EXHIBIT 2.2
ACQUISITION AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PALEX, INC.,
ACME ACQUISITION, INC.,
ACME BARREL COMPANY, INC.,
THE ACME BARREL COMPANY EMPLOYEE STOCK
OWNERSHIP PLAN,
THE ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LIVING TRUST U/T/A DATED AUGUST 7, 1992,
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇,
THE ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ LIVING TRUST U/T/A DATED MARCH 16, 1989
AND
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
DATED AS OF FEBRUARY 23, 1998
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1. Definitions........................................................1
1.2. Interpretation.....................................................5
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1. The Merger.........................................................6
2.2. Effective Time of the Merger.......................................6
2.3. Articles of Incorporation, By-laws and Board of Directors of
Surviving Corporation..............................................6
ARTICLE III
CONVERSION OF SHARES
3.1. Conversion of Company Shares.......................................6
3.2. Conversion of Newco Shares.........................................7
3.3. Exchange of Certificates...........................................7
3.4. Closing............................................................7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE INDEMNIFYING STOCKHOLDERS
4.1. Due Organization and Qualification.................................7
4.2. Authorization; Non-Contravention; Approvals........................8
4.3. Capitalization.....................................................8
4.4. Pooling-of-Interests Accounting....................................9
4.5. Subsidiaries.......................................................9
4.6. Financial Statements...............................................9
4.7. Liabilities and Obligations.......................................10
4.8. Accounts and Notes Receivable.....................................10
4.9. Assets............................................................11
4.10. Material Customers, Contracts and Bartering Commitments..........11
4.11. Permits..........................................................12
4.12. Environmental Matters............................................13
4.13. Labor and Employee Relations.....................................13
4.14. Insurance........................................................13
4.15. Compensation; Employment Agreements..............................13
4.16. Noncompetition, Confidentiality and Nonsolicitation Agreements...14
4.17. Employee Benefit Plans...........................................14
4.18. Litigation and Compliance with Law...............................16
4.19. Taxes............................................................16
4.20. Absence of Changes...............................................16
4.21. Accounts with Banks and Brokerages; Powers of Attorney...........18
4.22. Absence of Certain Business Practices............................18
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4.23. Competing Lines of Business; Related-Party Transactions..........18
4.24. Intangible Property..............................................18
4.25. Disclosure.......................................................18
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX AND NEWCO
5.1. Organization......................................................18
5.2. Authorization; Non-Contravention; Approvals.......................19
5.3. PalEx Common Stock................................................19
5.4. Tax Reorganization Representations................................20
5.6. Legal Compliance..................................................21
5.7. Litigation and Compliance with Law................................21
5.8. Disclosure........................................................21
ARTICLE VI
CERTAIN COVENANTS
6.1. Release From Guarantees...........................................21
6.2. Future Cooperation; Tax Matters...................................21
6.3. Expenses..........................................................22
6.4. Employment Agreement..............................................22
6.5. Registration Rights Agreement.....................................22
6.6. Repayment of Related Party Indebtedness...........................22
6.7. Stock Options.....................................................22
6.8. Termination of ESOP...............................................23
ARTICLE VII
INDEMNIFICATION
7.1. General Indemnification by the Indemnifying Stockholders..........23
7.2. Indemnification by PalEx..........................................23
7.3. Third Person Claims...............................................23
7.4. Indemnification Deductible........................................24
7.5. Indemnification Limitation........................................24
7.6. Indemnification for Negligence of Indemnified Party...............25
ARTICLE VIII
NONCOMPETITION COVENANTS
8.1. Prohibited Activities.............................................26
8.2. Equitable Relief..................................................26
8.3. Reasonable Restraint..............................................27
8.4. Severability; Reformation.........................................27
8.5. Material and Independent Covenant.................................27
ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. General...........................................................27
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9.2. Equitable Relief..................................................27
ARTICLE X
POOLING-OF-INTERESTS
ACCOUNTING AND INTENDED TAX TREATMENT
10.1. Execution of Documents Necessary for Pooling Treatment...........28
10.2. Restrictions on Resale...........................................28
10.3. Tax-Free Reorganization..........................................28
ARTICLE XI
FEDERAL SECURITIES ACT; RESTRICTIONS
ON PALEX COMMON STOCK
11.1. Compliance with Law..............................................28
11.2. Economic Risk; Sophistication....................................29
11.3. Rule 144 Reporting...............................................29
ARTICLE XII
MISCELLANEOUS
12.1. Successors and Assigns...........................................30
12.2. Entire Agreement.................................................30
12.3. Counterparts.....................................................30
12.4. Brokers and Agents...............................................30
12.5. Notices..........................................................30
12.6. Survival of Representations and Warranties.......................31
12.7. Exercise of Rights and Remedies..................................31
12.8. Reformation and Severability.....................................32
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ACQUISITION AGREEMENT AND PLAN OF REORGANIZATION
THIS ACQUISITION AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT")
is made as of the 23rd day of February, 1998, by and among PalEx, Inc., a
Delaware corporation ("PALEX"), Acme Acquisition, Inc., a Delaware corporation
that is a subsidiary of PalEx ("NEWCO"), Acme Barrel Company, Inc., an Illinois
corporation (the "COMPANY"), The Acme Barrel Company Employee Stock Ownership
Plan (the "ESOP"), ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, The ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Living Trust u/t/a dated
August 7, 1992 (together with ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, "▇. ▇▇▇▇▇▇▇▇") and ▇▇▇▇▇▇ ▇.
▇▇▇▇▇▇▇▇, and The ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ Living Trust u/t/a dated March 16, 1989
(together with ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, "▇. ▇▇▇▇▇▇▇▇") (the ESOP, ▇. ▇▇▇▇▇▇▇▇ and ▇.
▇▇▇▇▇▇▇▇ are herein collectively referred to as the "STOCKHOLDERS"), with the
Stockholders being the Company's only stockholders.
WHEREAS, the respective Boards of Directors of Newco and the Company
(collectively referred to as "CONSTITUENT CORPORATIONS") deem it advisable and
in the best interests of the Constituent Corporations and their respective
stockholders that Newco merge with and into the Company (the "MERGER"); and
WHEREAS, the Boards of Directors of the Constituent Corporations have
approved and adopted this Agreement as a plan of reorganization within the
provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the
"CODE"); and
WHEREAS, the stockholders of the Constituent Corporations have approved
the Merger in accordance with the GCL and the Illinois Act; and
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants contained
herein, the parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
1.1. DEFINITIONS. Capitalized terms used in this Agreement shall have the
following meanings:
"AFFILIATE" of, or "AFFILIATED" with, a specified person or entity means a
person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the specified person or entity.
"AGREEMENT" has the meaning set forth in the first paragraph of this
Agreement.
"BALANCE SHEET DATE" has the meaning set forth in SECTION 4.6.
"CLOSING" has the meaning set forth in SECTION 3.4.
"CLOSING DATE" has the meaning set forth in SECTION 3.4.
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"CODE" has the meaning set forth in the third paragraph of this Agreement.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"COMPANY COMMON STOCK" has the meaning set forth in SECTION 3.1.
"COMPANY PREFERRED STOCK" has the meaning set forth in SECTION 3.1.
"COMPANY STOCK" has the meaning set forth in SECTION 3.1.
"COMPETITIVE BUSINESS" means any business that competes with the Company,
including, without limitation, any business that (a) reconditions, recycles,
repairs, markets, distributes, brokers, manages or transports drums or barrels
and other logistics services with respect thereto; or (b) competes with the
Company for raw materials (E.G., open top and closed top drums); PROVIDED,
HOWEVER, that such term shall not include the businesses of manufacturing,
reconditioning, recycling and repairing, and marketing, distributing, brokering,
leasing, managing and transporting, plastic drums, plastic barrels, plastic
pails and plastic intermediate bulk containers.
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second
paragraph of this Agreement.
"CSC" means, collectively, Consolidated Drum Reconditioning Co., Inc. and
its Affiliates, certain assets of which were acquired by a subsidiary of PalEx
on February 12, 1998.
"▇. ▇▇▇▇▇▇▇▇" has the meaning set forth in the first paragraph of this
Agreement.
"EFFECTIVE TIME" has the meaning set forth in SECTION 2.2.
"ENCUMBRANCES" means all liens, encumbrances, mortgages, pledges, security
interests, conditional sales agreements, charges, options, preemptive rights,
rights of first refusal, reservations, restrictions or other encumbrances or
defects in title.
"EMPLOYEE BENEFIT PLAN" has the meaning set forth in SECTION 4.17.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in SECTION 4.17.
"EMPLOYMENT AGREEMENT" has the meaning set forth in SECTION 6.4.
"ENVIRONMENTAL LAWS" means any Law or agreement with any Governmental
Authority relating to (a) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface land, subsurface land, plant and
animal life or any other natural resource) or to human health or safety or (b)
the exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of any substance, in each case as amended and as in effect on the Closing Date.
The term "ENVIRONMENTAL LAW" includes, without limitation, (i) the Federal
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act, the Federal
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Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal
Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments thereto), the Federal Solid
Waste Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide Fungicide and Rodenticide Act, the Federal Occupational Safety and
Health Act of 1970, each as amended and as in effect on the Closing Date, and
(ii) any common law or equitable doctrine (including, without limitation,
injunctive relief and tort doctrines such as negligence, nuisance, trespass and
strict liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of, effects of or
exposure to any substance.
"ERI" means Environmental Recyclers of Colorado Inc., a Colorado
corporation.
"ERI ACQUISITION AGREEMENT" means the Acquisition Agreement and Plan of
Reorganization dated as of the date hereof, by and among PalEx, Western
Container Acquisition, Inc., ERI and the stockholders of ERI.
"ERISA" has the meaning set forth in SECTION 4.17.
"ERISA AFFILIATE" has the meaning set forth in SECTION 4.17.
"ESOP" has the meaning set forth in the first paragraph of this Agreement.
"ESP" means ESP Realty Corp., Inc., an Illinois corporation.
"ESP ACQUISITION AGREEMENT" means the Acquisition Agreement and Plan of
Reorganization dated as of the date hereof, by and among PalEx, the Surviving
Corporation, ESP and the stockholder of ESP.
"EXPIRATION DATE" has the meaning set forth in SECTION 12.6.
"FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.6.
"GAAP" means generally accepted accounting principles applied on a basis
consistent with preceding years and throughout the periods involved.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or foreign
government, political subdivision or governmental or regulatory authority,
agency, board, bureau, commission, instrumentality or court or
quasi-governmental authority.
"GCL" means General Corporation Law of the State of Delaware, as amended.
"HAZARDOUS SUBSTANCES" means any substance presently or hereafter listed,
defined, designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, under any Environmental Law. The term "HAZARDOUS
SUBSTANCES" includes, without limitation, any substance to which exposure is
regulated by any Governmental Authority or any Environmental Law including,
without limitation, any toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial substance
or petroleum or any derivative or by-product thereof, radon, radioactive
material,
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asbestos or asbestos containing material, urea formaldehyde foam insulation,
lead or polychlorinated biphenyls.
"ILLINOIS ACT" means the Illinois Business Corporation Act of 1983, as
amended.
"INDEMNIFIED PARTY" has the meaning set forth in SECTION 7.3.
"INDEMNIFYING PARTY" has the meaning set forth in SECTION 7.3.
"INDEMNIFYING STOCKHOLDERS" means ▇. ▇▇▇▇▇▇▇▇ and ▇. ▇▇▇▇▇▇▇▇.
"INTERIM BALANCE SHEET" has the meaning set forth in SECTION 4.6.
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.6.
"LAW" or "LAWS" means any and all federal, state, local or foreign
statutes, laws, ordinances, proclamations, code, regulations, licenses, permits,
authorizations, approvals, consents, legal doctrine, published requirements,
orders, decrees, judgments, injunctions and rules of any Governmental Authority,
including, without limitation, those covering environmental, Tax, energy,
safety, health, transportation, bribery, recordkeeping, zoning, discrimination,
antitrust and wage and hour matters, in each case as amended and in effect from
time to time.
"LOSS" or "LOSSES" means all liabilities, losses, claims, damages,
actions, suits, proceedings, demands, assessments, adjustments, fees, costs and
expenses (including specifically, but without limitation, reasonable attorneys'
fees and costs and expenses of investigation).
"MATERIAL ADVERSE EFFECT" has the meaning set forth in SECTION 5.6.
"MATERIAL CUSTOMERS" has the meaning set forth in SECTION 4.10.
"MERGER" has the meaning set forth in the second paragraph of this
Agreement.
"MERGER FILINGS" has the meaning set forth in SECTION 2.2.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"1933 ACT" means the Securities Act of 1933, as amended.
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"OPINION NO. 16" has the meaning set forth in SECTION 4.4.
"▇. ▇▇▇▇▇▇▇▇" has the meaning set forth in the first paragraph of this
Agreement.
"PALEX" has the meaning set forth in the first paragraph of this
Agreement.
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"PALEX COMMON STOCK" means PalEx's Common Stock, par value $.01 per share.
"PERMITS" has the meaning set forth in SECTION 4.11.
"PERMITTED ENCUMBRANCES" means (a) any Encumbrances reserved against in
the Interim Balance Sheet, (b) Encumbrances for property or ad valorem Taxes not
yet due and payable or which are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are maintained
on the Company's books in accordance with GAAP, and (c) obligations under
operating and capital leases described in SCHEDULE 4.10.
"PLAN" has the meaning set forth in SECTION 4.17.
"PURCHASE PRICE SHARES" has the meaning set forth in SECTION 7.5.
"QUALIFIED PLANS" has the meaning set forth in SECTION 4.17.
"REGISTRATION RIGHTS AGREEMENT" has the meaning set forth in SECTION 6.5.
"RESTRICTED SHARES" has the meaning set forth in SECTION 11.1.
"RULE 144" means Rule 144 as promulgated under the 1933 Act.
"SEC" means the Securities and Exchange Commission.
"STOCKHOLDERS" has the meaning set forth in the first paragraph of this
Agreement.
"SURVIVING CORPORATION" has the meaning set forth in SECTION 2.1.
"TAXES" has the meaning set forth in SECTION 4.19.
"TERRITORY" has the meaning set forth in SECTION 8.1.
"THIRD PERSON" has the meaning set forth in SECTION 7.3.
"YEAR-END FINANCIAL STATEMENTS has the meaning set forth in SECTION 4.6.
1.2. INTERPRETATION. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in SECTION 1.1 and elsewhere in this Agreement
include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the
meanings ascribed to them in accordance with GAAP; and
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(c) the words "herein," "hereof," and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision.
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1. THE MERGER. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time in accordance with the Illinois Act and the
GCL, Newco shall be merged with and into the Company (the "MERGER") and the
separate existence of Newco shall thereupon cease. The Company shall be the
surviving corporation in the Merger (hereinafter sometimes referred to as the
"SURVIVING CORPORATION").
2.2. EFFECTIVE TIME OF THE MERGER. The Merger shall become effective at
such time (the "EFFECTIVE TIME") as (a) holders of a majority of the Company
Common Stock approve the Merger, (b) holders of a majority of the Company
Preferred Stock approve the Merger, and (c) a certificate of merger and articles
of merger, in forms mutually acceptable to PalEx and the Company, are filed with
the Secretaries of State of the States of Delaware and Illinois, respectively
(the "MERGER FILINGS"). The Merger Filings shall be made simultaneously with or
as soon as practicable after the execution of this Agreement and the Closing.
2.3. ARTICLES OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. As a result of the Merger and at the Effective Time:
(a) the Articles of Incorporation of the Company in effect
immediately prior to the Effective Time shall become the Articles of
Incorporation of the Surviving Corporation, and thereafter may be amended
in accordance with their terms and as provided in the Illinois Act;
(b) the By-laws of the Company in effect immediately prior to the
Effective Time shall become the By-laws of the Surviving Corporation, and
thereafter may be amended in accordance with their terms and as provided
by the Articles of Incorporation of the Surviving Corporation and the
Illinois Act; and
(c) the Board of Directors of Newco as constituted immediately prior
to the Effective Time shall be the Board of Directors of the Surviving
Corporation.
ARTICLE III
CONVERSION OF SHARES
3.1. CONVERSION OF COMPANY SHARES.
(a) At the Effective Time, by virtue of the Merger, and without any
action on the part of any holder of any capital stock of the Company, the
issued and outstanding shares of common stock, $10.00 par value per share,
of the Company as of the Effective Time (the "COMPANY COMMON STOCK") shall
be converted into the right to receive, and become exchangeable for, an
aggregate of 2,248,218 shares of PalEx Common Stock, which shares of PalEx
Common Stock shall be
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exchangeable for all the Company Common Stock at the Effective Time and
issued to the Stockholders as set forth on SCHEDULE 3.1.
(b) At the Effective Time, by virtue of the Merger, and without any
action on the part of any holder of any capital stock of the Company, the
issued and outstanding shares of preferred stock, $.20 par value per
share, of the Company as of the Effective Time (the "COMPANY PREFERRED
STOCK" and, together with the Company Common Stock, the "COMPANY STOCK")
shall be converted into the right to receive, and become exchangeable for,
an aggregate of _____ shares of PalEx Common Stock, which shares of PalEx
Common Stock shall be exchangeable for all the Company Preferred Stock at
the Effective Time and be issued to the Stockholders as set forth on
SCHEDULE 3.1.
3.2. CONVERSION OF NEWCO SHARES. At the Effective Time, by virtue of the
Merger and without any action on the part of PalEx Container Systems, Inc., a
Delaware corporation and wholly-owned subsidiary of PalEx, as the sole holder of
capital stock of Newco, each issued and outstanding share of common stock, par
value $.01 per share, of Newco shall be converted into one share of common
stock, $10.00 par value per share, of the Surviving Corporation.
3.3. EXCHANGE OF CERTIFICATES. At the Closing, (a) each Stockholder shall
furnish to PalEx the certificates representing its Company Stock, duly endorsed
in blank by such Stockholder or accompanied by duly executed blank stock powers,
and (b) PalEx shall deliver to each Stockholder certificates representing the
shares of PalEx Common Stock to be delivered to such Stockholder pursuant to
SECTION 3.1 and in accordance with SECTION 10.2. Each Stockholder agrees
promptly to cure any deficiencies with respect to the endorsement of the
certificates or other documents of conveyance with respect to the Company Stock
or with respect to the stock powers accompanying the Company Stock.
3.4. CLOSING. The consummation of the Merger and exchange of shares
described in SECTION 3.3 hereof and the other transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of PalEx, ▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇., ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇, concurrently with the execution of this
Agreement or at such other time and date as PalEx, the Company and the
Stockholders may mutually agree, which date is herein referred to as the
"CLOSING DATE."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE INDEMNIFYING STOCKHOLDERS
The Indemnifying Stockholders jointly and severally represent and warrant
to PalEx as follows:
4.1. DUE ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Illinois and is duly authorized and qualified to do business under all
applicable Laws and to carry on its business in the places and in the manner as
now conducted. The Company has the requisite corporate power and authority to
own, lease and operate its assets and properties and to carry on its business as
such business is currently being conducted. SCHEDULE 4.1 contains a list of all
jurisdictions in which the Company is authorized or qualified to do business.
True, complete and correct copies of the Articles of Incorporation and By-laws,
each as amended, of the Company are attached hereto as SCHEDULE 4.1. Correct and
complete copies of all stock records and minute books of
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the Company for the past five years have been provided to PalEx, and correct and
complete copies of all other stock records and minute books of the Company have
been made available to PalEx.
4.2. AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) The Company has the requisite corporate power and authority to
enter into this Agreement and to effect the Merger. Each Stockholder has
the full legal right, power and authority to enter into this Agreement.
The execution, delivery and performance of this Agreement have been
approved by the board of directors of the Company and by the Stockholders.
No additional corporate proceedings on the part of the Company is
necessary to authorize the execution and delivery of this Agreement and
the consummation by the Company of the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by the
Company and the Stockholders, and, assuming the due authorization,
execution and delivery hereof by PalEx and Newco, constitutes a valid and
binding agreement of the Company and each Stockholder, enforceable against
the each of them in accordance with its terms.
(b) The execution and delivery of this Agreement by the Company and
the Stockholders do not, and the consummation by the Company and the
Stockholders of the transactions contemplated hereby will not, violate or
result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or
acceleration under, or result in the creation of any Encumbrance upon any
of the properties or assets of the Company under any of the terms,
conditions or provisions of, (i) the Articles of Incorporation or By-laws
of the Company, (ii) any Laws applicable to the Stockholders or the
Company or any of its properties or assets, or (iii) except as set forth
in SCHEDULE 4.2, any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, lease or other instrument,
obligation or agreement of any kind to which any Stockholder or the
Company is now a party or by which the Company or any of its properties or
assets may be bound or affected.
(c) Except for the Merger Filings and as set forth in SCHEDULE 4.2,
no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any Governmental Authority or third
party is necessary for the execution and delivery of this Agreement by the
Company and the Stockholders or the consummation by the Company and the
Stockholders of the transactions contemplated hereby. Except as set forth
in SCHEDULE 4.2, none of the customer contracts providing for purchases
individually in excess of $50,000, or in the aggregate in excess of
$100,000, or other material agreements, licenses or permits to which the
Company is a party requires notice to, or the consent or approval of, any
third party for the execution and delivery of this Agreement by the
Company and the Stockholders and the consummation of the transactions
contemplated hereby.
4.3. CAPITALIZATION. The authorized capital stock of the Company consists
solely of 3,500,000 shares of Company Preferred Stock, all of which are issued
and outstanding, and 10,000 shares of Company Common Stock, all of which are
issued and outstanding. All of the issued and outstanding shares of Company
Stock are owned beneficially and of record by the Stockholders as set forth in
SCHEDULE 4.3. All of the issued and outstanding shares of the Company Stock have
been duly authorized and validly issued,
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are fully paid and nonassessable, and were offered, issued, sold and delivered
by the Company in compliance with all applicable Laws, including, without
limitation, those Laws concerning the issuance of securities. None of such
shares were issued in violation of the preemptive rights of any past or present
stockholder. At the Effective Time, by virtue of the Merger, assuming Newco is a
wholly-owned subsidiary of PalEx, PalEx will acquire good and marketable title
in all the outstanding capital stock of the Surviving Corporation, free and
clear of all Encumbrances except for those created by PalEx and those set forth
in SCHEDULE 4.3. Except as set forth in SCHEDULE 4.3, no subscription, option,
warrant, call, convertible or exchangeable security, other conversion right or
commitment of any kind exists which obligates the Company to issue any of its
capital stock or the Stockholders to transfer any of the Company Stock.
4.4. POOLING-OF-INTERESTS ACCOUNTING. The Company has never been a
subsidiary or division of another corporation or a part of an acquisition which
was later rescinded and, within the past two years, there has not been any sale
or spin-off of a significant amount of assets of the Company or any affiliate of
the Company other than in the ordinary course of business. The Company owns no
capital stock of PalEx. The Company has not acquired any of its capital stock
during the past two years. Except as set forth in SCHEDULE 4.4, the Company has
no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its capital stock or any interest therein or to pay any dividend or make
any distribution in respect thereof. Neither the voting stock structure of the
Company nor the relative ownership of shares among any of the Company's
stockholders has been altered or changed within the last two years in
contemplation of the Merger. None of the shares of Company Stock was issued
pursuant to awards, grants or bonuses, and there has been no transaction or
action taken with respect to the equity ownership of the Company in
contemplation of the Merger that would prevent PalEx from accounting for the
Merger under the pooling-of-interests method of accounting in accordance with
Opinion No. 16 of the Accounting Principles Board ("OPINION NO. 16").
4.5. SUBSIDIARIES. Except as set forth in SCHEDULE 4.5, the Company does
not own, of record or beneficially, or control, directly or indirectly, any
capital stock, securities convertible into or exchangeable for capital stock or
any other equity interest in any corporation, association or other business
entity. Except as set forth in SCHEDULE 4.5, the Company is not, directly or
indirectly, a participant in any joint venture, limited liability company,
partnership or other noncorporate entity.
4.6. FINANCIAL STATEMENTS.
(a) The Company has delivered to PalEx complete and correct copies
of the following financial statements:
(i) the audited balance sheets of the Company as of April
30, 1995, 1996 and 1997 and the related audited
statements of operations, stockholders' equity and cash
flows for the three-year period ended April 30, 1997,
together with the related notes, schedules and report of
auditors (such balance sheets, the related statements of
operations, stockholders' equity and cash flows and the
related notes and schedules are referred to herein as
the "YEAR-END FINANCIAL STATEMENTS"); and
9
(ii) the unaudited balance sheet (the "INTERIM BALANCE
SHEET") of the Company as of December 31, 1997(the
"BALANCE SHEET DATE") and the related unaudited
statements of operations, stockholders' equity and cash
flows for the eight- month period ended December 31,
1997, together with the related notes and schedules
(such balance sheets, the related statements of
operations, stockholders' equity and cash flows and the
related notes and schedules are referred to herein as
the "INTERIM FINANCIAL STATEMENTS"). The Year-End
Financial Statements and the Interim Financial
Statements (collectively, the "FINANCIAL STATEMENTS")
are attached as SCHEDULE 4.6 to this Agreement.
(b) Except as set forth in SCHEDULE 4.6, the Financial Statements
have been prepared from the books and records of the Company in conformity
with GAAP (except for the absence of notes in the Interim Financial
Statements) and present fairly the financial position and results of
operations of the Company as of the dates of such statements and for the
periods covered thereby. The books of account of the Company have been
kept accurately in all material respects in the ordinary course of
business, the transactions entered therein represent bona fide
transactions, and the revenues, expenses, assets and liabilities of the
Company have been properly recorded therein in all material respects.
4.7. LIABILITIES AND OBLIGATIONS. Except as set forth in SCHEDULE 4.7, as
of the Balance Sheet Date the Company did not have, nor has it incurred since
that date, any liabilities or obligations (whether absolute, accrued, contingent
or otherwise) of any nature, except (a) liabilities, obligations or
contingencies (i) that are accrued or reserved against in the Financial
Statements or reflected in the notes thereto or (ii) that were incurred after
the Balance Sheet Date and were incurred in the ordinary course of business and
consistent with past practices, and (b) liabilities and obligations that are of
a nature not required to be reflected in the Financial Statements prepared in
accordance with GAAP and that were incurred in the normal course of business and
are described in SCHEDULE 4.7. SCHEDULE 4.7 contains a reasonable estimate by
the Indemnifying Stockholders of the maximum amount which may be payable with
respect to liabilities which are not fixed. For each such liability for which
the amount is not fixed or is contested, the Company has provided a summary
description of the liability together with copies of all relevant documentation
relating thereto. SCHEDULE 4.7 sets forth the Company's outstanding principal
amount of indebtedness for borrowed money (including overdrafts) as of the date
hereof.
4.8. ACCOUNTS AND NOTES RECEIVABLE. SCHEDULE 4.8 sets forth an accurate
list of the accounts and notes receivable of the Company as of the Balance Sheet
Date and of those generated between the Balance Sheet Date and the second
business day preceding the Closing Date, including any such amounts which are
not reflected in the Interim Balance Sheet. Receivables from and advances to
employees, the Stockholders and any entities or persons related to or Affiliates
of the Stockholders are separately identified in SCHEDULE 4.8. SCHEDULE 4.8 also
sets forth an accurate aging of all accounts and notes receivable as of the
Balance Sheet Date, showing amounts due in 30-day aging categories. The trade
and other accounts receivable of the Company, including without limitation those
classified as current assets on the Interim Balance Sheet, are bona fide
receivables, were acquired in the ordinary course of business, and are stated in
accordance with GAAP.
10
4.9. ASSETS.
(a) SCHEDULE 4.9 sets forth an accurate list of all real and
personal property included in "property and equipment" on the Interim
Balance Sheet and all other tangible assets of the Company with a book
value in excess of $10,000 (i) owned by the Company as of the Balance
Sheet Date and (ii) acquired since the Balance Sheet Date, including in
each case true, complete and correct copies of leases for significant
equipment and for all real property leased by the Company and descriptions
of all real property on which buildings, warehouses, workshops, garages
and other structures used in the operation of the business of the Company
are situated. SCHEDULE 4.9 indicates which assets used in the operation of
the business of the Company are currently owned by the Stockholders or
Affiliates of the Company or the Stockholders. Except as specifically
identified in SCHEDULE 4.9, to the knowledge of the Company after due
inquiry, all of the tangible assets, vehicles and other significant
machinery and equipment of the Company listed in SCHEDULE 4.9 are in good
working order and condition, ordinary wear and tear excepted, and have
been maintained in accordance with standard industry practices. Except for
the real property owned by ESP Realty Corp., Inc., all fixed assets used
by the Company in its business are either owned by the Company or leased
under agreements identified in SCHEDULE 4.9. All leases set forth in
SCHEDULE 4.9 are in full force and effect and constitute valid and binding
agreements of the Company, and to the knowledge of the Company, the other
parties thereto in accordance with their respective terms. SCHEDULE 4.9
contains true, complete and correct copies of all title reports and title
insurance policies received or owned by the Company. SCHEDULE 4.9 also
includes a summary description of all plans or projects involving the
opening of new operations, expansion of existing operations or the
acquisition of any real property or existing business, to which management
of the Company has devoted any significant effort or expenditure in the
two-year period prior to the date of the Agreement, which if pursued by
the Company would require additional expenditures of capital.
(b) The Company has good and indefeasible title to the tangible and
intangible personal property and the real property owned and used in its
business, including the properties identified in SCHEDULE 4.9, free and
clear of all Encumbrances other than Permitted Encumbrances and those set
forth in SCHEDULE 4.9.
(c) The tangible and intangible assets of the Company include all
the assets used in the operation of the business of the Company as
conducted at April 30, 1997, except for dispositions of such assets since
such date in the ordinary course of business, consistent with past
practices.
(d) Except as set forth in this SECTION 4.9 and in the other
representations and warranties in this Agreement, the Company and the
Indemnifying Stockholders are making no representations or warranties as
to the condition of the assets of the Company, including, without
limitation, any implied warranties or any representation or warranty as to
merchantability or fitness for any particular purpose and, subject to the
representations set forth in this Agreement, such assets are being
purchased "as is," "where is" and with all faults.
4.10. MATERIAL CUSTOMERS, CONTRACTS AND BARTERING COMMITMENTS.
11
(a) SCHEDULE 4.10 sets forth an accurate list of (i) all customers
representing 5% or more of the Company's revenues for the fiscal year
ended April 30, 1997 or the eight-month period ended on the Balance Sheet
Date (the "MATERIAL CUSTOMERS"), and (ii) all material executory
contracts, commitments and similar agreements to which the Company is
currently a party or by which it or any of its properties is bound,
including, but not limited to, (A) all customer contracts in excess of
$10,000, individually, or $25,000 in the aggregate, including, without
limitation, consignment contracts, (B) contracts with any labor
organizations, (C) leases providing for annual rental payments in excess
of $5,000, individually, or $10,000 in the aggregate, (D) loan agreements,
(E) pledge and security agreements, (F) indemnity or guaranty agreements
or obligations , (G) bonds, (H) notes, (I) mortgages, (J) joint venture or
partnership agreements, (K) options to purchase real or personal property,
and (L) agreements relating to the purchase or sale by the Company of
assets (other than oral agreements relating to sales of inventory or
services in the ordinary course of business, consistent with past
practices) or securities for more than $5,000, individually, or $10,000 in
the aggregate. Prior to the date hereof, the Company has made available to
PalEx complete and correct copies of all such agreements.
(b) Except to the extent set forth in SCHEDULE 4.10, (i) no Material
Customer has canceled or substantially reduced or, to the knowledge of the
Company, threatened to cancel or substantially reduce its purchases of the
Company's products or services, and (ii) the Company is in compliance with
all material commitments and obligations pertaining to it under such
agreements and is not in default under any the agreements described in
SUBSECTION (A), no notice of default has been received by the Company, and
the Indemnifying Stockholders and the Company are aware of no basis
therefor.
(c) The Company is not a party to any governmental contracts subject
to price redetermination or renegotiation. The Company is not required to
provide any bonding or other financial security arrangements in any
material amount in connection with any transactions with any of its
customers or suppliers.
(d) SCHEDULE 4.10 sets forth a summary of the material terms of all
oral and written bartering arrangements to which the Company is a party.
The Company has a sufficient supply of uncommitted inventory to fulfill
its bartering obligations with third parties.
4.11. PERMITS. SCHEDULE 4.11 contains an accurate list of all material
licenses, franchises, permits, transportation authorities and other governmental
authorizations and intangible assets held by the Company, including, without
limitation, permits, licenses and operating authorizations, titles (including
motor vehicle titles and current registrations), fuel permits, franchises,
certificates, trademarks, trade names, patents, patent applications and
copyrights owned or held by the Company (the "PERMITS"). The Permits are valid,
and the Company has not received any written notice that any Governmental
Authority intends to cancel, terminate or not renew any such license, operating
authorization, franchise, permit or other governmental authorization. The
Permits are all the permits that are required by Law for the operation of the
business of the Company as conducted at the Balance Sheet Date and the ownership
of the assets of the Company. The Company has conducted and is conducting its
business in substantial compliance with the requirements, standards, criteria
and conditions set forth in the Permits, as well as the applicable orders,
approvals and variances related thereto, and is not in violation of any of the
foregoing. Except as specifically provided in
12
SCHEDULE 4.11, the transactions contemplated by this Agreement will not result
in a default under or a breach or violation of, or adversely affect the rights
and benefits afforded to the Company by, any Permits.
4.12. ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 4.12, (a) the
Company has complied with and is in compliance with all Environmental Laws,
including, without limitation, Environmental Laws relating to air, water, land
and the generation, storage, use, handling, transportation, treatment or
disposal of Hazardous Substances; (b) the Company has obtained and complied with
all necessary permits and other approvals necessary to treat, transport, store,
dispose of and otherwise handle Hazardous Substances and has reported, to the
extent required by all Environmental Laws, all past and present sites owned or
operated by the Company where Hazardous Substances have been treated, stored,
disposed of or otherwise handled; (c) there have been no "releases" or threats
of "releases" (as defined in any Environmental Laws) at, from, in or on any
property owned or operated by the Company; (d) there is no on-site or off-site
location to which the Company has transported or disposed of Hazardous
Substances or arranged for the transportation or disposal Hazardous Substances
which is the subject of any federal, state, local or foreign enforcement action
or any other investigation which could lead to any claim against the Surviving
Corporation, PalEx or Newco for any clean-up cost, remedial work, damage to
natural resources or personal injury, including, but not limited to, any claim
under (i) the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, (ii) the Resource Conservation and Recovery Act, (iii)
the Hazardous Materials Transportation Act, or (iv) comparable state and local
statutes and regulations; and (e) the Company has no contingent liability in
connection with any release or disposal of any Hazardous Substance into the
environment.
4.13. LABOR AND EMPLOYEE RELATIONS. Except as set forth in SCHEDULE 4.13,
the Company is not bound by or subject to any arrangement with any labor union.
Except as set forth in SCHEDULE 4.13, no employees of the Company are
represented by any labor union or covered by any collective bargaining agreement
nor, to the Company's or the Indemnifying Stockholders' knowledge, is any
campaign to establish such representation in progress. There is no pending or,
to the Company's or the Indemnifying Stockholders' knowledge, threatened labor
dispute involving the Company and any group of its employees nor has the Company
experienced any significant labor interruptions over the past five years.
Neither the Company nor any Indemnifying Stockholder has any knowledge of any
significant issues or problems in connection with the relationship of the
Company with its employees.
4.14. INSURANCE. SCHEDULE 4.14 sets forth an accurate list as of the
Balance Sheet Date of all insurance policies carried by the Company and of all
insurance loss runs or workmen's compensation claims received for the past five
policy years. Except as set forth in SCHEDULE 4.14, none of such policies is a
"claims made" policy. To the Company's knowledge, after due inquiry, the
insurance policies set forth in SCHEDULE 4.14 provide adequate coverage against
the risks involved in the Company's business. Such policies are currently in
full force and effect.
4.15. COMPENSATION; EMPLOYMENT AGREEMENTS. SCHEDULE 4.15 sets forth an
accurate schedule of all officers, directors and employees of the Company with
annual salaries of $70,000 or more, listing the rate of compensation (and the
portions thereof attributable to salary, bonus, benefits and other compensation,
respectively) of each of such persons as of (a) the Balance Sheet Date and (b)
the date hereof. Attached to SCHEDULE 4.15 are true, complete and correct copies
of each employment or consulting agreement with any employee of the Company or
any Stockholder.
13
4.16. NONCOMPETITION, CONFIDENTIALITY AND NONSOLICITATION AGREEMENTS.
SCHEDULE 4.16 sets forth all agreements containing covenants not to compete or
solicit employees or to maintain the confidentiality of information to which the
Company is bound or under which the Company has any rights or obligations.
4.17. EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 4.17 sets forth an accurate schedule of each "EMPLOYEE
BENEFIT PLAN," as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and all nonqualified
deferred compensation arrangements, whether formal or informal and whether
legally binding or not, under which the Company or an ERISA Affiliate has
any current or future obligation or liability or under which any present
or former employee of the Company or an ERISA Affiliate, or such present
or former employee's dependents or beneficiaries, has any current or
future right to benefits (each such plan and arrangement referred to
hereinafter as a "PLAN"), together with true and complete copies of such
Plans, arrangements and any trusts related thereto, and classifications of
employees covered thereby as of December 31, 1997. Except as set forth on
SCHEDULE 4.17, neither the Company nor any ERISA Affiliate sponsors,
maintains or contributes currently, or at any time during the preceding
five years, to any plan, program, fund or arrangement that constitutes an
employee pension benefit plan. Each Plan may be terminated by the Company,
or if applicable, by an ERISA Affiliate at any time without any liability,
cost or expense, other than costs and expenses that are reasonable and
customary in connection with the termination of a Plan. For purposes of
this Agreement, the term "EMPLOYEE PENSION BENEFIT PLAN" shall have the
meaning given that term in Section 3(2) of ERISA, and the term "ERISA
AFFILIATE" means any corporation or trade or business under common control
with the Company as determined under Section 414(b), (c), (m) or (o) of
the Code.
(b) Each Plan listed on SCHEDULE 4.17 is in compliance in all
material respects with the applicable provisions of ERISA, the Code, and
any other applicable Law. With respect to each Plan of the Company and
each ERISA Affiliate (other than a "MULTIEMPLOYER PLAN," as defined in
Section 4001(a)(3) of ERISA), all reports and other documents required
under ERISA or other applicable Law to be filed with any Governmental
Authority, the failure of which to file could reasonably be expected to
result in a material liability to the Company or any ERISA Affiliate, or
required to be distributed to participants or beneficiaries, have been
duly filed or distributed. True and complete copies of all such reports
and other documents with respect to the past five years for each Plan have
been provided to PalEx. No "ACCUMULATED FUNDING DEFICIENCY" (as defined in
Section 412(a) of the Code) with respect to any Plan has been incurred
(without regard to any waiver granted under Section 412 of the Code), nor
has any funding waiver from the Internal Revenue Service been received or
requested. Each Plan that is intended to be "QUALIFIED" within the meaning
of Section 401(a) of the Code (a "QUALIFIED PLAN") is, and has been during
the period from its adoption to the date hereof, so qualified, both as to
form and operation and all necessary approvals of Governmental
Authorities, including a favorable determination as to the qualification
under the Code of each of such Qualified Plans and each amendment thereto,
have been timely obtained. Except as set forth in SCHEDULE 4.17, all
accrued contribution obligations of the Company with respect to any Plan
have either been fulfilled in their entirety or are fully reflected in the
Financial Statements.
14
(c) No Plan has incurred, and neither the Company nor any ERISA
Affiliate has incurred, any liability for excise tax or penalty due to the
Internal Revenue Service. There have been no terminations, partial
terminations or discontinuances of contributions to any Qualified Plan
during the preceding five years without notice to and approval by the
Internal Revenue Service and payment of all obligations and liabilities
attributable to such Qualified Plan.
(d) Neither the Company nor any ERISA Affiliate has made any
promises of retirement or other benefits to employees, except as set forth
in the Plans, and neither the Company nor any ERISA Affiliate maintains or
has established any Plan that is a "WELFARE BENEFIT PLAN" within the
meaning of Section 3(1) of ERISA that provides for continuing benefits or
coverage for any participant or any beneficiary of a participant after
such participant's termination of employment, except as may be required by
Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code,
and at the expense of the participant or the beneficiary of the
participant, or retiree medical liabilities. Neither the Company nor any
ERISA Affiliate maintains, has established or has ever participated in a
multiple employer welfare benefit arrangement as described in Section
3(40)(A) of ERISA. Except as set forth in SCHEDULE 4.17, neither the
Company nor any ERISA Affiliate has any current or future obligation or
liability with respect to a Plan pursuant to the provisions of a
collective bargaining agreement.
(e) Neither the Company nor any ERISA Affiliate has incurred any
material liability to the Pension Benefit Guaranty Corporation in
connection with any Plan. The assets of each Plan that is subject to Title
IV of ERISA are sufficient to provide the benefits under such Plan, the
payment of which the Pension Benefit Guaranty Corporation would guarantee
if such Plan were terminated, and such assets are also sufficient to
provide all other "BENEFITS LIABILITIES" (as defined in ERISA Section
4001(a)(16)) due under such Plan upon termination.
(f) No "REPORTABLE EVENT" (as defined in Section 4043 of ERISA) has
occurred and is continuing with respect to any Plan. There are no pending,
or to the Company's knowledge, threatened claims, lawsuits or actions
(other than routine claims for benefits in the ordinary course) asserted
or instituted against, and neither the Company nor any ERISA Affiliate has
knowledge of any threatened litigation or claims against, the assets of
any Plan or its related trust or against any fiduciary of a Plan with
respect to the operation of such Plan. To the Company's knowledge, there
are no investigations or audits of any Plan by any Governmental Authority
currently pending and there have been no such investigations or audits
that have been concluded that resulted in any liability to the Company or
any ERISA Affiliate that has not been fully discharged. Neither the
Company nor any ERISA Affiliate has participated in any voluntary
compliance or closing agreement programs established with respect to the
form or operation of a Plan.
(g) Neither the Company nor any ERISA Affiliate has engaged in any
prohibited transaction, within the meaning of Section 406 of ERISA or
Section 4975 of the Code, in connection with any Plan. Except as set forth
in SCHEDULE 4.17, neither the Company nor any ERISA Affiliate is, or ever
has been, a participant in or is obligated to make any payment to a
multiemployer plan. Other than ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, in the last two years, no
person or entity that was engaged by the Company or an ERISA Affiliate as
an independent contractor can or will be characterized or deemed to be an
employee of the Company or an ERISA Affiliate under applicable Laws for
any purpose
15
whatsoever, including, without limitation, for purposes of federal, state
and local income taxation, workers' compensation and unemployment
insurance and Plan eligibility.
4.18. LITIGATION AND COMPLIANCE WITH LAW. Except as set forth in SCHEDULE
4.18, there are no claims, actions, suits or proceedings, pending or, to the
knowledge of the Company and the Indemnifying Stockholders, threatened against
or affecting the Company, at law or in equity, or before or by any Governmental
Authority having jurisdiction over the Company. No written notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
the Company and, to the Indemnifying Stockholders' and the Company's knowledge,
there is no basis therefor. Except to the extent set forth in SCHEDULE 4.18, the
Company has conducted and is conducting its business in compliance with all Laws
applicable to the Company, its assets or the operation of its business.
4.19. TAXES. For purposes of this Agreement, the term "TAXES" shall mean
all taxes, charges, fees, levies or other assessments including, without
limitation, income, gross receipts, excise, property, sales, withholding, social
security, unemployment, occupation, use, service, service use, license, payroll,
franchise, transfer and recording taxes, fees and charges, imposed by the United
States or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate, consolidated, unitary, combined or any
other basis; and such term shall include any interest, fines, penalties or
additional amounts attributable to or imposed with respect to any such taxes,
charges, fees, levies or other assessments. The Company has timely filed all
requisite federal, state, local and other tax returns for all fiscal periods
ended on or before the Closing, and has duly paid in full or made adequate
provision in the Financial Statements for the payment of all Taxes for all
periods ending at or prior to the Closing Date. The Company has duly withheld
and paid or remitted all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, shareholder or other person or entity that required withholding under
any applicable Law, including, without limitation, any amounts required to be
withheld or collected with respect to social security, unemployment
compensation, sales or use taxes or workers' compensation. Except as set forth
in SCHEDULE 4.19, there are no examinations in progress or claims against the
Company relating to Taxes for any period or periods prior to and including the
Balance Sheet Date and no written notice of any claim for Taxes, whether pending
or threatened, has been received. The Company has not granted or been requested
to grant any extension of the limitation period applicable to any claim for
Taxes or assessments with respect to Taxes. The Company is not a party to any
Tax allocation or sharing agreement and is not otherwise liable or obligated to
indemnify any person or entity with respect to any Taxes. The amounts shown as
accruals for Taxes on the Interim Financial Statements as of the Balance Sheet
Date are sufficient for the payment of all Taxes for all fiscal periods ended on
or before that date. True and complete copies of (a) any tax examinations, (b)
extensions of statutory limitations and (c) the federal, state and local Tax
returns of the Company for the last three fiscal years have been previously
provided to PalEx. There are no requests for ruling in respect of any Tax
pending between the Company and any Taxing authority. The Company currently
utilizes the accrual method of accounting for income tax purposes. Such method
of accounting has not changed in the past five years.
4.20. ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set
forth in SCHEDULE 4.20, the Company has conducted its operations in the ordinary
course and there has not been:
(a) any material adverse change in the business, operations,
properties, condition (financial or other), assets, liabilities
(contingent or otherwise), results or prospects of the Company;
16
(b) any damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting the properties or business of
the Company, individually or in the aggregate;
(c) any change in the authorized capital stock of the Company or in
its outstanding securities or any change in the Stockholders' ownership
interests in the Company or any grant of any options, warrants, calls,
conversion rights or commitments;
(d) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the Company;
(e) any increase in the compensation payable or to become payable by
the Company to the Stockholders or any of its officers, directors,
employees, consultants or agents, except for ordinary and customary
bonuses and salary increases for employees in accordance with past
practice, which bonuses and salary increases are set forth in SCHEDULE
4.20;
(f) any significant work interruptions, labor grievances or claims
filed;
(g) any sale or transfer, or any agreement to sell or transfer, any
material assets, properties or rights of the Company to any person,
including, without limitation, the Stockholders and their Affiliates;
(h) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company;
(i) any increase in the Company's indebtedness, other than accounts
payable incurred in the ordinary course of business, consistent with past
practices or incurred in connection with the transactions contemplated by
this Agreement;
(j) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the transfer
and assignment of any such assets, property or rights;
(k) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside
of the ordinary course of the Company's business;
(l) any waiver of any material rights or claims of the Company;
(m) any material breach, amendment or termination of any material
contract, agreement, Permit or other right to which the Company is a party
or any of its property is subject; or
(n) any other material transaction by the Company outside the
ordinary course of business.
17
4.21. ACCOUNTS WITH BANKS AND BROKERAGES; POWERS OF ATTORNEY. SCHEDULE
4.21 sets forth an accurate schedule, as of the date of this Agreement, of (a)
the name of each financial institution or brokerage firm in which the Company
has accounts or safe deposit boxes; (b) the names in which the accounts or boxes
are held; (c) the type of account and the cash, cash equivalents and securities
held in such account as of the second business day prior to the Closing, none of
which assets have been withdrawn from such accounts since such date except for
bona fide business purposes in the ordinary course of the business of the
Company; and (d) the name of each person authorized to draw thereon or have
access thereto. SCHEDULE 4.21 also sets forth the name of each person,
corporation, firm or other entity holding a general or special power of attorney
from the Company and a description of the terms thereof.
4.22. ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Company nor any
of its affiliates has given or offered to give anything of value to any
governmental official, political party or candidate for government office nor
has it otherwise taken any action which would constitute a violation of the
Foreign Corrupt Practices Act of 1977, as amended, or any similar Law.
4.23. COMPETING LINES OF BUSINESS; RELATED-PARTY TRANSACTIONS. Except as
set forth in SCHEDULE 4.23, neither the Stockholders nor any other Affiliate of
the Company owns, directly or indirectly, any interest in, or is an officer,
director, employee or consultant of or otherwise receives remuneration from, any
business which is in a Competitive Business or is a competitor, lessor, lessee,
customer or supplier of the Company. Except as set forth in SCHEDULE 4.23, no
officer or director of the Company nor any Stockholder has nor, during the
period beginning January 1, 1996 through the date hereof, had any interest in
any property, real or personal, tangible or intangible, used in or pertaining to
the business of the Company.
4.24. INTANGIBLE PROPERTY. SCHEDULE 4.24 sets forth an accurate list of
all patents, patent applications, trademarks, service marks, technology,
licenses, trade names, copyrights and other intellectual property or proprietary
property rights owned or used by the Company. The Company owns or possesses, and
the assets of the Company include, sufficient legal rights to use all of such
items without conflict with or infringement of the rights of others.
4.25. DISCLOSURE. The Stockholders and the Company have provided PalEx or
its representatives all the information that PalEx has requested in analyzing
whether to consummate the Merger and the other transactions contemplated by this
Agreement. None of the information so provided nor any representation or
warranty of the Company or the Stockholders to PalEx or Newco in this Agreement
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein, in light of the
circumstances under which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX AND NEWCO
PalEx and Newco jointly and severally represent and warrant to the
Stockholders as follows:
5.1. ORGANIZATION. Each of PalEx and Newco is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Delaware, and is duly authorized and qualified under all applicable Laws to
carry on its business in the places and in the manner now conducted. Each of
PalEx and
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Newco has the requisite power and authority to own, lease and operate its assets
and properties and to carry on its business as such business is currently being
conducted. Correct and complete copies of PalEx's minute books have been made
available to the Company.
5.2. AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) Each of PalEx and Newco has the full legal right, power and
authority to enter into this Agreement and the Registration Rights
Agreement and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance of this Agreement and the
Registration Rights Agreement have been approved by the boards of
directors of PalEx and Newco and PalEx, as the sole stockholder of Newco.
No additional corporate proceedings on the part of PalEx or Newco are
necessary to authorize the execution and delivery of this Agreement or the
Registration Rights Agreement and the consummation by PalEx and Newco of
the transactions contemplated hereby. This Agreement and the Registration
Rights Agreement have been duly and validly executed and delivered by
PalEx and Newco, and, assuming the due authorization, execution and
delivery by the Company and the Stockholders, constitutes valid and
binding agreements of PalEx and Newco, enforceable against PalEx and Newco
in accordance with its terms.
(b) The execution and delivery of this Agreement by PalEx and Newco,
and the Registration Rights Agreement by PalEx, do not, and the
consummation by PalEx and Newco of the transactions contemplated hereby
will not, violate or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of
termination or acceleration under any of the terms, conditions or
provisions of (i) the Certificate of Incorporation or By-Laws of PalEx or
Newco, (ii) any Law applicable to either PalEx or Newco or any of its
properties or assets or (iii) any material note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession,
contract, lease or other instrument, obligation or agreement of any kind
to which PalEx or Newco is now a party or by which either PalEx or Newco
or any of its properties or assets may be bound or affected.
(c) Except for the Merger Filings and such filings as may be
required under federal or state securities Laws, no declaration, filing or
registration with, or notice to, or authorization, consent or approval of,
any Governmental Authority is necessary for the execution and delivery of
this Agreement or the Registration Rights Agreement by PalEx and Newco or
the consummation by PalEx and Newco of the transactions contemplated
hereby or thereby.
5.3. PALEX COMMON STOCK. The shares of PalEx Common Stock to be issued to
the Stockholders pursuant to the Merger are duly authorized and, when issued in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable. The issuance of PalEx Common Stock pursuant to the Merger
will transfer to the Stockholders valid title to such shares of PalEx Common
Stock, free and clear of all Encumbrances, except for any Encumbrances created
by the Stockholders.
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5.4. TAX REORGANIZATION REPRESENTATIONS.
(a) Prior to the Merger, PalEx will be in control of Newco within
the meaning of Section 368(c) of the Code.
(b) PalEx has no plan or intention to cause the Surviving
Corporation to issue additional shares of its stock that would result in
PalEx losing control of the Surviving Corporation within the meaning of
Section 368(c) of the Code.
(c) PalEx has no plan or intention to reacquire any of its stock
issued in the Merger.
(d) PalEx has no plan or intention to liquidate the Surviving
Corporation; to merge the Surviving Corporation with or into another
corporation; to sell or otherwise dispose of the stock of the Surviving
Corporation except for transfers of stock to another corporation
controlled by PalEx; or to cause the Surviving Corporation to sell or
otherwise dispose of any of its assets, except for dispositions made in
the ordinary course of business or transfers of assets to a corporation
controlled by PalEx.
(e) Following the Closing, PalEx's intention is that the Surviving
Corporation will continue the historic business of the Company or use a
significant portion of the historic business assets of the Company in a
business, all as required to satisfy the "continuity of business
enterprise" requirement under Section 368 of the Code.
(f) PalEx does not own, nor has it owned during the past five years,
any shares of the stock of the Company.
(g) Each of PalEx and Newco is undertaking the Merger for a bona
fide business purpose and not merely for the avoidance of federal income
tax.
(h) Neither PalEx nor Newco is an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(i) As of the Closing Date, the fair market value of the assets of
Newco will exceed the sum of Newco's liabilities plus the amount of other
liabilities, if any, to which Newco's assets are subject.
5.5. SEC FILINGS; DISCLOSURE. PalEx has filed with the Securities and
Exchange Commission ("SEC") all material forms, statements, reports and
documents required to be filed by it prior to the date hereof under each of the
Securities Act of 1933, as amended (the "1933 ACT"), the Securities Exchange Act
of 1934, as amended (the "1934 ACT"), and the respective rules and regulations
thereunder, (a) all of which, as amended, if applicable, complied when filed in
all material respects with all applicable requirements of the appropriate Act
and the rules and regulations thereunder, and (b) none of which, as amended, if
applicable, contains any untrue statement of material fact or, except for
disclosure of the acquisition of the assets, and assumption of the liabilities,
of CSC and its Affiliates, omits to state a material fact required to
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be stated therein or necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading.
5.6. LEGAL COMPLIANCE. Neither PalEx nor Newco is (a) in violation of its
charter or by-laws, (b) in default in any material respect, and no event has
occurred that, with notice or lapse of time or both, would constitute a material
default under any in material agreement to which PalEx or Newco is party or by
which its assets are subject, or (c) in, or, as to CSC, to the actual knowledge
of PalEx in, violation, in any material respect, of any material Law to which
either PalEx or Newco or their properties or assets may be subject, in each
case, except to the extent that such violation or default would not reasonably
be expected have a material adverse effect on the business, operations,
properties, condition (financial or otherwise), assets, liabilities (contingent
or otherwise), or results of operations of PalEx and its subsidiaries, taken as
a whole (a "MATERIAL ADVERSE EFFECT").
5.7. LITIGATION AND COMPLIANCE WITH LAW. There are no claims, actions,
suits or proceedings, pending or, to the knowledge of PalEx, threatened against
PalEx or Newco, at law or in equity, before or by any Governmental Authority
having jurisdiction over PalEx or Newco that, if adversely determined against
PalEx or Newco, as the case may be, would reasonably be expected to have a
Material Adverse Effect. PalEx and Newco have conducted and are conducting their
respective businesses, and to the actual knowledge of PalEx, CSC is conducting
its business, in compliance with all applicable Laws, except to the extent
noncompliance with such Laws would not reasonably be expected to have a Material
Adverse Effect.
5.8. DISCLOSURE. PalEx has fully provided the Stockholders or their
representatives with all the information that the Stockholders have requested in
analyzing whether to consummate the Merger. None of the information so provided
nor any representation or warranty of PalEx contained in this Agreement contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE VI
CERTAIN COVENANTS
6.1. RELEASE FROM GUARANTEES. PalEx shall use its commercially reasonable
best efforts to have the Stockholders released from the personal guarantees of
the Company indebtedness identified in SCHEDULE 6.1. PalEx hereby agrees to
indemnify each Stockholder and hold such Stockholder harmless for any amounts
that such Stockholder is required to pay in connection with the enforcement of
any obligations under such personal guarantees after the Closing, including
without limitation any reasonable attorneys' fees and expenses incurred in
connection therewith.
6.2. FUTURE COOPERATION; TAX MATTERS. The Stockholders and PalEx shall
each deliver or cause to be delivered to the other following the Closing such
additional instruments as the other may reasonably request for the purpose of
fully carrying out this Agreement. The Stockholders will cooperate and use their
commercially reasonable best efforts to have the present officers, directors and
employees of the Company cooperate with PalEx, Newco and the Surviving
Corporation at and after the Closing in furnishing information, evidence,
testimony and other assistance in connection with any actions, proceedings,
arrangements or disputes of any nature with respect to matters pertaining to all
periods prior to the Closing.
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The Stockholders will cooperate with the Surviving Corporation in the
preparation of all tax returns covering the period from the beginning of the
Company's current tax year through the Closing. In addition, PalEx will provide
the Stockholders with access to such of its books and records as may be
reasonably requested by the Stockholders in connection with federal, state and
local tax matters relating to periods prior to the Closing. The party requesting
cooperation, information or actions under this SECTION 6.2 shall reimburse the
other party for all reasonable out-of-pocket costs and expenses paid or incurred
in connection therewith, which costs and expenses shall not, HOWEVER, include
per diem charges for employees or allocations of overhead charges.
6.3. EXPENSES. PalEx will pay the fees, expenses and disbursements of
PalEx and its agents, representatives, accountants and counsel incurred in
connection with the execution, delivery and performance of this Agreement and
any amendments thereto. The Surviving Corporation following the Closing will pay
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP's expenses of its audit of the Year-End Financial
Statements. The Stockholders will pay their fees, expenses and disbursements and
those of their and the Company's agents, representatives, financial advisors,
accountants and counsel incurred in connection with the execution, delivery and
performance of this Agreement and any amendments hereto and the consummation of
the transactions contemplated hereby; PROVIDED, HOWEVER, that Newco will pay
such fees, expenses and disbursements up to, but not in excess of, an amount
equal to (a) $1,000,000 less (b) any fees, expenses and disbursements of Western
Container Limited Liability Company, a Wyoming limited liability company, ESP
Realty Corp., Inc. or Environmental Recyclers of Colorado, Inc., a Colorado
corporation paid by PalEx, Newco or any Affiliate of PalEx or Newco, or for
which any such party is liable.
6.4. EMPLOYMENT AGREEMENT. Concurrently with the execution of this
Agreement, the Surviving Corporation shall enter into a mutually acceptable
Employment Agreement with ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ (the "EMPLOYMENT AGREEMENT").
6.5. REGISTRATION RIGHTS AGREEMENT. Concurrently with the execution of
this Agreement, PalEx and the Stockholders shall enter into a mutually
acceptable Registration Rights Agreement (the "REGISTRATION RIGHTS AGREEMENT".
6.6. REPAYMENT OF RELATED PARTY INDEBTEDNESS. Concurrently with the
execution of this Agreement, (a) the Stockholders shall repay to the Company all
amounts outstanding as advances to or receivables from the Stockholders, each of
which advances or receivables is specifically reflected in SCHEDULE 4.8, and (b)
the Company shall repay all amounts outstanding under loans to the Company from
the Stockholders, each of which loans to the Company is specifically reflected
in SCHEDULE 4.7.
6.7. STOCK OPTIONS. PalEx shall recommend to the Compensation Committee of
its Board of Directors that nonqualified options to purchase an aggregate of
100,000 shares of PalEx Common Stock be granted as of the Closing Date or as
soon as practicable thereafter under PalEx's 1996 Stock Option Plan, as amended,
to individuals who are employees of the Company and Western as of the date of
this Agreement (other than the Stockholders), as mutually agreed upon by ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ and PalEx. Until such options are granted, PalEx shall cause at least
100,000 options to be available for grant under the 1996 Stock Option Plan, as
amended, as contemplated herein.
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6.8. TERMINATION OF ESOP. PalEx shall cause the ESOP to be terminated as
soon as practicable after May 15, 1998 and shall request a determination from
the Internal Revenue Service that the termination does not adversely affect the
tax qualified status of the ESOP. PalEx shall cause the ESOP to distribute all
assets that it holds as soon as administratively feasible following the receipt
of a favorable determination letter from the Internal Revenue Service. In
addition, PalEx shall use its commercially reasonable efforts to (a) file a
Registration Statement on Form S-8 with respect to the shares of PalEx Common
Stock held by the ESOP and (b) cause such Registration Statement to be declared
effective by the SEC on or before the publication and dissemination by PalEx of
consolidated financial results that include results of the combined operations
of the Company and PalEx for at least 30 days on a consolidated basis following
the Closing. After such Registration Statement becomes effective, each
participant in the ESOP shall have the authority, subject to the terms of the
ESOP and applicable Law, to direct the trustee of the ESOP to sell up to 25% of
the shares of PalEx Common Stock allocated to such participant's account and
reinvest the proceeds therefrom in such money market funds as may be selected by
the Trustee of the ESOP.
ARTICLE VII
INDEMNIFICATION
The Indemnifying Stockholders, PalEx and Newco each make the following
covenants:
7.1. GENERAL INDEMNIFICATION BY THE INDEMNIFYING STOCKHOLDERS. Subject to
SECTIONS 7.4 and 7.5, the Indemnifying Stockholders covenant and agree that they
will jointly and severally indemnify, defend, protect and hold harmless PalEx,
Newco and the Surviving Corporation, and their respective officers, directors,
employees, stockholders, agents, representatives and Affiliates, at all times
from and after the date of this Agreement until the Expiration Date from and
against all Losses incurred by any of such indemnified persons as a result of or
arising from (a) any breach of the representations and warranties of the
Indemnifying Stockholders set forth herein or in the Schedules or certificates
delivered in connection herewith, (b) any breach or nonfulfillment of any
covenant or agreement on the part of the Stockholders or the Company under this
Agreement, (c) all income Taxes payable by the Company for all periods prior to
and including the Closing Date, and (d) the Company's, the ESOP's and the
Indemnifying Stockholders' engagement of Consulting Fiduciaries, Inc. as an
independent fiduciary for the ESOP or the acts or omissions of Consulting
Fiduciaries, Inc.
7.2. INDEMNIFICATION BY PALEX. PalEx covenants and agrees that it will
indemnify, defend, protect and hold harmless the Stockholders and their
respective agents, representatives, Affiliates , beneficiaries and heirs and
employees at all times from and after the date of this Agreement until the
Expiration Date from and against all Losses incurred by any of such indemnified
persons as a result of or arising from (a) any breach of the representations and
warranties of PalEx or Newco set forth herein or in the Schedules or
certificates attached hereto, and (b) any breach or nonfulfillment of any
covenant or agreement on the part of PalEx or Newco under this Agreement.
7.3. THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the
"INDEMNIFIED PARTY") has received notice of or has knowledge of any claim by a
person not a party to this Agreement ("THIRD PERSON"), of the commencement of
any action or proceeding by a Third Person, which the Indemnified Party believes
in good faith is an indemnifiable claim under this Agreement, the Indemnified
Party shall give to
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the party obligated to provide indemnification pursuant to SECTION 7.1, or 7.2
hereof (hereinafter the "INDEMNIFYING PARTY") written notice of such claim or
the commencement of such action or proceeding. Such notice shall state the
nature and the basis of such claim and a reasonable estimate of the amount
thereof. The Indemnifying Party shall have the right to defend and settle, at
its own expense and by its own counsel, any such matter so long as the
Indemnifying Party pursues the same diligently and in good faith. If the
Indemnifying Party undertakes to defend or settle, it shall promptly notify the
Indemnified Party of its intention to do so, and the Indemnified Party shall
cooperate with the Indemnifying Party and its counsel in all commercially
reasonable respects in the defense thereof and in any settlement thereof. Such
cooperation shall include, but shall not be limited to, furnishing the
Indemnifying Party with any books, records and other information reasonably
requested by the Indemnifying Party and in the Indemnified Party's possession or
control. After the Indemnifying Party has notified the Indemnified Party of its
intention to undertake to defend or settle any such asserted liability, and for
so long as the Indemnifying Party diligently pursues such defense, the
Indemnifying Party shall not be liable for any additional legal expenses
incurred by the Indemnified Party in connection with any defense or settlement
of such asserted liability; PROVIDED, HOWEVER, that the Indemnified Party shall
be entitled, at its expense, to participate in the defense of such asserted
liability and the negotiations of the settlement thereof. The Indemnifying Party
shall not settle any such Third Person claim without the consent of the
Indemnified Party, unless the settlement thereof imposes no liability or
obligation on, and includes a complete release from liability of, the
Indemnified Party. If the Indemnifying Party desires to accept a final and
complete settlement of any such Third Person claim and the Indemnified Party
refuses to consent to such settlement, then the Indemnifying Party's liability
under this Section with respect to such Third Person claim shall be limited to
the amount so offered in settlement by said Third Person; PROVIDED, HOWEVER,
that notwithstanding the foregoing, the Indemnified Party shall be entitled to
refuse to consent to any such proposed settlement and the Indemnifying Party's
liability hereunder shall not be limited by the amount of the proposed
settlement if such settlement does not provide for the complete release of the
Indemnified Party. If, upon receiving notice, the Indemnifying Party does not
timely undertake to defend such matter to which the Indemnified Party is
entitled to indemnification hereunder, or fails diligently to pursue such
defense, the Indemnified Party may undertake such defense through counsel of its
choice, at the cost and expense of the Indemnifying Party, and the Indemnified
Party may settle such matter, in its discretion, and the Indemnifying Party
shall reimburse the Indemnified Party for the amount paid in such settlement and
any other liabilities or expenses incurred by the Indemnified Party in
connection therewith.
7.4. INDEMNIFICATION DEDUCTIBLE. Neither the Indemnifying Stockholders, on
the one hand, nor PalEx, Newco and the Surviving Corporation, on the other hand,
shall be entitled to indemnification from the other under the provisions of
SECTION 7.1(A) or SECTION 7.2(A), as the case may be, until such time as, and
only to the extent that, the claims subject to indemnification by such other
party exceed, in the aggregate, $400,000. Notwithstanding the foregoing, the
limitations set forth in this SECTION 7.4 shall not apply to fraudulent
misrepresentations.
7.5. INDEMNIFICATION LIMITATION.
(a) Subject to SECTIONS 7.4 and 7.5(B), with respect to any Losses
for which the Indemnifying Stockholders are obligated or liable under this
ARTICLE VII, the Indemnifying Stockholders shall be jointly and severally
liable only to the extent of 42% of such Losses; PROVIDED,
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HOWEVER, that notwithstanding anything to the contrary contained herein,
the foregoing limitation shall not apply to the Indemnifying Stockholders'
obligations and liability under SECTION 7.1(D).
(b) Subject to SECTIONS 7.4 and 7.5(A), the aggregate
indemnification obligation of the Indemnifying Stockholders under SECTION
7.1(A) shall be limited to (a) the value of any shares of PalEx Common
Stock that (i) were received by the Indemnifying Stockholders, or either
of them, in (A) the Merger and/or (B) the merger of ESP Realty Corp.,
Inc., an Illinois corporation, into a subsidiary of PalEx on the date
hereof, and/or (C) the merger of ERI into a subsidiary of PalEx on the
date hereof (subject, in each case, to appropriate adjustments in the
event of any stock dividend on, or split-up or other recapitalization of,
the PalEx Common Stock) and (ii) have not been sold by an Indemnifying
Stockholder in a bona fide arms'-length transaction to a third party that
is not an Affiliate of either Indemnifying Stockholder (collectively, the
"PURCHASE PRICE SHARES"), plus (b) the gross proceeds from the sale of
Purchase Price Shares in bona fide arms'-length transactions to a third
party that is not an Affiliate of either Indemnifying Stockholder, less
(c) the amount of any Losses (as such term is defined in the ERI
Acquisition Agreement and the ESP Acquisition Agreement, respectively)
paid by the Indemnifying Stockholders, or either of them, as an
indemnifying party under the ERI Acquisition Agreement or the ESP
Acquisition Agreement. Indemnification claims under this ARTICLE VII shall
be settled first from the sale or recovery of Purchase Price Shares, to
the extent thereof, and thereafter, from the gross proceeds from prior
bona fide arms'-length sales of Purchase Price Shares to third parties
that are not Affiliates of either Indemnifying Stockholder.
(c) For purposes of this SECTION 7.5, the value of Purchase Price
Shares shall be the average closing price per share of PalEx Common Stock
for the 10 trading days ending on the second trading day before the date a
Loss becomes payable by the Indemnifying Stockholders (either by agreement
or pursuant to a judgment or binding determination by an arbitrator) in
accordance with this ARTICLE VII, as reported on The Nasdaq Stock Market
or such other national securities exchange on which the PalEx Common Stock
is principally traded. Notwithstanding the foregoing, the limitations set
forth in this SECTION 7.5 shall not apply to fraudulent
misrepresentations.
7.6. INDEMNIFICATION FOR NEGLIGENCE OF INDEMNIFIED PARTY. THE RIGHTS TO
INDEMNIFICATION UNDER THIS ARTICLE VII INCLUDE RIGHTS TO INDEMNIFICATION
FOR THE RESULTS OF AN INDEMNIFIED PARTY'S ACTUAL OR ALLEGED NEGLIGENCE,
IF SUCH INDEMNIFIED PARTY WOULD OTHERWISE BE ENTITLED TO
INDEMNIFICATION HEREUNDER.
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ARTICLE VIII
NONCOMPETITION COVENANTS
8.1. PROHIBITED ACTIVITIES.
(a) For no additional consideration, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ will not, for
the longer of (y) five years following the Closing Date and (z) one year
following such Stockholder's voluntary termination of his employment with
the Surviving Corporation or its Affiliates or the termination of such
individual's employment with the Surviving Corporation "for cause," in
each case as determined in accordance with the Employment Agreement,
directly or indirectly, for himself or on behalf of or in conjunction with
any other person, company, partnership, corporation or business of
whatever nature:
(i) engage, as an officer, director, employee, shareholder,
owner, partner, joint venturer, or in a managerial or
advisory capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales
representative, in any Competitive Business within 250
miles of where the Company or any of its subsidiaries
conducts business (the "TERRITORY");
(ii) call upon any person who is an employee or consultant of
PalEx or the Surviving Corporation or any of their
respective subsidiaries for the purpose or with the
intent of enticing such employee or consultant away from
or out of the employ or contract with PalEx or the
Surviving Corporation or any of their respective
subsidiaries; or
(iii) call upon any person or entity which is, at that time,
or which has been, within one year prior to that time, a
customer of the Company, PalEx or the Surviving
Corporation or any of the subsidiaries of such parties
within the Territory for the purpose of soliciting or
selling services or products in a Competitive Business
within the Territory.
(b) Notwithstanding the above, the foregoing covenant shall not be
deemed to prohibit any Stockholder from acquiring, as a passive investor
with no involvement in the operations of the business, not more than one
percent of the capital stock of a Competitive Business whose stock is
publicly traded on a national securities exchange, the Nasdaq National
Market or over-the-counter.
8.2. EQUITABLE RELIEF. Because of the difficulty of measuring economic
losses to PalEx and the Surviving Corporation as a result of a breach of the
foregoing covenant, because a breach of such covenant would diminish the value
of the assets and business of the Company being sold pursuant to this Agreement,
and because of the immediate and irreparable damage that could be caused to
PalEx and the Surviving Corporation for which it would have no other adequate
remedy, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ agrees that the foregoing covenant may be enforced
against such individual by injunctions, restraining orders and other equitable
actions.
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8.3. REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this ARTICLE VIII are necessary in terms of time,
activity and territory to protect PalEx's and the Surviving Corporation's
interest in the assets and business being acquired pursuant to the terms of this
Agreement and impose a reasonable restraint on each Stockholder in light of the
activities and business of the Company on the date of the execution of this
Agreement and the current plans of the Company.
8.4. SEVERABILITY; REFORMATION. The covenants in this ARTICLE VIII are
severable and separate, and the unenforceability of any specific covenant shall
not affect the continuing validity and enforceability of any other covenant. In
the event any court of competent jurisdiction shall determine that the scope,
time or territorial restrictions set forth in this ARTICLE VIII are unreasonable
and therefore unenforceable, then it is the intention of the parties that such
restrictions be enforced to the fullest extent which the court deems reasonable
and this Agreement shall thereby be reformed.
8.5. MATERIAL AND INDEPENDENT COVENANT. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ acknowledges that
his agreements and the covenants set forth in this ARTICLE VIII are material
conditions to PalEx's and Newco's agreements to execute and deliver this
Agreement and to consummate the transactions contemplated hereby and that PalEx
and Newco would not have entered into this Agreement without such covenants. All
of the covenants in this ARTICLE VIII shall be construed as an agreement
independent of any other provision in this Agreement.
ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. GENERAL. Each Stockholder recognizes and acknowledges that he had in
the past, currently has, and in the future will have, access to certain
confidential information relating to the business of the Company, such as lists
of customers, operational policies, and pricing and cost policies that are, and
following the Closing will be, valuable, special and unique assets of the
Surviving Corporation. Each Stockholder agrees that he will not use or disclose
such confidential information to any person, firm, corporation, association or
other entity for any purpose whatsoever, except as is required in the course of
performing his duties to the Surviving Corporation and/or PalEx, unless (a) such
information becomes known to the public generally through no fault of such
Stockholder, or (b) disclosure is required by Law, PROVIDED that prior to
disclosing any information pursuant to this clause (b) such Stockholder shall,
if possible, give prior written notice thereof to PalEx and the Surviving
Corporation and provide PalEx with the opportunity to contest such disclosure.
In the event of a breach or threatened breach by any Stockholder of the
provisions of this Section, PalEx shall be entitled to an injunction restraining
such Stockholder from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting PalEx from
pursuing any other available remedy for such breach or threatened breach,
including, without limitation, the recovery of damages.
9.2. EQUITABLE RELIEF. Because of the difficulty of measuring economic
losses as a result of the breach of the foregoing covenants, because a breach of
such covenant would diminish the value of the assets and business of the Company
being sold pursuant to this Agreement, and because of the immediate and
irreparable damage that would be caused for which the Surviving Corporation
and/or PalEx would have no
27
other adequate remedy, each Stockholder agrees that the foregoing covenants may
be enforced against him by injunctions, restraining orders and other equitable
actions.
ARTICLE X
POOLING-OF-INTERESTS
ACCOUNTING AND INTENDED TAX TREATMENT
10.1. EXECUTION OF DOCUMENTS NECESSARY FOR POOLING TREATMENT. If required,
each Stockholder and the President and Chief Financial Officer of the Company
will execute any documentation reasonably required by PalEx's independent public
accountants to enable PalEx to account for the Merger as a pooling-of-interests.
10.2. RESTRICTIONS ON RESALE. PalEx has informed each Stockholder that
PalEx intends to account for the Merger as a pooling-of-interests under Opinion
No. 16. PalEx has also informed each Stockholder that its ability to account for
the Merger as a pooling-of-interests was a material factor considered by PalEx
in its decision to enter into this Agreement. Therefore, pursuant to Opinion No.
16, prior to the publication and dissemination by PalEx of consolidated
financial results which include results of the combined operations of the
Company and PalEx for at least 30 days on a consolidated basis following the
Closing, the Stockholders shall not sell, offer to sell, or otherwise transfer
or dispose of, any shares of the PalEx Common Stock received by the
Stockholders, engage in put, call, short-sale, straddle or similar transactions,
or in any other way reduce the Stockholders' risks of owning shares of PalEx.
The certificates evidencing the PalEx Common Stock to be received by the
Stockholders will bear a legend substantially in the form set forth below:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY
ATTEMPTED SALE, TRANSFER OR ASSIGNMENT, PRIOR TO THE PUBLICATION AND
DISSEMINATION OF FINANCIAL STATEMENTS BY THE ISSUER WHICH INCLUDE THE
RESULTS OF AT LEAST 30 DAYS OF COMBINED OPERATIONS OF THE ISSUER AND THE
COMPANY ACQUIRED BY THE ISSUER FOR WHICH THESE SHARES ARE ISSUED. UPON THE
WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER WILL REMOVE
THIS RESTRICTIVE LEGEND WHEN THIS REQUIREMENT HAS BEEN MET.
10.3. TAX-FREE REORGANIZATION. PalEx and the Stockholders are entering
into this Agreement with the intention that the Merger qualify as a tax-free
reorganization for federal income tax purposes, except to the extent of any
"boot" received, and neither PalEx nor the Stockholders will not take any
actions that disqualify the Merger for such treatment.
ARTICLE XI
FEDERAL SECURITIES ACT; RESTRICTIONS
ON PALEX COMMON STOCK
11.1. COMPLIANCE WITH LAW. The Stockholders acknowledge the shares of
PalEx Common Stock issued at the Closing in accordance with the terms of this
Agreement (the "RESTRICTED SHARES") will not be
28
registered under the 1933 Act and therefore may not be resold without compliance
with the 1933 Act. The Restricted Shares are being or will be acquired by
Stockholders solely for their own accounts, for investment purposes only, and
with no present intention of distributing, selling or otherwise disposing of
them in connection with a distribution. The Stockholders covenant, warrant and
represent that none of the Restricted Shares will be, directly or indirectly,
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC. Certificates
representing the Restricted Shares shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE NOT ISSUED IN A
TRANSACTION REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THE SHARES
REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD
OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS COVERED BY AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR, IN THE OPINION OF COUNSEL TO THE ISSUER, IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS.
11.2. ECONOMIC RISK; SOPHISTICATION. Each Stockholder is able to bear the
economic risk of an investment in the Restricted Shares and can afford to
sustain a total loss of such investment. Each Stockholder has such knowledge and
experience in financial and business matters that it or he is capable of
evaluating the merits and risks of the proposed investment and therefore has the
capacity to protect its or his own interests in connection with the acquisition
of the Restricted Shares pursuant hereto. Each Stockholder represents to PalEx
that it or he is an "accredited investor," as that term is defined in Regulation
D under the 1933 Act. Each Stockholder or its or his representatives have had an
adequate opportunity to ask questions and receive answers from the officers of
PalEx concerning, among other matters, PalEx, its management, its plans for the
operation of its business and potential additional acquisitions.
11.3. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of PalEx
Common Stock to the public without registration, PalEx agrees, so long as any
Stockholder holds any Restricted Shares, to use its reasonable best efforts to:
(a) make and keep public information (as such terms are defined in
Rule 144) regarding PalEx available;
(b) file with the SEC in a timely manner all reports and other
documents required of PalEx under the 1933 Act and the 1934 Act; and
(c) furnish to each Stockholder upon written request a written
statement by PalEx as to its compliance with the reporting requirements of
Rule 144, the 1933 Act and the 1934 Act, a copy of the most recent annual
or quarterly report of PalEx, and such other reports and documents so
filed as such Stockholder may reasonably request in availing itself of any
rule or regulation of the SEC allowing such Stockholder to sell any such
shares without registration
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ARTICLE XII
MISCELLANEOUS
12.1. SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties
hereunder may not be assigned (except by operation of Law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
PalEx, Newco, the Surviving Corporation and the Company, and the heirs and legal
representatives of the Stockholders.
12.2. ENTIRE AGREEMENT. This Agreement (including the Schedules, exhibits
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the Stockholders, the
Company, Newco and PalEx and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement may be modified
or amended only by a written instrument executed by the Stockholders, the
Company, Newco and PalEx, acting through their respective officers, duly
authorized by their respective Boards of Directors.
12.3. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
12.4. BROKERS AND AGENTS. Except for the Stockholders' engagement of DN
Partners LLC, each party hereto represents and warrants that it employed no
broker or agent in connection with the transactions contemplated by this
Agreement. Subject to SECTION 6.3, each party agrees to indemnify each other
party against all loss, cost, damages or expense arising out of claims for fees
or commissions of brokers employed or alleged to have been employed by such
indemnifying party.
12.5. NOTICES. All notices and communications required or permitted
hereunder shall be in writing and may be given by depositing the same in the
United States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, or by delivering the same
in person to an officer or agent of such party, as follows:
(a) If to PalEx, Newco or the Surviving Corporation, addressed to
them at:
PalEx, Inc.
▇▇▇▇ ▇▇▇▇ ▇▇▇ ▇▇▇▇.
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
(b) If to ▇. ▇▇▇▇▇▇▇▇, addressed as follows:
c/o Acme Barrel Company, Inc.
▇▇▇▇ ▇. ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
30
With a copy (which shall not constitute notice) to:
Barack ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇
▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
(c) If to the ESOP, addressed as follows:
c/o Acme Barrel Company, Inc.
▇▇▇▇ ▇. ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: Trustee of the Acme Barrel Company
Employee Stock Ownership Plan
With a copy (which shall not constitute notice) to:
Barack ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇
▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
(d) If to ▇. ▇▇▇▇▇▇▇▇, addressed as follows:
▇/▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ &
▇▇▇▇▇▇▇▇▇
▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
or such other address as any party hereto shall specify pursuant to this SECTION
12.5 from time to time.
12.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in ARTICLE IV and ARTICLE V shall survive the Closing for a
period of 12 months from the Closing Date (the "EXPIRATION DATE"), except that
the representations and warranties set forth in SECTION 4.19 hereof shall
survive until such time as the limitations period has run for all tax periods
ended prior to the Closing Date, which shall be deemed to be the Expiration Date
for SECTION 4.19.
12.7. EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
31
12.8. REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and unenforceable,
but so as to most nearly retain the intent of the parties, and if such
modification is not possible, such provision shall be severed from this
Agreement, and in either case, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
PALEX, INC.
By:______________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Vice President and General Counsel
ACME ACQUISITION, INC.
By:__________________________________
▇▇▇▇▇▇ ▇▇▇▇▇
President
ACME BARREL COMPANY, INC.
By:__________________________________
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
President
THE ACME BARREL COMPANY EMPLOYEE
STOCK OWNERSHIP PLAN
By:__________________________________
__________________________________
Trustee
THE ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LIVING TRUST U/T/A DATED
AUGUST 7, 1992
By:__________________________________
__________________________________
Trustee
_____________________________________
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, Individually
THE ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ LIVING TRUST U/T/A
DATED MARCH 16, 1989
By:__________________________________
__________________________________
Trustee
_____________________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Individually