judicial limitations on the right of
specific performance and other equitable remedies,
and except as the enforceability of indemnification
or contribution provisions hereof may be limited by
federal or state securities laws. The Warrant Shares
when issued in accordance with the terms of this
Agreement and pursuant to the Representative's
Warrant, will be validly issued, fully paid,
nonassessable and subject to no preemptive rights
granted or required to be granted by the Company or
similar rights on the part of any person or entity. A
sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the
Representative's Warrant.
(vii) The Registration Statement has become effective under
the 1933 Act and, to the best knowledge of such
counsel after due inquiry, no stop order suspending
the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under
the 1933 Act.
(viii) There are no (A) material legal or governmental
proceedings or (B) material statutes, agreements,
contracts, leases, or other documents of a character
required by the 1933 Act and the Rules and
Regulations to be described or referred to in the
Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement that are
not described or referred to therein or filed as
required.
(ix) To the best of such counsel's knowledge after due
inquiry, the Company has not received any notice of
conflict with the asserted rights of others in
respect of any patents, trademarks, service marks,
trade names, trademark registrations, service mark
registrations, copyrights, licenses, or other
intellectual property or similar rights, nor of any
threatened actions with respect thereto, which, if
determined adversely to the Company, would
individually or in the aggregate have a material
adverse effect on the general affairs, financial
position, net worth or results of operations of the
Company.
(x) To the best of such counsel's knowledge after due
inquiry, there are no legal, governmental or
administrative proceedings pending or threatened
against the Company that relate to patents,
trademarks, copyrights or other intellectual
property.
(xi) No authorization, approval or consent of any
governmental authority or agency is necessary in
connection with the issuance and sale of the Shares
as contemplated under this Agreement, except as have
been obtained or may be required under the 1933 Act
or under state or other securities laws in connection
with the purchase and distribution of the Shares by
the Underwriters.
(xii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than
the financial statements and supporting financial and
statistical data included or incorporated therein, as
to which such counsel need express no opinion) comply
as to form in all material respects with the
requirements of the 1933 Act and the Rules and
Regulations, and the conditions for use of a
registration statement on Form S-1 for the
distribution of the Shares have been satisfied with
respect to the Company.
(xiii) This Agreement has been duly authorized by all
requisite corporate action, executed and delivered
by, and is a valid and binding agreement of the
Company, enforceable in accordance with its terms,
except as enforceability may be limited by the
application of bankruptcy, insolvency, moratorium or
similar laws affecting the rights of creditors
generally and judicial limitations on the right of
specific performance and except as the enforceability
of indemnification or contribution provisions hereof
may be limited by action of a court interpreting or
applying federal or state securities laws or
equitable principles.
(xiv) The performance of this Agreement and the
consummation of the transactions described herein
will not result in a violation of or default under,
its Amended and Restated Certificate of
Incorporation, as amended, or Amended Bylaws. The
performance of this Agreement and the consummation of
the transactions described herein will not result in
a violation of, or a default under, the terms or
provisions of (i) any material bond, debenture, note,
contract, lease, license, indenture, mortgage, deed
of trust, loan agreement, joint venture or other
agreement or instrument to which the Company is a
party or by which the Company or any of its
properties is bound, or (ii) any law, rule or
regulation of the United States or the State of
Delaware (other than federal or state securities
laws), or any order, or writ, injunction, or decree
applicable to the Company known to such counsel of
any government, governmental agency or court having
jurisdiction over the Company or any of its
properties, which violation or default would have a
material adverse effect on the business of the
Company.
(xvi) To the best of such counsel's knowledge after due
inquiry, there are no defects in title or leasehold
interests, or any liens, encumbrances, equities,
charges or claims not disclosed in the Prospectus
which would materially affect the present occupancy
or use of any of the real or personal property owned
or leased by the Company.
(xvii) The statements under the captions "Management - Stock
Option Plan," "Management - Limitation on Liability
and Indemnification Matters," "Certain Transactions,"
"Description of Capital Stock," "Description of the
Term Loan and Certain Other Outstanding Indebtedness"
and "Shares Eligible for Future Sale" in the
Prospectus, insofar as such statements constitute a
summary of documents referred to therein or matters
of law, are accurate summaries and fairly and
correctly present the information called for with
respect to such documents and matters.
In expressing the foregoing opinion, as to matters of fact
relevant to conclusions of law, counsel may rely, to the extent that
they deem proper, upon certificates of public officials and of the
officers of the Company.
In addition to the matters set forth above, such opinion shall
also include a statement to the effect that, although such counsel
cannot guarantee the accuracy, completeness or fairness of any of the
statements contained in the Registration Statement or Prospectus, in
connection with such counsel's representation, investigation and due
inquiry of the Company in the preparation of the Registration
Statement, nothing has come to the attention of such counsel which
causes them to believe that the Registration Statement or Prospectus
(except as to the financial and statistical information mentioned in
the preceding clause) contains an untrue statement of a material fact
or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
in which they were made, not misleading; provided, however, that such
opinion of counsel does not require any statement concerning statements
in, or omissions from, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto, which are based upon and
conform to information furnished to the Company by any of the
Underwriters in writing specifically for use in the preparation of the
Registration Statement or the Prospectus or any such amendment or
supplement.
(e) The Representative shall have received from Briggs and
Morgan, Professional Association, its counsel, such opinion or opinions
as the Representative may reasonably require, dated as of each closing
date and satisfactory in form and substance to the Representative, with
respect to the sufficiency of corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated
hereby, and the Company shall have furnished to said counsel such
documents as they may have reasonably requested for the purpose of
enabling them to pass upon such matters. In connection with such
opinion, as to matters of fact relevant to conclusions of law, such
counsel may rely, to the extent that they deem proper, upon
representations or certificates of public officials and of responsible
officers of the Company.
(f) The Representative and the Company shall have received
letters, dated the date hereof and as of each closing date, from KPMG
Peat Marwick LLP, independent public accountants, substantially in the
form set forth in Appendix A hereto.
(g) The Representative shall have received from the Company a
certificate, dated as of each closing date, signed by the principal
executive officer and the principal financial or accounting officer of
the Company to the effect that:
(i) The representations and warranties of the Company in
this Agreement are true and correct as if made on and
as of each closing date. The Company has complied
with all the agreements and satisfied all the
conditions on its part to be performed or satisfied
at, or prior to, such date.
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no
proceeding for that purpose has been instituted or to
the best knowledge of such officers is pending or
contemplated under the 1933 Act.
(iii) Neither the Registration Statement nor the Prospectus
nor any amendment thereof or supplement thereto
included any untrue statement of a material fact or
omitted to state any material fact required to be
stated therein or necessary to make the statements
therein, in light of the circumstances in which they
were made, not misleading, and, since the effective
date of the Registration Statement, there has
occurred no event required to be set forth in an
amended or supplemented prospectus which has not been
so set forth; provided, however, that such
certificate does not require any representation
concerning statements in, or omissions from, the
Registration Statement or Prospectus or any amendment
thereof or supplement thereto, which are based upon
and conform to written information furnished to the
Company by any of the Underwriters specifically for
use in the preparation of the Registration Statement
or the Prospectus or any such amendment or
supplement.
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement
and the Prospectus and except as contemplated or
referred to in the Prospectus, the Company has not
incurred any direct or contingent liabilities or
obligations material to the Company, or entered into
any material transactions, except liabilities,
obligations or transactions in the ordinary course of
business, and there has not been any change in the
capital stock, short-term debt, or long-term debt of
the Company, any material adverse change in the
financial position, net worth or results of
operations of the Company or declaration or payment
of any dividend by the Company.
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement
and the Prospectus, the Company has not sustained any
material loss of, or damage to, its properties,
whether or not insured.
(vi) Except as is otherwise expressly stated in the
Registration Statement and Prospectus there are no
material actions, suits or proceedings pending before
any court or governmental agency, authority or body,
or, to the best of such officers' knowledge,
threatened, to which the Company is a party or of
which the business or property of the Company is the
subject.
(h) The Representative shall have received, dated as of each
closing date, from the Secretary of the Company a certificate of
incumbency certifying the names, titles and signatures of the officers
authorized to execute the resolutions of the Board of Directors of the
Company authorizing and approving the execution, delivery and
performance of this Agreement, a copy of such resolutions to be
attached to such certificate, certifying such resolutions and
certifying that the Amended and Restated Certificate of Incorporation
of the Company and the Amended Bylaws of the Company have been validly
adopted and have not been amended or modified, except as described in
the Prospectus.
(i) Except as disclosed by the Company in writing to the
Representative, the Representative shall have received a written
agreement from each of the officers, directors and stockholders who
beneficially own __________or more shares of the outstanding Common
Stock of the Company, that for 360 days following the Effective Date,
such person will not, without the Representative's prior written
consent, sell, transfer or otherwise dispose of, or agree to sell,
transfer or otherwise dispose of, other than by gift to donees who
agree to be bound by the same restriction or by will or the laws of
descent, any of his or her Common Stock, or any options, warrants or
rights to purchase Common Stock or any shares of Common Stock received
upon exercise of any options, warrants or rights to purchase Common
Stock, all of which are beneficially held by such persons during the
360-day period except pursuant to the terms of such written agreement.
(k) The Company's Common Stock shall have been approved for
quotation on the NASDAQ National Market.
(l) The Company shall have furnished to the Underwriters,
dated as of the date of each closing date, such further certificates
and documents as the Representative shall have reasonably required.
(m) All such opinions, certificates, letters and documents
will be in compliance with the provisions hereof only if they are
reasonably satisfactory to the Representative and its legal counsel.
All statements contained in any certificate, letter or other document
delivered pursuant hereto by, or on behalf of, the Company shall be
deemed to constitute representations and warranties of the Company.
(n) The Representative may waive in writing the performance of
any one or more of the conditions specified in this Section 4 or extend
the time for their performance.
(o) If any of the conditions specified in this Section 4 shall
not have been fulfilled when and as required by this Agreement to be
fulfilled, this Agreement and all obligations of the Underwriters
hereunder may be canceled at, or at any time prior to, each closing
date by the Representative. Any such cancellation shall be without
liability of the Underwriters to the Company or to any other party, and
shall not relieve the Company of its obligations under Section 3(h)
hereof. Notice of such cancellation shall be given to the Company at
the address specified in Section 11 hereof in writing, or by facsimile
or telephone and confirmed in writing.
5. Representative's Warrant.
On the First Closing Date, the Company shall sell to you for $50 the
Representative's Warrant, which shall first become exercisable one year after
the Effective Date and shall remain exercisable for a period of four years
thereafter. The Representative's Warrant shall be subject to certain transfer
restrictions and shall be in substantially the form filed as an exhibit to the
Registration Statement and attached as Appendix B hereto.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the 1933 Act against any losses,
claims, damages or liabilities, joint or several, to which such
Underwriter, or each such controlling person may become subject, under
the 1933 Act, the 1934 Act, the common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof arise out of, or are based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, or the omission or
alleged omission to state in the Registration Statement or any
amendment thereof a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; (ii) any untrue statement
or alleged untrue statement of a material fact contained in any
Preliminary Prospectus if used prior to the Effective Date of the
Registration Statement or in the Prospectus (as amended or as
supplemented, if the Company shall have filed with the Commission any
amendment thereof or supplement thereto), or the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact
contained in any application or other statement executed by the Company
or based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Shares under, or exempt the Shares
or the sale thereof from qualification under, the securities laws of
such jurisdiction, or the omission or alleged omission to state in such
application or statement a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and the
Company will reimburse each Underwriter, and each such controlling
person for any legal or other expenses reasonably incurred by such
Underwriter or controlling person in connection with investigating or
defending against any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out
of, or is based upon, an untrue statement, or alleged untrue statement,
omission or alleged omission, made in reliance upon and in conformity
with information furnished to the Company by, or on behalf of, any
Underwriter in writing specifically for use in the preparation of the
Registration Statement or any such post effective amendment thereof,
any such Preliminary Prospectus or the Prospectus or any such amendment
thereof or supplement thereto; and provided further that the foregoing
indemnity agreement is subject to the condition that, insofar as it
relates to any untrue statement, alleged untrue statement, omission or
alleged omission made in any Preliminary Prospectus but eliminated or
remedied in the Prospectus, such indemnity agreement shall not inure to
the benefit of any Underwriter (or to the benefit of any person who
controls such Underwriter), if the person asserting any loss, claim,
damage or liability purchased the Shares from such Underwriter which
are the subject thereof, was not sent or given a copy of the Prospectus
with, or prior to, the written confirmation of the sale of such Shares
to such person. This indemnity agreement is in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter severally, but not jointly, agrees to
indemnify and hold harmless the Company, each of the Company's
directors, each of the Company's officers who has signed the
Registration Statement, and each person who controls the Company within
the meaning of Section 15 of the 1933 Act against any losses, claims,
damages or liabilities to which any of the Company or any such
director, officer, or controlling person may become subject, under the
1933 Act, the 1934 Act, the common law, or otherwise, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of, or are based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, or the omission or alleged omission
to state in the Registration Statement or any amendment thereof, a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus if used prior to the Effective Date of the Registration
Statement or in the Prospectus (as amended or as supplemented, if the
Company shall have filed with the Commission any amendment thereof or
supplement thereto), or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading; or (iii) any untrue
statement or alleged untrue statement of a material fact contained in
any application or other statement executed by the Company or by any
Underwriter and filed in any jurisdiction in order to qualify the
Shares under, or exempt the Shares or the sale thereof from
qualification under, the securities laws of such jurisdiction, or the
omission or alleged omission to state in such application or statement
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; in each of the above cases to the extent, but
only the extent, that such untrue statement, alleged untrue statement,
omission or alleged omission, was made in reliance upon and in
conformity with information furnished to the Company by, or on behalf
of, any Underwriter in writing specifically for use in the preparation
of the Registration Statement or any such post-effective amendment
thereof, any such Preliminary Prospectus or the Prospectus or any such
amendment thereof or supplement thereto, or in any application or other
statement executed by the Company or by any Underwriter and filed in
any jurisdiction; and each Underwriter will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or
defending against any such loss, claim, damage, liability or action.
This indemnity agreement is in addition to any liability which the
Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 6, notify in writing the
indemnifying party of the commencement thereof. The omission to so
notify the indemnifying party will not relieve it from any liability
under this Section 6 as to the particular item for which
indemnification is then being sought, unless such omission so to notify
prejudices the indemnifying party's ability to defend such action. In
case any such action is brought against any indemnified party and the
indemnified party notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein
and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof,
with counsel who shall be reasonably satisfactory to such indemnified
party; and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under
this Section 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that if, in
the reasonable judgment of the indemnified party, it is advisable for
such parties and controlling persons to be represented by separate
counsel, any indemnified party shall have the right to employ separate
counsel to represent it and all other parties and their controlling
persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the Underwriters against
the Company or by the Company against the Underwriters hereunder, in
which event the fees and expenses of one firm of such separate counsel
shall be borne by the indemnifying party. Any such indemnifying party
shall not be liable to any such indemnified party on account of any
settlement of any claim or action effected without the consent of such
indemnifying party.
7. Contribution.
(a) If the indemnification provided for in Section 6 is
unavailable under applicable law to any indemnified party in respect of
any losses, claims, damages or liabilities referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Underwriters from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the parties in
connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The Company and the Underwriters agree that
contribution determined by per capita allocation (even if the
Underwriters were considered a single person) would not be equitable.
The respective relative benefits received by the Company on the one
hand, and the Underwriters, on the other hand, shall be deemed to be in
the same proportion (A) in the case of the Company as the total price
paid to it for the Shares by the Underwriters (net of underwriting
discount received but before deducting expenses) bears to the aggregate
public offering price of the Shares, and (B) in the case of the
Underwriters, as the aggregate underwriting discount received by them
bears to the aggregate public offering price of the Shares, in each
case as reflected in the Prospectus. The relative fault of the parties
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to information
supplied by the parties and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim. Notwithstanding the provisions of this
Section 7, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by
reason of any untrue or alleged untrue statement or omission or alleged
omission in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto. The Underwriters'
obligation to contribute pursuant to this section are several and not
joint. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person who
controls an Underwriter within the meaning of the 1933 Act or the 1934
Act shall have the same rights to contribution as such Underwriter,
each person who controls the Company within the meaning of the 1933 Act
or the 1934 Act shall have the same rights to contribution as the
Company and each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the
same rights to contribution as the Company.
(b) Promptly after receipt by a party to this Agreement of
notice of the commencement of any action, suit, or proceeding, such
person will, if a claim for contribution in respect thereof is to be
made against another party (the "Contributing Party"), notify the
Contributing Party of the commencement thereof, but the omission so to
notify the Contributing Party will not relieve the Contributing Party
from any liability which it may have to any party other than under this
Section 7, unless such omission so to notify prejudices the
Contributing Party's ability to defend such action. Any notice given
pursuant to Section 6 hereof shall be deemed to be like notice
hereunder. In case any such action, suit or proceeding is brought
against any party, and such person notifies a Contributing Party of the
commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing
Party similarly notified.
8. Effective Date of This Agreement and Termination.
(a) This Underwriting Agreement shall become effective at
10:00 a.m., Minneapolis time, on the first full business day following
the earlier of the Effective Date or the day upon which this Agreement
shall have been executed by the Representative, or such earlier time
after the Effective Date and the execution of this Agreement as the
Underwriters release Shares to the public. By giving notice as
hereinafter specified before the time this Underwriting Agreement
becomes effective, either the Representative, by notifying the Company,
or the Company, by notifying the Representative, may prevent this
Underwriting Agreement from becoming effective but the giving of such
notice shall not affect the obligations of the Company under Section
3(h) hereof.
(b) Until the First Closing Date, this Agreement may be
terminated by the Representative, at its option, by giving notice to
the Company, if (i) the Company shall have sustained a loss by fire,
flood, accident or other calamity which is material with respect to the
business of the Company; the Company has become a party to material
litigation not disclosed in the Registration Statement or the
Prospectus; or the business or financial condition of the Company has
become the subject of any material litigation not disclosed in the
Registration Statement or the Prospectus, or there shall have been,
since the respective dates as of which information is given in the
Registration Statement or the Prospectus any material adverse change in
the general affairs, business, key personnel, capitalization, financial
position or net worth of the Company, whether or not arising in the
ordinary course of business, which loss or change, in the reasonable
judgment of the Representative, shall render it inadvisable to proceed
with the delivery of the Shares, whether or not such loss shall have
been insured; (ii) trading in securities generally on the New York
Stock Exchange, American Stock Exchange or the over-the-counter market
shall have been suspended or minimum prices shall have been established
by the Commission or by such exchange; (iii) a general banking
moratorium shall have been declared; (iv) there shall have been such a
material adverse change in general economic, monetary, political or
financial conditions, or the effect of international conditions on the
financial markets in the United States shall be such as, in the
judgment of the Representative, makes it inadvisable to proceed with
the delivery of the Shares; (v) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or
order of any court or other governmental authority, which in the
judgment of the Representative materially and adversely affects or will
materially and adversely affect the business or operations of the
Company; (vi) there shall be a material outbreak of hostilities or
material escalation and deterioration in the political and military
situation between the United States and any foreign power or a formal
declaration of war by the United States of America shall have occurred.
Any such termination shall be without liability of any party to any
other party, except as provided in Sections 6 and 7 hereof; provided,
however, that the Company shall remain obligated to pay costs and
expenses to the extent provided in Section 3(h) hereof.
(c) If the Representative elects to prevent this Agreement
from becoming effective or to terminate this Agreement as provided in
this Section 8, it shall notify the Company promptly by telegram or
telephone, confirmed by letter sent to the address specified in Section
11 hereof. If the Company shall elect to prevent this Agreement from
becoming effective, it shall notify the Representative promptly by
telegram or telephone, confirmed by letter sent to the address
specified in Section 11 hereof.
9. Default of Underwriter.
If any Underwriter or Underwriters default in their obligation to
purchase the Firm Shares hereunder and the aggregate amount of Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed to purchase does
not exceed 10% of the total amount of Firm Shares, the other Underwriters shall
be obligated, severally, in proportion to their respective commitments
hereunder, to purchase the Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase. If any Underwriter or Underwriters
so defaults and the aggregate amount of Firm Shares with respect to which such
default or defaults occur is more than 10% of the total number of Firm Shares
and arrangements satisfactory to the Representative and the Company for purchase
of such Firm Shares by other persons (who may include one or more of the
nondefaulting Underwriters, including the Representative) are not made within 72
hours after such default, this Agreement will terminate without liability on the
part of any nondefaulting Underwriter or the Company except for the provisions
of Sections 6 and 7 hereof. In such case as a default of an Underwriter occurs
but the Agreement is not terminated because a substitute Underwriter is found,
either you or the Company shall have the right to postpone the Closing Date, but
in no event for more than seven days, in order that the required changes, if
any, in the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. Survival of Indemnities, Contribution Agreements, Warranties
and Representations.
The respective indemnity and contribution agreements of the Company,
and the Underwriters contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Section 1 hereof and
the covenants of the Company set forth in Section 3 hereof shall remain
operative and in full force and effect, regardless of any investigation made by,
or on behalf of, the Underwriters, the Company, any of its officers and
directors or any controlling person referred to in Sections 6 and 7 and shall
survive the delivery of and payment for the Shares. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person, or
any legal representative of such controlling person, as the case may be, shall
be entitled to the benefit of the respective indemnity and contribution
agreements.
11. Notices.
All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to the Representative or
any of the Underwriters, shall be mailed, delivered, or telecopied and
confirmed, to John G. Kinnard and Company, Incorporated, Kinnard Financial
Center, 920 Second Avenue South, Minneapolis, Minnesota 55402, Attention: Joseph
A. Radecki, with a copy to William T. Dolan, Esq., Briggs and Morgan,
Professional Association, 2400 IDS Center, Minneapolis, Minnesota 55402; if sent
to the Company, shall be mailed, delivered, or telegraphed, and confirmed, to
Pallet Recycling Associates of North America, Inc., 2665 Long Lake Road,
Roseville, Minnesota 55113, Attention: Jeffery E. Otto, Chairman and CEO, with a
copy to Kenneth L. Cutter, Esq., Dorsey & Whitney LLP, Pillsbury Center South,
220 South Sixth Street, Minneapolis, Minnesota 55402-1498.
12. Information Furnished by the Underwriter.
The statements relating to the stabilization activities of the
Underwriters and the statements under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the information
furnished by, or on behalf of, the Underwriters in writing specifically for use
with reference to the Underwriters referred to in Section 1(b) and Section 6
hereof.
13. Parties.
This Agreement shall inure to the benefit of and be binding upon the
Underwriters and the Company, their respective successors and assigns and the
officers, directors and controlling persons referred to in Sections 6 and 7.
Nothing expressed in this Agreement is intended or shall be construed to give
any person or corporation, other than the parties hereto, their respective
successors and assigns and the controlling persons, officers and directors
referred to in Sections 6 and 7 any legal or equitable right, remedy or claim
under, or in respect of, this Agreement or any provision herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors, assigns and such controlling
persons, officers and directors, and for the benefit of no other person or
corporation. No purchaser of any Shares from the Underwriters shall be construed
a successor or assign merely by reason of such purchase.
14. Governing Law.
This Agreement shall be construed and enforced in accordance with the
laws of the State of Minnesota.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed counterpart of this
Agreement, whereupon it will become a binding agreement between the Company and
each of the Underwriters in accordance with its terms.
Very truly yours,
PALLET RECYCLING ASSOCIATES OF NORTH
AMERICA, INC.
By _____________________________________
Its _________________________________
The foregoing Underwriting Agreement is
hereby confirmed and accepted by the
undersigned for itself and as
Representative of the Underwriters
referred to in the foregoing Agreement
as of the date first above written.
JOHN G. KINNARD AND COMPANY,
INCORPORATED
By _____________________________
Its__________________________
SCHEDULE I
NAME OF UNDERWRITER NUMBER OF FIRM SHARES
John G. Kinnard and Company, Incorporated
APPENDIX A
FORM OF COMFORT LETTER OF KPMG PEAT MARWICK LLP
(1) They are independent public accountants with respect to the Company
within the meaning of the Securities Act of 1933, as amended (the "1933 Act").
(2) In their opinion, the financial statements of the Company included
in the Registration Statement which are stated therein to have been examined by
them conform in all material respects with generally accepted accounting
principles.
(3) They have carried out specified procedures, which have been agreed
to by the Underwriters, with respect to certain information in the Prospectus
specified by the Underwriters, and on the basis of such procedures, they have
found such information to be in agreement with the accounting records of the
Company or with material derived from such records.
APPENDIX B
WARRANT
TO PURCHASE 275,000 SHARES OF
COMMON STOCK OF
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
THIS CERTIFIES THAT, for good and valuable consideration, John G.
Kinnard and Company, Incorporated (the "Underwriter"), or its registered
assigns, is entitled to subscribe for and purchase from Pallet Recycling
Associates of North America, Inc., a Minnesota corporation (the "Company"), at
any time after ____________, 1997 (one year after Effective Date as defined in
the Underwriting Agreement), up to and including ____________, 2001, Two Hundred
Seventy-Five Thousand (275,000) fully paid and nonassessable shares of the
Common Stock of the Company at the price of $_____ per share (the "Warrant
Exercise Price"), subject to the antidilution provisions, and to the provisions
of Section 10, of this Warrant. Reference is made to this Warrant in the
Underwriting Agreement dated ____________, 1996, by and between the Company and
the Underwriter. The shares which may be acquired upon exercise of this Warrant
are referred to herein as the "Warrant Shares." As used herein, the term
"Holder" means the Underwriter, any party who acquires all or a part of this
Warrant as a registered transferee of the Underwriter, or any record holder or
holders of the Warrant Shares issued upon exercise, whether in whole or in part,
of the Warrant; the term "Common Stock" means and includes the Company's
presently authorized common stock, $.01 par value, and shall also include any
capital stock of any class of the Company hereafter authorized which shall not
be limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution, or winding up of the Company;
and the term "Convertible Securities" means any stock or other securities
convertible into, or exchangeable for, Common Stock.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise: Transferability.
(a) Subject to the provisions of Section 3 hereof, the rights
represented by this Warrant may be exercised by the Holder hereof, in whole or
in part (but not as to a fractional share of Common Stock), by written notice of
exercise (in the form attached hereto) delivered to the Company at the principal
office of the Company prior to the expiration of this Warrant and accompanied or
preceded by the surrender of this Warrant along with a check in payment of the
Warrant Exercise Price for such shares.
(b) For a period of one year from the Effective Date, this Warrant may
not be sold, assigned, hypothecated, or otherwise transferred, other than by
will or pursuant to the operation of law, except to a person who is a
stockholder and an officer of the Underwriter. Further, for a period of one year
from the Effective Date, this Warrant may not be sold, transferred, assigned,
hypothecated or divided into two or more Warrants of smaller denominations, nor
may any Warrant shares issued pursuant to exercise of this Warrant be
transferred, except as provided in Section 7 hereof.
2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as aforesaid. Subject to the provisions of the next
section, certificates for the Warrant Shares so purchased shall be delivered to
the Holder within a reasonable time, not exceeding fifteen (15) days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the right to purchase the
number of Warrant Shares, if any, with respect to which this Warrant shall not
then have been exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with registrations under applicable securities laws
or an opinion of counsel reasonably acceptable to it to the effect that an
exemption from the applicable securities registration requirements is available.
Nothing herein, however, shall obligate the Company to effect registration under
federal or state securities laws, except as provided in Section 9. If
registration is not in effect and if the Company has not received an opinion of
counsel reasonably acceptable to it to the effect that an exemption is available
when the Holder seeks to exercise the Warrant, the Warrant exercise period will
be extended, if need be, to prevent the Warrant from expiring, until such time
as either registration becomes effective or the Company has received an opinion
of counsel reasonably acceptable to it to the effect that an exemption is
available, and the Warrant shall then remain exercisable for a period of at
least 45 calendar days from the date the Company delivers to the Holder written
notice of the availability of such registration or exemption. The Holder agrees
to execute such documents and make such representations, warranties, and
agreements as may be required solely to comply with the exemptions relied upon
by the Company, or the registrations made, for the issuance of the Warrant
Shares.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
5. Antidilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock
into a greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the total number of shares of Common Stock
outstanding immediately prior to such event (including the maximum number of
shares of Common Stock issuable in respect of any securities convertible into
Common Stock), multiplied by the then existing Warrant Exercise Price, by (b)
the total number of shares of Common Stock outstanding immediately after such
event (including the maximum number of shares of Common Stock issuable in
respect of any securities convertible into Common Stock), and the resulting
quotient shall be the adjusted Warrant Exercise Price per share. An adjustment
made pursuant to this subsection shall become effective immediately after the
record date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification. If, as a result of an adjustment made pursuant to this
subsection, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock or
shares of Common Stock and other capital stock of the Company, the Board of
Directors (whose determination shall be conclusive) shall determine the
allocation of the adjusted Warrant Exercise Price between or among shares of
such classes of capital stock or shares of Common Stock and other capital stock.
All calculations under this subsection shall be made to the nearest cent or to
the nearest 1/100 of a share, as the case may be. In the event that at any time
as a result of an adjustment made pursuant to this subsection, the holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive any
shares of the Company other than shares of Common Stock, thereafter the Warrant
Exercise Price of such other shares so receivable upon exercise of any Warrant
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to Common Stock
contained in this Section.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price
the number of shares, calculated to the nearest full share, obtained by
multiplying the number of shares specified in such Warrant (as adjusted as a
result of all adjustments in the Warrant Exercise Price in effect prior to such
adjustment) by the Warrant Exercise Price in effect prior to such adjustment and
dividing the product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of a
third corporation into the Company), there shall be no adjustment under
subsection (a) of this Section above but the Holder of each Warrant then
outstanding shall have the right thereafter to convert such Warrant into the
kind and amount of shares of stock and other securities and property which he,
she or it would have owned or have been entitled to receive immediately after
such consolidation, merger, statutory exchange, sale, or conveyance had such
Warrant been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale, or conveyance and in any such
case, if necessary, appropriate adjustment shall be made in the application of
the provisions set forth in this Section with respect to the rights and
interests thereafter of any Holders of the Warrant, to the end that the
provisions set forth in this Section shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to any shares of stock
and other securities and property thereafter deliverable on the exercise of the
Warrant. The provisions of this subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a stockholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "1933 Act") and applicable state
securities laws; and provided further that the Holder and prospective transferee
or purchaser shall execute such documents and make such representations,
warranties, and agreements as may be required solely to comply with the
exemptions relied upon by the Company for the transfer or disposition of the
Warrant or Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such Warrant
Shares described in the written notice given pursuant to this Section 7 may not
be effected without registration or qualification of this Warrant or such
Warrant Shares, the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such as, in the
opinion of both such counsel, are permitted by law.
8. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the last reported sale price or, if none, the average of the last reported
closing bid and asked prices on any national securities exchange or quoted in
the National Association of Securities Dealers, Inc's Automated Quotations
System (NASDAQ), or if not listed on a national securities exchange or quoted in
NASDAQ, the average of the last reported closing bid and asked prices as
reported by Metro Data Company, Inc. from quotations by market makers in such
Common Stock on the Minneapolis-St.Paul local over-the-counter market.
9. Registration Rights.
(a) If at any time after ____________, 1996 and prior to the end of the
two-year period following complete exercise of this Warrant or ____________,
2003, whichever occurs earlier, the Company proposes to register under the 1933
Act (except by a Form S-4 or Form S-8 Registration Statement or any successor
forms thereto) or qualify for a public distribution under Section 3(b) of the
1933 Act, any of its equity securities or debt with equity features, it will
give written notice to all Holders of this Warrant, any Warrants issued pursuant
to Section 2 and/or Section 3(a) hereof, and any Warrant Shares of its intention
to do so and, on the written request of any such Holder given within twenty (20)
days after receipt of any such notice (which request shall specify the Warrant
Shares intended to be sold or disposed of by such Holder and describe the nature
of any proposed sale or other disposition thereof), the Company will use its
best efforts to cause all such Warrant Shares, the Holders of which shall have
requested the registration or qualification thereof, to be included in such
registration statement proposed to be filed by the Company; provided, however,
that if a greater number of Warrant Shares is offered for participation in the
proposed offering than in the reasonable opinion of the managing underwriter of
the proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Warrant Shares proposed to be offered by
such Holders for registration, as well as the number of securities of any other
selling stockholders participating in the registration, shall be proportionately
reduced to a number deemed satisfactory by the managing underwriter.
(b) Further, on a one-time basis during the four-year period commencing
____________, 1997 (one year after the Effective Date as defined in the
Underwriting Agreement), upon request by the Holder or Holders of a majority in
interest of this Warrant, of any Warrants issued pursuant to Section 2 and/or
Section 3(a) hereof, and of any Warrant Shares, the Company will promptly take
all necessary steps to register or qualify, on Form S-3, if available, under the
1933 Act and the securities laws of such states as the holders may reasonably
request, such number of Warrant Shares issued and to be issued upon exercise of
the Warrants requested by such holders in their request to the Company. If Form
S-3 is not available the Company will have no obligation to effect the
registration provided for by this Section 9(b) until such time as Form S-3 is
available. The Company shall keep effective and maintain any registration,
qualification, notification, or approval specified in this subparagraph (b) for
such period as may be reasonably necessary for such Holder or Holders of such
Warrant Shares to dispose thereof and from time to time shall amend or
supplement the prospectus used in connection therewith to the extent necessary
in order to comply with applicable law. The Company shall pay all costs of the
registration provided for in this section 9(b).
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following fees,
costs, and expenses: all registration, filing and NASD fees, NASDAQ fees,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if the offering is underwritten and the Company is required
to bear such fees and disbursements), all internal expenses, the premiums and
other costs of policies of insurance against liability arising out of the public
offering, and legal fees and disbursements and other expenses of complying with
state securities laws of any jurisdictions in which the securities to be offered
are to be registered or qualified. Fees and disbursements of special counsel and
accountants for the selling Holders, underwriting discounts and commissions, and
transfer taxes for selling Holders and any other expenses relating to the sale
of securities by the selling Holders not expressly included above shall be borne
by the selling Holders.
(d) The Company hereby indemnifies each of the Holders of this Warrant
and of any Warrant Shares, and the officers and directors, if any, who control
such Holders, within the meaning of Section 15 of the 1933 Act, against all
losses, claims, damages, and liabilities caused by (1) any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus (and as amended or supplemented if the Company shall
have furnished any amendments thereof or supplements thereto), any Preliminary
Prospectus or any state securities law filings; (2) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, or liabilities are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
Holder expressly for use therein; and each such Holder by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Company, each of
its officers who signs such Registration Statement, and each person, if any, who
controls the Company, within the meaning of Section 15 of the 1933 Act, with
respect to losses, claims, damages, or liabilities which are caused by any
untrue statement or omission contained in information furnished in writing to
the Company by such Holder expressly for use therein.
(e) Notwithstanding anything contained in this Section 9, Holders
requesting inclusion of Warrant Shares in any registration statement shall not
be required to exercise the Warrant prior to closing of the offering of Warrant
Shares covered by such registration statement.
10. Additional Right to Convert Warrant.
(a) The holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of the Company's Common
Stock as provided for in this Section 10. Upon exercise of the Conversion Right,
the Company shall deliver to the holder (without payment by the holder of any
Warrant Exercise Price) that number of shares of the Company's Common Stock
equal to the result obtained by (a) multiplying (i) the number of warrant shares
the holder seeks to convert by (ii) the result of subtracting (x) the Warrant
Exercise Price from (y) the Fair Market Value of a share of the Company's Common
Stock immediately prior to the exercise of the Conversion Right and (b) dividing
the product of (a) above by the Fair Market Value of a share of the Company's
Common Stock immediately prior to the exercise of the Conversion Right;
provided, however, that in no event shall the number of shares of the Company's
Common Stock deliverable to the holder of this Warrant exceed 275,000, subject
to adjustment as provided in Section 5.
(b) The Conversion Right may be exercised by the holder, at any time or
from time to time, prior to its expiration, on any business day by delivering a
written notice in the form attached hereto (the "Conversion Notice") to the
Company at the offices of the Company exercising the Conversion Right and
specifying (i) the total number of shares of Stock the Holder will purchase
pursuant to such conversion and (ii) a place and date not less than one or more
than 20 business days from the date of the Conversion Notice for the closing of
such purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of the Company's Common
Stock issuable upon such conversion, together with cash, in lieu of any fraction
of a share, and (iii) the Company will deliver to the Holder a new warrant
representing the number of shares, if any, with respect to which the warrant
shall not have been exercised.
(d) Fair Market Value of a share of Common Stock as of a particular
date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or
is quoted on the Nasdaq Stock Market, then the average closing or last
sale prices, respectively, reported for the ten (10) business days
immediately preceding the Determination Date, and
(ii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq Stock Market, but is traded on the
over-the-counter market, then the average closing bid and asked prices
reported for the ten (10) business days immediately preceding the
Determination Date.
IN WITNESS WHEREOF, Pallet Recycling Associates of North America, Inc.
has caused this Warrant to be signed by its duly authorized officer and this
Warrant to be dated ____________, 1996.
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA,
INC.
By ____________________________
Its ________________________
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
WARRANT EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
The undersigned, the holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
for, and to purchase thereunder, ___________________ shares of the Common Stock
of Pallet Recycling Associates of North America, Inc., to which such Warrant
relates and herewith makes payment of $____________ therefor in cash or by
certified or cashier's check and requests that the certificates for such shares
be issued in the name of, and be delivered to ___________________________, whose
address is set forth below the signature of the undersigned. If said number of
shares shall not be all the shares purchasable under the Warrant, a new Warrant
is to be issued in the name of the undersigned for the balance remaining of the
shares purchasable thereunder.
Name of Warrant Holder:
_________________________________________
(Please print)
Address of Warrant Holder:
_________________________________________
_________________________________________
Tax Identification No. or
Social Security No. of Warrant Holder:
_________________________________________
Signature _________________________________________
NOTE: THE ABOVE SIGNATURE SHOULD
CORRESPOND EXACTLY WITH THE NAME OF THE
WARRANT HOLDER AS IT APPEARS ON THE FIRST
PAGE OF THE WARRANT OR ON A DULY EXECUTED
WARRANT ASSIGNMENT.
Dated: __________________________________________
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
WARRANT ASSIGNMENT
(TO BE SIGNED ONLY UPON TRANSFER OF WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________, the assignee, whose address is
_____________________________________________, and whose tax identification or
social security number is _______________________, the right represented by the
foregoing Warrant to purchase ___________________ shares of the Common Stock of
Pallet Recycling Associates of North America, Inc., to which the foregoing
Warrant relates and appoints ___________________________ attorney to transfer
said right on the books of Pallet Recycling Associates of North America, Inc.,
with full power of substitution in the premises. If said number of shares shall
not be all the shares purchasable under the Warrant, a new Warrant is to be
issued in the name of the undersigned for the balance remaining of the shares
purchasable thereunder.
Name of Warrant Holder:
_________________________________________
(Please print)
Address of Warrant Holder:
_________________________________________
_________________________________________
Tax Identification No. or
Social Security No. of Warrant Holder:
_________________________________________
Signature _________________________________________
NOTE: THE ABOVE SIGNATURE SHOULD
CORRESPOND EXACTLY WITH THE NAME OF THE
WARRANT HOLDER AS IT APPEARS ON THE FIRST
PAGE OF THE WARRANT OR ON A DULY EXECUTED
WARRANT ASSIGNMENT.
Dated: __________________________________________
COMMON STOCK COMMON STOCK
SEE REVERSE FOR CERTAIN DEFINITIONS
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE,
OF
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile signatures of its duly authorized officers.
Dated:
SECRETARY CHIEF EXECUTIVE OFFICER
Countersigned and Registered:
NORWEST BANK MINNESOTA, N.A.
Transfer Agent and Registrar
By
Authorized Signature
PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT - _____________ Custodian ___________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ___________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
____________________________________
|____________________________________|
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE,
OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated, ________________________
- --------------------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Exhibit 5.1
August 30, 1996
Pallet Recycling Associates
of North America, Inc.
2665 Long Lake Road, Suite 120
Roseville, Minnesota 55113
Re: Pallet Recycling Associates of North America, Inc.
Pre-Effective Amendment No. 1
Registration Statement on Form S-1
(File No. 333-3968)
Ladies and Gentlemen:
We have acted as special counsel to Pallet Recycling Associates of
North America, Inc., a Minnesota corporation (the Company"), in connection with
a Registration Statement on Form S-1, as amended by pre-effective amendment No.
1 (the Registration Statement") relating to 3,162,500 shares of the Company's
common stock, par value $0.01 per share (the Common Stock"), all of which are
authorized but heretofore unissued.
We have examined such documents and reviewed such questions of law as
we have considered necessary and appropriate for the purposes of our opinion set
forth below. In rendering our opinion, we have assumed that the Common Stock
will be priced by the Pricing Committee established by the authorizing
resolutions adopted by the Company's Board of Directors in accordance with such
resolutions and will be issued and sold as described in the Registration
Statement.
Based on the foregoing, we are of the opinion that the shares of
Common Stock to be sold by Company pursuant to the Registration Statement, upon
issuance, delivery and payment therefor as described in the Registration
Statement, will be, validly issued, fully paid and nonassessable.
Our opinions expressed above are limited to the laws of the State of
Minnesota and the federal laws of the United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the heading Legal
Matters" in the Prospectus constituting part of the Registration Statement.
Very truly yours,
DORSEY & WHITNEY LLP
/s/Dorsey & Whitney LLP
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this
1st day of April, 1996, by and between Pallet Recycling Associates of North
America, Inc., a Minnesota Corporation (the "Company"), and Bruce C. Faulken
(hereinafter "Employee").
R E C I T A L S
The Company desires to employ the Employee pursuant to the terms and
conditions of this Agreement and represents and warrants hereby that it has the
power to enter into this Agreement and that the officer executing this Agreement
has been duly authorized and empowered to do so by its Board of Directors, and
the Employee desires to work for the Company under the terms and conditions of
this Agreement and represents to the Company that such Employment will not
violate any agreement, restriction or obligation to which Employee is a party or
is bound. This Agreement replaces all previous understandings and agreements
between the parties hereto.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions herein, the Company and the Employee, for themselves and their
respective successors-in-interest, do hereby agree as follows:
1. Employment and Term. The Company hereby employs the Employee and the
Employee hereby accepts such employment for a term beginning on April 1, 1996
and ending on December 31, 1997. This Agreement automatically shall be renewed
for successive one (1) year periods unless either party notifies the other party
of its intention not to renew this Agreement, such notice to be given at least
thirty (30) days prior to the expiration of the initial term or any renewed term
hereunder. This Agreement may be terminated before the end of its term according
to the provisions of Section 8 below. This Agreement supersedes and in all
respects replaces that certain "Employment Agreement" dated January 1, 1995
between the parties hereto.
2. Title and Duties. The Employee shall serve as the President of the
Company. The Employee shall assume such responsibilities, perform such duties
and have such authority as from time to time may be assigned, delegated or
limited by the Company and such other duties as customarily are performed by a
president in comparable companies.
3. Other Activities. The Employee shall be free to engage in any other
busines activity so long as it does not violate Employee's agreement set forth
in Section 10 below.
4. Compensation and Benefits. The Employee shall receive the following
compensation and benefits:
a. COMPENSATION. During the initial term of this Agreement, the
Employee shall receive an annual salary of One Hundred Thousand Dollars
($100,000). Payment of such salary, less all legally required or
Employee-directed deductions, shall occur at such times as the Company pays
similary situated employees. In the event that this Agreement is renewed for any
one year term, the Employee's compensation for such year shall be such amount as
is mutually agreed to between the Company and the Employee.
b. BENEFITS. The Employee shall receive the following benefits:
(i) BONUS: Such annual bonus, if any, as shall be approved by
the Board of Directors of the Company.
(ii) VACATION: Employee shall be entitled to six (6) weeks
paid vacation per year, such vacation to be taken at appropriate times, given
due concern for workload demands. All vacation accrued within any calendar year
is to be used before the end of the following calendar year.
(iii) HEALTH INSURANCE: Employee shall receive health
insurance coverage for himself, his spouse and dependents through such insurer
or health care provider as may be selected from time to time by the Company.
(iv) LONG TERM DISABILITY BENEFITS: Employee shall be
entitled to participate in the Company's group disability income plan, when, and
if, one is put into place.
(v) AUTOMOBILE: The Company shall furnish the Employee with a
suitable automobile at no cost to the Employee and will pay all costs of
operating, maintaining and insuring said automobile.
5. Expenses. The Company shall reimburse the Employee for all
out-of-pocket expenses incurred by the Employee in connection with his duties
hereunder within fifteen (15) days after being presented with such receipts,
vouchers, etc. as shall be required by the Company's Board of Directors or Chief
Executive Officer.
6. Confidential Information. Except in the normal and proper course of
the Employee's duties hereunder, Employee will not use for his own account or
disclose to anyone else, during or after the term of this Agreement, any
confidential or proprietary material or information relating to the Company's
operations or business which the Employee may obtain from the Company or its
employees, or otherwise by virtue of his employment by the Company. Confidential
or proprietary material shall include, but not be limited to, the following
types of material or information, both existing and contemplated, regarding the
Company, or any of its subsidiaries or affiliates: corporate information,
including sources of pallets, contractual licensing arrangements, plans,
strategies, tactics, policies, resolutions, patent, trademark and tradename
applications, and any litigation or negotiations; marketing information,
including sales or product plans, strategies, tactics, methods, customers,
prospects, or market research data; financial information, including cost and
performance data, debt arrangement, equity structure, investors and holdings;
operational and scientific information, including trade secrets; technical
information, including technical drawings and designs; and personnel
information, including personnel lists, resumes, personnel data, organizational
structure and performance evaluations.
7. Inventions and Discoveries. In the event that the Employee invents
or discovers any invention, device, business process, manufacturing process or
product during the term of this Agreement, or within one year thereafter, which
has any application in the business of pallet recycling or any other business
engaged in by the Company at the time of such invention or discovery, the
Employee will so notify the Company in writing, stating the specifics of such
invention or discovery. In the event such invention or discovery is made solely
by the Employee, he hereby acknowledges that such invention or discovery is at
all times and shall remain the property of the Company. If such invention or
discovery is made in collaboration with another person or entity, then the
Employee acknowledges that all of his interest in such invention or discovery
(subject to the interest of such other person or entity) is and at all times
will remain the property of the Company. Upon request of the Company, the
Employee shall immediately turn over to the Company all printed, typewritten,
handwritten or otherwise recorded matter of whatever character, including but
not limited to, letters, memorandum, telegrams, notes, diaries, datebooks,
reports, work papers, diagrams, test data, mechanical or sound recordings or
transcripts thereof, computer printouts, mechanical or magnetic storage media
concerning or relating to such discovery or invention.
8. Termination. Prior to the termination of this Agreement pursuant to
the provisions set forth in Section 1 above, this Agreement shall terminate (a)
if the Employee should die; (b) if the Employee should unilaterally terminate
this Agreement, provided that the Employee shall give the Company written notice
of such termination at least thirty (30) days in advance of such termination;
(c) pursuant to the terms of a written mutual agreement between the Employee and
the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e)
if the Employee is terminated for cause. As used in this Section 8(e), the term
"for cause" shall mean: intentional, gross or felonious misconduct which damages
the Company.
Upon termination of employment for whatever reason, the Employee shall
return to the Company all of the property of the Company in his possession,
including, but not limited to, all documents and other records relating in any
way to the business of the Company.
In the event this Agreement is terminated by reason of the death of the
Employee, the Employee shall be entitled to compensation as provided in Section
4(a) herein; provided that such compensation shall cease at the end of the month
following the month in which the death of the Employee occurred.
In the event this Agreement is terminated by reason of the voluntary or
involuntary termination of employment, the Employee shall be entitled to that
compensation as provided in Section 4(a) herein for that portion of the contract
year ending the effective date of such termination.
In the event this Agreement is terminated by reason of mutual agreement
between the Company and the Employee, the Employee shall be entitled to
compensation as provided in Section 4(a) herein as agreed upon by the Company
and the Employee in such termination agreement.
9. Incapacity. Subject to the right of the Employee to participate in
the Company's group disability income plan as described in Section 4(b)(iv)
above, in the event that the Employee is incapacitated, the following terms
shall apply:
(a) TEMPORARY DISABILITY. In the event that the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
hereunder for a consecutive period of sixty (60) days, and if the Employee
should thereafter remain incapacitated, he shall then receive no compensation
under Section 4(a) hereof until such time as the Employee resumes performance of
his duties under this Agreement.
(b) PARTIAL DISABILITY. In the event during any one hundred eighty
(180) day consecutive period ("measuring period") the Employee becomes
incapacitated to such an extent that he shall be unable in the aggregate to
perform his duties hereunder for ninety (90) days during such measuring period,
then in such event compensation payable to the Employee under Section 4(a)
herein shall be modified as follows:
The compensation payable to the Employee under Section 4(a) shall be
reduced by fifty percent (50%) thereof for three (3) months beginning
on the first day of the calendar month next succeeding the date on
which the ninetieth day of such incapacitation during the measuring
period shall occur.
(c) TERMINATION FOR INCAPACITY. In the event: (I) the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
for a period of one hundred eighty (180) consecutive days, and if the Employee
shall thereafter remain incapacitated or (II) the Employee during any
consecutive period of three hundred and sixty-five (365) days (termination
measuring period) becomes incapacitated to such an extent that he is, in the
aggregate, unable to perform his duties hereunder for two hundred and forty
(240) days during such termination measuring period, then the Company, as its
option, may by written notice to the Employee terminate this Agreement.
10. Non-Competition. Employee agrees that during the term of this
Agreement and for two (2) years thereafter, the Employee will not, within the
continental United States or Canada, directly or indirectly engage in the
business of pallet recycling or in any business competitive with the Company.
Directly or indirectly engaging in the business of pallet recycling or in any
competitive business shall include engaging in business as owner, partner or
agent, or as an employee or consultant of any person, firm or corporation
engaged in such business, or being interested directly or indirectly in any such
business conducted by any person, firm or corporation. The Employee agrees that
the restrictions set forth in this Agreement are reasonable, that he has
received adequate consideration for agreeing to said restrictions and that he
has consulted legal counsel with respect to said restrictions.
11. Notices. All notices, objections, demands or other communications
required or permitted to be given or served under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered in person or
deposited in the United States mail, postage prepaid, for mailing by certified
or registered mail, return receipt requested, as follows:
(a) In the case of the Employee, to his last address as shown on the
records of the Company; or
(b) In the case of the Company, to its registered office in the State
of Minnesota.
12. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their assigns, executors, heirs,
or successors, provided that the Employee may not assign any right or obligation
hereunder, in whole or in part, without the prior written consent of the
Company, and any attempt to do so shall be void.
13. Amendment, Modification or Waiver. No amendment, modification or
waiver of any condition, provision or term of this Agreement shall be valid or
of any effect unless made in writing, signed by the party or parties to be bound
or its duly authorized representative and specifying with particularity the
nature and extent of such amendment, modification or waiver. Any waiver by any
party of a default of the other party shall not affect or impair any right
arising from any subsequent default. Nothing herein shall limit the remedies and
rights of the parties hereto under and pursuant to this Agreement.
14. Remedies. The parties hereto agree that the failure of a party to
perform any obligation or duty which each has agreed to perform shall cause
irreparable harm to the party willing to perform the obligations and duties
herein, which harm cannot be adequately compensated for by money damages. It is
further agreed by the parties hereto that an order of specific performance
against a party in default under the terms of this Agreement would be equitable
and would not work a hardship on the defaulting party. Accordingly, in the event
of a default by a party hereto, the non-defaulting party, in addition to
whatever other remedies are available at law or in equity, shall have the right
either to obtain injunctive relief against, or to compel specific performance
by, the defaulting party of any obligation or duty herein or breach thereof.
15. Severable Provisions. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable under any applicable law or rule in any jurisdiction,
such provision will be ineffective only to the extent of such invalidity,
illegality, or unenforceability in such jurisdiction, without invalidating the
remainder of this Agreement in such jurisdiction or any provision hereof in any
other jurisdiction.
16. Entire Agreement. This Agreement contains the entire understanding
of the parties hereto in respect of the transactions contemplated hereby and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
17. Captions, Headings or Titles and Reference to Gender. All captions,
headings or titles in the paragraphs or sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part of this
Agreement or as a limitation of the scope of the particular paragraphs or
sections to which they apply. Where appropriate, the masculine gender may be
read as the feminine gender or the neuter gender, the feminine gender may be
read as the masculine gender or the neuter gender and the neuter gender may be
read as the masculine gender or the feminine gender.
18. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be considered one and the same Agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to both parties.
19. Minnesota Law to Govern. This Agreement shall be construed and
enforced in accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
PALLET RECYCLING ASSOCIATES
OF NORTH AMERICA, INC.
By ______________________________
Its _____________________________
______________________________
BRUCE C. FAULKEN
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this
1st day of April 1996, by and between Pallet Recycling Associates of North
America, Inc., a Minnesota Corporation (the "Company"), and Clarence A. Johnson
(hereinafter "Employee").
R E C I T A L S
The Company desires to employ the Employee pursuant to the terms and
conditions of this Agreement and represents and warrants hereby that it has the
power to enter into this Agreement and that the officer executing this Agreement
has been duly authorized and empowered to do so by its Board of Directors, and
the Employee desires to work for the Company under the terms and conditions of
this Agreement and represents to the Company that such Employment will not
violate any agreement, restriction or obligation to which Employee is a party or
is bound. This Agreement replaces all previous understandings and agreements
between the parties hereto.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions herein, the Company and the Employee, for themselves and their
respective successors-in-interest, do hereby agree as follows:
1. Employment and Term. The Company hereby employs the Employee and the
Employee hereby accepts such employment for a term beginning on April 1, 1996
and ending on December 31, 1997. This Agreement automatically shall be renewed
for successive one (1) year periods unless either party notifies the other party
of its intention not to renew this Agreement, such notice to be given at least
thirty (30) days prior to the expiration of the initial term or any renewed term
hereunder. This Agreement may be terminated before the end of its term according
to the provisions of Section 8 below.
2. Title and Duties. The Employee shall serve as VicePresident and
Chief Financial Officer for the Company. The Employee shall assume such
responsibilities, perform such duties and have such authority as from time to
time may be assigned, delegated or limited by the Company and such other duties
as customarily are performed by a chief financial officer in comparable
companies.
3. Other Activities. The Employee shall be free to engage in any other
busines activity so long as it does not interfere with Employee's duties
hereunder or violate Employee's agreement set forth in Section 10 below.
4. Compensation and Benefits. The Employee shall receive the following
compensation and benefits:
a. COMPENSATION. During the initial term of this Agreement, the
Employee shall receive an annual salary of Ninety-Six Thousand Dollars
($96,000). Payment of such salary, less all legally required or
Employee-directed deductions, shall occur at such times as the Company pays
similary situated employees. In the event that this Agreement is renewed for any
one year term, the Employee's compensation for such year shall be such amount as
is mutually agreed to between the Company and the Employee.
b. BENEFITS. The Employee shall receive the following
benefits:
(i) BONUS: Such annual bonus as shall be approved by the
Board of Directors of the Company.
(ii) VACATION: Employee shall be entitled to three (3) weeks
paid vacation per year, such vacation to be taken at appropriate times, given
due concern for workload demands. All vacation accrued within any calendar year
is to be used before the end of the following calendar year.
(iii) HEALTH INSURANCE: Employee shall receive health
insurance coverage for himself, his spouse and dependents through such insurer
or health care provider as may be selected from time to time by the Company.
(iv) LONG TERM DISABILITY BENEFITS: Employee shall be
entitled to participate in the Company's group disability income plan, when, and
if, one is put into place.
5. Expenses. The Company shall reimburse the Employee for all
out-of-pocket expenses incurred by the Employee in connection with his duties
hereunder within fifteen (15) days after being presented with such receipts,
vouchers, etc. as shall be required by the Company's Board of Directors or Chief
Executive Officer.
6. Confidential Information. Except in the normal and proper course of
the Employee's duties hereunder, Employee will not use for his own account or
disclose to anyone else, during or after the term of this Agreement, any
confidential or proprietary material or information relating to the Company's
operations or business which the Employee may obtain from the Company or its
employees, or otherwise by virtue of his employment by the Company. Confidential
or proprietary material shall include, but not be limited to, the following
types of material or information, both existing and contemplated, regarding the
Company, or any of its subsidiaries or affiliates: corporate information,
including sources of pallets, contractual licensing arrangements, plans,
strategies, tactics, policies, resolutions, patent, trademark and tradename
applications, and any litigation or negotiations; marketing information,
including sales or product plans, strategies, tactics, methods, customers,
prospects, or market research data; financial information, including cost and
performance data, debt arrangement, equity structure, investors and holdings;
operational and scientific information, including trade secrets; technical
information, including technical drawings and designs; and personnel
information, including personnel lists, resumes, personnel data, organizational
structure and performance evaluations.
7. Inventions and Discoveries. In the event that the Employee invents
or discovers any invention, device, business process, manufacturing process or
product during the term of this Agreement, or within one year thereafter, which
has any application in the business of pallet recycling or any other business
engaged in by the Company at the time of such invention or discovery, the
Employee will so notify the Company in writing, stating the specifics of such
invention or discovery. In the event such invention or discovery is made solely
by the Employee, he hereby acknowledges that such invention or discovery is at
all times and shall remain the property of the Company. If such invention or
discovery is made in collaboration with another person or entity, then the
Employee acknowledges that all of his interest in such invention or discovery
(subject to the interest of such other person or entity) is and at all times
will remain the property of the Company. Upon request of the Company, the
Employee shall immediately turn over to the Company all printed, typewritten,
handwritten or otherwise recorded matter of whatever character, including but
not limited to, letters, memorandum, telegrams, notes, diaries, datebooks,
reports, work papers, diagrams, test data, mechanical or sound recordings or
transcripts thereof, computer printouts, mechanical or magnetic storage media
concerning or relating to such discovery or invention.
8. Termination. Prior to the termination of this Agreement pursuant to
the provisions set forth in Section 1 above, this Agreement shall terminate (a)
if the Employee should die; (b) if the Employee should unilaterally terminate
this Agreement, provided that the Employee shall give the Company written notice
of such termination at least thirty (30) days in advance of such termination;
(c) pursuant to the terms of a written mutual agreement between the Employee and
the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e)
if the Employee is terminated for cause. As used in this Section 8(e), the term
"for cause" shall mean: intentional, gross or felonious misconduct which damages
the Company.
Upon termination of employment for whatever reason, the Employee shall
return to the Company all of the property of the Company in his possession,
including, but not limited to, all documents and other records relating in any
way to the business of the Company.
In the event this Agreement is terminated by reason of the death of the
Employee, the Employee shall be entitled to compensation as provided in Section
4(a) herein; provided that such compensation shall cease at the end of the month
following the month in which the death of the Employee occurred.
In the event this Agreement is terminated by reason of the voluntary or
involuntary termination of employment, the Employee shall be entitled to that
compensation as provided in Section 4(a) herein for that portion of the contract
year ending the effective date of such termination.
In the event this Agreement is terminated by reason of mutual agreement
between the Company and the Employee, the Employee shall be entitled to
compensation as provided in Section 4(a) herein as agreed upon by the Company
and the Employee in such termination agreement.
9. Incapacity. Subject to the right of the Employee to participate in
the Company's group disability income plan as described in Section 4(b)(iv)
above, in the event that the Employee is incapacitated, the following terms
shall apply:
(a) TEMPORARY DISABILITY. In the event that the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
hereunder for a consecutive period of sixty (60) days, and if the Employee
should thereafter remain incapacitated, he shall then receive no compensation
under Section 4(a) hereof until such time as the Employee resumes performance of
his duties under this Agreement.
(b) PARTIAL DISABILITY. In the event during any one hundred eighty
(180) day consecutive period ("measuring period") the Employee becomes
incapacitated to such an extent that he shall be unable in the aggregate to
perform his duties hereunder for ninety (90) days during such measuring period,
then in such event compensation payable to the Employee under Section 4(a)
herein shall be modified as follows:
The compensation payable to the Employee under Section 4(a) shall be
reduced by fifty percent (50%) thereof for three (3) months beginning
on the first day of the calendar month next succeeding the date on
which the ninetieth day of such incapacitation during the measuring
period shall occur.
(c) TERMINATION FOR INCAPACITY. In the event: (i) the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
for a period of one hundred eighty (180) consecutive days, and if the Employee
shall thereafter remain incapacitated or (ii) the Employee during any
consecutive period of three hundred and sixty-five (365) days (termination
measuring period) becomes incapacitated to such an extent that he is, in the
aggregate, unable to perform his duties hereunder for two hundred and forty
(240) days during such termination measuring period, then the Company, as its
option, may by written notice to the Employee terminate this Agreement.
10. Non-Competition. Employee agrees that during the term of this
Agreement and for two (2) years thereafter, the Employee will not, within the
continental United States or Canada, directly or indirectly engage in the
business of pallet recycling or in any business competitive with the Company.
Directly or indirectly engaging in the business of pallet recycling or in any
competitive business shall include engaging in business as owner, partner or
agent, or as an employee or consultant of any person, firm or corporation
engaged in such business, or being interested directly or indirectly in any such
business conducted by any person, firm or corporation. The Employee agrees that
the restrictions set forth in this Agreement are reasonable, that he has
received adequate consideration for agreeing to said restrictions and that he
has consulted legal counsel with respect to said restrictions.
11. Notices. All notices, objections, demands or other communications
required or permitted to be given or served under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered in person or
deposited in the United States mail, postage prepaid, for mailing by certified
or registered mail, return receipt requested, as follows:
(a) In the case of the Employee, to his last address as shown on the
records of the Company; or
(b) In the case of the Company, to its registered office in the State
of Minnesota.
12. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their assigns, executors, heirs,
or successors, provided that the Employee may not assign any right or obligation
hereunder, in whole or in part, without the prior written consent of the
Company, and any attempt to do so shall be void.
13. Amendment, Modification or Waiver. No amendment, modification or
waiver of any condition, provision or term of this Agreement shall be valid or
of any effect unless made in writing, signed by the party or parties to be bound
or its duly authorized representative and specifying with particularity the
nature and extent of such amendment, modification or waiver. Any waiver by any
party of a default of the other party shall not affect or impair any right
arising from any subsequent default. Nothing herein shall limit the remedies and
rights of the parties hereto under and pursuant to this Agreement.
14. Remedies. The parties hereto agree that the failure of a party to
perform any obligation or duty which each has agreed to perform shall cause
irreparable harm to the party willing to perform the obligations and duties
herein, which harm cannot be adequately compensated for by money damages. It is
further agreed by the parties hereto that an order of specific performance
against a party in default under the terms of this Agreement would be equitable
and would not work a hardship on the defaulting party. Accordingly, in the event
of a default by a party hereto, the non-defaulting party, in addition to
whatever other remedies are available at law or in equity, shall have the right
either to obtain injunctive relief against, or to compel specific performance
by, the defaulting party of any obligation or duty herein or breach thereof.
15. Severable Provisions. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable under any applicable law or rule in any jurisdiction,
such provision will be ineffective only to the extent of such invalidity,
illegality, or unenforceability in such jurisdiction, without invalidating the
remainder of this Agreement in such jurisdiction or any provision hereof in any
other jurisdiction.
16. Entire Agreement. This Agreement contains the entire understanding
of the parties hereto in respect of the transactions contemplated hereby and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
17. Captions, Headings or Titles and Reference to Gender. All captions,
headings or titles in the paragraphs or sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part of this
Agreement or as a limitation of the scope of the particular paragraphs or
sections to which they apply. Where appropriate, the masculine gender may be
read as the feminine gender or the neuter gender, the feminine gender may be
read as the masculine gender or the neuter gender and the neuter gender may be
read as the masculine gender or the feminine gender.
18. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be considered one and the same Agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to both parties.
19. Minnesota Law to Govern. This Agreement shall be construed and
enforced in accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
PALLET RECYCLING ASSOCIATES
OF NORTH AMERICA, INC.
By ______________________________
Its _____________________________
______________________________
CLARENCE A. JOHNSON
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this
1st day of April, 1996 by and between Pallet Recycling Associates of North
America, Inc., a Minnesota Corporation (the "Company"), and Randy L. Hines
(hereinafter "Employee").
R E C I T A L S
The Company desires to employ the Employee pursuant to the terms and
conditions of this Agreement and represents and warrants hereby that it has the
power to enter into this Agreement and that the officer executing this Agreement
has been duly authorized and empowered to do so by its Board of Directors, and
the Employee desires to work for the Company under the terms and conditions of
this Agreement and represents to the Company that such Employment will not
violate any agreement, restriction or obligation to which Employee is a party or
is bound. This Agreement replaces all previous understandings and agreements
between the parties hereto.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions herein, the Company and the Employee, for themselves and their
respective successors-in-interest, do hereby agree as follows:
1. Employment and Term. The Company hereby employs the Employee and the
Employee hereby accepts such employment for a term beginning on April 1, 1996
and ending on December 31, 1997. This Agreement automatically shall be renewed
for successive one (1) year periods unless either party notifies the other party
of its intention not to renew this Agreement, such notice to be given at least
thirty (30) days prior to the expiration of the initial term or any renewed term
hereunder. This Agreement may be terminated before the end of its term according
to the provisions of Section 8 below.
2. Title and Duties. The Employee shall serve as VicePresident and
Treasurer of the Company. The Employee shall assume such responsibilities,
perform such duties and have such authority as from time to time may be
assigned, delegated or limited by the Company and such other duties as
customarily are performed by a a vice-president and treasurer in comparable
companies.
3. Other Activities. The Employee shall be free to engage in any other
busines activity so long as it does not interfere with Employee's duties
hereunder or violate Employee's agreement set forth in Section 10 below.
4. Compensation and Benefits. The Employee shall receive the following
compensation and benefits:
a. COMPENSATION. During the initial term of this Agreement, the
Employee shall receive an annual salary of seventy-five thousand dollars
($75,000). Payment of such salary, less all legally required or
Employee-directed deductions, shall occur at such times as the Company pays
similary situated employees. In the event that this Agreement is renewed for any
one year term, the Employee's compensation for such year shall be such amount as
is mutually agreed to between the Company and the Employee.
b. BENEFITS. The Employee shall receive the following
benefits:
(i) BONUS: Such annual bonus as shall be approved by the
Board of Directors of the Company.
(ii) VACATION: Employee shall be entitled to three (3) weeks
paid vacation per year, such vacation to be taken at appropriate times, given
due concern for workload demands. All vacation accrued within any calendar year
is to be used before the end of the following calendar year.
(iii) HEALTH INSURANCE: Employee shall receive health
insurance coverage for himself, his spouse and dependents through such insurer
or health care provider as may be selected from time to time by the Company.
(iv) LONG TERM DISABILITY BENEFITS: Employee shall be
entitled to participate in the Company's group disability income plan, when, and
if, one is put into place.
5. Expenses. The Company shall reimburse the Employee for all
out-of-pocket expenses incurred by the Employee in connection with his duties
hereunder within fifteen (15) days after being presented with such receipts,
vouchers, etc. as shall be required by the Company's Board of Directors or Chief
Executive Officer.
6. Confidential Information. Except in the normal and proper course of
the Employee's duties hereunder, Employee will not use for his own account or
disclose to anyone else, during or after the term of this Agreement, any
confidential or proprietary material or information relating to the Company's
operations or business which the Employee may obtain from the Company or its
employees, or otherwise by virtue of his employment by the Company. Confidential
or proprietary material shall include, but not be limited to, the following
types of material or information, both existing and contemplated, regarding the
Company, or any of its subsidiaries or affiliates: corporate information,
including sources of pallets, contractual licensing arrangements, plans,
strategies, tactics, policies, resolutions, patent, trademark and tradename
applications, and any litigation or negotiations; marketing information,
including sales or product plans, strategies, tactics, methods, customers,
prospects, or market research data; financial information, including cost and
performance data, debt arrangement, equity structure, investors and holdings;
operational and scientific information, including trade secrets; technical
information, including technical drawings and designs; and personnel
information, including personnel lists, resumes, personnel data, organizational
structure and performance evaluations.
7. Inventions and Discoveries. In the event that the Employee invents
or discovers any invention, device, business process, manufacturing process or
product during the term of this Agreement, or within one year thereafter, which
has any application in the business of pallet recycling or any other business
engaged in by the Company at the time of such invention or discovery, the
Employee will so notify the Company in writing, stating the specifics of such
invention or discovery. In the event such invention or discovery is made solely
by the Employee, he hereby acknowledges that such invention or discovery is at
all times and shall remain the property of the Company. If such invention or
discovery is made in collaboration with another person or entity, then the
Employee acknowledges that all of his interest in such invention or discovery
(subject to the interest of such other person or entity) is and at all times
will remain the property of the Company. Upon request of the Company, the
Employee shall immediately turn over to the Company all printed, typewritten,
handwritten or otherwise recorded matter of whatever character, including but
not limited to, letters, memorandum, telegrams, notes, diaries, datebooks,
reports, work papers, diagrams, test data, mechanical or sound recordings or
transcripts thereof, computer printouts, mechanical or magnetic storage media
concerning or relating to such discovery or invention.
8. Termination. Prior to the termination of this Agreement pursuant to
the provisions set forth in Section 1 above, this Agreement shall terminate (a)
if the Employee should die; (b) if the Employee should unilaterally terminate
this Agreement, provided that the Employee shall give the Company written notice
of such termination at least thirty (30) days in advance of such termination;
(c) pursuant to the terms of a written mutual agreement between the Employee and
the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e)
if the Employee is terminated for cause. As used in this Section 8(e), the term
"for cause" shall mean: intentional, gross or felonious misconduct which damages
the Company.
Upon termination of employment for whatever reason, the Employee shall
return to the Company all of the property of the Company in his possession,
including, but not limited to, all documents and other records relating in any
way to the business of the Company.
In the event this Agreement is terminated by reason of the death of the
Employee, the Employee shall be entitled to compensation as provided in Section
4(a) herein; provided that such compensation shall cease at the end of the month
following the month in which the death of the Employee occurred.
In the event this Agreement is terminated by reason of the voluntary or
involuntary termination of employment, the Employee shall be entitled to that
compensation as provided in Section 4(a) herein for that portion of the contract
year ending the effective date of such termination.
In the event this Agreement is terminated by reason of mutual agreement
between the Company and the Employee, the Employee shall be entitled to
compensation as provided in Section 4(a) herein as agreed upon by the Company
and the Employee in such termination agreement.
9. Incapacity. Subject to the right of the Employee to participate in
the Company's group disability income plan as described in Section 4(b)(iv)
above, in the event that the Employee is incapacitated, the following terms
shall apply:
(a) TEMPORARY DISABILITY. In the event that the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
hereunder for a consecutive period of sixty (60) days, and if the Employee
should thereafter remain incapacitated, he shall then receive no compensation
under Section 4(a) hereof until such time as the Employee resumes performance of
his duties under this Agreement.
(b) PARTIAL DISABILITY. In the event during any one hundred eighty
(180) day consecutive period ("measuring period") the Employee becomes
incapacitated to such an extent that he shall be unable in the aggregate to
perform his duties hereunder for ninety (90) days during such measuring period,
then in such event compensation payable to the Employee under Section 4(a)
herein shall be modified as follows:
The compensation payable to the Employee under Section 4(a) shall be
reduced by fifty percent (50%) thereof for three (3) months beginning
on the first day of the calendar month next succeeding the date on
which the ninetieth day of such incapacitation during the measuring
period shall occur.
(c) TERMINATION FOR INCAPACITY. In the event: (i) the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
for a period of one hundred eighty (180) consecutive days, and if the Employee
shall thereafter remain incapacitated or (ii) the Employee during any
consecutive period of three hundred and sixty-five (365) days (termination
measuring period) becomes incapacitated to such an extent that he is, in the
aggregate, unable to perform his duties hereunder for two hundred and forty
(240) days during such termination measuring period, then the Company, as its
option, may by written notice to the Employee terminate this Agreement.
10. Non-Competition. Employee agrees that during the term of this
Agreement and for two (2) years thereafter, the Employee will not, within the
continental United States or Canada, directly or indirectly engage in the
business of pallet recycling or in any business competitive with the Company.
Directly or indirectly engaging in the business of pallet recycling or in any
competitive business shall include engaging in business as owner, partner or
agent, or as an employee or consultant of any person, firm or corporation
engaged in such business, or being interested directly or indirectly in any such
business conducted by any person, firm or corporation. The Employee agrees that
the restrictions set forth in this Agreement are reasonable, that he has
received adequate consideration for agreeing to said restrictions and that he
has consulted legal counsel with respect to said restrictions.
11. Notices. All notices, objections, demands or other communications
required or permitted to be given or served under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered in person or
deposited in the United States mail, postage prepaid, for mailing by certified
or registered mail, return receipt requested, as follows:
(a) In the case of the Employee, to his last address as shown on the
records of the Company; or
(b) In the case of the Company, to its registered office in the State
of Minnesota.
12. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their assigns, executors, heirs,
or successors, provided that the Employee may not assign any right or obligation
hereunder, in whole or in part, without the prior written consent of the
Company, and any attempt to do so shall be void.
13. Amendment, Modification or Waiver. No amendment, modification or
waiver of any condition, provision or term of this Agreement shall be valid or
of any effect unless made in writing, signed by the party or parties to be bound
or its duly authorized representative and specifying with particularity the
nature and extent of such amendment, modification or waiver. Any waiver by any
party of a default of the other party shall not affect or impair any right
arising from any subsequent default. Nothing herein shall limit the remedies and
rights of the parties hereto under and pursuant to this Agreement.
14. Remedies. The parties hereto agree that the failure of a party to
perform any obligation or duty which each has agreed to perform shall cause
irreparable harm to the party willing to perform the obligations and duties
herein, which harm cannot be adequately compensated for by money damages. It is
further agreed by the parties hereto that an order of specific performance
against a party in default under the terms of this Agreement would be equitable
and would not work a hardship on the defaulting party. Accordingly, in the event
of a default by a party hereto, the non-defaulting party, in addition to
whatever other remedies are available at law or in equity, shall have the right
either to obtain injunctive relief against, or to compel specific performance
by, the defaulting party of any obligation or duty herein or breach thereof.
15. Severable Provisions. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable under any applicable law or rule in any jurisdiction,
such provision will be ineffective only to the extent of such invalidity,
illegality, or unenforceability in such jurisdiction, without invalidating the
remainder of this Agreement in such jurisdiction or any provision hereof in any
other jurisdiction.
16. Entire Agreement. This Agreement contains the entire understanding
of the parties hereto in respect of the transactions contemplated hereby and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
17. Captions, Headings or Titles and Reference to Gender. All captions,
headings or titles in the paragraphs or sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part of this
Agreement or as a limitation of the scope of the particular paragraphs or
sections to which they apply. Where appropriate, the masculine gender may be
read as the feminine gender or the neuter gender, the feminine gender may be
read as the masculine gender or the neuter gender and the neuter gender may be
read as the masculine gender or the feminine gender.
18. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be considered one and the same Agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to both parties.
19. Minnesota Law to Govern. This Agreement shall be construed and
enforced in accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
PALLET RECYCLING ASSOCIATES
OF NORTH AMERICA, INC.
By ______________________________
Its _____________________________
______________________________
RANDY L. HINES
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this
1st day of April, 1996 by and between Pallet Recycling Associates of North
America, Inc., a Minnesota Corporation (the "Company"), and Terry Stewart
(hereinafter "Employee").
R E C I T A L S
The Company desires to employ the Employee pursuant to the terms and
conditions of this Agreement and represents and warrants hereby that it has the
power to enter into this Agreement and that the officer executing this Agreement
has been duly authorized and empowered to do so by its Board of Directors, and
the Employee desires to work for the Company under the terms and conditions of
this Agreement and represents to the Company that such Employment will not
violate any agreement, restriction or obligation to which Employee is a party or
is bound. This Agreement replaces all previous understandings and agreements
between the parties hereto.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions herein, the Company and the Employee, for themselves and their
respective successors-in-interest, do hereby agree as follows:
1. Employment and Term. The Company hereby employs the Employee and the
Employee hereby accepts such employment for a term beginning on April 1, 1996
and ending on December 31, 1997. This Agreement automatically shall be renewed
for successive one (1) year periods unless either party notifies the other party
of its intention not to renew this Agreement, such notice to be given at least
thirty (30) days prior to the expiration of the initial term or any renewed term
hereunder. This Agreement may be terminated before the end of its term according
to the provisions of Section 8 below.
2. Title and Duties. The Employee shall serve as Vice-President of
Corporate Development and Secretary of the Company. The Employee shall assume
such responsibilities, perform such duties and have such authority as from time
to time may be assigned, delegated or limited by the Company and such other
duties as customarily are performed by a a vice-president and treasurer in
comparable companies.
3. Other Activities. The Employee shall be free to engage in any other
busines activity so long as it does not interfere with Employee's duties
hereunder or violate Employee's agreement set forth in Section 10 below.
4. Compensation and Benefits. The Employee shall receive the following
compensation and benefits:
a. COMPENSATION. During the initial term of this Agreement, the
Employee shall receive an annual salary of seventy-five thousand dollars
($75,000). Payment of such salary, less all legally required or
Employee-directed deductions, shall occur at such times as the Company pays
similary situated employees. In the event that this Agreement is renewed for any
one year term, the Employee's compensation for such year shall be such amount as
is mutually agreed to between the Company and the Employee.
b. BENEFITS. The Employee shall receive the following
benefits:
(i) BONUS: Such annual bonus as shall be approved by the
Board of Directors of the Company.
(ii) VACATION: Employee shall be entitled to three (3) weeks
paid vacation per year, such vacation to be taken at appropriate times, given
due concern for workload demands. All vacation accrued within any calendar year
is to be used before the end of the following calendar year.
(iii) HEALTH INSURANCE: Employee shall receive health
insurance coverage for himself, his spouse and dependents through such insurer
or health care provider as may be selected from time to time by the Company.
(iv) LONG TERM DISABILITY BENEFITS: Employee shall be
entitled to participate in the Company's group disability income plan, when, and
if, one is put into place.
5. Expenses. The Company shall reimburse the Employee for all
out-of-pocket expenses incurred by the Employee in connection with his duties
hereunder within fifteen (15) days after being presented with such receipts,
vouchers, etc. as shall be required by the Company's Board of Directors or Chief
Executive Officer.
6. Confidential Information. Except in the normal and proper course of
the Employee's duties hereunder, Employee will not use for his own account or
disclose to anyone else, during or after the term of this Agreement, any
confidential or proprietary material or information relating to the Company's
operations or business which the Employee may obtain from the Company or its
employees, or otherwise by virtue of his employment by the Company. Confidential
or proprietary material shall include, but not be limited to, the following
types of material or information, both existing and contemplated, regarding the
Company, or any of its subsidiaries or affiliates: corporate information,
including sources of pallets, contractual licensing arrangements, plans,
strategies, tactics, policies, resolutions, patent, trademark and tradename
applications, and any litigation or negotiations; marketing information,
including sales or product plans, strategies, tactics, methods, customers,
prospects, or market research data; financial information, including cost and
performance data, debt arrangement, equity structure, investors and holdings;
operational and scientific information, including trade secrets; technical
information, including technical drawings and designs; and personnel
information, including personnel lists, resumes, personnel data, organizational
structure and performance evaluations.
7. Inventions and Discoveries. In the event that the Employee invents
or discovers any invention, device, business process, manufacturing process or
product during the term of this Agreement, or within one year thereafter, which
has any application in the business of pallet recycling or any other business
engaged in by the Company at the time of such invention or discovery, the
Employee will so notify the Company in writing, stating the specifics of such
invention or discovery. In the event such invention or discovery is made solely
by the Employee, he hereby acknowledges that such invention or discovery is at
all times and shall remain the property of the Company. If such invention or
discovery is made in collaboration with another person or entity, then the
Employee acknowledges that all of his interest in such invention or discovery
(subject to the interest of such other person or entity) is and at all times
will remain the property of the Company. Upon request of the Company, the
Employee shall immediately turn over to the Company all printed, typewritten,
handwritten or otherwise recorded matter of whatever character, including but
not limited to, letters, memorandum, telegrams, notes, diaries, datebooks,
reports, work papers, diagrams, test data, mechanical or sound recordings or
transcripts thereof, computer printouts, mechanical or magnetic storage media
concerning or relating to such discovery or invention.
8. Termination. Prior to the termination of this Agreement pursuant to
the provisions set forth in Section 1 above, this Agreement shall terminate (a)
if the Employee should die; (b) if the Employee should unilaterally terminate
this Agreement, provided that the Employee shall give the Company written notice
of such termination at least thirty (30) days in advance of such termination;
(c) pursuant to the terms of a written mutual agreement between the Employee and
the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e)
if the Employee is terminated for cause. As used in this Section 8(e), the term
"for cause" shall mean: intentional, gross or felonious misconduct which damages
the Company.
Upon termination of employment for whatever reason, the Employee shall
return to the Company all of the property of the Company in his possession,
including, but not limited to, all documents and other records relating in any
way to the business of the Company.
In the event this Agreement is terminated by reason of the death of the
Employee, the Employee shall be entitled to compensation as provided in Section
4(a) herein; provided that such compensation shall cease at the end of the month
following the month in which the death of the Employee occurred.
In the event this Agreement is terminated by reason of the voluntary or
involuntary termination of employment, the Employee shall be entitled to that
compensation as provided in Section 4(a) herein for that portion of the contract
year ending the effective date of such termination.
In the event this Agreement is terminated by reason of mutual agreement
between the Company and the Employee, the Employee shall be entitled to
compensation as provided in Section 4(a) herein as agreed upon by the Company
and the Employee in such termination agreement.
9. Incapacity. Subject to the right of the Employee to participate in
the Company's group disability income plan as described in Section 4(b)(iv)
above, in the event that the Employee is incapacitated, the following terms
shall apply:
(a) TEMPORARY DISABILITY. In the event that the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
hereunder for a consecutive period of sixty (60) days, and if the Employee
should thereafter remain incapacitated, he shall then receive no compensation
under Section 4(a) hereof until such time as the Employee resumes performance of
his duties under this Agreement.
(b) PARTIAL DISABILITY. In the event during any one hundred eighty
(180) day consecutive period ("measuring period") the Employee becomes
incapacitated to such an extent that he shall be unable in the aggregate to
perform his duties hereunder for ninety (90) days during such measuring period,
then in such event compensation payable to the Employee under Section 4(a)
herein shall be modified as follows:
The compensation payable to the Employee under Section 4(a) shall be
reduced by fifty percent (50%) thereof for three (3) months beginning
on the first day of the calendar month next succeeding the date on
which the ninetieth day of such incapacitation during the measuring
period shall occur.
(c) TERMINATION FOR INCAPACITY. In the event: (i) the Employee becomes
incapacitated to such an extent that he shall be unable to perform his duties
for a period of one hundred eighty (180) consecutive days, and if the Employee
shall thereafter remain incapacitated or (ii) the Employee during any
consecutive period of three hundred and sixty-five (365) days (termination
measuring period) becomes incapacitated to such an extent that he is, in the
aggregate, unable to perform his duties hereunder for two hundred and forty
(240) days during such termination measuring period, then the Company, as its
option, may by written notice to the Employee terminate this Agreement.
10. Non-Competition. Employee agrees that during the term of this
Agreement and for two (2) years thereafter, the Employee will not, within the
continental United States or Canada, directly or indirectly engage in the
business of pallet recycling or in any business competitive with the Company.
Directly or indirectly engaging in the business of pallet recycling or in any
competitive business shall include engaging in business as owner, partner or
agent, or as an employee or consultant of any person, firm or corporation
engaged in such business, or being interested directly or indirectly in any such
business conducted by any person, firm or corporation. The Employee agrees that
the restrictions set forth in this Agreement are reasonable, that he has
received adequate consideration for agreeing to said restrictions and that he
has consulted legal counsel with respect to said restrictions.
11. Notices. All notices, objections, demands or other communications
required or permitted to be given or served under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered in person or
deposited in the United States mail, postage prepaid, for mailing by certified
or registered mail, return receipt requested, as follows:
(a) In the case of the Employee, to his last address as shown on the
records of the Company; or
(b) In the case of the Company, to its registered office in the State
of Minnesota.
12. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their assigns, executors, heirs,
or successors, provided that the Employee may not assign any right or obligation
hereunder, in whole or in part, without the prior written consent of the
Company, and any attempt to do so shall be void.
13. Amendment, Modification or Waiver. No amendment, modification or
waiver of any condition, provision or term of this Agreement shall be valid or
of any effect unless made in writing, signed by the party or parties to be bound
or its duly authorized representative and specifying with particularity the
nature and extent of such amendment, modification or waiver. Any waiver by any
party of a default of the other party shall not affect or impair any right
arising from any subsequent default. Nothing herein shall limit the remedies and
rights of the parties hereto under and pursuant to this Agreement.
14. Remedies. The parties hereto agree that the failure of a party to
perform any obligation or duty which each has agreed to perform shall cause
irreparable harm to the party willing to perform the obligations and duties
herein, which harm cannot be adequately compensated for by money damages. It is
further agreed by the parties hereto that an order of specific performance
against a party in default under the terms of this Agreement would be equitable
and would not work a hardship on the defaulting party. Accordingly, in the event
of a default by a party hereto, the non-defaulting party, in addition to
whatever other remedies are available at law or in equity, shall have the right
either to obtain injunctive relief against, or to compel specific performance
by, the defaulting party of any obligation or duty herein or breach thereof.
15. Severable Provisions. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable under any applicable law or rule in any jurisdiction,
such provision will be ineffective only to the extent of such invalidity,
illegality, or unenforceability in such jurisdiction, without invalidating the
remainder of this Agreement in such jurisdiction or any provision hereof in any
other jurisdiction.
16. Entire Agreement. This Agreement contains the entire understanding
of the parties hereto in respect of the transactions contemplated hereby and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
17. Captions, Headings or Titles and Reference to Gender. All captions,
headings or titles in the paragraphs or sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part of this
Agreement or as a limitation of the scope of the particular paragraphs or
sections to which they apply. Where appropriate, the masculine gender may be
read as the feminine gender or the neuter gender, the feminine gender may be
read as the masculine gender or the neuter gender and the neuter gender may be
read as the masculine gender or the feminine gender.
18. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be considered one and the same Agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to both parties.
19. Minnesota Law to Govern. This Agreement shall be construed and
enforced in accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
PALLET RECYCLING ASSOCIATES
OF NORTH AMERICA, INC.
By ______________________________
Its _____________________________
______________________________
TERRY STEWART
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this
1st day of May, 1996 by and between Pallet Recycling Associates of North
America, Inc., a Minnesota corporation (the "Company"), and James Doyle
(hereinafter "Employee").
R E C I T A L S
The Company desires to employ the Employee pursuant to the terms and
conditions of this Agreement and represents and warrants hereby that it has the
power to enter into this Agreement and that the officer executing this Agreement
has been duly authorized and empowered to do so by its Board of Directors, and
the Employee desires to work for the Company under the terms and conditions of
this Agreement and represents to the Company that such Employment will not
violate any agreement, restriction or obligation to which Employee is a party or
is bound.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions herein, the Company and the Employee, for themselves and their
respective successors-in-interest, do hereby agree as follows:
1. Retention of Employee. The Company hereby retains the Employee and
the Employee hereby accepts such retention for a term of one year from the date
first written above. This Agreement will be renewed automatically for additional
one year terms unless either party notifies the other party in writing at least
sixty (60) days prior to the expiration of this Agreement or any renewal term of
its desire not to renew this Agreement.
2. Duties of Employee. The Employee shall assist the Company in its
acquisition of pallet recycling and manufacturing companies by making contacts
and visits with such companies, evaluating the merits of acquisitions of said
companies and assisting representatives of the Company in consummating such
acquisitions. Attached hereto as Exhibit "A" is a list of those companies for
which Employee agrees to provide the above-described services and for which
Employee will receive the commission compensation described in Section 4 (a)
below in the event that the Company consummates an acquisition of any such
company. Said Exhibit may be modified from time to time by the parties to add
additional companies. Any such modification, when executed by the parties, will
become the new Exhibit "A" to this Agreement. In addition, the Employee will
accept assignments from the Company to work with subsidiaries or divisions to
improve operations.
3. Other Activities. The Employee shall be free to engage in any other
business activity so long as it does not interfere with Employee's duties
hereunder.
4. Compensation and Benefits. During the term of this Agreement, the
Employee shall receive the following compensation and benefits:
a.) COMPENSATION. The Employee shall receive an annual salary
of $50,000, which salary shall be paid in equal installments, less all legally
required or Employee-directed deductions, at such times as the Company pays
similarly situated employees in accordance with the Company's normal payroll
practices. In addition, the Employee shall receive a commission for all
consummated acquisitions of all or substantially all of the assets or capital
stock of companies listed on Exhibit "A" for which Employee provides services to
the Company in connection therewith, according to the following schedule:
IF THE GROSS REVENUES OF A COMPANY THEN THE COMMISSION
FOR ITS MOST RECENTLY CONCLUDED FISCAL TO BE PAID TO
YEAR ARE: EMPLOYEE IS:
Less than $1 million $12,000
$1 million to $2 million 20,000
More than $2 million 30,000
The Employee will be paid a draw against said commissions in the amount of
$40,000 annually, which draw shall be paid in equal installments at the same
time that the Employee is paid salary. Commissions earned under this Section 4
(a) shall be paid by the Company within thirty (30) days of the closing of any
such acquisition. From any said commission payment will be subtracted all draws
against commissions to the date of said commission payment. The Employee's total
compensation of salary and commissions shall not be less than $90,000 and shall
not exceed $150,000 annually.
b.) BENEFITS. The Employee shall be entitled to participate
in the following benefits:
A. BONUS. Such annual bonus as shall be approved by the
Company's Board of directors.
B. VACATION: Employee shall be entitled to four (4) weeks
paid vacation per year, such vacation to be taken at appropriate times, given
due concern for workload demands. All vacation accrued within any calendar year
is to be used before the end of the following calendar year.
5. Expenses. The Company shall reimburse the Employee for all
out-of-pocket expenses incurred by the Employee in connection with his duties
hereunder within fifteen (15) days after being presented with such receipts,
vouchers, etc. as shall be required by the Company's Board of Directors.
6. Confidential Information. Except in the normal and proper course of
the Employee's duties hereunder, Employee will not use for his own account or
disclose to anyone else, during or after the term of this Agreement, any
confidential or proprietary material or information relating to the Company's
operations or business which the Employee may obtain from the Company or its
Employees, or otherwise by virtue of his employment by the Company. Confidential
or proprietary material shall include, but not be limited to, the following
types of material or information, both existing and contemplated, regarding the
Company, or any of its subsidiaries or affiliates: corporate information,
including sources of pallets, contractual licensing arrangements, plans,
strategies, tactics, policies, resolutions, patent, trademark and tradename
applications, and any litigation or negotiations; marketing information,
including sales or product plans, strategies, tactics, methods, customers,
prospects, or market research data; financial information, including cost and
performance data, debt arrangement, equity structure, investors and holdings;
operational and scientific information, including trade secrets; technical
information, including technical drawings and designs; and personnel
information, including personnel lists, resumes, personnel data, organizational
structure and performance evaluations. As used in this Agreement, "confidential
and proprietary information" shall not include: a. information known to Employee
prior to the date of disclosure by the Company and not obtained or derived
directly or indirectly from the Company, b. information which is or becomes
public or available to the general public otherwise than through the act or
default of the Employee, or c. information obtained subsequent to any disclosure
from a third party who is lawfully in possession of same and which information
is not subject to any confidential or non-use obligations owed to the disclosure
under this Agreement from a third party who is lawfully in possession of the
same and which information is not subject to any confidential or non-use
obligations owed to the disclosing party or others.
7. Termination. Prior to the termination of this Agreement pursuant to
the provisions set forth in Section 1 above, this Agreement shall terminate (a)
if the Employee should die; (b) if the Employee should unilaterally terminate
this Agreement, provided that the Employee shall give the Company written notice
of such termination at least thirty (30) days in advance of such termination;
(c) pursuant to the terms of a written mutual agreement between the Employee and
the Company; or (d) if the Employee is terminated for cause. As used in this
Section 7(d), the term "for cause" shall mean: intentional misconduct which
damages the Company.
8. Notices. All notices, objections, demands or other communications
required or permitted to be given or served under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered in person or
deposited in the United States mail, postage prepaid, for mailing by certified
or registered mail, return receipt requested, as follows:
(a) In the case of the Employee, to his last address as shown on the
records of the Company; or
(b) In the case of the Company, to its registered office in the State
of Minnesota.
9. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their assigns, executors, heirs,
or successors, provided that the Employee may not assign any right or obligation
hereunder, in whole or in part, without the prior written consent of the
Company, and any attempt to do so shall be void.
10. Amendment, Modification or Waiver. No amendment, modification or
waiver of any condition, provision or term of this Agreement shall be valid or
of any effect unless made in writing, signed by the party or parties to be bound
or its duly authorized representative and specifying with particularity the
nature and extent of such amendment, modification or waiver. Any waiver by any
party of a default of the other party shall not affect or impair any right
arising from any subsequent default. Nothing herein shall limit the remedies and
rights of the parties hereto under and pursuant to this Agreement.
11. Remedies. The parties hereto agree that the failure of a party to
perform any obligation or duty which each has agreed to perform shall cause
irreparable harm to the party willing to perform the obligations and duties
herein, which harm cannot be adequately compensated for by money damages. It is
further agreed by the parties hereto that an order of specific performance
against a party in default under the terms of this Agreement would be equitable
and would not work a hardship on the defaulting party. Accordingly, in the event
of a default by a party hereto, the non-defaulting party, in addition to
whatever other remedies are available at law or in equity, shall have the right
either to obtain injunctive relief against, or to compel specific performance
by, the defaulting party of any obligation or duty herein or breach thereof.
12. Severable Provisions. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable under any applicable law or rule in any jurisdiction,
such provision will be ineffective only to the extent of such invalidity,
illegality, or unenforceability in such jurisdiction, without invalidating the
remainder of this Agreement in such jurisdiction or any provision hereof in any
other jurisdiction.
13. Entire Agreement. This Agreement contains the entire understanding
of the parties hereto in respect of the transactions contemplated hereby and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
14. Captions, Headings or Titles and Reference to Gender. All captions,
headings or titles in the paragraphs or sections of this Agreement are inserted
for convenience of reference only and shall not constitute a part of this
Agreement or as a limitation of the scope of the particular paragraphs or
sections to which they apply. Where appropriate, the masculine gender may be
read as the feminine gender or the neuter gender, the feminine gender may be
read as the masculine gender or the neuter gender and the neuter gender may be
read as the masculine gender or the feminine gender.
15. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be considered one and the same Agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to both parties.
16. Tennessee Law to Govern. This Agreement shall be construed and
enforced in accordance with the laws of the State of Tennessee.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
PALLET RECYCLING ASSOCIATES
OF NORTH AMERICA, INC.
By ______________________________
Its _____________________________
______________________________
JAMES DOYLE
EXHIBIT 10.26
TERM LOAN AND SECURITY AGREEMENT
Dated as of August ___, 1995
PRANA Holdings, Inc., a Minnesota corporation (the "Borrower"), and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"),
hereby agree as follows:
ARTICLE I.
Definitions
Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
and
(b) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting
principles.
"Accrual Rate" means nine percent (9.0%) per annum.
"Acquisition Documents" has the meaning specified in Section 5.16 hereof.
"Advance" means an advance to the Borrower under the Advancing Term Loan
Facility.
"Advancing Term Loan Facility" means the advancing term loan facility being made
available to the Borrower by the Lender pursuant to Article II hereof.
"Affiliate" or "Affiliates" means the Guarantor, the Subsidiaries and any other
Person controlled by, controlling or under common control with the Borrower,
including (without limitation) any Subsidiary of the Borrower. For purposes of
this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise.
"Agreement" means this Term Loan and Security Agreement.
"Assignment of Seller's Representations and Warranties" means the Assignment of
Sellers Representations, Warranties, Covenants and Indemnities of even date
herewith by and among the Borrower, the Lender and the Sellers.
"Banking Day" means a day other than a Saturday on which banks are generally
open for business in Minneapolis, Minnesota.
"Base Rate" means the rate of interest publicly announced from time to time by
the Lender as its "base rate" or, if the Lender ceases to announce a rate so
designated, any similar successor rate designated by the Lender.
"Book Net Worth" means, as of the date of determination, Total Assets minus
Indebtedness, as determined in accordance with generally accepted accounting
principles, consistently applied.
"Capital Expenditures" means, for any specified period, the aggregate of all
gross expenditures during such period for the purchase or construction of fixed
assets, for improvements, replacements, substitutions or additions therefor or
thereto, which are required to be capitalized on the balance sheet, including
the balance sheet amount of any lease obligations incurred during any such
period.
"Cash Available for Debt Service" means for any specified period (i) net income
(net of any deferred income tax entries) plus (ii) Total Interest, plus (iii)
amortization of intangibles, plus (iv) depreciation, minus (v) Upstreamed Cash,
and minus (vi) Capital Expenditures (exclusive of all Capital Expenditures to
the extent financed by Indebtedness).
"Collateral" means all of the Equipment, General Intangibles, Inventory,
Receivables, the PRANA Note, the Machine Specialists Note, and the shares of
stock and membership interests described in the Collateral Pledge Agreement, and
any shares of stock, membership interests or partnership interests acquired by
the Borrower at any time in the future, together with all substitutions and
replacements for and products of any of the foregoing Collateral and together
with proceeds of any and all of the foregoing Collateral and, in the case of all
tangible Collateral, together with all accessions and together with (i) all
accessories, attachments, parts, equipment and repairs now or hereafter attached
or affixed to or used in connection with any such goods, and (ii) all warehouse
receipts, bills of lading and other documents of title now or hereafter covering
such goods.
"Collateral Pledge Agreement" means the collateral pledge agreement executed by
the Borrower in favor of the Lender pursuant to which the Borrower grants the
Lender a security interest in the PRANA Note, the Machine Specialists Note, the
membership interest owned by the Borrower in SUTA, L.L.C., and the stock of the
Subsidiaries owned by the Borrower.
"Debt Service" means for any specified period, the sum of (i) Total Interest
(excluding for purposes of the definition of Debt Service only, interest which
accrues on the Term Loan at the Accrual Rate) plus (ii) scheduled principal
amortization of all interest bearing Indebtedness, including all mandatory
prepayments required under Section 2.5 hereof.
"Debt Service Coverage Ratio" means Cash Available for Debt Service divided by
Debt Service.
"Debt Subordination Agreements" means collectively, the Debt Subordination
Agreements executed by John J. Baggett, Tony W. Baggett, Kelley O'Neal, Dan
Giger and the Sellers.
"Default" means an event that, with giving of notice or passage of time or both,
would constitute an Event of Default.
"Environmental Laws" has the meaning specified in Section 5.12 hereof.
"Equipment" means all of the Borrower's equipment, as such term is defined in
the UCC, whether now owned or hereafter acquired, including but not limited to
all present and future machinery, vehicles, furniture, fixtures, manufacturing
equipment, shop equipment, office and recordkeeping equipment, parts, tools,
supplies, and including specifically (without limitation) the goods described in
any equipment schedule or list herewith or hereafter furnished to the Lender by
the Borrower.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA Affiliate" means, any Person who is a member of a "controlled group of
corporations" (within the meaning of ERISA) with the Borrower.
"Event of Default" has the meaning specified in Section 8.1 hereof.
"Excess Cash Flow" means, for any specified period, the sum of (i) net income
(net of any deferred income tax entries), plus (ii) interest which accrues on
the Term Loan at the Accrual Rate, plus (iii) amortization of intangibles, plus
(iv) depreciation, minus (v) Capital Expenditures (exclusive of Capital
Expenditures to the extent financed by Indebtedness), minus (vi) scheduled
principal amortization of all interest bearing Indebtedness.
"Floating Rate" means an annual rate equal to the sum of the Base Rate plus
three percent (3.0%), which Floating Rate shall change when and as the Base Rate
changes.
"General Intangibles" means all of the Borrower's general intangibles, as such
term is defined in the UCC, whether now owned or hereafter acquired, including
(without limitation) all present and future patents, patent applications,
copyrights, trademarks, trade names, trade secrets, customer or supplier lists
and contracts, manuals, operating instructions, permits, franchises, the right
to use the Borrower's name, and the goodwill of the Borrower's business.
"Guarantor" means PRANA.
"Guarantor Documents" means the Guaranty, the Option to Purchase Warrant and the
Trademark Mortgage as the same may be amended from time to time.
"Guaranty" means the guaranty by corporation executed by the Guarantor in favor
of the Lender with respect to the Obligations.
"Indebtedness" means collectively, (i) all items which in accordance with
generally accepted accounting principles, would be included on the liabilities
side of a balance sheet as of the date which Indebtedness is to be determined
excluding capital stock, surplus capital and retained earnings, (ii) all
indebtedness secured by any mortgage, pledge, security interest or lien existing
on property owned subject to such mortgage, pledge security interest or lien
whether or not the indebtedness secured thereby shall have been assumed, (iii)
all amounts representing the capitalization of rentals in accordance with
generally accepted accounting principles, and (iv) all guaranties, endorsements
and other contingent obligations.
"Inventory" means all of the Borrower's inventory, as such term is defined in
the UCC, whether now owned or hereafter acquired, whether consisting of whole
goods, spare parts or components, supplies or materials, whether acquired, held
or furnished for sale, for lease or under service contracts or for manufacture
or processing, and wherever located.
"Loan Documents" means this Agreement, the Debt Subordination Agreements, the
Note, and the Collateral Pledge Agreement, as the same may be amended from time
to time.
"Machine Specialists" means Machine Specialists, Inc., a Tennessee corporation.
"Machine Specialists Note" means that certain Subordinated Convertible Debenture
of even date herewith executed by Machine Specialists and payable to the order
of the Lender in the original principal amount of $300,000.
"Maturity Date" means February 28, 1998.
"Merger" means individually and collectively, (i) the merger of PRANA Memphis
into Pallet Supply effective on or about the date hereof.
"Merger Documents" means the executed agreement and articles of merger merging
Pallet Supply and PRANA Memphis, and all agreements attached thereto and
executed pursuant thereto.
"Note" means the Advancing Term Note of the Borrower payable to the order of the
Lender in substantially the form attached hereto as Exhibit A.
"Obligations" has the meaning specified in Section 3.1 hereof.
"Option to Purchase Warrant" means the option to purchase warrant executed by
the Guarantor in favor of the Lender.
"Pallet Supply" means Pallet Supply Co., Inc., a Tennessee corporation.
"Person" means any individual, corporation, partnership, joint venture, limited
liability company, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for employees of
the Borrower and covered by Title IV of ERISA.
"PRANA" means Pallet Recycling Associates of North America, Inc., a Minnesota
corporation.
"PRANA Memphis" means PRANA Memphis, Inc., a Minnesota corporation.
"PRANA Note" means the Demand Promissory Note of even date herewith executed by
the Guarantor and payable to the order of the Borrower in the original principal
amount of $700,000.
"Premises" means all premises where the Borrower conducts its business and has
any rights of possession, including (without limitation) the premises located at
2665 Long Lake Road, Suite 120, Roseville, Minnesota 55113.
"Receivables" means each and every right of the Borrower to the payment of
money, whether such right to payment now exists or hereafter arises, whether
such right to payment arises out of a sale, lease or other disposition of goods
or other property, out of a rendering of services, out of a loan, out of the
overpayment of taxes or other liabilities, or otherwise arises under any
contract or agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other person who subsequently transfers such
person's interest to the Borrower, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all liens and
security interests) which the Borrower may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such payment
or against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt instruments,
tax refunds and rights to payment in the nature of general intangibles.
"Release Agreements" means collectively, the agreements executed by Otto
Packaging, Inc.; Jeffrey E. Otto and Judy M. Otto; BVS, Inc.; Orville Roberts,
Theodore Shepherd and Edward Van; Harris Supply Company, Inc.; Charles S.
Harris; Pallet Source, Inc.; George Gustafson; Quality Pallet, Inc.; James W.
Brill and Terry L. Brill; Hurt's Pallet & Sales, Inc.; Robert F. Jarvis and
Judith A. Jarvis; Pallet City, Inc.; Donald J. Matre, Ronald J. Matre, Ronald A.
Matre, Thomas R. Matre and Tracy Matre-Waring, pursuant to which each of said
parties agrees to release certain rights of such party to cause an exchange of
certain preferred stock of the Guarantor for certain common stock of the
subsidiary of the Guarantor described therein and agrees to eliminate certain
restrictions with respect to the business and operations of the Guarantor.
"Release Notes" means, collectively and individually, the following notes, each
of even date herewith, executed by the Guarantor, and payable to the following
parties in the following principal amounts:
Holder Principal Amount
James W. Brill $ 190,811
Terry L. Brill 127,207
Charles S. Harris 50,000
Donald J. Matre 214,820
Ronald J. Matre 102,740
Ronald A. Matre 102,740
Thomas R. Matre 23,350
Tracy Matre-Waring 23,350
"Reportable Event" shall have the meaning assigned to that term in Title IV of
ERISA.
"Security Interest" has the meaning specified in Section 3.1 hereof.
"Sellers" means collectively, James J. Doyle, Lisa B. Doyle, Dawn Christine
Crenshaw, Lisa Ann Chayer, James J. Doyle II, Kris Chayer, Gregory B. Crenshaw,
Tabitha Doyle Barkley, Teri Leigh Doyle and Clay Barkley.
"Subsidiary" means any corporation or limited liability company of which more
than 50% of the outstanding shares of capital stock or membership interests, as
the case may be, having general voting power under ordinary circumstances to
elect a majority of the board of directors of such corporation, of the board of
governors of such limited liability company, as the case may be, irrespective of
whether or not at the time stock or membership interests, as the case may be, of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency, is at the time directly or indirectly owned by
the Borrower, by the Borrower and one or more other Subsidiaries, or by one or
more other Subsidiaries, including, without limitation, the Subsidiaries
described on Exhibit B attached hereto.
"Term Loan" has the meaning specified in Section 2.1 hereof.
"Termination Date" means June 30, 1996.
"Total Assets" means, as of the date of the determination, all assets of the
Borrower as of such date which should properly be classified as assets on a
balance sheet of the Borrower, prepared in accordance with generally accepted
accounting principles, consistently applied. Notwithstanding the foregoing
definition of Total Assets, all unrealized appreciation, increases in value and
loans to officers, shareholders or employees of the Borrower shall be excluded
in determining the amount of Total Assets.
"Total Interest" means, for any specified period, all interest accrued within
such period on all Indebtedness (including, without limitation, interest which
accrues on the Term Loan at the Accrual Rate).
"Trademark Mortgage" means the trademark mortgage executed by the Guarantor in
favor of the Lender with respect to the trademarks described therein.
"UCC" means the Uniform Commercial Code as in effect from time to time in the
state designated in Section 9.12 hereof as the state whose laws shall govern
this Agreement, or in any other state whose laws are held to govern this
Agreement or any portion hereof.
"Upstreamed Cash" means, for any specified period, (i) all cash transferred,
paid or credited to the Guarantor by the Borrower or its Subsidiaries on a
consolidated basis, including, without limitation, cash transferred, paid or
credited in the form of dividends, loans, advances or management fees, minus
(ii) all cash transferred or paid by the Guarantor to the Borrower.
ARTICLE II.
Amount and Terms of the Advancing Term Loan Facility
Section 2.1 Advancing Term Loan. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make Advances to the Borrower from time to
time during the period from the date hereof to and including the Termination
Date or the earlier date of termination in whole of the Advancing Term Loan
Facility pursuant to Section 8.2 hereof with the total aggregate amount of such
Advances not to exceed $2,600,000, which Advances shall be secured by the
Collateral as provided in Article III hereof. The Advancing Term Loan Facility
shall be an advancing term loan facility and shall not be a revolving facility.
The maximum aggregate amount which the Lender agrees to advance hereunder is
$2,600,000 irrespective of whether any Advances are prepaid, provided, that the
Lender shall not advance more than $2,400,000 hereunder unless and until either
(i) the Guarantor or the Borrower has satisfied its obligation to pay $100,000
to John J. Baggett and $100,000 to Tony W. Baggett pursuant to Section 6.16
hereof, or (ii) the "puts" of said individuals under Section 7.05 of that
certain Agreement and Plan of Reorganization dated May 22, 1995 by and between
among other parties, said individuals and the Guarantor, have ceased to exist as
a result of the completion of an initial public offering of common stock by the
Borrower or the Guarantor prior to June 30, 1996 at an initial offering price of
no less than $5.00 per share. The Borrower agrees to comply with the following
procedures in requesting Advances under this Section 2.1:
(a) The Borrower will not request any Advance under this Section 2.1,
if, after giving effect to such requested Advance, the total aggregate
amount of all Advances under this Section 2.1 or otherwise will exceed
$2,600,000;
(b) Each request for an Advance under this Section 2.1 shall be made to
the Lender prior to 11:00 a.m. (Minneapolis time) three Banking Days
prior to the requested date of funding of the Advance by the Borrower.
Each request for an Advance shall be made in writing specifying the
date of the requested Advance and shall be accompanied by any items
required by the Lender pursuant to Section 4.2(2) hereof and by a
certificate executed by an officer of the Borrower indicating the
Borrower's proposed use of the funds to be advanced pursuant to the
requested Advance and shall be by (i) any officer of the Borrower; or
(ii) any person designated as the Borrower's agent by any officer of
the Borrower in a writing delivered to the Lender; or (iii) any person
reasonably believed by the Lender to be an officer of the Borrower or
such a designated agent.
(c) Upon fulfillment of the applicable conditions set forth in Article
IV hereof, the Lender shall disburse loan proceeds by crediting the
same to the Borrower's demand deposit account maintained at the Lender
unless the Lender and the Borrower shall agreed in writing to another
manner of disbursement. The Borrower shall be obligated to repay all
Advances under this Section 2.1 notwithstanding the fact that the
person requesting the same was not in fact authorized to do so. Any
request for an Advance under this Section 2.1 shall be deemed to be a
representation by the Borrower that (i) the conditions set forth in
Section 2.1(a) hereof has been met, and (ii) the conditions set forth
in Section 4.2 hereof have been met as of the time of their request.
Section 2.2 Note. All advances made by the Lender under this Article II shall be
evidenced by and repayable with interest in accordance with the Note. The
principal of the Note shall be due and payable in accordance with Section 2.5
hereof and on or before the Maturity Date or upon acceleration by the Lender
pursuant to Section 8.2 hereof. The Borrower may prepay the Note in accordance
with Section 2.4 hereof.
Section 2.3 Interest.
(a) The principal of the Advances outstanding from time to time during
any month shall bear interest (computed on the basis of actual days
elapsed in a 360-day year) at the Floating Rate; provided that in any
event no rate change shall be put into effect which would result in a
rate greater than the highest rate permitted by law. Interest accruing
at the Floating Rate on the principal balance of the Advances
outstanding from time to time shall be due and payable on the last day
of each month and on the Maturity Date or earlier upon the earlier of
acceleration (pursuant to Section 8.2 hereof) or prepayment in full.
(b) In addition to the interest which accrues at the Floating Rate as
provided in Section 2.3(a) above, interest shall also accrue on the
principal of the Advances outstanding from time to time (computed on
the basis of actual days elapsed in a 360 day year) at the Accrual
Rate; provided however, that in no event shall the combined rate of
interest under Sections 2.3(a) and (b) result in a rate greater than
the highest rate permitted by law. Interest accruing at the Accrual
Rate on the principal balance of the Advances outstanding from time to
time shall be compounded monthly and shall be due and payable on the
earlier of (i) the Maturity Date, or (ii) acceleration (pursuant to
Section 8.2 hereof), or (iii) upon prepayment in full, or (iv) at the
option of the Lender, upon the closing of a private placement of any of
the Borrower's or the Guarantor's stock.
Section 2.4 Voluntary Prepayment. Except as otherwise provided herein, the
Borrower may, in its discretion, prepay the Advances in whole at any time or
from time to time in part, provided, however, that the Borrower will give Lender
notice of any optional prepayment, said notice to be given not later than five
(5) business days prior to the prepayment date and to specify the prepayment
date and the proposed amount to be prepaid. Such optional prepayments may be
made only on the first business day of any calendar month. Each optional
prepayment shall be in integral multiples of $25,000, and in an amount at least
equal to $100,000 or, if less, the remaining outstanding balance due.
Notwithstanding the foregoing, in the event the Borrower or any Subsidiary
enters into any working capital financing arrangement with the Lender or any
affiliate of the Lender, no optional prepayments shall be made of the Advances
unless no default or event of default exists under any of the documents
evidencing any such financing arrangement(s), or would be caused by such
prepayment.
Section 2.5 Mandatory Prepayment.
(a) Without notice or demand, if the sum of the aggregate amount of all
Advances shall at any time exceed $2,600,000 (or $2,400,000 during the
period of time aggregate Advances are limited to $2,400,000 pursuant to
Section 2.1), the Borrower shall immediately prepay the Advances to the
extent necessary to reduce the sum of the aggregate amount of all
Advances to $2,600,000, or $2,400,000 as the case may be, and the
Borrower shall not thereafter be entitled to request any further
Advance.
(b) Within thirty (30) days after the last day of each of the
Borrower's fiscal quarters (commencing with the fiscal quarter ending
September 30, 1996) in which any principal indebtedness under the Term
Note shall be outstanding, the Borrower shall pay, without demand,
mandatory prepayments of principal on the Advances equal to (i) fifty
percent (50%) of the Borrower's Excess Cash Flow for such fiscal
quarter, minus (ii) any optional prepayments made during such fiscal
quarter pursuant to Section 2.4 hereof. The Borrower shall prepay the
Advances in full within one (1) Banking Day following the Borrower's or
the Guarantor's receipt of the proceeds of an initial public offering
of any of the Borrower's or the Guarantor's stock.
(c) Any payment received by the Lender under this Section 2.5 or under
Section 2.4 may be applied to the Advances, including interest thereon
and any fees, commissions, costs and expenses hereunder in such order
and in such amounts as the Lender, in its discretion, may from time to
time determine.
Section 2.6 Payment. All payments of principal of and interest on the Advances
shall be made to the Lender in immediately available funds. The Borrower hereby
authorizes the Lender to charge against the Borrower's accounts with the Lender
an amount equal to the principal and accrued interest from time to time due and
payable to the Lender hereunder (and any fees, costs, or expenses or other
amounts hereunder or under the Loan Documents or the Guarantor Documents
(including, without limitation, any amounts paid by the Lender to John J.
Baggett and Tony W. Baggett pursuant to Section 6.16 hereof) and further
authorizes the Lender, in its discretion at any time or from time to time
without request by the Borrower, to make an Advance under the Advancing Term
Loan Facility to the extent necessary to pay any such amounts.
Section 2.7 Payment on Non-Banking Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Banking Day, such
payment may be made on the next succeeding Banking Day, and such extension of
time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
Section 2.8 Intentionally Omitted.
Section 2.9 Liability Records. The Lender may maintain from time to time, at its
discretion, liability records as to the outstanding balance of the Advances made
and interest accrued or paid under this Agreement. All entries made on any such
record shall be presumed correct until the Borrower establishes the contrary. On
demand by the Lender, the Borrower will admit and certify in writing the exact
principal balance that the Borrower then asserts to be outstanding to the Lender
under this Agreement. Any billing statement or accounting rendered by the Lender
shall be conclusive and fully binding on the Borrower unless specific written
notice of exception is given to the Lender by the Borrower within 45 days after
its receipt by the Borrower.
Section 2.10 Setoff. The Borrower agrees that following the occurrence of an
Default or an Event of Default, the Lender may at any time or from time to time,
at its sole discretion and without demand and without notice to anyone, setoff
any liability owed to the Borrower by the Lender, whether or not due, against
any Obligations whether or not due. In addition, each other Person holding a
participating interest in any Advances made to the Borrower by the Lender shall
have the right to appropriate or setoff any deposit or other liability then owed
by such Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating interest.
Section 2.11 Fees.
(a) The Borrower hereby agrees to pay the Lender a fully earned and
non-refundable origination fee of $25,190.00 due and payable upon the
execution of this Agreement.
(b) The Borrower hereby agrees to pay the Lender, on demand, audit fees
at the Lender's current standard rate (which is currently $400 per day
per auditor as of the date hereof) as the same changes from time to
time, in connection with any audits or inspections by the Lender of any
collateral or the operations or business of the Borrower, together with
all actual out-of-pocket costs and expenses incurred in conducting any
such audit or inspection.
Section 2.12 Capital Adequacy. If the Lender shall determine that the adoption
after the date hereof of any applicable law, rule or regulation regarding
capital adequacy, or any change therein after the date hereof, any change after
the date hereof in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender or its
parent corporation with any guideline or request issued after the date hereof
regarding capital adequacy (whether nor not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on the Lender's or the Lender's parent corporation's
capital as a consequence of the Lender's obligations hereunder to a level below
that which the Lender or its parent corporation could have achieved but for such
adoption, change or compliance (taking into consideration the Lender's policies
with respect to capital adequacy and those of the Lender's parent corporation)
by an amount deemed to the Lender or its parent corporation to be material, then
from time to time on demand by the Lender, the Borrower shall pay to the Lender
such additional amount or amounts as will compensate the Lender or its parent
corporation for such reduction. Certificates of the Lender sent to the Borrower
from time to time claiming compensation under this Section, stating the reason
therefor and setting forth in reasonable detail the calculation of the
additional amount or amounts to be paid to the Lender hereunder shall be
conclusive absent manifest error. In determining such amounts, the Lender or its
parent corporation may use any reasonable averaging and attribution methods.
ARTICLE III.
Security Interest
Section 3.1 Grant of Security Interest. The Borrower hereby assigns and grants
to the Lender a security interest (collectively referred to as the "Security
Interests") in the Collateral, as security for the payment and performance of
each and every debt, liability and obligation of every type and description
which the Borrower may now or at any time hereafter owe to the Lender (whether
such debt, liability or obligation now exists or is hereafter created or
incurred, whether it arises in a transaction involving the Lender alone or in a
transaction involving other creditors of the Borrower, and whether it is direct
or indirect, due or to become due, absolute or contingent, primary or secondary,
liquidated or unliquidated, or sole, joint, several or joint and several, and
including specifically, but not limited to, all indebtedness of the Borrower
arising under this Agreement or any other loan or credit agreement or guaranty
between the Borrower and the Lender, whether now in effect or hereafter entered
into; all such debts, liabilities and obligations are herein collectively
referred to as the "Obligations").
Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may
at any time (before or after the occurrence of an Event of Default) notify any
account debtor or other person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as agent and attorney in fact of the Borrower,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.
Section 3.3 Assignment of Insurance. As additional security for the payment and
performance of the Obligations, the Borrower hereby assigns to the Lender any
and all monies (including, without limitation, proceeds of insurance and refunds
of unearned premiums) due or to become due under, and all other rights of the
Borrower with respect to, any and all policies of insurance now or at any time
hereafter covering the Collateral or any evidence thereof or any business
records or valuable papers pertaining thereto, and the Borrower hereby directs
the issuer of any such policy to pay all such monies directly to the Lender. At
any time, whether before or after the occurrence of any Event of Default, the
Lender may (but need not), in the Lender's name or in the Borrower's name,
execute and deliver proof of claim, receive all such monies, endorse checks and
other instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section 3.4 Intentionally Omitted.
Section 3.5 License. The Borrower hereby grants to the Lender a nonexclusive,
worldwide and royalty-free license to use or otherwise exploit all trademarks,
franchises, trade names, copyrights and patents of the Borrower for the purpose
of selling, leasing or otherwise disposing of any or all Collateral following an
Event of Default.
ARTICLE IV.
Conditions of Lending
Section 4.1 Conditions Precedent to the Initial Advance under the Term Loan. The
obligation of the Lender to make the initial Advance under the Term Loan shall
be subject to the condition precedent that the Lender shall have received all of
the following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed on behalf of the Borrower.
(b) The Note, properly executed on behalf of the Borrower.
(c) A true and correct copy of the lease pursuant to which the
Guarantor leases the premises located at 2665 Long Lake Road, Suite
120, Roseville, Minnesota 55113.
(d) Current searches of appropriate filing offices showing that (i) no
state or federal tax liens have been filed and remain in effect against
the Borrower, and (ii) no financing statements have been filed and
remain in effect against the Borrower, except those financing
statements relating to liens permitted pursuant to Section 7.1 hereof
and those financing statements filed by the Lender.
(e) Current searches of appropriate filings officers showing all
financing statements filed of record against the Subsidiaries described
on Exhibit B attached hereto.
(f) A certificate of the Chief Executive Officer of the Borrower,
certifying as to (i) the resolutions of the directors of the Borrower,
authorizing the execution, delivery and performance of the Loan
Documents, and the documents related thereto; (ii) the articles of
incorporation and bylaws of the Borrower, and (iii) the signatures of
the officers or agents of the Borrower authorized to execute and
deliver the Loan Documents, and the documents related thereto and other
instruments, agreements and certificates on behalf of the Borrower.
(g) A certificate of the President of the Guarantor, certifying as to
(i) the resolutions of the directors of the Guarantor, authorizing the
execution, delivery and performance of the Guarantor Documents, and the
documents related thereto; (ii) the articles of incorporation and
bylaws of the Guarantor, and (iii) the signatures of the officers or
agents of the Guarantor authorized to execute and deliver the Guarantor
Documents, and the documents related thereto and other instruments,
agreements and certificates on behalf of the Guarantor, and (iv) the
share designation resolutions adopted by the directors of the Borrower
creating the Preferred Stock and the Class Two Preferred Stock of the
Borrower.
(h) A certificate of good standing (or equivalent certificate) of the
Borrower and the Guarantor duly issued (with no exceptions) by the
Secretary of State of the State of Minnesota and each and every other
state in which the Borrower or the Guarantor, as the case may be, is
qualified to do business.
(i) True and correct copies of the Release Notes, duly executed by the
Borrower.
(j) The Release Agreements, duly executed by the parties thereto.
(k) An opinion of counsel to the Borrower and the Guarantor, addressed
to the Lender.
(l) The Option to Purchase Warrant, duly executed by the Guarantor.
(m) Certificates of the insurance required hereunder, with all
liability insurance with respect to the Borrower, the Subsidiaries and
the Guarantor naming the Lender as an additional insured.
(n) The Guaranty, properly executed by the Guarantor.
(o) A true and correct copy of the Acquisition Documents, together with
a certificate executed by the Guarantor and the Sellers which are a
party thereto certifying that the closing contemplated by all of the
Acquisition Documents has been consummated in accordance with the terms
of the Acquisition Documents, without resort to any provision thereof
permitting the waiver by any party thereto of any condition,
obligation, representation, warranty, covenant or other requirement
except as disclosed and consented to by the Lender, and the Lender
shall have received such evidence as it shall deem satisfactory to the
consummation of the acquisition in accordance with the terms of the
Acquisition Documents.
(p) A certificate certifying that any and all the documents (including,
but not limited to, letters of intent) heretofore executed by the
Guarantor with respect to the proposed acquisitions of Summers Pallet
Service, Inc., a Texas corporation, American Pallet Recyclers, Inc., a
Texas corporation, The Pallet Factory, Inc., a Tennessee corporation,
C&C Pallet, Inc., a Missouri corporation, and Central Pallet, Inc., a
Missouri corporation, have been assigned to the Borrower, and that
there are no other acquisitions proposed by the Guarantor as of the
date hereof with respect to which any documents have been executed.
Executed copies of such assignments shall also be delivered to the
Lender.
(q) A true and correct copy of the Merger Documents, together with a
certificate certifying that the Merger contemplated by the Merger
Documents has been consummated in accordance with the terms of the
Merger Documents, without resort to any provision thereof permitting
the waiver by any party thereto of any condition, obligation,
representation, warranty, covenant or other requirement except as
disclosed and consented to by the Lender.
(r) The Collateral Pledge Agreement, duly executed by the Borrower,
together with the original PRANA Note and the Machine Specialists Note,
endorsed to the Lender, and together with the original stock
certificates for the shares described therein and the original
certificates for the membership interests described therein and duly
executed stock powers (and an equivalent document for the membership
interests) with respect to each such certificate.
(s) A certificate executed by the Borrower certifying as to certain
information with respect to the shares of stock and membership
interests, as the case may be, owned by the Borrower.
(t) UCC-1 financing statements, duly executed by the Borrower and
satisfying the requirements of Section 5.14.
(u) Payment of the fees due under Section 2.11 hereof and expenses
incurred by the Lender through such date and required to be paid by the
Borrower under Section 9.7 hereof.
(v) The Assignment of Seller's Representations and Warranties duly
executed and delivered by the parties thereto.
(w) The Debt Subordination Agreements duly executed by the parties
thereto and acknowledged by the Borrower.
(x) The Trademark Mortgage, duly executed by the Guarantor.
(y) A certificate executed by the Borrower indicating the Borrower's
proposed use of the funds to be advanced pursuant to the initial
Advance.
(z) Such other documents as the Lender in its reasonable discretion may
require.
Section 4.2 Conditions Precedent to all Advances. The Obligation of the Lender
to make each Advance shall be subject to the further conditions precedent that
on such date:
(a) The representations and warranties contained in Article V hereof
are correct on and as of the date of such Advance as though made on and
as of such date, except to the extent that such representations and
warranties relate solely to an earlier date; and
(b) No event has occurred and continuing or would result from such
Advance which constitutes a Default or an Event of Default;
(c) The Borrower has complied in all respects with the provisions of
Section 2.1(b) with respect to any Advance other than the initial
Advance, and the proposed uses of the funds to be advanced pursuant to
such proposed Advance are acceptable to the Lender in its sole
discretion; and
(d) The Borrower has executed and/or delivered, as the case may be, any
and all other documents, instruments, agreements, certificates,
materials and information as the Lender may require in its sole
discretion.
ARTICLE V.
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations. The Borrower and each Subsidiary in existence
as of the date hereof is a corporation duly incorporated, validly existing and
in good standing under the laws of, in the case of the Borrower, the State of
Minnesota, and, in the case of each Subsidiary, the state of its incorporation,
and is or within thirty (30) days of the date hereof will be duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary. The Borrower and each Subsidiary has
all requisite power and authority, corporate or otherwise, to conduct its
business, to own its properties and the Borrower has all requisite power,
corporate or otherwise, execute and deliver, and to perform all of its
obligations under, the Loan Documents. During its corporate existence, the
Borrower has done business solely under the names set forth in Exhibit B hereto.
The chief executive office and principal place of business of the Borrower is
located at the address set forth in Exhibit B hereto, and all of the Borrower's
records relating to its business or the Collateral are kept at that location.
All Inventory and Equipment is located at that location or at one of the other
locations set forth in Exhibit B hereto.
Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements. The
execution, delivery and performance by (i) the Borrower of the Loan Documents
and the borrowing hereunder, and (ii) PRANA Memphis of the Acquisition Documents
and the Merger Documents, have been duly authorized by all necessary corporate
action and do not and will not (a) require any authorization, consent or
approval by, or registration, declaration or filing with, or notice to, any
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, or any third party, except such authorization, consent,
approval, registration, declaration, filing or notice as has been obtained,
accomplished or given prior to the date hereof, (b) violate any provision of any
law, rule or regulation (including, without limitation, Regulation X of the
Board of Governors of the Federal Reserve System) or of any order, writ,
injunction or decree presently in effect having applicability to the Borrower or
PRANA Memphis, as the case may be, or of the Articles of Incorporation or Bylaws
of the Borrower or PRANA Memphis, as the case may be, (c) result in a breach of
or constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Borrower, or PRANA
Memphis, as the case may be, is a party or by which it or its properties may be
bound or affected, or (d) result in, or require, the creation or imposition of
any mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interests) upon or with
respect to any of the properties now owned or hereafter acquired by the Borrower
or PRANA Memphis, as the case may be.
Section 5.3 Legal Agreements. This Agreement constitutes and, upon due execution
by the Borrower, the other Loan Documents will constitute the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms.
Section 5.4 Subsidiaries. Except as set forth in Exhibit B attached hereto, the
Borrower has no Subsidiaries. The Borrower owns, with power to vote, all of the
issued and outstanding stock of the Subsidiaries.
Section 5.5 Financial Condition; No Adverse Change. The Borrower has heretofore
furnished to the Lender consolidated audited financial statements of the
Guarantor for the fiscal year ended December 31, 1993, and consolidated
unaudited financial statements of the Guarantor for the fiscal year ended
December 31, 1994, and for the month and fiscal year-to-date ended May 31, 1995,
and those statements fairly present the financial condition of the Guarantor on
the dates thereof and the results of their operations and cash flows for the
periods then ended and were prepared in accordance with generally accepted
accounting principles. Since the date of the most recent financial statements,
there has been no material adverse change in the business, properties or
condition (financial or otherwise) of the Guarantor or its affiliates, or the
Borrower or its Affiliates.
Section 5.6 Litigation. There are no actions, suits or proceedings pending or,
to the knowledge of the Borrower, threatened against or affecting the Borrower
or any of its Affiliates, or the properties of the Borrower or any of its
Affiliates, before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to such Person, would have a material adverse effect on such Person's
financial condition, properties or operations.
Section 5.7 Regulation U. Neither the Borrower nor any of its Affiliates is
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Advance will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock.
Section 5.8 Taxes. The Borrower and its Affiliates have paid or caused to be
paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
Section 5.9 Titles and Liens. The Borrower has good and absolute title to all
Collateral and all other properties and assets reflected in the latest balance
sheet referred to in Section 5.5 hereof and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for (i)
mortgages, security interests and liens permitted by Section 7.1 hereof, and
(ii) in the case of any such property which is not Collateral or other
collateral described in the Loan Documents, covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with the business or operations of the Borrower as presently conducted. No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only security interests permitted by Section 7.1 hereof.
Section 5.10 Plans. Except as disclosed on Exhibit F attached hereto, neither
the Borrower nor any of its ERISA Affiliates maintains or has maintained any
Plan. Neither the Borrower nor any ERISA Affiliate has received any notice or
has any knowledge to the effect that it is not in full compliance with any of
the requirements of ERISA. No Reportable Event or other fact or circumstance
which may have an adverse effect on the Plan's tax qualified status exists in
connection with any Plan. Neither the Borrower nor any of its ERISA Affiliates
has:
(a) Any accumulated funding deficiency within the meaning of ERISA; or
(b) Any liability or knows of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation,
the Internal Revenue Service, the Department of Labor or any
participant in connection with any Plan (other than accrued benefits
which or which may become payable to participants or beneficiaries of
any such Plan).
Section 5.11 Default. The Borrower and each of its Affiliates is in compliance
with all provisions of all agreements, instruments, decrees and orders to which
it is a party or by which it or its property is bound or affected, the breach or
default of which could have a material adverse effect on the financial
condition, properties or operations of the Borrower or such Affiliate, as the
case may be.
Section 5.12 Environmental Protection. The Borrower and its Affiliates have all
obtained all permits, licenses and other authorizations which are required under
federal, state and local laws and regulations relating to emissions, discharges,
releases of pollutants, contaminants, hazardous or toxic materials, or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws") at the Borrower's or such
Affiliate's, as the case may be, facilities or in connection with the operation
of their respective facilities. The Borrower and its Affiliates and all
activities of the Borrower and its Affiliates at their respective facilities
comply with all Environmental Laws and with all terms and conditions of any
required permits, licenses and authorizations applicable to the Borrower or such
Affiliate with respect thereto. The Borrower and its Affiliates are also in
compliance with all limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
Environmental Laws or contained in any plan, order, decree, judgment or notice
of which the Borrower is aware. The Borrower is not aware of, nor has the
Borrower received notice of, any events, conditions, circumstances, activities,
practices, incidents, actions or plans which may interfere with or prevent
continued compliance with, or which may give rise to any liability for the
Borrower or any of its Affiliates under, any Environmental Laws.
Section 5.13 Submissions to Lender. All financial and other information provided
to the Lender by or on behalf of the Borrower and its Affiliates in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section 5.14 Financing Statements. The Borrower has provided to the Lender
signed financing statement sufficient when filed to perfect the Security
Interests and the other security interests created by the Loan Documents. When
such financing statements are filed in the offices noted therein, the Lender
will have a valid and perfected security interest in all Collateral and all
other collateral described in the Loan Documents which is capable of being
perfected by filing financing statements. None of the Collateral or other
collateral covered by the Loan Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5.15 Rights to Payment. Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral or other collateral covered by the Loan Documents is (or, in the case
of all future Collateral or such other collateral, will be when arising or
issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim, of the account debtor or other obligor named
therein or in the Borrower's records pertaining thereto as being obligated to
pay such obligation.
Section 5.16 Acquisition Documents. The Agreement and Plan of Reorganization by
and among PRANA Memphis, the Guarantor and Pallet Supply dated as of June 9,
1995, and all exhibits and schedules thereto and the documents related thereto
(collectively, the "Acquisition Documents") and the agreement and articles of
merger relating to Pallet Supply and PRANA Memphis, copies of which have been
delivered to the Lender, are true and correct and together comprise full and
complete copies of all agreements among the parties thereto, with respect to the
transactions contemplated by such Acquisition Documents, and there are no oral
agreements or understandings not contained therein relating to or modifying the
substance thereof. The Acquisition Documents are in full force and effect and
have not been further amended, terminated, rescinded or withdrawn, and no
material provision has been waived by any party thereto.
Section 5.17 Merger Documents. The Merger Documents and all exhibits and
schedules thereto, copies of which have been delivered to the Lender, are true
and correct copies thereof and together comprise full and complete copies of all
agreements among Pallet Supply and PRANA Memphis with respect to the Merger, and
there are no oral agreements or understandings not contained therein relating to
or modifying the substance thereof. The Merger Documents are or will be as of
the date hereof, in full force and effect and have not been further amended,
terminated, rescinded or withdrawn and no material provision has been waived by
any party thereto, except with the written consent of the Lender.
Section 5.18 Prior Activities. Prior to the date hereof, the Borrower did not
incur directly or through any Affiliate or Subsidiary, any liabilities or
obligations or engage in any transactions other than the transaction
contemplated hereby.
Section 5.19 Solvency.
(a) Immediately following the closing of the transactions contemplated
hereby including, without limitation, the Merger, the fair saleable
value of the Borrower as a going concern will exceed the amount that
will be required to be paid in respect to the existing debts and other
liabilities (including all contingent liabilities except those
contingent liabilities arising under the Acquisition Documents which
have not yet accrued) of the Borrower as they mature.
(b) The Borrower does not and will not have, immediately following the
closing of the transactions contemplated hereunder, unreasonably small
capital to carry out its business as conducted or as proposed to be
conducted.
(c) The Borrower does not intend to and does not believe that it will
incur debts beyond its ability to pay such debts as they mature.
Section 5.20 Trademarks and Patents. Except as set forth on Exhibit E attached
hereto, the Borrower does not own any interest in any copyrights, patents or
trademarks that are registered under either federal or state law.
Section 5.21 Ownership of Guarantor. All issued and outstanding capital stock of
the Guarantor (whether common or preferred) is held by the Persons and in the
amounts set forth on Exhibit G attached hereto.
ARTICLE VI.
Affirmative Covenants of the Borrower
So long as the Note shall remain unpaid or the Advancing Term Loan Facility
shall be outstanding, the Borrower will comply with the following requirements,
unless the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to be
delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) as soon as available, and in any event within one hundred twenty
(120) days after the end of each fiscal year of the Borrower audited
financial statements of the Borrower prepared on a consolidating basis
with the Guarantor with the unqualified opinion of independent
certified public accountants selected by the Borrower and acceptable to
the Lender, which annual financial statements shall include the
consolidating balance sheets of the Borrower and the Guarantor as at
the end of such fiscal year and the related consolidating statements of
income, retained earnings and cash flows of the Borrower and the
Guarantor for the fiscal year then ended, prepared, if the Lender so
requests, on a consolidating and consolidated basis to include any
Subsidiary, all in reasonable detail and prepared in accordance with
generally accepted accounting principles applied on a basis consistent
with the accounting practices applied in the financial statements
referred to in Section 5.5 hereof, together with (i) copies of any
management letters delivered by the accounting firm in connection with
such audited financial statements, (ii) a report signed by such
accountants stating that in making the investigations necessary for
said opinion they obtained no knowledge, except as specifically stated,
of any Default or Event of Default hereunder and all relevant facts in
reasonable detail to evidence, and the computations as to, whether or
not the Borrower is in compliance with the requirements set forth in
Sections 6.11, 6.12, and 7.18, and (iii) a certificate of an authorized
officer of the Borrower stating that such financial statements have
been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices
reflected in the annual financial statements referred to in Section 5.5
hereof and whether or not such officer has knowledge of the occurrence
of any Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;
(b) as soon as available and in any event within twenty-five (25) days
after the end of each fiscal month of the Borrower, an
unaudited/internal balance sheet and statements of income and retained
earnings of the Borrower prepared on a consolidating basis with the
Guarantor as of the end of and for such month, prepared, if the Lender
so requests, on a consolidating and consolidated basis to include any
Subsidiary, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year,
all prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices
reflected in the financial statements referred to in Section 5.5
hereof, subject to year-end audit adjustments; and accompanied by a
certificate of an authorized officer of the Borrower, substantially in
the form of Exhibit D hereto stating (i) that such financial statements
have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices
reflected in the financial statements referred to in Section 5.5
hereof, subject to year-end audit adjustments, (ii) whether or not such
officer has knowledge of the occurrence of any Default or Event of
Default hereunder not theretofore reported and remedied and, if so,
stating in reasonable detail the facts with respect thereto, and (iii)
all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with
the requirements set forth in Sections 6.11, 6.12 and 7.18 hereof;
(c) at least thirty (30) days before the beginning of each fiscal year
of the Borrower, the consolidating projected balance sheets and income
statements for each month of such year, each in reasonable detail,
representing the good faith projections of the Borrower and certified
by an authorized officer the Borrower as being the most accurate
projections available, together with such supporting schedules and
information as the Lender may in its reasonable discretion require;
(d) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower or any Affiliate of the type
described in Section 5.6 hereof or which seek a monetary recovery
against the Borrower or such Affiliate in excess of $25,000;
(e) as promptly as practicable (but in any event not later than five
business days) after an officer of the Borrower obtains knowledge of
the occurrence of any breach, default or event of default under any
Loan Document or any event which constitutes a Default or Event of
Default hereunder, notice of such occurrence, together with a detailed
statement by a responsible officer of the Borrower of the steps being
taken by the Borrower to cure the effect of such breach, default or
event;
(f) as soon as possible and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with
respect to any Plan or with respect to any plan maintained by an
Affiliate has occurred, the statement of the president of the Borrower
or such Affiliate setting forth details as to such Reportable Event and
the action which the Borrower or such Affiliate proposes to take with
respect thereto, together with a copy of the notice of such Reportable
Event to the Pension Benefit Guaranty Corporation;
(g) as soon as possible, and in any event within 10 days after the
Borrower or any Affiliate fails to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, the statement of the president of the
Borrower or such Affiliate setting forth details as to such failure and
the action which the Borrower or such Affiliate proposes to take with
respect thereto, together with a copy of any notice of such failure
required to be provided to the Pension Benefit Guaranty Corporation;
(h) promptly upon knowledge thereof, notice of (i) any disputes or
claims by customers of the Borrower or any of its Affiliates where the
amount of such dispute or claim exceeds $25,000; (ii) any goods
returned to or recovered by the Borrower or any Affiliates when the
value of the goods so returned exceeds $25,000, and (iii) any change in
the persons constituting the officers and directors of the Borrower or
any Affiliate;
(i) promptly upon knowledge thereof, notice of any material loss of or
material damage to any Collateral or other collateral covered by the
Loan Documents or of any substantial adverse change in any Collateral
or such other collateral or the prospect of payment thereof;
(j) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower or any
Affiliate shall have sent to its stockholders;
(k) promptly after the sending or filing thereof, copies of all regular
and periodic financial reports which the Borrower or any Affiliate
shall file with the Securities and Exchange Commission or any national
securities exchange;
(l) promptly upon knowledge thereof, notice of the violation by the
Borrower or any Affiliate of any law, rule or regulation, the
non-compliance with which could materially and adversely affect its
business or its financial condition; and
(m) from time to time, upon request by the Lender, with reasonable
promptness, any and all receivables schedules, collection reports,
deposit records, equipment schedules, copies of invoices to account
debtors, shipment documents and delivery receipts for goods sold, and
such other material, reports, records or information.
Section 6.2 Books and Records; Inspection and Examination. The Borrower will and
will cause all Subsidiaries to keep accurate books of record and account for
itself pertaining to the Collateral and pertaining to the Borrower's and all
Subsidiaries' respective businesses and financial conditions and such other
matters as the Lender may from time to time request in which true and complete
entries will be made in accordance with generally accepted accounting principles
consistently applied and, upon request of the Lender, will permit any officer,
employee, attorney or accountant for the Lender to audit, review, make extracts
from or copy any and all corporate and financial books and records of the
Borrower or any Subsidiary at all times during ordinary business hours, to send
and discuss with account debtors and other obligors requests for verification of
amounts owed to the Borrower or any Subsidiary, and to discuss the affairs of
the Borrower or any of its Subsidiaries with any of its directors, officers,
employees or agents. The Borrower will and will cause all Subsidiaries to permit
the Lender, or its employees, accountants, attorneys or agents, to examine and
inspect any Collateral, other collateral covered by the Loan Documents or any
other property of the Borrower at any time during ordinary business hours.
Section 6.3 Account Verification. The Borrower will and will cause all
Subsidiaries to at any time and from time to time upon request of the Lender
send requests for verification of accounts or notices of assignment to account
debtors and other obligors.
Section 6.4 Compliance with Laws; Environmental Indemnity. The Borrower will and
will cause all Subsidiaries to (a) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect such Person's business or such Person's financial condition,
and (b) comply with all applicable Environmental Laws and obtain any permits,
licenses or similar approvals required by any such Environmental Laws. The
Borrower will use and keep the Collateral, and will require that others use and
keep the Collateral, only for lawful purposes, without violation of any federal,
state or local law, statute or ordinance. The Borrower will and will cause all
Subsidiaries to indemnify, defend and hold the Lender harmless from and against
any claims, loss or damage to which the Lender may be subjected as a result of
any past, present or future existence, use, handling, storage, transportation or
disposal of any hazardous waste or substance or toxic substance by the Borrower
or any Subsidiary or on property owned, leased or controlled by the Borrower or
any Subsidiary. This indemnification agreement shall survive the termination of
this Agreement and payment of the Obligations.
Section 6.5 Payment of Taxes and Other Claims. The Borrower will and will cause
all Subsidiaries to pay or discharge, when due, (a) all taxes, assessments and
governmental charges levied or imposed upon it or upon its income or profits,
upon any properties belonging to it (including, without limitation, the
Collateral) or upon or against the creation, perfection or continuance of the
Security Interests, prior to the date on which penalties attach thereto, (b) all
federal, state and local taxes required to be withheld by it, and (c) all lawful
claims for labor, materials and supplies which, if unpaid, might by law become a
lien or charge upon any properties of the Borrower or any Subsidiary; provided,
that the Borrower or such Subsidiary shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings.
Section 6.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Loan Documents and all of its other
properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from
time to time replace or repair any worn, defective or broken parts;
provided, however, that nothing in this Section 6.6 shall prevent the
Borrower from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the judgment of the Lender,
desirable in the conduct of the Borrower's business and not
disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral
or any interest therein.
(c) The Borrower will keep all Collateral and other collateral covered
by the Loan Documents free and clear of all security interests, liens
and encumbrances except the Security Interests and other security
interests permitted by Section 7.1 hereof.
Section 6.7 Insurance. The Borrower will and will cause all Subsidiaries to
obtain and at all times maintain insurance with insurers believed by the
Borrower to be responsible and reputable, in such amounts and against such risks
as may from time to time be required by the Lender, but in all events in such
amounts and against such risks as is usually carried by companies engaged in
similar business and owning similar properties in the same general areas in
which the Borrower operates. Without limiting the generality of the foregoing,
the Borrower will at all times keep all tangible Collateral, if any, insured
against risks of fire (including so-called extended coverage), theft, collision
(for Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender's loss payable endorsement for the benefit of the Lender. All
policies of liability insurance required hereunder with respect to the Borrower
and the Subsidiaries shall name the Lender as an additional insured.
Section 6.8 Preservation of Corporate Existence. The Borrower will and will
cause all Subsidiaries to preserve and maintain its corporate existence and all
of its rights, privileges and franchises necessary or desirable in the normal
conduct of its business and shall conduct its business in an orderly, efficient
and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the Lender, the
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10 Performance by the Lender. If the Borrower at any time fails to
perform or observe any of the foregoing covenants contained in this Article VI
or elsewhere herein, and if such failure shall continue for a period of ten
calendar days after the Lender gives the Borrower written notice thereof (or in
the case of the agreements contained in Sections 6.5 and 6.7 hereof, immediately
upon the occurrence of such failure, without notice or lapse of time), the
Lender may, but need not, perform or observe such covenant on behalf and in the
name, place and stead of the Borrower (or, at the Lender's option, in the
Lender's name) and may, but need not, take any and all other actions which the
Lender may reasonably deem necessary to cure or correct such failure (including,
without limitation, the payment of taxes, the satisfaction of security
interests, liens or encumbrances, the performance of obligations owed to account
debtors or other obligors, the procurement and maintenance of insurance, the
execution of assignments, security agreements and financing statements, and the
endorsement of instruments); and the Borrower shall thereupon pay to the Lender
on demand the amount of all monies expended and all costs and expenses
(including reasonable attorneys' fees and legal expenses) incurred by the Lender
in connection with or as a result of the performance or observance of such
agreements or the taking of such action by the Lender, together with interest
thereon from the date expended or incurred at the sum of the Floating Rate and
the Accrual Rate, but in no event shall the combined Floating Rate and Accrual
Rate exceed the highest rate permitted by law. To facilitate the performance or
observance by the Lender of such covenants of the Borrower, the Borrower hereby
irrevocably appoints the Lender, or the delegate of the Lender, acting alone, as
the attorney in fact of the Borrower (which appointment is coupled with an
interest) with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name and on behalf
of the Borrower any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by the Borrower under this Section 6.10.
Section 6.11 Debt Service Coverage Ratio. The Borrower will at all times
maintain (calculated on a consolidated basis for the Borrower and its
Subsidiaries) a Debt Service Coverage Ratio calculated quarterly as of the last
day of each fiscal quarter of the Borrower using the actual results of such
quarter, of at least 1.3 to 1.0.
Section 6.12 Book Net Worth. The Borrower shall at all times maintain
(calculated on a consolidated basis for the Borrower and its Subsidiaries) Book
Net Worth calculated quarterly as of the last day of each fiscal quarter of the
Borrower of at least $5,300,000.
Section 6.13 Merger Certificate. Within three (3) days of the date hereof, the
Borrower shall deliver a certificate of merger and certified copies of the filed
articles of merger issued by the Secretaries of State of Minnesota and of
Tennessee with respect to the merger of PRANA Memphis and Pallet Supply.
Section 6.14 Acquisitions. In the event the Lender consents to any proposed
acquisition pursuant to Section 7.7 hereof, such acquisition shall be
consummated by the Borrower or a future Subsidiary of the Borrower and not by
PRANA or any of the Affiliates (other than the Borrower or any future Subsidiary
of the Borrower).
Section 6.15 Stock of Subsidiaries. The Borrower shall at all times own, with
power to vote, all of the issued and outstanding stock of the Subsidiaries.
Section 6.16 Payment under Debt Subordination Agreement. If the Borrower or the
Guarantor has not completed an initial public offering of the Borrower's or the
Guarantor's common stock by June 30, 1996 at an initial offering price of no
less than $5.00 per share, and so long as no Default or Event of Default shall
occur as a result of such payment, the Borrower shall pay $100,000 to John J.
Baggett and $100,000 to Tony W. Baggett on or before June 30, 1996 in order to
make the Debt Subordination Agreement executed by John J. Baggett and Tony W.
Baggett in favor of the Lender effective pursuant to Paragraph 17 of such
agreement. Notwithstanding the foregoing, the Borrower acknowledges that the
Lender reserves the right to make any such payments in the Lender's sole
discretion, and in the event the Lender elects to make any such payment, the
amount of such payment shall be deemed to be an Advance under the Advancing Term
Loan Facility.
Section 6.17 Insurance. By December 31, 1995, the Borrower shall have added all
of the Subsidiaries as additional named insureds to the Borrower's master
corporate policies of general liability, excess liability or "umbrella"
coverage, property, boiler and machinery, crime, automobile and worker's
compesnation insurance; provided that the Borrower shall not be required to add
any such Subsidiary as an additional named insured with respect to property or
worker's compensation insurance if such Subsidiary maintains such insurance
under seprate policies and otherwise in compliance with the terms of this
Agreement.
Section 6.18 Foreign Trademarks. The Borrower has advised the Lender that it
intends to register the "PRANA" trademark and design in Canada and Mexico. The
Borrower agrees to advise the Lender from time to time as to the status of such
registrations and to execute such documents as the Lender may request pursuant
to Section 9.5 hereof to allow the Lender to perfect its Security Interest in
such trademarks.
ARTICLE VII.
Negative Covenants
So long as the Note shall remain unpaid or the Advancing Term Loan Facility
shall be outstanding, the Borrower agrees that, without the prior written
consent of the Lender:
Section 7.1 Liens and Capitalized Leases. The Borrower will not and will not
permit any Subsidiary to (i) create, incur or suffer to exist any mortgage, deed
of trust, pledge, lien, security interest, assignment or transfer upon or of any
of its assets, now owned or hereafter acquired, to secure any indebtedness, or
(ii) incur any lease obligations which are required to be capitalized on the
balance sheet ("Capitalized Lease Obligations"); excluding, however, from the
operation of the foregoing:
(a) mortgages, deeds of trust, pledges, liens, security interests and
assignments in existence on the date hereof and listed in Exhibit C
hereto, securing indebtedness for borrowed money permitted under
Section 7.2 hereof;
(b) the Security Interests; and
(c) purchase money security interests (as such term is defined in
Section 9-107 of the UCC) or Capitalized Lease Obligations relating to
the acquisition of machinery and equipment of the Borrower so long as
the Borrower is in, and maintains, compliance with every other
provision of this Agreement;
(d) liens granted by any Subsidiary to the Lender or any Affiliate of
the Lender.
Section 7.2 Indebtedness. The Borrower will not and will not permit any
Subsidiary to incur, create, assume or permit to exist any indebtedness or
liability on account of deposits or advances or any indebtedness for borrowed
money, or any other indebtedness or liability evidenced by notes, bonds,
debentures or similar obligations or any Capitalized Lease Obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness or Capitalized Lease Obligations of the Borrower or
any Subsidiary in existence on the date hereof and listed in Exhibit C
hereto; and
(c) indebtedness or Capitalized Lease Obligations relating to liens
permitted in accordance with Section 7.1(c) hereof, so long as the
total aggregate amount of all such indebtedness and Capitalized Lease
Obligations (whether payable currently or in the future) outstanding at
any time does not exceed $200,000; and
(d) indebtedness of any Subsidiary to the Lender or any affiliate of
the Lender, so long as the total aggregate amount of all such
indebtedness of all such Subsidiaries to the Lender and all of its
Affiliates outstanding at any time does not exceed $2,300,000.
Section 7.3 Guaranties. The Borrower will not and will not permit any Subsidiary
to assume, guarantee, endorse or otherwise become directly or contingently
liable in connection with any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower or any
Subsidiary for deposit or collection or similar transactions in the
ordinary course of business; and
(b) guaranties, endorsements and other direct or contingent liabilities
in connection with the obligations of other Persons in existence on the
date hereof and listed in Exhibit C hereto.
Section 7.4 Investments and Subsidiaries.
(a) The Borrower will not and will not permit any Subsidiary to
purchase or hold beneficially any stock or other securities or
evidences of indebtedness of, make or permit to exist any loans or
advances to, or make any investment or acquire any interest whatsoever
in, any other Person, including specifically but without limitation any
partnership or joint venture, except:
(1) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose
obligations constitute full faith and credit obligations of
the United States of America having a maturity of one year or
less, commercial paper issued by U.S. corporations rated "A-l"
or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by
Moody's Investors Service or certificates of deposit or
bankers' acceptances having a maturity of one year or less
issued by members of the Federal Reserve System having
deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the
Federal Deposit Insurance Corporation);
(2) travel advances or loans to officers and employees of the
Borrower not exceeding at any one time an aggregate of
$10,000; and
(3) advances in the form of progress payments, prepaid rent or
security deposits.
(b) The Borrower will not create or permit to exist any Subsidiary,
other than any Subsidiary in existence on the date hereof and listed in
Exhibit B hereto.
Section 7.5 Dividends. Except as permitted in Section 7.18 hereof, the Borrower
will not declare or pay any dividends (other than dividends payable solely in
stock of the Borrower) on any class of its stock or make any payment on account
of the purchase, redemption or other retirement of any shares of such stock or
make any distribution in respect thereof, either directly or indirectly.
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations. The
Borrower will not and will not permit any Subsidiary to sell, lease, assign,
transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a
substantial part of its assets, or (iii) any Collateral or any interest therein
(whether in one transaction or in a series of transactions) to any other Person
other than the sale of Inventory in the ordinary course of business. The
Borrower will not and will not permit any Subsidiary to liquidate, dissolve or
suspend business operations. The Borrower will not and will not permit any
Subsidiary to in any manner transfer any property without prior or present
receipt of full and adequate consideration.
Section 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower will not
and will not permit any Subsidiary to consolidate with or merge into any Person,
or permit any other Person to merge into it, or acquire (in a transaction
analogous in purpose or effect to a consolidation or merger) all or
substantially all the assets of any other Person other than the Merger, and the
Acquisition contemplated by the Acquisition Documents. The Lender agrees that so
long as no Default or Event of Default has occurred, its consent to any
consolidation, merger or acquisition described in this Section 7.7 shall not be
unreasonably withheld.
Section 7.8 Sale and Leaseback. The Borrower will not and will not permit any
Subsidiary to enter into any arrangement, directly or indirectly, with any other
Person whereby the Borrower or such Subsidiary shall sell or transfer any real
or personal property owned by the Borrower as of the date hereof, and then or
thereafter rent or lease as lessee such property or any part thereof or any
other property which the Borrower or such Subsidiary intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 Restrictions on Nature of Business. The Borrower will not and will
not permit any Subsidiary to engage in any line of business materially different
from that presently engaged in by the Borrower or such Subsidiary and will not
purchase, lease or otherwise acquire assets not related to its business.
Section 7.10 Intentionally Omitted.
Section 7.11 Accounting. The Borrower will not and will not permit any
Subsidiary to adopt any material change in accounting principles other than as
required by generally accepted accounting principles. The Borrower will not and
will not permit any Subsidiary to adopt, permit or consent to any change in its
fiscal year.
Section 7.12 Discounts, etc. The Borrower will not and will not permit any
Subsidiary to, after notice from the Lender (which may only be given if a
Default or an Event of Default has occurred and continues to exist), grant any
discount, credit or allowance to any customer of the Borrower or accept any
return of goods sold, or at any time (whether before after notice from the
Lender) modify, amend, subordinate, cancel or terminate the obligation of any
account debtor or other obligor of the Borrower or such Subsidiary.
Section 7.13 Defined Benefit Pension Plans. The Borrower will not and will not
permit any Subsidiary to adopt, create, assume or become a party to any defined
benefit pension plan.
Section 7.14 Other Defaults. The Borrower will not and will not permit any
Subsidiary to permit any breach, default or event of default to occur under any
note, loan agreement, indenture, lease, mortgage, contract for deed, security
agreement or other contractual obligation binding upon the Borrower or such
Subsidiary.
Section 7.15 Place of Business; Name. The Borrower will not transfer its chief
executive office or principal place of business, or move, relocate, close or
sell any business location; provided that, the Borrower may move, relocate or
close any business location (i) upon thirty (30) days prior written notice to
the Lender, and (ii) upon delivery to the Lender of such documents, instruments
and agreements as the Lender may require. The Borrower will not permit any
tangible Collateral or any records pertaining to the Collateral to be located in
any state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interests. The Borrower will not change
its name.
Section 7.16 Organizational Documents; S Corporation Status. The Borrower will
not and will not permit any Subsidiary to amend its certificate of
incorporation, articles of incorporation or bylaws. The Borrower will not and
will not permit any Subsidiary to become an S Corporation within the meaning of
the Internal Revenue Code of 1986, as amended.
Section 7.17 Salaries; Management Fees. The Borrower will not and will not
permit any Subsidiary to pay excessive or unreasonable salaries, bonuses,
commissions, consultant fees or other compensation; or increase the salary,
bonus, commissions, consultant fees or other compensation of any director,
officer or consultant who is also a shareholder of the Guarantor, or any member
of their families, by more than ten percent (10%) in any one year, either
individually or for all such persons in the aggregate, or pay any such increase
from any source other than profits earned in the year of payment. Without
limiting the generality of the foregoing, the Lender agrees that if the
Borrower's or any Affiliate's board of directors approves a bonus or other
compensation plan for officers and key employees of the Borrower or any
Affiliate and submits such plan to the Lender, the Lender's consent to payments
under such plan in excess of the limitations set forth in this Section 7.17
shall not be unreasonably withheld so long as no Default or Event of Default has
occurred.
Section 7.18 Upstreamed Cash. The Borrower will not (calculated on a
consolidated basis for the Borrower and its Subsidiaries) pay, transfer or give
credit for Upstreamed Cash during any of the following periods in an amount
greater than the lesser of (i) the maximum amount which could be paid,
transferred or credited to the Guarantor from the Borrower and its Subsidiaries
without causing a violation of the Debt Service Coverage Ratio set forth in
Section 6.11 hereof; or (ii) the amount set forth below:
For the fiscal quarter ending: Upstreamed Cash
----------------------------- ---------------
September 30, 1995 $ 800,000
December 31, 1995 $ 900,000
March 31, 1996 $ 950,000
June 30, 1996 $1,000,000
September 30, 1996 $ 900,000
December 31, 1996 $ 500,000
all quarters thereafter $ 250,000
Notwithstanding the foregoing, following the occurrence of a Default or an Event
of Default, the Borrower will not pay, transfer or give credit for any
Upstreamed Cash.
Section 7.19 Change in Ownership. The Borrower will not issue or sell any stock
of the Borrower so as to change the percentage of voting and nonvoting stock
owned by each of the Borrower's shareholders, and the Borrower will not permit
or suffer to occur the sale, transfer, assignment, pledge or other disposition
of any or all of the issued and outstanding stock of the Borrower.
Section 7.20 Payment under Debt Subordination Agreement. If a Default or an
Event of Default has occurred or will occur as a result of any such payment, or
if the Borrower or the Guarantor has completed an initial public offering of the
Borrower's or the Guarantor's common stock by June 30, 1996 at an initial
offering price of at least $5.00 per share, the Borrower will not pay the
$100,000 to either John J. Baggett or Tony W. Baggett necessary to make the Debt
Subordination Agreement executed by John J. Baggett and Tony W. Baggett in favor
of the Lender effective pursuant to Paragraph 17 of said agreement.
Section 7.21 Payment under Release Notes. The Borrower will not prepay any of
the Release Notes. If a Default or an Event of Default has occurred or would
occur as a result of such payment, the Borrower will not make any payments
(whether of principal, interest or otherwise) under the Release Notes.
ARTICLE VIII.
Events of Default, Rights and Remedies
Section 8.1 Events of Default. "Event of Default," wherever used herein, means
any one of the following events:
(a) Default in the payment of any interest on or principal of the Note
when it becomes due and payable; or
(b) Default in the payment of any fees, commissions, costs or expenses
required to be paid by the Borrower under this Agreement; or
(c) Default in the performance, or breach, of any covenant or agreement
of the Borrower contained in this Agreement or of the Guarantor
contained in the Guarantor Documents or of any Subsidiary or other
Affiliate contained in any document, instrument or agreement now or
hereafter entered into by such Subsidiary or other Affiliate with the
Lender or any affiliate of the Lender; or
(d) The Borrower or any Affiliate shall be or become insolvent, or
admit in writing its inability to pay its or his debts as they mature,
or make an assignment for the benefit of creditors; or the Borrower or
any Affiliate shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent
of the Borrower or such Affiliate, as the case may be; or the Borrower
or any Affiliate shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it or him under the laws of any jurisdiction; or
any such proceeding shall be instituted (by petition, application or
otherwise) against the Borrower or any Affiliate; or any judgment,
writ, warrant of attachment, garnishment or execution or similar
process shall be issued or levied against a substantial part of the
property of the Borrower or any Affiliate; or
(e) A petition shall be filed by or against the Borrower or any
Affiliate under the United States Bankruptcy Code naming the Borrower
as debtor; or
(f) Any representation or warranty made by the Borrower in this
Agreement or by the Guarantor in any Guarantor Document, or in any
agreement, certificate, instrument or financial statement or other
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement or any Guarantor Document shall prove to
have been incorrect in any material respect when deemed to be
effective; or
(g) The rendering against the Borrower or any Affiliate of a final
judgment, decree or order for the payment of money in excess of $25,000
and the continuance of such judgment, decree or order unsatisfied and
in effect for any period of 30 consecutive days without a stay of
execution; or
(h) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower or any Affiliate owed to any Person other
than the Lender or under any indenture or other instrument under which
any such evidence of indebtedness has been issued or by which it is
governed, or under any lease of any of the Premises, and the expiration
of the applicable period of grace, if any, specified in such evidence
of indebtedness, indenture, other instrument or lease; or
(i) Any Reportable Event with respect to the Borrower or any Affiliate,
which the Lender determines in good faith might constitute grounds for
the termination of any Plan or plan, as the case may be, or for the
appointment by the appropriate United States District Court of a
trustee to administer any Plan or plan, as the case may be, shall have
occurred and be continuing 30 days after written notice to such effect
shall have been given to the Borrower or such Affiliate by the Lender;
or a trustee shall have been appointed by an appropriate United States
District Court to administer any Plan, or plan, as the case may be; or
the Pension Benefit Guaranty Corporation shall have instituted
proceedings to terminate any Plan or plan, as the case may be, or to
appoint a trustee to administer any Plan or plan, as the case may be;
or the Borrower or any Affiliate shall have filed for a distress
termination of any Plan or plan, as the case may be, under Title IV of
ERISA; or the Borrower or any Affiliate shall have failed to make any
quarterly contribution required with respect to any Plan or plan, as
the case may be, under Section 412(m) of the Internal Revenue Code of
1986, as amended, which the Lender determines in good faith may by
itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition
of a lien on the assets of the Borrower or such Affiliate in favor of
the Plan or plan, as the case may be; or
(j) An event of default shall occur under any Loan Document or under
any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower
hereunder or under any note payable to the order of the Lender; or
(k) The Borrower or any Affiliate shall liquidate, dissolve, terminate
or suspend its business operations or otherwise fail to operate its
business in the ordinary course, or sell all or substantially all of
its assets, without the prior written consent of the Lender; or
(l) The Borrower or any Affiliate shall fail to pay, withhold, collect
or remit any tax or tax deficiency when assessed or due (other than any
tax deficiency which is being contested in good faith and by proper
proceedings and for which it shall have set aside on its books adequate
reserves therefor) or notice of any state or federal tax liens shall be
filed or issued; or
(m) Default in the payment of any amount owed by the Borrower to the
Lender other than any indebtedness arising hereunder; or
(n) Any breach, default or event of default by or attributable to any
Affiliate under any agreement executed in connection herewith or in any
agreement executed in connection with any financial accommodation
between such Affiliate or any Affiliate and the Lender; or
(o) Any Guarantor shall repudiate, purport to revoke or fail to perform
any such Guarantor's obligations under such Guarantor's Guaranty in
favor of the Lender, any individual Guarantor shall die or any other
Guarantor shall cease to exist; or
(p) Any Person shall own or control, directly or indirectly, more than
35% of the issued and outstanding voting stock of the Guarantor.
(q) Jeffery E. Otto shall fail to serve as Chief Executive Officer of
the Guarantor and as President of the Borrower.
(r) The Guarantor shall be in payment default under any of the Release
Notes.
Section 8.2 Rights and Remedies. Upon the occurrence of an Event of Default or
at any time thereafter, the Lender may exercise any or all of the following
rights and remedies:
(a) The Lender may, by notice to the Borrower, declare the Advancing
Term Loan Facility to be terminated, whereupon the same shall forthwith
terminate;
(b) The Lender may, by notice to the Borrower, declare to be forthwith
due and payable the entire unpaid principal amount of the Note then
outstanding, all interest accrued and unpaid thereon, all amounts
payable under this Agreement and any other Obligations, whereupon the
Note, all such accrued interest and all such amounts and Obligations
shall become and be forthwith due and payable, without presentment,
notice of dishonor, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower;
(c) The Lender may, without notice to the Borrower and without further
action, apply any and all money owing by the Lender to the Borrower,
including without limitation any funds on deposit with the Lender,
whether or not matured, to the payment of the Advances, including
interest accrued thereon, and of all other sums then owing by the
Borrower hereunder;
(d) The Lender may, exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (without a prior hearing or notice
thereof, which the Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and,
in connection therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both
parties;
(e) the Lender may exercise and enforce its rights and remedies under
the Loan Documents and under the Guarantor Documents; and
(f) the Lender may exercise any other rights and remedies available to
it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 8.1(e) hereof, the entire unpaid principal amount of the
Note (whether contingent or funded), all interest accrued and unpaid thereon,
all other amounts payable under this Agreement and any other Obligations shall
be immediately due and payable automatically without presentment, demand,
protest or notice of any kind.
Section 8.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten calendar days prior
to the date of intended disposition or other action.
ARTICLE IX.
Miscellaneous
Section 9.1 No Waiver; Cumulative Remedies. No failure or delay on the part of
the Lender in exercising any right, power or remedy under the Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy under the Loan Documents.
The remedies provided in the Loan Documents are cumulative and not exclusive of
any remedies provided by law.
Section 9.2 Amendments, Etc. No amendment, modification, termination or waiver
of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 Addresses for Notices, Etc. Except as otherwise expressly provided
herein, all notices, requests, demands and other communications provided for
under the Loan Documents shall be in writing and shall be (a) personally
delivered, (b) sent by first class United States mail, (c) sent by overnight
courier of national reputation, or (d) transmitted by telecopy, in each case
addressed to the party to whom notice is being given at its address as set forth
below and, if telecopied, transmitted to that party at its telecopier number set
forth below:
If to the Borrower:
PRANA Holdings, Inc.
2665 Long Lake Road, Suite 120
Roseville, MN 55113
Telecopier: (612) 635-0680
Attention: Tom Schreier
If to the Lender:
Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0089
Telecopier: (612) 667-7266
Attention: Heidi H. Samuels
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) three (3) days after being
deposited in the mail if delivered by mail, (c) one (1) day after the date sent
if sent by overnight courier, or (d) the date of transmission if delivered by
telecopy, except that notices or requests to the Lender pursuant to any of the
provisions of Article II hereof shall not be effective until received by the
Lender.
Section 9.4 Financing Statement. A carbon, photographic or other reproduction of
this Agreement or of any financing statements signed by the Borrower is
sufficient as a financing statement and may be filed as a financing statement in
any state to perfect the security interests granted hereby. For this purpose,
the following information is set forth:
Name and address of Debtor:
PRANA Holdings, Inc.
2665 Long Lake Road, Suite 120
Roseville, MN 55113
Federal Tax Identification No. 41-1815904
Name and address of Secured Party:
Norwest Bank Minnesota, National Association
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479-0089
Section 9.5 Further Documents. The Borrower will from time to time execute and
deliver or endorse any and all instruments, documents, conveyances, assignments,
security agreements, financing statements and other agreements and writings that
the Lender may reasonably request in order to secure, protect, perfect or
enforce the Security Interests or the rights of the Lender under this Agreement
(but any failure to request or assure that the Borrower executes, delivers or
endorses any such item shall not affect or impair the validity, sufficiency or
enforceability of this Agreement and the Security Interests, regardless of
whether any such item was or was not executed, delivered or endorsed in a
similar context or on a prior occasion).
Section 9.6 Collateral. This Agreement does not contemplate a sale of accounts,
contract rights or chattel paper, and, as provided by law, the Borrower is
entitled to any surplus and shall remain liable for any deficiency. The Lender's
duty of care with respect to Collateral in its possession (as imposed by law)
shall be deemed fulfilled if it exercises reasonable care in physically keeping
such Collateral, or in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and the Lender need not otherwise preserve,
protect, insure or care for any Collateral. The Lender shall not be obligated to
preserve any rights the Borrower may have against prior parties, to realize on
the Collateral at all or in any particular manner or order or to apply any cash
proceeds of the Collateral in any particular order of application.
Section 9.7 Costs and Expenses. The Borrower agrees to pay on demand all costs
and expenses, including (without limitation) attorneys' fees, incurred by the
Lender in connection with the Obligations, this Agreement, the Loan Documents,
the Guarantor Documents, and any other document or agreement related hereto or
thereto, and the transactions contemplated hereby, including without limitation
all such reasonable costs, expenses and fees incurred in connection with the
negotiation, preparation, execution, amendment and administration of the Loan
Documents, the Guarantor Documents, and all such documents and agreements and
the creation and perfection of the Security Interests and all such costs,
expenses and fees incurred in connection with the performance, collection and
enforcement of the Obligations and all such documents and agreements and the
protection, satisfaction, foreclosure or enforcement of the Security Interests
or any security interest granted by the Guarantor Documents.
Section 9.8 Indemnity. In addition to the payment of expenses pursuant to
Section 9.7 hereof and the environmental indemnity pursuant to Section 6.4
hereof, the Borrower agrees to indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees and agents of the foregoing (the "Indemnitees"),
from and against (i) any and all transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the execution and
delivery of this Agreement and the other Loan Documents or the Guarantor
Documents, or the making of the Advances and (ii) any and all liabilities,
losses, damages, penalties, judgments, suits, claims, costs and expenses of any
kind or nature whatsoever (including, without limitation, the reasonable fees
and disbursements of counsel) in connection with any investigative,
administrative or judicial proceedings, whether or not such Indemnitee shall be
designated a party thereto, which may be imposed on, incurred by or asserted
against such Indemnitee, in any manner relating to or arising out of or in
connection with the making of the Advances, this Agreement, all other Loan
Documents or the Guarantor Documents, or the use or intended use of the proceeds
of the Advances; provided, however, that Indemnitees shall not be entitled to
any indemnification pursuant to this Section 9.8 if such liabilities, losses,
damage, penalties, judgments, suits, claims, costs or expense arise solely as a
result of the gross negligence of an Indemnitee (the "Indemnified Liabilities").
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon request of such
Indemnitee, the Borrower, or counsel designated by the Borrower and reasonably
satisfactory to the Indemnitee, will resist and defend such action, suit or
proceeding to the extent and in the manner directed by the Indemnitee, at the
Borrower's sole cost and expense. Each Indemnitee will use its best efforts to
cooperate in the defense of any such action, suit or proceeding. If the
foregoing undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the Borrower shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
The obligation of the Borrower under this Section 9.8 shall survive the
termination of this Agreement and the discharge of the Borrower's other
Obligations.
Section 9.9 Participants. The Lender and its participants, if any, are not
partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the participants, successors or assigns of the Lender.
Section 9.10 Execution in Counterparts. This Agreement and other Loan Documents
may be executed in any number of counterparts, each of which when so executed
and delivered shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same instrument.
Section 9.11 Binding Effect; Assignment; Complete Agreement. The Loan Documents
shall be binding upon and inure to the benefit of the Borrower and the Lender
and their respective successors and assigns, except that the Borrower shall not
have the right to assign its rights thereunder or any interest therein without
the prior written consent of the Lender. This Agreement, together with the Loan
Documents, comprises the complete and integrated agreement of the parties on the
subject matter hereof and supersedes all prior agreements, written or oral, on
the subject matter hereof.
Section 9.12 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan
Documents shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Minnesota. Each party consents
to the personal jurisdiction of the state and federal courts located in the
State of Minnesota in connection with any controversy related to this Agreement,
waives any argument that venue in any such forum is not convenient and agrees
that any litigation initiated by any of them in connection with this Agreement
shall be venued in either the District Court of Hennepin County, Minnesota, or
the United States District Court, District of Minnesota, Fourth Division. The
parties waive any right to trial by jury in any action or proceeding based on or
pertaining to this Agreement.
Section 9.13 Severability of Provisions. Any provision of this Agreement which
is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
Section 9.14 Headings. Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized as of the date first
above written.
PRANA HOLDINGS, INC.
By:
Jeffery E. Otto
Its: President
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION
By:
Its:
Exhibit A to Term Loan and
Security Agreement
ADVANCING TERM NOTE
$2,600,000.00 Minneapolis, Minnesota
August ___, 1995
For value received, the undersigned, PRANA Holdings, Inc., a Minnesota
corporation (the "Borrower"), hereby promises to pay on February 28, 1998 to the
order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking
association (the "Lender"), at its main office in Minneapolis, Minnesota, or at
any other place designated at any time by the holder hereof, in lawful money of
the United States of America and in immediately available funds, the principal
sum of TWO MILLION SIX HUNDRED THOUSAND AND NO/100 DOLLARS ($2,600,000.00), or,
if less, the aggregate unpaid amount of all principal advances made by the
Lender to the Borrower hereunder, together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the Term
Loan and Security Agreement of even date herewith (the "Credit Agreement") by
and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof. This Note is the Note
referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit Agreement, and
may now or hereafter be secured by one or more other security agreements,
mortgages, deeds of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including attorneys'
fees and legal expenses in the event this Note is not paid when due, whether or
not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
PRANA HOLDINGS, INC.
By:
Jeffery E. Otto
Its: President
Exhibit B to Term Loan and
Security Agreement
Names
PRANA Holdings, Inc.
Chief Executive Office/Principal Place of Business
2665 Long Lake Road, Suite 120
Roseville, Minnesota 55113
Other Inventory and Equipment Locations
NONE
Subsidiaries
BVS, Inc.
Pallet Exchange of Kansas City, Inc.
Otto Packaging, Inc.
Harris Supply Company, Inc.
Harris Supply Company of Georgia, Inc.
Quality Pallet, Inc.
Hurt's Pallet & Sales, Inc.
Pallet Source, Inc.
Pallet City, Inc.
PRANA Oklahoma City, Inc.
PRANA Denver, Inc.
B&B Pallet Supply Company
Pallet Supply Co., Inc.
Exhibit C to Term Loan and
Security Agreement
Permitted Liens, Indebtedness and Guaranties
Liens
See attached.
Indebtedness
See attached.
Guaranties
NONE
Exhibit D to Term Loan and
Security Agreement
COMPLIANCE CERTIFICATE
In accordance with our Term Loan and Security Agreement dated as of August ___,
1995 (the "Credit Agreement"), attached are the financial statements of PRANA
Holdings, Inc. (the "Borrower") as of and for the month and year-to-date period
ended __________, 199___ (the "Current Financials").
I certify that the Current Financials have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with the
accounting practices reflected in the financial statements referred to in
Section 5.5 of the Credit Agreement, subject to year-end audit adjustments.
Defaults and Events of Default (check one)
|_| I have no knowledge of the occurrence of any Default or
Event of Default under the Credit Agreement which has not
previously been reported to you and remedied.
|_| Attached is a detailed description of all Defaults and
Events of Default of which I have knowledge and which have
not previously been reported to you and remedied.
For the date and periods covered by the Current Financials, the Borrower is in
compliance with the covenants set forth in Sections 6.11, 6.12 and 7.18 of the
Credit Agreement, except as indicated below. The calculations made to determine
compliance are as follows:
Covenant Actual Requirement
6.11) Debt Service Coverage Ratio ____ to ____ 1.3 to 1.0
6.12) Book Net Worth $________ $5,300,000
7.18) Upstreamed Cash $_______________ Maximum $_______
______________________________________,
_______________ of PRANA Holdings, Inc.
Exhibit E to Term Loan and
Security Agreement
COPYRIGHTS, PATENTS AND TRADEMARKS
NONE
Exhibit F to Credit and
Security Agreement
PLANS
Harris Supply Company, Inc. has an SEP/IRA which is for certain qualified
employees. It will be terminated on or before December 31, 1995.
Exhibit G to Credit and
Security Agreement
STOCK OWNERSHIP OF THE GUARANTOR
See attached.
FIRST AMENDMENT TO TERM LOAN AND SECURITY AGREEMENT
This Amendment is made as of the ____ day of _____________, 1996 by and between
PRANA Holdings, Inc., a Minnesota corporation (the "Borrower"), and Norwest Bank
Minnesota, National Association, a national banking association (the "Lender").
Recitals
The Borrower and the Lender have entered into the Term Loan and Security
Agreement dated as of August 8, 1995 (the "Credit Agreement").
The Lender has agreed to make certain term loan advances to the Borrower
pursuant to the terms and conditions set forth in the Credit Agreement.
The loan advances under the Credit Agreement are evidenced by the Borrower's
advancing term note dated as of August 8, 1995, in the maximum principal amount
of $2,600,000 and payable to the order of the Lender (the "Note").
All indebtedness of the Borrower to the Lender is secured pursuant to the terms
of the Credit Agreement and all other Loan Documents as defined therein
(collectively, the "Security Documents") and is guaranteed and secured pursuant
to the unconditional guaranty of the Guarantor and the other "Guarantor
Documents" defined therein (collectively, the "Guarantor").
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:
1. Terms used in this Amendment which are defined in the Credit Agreement shall
have the same meanings as defined therein, unless otherwise defined herein.
2. The Credit Agreement is hereby amended as follows:
(a) Section 2.1(b) of the Credit Agreement is hereby amended to
delete the reference to "Section 4.2(2)" therefrom and to
substitute the reference to "Section 4.2" therefor.
(b) Section 2.3(b) of the Credit Agreement is hereby amended to
add the phrase "at the Accrual Rate" after the word "monthly"
and before the word "and" in the second sentence thereof.
(c) Section 2.11(a) of the Credit Agreement is hereby amended to
delete the numeral "$25,190" therefrom and to substitute the
numeral "$26,000" therefor.
(d) Section 6.12 of the Credit Agreement is hereby amended in its
entirety to read as follows:
Section 6.12 Book Net Worth. The Borrower shall at
all times maintain (calculated on a consolidated
basis for the Borrower and its subsidiaries) Book Net
Worth calculated monthly of at least the following
amounts as of the following dates:
As of Book Net Worth
08/31/95 $4,000,000
09/30/95 4,100,000
10/31/95 4,350,000
11/30/95 4,450,000
12/31/95 4,275,000
01/31/96 4,325,000
As of each month end after January 31, 1996,
commencing with the month ending February 29, 1996,
the minimum Book Net Worth covenant shall be
increased by $50,000 over the covenant level for the
previous month. For example, the minimum Book Net
Worth covenant for February 29, 1996 shall be
$4,375,000, for March 31, 1996 shall be $4,425,000,
etc.
(e) Section 7.2(d) of the Credit Agreement is hereby amended in
its entirety to read as follows:
(d) Revolving and Term Indebtedness of Otto
Packaging, Inc., B.V.S., Inc., Quality Pallet, Inc.
and Pallet Supply Co., Inc. to Norwest Credit, Inc.
in the following maximum aggregate amounts:
Company Revolving Note Term Note
Otto Packaging, Inc. $300,000 $ 228,000
B.V.S., Inc. $400,000 $ 209,000
Quality Pallet, Inc. $400,000 $ 123,000
Pallet Supply Co., Inc. $750,000 $ 748,000
TOTAL, REVOLVING NOTES AND
TERM NOTES LISTED ABOVE $3,158,000
So long as the proceeds of such indebtedness are
applied as follows:
(i) no more than $2,542,000 of the proceeds of
such indebtedness may be used by the
Subsidiary incurring such indebtedness to
refinance existing indebtedness of such
Subsidiary;
(ii) no more than $616,000 of the proceeds of
such indebtedness may be used by the
Subsidiary incurring such indebtedness to
fund the working capital growth needs at
such Subsidiary; and
(iii) no more than $300,000 of the proceeds of
such indebtedness may be paid upstream by
the Subsidiary incurring such indebtedness
to the Borrower for the purpose of funding
acquisitions by the Borrower (whether
directly by the Borrower or through any
present or future Subsidiary of the
Borrower), provided that no more than
$25,000 of the proceeds of such indebtedness
may be expended by the Borrower in
connection with any single acquisition.
3. Except as explicitly amended by this Amendment, all of the terms and
conditions of the Credit Agreement shall remain in full force and effect and
shall apply to any advance thereunder.
4. This Amendment shall be effective upon receipt by the Lender of an executed
original hereof, together with each of the following, each in substance and form
acceptable to the Lender in its sole discretion:
(a) The Acknowledgement and Agreement of Guarantors set forth at the
end of this Amendment, duly executed by each of the Guarantors.
(b) Certificate of the President of the Borrower certifying as to (i)
the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the
Articles of Incorporation and Bylaws of the Borrower, which were
certified and delivered to the Lender pursuant to the Certificate of
the Borrower's President dated as of August 8, 1995 in connection with
the execution and delivery of the Credit Agreement, continue in full
force and effect and have not been amended or otherwise modified except
as set forth in the Certificate to be delivered, and (iii) certifying
that the officers and agents of the Borrower who have been certified to
the Lender, pursuant to the Certificate of the Borrower's President
dated as of August 8, 1995, as being authorized to sign and to act on
behalf of the Borrower continue to be so authorized or setting forth
the sample signatures of each of the officers and agents of the
Borrower authorized to execute and deliver this Amendment and all other
documents, agreements and certificates on behalf of the Borrower.
(c) Opinion of the Borrower's counsel as to the matters set forth in
paragraphs 5(a) and (b) hereof and as to such other matters as the
Lender shall require.
5. The Borrower hereby represents and warrants to the Lender as follows:
(a) The Borrower has requisite power and authority to execute this
Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action
and do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the
articles of incorporation or by-laws of the Borrower, or (iii) result
in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound
or affected.
(c) All of the representations and warranties contained in Article V of
the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
6. All references in the Credit Agreement to "this Agreement" shall be deemed to
refer to the Credit Agreement as amended hereby; and any and all references in
the Security Documents to the Credit Agreement shall be deemed to refer to the
Credit Agreement as amended hereby.
7. The execution of this Amendment and acceptance of any documents related
hereto shall not be deemed to be a waiver of any Default or Event of Default
under the Credit Agreement or breach, default or event of default under any
Security Document or other document held by the Lender, whether or not known to
the Lender and whether or not existing on the date of this Amendment.
8. The Borrower hereby absolutely and unconditionally releases and forever
discharges the Lender, and any and all participants, parent corporations,
subsidiary corporations, affiliated corporations, insurers, indemnitors,
successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and
all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has made claim
to have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including
the date of this Amendment, whether such claims, demands and causes of action
are matured or unmatured or known or unknown.
9. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay
or reimburse the Lender on demand for all costs and expenses incurred by the
Lender in connection with the Credit Agreement, the Security Documents and all
other documents contemplated thereby, including without limitation all
reasonable fees and disbursements of legal counsel. Without limiting the
generality of the foregoing, the Borrower specifically agrees to pay all fees
and disbursements of counsel to the Lender for the services performed by such
counsel in connection with the preparation of this Amendment and the documents
and instruments incidental hereto. The Borrower hereby agrees that the Lender
may, at any time or from time to time in its sole discretion and without further
authorization by the Borrower, make a loan to the Borrower under the Credit
Agreement, or apply the proceeds of any loan, for the purpose of paying any such
fees, disbursements, costs and expenses and the fee required under paragraph 4
hereof.
10. This Amendment and the Acknowledgment and Agreement of Guarantors may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed an original and all of which counterparts, taken
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
PRANA HOLDINGS, INC.
By: ___________________________________
Jeffery E. Otto
Its: President
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: ___________________________________
Heidi H. Samuels
Its: Assistant Vice President
ACKNOWLEDGEMENT AND AGREEMENT OF GUARANTORS
The undersigned, a guarantor of the indebtedness of PRANA Holdings, Inc. (the
"Borrower") to Norwest Bank Minnesota, National Association (the "Lender")
pursuant to a Guaranty by the Corporation dated as of August 8, 1995 (the
"Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii)
consents to the terms and execution thereof; (iii) reaffirms his or its
obligations to the Lender pursuant to the terms of his or its Guaranty; and (iv)
agrees that Section 7.2(d) of the Credit Agreement (which is incorporated into
the Guaranty by reference pursuant to Section 17 of the Guaranty) is amended in
the same manner that such Section is amended in the foregoing Amendment; and (v)
acknowledges that the Lender may amend, restate, extend, renew or otherwise
modify the Credit Agreement and any indebtedness or agreement of the Borrower,
or enter into any agreement or extent additional or other credit accommodations,
without notifying or obtaining the consent of the undersigned and without
impairing the liability of the undersigned under his or its Guaranty for all of
the present and future indebtedness of the Borrower to the Lender.
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC.
By: ________________________________
Jeffery E. Otto
Its: President
SECOND AMENDMENT TO TERM LOAN AND SECURITY AGREEMENT
This Amendment is made as of the ____ day of April, 1996 by and between PRANA
Holdings, Inc., a Minnesota corporation (the "Borrower"), and Norwest Bank
Minnesota, National Association, a national banking association (the "Lender").
Recitals
The Borrower and the Lender have entered into the Term Loan and Security
Agreement dated as of August 8, 1995, as amended by an Amendment dated as of
April 5, 1996 (as so amended, the "Credit Agreement").
The Lender has agreed to make certain term loan advances to the Borrower
pursuant to the terms and conditions set forth in the Credit Agreement.
The loan advances under the Credit Agreement are evidenced by the Borrower's
advancing term note dated as of August 8, 1995, in the maximum principal amount
of $2,600,000 and payable to the order of the Lender (the "Note").
All indebtedness of the Borrower to the Lender is secured pursuant to the terms
of the Credit Agreement and all other Loan Documents as defined therein
(collectively, the "Loan Documents") and is guaranteed pursuant to the
unconditional guaranty of the Guarantor defined therein (the "Guarantor").
The Borrower has requested that certain amendments be made to the Credit
Agreement and the Guaranty executed by the Guarantor, which the Lender is
willing to make pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:
1. Terms used in this Amendment which are defined in the Credit Agreement shall
have the same meanings as defined therein, unless otherwise defined herein.
2. The Credit Agreement is hereby amended as follows:
(a) The following definitions set forth in Section 1.1 of the
Credit Agreement are hereby amended in their entirety to read
as follows:
"Maturity Date" means the earlier of February 28, 1998 or one
year from the IPO Closing.
"Guarantor Documents" means the Guaranty, the Guarantor
Security Agreement, the Option to Purchase Warrant, the
Trademark Mortgage and the subsidiary security agreements as
the same may be amended from time to time.
(b) Section 1.1 of the Credit Agreement is hereby amended to add
the following definitions thereto:
"Bridge Loan" means the indebtedness of the Borrower in the
aggregate principal amount of $1,500,000 and more particularly
described on Exhibit G attached hereto.
"1995 Loan" means the indebtedness of the Borrower in the
aggregate principal amount of $1,706,000 and more particularly
described on Exhibit H attached hereto.
"Cash Flow" means Consolidated Operating Profit of
Subsidiaries minus Operating Expenses of Guarantor and
Borrower.
"IPO Closing" means the date of receipt by the Borrower of at
least $6,700,000 in net proceeds of an initial public
offering.
"Operating Expenses of Guarantor and Borrower" means, as of
any date of determination, the combined pre-tax net loss
before net interest expense and before gain or loss on the
sale of assets and other extraordinary items of the Guarantor
and the Borrower, all as determined in accordance with
generally accepted accounting principals, consistently
applied.
"Operating Profit of Subsidiaries" means the combined pre-tax
profit before net interest expense and before gain or loss on
the sale of assets and other extraordinary items of all
subsidiaries, all as determined in accordance with generally
accepted accounting principals, consistently applied.
"Guarantor Security Agreement" means the Third Party Security
Agreement executed by the Guarantor in favor of the Lender
with respect to the Obligations.
"Subsidiary Security Agreements" means the Third Party
Security Agreements executed by each of the Subsidiaries in
favor of the Lender with respect to the Obligations.
(c) The last sentence of Section 2.3(b) of the Credit Agreement is
hereby amended in its entirety to read as follows:
Interest accruing at the Accrual Rate on the principal balance
of the Advances outstanding from time to time shall be
compounded monthly at the Accrual Rate and shall be due and
payable on the earlier of (i) the Maturity Date, or (ii)
acceleration (pursuant to Section 8.2 hereof), or (iii) upon
prepayment in full, or (iv) at the option of the Lender, upon
the closing of a private placement of any of the Borrower's or
the Guarantor's stock or of securities convertible into or
exercisable for shares of stock, or (v) upon the closing of a
public offering of any of the Borrower's or the Guarantor's
stock or securities convertible into or exercisable for shares
of stock.
(d) Section 2.5(b) of the Credit Agreement is hereby amended by
deleting the last sentence thereof.
(e) Section 5.21 of this Credit Agreement is hereby deleted.
(f) Section 6.12 of the Credit Agreement is hereby deleted in its
entirety and the following is substituted therefore:
Section 6.12 Cash Flow. The Borrower will at all times
maintain (calculated on a consolidated basis for the Borrower,
the Guarantor and its subsidiaries) Cash Flow calculated
quarterly as of the last day for such fiscal quarter, using
actual results of such fiscal quarter, of at least the
following:
IF THE IPO
IF THE IPO CLOSING HAS
CLOSING HAS NOT OCCURRED
FOR THE FISCAL OCCURRED DURING DURING SUCH
QUARTER ENDING SUCH QUARTER QUARTER
June 30, 1996 $300,000 $425,000
September 30, 1996 N/A $600,000
December 31, 1996 N/A $800,000
(and thereafter)
(g) The Credit Agreement is hereby amended to add a new Section
6.19 thereto; which shall read as follows:
Section 6.19 Subsidiary Third Party Security Agreements. The
Borrower shall cause all present and future Subsidiaries to
execute and deliver to the Lender Third Party Security
Agreements in form and substance acceptable to the Lender, to
secure the Obligations; together with any and all UCC
Financing Statements which the Lender may require.
(h) Section 7.2 of the Credit Agreement is hereby amended in its
entirety to read as follows:
Section 7.2 Indebtedness. The Borrower will not and permit any
Subsidiary to incur, create, assume or permit to exist any
indebtedness or liability on account of deposits or advances
or any indebtedness for borrowed money, or any other
indebtedness or liability evidenced by notes, bonds,
debentures or similar obligations or any Capitalized Lease
Obligations, except:
(a) indebtedness arising hereunder; and
(b) indebtedness or Capitalized Lease Obligations of
the Borrower or any Subsidiary in existence on the
date hereof and listed in Exhibit C hereto.
(i) Section 8.1(q) of the Credit Agreement is hereby amended in
its entirety to read as follows:
(q) Any of the Borrower's existing officers shall fail to
serve in their capacity as an officer as of the date hereof.
(j) Section 8.1 is hereby amended to delete the "." from the end
of clauses (p) and (q) and to replace each "." with "; or".
(k) Section 8.1(r) of the Credit Agreement is hereby amended in
its entirety to read as follows:
(r) The Guarantor shall be in payment default under any
present or future indebtedness of the Guarantor
including, without limitation, the indebtedness
described on Exhibit B to the Guaranty.
(l) Section 8.1 is hereby amended to add a new subsection (s)
thereto, which shall read as follows:
(s) The IPO Closing shall not have occurred by July 31,
1996 with the Borrower receiving at least $6,700,000
in net proceeds thereof or, if the IPO Closing has
occurred by such date, the Guarantor shall have
failed to pay the following indebtedness in full out
of the proceeds of the IPO Closing: (i) the Bridge
Loan, (ii) the 1995 Loan, and (iii) payment of all
interest accrued at the Accrual Rate as of the date
of the IPO Closing; or
(m) Section 8.1 is hereby amended to add a new subsection (t)
thereto, which shall read as follows:
(t) The Borrower shall use the proceeds of the Bridge
Loan in any manner other than as follows: (i) at
least $750,000 of such proceeds shall be used for
acquisitions including, but not limited to, the
Borrower's proposed Metroplex acquisition, (ii) no
more than $90,000 of such proceeds shall be used to
pay fees and expenses incurred in connection with the
Bridge Loan, and (iii) no more than $660,000 of the
proceeds shall be used for general working capital
and expenses; or
(n) Section 8.1 is hereby amended to add a new subsection (u)
thereto, which shall read as follows:
(u) The Guarantor shall issue any shares of stock which
include "put" or "unwind" provisions.
(o) Exhibit B to the Credit Agreement is hereby replaced by the
Exhibit B attached hereto.
(p) Exhibit C to the Credit Agreement is hereby replaced by the
Exhibit C attached hereto.
(q) Exhibit D to the Credit Agreement is hereby replaced by the
Exhibit D attached hereto.
(r) Exhibit G to the Credit Agreement is hereby replaced by the
Exhibit G attached hereto.
(s) A new Exhibit H is hereby added to the Credit Agreement in the
form attached hereto.
3. Except as explicitly amended by this Amendment, all of the terms and
conditions of the Credit Agreement shall remain in full force and effect and
shall apply to any advance thereunder.
4. The Lender hereby consents to the following acquisitions by the Borrower:
(a) The acquisition by the Borrower of all of the issued and
outstanding stock of Diamond Pallet, Inc.
(b) The acquisition by PRANA Las Vegas, Inc., a wholly owned
subsidiary of the Borrower, of substantially all of the assets
of Bluelight Industries, Inc.
(c) The acquisition by merger of The Pallet Factory, Inc. so long
as (i) such acquisition is closed in accordance with the terms
and conditions of that certain agreement and plan of
reorganization dated as of September 28, 1995, by and between
the Guarantor, the Borrower, The Pallet Factory, Inc. and
Michael Doyle (except that the Borrower shall form PRANA of
Memphis, Inc. ("Memphis") a Minnesota corporation, as a
wholly-owned subsidiary of the Borrower, and Memphis, as
opposed to the Borrower, shall merge with The Pallet Factory,
Inc. with Memphis being the surviving corporation) (ii) the
Borrower delivers to the Lender the original stock
certificate(s) evidencing all of the issued and outstanding
shares of stock of Memphis, (iii) the Borrower executes and
delivers to the Lender a stock power in form and substance
acceptable to the Lender with respect to all such stock
certificate(s), (iv) Memphis executes and delivers to the
Lender a Third Party Security Agreement and one or more UCC-1
financing statements, all in form and substance acceptable to
the Lender, pursuant to which Memphis or such subsidiary
grants a security interest to the Lender on all of Memphis'
assets.
(d) The acquisition by merger of Indy Pallet Co., Inc. so long as
(i) such acquisition is closed in accordance with the terms
and conditions of that certain agreement and plan of
reorganization dated as of October 26, 1995, by and between
the Guarantor, the Borrower, Indy Pallet Co., Inc. and Patrick
Lovett (except that the Borrower shall form PRANA
Indianapolis, Inc. ("Indianapolis"), a Minnesota corporation,
as a wholly-owned subsidiary of the Borrower, and
Indianapolis, as opposed to the Borrower, shall merge with
Indy Pallet Co., Inc., with Indianapolis being the surviving
corporation), (ii) the Borrower delivers to the Lender the
original stock certificate(s) evidencing all of the issued and
outstanding shares of stock of Indianapolis, (iii) the
Borrower executes and delivers to the Lender a stock power in
form and substance acceptable to the Lender with respect to
all such stock certificate(s), (iv) Indianapolis executes and
delivers to the Lender a Third Party Security Agreement and
one or more UCC-1 financing statements, all in form and
substance acceptable to the Lender, pursuant to which
Indianapolis grants a security interest to the Lender on all
of Indianapolis' assets.
5. The Lender hereby consents to the incurrence of the following indebtedness by
the Guarantor:
(a) The 1995 Loan.
(b) The Bridge Loan
(c) The indebtedness of the Guarantor evidenced by that certain
Promissory Note dated March 20, 1996 executed by the Guarantor
and payable to the order of Tony W. Baggett in the original
principal amount of $40,941.
(d) The indebtedness of the Guarantor evidenced by that certain
Promissory Note dated March 20, 1996 executed by the Guarantor
and payable to the order of John J. Baggett in the original
principal amount of $40,941.
6. The Borrower agrees to pay the Lender as of the date hereof a fully earned,
non-refundable fee in the amount of $10,000 in consideration of the execution by
the Lender of this Amendment.
7. This Amendment shall be effective upon receipt by the Lender of an executed
original hereof, together with each of the following, each in substance and form
acceptable to the Lender in its sole discretion:
(a) The Acknowledgement and Agreement of Guarantor set forth at
the end of this Amendment, duly executed by each of the
Guarantor.
(b) Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower
approving the execution and delivery of this Amendment, (ii)
the fact that the Articles of Incorporation and Bylaws of the
Borrower, which were certified and delivered to the Lender
pursuant to the Certificate of the Borrower's Secretary dated
as of August 8, 1995 in connection with the execution and
delivery of the Credit Agreement continue in full force and
effect and have not been amended or otherwise modified except
as set forth in the Certificate to be delivered, and (iii)
certifying that the officers and agents of the Borrower who
have been certified to the Lender, pursuant to the Certificate
of the Borrower's Secretary dated as of August 8, 1995, as
being authorized to sign and to act on behalf of the Borrower
continue to be so authorized or setting forth the sample
signatures of each of the officers and agents of the Borrower
authorized to execute and deliver this Amendment and all other
documents, agreements and certificates on behalf of the
Borrower.
(c) Opinion of the Borrower's counsel as to the matters set forth
in paragraphs 8(a) and (b) hereof and as to such other matters
as the Lender shall require.
(d) Debt Subordination Agreements from all holders of the any
portion of the Bridge Loan with respect to the Borrower and
the Guarantor.
(e) Legended copies of all notes evidencing the any portion of the
Bridge Loan and the security agreements securing the any
portion of the Bridge Loan.
(f) A Third Party Security Agreement duly executed by the
Guarantor in favor of the Lender.
(g) UCC-1 Financing Statements duly executed by the Guarantor in
favor of the Lender with respect to the security interest
granted to the Lender by the Guarantor under the Third Party
Security Agreement executed by the Guarantor.
(h) An Amendment to Guaranty by Corporation duly executed by the
Guarantor.
(i) The original stock certificates evidencing all shares owned by
the Borrower in PRANA Las Vegas, Inc., Diamond Pallet, Inc.,
together with duly executed stock powers with respect to each
such certificate.
(j) Third Party Security Agreements duly executed by each
Subsidiary of the Borrower pursuant to which each such
Subsidiary grants the Lender a security interest on
substantially all of its assets to secure the Obligations (as
defined in the Credit Agreement).
(k) An Amendment to the Collateral Pledge Agreement duly executed
by the Borrower.
(l) Amendments to all UCC-1 Financing Statements previously
executed by the Borrower in favor of the Lender to add the
stock of the new Subsidiaries of the Borrower to the
description of the Collateral covered thereby.
(m) UCC-1 Financing Statements duly executed by each of the
Subsidiaries of the Borrower in connection with the Third
Party Security Agreement executed by such Subsidiary pursuant
to clause (j) above.
(n) A certificate of an officer of the Guarantor and each
Subsidiary of the Borrower, certifying as to (i) the
resolutions of the directors of each such corporation
authorizing the execution, delivery and performance of each
document referred to in this paragraph 7 and executed or to be
executed by such corporation; (ii) the articles of
incorporation and bylaws of each such corporation, and (iii)
the signatures of the officers or agents of each such
corporation authorize to execute and deliver the documents
referred to in paragraph 7 hereof and executed or to be
executed by such corporation and other instruments, agreements
and certificates on behalf of each such corporation.
(o) A release of put rights executed by John and Tony Baggett.
8. The Borrower hereby represents and warrants to the Lender as follows:
(a) The Borrower has requisite power and authority to execute this
Amendment and the other documents referred to in Paragraph 7 hereof and
executed or to be executed by the Borrower and to perform all of its
obligations hereunder, and this Amendment and the other documents
referred to in Paragraph 7 hereof and executed or to be executed by the
Borrower have been duly executed and delivered by the Borrower and
constitute the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment and the other documents referred to in Paragraph 7 hereof and
executed or to be executed by the Borrower have been duly authorized by
all necessary corporate action and do not (i) require any
authorization, consent or approval by any governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) violate any provision of any law, rule or regulation or
of any order, writ, injunction or decree presently in effect, having
applicability to the Borrower, or the articles of incorporation or
by-laws of the Borrower, or (iii) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other
agreement, lease or instrument to which the Borrower is a party or by
which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V of
the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
9. All references in the Credit Agreement to "this Agreement" shall be deemed to
refer to the Credit Agreement as amended hereby; and any and all references in
the Loan Documents to the Credit Agreement shall be deemed to refer to the
Credit Agreement as amended hereby. Upon satisfaction of each of the conditions
set forth in paragraph 7 hereof, all references to any of the Loan Documents in
the Credit Agreement or any of the Loan Documents shall be deemed to refer to
the Loan Documents as amended by any of the documents referred to in paragraph 7
hereof.
10. The Borrower hereby acknowledges that the Guarantor was in default of the
Book Net Worth Covenant as of December 31, 1995. The Lender hereby waives said
Event of Default. Except for the waiver set forth in the immediately preceding
sentence, the execution of this Amendment and acceptance of any documents
related hereto shall not be deemed to be a waiver of any Default or Event of
Default under the Credit Agreement or breach, default or event of default under
any Loan Document or other document held by the Lender, whether or not known to
the Lender and whether or not existing on the date of this Amendment.
11. The Borrower hereby absolutely and unconditionally releases and forever
discharges the Lender, and any and all participants, parent corporations,
subsidiary corporations, affiliated corporations, insurers, indemnitor,
successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and
all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has made claim
to have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including
the date of this Amendment, whether such claims, demands and causes of action
are matured or unmatured or known or unknown.
12. The Borrower hereby reaffirms its agreement under the Credit Agreement to
pay or reimburse the Lender on demand for all costs and expenses incurred by the
Lender in connection with the Credit Agreement, the Security Documents and all
other documents contemplated thereby, including without limitation all
reasonable fees and disbursements of legal counsel. Without limiting the
generality of the foregoing, the Borrower specifically agrees to pay all fees
and disbursements of counsel to the Lender for the services performed by such
counsel in connection with the preparation of this Amendment and the documents
and instruments incidental hereto. The Borrower hereby agrees that the Lender
may, at any time or from time to time in its sole discretion and without further
authorization by the Borrower, make a loan to the Borrower under the Credit
Agreement, or apply the proceeds of any loan, for the purpose of paying any such
fees, disbursements, costs and expenses and the fee required under paragraph 6
hereof.
13. This Amendment and the Acknowledgment and Agreement of Guarantors may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed an original and all of which counterparts, taken
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
PRANA HOLDINGS, INC.
By: ___________________________________
Its: _________________________________
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: ___________________________________
Its: _________________________________
ACKNOWLEDGEMENT AND AGREEMENT OF GUARANTOR
The undersigned, a guarantor of the indebtedness of PRANA Holdings, Inc. (the
"Borrower") to Norwest Bank Minnesota, National Association (the "Lender")
pursuant to a Guaranty by Corporation each dated as of August 8, 1995 as amended
by that certain Amendment to Guaranty of even date herewith (as so amended, the
"Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii)
consents to the terms and execution thereof; (iii) reaffirms his or its
obligations to the Lender pursuant to the terms of his or its Guaranty; and (iv)
acknowledges that the Lender may amend, restate, extend, renew or otherwise
modify the Credit Agreement and any indebtedness or agreement of the Borrower,
or enter into any agreement or extent additional or other credit accommodations,
without notifying or obtaining the consent of the undersigned and without
impairing the liability of the undersigned under his or its Guaranty for all of
the present and future indebtedness of the Borrower to the Lender.
PALLET RECYCLING ASSOCIATES
OF NORTH AMERICA, INC.
By: ___________________________________
Its: _________________________________
Exhibit B to Term Loan and
Security Agreement
Names
PRANA Holdings, Inc.
Chief Executive Office/Principal Place of Business
2665 Long Lake Road, Suite 120
Roseville, Minnesota 55113
Other Inventory and Equipment Locations
NONE
Subsidiaries
B.V.S., Inc.
Pallet Exchange of Kansas City, Inc.
Otto Packaging, Inc.
Harris Supply Company, Inc.
Harris Supply Company of Georgia, Inc.
Quality Pallet, Inc.
Hurt's Pallet & Sales, Inc.
Pallet Source, Inc.
Pallet City, Inc.
PRANA Oklahoma City, Inc.
PRANA Denver, Inc.
B&B Pallet Supply Company
Pallet Supply Co., Inc.
PRANA Las Vegas, Inc.
Diamond Pallet, Inc.
Exhibit C to Term Loan
Security Agreement
Permitted Liens, Indebtedness and Guaranties
Liens
TO BE REVISED BY BORROWER
Indebtedness
TO BE REVISED BY BORROWER
Guaranties
NONE
Exhibit D to Term Loan and
Security Agreement
COMPLIANCE CERTIFICATE
In accordance with our Term Loan and Security Agreement dated as of August ___,
1995 (the "Credit Agreement"), attached are the financial statements of PRANA
Holdings, Inc. (the "Borrower") as of and for the month and year-to-date period
ended __________, 199___ (the "Current Financials").
I certify that the Current Financials have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with the
accounting practices reflected in the financial statements referred to in
Section 5.5 of the Credit Agreement, subject to year-end audit adjustments.
Defaults and Events of Default (check one)
|_| I have no knowledge of the occurrence of any Default or
Event of Default under the Credit Agreement which has not
previously been reported to you and remedied.
|_| Attached is a detailed description of all Defaults and
Events of Default of which I have knowledge and which have
not previously been reported to you and remedied.
For the date and periods covered by the Current Financials, the Borrower is in
compliance with the covenants set forth in Sections 6.11, 6.12 and 7.18 of the
Credit Agreement, except as indicated below. The calculations made to determine
compliance are as follows:
Covenant Actual Requirement
6.11) Debt Service Coverage Ratio ____ to ____ 1.3 to 1.0
6.12) Cash Flow $________ $__________
7.18) Upstreamed Cash $_______________ Maximum $_______
______________________________________,
_______________ of PRANA Holdings, Inc.
Exhibit G to Term Loan and
Security Agreement
BRIDGE LOAN
NOTE DATED PAYABLE TO ORIGINAL PRINCIPAL AMOUNT
_______________ ____________________ $_______________
_______________ ____________________ $_______________
_______________ ____________________ $_______________
Total $_______________
Exhibit H to Term Loan and
Security Agreement
1995 LOAN
NOTE DATED PAYABLE TO ORIGINAL PRINCIPAL AMOUNT
_______________ ____________________ $_______________
_______________ ____________________ $_______________
_______________ ____________________ $_______________
Total $_______________
CREDIT AND SECURITY AGREEMENT
B.V.S., INC.
Dated as of October 30, 1995
B.V.S., Inc., an Arizona corporation (the "Borrower"), and Norwest
Credit, Inc., a Minnesota corporation (the "Lender"), hereby agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles.
"Accounts" means the aggregate unpaid obligations of customers and
other account debtors to the Borrower arising out of the sale or lease of goods
or rendition of services by the Borrower on an open account or deferred payment
basis.
"Advance" means an advance to the Borrower by the Lender under the
Credit Facility.
"Affiliate" or "Affiliates" means the Guarantors and any other Person
controlled by, controlling or under common control with the Borrower, including
(without limitation) any Subsidiary of the Borrower. For purposes of this
definition, "control," when used with respect to any specified Person, means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" means this Credit and Security Agreement.
"Availability" means, as of any date of determination, the Borrowing
Base minus the sum of the outstanding and unpaid Advances.
"Banking Day" means a day other than a Saturday on which banks are
generally open for business in Minneapolis, Minnesota.
"Base Rate" means the rate of interest publicly announced from time to
time by Norwest Bank Minnesota, National Association as its "base rate" or, if
such bank ceases to announce a rate so designated, any similar successor rate
designated by the Lender.
"Book Net Worth" means, as of the date of determination, Total Assets
minus Indebtedness.
"Borrowing Base" means, at any time and subject to change from time to
time in the Lender's sole discretion, the lesser of
(a) the Commitment, or
(b) the sum of
(i) 80% of Eligible Accounts, plus
(ii) the lesser of (A) 30% of Eligible Inventory
or (B) $75,000.
"Capital Expenditures" means, for any specified period, the aggregate
of all gross expenditures during such period for the purchase or construction of
fixed assets, or for improvements, replacements, substitutions or additions
therefor or thereto, which are required to be capitalized on the balance sheet,
including the balance sheet amount of any lease obligations incurred during such
period.
"Capitalized Lease Obligations" has the meaning assigned thereto in
Section 7.1 hereof.
"Cash Available for Debt Service" means, for any specified period, (i)
Net Income, plus (ii) Total Interest, plus (iii) amortization of intangibles,
plus (iv) depreciation, minus (v) unfinanced Capital Expenditures.
"Collateral" means all of the Equipment, General Intangibles,
Inventory, Receivables, and the Holdings Note together with all substitutions
and replacements for and products of any of the foregoing and together with
proceeds of any and all of the foregoing and, in the case of all tangible
collateral, together with all accessions and together with (i) all accessories,
attachments, parts, equipment and repairs now or hereafter attached or affixed
to or used in connection with any such goods, and (ii) all warehouse receipts,
bills of lading and other documents of title now or hereafter covering such
goods.
"Collateral Account" has the meaning specified in Section hereof.
"Collateral Account Agreement" has the meaning specified in Section
4.1(d) hereof.
"Collateral Pledge Agreement" means the collateral pledge agreement
executed by the Borrower in favor of the Lender pursuant to which the Borrower
grants the Lender a security interest in the Holdings Note.
"Commitment" means $400,000, unless said amount is reduced pursuant to
Section hereof, in which event it means the amount to which said amount is
reduced.
"Credit Facility" means the credit facility being made available to the
Borrower by the Lender pursuant to Article II hereof.
"Debt Service" means, for any specified period, the sum of (i) Total
Interest, plus (ii) scheduled principal amortization of all interest bearing
Indebtedness, plus (iii) scheduled payments of rent under all Capitalized Lease
Obligations.
"Debt Service Coverage Ratio" means Cash Available for Debt Service
divided by Debt Service.
"Default" means an event that, with giving of notice or passage of time
or both, would constitute an Event of Default.
"Default Rate" means at any time two percent (2%) over the Floating
Rate or the Term Loan Floating Rate, as the case may be, which Default Rate
shall change when and as the Floating Rate changes and as the Term Loan Floating
Rate changes.
"Eligible Accounts" means all unpaid Accounts, net of any credits,
except the following shall not in any event be deemed Eligible Accounts:
(1) That portion of Accounts over 90 days past invoice date;
(2) That portion of Accounts that are disputed or subject to a
claim of offset or a contra account;
(3) That portion of Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by the
Borrower to the customer;
(4) Accounts owed by any unit of government, whether foreign
or domestic (provided, however, that there shall be included in
Eligible Accounts that portion of Accounts owed by such units of
government with respect to which the Borrower has provided evidence
satisfactory to the Lender that (A) the Lender has a first priority
perfected security interest and (B) such Accounts may be enforced by
the Lender directly against such unit of government under all
applicable laws);
(5) Accounts owed by an account debtor located outside the
United States which are not backed by a bank letter of credit assigned
to the Lender, in the possession of the Lender and acceptable to the
Lender in all respects, in its sole discretion;
(6) Accounts owed by an account debtor that is the subject of
bankruptcy proceedings or has gone out of business;
(7) Accounts owed by a shareholder, subsidiary, Affiliate,
officer or employee of the Borrower;
(8) Accounts not subject to a duly perfected security interest
in favor of the Lender or which are subject to any lien, security
interest or claim in favor of any Person other than the Lender;
(9) That portion of Accounts that have been restructured,
extended, amended or modified;
(10) That portion of Accounts that constitutes finance
charges, service charges or sales or excise taxes;
(11) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (1), (2) or (9)
above; and
(12) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its reasonable discretion.
"Eligible Inventory" means all inventory of the Borrower consisting of
(i) new lumber and (ii) pallets which have been repaired and are ready for sale,
at the lower of cost or market value as determined in accordance with generally
accepted accounting principles; provided, however, that the following shall not
in any event be deemed Eligible Inventory:
(1) Inventory that is: in-transit; located at any warehouse or
other premises not approved by the Lender in writing; located outside
of the states, or localities, as applicable, in which the Lender has
filed financing statements to perfect a first priority security
interest in such inventory; covered by any negotiable or non-negotiable
warehouse receipt, bill of lading or other document of title; on
consignment to or from any other person or subject to any bailment;
(2) Supplies, packaging or parts inventory;
(3) Work-in-process inventory;
(4) Inventory that is damaged, obsolete or not currently
saleable in the normal course of the Borrower's operations;
(5) Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the
vendor thereof;
(6) Inventory that is subject to a security interest in favor
of any Person other than the Lender;
(7) Inventory that consists of customer pallets (i.e., pallets
owned by customers and delivered to the Borrower for repair and return
to the customer), machine pallets (i.e., pallets to be destroyed or
dismantled), pallets awaiting repair, and used lumber;
(8) Inventory otherwise deemed ineligible by the Lender in its
reasonable discretion.
"Environmental Laws" has the meaning specified in Section hereof.
"Equipment" means all of the Borrower's equipment, as such term is
defined in the UCC, whether now owned or hereafter acquired, including but not
limited to all present and future machinery, vehicles, furniture, fixtures,
manufacturing equipment, shop equipment, office and recordkeeping equipment,
parts, tools, supplies, and including specifically (without limitation) the
goods described in any equipment schedule or list herewith or hereafter
furnished to the Lender by the Borrower.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" has the meaning specified in Section hereof.
"Floating Rate" means an annual rate equal to the sum of the Base Rate
plus one and one-quarter percent (1.25%), which Floating Rate shall change when
and as the Base Rate changes.
"General Intangibles" means all of the Borrower's general intangibles,
as such term is defined in the UCC, whether now owned or hereafter acquired,
including (without limitation) all present and future patents, patent
applications, copyrights, trademarks, trade names, trade secrets, customer or
supplier lists and contracts, manuals, operating instructions, permits,
franchises, the right to use the Borrower's name, and the goodwill of the
Borrower's business.
"Guarantor Security Agreements" means, individually and collectively,
the Third Party Security Agreements executed by Pallet Recycling Associates of
North America, Inc., Holdings, Otto Packaging, Inc., Quality Pallet, Inc., and
Pallet Supply Co., Inc., and delivered to the Lender.
"Guarantors" means Pallet Recycling Associates of North America, Inc.,
Holdings, Pallet Exchange of Kansas City, Inc., Otto Packaging, Inc., Harris
Supply, Inc., Harris Supply Company of Georgia, Inc., Quality Pallet, Inc.,
Hurt's Pallet & Sales, Inc., Pallet Source, Inc., Pallet City, Inc., PRANA
Oklahoma City, Inc., PRANA Denver, Inc., B&B Pallet Supply Company, Pallet
Supply Co., Inc., and any other Subsidiary of any of the foregoing entities
formed or acquired on or after the date hereof.
"Guaranty" means, individually and collectively, the guaranty by
corporation executed by each of the Guarantors and delivered to the Lender.
"Holdings" means PRANA Holdings, Inc., a Minnesota corporation.
"Holdings Note" means that certain Promissory Note dated October 30,
1995 executed by Holdings and payable to the order of the Lender in the original
principal amount of $_________________.
"Indebtedness" means, collectively, (i) all items which, in accordance
with generally accepted accounting principles, would be included on the
liability side of a balance sheet as of the date on which Indebtedness is to be
determined, excluding capital stock, surplus capital and retained earnings, (ii)
all indebtedness secured by any mortgage, pledge, security interest or lien
existing on property owned subject to such mortgage, pledge, security interest
or lien, whether or not the indebtedness secured thereby shall have been
assumed, (iii) all amounts representing the capitalization of rentals in
accordance with generally accepted accounting principles, and (iv) all
guaranties, endorsements and other contingent obligations.
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired, whether consisting
of whole goods, spare parts or components, supplies or materials, whether
acquired, held or furnished for sale, for lease or under service contracts or
for manufacture or processing, and wherever located.
"Loan Documents" means this Agreement, the Note and the Security
Documents.
"Lockbox" has the meaning specified in Section 4.1(e) hereof.
"Lockbox Agreement" has the meaning specified in Section 4.1(e) hereof.
"Management Agreement" means that certain Management Agreement executed
by and between the Borrower and Holdings pursuant to which Holdings agrees to
provide management services to the Borrower in exchange for payment of certain
management fees.
"Net Income" means, for any specified period, the Borrower's net
after-tax income for such period as determined in accordance with generally
accepted accounting principles, consistently applied.
"Note" means the Revolving and Term Note.
"Obligations" has the meaning specified in Section hereof.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Plan" means an employee benefit plan or other plan maintained for
employees of the Borrower and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its business
and has any rights of possession, including (without limitation) the premises
legally described in Exhibit attached hereto.
"Receivables" means each and every right of the Borrower to the payment
of money, whether such right to payment now exists or hereafter arises, whether
such right to payment arises out of a sale, lease or other disposition of goods
or other property, out of a rendering of services, out of a loan, out of the
overpayment of taxes or other liabilities, or otherwise arises under any
contract or agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other person who subsequently transfers such
person's interest to the Borrower, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all liens and
security interests) which the Borrower may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such payment
or against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt instruments,
tax refunds and rights to payment in the nature of general intangibles.
"Related Borrowers" means Holdings, Otto Packaging, Inc., Quality
Pallet, Inc., Pallet Supply Co., Inc., and any other present or future Affiliate
who at any time incurs indebtedness to the Lender or any affiliate of the Lender
including, without limitation, Norwest Bank Minnesota, National Association.
"Related Debt" means all present and future indebtedness of the Related
Borrowers to the Lender and any affiliate of the Lender including, without
limitation, the indebtedness of Holdings to Norwest Bank Minnesota, National
Association.
"Related Loan Documents" means any and all documents, instruments and
agreements now or hereafter executed by any Related Borrower in favor of the
Lender or any affiliate of the Lender, including, without limitation, the credit
and security agreements executed by each of the present Related Borrowers (other
than Holdings) in favor of the Lender, the Term Loan and Security Agreement
dated August 8, 1995 executed by Holdings and Norwest Bank Minnesota, National
Association, and the other "Loan Documents" as defined in each of said credit
and security agreements and said Term Loan and Security Agreement, as any of
said documents may be or have been amended from time to time.
"Reportable Event" shall have the meaning assigned to that term in
Title IV of ERISA.
"Revolving Note" means the revolving note of the Borrower payable to
the order of the Lender in substantially the form attached hereto as Exhibit
A-1.
"Security Documents" means the Collateral Account Agreement, the
Lockbox Agreement and the Collateral Pledge Agreement, each as described in
Section hereof or as defined herein.
"Security Interest" has the meaning specified in Section hereof.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such corporation,
irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency, is at the time directly or indirectly owned by the Borrower, by the
Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.
"Tangible Net Worth" means, as of the date of determination, the Book
Net Worth of the Borrower as of such date after eliminating all intangible
assets (as determined under generally accepted accounting principles properly
used in the preparation of the financial statements for financial reporting
purposes, consistently applied) including, without limitation, good will,
franchises, licenses, license rights, patents, trademarks, trade names,
copyrights, unamortized organization expense and amounts designated on the
balance sheet of the Borrower as a covenant not to compete, leasehold
improvements, any amount at which shares of common or preferred stock of the
Borrower appear as an asset on the balance sheet of the Borrower, advances or
loans to stockholders, directors, officers or employees of the Borrower or any
Affiliate, advances or loans by the Borrower to any Affiliate, investments in
common or preferred stock or general or limited partnership interests except
investments in direct obligations of the United States and commercial bank
deposits, intercompany transactions between the Borrower and any Affiliate, or
between any Affiliate of the Borrower (including specifically, but not limited
to, the Holdings Note), deferred expenses and prepaid expenses, and all other
intangible assets designated by the Lender in its sole discretion.
"Term Loan" has the meaning specified in Section hereof.
"Term Loan Floating Rate" means an annual rate equal to the sum of the
Base Rate plus one and three-quarters percent (1.75%), which Term Loan Floating
Rate shall change when and as the Base Rate changes.
"Term Note" means the term note of the Borrower payable to the order of
the Lender in substantially the form attached hereto as Exhibit A-2.
"Termination Date" means February 28, 1998.
"Total Assets" means, as of the date of determination, all assets of
the Borrower as of such date which should properly be classified as assets on a
balance sheet of the Borrower, prepared in accordance with generally accepted
accounting principles, consistently applied. Notwithstanding the foregoing
definition of Total Assets, all unrealized appreciation and all increases in
value shall be excluded in determining the amount of Total Assets.
"Total Interest" means, for any specified period, all interest accrued
within such period on all Indebtedness, as determined in accordance with
generally accepted accounting principles, consistently applied.
"UCC" means the Uniform Commercial Code as in effect from time to time
in the state designated in Section hereof as the state whose laws shall govern
this Agreement, or in any other state whose laws are held to govern this
Agreement or any portion hereof.
ARTICLE II
Amount and Terms of the Credit Facility
Section 2.1 Advances. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make Advances to the Borrower from time to
time during the period from the date hereof to and including the Termination
Date, or the earlier date of termination in whole of the Credit Facility
pursuant to Sections or hereof, in an aggregate amount at any time outstanding
not to exceed the Borrowing Base, which Advances shall be secured by the
Collateral as provided in Article hereof. The Credit Facility shall be a
revolving facility and it is contemplated that the Borrower will request
Advances, make prepayments and request additional Advances. The Borrower agrees
to comply with the following procedures in requesting Advances under this
Section:
(a) The Lender will not make any Advance under this Section
if, after giving effect to such requested Advance, the sum of the
outstanding and unpaid Advances under this Section or otherwise would
exceed the Borrowing Base.
(b) Each request for an Advance under this Section shall be
made to the Lender prior to 11:00 a.m. (Minneapolis time) of the day of
the requested Advance by the Borrower. Each request for an Advance may
be made in writing or by telephone, specifying the date of the
requested Advance and the amount thereof, and shall be by (i) any
officer of the Borrower; or (ii) any person designated as the
Borrower's agent by any officer of the Borrower in a writing delivered
to the Lender; or (iii) any person reasonably believed by the Lender to
be an officer of the Borrower or such a designated agent.
(c) Upon fulfillment of the applicable conditions set forth in
Article hereof, the Lender shall disburse loan proceeds by crediting
the same to the Borrower's demand deposit account maintained with
Norwest Bank Arizona, National Association unless the Lender and the
Borrower shall agree in writing to another manner of disbursement. Upon
request of the Lender, the Borrower shall promptly confirm each
telephonic request for an Advance by executing and delivering an
appropriate confirmation certificate to the Lender. The Borrower shall
be obligated to repay all Advances under this Section notwithstanding
the failure of the Lender to receive such confirmation and
notwithstanding the fact that the person requesting the same was not in
fact authorized to do so. Any request for an Advance under this Section
, whether written or telephonic, shall be deemed to be a representation
by the Borrower that (i) the condition set forth in Section hereof has
been met, and (ii) the conditions set forth in Section hereof have been
met as of the time of the request.
Section 2.2 Term Loan. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make a term loan (the "Term Loan") in the
aggregate principal amount of $209,000, which Term Loan shall be secured by the
Collateral as provided in Article hereof. Upon the Borrower's request and
fulfillment of the applicable conditions set forth in Article hereof, the Lender
shall disburse loan proceeds, crediting the same to the Borrower's demand
deposit account specified in Section hereof unless the Lender and the Borrower
shall agree in writing to another manner of disbursement.
Section 2.3 Notes. All Advances, if any, made by the Lender under this
Article shall be evidenced by and repayable with interest in accordance with the
Revolving Note. The Term Loan shall be evidenced by and repayable with interest
in accordance with the Term Note. The principal of the Revolving Note shall be
payable as provided herein and on the earlier of the Termination Date or
acceleration by the Lender pursuant to Section hereof, and shall bear interest
as provided herein. The principal of the Term Note shall be payable in 27 equal
monthly installments of $4,354.17 each commencing on December 1, 1995 and
continuing on the first day of each month thereafter until and including
February 1, 1998, and the entire remaining unpaid principal balance of the Term
Note shall be due and payable in full on February 28, 1998. The principal of the
Term Note shall also be payable earlier upon acceleration by the Lender pursuant
to Section 8.2 hereof. The principal of the Term Note shall bear interest as
provided herein.
Section 2.4 Interest.
(a) The principal of the Advances and the Term Loan
outstanding from time to time during any month shall bear interest
(computed on the basis of actual days elapsed in a 360-day year) at the
Floating Rate and at the Term Loan Floating Rate, respectively;
provided, however, that from the first day of any month during which
any Default or Event of Default occurs or exists at any time, in the
Lender's discretion and without waiving any of its other rights and
remedies, the principal of the Advances and the Term Loan outstanding
from time to time shall bear interest at the Default Rate; and
provided, further, that in any event no rate change shall be put into
effect which would result in a rate greater than the highest rate
permitted by law. Interest accruing on the principal balance of the
Advances and the Term Loan outstanding from time to time shall be
payable on the first day of the next succeeding month and on the
Termination Date or earlier prepayment in full.
(b) If any Person shall acquire a participation in the
Advances or the Term Loan under this Agreement, the Borrower shall be
obligated to the Lender to pay the full amount of all interest
calculated under Section hereof, along with all other fees, charges and
other amounts due under this Agreement, regardless if such Person
elects to accept interest with respect to its participation at a lower
rate than the Floating Rate or the Term Loan Floating Rate, or
otherwise elects to accept less than its prorata share of such fees,
charges and other amounts due under this Agreement.
Section 2.5 Voluntary Prepayment; Termination of Agreement by Borrower;
Permanent Reduction of Commitment.
(a) Except as otherwise provided herein, the Borrower may, in
its discretion, prepay the Advances or the Term Loan in whole at any
time or from time to time in part. If either the Advances or the Term
Loan is paid or prepaid, in whole or in part, from the proceeds of a
refinancing with another party (other than the Lender or an affiliate
of the Lender) or from any source other than the cash flow from
operations of the Borrower, then the Revolving Note and the Term Note
shall, at the option of the Lender, be subject to mandatory prepayment
in full. If the prepayment is made on or prior to September 30, 1996, a
prepayment fee shall be payable to the Lender in an amount equal to two
percent (2%) of the sum of (i) the Commitment, plus (ii) the then
outstanding principal balance of the Term Loan. If the prepayment is
made at any time on or after September 30, 1996, a prepayment fee shall
be payable to the Lender in an amount equal to one percent (1%) of the
sum of (i) the Commitment, plus (ii) the then outstanding principal
balance of the Term Loan. The Borrower acknowledges that the prepayment
fee is an integral part of the pricing of the Credit Facility and the
Term Loan and has been established in conjunction with the interest
rate under the Revolving Note and the Term Note and that establishment
of the prepayment fee is in lieu of increasing the margin used to
compute the interest rate under the Revolving Note and the Term Note.
The Borrower hereby acknowledges that such prepayment premium is
reasonable.
(b) The Borrower may terminate this Agreement at any time and,
subject to payment and performance of all the Borrower's Obligations to
the Lender, may obtain any release or termination of the Security
Interest to which the Borrower is otherwise entitled by law by (i)
giving at least 30 days' prior written notice to the Lender of the
Borrower's intention to terminate this Agreement; and (ii) if the
Borrower terminates this Agreement effective as of any date other than
the Termination Date, paying Lender a prepayment fee which prepayment
fee shall be in an amount equal to (i) if the prepayment is made on or
prior to September 30, 1996, two percent (2%) of the sum of (a) the
Commitment, plus (b) the then outstanding principal balance of the Term
Loan; and (ii) if such prepayment is made on or after September 30,
1996, one percent (1%) of the sum of (a) the Commitment, plus (b) the
then outstanding principal balance of the Term Loan.
Section 2.6 Mandatory Prepayment. Without notice or demand, if the sum
of the outstanding principal balance of the Advances shall at any time exceed
the Borrowing Base, the Borrower shall immediately prepay the Advances to the
extent necessary to reduce the sum of the outstanding principal balance of the
Advances to the Borrowing Base. If any obligations of any of the Related
Borrowers to the Lender or any affiliate of the Lender (including, without
limitation, the Related Debt) pursuant to any present or future documents,
instruments or agreements (including, without limitation, the Related Loan
Documents) are prepaid in whole or in part, whether such prepayment is voluntary
or mandatory, or if any loan or credit facility or agreement between any of the
Related Borrowers and the Lender or any affiliate of the Lender is terminated
(including, without limitation, the Related Loan Document), whether such
termination is voluntary or involuntary on behalf of and Related Borrower, then,
at the option of the Lender, the Revolving Note and the Term Note shall be
subject to mandatory prepayment in full, and the Borrower shall also pay a
prepayment premium calculated pursuant to Section 2.5 hereof. Any payment
received by the Lender under this Section or under Section may be applied to the
Advances or the Term Loan, including interest thereon and any fees, commissions,
costs and expenses hereunder and under the Security Documents, in such order and
in such amounts as the Lender, in its discretion, may from time to time
determine; provided that any prepayment by the Borrower under Section which is
designated as a partial prepayment of the Term Loan shall be applied to
principal installments of the Term Loan in inverse order of maturity.
Section 2.7 Payment. All payments of principal of and interest on the
Advances and the Term Loan shall be made to the Lender in immediately available
funds. The Borrower hereby authorizes the Lender, in its discretion at any time
or from time to time and without request by the Borrower, to make an Advance to
the extent necessary to pay any such amounts and any fees, costs or expenses
hereunder or under the Security Documents.
Section 2.8 Payment on Non-Banking Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances, the Term Loan or the fees hereunder, as the case may be.
Section 2.9 Intentionally Omitted.
Section 2.10 Liability Records. The Lender may maintain from time to
time, at its discretion, liability records as to any and all Advances and the
Term Loan made or repaid and interest accrued or paid under this Agreement. All
entries made on any such record shall be presumed correct until the Borrower
establishes the contrary. On demand by the Lender, the Borrower will admit and
certify in writing the exact principal balance that the Borrower then asserts to
be outstanding to the Lender for Advances and the Term Loan under this
Agreement. Any billing statement or accounting rendered by the Lender shall be
conclusive and fully binding on the Borrower unless specific written notice of
exception is given to the Lender by the Borrower within 30 days after its
receipt by the Borrower.
Section 2.11 Fees.
(a) The Borrower hereby agrees to pay the Lender a fully
earned and non-refundable origination fee of $4,567.50, due and payable
upon the execution of this Agreement.
(b) The Borrower agrees to pay to the Lender a commitment fee
at the rate of one-quarter of one percent (.25%) per annum on the
average daily unused amount of the Commitment from the date hereof to
and including the date on which such facility is terminated, due and
payable quarterly in arrears on the first day of each quarter,
commencing January 1, 1996, provided that any such commitment fee
remaining unpaid upon termination of the Credit Facility or
acceleration of the Revolving Note by the Lender pursuant to Section
hereof shall be due and payable on the date of such termination or
acceleration. Such fee shall be calculated on the basis of actual days
elapsed in a 360-day year.
(c) The Borrower agrees to pay to the Lender a monitoring fee
at the rate of $7,500.00 per year from the date hereof to and including
the date on which the Credit Facility is terminated, due and payable
quarterly in arrears on the first day of each calendar quarter in an
amount equal to $1,875.00 per quarter commencing January 1, 1996,
provided that any such monitoring fee remaining unpaid upon termination
of the Credit Facility or acceleration of the Revolving Note by the
Lender pursuant to Section 8.2 hereof, shall be due and payable on the
date of such termination or acceleration.
(d) The Borrower hereby agrees to pay the Lender, on demand,
the Lender's then current audit fees (which audit fees are currently
$400 per day) in connection with any audits or inspections by the
Lender of any collateral or the operations or business of the Borrower,
together with all actual out-of-pocket costs and expenses incurred in
conducting any such audit or inspection. The Lender may at any time and
from time to time conduct such audits or inspections of any collateral
or the operations or business of the Borrower as the Lender may
determine in its sole discretion; provided, however, that prior to the
occurrence of a Default or Event of Default, the Borrower shall not be
required to pay for more than four (4) such audits or inspections per
calendar year. Following the occurrence of a Default or an Event of
Default, the Borrower shall pay for any and all audits or inspections
which the Lender may determine to conduct in its sole discretion.
Section 2.12 Capital Adequacy. If the Lender shall determine that the
adoption after the date hereof of any applicable law, rule or regulation
regarding capital adequacy, or any change therein after the date hereof, any
change after the date hereof in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender or its
parent corporation with any guideline or request issued after the date hereof
regarding capital adequacy (whether nor not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on the Lender's or the Lender's parent corporation's
capital as a consequence of the Lender or its parent corporation could have
achieved but for such adoption, change or compliance (taking into consideration
the Lender's policies with respect to capital adequacy and those of the Lender's
parent corporation) by an amount deemed to the Lender or its parent corporation
to be material, then from time to time on demand by the Lender, the Borrower
shall pay to the Lender such additional amount or amounts as will compensate the
Lender or its parent corporation for such reduction. Certificates of the Lender
sent to the Borrower from time to time claiming compensation under this Section,
stating the reason therefor and setting forth in reasonable detail the
calculation of the additional amount or amounts to be paid to the Lender
hereunder shall be conclusive absent manifest error. In determining such
amounts, the Lender or its parent corporation may use any reasonable averaging
and attribution methods.
ARTICLE III
Security Interest
Section 3.1 Grant of Security Interest. The Borrower hereby assigns and
grants to the Lender a security interest (together with the security interest
granted to the Lender pursuant to the Collateral Pledge Agreement, such security
interests are collectively referred to as the "Security Interests") in the
Collateral, as security for the payment and performance of each and every debt,
liability and obligation of every type and description which the Borrower may
now or at any time hereafter owe to the Lender (whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it arises in
a transaction involving the Lender alone or in a transaction involving other
creditors of the Borrower, and whether it is direct or indirect, due or to
become due, absolute or contingent, primary or secondary, liquidated or
unliquidated, or sole, joint, several or joint and several, and including
specifically, but not limited to, all indebtedness of the Borrower arising under
this Agreement, the Note, or any other loan or credit agreement or guaranty
between the Borrower and the Lender, whether now in effect or hereafter entered
into; all such debts, liabilities and obligations are herein collectively
referred to as the "Obligations").
Section 3.2 Notification of Account Debtors and Other Obligors. In
addition to the rights of the Lender under Section hereof, with respect to any
and all rights to payment constituting Collateral, the Lender may at any time
(after the occurrence of an Event of Default) notify any account debtor or other
person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender. The Borrower will join in giving such notice if the Lender so
requests. At any time after the Borrower or the Lender gives such notice to an
account debtor or other obligor, the Lender may, but need not, in the Lender's
name or in the Borrower's name, (a) demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligations (including collateral obligations) of any such account debtor or
other obligor; and (b) as agent and attorney in fact of the Borrower, notify the
United States Postal Service to change the address for delivery of the
Borrower's mail to any address designated by the Lender, otherwise intercept the
Borrower's mail, and receive, open and dispose of the Borrower's mail, applying
all Collateral as permitted under this Agreement and holding all other mail for
the Borrower's account or forwarding such mail to the Borrower's last known
address.
Section 3.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether before or after the occurrence of any Event of
Default, the Lender may (but need not), in the Lender's name or in the
Borrower's name, execute and deliver proof of claim, receive all such monies,
endorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy.
Section 3.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take possession of the Premises at any time after the
occurrence and during the continuance of an Event of Default.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the
Lender may in good faith deem to be related or incidental purposes.
(c) The right of the Lender to hold the Premises shall cease
and terminate upon the earlier of (i) payment in full and discharge of
all Obligations, and (ii) final sale or disposition of all goods
constituting Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession, occupancy or use of
any of the Premises; provided, however, in the event that the Lender
does pay or account for any rent or other compensation for the
possession, occupancy or use of any of the Premises, the Borrower shall
reimburse the Lender promptly for the full amount thereof. In addition,
the Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or
imposed upon the Lender by reason of the execution, delivery,
existence, recordation, performance or enforcement of this Agreement or
the provisions of this Section.
Section 3.5 License. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral following an Event of Default.
ARTICLE IV
Conditions of Lending
Section 4.1 Conditions Precedent to the Initial Advance and the Term
Loan. The obligation of the Lender to make the initial Advance or the Term Loan
under the Credit Facility shall be subject to the condition precedent that the
Lender shall have received all of the following, each in form and substance
satisfactory to the Lender:
(a) This Agreement, properly executed on behalf of the
Borrower.
(b) The Note, properly executed on behalf of the Borrower.
(c) A true and correct copy of any and all leases pursuant to
which the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease.
(d) A Collateral Account Agreement (the "Collateral Account
Agreement"), duly executed by the Borrower and a financial institution
acceptable to the Lender, pursuant to which the Borrower and the
institution establish a depository account (the "Collateral Account")
in the name of and under the sole and exclusive control of the Lender,
from which such institution agrees to transfer finally collected funds
to the Lender for application to the Advances.
(e) A Lockbox Agreement (the "Lockbox Agreement"), duly
executed by the Borrower and an institution acceptable to the Lender,
pursuant to which the Borrower agrees to maintain and direct account
debtors to make payment to, and such institution agrees to maintain and
process payments received in, a lockbox for the benefit of the Lender
(the "Lockbox"), from which Lockbox such institution shall transfer
funds to the Collateral Account.
(f) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in
effect against the Borrower or any Guarantor executing a Guarantor
Security Agreement, (ii) no financing statements have been filed and
remain in effect against the Borrower or any Guarantor executing a
Guarantor Security Agreement, except, with respect to the Borrower,
those financing statements relating to liens permitted pursuant to
Section hereof and, with respect to any Guarantor executing a Guarantor
Security Agreement, those financing statements filed by the Lender and
with respect to any Guarantor execution a Guarantor Security Agreement,
those financing statements relating to liens permitted pursuant to the
Guarantor Security Agreement executed by such Guarantor, and (iii) the
Lender has duly filed all financing statements necessary to perfect the
Security Interests granted hereunder and the security interests granted
under the Guarantor Security Agreements, to the extent the Security
Interests or such security interests, as the case may be, are capable
of being perfected by filing.
(g) A certificate of the Secretary or an Assistant Secretary
of the Borrower, certifying as to (i) the resolutions of the directors
and, if required, the shareholders of the Borrower, authorizing the
execution, delivery and performance of this Agreement and the Security
Documents, (ii) the articles of incorporation and bylaws of the
Borrower, and (iii) the signatures of the officers or agents of the
Borrower authorized to execute and deliver this Agreement, the Security
Documents and other instruments, agreements and certificates, including
Advance requests, on behalf of the Borrower.
(h) A certificate of the Secretary or an Assistant Secretary
of each Guarantor, certifying as to (i) the resolutions of the
directors and, if required, the shareholders of such Guarantor,
authorizing the execution, delivery and performance of such Guarantor's
Guaranty, and, if applicable, such Guarantor's Guarantor Security
Agreement, (ii) the articles of incorporation and bylaws of such
Guarantor, and (iii) the signatures of the officers or agents of such
Guarantor authorized to execute and deliver such Guarantor's Guaranty
and, if applicable, such Guarantor's Guarantor Security Agreement, and
other instruments, agreements and certificates on behalf of such
Guarantor.
(i) A current certificate issued by the Secretary of State of
the state of the Borrower's and each Guarantor's incorporation,
certifying that the Borrower or such Guarantor, as the case may be, is
in compliance with all corporate organizational requirements of such
state.
(j) Evidence that the Borrower and each Guarantor is duly
licensed or qualified to transact business in all jurisdictions where
the character of the property owned or leased or the nature of the
business transacted by it makes such licensing or qualification
necessary.
(k) An opinion of counsel to the Borrower and each Guarantor,
addressed to the Lender.
(l) Certificates of the insurance required hereunder and under
each Guarantor Security Agreement, with all hazard insurance containing
a lender's loss payable endorsement in favor of the Lender and with all
liability insurance naming the Lender as an additional insured.
(m) The Guaranties, properly executed by each of the
Guarantors.
(n) The Guarantor Security Agreements, properly executed by
the Guarantor executing each such Guarantor Security Agreement.
(o) The Related Loan Documents shall have been executed by all
of the parties thereto, and all conditions precedent set forth in the
Related Loan Documents shall have been satisfied.
(p) The Collateral Pledge Agreement, duly executed by the
Borrower, together with the original Holdings Note endorsed to the
Lender.
(q) The Management Agreement, properly executed by the parties
thereto.
(r) An opening pro forma balance sheet of the Borrower, which
balance sheet shall be prepared as if the loans contemplated hereby had
been funded as of such date.
(s) An equipment appraisal addressed to the Lender prepared by
an appraisal firm acceptable to the Lender, which appraisal shall be in
form and substance acceptable to the Lender and shall indicate an
orderly liquidation value of the Borrower's Equipment of at least
$261,250.
(t) The original certificates of title for all of the
Borrower's vehicles, together with all documents necessary to allow the
Lender's security interest to be added to the certificates of title,
and to cause the deletion of all other security interests shown
thereon, all properly executed by the appropriate parties.
(u) Payment of the fees due through the date of the initial
Advance or Term Loan under Section hereof and expenses incurred by the
Lender through such date and required to be paid by the Borrower under
Section hereof.
(v) Such other documents as the Lender in its sole discretion
may require.
Section 4.2 Conditions Precedent to All Advances and the Term Loan. The
obligation of the Lender to make each Advance or Term Loan shall be subject to
the further conditions precedent that on such date:
(a) the representations and warranties contained in Article
hereof are correct on and as of the date of such Advance or Term Loan
as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result
from such Advance or Term Loan which constitutes a Default or an Event
of Default.
ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief Executive
Office; Inventory and Equipment Locations. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Arizona, and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary, except when the failure to be so licensed or qualified would not have
a material adverse effect on the financial condition, properties or operations
of the Borrower. The Borrower has all requisite power and authority, corporate
or otherwise, to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under, the Loan Documents. During
its corporate existence, the Borrower has done business solely under the names
set forth in Exhibit hereto. The chief executive office and principal place of
business of the Borrower is located at the address set forth in Exhibit hereto,
and all of the Borrower's records relating to its business or the Collateral are
kept at that location. All Inventory and Equipment is located at that location
or at one of the other locations set forth in Exhibit hereto. The Borrower's tax
identification number is correctly set forth in Section.
Section 5.2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (a) require
any consent or approval of the stockholders of the Borrower, (b) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof, (c) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Articles of Incorporation or Bylaws of the Borrower, (d)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected, or (e) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interests) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 5.3 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
Section 5.4 Subsidiaries. Except as set forth in Exhibit attached
hereto, the Borrower has no Subsidiaries.
Section 5.5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender unaudited financial statements of the
Borrower for its fiscal year ended December 31, 1994 and unaudited financial
statements of the Borrower for the months ended July 31, 1995, and those
statements fairly present the financial condition of the Borrower on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles. Since the date of the most recent financial statements, there has
been no material adverse change in the business, properties or condition
(financial or otherwise) of the Borrower.
Section 5.6 Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any of its Affiliates or the properties of the Borrower or any
of its Affiliates before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to the Borrower or any of its Affiliates, would have a
material adverse effect on the financial condition, properties or operations of
the Borrower or any of its Affiliates.
Section 5.7 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance or Term Loan will be
used to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
Section 5.8 Taxes. The Borrower and its Affiliates have paid or caused
to be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
Section 5.9 Titles and Liens. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest balance
sheet referred to in Section hereof and all proceeds thereof, free and clear of
all mortgages, security interests, liens and encumbrances, except for (i)
mortgages, security interests and liens permitted by Section hereof, and (ii) in
the case of any such property which is not Collateral or other collateral
described in the Security Documents, covenants, restrictions, rights, easements
and minor irregularities in title which do not materially interfere with the
business or operations of the Borrower as presently conducted. No financing
statement naming the Borrower as debtor is on file in any office except to
perfect only security interests permitted by Section hereof.
Section 5.10 Plans. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains or
has maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither the Borrower nor any of its
Affiliates has:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued
benefits which or which may become payable to participants or
beneficiaries of any such Plan).
Section 5.11 Default. The Borrower is in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on the financial condition, properties or
operations of the Borrower.
Section 5.12 Environmental Protection. The Borrower has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws and regulations relating to emissions, discharges, releases
of pollutants, contaminants, hazardous or toxic materials, or wastes into
ambient air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws") at the Borrower's facilities or in
connection with the operation of its facilities. Except as previously disclosed
to the Lender in writing, the Borrower and all activities of the Borrower at its
facilities comply with all Environmental Laws and with all terms and conditions
of any required permits, licenses and authorizations applicable to the Borrower
with respect thereto and except when the failure to so comply would not have a
material adverse effect on the Borrower or its properties, assets, business or
financial condition. Except as previously disclosed to the Lender in writing,
the Borrower is also in compliance with all limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in Environmental Laws or contained in any plan, order,
decree, judgment or notice of which the Borrower is aware and except where the
failure to so comply would not have a material adverse effect on the Borrower or
its properties, assets, business or financial condition. Except as previously
disclosed to the Lender in writing, the Borrower is not aware of, nor has the
Borrower received notice of, any events, conditions, circumstances, activities,
practices, incidents, actions or plans which may interfere with or prevent
continued compliance with, or which may give rise to any liability under, any
Environmental Laws.
Section 5.13 Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is true and
correct in all material respects and, as to projections, valuations or proforma
financial statements, present a good faith opinion as to such projections,
valuations and proforma condition and results.
Section 5.14 Financing Statements. The Borrower has provided to the
Lender signed financing statement sufficient when filed to perfect the Security
Interests and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5.15 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
Section 5.16 Trademarks and Patents. Except as set forth on Exhibit F
attached hereto, the Borrower does not own any interest in any copyrights,
patents or trademarks that are registered under either federal or state law.
Section 5.17 Ownership of Borrower. All issued and outstanding capital
stock of the Borrower (whether common or preferred) is held by Holdings.
Section 5.18 Vehicles. Except as set forth on Exhibit G attached
hereto, the Borrower does not own any interest in any certificated vehicles or
certificated piece of equipment.
Section 5.19 Solvency.
(a) The fair salable value of the Borrower as a going concern
exceeds the amount that will be required to be paid in respect to the
existing debts and other liabilities (including all contingent
liabilities) of the Borrower as they mature.
(b) The Borrower does not and will not have, immediately
following the closing of the transactions contemplated hereunder,
unreasonably small capital to carry out its business as conducted or as
proposed to be conducted.
(c) The Borrower does not intend to and does not believe that
it will incur debts beyond its ability to pay such debts as they
mature.
ARTICLE VI
Affirmative Covenants of the Borrower
So long as the Note shall remain unpaid or the Credit Facility shall be
outstanding, the Borrower will comply with the following requirements, unless
the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrower will deliver, or cause
to be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days
after the end of each fiscal year of the Borrower, audited financial
statements of the Borrower with the unqualified opinion of independent
certified public accountants selected by the Borrower and acceptable to
the Lender, which annual financial statements shall include the balance
sheet of the Borrower as at the end of such fiscal year and the related
statements of income, retained earnings and cash flows of the Borrower
for the fiscal year then ended, prepared, if the Lender so requests, on
a consolidating and consolidated basis to include any Affiliates, all
in reasonable detail and prepared in accordance with generally accepted
accounting principles applied on a basis consistent with the accounting
practices applied in the financial statements referred to in Section
hereof, together with (i) a report signed by such accountants stating
that in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any Default or
Event of Default hereunder and all relevant facts in reasonable detail
to evidence, and the computations as to, whether or not the Borrower is
in compliance with the requirements set forth in Sections through and
Section hereof; and (ii) a certificate of the chief financial officer
of the Borrower stating that such financial statements have been
prepared in accordance with generally accepted accounting principles
applied on a basis consistent with the accounting practices reflected
in the annual financial statements referred to in Section hereof and
whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder and, if so, stating in reasonable
detail the facts with respect thereto;
(b) as soon as available and in any event within 30 days after
the end of each month, an unaudited/internal balance sheet and
statements of income and retained earnings of the Borrower as at the
end of and for such month and for the year to date period then ended,
prepared, if the Lender so requests, on a consolidating and
consolidated basis to include any Affiliates, in reasonable detail and
stating in comparative form the figures for the corresponding date and
periods in the previous year, all prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the
accounting practices reflected in the financial statements referred to
in Section hereof, subject to year-end audit adjustments; and
accompanied by a certificate of the chief financial officer of the
Borrower, substantially in the form of Exhibit hereto stating (i) that
such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent
with the accounting practices reflected in the financial statements
referred to in Section hereof, subject to year-end audit adjustments,
(ii) whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the requirements set forth in Sections through and
Section hereof;
(c) on a daily basis, a schedule of assigned receivables, a
collection report and such other documents regarding the Borrower's
accounts receivable as the Lender may request on forms provided by the
Lender;
(d) within 20 days after the end of each month, agings of the
Borrower's accounts receivable (including a calculation of Eligible
Accounts) and its accounts payable and an inventory certification
report as at the end of such month;
(e) at least 30 days before the beginning of each fiscal year
of the Borrower, the projected balance sheets and income statements for
each month of such year, each in reasonable detail, representing the
good faith projections of the Borrower and certified by the Borrower's
chief financial officer as being the most accurate projections
available and identical to the projections used by the Borrower for
internal planning purposes, together with such supporting schedules and
information as the Lender may in its discretion require;
(f) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any
governmental or regulatory agency affecting the Borrower of the type
described in Section hereof or which seek a monetary recovery against
the Borrower in excess of $10,000;
(g) as promptly as practicable (but in any event not later
than five business days) after an officer of the Borrower obtains
knowledge of the occurrence of any breach, default or event of default
under any Security Document or any event which constitutes a Default or
Event of Default hereunder, notice of such occurrence, together with a
detailed statement by a responsible officer of the Borrower of the
steps being taken by the Borrower to cure the effect of such breach,
default or event;
(h) as soon as possible and in any event within 30 days after
the Borrower knows or has reason to know that any Reportable Event with
respect to any Plan has occurred, the statement of the chief financial
officer of the Borrower setting forth details as to such Reportable
Event and the action which the Borrower proposes to take with respect
thereto, together with a copy of the notice of such Reportable Event to
the Pension Benefit Guaranty Corporation;
(i) as soon as possible, and in any event within 10 days after
the Borrower fails to make any quarterly contribution required with
respect to any Plan under Section 412(m) of the Internal Revenue Code
of 1986, as amended, the statement of the chief financial officer of
the Borrower setting forth details as to such failure and the action
which the Borrower proposes to take with respect thereto, together with
a copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation;
(j) promptly upon knowledge thereof, notice of (i) any
disputes or claims by customers of the Borrower; (ii) any goods
returned to or recovered by the Borrower; and (iii) any change in the
persons constituting the officers and directors of the Borrower;
(k) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any
Collateral or such other collateral or the prospect of payment thereof;
(l) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have
sent to its stockholders;
(m) promptly after the sending or filing thereof, copies of
all regular and periodic financial reports which the Borrower shall
file with the Securities and Exchange Commission or any national
securities exchange;
(n) promptly upon knowledge thereof, notice of the violation
by the Borrower of any law, rule or regulation, the non-compliance with
which could materially and adversely affect its business or its
financial condition; and
(o) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents
and delivery receipts for goods sold, and such other material, reports,
records or information as the Lender may request.
Section 6.2 Books and Records; Inspection and Examination. The Borrower
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to the Borrower's business and financial condition and
such other matters as the Lender may from time to time request in which true and
complete entries will be made in accordance with generally accepted accounting
principles consistently applied and, upon request of the Lender, will permit any
officer, employee, attorney or accountant for the Lender to audit, review, make
extracts from or copy any and all corporate and financial books and records of
the Borrower at all times during ordinary business hours, to send and discuss
with account debtors and other obligors requests for verification of amounts
owed to the Borrower, and to discuss the affairs of the Borrower with any of its
directors, officers, employees or agents. The Borrower will permit the Lender,
or its employees, accountants, attorneys or agents, to examine and inspect any
Collateral, other collateral covered by the Security Documents or any other
property of the Borrower at any time during ordinary business hours.
Section 6.3 Account Verification. The Lender may, and Borrower will, at
any time and from time to time upon request of the Lender, send requests for
verification of accounts or notices of assignment to account debtors and other
obligors.
Section 6.4 Compliance with Laws; Environmental Indemnity. The Borrower
will (a) comply with the requirements of applicable laws and regulations, the
non-compliance with which would materially and adversely affect its business or
its financial condition, (b) comply with all applicable Environmental Laws and
obtain any permits, licenses or similar approvals required by any such
Environmental Laws, and (c) use and keep the Collateral, and will require that
others use and keep the Collateral, only for lawful purposes, without violation
of any federal, state or local law, statute or ordinance. The Borrower will
indemnify, defend and hold the Lender harmless from and against any claims, loss
or damage to which the Lender may be subjected as a result of any past, present
or future existence, use, handling, storage, transportation or disposal of any
hazardous waste or substance or toxic substance by the Borrower or on property
owned, leased or controlled by the Borrower. This indemnification agreement
shall survive the termination of this Agreement and payment of the indebtedness
hereunder.
Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Collateral) or upon or against the
creation, perfection or continuance of the Security Interests, prior to the date
on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien or charge upon any
properties of the Borrower; provided, that the Borrower shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings.
Section 6.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the
other collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from
time to time replace or repair any worn, defective or broken parts;
provided, however, that nothing in this Section shall prevent the
Borrower from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the judgment of the Lender,
desirable in the conduct of the Borrower's business and not
disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against all claims
or demands of all persons (other than the Lender) claiming the
Collateral or any interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security
interests, liens and encumbrances except the Security Interests and
other security interests permitted by Section hereof.
Section 6.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the benefit of the Lender. All policies of liability insurance required
hereunder shall name the Lender as an additional insured.
Section 6.8 Preservation of Corporate Existence. The Borrower will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10 Lockbox; Collateral Account.
(a) The Borrower will irrevocably direct all present and
future Account debtors and other Persons obligated to make payments
constituting Collateral to make such payments directly to the Lockbox.
All of the Borrower's invoices, account statements and other written or
oral communications directing, instructing, demanding or requesting
payment of any Account or any other amount constituting Collateral
shall conspicuously direct that all payments be made to the Lockbox and
shall include the Lockbox address. All payments received in the Lockbox
shall be processed to the Collateral Account.
(b) The Borrower agrees to deposit in the Collateral Account
or, at the Lender's option, to deliver to the Lender all collections on
Accounts, contract rights, chattel paper and other rights to payment
constituting Collateral, and all other cash proceeds of Collateral,
which the Borrower may receive directly notwithstanding its direction
to Account debtors and other obligors to make payments to the Lockbox,
immediately upon receipt thereof, in the form received, except for the
Borrower's endorsement when deemed necessary. Until delivered to the
Lender or deposited in the Collateral Account, all proceeds or
collections of Collateral shall be held in trust by the Borrower for
and as the property of the Lender and shall not be commingled with any
funds or property of the Borrower. Amounts deposited in the Collateral
Account shall not bear interest and shall not be subject to withdrawal
by the Borrower, except after full payment and discharge of all
Obligations. All such collections shall constitute proceeds of
Collateral and shall not constitute payment of any Obligation.
Collected funds from the Collateral Account shall be transferred to the
Lender's general account, and the Lender may deposit in its general
account or in the Collateral Account any and all collections received
by it directly from the Borrower. The Lender may commingle such funds
with other property of the Lender or any other person. The Lender from
time to time at its discretion may, after allowing 2 Banking Days,
apply such funds to the payment of any and all Obligations, in any
order or manner of application satisfactory to the Lender.
All items delivered to the Lender or deposited in the Collateral
Account shall be subject to final payment. If any such item is returned
uncollected, the Borrower will immediately pay the Lender, or, for
items deposited in the Collateral Account, the bank maintaining such
account, the amount of that item, or such bank at its discretion may
charge any uncollected item to the Borrower's commercial account or
other account. The Borrower shall be liable as an endorser on all items
deposited in the Collateral Account, whether or not in fact endorsed by
the Borrower.
Section 6.11 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article or elsewhere herein, and if such failure shall continue for a period of
ten calendar days after the Lender gives the Borrower written notice thereof (or
in the case of the agreements contained in Sections , and hereof, immediately
upon the occurrence of such failure, without notice or lapse of time), the
Lender may, but need not, perform or observe such covenant on behalf and in the
name, place and stead of the Borrower (or, at the Lender's option, in the
Lender's name) and may, but need not, take any and all other actions which the
Lender may reasonably deem necessary to cure or correct such failure (including,
without limitation, the payment of taxes, the satisfaction of security
interests, liens or encumbrances, the performance of obligations owed to account
debtors or other obligors, the procurement and maintenance of insurance, the
execution of assignments, security agreements and financing statements, and the
endorsement of instruments); and the Borrower shall thereupon pay to the Lender
on demand the amount of all monies expended and all costs and expenses
(including reasonable attorneys' fees and legal expenses) incurred by the Lender
in connection with or as a result of the performance or observance of such
agreements or the taking of such action by the Lender, together with interest
thereon from the date expended or incurred at the Floating Rate. To facilitate
the performance or observance by the Lender of such covenants of the Borrower,
the Borrower hereby irrevocably appoints the Lender, or the delegate of the
Lender, acting alone, as the attorney in fact of the Borrower (which appointment
is coupled with an interest) with the right (but not the duty) from time to time
to create, prepare, complete, execute, deliver, endorse or file in the name and
on behalf of the Borrower any and all instruments, documents, assignments,
security agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by the Borrower under this Section.
Section 6.12 Net Income. The Borrower shall at all times maintain
(exclusive of any Subsidiaries or Affiliates unless the Lender specifically
consents in writing to their inclusion in such calculation), a fiscal
year-to-date Net Income of at least the following, calculated as of the
following dates:
As of the Last Day of Net Income
September, 1995 $175,000.00
October, 1995 175,000.00
November, 1995 175,000.00
December, 1995 200,000.00
January, 1996 0.00
February, 1996 0.00
March, 1996 50,000.00
April, 1996 50,000.00
May, 1996 50,000.00
June, 1996 100,000.00
Section 6.13 Tangible Net Worth. The Borrower shall at all times
maintain (exclusive of any Subsidiaries or Affiliates unless the Lender
specifically consents in writing to their inclusion in such calculation), a
Tangible Net Worth of at least the following, calculated as of the following
dates:
As of the Last Day of Tangible Net Worth
September, 1995 $600,000.00
October, 1995 600,000.00
November, 1995 600,000.00
December, 1995 700,000.00
January, 1996 700,000.00
February, 1996 700,000.00
March, 1996 700,000.00
April, 1996 700,000.00
May, 1996 700,000.00
June, 1996 700,000.00
Section 6.14 Book Net Worth. The Borrower shall at all times maintain
(exclusive of any Subsidiaries or Affiliates unless the Lender specifically
consents in writing to their inclusion in such calculation), a Book Net Worth of
at least the following, calculated as of the following dates:
As of the Last Day of Book Net Worth
September, 1995 $1,055,000.00
October, 1995 1,055,000.00
November, 1995 1,055,000.00
December, 1995 1,075,000.00
As of the last day of January through June of 1996, the Book Net Worth covenant
amount shall be an amount equal to the sum of (i) the greater of the Borrower's
actual Book Net Worth as of December 31, 1995 or $1,075,000, plus (ii) for
January and February of 1996, zero dollars, for March, April and May of 1996,
$50,000, and for June of 1996, $100,000.
Section 6.15 Debt Service Coverage Ratio. The Borrower shall at all
times maintain (exclusive of any Subsidiaries or Affiliates unless the Lender
specifically consents in writing to their inclusion in such calculation), a Debt
Service Coverage Ratio, calculated quarterly as of the end of each fiscal
quarter of the Borrower, of at least 1.3 to 1.0.
Section 6.16 Financial Covenants for Subsequent Periods. The Net
Income, Tangible Net Worth, Book Net Worth, and Debt Service Coverage Ratio
covenants and any other covenants which the Lender may deem appropriate in the
future based upon the financial condition or performance of the Borrower, for
the period commencing July 1, 1996 and thereafter, shall be established by the
Lender in its sole discretion, based upon projections acceptable to the Lender,
delivered to the Lender pursuant to Section 6.1 hereof, but in any event such
covenants shall not be any less stringent than the covenants set forth in
Sections 6.12, 6.13, 6.14 and 6.15 above.
Section 6.17 Future Subsidiaries of Holdings. In the event that
Holdings consummates any acquisition subsequent to the date hereof, and if such
acquisition results in the creation of a new Subsidiary of Holdings, the
Borrower agrees to take any and all action required in order to cause such new
Subsidiary of Holdings to execute a guaranty of the Obligations and the Related
Debt in form and substance acceptable to the Lender in its sole discretion. The
Borrower also agrees that in the event the Lender extends any financial
accommodations to any other Subsidiary of Holdings in addition to the financial
accommodations extended to the Related Borrowers who are Subsidiaries of
Holdings on this date by the Lender pursuant to the Related Loan Documents, the
Borrower will, at the request of the Lender, execute a guaranty of such
financial accommodations, and execute a security agreement or such other
documents as the Lender shall deem necessary in order to grant the Lender a
security interest in the assets of the Borrower to secure the payment and
performance of the financial accommodations to be extended to such Subsidiary of
Holdings by the Lender.
Section 6.18 Availability. The Borrower shall at all times maintain
Availability of at least $50,000.
ARTICLE VII
Negative Covenants
So long as the Note shall remain unpaid or the Credit Facility shall be
outstanding, the Borrower agrees that, without the prior written consent of the
Lender:
Section 7.1 Liens. The Borrower will not (i) create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness, or (ii) incur any lease obligations which are required
to be capitalized on the balance sheet ("Capitalized Lease Obligations");
excluding, however, from the operation of the foregoing:
(a) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in
Exhibit hereto, securing indebtedness for borrowed money permitted
under Section hereof;
(b) the Security Interests;
(c) purchase money security interests or Capitalized Lease
Obligations relating to the acquisition of machinery and equipment of
the Borrower so long as the Borrower is in, and maintains, compliance
with every other provision of this Agreement; and
(d) liens granted to the Lender or any affiliate of the
Lender.
Section 7.2 Indebtedness. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness or Capitalized Lease Obligations of the
Borrower in existence on the date hereof and listed in Exhibit hereto;
and
(c) indebtedness or Capitalized Lease Obligations relating to
liens permitted in accordance with Section hereof.
Section 7.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower
for deposit or collection or similar transactions in the ordinary
course of business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons in
existence on the date hereof and listed in Exhibit hereto.
Section 7.4 Investments and Subsidiaries.
(a) The Borrower will not purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or
permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including
specifically but without limitation any partnership or joint venture,
except:
(1) investments in direct obligations of the United
States of America or any agency or instrumentality thereof
whose obligations constitute full faith and credit obligations
of the United States of America having a maturity of one year
or less, commercial paper issued by U.S. corporations rated
"A-1" or "A-2" by Standard & Poors Corporation or "P-1" or
"P-2" by Moody's Investors Service or certificates of deposit
or bankers' acceptances having a maturity of one year or less
issued by members of the Federal Reserve System having
deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the
Federal Deposit Insurance Corporation);
(2) travel advances or loans to officers and
employees of the Borrower not exceeding at any one time an
aggregate of $10,000; and
(3) advances in the form of progress payments,
prepaid rent or security deposits.
(b) The Borrower will not create or permit to exist any
Subsidiary, other than any Subsidiary in existence on the date hereof
and listed in Exhibit hereto.
Section 7.5 Dividends. The Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock or make any payment on account of the purchase, redemption or
other retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly.
Section 7.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
Section 7.8 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
Section 7.10 Capital Expenditures. The Borrower will not expend or
contract to expend Capital Expenditures or Capitalized Lease Obligations in an
amount greater than $100,000 in the aggregate during any fiscal year.
Section 7.11 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by generally accepted
accounting principles. The Borrower will not adopt, permit or consent to any
change in its fiscal year.
Section 7.12 Discounts, etc. The Borrower will not, after notice from
the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before
after notice from the Lender) modify, amend, subordinate, cancel or terminate
the obligation of any account debtor or other obligor of the Borrower.
Section 7.13 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section hereof.
Section 7.14 Other Defaults. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation binding upon the Borrower.
Section 7.15 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interests. The Borrower will not change
its name.
Section 7.16 Organizational Documents; S Corporation Status. The
Borrower will not amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation within
the meaning of the Internal Revenue Code of 1986, as amended.
Section 7.17 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than 10% in any one year, either individually or for all
such persons in the aggregate, or pay any such increase from any source other
than profits earned in the year of payment. Without limiting the generality of
the foregoing, the Lender agrees that if the Borrower's Board of Directors
approves a bonus or other compensation planned for officers and key employees of
the Borrower and submits such plan to the Lender, the Lender's consent to
payments under such plan in excess of the limitation set forth in this Section
7.17 shall not be unreasonably withheld so long as no Default or Event of
Default has occurred.
Section 7.18 Change in Ownership. The Borrower will not issue or sell
any stock of the Borrower so as to change the percentage of voting and
non-voting stock owned by each of the Borrower's shareholders, and the Borrower
will not permit or suffer to occur the sale, transfer, assignment, pledge or
other disposition of any or all of the issued and outstanding shares of stock of
the Borrower.
Section 7.19 Permitted Payments to Holdings. The Borrower will not make
any payments to Holdings of any amounts of money whatsoever for any purpose
other than (i) payments of management fees payable pursuant to the Management
Agreement so long as such management fees do not exceed an amount equal to five
percent (5%) of the Borrower's gross sales in any fiscal year and so long as
such payments are treated as an expense item; and (ii) additional loans or
advances under the Holdings Note so long as the obligation of Holdings to repay
such loans or advances is evidenced by and payable in accordance with the
Holdings Note.
Section 7.20 Receivables from Affiliates. The Borrower will not allow
the aggregate Receivables due to the Borrower from Affiliates at any time to
exceed $20,000.
ARTICLE VIII
Events of Default, Rights and Remedies
Section 8.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any interest on or principal of
the Note when it becomes due and payable; or
(b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement; or
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement; or
(d) The Borrower or any Guarantor shall be or become
insolvent, or admit in writing its inability to pay its or his debts as
they mature, or make an assignment for the benefit of creditors; or the
Borrower or any Guarantor shall apply for or consent to the appointment
of any receiver, trustee, or similar officer for it or him or for all
or any substantial part of its or his property; or such receiver,
trustee or similar officer shall be appointed without the application
or consent of the Borrower or such Guarantor, as the case may be; or
the Borrower or any Guarantor shall institute (by petition,
application, answer, consent or otherwise) any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution,
liquidation or similar proceeding relating to it or him under the laws
of any jurisdiction; or any such proceeding shall be instituted (by
petition, application or otherwise) against the Borrower or any such
Guarantor; or any judgment, writ, warrant of attachment, garnishment or
execution or similar process shall be issued or levied against a
substantial part of the property of the Borrower or any Guarantor; or
(e) A petition shall be filed by or against the Borrower or
any Guarantor under the United States Bankruptcy Code naming the
Borrower or such Guarantor as debtor; or
(f) Any representation or warranty made by the Borrower in
this Agreement, by any Guarantor in any guaranty delivered to the
Lender or by the Borrower (or any of its officers) or any Guarantor in
any agreement, certificate, instrument or financial statement or other
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement or any such guaranty shall prove to have
been incorrect in any material respect when deemed to be effective; or
(g) The rendering against the Borrower of a final judgment,
decree or order for the payment of money in excess of $10,000 and the
continuance of such judgment, decree or order unsatisfied and in effect
for any period of 30 consecutive days without a stay of execution; or
(h) A default under any bond, debenture, note or other
evidence of indebtedness of the Borrower owed to any Person other than
the Lender, or under any indenture or other instrument under which any
such evidence of indebtedness has been issued or by which it is
governed, or under any lease of any of the Premises, and the expiration
of the applicable period of grace, if any, specified in such evidence
of indebtedness, indenture, other instrument or lease; or
(i) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for
the appointment by the appropriate United States District Court of a
trustee to administer any Plan, shall have occurred and be continuing
30 days after written notice to such effect shall have been given to
the Borrower by the Lender; or a trustee shall have been appointed by
an appropriate United States District Court to administer any Plan; or
the Pension Benefit Guaranty Corporation shall have instituted
proceedings to terminate any Plan or to appoint a trustee to administer
any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed
to make any quarterly contribution required with respect to any Plan
under Section 412(m) of the Internal Revenue Code of 1986, as amended,
which the Lender determines in good faith may by itself, or in
combination with any such failures that the Lender may determine are
likely to occur in the future, result in the imposition of a lien on
the assets of the Borrower in favor of the Plan; or
(j) An event of default shall occur under any Security
Document or under any other security agreement, mortgage, deed of
trust, assignment or other instrument or agreement securing any
obligations of the Borrower hereunder or under any note; or
(k) The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its
business in the ordinary course, or sell all or substantially all of
its assets, without the prior written consent of the Lender; or
(l) The Borrower shall fail to pay, withhold, collect or remit
any tax or tax deficiency when assessed or due (other than any tax
deficiency which is being contested in good faith and by proper
proceedings and for which it shall have set aside on its books adequate
reserves therefor) or notice of any state or federal tax liens shall be
filed or issued; or
(m) Default in the payment of any amount owed by the Borrower
to the Lender other than any indebtedness arising hereunder; or
(n) Any Guarantor shall repudiate, purport to revoke or fail
to perform any such Guarantor's obligations under such Guarantor's
guaranty in favor of the Lender, any individual Guarantor shall die or
any other Guarantor shall cease to exist; or
(o) Any breach, default or event of default by or attributable
to any Affiliate under any agreement between such Affiliate and the
Lender or any affiliate of the Lender (including, without limitation,
Norwest Bank Minnesota, National Association) including, without
limitation, any Default or Event of Default under any of the Related
Loan Documents.
Section 8.2 Rights and Remedies. Upon the occurrence of an Event of
Default or at any time thereafter, the Lender may exercise any or all of the
following rights and remedies:
(a) The Lender may, by notice to the Borrower, declare the
Credit Facility to be terminated, whereupon the same shall forthwith
terminate;
(b) The Lender may, by notice to the Borrower, declare to be
forthwith due and payable the entire unpaid principal amount of the
Note then outstanding, all interest accrued and unpaid thereon, all
amounts payable under this Agreement and any other Obligations,
whereupon the Note, all such accrued interest and all such amounts and
Obligations shall become and be forthwith due and payable, without
presentment, notice of dishonor, protest or further notice of any kind,
all of which are hereby expressly waived by the Borrower;
(c) The Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the
Borrower to the payment of the Advances and the Term Loan, including
interest accrued thereon, and of all other sums then owing by the
Borrower hereunder;
(d) The Lender may, exercise and enforce any and all rights
and remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (without a prior hearing or notice
thereof, which the Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral,
and, in connection therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both
parties;
(e) the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(f) the Lender may exercise any other rights and remedies
available to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section hereof, the entire unpaid principal amount of the Note
(whether contingent or funded), all interest accrued and unpaid thereon, all
other amounts payable under this Agreement and any other Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section ) at least ten calendar days prior to
the date of intended disposition or other action.
ARTICLE IX
Miscellaneous
Section 9.1 No Waiver; Cumulative Remedies. No failure or delay on the
part of the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 9.2 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed to the party to whom notice is being given at its address as
set forth below and, if telecopied, transmitted to that party at its telecopier
number set forth below:
If to the Borrower:
B.V.S., Inc.
801 South 11th Street
Phoenix, AZ 85034
Telecopier: (602) 495-1712
Attention: Edward Van
If to the Lender:
Norwest Credit, Inc.
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-2058
Telecopier: (612) 341-2472
Attention: Michelle Guetter
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article hereof shall not be
effective until received by the Lender.
Section 9.4 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
B.V.S., Inc.
801 South 11th Street
Phoenix, AZ 85034
Federal Tax Identification No. 86-0416231
Name and address of Secured Party:
Norwest Credit, Inc.
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479-2058
Section 9.5 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interests or the rights of the Lender under this
Agreement (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of this Agreement and the Security Interests,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
Section 9.6 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.7 Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) attorneys' fees, incurred
by the Lender in connection with the Obligations, this Agreement, the Loan
Documents and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including without limitation all such costs,
expenses and fees incurred in connection with the negotiation, preparation,
execution, amendment, administration, performance, collection and enforcement of
the Obligations and all such documents and agreements and the creation,
perfection, protection, satisfaction, foreclosure or enforcement of the Security
Interests.
Section 9.8 Indemnity. In addition to the payment of expenses pursuant
to Section hereof and the environmental indemnity pursuant to Section hereof,
the Borrower agrees to indemnify, defend and hold harmless the Lender, and any
of its participants, parent corporations, subsidiary corporations, affiliated
corporations, successor corporations, and all present and future officers,
directors, employees and agents of the foregoing (the "Indemnitees"), from and
against (i) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution and
delivery of this Agreement and the other Loan Documents or the making of the
Advances or the Term Loan, and (ii) any and all liabilities, losses, damages,
penalties, judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and disbursements
of counsel) in connection with any investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be designated a party thereto,
which may be imposed on, incurred by or asserted against such Indemnitee, in any
manner relating to or arising out of or in connection with the making of the
Advances or the Term Loan, this Agreement and all other Loan Documents or the
use or intended use of the proceeds of the Advances or the Term Loan (the
"Indemnified Liabilities"). If any investigative, judicial or administrative
proceeding arising from any of the foregoing is brought against any Indemnitee,
upon request of such Indemnitee, the Borrower, or counsel designated by the
Borrower and satisfactory to the Indemnitee, will resist and defend such action,
suit or proceeding to the extent and in the manner directed by the Indemnitee,
at the Borrower's sole cost and expense. Each Indemnitee will use its best
efforts to cooperate in the defense of any such action, suit or proceeding. If
the foregoing undertaking to indemnify, defend and hold harmless may be held to
be unenforceable because it violates any law or public policy, the Borrower
shall nevertheless make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities which is permissible under applicable
law. The obligation of the Borrower under this Section shall survive the
termination of this Agreement and the discharge of the Borrower's other
Obligations.
Section 9.9 Participants. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the participants, successors or assigns of the Lender.
Section 9.10 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.11 Binding Effect; Assignment; Complete Agreement. The Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lender and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights thereunder or any interest therein
without the prior written consent of the Lender. This Agreement, together with
the Loan Documents, comprises the complete and integrated agreement of the
parties on the subject matter hereof and supersedes all prior agreements,
written or oral, on the subject matter hereof.
Section 9.12 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. Each
party consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related to
this Agreement, waives any argument that venue in any such forum is not
convenient and agrees that any litigation initiated by any of them in connection
with this Agreement shall be venued in either the District Court of Hennepin
County, Minnesota, or the United States District Court, District of Minnesota,
Fourth Division. The parties waive any right to trial by jury in any action or
proceeding based on or pertaining to this Agreement.
Section 9.13 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.14 Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
B.V.S., INC.
By____________________________
Its_________________________
NORWEST CREDIT, INC.
By____________________________
Its_________________________
SIGNATURE PAGE TO CREDIT AND SECURITY AGREEMENT
EXHIBIT A-1 TO CREDIT AND
SECURITY AGREEMENT
REVOLVING NOTE
$400,000.00 Minneapolis, Minnesota
October 30, 1995
For value received, the undersigned, B.V.S., Inc., an Arizona
corporation (the "Borrower"), hereby promises to pay on February 28, 1998 to the
order of Norwest Credit, Inc., a Minnesota corporation (the "Lender"), at its
main office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Four Hundred Thousand and
no/00 Dollars ($400,000.00) or, if less, the aggregate unpaid principal amount
of all Advances made by the Lender to the Borrower under the Credit Agreement
(defined below) together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Credit and Security
Agreement of even date herewith (the "Credit Agreement") by and between the
Lender and the Borrower. The principal hereof and interest accruing thereon
shall be due and payable as provided in the Credit Agreement. This Note may be
prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit
Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest
are expressly waived.
B.V.S., INC.
By____________________________
Its_________________________
EXHIBIT A-2 TO CREDIT AND
SECURITY AGREEMENT
TERM NOTE
$209,000.00 Minneapolis, Minnesota
October 30, 1995
For value received, the undersigned, B.V.S., Inc., an Arizona
corporation (the "Borrower"), hereby promises to pay on February 28, 1998 to the
order of Norwest Credit, Inc., a Minnesota corporation (the "Lender"), at its
main office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Two Hundred Nine Thousand
and no/00 Dollars ($209,000.00) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360- day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the Credit
and Security Agreement of even date herewith (the "Credit Agreement") by and
between the Lender and the Borrower. The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement. This Note
may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Term Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit
Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest
are expressly waived.
B.V.S., INC.
By____________________________
Its_________________________
EXHIBIT B TO CREDIT AND
SECURITY AGREEMENT
NAMES
B.V.S., Inc.
Pallet Exchange
PRANA Phoenix, Inc.
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
801 South 11th Street
Phoenix, AZ 85034
OTHER INVENTORY AND EQUIPMENT LOCATIONS
6045 West Washington
Phoenix, AZ 85043
SUBSIDIARIES
None
EXHIBIT C TO CREDIT AND
SECURITY AGREEMENT
PERMITTED LIENS, INDEBTEDNESS AND GUARANTIES
Liens
NONE
Indebtedness
NONE
Guaranties
Guaranties in favor of the Lender in connection with financial accommodations
extended by the Lender to Otto Packaging, Inc., Quality Pallet, Inc. and Pallet
Supply Co., Inc.
EXHIBIT D TO CREDIT AND
SECURITY AGREEMENT
COMPLIANCE CERTIFICATE
In accordance with our Credit and Security Agreement dated as of
October 30, 1995 (the "Credit Agreement"), attached are the financial statements
of B.V.S., Inc. (the "Borrower") as of and for the month and year-to-date period
ended ______________ __, 199_ (the "Current Financials").
I certify that the Current Financials have been prepared in accordance
with generally accepted accounting principles applied on a basis consistent with
the accounting practices reflected in the financial statements referred to in
Section of the Credit Agreement, subject to year-end audit adjustments.
Defaults and Events of Default (check one)
|_| I have no knowledge of the occurrence of any Default or Event
of Default under the Credit Agreement which has not previously
been reported to you and remedied.
|_| Attached is a detailed description of all Defaults and Events
of Default of which I have knowledge and which have not
previously been reported to you and remedied.
For the date and periods covered by the Current Financials, the
Borrower is in compliance with the covenants set forth in Sections 6.12 through
6.15, 6.17 and 7.10 of the Credit Agreement, except as indicated below. The
calculations made to determine compliance are as follows:
Covenant Actual Requirement
6.12 Net Income $_____________ $_____________
6.13 Tangible Net Worth $_____________ $_____________
6.14 Book Net Worth $_____________ $_____________
6.15 Debt Service
Coverage Ratio _____ to _____ _____ to _____
6.17 Availability $_____________ $_____________
7.10 Capital
Expenditures
Aggregate fiscal
year-to-date
expenditures $_____________ Maximum $_____________
__________________________________
_______________________________ of
B.V.S., Inc.
EXHIBIT E TO CREDIT AND
SECURITY AGREEMENT
PREMISES
The Premises referred to in the Credit and Security Agreement are
legally described as follows:
EXHIBIT F TO CREDIT AND
SECURITY AGREEMENT
TRADEMARKS, PATENTS AND COPYRIGHTS
NONE
EXHIBIT G TO CREDIT AND
SECURITY AGREEMENT
VEHICLES*
1976 Frueh Fbtl VIN FRX636516
1976 Frueh Fbtl VIN FRX636515
1976 Frueh Fbtl VIN FRX636512
1984 Vulca Fbtl VIN 1LZF48207E1001166
1974 Schus Tl VIN G416G22800
1973 Schus Tl VIN K316G31156
1987 Deckk Tl VIN B082
1966 Weste Dptl VIN 16675578
1984 Lufki Fbtl VIN 1L01B4825E1063660
1959 Pike Fbtl VIN 4181
1976 Frueh Fbtl VIN FRX636510
1979 Budd Fbtl VIN 172040L
1979 Trail Fbtl VIN T52538
1976 Trail Fbtl VIN M21585
1960 Utili Fbtl VIN 35536
1975 Lufki Fbtl VIN 45364
1980 Utili Fbtl VIN AZ101860
1979 Aztec Fbtl VIN 4907
1982 Lemon Fbtl VIN 0038
1984 Great Fbtl VIN 1GRDM9027EM052601
1983 Ford St VIN 1FDNF70H1DVA17994
1974 GMC Tt VIN TFH924V562306
1982 Aztec Fbtl VIN A347K
1981 Vanco Vntl VIN 1VVV55201B1000038
1982 Vanco Vntl VIN 1VVV58207C1000953
1972 Ford Tt VIN C70EVP77119
1980 Peter Tt VIN 137929P
1959 Great Tl VIN 17484
1976 Frueh Vntl VIN CHX230132
1976 Frueh Se VIN CHX230164
1976 Frueh Vntl VIN CHX230140
1978 White Tt VIN 2QPCFHI011638
1981 Ford Tt VIN 1FDX96X5BVJ05354
1982 Great Se VIN 1GRDM8829CM020101
1984 Utili Fbtl VIN 1UYFS2454EA187901
*All titled in the State of Arizona
FIRST AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the ____ day of April, 1996 by and between B.V.S.,
Inc., an Arizona corporation (the "Borrower"), and Norwest Credit, Inc., a
Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into the Credit and Security Agreement
dated as of October 30, 1995, (the "Credit Agreement").
The Lender has agreed to make certain loan advances and a term loan to the
Borrower pursuant to the terms and conditions set forth in the Credit Agreement.
The loan advances under the Credit Agreement are evidenced by the Borrower's
revolving note dated as of October 30, 1995, in the maximum principal amount of
$400,000 and payable to the order of the Lender (the "Revolving Note"), and the
term loan is evidenced by the Borrower's term note dated as of October 30, 1995,
in the original principal amount of $209,000 and payable to the order of the
Lender (the "Term Note") (the Revolving Note and the Term Note are collectively
referred to herein as the "Note").
All indebtedness of the Borrower to the Lender is secured pursuant to the terms
of the Credit Agreement and all other Security Documents as defined therein
(collectively, the "Security Documents") and by the Guarantor Security
Agreements (as defined in the Credit Agreement) and is guaranteed pursuant to
the Guaranties (as defined therein) of the Guarantors (as defined therein).
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:
1. Terms used in this Amendment which are defined in the Credit Agreement shall
have the same meanings as defined therein, unless otherwise defined herein.
2. The Credit Agreement is hereby amended as follows:
(a) The following definitions set forth in Section 1.1 of the Credit
Agreement are hereby amended in their entirety to read as follows:
"Guarantor Security Agreements" means, individually and
collectively, the Third Party Security Agreements executed by Pallet
Recycling Associates of North America, Inc., Holdings, Otto Packaging,
Inc., Quality Pallet, Inc., Pallet Supply Co., Inc., Pallet City, Inc.,
and B&B Pallet Supply Company and delivered to the Lender.
"Guarantors" means Pallet Recycling Associates of North
America, Inc., Holdings, Pallet Exchange of Kansas City, Inc., Otto
Packaging, Inc., Harris Supply, Inc., Harris Supply Company of Georgia,
Inc., Quality Pallet, Inc., Hurt's Pallet & Sales, Inc., Pallet Source,
Inc., Pallet City, Inc., PRANA Oklahoma City, Inc., PRANA Denver, Inc.,
B&B Pallet Supply Company, Pallet Supply Co., Inc., PRANA Las Vegas,
Inc., Diamond Pallet, Inc. and any other Subsidiary of any of the
foregoing entities formed or acquired on or after the date hereof.
"Note" means the Revolving Note and the Term Note.
"Related Borrowers" means Holdings, Otto Packaging, Inc.,
Quality Pallet, Inc., Pallet Supply Co., Inc., Pallet City, Inc., and
B&B Pallet Supply Company and any other present or future Affiliate who
at any time incurs indebtedness to the Lender or any affiliate of the
Lender including, without limitation, Norwest Bank Minnesota, National
Association.
(b) Exhibit C to the Credit Agreement is hereby replaced by the Exhibit
C attached hereto.
3. Except as explicitly amended by this Amendment, all of the terms and
conditions of the Credit Agreement shall remain in full force and effect and
shall apply to any advance thereunder.
4. This Amendment shall be effective upon receipt by the Lender of an executed
original hereof, together with each of the following, each in substance and form
acceptable to the Lender in its sole discretion:
(a) The Acknowledgement and Agreement of Guarantors set forth at the
end of this Amendment, duly executed by each of the Guarantors.
(b) Certificate of the Secretary of the Borrower certifying as to (i)
the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the
Articles of Incorporation and Bylaws of the Borrower, which were
certified and delivered to the Lender pursuant to the Certificate of
the Borrower's Secretary dated as of October 30, 1995 continue in full
force and effect and have not been amended or otherwise modified except
as set forth in the Certificate to be delivered, and (iii) certifying
that the officers and agents of the Borrower who have been certified to
the Lender, pursuant to the Certificate of the Borrower's Secretary
dated as of October 30, 1995, as being authorized to sign and to act on
behalf of the Borrower continue to be so authorized or setting forth
the sample signatures of each of the officers and agents of the
Borrower authorized to execute and deliver this Amendment and all other
documents, agreements and certificates on behalf of the Borrower.
(c) Opinion of the Borrower's counsel as to the matters set forth in
paragraphs 6(a) and (b) hereof and as to such other matters as the
Lender shall require.
5. The Borrower hereby represents and warrants to the Lender as follows:
(a) The Borrower has requisite power and authority to execute this
Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitute the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action
and do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the
articles of incorporation or by-laws of the Borrower, or (iii) result
in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound
or affected.
(c) All of the representations and warranties contained in Article V of
the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
6. All references in the Credit Agreement to "this Agreement" shall be deemed to
refer to the Credit Agreement as amended hereby; and any and all references in
the Loan Documents to the Credit Agreement shall be deemed to refer to the
Credit Agreement as amended hereby.
7. The execution of this Amendment and acceptance of any documents related
hereto shall not be deemed to be a waiver of any Default or Event of Default
under the Credit Agreement or breach, default or event of default under any
Security Document or other document held by the Lender, whether or not known to
the Lender and whether or not existing on the date of this Amendment.
8. The Borrower hereby absolutely and unconditionally releases and forever
discharges the Lender, and any and all participants, parent corporations,
subsidiary corporations, affiliated corporations, insurers, indemnitors,
successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and
all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has made claim
to have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including
the date of this Amendment, whether such claims, demands and causes of action
are matured or unmatured or known or unknown.
9. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay
or reimburse the Lender on demand for all costs and expenses incurred by the
Lender in connection with the Credit Agreement, the Security Documents and all
other documents contemplated thereby, including without limitation all
reasonable fees and disbursements of legal counsel. Without limiting the
generality of the foregoing, the Borrower specifically agrees to pay all fees
and disbursements of counsel to the Lender for the services performed by such
counsel in connection with the preparation of this Amendment and the documents
and instruments incidental hereto. The Borrower hereby agrees that the Lender
may, at any time or from time to time in its sole discretion and without further
authorization by the Borrower, make a loan to the Borrower under the Credit
Agreement, or apply the proceeds of any loan, for the purpose of paying any such
fees, disbursements, costs and expenses and the fee required under paragraph 4
hereof.
10. This Amendment and the Acknowledgment and Agreement of Guarantors may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed an original and all of which counterparts, taken
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
B.V.S., INC.
By:
Its:
NORWEST CREDIT, INC.
By:
Its:
ACKNOWLEDGEMENT AND AGREEMENT OF GUARANTORS
The undersigned, each a guarantor of the indebtedness of Pallet Supply Co., Inc.
(the "Borrower") to Norwest Credit, Inc. (the "Lender") pursuant to a separate
Guaranty each dated as of October 30, 1995 (each, a "Guaranty"), hereby (i)
acknowledges receipt of the foregoing Amendment; (ii) consents to the terms and
execution thereof; (iii) reaffirms his or its obligations to the Lender pursuant
to the terms of his or its Guaranty; and (iv) acknowledges that the Lender may
amend, restate, extend, renew or otherwise modify the Credit Agreement and any
indebtedness or agreement of the Borrower, or enter into any agreement or extent
additional or other credit accommodations, without notifying or obtaining the
consent of the undersigned and without impairing the liability of the
undersigned under his or its Guaranty for all of the present and future
indebtedness of the Borrower to the Lender.
PALLET RECYCLING ASSOCIATES OF
NORTH AMERICA, INC.
By:
Its:
PRANA HOLDINGS, INC.
By:
Its:
OTTO PACKAGING, INC.
By:
Its:
HARRIS SUPPLY COMPANY, INC.
By:
Its:
HARRIS SUPPLY COMPANY OF
GEORGIA, INC.
By:
Its:
QUALITY PALLET, INC.
By:
Its:
HURT'S PALLET & SALES, INC.
By:
Its:
PALLET SOURCE, INC.
By:
Its:
PALLET CITY, INC.
By:
Its:
PRANA OKLAHOMA CITY, INC.
By:
Its:
PRANA DENVER, INC.
By:
Its:
B&B PALLET SUPPLY COMPANY
By:
Its:
PALLET SUPPLY CO., INC.
By:
Its:
PALLET EXCHANGE OF
KANSAS CITY, INC.
By:
Its:
PRANA LAS VEGAS, INC.
By:
Its:
DIAMOND PALLET, INC.
By:
Its:
EXHIBIT C TO CREDIT AND SECURITY AGREEMENT
PERMITTED LIENS, INDEBTEDNESS AND GUARANTIES
Liens
NONE
Indebtedness
NONE
Guaranties
Guarantees in favor of the Lender in connection with financial accommodations
extended by the Lender to Otto Packaging, Inc., Quality Pallet, Inc., Pallet
Supply Co., Inc., Pallet City, Inc. and B&B Pallet Supply Company.
EXHIBIT 23.2
INDEPENDENT AUDITORS' REPORT AND CONSENT
The Board of Directors
Pallet Recycling Associates of North America, Inc.
The audits referred to in our report dated February 9, 1996, except as to
notes 10, 17, 14, 16(c)(iii), 15, 16(a), 16(c)(ii), 16(b), and 16(c)(i),
which are as of August 30, 1996, August 30, 1996, August 19, 1996, June 25,
1996, June 7, 1996, April 25, 1996, April 23, 1996, April 4, 1996, and March
4, 1996, respectively, included the related financial statement schedule
as of December 31, 1995, and for the period from March 2, 1993 (date of
inception) to December 31, 1993 and for the years ended December 31, 1994 and
1995, included in the registration statement. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects, the information set
forth therein.
Our report dated February 9, 1996, except as to notes 10, 17, 14, 16(c)(iii),
15, 16(a), 16(c)(ii), 16(b), and 16(c)(i), which are as of August 30, 1996,
August 30, 1996, August 19, 1996, June 25, 1996, June 7, 1996, April 25,
1996, April 23, 1996, April 4, 1996 and March 4, 1996, respectively,
indicates that the Company has incurred net losses since its inception date,
has defaulted on the payment of certain notes, and is not in compliance with
certain terms of its long-term debt agreements. The combination of these
events has put the Company in a working capital deficit position, which
raises substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements and financial statement
schedule do not include any adjustments that might result from the outcome of
that uncertainty.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 5, 1996
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pallet Recylcing Associates of North America, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
SCHUTTA, NELSON & ZEMBAL, LTD.
/s/ SCHUTTA, NELSON & ZEMBAL, LTD.
Minneapolis, Minnesota
August 30, 1996
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<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
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