EXHIBIT 2.2
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PALEX, INC.,
SONOMA PACIFIC ACQUISITION, INC.,
SONOMA PACIFIC COMPANY,
THE XXXXXXX 1981 REVOCABLE TRUST,
THE XXXXXX 1982 REVOCABLE TRUST,
XXXXXX X. XXXXXXX,
AND
XXXXX X. XXXXXX
DATED AS OF AUGUST 1, 1997
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1. Definitions......................................................2
1.2. Interpretation...................................................5
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1. The Merger.......................................................5
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 STOCKHOLDERS
4.1. Due Organization and Qualification...............................7
4.2. Authorization; Non-Contravention; Approvals......................8
4.3. Capitalization...................................................9
4.4. Pooling-of-Interests Accounting.................................10
4.5. Subsidiaries....................................................10
4.6. Financial Statements............................................11
4.7. Liabilities and Obligations.....................................12
4.8. Accounts and Notes Receivable...................................12
4.9. Assets..........................................................13
4.10. Material Customers and Contracts...............................14
4.11. Permits........................................................15
4.12. Environmental Matters..........................................15
4.13. Labor and Employee Relations...................................16
4.14. Insurance......................................................16
4.15. Compensation; Employment Agreements............................17
4.16. Employee Benefit Plans.........................................17
4.17. Litigation and Compliance with Law.............................19
4.18. Taxes..........................................................19
4.19. Absence of Changes.............................................20
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4.20. Accounts with Banks and Brokerages; Powers of Attorney.........22
4.21. Absence of Certain Business Practices..........................22
4.22. Competing Lines of Business; Related-Party Transactions........22
4.23. Intangible Property............................................23
4.24. Disclosure.....................................................23
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX AND NEWCO
5.1. Organization....................................................24
5.2. Authorization; Non-Contravention; Approvals.....................24
5.3. PalEx Common Stock..............................................25
5.4. SEC Filings; Disclosure.........................................26
5.5. Registration Statement..........................................26
5.6. Tax Reorganization Representations..............................26
5.7. Disclosure......................................................27
ARTICLE VI
CERTAIN COVENANTS
6.1. Release From Guarantees.........................................28
6.2. Future Cooperation; Tax Matters.................................28
6.3. Expenses........................................................28
6.4. Employment Agreement............................................29
6.5. Repayment of Related Party Indebtedness.........................29
6.6. Stock Options...................................................29
6.7. Legal Opinion...................................................29
6.8. Distribution of Taxes on Company Earnings.......................29
ARTICLE VII
INDEMNIFICATION
7.1. General Indemnification by the Stockholders.....................30
7.2. Indemnification by PalEx........................................31
7.3. Third Person Claims.............................................31
7.4. Limitation Upon Indemnity.......................................32
ARTICLE VIII
NONCOMPETITION COVENANTS
8.1. Prohibited Activities...........................................33
8.2. Equitable Relief................................................34
8.3. Reasonable Restraint............................................34
8.4. Severability; Reformation.......................................34
8.5. Material and Independent Covenant...............................34
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ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. General.........................................................35
9.2. Equitable Relief................................................36
9.3. Survival........................................................36
ARTICLE X
POOLING-OF-INTERESTS
ACCOUNTING AND INTENDED TAX TREATMENT
10.1. Execution of Documents Necessary for Pooling Treatment.........36
10.2. Restrictions on Resale.........................................36
10.3. Tax-Free Reorganization........................................37
ARTICLE XI
FEDERAL SECURITIES ACT AND CONTRACTUAL RESTRICTIONS
ON PALEX COMMON STOCK
11.1. Compliance with Law............................................37
11.2. Economic Risk; Sophistication..................................38
11.3. Rule 144 Affiliates............................................38
11.4. Rule 144 Reporting.............................................38
11.5. Consent to Sell Registered Shares Under Prospectus.............39
ARTICLE XII
MISCELLANEOUS
12.1. Successors and Assigns.........................................40
12.2. Entire Agreement...............................................40
12.3. Counterparts...................................................40
12.4. Brokers and Agents.............................................40
12.5. Notices........................................................40
12.6. Survival of Representations and Warranties.....................41
12.7. Exercise of Rights and Remedies................................42
12.8. Time of Essence................................................42
12.9. Reformation and Severability...................................42
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made as of
the 1st day of August 1997, by and among PalEx, Inc., a Delaware corporation
("PALEX"), Sonoma Pacific Acquisition, Inc., a Delaware corporation that is a
wholly-owned subsidiary of PalEx ("NEWCO"), Sonoma Pacific Company, a California
corporation (the "COMPANY"), and the Xxxxxxx 1981 Revocable Trust and the Xxxxxx
1982 Revocable Trust (collectively, the "STOCKHOLDERS"), who are the Company's
only stockholders, Xxxxxx X. Xxxxxxx and Xxxxx X. Xxxxxx (collectively, the
"PRINCIPALS"), who are affiliates of the Stockholders and are the principal
officers of the Company.
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; 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 CCC; and
WHEREAS, the Principals will directly or indirectly benefit from the
consummation of the transactions contemplated by this Agreement, including the
Merger;
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:
"AGREEMENT" has the meaning set forth in the first paragraph of this
Agreement.
"ASSUMED TAX RATE" has the meaning set forth in SECTION 6.7.
"BALANCE SHEET DATE" has the meaning set forth in SECTION 4.6.
"CCC" has the meaning set forth in SECTION 2.1.
"CLOSING" has the meaning set forth in SECTION 3.4.
"CLOSING DATE" has the meaning set forth in SECTION 3.4.
"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 STOCK" has the meaning set forth in SECTION 3.1.
"COMPETITIVE BUSINESS" means any business that competes with the Company
or any subsidiary of the Company, including, without limitation, any business
that manufactures, recycles, markets, distributes, brokers or manages new or
used pallets or pallet parts or that competes with the Company or the Subsidiary
for raw materials (E.G., wood).
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second
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, rights of first
refusal, reservations, restrictions or other encumbrances or defects in title.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in SECTION 4.16.
"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,
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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 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.
"ERISA" has the meaning set forth in SECTION 4.16.
"EXPIRATION DATE" has the meaning set forth in SECTION 12.6.
"FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.6.
"GAAP" has the meaning set forth in SECTION 4.6.
"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" has the meaning set forth in SECTION 2.1.
"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-
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product thereof, radon, radioactive material, asbestos or asbestos containing
material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls.
"H-S-R" means the Xxxx-Xxxxx-Xxxxxx Antitrust Improvements Act of 1976, as
amended.
"INDEMNIFIED PARTY" has the meaning set forth in SECTION 7.3.
"INDEMNIFYING PARTY" has the meaning set forth in SECTION 7.3.
"INTERIM BALANCE SHEET" has the meaning set forth in SECTION 4.6.
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.6.
"INTERIM TAX PERIOD" has the meaning set forth in SECTION 6.7.
"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.
"MERGER" has the meaning set forth in SECTION 2.1.
"MERGER FILINGS" has the meaning set forth in SECTION 2.2.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"1934 ACT" has the meaning set forth in SECTION 5.4.
"1933 ACT" has the meaning set forth in SECTION 5.4.
"OPINION NO. 16" has the meaning set forth in SECTION 4.4.
"PALEX" has the meaning set forth in the first paragraph of this
Agreement.
"PALEX COMMON STOCK" has the meaning set forth in SECTION 3.1.
"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 on SCHEDULE 4.10.
"PRINCIPALS" has the meaning set forth in the first paragraph of this
Agreement.
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"QUALIFIED PLANS" has the meaning set forth in SECTION 4.16.
"REGISTERED SHARES" has the meaning set forth in SECTION 5.5.
"REGISTRATION STATEMENT" has the meaning set forth in SECTION 5.5.
"RESTRICTED SHARES" has the meaning set forth in SECTION 11.1.
"RULE 144" has the meaning set forth in SECTION 11.2, 11.3.
"SEC" has the meaning set forth in SECTION 5.4.
"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 4.18.
"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
(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 California
Corporations Code ("CCC") and the General Corporation Law of the State of
Delaware ("GCL"), Newco shall be merged with and into the
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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 certificates of merger, in a form
mutually acceptable to PalEx and the Company, are filed with the Secretaries of
State of the States of California and Delaware, 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 CCC;
(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 CCC;
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. 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, each share of common stock, par value $1.00 per share, of
the Company issued and outstanding as of the Effective Time (the "COMPANY
STOCK") shall be converted into the right to receive, and become exchangeable
for, its pro rata interest in the aggregate consideration payable to all holders
of
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Company Stock, which aggregate consideration shall consist of 1,652,174 shares
of common stock, par value $.01 per share, of PalEx ("PALEX COMMON STOCK") and
shall be exchangeable for all the Company Stock at the Effective Time.
3.2. CONVERSION OF NEWCO SHARES. At the Effective Time, by virtue of
the Merger and without any action on the part 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, par value $1.00 per share, of the Surviving Corporation.
3.3. EXCHANGE OF CERTIFICATES. At the Closing, (a) the Stockholders
shall furnish to PalEx the certificates representing the Company Stock, duly
endorsed in blank by the Stockholders or accompanied by blank stock powers; and
(b) PalEx shall deliver to the Stockholders certificates representing the PalEx
Common Stock in accordance with SECTIONS 3.1, 10.2 and 11.1. The Stockholders
agree 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, 0000 Xxxxxxx
Xxxx, Xxxxx 000, Xxxxxxx, Xxxxx, 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 shall be referred to as the "CLOSING
DATE."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
The Stockholders and the Principals 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 California and is duly
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authorized and qualified to do business under all applicable Laws and to carry
on its businesses in the places and in the manner as now conducted except where
the failure to be so authorized or qualified would not, when taken together with
all such other failures, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of the Company. 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 it is currently being conducted. SCHEDULE 4.1 contains a list of
all jurisdictions in which the Company is authorized or qualified to do
business. In addition, SCHEDULE 4.1 sets forth a true, complete and correct list
of all counties in California in which the Company conducts any 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. All the stock
records and minute books of the Company have been made available to PalEx and
are correct and complete.
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 and
Principal 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 are 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, the Stockholders and the Principals, and,
assuming the due authorization, execution and delivery hereof by PalEx and
Newco, constitutes a valid and binding agreement of the Company, the
Stockholders and the Principals, enforceable against the each of them in
accordance with its terms, subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar Laws affecting or relating to
the enforcement of creditors' rights generally and (ii) such principles of
equity as may effect the availability of equitable remedies.
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(b) The execution and delivery of this Agreement by the Company do
not, and the consummation by the Company 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 or any of
its subsidiaries 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 Company or any of its properties or assets, or
(iii)except as set forth on SCHEDULE 4.2, any agreement, note, bond,
mortgage, indenture, deed of trust, license, franchise, permit,
concession, lease or other instrument, obligation or agreement of any kind
to which 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, 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, the Stockholders or the
Principals or the consummation by the Company, the Stockholders or the
Principals of the transactions contemplated hereby. Except as set forth on
SCHEDULE 4.2, none of the customer contracts or other material agreements
to which the Company is a party requires notice to, or the consent or
approval of, any Governmental Authority or other third party to any of the
transactions contemplated hereby to remain in full force and effect
following such transactions.
4.3. CAPITALIZATION. The authorized capital stock of the Company
consists solely of 100,000 shares of common stock, par value $1.00 per share, of
which 20,000 shares are issued and outstanding and represent the Company Stock.
All of the issued and outstanding shares of the Company Stock are owned
beneficially and of record by the Stockholders as set forth on SCHEDULE 4.3. All
of the issued and outstanding shares of the Company Stock have been duly
authorized and validly issued, are fully paid and nonassessable, and were
offered, issued, sold and delivered by the
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Company in compliance with all applicable Laws concerning the issuance of
securities. None of such shares were issued in violation of the preemptive
rights of any past or present stockholder. The exchange of the Company Stock for
PalEx Common Stock pursuant to the Merger will transfer to PalEx good and
marketable title in the shares of the Company Stock owned by the Stockholders,
free and clear of all Encumbrances except for those created by PalEx. 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. Except as set forth
on SCHEDULE 4.4, 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
on SCHEDULE 4.4, the Company has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of the Company 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. Except as set forth in
SCHEDULE 4.4, none of the shares of Company Stock was issued pursuant to awards,
grants or bonuses. To the Stockholders' and the Principals' knowledge, after due
inquiry, 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 presently 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,
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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,
partnership or other noncorporate entity.
4.6. FINANCIAL STATEMENTS.
(a) The Stockholders have delivered to PalEx complete and correct
copies of the following financial statements:
(i) the balance sheets of the Company as of December 31 ,
1992, 1993, 1994, 1995 and 1996 and the related
statements of operations, of stockholder's equity and of
cash flows for the five-year period ended December 31,
1996, together with the related notes and schedules
(such balance sheets, the related statements of
operations, of stockholders' equity and of cash flows
and the related notes and schedules are referred to
herein as the "YEAR-END FINANCIAL STATEMENTS"); and
(ii) the balance sheet (the "INTERIM BALANCE SHEET") of the
Company as of May 31, 1997 (the "BALANCE SHEET DATE")
and the related statements of operations, of
stockholders' equity and of cash flows for the five-
month period ended May 31, 1997, together with the
related notes and schedules (such balance sheets, the
related statements of operations, of stockholders'
equity and of 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 on SCHEDULE 4.6, the Financial Statements
have been prepared from the books and records of the Company in conformity
with generally accepted accounting principles applied on a basis
consistent with preceding years and throughout the periods involved
("GAAP") 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
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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, the Company did not have at the Balance Sheet Date, 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 on SCHEDULE 4.7. SCHEDULE 4.7 contains a reasonable estimate by
the 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 Stockholders have 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 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 affiliated
with the Stockholders are separately identified on 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. The
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trade and accounts receivable of the Company that are classified as current
assets on the Interim Balance Sheet, subject to the reserve for doubtful
accounts reflected in the Interim Balance Sheet, need not be written-off as
uncollectible. Such accounts and notes are collectible in the amount shown on
SCHEDULE 4.8, net of reserves for doubtful accounts reflected in the Interim
Balance Sheet.
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 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 are currently owned, or were
formerly owned, by the Stockholders or affiliates of the Company or
Stockholders. Except as specifically identified on SCHEDULE 4.9, all of
the tangible assets, vehicles and other significant machinery and
equipment of the Company listed on 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. All fixed assets used by
the Company that are material to the operation of the Company's business
are either owned by the Company or leased under an agreement identified on
SCHEDULE 4.9. All leases set forth on SCHEDULE 4.9 are in full force and
effect and constitute valid and binding agreements of the 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.
-13-
(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 on SCHEDULE 4.9, subject to
no Encumbrances, except for (i) Encumbrances reflected on SCHEDULE 4.9,
(ii) Permitted Encumbrances, and (iii) such other Encumbrances that,
individually or in the aggregate, could not reasonably be expected to have
a material adverse effect on the business, operations, properties, assets,
condition (financial or other), or results of operations of the Company.
4.10. MATERIAL CUSTOMERS AND CONTRACTS. SCHEDULE 4.10 sets forth an
accurate list of (a) all customers representing 5% or more of the Company's
revenues in the two-year period ended December 31, 1996 and the six-month period
ended June 28, 1997, and (b) all material 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, contracts with
customers, contracts with any labor organizations, leases, loan agreements,
pledge and security agreements, indemnity or guaranty agreements, bonds, notes,
mortgages, joint venture or partnership agreements, options to purchase real or
personal property, and agreements relating to the purchase or sale by the
Company of assets or securities. SCHEDULE 4.10 contains true, complete and
correct copies of all such agreements. Except to the extent set forth on
SCHEDULE 4.10, (i) none of the customers of the Company that represented
$500,000 or more of the Company's revenues in the year ended December 31, 1996,
or $250,000 or more of the Company's revenues in the six-month period ended June
28, 1997, has canceled or substantially reduced or is currently attempting or,
to the knowledge of the Company, the Stockholders and the Principals,
threatening to cancel or substantially reduce its purchases of the Company's
products and (ii) the Company has complied with all material commitments and
obligations pertaining to it under such agreements and is not in default under
any such agreements, no notice of default has been received by the Company and
the Stockholders are aware of no basis therefor. Except as set forth on SCHEDULE
4.10, the Company is not now and has never been a party to any governmental
contracts subject to price redetermination or renegotiation. Except as set forth
on SCHEDULE 4.10, the Company is not required to provide any bonding or other
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financial security arrangements in any material amount in connection with any
transactions with any of its customers or suppliers.
4.11. PERMITS. SCHEDULE 4.11 contains an accurate list, summary
description and copies of all licenses, franchises, permits, transportation
authorities and other governmental authorizations and intangible assets held by
the Company that are material to the conduct of its business 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 licenses, operating authorizations,
franchises, permits and other governmental authorizations listed on SCHEDULE
4.11 are valid, and the Company has not received any notice that any
Governmental Authority intends to cancel, terminate or not renew any such
license, operating authorization, franchise, permit or other governmental
authorization. The Company holds all material licenses, operating
authorizations, franchises, permits and other governmental authorizations. The
Company has conducted and is conducting its business in substantial compliance
with the requirements, standards, criteria and conditions set forth in its
licenses, operating authorizations, franchises, permits and other governmental
authorizations as well as the applicable orders, approvals and variances related
thereto, and is not in violation of any of the foregoing except for any
violations that would not have a material and adverse effect on the business,
operations, properties, assets, condition (financial or otherwise), or results
of operations of the Company. Except as specifically provided in 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 such material licenses, operating
authorizations, franchises, permits and other government authorizations.
4.12. ENVIRONMENTAL MATTERS. Except as set forth on 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
-15-
of and otherwise handle Hazardous Substances and has reported, to the extent
required by all Environmental Laws, all past and present sites owned and
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 except as permitted by Environmental
Laws; (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 Company, 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 known contingent liability in connection with any
release 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. No employees of the Company are represented by any labor union or covered
by any collective bargaining agreement nor, to the best of the Stockholders'
knowledge, is any campaign to establish such representation in progress. There
is no pending or threatened labor dispute involving the Company and any group of
its employees nor has the Company experienced any labor interruptions over the
past five years. Neither the Company, the Stockholders nor the Principals has
any knowledge of any 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. Also attached to SCHEDULE 4.14 are true, complete and correct
copies of all of the Company's insurance policies, covering at least the past
three years. None of such policies is a "claims made" policy. The insurance
policies set forth on
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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 key employees of the
Company, listing all employment agreements with such officers, directors and
employees and 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 all such employment
agreements and all other employment agreements and other similar agreements or
arrangements containing "golden parachute"or other similar provisions.
4.16. EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 4.16 sets forth an accurate schedule of all employee
benefit plans of the Company and deferred compensation agreements,
together with true, complete and correct copies of such plans, agreements
and any trusts related thereto, and classifications of employees covered
thereby as of the Balance Sheet Date. Except for the employee benefit
plans described on SCHEDULE 4.16, the Company does not sponsor, maintain
or contribute to any plan, program, fund or arrangement that constitutes
an "employee pension benefit plan," nor does the Company have any
obligation to contribute to or accrue or pay any benefits under any
deferred compensation or retirement funding arrangement on behalf of any
employee or employees (such as, for example, and without limitation, any
individual retirement account or annuity, retiree medical benefits or
"excess benefit plan" (within the meaning of Section 3(36) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or any
non-qualified deferred compensation arrangement). For the purposes of this
Agreement, the term "EMPLOYEE PENSION BENEFIT PLAN" shall have the same
meaning given that term in Section 3(2) of ERISA. Since January 1, 1990,
the Company has not sponsored, maintained or contributed to any employee
pension benefit plan other than the plans set forth on SCHEDULE 4.16. The
Company is not required to contribute to any
-17-
retirement plan pursuant to the provisions of any collective bargaining
agreement or otherwise.
(b) The Company is not now, nor will it become as a result of its
past activities, liable to the Pension Benefit Guaranty Corporation or to
any multi-employer employee pension benefit plan under the provisions of
Title IV of ERISA. All employee benefit plans listed on SCHEDULE 4.16 are
in substantial compliance with all applicable provisions of ERISA and the
regulations issued thereunder, as well as with all other applicable
federal, state and local statutes, ordinances and regulations. All accrued
contribution obligations of the Company with respect to any plan listed on
SCHEDULE 4.16 have either been fulfilled in their entirety or are fully
reflected on the balance sheet of the Company as of the Balance Sheet
Date.
(c) All plans listed on SCHEDULE 4.16 that are intended to qualify
(the "QUALIFIED PLANS") under Section 401(a) of the Code have been
determined by the Internal Revenue Service to be so qualified, and copies
of such determination letters are included as part of SCHEDULE 4.16
hereof. Except as disclosed on SCHEDULE 4.16, all material reports and
other documents required to be filed with any Governmental Authority or
distributed to plan participants or beneficiaries (including, but not
limited to, actuarial reports, audits or tax returns) have been timely
filed or distributed, and copies thereof are included as part of SCHEDULE
4.16 hereof. Neither the Stockholders, any such plan listed in SCHEDULE
4.16, nor the Company has engaged in any transaction prohibited under the
provisions of Section 4975 of the Code or Section 406 of ERISA. No such
plan listed in SCHEDULE 4.16 has incurred an "accumulated funding
deficiency," as defined in Section 412(a) of the Code and Section 302(1)
of ERISA, and the Company has not incurred any liability for excise tax or
penalty due to the Internal Revenue Service nor any liability to the
Pension Benefit Guaranty Corpor ation. There have been no terminations,
partial terminations or discontinuances of contri butions to any such
Qualified Plan without notice to and approval by the Internal Revenue
Service; no plan listed in SCHEDULE 4.16 subject to the provisions of
Title IV of ERISA has been terminated; there have been no "reportable
events" (as that phrase is defined in Section
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4043 of ERISA) with respect to any such plan; and the Company has not
incurred liability under Section 4062 of ERISA.
4.17. LITIGATION AND COMPLIANCE WITH LAW. Except as set forth in
SCHEDULE 4.17, there are no claims, actions, suits or proceedings, pending or
threatened against or affecting the Company, at law or in equity, or before or
by any Governmental Authority having jurisdiction over the Company. No notice of
any claim, action, suit or proceeding, whether pending or threatened, has been
received by the Company and there is no basis therefor. Except to the extent set
forth on SCHEDULE 4.17, the Company has conducted for the past five years and
does conduct its business in compliance with all Laws applicable to the Company
or its assets, except where noncompliance could not reasonably be expected,
alone or in the aggregate, to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), or results of
operations of the Company.
4.18. TAXES.
(a) 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 Effective Time, 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,
-19-
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 4.18, there are no examinations in progress or claims against the
Company for any period or periods prior to and including the Balance Sheet
Date and no 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. Copies of (i) any tax
examinations, (ii) extensions of statutory limitations and (iii) the
federal, state and local Tax returns of the Company for the last three
fiscal years are attached hereto as SCHEDULE 4.18. There are no requests
for ruling in respect of any Tax pending between the Company and any
Taxing authority. The Company made an election to be taxed under the
provisions of Subchapter S of the Code on June 6, 1990, and has not since
the year ended December 31, 1990 been taxed under the provisions of
Subchapter C of the Code. 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.
(b) During all tax periods ended prior to the Closing Date for which
the statute of limitations has not expired, the Company has conducted its
business in a manner which entitles it to protection under the safe harbor
provisions of Section 530(a) of the Revenue Act of 1978, which was
extended indefinitely by Section 269(c) of the Tax Equity and Fiscal
Responsibility Act of 1982.
(c) There are no accounting method changes or proposed accounting
method changes by the Company that could give rise to an adjustment under
Section 481 of the Code with respect to the period after the Closing Date.
-20-
4.19. ABSENCE OF CHANGES. Since the Balance Sheet Date, the Company
has conducted its operations in the ordinary course and, except as set forth in
SCHEDULE 4.19, there has not been:
(a) any material adverse change in the business, operations,
properties, condition (financial or other), assets, liabilities
(contingent or otherwise), or results of the Company;
(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 securities outstanding or any change in the Stockholders' ownership
interests or any grant of any options, warrants, calls, conversion rights
or commitments or the declaration or payment of any dividend or other
distribution;
(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 any of its officers, directors, Stockholders, employees,
consultants or agents, except for ordinary and customary bonuses and
salary increases for employees in accordance with past practice;
(f) any work interruptions, labor grievances or claims filed, or any
proposed Law, or event or condition of any character materially adversely
affecting the business of the Company;
(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;
-21-
(i) any increase in the Company's indebtedness, other than accounts
payable incurred in the ordinary course of business;
(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, license, permit or other right to which the Company
is a party or any of its property is subject; or
(n) any material transaction by the Company outside the ordinary
course of business.
4.20. ACCOUNTS WITH BANKS AND BROKERAGES; POWERS OF ATTORNEY.
SCHEDULE 4.20 sets forth an accurate schedule, as of the (a) Balance Sheet Date
and (b) date of this Agreement, of (i) the name of each financial institution or
brokerage firm in which the Company has accounts or safe deposit boxes; (ii) the
names in which the accounts or boxes are held; (iii) 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 (iv) the name of each person
authorized to draw thereon or have access thereto. SCHEDULE 4.20 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.
4.21. 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
-22-
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.
4.22. COMPETING LINES OF BUSINESS; RELATED-PARTY TRANSACTIONS.
Except as set forth in SCHEDULE 4.22, 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 a competitor, lessor, lessee, customer or supplier
of the Company. Except as set forth in SCHEDULE 4.22, no officer, director or
Stockholder of the Company has nor, during the period beginning January 1, 1992
through the date hereof, had any interest in any property, real or personal,
tangible or intangible, used in or pertaining to the Company's business.
4.23. INTANGIBLE PROPERTY. SCHEDULE 4.23 sets forth an accurate list
of all patents, patent applications, trademarks, service marks, trade names,
copyrights, and other intellectual property or proprietary property rights owned
or used by the Company. The Company owns or possesses sufficient legal rights to
use all of such items without conflict with or infringement of the rights of
others.
4.24. DISCLOSURE. The Stockholders have fully provided PalEx or its
representatives with all the information that PalEx has requested in analyzing
whether to consummate the Merger. None of the information so provided nor any
representation or warranty of the Stockholders 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. There is no fact
known to the Stockholders which has specific application to the Company (other
than general economic or industry conditions) and which materially adversely
affects or, so far as the Stockholders can reasonably foresee, materially
threatens, the assets, business, condition (financial or otherwise), or results
of the Company which has not been described in this Agreement or the Schedules
hereto or otherwise disclosed in writing to PalEx. It is understood by the
parties hereto that any estimates, projections or other predictions that may
have been provided to PalEx are not and shall not be deemed to be
representations or warranties of the Stockholders, but shall be deemed to be
good faith
-23-
estimates and assumptions of the Stockholders, which are intended to be
reasonable at the time made concerning the most likely course of the Company and
its business. Notwithstanding the foregoing or anything to the contrary
contained herein, nothing in this Agreement shall be deemed or construed to
imply that the Company, the Stockholders or the Principals has provided PalEx
with any projections or other predictions regarding the Company or its business
on which PalEx has relied, and PalEx and Newco expressly waive any right to make
any claim based on any such projections or predictions.
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 duly organized,
validly existing and in good standing under the Laws of the state of its
incorporation, and is duly authorized and qualified under all applicable Laws to
carry on its business in the places and in the manner now conducted except where
the failure to be so authorized or qualified would not, when taken together with
all such other failures, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of PalEx.
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 to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement have been approved by the boards of directors of PalEx and Newco
and by 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 and the consummation by PalEx and Newco of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by PalEx and Newco, and, assuming the due
authorization, execution and delivery by the Company, the Stockholders and
the Principals, constitutes a valid and binding agreement of PalEx and
Newco, enforceable against PalEx and Newco in accordance with
-24-
its terms, subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar Laws affecting or relating to the enforcement
of creditors' rights generally and (ii) such principles of equity as may
effect the availability of equitable remedies.
(b) The execution and delivery of this Agreement by PalEx and Newco
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, or result in the creation of
any Encumbrance upon any of the properties or assets of PalEx or any of
its subsidiaries 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 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, excluding from the foregoing clauses (ii) and (iii)
such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of Encumbrances that would not, in the
aggregate, have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), or results of
operations of PalEx.
(c) Except for the Merger Filings, such filings as may be required
under federal or state securities Laws and as required under H-S-R, 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 by PalEx or the consummation by
PalEx of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not,
in the aggregate, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), or results
of operations of PalEx.
-25-
5.3. PALEX COMMON STOCK. The shares of PalEx Common Stock to be
issued to the Stockholders pursuant to the Merger, when issued in accordance
with the terms of this Agreement, will be duly authorized, 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 as contemplated in this
Agreement and for any Encumbrances created by the Stockholders.
5.4. 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 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 omits to state a material fact
required to 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.
5.5. REGISTRATION STATEMENT. A registration statement on Form S-1
(File No. 333- 28027) (the "REGISTRATION STATEMENT") has been filed by PalEx
with the SEC and declared effective under the Act. 60% of the shares of PalEx
Common Stock issued in the Merger shall be issued under the Registration
Statement (the "REGISTERED SHARES"), and the SEC has not issued an order
preventing or suspending the use of any prospectus included in the Registration
Statement nor, to the knowledge of PalEx, instituted proceedings for that
purpose.
5.6. 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.
-26-
(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 Merger, 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.
(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) If any payment of cash is made in lieu of fractional shares of
PalEx Common Stock, such payment would be made solely for the purpose of
avoiding the expense and inconvenience to PalEx of issuing fractional
shares and does not represent separately bargained-for consideration.
(j) As of the Effective 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.
5.7. 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
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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's indebtedness identified in SCHEDULE 6.1. PalEx
hereby agrees to indemnify each such 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 Effective
Time 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 and/or Newco at and
after the Effective Time 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 Effective Time. The Stockholders will cooperate with the Company 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.
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 Company following the Merger will pay the expenses
of the audit of the Year-end Financial Statements and the expenses
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of preparing and filing its income tax returns for the short tax year resulting
from the Merger. The Stockholders and the Principals will pay the fees, expenses
and disbursements of the Stockholders and Principals and their respective
agents, representatives, financial advisors, accountants and counsel incurred in
connection with the execution, delivery and performance of this Agreement and
any amendments hereto.
6.4. EMPLOYMENT AGREEMENT. Concurrently with the execution of this
Agreement, the Company and Xxxxx Xxxxxx shall enter into the Employment
Agreement attached as EXHIBIT 6.4(A).
6.5. 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 on 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
on SCHEDULE 4.7.
6.6. STOCK OPTIONS. PalEx shall recommend to the Compensation
Committee of its Board of Directors that options to purchase an aggregate of
100,000 shares of PalEx Common Stock be granted as soon as practicable after the
Closing under PalEx's 1996 Stock Option Plan to individuals who are employees of
the Company as of the date of this Agreement (other than Xxxxx X. Xxxxxx) and
who are mutually designated in good faith by PalEx and Xxxxx X. Xxxxxx.
6.7. LEGAL OPINION. At the Closing, the Company shall cause its
legal counsel, Xxxxxx Radovsky Xxxxxxx & Share LLP, to deliver to PalEx a legal
opinion in the form of EXHIBIT 6.7.
6.8. DISTRIBUTION OF TAXES ON COMPANY EARNINGS.
(a) The Company shall distribute to the Stockholders an amount equal
to the income taxes payable by the Stockholders in accordance with
Subchapter S of the Code on the Company's taxable income for the period
from January 1, 1997 through the Closing Date (the "INTERIM TAX PERIOD"),
which income taxes shall be calculated based on an assumed combined state
and federal income tax rate of 46.4% (the "ASSUMED TAX RATE"). At the
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Closing, the Stockholders and PalEx shall in good faith calculate the
Company's taxable income from January 1, 1997 through June 30, 1997 and
calculate and distribute to each Stockholder (i) the income taxes payable
by such Stockholder with respect to such income at the Assumed Tax Rate,
less (ii) the amount of all distributions to such Stockholder during or
with respect to the Interim Tax Period. As promptly as practicable after
the Closing, the Stockholders and PalEx shall in good faith calculate the
Company's taxable income for the entire Interim Tax Period and distribute
to each Stockholder (A) the income taxes payable by such Stockholder with
respect to such income at the Assumed Tax Rate, less (B) the amount of all
distributions to such Stockholder during or with respect to the Interim
Tax Period, including, without limitation, any distributions to such
Stockholder in accordance with the immediately preceding sentence.
(b) If the Stockholders and PalEx are unable to mutually agree upon
the amount of the distributions by the Company under SECTION 6.7(A), then
either the Stockholders or PalEx may notify the other party in writing of
the submission of the calculation of the amount of such distributions to
Xxxxxx Xxxxxxxx LLP for final determination, which determination shall be
final, conclusive and binding.
ARTICLE VII
INDEMNIFICATION
The Stockholders, Principals, PalEx and Newco each make the following
covenants:
7.1. GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders
and Principals covenant and agree that they, jointly and severally, will
indemnify, defend, protect and hold harmless PalEx, Newco and the Company, 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 claims, damages,
actions, suits, proceed ings, demands, assessments, adjustments, costs and
expenses (including specifically, but without limitation, reasonable attorneys'
fees and expenses of investigation) incurred by any of such
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indemnified persons as a result of or arising from (a) any breach of the
representations and warranties of the Stockholders or the Principals 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, the Principals or the Company under this Agreement, and (c) all
income Taxes payable by the Company for all periods prior to and including the
Closing Date, including, without limitation, as a result of the Company's S
election being treated as invalid or ineffective for any reason or such election
being revoked or terminated prior to the Merger.
7.2. INDEMNIFICATION BY PALEX. PalEx covenants and agrees that it
will indemnify, defend, protect and hold harmless the Stockholders and their
agents, representatives, affiliates and employees at all times from and after
the date of this Agreement until the Expiration Date from and against all
claims, damages, actions, suits, proceedings, demands, assessments, adjustments,
costs and expenses (including specifically, but without limitation, reasonable
attorneys' fees and expenses of investigation) incurred by any of such
indemnified persons as a result of or arising from (a) any breach of the
representations and warranties 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 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, the Indemnified
Party shall give to 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; PROVIDED,
HOWEVER, that the Indemnified Party shall have the right, but not the
obligation, to participate at its own expense and with counsel of its own
choosing in such defense or any settlement negotiations relating thereto. If the
Indemnifying Party undertakes to defend or settle, it shall promptly notify the
Indemnified Party
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of its intention to do so, and the Indemnified Party shall cooperate in all
reasonable respects with the Indemnifying Party and its counsel 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. 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 (a)
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, (b) the Indemnified Party shall be entitled to assume the defense
of such Third Person claim, and (c) if the Indemnified Party does not assume the
defense of such Third Person claim, the Indemnified Party shall reimburse the
Indemnifying Party for any additional costs of defense which it subsequently
incurs with respect to such claim and all additional costs of settlement or
judgment. If the Indemnifying Party does not 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, 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, PROVIDED, HOWEVER, that under no
circumstances shall the Indemnified Party settle any Third Person claim without
the written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld.
7.4. LIMITATION UPON INDEMNITY.
(a) Neither the Stockholders or the Principals nor PalEx shall be
entitled to indemnification from the other under the provisions of this
ARTICLE VII until such time
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as, and to the extent that, the claims subject to indemnification by such
party exceed, in the aggregate, $220,000.
(b) The aggregate indemnification obligations of the Stockholders
and the Principals under this ARTICLE VII shall be limited to $22,000,000.
(c) 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.
ARTICLE VIII
NONCOMPETITION COVENANTS
8.1. PROHIBITED ACTIVITIES.
(a) For no additional consideration, neither the Stockholders nor
the Principals will, for a period of five years following the Closing
Date, directly or indirectly, for themselves 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, 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 a Competitive Business (A) in the
counties in California in which the Company or any
subsidiary conducts business, all of which counties are
set forth on SCHEDULE 4.1, or (B) within 150 miles of
where the Company or any of its subsidiaries conducts
business outside of California, including any territory
outside of California that is serviced by the Company or
any of such
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subsidiaries (the counties and other areas included
within clause (A) and (B) being herein referred to as
the "TERRITORY");
(ii) call upon any person who is an employee of the Company
or any of its subsidiaries for the purpose or with the
intent of enticing such employee away from or out of the
employ of the Company or any of its subsidiaries; or
(iii) call upon any person or entity which is or which has
been, within the previous year, a customer of the
Company or any of its subsidiaries within the Territory
for the purpose of soliciting or selling services or
products in competition with the Company or any of its
subsidiaries 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 business manufacturing, distributing or
marketing pallets whose stock is publicly traded on a national securities
exchange or over-the-counter.
8.2. EQUITABLE RELIEF. Because of the difficulty of measuring
economic losses to PalEx as a result of a breach of the foregoing covenant, and
because of the immediate and irreparable damage that could be caused to PalEx
for which it would have no other adequate remedy, each Stockholder agrees that
the foregoing covenant may be enforced by PalEx by injunctions, restraining
orders and other equitable actions.
8.3. REASONABLE RESTRAINT. It is agreed by the parties hereto that
the foregoing covenants in this ARTICLE VIII impose a reasonable restraint on
the Stockholders in light of the activities and business of PalEx on the date of
the execution of this Agreement and the current plans of PalEx, but it is also
the intent of PalEx and the Stockholders that such covenants be construed and
enforced in accordance with the changing activities, business and locations of
PalEx and its subsidiaries throughout the term of this covenant.
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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, 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. The Stockholders acknowledge
that their agreements with the covenants set forth in this ARTICLE VIII are
material conditions to PalEx's agreement to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. All of the covenants in
this ARTICLE VIII shall be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim or cause of action
of any Stockholder against PalEx or one of its subsidiaries, whether predicated
on this Agreement or otherwise, shall not constitute a defense to the
enforcement by PalEx of such covenants. It is specifically agreed that the
five-year period during which the agreements and covenants of each Stockholder
made in this ARTICLE VIII shall survive shall be computed by excluding from such
computation any time during which such Stockholder is in violation of any
provision of this ARTICLE VIII. The covenants contained in this ARTICLE VIII
shall not be affected by any breach of any other provision hereof by any party
hereto.
ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1. GENERAL. The Stockholders recognize and acknowledge that they
had in the past, currently have, and in the future will have, access to certain
confidential information of the Company and/or PalEx, such as lists of
customers, operational policies, and pricing and cost policies that are
valuable, special and unique assets of the Company and/or PalEx. The
Stockholders agree that they will not 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 their
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duties to the Company and/or PalEx, unless (a) such information becomes known to
the public generally through no fault of the Stockholders, or (b) disclosure is
required by Law, provided, that prior to disclosing any information pursuant to
this clause (b) the Stockholders shall, if possible, give prior written notice
thereof to PalEx and provide PalEx with the opportunity to contest such
disclosure. In the event of a breach or threatened breach by the Stockholders of
the provisions of this Section, PalEx shall be entitled to an injunction
restraining the Stockholders 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 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, and
because of the immediate and irreparable damage that would be caused for which
the Company and/or PalEx would have no other adequate remedy, the Stockholders
agree that the foregoing covenants may be enforced against them by injunctions,
restraining orders and other equitable actions.
9.3. SURVIVAL. The obligations of the parties under this ARTICLE IX
shall survive the termination of this Agreement.
ARTICLE X
POOLING-OF-INTERESTS
ACCOUNTING AND INTENDED TAX TREATMENT
10.1. EXECUTION OF DOCUMENTS NECESSARY FOR POOLING TREATMENT. If
required, the Stockholders and the President or 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 the Stockholders
that PalEx intends to account for the Merger as a pooling-of-interests under
Opinion No. 16. PalEx has also informed the Stockholders that its ability to
account for the Merger as a pooling-of-interests was a
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material factor considered by PalEx in PalEx's 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 Effective Time, the Stockholders shall not
sell, offer to sell, or otherwise transfer or dispose of, any shares of the
PalEx Common Stock received by Stockholders, engage in put, call, short-sale,
straddle or similar transactions, or in any other way reduce the Stockholders'
risk 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 the Stockholders will not take any actions that
disqualify the Merger for such treatment.
ARTICLE XI
FEDERAL SECURITIES ACT AND CONTRACTUAL RESTRICTIONS
ON PALEX COMMON STOCK
11.1. COMPLIANCE WITH LAW. The Stockholders acknowledge that 40% of
the shares of PalEx Common Stock to be delivered to the Stockholders pursuant to
this Agreement (the
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"RESTRICTED SHARES") have not been and will not be registered under the 1933 Act
and therefore may not be resold without compliance with the 1933 Act. The
Restricted Shares are being acquired by the Stockholders solely for their own
account, 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 offered, sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of except after full compliance with all of
the applicable provisions of the Act and the rules and regulations of the SEC.
Certificates representing the Restricted Shares shall bear the following legend
in addition to the legend under ARTICLE X:
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. The Stockholders are able to
bear the economic risk of an investment in the PalEx Common Stock acquired
pursuant to this Agreement and can afford to sustain a total loss of such
investment. The Stockholders have such knowledge and experience in financial and
business matters that they are capable of evaluating the merits and risks of the
proposed investment and therefore have the capacity to protect their own
interests in connection with their acquisition of the PalEx Common Stock. The
Stockholders are "accredited investors," as that term is defined in Regulation D
under the 1933 Act. The Stockholders or their respective 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.
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11.3. RULE 144 AFFILIATES. PalEx, the Stockholders and the
Principals acknowledge that immediately following the Effective Time no
Stockholder or Principal shall be deemed an "affiliate" of PalEx, as such term
is defined for purposes of Rule 144 under the 1933 Act ("RULE 144"), and that it
is not currently contemplated that any Stockholder or Principal would
subsequently be deemed such an affiliate of PalEx as a result of such
Stockholder's power or authority at PalEx, the Surviving Corporation or the
Subsidiary.
11.4. 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 to use its
commercially reasonable 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) so long as a Stockholder owns any restricted shares of PalEx
Common Stock, furnish to such 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.
11.5. CONSENT TO SELL REGISTERED SHARES UNDER PROSPECTUS. PalEx
hereby consents to the Stockholders publicly reselling the Registered Shares
they receive in the Merger pursuant to the prospectus contained in the
Registration Statement, as such prospectus may be amended or supplemented from
time to time. PalEx shall use its commercially reasonable best efforts to
maintain the effectiveness of the Registration Statement until the earlier of
(a) two years after the Effective Time and (b) the first date on which the
Stockholders no longer hold any shares of PalEx Common Stock; PROVIDED, HOWEVER,
that the Stockholders acknowledge and agree that PalEx will be required in
accordance with the 1933 Act and the rules and regulations thereunder to
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file with the SEC amendments and supplements to the Registration Statement from
time to time to maintain the effectiveness of the Registration Statement, which
amendments and supplements PalEx agrees to file as promptly as commercially
practicable after the Registration Statement becomes stale or as may otherwise
be required pursuant to the 1933 Act and the rules and regulations thereunder.
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 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 and 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. Each party represents and warrants that it
employed no broker or agent in connection with this transaction and agrees to
indemnify the other 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
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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 or Newco, addressed to them at:
PalEx, Inc.
0000 Xxxxxxx Xxxx, Xxxxx 000
Xxxxxxx, Xxxxx 00000
Attn: Xxxxx X. Xxxxxxxx, Xx.
and
Xxxxxx X. Xxxxx
(b) If to the Stockholders or the Principals, addressed to them,
respectively, at:
The Xxxxxx 1982 Revocable Trust
c/o Mr. and Xxx. Xxxxx Xxxxxx
00 Xxxxx Xxx
Xxx Xxxxxxx, XX 00000
Xxxxx X. Xxxxxx
00 Xxxxx Xxx
Xxx Xxxxxxx, XX 00000
The Xxxxxxx 1981 Revocable Trust
c/o Mr. and Xxx. Xxxxxx Xxxxxxx
0000 Xxx Xxxxxx Xxxxx
Xxxxx Xxxx, XX 00000
Xxxxxx X. Xxxxxxx
0000 Xxx Xxxxxx Xxxxx
Xxxxx Xxxx, XX 00000
With a copy to:
Xxxxxx Xxxxxxxx Xxxxxxx & Share LLP
Four Xxxxxxxxxxx Xxxxxx
Xxxxx 0000
Xxx Xxxxxxxxx, XX 00000-0000
Attention: Xxxxxxx X. Xxxxxx, Esq.
or such other address as any party hereto shall specify pursuant to this SECTION
12.5 from time to time.
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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 4.18 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 4.18.
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.
12.8. TIME OF ESSENCE. Time is of the essence with respect to this
Agreement.
12.9. 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.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
PALEX, INC.
By: /S/ XXXXX X. XXXXXXXX
Name: Xxxxx X. Xxxxxxxx
Title:President and Chief Executive Officer
SONOMA PACIFIC ACQUISITION, INC.
By: /S/ XXXXXX XXXXX
Name: Xxxxxx Xxxxx
Title:President
SONOMA PACIFIC COMPANY
By: /S/ XXXXX X. XXXXXX
Name: Xxxxx X. Xxxxxx
Title:President
THE XXXXXXX 1981 REVOCABLE TRUST
By: /S/ XXXXX X. XXXXXX
Xxxxx X. Xxxxxx, Trustee
-43-
By: N/A
Xxxxx Xxxxxxx, Trustee
THE XXXXXX 1982 REVOCABLE TRUST
By: /S/ XXXXX X. XXXXXX
Xxxxx X. Xxxxxx, Trustee
By: N/A
Xxxxxx Xxxxxx, Trustee
/S/ XXXXX X. XXXXXX
Xxxxx X. Xxxxxx, Individually
/S/ XXXXX X. XXXXXX, ATTY IN FACT
Xxxxxx X. Xxxxxxx, Individually
-44-
