<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
Commission file number: 1-12619
RALCORP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Missouri 43-1766315
(State of Incorporation) (I.R.S. Employer
Identification No.)
800 Market Street, Suite 2900
St. Louis, MO 63101
(Address of principal (Zip Code)
executive offices)
(314) 877-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at
par value $.01 per share May 13, 1997
33,011,317
<PAGE> 2
RALCORP HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statement of Earnings 1
Condensed Consolidated Balance Sheet 2
Condensed Consolidated Statement of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Unaudited Pro Forma Combined Financial Information 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Other Information 18
Exhibits and Reports on Form 8-K 18
(i)
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------- ------------------------------
1997 1996 1997 1996
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 161.4 $277.4 $ 454.3 $572.7
------------ ------------- ------------- --------------
Costs and Expenses
Cost of products sold 94.3 139.4 235.5 281.7
Selling, general and administrative 38.8 44.2 77.2 87.9
Advertising and promotion 29.0 53.7 109.3 131.1
Interest expense, net 1.0 6.4 7.9 13.4
Gain on Branded Sale (516.5) (516.5)
Restructuring charge 18.4 (.9) 23.0
Equity earnings in Vail Resorts (10.5) (10.5)
------------ ------------- ------------- --------------
(345.5) 242.8 (74.1) 514.1
------------ ------------- ------------- --------------
Earnings before Income Taxes 506.9 34.6 528.4 58.6
Income Taxes (3.5) 13.4 4.9 22.7
------------ ------------- ------------- --------------
Net Earnings $ 510.4 $ 21.2 $ 523.5 $ 35.9
============ ============= ============= ==============
Earnings per Common Share $ 15.47 $ .64 $ 15.91 $ 1.09
============ ============= ============= ==============
</TABLE>
See Accompanying Notes to Condensed Financial Statements.
1
<PAGE> 4
RALCORP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Condensed)
(Dollars in millions)
<TABLE>
<CAPTION>
March 31, Sept. 30,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 20.0
Receivables, less allowance for doubtful
accounts of $1.1 and $1.0, respectively 49.8 $ 75.5
Inventories -
Raw materials and supplies 19.7 26.5
Finished products 53.1 76.8
Prepaid expenses 10.8 14.2
------------- ------------
Total Current Assets 153.4 193.0
------------- ------------
Investments and Other Assets 58.9 88.1
------------- ------------
Deferred income taxes 36.8 23.4
------------- ------------
Property at Cost 237.6 537.0
Accumulated depreciation 101.7 214.4
------------- ------------
135.9 322.6
------------- ------------
Total $385.0 $627.1
============= ============
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Current maturities of long-term debt $ - $ 1.8
Accounts payable 25.0 54.7
Income tax payable 2.4
Other current liabilities 42.1 45.9
------------- ------------
Total Current Liabilities 69.5 102.4
------------- ------------
Long-Term Debt - 376.6
------------- ------------
Other Liabilities 37.2 40.7
------------- ------------
Shareholders Equity
Common stock .3 .3
Capital in excess of par value 109.7 130.9
Retained earnings 168.3 (.2)
Common stock in treasury, at cost - (22.7)
Unearned portion of restricted stock - (.9)
------------- ------------
Total Shareholders Equity 278.3 107.4
------------- ------------
Total $385.0 $627.1
============= ============
</TABLE>
See Accompanying Notes to Condensed Financial Statements.
2
<PAGE> 5
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Condensed)
(Dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash Flow from Operations
Net earnings $ 523.5 $ 35.9
Restructuring charge ($23.0 less payments of $16.0) 7.0
Gain on sale of Branded Business (516.5)
Non-cash items included in income 16.6 22.8
Changes in assets and liabilities used in operations 13.2 (6.4)
Other, net (4.6) 6.4
----------- -----------
Net cash flow from operations 39.2 58.7
----------- -----------
Cash Flow from Investing Activities
Property additions, net (15.5) (28.5)
Other, net (.6) (1.7)
----------- -----------
Net cash used by investing activities (16.1) (30.2)
----------- -----------
Cash Flow from Financing Activities
Net cash flow used by debt (3.1) (21.5)
Treasury stock purchases - (7.0)
----------- -----------
Net cash used by financing activities (3.1) (28.5)
----------- -----------
Net Increase in Cash and Cash Equivalents 20.0 0.0
Cash and Cash Equivalents, Beginning of Year
----------- -----------
Cash and Cash Equivalents, End of Period $ 20.0 $ .0
=========== ===========
</TABLE>
See Accompanying Notes to Condensed Financial Statements.
3
<PAGE> 6
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Dollars in millions except per share data)
NOTE 1 - SALE TRANSACTIONS
On January 3, 1997, the United States Department of Justice approved
the sale of Ralcorp's ski resort holdings to Vail Resorts, Inc.
Effective on this date, the sale transaction, pending since first
announced in July 1996, was closed. The value of this transaction
was approximately $310 million, comprised of Vail assuming $165 million
in Ralcorp debt and the balance being realized through the Company's
approximate 22.7% ownership interest in the newly combined ski company,
after giving effect to Vail's public stock offering. Vail stock began
trading on the New York Stock Exchange on February 4, 1997.
On January 31, 1997, the original Ralcorp Holdings, Inc. (Old Ralcorp)
was merged with a subsidiary of General Mills, Inc. (the Merger).
Immediately prior to the Merger, Old Ralcorp spun-off its private label
cereal, branded baby food and private label cracker and cookie
businesses (the Spin-Off) by distributing one share of New Ralcorp
Holdings, Inc. Common Stock for each share of Old Ralcorp Common Stock
owned as of the close of business on January 31, 1997. Immediately
prior to the Spin-Off, New Ralcorp Holdings, Inc. (Ralcorp) changed its
name to Ralcorp Holdings, Inc. and in the Merger, Old Ralcorp changed
its name to General Mills Missouri, Inc. This completed the $570
transaction with General Mills that was first announced in August 1996.
The $570 value was reached by General Mills assuming $215 in Ralcorp
debt and funding the remaining $355 through the distribution of General
Mills stock to Ralcorp shareholders of record on January 31, 1997.
For financial reporting purposes, Ralcorp is a "successor registrant"
to Old Ralcorp and, as such, the accompanying Ralcorp financial
statements represent the historical financial position and results
of operations of Old Ralcorp, for periods prior to January 31, 1997,
and Ralcorp, for subsequent periods. Therefore, references to the
"Company", for periods prior to January 31, 1997, are references to Old
Ralcorp, without giving effect to the Merger or the Spin-Off.
NOTE 2 - PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited historical financial statements of the
Company have been prepared in accordance with the instructions for Form
10-Q and do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments considered necessary
for a fair presentation, have been included. Operating results for any
quarter are not necessarily indicative of the results for any other
quarter or for the full year. These statements should be read in
connection with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended September 30,
1996.
NOTE 3 - GAIN ON SALE OF THE BRANDED BUSINESS
During the quarter ended March 31, 1997, the Company recorded a $516.5
tax-free gain related to the sale of its branded cereal and snack
business (Branded Business) to General Mills, Inc. on January 31, 1997.
This is, however, only a preliminary amount as certain provisions
contained in the sale contract with General Mills have yet to be
finalized. It is expected that all outstanding issues will be
addressed by the end of the Company's current fiscal year, at which
time the final gain on sale amount can be recorded.
4
<PAGE> 7
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Dollars in millions except per share data)
NOTE 4 - SALE OF RESORT OPERATIONS
In accordance with Accounting Principles Board Opinion No. 29 -
"Accounting for Nonmonetary Transactions" (APB 29), the Resort
Operations sale transaction with Vail Resorts, Inc. has been
treated as a nonmonetary exchange. The assumption of debt and the
issuance of equity qualifies this transaction as being nonmonetary in
nature. Therefore, by meeting the provisions of APB 29, the initial
equity investment in Vail has been recorded at Ralcorp's net book
value of assets contributed, or $39.3. This initial equity investment
is then increased by the pre-tax amount of the Company's equity
interest in the earnings of Vail, which through March 31, 1997 was
$10.5. Included as a component of the Company's equity earnings is
$.9 of amortization income. This amortization income is the result of
the basis difference between the net book value of the net assets
contributed to Vail and the Company's 22.7% equity interest in the
Vail net assets. The basis difference, which can not be finalized
until all appropriate purchase price allocations have taken place, is
being amortized over twenty years.
NOTE 5 - RESTRUCTURING CHARGES
During the quarter ended March 31, 1997, the Company recorded a
pre-tax restructuring charge of $18.4 ($11.6 after taxes or $.35 per
common share) to cover costs associated with the sale of the Company's
Branded Business, including severance payments to employees whose jobs
were eliminated and financial penalties related to the early
termination of information systems contracts. The level of systems
support included in these contracts was no longer warranted after the
Branded Business sale.
In the quarter ended December 31, 1996, the Company recorded a pre-tax
restructuring charge of $4.6 ($2.9 after taxes or $.09 per common
share). This charge covered severance costs for certain employees
whose jobs were eliminated in recent downsizing initiatives.
In addition, during the fourth quarter of fiscal 1996 the Company
recorded a pre-tax charge of $16.5 ($10.4 after taxes or $.31 per
common share) to recognize the costs related to the restructuring of
its ready-to-eat cereal subsidiary, Ralston Foods, as well as its
corporate support groups.
The restructuring charges and their utilization are summarized
in the following table.
<TABLE>
<CAPTION>
Six months Utilized in
FY 1996 Utilized in FY 1997 Six months Balance of
Charges FY 1996 Charges FY 1997 Reserve
-------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Salaries, severance and
benefits $ 8.0 $ (5.0) $10.6 $(10.1) $ 3.5
Asset writedowns 7.3 (7.3) 3.2 (1.8) 1.4
Contract penalties 6.2 (6.2) -
Other 1.2 (.5) 3.0 (.1) 3.6
----------------------------------------------------------
Total restructuring charge $16.5 $(12.8) $23.0 $(18.2) $ 8.5
==========================================================
</TABLE>
5
<PAGE> 8
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Dollars in millions except per share data)
NOTE 6 - EARNINGS PER SHARE
Earnings per common share for the quarter and six month periods ended
March 31, 1997 and 1996 are computed by using the weighted average
number of shares of Ralcorp Common Stock outstanding for the
periods then ended. Earnings per common share is computed independently
for all of the periods presented, therefore, the sum of earnings per
common share amounts for the quarters may not total the year-to-date.
The weighted average numbers of common shares used for all periods are
as follows:
Quarter ended March 31, 1997....................32,990,000
Quarter ended March 31, 1996....................33,015,000
Six months Ended March 31, 1997.................32,937,000
Six months Ended March 31, 1996.................33,066,000
Actual outstanding shares of Ralcorp Common Stock at March 31, 1997
were 33,011,000.
NOTE 7 - RECEIVABLES consists of the following:
Mar. 31, Sept. 30,
1997 1996
----------- -----------
Trade receivables $ 32.2 $ 63.3
Other 18.7 13.2
Allowance for doubtful accounts (1.1) (1.0)
---------- ----------
$ 49.8 $ 75.5
========== ==========
NOTE 8 - INVESTMENTS AND OTHER ASSETS consists of the following:
Mar. 31, Sept. 30,
1997 1996
------------ -----------
Intangible assets $ 7.4 $ 43.2
Property held for development - 12.4
Investments in affiliated companies 49.8 29.1
Deferred charges and other assets 1.7 3.4
------------ -----------
$ 58.9 $ 88.1
============ ===========
NOTE 9 - OTHER CURRENT LIABILITIES consists of the following:
Mar. 31, Sept. 30,
1997 1996
----------- ------------
Accrued advertising and promotion $ 14.3 $ 9.6
Restructuring and shutdown reserves 11.4 7.6
Other items 16.4 28.7
----------- ------------
$ 42.1 $ 45.9
=========== ============
6
<PAGE> 9
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Dollars in millions except per share data)
NOTE 10 - CHANGE IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Capital in Treasury, Unearned
Common Stock in at Cost Retained Portion of
------------------ ------------------ Restricted
Shares Amount Excess Shares Amount Earnings Stock
------- --------- ------- ------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPT. 30, 1996 33,925 $.3 $130.9 (1,008) $(22.7) $ (.2) $(.9)
Net earnings 523.5
Activity under stock plans (52) (1.1) 146 2.6
Amortization of restricted
stock .1
Acceleration of restricted
stock .8
Distribution of GMI Stock (355.0)
Retire treasury stock (862) (20.1) 862 20.1
-----------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 33,011 .3 $109.7 - $ - $ 168.3 $ -
===================================================================================
</TABLE>
NOTE 11 - LONG-TERM DEBT
As of March 31, 1997, the Company had no long-term debt outstanding.
As discussed in "Note 1 - Sale Transactions" of this Form 10-Q, terms
of the individual sale agreements provided that Vail Resorts, Inc.
assume $165 of Company debt as partial consideration for the Company's
ski resort operations and General Mills, Inc. assume the remaining
$215 of Company debt as partial consideration for the Company's
branded cereal and snack business.
At September 30, 1996, long-term debt associated with the Company's
businesses consisted of the following:
Sept. 30,
1996
----------
8.75% Notes due 2004 $ 150.0
Bank Credit Agreements 200.1
10.85% and 11.15% Notes due 9/30/97
and 9/30/98 3.0
Refunding Revenue Bonds Series 90
7.20%-7.875% due 9/2/98, 9/1/06 and 9/1/08 20.4
Refunding Revenue Bonds Series 91
7.125%-7.375% due 9/1/02 and 9/1/10 3.0
Other 1.9
---------
378.4
Less Current Portion (1.8)
---------
$ 376.6
=========
Included in the Bank Credit Agreements line item, at September 30, 1996,
is $140.0 of bank debt that had been borrowed directly by the Company's
Resort Operations and fully guaranteed by the Company.
7
<PAGE> 10
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Dollars in millions except per share data)
To meet its on-going working capital needs Ralcorp has obtained a $50
working capital credit facility. The proceeds of the facility may be
used to fund Ralcorp's working capital needs, capital expenditures, and
other general corporate purposes. Provisions of the $50 credit
facility require the Company to maintain certain financial ratios and a
minimum level of shareholders' equity.
NOTE 12 - SUBSEQUENT EVENT
On April 21, 1997, the Company completed the purchase of a private
label cracker and cookie operation, the Wortz Company. Wortz, which
will be operated as part of the Company's Bremner operation, is
headquartered in Poteau, OK, and had sales in its latest fiscal
year of approximately $65. The acquisition was financed by a
combination of available cash, and debt under the Company's credit
facility.
8
<PAGE> 11
RALCORP HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Ralcorp was organized for the purpose of effecting the Spin-Off and the Merger
and has operated as an independent company only since January 31, 1997. The
Ralcorp historical financial statements presented in the "Ralcorp Historical"
column of the unaudited pro forma combined statement of earnings for the six
months ended March 31, 1997, reflects four months, October 1, 1996 through
January 31, 1997, during which the various spun-off businesses operated as
divisions or subsidiaries of Old Ralcorp. Likewise, the "Ralcorp Historical"
column of the unaudited pro forma combined statement of earnings for the year
ended September 30, 1996 reflects an entire year during which the various
spun-off businesses were divisions or subsidiaries of Old Ralcorp. These
historical financial statements include the results of operations of the
branded cereal and snack businesses (the Branded Business), which Ralcorp sold
to General Mills on January 31, 1997 and the Resort Operations, which Ralcorp
sold to Vail Resorts, Inc. on January 3, 1997. Therefore, the historical
financial statements do not reflect the combined results of operations that
would have existed had Ralcorp been an independent company. Since Ralcorp did
not operate independently during the entire periods shown, the unaudited pro
forma information may not necessarily reflect future results of operations or
what the results of operations would have been had the formation of Ralcorp and
its related businesses occurred at the beginning of the periods shown.
The pro forma combined statement of earnings for the six months ended March 31,
1997 presents the combined results of Ralcorp's operations assuming that the
sale of the Branded Business and the sale of the Resort Operations had occurred
as of October 1, 1996. The pro forma combined statement of earnings for the
year ended September 30, 1996 presents the combined results of Ralcorp's
operations assuming that both sale transactions had occurred as of October 1,
1995. Both statements of earnings have been prepared by adjusting the
historical statements of earnings for the effect of costs and expenses and the
recapitalization which might have occurred had the Spin-Off and the sale of the
Resort Operations occurred at the beginning of each respective period.
The "Branded Business" and "Resort Operations" columns in the pro forma
combined statements of earnings represent the combined historical results of
operations of the Branded Business and the consolidated historical results of
operations of the Resort Operations, respectively.
Please read the Notes to the Unaudited Pro Forma Combined Financial Information
for a discussion of adjustments made to the historical financial information in
order to calculate the Ralcorp pro forma financial information.
9
<PAGE> 12
RALCORP HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(in millions except per share data)
Six Months Ended March 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Ralcorp Branded Resort ------------------------ Pro Forma
Historical Business Operations Debit Credit Ralcorp
---------- -------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 454.3 $(172.5) $(33.1) $248.7
--------- ------- --------- ------- ------ --------
Costs and Expenses
Cost of products sold 235.5 (43.4) (27.5) 1.4 (a) 166.0
Selling, general and
administrative 77.2 (20.9) (3.5) 6.1 (a) 3.3 (g) 55.6
Advertising and promotion 109.3 (78.1) (1.8) 29.4
Gain on Branded Sale (516.5) 516.5 (f) -
Equity earnings in
Vail Resorts (10.5) 2.3 (b) (12.8)
Interest expense, net 7.9 (1.4) (2.8) 4.0 (c) (.3)
Restructuring charge 23.0 - 18.4 (h) 4.6
--------- ------- --------- ------- ------ --------
(74.1) (143.8) (35.6) 524.0 28.0 242.5
--------- ------- --------- ------- ------ --------
Earnings before
Income Taxes 528.4 (28.7) 2.5 (524.0) (28.0) 6.2
Income Taxes 4.9 (11.2) 1.0 (7.7) (d) 2.4
--------- ------- --------- ------- ------ --------
Net Earnings $ 523.5 $ (17.5) $ 1.5 $(524.0) $(20.3) $ 3.8
========= ======= ========= ======= ====== ========
Earnings per common share (e) $ 15.91 $ .12
========= ========
Outstanding shares of common
stock (e) 32.9 32.9
========= ========
</TABLE>
10
<PAGE> 13
RALCORP HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(in millions except per share data)
Year Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Ralcorp Branded Resort ----------------------- Pro Forma
Historical Business Operations Debit Credit Ralcorp
---------- -------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $1,027.4 $(386.7) $(135.4) $ 505.3
--------- ------- --------- --------
Costs and Expenses
Cost of products sold 536.8 (114.1) (91.7) 5.7 (a) 336.7
Selling, general and
administrative 177.6 (52.5) (14.6) 15.3 (a) 125.8
Advertising and promotion 233.3 (162.5) (6.1) 64.7
Equity earnings in
Vail Resorts 4.5 (b) (4.5)
Interest expense 26.8 (4.2) (10.5) 11.1 (c) 1.0
Nonrecurring charge 109.5 109.5
Restructuring charge 16.5 (2.5) 14.0
--------- ------- --------- ------ ------ --------
1,100.5 (335.8) (122.9) 21.0 15.6 647.2
--------- ------- --------- ------ ------ --------
Earnings before
Income Taxes (73.1) (50.9) (12.5) (21.0) (15.6) (141.9)
Income Taxes (26.3) (19.3) (5.3) 2.1 (d) (53.0)
--------- ------- --------- ------ ------ --------
Net Earnings $ (46.8) $ (31.6) $ (7.2) $(21.0) $(17.7) $ (88.9)
========= ======= ========= ====== ====== ========
Earnings per common share (e) $ (1.42) $ (2.69)
========= ========
Outstanding shares of common
stock (e) 33.0 33.0
========= ========
</TABLE>
11
<PAGE> 14
RALCORP HOLDINGS, INC.
Notes to Unaudited Pro Forma Combined Financial Information
(a) To reflect the fixed costs (i.e., fixed manufacturing, information
systems, general administrative and corporate overhead) included in the
combined historical results of operations of the Branded Business that
will be absorbed by Ralcorp with the sale of the Branded Business.
(b) To reflect Ralcorp's equity earnings in Vail Resorts. The equity
earnings include $.9 million, for the six months ended March 31, 1997, and
$1.9 million, for the fiscal year ended September 30, 1996, of
amortization income. The amortization income is the result of the basis
difference between the net book value of the Resort Operations' net assets
contributed to Vail Resorts and Ralcorp's approximate 22.7% equity
interest in Vail Resorts' net assets. This basis difference is being
amortized ratably over 20 years.
(c) To reduce interest expense due to General Mills assuming $215.0 million
of Ralcorp debt upon the sale of the Branded Business. Interest income
shown of $.3 million, for the six months ended March 31, 1997, reflects
residual interest earned on short term investments. Residual interest
expense shown of $1.0 million, for the fiscal year ended September 30,
1996, is related to estimated revolving credit facility debt needed to
finance working capital.
(d) To reflect the tax effect of the pro forma adjustments shown at an
effective rate of 38%.
(e) The weighted average number of shares used to compute Ralcorp earnings
per share is based on the weighted average number of Ralcorp common shares
outstanding during the six months ended March 31, 1996 and during the
fiscal year ended September 30, 1996.
(f) To eliminate the tax-free gain on sale of the Branded Business reflected
in the historical statement of earnings.
(g) To eliminate certain expenses incurred directly as a result of the two
sale transactions.
(h) To eliminate the amount of the second quarter of fiscal 1997
restructuring charge that was specifically related to the sale of the
Branded Business.
12
<PAGE> 15
Item 2.
RALCORP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For financial reporting purposes, Ralcorp is a "successor registrant" to the
Ralcorp Holdings, Inc. that was acquired by General Mills, Inc. on January 31,
1997 (Old Ralcorp) and, as such, all financial information of Ralcorp included
in this discussion and the accompanying financial statements represent the
historical financial information of Old Ralcorp, for periods prior to January
31, 1997, and Ralcorp, for subsequent periods. Therefore, references to the
"Company", as they relate to financial information for periods prior to January
31, 1997, are references to Old Ralcorp.
HIGHLIGHTS
For the quarter ended March 31, 1997, sales and net earnings, were $161.4
million and $5.5 million (excluding a $18.4 million pre-tax restructuring
charge and a one-time, tax-free gain of $516.5 million) compared to $277.4
million and $20.6 million for the comparable prior year period (excluding a
one-time gain of $.9 million, pre-tax). Earnings per share (excluding the
respective one-time items in both periods) were $.17 for the three months ended
March 31, 1997 compared to $.62 in the prior year quarter. The second quarter
of fiscal 1997 includes only one month of the Company's branded cereal and
snack operations, compared to three months in the prior fiscal year second
quarter. The Company sold its branded cereal and snack business (Branded
Business) to General Mills, Inc. on January 31, 1997, for $570 million,
comprised of $355 million in General Mills stock for distribution to Ralcorp
shareholders and the assumption of $215 million in Ralcorp debt.
During the quarter ended March 31, 1997 the Company recorded a pre-tax
restructuring charge of $18.4 million ($11.6 million after-tax or $.35 per
share) to cover costs associated with the sale of the Company's Branded
Business on January 31, 1997, including severance payments to employees whose
jobs were eliminated and certain penalties related to the early termination of
information systems contracts. Also, in the quarter ended March 31, 1997, the
Company recorded a $516.5 million ($15.65 per share) tax-free gain related to
the sale of its Branded Business to General Mills, Inc. The pre-tax gain of
$.9 million ($.6 million after-tax or $.02 per share) recorded in the quarter
ended March 31, 1996 related to the sale of the Company's promotional
fulfillment and coupon management subsidiary. Including these items, net
earnings and earnings per share were $510.4 million and $15.47, respectively,
for the second quarter of the current fiscal year and $21.2 million and $.64
for the same prior year period.
For the first six months of fiscal 1997, the Company recorded sales of $454.3
million and net earnings and earnings per share of $21.5 million and $.65,
respectively, again excluding the second quarter fiscal 1997 restructuring
charge and tax-free gain on sale of the Branded Business, as well as a separate
severance related restructuring charge recorded in the current fiscal year's
first quarter. The total of the pre-tax restructuring charges recorded in the
six-month period ended March 31, 1997 was $23.0 million ($14.5 million or $.44
per share after taxes). The tax-free gain on sale of the Branded Business was
$516.5 million or $15.70 per share for the initial six months of fiscal 1997.
For the six-month period ended March 31, 1996, the Company had sales, net
earnings and earnings per share of $572.7 million, $35.9 million and $1.09,
respectively. For comparison purposes, however, it must be noted that the six
month period of the current fiscal year includes only four months of results
from the Branded Business and three months and three days of Ralston Resort
operations, while the same period of the prior fiscal year includes six months
of these operations.
The Unaudited Pro Forma Combined Financial Information included elsewhere in
this document, reflects the pro forma results of operations of the Ralcorp
businesses assuming the sales of the Company's Branded Business and Resort
Operations were completed as of the beginning of the periods presented, for
combined statements of earnings purposes. The Condensed Consolidated Balance
Sheet at March 31, 1997 fully reflects both sale transactions, therefore, no
pro forma balance sheet is presented. The sale of Resort Operations to Vail
Resorts, Inc. was completed on January 3, 1997 and the sale of the Branded
Business to General Mills, Inc. was completed on January 31, 1997.
On a pro forma basis, excluding the restructuring charge taken in the first
quarter of fiscal 1997, sales, net earnings and earnings per share for the six
months ended March 31, 1997 were $248.7 million, $6.7 million and $.20,
respectively, compared to sales of $257.5 million, net earnings of $1.9 million
and earnings per share of $.06 for the
13
<PAGE> 16
same period of the prior year. The six month period ended March 31, 1996 did
not include any nonrecurring items. On a pro forma basis, including the first
quarter fiscal 1997 restructuring charge, operations for the six months ended
March 31, 1997 resulted in net earnings of $3.8 million, or $.12 per share.
Since Ralcorp, exclusive of the Branded Business and Resort Operations,
operated for only the months of February and March 1997, the unaudited pro
forma information may not necessarily reflect future results of operations or
what the results of operations would have been had the formation of Ralcorp and
its related businesses occurred at the beginning of the periods shown.
DISCUSSION OF BUSINESSES
With the sale of its Resort Operations on January 3, 1997 to Vail Resorts,
Inc., the Company operates solely in the Consumer Foods segment, while
maintaining an equity interest in Vail Resorts, Inc.
CONSUMER FOODS
Comparisons of operating results in the Consumer Foods segment on a historical
basis are complicated by the fact that the operations of the Company's Branded
Business are included only through January 31, 1997, the date of the Branded
Business sale to General Mills.
Consumer Foods sales of $157.5 million for the second quarter of fiscal 1997
represents a decrease of 21.6% or $43.4 million when comparing to the second
quarter of fiscal 1996. Sales in the Consumer Foods segment for the six months
ended March 31, 1997 fell $47.6 million, or 10.2%, to $421.2 million compared
to the six months ended March 31, 1996. These period to period declines were
primarily due to the inclusion of Branded Business operations through January
1997 only. For the current year's quarter and six months, private label cereal
volume declined approximately 4.5% reflecting the negative impact of branded
cereal price reductions that began in April 1996. Beech-Nut baby food sales
were down on a quarter-to-quarter basis and for the comparative six-month
periods primarily on difficult comparisons to the a record volume performance
in the second quarter of fiscal 1996. Bremner cracker and cookie sales
continued to post favorable increases in both the quarter and six-month periods
of the current fiscal year compared to the same periods of the prior year on
favorable volume growth and the addition of new product sales.
Consumer Foods operating profit, excluding the current quarter's $18.4 million
pre-tax restructuring charge and the $.9 pre-tax in gain in the prior year's
second quarter, was flat for the quarter ended March 31, 1997 compared to the
same quarter of fiscal 1996. The Branded Business, despite operating as part
of the Company for the month of January 1997 only, was able to generate
improved operating results over those achieved for a full quarter in the prior
year. This favorable performance was offset by a decline in the operating
profit of the Beech-Nut baby food business, which experienced lower volume,
partially offset by improved pricing. Bremner second quarter fiscal 1997
operating profit was flat to prior year on the negative impact of certain
one-time items, namely, reserves taken in the current year quarter to cover
costs related to a minor fire at its Kentucky manufacturing plant, and costs of
certain packaging changes.
For the six months, Consumer Foods operating profit, excluding the $23.0
million pre-tax restructuring charges, increased $2.9 million, due primarily to
the improved performance of the branded cereal and snack business. Beech-Nut
baby food operating profit for the first six months of fiscal 1997 was down
compared to the prior year, as the benefit of improved pricing was not able to
offset the decline from historically high volume levels. Operating profit of
the Bremner cracker and cookie operation increased slightly between six-month
periods as improved volumes and a favorable product mix were partially offset
by higher costs.
EQUITY EARNINGS IN VAIL RESORTS, INC.
On January 3, 1997, Ralcorp sold its three Colorado ski resort properties of
Keystone, Breckenridge and Arapahoe Basin to Vail Resorts, Inc. in exchange for
the assumption of $165 million in Ralcorp debt and a 22.7%, post-IPO, equity
interest in the combined Vail Resorts. As a result of this 22.7% ownership
interest in Vail, Ralcorp recorded, in the second quarter of fiscal 1997, $10.5
million, pre-tax, in equity earnings, or $.20 per share, after taxes.
14
<PAGE> 17
RESULTS OF OPERATIONS
Cost of products sold as a percentage of sales was 58.4% for the current year
second quarter compared to 50.3% for the same quarter of the prior year, and
for the six months ended March 31, 1997, increased to 51.8% of sales from 49.2%
in the same prior year period. Selling, general and administrative expense as
a percent of sales increased significantly for both the current year quarter
and six month periods compared to the same periods of the prior year. Such
increases in expense categories can be attributed to the elimination of
significant portions of the Company's operating revenues through the Branded
Business sale and sale of Resort Operations, while much of the cost structure
that was historically in place to support the larger corporation had not yet
been reduced. In addition, the products associated with the Branded Business
were the products with higher margins, their elimination also had a negative
effect on costs as a percentage of sales. Advertising and promotion expense as
a percentage of sales, however, has declined on a quarter-to-quarter
comparison, reflecting the reduced level of advertising and promotional support
necessary for a primarily private label company. Income taxes were 38.7% of
earnings before income taxes, restructuring charges and equity earnings in the
first six months of the current year, unchanged from the year-ago period.
FINANCIAL CONDITION
The Company's primary source of liquidity is cash flow from operations, which
decreased to $39.2 million for the six months ended March 31, 1997 compared to
$58.7 million for the same period in the prior year, primarily due to the
reduced level of net earnings, excluding the tax-free gain on sale, resulting
from the two sale transactions completed in this year's second quarter.
Partially offsetting the earnings decrease, was the favorable cash flow impact
of reduced operating assets, primarily inventories and accounts receivable.
Net working capital, excluding cash and current maturities of long-term debt,
was $63.9 million at March 31, 1997 compared to $92.4 million at September 30,
1996.
Property additions decreased to $15.5 million for the first six months of
fiscal 1997 compared to $28.5 million in the prior year six month period.
During the six month period ended March 31, 1996 the Company repurchased $7.0
million of its Common Stock. The Company transacted no stock repurchases
during the same period of fiscal 1997. As a result of the Branded Business and
Resort Operations sales in January 1997, Ralcorp emerged debt free at March 31,
1997 compared to total debt of $378.4 million at September 30, 1996.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 - "Earnings per Share" (FAS 128). This
Statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. FAS 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15 - "Earnings per Share". FAS 128
replaces the presentation of primary earnings per share with basic earnings per
share. As applicable, FAS 128 retains the presentation of fully diluted
earnings per share for those entities with complex capital structures. The
provisions of FAS 128 are effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted and restatement of all prior period earnings per share is
required. Upon initial review of FAS 128, Company management believes that the
provisions of this Statement will not have a significant effect on the
Company's historical calculations of earnings per share.
OUTLOOK
Management expects that Ralcorp will continue to be negatively affected by the
competitive environment that exists in the ready-to-eat cereal category. To be
successful, Ralcorp must maintain an effective price gap between its private
label products and those products of top branded cereal competitors. Ralcorp
has only recently been able to reestablish that gap. Ralcorp management is in
the process of removing excess costs from its cereal operations in order to
attain a cost basis that will allow maintenance of an adequate price gap and
still provide a quality alternative to branded cereals.
To reflect expenses associated with removing excess costs, Ralcorp recorded a
restructuring charge in the second quarter of fiscal 1997. The amount of the
restructuring charge was $18.4 million, pre-tax, and covers costs associated
with the sale of the Branded Business, including, both process efficiency
initiatives and headcount
15
<PAGE> 18
reductions throughout all cereal operations and corporate support groups, as
well as certain financial penalties incurred through early contract
termination/modification. Restructuring initiatives are progressing according
to management's intentions. Barring any unforeseen upheaval in the cereal
category, Ralcorp management expects its private label cereal business to
return to consistent profitability sometime in fiscal 1998.
In baby foods, despite a disappointing second quarter of fiscal 1997, in which
comparisons were difficult, results were still in line with historical
quarterly performances. The significant competitive pressures under which
Beech-Nut operates as well as the continued decline in the United States birth
rate, are important concerns for the management of Beech-Nut. However,
Beech-Nut will continue to focus on the production of quality products,
maintaining its presence in key regional markets and continued emphasis on
controlling and cutting costs. With regard to the Bremner cracker and cookie
business, management anticipates continuing to improve earnings through new
product introductions, adding new customers and improving sales mix towards
higher margin products. The benefit of new products is beginning to be
realized with the introduction of private label shredded wheat cereals and
woven wheat crackers. Despite recent positive performance, Bremner still faces
significant competition from large branded and regional private label cracker
and cookie manufacturers. Bremner was able to enhance its competitive position
with the acquisition of the Wortz Company on April 21, 1997. Wortz, a private
label cracker and cookie operation headquartered in Poteau, OK, had sales in
its latest fiscal year of approximately $65 million. The acquisition was
financed through a combination of available cash, and debt under the Company's
credit facility.
RALCORP LIQUIDITY
To meet its on-going working capital needs Ralcorp has obtained a $50 million
working capital credit facility. The proceeds of the facility may be used to
fund Ralcorp's working capital needs, capital expenditures, and other general
corporate purposes. Provisions of the $50 million credit facility require
Ralcorp to maintain certain financial ratios and a minimum level of
shareholders' equity.
Management believes that Ralcorp will be able to generate positive operating
cash flows through its mix of businesses and expects that future liquidity
requirements will be met through a combination of existing cash balances,
operating cash flow and, as necessary, use of borrowings available under its
working capital credit facility.
16
<PAGE> 19
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of the Securities
Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis. The Company's results of operations and liquidity status may differ
materially from those in the forward-looking statements. Such statements are
based on management's current views and assumptions, and involve risks and
uncertainties that could affect expected results. For example any of the
following factors cumulatively or individually may impact expected results:
(i) If the Company is unable to maintain a meaningful price gap between
its private label cereal products and the branded products of its competitors,
then the Company's cereal business could continue incurring significant
operating losses;
(ii) If the Company's cereal business incurs losses more than offsetting
the combined profits of its other businesses and equity earnings from the Vail
investment, then the Company will be unable to borrow under its credit facility
and the repayment of outstanding borrowings, if any, at that time could be
accelerated by the lenders;
(iii) In light of its significant ownership in Vail Resorts, Inc., the
Company's non-cash earnings can be adversely affected by Vail's unfavorable
performance; and
(iv) The Company's businesses compete in mature segments with competitors
having large percentages of segment sales. The Company's profit growth depends
largely on the ability to successfully introduce new products and aggressively
manage costs across all parts of the Company.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
<PAGE> 20
PART II OTHER INFORMATION
There is no information to be reported under any items except indicated below.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Stock Purchase Agreement Among Bremner, Inc. and all of the
shareholders of the Wortz Company dated March 14, 1997.
27 Financial Data Schedule.
(B) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RALCORP HOLDINGS, INC.
By: /s/ T. G. Granneman
------------------------------
Duly Authorized Signatory, and
Chief Accounting Officer
May 14, 1997
18
<PAGE> 21
RALCORP HOLDINGS, INC.
EXHIBIT INDEX
No.
10.1 Stock Purchase Agreement Among Bremner, Inc. and all of the
shareholders of the Wortz Company dated March 14, 1997.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
AMONG
BREMNER, INC.
("Buyer")
AND
WARREN BLACK,
VICTOR L. CARY,
JANE WARNER MOORE,
THOMAS C. MUELLER,
SUSAN WARNER SKELSEY,
C. RANDOLPH WARNER, JR.,
C. RANDOLPH WARNER, III.,
KATE WARNER
and
MATTHEW WARNER
(collectively the "Sellers")
MARCH 14, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Purchase and Sale of Target Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(a) Basic Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(b) Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(c) The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(d) Deliveries at the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(e) Net Asset Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3. Representations and Warranties Concerning the
Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(a) Representations and Warranties of the Sellers . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Representations and Warranties of the Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Representations and Warranties Concerning the
Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(a) Organization, Qualification, and Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . 13
(b) Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(c) Noncontravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(d) Brokers' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(e) Title to Tangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(f) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(g) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(h) Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(i) Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(j) Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(k) Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(l) Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(m) Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(n) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(o) Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(p) Environment, Health, and Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(q) Certain Business Relationships with the Target . . . . . . . . . . . . . . . . . . . . . . . . 22
(r) Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(s) Sufficiency of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(t) Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(u) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(v) No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(w) No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(x) Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(y) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(z) Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(aa)Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(bb)Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(cc)Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(dd)Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(ee)Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5. Pre-Closing Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(b) Notices and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(c) Operation of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(d) Negative Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(e) Full Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(f) Notice of Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(g) Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6. Post-Closing Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(b) Litigation Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(c) Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
(d) Election Under Section 338(h)(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
(e) Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
(f) Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
(g) Rock-Tenn. Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7. Conditions to Obligation to Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
(a) Conditions to Obligation of the Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
(b) Conditions to Obligation of the Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8. Remedies for Breaches of This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
(a) Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
(b) Indemnification Provisions for Benefit ofthe Buyer . . . . . . . . . . . . . . . . . . . . . . . 37
(c) Indemnification Provisions for Benefit of the Sellers . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
(d) Matters Involving Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
(e) Determination of Adverse Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(f) Other Indemnification Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(g) Failure to Give Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(h) Matters Disclosed in Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(a) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(b) Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(a) Nature of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(b) No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(c) Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(d) Succession and Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
(e) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
(f) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
(g) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
(h) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
(i) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
(j) Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
(k) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
(l) Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
(m) Incorporation of Exhibits, Annexes, and Schedules . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
Exhibit A - Target Accounting Principles
Exhibit A-1 - Historical Financial Statements
Exhibit A-2 - Procedures for Calculating and Paying Net Worth Adjustment
Exhibit B-1 - Pro Forma Additional Tax Calculation
Exhibit B-2 - Allocation of Purchase Price
Exhibit B-3 - Pro Forma Tax Calculation
Exhibit B-4 - Sellers' Tax Rates
<PAGE> 5
Annex I - Form of Escrow Agreement
Annex II - Exceptions to the Sellers' Representations and Warranties
Concerning the Transaction
Annex III - Exceptions to the Buyer's Representations and Warranties
Concerning the Transaction
Disclosure
Schedule - Exceptions to Representations and Warranties Concerning the Target
<PAGE> 6
STOCK PURCHASE AGREEMENT
Agreement entered into on March 14, 1997, by and among BREMNER,
INC., a Nevada corporation (the "Buyer"), and WARREN BLACK, an individual
and resident of the State of Florida ("Black"), VICTOR L. CARY, an
individual and resident of the State of Texas ("Cary"), JANE WARNER MOORE,
an individual and resident of the State of Illinois ("Moore"), TOM MUELLER, an
individual and resident of the State of Arkansas ("Mueller"), SUSAN WARNER
SKELSEY, an individual and resident of the State of New York ("Skelsey"), C.
RANDOLPH WARNER, JR., an individual and resident of the State of Florida
("Warner, Jr."), C. RANDOLPH WARNER, III., an individual and resident of
the State of Florida ("Warner, III."), KATE WARNER, an individual and resident
of the State of Texas ("K. Warner") and MATTHEW WARNER, an individual and
resident of the State of Arkansas (" M. Warner"), (Black, Cary, Moore,
Mueller, Skelsey, Warner, Jr., Warner, III., K. Warner and M. Warner are
referred to collectively herein as "Sellers" and each individually as a
"Seller"). The Buyer and the Sellers are referred to collectively herein as
the "Parties."
The Sellers in the aggregate own all of the outstanding capital stock
of Wortz Company, an Arkansas corporation (the "Target").
This Agreement contemplates a transaction in which the Buyer will
purchase from the Sellers, and the Sellers will sell to the Buyer, all of the
outstanding capital stock of the Target in return for cash.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations,
warranties, and covenants herein contained, the Parties agree as follows.
1. Definitions.
"Accounting Firm" has the meaning set forth in Exhibit A-2 hereof.
"Accredited Investor" has the meaning set forth in
<PAGE> 7
Regulation D promulgated under the Securities Act.
"Accrued Profit Sharing Obligations" means the amount of fiscal
1997 bonus payments due and payable to certain officer of Target pursuant
to the Wortz Company Executive Profit Sharing Program (Plans A & B) which have
been accrued on Target books as of the Closing Date and which will be paid to
certain officers of Target on the Closing Date pursuant to that certain
Continuation of Executive Profit Sharing Program - Change in Control
Agreement, dated as of October 9, 1996 between Target and certain officers
of Target, such payments to be made in accordance with the terms of the
Escrow Agreement.
"Additional Taxes" has the meaning set forth in Section 6(d) below.
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, diminution of
value, dues, penalties, fines, costs, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including costs of investigation, court costs and
reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning
of Code Sec. 1504 or any similar group defined under a similar provision
of state, local or foreign law.
"Allocable Portion" means with respect to the share of any Seller in
a particular amount that fraction equal to the number of Target Shares the
Seller holds as set forth in Section 4(b) of the Disclosure Schedule over the
total number of outstanding Target Shares.
"Applicable Rate" means the prime rate of interest published from time
to time by the Wall Street Journal,
2
<PAGE> 8
Dallas, Texas edition.
"Auditor" has the meaning set forth in Section 2(e) below.
"Average Adjusted Net Assets" has the meaning set forth in Section
2(e) below.
"Buyer" has the meaning set forth in the preface above.
"Cash" means cash and cash equivalents (including marketable
securities and short term investments) calculated in accordance with GAAP
applied on a basis consistent with the preparation of the Financial Statements.
"Closing" has the meaning set forth in Section 2(d) below.
"Closing Adjusted Net Assets" has the meaning set forth in Exhibit A-2
hereof.
"Closing Date" has the meaning set forth in Section 2(d) below.
"Closing Date Balance Sheet" has the meaning set forth in Exhibit A-2
hereof.
"Closing Date Indebtedness" has the meaning set forth in Section 2(b)
below.
"Closing Net Asset Adjustment" has the meaning set forth in Section
2(e) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" means that certain agreement, dated
January 8, 1997, as amended, among Target and Buyer.
"Disclosure Schedule" has the meaning set forth in Section 4 below.
3
<PAGE> 9
"Election" has the meaning set forth in Section 6(d) below.
"Employee Benefit Plan" means any employee benefit plan as such
term is defined in Section 3(B) of ERISA and any other deferred
compensation, stock option, restricted stock, bonus, vacation, severance, sick
leave, fringe benefits or other welfare or incentive plan.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Sec. 3(2).
"Environmental, Health, and Safety Requirements" means all federal,
state, local and foreign statutes, regulations, ordinances, orders and
principles of common law concerning public health and safety, worker health
and safety, and pollution or protection of the environment, including without
limitation all those relating to the presence, use, production, reduction,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, release, threatened
release, control, or cleanup of any hazardous materials, substances, wastes
or pollutants, as such requirements are enacted and in effect on or prior to
the Closing Date.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any person that, together with the Target,
would be treated as a single employer under Section 414 of the Code.
"Escrow Account" means the account established and maintained by the
Escrow Agent in accordance with the terms of the Escrow Agreement.
"Escrow Agent" shall mean The First National Bank of Ft. Smith,
Arkansas as escrow agent under the Escrow Agreement, or any other escrow
agent selected by Sellers, with the approval of Buyer, prior to the Closing.
"Escrow Agreement" means that certain form of Escrow Agreement to be
executed prior to Closing among the Escrow
4
<PAGE> 10
Agent, Target, Buyer and Sellers in substantially the form as attached hereto
as Annex I.
"Fraud" means a knowing and intentional misstatement or
misrepresentation of material fact by Sellers with respect to a representation
and warranty contained in Section 4 hereof or a covenant contained in Section 5
hereof.
"Financial Statements" has the meaning set forth in Section 4(g) below.
"GAAP" means United States generally accepted accounting principles
consistently applied in effect from time to time.
"Gross Purchase Price" has the meaning set forth in Section 2(b) below.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Income Tax" means any federal, state, local, or foreign income
tax, including any interest, penalty, or addition thereto, whether disputed
or not.
"Income Tax Return" means any return, declaration, report, claim
for refund, or information return or statement relating to Income Taxes,
including any schedule or attachment thereto.
"Indebtedness" means any (i) any liability, contingent or otherwise
(a) for borrowed money (including interest thereon), (b) evidenced by a note,
purchase money obligation, debenture or similar instrument or letter of
credit or (c) that is comprised of trade payables (except for trade payables
that are not more than 30 days past due); (ii) any liability described in (i)
above which the Target has (a) guaranteed or which is otherwise its legal
liability or (b) granted a lien on any of the Target's assets or
properties; and (iii) all capitalized lease obligations of the Target. For
purposes of clarification, the term Indebtedness shall not include the balance
of outstanding
5
<PAGE> 11
checks which have not yet been paid in the Ordinary Course of Business.
"Indemnification Escrow Amount" has the meaning set forth in the
Escrow Agreement.
"Indemnified Party" has the meaning set forth in Section 8(d) below.
"Indemnifying Party" has the meaning set forth in Section 8(d) below.
"Intellectual Property" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof,
(b) all trademarks, service marks, trade dress, packaging design, logos,
trade names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, and renewals in
connection therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations, and renewals in connection therewith, (d) all
mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, recipes,
compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier
lists, pricing and cost information, and business and marketing plans and
proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
"Knowledge" an individual will be deemed to have "Knowledge" of a
particular fact or other matter if (a) such individual is actually aware of
such fact or other matter or (b) a prudent individual could be expected to
discover or
6
<PAGE> 12
otherwise become aware of such fact or other matter in the course of
conducting a reasonable investigation concerning the existence of such fact
or other matter.
"Legal Requirements" shall have the meaning set forth in Section
3(a)(ii) below.
"Material Adverse Change" means with respect to the Target, any
event, occurrence, change or effect that is materially adverse to the
business, operations, results of operations, financial condition or prospects
of the Target.
"Material Contracts" has the meaning set forth in Section 4(l) below.
"Most Recent Financial Statements" has the meaning set forth in Section
4(g) below.
"Most Recent Fiscal Period End" has the meaning set forth in Section
4(g) below.
"Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37).
"Net Asset Escrow Amount" has the meaning set forth in the Escrow
Agreement.
"Net Asset Excess" has the meaning set forth in Section 2(e) below.
"Net Asset Shortfall" has the meaning set forth in Section 2(e) below.
"Net Purchase Price" has the meaning set forth in Section 2(b) below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" has the meaning set forth in the preface above.
7
<PAGE> 13
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Exceptions" has the meaning set forth in Section 4(j) below.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust,
a joint venture, an unincorporated organization, or a governmental entity (or
any department, agency, or political subdivision thereof).
"Prohibited Transaction" has the meaning set forth in ERISA Sec. 406
and Code Sec. 4975.
"Proprietary Rights Agreement" has the meaning set forth in Section
4(z) below.
"Purchase Price" has the meaning set forth in Section 2(b) below.
"Reportable Event" has the meaning set forth in ERISA Sec. 4043.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security or similar interest.
"Sellers" has the meaning set forth in the preface above.
"Sellers' Representative" shall mean C. Randolph Warner, Jr.
"Settlement Date" has the meaning set forth in Section 2(e) below.
"Subsidiary" means any corporation with respect to
8
<PAGE> 14
which a specified Person (or a Subsidiary thereof) owns a majority of the
common stock or has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors.
"Target" has the meaning set forth in the preface above.
"Target Auditor" has the meaning set forth in Exhibit A-2 hereof.
"Target Principles" means the Accounting Principles described on
Exhibit A hereto, utilized by the Target in the preparation of its Beginning
Balance Sheet, the Closing Balance Sheet and in the determination of the amount
of Closing Date Indebtedness and Closing Adjusted Net Assets.
"Target Share" means any share of the Common Stock of the Target.
"Third Party Claim" has the meaning set forth in Section 8(d) below.
"Unaccrued Target Bonus Obligations" means (i) the amounts
payable at Closing to certain officers of Target pursuant to the
(A)Incentive Pool Share - Change in Control Agreement, dated as of December
23, 1996, between Target and Randy Whitaker, (B)Incentive Pool Share - Change
in Control Agreement, dated as of December 16, 1996, between Target and Halen
Wendelgast, (C) Incentive Pool Share - Change in Control Agreement, dated as
of December 16, 1996, between Target and Dave Williams, (D) Bonus - Change
in Control Agreement, dated as of December 16, 1996, between Target and all
salaried employees and (E) Employment Agreement, dated June 12, 1995, between
Target and Richard M. Tolbert, as amended August 1, 1996 and (ii) the amount
of fiscal 1997 bonus payments due and payable to certain officer of Target
pursuant to the Wortz Company Executive Profit Sharing Program (Plans A & B)
which do not constitute Accrued Profit Sharing Obligations and which will be
paid to certain officers of Target on the Closing Date pursuant to that certain
Continuation of Executive Profit Sharing Program -
9
<PAGE> 15
Change in Control Agreement, dated as of October 9, 1996 between Target and
certain officers of Target, such payments to be made in accordance with the
terms of the Escrow Agreement.
"Unpaid Indebtedness" has the meaning set forth in Section 2(e) below
"Unresolved Matters" has the meaning set forth in Section 2(e) below.
2. Purchase and Sale of Target Shares.
(a) Basic Transaction. On and subject to the terms and conditions
of this Agreement, the Buyer agrees to purchase from each of the Sellers,
and each of the Sellers agrees to sell to the Buyer, all of his or her Target
Shares for the Net Purchase Price, as defined below.
(b) Calculation and Payment of Gross Purchase Price and Net Purchase
Price.
(i) Amount. The term "Gross Purchase Price" shall mean
U.S. $41,000,000 in immediately available funds. The term "Net Purchase
Price" shall mean:
(A) the Gross Purchase Price; minus
(B) the amount of Indebtedness (including any prepayment
penalties thereon) of the Target outstanding on the Closing
Date (the "Closing Date Indebtedness"); minus
(C) the amount of the Unaccrued Target Bonus Obligations on
the Closing Date; plus or minus
(D) the Closing Net Asset Adjustment.
(ii) Payment. By no later than 10:00 a.m central time on
the Closing Date an amount equal to the sum of (i) the Gross Purchase
Price, plus (ii) the Accrued Profit Sharing Obligations, plus (iii) one-half of
the escrow agent
10
<PAGE> 16
fees payable under the Escrow Agreement, shall be deposited by Buyer into
the Escrow Account maintained by the Escrow Agent and held by said Escrow
Agent for distribution on or subsequent to said Closing Date in accordance
with the terms of the Escrow Agreement. Buyer and Seller agree to finalize
and execute the Escrow Agreement on or prior to the Closing Date.
Notwithstanding the fact that said Escrow Agreement has not been finalized
and executed as of the date hereof, the provisions contained in Sections 1-5
thereof (other than the exhibits thereto which will not be finalized and
completed until Closing) shall be final and binding upon Buyer and Seller and
shall be specifically incorporated by reference into this Section 2(b)(ii).
(c) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Rose Law Firm,
120 East Fourth Street, Little Rock, Arkansas, 72201 commencing at 10:00
a.m. local time on the third business day immediately following the
satisfaction or waiver of all conditions to the obligations of the Parties
to consummate the transactions contemplated hereby (other than conditions with
respect to actions the respective Parties will take at the Closing itself) or
such other date as the Buyer and the Sellers' Representative may mutually
determine (the "Closing Date"). The Closing shall be deemed to be effective
at 11:59 p.m. on the Closing Date.
(d) Deliveries at the Closing. At the Closing, (i) the Sellers will
deliver to the Buyer the various certificates, instruments, and documents
referred to in Section 7(a) below, (ii) the Buyer will deliver to the Sellers
the various certificates, instruments, and documents referred to in Section 7(b)
below, (iii) each of the Sellers will deliver to the Buyer stock certificates
representing all of his Target Shares, endorsed in blank or accompanied by
duly executed assignment documents, and (iv) the Buyer will deliver to each of
the Sellers the consideration specified in Section 2(b) above.
(e) Closing Net Asset Adjustment and Indebtedness Adjustment. The
Closing Net Asset Adjustment and
11
<PAGE> 17
Indebtedness Adjustment, if any, will be determined as follows:
(i) If the Closing Adjusted Net Assets of the Target (as
such term is specifically defined on Exhibit A-2 hereof) is less than
$1,963,000.00 (the "Average Adjusted Net Assets"), then the Sellers shall pay
to the Buyer an amount equal to such shortfall (the "Net Asset Shortfall")
as the Closing Net Asset Adjustment.
(ii) If the Closing Adjusted Net Assets of the Target is
equal to or greater than the Average Adjusted Net Assets (the "Net Asset
Excess"), then the Buyer shall pay to the Sellers an amount equal to such Net
Asset Excess.
(iii) If the Target has Closing Date Indebtedness (or
prepayment penalties thereon) or interest accrued thereon for which
repayment thereof (or payment to Buyer in the case of capitalized lease
obligations) was not made pursuant to the terms of the Escrow Agreement on the
Closing Date, then the Sellers shall pay such amount to the Buyer (the "Unpaid
Indebtedness").
(iv) Exhibit A-2 (A) sets forth the procedures for
calculating the Closing Net Asset Adjustment and (B) the manner in which the
(x) Closing Net Asset Adjustment and Closing Date Indebtedness shall be
calculated and (y) payment of the Net Asset Shortfall, Net Asset Excess or
Unpaid Indebtedness, as applicable, shall be made. The payments under this
Section 2(e) shall be deemed to be an adjustment to the Net Purchase Price.
3. Representations and Warranties Concerning the Transaction.
(a) Representations and Warranties of the Sellers. Each of the
Sellers represents and warrants to the Buyer that the statements contained
in this Section 3(a) are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Section 3(a)) with respect
12
<PAGE> 18
to himself, except as set forth in Annex II attached hereto.
(i) Authorization of Transaction. The Seller has
full power and authority to execute and deliver this Agreement and to perform
his or her obligations hereunder. This Agreement constitutes the valid and
legally binding obligation of such Seller, enforceable in accordance with its
terms and conditions. Except for required notices under the Hart-Scott-Rodino
Act, the Seller need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental
agency in order to consummate the transactions contemplated by this Agreement.
(ii) Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will (A) violate any constitution, statute,
regulation, rule, injunction, judgment, order, principle of common law,
decree, ruling, charge, or other restriction of any government, governmental
agency, or court to which the Seller is subject (collectively "Legal
Requirement") or (B) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right
to accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
such Seller is a party or by which he or she is bound or to which any of his or
her assets is subject.
(iii) Brokers' Fees. The Seller has no liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which the Buyer
could become liable or obligated.
(iv) Target Shares. The Seller holds of record and owns
beneficially the number of Target Shares set forth next to his or her name in
Section 4(b) of the Disclosure Schedule, free and clear of any restrictions on
transfer (other than restrictions under the Securities Act and state securities
laws), taxes, Security Interests, options, warrants,
13
<PAGE> 19
purchase rights, contracts, commitments, equities, claims, and demands. The
Seller is not a party to any option, warrant, purchase right, or other
contract or commitment that could require such Seller to sell, transfer, or
otherwise dispose of any capital stock of the Target (other than this
Agreement). The Seller is not a party to any voting trust, proxy, or other
agreement or understanding with respect to the voting of any capital stock of
the Target.
(b) Representations and Warranties of the Buyer. The Buyer represents
and warrants to the Sellers that the statements contained in this Section 3(b)
are correct and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout
this Section 3(b)), except as set forth in Annex III attached hereto.
(i) Organization of the Buyer. The Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation.
(ii) Authorization of Transaction. The Buyer has full power and
authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. This
Agreement constitutes the valid and legally binding obligation of the Buyer,
enforceable in accordance with its terms and conditions. Except for required
notices under the Hart-Scott-Rodino Act, the Buyer need not give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order to consummate the transactions
contemplated by this Agreement.
(iii) Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (A) violate any Legal Requirement or any resolution of its Board of
Directors or provision of its charter or bylaws or (B) conflict with,
14
<PAGE> 20
result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which the Buyer is a party or by
which it is bound or to which any of its assets is subject.
(iv) Brokers' Fees. The Buyer has no liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which any Seller could become
liable or obligated.
(v) Investment. The Buyer (A) understands that the Target
Shares have not been, and will not be, registered under the Securities
Act, or under any state securities laws, and are being offered and sold
in reliance upon federal and state exemptions for transactions not
involving any public offering, (B) is acquiring the Target Shares solely for
its own account for investment purposes, and not with a view to the
distribution thereof and (C) is an Accredited Investor.
4. Representations and Warranties Concerning the Target. The Sellers
represent and warrant to the Buyer that the statements contained in this
Section 4 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout
this Section 4), except as set forth in the disclosure schedule delivered by
the Sellers to the Buyer on the date hereof and initialed by the Parties (the
"Disclosure Schedule"). Disclosures on the Disclosure Schedule shall be
effective with respect to only the subsections (but not necessarily
subclauses) of this Section 4 so identified on said Disclosure Schedule.
(a) Organization, Qualification, and Corporate Power. The Target
is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Arkansas. The Target is duly authorized to
conduct
15
<PAGE> 21
business and is in good standing under the laws of each jurisdiction where
such qualification is required, except where the lack of such qualification
would not result in a Material Adverse Change. The Target has full corporate
power and authority to carry on the businesses in which it is engaged and to
own and use the properties owned and used by it. Section 4(a) of the
Disclosure Schedule lists all of the directors and officers of the Target.
(b) Capitalization. The entire issued and outstanding capital stock
of the Target consists of 3,878 Target Shares. All of the issued and
outstanding Target Shares have been duly authorized, are validly issued,
fully paid, and nonassessable, and are held of record by the respective
Sellers as set forth in Section 4(b) of the Disclosure Schedule. There are no
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other contracts or commitments
that could require the Target to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or similar
rights with respect to the Target.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate, contravene, conflict with or give any person or
governmental entity the right to challenge the transaction contemplated
herein or to exercise any remedy or relief under any Legal Requirement to
which the Target is subject or any provision of the charter or bylaws of
the Target or (ii) contravene, conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or require
any notice under any agreement, understanding, contract, lease, license,
instrument, permit, waiver, consent or other arrangement or authorization to
which the Target is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets), except where the violation, conflict, breach, default,
acceleration,
16
<PAGE> 22
termination, modification, cancellation, failure to give notice, or Security
Interest would not have a Material Adverse Change or a material adverse
effect on the ability of the Parties to consummate the transactions
contemplated by this Agreement. The Target need not give any notice to,
make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order for the Parties to consummate
the transactions contemplated by this Agreement, except where the failure to
give notice, to file, or to obtain any authorization, consent, or approval
would not have a Material Adverse Change or a material adverse effect on the
ability of the Parties to consummate the transactions contemplated by this
Agreement.
(d) Brokers' Fees. The Target has no liability or obligation to pay
any fees, commissions or reimbursement to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.
(e) Title to Tangible Assets. The Target has good and marketable
title to, or a valid leasehold interest in, the tangible assets (i) necessary
to operate and conduct the business of Target in the same manner as
currently conducted, (ii) located and regularly used in the operation of the
business carried on at the Target' facilities and (iii) reflected as owned or
leased in the books and records of the Target.
(f) Subsidiaries and Affiliates. The Target has no Subsidiaries and
except for the Sellers and the Target's officers and directors, Target has no
affiliates.
(g) Financial Statements. Attached hereto as Exhibit A-1 are
the following financial statements (collectively the "Financial
Statements"): (i) audited balance sheets and statements of income, changes
in stockholders' equity, and cash flow as of and for the fiscal years ended
May 31, 1994, 1995 and 1996 for the Target; and (ii) unaudited balance sheet
and statements of income, changes in stockholders' equity, and cash flow (the
"Most Recent Financial Statements") as of and for the period ended February 8,
1997, (the "Most Recent Fiscal Period End") for the Target.
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The Financial Statements have been prepared in accordance with GAAP
throughout the periods covered thereby and present fairly the financial
condition of the Target as of such dates and the results of operations,
statements of cash flow and changes in shareholders' equity of the Target for
such periods; provided, however, that the Most Recent Financial Statements are
subject to normal year-end adjustments (the effect of which individually or in
the aggregate will not result in a Material Adverse Change) and lack
footnotes and other presentation items that may otherwise be included with
audited financial statements.
(h) Legal Compliance. The Target has complied with all Legal
Requirements except where the failure to so comply would not result in a
Material Adverse Change.
(i) Tax Matters. The Shareholders of Target have elected to have
Target taxed as an S Corporation under the Code and the Target has at all
times and currently complies with all Code requirements relating to S
Corporations. As a result, Target is not subject to federal or state income
tax for any periods prior to the Closing Date. There are no tax Security
Interests upon any of the assets (real, personal, intangible or mixed) of
Target, and Target has paid or accrued on its books all federal, state, local
or foreign taxes of any kind whatsoever required to be paid on or prior to the
Closing Date or which have been assessed against Target. All taxes and other
assessments and levies which Target is required by law to withhold or to
collect for payment have been duly withheld and collected.
(j) Real Property.
(i) Section 4(j)(i) of the Disclosure Schedule lists all
real property that the Target owns. With respect to each such parcel of
owned real property:
(A) the identified owner has good and marketable
title to the parcel of real property, free and clear of any
Security Interest, easement, covenant, or other restriction;
except for (i) liens for current taxes not yet due, (ii)
minor
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imperfections of title and utility easements, if any, none
of which is substantial in amount, materially detracts from
the value or impairs the use of the property subject thereto,
or impairs the operations of the Target, (iii) zoning laws and
other land use restrictions that do not materially impair the
present or anticipated use of the property subject thereto (i,
ii, and iii, collectively, are referred to as "Permitted
Exceptions"). All buildings, plants and structures owned by
the Target lie wholly within the boundaries of the real
property owned by the Target and do not encroach upon the
property of, or otherwise conflict with the property rights
of, any other Person; except where such encroachment does
not materially impair the present or anticipated use of the
property or would not result in a Material Adverse Change
("Permitted Encroachments").
(B) there are no leases, subleases, licenses,
concessions, or other agreements granting to any party or
parties the right of use or occupancy of any portion of the
parcel of real property; and
(C) there are no outstanding options or rights of
first refusal to purchase the parcel of real property, or
any portion thereof or interest therein.
(ii) Section 4(j)(ii) of the Disclosure Schedule lists all
real property leased or subleased to the Target. The Sellers have delivered
to the Buyer correct and complete copies of the leases and subleases listed in
Section 4(j)(ii) of the Disclosure Schedule (as amended to date). Each lease
and sublease listed in Section 4(j)(ii) of the Disclosure Schedule is legal,
valid, binding, enforceable, and in full force and effect, except where the
illegality, invalidity, nonbinding nature, unenforceability, or
ineffectiveness would not result in a Material Adverse Change.
(k) Intellectual Property. Section 4(k) of the Disclosure
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Schedule identifies each patent or registration which has been issued to
the Target with respect to any of its Intellectual Property, identifies
each pending patent application or application for registration which the
Target has made with respect to any of its Intellectual Property, and
identifies each license, agreement, or other permission which the Target has
granted to any third party with respect to any of its Intellectual Property.
To the Knowledge of Sellers, with respect to Intellectual Property currently
or previously used or held for use by the Target, except as set forth in the
Disclosure Schedule:
(i) Target is the sole and exclusive owner and has the
sole and exclusive right to use the same in the conduct of its business;
(ii) no proceedings have been instituted, are pending or
threatened against Target which challenge any material rights in respect
thereto or the validity thereof;
(iii) none of the aforesaid infringes upon, is alleged to
infringe upon or otherwise violates the rights of others, or is being
infringed upon by others, and none is subject to any outstanding order, decree,
judgment, stipulation or charge;
(iv) no licenses or sublicenses pertaining to any of the
aforesaid have been granted by Target;
(v) Target has not received any written notice of
interference or infringement of any of the foregoing;
(l) Material Contracts. All contracts, agreements, instruments,
plan and leases (including all amendments, modifications and supplements
thereto) meeting any of the descriptions set forth below to which Target is a
party (the "Material Contracts") are listed on Section 4(l) of, or contained
elsewhere in, the Disclosure Schedule:
(i) any purchase order, agreement or commitment
obligating Target to purchase or sell any products or services and which
either:
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(A) was not entered into in the Ordinary Course of
Business, or
(B) is not terminable by Target without payment or
penalty upon 60 days' (or less) notice, or
(C) is in an aggregate amount exceeding $50,000, or
(D) is presently expected to result in a loss
upon completion or performance thereof in an amount in excess of
$50,000.
(ii) any Indebtedness;
(iii) any agreement concerning joint venture, partnership or
involving a sharing of profits;
(iv) any sales agency, brokerage, distribution or similar
contract;
(v) any written agreement which includes provisions regarding
minimum volumes or volume discounts;
(vi) any written agreement pursuant to which a rebate,
discount, bonus, commission or other payment with respect to the sale of any
product of Target will be payable or required after the Closing;
(vii) any agreement involving the Target Shareholders and the
Target;
(viii) any written arrangement regarding confidentiality or
noncompetition or any restriction upon the Target engaging in any line of
business (other than confidentiality agreements executed in connection with or
in anticipation of a sale of Target);
(ix) any written arrangement with any of Target's directors,
officers, and employees in the nature of a collective bargaining agreement,
employment agreement,
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compensation arrangement not disclosed in Section 4(o) of the Disclosure
Schedule, or severance contract; and
(x) any consulting agreement or arrangement.
Except as set forth in the Disclosure Schedule:
(A) all Material Contracts are in full force and effect and
are valid, binding and enforceable against Target in accordance with
their terms, except to the extent such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting the enforcement of creditors' rights or by
general equitable principles;
(B) Target is not in breach of any material provision of,
in violation of, or in default under the material terms of any
Material Contract;
(C) no event has occurred which, after the giving of notice
or passage of time or both, would constitute a material default
under or result in a material breach of any Material Contract by
Target;
(D) Target is not a party to any oral contract, agreement,
or other arrangement which, if reduced to written form, would be
required to be listed in Section 4(l) of the Disclosure Schedule;
(E) except in the Ordinary Course of Business, no
unfilled customer order or commitment obligating Target to
process, manufacture, or deliver products or perform services will
result in a loss to Target upon completion of performance;
(F) no purchase order or commitment of Target is in excess
of normal requirements, nor are prices provided there in excess of
current market prices for the products or services to be provided
thereunder; and
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(G) no customer order, contract or commitment contains
terms that will give rise to a violation by the Target of any
applicable Legal Requirements.
(m) Powers of Attorney. To the Knowledge of any of the Sellers,
there are no outstanding powers of attorney executed on behalf of Target.
(n) Litigation. Section 4(n) of the Disclosure Schedule sets forth
each instance in which the Target (i) is subject to any outstanding injunction,
judgment, order, decree, ruling, or charge or (ii) is a party to any
action, suit, proceeding, hearing, or to the Seller's Knowledge,
investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction,
except where the injunction, judgment, order, decree, ruling, action,
suit, proceeding, hearing, or investigation would not result in a Material
Adverse Change.
(o) Employee Benefits.
(i) Section 4(o) of the Disclosure Schedule lists each
Employee Benefit Plan that the Target maintains or to which the Target
contributes or has contributed and each ERISA Affiliate, if any.
(A) Each such Employee Benefit Plan (and each
related trust, insurance contract, or fund) complies in form and in
operation in all respects with the applicable requirements of ERISA
and the Code, except where the failure to comply would not result in
a Material Adverse Change.
(B) All contributions (including all employer
contributions and employee salary reduction contributions) which are
due have been paid to each such Employee Benefit Plan which is an
employee Pension Benefit Plan.
(C) Each such Employee Benefit Plan which is an
Employee Pension Benefit Plan has received a
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determination letter from the Internal Revenue Service to the effect
that it meets the requirements of Code Sec. 401(a).
(D) The Sellers have delivered to the Buyer
correct and complete copies of the plan documents and summary
plan descriptions, the most recent determination letter received from
the Internal Revenue Service, the most recent Form 5500 Annual Report.
(E) The Target has no withdrawal liability with
respect to any Multi-Employer Plan to which the Target participated
or contributed.
(F) All filings required by ERISA and the Code as
to each Employee Benefit Plan have been timely filed, and all
notices and disclosures to participants required by either ERISA or
the Code have been timely provided, except where the failure to
file or give notice or disclosure would not result in a Material
Adverse Change.
(G) Except as otherwise disclosed in Section
4(l)(ix) of the Disclosure Schedule, since May 31, 1996, there has
been no establishment or amendment of any Employee Benefit Plan.
(H) The Disclosure Schedule sets forth an accurate
description of any Employee Benefit Plan of Target that is not
otherwise in writing.
(I) Since May 31, 1996, no event has occurred
that could result in a material increase in premium costs of the
Target's Employee Pension Benefit Plans that are insured, or a
material increase in benefit costs of such Employee Benefit Plans
that are self-insured.
(J) Each Employee Benefit Plan of Target that is an
Employee Pension Benefit is qualified in form and operation under Code
Section 401(a); each trust for each such Employee Pension Benefit Plan
is exempt from
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federal income tax under Code Section 501 (a). No event has occurred
or circumstance exists that will or could give rise to
disqualification or loss of tax-exempt status of any such Employee
Pension Benefit Plan or trust.
(K) The Target has the right to modify and
terminate benefits to retirees (other than pursuant to Employee
Pension Benefit Plans or with respect to benefits provided under the
agreements referenced in items 4(o) 5-7 of the Disclosure Schedule)
with respect to both retired and active employees.
(L) The consummation of the transactions
contemplated in this Agreement will not result in the payment,
vesting, or acceleration of any benefit under any Target Employee
Benefit Plan (except for the agreements referenced in Section 3(a) and
(b) of the Disclosure Schedule.
(ii) With respect to each Employee Benefit Plan the Target
maintains or ever has maintained or to which it contributes, ever has
contributed, or ever has been required to contribute:
(A) No such Employee Benefit Plan which is an
Employee Pension Benefit Plan (other than any Multiemployer Plan)
has been completely or partially terminated or been the subject of a
Reportable Event as to which notices would be required to be filed
with the PBGC. No proceeding by the PBGC to terminate any such
Employee Pension Benefit Plan (other than any Multiemployer Plan) has
been instituted.
(B) No action, suit, proceeding, hearing, or
investigation with respect to the administration or the investment of
the assets of any such Employee Benefit Plan (other than routine
claims for benefits) is pending, except where the action, suit,
proceeding, hearing, or investigation would not result in Material
Adverse Change.
(C) Target currently has no liability to the
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PBGC (other than PBGC premium payments) or otherwise under Title IV
of ERISA (including any withdrawal liability) with respect to any
such Employee Benefit Plan which is an Employee Pension Benefit Plan.
(D) No statement, either written or oral, has been
made by Target or by any Seller to any Person with regard to any
Employee Benefit Plan that was not in accordance with the Employee
Benefit Plan and that could reasonably be expected to result in a
Material Adverse Change.
(F) No transaction prohibited by ERISA Section 406
and no "prohibited transaction" under Code 4975(c) have occurred
with respect to any Target Employee Benefit Plan.
(p) Environment, Health, and Safety.
(i) The Target is in compliance with Environmental, Health, and
Safety Requirements, and any permits, licenses or authorizations related
thereto, except for such noncompliance as would not result in a Material
Adverse Change.
(ii) The Target has not received any written notice, report or other
information regarding any actual or alleged material violation of
Environmental, Health, and Safety Requirements, or any material liabilities
or potential material liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise), including any investigatory, remedial or
corrective obligations, relating to the Target or its facilities arising
under Environmental, Health, and Safety Requirements, the subject of which
could result in a Material Adverse Change.
(iii) The Target has obtained (or is capable of obtaining without
incurring any material incremental expense) all permits, licenses and other
authorizations and have made all registrations and given all notifications
that are required under any applicable Environmental, Health and Safety
Requirements.
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(iv) The Target did not generate, treat, store, transport,
discharge, dispose of or release any materials or waste deemed hazardous
under any applicable Environmental, Health and Safety Requirements in violation
of such Environmental, Health and Safety Requirements.
(v) This Section 4(p) contains the sole and exclusive
representations and warranties of the Seller with respect to any
environmental, health, or safety matters, including without limitation any
arising under any Environmental, Health, and Safety Requirements.
(q) Certain Business Relationships with the Target. None of the
Sellers and their Affiliates has been involved in any material business
arrangement or relationship with the Target within the past 36 months and none
of the Sellers and their Affiliates owns any asset, tangible or intangible,
which is used in the business of any of the Target. No Seller, nor any
Affiliate, director, officer, nor employee of Target has outstanding any loan
or other repayment obligation of any kind owed to the Target. The Target
has no outstanding loan or other repayment obligation of any kind (other
than ordinary wage, salary and benefit obligations) to any Seller, Affiliate,
director, officer, or employee of Target.
(r) Books and Records. The books of account, minute books, stock
record books, and other records of the Target, are complete and correct and
have been maintained in accordance with sound business practices, including
the maintnance of an adequate system of internal controls, except where any
such incompleteness, incorrectness or failure to so maintain would not result
in a Material Adverse Change. At the Closing, all of those books and records
will be in the possession of the Target.
(s) Condition and Sufficiency of Assets. The buildings, plants,
structures and equipment of the Target are structurally sound, are in good
operating condition and repair, and are adequate for the uses to which they
are being put, and none of such buildings, plants, structures or equipment is
in need of maintenance or repairs except for ordinary, routine maintenance and
repairs that are not
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material in nature or cost. The building, plants, structures and equipment
of the Target are sufficient for the continued conduct of the Target's
businesses after the Closing in the same manner as conducted prior to the
Closing.
(t) Accounts Receivable. All accounts receivable of the Target
that are reflected on Most Recent Financial Statements or on the Closing
Date Balance Sheet (collectively, the "Accounts Receivable") represent valid
obligations arising from sales actually made or services actually performed in
the Ordinary Course of Business and as of said dates were current within 30
days of the date upon which they became due and payable.
(u) Inventory. The inventory of the Target reflected in the Most
Recent Balance Sheet and Closing Date Balance Sheet consists of a quality
and quantity usable and salable in the Ordinary Course of Business, except
for obsolete items and items of below-standard quality, which will be written
off or written down (in accordance with the Target Principles) in connection
with the physical count to be performed immediately following the Closing.
All inventories not written off will be priced in accordance with the Target
Principles. The quantities of each item of inventory (whether raw
materials, work-in-process, or finished goods) are not excessive, but are
reasonable in the present circumstances of the Target.
(v) No Undisclosed Liabilities. Except as set forth in
Section 4(v) of the Disclosure Schedule, the Target has no liabilities or
obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent or otherwise) except for (i) liabilities or obligations
reflected or reserved against in Most Recent Balance Sheet, (ii) current
liabilities incurred in the Ordinary Course of Business since the date thereof
and (iii) liabilities or obligations which do not result in a Material Adverse
Change.
(w) No Material Adverse Change. Since the date of the Most Recent
Fiscal Period End, there has not been any
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Material Adverse Change in the Target and no event has occurred or
circumstance exists that has resulted in such a Material Adverse Change. For
purposes of this Section 4(w), the term Material Adverse Change shall not
include any event, occurrence, change or effect arising out of or which results
either directly or indirectly from the loss of, or diminution in relationship
with, any customer or employee of Target.
(x) Absence of Certain Changes or Events. Except as set forth in
Section 4(x) of the Disclosure Schedule since the Most Recent Fiscal Period
End, the Target has conducted its businesses only in the Ordinary Course of
Business and there has not been any:
(i) change in the Target's authorized or issued capital
stock; grant of any stock option or right to purchase shares of capital
stock of the Target; issuance of any security convertible into such
capital stock; grant of any registration rights; purchase, redemption,
retirement or other acquisition by the Target of any shares of any such
capital stock; or declaration or payment of any dividend or other distribution
or payment in respect of shares of capital stock;
(ii) amendment to the charter or bylaws of the Target;
(iii) payment or increase by the Target of any bonuses,
salaries, or other compensation to any stockholder, director, officer or
(except in the Ordinary Course of Business) employee or entry into any
employment, severance, or similar agreement or arrangement with any director,
officer or employee;
(iv) adoption of, or increase in the payments to or
benefits under, any profit sharing, bonus, deferred compensation, savings,
insurance, pension, retirement, or other Employee Benefit Plan for or with any
employees of the Target;
(v) damage to or destruction or loss of any asset
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or property of the Target, whether or not covered by insurance, which resulted
in a Material Adverse Change;
(vi) entry into, termination of, or receipt of notice
of termination of (a) any license, distributorship, dealer, sales
representative, joint venture, credit, or similar agreement, or (b) any
agreement, arrangement, or transaction involving a total remaining commitment
by or to the Target of at least $50,000;
(vii) sale (other than sales of inventory in the Ordinary
Course of Business), lease, or other disposition of any asset or property of
the Target or mortgage, pledge, or imposition of any lien or other
encumbrance on any material asset or property of the Target, including the
sale, lease or other disposition of any of the Intellectual Property;
(viii) cancellation or waiver of any claims or rights with a
value to the Target in excess of $50,000;
(ix) material change in the accounting or tax methods used
by the Target; or
(xi) agreement, whether oral or written, by the Target to do
any of the foregoing.
(y) Insurance
(i) Sellers have delivered to Buyer:
(A) true and complete copies of all policies
of insurance to which the Target is a party or under which the
Target, or any director of the Target, is covered;
(B) true and complete copies of all pending
applications for policies of insurance; and
(C) any written statement by the auditor of the
Financial Statements with regard to the adequacy of such entity's
coverage or of the reserves for claims.
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(ii) Section 4 (y)(ii) of the Disclosure Schedule describes:
(A) any self-insurance arrangement by or affecting
the Target;
(B) any contract or arrangement, other than a
policy of insurance, for the transfer or sharing of any risk by the
Target; and
(D) all obligations of the Target to third
parties with respect to insurance (including such obligations under
leases and service agreements) and identifies the policy under which
such coverage is provided.
(iii) Except as set forth on Section 4(y)(iii) of the
Disclosure Schedule:
(A) all policies to which the Target is a party or
that provide coverage to either any Seller, the Target, or any
director or officer of the Target: (i) are valid, outstanding and
enforceable; (ii) are issued by an insurer that is financially sound
and reputable; (iii) taken together, provide adequate insurance
coverage for the assets and the operations of the Target for all
risks normally insured against by a Person carrying on the same
business or businesses as the Target; (iv) are sufficient for
compliance with all requirements of applicable constitutions,
statutes, regulations, rules, injunctions, judgments, orders,
principles of common law, decree, ruling, charge or other
restriction of any government or governmental agency or court and
agreement or arrangements to which the Target is a party or by
which it is bound; (v) will continue in full force and effect
following the consummation of the transactions contemplated in
this Agreement; and (vi) do not provide for any
retrospective premium adjustment or other experienced-based
liability on the part of the Target.
(B) the Target has not received (i) any
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refusal of coverage or any notice that a defense will be afforded
with reservation of rights, or (ii) any notice of cancellation or any
other indication that any insurance policy is no longer in full force
or effect or will not be renewed or that the issuer of any policy is
not willing or able to perform its obligations thereunder.
(iv) The Target has paid all premiums due, and have otherwise
performed all of their respective obligations, under each policy to which the
Target is a party or that provides coverage to the Target or shareholder,
officer or director thereof.
(v) The Target has given notice to the insurer of all claims
that may be insured thereby.
(z) Employees
(i) The Target has provided to Buyer a complete and accurate
list of the following information for each director, officer or salaried
employee of the Target, including each such individual on leave of absence
or layoff status: employer; name; job title; current compensation paid or
payable.
(ii) No director, officer or salaried employee of the
Target is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, noncompetition, or proprietary
rights agreement, between such director, officer or salaried employee and
any other Person ("Proprietary Rights Agreement") that in any way adversely
affects or will affect (A) the performance of his or her duties as a
director, officer or salaried employee of the Target, or (B) the ability of
the Target to conduct its business, including any Proprietary Rights
Agreement with Sellers or the Target by any such director, officer or salaried
employee. To Sellers' knowledge, no officer or key employee of the Target
intends to terminate his or her employment with Target.
(aa) Labor Relations; Compliance. Except as set forth
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in Section 4(aa) of the Disclosure Schedule, the Target has not been nor is
it a party to any collective bargaining or other labor contract. Since May
31, 1990, there has not been, nor is there presently pending or existing, and
to Sellers' Knowledge, there is not threatened (A) any strike, slowdown,
picketing, work stoppage, or employee grievance process, (B) any action
claim, suit, demand, litigation or other proceeding against or affecting the
Target relating to the alleged violation of any Legal Requirement pertaining to
labor relations or employment matters, including any charge or complaint
filed by an employee or union with the National Labor Relations Board, the
Equal Employment Opportunity Commission, or any comparable governmental
authority, organizational activity, or other labor or employment dispute
against or affecting any of the Target or their premises which could
reasonably be expected to result in a Material Adverse Change. To Sellers'
Knowledge, no event has occurred or circumstance exists that could provide
the basis for any work stoppage or other labor dispute. There is no
lockout of any employees by the Target and no such action is contemplated by
the Target. The Target has complied in all respects with all Legal
Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective
bargaining, the payment of social security and similar taxes, occupational
safety and health and plant closings, except where failure to so comply would
not result in a material Adverse Change. The Target is not liable for the
payment of any material compensation, damages, taxes, fines, penalties, or
other amounts however designated for failure to comply with any of the
foregoing Legal Requirements.
(bb) Disclosure. To the Knowledge of the Sellers there is no fact
that has specific application to either any Seller or the Target (other than
general economic or industry conditions) and that as far as Seller can
reasonably foresee, which could be reasonably expected to result in a
Material Adverse Change that has not been set forth in this Agreement, the
Disclosure Schedule or otherwise disclosed to Buyer.
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(cc) Indebtedness. The Target has no Indebtedness other than as set
forth in the Most Recent Balance Sheet.
(dd) Auditors. The Target did not change its auditors from
Ernst and Young to Beall, Barclay & Company, P.L.C., due to any
disagreement between the Target and Ernst and Young regarding the Target's
accounting policies or procedures.
(ee) Payables. Other than amounts reasonably disputed in good faith,
the Target is not more than thirty (30) days past due in paying any trade or
other accounts payable.
5. Pre-Closing Covenants. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
(a) General. Each of the Parties will use his or its best efforts
to take all action and to do all things necessary, proper, or advisable in
order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Section 7 below).
(b) Notices and Consents. The Sellers will cause the Target to give
any notices to third parties, and will cause the Target to use its reasonable
best efforts to obtain any third party consents, that the Buyer reasonably may
request in connection with the matters referred to in Section 4(c) above. Each
of the Parties will (and the Sellers will cause the Target to) give any
notices to, make any filings with, and use its reasonable best efforts to
obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred to in Section
3(a)(ii), Section 3(b)(ii) and Section 4(c) above. Without limiting the
generality of the foregoing, the Buyer will (or, if applicable, will cause
their Affiliates to) file, and the Sellers will cause the Target to file, any
Notification and Report Forms and related material that it may be required
to file with the Federal Trade Commission and the Antitrust Division of
the United States Department of Justice under the Hart-Scott-Rodino Act, will
use its
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reasonable best efforts to obtain, and the Sellers will cause the Target to
use its reasonable best efforts to obtain, a waiver from the applicable
waiting period, and will make, and the Sellers will cause the Target to
make, any further filings pursuant thereto that may be necessary, proper, or
advisable in connection therewith. In connection with any such filings, the
parties agree to bear their own costs and expenses (including legal fees)
incurred in the preparation of such filings; provided however that each of
Buyer and Seller agrees to fully cooperate with one another in preparing any
follow-up responses or filings and agree to equally share any costs or
expense items that can reasonably be so shared.
(c) Operation of Business. Until the Closing, the Target shall,
and the Sellers shall cause the Target to use the Target's best efforts to:
(i) conduct the Target's business in the Ordinary Course of Business
including, but not limited to, making capital expenditures contemplated in
the Target's budget or necessary to continue operating the business in
substantially the same manner as it is presently conducted; (ii) preserve
intact the current business organization of the Target, keep available the
services of the current officers, employees and agents and maintain the
relations and good will with suppliers, customers, landlords, creditors,
employees, agents, governmental authorities and others having business with
the Target; (iii) confer with the Buyer concerning operational matters of a
material nature; and (iv) report weekly to the Buyer concerning the status of
the business operations, prospects and finances of the Target.
(d) Negative Covenant. Except as otherwise expressly permitted by
this Agreement, between the date of this Agreement and the Closing Date, the
Target shall not, and the Sellers shall not cause the Target to, without the
prior consent of the Buyer, take any action or fail to take any action within
its control, as a result of which any of the following events could be
reasonably expected to occur: (i)any matters set forth in Section_4(x);
(ii) enter into any employment or severance agreements with any employee,
officer or director or increase any compensation or bonuses or benefits of
any employee, officer or director; (iii)
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execute any collective bargaining agreements or any amendment,
modification, change, or extension thereto; (iv) hire any new employee at a
grade level of manager or higher; (v) merge with another corporation or any
other Person or otherwise acquire all or any part of another business,
corporation or other Person; (vi) change in any methods of calculating bad
debts or the assumptions thereunder; (vii) dispose of or permit to lapse, any
license, permit or other authorization or disclose to any Person, other than
employees, any confidential information, trade secrets, formulas, processes,
know-how or recipes; (viii) make any commitments for capital expenditures in
an aggregate amount exceeding $100,000; (ix) enter into any contract, lease,
license, permit, arrangement or other agreement (A)_requiring the payment of
more than $50,000 or that extends for more than six months, or (B)_that is not
in the Ordinary Course of Business; (x) dispose of, sell, convey or transfer
any assets of the Target other than inventory in the Ordinary Course of
Business; (xi) accelerate the collection of accounts receivable or lengthen
the period for payments of accounts payable; (xii) fail to comply with any
Legal Requirements, except where the failure to so comply would not result in
a Material Adverse Change.
(e) Full Access. Each of the Sellers will permit, and the Sellers
will cause the Target to permit, representatives of the Buyer to have full
access at all reasonable times, and in a manner so as not to interfere with the
normal business operations of the Target, to all premises, properties
(including for the purpose of conducting a Phase I Environmental review),
personnel, consultants, books, records (including tax records), contracts,
and documents of or pertaining to the Target. Notwithstanding the
execution of this Agreement, the Buyer agrees to continue to be governed by
the terms of the Confidentiality Agreement.
(f) Notice of Developments.
(i) Between the date of this Agreement and the Closing Date,
each Seller shall be required at any time to notify the Buyer in writing if
such Seller becomes aware of any fact, condition or development that
causes or constitutes a breach of any of Target's representations and
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warranties in Section 4 above as made on the date of this Agreement or if such
Seller becomes aware of any fact or condition that would (except as expressly
contemplated by this Agreement) cause or constitute a breach of any such
representation or warranty had such representation or warranty been made as
of the time of occurrence or discovery of such fact, condition or
development. Unless the Buyer has the right to terminate this Agreement
pursuant to Section 9(a)(ii) below by reason of the fact, condition or
development and exercises that right within the period of 10 business days
referred to in Section 9(a)(ii) below, the written notice pursuant to this
Section 5(e)(i) will be deemed to have amended the Disclosure Schedule, to
have qualified the representations and warranties contained in Section 4
above, and to have cured any misrepresentation or breach of warranty that
otherwise might have existed hereunder by reason of the fact, condition or
development; provided however, that the qualification of said representations
and warranties or the curing of any misrepresentation or breach of warranty
shall only act to foreclose Buyer's termination rights under Section 9 hereof
and shall not preclude Buyer from seeking indemnification for Adverse
Consequences resulting from the existence of such fact, condition or
development.
(ii) Each Party will give prompt written notice to the others
of any material adverse development causing a breach of any of his, her or
its own representations and warranties in Section 3 above. No disclosure by
any Party pursuant to this Section 5(e)(ii), however, shall be deemed to
amend or supplement Annex II, Annex III, or the Disclosure Schedule or to
prevent or cure any misrepresentation or breach of warranty.
(g) Exclusivity. None of the Sellers will (and the Sellers will not
cause or permit the Target to) solicit, initiate, encourage the submission
of any proposal or offer from any Person, or maintain or conduct
discussions or negotiations with any Person, relating to the acquisition of
all or substantially all of the capital stock or assets of any of the Target
(including any acquisition structured as a merger, consolidation, or share
exchange). Each Seller shall immediately notify Buyer upon the receipt by
such
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Seller or Target of any inquiry or proposal from any Person regarding the
acquisition of all or a portion of the business of Target.
6. Post-Closing Covenants. The Parties agree as follows with respect to the
period following the Closing.
(a) General. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any
other Party reasonably may request, all at the sole cost and expense of the
requesting Party (unless the requesting Party is entitled to indemnification
therefor under Section 8 below).
(b) Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection
with (i) any transaction contemplated under this Agreement or (ii) any
fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Target, each of the other Parties shall
cooperate with him or it and his or its counsel in the defense or contest,
make available their personnel, and provide such testimony and access to
their books and records as shall be necessary in connection with the defense or
contest, all at the sole cost and expense of the contesting or defending Party
(unless the contesting or defending Party is entitled to indemnification
therefor under Section 8 below).
(c) Transition. None of the Sellers will take any action that is
designed or intended to have the effect of discouraging any lessor, licensor,
customer, supplier, or other business associate of the Target from maintaining
the same business relationships with the Target after the Closing as it
maintained with the Target prior to the Closing.
(d) Election Under Section 338(h)(10).
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(i) Sellers and Target shall, if requested by Buyer, join
with Buyer in preparing a joint election on Form 8023A for the Target under
Section 338(h)(10) of the Code and under any applicable similar provisions of
state law with respect to the purchase of the Shares ("Election"). The Form
8023A shall be prepared and executed no later than one hundred twenty (120)
days following the Closing Date and shall be timely filed by Buyer if Buyer,
in its sole discretion, decides to make such election. Information
accompanying the Form 8023A will reflect the purchase price allocation among
Target's assets, based on a qualified independent appraisal paid for by Buyer
and reasonably acceptable to Seller's Representative.
(ii) The parties acknowledge that if Buyer elects to make the
Election, Sellers' collective federal and state income tax liabilities will
be greater than had the Election not been made. Accordingly, if such Election
is made, Buyer shall pay Sellers, an amount equal to the difference in the
Sellers' combined federal and state income tax liabilities, as calculated
below, resulting from the transaction being treated as a deemed sale of
assets pursuant to the Election as opposed to a sale by Sellers of the
Target Shares (including, without limitation, additional income taxes due as
a result of some or all of the gain on such transaction being ordinary in
character rather than capital in character), adjusted, or grossed-up as set
forth below, to account for the taxable nature of such differential
(collectively referred to as "Additional Taxes").
(A). In calculating the Additional Taxes, the applicable
marginal federal and state tax rates or blended rates, set forth on
Exhibit B-4 shall be used for all Sellers (whether of not such rates are
actually or effectively higher or lower).
(B). In calculating the Additional Taxes, the gross-up rate to
be applied to Sellers' pre-tax differential in the collective tax liabilities
shall be 35%.
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(C). The Additional Taxes shall be calculated in the form and
substance as set forth in the example contained in Exhibit B-1 through B-3
hereof, using Form 8023A allocation figures.
(iii) Buyer shall provide Seller's Representative with a copy of the
purchase price allocation Buyer proposes to file in the schedule accompanying
the Form 8023A within 10 days following the date of the Election. As soon as
practicable after Sellers' Representative receives from Buyer the purchase
price allocation, Sellers shall provide Buyer with a calculation of
Additional Taxes in form and substance as set forth on Exhibits B-1 through
B-3. Buyer shall approve or notify Sellers's Representative in writing of
any objections to the amount of such Additional Taxes within 5 business days
of receipt of such calculation. If accepted, Buyer shall deposit the Amount of
Additional Taxes in the Escrow Account for distribution pursuant to the
provisions of the Escrow Agreement. If Buyer and Sellers are unable to reach
agreement on the amount of the Additional Taxes, the Buyer and Sellers will
request that the Accounting Firm determine the amount of Additional Taxes.
(iv) In addition to the Additional Taxes as calculated above,
Buyer shall indemnify and hold harmless Sellers from any tax, penalties and
interest incurred by Sellers, including but not limited to any tax liability
of Target reportable by Sellers resulting from any corporate-level tax which
Target or Sellers are required to recognize, attributable to the making of the
Section 338(h)(10) Election.
(e) Public Announcements. Any public announcement or similar
publicity with respect to this Agreement or the transactions contemplated in
the Agreement will be issued, if at all, at such time and in such manner
as Buyer and the Sellers' Representative mutually determines. Unless
consented to by Buyer or Sellers' Representative in advance or except as
required by applicable Legal Requirements, prior to the Closing, Buyer and
Sellers shall, and Sellers shall cause the Target to, keep this Agreement
strictly
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confidential and may not make any disclosure of this Agreement to any
Person. Sellers and Buyer will consult with each other concerning the means
by which the Targets' employees, customers, and suppliers and others having
dealings with the Target will be informed of the transactions contemplated in
this Agreement, and Buyer will have the right to be present for any such
communication.
(f) Confidentiality. Between the date of this Agreement and the
Closing Date, and after the Closing with respect to each of the Sellers, the
Sellers will maintain in confidence, and will cause each of his or her agents
and advisors to maintain in confidence, and not use to the detriment of
another party or the Target, any written, oral, or other information that is
confidential, nonpublic, or proprietary to the Target or that relates or
reflects the terms of the transaction of the transactions contemplated in this
Agreement, unless (i) the use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval
required for the consummation of the transactions contemplated in this
Agreement, or (ii) the furnishing or use of such information is required to
be disclosed pursuant to any applicable Legal Requirements.
(g) Rock-Tenn. Agreement. Each of the Parties will use his or its
reasonable best efforts, and the Buyer will cause the Target to use its best
efforts, to avoid any liability (other than liabilities resulting from the
purchase of goods in the Ordinary Course of Business) arising from any
agreement (whether written or oral) between the Target and Rock-Tenn. The
Buyer agrees to permit, and agrees to cause the Target to permit, Rock-Tenn.
to serve as the primary supplier of packaging inventories to the Target's
business for a period not to exceed nine (9) months from the Closing Date,
provided that Rock-Tenn. satisfies reasonable standards of quality, service and
price.
7. Conditions to Obligation to Close.
(a) Conditions to Obligation of the Buyer. The obligation of the
Buyer to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
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(i) the representations and warranties set forth in Section 3(a) and
Section 4 above shall be true and correct in all material respects at and as of
the Closing Date;
(ii) the Sellers shall have performed and complied with all of their
covenants hereunder in all material respects through the Closing and each
such Seller shall deliver stock certificate(s) free of any Security Interests
representing his or her ownership of the Target Shares, duly endorsed or
accompanied by a duly executed stock power, into the possession of Buyer
against payment as provided in Section 2 hereof;
(iii) there shall not be any injunction, judgment, order, decree,
ruling, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement;
(iv) the Sellers shall have delivered to the Buyer a certificate
to the effect that each of the conditions specified above in
Section 7(a)(i)-(iii) is satisfied in all respects;
(v) all applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated and the Parties and the Target shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Section 3(a)(ii), Section 3(b)(ii), and Section 4(c)
above;
(vi) reserved;
(vii) the Buyer shall have received from counsel to the Sellers an
opinion in a form which is customary for transactions of this type and which
is reasonably satisfactory to Buyer;
(viii) Buyer shall have received (i) commitments for title insurance
from a title insurance company reasonably acceptable to Buyer, committing to
insure, subject only to Permitted Exceptions, Buyer's interest in its owned
real
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property and (ii) a survey of the Target's owned real property reflecting no
encroachments other than Permitted Encroachments.
(ix) Buyer shall have received evidence satisfactory to the Buyer
that all of the Target's Indebtedness (other than capitalized lease
obligations) including accrued interest and repayment penalties have been
paid in full and all Security Interests related thereto have been released or
terminated.
(x) all actions to be taken by the Sellers in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Buyer.
The Buyer may waive any condition specified in this Section 7(a) if it executes
a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Sellers. The obligation of the
Sellers to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 3(b)
above shall be true and correct in all material respects at and as of the
Closing Date;
(ii) the Buyer shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) there shall not be any injunction, judgment, order, decree,
ruling, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement;
(iv) the Buyer shall have delivered to the Sellers a certificate to
the effect that each of the conditions specified above in Section
7(b)(i)-(iii) is satisfied in all
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respects;
(v) all applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated and the Parties and the Target shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Section 3(a)(ii), Section 3(b)(ii), and Section 4(c)
above;
(vi) reserved;
(vii) the Sellers shall have received from counsel to the Buyer an
opinion in a form which is customary for transactions of this type and which
is reasonably satisfactory to Sellers' Representative;
(viii) reserved;
(ix) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
the Sellers' Representative.
The Sellers' Representative may waive any condition specified in this Section
7(b) if they execute a writing so stating at or prior to the Closing.
8. Remedies for Breaches of This Agreement.
(a) Survival of Representations and Warranties. All of the
representations and warranties of the Sellers contained in Section 4 above
shall survive the Closing hereunder and continue in full force and effect
for a period of 18 months thereafter. All of the representations and
warranties of the Parties contained in Section 3 above shall survive the Closing
and continue in full force and effect forever thereafter (subject to any
applicable statutes of limitations).
(b) Indemnification Provisions for Benefit of the
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Buyer.
(i) In the event any of the Sellers breaches any of their
representations, warranties, and covenants contained herein (other than the
covenants in Section 2(a) above and the representations and warranties in
Section 3(a) above), and, if there is an applicable survival period pursuant
to Section 8(a) above, provided that the Buyer makes a written claim for
indemnification against any of the Sellers pursuant to Section 10(g) below
within such survival period, then each of the Sellers agrees to jointly and
severally indemnify the Buyer from and against any Adverse Consequences the
Buyer shall suffer through and after the date of the claim for
indemnification (but excluding any Adverse Consequences the claim for which
arose after the end of any applicable survival period) caused proximately by
the breach; provided, however, that the Sellers shall not have any obligation
to indemnify the Buyer from and against any Adverse Consequences resulting
from, arising out of, relating to, in the nature of, or caused by the breach
of any representation or warranty of the Sellers contained in Section 4 above
until the Buyer has suffered Adverse Consequences by reason of all such
breaches in excess of an aggregate deductible equal to $200,000 and then only
to the extent of such excess; provided further, that any amounts owed by
Sellers pursuant to this Section 8(b)(i) for Adverse Consequences caused by the
breach of any representation or warranty of the Sellers contained in Section 4
above shall in all events be limited to and paid exclusively from the
Indemnification Escrow Amount in accordance with the terms of the Escrow
Agreement; provided further however, that any amounts owed by Sellers pursuant
to this Section 8(b)(i) for Adverse Consequences caused by the breach of any
representation or warranty of the Sellers contained in Section 4 above which
is caused as a result of Sellers' Fraud shall to the extent the
Indemnification Escrow Amount is not adequate, be jointly and severally paid by
Sellers.
(ii) In the event any of the Sellers breaches any of his or its
covenants in Section 2(a) above or any of his or its representations and
warranties in Section 3(a) above, and, if there
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is an applicable survival period pursuant to Section 8(a) above, provided that
the Buyer makes a written claim for indemnification against the Seller pursuant
to Section 10(g) below within such survival period, then the Seller agrees to
indemnify the Buyer from and against the entirety of any Adverse
Consequences the Buyer shall suffer through and after the date of the claim
for indemnification (but excluding any Adverse Consequences the claim for which
arose after the end of any applicable survival period) caused proximately by
the breach.
(iii) In the event that the Buyer incurs any Adverse Consequences
caused proximately by a breach or disagreement resulting from, arising out
of or relating to any agreement (whether written or oral) between the Target
and Rock-Tenn. that is in existence on or prior to the Closing Date or entered
into pursuant to Section 6(g) above, and provided that the Buyer makes a
written claim for indemnification against the Sellers pursuant to Section 10(g)
below within the period of 18 months after the Closing Date, then each of
the Sellers agrees to jointly and severally indemnify the Buyer from and
against any such Adverse Consequences that the Buyer shall suffer through
and after the date of the claim for indemnification ((but excluding any
Adverse Consequences resulting from, arising out of or relating to a breach by
the Buyer of its covenants under Section 6(g) above or any Adverse
Consequences the claim for which arose after the end of the survival
period); provided however, that any amounts owed by Sellers pursuant to this
Section 8(b)(iii) for such Adverse Consequences shall in all events be limited
to and paid exclusively from the Indemnification Escrow Amount in accordance
with the terms of the Escrow Agreement; provided further however, that any
amounts owed by Sellers pursuant to this Section 8(b)(iii) for such Adverse
Consequences which is caused as a result of Sellers' Fraud shall to the
extent the Indemnification Escrow Amount is not adequate, be jointly and
severally paid by Sellers.
(c) Indemnification Provisions for Benefit of the Sellers. In the
event the Buyer breaches any of its representations, warranties, and covenants
contained herein, and, if there is an applicable survival period pursuant to
Section 8(a) above, provided that any of the Sellers makes a written claim for
indemnification against the Buyer pursuant to
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Section 8(a) above, provided that any of the Sellers make a written claim for
indemnification against the Buyer pursuant to Section 10(g) below within such
survival period, then the Buyer agrees to indemnify each of the Sellers from
and against the entirety of any Adverse Consequences the Seller shall suffer
through and after the date of the claim for indemnification (but excluding any
Adverse Consequences the Seller shall suffer after the end of any applicable
survival period) caused proximately by the breach. Buyer further agrees to
indemnify, defend and hold harmless, to the full extent permissible under
Arkansas law, any person who is now, or has been at any time prior to the
Closing Date, an officer, director or employee of the Target against any
Adverse Consequences based in whole or in part on or arising in whole or in
part out of the fact that such person is or was a director, officer or employee
of Target and pertaining to any matter existing or occurring at or prior to
the Closing Date and whether asserted or claimed prior to, at or after the
Closing Date. Notwithstanding the foregoing sentence, Buyer shall not be
obligated to make any indemnification under this provision for any Shareholder
derivative action or for any matter for which Buyer would be entitled to a
claim for indemnification under Section 8(b).
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third Party Claim") which
may give rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party shall
promptly (and in any event within five business days after receiving notice
of the Third Party Claim) notify each Indemnifying Party thereof in writing.
(ii) Any Indemnifying Party will have the right to assume
and thereafter conduct the defense of the Third Party Claim with counsel of
his or its choice reasonably satisfactory to the Indemnified Party; provided,
however, that the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim
without the prior written consent of
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the Indemnified Party (not to be withheld unreasonably) unless the judgment
or proposed settlement involves only the payment of money damages and does not
impose an injunction or other equitable relief upon the Indemnified Party.
(iii) Unless and until an Indemnifying Party assumes the
defense of the Third Party Claim as provided in Section 8(d)(ii) above,
however, the Indemnified Party may defend against the Third Party Claim in any
manner he or it reasonably may deem appropriate.
(iv) In no event will the Indemnified Party consent to the
entry of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of each of the Indemnifying
Parties (not to be withheld unreasonably).
(e) Determination of Adverse Consequences. The Parties shall make
appropriate adjustments for insurance coverage (net of paid loss
retro-premiums) and take into account the time cost of money (using the
Applicable Rate as the discount rate) in determining Adverse Consequences
for purposes of this Section 8. All indemnification payments under this Section
8 shall be deemed adjustments to the Purchase Price.
(f) Other Indemnification Provisions. The indemnification provisions
in this Section 8 are in addition to, and not in derogation of, any
statutory, equitable, or common law remedy any Party may have for breach of
representation, warranty, or covenant; provided, however, that the Buyer
acknowledges and agrees that the foregoing indemnification provisions in
this Section 8 shall be the exclusive remedy of the Buyer for any breach of
the representations and warranties in Section 4 above.
(g) Failure to Give Notice. The failure of an Indemnified Party to
timely give notice of indemnification required under this Section 8 shall not
release the Indemnifying Party from its indemnification obligations, except
(i) to the extent that such failure adversely affects the ability of the
Indemnifying Party to defend such claim (including Third Party Claims) asserted
by the Indemnified
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Party or (ii) such notice is given after the expiration of the applicable
survival period contained herein.
(h) Matters Disclosed in Disclosure Schedule. Notwithstanding
the fact that Sellers have designated the matters listed in items 4(h)(2)
and 4(p)(2) (relating to failure to obtain required air permits), 4(p)(1)
(relating to matters disclosed in the 1992 Phase I Report) and 4(h)(3) and
4(o)(10) (relating to failure to file a Form 5500) of the Disclosure
Schedule as exceptions and qualifications to the representations and
warranties contained in Section 4 above, Buyer, while being foreclosed from
terminating the Agreement under Section 9 hereof on the basis of the existence
of such matters, will not be precluded from seeking indemnification for any
Adverse
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Consequences resulting from said matters in accordance with the procedures set
forth herein.
9. Termination.
(a) Termination of Agreement. Certain of the Parties may terminate
this Agreement as provided below:
(i) the Buyer and the Sellers' Representative may terminate
this Agreement by mutual written consent at any time prior to the Closing;
(ii) the Buyer may terminate this Agreement by giving written
notice to the Sellers' Representative at any time prior to the Closing in
the event (A) any of the Sellers has within the then previous 10 business
days given the Buyer any notice pursuant to Section 5(e)(i) above, (B) the
development that is the subject of the notice would result in a Material
Adverse Change and (C) any Seller becomes unable or is unlikely to be able to
consumate the transactions contemplated by this Agreement;
(iii) the Buyer may terminate this Agreement by giving
written notice to the Sellers' Representative at any time prior to the Closing
(A) in the event any of the Sellers has breached any material representation,
warranty, or covenant contained in this Agreement in any material respect,
the Buyer has notified the Sellers' Representative of the breach, and the
breach has continued without cure for a period of 30 days after the notice of
breach or (B) if the Closing shall not have occurred on or before June 15,
1997 by reason of the failure of any condition precedent under Section 7(a)
hereof(unless the failure to close results from the Buyer itself breaching
any representation, warranty, or covenant contained in this Agreement); and
(iv) the Sellers' Representative may
terminate this Agreement by giving written notice to the Buyer at any time
prior to the Closing (A) in the event the Buyer has breached any
material representation, warranty, or covenant contained in this Agreement
in any material respect, the Sellers' Representative has notified the Buyer
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of the breach, and the breach has continued without cure for a period of 30
days after the notice of breach or (B) if the Closing shall not have occurred
on or before June 15, 1997 by reason of the failure of any condition
precedent under Section 7(b) hereof (unless the failure to close results from
any of the Sellers themselves breaching any representation, warranty, or
covenant contained in this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 9(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other
Party (except for any liability of any Party then in breach); provided,
however, that the confidentiality provisions contained in Section 5(d) and
Section 10(f) above shall survive termination.
10. Miscellaneous.
(a) Nature of Certain Obligations.
(i) The covenants of each of the Sellers in Section 2(a) above
concerning the sale of his or its Target Shares to the Buyer and the
representations and warranties of each of the Sellers in Section 3(a) above
concerning the transaction are several obligations. This means that the
particular Seller making the representation, warranty, or covenant will be
solely responsible to the extent provided in Section 8 above for any Adverse
Consequences the Buyer may suffer as a result of any breach thereof.
(ii) The remainder of the representations,
warranties, and covenants in this Agreement are joint and several obligations.
This means that each Seller will be responsible to the extent provided in
Section 8 above for any and all of the Adverse Consequences the Buyer may
suffer as a result of any breach thereof; provided, however, that any
amounts owed by Sellers pursuant to Section 8(b)(i) for Adverse Consequences
caused by the breach of any representation or warranty of the Sellers contained
in Section 4 above shall in all events be limited to and paid exclusively from
the Indemnification Escrow Amount; provided further however, that any amounts
owed by Sellers pursuant to Section 8(b)(i) for Adverse Consequences caused by
the breach of
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any representation or warranty of the Sellers contained in Section 4 above
which is caused as a result of Sellers' Fraud shall to the extent the
Indemnification Escrow Amount is not adequate, be jointly and severally paid by
Sellers.
(b) No Third-Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or
among the Parties, written or oral, to the extent they have related in any
way to the subject matter hereof; provided however, that the Confidentiality
Agreement shall continue in full force and effect.
(d) Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement
or any of his or its rights, interests, or obligations hereunder without the
prior written approval of the Buyer and the Sellers' Representative; provided
however, that the Buyer may (i) assign any or all of its rights and interests
hereunder to one or more of its Affiliates and (ii) designate one or more of
its Affiliates to perform its obligations hereunder (in any or all of which
cases the Buyer nonetheless shall remain responsible for the performance
of all of its obligations hereunder).
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this
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<PAGE> 58
Agreement.
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and
then two business days after) it is sent by registered or certified mail,
return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Sellers:
C. Randolph Warner, Jr.
12332 Harbor Ridge Drive
Palm City, Florida, 34999
With a copy to:
Les R. Baledge, Esq.
120 East Fourth Street
Little Rock, Arkansas 72201
If to the Buyer:
President
Bremner, Inc.
800 Market Street, Suite 2900
St. Louis, MO 63101
With a copy to:
General Counsel
Ralcorp Holdings Inc.
800 Market Street, Suite 2900
St. Louis, MO 63101
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
53
<PAGE> 59
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
(h) Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of Arkansas without giving
effect to any choice or conflict of law provision or rule (whether of the
State of Arkansas or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of Arkansas.
(i) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
the Buyer and the Sellers' Representative. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
(j) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
(k) Expenses. Each of the Buyer and the Target will bear its own
costs and expenses (including legal fees and expenses) incurred in connection
with this Agreement and the transactions contemplated hereby.
(l) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation
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<PAGE> 60
arises, this Agreement shall be construed as if drafted jointly by the
Parties and no presumption or burden of proof shall arise favoring or
disfavoring any Party by virtue of the authorship of any of the provisions of
this Agreement. Any reference to any federal, state, local, or foreign
statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise.
The word "including" shall mean including without limitation.
(m) Incorporation of Exhibits, Annexes, and Schedules. The
Exhibits, Annexes, and Schedules identified in this Agreement are
incorporated herein by reference and made a part hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
55
<PAGE> 61
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
BUYER:
BREMNER, INC.
By: /s/ Joe R. Micheletto
-----------------------------
Name: Joe R. Micheletto
-----------------------------
Title: Chief Executive Officer
----------------------------
SELLERS:
WARREN BLACK
/s/ C. Randolph Warner, Jr.
----------------------------------
By: C. Randolph Warner, Jr.,
Attorney-in-Fact
VICTOR L. CARY
/s/ C. Randolph Warner, Jr.
----------------------------------
By: C. Randolph Warner, Jr.,
Attorney-in-Fact
JANE WARNER MOORE
/s/ C. Randolph Warner, Jr.
----------------------------------
By: C. Randolph Warner, Jr.,
Attorney-in-Fact
THOMAS C. MUELLER
56
<PAGE> 62
/s/ C. Randolph Warner, Jr.
----------------------------------
By: C. Randolph Warner, Jr.,
Attorney-in-Fact
57
<PAGE> 63
SUSAN WARNER SKELSEY
/s/ C. Randolph Warner, Jr.
----------------------------------
By: C. Randolph Warner, Jr.,
Attorney-in-Fact
C. RANDOLPH WARNER, JR.
/s/ C. Randolph Warner, Jr.
----------------------------------
C. Randolph Warner, Jr.
C. RANDOLPH WARNER, III.
/s/ C. Randolph Warner, Jr.
----------------------------------
By: C. Randolph Warner, Jr.,
Attorney-in-Fact
KATE WARNER
/s/ C. Randolph Warner, Jr.
----------------------------------
By: C. Randolph Warner, Jr.,
Attorney-in-Fact
MATTHEW WARNER
/s/ Matthew Warner
----------------------------------
Matthew Warner
58
<PAGE> 64
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
59
<PAGE> 65
GUARANTOR:
THE UNDERSIGNED, RALCORP HOLDINGS, INC., THE PARENT OF BUYER, DOES HEREBY
UNCONDITIONALLY GUARANTEE THE PAYMENT AND PERFORMANCE OF ALL COVENANTS AND
OBLIGATIONS OF BUYER UNDER THIS AGREEMENT INCLUDING, BUT NOT LIMITED TO,
BUYER'S OBLIGATIONS TO FUND THE GROSS PURCHASE PRICE AT CLOSING.
RALCORP HOLDINGS, INC.
By: /s/ Joe R. Micheletto
---------------------
Name: Joe R. Micheletto
--------------------
Title: Chief Executive Officer and President
-------------------------------------
60
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
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