-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O6fntQB8gqEIuykfmBf4CsPHsbUvgGvVozIc6sGSTtfIyKhr1tFkdVR+xpv98UjO 10mDIMuEo1+6PApljqs8ig== 0001072613-03-000073.txt : 20030114 0001072613-03-000073.hdr.sgml : 20030114 20030114162314 ACCESSION NUMBER: 0001072613-03-000073 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021130 FILED AS OF DATE: 20030114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALWEB CORP CENTRAL INDEX KEY: 0001088413 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 751984048 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26331 FILM NUMBER: 03513732 BUSINESS ADDRESS: STREET 1: 1607 W COMMERCE ST CITY: DALLAS STATE: TX ZIP: 75208 BUSINESS PHONE: 2146988330 MAIL ADDRESS: STREET 1: 1607 W. COMMERCE ST CITY: DALLAS STATE: TX ZIP: 75208 10QSB 1 form10-q_11681.txt PALWEB CORPORATION FORM 10-QSB ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2002 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ________ Commission file number 000-26331 --------- PALWEB CORPORATION ------------------ (Exact name of small business issuer as specified in its charter) OKLAHOMA 75-2954680 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1607 WEST COMMERCE STREET DALLAS, TEXAS 75208 ------------------------- ------------------- (Address of principal executive offices) (City, State and Zip Code) (214) 698-8330 -------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: NOVEMBER 30, 2002 - 5,155,373 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [_] No [X] ================================================================================ PALWEB CORPORATION FORM 10-QSB FOR THE PERIOD ENDED NOVEMBER 30, 2002 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAGE Balance Sheets as of November 30, 1 2002 and May 31, 2002 Statement of Operations 2 For the Six Month Periods Ended November 30, 2002 and 2001 Statements of Operations 3 For the Three Month Periods Ended November 30, 2002 and 2001 Statements of Cash Flows for the 4 For the Six Month Periods Ended November 30, 2002 and 2001 Notes to Financial Statements 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 7 ITEM 3. CONTROLS AND PROCEDURES 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 13 ITEM 2. CHANGES IN SECURITIES 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 SIGNATURES 16 CERTIFICATIONS 17 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PALWEB CORPORATION CONSOLIDATED BALANCE SHEETS
November 30, May 31, 2002 2002 ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash $ 10,109 $ 13,521 Accounts receivable 481,448 43,646 Inventory 354,735 204,446 ------------ ------------ TOTAL CURRENT ASSETS 846,292 261,613 PROPERTY, PLANT AND EQUIPMENT, at cost 8,210,777 7,453,529 Accumulated depreciation (624,002) (509,199) ------------ ------------ TOTAL PROPERTY, PLANT AND EQUIPMENT 7,586,775 6,944,330 OTHER ASSETS 153,268 161,396 ------------ ------------ TOTAL ASSETS $ 8,586,335 $ 7,367,339 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Notes payable $ 4,242,700 $ 3,777,700 Notes payable - related party 2,150,000 -- Accounts payable and accrued liabilities 1,114,911 570,868 Preferred dividends payable -- 211,440 ------------ ------------ TOTAL CURRENT LIABILITIES 7,507,611 4,560,008 STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par, 20,750,000 shares authorized; 750,000 outstanding 75 75 Common stock, $.0001 par value, 5,000,000,000 authorized, outstanding - 5,155,373 and 4,691,625 516 469 Additional paid-in capital 41,517,969 40,732,767 Deficit (40,439,836) (37,925,980) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 1,078,724 2,807,331 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,586,335 $ 7,367,339 ============ ============ The accompanying notes are an integral part of this consolidated financial statement.
1 PALWEB CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended November 30, ------------------------------- 2002 2001 ----------- ----------- SALES $ 573,929 $ 38,788 COST OF SALES 1,439,863 315,053 ----------- ----------- GROSS PROFIT (LOSS) (865,934) (276,265) EXPENSES: General and administrative expense 752,281 634,518 Impairment of fixed assets 310,875 -- Interest expense 135,833 105,094 ----------- ----------- TOTAL EXPENSES 1,198,989 739,612 ----------- ----------- LOSS, BEFORE DISCONTINUED OPERATIONS (2,064,923) (1,015,877) LOSS FROM DISCONTINUED OPERATIONS -- (104,818) ----------- ----------- NET LOSS $(2,064,923) $(1,120,695) =========== =========== LOSS PER COMMON SHARE: LOSS BEFORE DISCONTINUED OPERATIONS $ (0.51) $ (0.22) DISCONTINUED OPERATIONS -- (0.02) ----------- ----------- LOSS PER COMMON SHARE $ (0.51) $ (0.24) =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 4,934,000 4,644,000 =========== =========== The accompanying notes are an integral part of this consolidated financial statement. 2 PALWEB CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended November 30, ------------------------------- 2002 2001 ----------- ----------- SALES $ 513,012 $ 26,547 COST OF SALES 813,218 220,414 ----------- ----------- GROSS PROFIT (LOSS) (300,206) (193,867) EXPENSES: General and administrative expense 408,809 292,750 Impairment of fixed assets 310,875 -- Interest expense 78,026 50,941 ----------- ----------- TOTAL EXPENSES 797,710 343,691 ----------- ----------- LOSS, BEFORE DISCONTINUED OPERATIONS (1,097,916) (537,558) LOSS FROM DISCONTINUED OPERATIONS -- (64,093) ----------- ----------- NET LOSS $ (1,097,916) $ (601,651) =========== =========== LOSS PER COMMON SHARE: LOSS BEFORE DISCONTINUED OPERATIONS $ (0.26) $ (0.12) DISCONTINUED OPERATIONS -- (0.01) ----------- ----------- LOSS PER COMMON SHARE $ (0.26) $ (0.13) =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 5,073,000 4,650,000 =========== =========== The accompanying notes are an integral part of this consolidated financial statement. 3 PALWEB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended November 30, --------------------------------- 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by (used) continuing operations $(1,585,870) $ 543,272 Net cash provided by (used) discontinued operations -- (24,244) ------------ ------------ Net cash flow provided by (used) operations (1,585,870) 519,028 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,068,123) (4,272,534) Decrease in loans receivable -- 225,389 Other 7,831 -- ------------ ------------ Net cash used in investing activities (1,060,292) (4,047,145) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 2,650,000 3,721,820 Payments on notes payable (35,000) (20,398) Proceeds from issuance of common stock 27,750 -- ------------ ------------ Net cash provided by financing activities 2,642,750 3,701,422 ------------ ------------ NET INCREASE (DECREASE) IN CASH (3,412) 173,305 CASH, beginning of period 13,521 80,469 ------------ ------------ CASH, end of period $ 10,109 $ 253,774 ============ ============ NONCASH ACTIVITIES: Issuance of common stock in payment of preferred dividends $ 660,374 -- Issuance of common stock in payment of liabilities and claims 97,126 -- Conversion of preferred stock to common -- 55 Amortization of deferred income to additional paid-in capital -- 70,704 The accompanying notes are an integral part of this consolidated financial statement.
4 PALWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial position as of November 30, 2002, and the results of its operations and its cash flows for the six month and three month periods ended November 30, 2002 and 2001. These consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended May 31, 2002 and the notes thereto included in the Company's Form 10-KSB. 2. PalWeb was classified a development stage company from its inception November 20, 1995 to August 31, 2002. The accumulated deficit during the development stage totaled $39,117,987. 3. The results of operations for the six month and three month periods ended November 30, 2002 are not necessarily indicative of the results to be expected for the full year. 4. The computation of loss per share is computed by dividing the loss available to common stockholders by the weighted average shares outstanding for the periods. For the six month and three month periods ended November 30, 2002, loss available to common stockholders is determined by adding preferred dividends for the periods in the amounts of $448,934 and $225,000, respectively, to the loss from continuing operations and to net loss. There were no preferred dividends for the comparable periods ended November 30, 2001. For the six month periods ended November 30, 2002 and 2001, the average common shares outstanding are 4,934,000 and 4,644,000, respectively. For the three month periods ended November 30, 2002 and 2001, the average common shares outstanding are 5,073,000 and 4,650,000, respectively. Convertible preferred stock is not considered as its effect is antidilutive. 5. PalWeb incurred an expense of $310,875 in fiscal year 2003 to record the impairment of certain production equipment. PalWeb wrote down the cost of its original prototype injection molding machine and related molds to the value of the expected future cash flows. 6. Effective October 17, 2002, PalWeb's Board of Directors authorized the issuance of 15,584 shares of common stock at the then market rate of $1.50 per share to Paul Kruger in payment of $23,376 of accrued interest as of October 31, 2002, on notes payable to Mr. Kruger. 7. Effective October 17, 2002, the Board of Directors authorized dividends on the Series 2001 preferred stock in the amount of $223,934 as of September 30, 2002. Additionally, the Board authorized payment of such preferred dividends in the form of restricted common stock at 5 the then market rate of $1.50 per share of common stock or 149,289 shares. 8. See "Management Discussion and Analysis, Liquidity and Capital Resources," for discussion regarding the January 10, 2003, refinancing of debt by Paul Kruger through issuance of a $7,000,000 note payable at 3% above prime rate of interest, due June 4, 2004. 6 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS - --------------------- GENERAL TO ALL PERIODS The consolidated statements include PalWeb and its wholly-owned subsidiary, Plastic Pallet Production, Inc. ("PPP"). PalWeb has incurred significant losses from operations, and there is no assurance that it will achieve profitability or obtain funds necessary to finance continued operations. PalWeb's primary business is the manufacturing and selling of plastic pallets, which is referred to herein as continuing operations. During the period ended November 30, 2002, PalWeb has continued to explore the possible marketing of its patent-pending PIPER 600 equipment to third parties; however generating pallet sales remain the company's main focus. For the month of November 2002, production of plastic pallets was approximately 10,000. PalWeb has a production capacity of approximately 40,000 pallets per month. As of November 30, 2002, PalWeb had 18 full-time and 18 temporary employees. Temporary employees are used to supplement the manufacturing process as necessary. This production level will be maintained as sales dictate. There is no assurance that PalWeb will receive orders for pallets that will maintain, or justify any significant increase to, PalWeb's current production levels. For all years presented, PalWeb's effective tax rate is 0%. PalWeb has generated net operating losses since inception, which would normally reflect a tax benefit in the statement of operations and a deferred asset on the balance sheet. However, because of the current uncertainty as to PalWeb's ability to achieve profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the consolidated statement of operations. PRODUCTS PalWeb currently has three series of plastic pallets: Hawker, Granada and Tank. The following is a description of each series and its pallet line. o HAWKER SERIES PalWeb's Hawker Series pallets are all manufactured using the Company's proprietary fire retardant plastic blend. o THE HAWKER 4840 PICTURE-FRAME interlocking pallet is the first in the Hawker Series. The Hawker 4840 utilizes a patented inter-locking design featuring CJ2TM fire retardant polymers that are UL 2335 certified. The Hawker 4840 has a static load capacity of 25,000 lbs., and weighs approximately 53 lbs. 7 o GRANADA SERIES The Granada series of pallets are manufactured using a blend of recycled plastic developed by the Company. The Granada series features a picture frame, nestable, stackable and three-runner pallet. o THE GRANADA PICTURE FRAME PALLET utilizes the patented inter-locking design, and has a dynamic load of 5,000 lbs., rackable load of 2,800 lbs., and weighs approximately 47.5 lbs. o THE GRANADA STACKABLE PALLET, which consists of the tops of the Granada Picture Frame, has a dynamic load of 5,000 lbs. and a static load of 7,000 lbs. The Granada Stackable weighs approximately 32 lbs. o THE GRANADA NESTABLE PALLET features a dynamic load of 5,000 lbs. and a static load of 7,000 lbs. The Granada Nestable weighs approximately 30 lbs. o THE GRANADA THREE-RUNNER PALLET with a free-span racking capacity of 1,200 lbs., features a dynamic load of 5,000 lbs. and a static load of 12,000 lbs. The Granada Three-Runner which weighs approximately 41 lbs., utilizes a design that allows for easier handling by electric plastic pallet trucks. o TANK SERIES PalWeb's Tank Series pallets are manufactured using virgin materials developed by the Company. The Tank Picture Frame Pallet is the first in the Tank Series. o The Tank Picture Frame Pallet which features the patented interlocking design, has a static load of 30,000 lbs., and weighs approximately 50 lbs. The Hawker 4840, Granada Picture Frame, Granada Three- Runner and Tank Picture Frame all successfully passed the CONTAINER TECHNOLOGIES LABORATORY INC., TEST ASTM D1185-98A which included open rack bend, compression, free fall impact, random vibration and incline impact tests. SALES PalWeb primary marketing efforts are the development of distributors in key geographic locations and attendance at material handling trade shows. Sales for the six months ended November 30, 2002, consisted of 230 Hawker 4840 Pallets, 13,807 Granada Picture Frame Pallets, 3,327 Granada Nestable and Stackable Pallets, 4,650 Granada Three-Runner Pallets, and 1,638 Tank Picture Frame Pallets. 8 SIX MONTH PERIOD ENDED NOVEMBER 30, 2002, COMPARED TO SIX MONTH PERIOD ENDED NOVEMBER 30, 2001 CONTINUED OPERATIONS Sales for the six month period ended November 30, 2002 were $573,929 compared to $38,788 in fiscal year 2001. Sales revenues remained insufficient to cover material and operating costs. The increase of $535,141 represents PalWeb's ongoing sales efforts as described above. Cost of sales was $1,439,863 in fiscal year 2003 compared to $315,053 in fiscal year 2002 for an increase of $1,124,810. The principal reason for this increase is a combination of (1) start-up costs required to operate the new production line and upgrade the original prototype equipment to produce nestable pallets and (2) costs related to the increased production including the addition of another production shift, materials, depreciation and utilities. Start-up costs included training, building modifications to accommodate the production line and reconfiguration of certain molds. PalWeb is currently operating two shifts. Additional personnel may be required if sales increase further. The general and administrative expenses increased $117,763 from $634,518 for fiscal year 2002 to $752,281 for fiscal year 2003. This increase is primarily due to the addition of personnel and commissions on sales of pallets. In addition, PalWeb incurred $83,750 in settlement of a claim by Roger Landress through payment of $50,000 cash and the issuance of 15,000 shares of common stock. PalWeb intends to pursue indemnification from the Union Group Inc.; however, there is no assurance that PalWeb will be successful in recovering the costs. During the period ended November 30, 2002, PalWeb wrote down the cost of its original prototype injection molding machine and related molds. An expense of $310,875 was recorded to reduce the cost of this equipment to the expected future cash flows. Interest expense increased $30,739 from $105,094 in fiscal year 2002 to $135,833 in fiscal year 2003. The debt outstanding at November 30, 2001, was exchanged for preferred stock on January 4, 2002. The debt outstanding at November 30, 2002, was incurred subsequent to January 4, 2002, to fund additions to property and equipment and working capital. The loss from continuing operations increased $1,049,046 from $1,015,877 for fiscal year 2002 to $2,064,923 for fiscal year 2003. After deducting the loss from discontinued operations in fiscal year 2002, the net loss is $1,120,695, or $0.24 per share, compared to a net loss of $2,064,923 or $0.51 per share in fiscal year 2003 for an increase of $944,228. THREE MONTH PERIOD ENDED NOVEMBER 30, 2002, COMPARED TO THREE MONTH PERIOD ENDED NOVEMBER 30, 2001 9 CONTINUED OPERATIONS Sales for the three month period ended November 30, 2002 were $513,012 compared to $26,547 in 2001 and sales revenues remained insufficient to cover material and operating costs. The increase was $486,465 and represents PalWeb's ongoing sales efforts as described above. Cost of sales were $813,218 in fiscal year 2003 compared to $220,414 in fiscal year 2002 for an increase of $592,804. The principal reason is the increased production of pallets including costs associated with the addition of another production shift, materials, depreciation, repairs and maintenance and utilities . PalWeb is currently operating two shifts. Additional personnel may be required if sales increase further. The general and administrative expenses increased $116,059 from $292,750 for fiscal year 2002 to $408,809 for fiscal year 2003. This increase is primarily due to the addition of personnel and commission on sales of pallets. During the three month period ended November 30, 2002, PalWeb wrote down the cost of its original prototype injection molding machine and related molds. An expense of $310,875 was recorded to reduce the cost of this equipment to the expected future cash flows. Interest expense increased $27,085 from $50,941 in fiscal year 2002 to $78,026 in fiscal year 2003. The debt outstanding at November 30, 2001 was exchanged for preferred stock on January 4, 2002. The debt outstanding at November 30, 2002, was incurred subsequent to January 4, 2002 to fund additions to property and equipment and working capital. The loss from continuing operations increased $560,358 from $537,558 for fiscal year 2002 to $1,097,916 for fiscal year 2003. After deducting the loss from discontinued operations in fiscal year 2002, the net loss is $601,651, or $0.13 per share, compared to a net loss of $1,097,916 or $0.26 per share in fiscal year 2003 for an increase of $496,265. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- GENERAL Currently, PalWeb's management projects that the sales of approximately 15,000 pallets per month are necessary to break even. Sales at this level would provide monthly revenues of approximately $450,000 and should provide sufficient cash flow to sustain its operations including about $225,000 in cash operating expenses for labor, recurring overhead and interest and $225,000 for material costs. Although significant sales orders have been executed, there is no assurance that this sales level will be achieved. Until sales reach this level, PalWeb will remain dependent on 10 outside sources of cash to fund its operations as its sales revenues will be insufficient to meet current liabilities. PalWeb has had difficulty in obtaining financing from traditional financing sources. Substantially all of the financing that PalWeb has received through November 30, 2002, has been provided by loans from entities controlled by Mr. Paul Kruger, PalWeb's former Chairman and Chief Executive Officer, and from entities affiliated with Warren Kruger, Paul Kruger's brother and current President and a director of PalWeb, and through the offering of 2001 Preferred Stock. In addition, PalWeb's former bank line of credit, which was outstanding on November 30, 2002, was obtained with the personal guarantees of Paul Kruger and Warren Kruger plus a lien on all equipment. The bank line of credit is being replaced with financing provided by Paul Kruger pursuant to an agreement with PalWeb and PPP reached on January 10, 2003. For further discussion of the financing provided by Paul Kruger, see "Paul Kruger Financing" below. There is no assurance that Paul Kruger or Warren Kruger will continue to provide loans or loan guarantees in the future. OTHER PalWeb has accumulated a working capital deficit of approximately $6,661,000 at November 30, 2002, which includes $3,492,700 due to The F&M Bank & Trust Company, $2,150,000 due to Paul Kruger, $750,000 mortgage payable to Texas Capital Bank due January 1, 2003 and $1,114,911 in accounts payable and accrued liabilities. The working capital deficit reflects the uncertain financial condition of PalWeb resulting from its inability to obtain long term financing until it can generate sufficient sales to support its operations. There is no assurance that PalWeb will secure such financing. YORKTOWN FINANCING Subsequent to November 30, 2002, Yorktown Management & Financial Services, L.L.C. ("Yorktown"), an entity with which Warren Kruger is affiliated, agreed to loan PalWeb and PPP up to $500,000 pursuant to an unsecured promissory note with interest at the fixed rate of nine percent (9%) per annum. The principal and interest due under the note mature on January 4, 2003, with automatic extensions for successive thirty (30) day periods until Yorktown provides notice of its election not to further extend such maturity. Through the filing date of this report, Yorktown had advanced $402,953 under the note. Yorktown has not provided any notice of an election not to extend the maturity of the note. PAUL KRUGER FINANCING At November 30, 2002, PalWeb had outstanding bank financing provided by The F&M Bank and Trust Company ("F&M"), and PPP had granted a deed of trust on its building to secure indebtedness to Texas Capital Bank ("Texas Capital"). The F&M financing and the Texas Capital loan are being replaced by a loan provided by Paul Kruger, PalWeb's former Chairman and Chief Executive Officer. The Yorktown financing discussed above is not being repaid pursuant to the loan 11 from Paul Kruger. Effective January 10, 2003, PalWeb entered into a Loan Agreement with Paul Kruger whereby Mr. Kruger will provide $7,000,000 in financing at 3% above the prime rate of interest due June 4, 2004 (the "Loan Agreement"). The proceeds will be used to pay the outstanding debt to F&M, Texas Capital and to Paul Kruger. Mr. Kruger, along with an officer and two employees associated with Mr. Kruger, and Lyle Miller, a director, will resign their employment and director positions with PalWeb, and: (1) Those resigning will become fully vested with respect to all PalWeb common stock options previously granted to them and will receive extensions on the exercise of such options for a period of five (5) years from the effective date of the Paul Kruger loan, or until January 10, 2008, at the same exercise price. (2) Mr. Kruger will receive a non-exclusive distribution agreement to acquire pallets at PPP's F.O.B. price at PPP's plant in Dallas, Texas, less the greatest discounts or concessions made to any of PPP's other distributors for similar kinds and quantities of products. The agreement may be terminated by either party upon thirty (30) days written notice to the other party. (3) Mr. Kruger will receive an assignment of a $20,000,000 default judgement that PalWeb holds in its favor against Wolfgang Ullrich, a German citizen. PalWeb will have the option to participate pro rata with Paul Kruger in any or all of the judgment proceeds by electing to pay a share of the costs associated with enforcement and collection of the judgment. (4) Pursuant to the Loan Agreement, to secure the financing provided by Mr. Kruger, PalWeb and PPP have granted to Mr. Kruger a lien on all assets of PPP, and PalWeb has granted to Mr. Kruger a pledge of its stock in PPP. In addition, in connection with the Loan Agreement, PalWeb and PPP have agreed, among other things, not to engage in the following activities without the written consent of Paul Kruger: o create, assume or suffer to exist certain liens, charges or encumbrances on the properties encumbered to Mr. Kruger; o sell, assign, transfer, convey, or encumber their assets; o create, assume or suffer to exist any indebtedness in excess of $500,000 in any single year; o make certain loans, advances or extensions of credit; o merge, consolidate, enter into certain business combinations, or acquire substantially all of the assets of any other corporation; o liquidate either corporation; 12 o engage in any business activities substantially different from or unrelated to their present or proposed business activities; o declare or pay certain cash or asset dividends; or o permit intercompany transfers, loans or advances to other companies related to either PalWeb or PPP. PalWeb continues to be dependent upon Paul Kruger and Warren Kruger to provide and/or secure additional financing and there is no assurance that either will do so. As such, there is no assurance that funding will be available for PalWeb to continue operations. MATERIAL RISKS - -------------- PalWeb has incurred significant losses from operations and there is no assurance that it will achieve profitability or obtain funds to finance continued operations. For other material risks, see PalWeb's Form 10-KSB for the period ended May 31, 2002, which was filed on September 13, 2002. ITEM 3. CONTROLS AND PROCEDURES PalWeb's Chief Executive Officer and Chief Financial Officer (collectively, the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures. Such officers have concluded that PalWeb's disclosure controls and procedures are effective to ensure that information required to be disclosed by PalWeb in this report is accumulated and communicated to allow timely decisions regarding required disclosure. The Certifying Officers also have indicated that there were no significant changes in PalWeb's internal controls or other factors that could significantly affect such controls as of the date of this report. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS No changes during the period. ITEM 2. CHANGES IN SECURITIES Effective October 17, 2002, PalWeb authorized the issuance of 15,584 shares of common stock in payment of interest expense accrued through October 31, 2002, in the amount of $23,376 on notes payable to Paul Kruger. Holders of PalWeb's Series 2001 12% Cumulative Convertible Senior Preferred Stock ("2001 13 Preferred Stock") are entitled to cumulative dividends of 12% per annum, $1.20 per share, or a total of $900,000. In lieu of the quarterly payment of cash dividends $223,934 due on September 30, 2002, the holders of such 2001 Preferred Stock agreed to accept common stock of PalWeb, and PalWeb's Board of Directors approved the payment of such dividends in the form of 149,289 shares of the authorized but unissued shares of the company's common stock at an effective price of $1.50 per share as of the date such payment of shares was authorized. PalWeb relied on the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended, in connection with the issuance of the stock and the stock dividend set forth above. All parties listed above are sophisticated persons or entities. All of the purchasers executed investment letters representing that they had sufficient access to information to make the investment and acknowledging the restrictions on transfer of the stock. There was no underwriting, and no commissions were paid to any party upon the issuance of such stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits 10.1 Promissory Note in the amount of $500,000.00 executed by PalWeb Corporation and Plastic Pallet Production, Inc., in favor of Yorktown Management & Financial Services, Inc., dated December 4, 2002 (submitted herewith). 10.2 Letter Agreement between PalWeb Corporation, Plastic Pallet Production, Inc., and Paul A. Kruger dated January 10, 2003 (submitted herewith). 10.3 Loan Agreement between PalWeb Corporation, Plastic Pallet Production, Inc., and Paul A. Kruger dated January 10, 2003 (submitted herewith). 10.4 Promissory Note in the amount of $7,000,000.00 executed by PalWeb Corporation and Plastic Pallet Production, Inc., in favor of Paul A. Kruger dated January 10, 2003 (submitted herewith). 10.5 Stock Pledge Agreement executed by PalWeb Corporation in favor of Paul A. Kruger dated January 10, 2003 (submitted herewith). 10.6 Security Agreement between PalWeb Corporation, Plastic Pallet Production, Inc., and Paul A. Kruger dated January 10, 2003 (submitted herewith). 10.7 Deed of Trust executed by Plastic Pallet Production, Inc., in favor of Paul A. Kruger dated January 10, 2003 (submitted herewith). 10.8 Letter Agreement between PalWeb Corporation and Lyle W. Miller dated 14 January 10, 2003 (amending terms of outstanding stock options)(submitted herewith). 11.1 Computation of Loss per Share is in Note 3 in the Notes to the financial statements. 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.ss.1350 (submitted herewith). 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 (submitted herewith). B. Reports on Form 8-K One report on Form 8-K was filed by PalWeb during the three months ended November 30, 2002, regarding a change in auditors. 15 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be singed on its behalf by the undersigned, thereunto duly authorized. PALWEB CORPORATION ------------------------------------ (Registrant) Date: January 14, 2003 /s/ Warren F. Kruger ------------------------------------ Warren F. Kruger President and Chief Executive Officer 16 CERTIFICATIONS I, Warren F. Kruger, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of PalWeb Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 17 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 14, 2003 /s/ Warren F. Kruger ------------------------------------ Warren F. Kruger President and Chief Executive Officer (Principal Executive Officer) 18 CERTIFICATIONS I, William W. Rahhal, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of PalWeb Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 19 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 14, 2003 /s/ William W. Rahhal ------------------------------------ William W. Rahhal Chief Financial Officer (Principal Financial Officer) 20 EX-10.1 3 ex10-1_11681.txt PROMISSORY NOTE DATED DECEMBER 4, 2002 EXHIBIT 10.1 ------------ PROMISSORY NOTE $500,000.00 Norman, Oklahoma December 4, 2002 FOR VALUE RECEIVED, the undersigned Borrowers, jointly and severally, promise to pay to the order of Yorktown Management & Financial Services, L.L.C. (the "Lender"), at Norman, Oklahoma, or such other place as the holder may designate in writing, the principal sum of Five Hundred Thousand Dollars ($500,000.00), or so much thereof as shall have been advanced by Lender to either Borrower and remain outstanding, with interest thereon at the rate of nine percent (9%) per annum. The outstanding principal and accrued interest shall be payable in a single lump sum payment at maturity on January 4, 2003; provided that the maturity of this Note shall automatically be extended for successive thirty (30) day periods unless and until Lender shall have given written notice to Borrowers at least ten (10) days prior to any scheduled maturity date hereunder of Lender's election not to extend further the maturity of this Note, in which event all outstanding principal and accrued interest shall become due and payable on the next scheduled maturity date following such notice. The undersigned agree that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the holder's rights hereunder, the undersigned will pay to the holder a reasonable attorney's fee, together with all court costs and other expenses of collection paid by such holder. On the breach of any provision of this Note or of any other instrument evidencing or securing payment of this Note, at the option of the holder, and, should the undersigned fail to cure the breach within ten (10) days after receipt of written notice specifying the breach, the entire indebtedness hereby evidenced will become due, payable and collectible then or thereafter as the holder may elect, regardless of the date of maturity hereof. This Note may be prepaid in whole or in part at any time, without penalty, and shall be prepaid to the extent either Borrower receives additional financing from third parties for such repayment. This Note is made, executed, delivered and to be performed in Norman, Oklahoma and shall be governed by and construed in accordance with the laws of the State of Oklahoma applicable to promissory notes made and to be performed therein, without reference to its conflict of laws provisions. Any suit, action or proceeding with respect to this Note shall be brought exclusively in the Oklahoma state courts of competent subject matter jurisdiction sitting in Cleveland County, Oklahoma, or in the United States District Court for the District of Oklahoma in which Cleveland County is located. The Borrowers hereby irrevocably waive any objections which Borrowers may now or hereafter have to the jurisdiction or venue of any suit, action or proceeding, arising out of or relating to this Note, brought in such courts, and hereby further irrevocably waive any claim that such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Borrowers hereby further irrevocably waive any right to a jury trial in any action arising out of or in connection with this Note or any related agreements. For the purpose of computing interest under this Note, payments of all or any portion of the principal sum owing under this Note will not be deemed to have been made until such payments are received by the Lender in collected funds. All agreements between the Borrowers and the Lender are expressly limited so that in no event whatsoever, whether by reason of disbursement of the proceeds hereof or otherwise, shall the amount of interest or finance charge (as defined by the laws of the State of Oklahoma) paid or agreed to be paid by the Borrowers to the Lender exceed the highest lawful contractual rate of interest or the maximum finance charge permissible under the law which a court of competent jurisdiction, by final non-appealable order, determines to be applicable hereto. If fulfillment of any agreement between the Borrowers and the Lender, at the time the performance of such agreement becomes due, involves exceeding such highest lawful contractual rate or such maximum permissible finance charge, then the obligation to fulfill the same shall be reduced so that such obligation does not exceed such highest lawful contractual rate or maximum permissible finance charge. If by any circumstance the Lender shall ever receive as interest or finance charge an amount which would exceed the amount allowed by applicable law, the amount which may be deemed excessive shall be deemed applied to the principal of the indebtedness evidenced hereby and not to interest. All interest and finance charges paid or agreed to be paid to the Lender shall be prorated, allocated and spread throughout the full period of this Note. The terms and provisions of this paragraph shall control all other terms and provisions contained herein and in any of the other documents executed in connection herewith. If any provision of this Note or the application thereof to any party or encumbrance is held invalid or unenforceable, the remainder of this Note and the application of such provision to other parties or circumstances shall not be affected thereby, the provisions of this Note being severable in any such instance. The makers, endorsers, sureties, guarantors and all other persons who may be liable for all or any part of this obligation severally waive presentment for payment, protest, demand and notice of nonpayment. Said parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the security for the payment hereof, or release of any party liable for payment of this obligation. Any such extensions or release may be made without notice to any such party and without discharging said party's liability hereunder. The failure of the Lender to exercise any of the remedies or options set forth in this Note or in any instrument securing payment hereof, or any agreement by the Lender to forebear from exercising any available remedy for any specified period upon the occurrence of one or more of the events of default shall not constitute a waiver of the right to exercise the same or any other remedy at law, or in equity, at any subsequent time in respect to the same or any other event of default. The acceptance by the Lender of any payment which is less than the total of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing remedies or options at that time or at any subsequent time, or nullify any 2 prior exercise of any such remedy or option, without the express consent of the Lender, except as and to the extent otherwise provided by law. "BORROWERS" PALWEB CORPORATION By: /s/ Paul A. Kruger ------------------------------------ Paul A. Kruger, President PLASTIC PALLET PRODUCTION, INC. By: /s/ Paul A. Kruger ------------------------------------ Paul A. Kruger, President 3 EX-10.2 4 ex10-2_11681.txt LETTER AGREEMENT WITH PAUL A. KRUGER EXHIBIT 10.2 ------------ PalWeb Corporation 1607 West Commerce Street Dallas, Texas 75208 Plastic Pallet Production, Inc. 1607 West Commerce Street Dallas, Texas 75208 January 10, 2003 Paul A. Kruger 2500 S. McGee, Suite 147 Norman, OK 73072 Re: $7,000,000 Financing of PalWeb Corporation and Plastic Pallet Production, Inc. Dear Paul: This letter is intended to memorialize the terms of the agreement between you and PalWeb Corporation ("PalWeb") and Plastic Pallet Production, Inc. ("PPP"), pursuant to which you have agreed to loan seven million dollars ($7,000,000) to PalWeb and PPP (the "Loan"). 1. Financing. You or your affiliates are making a loan to PalWeb and PPP on the date hereof (the "Closing Date"), in the amount of $7,000,000. The terms of the Loan are as set forth in a loan agreement, promissory note, security agreement and stock pledge agreement being executed and delivered on the Closing Date. 2. Assignment of Judgments and Agreement Regarding Collection. As additional consideration for the Loan, PalWeb and PPP do hereby transfer, assign and convey to Paul A. Kruger or his designee all of their rights and interests in and to the judgments ("Judgments") entered against (i) Vimonta AG, a Swiss company, in Case No.3:00-CV-1388-P, in the United States District Court for the Northern District of Texas (the "Vimonta Judgment") and (ii) Wolfgang Ullrich, Rosarin Chaisayan, Chartex AG and New Inter HKB AG, in Case Nos. DV99-00110-E and 99-10249-B in the District Court of Dallas County, Texas (the "Ullrich Judgments"), to be effective as of the dates set forth below. The parties agree that the Judgments currently have no value to PalWeb or PPP and that any value associated with the Judgments is dependent upon further collection action which is highly speculative and uncertain. (a) The Vimonta Judgment. The assignment of the Vimonta Judgment shall be effective after a final default judgment is entered against Vimonta AG pursuant to PalWeb's and PPP's Request for Leave to Submit Final Default Judgment and for additional Time to Serve Defendant in Accordance with the Hague Convention as filed in the United States District Court for the Northern District of Texas on August 28, 2002. PalWeb and PPP agree to undertake diligently and to complete all things reasonably necessary to have such final judgment entered in the name of PalWeb and PPP against Vimonta AG, including, but not limited to, the filing and service of appropriate papers in accordance with the Hague Convention. You shall reimburse promptly upon demand all costs incurred by PalWeb or PPP from and after the Closing Date in connection with the perfection and enforcement of the Vimonta Judgment. Promptly after the entry of such final judgment, PalWeb and PPP shall execute and deliver such assignments as may be necessary to assign the judgment of record to you. (b) The Ullrich Judgments. The assignment of the Ullrich Judgment shall be effective immediately on the Closing Date; provided, that PalWeb shall be entitled to share in the proceeds of the Ullrich Judgments as follows. You shall complete an investigation, at your own expense, to determine what actions are necessary to enforce the Ullrich Judgments against the judgment debtors in Germany, and you shall report the conclusions of such investigation to PalWeb together with an estimate of the costs and expenses, including legal fees, necessary to collect the Ullrich Judgments and an estimate of the probability of collection of such judgments. If PalWeb elects to participate with you in the costs of enforcement and collection of the Ullrich Judgments, PalWeb will receive its pro rata share of the proceeds collected based on PalWeb's expense sharing percentage. In any event, PalWeb will be entitled to receive five percent (5%) of any amounts collected on such Ullrich Judgments in excess of the investigation, enforcement and collection expenses incurred by you with regard to such judgments. 3. Pallet Sales. You and PPP will execute and deliver the Non-Exclusive Distribution Agreement attached hereto as Exhibit A. 4. Stonegate. PalWeb and PPP shall permit Stonegate Securities to continue its engagement through the completion of its research report pursuant to the terms of the existing letter agreement between PalWeb and Stonegate, and PalWeb shall cause to be paid the balance of $50,000 owed to Stonegate in accordance with the terms of such agreement. You will assist continuing management of PalWeb with introductions to Stonegate and will make Terri Metzger available for assistance with completion of the research report. 5. Stock Options. PalWeb has heretofore granted to you the following options to purchase shares of PalWeb's common stock, par value $0.0001 per share ("Options"): Current Number of Option Grant Expiration Options Price Date Date 50,000 $2.00 5/11/01 5/11/11 150,000 $3.125 4/11/02 4/11/12 25,000 $1.60 6/26/02 6/26/12 Notwithstanding the terms and provisions of the stock option agreements previously executed by you and PalWeb with respect to such Options, all of such Options are hereby amended to provide that (i) they shall be fully vested as of the Closing Date, and may be exercised, in whole or in part, at any time and from time to time until the expiration date; and (ii) the expiration date shall be January 10, 2008. Except as so amended, the terms of the options shall remain in full force and effect. PalWeb recognizes that such modifications in terms will result in a different accounting treatment for such options. 6. Resignation. By execution of this letter agreement, you do hereby resign as Chairman, Director and Chief Executive Officer of PalWeb and PPP effective immediately. PalWeb and PPP hereby accept your resignation from such positions. 7. Mutual Releases. You, your affiliates, Hildalgo Trading Company, L.C., and Onward, LLC, and PalWeb and PPP, as well as the directors of PalWeb and their specifically-named affiliated entities, will execute and deliver the Mutual Release Agreement attached hereto as Exhibit B. If the foregoing accurately and completely sets forth the terms of the agreement between you and PalWeb and PPP, please so indicate by signing and returning one original of this letter. Sincerely, PALWEB CORPORATION By: /s/ Warren Kruger ------------------------------------- Name: Warren Kruger ------------------------------------- Title: President ------------------------------------- PLASTIC PALLET PRODUCTION, INC. By: /s/ Warren F. Kruger ------------------------------------- Name: Warren F. Kruger ------------------------------------- Title: President ------------------------------------- Enclosures Accepted and agreed: /s/ Paul A. Kruger - ------------------------------------ PAUL A. KRUGER Date: January 13, 2003 ------------------------------ Exhibit A NON-EXCLUSIVE DISTRIBUTION AGREEMENT THIS NON-EXCLUSIVE DISTRIBUTION AGREEMENT ("Agreement") is made and entered into this 10th day of January, 2003, by and between Plastic Pallet Production, Inc., a Texas corporation (the "Company"), and Paul A. Kruger ("Kruger"). RECITALS -------- WHEREAS, the Company has determined Kruger's services as a non-exclusive distributor of the Company's plastic pallets and other products (the "Products") will be of great value to the Company, and accordingly, the Company desires to enter into this Agreement with Kruger as set forth herein in order to secure such services; and WHEREAS, Kruger desires to act as a non-exclusive distributor for the Company of its Products on the terms set forth herein. NOW, THEREFORE, for and in consideration of the above premises and the mutual agreements hereinafter set forth, Kruger and the Company agree as follows: 1. Appointment and Relation of Distributor. The Company hereby appoints Kruger as a non-exclusive distributor of the Company's Products. From time to time, Kruger shall act as a purchaser of the Company's Products for the purpose of resale and is not the Company's agent or employee for any purpose whatsoever. 2. Distributor's Duties. In connection with any efforts undertaken by Kruger to sell the Company's Products, Kruger shall: (a) coordinate his marketing activities with the marketing personnel of the Company or such other personnel as directed by the Company's Board, (b) diligently observe all policies and decisions communicated by the Board and/or marketing personnel, and (c) timely prepare and forward to the Board and/or marketing personnel all reports and accountings as may be requested. 3. Company's Duties. To facilitate any efforts undertaken by Kruger to sell the Company's Products, the Company shall: (a) provide Kruger with such technical support as appropriate in order for Kruger to perform under this Agreement, and (b) use reasonable efforts to manufacture sufficient quantities of Products to fill orders received by Kruger for the purchase of the Company's Products subject to the Company's then-existing orders from third parties. 4. Prices and Discounts. Upon all of Kruger's purchases of the Company's Products hereunder, Kruger's cost shall be the Company's F.O.B. price at the Company's plant in Dallas, Texas, less the greatest discounts or concessions made to any of the Company's other distributors for similar kinds and quantities of Products. Such pricing shall be applied so that Product prices charged to Kruger are no greater than the most favorable standard wholesale pricing terms afforded to any distributor of similar kinds and quantities of the Company's Products. 5. Terms and Billing. Payment terms will be net thirty (30) days after the invoice date. Invoices shall be issued to Kruger in increments equal to and on the date of actual shipments. 6. Termination. This Agreement may be terminated by either party upon thirty (30) days written notice to the other party. This Agreement may be terminated by the Company for Cause immediately and without notice. For purposes of this Section 6, "Cause" shall mean conduct amounting to (i) fraud, dishonesty or breach of fiduciary duty against the Company, (ii) willful misconduct, repeated refusal to follow the reasonable directions of the Company or violation of law in the course of performance under the Agreement, (iii) a material breach or violation of the terms of this Agreement, or (iv) nonpayment of amounts owed the Company to be paid timely in accordance with Section 5. Upon termination of this Agreement, Kruger shall diligently assist the Company in transitioning all matters and work for which he was responsible as the Company shall direct. 7. Non-Exclusivity. The Agreement grants Kruger the non-exclusive right to sell the Company's Products; provided, however, that any sales of Products made during the term hereof, or within one year following the termination of this Agreement, by the Company or by its other distributors to customers introduced to the Company by Kruger shall be deemed sales made through Kruger as distributor of the Products so sold. Upon receipt by the Company of payment for purchases by such a customer, the Company shall pay to Kruger a sum which will compensate Kruger for the profit that he would have made had the sale been effected as an actual sale of the Products to Kruger under the terms of this Agreement followed by a resale of the Products by Kruger to the customer. 8. Severability. The parties agree that each of the provisions included in this Agreement is separate, distinct, and severable from the other provisions of hereof, and that the invalidity or unenforceability of any provision shall not affect the validity or enforceability of any other provision of this Agreement. Further, if any provision of this Agreement is ruled invalid or unenforceable by a court of competent jurisdiction because of a conflict between the provision and any applicable law or public policy, the provision shall be redrawn to make the provision consistent with and valid and enforceable under the law or public policy. 9. Assignment. This Agreement and the rights and obligations of the parties hereunder may not be assigned by either party hereto without the prior written consent of the other party hereto. Notwithstanding the foregoing, this Agreement shall be binding on and inure to the benefit of the Company's successors. 10. Notices. Except as otherwise specifically provided herein, any notice required or permitted to be given by, or to, either party pursuant to this Agreement shall be given in writing, and shall be personally delivered, or mailed by certified mail, return receipt requested, or provided by electronic transmission with a copy sent contemporaneously by certified mail, return receipt requested, at the address set forth below or at such other address as either party shall designate by written notice to the other given in accordance with this Section. Any notice complying with this Section shall be effective immediately upon personal delivery or electronic transmission, or, if mailed only, on the third business day after mailing. 2 11. Waiver. The waiver by either party hereto of any breach of this Agreement by the other party hereto shall not be effective unless in writing, and no such waiver shall operate or be construed as the waiver of the same or another breach on a subsequent occasion. 12. Independent Contractor. It is expressly understood that Kruger is an independent contractor and that he is not an officer or employee of the Company. The actual performance of all day-to-day work by Kruger hereunder shall be under the control and direction of Kruger. The Company, being interested in the result to be obtained, shall at all times have access to the sales information of Kruger for the purposes of observing the performance hereunder by Bosh. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Oklahoma. The parties agree that jurisdiction and venue for any matter arising out of or pertaining to this Agreement shall be proper only in the state courts located in Tulsa County, Oklahoma, or in any federal courts having jurisdiction over the parties and subject matter of such matter to be resolved, and the parties hereby consent to such venue and jurisdiction. 14. Beneficiary. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, heirs, executors, administrators and permitted assigns. 15. Entire Agreement. This Agreement constitutes the entire agreement of the parties on the subject matter stated in the Agreement. No amendment or modification of this Agreement shall be valid or binding upon the Company or Kruger unless made in writing and signed by both parties. All prior understandings and agreements relating to the subject matter of this Agreement are hereby expressly terminated. IN WITNESS WHEREOF, Kruger and the Company have executed and delivered this Agreement as of the date first above written. PLASTIC PALLET PRODUCTION, INC. 1607 West Commerce Street Dallas, Texas 75208 By: /s/Warren F. Kruger ------------------------------------- Name: Warren F. Kruger ------------------------------------- Title: President ------------------------------------- PAUL A. KRUGER 2500 S. McGee, Suite 147 Norman, Oklahoma 73072 /s/ Paul A. Kruger -------------------------------------------- Paul A. Kruger 3 EXHIBIT B MUTUAL RELEASE AGREEMENT ------------------------ THIS MUTUAL RELEASE AGREEMENT ("Agreement") is made and entered into as of this 10th day of January, 2003, by and among PAUL A. KRUGER, PACECO FINANCIAL SERVICES, INC., PACE PLASTIC PALLETS, INC., HILDALGO TRADING COMPANY, LC, ONWARD, LLC, PALWEB CORPORATION, PLASTIC PALLET PRODUCTION, INC., WARREN F. KRUGER, YORKTOWN MANAGEMENT & FINANCIAL SERVICES, L.L.C., WESTGATE INVESTMENTS, L.P., WESTGATE CAPITAL COMPANY, L.L.C., LYLE W. MILLER, BRYAN R. KIRCHMER, GME GROUP, BRADLEY C. SHOUP, WILLIAM W. PRITCHARD and PP FINANCIAL, INC. (each of the foregoing being referred to herein as a "Party" and being collectively referred to herein as the "Parties"). This Agreement shall be effective as of the date that each Party has executed the Agreement or counterparts thereof. W I T N E S S E T H: WHEREAS, pursuant to that certain Letter Agreement dated as of the date hereof, Paul A. Kruger ("PAK") has agreed to make a loan or loans to PalWeb Corporation ("Palweb") and its wholly-owned subsidiary, Plastic Pallet Production, Inc. ("PPP"), in the aggregate amount of $7,000,000 (such loan or loans collectively referred to herein as the "Loan"); WHEREAS, it is a condition precedent to the obligations of PAK to make the Loan that each Party hereto shall have executed and delivered this Agreement; NOW, THEREFORE, in consideration of the mutual promises, releases and undertakings hereinafter set out, and for other good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, each Party hereby agrees as follows: 1. Definitions For purposes of this Agreement, the term "Claims" shall include, without limitation, any previously or presently existing or subsequently arising assertion, allegation, claim, demand, right, debt, request for indemnification, request for payment, request for reimbursement, cause of action, liability, loss, damage (including without limitation consequential damages such as lost profits), deficiency, remedy, judgment, lien, penalty, cost, expense, attorneys fees, interest, right to indemnification, suit and proceeding of every kind, at law or in equity, regardless of whether any of the foregoing are asserted or unasserted, now known or hereafter discovered, foreseeable or unforeseeable, matured or unmatured, or accrued, contingent or potential, and regardless of whether any of the foregoing have resulted now or could result in the future in the commencement of a lawsuit, the filing of a claim, or a legal proceeding of whatsoever kind, and regardless of whether any of the foregoing have resulted now or could result in the future in a final and unappealable order, ruling or judgment. 2. Mutual Waivers and Releases 2.1. Each Party does hereby waive, remise, release, acquit and forever discharge each other Party hereto, and all of such Party's predecessors, successors, affiliates, assigns and, as applicable, all of such Party's shareholders, members, employees, officers, directors, managers, and agents of whatsoever kind from any and all Claims that each Party may have against any one or more of the other Parties arising from any relationship, action, event or transaction of whatsoever kind arising out of or in any way relating to Palweb or PPP, regardless of when such relationship, action, event or transaction occurred or may have occurred, irrespective of whether such Party was acting in an individual capacity or as a representative, officer, director, or shareholder of any business or other organization; provided, however, that 2 the foregoing mutual release and waiver shall not apply to any unpaid amounts due and owing to or from a Party as reflected on the books and records of Palweb or PPP or to any written agreements between a Party and Palweb or PPP of a continuing nature. It is not the intent of the Parties to terminate or modify the terms of existing contracts to which the Parties or any of them may be a party. 2.2 It is the intent of each Party hereto that the foregoing mutual releases and waivers secure to such Party and grant to all other Parties complete peace from any and all Claims among, between or against the Parties. To that end, the Parties hereby stipulate and agree that such mutual releases and waivers shall be given the broadest possible interpretation, construction and application to achieve the goals of this Agreement. 3. Representations and Warranties. Each Party hereby represents, warrants and covenants to the other Parties as follows: 3.1 Each Party has all right, power and authority to enter into this Agreement and consummate the transactions described herein, and the execution, delivery and performance of this Agreement by each Party will not violate any statute, rule, judgment, order or restriction of any government, governmental agency, or court to which any Party is subject and does not conflict with, result in a breach of, constitute a default under or require any notice under any agreement, contract or other document to which any Party is a party or are bound. This Agreement constitutes a binding obligation of each Party enforceable in accordance with its terms. 3.2 Each Party has had access to all information deemed necessary by such Party to evaluate the merits and risks of entering into this Agreement. 3 3.3 There are no legal proceedings pending or threatened against any Party, which, if adversely determined, could, in any respect, prevent or impair the ability of the any Party to perform its obligations under this Agreement. 4. No Admissions The Parties each acknowledge and agree that the matters set forth in this Agreement constitute the mutual release and waiver of any or all Claims between or among the Parties, and that this Agreement is not an admission or evidence of liability by any of them regarding any Claim. 5. Governing Law This Agreement shall be governed by and interpreted in accordance with the laws of the State of Oklahoma. 6. Binding Effect This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective heirs, executors, administrators, beneficiaries, affiliates, subsidiaries, related corporate entities, successors and assigns. 7. Mutual Drafting and Negotiation This Agreement is the product of mutual drafting and negotiation by each Party hereto, and each such Party has had the opportunity to consult counsel of such Party's choosing with regard to this Agreement. It is the intent of each Party hereto that no provision be construed against or in favor of any other Party hereto irrespective of whether such other Party initially proposed or drafted such provision. 4 8. Entire Agreement This Agreement contains the entire agreement between and among the Parties relating to the subject matter hereof. No representation, warranty, covenant, obligation, promise, inducement or statement of intention has been made by any Party hereto which is not expressed in this Agreement. IN WITNESS WHEREOF, this Agreement has been executed by the Parties in multiple originals to be effective as of the date first written above. PAUL A. KRUGER /s/ Paul A. Kruger ------------------------------------------- PACECO FINANCIAL SERVICES, INC. By: /s/ Paul A. Kruger ------------------------------------ Name: Paul A. Kruger ------------------------------------ Title: CEO ------------------------------------ PACE PLASTIC PALLETS, INC. By: /s/ Paul A. Kruger ------------------------------------ Name: Paul A. Kruger ------------------------------------ Title: President ------------------------------------ HIDALGO TRADING COMPANY, LC By: /s/ Paul A. Kruger ------------------------------------ Name: Paul A. Kruger ------------------------------------ Title: Manager ------------------------------------ 5 ONWARD, LLC By: /s/ Paul A. Kruger ------------------------------------ Name: Paul A. Kruger ------------------------------------ Title: Manager ------------------------------------ PALWEB CORPORATION By: /s/ Warren Kruger ------------------------------------ Name: Warren Kruger ------------------------------------ Title: President ------------------------------------ PLASTIC PALLET PRODUCTION, INC. By: /s/ Warren F. Kruger ------------------------------------ Name: Warren F. Kruger ------------------------------------ Title: President ------------------------------------ WARREN F. KRUGER /s/ Warren F. Kruger ------------------------------------------- YORKTOWN MANAGEMENT & SERVICES, L.L.C. By: /s/ Warren F. Kruger ------------------------------------ Name: Warren F. Kruger ------------------------------------ Title: President ------------------------------------ WESTGATE INVESTMENTS, L.P. By: /s/ Warren F. Kruger ------------------------------------ Name: Warren F. Kruger ------------------------------------ Title: Member ------------------------------------ 6 WESTGATE CAPITAL COMPANY, L.L.C. By: /s/ Warren F. Kruger ------------------------------------ Name: Warren F. Kruger ------------------------------------ Title: Member ------------------------------------ LYLE W. MILLER /s/ Lyle W. Miller ------------------------------------------- BRYAN R. KIRCHMER /s/ Bryan R. Kirchmer ------------------------------------------- GME GROUP By: /s/ Bryan R. Kirchmer ------------------------------------ Name: Bryan R. Kirchmer ------------------------------------ Title: President and Principal ------------------------------------ BRADLEY C. SHOUP /s/ Bradley C. Shoup ------------------------------------------- WILLIAM W. PRITCHARD /s/ William W. Pritchard ------------------------------------------- 7 PP FINANCIAL, INC. By: /s/ Paul A. Kruger ------------------------------------ Name: Paul A. Kruger ------------------------------------ Title: CEO ------------------------------------ 8 EX-10.3 5 ex10-3_11681.txt LOAN AGREEMENT WITH PAUL A. KRUGER EXHIBIT 10.3 ------------ LOAN AGREEMENT -------------- This Loan Agreement is made and entered into this 10th day of January, 2003, by and between PALWEB CORPORATION, an Oklahoma corporation ("PalWeb"), PLASTIC PALLET PRODUCTION, INC., a Texas corporation ("PPP") (PalWeb and PPP collectively, the "Borrowers") and PAUL A. KRUGER, an individual (the "Lender"). RECITALS: --------- A. The Lender and the Borrowers desire that the Lender will make in favor of the Borrowers a seventeen month term loan in the original principal amount of $7,000,000, the proceeds of which shall be used as follows: (i) $3,500,000 to repay outstanding principal on that certain Revolving Note dated December 11, 2001, made by PPP in favor of The F&M Bank & Trust Company; (ii) $2,500,000 to repay outstanding principal owing by the Borrowers to Lender; (iii) $750,000 to repay the Borrowers' outstanding indebtedness to Texas Capital Bank; and (iv) $250,000 to be used by Borrowers to pay accrued interest on the foregoing obligations or as working capital, including the payment in full of all trade payables designated by the Lender or other amounts previously advanced by the Lender. B. The Lender is willing to make a $7,000,000 term loan in favor of the Borrowers, subject to the terms and conditions of this Loan Agreement. NOW, THEREFORE, in consideration of premises and mutual covenants contained herein, and the loan facility established hereunder and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. As used in this Agreement the following terms will have the meanings indicated: 1.1 "Accounts" shall mean all accounts, accounts receivable, notes receivable, reimbursements and other rights to payment of the Borrowers, whether not existing or hereafter arising. 1.2 "Capital" shall mean the amount of the capital stock of the Borrowers, retained earnings and debentures to the extent subordinated to the debt of the Lender, all determined in accordance with GAAP. 1.3 "Closing" shall mean the date this Loan Agreement, the Note and the other Loan Documents are executed and delivered to the Lender. 1.4 "Collateral" shall mean the Mortgaged Property, the property described in the Security Agreement and the Stock Pledge Agreement and all other property now owned or hereafter held by the Lender to secure the payment of the Note, together with all increases, replacements and substitutions therefor, additions and accessions thereto and all proceeds and products thereof. 1.5 "Deed of Trust" shall mean the Deed of Trust to be executed and delivered pursuant to Section 3.2 of this Loan Agreement. 1.6 "Equipment" shall mean all of the Borrowers' equipment (as defined in Section 9-109(2) of the UCC), whether now owned or hereafter acquired, including, without limitation, machinery, furniture, appliances, furnishings, fixtures, together with substitutions therefor and all increases, parts, fittings, accessories, special tools, accessions or replacements thereof, and the proceeds thereof. 1.7 "General Intangibles" shall mean all General Intangibles of the Borrowers (as defined in the UCC), including, without limitation, all rights, patents, franchises, options or similar benefits, now owned by the Borrowers or hereafter acquired and the proceeds thereof. 1.8 "GAAP" shall mean generally accepted accounting principles in effect from time to time, applied on a consistent basis, as set forth in the opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or Statement of the Financial Accounting Standards Board which may be applicable in the circumstances as of the date involved. 1.9 "Indebtedness" shall mean and include all liabilities, obligations or indebtedness of the Borrowers to the Lender of every kind and description, now existing or hereafter incurred, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, together with all future advances and all extension and renewals, and including all indebtedness of the Borrowers to the Lender arising out of or related to this Loan Agreement, the Note or the Loan Documents; provided, however, that the term "Indebtedness" shall exclude all Claims (as defined in that certain Mutual Release Agreement dated as of even date herewith between the Lender, the Borrowers, Westgate Investments, L.P. and each of the existing directors of PalWeb). 1.10 "Inventory" shall mean all of the Borrowers' inventory (as defined in Section 9-109(4) of the UCC), now existing or hereafter acquired, and the proceeds and products thereof. 1.11 "Loan" shall mean the term loan described in Section 2.1 of this Loan Agreement. 1.12 "Loan Documents" shall mean this Loan Agreement, the Note, the Mortgage, the Security Agreement, the Stock Pledge Agreement and all instruments and documents executed or issued or to be executed or issued pursuant hereto or thereto or in connection with the Loan or the Collateral. 1.13 "Mortgaged Property" shall mean the real property more particularly described in the Deed of Trust. 2 1.14 "Note" shall mean the promissory note to be executed and delivered by the Borrowers pursuant to Section 2.2 of this Loan Agreement. 1.15 "Prime Lending Rate of Interest" shall mean the prime or base rate published by the Wall Street Journal, Southwest Edition, in its money rates column as the prime or base rate on corporate loans at large U. S. money center commercial banks (or a similar or successor rate published therein). If the Prime Lending Rate is no longer announced or published for any reason, the Bank may select in its sole discretion such alternative announced and established prime or base rate of a New York, New York money center commercial bank which Bank deems to be most comparable to the no longer announced Prime Lending Rate of Interest. 1.16 "Security Agreement" shall mean the Security Agreement to be executed and delivered by the Borrowers pursuant to Section 3.2 of this Loan Agreement. 1.17 "Stock Pledge Agreement" shall mean the Stock Pledge Agreement to be executed and delivered by PalWeb pursuant to Section 3.2 of this Loan Agreement. 1.18 "UCC" shall mean the Uniform Commercial Code of the State of Oklahoma, as amended and in effect from time to time. 2. LENDING AGREEMENT. 2.1 Term Loan. Lender agrees, upon the terms and subject to the conditions hereinafter set forth, to make a seventeen (17) month term loan to the Borrowers in the original principal amount of $7,000,000 (the "Loan"). 2.2 Note. The Borrowers shall herewith execute and deliver to the order of the Lender its promissory note in the original principal amount of $7,000,000 (the "Note"), dated as of even date herewith. All unpaid and accrued interest on the Note shall be due and payable on the fourth (4th) day of each calendar month, commencing February 4, 2003, and all outstanding principal and accrued and unpaid interest on the Note shall be due and payable at final maturity on June 4, 2004. Interest shall accrue on the unpaid principal balance from time to time outstanding at a variable rate of interest equal from day to day to the Prime Lending Rate of Interest plus three hundred basis points (3.0%) per annum. 2.3 Prepayment. The Borrowers may prepay the Note in whole or in part at any time without premium or penalty, but with interest at the date of prepayment if the Note is paid in full. The Borrowers shall be required to make a mandatory prepayment on the Note in the event the Borrowers obtain an alternate source of long-term financing for the Indebtedness (other than through the sale of common stock of PalWeb). The amount of such prepayment shall be equal to the amount of the alternate financing obtained by the Borrowers. 2.4 Origination Fee. At Closing, the Borrowers shall pay to the Lender an origination fee in the amount of $140,000; provided, however, that $126,866 of such origination fee shall be used by Lender to repay outstanding account receivables owing to the Borrowers. 3 3. COLLATERAL. 3.1 Collateral. To secure the prompt payment of the Indebtedness and the performance of all the covenants and agreements contained in this Loan Agreement and the Loan Documents: 3.1.1 Mortgaged Property. PalWeb shall grant and maintain, or cause to be granted or maintained, in favor of the Lender a valid and perfected mortgage lien and security interest in the Mortgaged Property. Such mortgage lien shall be first and prior to all other mortgage liens. 3.1.2 Personal Property Collateral. The Borrowers shall grant and maintain, or cause to be granted or maintained, a first and prior security interest in all of the Borrowers' now owned or hereafter acquired assets, including but not limited to, all Accounts, Inventory, General Intangibles, fixtures, Equipment, appliances, rents, issues and/or profits owned by the Borrowers, and as used wherever located. 3.1.3 Stock Pledge. PalWeb shall grant and maintain a valid and continuing first priority, perfected security interest in favor of the Lender in and to all of the outstanding shares of stock of PPP owned by PalWeb 3.2 Collateral Documents. In order to provide the Lender with perfected liens and security interests in and to the Collateral, the Borrowers shall execute and deliver the following collateral documents to the Lender, each in form and substance satisfactory to the Lender: 3.2.1 Deed of Trust. A Deed of Trust with respect to the Mortgaged Property. 3.2.2 Security Agreement. A Security Agreement from the Borrowers, together with all appropriate financing statements. 3.2.3 Stock Pledge Agreement. The Stock Pledge Agreement from PalWeb, together with original stock powers as to all such stock certificates executed in blank and in a form acceptable to the Lender. 3.3 Other Instruments. The Borrowers will execute and deliver all financing statements, other instruments, agreements or documents required by the Lender to perfect its mortgage lien or security interests, and to deliver such additional Collateral as is required to perfect the same. 4. CONDITIONS PRECEDENT. The obligation of the Lender to perform this Loan Agreement and to make the Loan is subject to the receipt in form and substance satisfactory to the Lender of the Loan Documents and the performance by the Borrowers, to-wit: 4 4.1 Inventory and Accounts Receivable. At the request of the Lender, which request will not be unreasonably denied, the Borrowers will provide a summary of all Inventory on hand and all Accounts Receivable aging on at least a quarterly basis, as well as such other information as the Lender may reasonably require. 4.2 Loan Documents. The Loan Documents and all other instruments incidental to the transaction hereby contemplated will have been duly issued, executed and delivered to the Lender, all in a form and substance satisfactory to the Lender. 4.3 Authority. The Lender shall have received a copy of Corporate Resolutions and other documents reasonably required to authorize the execution, delivery and performance of all of the Loan Documents by the parties thereto and all in a form satisfactory to the Lender. 5. REPRESENTATIONS AND WARRANTIES. The Borrowers represent and warrant that: 5.1 Lawful Existence. Each Borrower is a corporation duly organized and legally existing and in good standing under the laws of their respective states of incorporation. 5.2 Authority. The execution, delivery and performance by the Borrowers of this Agreement and the Loan Documents and the performance by them of their obligations (a) are and will be within the corporate powers of each Borrower; (b) have been and will be duly authorized by the Board of Directors of each Borrower; (c) are not and will not be in contravention of the laws or the terms of the Articles, or by-laws, material agreement or undertaking to which either Borrower or any of their property is bound; (d) do not require any consent or approval (including governmental) which has not been given; (e) do not contravene any statute, rule or regulation, or any other contractual or government restriction upon them; (f) are not subject to the jurisdiction of any state or federal agency or regulatory authority; and (g) would not result in the imposition of liens, charges or other encumbrance on any of the material properties or assets of either Borrower except as may be required pursuant to this Agreement. 5.3 Binding Obligation. This Agreement and all Loan Documents will be, when executed and delivered, legal and valid and binding obligations of each Borrower, enforceable in accordance with their terms except as may be limited by bankruptcy, insolvency similar laws and/or judicial decisions affecting creditors' rights generally. 5.4 Financial Data. Subject to any limitations stated herein, any balance sheet, earnings statement and other financial statement which have been or shall hereafter be furnished to the Lender to make this loan, or as to subsequent financial statements, fairly represent the financial condition of the Borrowers as of the dates for which the same were furnished; have been prepared in accordance with GAAP; and no material adverse change has since occurred in the condition, financial or otherwise, of the Borrowers; reports and other papers and data furnished to the Lender are or will be at the time same are so furnished, accurate and correct in all material respects sufficient to give the Lender as complete and accurate knowledge of the Borrowers' financial position as possible. 5 5.5 Litigation. There is not now pending against the Borrowers, nor to the knowledge of the Borrowers is there threatened any litigation, legal or administrative proceeding, investigation or any other action of any nature against them or affecting them, the outcome of which would materially and adversely affect their financial condition or business. 5.6 Collateral. All of the Collateral hypothecated to the Lender hereunder is and will be owned by a Borrower free and clear of all liens, claims or encumbrances whatsoever, except for the rights herein granted to the Lender and for any purchase money security interest now existing or hereafter created. The Borrowers have the right to cause such Collateral to be hypothecated to the Lender as security for the Borrowers' obligations. 5.7 Taxes. The Borrowers have filed all federal and state tax returns to be filed, paid all taxes shown thereon to be due, including interest and penalty, if any, or provided an adequate reserve for payment thereof, except for federal or state tax liability which has been disclosed to the Lender in writing. 6. AFFIRMATIVE COVENANTS. Until the full and final payment of all obligations, each Borrower covenants and agrees that unless the Lender waives compliance in writing, it will perform or cause to be performed the following agreements: 6.1 Financial Statements. Furnish to the Lender: (i) within one hundred twenty (120) days after and at the close of each fiscal year of such Borrower, its financial statement including a balance sheet, statement of income and retained earnings, and a statement of cash flows for such fiscal year, certified by an appropriate financial officer of such Borrower; all prepared in accordance with GAAP; (ii) within forty-five (45) days after the close of each quarter, a balance sheet and statement of income from the beginning of such fiscal year to the end of such quarterly period for such Borrower, prepared in conformity with GAAP and certified by an appropriate financial officer of such Borrower; (iii) simultaneously with the delivery of financial statements for each quarter of year, deliver a compliance certificate by a financial officer of such Borrower, stating whether, to the best of the knowledge of the preparer, there exists on the date of such certificate any Event of Default or any event or condition which, with the lapse of time or giving of notice or both, would constitute an Event of Default, and if so, setting forth the details of any such Event of Default and a statement by such Borrower's president as to the action such Borrower is taking or propose to take with respect thereto; and 6 (iv) copies of and access to such other books, records and reports, including unaudited financial statements of such Borrower, as the Lender may from time to time reasonably request. 6.2 Inspection. The Borrowers will permit the Lender to visit and inspect any of the properties (including Inventory) of the Borrowers, including books and records, and to make extracts therefrom, and to discuss its affairs and finances as the Lender may reasonably request. 6.3 Conduct of Business. The Borrowers will maintain their lawful existence and use their best efforts to maintain in full force and affect all material licenses, leases, contracts and other rights necessary or desirable to the conduct of their business. 6.4 Payment of Taxes and Assessments. The Borrowers will duly pay and discharge, or cause to be paid and discharged, all taxes, assessments and other government charges or rents imposed upon them and their properties or any part thereof, or upon the income or profits therefrom, or due by them, as well as all claims for labor, materials or supplies which if unpaid might by law become a lien or mechanic's or materialmen's lien on any property of either Borrower, except for such items as are being in good faith appropriately contested by the Borrowers and with respect to material liens or charges of amounts for which adequate reserves are set aside and maintained on the books of the Borrowers. 6.5 Notices. The Borrowers will promptly give written notice to the Lender of (a) all litigation affecting either Borrower where the amount involved, either in the case or in the aggregate, is ONE HUNDRED THOUSAND DOLLARS ($100,000.00) or more; (b) any claim or notice of an alleged or purported violation of any rule, law or statute of any governmental or regulatory body, law enforcement authority or other person relating to the property upon which the Borrowers will principally operate their business; (c) any labor controversy resulting in or threatened to result in a strike; (d) any Event of Default under the terms of this Loan Agreement or any instrument provided herein; or (e) a violation of any of the terms of the Loan Documents by any party other than the Lender. 6.6 Insurance. The Borrowers will keep adequately insured by duly licensed insurers, insurance on all premises used in operation of their business (whether owned or leased), on all Inventory and Equipment of the Borrowers, and also keep the Borrowers adequately insured at all times with responsible insurance carriers against liability on account of damage to persons or property and under all applicable workmen's compensation laws. All such insurance shall be in such amounts and with such coverage as is usually carried by corporations of a similar size engaged in the same or similar business similarly situated. All such property or hazard insurance shall name the Lender as a loss payee, shall be payable to the Lender and the Borrowers as their interests may appear and shall provide for at least thirty (30) days' advance notice of cancellation to the Lender. Upon request of the Lender, the Borrowers shall furnish insurance certificates evidencing compliance with this section. This section shall not require for compliance with its terms that the Borrowers have an appraisal made of their assets. 7 6.7 Further Assurances. The Borrowers will promptly cure any defects in the issuance of the Note and the execution of this Loan Agreement, the Security Agreement or any other instrument or documents referred to or mentioned herein. The Borrowers will immediately execute and deliver to the Lender upon request all such other and further instruments as may be reasonably required or desired by the Lender from time to time in compliance with or in accomplishment of the covenant contained in this Loan Agreements, the Security Agreement or any such other instruments and documents referred to or mentioned herein, or to further evidence and more fully describe the properties intended as security for the obligations, and to be subject to the Security Agreement; to correct any omission in the Security Agreement or to perfect any security interest or lien, to make any recordings, to file any notices, or to obtain any consents, all as may be necessary or appropriate in connection therewith. 6.8 Government Regulations. The Borrowers will comply in all material respects with the laws, rules, regulations and requirements of any governmental authority having jurisdiction over the Borrowers unless validly contested in a manner so as not to cause a loss or forfeiture of any rights, interests or obligations materially secured to the Lender pursuant to this Loan Agreement or any of the Loan Documents. 6.9 Audit. The Lender at his expense and upon notice to the Borrowers, will have the right to audit the accounts and records of the Borrowers. 6.10 Damage and Loss to Collateral. The Borrowers will promptly notify the Lender of any material damage to and/or loss of any of the Collateral and the costs or expenses necessary for the repair and replacement thereof. 7. NEGATIVE COVENANTS. Until payment in full of the Note, the Borrowers agree that unless the Lender consents in writing, the following negative covenants shall apply: 7.1 Liens. Neither Borrower will create, assume or suffer to exist any lien, charge or encumbrance on any of the properties encumbered to the Lender, except as to purchase money security interests, now or hereafter existing, liens for taxes, assessments and other governmental charges or levies or the claims or demands of landlords, carriers, warehousemen, mechanics, laborers, materialmen and other like persons arising by operation of law in the ordinary course of business for sums which are not yet due and payable, or such liens the enforcement of which are effectively stayed and are being contested in good faith by appropriate proceedings diligently conducted; deposits or pledges to secure the payment of workmen's compensation, unemployment insurance or other social security benefits or obligations, public or statutory obligations, surety or appeal bonds or other obligations of a like general nature incurred in the ordinary course of business; zoning restrictions, easements, licenses, restrictions on the use of real property or minor irregularities in title thereto which do not materially impair the use of such property in the operation of such Borrower's business; rights reserved to or vested in any municipality or governmental, statutory or public authority to control or regulate any property of the Borrower or to use such property in a manner which does not materially impair the use of such property for the purposes for which it is held by such Borrower (hereafter the "Permitted Liens"). 8 7 .2 Transfer of Interest. Without the prior written consent of the Lender, neither Borrower will permit, assist or cause the sale, assignment, transfer, conveyance or encumbrance, in whole or in part, or of a substantial part or a bulk sale of the assets of such Borrower nor enter into a sale and leaseback for part or all of the assets of such Borrower, which transaction is or would be of the out of the ordinary course of such Borrower's business. 7.3 Debt. Without prior written consent of the Lender, which shall not be unreasonably withheld, the Borrowers will not create, assume or suffer to exist any indebtedness in excess of $500,000.00 in the aggregate in any single year for borrowed money, or issue or sell any obligation of the Borrowers (whether absolutely, contingently or otherwise), excluding the debt evidenced by the Loan Documents or regularly accruing accounts payable or other ordinary course of business obligations. 7.4 Loans. The Borrowers will not make any loans, advances or extensions of credit to persons, firms or corporations, nor will the Borrowers assume, guaranty, endorse or otherwise become contingently liable for the obligations of any other person, firm, corporation or individual except by the endorsement of negotiable instruments for deposit or collection in the ordinary course of the Borrowers' business or other ordinary course of business transactions. 7.5 Merger. Without the prior consent of the Lender, neither Borrower will merge or consolidate into any other corporation or partnership; nor enter into any pool, joint venture, syndicate or any other combination with any person, firm or entity; or acquire substantially all of the assets of any other corporation or other entity for cash or by issuing its capital stock in exchange therefor or otherwise. 7.6 Liquidation. Neither Borrowers will liquidate, dissolve or enter into any consolidation or merger which constitutes a liquidation. 7.7 Change in Business. The Borrowers will not engage in any business activities substantially different from or unrelated to the present or proposed business activities and operations, without the prior written consent of the Lender. 7.8 Dividends and Distributions. Except with the Lender's prior consent, which will not be unreasonably withheld or delayed, the Borrowers will not declare or pay any cash or asset dividend on any of its shares or make any other distribution, gift or disposition of assets to shareholders or related persons to such shareholders in respect of its shares, or make or commit to make, any payment on account of the purchase, redemption or other retirement of any of its shares or warrants or options therefor; provided, however, the Borrowers may make such dividends or distributions to its shareholders, without restriction, in an amount not exceeding fifty per cent (50%) of the corporation's net income. 7.9 Intercompany Accounts. Without the Lender's prior consent, the Borrowers shall not permit intercompany transfers, loans or advances to any other companies or entities related to 9 the Borrowers, or in which the Borrowers own any interest, other than transfers between each Borrower. 8. EVENTS OF DEFAULT. Regardless of the terms of any Note or other instrument evidencing indebtedness from the Borrowers to the Lender, the occurrence of the following events shall constitute an Event of Default hereunder, which, at the option of the Lender (for so long as the Event continues) shall make all sums of interest and principal remaining on the obligations payable to the Lender immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of payment or dishonor, or any other notices of any kind or character: 8.1 Non-Payment. The failure to pay when due any installment of interest or principal in accordance with the terms of any promissory note or other instrument evidencing the Borrowers' indebtedness to the Lender under this Loan Agreement, or non-payment when due of any other sums payable by the Borrowers to the Lender under this Loan Agreement, provided that the Borrowers shall have ten days to cure any failure to pay after the due date of any payment and the receipt of notice from the Lender. 8.2 Involuntary Lien. The attachment of any involuntary lien in the sum of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) or more, of any kind or character, upon the assets or property of the Borrowers, except for taxes due, but not in default, and liens being contested in such a manner as to prevent the foreclosure thereof and except for Permitted Liens. 8.3 Judgment. The entry against the Borrowers of any judgment in the amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) or more on a claim not covered by insurance which has not been stayed pending appeal. 8.4 Act of Insolvency. Either Borrower shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator of all or a substantial part of its assets; (ii) admit in writing an inability to pay its debts as they fall due; (iii) make a general assignment for the benefit of its creditors; (iv) be adjudicated a bankrupt or insolvent; (v) file a voluntary petition in bankruptcy or file a petition or answer seeking reorganization or arrangement with the creditors, seeking to take advantage of any insolvency laws; or (vi) admit by answer, default or otherwise, the material allegations of petition filed against it in any bankruptcy, reorganization, rearrangement or insolvency proceedings. 8.5 Condemnation. The condemnation, seizure or appropriation of all, or such as in the reasonable opinion of the Lender, constitutes substantially all of the property of the Borrowers. 8.6 Suspension of Business. The voluntary or involuntary suspension of business by the Borrowers outside of the ordinary course of the Borrowers' business, for a period reasonably deemed by the Lender to substantially affect the Borrowers' ability to repay their obligations. 10 8. 7 Security Interest. The failure of any security interest, mortgage or assignment to constitute a valid first and prior security interest or lien on the Collateral, except as otherwise provided herein. Upon such failure the Borrowers shall have fifteen (15) days, after notice by the Lender to the Borrowers or after the Borrowers otherwise know of such failure, to cure this event unless the Lender is compelled to take immediate actions to protect its interest. 8.8 Termination of Material Agreements. The termination, suspension, release, discharge or other default under any of the material agreements owned by the Borrowers or material to the Borrowers' business or under any other material agreement that in the Lender's reasonable opinion impairs or affects the Borrowers' ability to repay the sums due hereunder. 8.9 General Default. The breach of, or default under, any covenant, agreement, term, condition, provision, representation, or warranty contained in this Loan Agreement, not specifically referred to in this section, if such breach or default is not cured within thirty (30) days after the notice by the Lender to the Borrowers of the occurrence thereof or after the Borrowers otherwise know of such event. 8.10 Termination of Corporate Existence. Either Borrower ceases to be a validly existing corporation under the laws of the State of Texas, which shall continue in excess of thirty (30) days after notice by the Lender of such default. 9. REMEDIES. In the event of a default, which shall be continuing, the Lender may exercise any one or more of the following options: 9.1 Acceleration of the Note. The Lender may declare the Note to be immediately due and payable, at which time the same will be due and payable and the Lender will be entitled to proceed selectively and successively to enforce the Lender's rights under the Note, the Loan Documents, or any of the other documents securing the payment of the Note, without limitation. 9.2 Selective Enforcement. In the event the Lender elects to selectively and successively enforce the Lender's rights under the Loan Documents or the instruments securing payment of the Note, such action will not be deemed to be waiver or discharge of any other lien or encumbrance securing payment of the Note, until such time as the Lender has been paid in full all sums advanced by the Lender under the Note, together with all interest, fees and other expenses including, but not limited to, a reasonable attorneys' fee. 9.3 Waiver of Default. The Lender may waive any default which has occurred and any of the consequences of such default, but no such waiver will extend to any subsequent or other default or impair any consequences of such subsequent or other default. 9.4 Setoff. Upon the occurrence of an Event of Default which shall be continuing, any indebtedness from the Lender to the Borrowers may be setoff or otherwise applied by the Lender, under a general lien covering such indebtedness which is hereby granted, to any obligation of the Borrowers under this Loan Agreement to the Lender at any time and from time to time, either before or after maturity and without demand or notice to anyone. 11 9.5 Additional Rights. When any indebtedness or liability of the Borrowers hereunder is due and payable and is unpaid in whole or in part, the Lender shall have, in addition to all other rights and remedies, howsoever granted, the rights and remedies under the Oklahoma Uniform Commercial Code (the "Code"), regardless of whether the Code is the law of the jurisdiction where the rights and remedies are asserted, including the right to take possession of the Collateral, and for that purpose, the Lender may, so far as the Borrowers can give authority therefor and if allowed by applicable law, enter upon the premises where the Collateral may be located and remove the same therefrom. The Lender may further require the Borrowers to assemble the Collateral and make it available to the Lender at a place mutually convenient to the Lender and the Borrowers. Unless the Collateral is perishable or threatens to decline speedily in value, or is of type customarily sold in a recognized market, the Lender shall give the Borrowers at least ten (10) days prior written notice which shall be deemed to be a reasonable notice under the Code before the time after which any public or private sale or other intended disposition is to be made, and any such notice shall be deemed commercially reasonable. 9.6 Non-Waiver of Rights. No delay or omission to exercise any right, power or remedy accruing to the Lender upon any breach or default of the Borrowers under this Loan Agreement or any of the Loan Documents or other agreements or instrument executed pursuant hereto or in connection herewith shall impair any such right, power or remedy of the Lender, nor shall it be construed to be a waiver of any such breach or default or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default heretofore occurring. Any waiver, permit, consent or approval of any kind or character on the part of the Lender, or any breach or default or conditions in the making of any loan under this Loan Agreement, or any waiver on the part of the Lender of any condition or provision of this Loan Agreement or any agreement or instrument executed pursuant hereto or in connection herewith, must be in writing signed by the Lender and shall be effective only to the extent of the provisions of such writing specifically set forth. All other remedies, either under this Loan Agreement or by law otherwise afforded the Lender, shall be cumulative and not alternative. 10. MISCELLANEOUS. 10.1 Agreement. This Loan Agreement has been delivered and accepted, and it shall be a contract made under and shall be entered into and governed by the laws of the State of Oklahoma. The Note shall be deemed to be an obligation made under and shall be construed in accordance with and governed by the laws of the State of Oklahoma. 10.2 Partial Invalidity. Whenever possible, each provision of this Loan Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity only, without invalidating the remainder of such provision or the remaining portions of this Loan Agreement. 12 10.3 Binding Effect. This Loan Agreement shall be binding upon the Borrowers and the Lender and each of their respective successors and assigns and shall inure to the benefit of the Lender and its successors and assigns. 10.4 Notices. All notices, requests and demands shall be served by registered or certified mail or by recognized overnight courier as follows: Borrower: --------- Plastic Pallet Production, Inc. 1607 West Commerce Street Dallas, Texas 75208 PalWeb Corporation 1607 West Commerce Street Dallas, Texas 75208 and Lender: ------- Paul A. Kruger 2500 South McGee, Suite 147 Norman, Oklahoma 73072 or at such other addresses as any party hereby designates for such purposes and a written notice to the other parties hereto. Notices will be deemed to have been given on the third business day after notice is deposited in the mail properly addressed, postage prepaid, certified mail, return receipt requested or by recognized overnight courier. 10.5 Section Headings. The section and paragraph headings of this Loan Agreement are for convenience and shall not affect, limit or expand any term or provision hereof. 10.6 Counterparts. This Loan Agreement may be executed in as many counterparts as may be deemed necessary, convenient and it shall not be necessary that the signatures of the all parties hereto be contained in any one counterpart hereof; and each counterpart shall be deemed an original, but all of which together shall be construed as one and the same instrument. [Remainder of page intentionally left blank] 13 IN WITNESS WHEREOF, the parties hereto have caused the instrument to be duly executed on the date first above written. PALWEB CORPORATION, an Oklahoma corporation By: /s/ Warren F. Kruger ------------------------------ Name: Warren F. Kruger ------------------------------ Title: President ------------------------------ PLASTIC PALLET PRODUCTION, INC., a Texas corporation By: /s/ Warren F. Kruger ------------------------------ Name: Warren F. Kruger ------------------------------ Title: President ------------------------------ "Borrowers" /s/ Paul A. Kruger ------------------------------ Paul A. Kruger "Lender" 14 EX-10.4 6 ex10-4_11681.txt PROMISSORY NOTE DATED JANUARY 10, 2003 EXHIBIT 10.4 ------------ PROMISSORY NOTE --------------- $7,000,000.00 Tulsa, Oklahoma January 10, 2003 FOR VALUE RECEIVED, the undersigned, PALWEB CORPORATION, an Oklahoma corporation, and PLASTIC PALLET PRODUCTION, INC., a Texas corporation (the "Borrowers"), promise to pay to the order of PAUL A. KRUGER (the "Lender"), the principal sum of SEVEN MILLION DOLLARS ($7,000,000.00) or so much as is advanced and remaining unpaid and outstanding hereunder together with interest on the unpaid balance from the date of the execution of this Note at the Prime Lending Rate of Interest (as defined in the Loan Agreement between the Lender and Borrowers dated as of even date herewith [the "Loan Agreement"]) plus three hundred basis points (3.0%). The rate of interest payable on this Note shall change or fluctuate daily and be adjusted daily based on any daily changes or fluctuations of the Prime Lending Rate of Interest; provided, however, that the rate of interest payable upon the indebtedness evidenced by this Note shall not at any time exceed the maximum rate of interest permitted under the laws of the State of Oklahoma for loans of the type and character evidenced by this Note. All unpaid and accrued interest on this Note shall be due and payable on the fourth (4th) day of each calendar month, commencing February 4, 2003, and all outstanding principal and accrued and unpaid interest on this Note shall be due and payable at final maturity on June 4, 2004. If any payment of interest or principal due hereunder is not paid when due and such failure to pay has not been cured within ten days after notice to the Borrowers, or if any default occurs under any of the Loan Agreement or the Loan Documents (as defined in the Loan Agreement), or if a receiver be appointed over any of the property of the Borrowers or if any proceeding in bankruptcy be instituted by or against the Borrowers, the holder hereof may, at its option, without notice or demand (except as permitted in the Loan Agreement or Loan Documents), declare this Note in default and all indebtedness hereunder immediately due and payable. All sums applied to this Note in excess of then due installment of interest or principal, whether by pre-payment, acceleration or otherwise, will be applied first to reduce the reasonable costs incurred under the security documents, then to accrued but unpaid interest, then to installments of principal then due but unpaid and finally, to the installments of principal last maturing in inverse order. In the event of default, the entire unpaid balance shall be immediately due and payable, together with interest from the date of default on such principal balance at the rate of five percent (5%) per annum above the Prime Lending Rate described above. Upon the occurrence of any Event of Default under the Loan Agreement, the Lender shall have the right, immediately and without further action by it, to set off against this Note all money owed by the Lender in any capacity to each or any maker or other person who is or might be liable for payment thereof, whether or not due, and also to set off against all other liabilities of each maker to the Lender all money owed by the Lender in any such capacity to each or any maker; and the Lender shall be deemed to have exercised such right of setoff and to have made a charge against such money immediately upon the occurrence of such default even though such charge is made or entered into the books of the Lender subsequently thereto. From time to time the maturity of this Note may be extended or this Note may be renewed, in whole or in part, or a new note of a different form may be substituted for this Note and/or the rate of interest may be changed, or changes may be made in consideration of loan extensions and, the holder, from time to time, may waive or surrender either in whole or in part any rights, security interest(s), liens, guaranties given for the benefit of the holder's Note in connection with the payment and securing the payment of this Note; but no such consequence shall in any manner affect, limit, modify or otherwise impair any rights, guaranties, assumption agreements or security not specifically waived, released or surrendered in writing, nor shall any maker, guarantor, person assuming the debt or any part thereof, endorser or any person who is or might be liable hereon either primarily or contingently, be released from such liability by reason of the occurrence of such event. The holder hereof, from time to time, shall have the unlimited right to release any person who might be liable hereon, and any such release shall not affect or discharge the liability of any other person who is or might be liable hereon, either primarily or secondarily. The Borrowers, on their own behalf and all persons assuming liability under this Note, endorsers, guarantors and sureties hereby severally waive, protest, presentment, demand, dishonor, notice of dishonor, notice of protest or non-payment in the case this Note or any payment due hereunder is not paid when due, and agree to any renewal of this Note or to any extension, acceleration or postponement of the time of payment, or any other indulgence to, any substitution, exchange or release of collateral and to the release of any party or person primarily or contingently liable without notice to any maker, endorser, guarantor, surety or other person assuming liability. The Borrowers and any guarantor, endorser, and surety or any other person who is or may be primarily liable hereon, will, on demand, pay all costs of collection, including a reasonable attorneys' fee to the holder hereof attempting to enforce the payment of this Note and a reasonable attorneys' fees for defending the validity of the Note or any documents securing this Note. The words "any party" or "all parties" shall, in addition to the undersigned, include endorsers, sureties and guarantors of the Note and the word "undersigned" shall include the singular as well as the plural member. This Promissory Note is subject to, and entitled to the benefits of the Loan Agreement as the Note issued thereunder. This Note shall be governed and construed in accordance with laws of the State of Oklahoma. PALWEB CORPORATION, an Oklahoma corporation By: /s/ Warren F. Kruger --------------------------------- Warren Kruger, President 2 PLASTIC PALLET PRODUCTION, INC., a Texas corporation By: /s/ Warren F. Kruger --------------------------------- Warren Kruger, President 3 EX-10.5 7 ex10-5_11681.txt STOCK PLEDGE AGREEMENT EXHIBIT 10.5 ------------ STOCK PLEDGE AGREEMENT ---------------------- This Agreement dated effective January 10, 2003, and granted by PALWEB CORPORATION, an Oklahoma corporation (the "Pledgor"), to PAUL A. KRUGER, an individual (the "Lender"). Concurrently herewith, the Pledgor and Plastic Pallet Production, Inc., a Texas corporation ("PPP") (the Pledgor and PPP collectively, the "Borrowers"), as borrowers, and the Lender, as lender, have entered into a Loan Agreement dated as of even date herewith (the "Loan Agreement") whereby the Lender will make a term loan in favor of the Borrowers, to be evidenced by a promissory note payable to the Lender in the original principal amount of SEVEN MILLION DOLLARS ($7,000,000.00) (the "Note"). As used herein, "UCC" shall mean the Uniform Commercial Code of Oklahoma, as amended and in effect as of the date hereof, as the context may require. All other capitalized terms, unless defined herein, shall have the meanings set forth in the Loan Agreement. 1. Pledge and Security Interest. As security for the due and punctual payment of all indebtedness of the Borrowers to the Lender arising under the Note, including all extensions, renewals and changes in the form thereof, whether for principal, interest, premiums, fees, expenses or otherwise as well as all future advances or obligations owed to the Lender (including without limitation) direct, indirect, contingent, joint, several, joint and several or howsoever created (all such indebtedness and obligations being herein sometimes referred to as the "Obligations"), together with any and all expenses which may be incurred by the Lender in collecting any or all of the Obligations or in enforcing any rights hereunder (all such expenses being hereinafter referred to as the "Expenses") (the "Obligations" and the "Expenses" shall also be part of the "Secured Obligations"), the Pledgor hereby pledges, assigns, transfers, sets over and delivers unto and for the benefit of the Lender the certificates for the Pledged Securities listed on Exhibit "A," with stock powers covering such certificates executed in blank, together with shares represented thereby and all cash securities, dividends or other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares except as allowed by the Loan Agreement (all collectively referred to herein as the "Pledged Securities"). TO HAVE AND TO HOLD the Pledged Securities, together with all rights, titles, interests, powers, privileges and preferences appertaining or incidental thereto, including all cash proceeds received in respect to the Pledged Securities and all securities delivered in substitution or addition to the foregoing Pledged Securities, unto the Lender, its successors and assigns, forever as security for the Secured Obligations subject, however, to the terms, covenants and conditions hereinafter set forth. 2. Representations and Warranties. The Pledgor represents and warrants as follows: (a) The Pledged Securities have been validly authorized and issued, are fully paid and non-accessible and the Pledgor owns the same beneficially free and clear of any liens, charges or encumbrances thereon or affecting the title thereto. (b) The Pledgor has good right and lawful authority to pledge and deposit the Pledged Securities as provided herein and warrants and will preserve and defend all right, title and interest in and to the Pledged Securities delivered to the Lender hereunder against the claims of all persons, and will maintain and preserve the lien hereof as long as this Agreement shall remain in full force and effect. 3. Appointment of the Lender; Registration in Nominee Name. The Lender shall have the right and absolute discretion to appoint one or more agents for the purpose of retaining physical possession of the certificates representing or evidencing the Pledged Securities, which may be held in the name of the Pledgor, endorsed or assigned in blank in favor of the Lender. In addition to all other rights possessed by the Lender, the Lender may, from time to time after the occurrence of an uncured Event of Default (hereinafter defined) or an event which with the giving of notice or the lapse of time, or both, would be an Event of Default, at the Lender's sole discretion and without notice to the Pledgor, take any or all of the following actions: (a) execute the blank stock power to authorize transfer of the Pledged Securities; (b) transfer all or any part of the Pledged Securities into the name of the Lender or its nominee for public or private sale; (c) take control of any proceeds of any of the Pledged Securities; and (d) exchange certificates or instruments representing or evidencing the Pledged Securities for certificates or instruments of smaller or larger denominations for any purpose consistent with its performance of this Agreement. 4. Voting Rights, Dividends, Replacement of Pledged Securities. (a) So long as there has not occurred an uncured Event of Default, the Pledgor shall be entitled to exercise any and all voting rights and powers relating or pertaining to the Pledged Securities or any part thereof for any purpose not inconsistent with the terms of this Agreement. (b) Unless the Lender expressly consents in writing, and except as allowed by the Loan Agreement, the Pledgor shall not receive and not be entitled to retain any and all stock and/or stock dividends in respect of the Pledged Securities, whether resulting from a subdivision, combination or reclassification of the outstanding capital stock of the issuer thereof or received in exchange for the Pledged Securities, or any part thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets to which such issuer or the Pledgor may be a party or otherwise. Except as allowed by the Loan Agreement, any and all cash dividends and distributions and other property received in respect of the Pledged Securities or in payment of the principal of or in redemption of or in exchange for any Pledged Securities (either at maturity, upon call for redemption or otherwise), 2 shall become part of the Pledged Securities and delivered to the Lender or, if received by the Pledgor, shall be held in trust for the benefit of the Lender and shall forthwith be delivered to the Lender or its designated agent (accompanied by proper instruments of assignment and/or stock powers executed by the Pledgor in accordance with the Lender's instructions) to be held subject to the terms of this Agreement. (c) Upon the occurrence of an uncured Event of Default, at the option of the Lender, all rights of the Pledgor to exercise the voting rights and powers which it is entitled to exercise shall cease and all such rights shall thereupon become vested in the Lender, which shall have the sole and exclusive right and authority to exercise such voting and/or consensual rights and powers. After the occurrence of an Event of Default, the Lender shall receive and be entitled to retain as collateral any and all cash dividends and distributions, if any, paid in respect of the Pledged Securities. Any and all money and other property paid over to or received by the Lender pursuant to the provisions of subsection (b) above shall be retained by the Lender as part of the Pledged Securities and be applied in accordance with the provisions hereof. 5. Remedies Upon Default. Upon the occurrence of an uncured Event of Default in the payment of the Secured Obligations when due (whether by acceleration or otherwise), then, in addition to having the right to exercise any rights and remedies of a secured party upon default under the Uniform Commercial Code in effect in the State of Oklahoma, the Lender may, without being required to give any notice to the Pledgor, apply the cash (if any) then held by it hereunder to the payment in full of the Secured Obligations and all other indebtedness referred to in the order and manner specified therein. If there shall be no such cash or the cash so applied shall be insufficient to pay all Obligations in full, the Lender may thereupon sell the Pledged Securities, or any part thereof, and shall apply the proceeds of such sale to the payment in full of the Secured Obligations and all other indebtedness referred herein in the order and manner specified therein. If the Pledgor commences the cure of an event of default which requires more than fifteen (15) days and the Pledgor has immediately initiated steps which are reasonably sufficient to cure such event of default and continues to take reasonable and necessary steps to cure the event of default, the Pledgor may continue to cure the event of default beyond any cure period so long as the event of default is capable of being cured within a reasonable time and the Pledgor continues in good faith to effect a cure. 6. Sale of the Pledged Securities. (a) Notwithstanding anything to the contrary herein, sale of the Pledged Securities may be made at any public or private sale, for cash, upon credit or for future delivery, as the Lender shall deem appropriate in a commercially reasonable manner. The Lender shall be authorized at any such sale (to the extent it, in its sole discretion, deems advisable) to restrict the prospective bidders or purchasers 3 to persons who will represent and agree that they are purchasing the Pledged Securities then being sold for their own account for investment and not with a view to the distribution or resale thereof, and upon consummation of any such sale the Lender shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Pledged Securities sold. Each such purchaser at any such sale shall hold the property purchased absolutely free from any claim or right on the part of the Pledgor. The Lender shall give the Pledgor at least fifteen (15) days' written notice of the Lender's intention to make any such public or private sale. Such notice, in case of public sale, shall state the time and place fixed for such sale. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Lender may fix in the notice of such sale. At any such sale, the Pledged Securities, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Lender may, in its sole discretion, determine, and the Lender may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for and purchase the whole or any part of the Pledged Securities. The Lender shall not be obligated to make any sale of the Pledged Securities if it shall determine not to do so, regardless of the fact that notice of sale of the Pledged Securities may have been given. The Lender may, after notice or publication as required by law, adjourn any public or private sale, or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale; and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case sale of all or any part of the Pledged Securities is made on credit or for future delivery, the Pledged Securities so sold may be retained by the Lender until the sale price is paid by the purchaser or purchasers thereof, but the Lender shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Pledged Securities so sold and, in the case of any such failure, such Pledged Securities may be sold again upon like notice. As an alternative to the Lender's right to sell hereunder or under the Uniform Commercial Code, the Lender may proceed by suit or suits at law or in equity to foreclose this Agreement and to sell the Pledged Securities, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction. (b) The Pledgor understands that compliance with federal or state securities laws may strictly limit the course of conduct of the Lender if the Lender were to attempt to dispose of all or any part of the Pledged Securities and may also limit the extent to which or the manner in which any subsequent transferee of the Pledged Securities may dispose of the same. The Pledgor agrees that in any sale of any of the Pledged Securities, the Lender is hereby authorized to comply with any such limitation or restriction in connection with such sale as it may be advised by counsel is necessary to avoid violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers and/or further restrict such prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale 4 of such Pledged Securities), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Lender be liable or accountable to the Pledgor for any discount allowed by reason of the fact that such Pledged Securities are sold in compliance with any such limitation or restriction. 7. Application of Proceeds of the Pledged Securities Sale. The Lender shall apply all cash held by it pursuant to Section 4 hereof and the proceeds of sale of the Pledged Securities as follows: First: to the payment of the Expenses, including but not limited to the costs and expenses of such sale or the collection of such cash, including the out-of-pocket expenses of the Lender and the reasonable fees and out-of-pocket expenses of counsel employed in connection therewith, and to the payment of all advances made by the Lender for the account of the Pledgor hereunder and the payment of all costs and expenses incurred by the Lender in connection with the administration and enforcement of this Agreement; Second: to the payment of the Obligations; and Third: the balance, if any, of such proceeds shall be paid to the Pledgor or its assigns, or as a court of competent jurisdiction may direct. 8. The Lender Appointed Attorney-in-Fact. The Pledgor hereby appoints the Lender the Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which the Lender may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, the Lender shall, to the extent permitted herein and except as provided in the Loan Agreement, have the right and power to receive, endorse and collect all checks and other orders for the payment of money made payable to the Pledgor representing any dividend, interest payment or other distribution payable or distributable in respect of the Pledged Securities or any part thereof and to give full discharge for the same. 9. Miscellaneous. (a) No Waiver. No failure on the part of the Lender to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy by the Lender preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and not exclusive of any other remedies provided by law. The Lender may extend or renew the Obligations and grant releases, compromises or indulgences with respect to the Secured Obligations, any extension or renewal thereof, any security 5 therefor, to any obligor hereunder or thereunder, and no such action shall impair the Lender's rights hereunder. (b) Termination. This Agreement shall terminate when the Secured Obligations have been fully performed and paid, at which time the Lender shall reassign and redeliver (or cause to be so reassigned and redelivered) to the Pledgor, without recourse or warranty and at the expense of the Pledgor against receipt, such of the Pledged Securities (if any) as shall not have been sold or otherwise applied by the Lender pursuant to the terms hereof and which is still held by the Lender hereunder, together with appropriate instruments of reassignment and release. (c) Addresses for Notices, Etc. All notices, requests, demands, directions and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed, telegraphed or delivered as set out in the Loan Agreement, or, as to any party, to such other address as such party shall specify by a notice in writing to the other parties. (d) Further Assurances. The Pledgor agrees to do such further reasonable acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments as the Lender may at any time request in connection with the administration or enforcement of this Agreement (including, without limitation, to aid the Lender in the sale of all or any part of the Pledged Securities) or related to the Pledged Securities or any part thereof or in order better to assure and confirm unto the Lender its rights, powers and remedies hereunder. The Pledgor hereby consents and agrees that the issuer of the Pledged Securities, or any registrar or transfer agent for any of the Pledged Securities, shall be entitled to accept the provisions hereof as conclusive evidence of the right of the Lender to affect any transfer pursuant to Section 2, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by the Pledgor or any other person to such issuer or to any such registrar or transfer agent. (e) Binding Agreement; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective successors and assigns, except that the Pledgor shall not be permitted to assign this Agreement or any interest herein or in the Pledged Securities, or any part thereof, or otherwise pledge, encumber or grant any option with respect to the Pledged Securities, or any part thereof, or any cash or property held by the Lender as Pledged Securities under this Agreement. (f) Governing Law; Amendments. This Agreement shall be governed by the laws of the State of Oklahoma. No provision of this Agreement may be amended, waived or modified, nor may any of the Pledged Securities be released, unless specifically provided for herein, except in writing signed by the Lender. 6 (g) Headings. Paragraph headings used herein are for convenience only and shall not affect the construction of this Agreement. (h) Jurisdiction; Venue. The Pledgor agrees that the exclusive jurisdiction to resolve any disputes in law or in equity arising out of this Agreement shall be in the state courts sitting in Tulsa County, Oklahoma or federal courts sitting in the Northern District of Oklahoma, and the Pledgor submits to the jurisdiction of the such courts, waiving all obligations to venue. (i) Counterparts. This Agreement may be executed in counterpart (or by facsimile signature with the original signature page to be delivered thereafter) and each counterpart shall constitute an original as if each signature is contained on a single document. 10. Definitions. "Event of Default" shall include but not be limited to any event or failure of the Borrowers to comply with any of the terms, covenants, agreements or obligations contained in this Agreement, the Loan Agreement or the Note or any other Loan Document (as defined in the Loan Agreement). IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. PALWEB CORPORATION, an Oklahoma corporation By: /s/ Warren F. Kruger ------------------------------ Name: Warren F. Kruger ------------------------------ Title: President ------------------------------ "Pledgor" 7 EXHIBIT A --------- (Pledged Securities) 2,000,000 shares of common stock of Plastic Pallet Production, Inc., represented by Certificate No. 2 issued to PalWeb Corporation. 8 EX-10.6 8 ex10-6_11681.txt SECURITY AGREEMENT DATED JANUARY 10, 2003 EXHIBIT 10.6 ------------ SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT is made and entered into effective as of the 10th day of January, 2003, between PALWEB CORPORATION, an Oklahoma corporation ("PalWeb"), PLASTIC PALLET PRODUCTION, INC., a Texas corporation ("PPP") (PalWeb and PPP collectively, the "Debtors"), and PAUL A. KRUGER, an individual (the "Secured Party"). RECITALS: --------- A. The Debtors have requested that the Secured Party make in favor of the Debtors a $7,000,000 term loan (the "Loan"), to be evidenced by that certain $7,000,000 Promissory Note (the "Note") dated as of even date herewith. B. Pursuant to that certain Loan Agreement dated as of even date herewith (the "Loan Agreement") between the Debtors and the Secured Party, the Secured Party has agreed to make the Loan in favor of the Debtors. C. The Loan Agreement provides that the Secured Party's obligations thereunder are subject to the execution and delivery of this Security Agreement. NOW, THEREFORE, to induce the Secured Party to enter into the Loan Agreement, to consummate the transactions provided for therein, and for other valuable considerations, the receipt of which is hereby acknowledged, the Secured Party and the Debtors agree as follows: 1. Definitions. 1.1. Terms Defined in Loan Agreement. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Loan Agreement. 1.2. Terms Defined in the UCC. Each term used herein which is defined in the UCC and not otherwise defined herein, shall have the respective meaning given such term in the UCC. 1.3. Definitions of Certain Terms Used Herein. As used in this Security Agreement, the following terms shall have the following meanings: "Account" shall have the meaning given such term in Article 9 of the UCC. "Collateral" is defined in Section 2 of this Security Agreement. "Chattel Paper" shall have the meaning given such term in Article 9 of the UCC. "Equipment" shall have the meaning given such term in Article 9 of the UCC. "General Intangible" shall have the meaning given such term in Article 9 of the UCC. "Instruments" shall have the meaning given such term in Article 9 of the UCC. "Inventory" shall have the meaning given such term in Article 9 of the UCC. "Indebtedness" means and includes all liabilities, obligations and indebtedness of the Debtors to the Secured Party, of every kind and description, now existing or hereafter incurred, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, and whether or not of the same or a similar class or character as the Loan and whether or not currently contemplated by the Secured Party or the Debtors, including (i) the Loan; (ii) all other liabilities, obligations and indebtedness of the Debtors to the Secured Party arising out of or related to the Loan Agreement, the Loan or any of the Loan Documents, including costs and expenses of collection and other amounts reimbursable under the Loan Agreement; and (iii) any and all extensions of any of the foregoing; PROVIDED, HOWEVER, that the term "Indebtedness" shall exclude all Claims (as defined in that certain Mutual Release Agreement dated as of even date herewith between the Lender, the Borrowers, Westgate Investments, L.P. and each of the existing directors of PalWeb). "Letter of Credit Rights" shall have the meaning given such term in Article 9 of the UCC. "Lien" shall mean any lien (statutory or other), security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, capitalized lease or other title retention agreement). "Payment Intangible" shall have the meaning given such term in Article 9 of the UCC. "Proceeds" shall have the broadest and most extensive meaning now or hereafter given or assigned to such term in Article 9 of the UCC and, in any event, shall include, but not be limited to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Debtors from time to time with respect to the Collateral, and (ii) any and all payments (in any form whatsoever) made or due and payable to the Debtors from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority. "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of Oklahoma as hereinafter amended, modified or re-enacted from time to time. 2. Grant of Security Interest. As security for the payment of all Indebtedness, the Debtors hereby assign and grant to the Secured Party, a first and prior, continuous and continuing security interest in, and assignment of, all of the following, whether now or hereafter existing or acquired (the "Collateral"): (a) All Accounts of the Debtors; (b) All Equipment of the Debtors; 2 (c) All Inventory of the Debtors; (d) All General Intangibles of the Debtors; (e) All Payment Intangibles of the Debtors; (f) All Instruments (including promissory notes), Letter of Credit Rights, Supporting Obligations, Documents, Chattel Paper of the Debtors; (g) All books, records, ledger cards, electronic data processing materials and other general intangibles relating to the foregoing subsections (a) through (f), inclusive; and (h) all proceeds of and all replacements, additions, substitutions, accessories, appurtenances, and parts for, the items or types of collateral described above in subsections (a) through (g), inclusive, whether now owned or hereafter acquired including, without limitation insurance proceeds. 3. Warranties. The Debtors warrant that: (i) no financing statement (other than any which may have been filed on behalf of the Secured Party or for Permitted Liens, as defined and described in the Loan Agreement) covering any of the Collateral is on file in any public office; (ii) except for Permitted Liens, the Debtors are and will be the lawful owners of all of the Collateral, free of all Liens and claims whatsoever, with full power and authority to execute this Security Agreement and to perform the Debtors' obligations hereunder, and to subject the Collateral to the security interest hereunder; (iii) all information with respect to the Collateral and the Account Debtors set forth on any schedule, certificate or other writing at any time heretofore or hereafter furnished by the Debtors to the Secured Party, is and will be true and correct in all material respects as of the date furnished, and (iv) the Debtors are duly authorized to execute, deliver and perform this Security Agreement. 4. Use and Possession. As long as there exists no Event of Default, the Debtors may have possession of the Collateral and use the same in any lawful manner not inconsistent with this Security Agreement, with any applicable law or regulation or with any policy of insurance on any of such Collateral. 5. Sales in the Ordinary Course of Business; Collections by Debtors. Until such time as the Secured Party shall notify the Debtors of the revocation of such power and authority because of the occurrence of an Event of Default (whether or not the Secured Party takes any other action or accelerates the Indebtedness), the Debtors (i) may, in the ordinary course of their business, at their own expense, sell, lease or furnish under contracts of service any of the Collateral held by the Debtors for such purpose, and use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by the Debtors for such purpose, and (ii) will, at their own expense, endeavor to collect, as and when due, all amounts due with respect to Accounts, lease and/or notes receivable, leases, lease agreements, chattel paper, contracts, General Intangibles and Payment Intangibles pertaining to any of the 3 Collateral, including the taking of such action with respect to such collection as the Secured Party may reasonably request or, in the absence of such request, as the Debtors may deem advisable. 6. Collections by the Secured Party. Upon the occurrence of an Event of Default (whether or not the Secured Party takes any other action or accelerates the Indebtedness), the Secured Party may at any time, whether before or after any revocation of such power and authority or the maturity of any of the Indebtedness, notify any parties obligated on any of the Accounts, leases and/or notes receivable, leases, lease agreements, Chattel Paper, contracts, General Intangibles or Payment Intangibles to make payment to the Secured Party of any amounts due or to become due thereunder and enforce collection of any such Accounts, leases and/or notes receivable, leases, lease agreements, Chattel Paper, contracts, General Intangibles or Payment Intangibles by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations thereunder or evidenced thereby. The Debtors will, at their own expense, notify any parties obligated on any of the Accounts, leases and/or notes receivable, leases, lease agreements, Chattel Paper, contracts, General Intangibles or Payment Intangibles pertaining to the Collateral to make payment to the Secured Party of any amounts due or to become due thereunder. The Secured Party is authorized to endorse, in the name of the Debtors, any item howsoever received by the Secured Party, representing any payment on or other proceeds of any of the Collateral. In each instance in which the Secured Party may elect hereunder to effect direct collection of any one or more Accounts, leases and/or notes receivable, leases, lease agreements, Chattel Paper, contracts, General Intangibles or Payment Intangibles pertaining to the Collateral, the Secured Party is also entitled to take possession of all books and records of the Debtors relating to the Debtors' Accounts, leases and/or notes receivable, leases, lease agreements, Chattel Paper, contracts, General Intangibles or Payment Intangibles, and the Debtors will not in any manner take or suffer any action to be taken to hinder, delay or interfere with the Secured Party's attempts to effect collection. 7. Inventory Location. The Debtors hereby represent and warrant to the Secured Party that the Inventory is located only in or near the locations set forth on Exhibit A hereto. The Debtors will not open or establish any warehouse not owned or established as of the date of this Security Agreement or locate any Inventory at any location except as set forth above without obtaining the Secured Party's prior written consent and executing such financing statements as the Secured Party and its counsel deem necessary to perfect its security interest therein. The Debtors shall immediately notify the Secured Party of the occurrence of any event causing loss or depreciation in value (except for ordinary wear and tear and loss or depreciation in value) of Collateral and the amount of such loss or depreciation. 8. Covenants of the Debtors. The Debtors will (i) upon demand, provide to the Secured Party any information the Secured Party deems necessary in order to protect, preserve, continue, perfect, extend or maintain a valid security interest in the Collateral (free of all other Liens, claims and rights of third parties whatsoever) to secure payment of the Indebtedness, and Debtors hereby authorize the filing of any financing statement, continuation statement, inventory list, lien entry forms or other similar documents and will pay any expenses and fees incurred from time to time by Secured Party in connection therewith; (ii) keep all Inventory only at the 4 locations set forth in Section 7 hereof or at such other addresses as shall be provided to the Secured Party at least fifteen days prior to the location of any Inventory thereat, and which address shall be acceptable to the Secured Party; (iii) keep only at the locations set forth in Section 7 hereof all records concerning Accounts, notes receivable, contracts, General Intangibles and Payment Intangibles, which records will be of such character as will enable the Secured Party or its agents or designees to determine at any time the status thereof; (iv) furnish the Secured Party such information concerning the Debtors, the Collateral and the Account Debtors as the Secured Party may from time to time reasonably request; (v) permit the Secured Party and its agents and designees from time to time to inspect the Inventory and to inspect, audit and make copies of and extracts from all records and all other papers in the possession of the Debtors, and will, upon reasonable request of the Secured Party, deliver to the Secured Party all of such records and papers which pertain to the Collateral and the Account Debtors; (vi) upon request of the Secured Party, stamp on the Debtors' records concerning the Collateral, a notation, in form satisfactory to the Secured Party, of the security interest of the Secured Party hereunder; (vii) except for the sale or lease of Inventory in the ordinary course of its business, not sell, lease, transfer or otherwise dispose of, assign or create or permit to exist any Lien on or security interest in any Collateral to or in favor of anyone other than the Secured Party, except with the prior written consent of the Secured Party; (viii) at all times keep all Collateral insured against loss, damage, theft and other risks, in such amounts, with such companies, under such policies and in such form, all as shall be reasonably satisfactory to the Secured Party, which policies shall provide that loss thereunder shall be payable to the Debtors and the Secured Party as their interests may appear, and such policies or certificates thereof shall, if the Secured Party so requests, be deposited with the Secured Party; (ix) if the Collateral is of a type normally used in more than one state, whether or not actually so used, the Debtors will immediately give written notice to the Secured Party of any change in the location of the chief executive office or the chief place of business of the Debtors, and of any transfer of any such Collateral in any jurisdiction other than the locations set forth in paragraph 7 hereof; and (x) reimburse the Secured Party for all reasonable expenses, including attorneys' fees and legal expenses, incurred by the Secured Party in seeking to collect or enforce any rights in the Collateral and to collect the Revolving Note and all other Indebtedness and to enforce its rights hereunder. 9. Remedies. Whenever an Event of Default shall exist, the Indebtedness shall be immediately due and payable, or not, as provided in the Loan Agreement, and the Secured Party may from time to time exercise any rights and remedies available to it hereunder, under the Loan Agreement or applicable law. The Debtors agree, in case of an Event of Default and upon the request of the Secured Party, to assemble the Collateral, at the Debtors' expense, at a convenient place acceptable to the Secured Party. Without limiting the foregoing, upon the existence of an Event of Default, the Secured Party may, to the fullest extent permitted by applicable law, without notice (except as required by the Loan Agreement), advertisement, hearing or process of law of any kind, (i) enter upon any premises where any of the Collateral may be located and take possession of and remove all or any such items, (ii) sell any or all of the Collateral free of all rights and claims of the Debtors therein and thereto at any public or private sale, and (iii) bid for and purchase any of the Collateral at any such sale. If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if mailed at least ten days before disposition, postage prepaid, addressed to the Debtors, at the address shown on the signature page or at any other address of the Debtors 5 appearing on the records of the Secured Party. Any proceeds of any of the Collateral (including proceeds of collections by the Secured Party described in Section 6) may be applied by the Secured Party to the payment of expenses incurred in connection with enforcing its rights or remedies with respect to the Collateral, including reasonable attorneys' fees and legal expenses, and any balance of such proceeds may be applied by the Secured Party toward the payment of such of the Indebtedness, and in such order of application as the Secured Party may from time to time elect, but only if allowed by applicable law. 10. Reimbursement of Secured Party. The Secured Party may from time to time, at its option, perform any agreement, obligation or covenant of the Debtors hereunder which the Debtors shall fail to perform, and take any other action which the Secured Party reasonably deems necessary for the maintenance or preservation of any of the Collateral or its interest therein, and the Debtors agree to forthwith reimburse the Secured Party for all reasonable expenses of the Secured Party in connection with the foregoing, together with interest thereon at the Default Rate from the date of notice thereof to the Debtors until reimbursed by the Debtors. 11. Reasonable Care. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if it takes such action for that purpose as the Debtors may request in writing, but failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. 12. Notices. Any notice from the Secured Party to the Debtors, if mailed, shall be deemed given when mailed, postage prepaid, or delivered by commercial delivery service, addressed to the Debtors, at the Debtors' address shown on the signature page hereto or at any other address of the Debtors appearing on the records of the Secured Party. Any notice from the Debtors to the Secured Party, if mailed, shall be deemed given when mailed, postage prepaid, or by commercial delivery service, addressed to the Secured Party at the address shown on the signature page hereto or at such other address as the Secured Party shall have provided to the Debtors for such purpose. 13. No Waiver. No delay on the part of the Secured Party in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Secured Party of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. 14. Amendments and Modifications. No amendment to, modification or waiver of, or consent with respect to any provision of this Security Agreement, shall in any event be effective unless the same shall be in writing and signed and delivered by the Secured Party, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15. Choice of Law. This Security Agreement has been delivered to the Secured Party at Tulsa, Oklahoma, and shall be construed in accordance with and governed by the laws of the State of Oklahoma. 6 16. Severability. Whenever possible each provision of this Security Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. 17. Binding Effect. This Security Agreement shall be binding upon the Debtors and their successors and assigns, and shall inure to the benefit of the Secured Party and its successors and assigns. 18. Financing Statement. A carbon or photographic copy, or other reproduction, of this Security Agreement or of any financing statement prepared or filed with respect hereto is sufficient as a financing statement for all purposes. IN WITNESS WHEREOF, this Security Agreement has been duly executed and delivered in Tulsa, Oklahoma, effective as of the day and year first above written. Address for Debtors: PALWEB CORPORATION, an Oklahoma corporation 1607 West Commerce By: /s/ Warren F. Kruger Dallas, Texas 75208 ------------------------------ Name: Warren F. Kruger ------------------------------ Title: President ------------------------------ PLASTIC PALLET PRODUCTION, INC., a Texas corporation 1607 West Commerce By: /s/ Warren F. Kruger Dallas Texas 75208 ------------------------------ Name: Warren F. Kruger ------------------------------ Title: President ------------------------------ "Debtors" Address for Secured Party /s/ Paul A. Kruger ------------------------------ Paul A. Kruger, an individual 2500 South McGee, Suite 147 Norman, Oklahoma 73072 "Secured Party" 7 EXHIBIT A --------- (Locations of Inventory) 1607 West Commerce Dallas, Texas 75208 EX-10.7 9 ex10-7_11681.txt DEED OF TRUST DATED JANUARY 10, 2003 EXHIBIT 10.7 ------------ DEED OF TRUST (Security Agreement and Financing Statement) -------------------------------------------- (Dallas, Dallas County, Texas) This combined Deed of Trust, Security Agreement and Financing Statement ("Instrument") is made on the date stated below among the Grantor, Beneficiary and Trustee who are identified and whose addresses are stated below. By signing this Instrument, Grantor agrees to the terms and conditions and makes the covenants stated in this Instrument. DATE: January 10, 2003 GRANTOR: PLASTIC PALLET PRODUCTION, INC. GRANTOR'S ADDRESS: 1607 West Commerce St. Dallas, Texas 75208 BENEFICIARY: PAUL A. KRUGER BENEFICIARY'S ADDRESS: 2500 South McGee, Suite 147 Norman, Oklahoma 73072 TRUSTEE: T. Allen Owen TRUSTEE'S ADDRESS: 1112 East Copeland Road, Suite 420 Arlington, Texas 76011 NOTE: Promissory Note in the maximum principal amount of Seven Million and No/100 dollars ($7,000,000) executed by Grantor and Palweb Corporation, an Oklahoma corporation ("Palweb") (Grantor and Palweb collectively, "Borrowers') and payable to the order of Beneficiary. LAND: See attached Exhibit "A" annexed hereto and incorporated herein by reference for all purposes. ARTICLE I - SECURITY -------------------- 1.01. Conveyance In Trust. For value received, the receipt and sufficiency of which Grantor acknowledges, and to secure the payment of the Indebtedness described in Section 2.01 and performance of the covenants and agreements of Grantor stated in this Instrument and in the Loan Documents (as hereinafter defined), Grantor conveys the Property described in Section 1.02, including, without limitation, the Land, to the Trustee in trust, with power of sale, TO HAVE AND TO HOLD the Property, together with the rights, privileges, and appurtenances thereto belonging unto the Trustee and the Trustee's substitutes or successors forever. Grantor binds itself and its heirs, executors, administrators, personal representatives, successors, and assigns to WARRANT AND FOREVER DEFEND the Property unto the Trustee, and the Trustee's substitutes or successors and assigns, against the claim or claims of all persons claiming or to claim the same or any part thereof subject to the Permitted Encumbrances (hereinafter defined). 1.02. Property. The Property covered by this Instrument includes the Land and the following items described in this Section 1.02, whether now owned or hereafter acquired, all of which, including replacements and additions thereto, shall be deemed to be and remain a part of the Property covered by this Instrument, and all rights, hereditaments and appurtenances pertaining thereto, all of which are referred to as the "Property": A. All buildings, structures and improvements now or hereafter erected or placed in or upon the Land, and all fixtures now or hereafter located in or upon any such building, structure or other improvement, regardless of the method of annexation or removability, including, without limitation, all electrical equipment (including lighting equipment, refrigeration equipment, ceiling fans, attic and window fans, motors and all other electrical paraphernalia), all furnaces, heaters, radiators and all other heating equipment, all linoleum and other permanent floor coverings, and all elevators (collectively, the "Improvements"); B. All apparatus, chattels, equipment, machinery, trade fixtures, furnishings, appliances and supplies now or hereafter located upon the Land or the Improvements, or attached to or used in connection with the Land or the Improvements, whether or not the same have or would become a part of the Land by attachment thereto, and all other personal property and fixtures of whatever kind and nature presently contained or hereafter placed in or located upon the Land or the Improvements, including all accessions and accessories to the personal property covered hereby, all replacements thereof and all parts substituted therein or thereon, whether or not same has or would become part of the Land or the Improvements (the foregoing personal property being sometimes hereinafter referred to separately as the "Personal Property"); C. All rents, issues and profits arising and to arise during the term of this Instrument for or on account of or with respect to the Land, the Improvements or the Personal Property; 2 D. All judgments and awards (and all proceeds thereof and other rights with respect thereto) made or to be made with respect to all or any part of the Land, the Improvements or the Personal Property under or in connection with any power of eminent domain; E. All rights to collect and receive any sums payable as or for damages to any of the Land, the Improvements or the Personal Property, for any reason or by virtue of any occurrence; and F. All rights to collect and receive any unearned or unaccrued premiums for casualty insurance policies covering the Improvements or the Personal Property, due or returnable upon any cancellation of or change in such policies. 1.03. Subrogation. If the money loaned or advanced by Beneficiary and secured hereby shall be used to pay off or discharge any lien or encumbrance upon or against the Property, Beneficiary, at its option, will be subrogated to all such liens or encumbrances so discharged, satisfied or paid, even though same may be released of record, and to all the rights of the person or persons to whom such payments have been made, and may immediately enforce the same against Grantor and the Property. ARTICLE II - INDEBTEDNESS AND PAYMENTS -------------------------------------- 2.01. Indebtedness. The indebtedness secured by this Instrument (the "Indebtedness") shall mean and include the following: A. Any and all sums becoming due and payable pursuant to the Note; B. Any and all Indebtedness (as defined in the Loan Agreement) of Borrowers to Beneficiary arising under or in connection with that certain Loan Agreement of even date herewith between and among Borrowers and Beneficiary (together with any extensions, renewals, modifications, restatements, supplements, or replacements thereof or therefor collectively, the "Loan Agreement"). C. Any and all other sums becoming due and payable by Grantor to Beneficiary as a result of advances made by Beneficiary pursuant to the terms and conditions of this Instrument or any other Loan Documents securing or executed in connection with or otherwise relating to the Note; and D. Any and all renewals, extensions, replacements, rearrangements, substitutions or modifications of the Indebtedness, or any part of the Indebtedness, including without limitation, the Note. 2.02. Other Loan Documents. In addition to this Instrument and the Note, Grantor and Beneficiary may execute various other documents and agreements relating to the Indebtedness secured by this Instrument, including the Loan Agreement and the other Loan Documents described and defined therein, all of which documents and agreements, including the Loan Agreement, are collectively referred to herein as the "Loan Documents." This Instrument shall 3 also secure the performance of all obligations and covenants of Grantor under this Instrument, the Loan Agreement, and other Loan Documents. Defined terms used herein but not expressly defined shall have the meanings ascribed thereto in the Loan Agreement. 2.03 Payment of Principal and Interest. Borrowers shall promptly pay when due the principal and interest on the Indebtedness evidenced by the Note, any prepayment and late charges or default rate of interest provided in the Note, and all other sums secured by this Instrument. 2.04 Application of Payments. Unless applicable law provides otherwise, all payments received by Beneficiary from Borrowers under the Note or this Instrument shall be applied by Beneficiary in the following order of priority: (a) amounts payable to Beneficiary by Grantor under this Instrument; (b) sums payable to Beneficiary under the Note to be applied to principal or interest as Beneficiary may determine in its discretion; and (c) any other sums secured by this Instrument in such order as Beneficiary, at Beneficiary's option, may determine. ARTICLE III - SECURITY AGREEMENT -------------------------------- 3.01. Uniform Commercial Code Security Agreement. This Instrument shall constitute a Security Agreement under the Uniform Commercial Code with respect to all of the Property. Grantor will, from time to time and as often as requested by Beneficiary, execute and deliver to Beneficiary such financing statements and such other and supplemental security agreements as Beneficiary may reasonably request to perfect the security interest created, or intended to be created, hereby and to more specifically identify the collateral subject to such security interest. No failure or omission of Beneficiary to request any financing statement or additional or supplemental security agreement, and no failure or omission of Grantor to execute or deliver any thereof, will impair the effectiveness or priority of the security interest created by this Instrument. Grantor will pay all costs of filing this Instrument (to the extent permitted by law) and any financing statements, continuation or termination statements with respect thereto and any affidavits or other instruments executed, or to be executed, to perfect, renew, continue or maintain the lien and security interest created hereby. Grantor hereby appoints Beneficiary as the agent and attorney-in-fact of Grantor to do, at Beneficiary's option and Grantor's expense, all acts and things reasonably necessary to perfect, and maintain perfection of, the lien and security interest created, or intended to be created, hereby. 3.02. Notice of Changes. Grantor shall give advance notice in writing to Beneficiary of any proposed change in Grantor's name, identity or structure and shall execute and deliver to Beneficiary, prior to or concurrently with the occurrence of any such change, all additional financing statements which Beneficiary may require to establish and maintain the validity and priority of Beneficiary's security interest with respect to any of the Property described or referred to herein. 3.03. Fixture Financing Statement. Some of the items of the Property described herein are goods which are or are to become fixtures related to the Property, and it is intended that, as to 4 those goods, this Instrument shall be effective as a financing statement filed as a fixture filing from the date of its filing for record in the real estate records of the county in which the Property is situated. Information concerning the security interest created by this instrument may be obtained from Beneficiary, as secured party, at the address of Beneficiary stated above. The mailing address of Grantor, as debtor, is as stated above. ARTICLE VI - GRANTOR'S REPRESENTATIONS, --------------------------------------- WARRANTIES, COVENANTS AND AGREEMENTS ------------------------------------ Grantor covenants, warrants and represents to and agrees with Beneficiary as follows: 4.01. Payment and Performance. Grantor shall make all payments on the Indebtedness when due and shall punctually and properly perform all of Grantor's covenants, obligations and liabilities under this Instrument and the other Loan Documents. 4.02. Warranty of Title. Grantor represents and warrants that it is the lawful owner and is in possession of the Property and is well and lawfully seized of a good and indefeasible estate in fee simple, free and clear of all encumbrances of every nature and kind whatsoever, except for the Permitted Liens (as defined in the Loan Agreement) and those encumbrances listed on Exhibit B attached hereto and made a part hereof (collectively, the "Permitted Encumbrances"). Grantor represents and warrants that it has good right and title and authority to sell, convey, mortgage, encumber and create a security interest in and to the same in favor of Trustee. Grantor agrees to make any further assurances of title that Beneficiary may require and will WARRANT AND DEFEND the same unto Beneficiary, its successors and assigns, forever, against the lawful claims and demands of all persons whomsoever, subject to the Permitted Encumbrances. 4.03. Title Insurance. Grantor shall, at its sole cost and expense, obtain and maintain mortgagee title insurance (in the form of a commitment, binder, or policy as Beneficiary may require) in form acceptable to Beneficiary in an amount equal to the appraised fair market value of the Property. 4.04. Insurance. A. Grantor agrees to maintain continuously, at all times during the term of this Instrument, casualty, public liability and other insurance coverage on the Property to the extent and in the amounts required under the Loan Agreement. B. If title to the Property is transferred, Beneficiary shall have the right, but not the duty, as authorized agent for Grantor, to assign the insurance to the grantee of title. In the event of loss under any such policies, Grantor will give immediate notice to Beneficiary. If Beneficiary by reason of such insurance receives any money for loss or damage, such amount shall, subject to the following proviso, be held by Beneficiary and paid to Grantor for the repair or restoration of the Property, provided that Grantor shall not be in default hereunder, and if Grantor shall have delivered to Beneficiary within sixty (60) days after such casualty: (a) plans 5 and specifications, in form and substance reasonably satisfactory to Beneficiary, for any such rebuilding or restoration; (b) a budget for rebuilding or restoration reasonably satisfactory to Beneficiary; and (c) evidence reasonably satisfactory to Beneficiary that Grantor has or will have upon receipt of insurance proceeds, all amounts necessary to pay the cost of such rebuilding or restoration. Otherwise, Beneficiary may retain and apply the insurance proceeds toward payment of the Indebtedness secured by this Instrument. In the event of a foreclosure of this Instrument, the purchaser of the Property shall succeed to all the rights of Grantor, including any right to unearned premiums, in and to all certificates and policies of insurance assigned and delivered to Beneficiary pursuant to the provisions of this paragraph. 4.05. Taxes. Grantor will pay, before same become delinquent or any penalty attaches thereto for nonpayment, all taxes, assessments and charges, general or special, of every nature and kind, that may be now or hereafter levied or assessed under any law now existing or hereafter enacted, upon the Property or any part thereof, upon the rents, issues, income or profits thereof, or upon the Indebtedness, whether any or all of said taxes, assessments or charges be levied directly or indirectly or as excise taxes or as income taxes, except to the extent required otherwise by the state law governing the Land. Grantor will not suffer or permit any liens, security interests, levy, attachment or other encumbrance to become effective, or to be asserted, against any of the, other than the Permitted Encumbrances, and will regularly and promptly submit to Beneficiary evidence of the due and punctual payment of such taxes, assessments or charges as Beneficiary may require from time to time. The foregoing notwithstanding, Grantor may in good faith contest, by a proper legal proceeding, the validity or amount of any such taxes, assessments or charges subject to the terms and conditions set forth in the Loan Agreement. Upon (i) violation of the foregoing in any part, (ii) the passage by the State of Texas of any law (a) imposing payment of the whole or any part of the aforesaid taxes or assessments upon Beneficiary, (b) deducting from the value of the Property for the purpose of taxation any liens thereon or, (c) changing in any way the laws now in force for the taxation of deeds of trust or debts secured by deeds of trust for state or local purposes or the manner of the collection of any such taxes so as to adversely affect this Instrument, or (iii) the rendering by any court of competent jurisdiction of a decision holding that any undertaking by Grantor to pay such taxes or assessments, or any of them, or any similar undertaking, is in whole or in part legally inoperative or void, and if any of (i), (ii) or (iii) above would have a material adverse effect (as defined in the Loan Agreement), then in such event the Indebtedness will, at the option of Beneficiary, become immediately due and payable, notwithstanding anything contained in this Instrument. 4.06. Condemnation. All awards heretofore or hereafter made by any public or quasi-public authority to the present or any future owner of the Property by virtue of an exercise of the right of eminent domain by such authority, including any award for a taking of title, possession or right of access to a public way, or for any change of grade of streets affecting said Property, are hereby assigned to Beneficiary. Beneficiary, at its option, is hereby authorized and empowered to collect and receive the proceeds of any such award or awards from the authorities making the same and to give proper receipts and acquittances therefor, and may, at Beneficiary's option, (i) apply such proceeds or any part thereof upon the Indebtedness, including unmatured portions thereof, (ii) use such proceeds or any part thereof to fulfill and satisfy any covenants 6 enjoined upon Grantor herein, (iii) use such proceeds or any part thereof to replace or restore the Property to a condition satisfactory to Beneficiary, or (iv) release such proceeds to Grantor. Upon request, Grantor agrees to make, execute and deliver any and all assignments and other instruments required for the purpose of assigning all such awards to the Beneficiary. 4.07. Additional Covenants. At all times during the term of this Instrument, Grantor will: A. Keep the Property in good order, condition and repair, ordinary wear and tear excepted; B. Not commit, permit or suffer any waste, impairment or deterioration of the Property or any part thereof, ordinary wear and tear excepted; C. Comply with all laws, ordinances, regulations, covenants, conditions and restrictions affecting the Property or the use thereof, and not suffer or permit any violation thereof; D. Not demolish or alter the design or structural character of the Property or any improvements now or hereafter erected upon the Property, unless Beneficiary shall first consent thereto in writing; E. Not remove without Beneficiary's written consent any of the Property, except for purposes of replacement or repair or in the ordinary course of Grantor's business; F. Except for the Permitted Encumbrances, keep the Property free from all judgments, mechanics' liens and all other statutory liens of whatsoever nature to the end that the priority of this Instrument may, at all times, be maintained; G. Allow Beneficiary to examine and inspect the Property at any reasonable time or times, subject to the limitations set forth in the Loan Agreement; and H. Pay Beneficiary within ten (10) days of demand together with interest accruing at the rate under the Note, all sums, including costs, expenses and reasonable agents' and attorneys' fees, it may expend or for which it may become obligated in any proceedings, legal or otherwise, to establish and sustain the lien of this Instrument or its priority or in defending against any liens, claims, rights, estates, easements or restrictions of any person or persons asserting priority thereto. 4.08. Protection of Beneficiary's Security. A. If Grantor fails to perform the covenants and agreements contained in this Instrument, or if any action or proceeding is commenced which affects the Property or title thereto or the interest of Beneficiary therein, including, without limitation, eminent domain, 7 insolvency, code enforcement, or arrangements or proceedings involving a bankrupt or decedent, then Beneficiary, at Beneficiary's option, may make such appearances, disburse such sums and take such action as Beneficiary deems necessary, in its sole discretion, to protect Beneficiary's interest, including, without limitation, (i) disbursement of attorneys' fees, (ii) entry upon the Property to make repairs, and (iii) procurement of satisfactory insurances as provided in Section 4.04. B. Any amounts disbursed by Beneficiary pursuant to this Section, with interest thereon, shall become additional indebtedness of Grantor secured by this Instrument. Unless Grantor and Beneficiary agree to other terms of payment, such amounts shall be immediately due and payable and shall bear interest from the date of disbursement at the rate stated in the Note unless collection from Grantor of interest at such rate would be contrary to applicable law, in which event such amounts shall bear interest at the highest non-usurious rate which may be collected from Grantor under applicable law. Grantor covenants and agrees that Beneficiary shall be subrogated, if and to the extent permitted by applicable law, to the lien of any mortgage or other lien discharged, in whole or in part, by the Indebtedness. Nothing contained in this Section shall require Beneficiary to incur any expense or take any action under this Instrument. 4.09. Liens. Except for the Permitted Encumbrances, Grantor shall promptly discharge any lien which has, or may have, priority over or equality with, the lien of this Instrument, and Grantor shall pay, when due, the claims of all persons supplying labor or materials to or in connection with the Property. Without Beneficiary's prior written permission, Grantor shall not allow any lien inferior to this Instrument to be perfected against the Property, except for the Permitted Encumbrances. 4.10. Business Use. Grantor warrants and represents to Beneficiary that the proceeds of the Note will be used solely for business or commercial purposes, and in no way will the proceeds be used for personal, family or household purposes. 4.11. Non-Homestead. Grantor warrants and represents to Beneficiary that the Property is not the business or residential homestead of Grantor or any other person. Grantor has no present intent to occupy on the future or use or claim in the future of the Property either as business or residential homestead. ARTICLE V - EVENTS OF DEFAULT ----------------------------- During the term of this Instrument, the occurrence of any one of the following events which shall continue beyond the expiration of any applicable notice and cure periods set forth in the Loan Agreement, if any, shall constitute an Event of Default: 5.01. Failure to Pay Indebtedness. Any of the Indebtedness is not paid when due, whether by acceleration or otherwise. 8 5.02. Nonperformance of Covenants. Any covenant in this Instrument or any of the other Loan Documents is not fully and timely performed, or the occurrence of any default or event of default under this Instrument or any other Loan Document. 5.03. False Representation. Any statement, representation or warranty in this Instrument or any of the other Loan Documents, any financial statement, or any other writing delivered to Beneficiary in connection with the Indebtedness is false, misleading, or erroneous in any material respect. 5.04. Transfer of the Property. Title to all or any part of the Property (other than obsolete or worn Personal Property replaced by adequate substitutes of equal or greater value than the replaced items when new) shall become vested in any party other than Grantor, whether by operation of law or otherwise, except as may be permitted under the Loan Agreement. Beneficiary may, in its sole discretion, waive this Event of Default, but it shall have no obligation to do so, and any waiver may be conditioned upon such one or more of the following which Beneficiary may require; (a) the grantee's integrity, reputation, character, creditworthiness, and management ability being satisfactory to Beneficiary in its sole judgment; and (b) grantee executing, prior to such sale or transfer, a written assumption agreement containing such terms as Beneficiary may require, such as a principal paydown on the Note, and increase in the rate of interest payable under the Note, a transfer fee, and any other modification of the Note, this Instrument or any of the other Loan Documents which Beneficiary may require. 5.05. Abandonment. Grantor abandons or vacates any of the Property, except as may be permitted under the Loan Agreement. 5.06. Foreclosure of Other Liens. The holder of any lien, security interest or assignment on the Property institutes foreclosure or other proceedings for the enforcement of its remedies thereunder and such proceedings are not dismissed or discharged within thirty (30) days. 5.07. Liquidation, Death, Etc. The liquidation, termination, dissolution, failure to maintain good standing in the State of Texas (if applicable), death, or legal incapacity of Grantor. 5.08. Material, Adverse Change. The occurrence of any material, adverse change in the financial condition of Grantor. ARTICLE VI - DEFAULT AND REMEDIES --------------------------------- 6.01. Acceleration and Waiver of Notices. Upon the occurrence of an Event of Default, Beneficiary, at Beneficiary's option, may declare all of the sums secured by this Instrument to be immediately due and payable without further demand and may invoke the power of sale and any other remedies permitted by applicable law or provided herein. Grantor acknowledges that the power of sale granted to Beneficiary may be exercised by Beneficiary without prior judicial hearing. Grantor and each surety, guarantor, and endorser of all or any part of the Indebtedness 9 expressly waive all presentations for payment, notices of intention to accelerate maturity, notices of intention to demand payment, demands for payment, protests, and notices of protest. Notwithstanding the foregoing, Grantor does not waive any right they may have to receive notices of default under this Instrument, the Note, and the other Loan Documents, as well as any opportunity to cure any such default. 6.02. Notice of Sale. Notice of sale of all or part of the Property by the Trustee shall be given by posting written notice thereof at the courthouse door (or other area in the courthouse as may be designated for such public notices) of the county in which the sale is to be made, and by filing a copy of the notice in the office of the county clerk of the county in which the sale is to be made, at least twenty-one (21) days preceding the date of the sale, and if the Property is to be sold is in more than one county, a notice shall be posted at the courthouse door (or other area in the courthouse as may be designated for such public notices) and filed with the county clerk of each county in which the Property to be sold is situated. If the Property to be sold is in more than one county, the notice shall designate the county in which the Property is to be sold. In addition, Beneficiary shall, at least twenty-one (21) days preceding the date of sale, serve written notice of the proposed sale by certified mail on Grantor and each debtor obligated to pay the Indebtedness secured hereby according to the Beneficiary's records. Service of such notice shall be completed upon deposit of the notice, enclosed in a postpaid wrapper, properly addressed to such debtor at the most recent address as shown by the records of Beneficiary, in a post office or official depository under the care and custody of the United States Postal Service. The affidavit of any person having knowledge of the facts to the effect that such service was completed shall be prima facie evidence of the fact of service. Any notice that is required or permitted to be given to Grantor may be addressed to Grantor at Grantor's Address stated above. Any notice that is to be given by certified mail to any other debtor may, if no address for such other debtor is shown by the records of certified mail to any other debtor may, if no address for such other debtor is shown by the records of Beneficiary, be addressed to such other debtor at the address of Grantor as is shown by the records of Beneficiary. Notwithstanding the foregoing provisions of this Section, notice of such sale given in accordance with the requirements of the applicable laws of the State of Texas in effect at the time of such sale and in accordance with the Loan Agreement shall constitute sufficient notice of such sale. The Trustee or his successor or substitute may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by Trustee, including the posting of notices and the conduct of sale, but in the name and on behalf of Trustee, his successor or substitute. If Trustee or his successor or substitute shall have given notice of sale hereunder any successor or substitute Trustee thereafter appointed may complete the sale and the conveyance of the property pursuant thereto as if such notice had been given by the successor or substitute Trustee conducting the sale. 6.03. Trustee's Sale. Beneficiary may require the Trustee to sell all or part of the Property, at public auction, to the highest bidder, for cash, at the county courthouse in the county in Texas in which the Property or any part thereof is situated, or if the Property is located in more than one county such sale or sales may be made at the courthouse in any county in which the Property is situated. All sales shall take place at such area of the courthouse as shall be properly 10 designated from time to time by the commissioners court (or, if not so designated by the commissioners court, as such other area in the courthouse may be provided in the notice of sale hereinafter described) of the specified county, between the hours of 10:00 o'clock a.m. and 4:00 o'clock p.m. (the commencement of such sale to occur within three hours following the time designated in the above-described notice of sale as the earliest time at which such sale shall occur, if required by applicable law) on the first Tuesday of any month, after giving notice of the time, place and terms of said sale (including the earliest time at which such sale shall occur) and of the Property to be sold in the manner hereinafter described, to the extent permitted by applicable law, any sale may be adjourned by announcement at the time and place appointed for such sale without further notice except as may be required by law. Trustee may sell all or any portion of the Property, together or in lots or parcels. In no event shall Trustee be required to exhibit, present or display at any such sale any of the Personal Property to be sold at such sale. Beneficiary may bid and become the purchaser of all or any party of the Property at any trustee's or foreclosure sale hereunder, and the amount of Beneficiary's successful bid may be credited on the Indebtedness. In the event any sale hereunder is not completed or is defective in the opinion of Beneficiary, such sale shall not exhaust the power of sale hereunder and Beneficiary shall have the right to cause a subsequent sale or sales to be made hereunder. 6.04. Partial Sales. The sale by Trustee of less than the whole of the Property shall not exhaust the power of sale herein granted, and Trustee is specifically empowered to make successive sales under such power until the whole of the Property shall be sold; and if the proceeds of such sale of less than the whole of the Property shall be less than the aggregate of the Indebtedness and the expenses thereof, this Instrument and the lien, security interest and assignment hereof shall remain in full force and effect as to the unsold portion of the Property just as though no sale had been made; provided, however, that Grantor shall never have any right to require the sale of less than the whole of the Property, but Beneficiary shall have the right, at its sole election, to request Trustee to sell less than the whole of the Property. If there is a default on the payment of any installment on the Note or any portion of the Indebtedness, and Beneficiary elects not to accelerate the unpaid balance of the Note or Indebtedness, Beneficiary shall have the option to proceed with foreclosure in satisfaction of such unpaid installment or other amount either through judicial proceedings or by directing Trustee to proceed as if under a full foreclosure, conducting the sale as herein provided without declaring the entire Indebtedness due. It is agreed that such sale, if so made, shall not in any manner affect the unmatured part of the Indebtedness, but as to such unmatured part of this Instrument shall remain in full force and effect as though no sale had been made under the provisions of this Section. Several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Indebtedness. 6.05. Foreclosure of All Property. The Land, Improvements, and Personal Property may be sold in one or more public sales pursuant to Texas Property Code ss.51.002 and Texas UCC ss.9.501(d). Grantor shall assemble the Personal Property and make it available to Beneficiary upon Beneficiary's written request. Grantor and all persons obligated to pay the Indebtedness agree that notice of sale of the Property provided pursuant to Section 6.02 above and pursuant to Texas Property Code ss.51.002 is and shall constitute commercially reasonable 11 notice of the sale of the Property or any part of the Property. Beneficiary shall also be entitled to foreclose its security interests against the Personal Property in accordance with any other rights and remedies Beneficiary may have as a secured party under the Texas UCC. 6.06 Trustee's Deed. Trustee shall deliver to the purchaser a Trustee's deed and such other assignments and documents of transfer and sale as Trustee may deem necessary conveying the Property so sold in fee simple with covenants of general warranty. Grantor covenants and agrees to defend generally the purchaser's title to the Property against any claims and demands. Notwithstanding the foregoing, Trustee shall deliver this Deed of Trust subject to the Permitted Encumbrances. At any such sale (a) Grantor hereby agrees, in its behalf and in behalf of Grantor's heirs, executors, administrators, successors, personal representatives and assigns, that any and all recitals made in any deed of conveyance given by Trustee with respect to the identify of Beneficiary, the occurrence or existence of any default, the acceleration of the maturity of any of the Indebtedness, the request to sell, the notice of sale, the given notice to all debtors legally entitled thereto, the time, place, terms and manner of sale, and receipt, distribution and application of the money realized therefrom, or the due and proper appointment of a substitute Trustee, and, without being limited by the foregoing, with respect to any other act or thing having been duly done by Beneficiary or by Trustee hereunder, shall be taken by all courts of law and equity as prima facie evidence that the statements or recitals state facts and are without further question to be so accepted, and Grantor hereby ratifies and confirms every act that Trustee or any substitute Trustee hereunder may lawfully do in the premises by virtue hereof, and (b) the purchaser may disaffirm any easement granted, subdivision plat filed, or rental, lease or other contract made in violation of any provision of this Instrument, and may take immediate possession of the Property free from, and despite the terms of, such grant of easement, subdivision plat, or rental, lease or other contract. 6.07. Proceeds of Sale. Trustee shall apply the proceeds of the sale in the following order: (a) to all reasonable costs and expenses of the sale, including but not limited to, reasonable Trustee's fees and attorneys' fees and costs of title evidence; (b) to all sums secured by this Instrument in such order as Beneficiary, in Beneficiary's sole discretion, directs; and (c) the excess, if any, to the person or persons legally entitled thereto. 6.08. Possession After Sale. If the Property is sold pursuant to Section 6.03, Grantor or any person holding possession of the Property through Grantor shall immediately surrender possession of the Property to the purchaser at such sale upon the purchaser's written demand. If possession is not surrendered upon the purchaser's written demand, Grantor or such person shall be a tenant at sufferance and may be removed by writ of possession or by an action for forcible entry and detainer. 6.09. Costs and Expenses. Beneficiary shall be entitled to collect all costs and expenses incurred in pursuing such remedies, including but not limited to, attorneys' fees and costs of documentary evidence, abstracts, and title reports. 12 6.10. Substitute Trustee. Beneficiary, at Beneficiary's option, with or without cause, may from time to time remove Trustee and appoint successor trustee to any Trustee appointed hereunder by an instrument recorded in the county in which this Instrument is recorded. Without conveyance of the Property, the successor trustee shall succeed to all title, power, and duties conferred upon the Trustee by this Instrument and by applicable law. 6.11. Remedies Cumulative. Each remedy provided in this Instrument is distinct and cumulative to all other rights or remedies under this Instrument or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever. 6.12. Forbearance by Beneficiary Not a Waiver. Any forbearance by Beneficiary in exercising any rights or remedy hereunder, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Beneficiary of payment of any sum secured by this Instrument after the due date of such payment shall not be a waiver of Beneficiary's right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. The procurement of insurance or the payment of taxes or other liens or charges by Beneficiary shall not be a waiver of Beneficiary's right to accelerate the maturity of the Indebtedness, nor shall Beneficiary's receipts of any awards, proceeds or damages under this Instrument operate to cure or waive Grantor's default in payment of sums secured by this Instrument. ARTICLE VII - MISCELLANEOUS PROVISIONS -------------------------------------- 7.01. Release. Upon payment of all sums and the performance of all obligations secured by this Instrument, Beneficiary shall release this Instrument. Grantor shall pay Beneficiary's reasonable costs incurred in releasing this Instrument. 7.02. Grantor and Lien Not Released. From time to time, Beneficiary may, at Beneficiary's option, without giving notice or obtaining the consent of Grantor, Grantor's successors or assigns or any junior lienholder, without liability on Beneficiary's part and notwithstanding the existence of an Event of Default, extend the time for payment of the Indebtedness or any part thereof, reduce the payments thereon, release anyone liable on any of the Indebtedness, accept a renewal note or note therefor, modify the terms and time of payment of the Indebtedness, release from the liens of this Instrument any part of the Property, take or release other or additional security, reconvey any part of the Property, consent to any map or plan of the Property, consent to the granting of any easement, join in any extension or subordination agreement, and agree in writing with Grantor to modify the rate of interest or period of amortization of the Note or change the amount of the installments payable thereunder. Any actions taken by Beneficiary pursuant to the terms of this section 7.02 shall not affect the obligation of the Grantor or Grantor's successors or assigns to pay the sums secured by this Instrument and to observe the covenants of Grantor contained herein, shall not affect the guaranty of any person, corporation, partnership, or other entity for payment of the Indebtedness or any part thereof, and shall affect the liens or priority of liens of this Instrument on the Property. Grantor shall pay Beneficiary a reasonable charge, together with such title insurance 13 premiums and attorneys' fees as may be incurred at Beneficiary's option, for any such action if taken at Grantor's request. 7.03. Notices. All notices given pursuant to this Instrument will be in writing and will be delivered in accordance with the Loan Agreement. 7.04. Binding Effect. This Instrument will be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, trustees, successors and assigns. 7.05. GOVERNING LAW. EXCEPT TO THE EXTENT THAT THE LAWS OF THE STATE OF TEXAS ARE MANDATORILY APPLICABLE WITH RESPECT TO VALIDITY, PRIORITY AND PERFECTION, THIS INSTRUMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OKLAHOMA AND BY THE LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO TRANSACTIONS IN THE STATE OF TEXAS. 7.06. Severability. In the event that any provision of this Instrument or the Note conflicts with applicable law, such conflict shall not affect other provisions of this Instrument or the Note which can be given effect without the conflicting provisions, and to this end the provisions of this Instrument and the Note are declared to be severable. 7.07 Partial Invalidity. In the event any portion of the sums intended to be secured by this Instrument cannot be lawfully secured hereby, payments in reduction of such sums shall be applied first to those portions not secured hereby. 7.08. Captions. The captions and headings of the Articles and Section of this Instrument are for convenience only and are not to be used to interpret or define the terms and provisions of this Instrument. 7.09. Conflicts with Loan Agreement. Notwithstanding anything to the contrary contained in this Instrument, in the event of any conflict or inconsistency between the terms and conditions contained in this Instrument and the terms and conditions contained in the Loan Agreement, the terms and conditions contained in the Loan Agreement shall control the resolution of any such conflict or inconsistency. [Remainder of page intentionally left blank] 14 IN WITNESS WHEREOF, Grantor has caused this Instrument to be executed in Tulsa, Oklahoma on the day and year first above written. PLASTIC PALLET PRODUCTION, INC., a Texas corporation By: /s/ Warren F. Kruger ------------------------------ Name: Warren F. Kruger ------------------------------ Title: President ------------------------------ 15 ACKNOWLEDGMENT STATE OF OKLAHOMA ) ) COUNTY OF TULSA ) This instrument was acknowledged before me on January 10, 2003, by Warren F. Kruger as President of PLASTIC PALLET PRODUCTION, INC., a Texas corporation. /s/ Cindy Heiliger ----------------------------- Notary Public Cindy Heiliger ----------------------------- Typed or Printed Name My commission expires: May 19, 2004 ---------------- Commission # 00008636 ---------------- [SEAL] 16 EXHIBIT A --------- (Legal Description) BEING a tract of land in the City of Dallas, Texas, in the Wm. Coombs Survey Abstract No. 290, and being part of Block 26 through 31 in City Block 7263, according to the plat of West Dallas recorded in Volume 106, Page 170, of the Deed Records of Dallas County, Texas, and being a part of a tract of land conveyed to Wyatt Metal and Boiler Works by Texas Northern Railroad Company, dated November 7, 1919, and recorded in Volume 799, Page 571, of the Deed Records of Dallas County, Texas, and part of two tracts of land conveyed to Wyatt Metal and Boiler Works by Gulf Colorado, and Santa Fe Railroad Company, dated August 28, 1948, and recorded in Volume 3089, Page 321 and 327, of the Deed Records of Dallas County, Texas, and being more particularly described as follows: BEGINNING at a 3/8 inch iron rod set for corner at the Northeast Intersection of the North line of West Commerce Street, with the East line of Vilbig Road, said point being the Southwest corner of City Block 3l/7263; THENCE North 0 degrees 06 minutes 19 seconds West, with the East line of said Vilbig Road, a distance of 313.88 feet to a 3/8 inch iron rod set for corner; THENCE in a Easterly direction with the North line of a tract of land conveyed to Wyatt Metal and Boiler Works in deed filed in Volume 3089, Page 326, and Volume 3089, Page 321, of the Deed Records of Dallas County, Texas, and the following course and distances; Southeasterly direction with a curve to the right having a radius of 1091.34 feet, an angle of 02 degrees 56 minutes 25 seconds, a distance of 56.0 feet to a 3/8 inch iron rod set for corner; South 80 degrees 55 minutes 26 seconds East, a distance of 750.50 feet to a 3/8 inch iron rod set for corner in a curve to the left having a radius of 3028.19 feet, an angle of 02 degrees 05 minutes 10 seconds, a distance of 110.25 feet, to a l/2 inch iron rod found for corner; THENCE South 0 degrees 03 minutes 32 seconds East, 174.17 feet to a l/2 inch iron rod found for corner in the North line of West Commerce Street; THENCE North 89 degrees 52 minutes 26 seconds West, 905.30 feet to the POINT OF BEGINNING and containing 220,922.916 square feet or 5.072 acres of land. 17 EXHIBIT B --------- (Permitted Encumbrances) 1. Real Property taxes for 2003, which are not yet due and payable. 2. Easement and Right of Way dated September 17, 2001, and recorded on September 18, 2001, in Volume 2001182, at Page 4114 of the records of Dallas County, Texas. 18 EX-10.8 10 ex10-8_11681.txt LETTER AGREEMENT WITH LYLE W. MILLER EXHIBIT 10.8 ------------ PalWeb Corporation 1607 West Commerce Street Dallas, TX 75208 January 10, 2003 Lyle W. Miller 2810 Hannah Blvd. P.O. Box 4697 East Lansing, MI 48823 RE: STOCK OPTIONS Dear Lyle: PalWeb has heretofore granted to you the following options to purchase shares of PalWeb's common stock, par value $0.0001 per share ("Options"): -------------- ----------------- -------------- ------------------ Number Current of Options Option Price Grant Date Expiration Date -------------- ----------------- -------------- ------------------ 50,000 $2.00 5/11/01 5/11/11 -------------- ----------------- -------------- ------------------ 100,000 $3.125 4/11/02 4/11/12 -------------- ----------------- -------------- ------------------ 25,000 $1.60 6/26/02 6/26/12 -------------- ----------------- -------------- ------------------ Notwithstanding the terms and provisions of the stock option agreements previously executed by you and PalWeb with respect to such Options, all of such Options are hereby amended to provide that (i) they shall be fully vested as of the Closing Date, and may be exercised, in whole or in part, at any time and from time to time until the expiration date; and (ii) the expiration date shall be January 10, 2008. Except as so amended, the terms of the options shall remain in full force and effect. PalWeb recognizes that such modifications in terms will result in a different accounting treatment for such options. Sincerely, PALWEB CORPORATION By: /s/Warren F. Kruger ------------------------------ Name: Warren F. Kruger ------------------------------ Title: President ------------------------------ Accepted and Agreed: /s/ Lyle W. Miller - -------------------- Lyle W. Miller EX-99.1 11 ex99-1_11681.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 ------------ CERTIFICATION Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of PalWeb Corporation (the "Company"), hereby certifies that the Company's Quarterly Report on Form 10-QSB for the Period Ended November 30, 2002 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: January 14, 2003 /s/ Warren F. Kruger ------------------------------------ Warren F. Kruger President and Chief Executive Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C.ss.1350. EX-99.2 12 ex99-2_11681.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 ------------ CERTIFICATION Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of PalWeb Corporation (the "Company"), hereby certifies that the Company's Quarterly Report on Form 10-QSB for the Period Ended November 30, 2002 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: January 14, 2003 /s/William W. Rahhal ------------------------------------ William W. Rahhal Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C.ss.1350. -----END PRIVACY-ENHANCED MESSAGE-----