Formation Agreement

FORMATION AGREEMENT


BETWEEN


SNAKE RIVER SUGAR COMPANY


AND


THE AMALGAMATED SUGAR COMPANY


OF THE


THE AMALGAMATED SUGAR LLC


DATED AS OF


JANUARY , 1996
--


TABLE OF CONTENTS


RECITALS..................................................................1


ARTICLE IDEFINITIONS......................................................1


ARTICLE IIFORMATION.......................................................7


2.1 Snake River Capital Contribution................................7
2.2 Amalgamated Contribution........................................8
2.3 Assumed Liabilities.............................................8
2.4 Closing.........................................................8


ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF AMALGAMATED..................9


3.1 Organization, Qualification and Corporate Power.................9
3.2 Authorization of Transaction....................................9
3.3 Noncontravention...............................................10
3.4 Brokers' Fees..................................................10
3.5 Title to Tangible Assets.......................................10
3.6 Subsidiaries...................................................10
3.7 Financial Statements...........................................10
3.8 Undisclosed Liabilities........................................11
3.9 Legal Compliance...............................................11
3.10 Real Property and Leases.......................................11
3.11 Contracts......................................................12
3.12 Powers of Attorney.............................................12
3.13 Litigation.....................................................12
3.14 Environment, Health, and Safety................................13
3.15 Employee Benefits..............................................13
3.16 Events Subsequent to Most Recent Fiscal Quarter End............14


ARTICLE IVREPRESENTATIONS AND WARRANTIES OF SNAKE RIVER..................14


4.1 Organization...................................................14
4.2 Authorization of Transaction...................................14
4.3 Noncontravention...............................................14
4.4 Brokers' Fees..................................................15
4.5 Disclosure.....................................................15


ARTICLE VPRE-CLOSING COVENANTS...........................................15


5.1 General........................................................15
5.2 Notices and Consents...........................................15
5.3 Operation of Business..........................................15
5.4 Obtaining Financing............................................16
5.5 Full Access....................................................16
5.6 Notice of Developments.........................................16
5.7 Exclusivity....................................................16


ARTICLE VICONDITIONS TO CLOSING..........................................17


6.1 Conditions to Obligation of Snake River........................17
6.2 Conditions to Obligation of Amalgamated........................18


ARTICLE VIITERMINATION...................................................19


7.1 Events of Termination..........................................19
7.2 Effect of Termination..........................................20


ARTICLE VIIIMISCELLANEOUS................................................20


8.1 Parties Obligated and Benefited................................20
8.2 Notices........................................................20
8.3 Attorneys' Fees................................................22
8.4 Amendment or Waiver............................................22
8.5 Captions.......................................................22
8.6 Choice of Law..................................................22
8.7 Terms..........................................................22
8.8 Further Actions................................................22
8.9 Time...........................................................22
8.10 Counterparts...................................................23
8.11 Entire Agreement...............................................23
8.12 Severability...................................................23
8.13 Construction...................................................23
8.14 Expenses.......................................................23
8.15 Press Releases and Public Announcements........................23
8.16 References.....................................................23


LIST OF EXHIBITS
----------------


EXHIBIT A Company Agreement of The Amalgamated Sugar LLC EXHIBIT B Officers of Amalgamated EXHIBIT C Financial Statements RELATED TRANSACTION AGREEMENTS


EXHIBIT D-1 Form of Office and Ground Lease
EXHIBIT D-2 Indemnification and Post Closing Agreement
EXHIBIT D-3 Form of Limited Recourse Promissory Note
EXHIBIT D-4 Form of Non-Recourse Promissory Note
EXHIBIT D-5 Form of Limited Recourse Pledge Agreement
EXHIBIT D-6 Form of Pledge Agreement (Non-Recourse Note)
EXHIBIT D-7 Form of Indemnification Pledge Agreement
EXHIBIT D-8 Four Forms of Memorandum of Agreement between Sugarbeet Growers and Amalgamated EXHIBIT E Directors of Snake River EXHIBIT F Form of Employment Agreement


LIST OF SCHEDULES
-----------------


SCHEDULE 1(D) Personal Property and Interests SCHEDULE 2.3 Excluded Liabilities SCHEDULE 3 General Exceptions to Representations and Warranties of Amalgamated SCHEDULE 3.8 Undisclosed Liabilities SCHEDULE 3.10(A) Real Property SCHEDULE 3.10(B) Leased Real Property SCHEDULE 3.11 Material Contracts SCHEDULE 3.12 Powers of Attorney SCHEDULE 3.13 Pending Litigation


SCHEDULE 3.14 Noncompliance with the Environmental, Health, and Safety Laws SCHEDULE 3.15 Employee Benefit Plans SCHEDULE 4 Exceptions to Representations and Warranties of Snake River


FORMATION AGREEMENT
-------------------


THIS FORMATION AGREEMENT (this "Agreement" or this "Formation Agreement") is made as of January , 1996, between SNAKE RIVER SUGAR COMPANY,
-- an Oregon cooperative (`Snake River''), and THE AMALGAMATED SUGAR COMPANY, a Utah corporation (`Amalgamated''), and, upon its formation and the execution and delivery of a counterpart to this Agreement, THE AMALGAMATED SUGAR LLC, a Delaware limited liability company (the `Company''). Together, Snake River, Amalgamated and the Company shall be referred to in this Agreement as the `Parties.'' Capitalized terms not otherwise defined in this Agreement have the meaning ascribed to such terms in Article I.


RECITALS
--------


WHEREAS, Snake River and Amalgamated desire to form a limited liability company, to be known as `The Amalgamated Sugar LLC,'' pursuant to the Company Agreement attached as EXHIBIT A (together with the exhibits thereto, the "Company Agreement") to conduct a sugarbeet processing business; and


WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, Amalgamated desires to make a capital contribution to the Company of certain assets, subject to certain liabilities, in return for which Amalgamated shall receive a Membership Interest in the Company, as set forth in the Company Agreement; and


WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, Snake River shall make a capital contribution to the Company of $[ ] million in cash, in return for which Snake River shall receive a -------- Membership Interest in the Company, as set forth in the Company Agreement;


NOW, THEREFORE, the Parties agree as follows:


ARTICLE I
DEFINITIONS


The following terms used in this Formation Agreement shall have the following meanings (unless otherwise expressly provided in this Agreement);


(a)`Affiliate'' has the meaning, with respect to any Person, set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended as of the Closing Date.


(b)`Affiliated Group'' has the meaning set forth in Code Sec. 1504.


(c)`Amalgamated'' has the meaning set forth in the recitals above.


(d)`Amalgamated Assets'' means all the properties and assets currently owned by Amalgamated (other than Excluded Assets), whether or not located on its premises, or shown on the Most Recent Financial Statement, including, but not limited to, all right, title and interest in, to and under


(i) all real property, and all leaseholds and subleasheholds thereon, improvements, fixtures and fittings thereon (such as appurtenant rights in and to public streets), as listed on SCHEDULE 3.11(A) AND (B), (ii) all personal property and interests, including machinery, equipment, furniture, office equipment, communications equipment, vehicles, and other tangible property, as listed on SCHEDULE 1(D), (iii) all Related Contracts and Licenses, (iv) all of Amalgamated's books, records, ledgers, files, documents, correspondence, lists, plats, architectural plans, drawings, specifications, creative materials, advertising and promotional materials, studies, reports and other printed or written materials, whether in hard copy or computer format, including without limitation engineering information, manuals and data, fixed asset registers and engineering reports, lists of present and former suppliers, personnel and employment records, and any information relating to any Tax (other than income or franchise Taxes); and (v) all of Amalgamated's Intellectual Property.


(e)`Amalgamated Credit Agreements'' means the Credit Agreement dated July 1, 1993, as most recently modified on May 31, 1996, among Amalgamated, United States National Bank of Oregon and the banks named therein, plus the $5,000,000 promissory note dated as of August 23, 1996 and due September 30, 1997, issued by Amalgamated in favor of United States National Bank of Oregon.


(f)`Amcorp'' means Amcorp, Inc., a Delaware corporation.


(g)`Assumed Liabilities'' has the meaning set forth in Section 2.3.


(h)`Business Day'' means any day excluding a Saturday, Sunday and any day which is a legal holiday under the laws of the State of Utah or is a day on which banking institutions located in such state are closed.


(i) `Closing'' has the meaning set forth in Section 2.4.


(j) `Closing Date'' means the date of the Closing.


(k)`Code" means the Internal Revenue Code of 1986, as amended, and the temporary, proposed and final Treasury Regulations promulgated thereunder, and any reference to a section of the Code shall include any successor section or provision of the Code.


(l) `Company Agreement'' has the meaning set forth in the Recitals.


(m)`Confidential Information'' means any information concerning the businesses and affairs of Amalgamated that is not already generally available to the public.


(n) `Conveyance Documents'' has the meaning set forth in Section 2.4(d).


(o) `Drop Date'' has the meaning set forth in Section 7.1.


(p)"Employee Benefit Plan" means any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension


Benefit Plan, (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any multiemployer plan as defined in Section 3(37) of ERISA), or (d) Employee Welfare Benefit Plan.


(q)"Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec. 3(2).


(r)"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec. 3(1).


(s)"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.


(t)"Environmental, Health, and Safety Laws" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Occupational Safety and Health Act of 1970, each as amended as of the Closing Date, together with all other laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) in effect as of the Closing Date of federal, state, local, and foreign governments (and all agencies thereof) concerning pollution or protection of the environment, public health and safety, or employee health and safety, including laws in effect as of the Closing Date relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic


materials or wastes into ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes.


(u)`Entity" means any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, governmental authority, cooperative, association or any foreign trust or foreign business organization or any other entity of any kind whatsoever.


(v)`Excluded Assets" means the Amalgamated corporate charter, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, stock transfer books, blank stock certificates, and other documents relating to the organization, maintenance, and existence of Amalgamated as a corporation. Confirm whether the beet contract is going to LLC or directly to SRSC (per Lemke memo of 10/1)
(w)`Excluded Liabilities" means (i) any Liability related to any exercise of compensatory options to purchase Valhi stock held by employees or former employees of Amalgamated as of the Effective Date or upon the lapse of restrictions on restricted shares of Valhi stock held by such employees or former employees, and (ii) and the specific Liabilities set forth on SCHEDULE 2.3 (collectively, the `Excluded Liabilities'').]


(x)"Financial Statement" has the meaning set forth in Section 3.7.


(y)"GAAP" means United States generally accepted accounting principles as in effect from time to time.


(z)"Intellectual Property" means (i) all trademarks, patents, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith and (ii) all computer software (including data and related documentation).


(aa)"Knowledge" means, for any matter, actual knowledge without independent investigation of the officers of Amalgamated listed on EXHIBIT B, or actual knowledge of facts or circumstances such that the matter should reasonably have been actually known by such officers.


(bb)`Liability'' means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes.


(cc)`Material Adverse Change'' means a material adverse change in the financial condition of Amalgamated since the Most Recent Fiscal Quarter End. Notwithstanding the foregoing, no event occurring after the Most Recent Fiscal Quarter End generally applicable to all companies involved in the sugar processing industry, including without limitation changes in market conditions,


trends, government regulations, consumer preferences or competition, shall be deemed to constitute a Material Adverse Change.


(dd)`Member'' means each of the Persons with an ownership interest in the Company and which executes a counterpart of the Company Agreement as a Member and each of the Persons who may hereafter become Members.


(ee) `Membership Interest'' means the rights of a Member or, in the case of an Assignee, the rights of the assigning Member in distributions (liquidating or otherwise) and allocations of the profits, losses, gains, deductions and credits of the Company.


(ff) "Most Recent Financial Statements" has the meaning set forth in Section 3.7 below.


(gg) "Most Recent Fiscal Quarter End" has the meaning set forth in Section 3.7 below.


(hh) `Ordinary Course of Business'' means the ordinary course of Amalgamated's business consistent with Amalgamated's past custom and practice (including with respect to quantity and frequency).


(ee) `Parties'' has the meaning set forth in the preface of this Agreement.


(ff)`Person'' means any individual or Entity, as well as the heirs, executors, administrators, legal representatives, successors and assigns of such `Person'' where the context so requires.


(gg)"Related Contracts and Licenses" means all contracts and agreements, leases, licenses, commitments, requests for proposals, correspondence, purchase orders and other instruments, franchises, approvals, permits, licenses, orders, registrations, certificates, variances and similar rights obtained from governmental authorities used or held by Amalgamated.


(hh)`Required Consents'' means all franchises, licenses, authorizations, approvals and consents required under any agreement or otherwise for Amalgamated to transfer the Amalgamated Assets to the Company without breaching or otherwise defaulting any representation or warranty made by Amalgamated in this Agreement.


(mm) `Security Interest'' means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (a) mechanic's,
----------


materialmen's, and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) purchase money liens and liens securing rental payments under capital lease arrangements, and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money.


(ii)`Snake River'' has the meaning set forth in the recitals above.


(jj)`Snake River Capital Contribution'' has the meaning set forth in Section 2.1 below.


(kk)`Snake River Materials'' means the offering circular and other materials relating to Snake River's sale of debt and equity securities in connection with the organization and funding of Snake River and related transactions, including this Formation Agreement.


(qq) `Subsidiary'' means any corporation with respect to which a specified Person (or a Subsidiary thereof) has the power to vote or direct the voting of sufficient securities to elect a majority of the directors.


(ll)"Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.


(mm)`Transaction Agreements'' means this Agreement, the Company Agreement, the Office and Ground Lease, the form of which is attached as EXHIBIT D-1, the Indemnification and Post Closing Agreement, the form of which is attached as EXHIBIT D-2, the Limited Recourse Promissory Note, the form of which


is attached hereto as EXHIBIT D-3, the Non-recourse Promissory Note, the form of which is attached hereto as EXHIBIT D-4, the Limited Recourse Pledge Agreement, the form of which is attached hereto as EXHIBIT D-5, the Pledge Agreement (Non- Recourse Note), the form of which is attached hereto as EXHIBIT D-6, the Indemnification Pledge Agreement, the form of which is attached hereto as EXHIBIT D-7, and the four Memoranda of Agreement between the Sugarbeet Growers and Amalgamated, the form of which is attached hereto as EXHIBIT D-8.


(nn)`Valhi'' means Valhi, Inc., a Delaware corporation and the parent of Amcorp.


(oo)`Valhi Credit Agreement'' means the Credit and Pledge Agreement among Valhi, Amcorp and The Chase Manhattan Bank, as Agent, dated August 25, 1995, as amended August 23, 1996.


ARTICLE II
FORMATION
---------


2.1 Snake River Capital Contr ...