AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON January 26, 1999
Registration No. 333-48165
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO FORM SB-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AWG, Ltd.
(Name of small business issuer in its charter)
NEVADA 2084 38-0685631
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification
of incorporation Classification Code Number Number)
or organization)
4162 Big Ranch Road
Napa, CA 94558
(707) 259-6777
(Address and telephone number of principal executive offices
and principal place of business)
JOSEPH E. ANTONINI
CHAIRMAN
AWG, Ltd.
1800 West Maple Road
Troy, MI 48084
(248) 614-3880
(Name, address and telephone number of agent for service)
COPIES TO:
Michael J. Eizelman, Esq. Ronald Brescia, Esq.
Lawrence S. Jackier, Esq. Doros & Brescia
Jackier, Gould, Bean, 1140 Avenue of the Americas
Upfal & Eizelman Penthouse 22nd Floor
1533 North Woodward New York, NY 10036
Suite 250 (212) 921-0550
Bloomfield Hills, MI 48304
(248) 642-0500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If the Form is filed to register additional securities for an Offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same Offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
SERIES OF REGISTERED MAXIMUM MAXIMUM REGISTRATION
SECURITIES OFFERING AGGREGATE FEE (1)
PRICE PER OFFERING
SHARE (1) PRICE (1)
<S> <C> <C> <C> <C>
Series A 6%, 1,295,000 $10 $13,038,500 $3,847
Par Value $.001
Preferred Stock
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act. Includes shares issuable upon
exercise of Underwriters warrants (69,000 shares at $16.50 per share) and
Over-allotment Option granted to the Underwriters of the total Registration
Fee, $2,950.00 has been previously paid.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE THE FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
AWG, Ltd.
CROSS REFERENCE SHEET SHOWING LOCATION IN
PROSPECTUS OF PART I OF FORM SB-1
HEADING CAPTION OR LOCATION IN PROSPECTUS
1. Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front Cover Page;
Outside Back Cover Page
2. Significant Parties..................... Prospectus Summary;
The Company; Risk Factors
3. Relationship with Issuer of Experts
Named in Registration Statement..... N/A
4. Selling Security Holders................ Principal Stockholders
5. Changes in and Disagreements with
Accountants......................... N/A
6. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities..................... Management Relationships,
Transactions and Remuneration
7. Executive Compensation.................. Management Relationships,
Transactions and Remuneration
8. Financial Statements.................... Consolidated Financial Statements
<PAGE>
AWG, LTD.
1,100,000 Shares of Series A Preferred Stock
600,000 Shares are offered on behalf of the Company
500,000 Shares are being registered on behalf of a
Selling Securityholder for future sale
Of the 1,100,000 shares (the "Shares") of Series A 6% Preferred Stock
(the "Preferred Stock") offered hereby, 600,000 shares are being offered by
the Underwriters on a firm commitment basis with the net proceeds payable to
AWG, Ltd. ("AWG" or the "Company"). An additional 500,000 shares of Preferred
Stock are being registered on behalf of a single stockholder who cannot sell
his shares for a period of 13 months subsequent to the effective date of this
offering. It is currently estimated that the initial public offering price
per share of Series A 6% Preferred Stock will be $10. Any ultimate sale of
the additional 500,000 shares of Preferred Stock may depress the price of the
Preferred Stock as it is offered into the Market, whether or not all of such
shares are actually sold.
The Company has two classes of stock, the Preferred Stock which is
offered hereby and Common Stock. Holders of the Preferred Stock do not have
voting rights except as may be required by applicable law. The holders of the
Common Stock are entitled to 1 vote per share. Other than with respect to
shares held by officers, directors and affiliates, the Preferred Stock and
the Common Stock will be freely transferrable. The Preferred Stock will
entitle the holders thereof to a Cumulative Preferred Annual Return of 6% per
annum payable in additional shares of Preferred Stock in an amount equivalent
to 6% of the number of shares of Preferred Stock registered in the name of
each of the holders as of the close of business on December 31 of each year
(the"Record Date"), which shall be issued to each holder within thirty (30)
days after the Record Date and will have a preference upon liquidation of the
Company in the amount of $10 per share. Other than for the foregoing, the
Preferred Stock will not share in any profits of the Company. The Company may
not redeem the Preferred Stock except at such price and upon such terms as
may be agreed upon by the Company and shareholders owning a majority of the
outstanding shares of Preferred Stock. No sinking fund has or will be
established to fund the Company's redemption obligations. INVESTORS SHOULD BE
AWARE THAT AS A RESULT OF THE FOREGOING, THEY WILL NOT BE ENTITLED TO ANY
CASH DISTRIBUTIONS WHATSOEVER FROM THE COMPANY UNTIL SUCH TIME AS THE COMPANY
IS LIQUIDATED, SOLD OR THE SHARES OF PREFERRED STOCK ARE REDEEMED BY THE
COMPANY.
Application has been made for inclusion of the Preferred Stock for
quotation on the Nasdaq SmallCap Market under the symbol JEAP.
Prior to this Offering, there has been no public market for the
Preferred Stock of the Company. The Common Stock of the Company is traded in
the "pink sheets" under the trading symbol "VINE".
All expenses of this Offering including the expenses of the selling
security holder will be borne by the Company other than any commissions
payable to the Underwriters with respect to shares sold by the selling
security holder.
SEE "RISK FACTORS" beginning on page 5 for a discussion of certain risks that
should be considered by prospective purchasers of the Preferred Stock.
The Company intends on offering the securities in the states of California,
Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois,
Kansas, Louisiana, Maryland, Nevada, New Jersey, New York, North Carolina,
Ohio, Rhode Island and Texas.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
(1)Underwriting
Discounts and (2)Proceeds To
Price To Public Commissions Company
--------------- --------------- --------------
<S> <C> <C> <C>
Per Share $ 10 1 9
---------- -------- ----------
Total(3) $6,000,000 $600,000 $5,400,000
========== ======== ==========
</TABLE>
If Shares of Preferred Stock offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and delivery by them
and subject to their right to reject any order in whole or in part. It is
expected that certificates for the Shares will be ready for delivery in New
York, New York on or about , 1999 against payment therefore in
immediately available funds.
- --------
(1) Excludes 2% non-accountable expense allowance payable by the Company to
the Underwriters. Company has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933. See "Plan of Distribution."
(2) Before deducting offering expenses payable by the Company estimated to be
at $308,000 including, among other expenses, legal and accounting fees,
printing, mailing, and marketing expenses. This is in addition to fees
and expenses payable to the Underwriters as set forth in Footnote 1
above.
(3) The Company has granted the Underwriters an option for 45 days to
purchase up to an additional 90,000 shares of Preferred Stock at the
initial public offer price per share, less the underwriting discount,
solely to cover over-allotments. If such options are exercised in full,
the total initial public offering price underwriting discount and
proceeds to the Company will be $6,900,000, $690,000 and $6,210,000. See
"Plan of Distribution."
KLEIN MAUS AND SHIRE NUTMEG SECURITIES, LTD.
The date of this prospectus is , 1999.
<PAGE>
AWG, Ltd. is not a reporting company pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). However, the Company
will become subject to Section 15(d) of the Exchange Act for at least one (1)
year following the Effective Date of the Offering and will be required to
provide security holders with such annual and quarterly reports as required
under the Exchange Act.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form SB-1 pursuant to the rules
and regulations under the Securities Act of 1933, as amended, in connection
with the shares offered hereby. This prospectus omits certain information
contained in the registration statement and reference is hereby made to the
registration statement and exhibits thereto for further information with
respect to the Company and the shares to which the prospectus relates. A copy
of the registration statement may be obtained from the public reference
section of the Commission at: Judiciary Plaza, 450 5th Street, N.W.,
Washington, D.C. 20549; and at the Commission's Regional Office located at:
1400 Citicorp Center, 500 West Madison Street, Chicago, IL 60661 upon payment
of prescribed fees. In addition, the Commission maintains a web site on the
Internet at the address http://www.sec.gov that contains reports, proxy
information statements and other information regarding registrants that file
electronically with the Commission.
2
<PAGE>
AWG, LTD.
(Exact name of Company as set forth in Charter)
Type of securities offered: Series A 6% Preferred Stock
Maximum number of securities offered on behalf of the Company: 600,000 shares
Price per security: $10 per share
Total proceeds: If maximum sold: $6,000,000
In addition to the foregoing, 500,000 shares will be registered for the
account of a single shareholder who currently owns 500,000 shares of Series A
6% Preferred Stock. (See Question 37)
(See Questions 9 and 10)
Is a commissioned selling agent selling the securities in this offering?
[x] Yes [ ] No
If yes, what percent is commission of price to public? 10%.
Is there other compensation to selling agent(s)? [x] Yes [ ] No
Is there a finder's fee or similar payment to any person?[ ] Yes [x] No
(See Question No. 22)
Is there an escrow of proceeds until minimum is obtained? [ ] Yes [x] No
(See Question No. 26)
Is this offering limited to members of a special group, such as employees of
the Company or individuals? [ ] Yes [x] No (See Question No. 25)
Is transfer of the securities restricted? [ ] Yes [x] No (See Question No. 25)
INVESTMENT IN SMALL BUSINESSES INVOLVES A HIGH DEGREE OF RISK, AND INVESTORS
SHOULD NOT INVEST ANY FUNDS IN THIS OFFERING UNLESS THEY CAN AFFORD TO LOSE
THEIR INVESTMENT IN ITS ENTIRETY. SEE QUESTION NO. 2 FOR THE RISK FACTORS
THAT MANAGEMENT BELIEVES PRESENT THE MOST SUBSTANTIAL RISKS TO AN INVESTOR IN
THIS OFFERING.
INVESTORS SHOULD BE AWARE THAT UNDER PRIOR MANAGEMENT, THE COMPANY SOLD
SECURITIES IN VIOLATION OF FEDERAL AND STATE SECURITIES LAWS. AS A RESULT, IT
IS POSSIBLE THAT PROCEEDS FROM THIS OFFERING COULD BE USED TO SATISFY ANY
COMPANY LIABILITIES THAT MAY ARISE AS A RESULT OF SUCH VIOLATIONS. AS OF THE
DATE OF THIS PROSPECTUS, NO INVESTOR HAS INSTITUTED ANY ACTION AGAINST THE
COMPANY NOR HAS ANY SUCH THREAT BEEN COMMUNICATED TO THE COMPANY.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION
OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF
ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON
THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR SELLING LITERATURE.
THESE SECURITIES ARE OFFERED UNDER AN EXEMPTION FROM REGISTRATION; HOWEVER,
THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THESE
SECURITIES ARE EXEMPT FROM REGISTRATION.
This Company:
[ ] Has never conducted operations.
[ ] Is in the development stage.
[x] Is currently conducting operations.
[ ] Has shown a profit in the last fiscal year
[ ] Other (Specify):___________________________
(Check at least one, as appropriate)
3
<PAGE>
This offering has been registered for offer and sale in the following states:
State State File No. Effective Date
----- -------------- --------------
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
4
<PAGE>
THE COMPANY
1. Exact corporate name: AWG, Ltd.
State and date of incorporation: Nevada, June 7, 1995
Street address of principal office: 4162 Big Ranch Road
Napa, California 94558
Company Telephone Number: (707) 259-6777 or (248) 614-3880
Fiscal year: December 31
-------- ----
(month) (day)
Person(s) to contact at Company with respect to offering:
Joseph E. Antonini
Mack H. Jennings
Telephone Number (if different from above): (___) _________
RISK FACTORS
2. List in order of importance the factors which the Company considers to be
the most substantial risks to an investor in this Offering in view of all of
the facts and circumstances or which otherwise make the Offering one of high
risk or speculative
Lack of Profitability; Receipt of Going Concern Emphasis Paragraph From
Deloitte & Touche, LLP. As of the date of this Offering, the Company has not
yet realized a profit from operations. Moreover, the Company's auditors,
Deloitte & Touche, LLP issued an opinion with an emphasis paragraph in
connection with its 1997 audit of the Company related to the Company's
ability to continue as a going concern based upon working capital deficiency,
limited capital resources, ongoing cash flow deficits and violations of
federal and state securities laws which occurred under prior management. (See
Question 45) While the Company believes that it will eventually achieve
profitability, it expects to realize additional near-term losses as it
attempts to expand its operations. There can be no assurance that the Company
will ever succeed in expanding its operations and sales or in limiting its
expenses to the extent necessary to achieve profitability.
Dependence Upon Offering. Wine making is a capital intensive business and the
Company presently has limited working capital. As the Company expands its
product lines and sales according to its development plan, the Company can
expect to incur additional expenses and capital costs to replant vineyards,
build inventory and acquire equipment and facilities for products which may
not reach the market for one to three years. Moreover, the Company may
require additional capital as cash flow deficits may continue beyond expected
time periods. There is no assurance the Company will be able to obtain
financing when required or that such financing will be available on terms
acceptable to the Company. Should the necessary additional financing not be
available, the Company may elect to: (i) reduce expansion to a level
consistent with the net proceeds from this Offering; or (ii) seek additional
capital from alternative sources.
Possible Violations of Federal and State Securities Laws By Prior Management.
Under prior management, during the period from March 5, 1996 through November
27, 1996, the Company sold shares of its Common Stock to three (3)
consultants retained by the Company as well as to approximately seven (7)
investors not affiliated with the Company. The aggregate amount raised from
such sales was approximately One Million Three Hundred Sixty Thousand Dollars
($1,360,000). The securities were not registered. Moreover, it appears that
no federal exemption was available for such sales and that such sales may
have also violated the laws of one or more states including, California. The
Company is not currently able to determine what exposure, if any, the Company
has in connection with such sales. Any potential liabilities to investors who
acquired the shares of the stock of the Company could result in a significant
portion of the proceeds of this Offering being utilized to satisfy such
liabilities. As of the date of this Prospectus, no investor has instituted
any action against the Company nor has any such threat been communicated to
the Company. (See Question 45)
Distribution of Product. The Company currently sells its product principally
to distributors for resale to retail outlets and restaurants. These channels
of distribution have recently gone through rapid change including the
consolidation of many of the distributors. This decrease in distributors
lessens the number of distribution alternatives and decreases
4
<PAGE>
individual distributor's attention to smaller brand names. The Company has no
written contracts with any of its distributors. There can be no assurance
that the Company's distributors and retailers will continue to purchase the
Company's products or provide the Company's products with adequate levels of
promotional support.
Dram Shop Liability. The serving of alcoholic beverages to a person known to
be intoxicated may, under certain circumstances, result in the server being
held liable to third parties for injuries caused by the intoxicated customer.
The Company will serve wine to customers. If an intoxicated customer is
served wine and subsequently injures someone, the Company may be held liable
for damages to the injured persons. The Company has host liquor liability
insurance coverage as part of its General Liability Insurance and will
maintain such coverage as long as the premiums remain financially reasonable.
The aggregate limit under such insurance is $5,000,000. However, the Company
is unable to make any prediction as to whether the premiums will remain
financially reasonable in the future. A large damage award against the
Company, if not adequately covered by insurance, could adversely affect the
Company's financial position and, perhaps, jeopardize its ability to operate.
Dependence on Key Personnel. The Company's success will be heavily dependent
upon the efforts of Mr. Mario Andretti and Mr. Joseph Antonini, both of whom
are contributing their efforts at modest compensation. The Company's
marketing strategy is dependent in large part on Mr. Andretti and his
continued association with the Company. In the event that Mr. Andretti left
the Company for any reason, it would have a materially adverse impact on the
Company's marketing strategy and its ability to sell its products. Mr.
Antonini has been instrumental in designing the Company's current financial,
operational and marketing strategy and is instrumental in its ongoing
implementation. In the event that Mr. Antonini for any reason discontinued
his relationship with the Company, it would have a materially adverse impact
on the ability of the Company to achieve its stated goals. Finally, the
Company is dependent to a certain degree on its wine maker Robert Pepi. While
the Company believes that other wine makers are available at similar
compensation and at relatively similar levels of competence, the loss of Mr.
Pepi would have a material short term adverse impact on the Company. The
Company currently has a Licensing Agreement in place with Mr. Andretti.
However, the Company does not have written Agreements with Mr. Antonini or
Mr. Pepi. (See Questions 39 and 40)
Lack of Director and Officer Liability Insurance. The Company has provisions
in its Bylaws providing indemnification by the Company to all directors and
officers to the maximum extent permitted under applicable law, including the
advancement of expenses incurred by a director or officer in any law suit in
which they may be involved. In addition, the Company's Bylaws contain
provisions limiting a director's liability for monetary damages for breach of
fiduciary duty, except in circumstances involving certain wrongful acts. The
cost associated with indemnifying a director or officer could be significant
and, if not covered by insurance, could adversely affect the Company's
financial performance. Furthermore, should the Company advance litigation
expenses to a director or officer and the director or officer is required to
repay the advanced expenses because it is ultimately adjudged that the
director or officer is not entitled to indemnification, the director or
officer may not have sufficient cash or assets to repay the expenses
advanced. The Company does not currently maintain officers and directors
liability insurance. (See "MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND
REMUNERATION")
<PAGE>
Potential Impact of Penny Stock Rules. It is possible that subsequent to
completion of the Offering, trading the Preferred Stock may become subject to
the Penny Stock Rules adopted pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Generally, Penny Stock is defined as a
security that is priced under $5; is not traded on a national securities
exchange or on NASDAQ (the NASD's automated quotation system for actively
traded stocks) and is issued by a company that has less then $5,000,000 in
net tangible assets and has been in business less than 3 years, by a company
that has less than $2,000,000 in net tangible assets and has been in business
for at least 3 years, or by a company that has revenues of less than
$6,000,000 for 3 years. To the extent that the trading price of the Preferred
Stock falls below $5, the Preferred Stock is not traded on NASDAQ and the
Company has net tangible assets of less than $5,000,000 (reduced to
$2,000,000 in July, 1999) trading in the Company's Preferred Stock would be
subject to the Penny Stock Rules. The Penny Stock Rules require that any
broker-dealer effecting transactions in Penny Stock verify that Purchasers
are suitable for the investment and that such Purchasers receive a detailed
statement as to the risks of investing in Penny Stock. By virtue of the fact
that potential purchasers must be pre-qualified to purchase Penny Stock and
that special disclosure rules regarding investment of Penny Stocks must be
satisfied, the potential market for the Company's Preferred Stock would be
reduced and it may be more difficult to sell the Preferred Stock on a timely
basis which may further impact the ultimate trading price. Neither the
Company nor the Underwriters can predict whether the Company will become
subject to the Penny Stock Rules. However, it should be noted that the
Company does not currently meet the Company tangible net asset test nor is
the Preferred Stock registered on the NASDAQ and it is not contemplated that
such registration will take place in the immediate future. Therefore, it is
possible that at least in the initial one year period following completion of
the offering, the Company may be subject to the Penny Stock Rules. Moreover,
if the Company's Business Plan is not successful and the Company continues to
5
<PAGE>
experience cash flow deficits beyond the time period contemplated herein, it
is possible that the Company could be subject to the Penny Stock Rules for an
indefinite period of time.
Arbitrary Offering Price. There has been no public trading market for any of
the Company's Preferred Stock. The per share price in this Offering bears no
relationship to the assets, book value, or net worth of the Company, or to
any other recognized criteria of value. Share value has been determined
arbitrarily by the Underwriters and management of the Company, and should not
be considered as an indication of the actual value of the Company.
Bridge Loan Financing. One investor, Colin Frank Riseam ("Bridge Lender") has
provided Fifty Thousand Dollars ($50,000) in bridge loan financing to help
the Company maintain its operations pending completion of this Offering. As
partial consideration for the financing, the Bridge Lender has received
500,000 shares of Preferred Stock with a liquidation value of $10 per share
or Five Million Dollars ($5,000,000). As a result of this financing
transaction, to the extent the Company were sold or liquidated, the initial
Five Million Dollars ($5,000,000) worth of value (assuming Five Million
Dollars ($5,000,000) of value could be obtained) would be payable solely to
the Bridge Lender. Purchasers of the Preferred Stock will share in such
liquidation or sales proceeds on a pro rata basis with the Bridge Lender.
Since it is highly unlikely that the Company could generate proceeds of
Eleven Million Dollars ($11,000,000) in the event of a sale or liquidation in
the next twelve (12) months, the Bridge Lender will have obtained a
disproportionate benefit in the event of the sale or liquidation of the
Company. If the Company were liquidated at an amount equal to the
shareholder's equity as of September 30, 1998, plus the net proceeds of the
600,000 shares of Preferred Stock offered hereby ($4,972,000), each share
would be entitled to approximately $4.53 per share. This would result in an
immediate loss to Purchasers of the Preferred Stock of $5.47 per share and an
immediate gain to the Bridge Lender of $4.53 per share or an aggregate of Two
Million Two Hundred Sixty-Five Thousand Dollars ($2,265,000).
Agricultural Risks. Wine grape production is subject to many risks common to
agriculture that can materially and adversely affect the quality and quantity
of grapes produced. These hazards include, among other things, adverse
weather such as drought, frost, excessive rain, excessive heat or prolonged
periods of cold weather. These weather conditions can materially and
adversely affect the quality and quantity of grapes produced by the Company
and its profitability.
Vineyards are also susceptible to certain diseases, insects and pests, which
can increase operating expenses, reduce yields or kill vines. In recent years
phylloxera, a louse that feeds on the roots of grape vines, has infested many
vineyards in the wine grape producing regions of California and caused grape
yields to decrease. Within a few years of the initial infestation, phylloxera
can leave a vine entirely unproductive. Phylloxera infestation has been
widespread in California, particularly in Napa County. As a result of this
widespread problem, thousands of vineyard acres throughout the State of
California have been or in the case of the Company, will be replanted with
phylloxera-resistant rootstock. It takes approximately 4 to 5 years for a
replanted vineyard to bear grapes in quantities sufficient for profitable
operations. The Company estimates that it currently costs approximately
$11,200 per acre to replant vineyards. All of the Company's approximately 43
net vine acres (i.e., excluding acreage devoted to roads, storage areas,
equipment yards or uses other than vineyards) were infested and will be
planted with rootstock believed to be resistant to phylloxera. Currently,
approximately 12 acres have been replanted. (See "BUSINESS")
Other pests that may infest vineyards include leafhoppers, thrips, nematodes,
mites, insects, orange tortrix, twigbore, microflora and various grapevine
diseases. Pesticides and the selection of resistant rootstocks reduce losses
from these pests, but do not eliminate the risk of such loss. Gophers,
rabbits, deer, wild hogs and birds can also pose a problem for vineyards, and
wine grape vines are also susceptible to certain virus infections which may
cause reduction of yields. None of these currently poses a major threat to
the Company's vineyard, although they could do so in the future and, at that
time, will have the potential to subject the vineyard to severe damage.
The Company does not currently insure against general agricultural risks,
since root stock has to be planted for a period of 3 years before the
plantings are eligible for coverage. Since the Company is in the process of
replanting its entire vineyard, such coverage will not be available for
several years.
<PAGE>
Grape Supply. While the Company believes that it can secure an adequate
supply of grapes from its own vineyards and from available suppliers to meet
its forecasted production needs, there can be no assurance that grape
shortages will not occur. A shortage in the supply of wine grapes could
result in an increase in the price of such grapes and, therefore, increase
the cost to the Company of its wine production. This would have a
particularly adverse effect on the Company since the Company will be
dependent, for the next several years, on significant third-party sources for
its grape needs. Moreover, while the Company does have contracts to acquire
wine grapes, such contracts are all short term and can be terminated by the
supplier at any time. In 1997, approximately 58% of the Company's wine
production represented bulk wine and wine grapes purchased from independent
growers and wineries. When dealing with third
6
<PAGE>
party grape suppliers, the Company maintains a quality control program by
maintaining a presence in the growers' vineyard by supervising and
controlling irrigation, pest control, and harvest method and timing. (See
"BUSINESS")
Fixed Costs and Revenue Fluctuations; Uncertainty of Profitability. The
Company incurs annual farming costs averaging approximately $1,500 to $2,500
per acre in production, depending upon the specific characteristics of the
vineyards, including vine spacing and the viticultural characteristics of
specific varieties, among other factors. These costs are incurred throughout
the year preceding harvest and are relatively fixed. Vineyard productivity
varies from year to year depending upon a number factors, and significant
variations in annual yields should be expected from time to time.
Furthermore, grape prices have fluctuated significantly in the past and
should be expected to continue to fluctuate from year to year and to increase
at times in the future. Because production costs are not significantly
adjustable in light of productivity or revenue levels, weak harvests and
higher grape prices cannot be mitigated by cost reductions and could have
significant adverse effects upon profitability. Since the Company intends on
purchasing a significant amount of grapes from third party growers in order
to bottle additional wine, a drop in grape prices may in fact, increase
profitability to the Company with respect to wine production which is made
from grapes purchased from third parties. Assuming that the Company was able
to fully utilize its wine production permit of 42,000 cases per year,
approximately 2/3 of the wine produced by the Company would be from grapes
acquired from third parties.
Competition; Industry Fragmentation. The wine industry is extremely
competitive. Many of the Company's current and prospective competitors have
substantially greater financial, production, personnel and other resources
than the Company. The Company competes with many other producers of premium
wine in California, including many small independent producers. This is in
addition to seven wineries, E and J Gallo, Canandaigua, The Wine Group,
Sutter Home, Sebastiani, Robert Mondavi and Heublein which accounted for
approximately 77 percent of the total California wine shipments of 1996.
Because of higher production costs in the United States and the high prices
of grapes in California, especially in comparison to the prices of years
past, some wineries can achieve significant cost savings, even after taking
into account shipping costs, by importing wine from abroad. Some countries,
such as France, have launched marketing campaigns to increase their sales in
the United States. Foreign competition can be expected to continue and
increase. Moreover, to a significant extent, wines of a particular variety
are fungible, and the ability of foreign producers to compete with the
Company on the basis of price due to their lower production costs may have a
negative impact upon the Company's profitability.
The Company will compete against other wineries on the basis of market
pricing for similar quality wine produced. The Company has a distribution
system that is based on wholesalers who are well established in their market.
In addition, the Company will maintain a presence in the market by using
periodic visits by its CEO and its wine maker and will oversee specific
promotion programs to educate the sales staff about the wines produced by the
Company.
Dependence on Consumer Demand. In recent years there has been substantial
publicity regarding the possible health benefits of moderate wine
consumption. Some studies suggest that moderate consumption of wine (or other
alcoholic beverages) could result in decreased mortality and other health
benefits. Other studies have suggested that alcohol consumption does not have
any health benefits and may, in fact, increase the risk of stroke, cancer and
other illnesses. Anti-alcohol groups have, in the past, successfully
advocated more stringent labeling requirements and other regulations designed
to discourage consumption of alcoholic beverages, including wine. More
restrictive regulations, negative publicity regarding alcohol consumption,
publication of studies that indicate a significant health risk from moderate
consumption of alcohol or changes in consumer perceptions of the relative
healthfulness or safety of wine generally could adversely affect the sale and
consumption of wine and the demand for wine and wine grapes and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Trends in consumer spending have a substantial impact on the wine industry
and the Company's business. Factors that influence consumer spending include
the general condition of the economy, federal, state and local taxation, the
deductibility of business entertainment expenses under federal and state tax
laws and general levels of consumer confidence. Imposition of excise or other
taxes on wine could negatively impact the wine industry by increasing wine
prices for consumers. These factors are especially relevant to premium wines,
which constitute the majority of wines for which the Company produces grapes.
The wine industry is also subject to changes in consumer tastes and
preferences. To the extent wine consumers reduce consumption of wine in favor
of other beverages, demand for wine grapes could decrease. Similarly, to the
extent wine consumers shift their preferences to different varieties of wines
or imports, the Company and other producers of certain grape varieties may
experience reduced demand for their grape production. Increasing demand for
wine products, and therefore wine grapes, may depend on advertising
expenditures and expanded new product introductions by the wineries.
<PAGE>
Government Regulation; Taxes. The Company is subject to a broad range of
federal and state regulatory requirements regarding its operations and
practices. The Company's current operations and future expansion are subject
to
7
<PAGE>
regulations governing the storage and use of fertilizers, fungicides,
herbicides, pesticides, fuels, solvents and other chemicals. These
regulations are subject to change and conceivably could have a significant
impact on operating practices, chemical usage, and other aspects of the
Company's business. There can be no assurance that new or revised regulations
pertaining to the wine grape production industry will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Wine production and sales are subject to extensive regulation by the Federal
Bureau of Alcohol, Tobacco and Firearms ("BATF"), the California Department
of Alcohol Beverage Control and other state and federal government
authorities that regulate licensing, trade and pricing practices, labeling,
advertising and other activities. In recent years, federal and state
authorities have required warning labels on beverages containing alcohol.
Restrictions imposed by government authorities on the sale of wine could
increase the retail price of wine, which could have an adverse effect on
demand for wine in general. There can be no assurance that there will not be
new or revised laws or regulations pertaining to the wine industry which
could have an negative impact on the Company's business. On January 1, 1991,
the federal excise tax on table wine increased by over 500% from $0.41 per
case to $2.55 per case. Various states, including California, also impose
excise taxes on wine. Further increases in excise taxes on wine, if enacted,
could reduce demand for wine and wine grapes, which could materially and
adversely affect the Company's business, financial condition and results of
operations.
Broad Management Discretion Over Use of Proceeds. Management of the Company
will have broad discretion with respect to the use of the proceeds derived
from the Offering and there can be no assurance that management's actual use
of the proceeds will correlate exactly with the Company's intended use of
proceeds. See "Use of Proceeds."
No Payment of Dividends. The Company currently intends to retain its future
earnings, if any, to fund the development and growth of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. See "Dividends, Distributions and Redemptions."
Important Factors Related to Forward-Looking Statements and Associated Risks.
This Prospectus contains forward- looking statements that are subject to
risks and uncertainties. Statements indicating that the Company "believes,"
"expects," "anticipates," or "estimates" are forward-looking as are all other
statements regarding future financial results, market conditions, product
offerings or other events that have not yet occurred. There are many
important risk factors set forth herein that could cause actual results or
events to differ materially and/or adversely from those anticipated by the
forward-looking statements contained in this Prospectus. Actual events or the
actual future results of the Company may differ materially from any
forward-looking statement due to such risks and uncertainties. The
forward-looking statements and associated risks set forth in this Prospectus
may include or relate to, among other things, (i) planting and harvesting of
the Company's vineyards, (ii) general health and social concerns regarding
consumption of wine and spirits, (iii) the size and growth rate of the
California wine industry, (iv) increases or changes in government regulations
regarding environmental impact, water use, labor or consumption of alcoholic
beverages, (v) competition from other producers and wineries and (vi)
proposed expansion of the Company's wine business.
"Blank Check" Preferred Stock. In addition to the Preferred Shares offered
hereby , the Board of Directors of the Company has the authority, subject to
the consent of the Underwriters, to issue up to 10,000,000 additional shares
of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock and the existing Preferred Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any additional series of
Preferred Stock other than the Preferred Stock offered herein.
Environmental Risks. Ownership of real property creates a potential for
environmental liability on the part of the Company. If hazardous substances
are discovered on or emanating from any of the Company's vineyard and the
release of hazardous substances (including fuels and chemicals kept by the
Company on its properties for use in its business) presents a threat of harm
to public health or the environment, the Company may be held strictly liable
for the cost of remediation of these hazardous substances.
<PAGE>
Underwriting Agreement. Pursuant to the Underwriting Agreement between the
Company, Klein Maus and Shire and Nutmeg Securities, Ltd. ("Underwriters"),
except for fair market value the Company cannot issue any shares of capital
stock, options, warrants or any other securities into which shares of capital
stock are issuable or any other debt or equity security for a period of
3 years from the effective date of the Registration Statement without the
express written consent of the Underwriters except for a maximum of 1,962,500
shares of common stock pursuant to the Company's existing
8
<PAGE>
stock option plans nor, during such 3 year period, effect a reverse split or
reclassification of shares of capital stock. Notwithstanding the foregoing,
the Company shall not issue any shares of preferred stock or securities
convertible into Preferred Stock during such 3 year period without the
express written consent of the Underwriters. (See "Management Relationships,
Transactions and Remuneration"). In the event the Company needs to obtain
additional equity financing, the ability of the Company to do so will be
dependent, in part, on obtaining the consent of the Underwriters to the
transaction. Moreover, the Underwriters will have the right of first refusal,
for a period of 5 years from the effective date of the Registration
Statement, to purchase for their account or to sell for the account of the
Company or any of its present or future subsidiary, any securities of the
Company or any of its present or future subsidiary, with respect to which the
Company or any of its present or future subsidiary may seek a public or
private sale. The Company will offer, or cause any of its present or future
subsidiary to offer, to the Underwriters, the opportunity on terms not more
favorable to the Company or such present or future subsidiary than they can
secure elsewhere, to purchase or sell any such securities. In addition to the
foregoing, the Underwriters have the right to select one Member of the Board
of Directors for a period of 3 years following the effective date of the
Registration Statement. Alternatively the Underwriters may elect to have a
representative attend Board Meetings. However, the ability to designate one
Board Member will not allow the Underwriters to control, in any manner, the
Board of Directors. Finally, as part of the Underwriting Agreement the
Company has granted to the Underwriters, warrants to purchase up to 60,000
shares of the Company's Preferred Stock exercisable for a period of 5 years.
In the event that the Underwriters Over-allotment Option is exercised in
full, the number of shares which could be purchased pursuant to the warrants
would increase to 69,000 shares. Although the exercise price of the warrants
is $16.50 per share and although it is unlikely that the trading price of the
Preferred Stock will reach that level, the issuance of such stock could have
a depressing effect on the price of the Preferred Stock.
Voting Control of Management: Common Stock and Preferred Stock. The Company
has two classes of stock: Common Stock, which is entitled to one vote per
share and the Preferred Stock offered hereby, which has no voting rights
other than as provided by law. In addition, the Directors of the Company
currently own 4,458,791 shares of Common Stock out of a total of 8,173,128
issued and outstanding shares of Common Stock inclusive of options to acquire
37,500 shares issued pursuant the Company's stock option plans (leaving a
balance of 1,962,500 shares of Common Stock which may be issued pursuant to
the Company's stock option plans). This represents 54.55% of the total issued
and outstanding shares of Common Stock of the Company. Therefore, the
existing Board of Directors will be able to continue to elect all of the
Company's Board of Directors and, as a result, continue to direct the
business, policies and management of the Company.
Risks of Leverage. As of December 31, 1997, the Company had indebtedness
outstanding in the principal amount of $3,119,400. Through December 31, 1998,
the principal total amount of indebtedness increased to $4,125,944. Of this
amount, $1,446,868 is represented by either demand notes or notes which
become due and payable by the end of the first quarter of 1999. It is
anticipated that from the proceeds of the Offering that the Company will be
able to reduce its long term debt to $2,500,000 and its short term debt to
$200,000. However, it is believed that as the Company expands, it may need to
have the ability to obtain additional indebtedness. It should be noted that a
significant portion of the current indebtedness provided to the Company is
guaranteed by the Company's Chairman, Joseph E. Antonini and the Company's
ability to obtain additional indebtedness may be dependent in large part on
the ability of Mr. Antonini to continue to provide his financial assistance.
Moreover, pursuant to the Underwriting Agreement, commencing for an 18 month
period from the effective date of the Registration Statement, the Company may
not without the consent of the Underwriters, make payment of principal or
interest on outstanding loans made to the Company by affiliated persons of
the Company except that $750,000 in outstanding loans to the Company
including interest thereon from affiliated persons and no more may be repaid
at any time and the Bridge Loan made by the Bridge Lender in the principal
sum of $50,000 plus accumulated interested thereon is being repaid out of the
proceeds of this offering.
<PAGE>
Absence of Prior Public Market for Preferred Stock; Possible Volatility of
Stock Price. Prior to this Offering, there has been no public market for the
Preferred Stock. Moreover, the initial public offering price for Preferred
Stock is substantially in excess of the current liquidation value of the
Company. As a result, there can be no assurance that an active trading market
will develop or be sustained for the Preferred Stock or that the Preferred
Stock will trade in the public market at or near the initial public offering
price. In addition, the Company is registering for sale an additional 500,000
shares of Preferred Stock issued to the Bridge Lender who acquired its shares
of stock in consideration of the bridge loan financing. Trading in these
shares can be expected to further depress the initial trading price of the
Preferred Stock. The Preferred Stock issued to the Bridge Lender will not be
offered for a period of at least 13 months from the effective date of the
Offering. Finally, the Underwriters will receive warrants to purchase up to
10% of the number of shares of Preferred Stock sold pursuant to this Offering
on behalf of the Company. The exercise of these warrants and potential sale
of the underlying Preferred Stock have yet a further adverse affect on the
trading price of
9
<PAGE>
the Preferred Stock. The Company has applied for listing on the NASDAQ
Small Cap Market. However, there can be no assurance that such application
will be approved.
The ultimate sale of the additional 500,000 shares Preferred Stock issued to
the Bridge Lender may depress the price of the Preferred Stock as it is
offered into the Market, whether or not all of such shares are actually sold.
In addition to factors specifically affecting the Company, it should be noted
that the stock market has, during recent years, experienced extreme price and
volume volatility. In addition, the price of the Preferred Stock may be
influenced by factors including investor perception of comparable public
companies, changes in the condition or trends in the wine industry or changes
in the economy.
The Company's Common Stock is currently listed on the "Pink Sheets" under the
trading symbol "Vine", and the trading market is not active.
NOTE: In addition to the above risks, businesses are often subject to risks
not foreseen or fully appreciated by management. In reviewing this Offering
Circular potential investors should keep in mind other possible risks that
could be important.
BUSINESS AND PROPERTIES
3. With respect to the business of the Company and its properties:
(a) describe in detail what business the Company does and proposes to
do including what products or goods are or will be produced or services that
are or will be rendered.
AWG, Ltd. was formed in 1995 for the purpose of producing and
marketing wine initially under the name of Mario Andretti. The concept for
the product began in 1994 during the retirement tour of Mario Andretti, an
internationally known race car driver. During the tour, known as the
Arrivederci Mario Tour, the initial founders of the Company arranged to have
Louis Martini Winery bottle over ten thousand (10,000) cases of 1991 North
Coast Cabernet Sauvignon for sale in conjunction with the Tour under a
license agreement with Mr. Andretti. In 1995, the founders of the Company
bottled additional wine under the name of Mr. Andretti. Due to the success of
this venture, the founders formed AWG, Inc., a Delaware corporation on
November 30, 1995, which was subsequently merged into a wholly owned
subsidiary of the Company on December 14, 1995. The Company's predecessor was
incorporated in Utah on April 1, 1970 as ABC Development, Inc. Its name was
subsequently changed several times ultimately becoming American Aurum, Inc.
The predecessor company was involved in various businesses and by 1995 had
over one thousand (1,000) shareholders and no assets or liabilities. On June
7, 1995, the Company was organized under Nevada law also under the name of
American Aurum. On the same day of its organization, American Aurum of Utah
was merged into American Aurum of Nevada solely for the purpose of effecting
a change in the domicile. On December 18, 1995, the Company changed its name
to its current name, AWG, Ltd. All operations described herein are conducted
through AWG, Inc., the wholly owned subsidiary of the Company.
During 1996, the Company acquired a 53 acre vineyard and winery site
in the Napa Valley upon which the Company currently conducts its business.
During 1996 the Company bottled 5,500 cases of wine and harvested 50 tons or
8,000 gallons of Chardonnay grapes. In late 1996, the founders sold their
entire interest in the Company to Mario Andretti and Joseph Antonini who are
currently the largest shareholders of the Company. See "Directors of the
Company" and "Principal Stockholders". From the proceeds of this Offering,
the Company will repay certain indebtedness to officers and directors and
will seek to accomplish 4 specific goals:
a. increase inventory production through the acquisition of bulk wine
until such time as grape harvest from the Company's vineyards and grape
contracts are sufficient to meet the Company's needs;
b. complete a vineyard replanting and maintenance program;
c. complete a winery construction and refurbishment program which will
result in a fully productive crush, tank and barrel storage facility; and
d. position itself to obtain additional capital to acquire other
wineries and vineyards. Set forth below is a more detailed discussion of
these foregoing goals of the Company.
10
<PAGE>
(b) describe how these products or services are to be produced and
rendered and how and when the Company intends to carry out its activities.
Inventory Production
Until such time as the Company has completed its vineyard development
and maintenance program and its winery construction, it will purchase grapes
and bulk wine from other Napa Valley Growers with whom the Company is
developing long term grape contracts. These relationships will also supply on
a long term basis, ongoing grape requirements over and above those which can
be grown at the Company's existing facility. The Company currently has
contracts for 60-90 tons of Merlot and Cabernet Sauvignon grapes which will
enable the Company to produce 4,000 to 6,000 cases of Merlot and Cabernet
wine. Such contracts are short term and can be canceled by the supplier at
any time. In addition, the Company will purchase wine on the bulk market
through wine brokers. The quality of the bulk wines will meet the standards
set by the Company and will be used to the extent needed in order to maintain
the Company's position in the market. This will also permit the Company to
generate income throughout the vineyard replanting program. It is anticipated
that at least $1,400,000 of the amount raised from this Offering will be
allocated to the inventory production program. In 1997, approximately 58% of
the Company's wine production represented bulk wine and wine grapes purchased
from independent growers and wineries.
Vineyard Replanting Program
The Company currently has a 43 acre vineyard of which 28 acres have
been recently replanted. In 1996, the 43 planted acres yielded 50 tons of
Chardonnay, which the Company used to produce approximately 3,100 cases of
1996 Andretti Chardonnay and 15 tons of Pinot Noir, which were sold to a Napa
Valley producer of a premium sparkling wine. The 65 tons of harvest in 1996
is small compared to the anticipated harvest of 270 to 290 tons when the
entire vineyard has been replanted by 1999 and reaches maturity which is not
expected to occur until 2002.
The Company anticipates completing the replanting of the entire
vineyard over the next 2 year period. The replanting is due to the fact that
the vines are 25 years old and have 3 common diseases: phylloxera, Leaf Roll
and Pierce's disease. Based upon representations from rootstock
manufacturers, the Company is planting rootstock (the root system for the
vines) believed to be resistant to the first 2 common diseases and will help
prevent the reoccurrence of these infestations. In order to avoid Pierce's
disease in the future, the Company is planting the 3 acres adjacent to the
Napa River with Sauvignon Blanc grape vines, a varietal known to be resistant
to Pierce's Disease infestations. As indicated above, the Company has already
completed the replanting of 12 acres. The Company anticipates that it will
tear out and replant an additional 15 acres in 1999.
Replanting vineyards generally cost approximately $11,000 to $15,000
per acre, depending on ground cultivation requirements, irrigation systems
selection, rootstock selection, trellising (the structural support system for
the vines and irrigation system) materials and labor availability. The
Company estimates that the total vineyard replanting will cost approximately
$11,200 per acre for 43 acres or a total of $362,900 over the entire
replanting program of which approximately $118,700 has been paid. Once
planted, it will be 2 years before the first crop is harvested and a total of
3 to 5 years before the vines reach commercial production levels. At that
time, the Company expects to harvest about 6.5 tons of grapes per acre or 270
to 290 tons per year. This harvest will be sufficient for about 14,000 to
15,000 cases per year. As indicated above, notwithstanding the increased
production, the Company will still need to acquire grapes from additional
sources in order to meet its long term production goals. In this regard,
controlling grapes through ownership or long term grape contracts with third
parties is a critical factor in crafting high quality wines. The wine maker
who can influence the wine from the berry to the bottle will have an
advantage over the wine maker who does not have that control. The Company
will have as high a level of control as possible over the grapes that make up
its basic varietals.
Winery Development and Construction Plan
The Company operates under a use permit that allows for the production
of 100,000 gallons of wine annually which is equivalent to approximately
42,000 cases. Also included in this permit is the right to operate a tasting
room with full "public tours and tastings access by the public." This latter
feature is not available to new wineries which generally can only access the
public market by "appointment only." The Company hopes to ultimately have
well over 100 visitors per day during the May-October season. Typically under
the "appointments only" category, visitors are limited to 2 groups with up to
4 people per group.
There are significant economic advantages to having a tasting room.
First, wine sales from a tasting room generally are priced at twice the price
of distributor sales, the normal channel of sales. This is done to protect
the
11
<PAGE>
distributor and the liquor store owner from being underpriced by the
manufacturer. Second, there is an opportunity to sell wine related
merchandise and in the case of the Company, an opportunity to sell Andretti
memorabilia. Third, the Company intends to create the "Andretti Wine Club"
which will hopefully create a source of higher price retail sales throughout
the year. The tasting room will provide a source for marketing membership in
the Club. The activation of the 100,000 gallon production facility, public
tours and tasting permit was conditioned upon the completion of the winery at
a level required by Napa County. This was accomplished during the second
quarter by the Company completing the following improvements: (a) the
refurbishment of an existing structure to become a barrel storage
room/tasting room facility; and (b) the construction of a new road to the
winery from the main artery leading to the property from Big Ranch Road. The
Company still needs to complete construction of a concrete pad and
storage/crush facility and the completion of a septic system which will be
paid from the proceeds of the Offering. The remaining construction does not
effect the permit. Funds for the entire construction project have been
obtained through bank financing guaranteed by Joseph E. Antonini, Chairman of
the Company. In total, when all improvements are completed, the Company will
have a tasting room with full public tours and tasting authority, a barrel
storage facility, a tank storage facility, offices, a private tasting
facility, a hospitality and event center and a 43 acre vineyard all on 53
acres of property that the Company owns. The balance of the improvements for
equipment and cooperage will be funded from the proceeds of the Offering and
is estimated to be approximately $400,000. This equipment includes a
stemmer/crusher and wine press; stainless steel tanks; mobile equipment and
pumps; and additional barrels.
Products and Operations
The Company will have 4 varietals as its base of wines to be offered
to the public. The Company will bottle Napa Valley grown grapes. The Company
will venture away from the Napa Valley for grape and wine sources when
required. Set forth below is a brief description of various varietals to be
offered by the Company:
Cabernet Sauvignon. Cabernet Sauvignon is one of the world's most renowned
grapes for production of fine, long lived red wine. Of Bordeaux origin, this
grape's remarkable concentration of tannin (a soluble astringent phenolic
substance in red wines produced in the plant) pigments and flavor compounds
produce a deeply colored wine worthy of long maceration (the time during
which the red wine and grape skins are in contact with each other during the
fermentation period to enhance the color of the wine) and wood aging with a
strong affinity for french oak. Its fruit flavors are often likened to black
currant and its aroma ranges from bell peppers to ripe berries and even mint
and chocolate. It adapts well to varying wine making techniques. These grapes
will be purchased from other growers.
Merlot. Merlot is the most planted Bordeaux vine. Merlot's flavor can vary
from opulently plummy and fruitcake like to a gentler variation on the
Cabernet theme, but its texture is almost invariably astringent and fuller
bodied. The Company's vineyard soils and climate are exceptionally well
suited for production of this grape and it is anticipated that the Company
will plant approximately 60-65% of its vineyard with this varietal. Merlot is
often blended with Cabernet as a compliment to its fruit fullness. Its early
maturation and shorter oak aging time make a wine which would be released a
full year earlier than the Cabernet grapes of the same vintage.
Chardonnay. Chardonnay has a relatively high level of alcohol, which combined
with the rich fruit can often taste slightly sweet which has probably played
a part in its popularity. This varietal's flavor is found to be nebulous with
tastes of vanilla, tropical fruits, peaches, tomatoes, tobacco, tea and rose
petals in the wine. Chardonnay grapes typically have higher yields.
Approximately 30-35% of the Company's vineyard will be planted with this
varietal.
Sauvignon Blanc. Sauvignon Blanc is another Bordeaux grape transported years
ago to regions outside of France. It is an aromatic, crisp dry wine. It is
generally described as grassy, herbaceous, musky, of green fruits and zesty
(but can also be reminiscent of tropical fruit or grapefruit). It is
extremely durable for white wine with up to 5 years in the bottle. The
Company may plant up to approximately 10% of its vineyard with this variety
of grape.
Complimentary Varietals. Other varietals will occasionally be produced by the
Company as the Company's wine maker discovers small quantities of bulk wine
or grapes available for purchase and bottling. The extra wines will be those
which have a particular high quality and suit the theme of the winery. Some
varietals which should be common for consideration are Pinot Noir, a burgundy
grape which grows in the climate found in the southern end of the Napa Valley
and Sangiovese, an Italian varietal which forms the base of most Chianti
wines.
<PAGE>
Wine Sources and Production
As indicated above, the Company's vineyard, when replanted, will yield
between 270 and 290 tons of Merlot, Chardonnay and Sauvignon Blanc grapes for
crushing. These grapes will enable the production of approximately
14,000-15,000 cases of wine, all of which will be eligible for "estate
designation" (a term that indicates that the wine in
12
<PAGE>
a bottle comes from grapes which were grown, crushed, fermented and bottled
on a property owned by the winery) since the grapes will be crushed,
fermented, stored and bottled at the Company's own wine facility.
However, it should be realized that the grapes that the Company
harvested in 1997 provided wine for the 1997 vintage which was released
in 1998 for Chardonnay and will be released in 1999 for Merlot and
2000 for Cabernet Sauvignon. In the meantime, the Company will purchase wine
on the bulk market through wine brokers. The quality of the bulk wines will
meet the standards of the Company's winemaker and it will be used only to the
extent needed to maintain its position on the market. In addition, on a more
long term basis, the Company will attempt to enter into long term grape
contracts with other Napa Valley growers to provide additional grapes for
additional wine production. As indicated earlier, while the Company's
production permit will permit it to produce 42,000 cases of wine a year at
its Big Ranch Road facility, the Company's production after the vineyard has
been totally replanted and reaches maximum maturity, will only produce
14,000-15,000 case of wine. Therefore, wine production in excess of that
produced from grapes grown by the Company's vineyard will have to come from
other sources. The Company currently has contracts for 60-90 tons of Merlot
and Cabernet grapes which will produce enough wine for approximately
4,000-5,000 cases of those varietals. It should be noted that the Company
maintains a quality control program for grapes obtained from third party
growers by maintaining a presence at the vineyard at which the grapes are
being grown. The Company will supervise and control irrigation, pest control,
harvest method and timing as well as all aspects of the farming operation.
Currently, the Company's facility requires that it harvests its own grapes
but that it crushes and ferments them at a neighboring facility. The wine is
then stored in oak barrels at the Company's winery and other warehouses and
then bottled at a neighboring facility or at the Company's location using a
mobile bottling line (a mobile bottling line consists of a large truck
equipped with bottling apparatus that drives to the winery and pumps the wine
in storage from tanks or barrels at the winery and bottles the wine). The
Company's wine maker, is present for and closely supervises all phases of the
operations. The Company uses an outside warehouse service for storage of
finished goods. Once the winery construction is complete, the Company will be
able to crush, ferment and age wines at its winery and then have a mobile
bottling line come to the winery and bottle the product. The Company believes
that such mobile bottling lines are provided by several suppliers and will be
available when needed and at a cost acceptable to the Company. The bottled
product will still be stored at a local outside warehouse for ease of
consolidation and shipping.
The Company has no current plans to install a bottling line. Though
the Company's permit allows it to produce 42,000 cases of wine, this can be
accomplished in 30-40 days per year. The under utilization of the bottling
line would be economically impractical.
Sources of Revenue
Sales revenue will come from four (4) primary areas: wholesale wine
sales, retail wine sales, wine and memorabilia merchandise sales and
hospitality/specialty events.
Wholesale Wine Sales. This will account for the bulk of the revenue. Wines
will be sold to distributors at price ranges typical of super premium wines
from the Napa Valley. Prices are a function of quality, varietal and vintage,
with the pricing of the Company's wines to be in the upper end of the super
premium price range. Super premium price range reflects market conditions and
supply and demand influences. Generally, for purposes of pricing wines,
premium wines are generally categorized as premium and popular premium which
have an average retail sales price of approximately $7; super premium which
have an average retail price of approximately $18 and ultra premium which
have an average retail price of approximately $25. As indicated, the Company
intends to produce and distribute wines in the superior premium range. The
results for the nine (9) month period ended September 30, 1998, reflect total
bottled wine sales of approximately $388,105 based upon the sale of 3,973
cases at an average price of $98 per case to distributors in the United States
and Japanese wholesale network. It should be noted that in 1997, 26% of the
Company's sales were made by one retailer, Trader Joe's, a California chain
of food and liquor stores. During the first nine months of 1998, 38% of sales
were made to one customer (Beverages and More!). This was a one time bulk sale
and no future sales to this customer are anticipated in 1998. Moreover, the
expected gross revenues set forth above do not reflect any further sales to
this customer.
13
<PAGE>
Further impacting the Company's performance for the nine (9) month
period ended September 30, 1998, was a temporary shortage of wine inventory
caused by cash flow shortages which will be addressed from the proceeds of
this offering. During the first quarter of the 1999 calendar year, the Company
intends to bottle and/or purchase an additional 6,000 cases of wine of which
4,000 cases will be shipped in calendar year 1999. When added to the Company's
inventory of approximately 4,400 cases at December 31, 1998, the Company
believes there will be an adequate supply of wine to supply the demand created
by its expanded distribution network (between 5,000 and 5,500 cases) as well
as an additional 1,500 to 2,000 cases through retail sales (see Retail Wine
Sales below).
Retail Wine Sales. These retail sales are anticipated to be made at an
average price of $240 per case (which approximates the California suggested
retail price) will occur at the winery, by mail order, through the Andretti
Wine Club, via Internet sales and through other channels that could be made
available to the public. It is customary that wine sales made at wineries or
through special promotions are priced at the California suggested retail
price and AWG intends to price retail sales consistent with this practice.
The Company hopes to ultimately sell 3,000 cases or more of wine annually in
this category although this is not expected to occur for several years.
Assuming the wine is sold at prices typical of the super premium price range,
this category of sales will account for gross profits of up to $300,000 per
year after deducting additional employee expenses of $60,000 to generate such
sales.
Wine and Memorabilia Merchandise Sales. These are products sold out of the
tasting room, through the Andretti Wine Club and Andretti Fan Club catalogue
and over the Internet. The source of revenue will not be significant and
estimated as ultimately approximately $1,000 to $2,000 per month.
Hospitality/Special Events. The winery has a 4,000 square foot hospitality
center surrounded by decks and a lawn that could be used for many types of
events for a service fee. The Company plans to have special events such as
weddings, rehearsal dinners, anniversary gatherings, gourmet food classes,
non-profit fundraisers, performances and car club events. Corporate events
such as board meetings, executive retreats, video conferencing, team
building, training, dinners, lunches and tours will also be available. In
addition, winery events such as food and wine pairings, an evening with the
wine maker, VIP and trade tours and tastings are possible. Gross profits for
the hospitality/special events could ultimately approach $300,000 per year.
However, this will not occur in 1998 and may not occur for several years
thereafter. While it was originally anticipated that the Hospitality Center
would generate revenues in the first quarter for calendar year 1998, this did
not occur due to delays in construction caused by weather conditions and
unanticipated construction delays. However, the Hospitality Center is
operational and is expected to generate revenues during the balance of the
1998 calendar year.
Bulk Wine Sales. As discussed above, under "Vineyard Replanting Program", the
Company has 43 acres of vineyards, of which 12 acres have been replanted. Of
the 12 acres which have been replanted, 6 acres will yield Merlot grapes, and
the balance of 6 acres will yield Chardonnay grapes. The Company believes
that this yield will create a disproportionate amount of Chardonnay at
harvest time which the Company will not require and will be able to sell in
bulk to other wineries in the Napa Valley. In this regard, the Company has
sold a Napa Valley winery approximately 6,800 gallons of 1997 Chardonnay for
approximately $74,000. The Company retained the balance of the Chardonnay
yield and bottled approximately 1,900 cases of wine for sale in calendar
year 1998 and calendar year 1999. In the third quarter of 1998, the Company
sold bulk grapes resulting in a loss of approximately $40,000.
(c) Describe the industry in the which the Company is selling or
expects to sell its product or services and, where applicable, any recognized
trends within that industry. Describe that part of the industry and the
geographic area in which the business competes or will compete.
According to a study by Gomberg, Frederickson and Associates, a wine
consulting firm in San Francisco ("Consultant"), published in February 1998,
reflecting the results of the California wine market for the year ended 1997,
shipments of table wines increased over 1996 by approximately 3% with
revenues increasing by 12%. The increase in revenues were the result of
increased sales of premium wines including super premium wines which are
produced and sold by the Company. The revenue increase in the super premium
wine category over 1996 was approximately 13%. The Consultant also indicated
that in 1997, approximately 90% of all table wine made in the United States
was produced in California and that total California wine sales reached
approximately $4.9 billion which is an increase of approximately $600 million
over 1996. Approximately 79% of wine sales represented the premium wine
segment.
<PAGE>
Table wines are wines usually containing less than 14% alcohol and are
generally consumed with food or as cocktails. Table wines represented 88% of
the total U.S. wine consumption in 1997, with dessert and sparkling wines
accounting for the remaining 12%. Table wines are categorized as either
non-varietal or varietal. Non-varietal, also referred to as generic, include
wines named after European regions where similar types of wines were
originally
14
<PAGE>
produced such as burgundy or Bordeaux as well as wines labeled simply red or
white. Varietal wines are those named for the grape that comprises the
principal component of the wine such as Chardonnay or Merlot and are
generally considered premium wines and typically retail at a substantially
greater price than non-varietal wines. The Company's grapes are used to
produce super premium varietal table wines.
As indicated above, the market for California premium varietal table
wines grew during 1997 with revenues for all premium wines increasing by 12%
and revenues for super premium wine sold by the Company increasing by 13%.
The most popular California premium wine varieties are Chardonnay, Cabernet
Sauvignon, Merlot, Sauvignon Blanc and Red Zinfandel. According to estimates
by the Consultant, case shipments for these varietal wines in 1997 were 23.6
million, 11.8 million, 7 million, 4.6 million and 2.4 million cases
respectively.
The California grape production industry is very fragmented and
consists of several thousand vineyard owners. Most wine grape producers have
small privately owned operations and sell their production to wineries. To
supplement the grapes they buy from independent producers, many wineries also
own or lease vineyards to supply some of their grape needs. There is no
published data regarding ownership or contractual relationships in the
California wine grape production industry and individual holdings of
properties are not publicly recorded. California wine is produced and
marketed by approximately 800 commercial wineries. However, 8 wineries, E and
J Gallo, Canandaigua, The Wine Group, Sutter Home, Sebastiani, Robert
Mondavi, Heublein and Beringer Wine Estates, account for approximately 79% of
the total California wine shipments in 1996. Of the 800 commercial wineries
(other than those mentioned above), approximately half produce fewer than
5,000 cases per year.
In addition to U.S. producers, there are numerous wine producers in
Europe, South America, South Africa, Australia and New Zealand. All of these
regions export wine into the United States. California grape and wine supply
shortages, especially red wines, have prompted some domestic national brand
marketers to purchase wine from foreign sources. Most imports are bottled
wines; however, some wineries have imported bulk wine for bottling and sale
in the United States. Most of the bulk wine imported for this purpose came
from Chili and France.
As indicated under question 3(d), the Company plans to market its wine
throughout the country through various distributors. It is envisioned that
the name and reputations of Mario Andretti and Robert Pepi, Jr. (the
Company's wine maker) will create unique marketing opportunities and set the
Company's wine apart from other wineries. See "Question 3(d)."
Note: because this Prospectus focuses primarily on details concerning
the Company, rather than the industry in which the Company operates or will
operate, potential investors may wish to conduct their own separate
investigation of the Company's industry to obtain broader insight in
assessing the Company's prospects.
(d) describe specifically marketing strategies the Company is
employing or will employ in penetrating its market or developing a new
market.
The Company's market plan has 3 key elements:
a. to develop and nurture relationships with distributors and principal
customers;
b. insure placement of the product in the proper channels and markets;
and
c. educate and train the sales staff at the distributor and user
facilities.
As indicated above, there is growing demand for wines, especially in
the premium categories. Super premium wine which have an average retail sales
price of approximately $18 per bottle will be the type of wine to be produced
and distributed by the Company. However, in the case of special volume or
promotional issues, lower prices may be provided periodically. The standard
lists of varietals will include Cabernet Sauvignon, Merlot, Chardonnay and
Sauvignon Blanc. Grapes for the latter three varieties will come from the
Company's own vineyards to the extent possible. The Company will occasionally
produce other special wines as they become available on the bulk market but
will generally not arrange for a long term grape contracts or plant other
varieties on its property.
The Company will aim consumer distributorship outlets at finer
restaurants, fine wine and liquor stores, Andretti Wine Club Members and
retail sales from the Wine Tasting. As wine production grows, the Company
will also look to chain liquor stores and grocery chains for distribution.
15
<PAGE>
It is anticipated that the consumer of the Company's wine will be fine
food and wine connoisseurs who enjoy dining out with a bottle of wine with
dinner. However, the Company will encourage wine by glass presentations in
the bar areas of the restaurant and will make the price concessions for that
privilege. While many Napa Valley wineries concentrate 40% to 60% of the
business in California, the Company intends to distribute not more than 25%
of its wines in California with a significant effort on heavily populated
areas on East Coast and Midwest. Large population areas and cities that host
significant racing events will also be targeted. The Company has targeted
certain areas for initial distribution based on the quality/price of the
wine, the attraction of the Andretti name and demographics. The Company also
looks to areas where fine foods are served, where cosmopolitan atmosphere
exists and where there is a certain level of disposable income for a
significant portion of the population. The Company's initially targeted
segments, by state, are:
STATES BROKER DISTRIBUTOR
- ------ ------ -----------
Arizona Multicarte, Dean Wilson Arizona Beverage
Arkansas Multicarte, Dean Wilson Strauss Distributing
California Wine Warehouse
Colorado Multicarte To be determined
Connecticut New England Wine Brokers Hartley & Parker
Florida Northern Florida - Mike Paden Lion Wine & Spirits
Louisiana Multicarte, Dwayne Schockley Heritage House,
Reliable Lafayette
Maine New England Wine Brokers To be determined
Massachusetts New England Wine Brokers Ruby Wines
Michigan Kathi Colli AHD Vintners
New Hampshire Jet Wine & Spirits
New Jersey R & R Marketing
New Mexico Multicarte, Dean Wilson Bacchus Distributors
New York Charmer Industries
Ohio Superior Distributing
Oklahoma Multicarte, David Messer Gold Medal Marketing
Pennsylvania Capital Wine & Spirits
Rhode Island New England Wine Brokers Providence Beverage
Texas (Dallas) Multicarte, Rick Sides Republic Beverages
Texas (Houston) Multicarte, Michael Benedetti Republic Beverages
(Heritage House)
Texas (San Antonio) Multicarte, Dean Wilson Block Distributing
Vermont New England Wine Brokers To be determined
Washington P & S Wine Company
16
<PAGE>
STATES BROKER DISTRIBUTOR
- ------ ------ -----------
W. Virginia Leonard George MBC-United
Wisconsin Badger Liquor
FOREIGN MARKETS
---------------
STATES BROKER DISTRIBUTOR
- ------ ------ -----------
Japan Mikio Kakihara Sunlit
The Company is fully licensed, except in the states of Colorado,
Connecticut, Maine, Oklahoma, Pennsylvania, Rhode Island and Vermont (where
applications are pending).
Secondary market states will include California, Georgia, New York,
Oregon and Washington. Ultimately, it is the goal of the Company to expand
its distribution to all fifty states, Canada and additional foreign markets
in China and Europe. As indicated above, certain characteristics make the
Company's winery a unique opportunity and set it apart from other wineries.
The prominence of Mario Andretti and Robert Pepi has increased the interest
of distributors who will handle the Company's product. Capitalizing on the
Andretti name, the Company will seek to establish distributorship
relationships with major wholesalers in target areas. In addition, the
Company will use its wine maker and executive staff to visit major
marketplaces and trade shows. The Company will also use Mario Andretti's
continued race circuit stops to raise the level of attention to its products.
The Company will also seek to increase revenues at its hospitality
center, develop an Internet presence, establish a tie to the Andretti racing
web page; promote the product through the Andretti Fan Club and, create
greater sales through business to the wine tasting room and through mail
order techniques.
(e) State the back log of written firm orders for products and/or
services as of the recent date (within the last ninety (90) days) and compare
it with the backlog of a year ago from that date
Not applicable.
(f) State the number of the Company's present employees and the number
of the employees it anticipates it will have in the next 12 months
The Company currently has 5 full time employees which consist of its
chief executive officer, Mr. Mack Jennings; and 4 supporting staff members.
None of the employees of the Company are covered by any collective bargaining
contracts. In the next 12 months, the Company anticipates expanding its staff
to include the following: (a) 8-10 part time visitor center tour guides; and
(b) one (1) cellar worker/maintenance person. Grapes are harvested through
independent contractors and seasonal employees.
(g) Describe generally the principal properties the Company owns
As indicated above, the Company owns a 53 acre parcel in Napa Valley,
California which consists of a 43 acre vineyard as well as a 6,000 square
foot winery, 4,000 square foot hospitality center plus the Company's offices.
(h) Indicate the extent to which the Company's operations depend or
expected to depend on patents, copy rights, trade secrets, know-how, or other
proprietary information.
While the Company's operations are not dependent upon any patents,
trademarks or form of trade secrets, the quality of the Company's products as
with other wineries is dependent upon skills of their winemaker which are
skills developed over many years of wine making. The Company has no formal
contract with its winemaker Mr. Robert Pepi, Jr. and Mr. Pepi is not under
any confidentiality agreement or covenant not to compete. While the loss of
Mr. Pepi would have an adverse short term impact on the Company, the Company
does believe it would be able to retain the services of another competent
winemaker.
17
<PAGE>
(i) Impact of government regulation
The Company is subject to a broad range of federal and regulatory
requirements regarding its operations and practices. The Company's current
operations and its future operations will be subject to regulations governing
the storage and use of fertilizers, fungicides, herbicides, pesticides and
other chemicals. In addition, wine production and sales are subject to
extensive regulation by the Federal Bureau of Alcohol, Tobacco and Firearms,
the California Department of Alcohol and Beverage Control and other state and
federal government authorities that regulate licensing, trade and pricing
practices, labeling, advertising and other activities. (See "RISK FACTORS".)
(j) State the names of any subsidiaries of the Company, their business
purposes and ownership, and indicate which are included in the financial
statements attached hereto
The only subsidiary of the Company is AWG, Inc., a Delaware
corporation, which holds all of the operating assets of the business. AWG,
Ltd., the parent company, is merely a holding company. All activities of both
AWG, Ltd. and AWG, Inc. are reflected on the Company's financial statements.
(k) Summarize material events in the development of the Company during
the past five years or for whatever lesser period the Company has been in
existence
The most significant event is the Company's brief history occurred in
1996 when it acquired the winery and vineyard upon which its business is
presently located.
The second most significant event in the Company's brief history is
the investment in the Company by Messrs. Andretti and Antonini in late 1996
which has provided marketing and operational direction for the Company.
In addition, Mr. Antonini has provided financial resources to the Company.
18
<PAGE>
MILESTONES TO BE ACCOMPLISHED
4(a) If the Company was not profitable during its last fiscal year,
list below, in chronological order, the events which in Management's opinion
must or should occur or the milestones in which in Management's opinion, the
Company must or should reach in order for the Company to become profitable
and indicate the expected manner or the occurrence or the expected method by
which the Company will achieve its milestones.
<TABLE>
<CAPTION>
DATE OR NUMBER OF
MONTHS AFTER THE
EXPECTED MANNER OF RECEIPT OF PROCEEDS
OCCURRENCE OR METHOD WHEN MILESTONE SHOULD
EVENT OR MILESTONE OF ACHIEVEMENT BE ACCOMPLISHED
- ------------------ --------------------------- ------------------------
<S> <C> <C>
Increase of The Company will need to The Company has already
inventory initially buy wine in bulk entered into modest
production from third parties in order contracts with existing
to establish a position in grape growers. As soon as
the marketplace. In additional funds are
addition, the Company will available, the Company
have to obtain short term believes that it would be
and long term contracts with able to immediately begin
the growers to acquire entering into to additional
grapes which can be crushed, inventory production
fermented and stored and contracts with grape growers
ultimately bottled. and distributors of bulk
wine. The Company believes
that such inventory will be
available in the quality
demanded by the Company,
with the only issue being
price.
Vineyard
development and It is expected that the Replanting of the remaining
maintenance. Company will replant the acreage will be accomplished
entire vineyard: 12 acres in 1999.
in 1997 and the balance of
31 acres will be replanted
in 1999.
Winery construction The Company already has Construction is substantially
and refurbishing commenced construction of a completed.
program. barrel storage facility, a
tasting room and a
refurbished hospitality
center.
</TABLE>
(b) State the probable consequences to the Company of delays in
achieving each of the events or milestones within the above time schedule and
particularly the effect of any delays upon the Company's liquidity in view of
the Company's anticipated level of operating costs
In the event the Company is unable to achieve its first milestone of
obtaining additional inventory production, the Company would have only very
limited capability of producing wine from its own vineyard during the
replanting process. It is anticipated that during the replanting process, the
Company will only be able to produce approximately 4,000 or 5,000 cases of
wine from its own grapes which would not be sufficient to fund its ongoing
operating costs. As a result, in the event that the Company is unable to
obtain sufficient inventory production, the Company would have to utilize
proceeds from this Offering that would otherwise be utilized for inventory
production to cover operating costs.
In the event that the Company is unable to proceed with its vineyard
replanting and maintenance program on schedule, the Company would be further
dependent on its ability to obtain grapes from other sources for the
production of wine or forced to increase its acquisition of bulk wines. While
the Company operations can still be profitable without production of wine
with grapes from its own vineyard, the Company would not be able to bottle
its "estate" product which would have an impact on profitability as the
Company is anticipating to be able to produce approximately 1/3 of its
maximum production from its own vineyards.
19
<PAGE>
Finally, in the event that the Company is unable to complete
construction of the additional wine making facilities, tasting room and
hospitality center on a timely basis, the Company would be forced to utilize
other facilities for purposes of making the wine which would negatively
impact profitability and the Company would lose projected revenues on public
tours and special events which would also have a significant negative impact
on revenues.
Note: After reviewing the nature and timing of each event or
milestone, potential investors should reflect upon whether achievement of
each within the estimated time frame is realistic and should assess the
consequences of delays or failure of achievement in making an investment
decision.
COMPANY INDEBTEDNESS
Bank Indebtedness. The Company currently has indebtedness outstanding in
three (3) institutions; one of which is long term. Set forth below is a brief
description of each debt:
Comerica Bank. The Company has obtained two (2) term loans from Comerica
Bank in Detroit, Michigan in the aggregate amount of $2,500,000 which
permitted the Company to refinance a significant portion of its indebtedness.
The first term loan in the principal amount of $1,650,000 has a term of seven
(7) years with principal and interest repaid based on a fifteen (15) year
amortization ($14,923.07 per month) and a final balloon payment of the
remaining principal balance on December 9, 2005. Interest accrues at the rate
of 7.1% per annum. The second term loan in the amount of $850,000 also has a
seven (7) year term but with repayment based on a seven (7) year amortization
at an interest rate of 7% per annum with monthly payments of $12,870.37. The
term loans may be repaid with a prepayment penalty equal to the difference
between the interest Comerica Bank would have earned for the remaining term
of the loan and 1/2 of 1% in excess of United States Treasury Obligations of
similar amount and maturity. Each of the term loans have been guaranteed by
Joseph E. Antonini and Mario Andretti. Each individual's guaranty is limited
to 50% of the loan balance. The loans are secured by a first secured interest
in all of the assets of the Company. In addition, Comerica Bank has extended
a line of credit in the amount of $200,000 with a one (1) year term ending on
December 9, 1999, the entire principal amount of which has been drawn.
Interest will accrue on the amount outstanding under the line of credit at
Comerica's prime rate of interest. This loan is also secured by the assets of
the Company and guaranteed by Messrs. Antonini and Andretti.
Bank of Bloomfield Hills. The Company has an outstanding loan from Bank of
Bloomfield Hills in Bloomfield Hills, Michigan, in the amount of $835,000.
The loan which was obtained in January 1997 bears interest at the rate of .5%
in excess of the prime rate of Citibank, N.A. per annum is payable interest
only on a monthly basis. The current rate is 9% per annum. Interest is
payable monthly with all principal due and payable no later than March 1,
1999. The loan has been guaranteed by Joseph Antonini, Chairman of the
Company.
Indebtedness To Related Parties. As of December 31, 1998, the Company had
outstanding indebtedness to various related parties in the aggregate amount
of $561,868. This indebtedness will be partially repaid from the proceeds of
the Offering. A brief description of the indebtedness is as follows:
Demand Notes. The Company has borrowed $60,000 from Mack Jennings, the
President and Chief Executive Officer of the Company. The two (2) Notes in
favor of Mr. Jennings were executed on August 18, 1997 ($35,000) and August
1, 1998 ($25,000) and provide for interest payments of 9% per annum payable
monthly and permits Mr. Jennings to call the Notes at any time. These notes
will be repaid from the proceeds of this Offering.
Term Notes. The Company has borrowed the sum of $95,000 from Mario Andretti,
the Vice Chairman of the Company and $60,000 from Sports Management Network,
Inc., a company controlled by John P. Caponigro, a Director of the Company
and its Secretary and General Counsel. Each of the Notes provide for interest
payments of 9% per annum payable monthly with the principal due upon demand
of the holder. One (1) note was executed by the Company on August 25, 1997,
two (2) notes on September 23, 1997 and two (2) notes on April 23, 1998.
These notes will be repaid from the proceeds of the Offering. In addition,
the Company has borrowed $98,868 from Joseph E. Antonini, Chairman of the
Company through a personal line of credit he has with Comerica Bank, Detroit,
Michigan. This loan bears interest at the prime rate of Comerica Bank (which
is the rate charged Mr. Antonini under his line of credit) and matures in
March, 1999. Finally, in December 1998, Mr. Antonini agreed to extend a
$250,000 line of credit to the Company, all of which has been drawn. This
line bears interest at the rate of 8% per annum and matures in March, 1999.
It is anticipated that these notes will be repaid in full from the
refinancing described below.
20
<PAGE>
Bridge Loan Financing. Pursuant to a note dated March 2, 1998, Colin Frank
Riseam (hereinafter referred to as "The Bridge Lender") loaned the Company
$50,000. The note bears interest at 6% per annum which is payable quarterly
commencing June 2, 1998 and each quarter thereafter until paid. Principal and
all accrued interest is due on the earlier of (a) March 2, 1999; (b) closing
date of this Offering or (c) the completion of any other debt or equity
offering in the principal amount of $500,000 or more. The loan is guaranteed
by AWG, Inc., the Company's wholly owned subsidiary. In addition to the
interest payment, the Bridge Lender has received 500,000 shares of Preferred
Stock, which is being registered as part of this Offering. The bridge loan
financing was placed by Klein, Maus and Shire, Inc. who received a commission
of 10% of the proceeds of the financing together with a 3% non-accountable
expense allowance.
21
<PAGE>
OFFERING PRICE FACTORS
5. What were net, after tax earnings for the last fiscal year?
Total loss of ($ 715,405) or ($0.13) per share.
6. If the Company had profits, show offering price as a multiple of
earnings.
N/A
7. (a) What is the net tangible book value of the Company?
Net deficit of $534,715 or ($1.07) per share computed solely with
regard to the 500,000 shares of Preferred Stock issued to the Bridge Lender.
The per share price has been determined arbitrarily by the Underwriters and
management based upon the financial needs of the Company.
(b) State the dates on which the Company sold or otherwise issued
securities during the last twelve (12) months.
In connection with the bridge loan financing described above, the
Company issued 500,000 shares of Preferred Stock to the Bridge Lender. This
issuance was made to a single investor who has no presence in the United
States. In addition, three investors--two of which are directors of the
Company--entered into an agreement in December, 1996 pursuant to which they
contributed an aggregate of $350,000 to the Company in exchange for a
yet-to-be-authorized class of preferred stock. The three investors were:
Joseph Antonini, Bruce Williams (each of which has been a Director of the
Company) and Carl Haas an associate of Messrs. Antonini and Andretti who
declined to become a director. In November, 1997, Messrs. Antonini, Williams
and Haas decided to acquire Common Stock of the Company in lieu of Preferred
Stock in order to facilitate this Offering. Finally, Mario Andretti, a
director of the Company agreed to exchange accrued but unpaid royalty fees
for common stock in the Company. (See "MANAGEMENT RELATIONSHIPS, TRANSACTIONS
AND REMUNERATION")
8. (a) What percentage of the outstanding Preferred Shares of the Company
will the investors in this Offering have?
Investors will own an aggregate of 55% of the issued and outstanding
shares of Preferred Stock upon conclusion of the Offering assuming
none of the over-allotment is exercised, and approximately 58% if
exercised in full.
(b) What post-offering value has management implicitly attributing to
the entire Company by establishing the price per security set
forth herein? Based solely on the Preferred Stock and assuming
completion of the Offering, the post offering value implicitly
attributed to the entire Company would be $11,000,000.
It should be noted in this regard that the Company's September 30, 1998 net
tangible book value is a deficit of $534,175. Assuming completion of the
Offering, with net proceeds of $4,972,000, the net tangible book value per
share computed solely with respect to the Preferred Stock would be $4.24 per
share. This will result in immediate dilution to purchasers of the Preferred
Stock offered hereby of $5.76 (or 57.6%). The holder of the Preferred Stock
issued in connection with the bridge loan financing would have an immediate
gain of $2,120,000 upon completion of Offering. The holder of the Preferred
Stock issued in connection with the bridge and loan financing did not pay any
separate consideration for such shares.
The expected sale of the additional 500,000 shares Preferred Stock may
depress the price of the Preferred Stock as it is offered into the Market,
whether or not all of such shares are actually sold.
22
<PAGE>
USE OF PROCEEDS
9. (a) The following table sets forth the use of the proceeds from this
Offering:
<TABLE>
<CAPTION>
<S> <C>
Total Proceeds $6,000,000
Less: Offering Expenses 600,000
Commissions & Finders Fees
Legal and Accounting 283,000
Copying and Advertising 25,000
Other (Specify):
Underwriting Expenses 120,000
Net Proceeds from Offering $4,972,000
Use of Net Proceeds
Repayment of Loans(1) $1,447,000
Accounts Payable 350,000
Inventory Production(2) 1,400,000
Equipment(3) 400,000
Vineyard Replanting Program 362,900
Reserve for Operating Deficits(4) 1,012,100
----------
Total Use of Net Proceeds $4,972,000
==========
(b) If there is no minimum amount of proceeds that must be raised
before the Company may use the proceeds of the Offering, describe
the order of priority in which the proceeds set forth above in
the column "If Maximum Sold" will be used. N/A
NOTE: After reviewing the portion of the Offering allocated to the payment of
Offering expenses, and to the immediate payment to management and promoters
of any fees, reimbursements, past salaries or similar payments, a potential
investor should consider whether the remaining portion of his investment,
which would be that part available for future development of the Company's
business and operations, would be adequate.
10. (a) If material amounts of funds from sources other than this
Offering are to be used in conjunction with the proceeds from
this Offering, state the amounts and sources of such other funds,
and whether funds are firm or contingent. If contingent, explain.
N/A
(b) If any material part of the proceeds is to be used to discharge
indebtedness, describe the terms of such indebtedness, including
interest rates. If the indebtedness to be discharged was incurred
within the current or previous fiscal year, describe the use of
the proceeds of such indebtedness.
- --------
(1) This includes repayment of the bridge loan financing in the principal
amount of $50,000 related party indebtedness of approximately $562,000
and the remaining outstanding balance of the loan to Bank of
Bloomfield Hills in the amount of $835,000.
(2) Reflects acquisition of wine grapes and bulk juice.
(3) Reflects acquisition of crush pad, fermentation tanks and storage
barrels.
(4) Based upon operations for the first nine (9) months of 1998, the reserve
would be sufficient for at least 12 months. Proceeds not utilized to fund
operating deficits would be held in reserve for acquisition of additional
inventory.
23
<PAGE>
See Question 4 "Company Indebtedness". The proceeds of the
indebtedness was used to fund ongoing operations and to fund a
portion of the construction of improvements to the winery.
(c) If any material amount of the proceeds is to be used to acquire
assets, other than in the ordinary course of business, briefly
describe and state the cost of the assets and other material
terms of the acquisitions. If the assets are to be acquired from
officers, directors, employees or principal stockholders of the
Company or their associates, give the names of the persons from
whom the assets are to be acquired and set forth the cost to the
Company, the method followed in determining the cost, and any
profit to such persons. N/A
(d) If any amount of the proceeds is to be used to reimburse any
officer, director, employee or stockholder for services already
rendered, assets previously transferred, or monies loaned or
advanced, or otherwise, explain:
Approximately $750,000 of the proceeds of the Offering will be
utilized to pay loans made by, or guaranteed by the Directors of
the Company.
11. Indicate whether the Company is having or anticipates having within
the next 12 months any cash flow or liquidity problems and whether or
not it is in default or in breach of any note, loan, lease or other
indebtedness or financing arrangement requiring the Company to make
payments. Indicate if a significant amount of the Company's trade
payables have not been paid within the stated trade term. State
whether the Company is subject to any unsatisfied judgements, liens or
settlement obligations and the amounts thereof. Indicate the Company's
plans to resolve any such problems.
The Company anticipates that, upon completion of this Offering, the
Company will have sufficient funds to allow it to achieve break even
cash flow by the end of 1999 and will have a sufficient reserve for
cash flow deficits to cover any losses. The Company is currently not
in default or in breach of any note, loan or lease, and it is not
anticipated that any default will occur assuming successful completion
of this Offering. In this regard, the Company secured cooperation of
its vendors who will be paid in full from the proceeds of this
Offering. In addition, indebtedness to related parties have either
been extended or have been termed demand notes for which no demand for
payment has been made. (See "MANAGEMENT, DISCUSSION AND ANALYSIS OF
CERTAIN FACTORS")
12. Indicate whether proceeds from this Offering will satisfy the
Company's cash requirements for the next 12 months and whether it will
be necessary to raise additional funds. State the source of additional
funds, if known. (See "MANAGEMENT, DISCUSSION AND ANALYSIS OF CERTAIN
FACTORS")
24
<PAGE>
CAPITALIZATION
13. Indicate the capitalization of the Company as of the most recent
balance sheet date (adjusted to reflect any subsequent stock splits,
stock dividends, recapitalization or refinancing) and as adjusted to
reflect the sale of the minimum and maximum amount of securities in
this Offering and the use of the net proceeds therefrom:
</TABLE>
<TABLE>
<CAPTION>
Amount Outstanding
-----------------------------------------
As of As of
12/31/97 9/30/98 As Adjusted
-------- ------- -----------
<S> <C> <C> <C>
Debt:
Short term debt (average
interest rate 9.1%;
adjusted after refinancing
to 7.1%) $ 1,454,000 $ 2,134,000 $ 200,000(B)
----------- ----------- -----------
Long-term debt (average
interest rate 11%;
adjusted after refinancing
to 7.1%) 1,665,400 $ 1,665,400 2,500,000(B)
----------- ----------- -----------
Total debt 3,119,400 $ 3,799,400 2,700,000
----------- ----------- -----------
Preferred stock-par or stated
value
Series A Preferred Stock
(1,000,000 shares out-
standing, as adjusted) -0- -0- 9,472,000(A)
----------- ----------- -----------
Common stock - Par or stated value 7,157 8,173 8,173
----------- ----------- -----------
Additional paid in capital 2,112,473 2,350,857 2,350,857
----------- ----------- -----------
Additional capital-stock awards 155,000 -0- -0-
----------- ----------- -----------
Additional Capital-Underwriters
Warrants
($.0001 per warrant) -0- -0- 5
----------- ----------- -----------
Receivable from stockholder (75,000) (75,000) (75,000)
----------- ----------- -----------
Retained earnings
(accumulated deficit) (1,559,348) (2,272,033) (6,772,033)
----------- ----------- -----------
Total stockholders equity 640,282 11,997 4,983,997
----------- ----------- -----------
Total Capitalization $ 3,759,682 $ 3,811,397 $ 7,683,997
=========== =========== ===========
<CAPTION>
Number of Preferred shares
authorized to be outstanding:
Number of Par Value
Class of Preferred Shares Authorized Per Share
------------------ ----------------- ---------
<S> <C> <C>
Series A 6% Preferred 1,600,000 $.001
------------------ ----------------- ---------
------------------ ----------------- ---------
<FN>
(A) Amount represents estimated net proceeds from this offering of
$4,972,000 and includes an estimated charge of $4,500,000 (based on a
10% discount from the offering price) related to the 500,000 shares of
Preferred Stock which are being registered on behalf of a single
shareholder.
(B) Short term and long term debt, as adjusted, reflects the Company's
refinancing with Comerica Bank, Detroit, Michigan, in December, 1998,
as described under "Company Indebtedness".
Number of common shares authorized: 50,000,000 shares. Par or stated value
per share, if any: $.001
</TABLE>
25
<PAGE>
Number of shares reserved to meet conversion requirements or for the issuance
upon exercise of options, warrants or rights: 2,000,000 shares.
DESCRIPTION OF SECURITIES
14. The securities being offered hereby are:
[ ] Common Stock
[x] Preferred or Preference Stock
[ ] Notes or Debentures
[ ] Units of two or more types of securities, composed of:
_________________________________________________________
[ ] Other: __________________________________________________
_________________________________________________________
_________________________________________________________
15. These securities have:
Common Stock
Yes No
[ ] [x] Cumulative voting rights
[ ] [x] Other special voting rights
[ ] [x] Preemptive rights to purchase in new issues of shares
[x] [ ] Preference as to dividends or interest--Preferred
[x] [ ] Preference upon liquidation--Preferred
[ ] [ ] Other special rights or preferences ________________
(specify):
16. Are the securities convertible? [ ] Yes [x] No
If so, state the conversion price or formula. __________________ .
Date when conversion becomes effective:__/__/___
Date when conversion expires: __/__/___
17. (a) If securities are notes or other types of debt securities: N/A
18. If securities are Preference or Preferred Stock: Are unpaid dividends
cumulative? [x] Yes [ ] No
Are securities callable? [x] Yes [ ] No Explain: The Company may
redeem the Preferred Stock at such price and upon such terms as may be
agreed upon by the Company and shareholders owning a majority of the
outstanding shares of Preferred Stock.
NOTE: Attached to this prospectus are copies of the Articles of
Incorporation of the Company that give rise to the rights of holders of the
Preferred stock being offered.
19. If securities are capital stock of any type, indicate restrictions on
dividends under loan or other financing arrangements or otherwise: N/A
20. Current amount of assets available for payment of dividends (if
deficit must be first made up, show deficit in parenthesis): Not
applicable as dividends are payable solely with shares of Preferred
Stock.
PLAN OF DISTRIBUTION
21. The selling agents (that is, the persons selling the securities as
agent for the Company for a commission or other compensation) in this
Offering are: _______________________________________________________
Name: Klein Maus and Shire, Inc. Name: Nutmeg Securities, Ltd.
Address: 110 Wall Street Address: 495 Post Road East
New York, NY 10005 Westport, CT 06880
Telephone No (212) 785-4545 Telephone No (203) 226-1857
The sole officers and directors of Klein Maus and Shire are: Asim
Kahli and Ali Mohammed Kahn. The officers and directors of Nutmeg
Securities, Ltd. are:
26
<PAGE>
22. Klein Maus and Shire, Inc. and Nutmeg Securities, Ltd. (the "Under-
writers") will acquire the shares of Preferred Stock on a firm
commitment basis for which it will receive a sales commission equal to
10% of the proceeds of the Offering. In addition, the Underwriters are
entitled to a non-accountable expense allowance equal to 2% of the
proceeds of the Offering ($120,000) of which $25,000 has been paid by
the Company. In addition, the Underwriters will receive warrants to
purchase up to 10% of the number of shares of Preferred Stock sold by
the Underwriters at a price of $.0001 per warrant. The warrants may be
exercised at any time during the four (4) year period commencing one
year after the issuance of the Preferred Stock offered hereby at an
exercise price of $16.50 per share. The Underwriters have the right to
have the warrants and the underlying shares of Preferred Stock
registered any time the Company files a registration statement and, in
addition, may demand one additional registration at any time at their
discretion.
The Underwriters have the right to designate one person to be a member
of the Board of Directors for up to three (3) years after the
effective date of this registration statement or, alternatively, the
right to designate an individual to attend all board meetings. As of
the date of this Prospectus, the Underwriters have not designated an
individual to be a member of the Board of Directors or be a
representative to attend board meetings.
For a period of five (5) years after the effective date of the
registration statement, the Underwriters will have a right of first
refusal to participate in any future securities Offering conducted by
the Company. In addition, except for fair market value the Company may
not offer any equity stock other than the 2 million shares authorized
under the current Stock Option Plans, without the prior written
consent of the Underwriters. Finally, current officers and directors
of the Company including holders of shares of Common Stock issued
pursuant to the Company's Stock Option Plans cannot sell their Common
Stock for a period of 24 months after the effective date of this
registration statement without the prior written consent of the
Underwriters.
500,000 shares are also being registered for the account of Colin
Frank Riseam who is currently the sole holder of Preferred Stock of
the Company. Mr. Riseam has never held any office or other position
with the Company nor has he had any other relationship with the
Company other than in connection with loaning the Company funds as
disclosed under Question 4 - Company Indebtedness. Mr. Riseam's shares
are subject to a Lock-Up Agreement and no shares will be sold on
behalf of Mr. Riseam by the Underwriters for a period of at least 13
months after the effective date of this Offering.
23. Describe any material relationships between any of the selling agents
or finders and the Company or its management. N/A
24. If this Offering is not being made through selling agents, the names
of persons at the Company through which this Offering is being made:
Name: N/A
25. If this Offering is limited to a special group, such as employees of
the Company, or is limited to a certain number of individuals (as
required to qualify under Subchapter S of the Internal Revenue Code)
or is subject to any other limitations, describe the limitations and
any restrictions on resale that apply: N/A
26. (a) Name, address and telephone number of independent bank or savings
and loan association or other similar depository institution acting as
escrow agent if proceeds are escrowee until minimum proceeds are
raised: N/A
(b) Date which funds will be returned by escrow agent if minimum
proceeds are not raised. N/A
27. Explain the nature of any resale restrictions on presently outstanding
shares, and when those restrictions will terminate, if this can be
determined: Other than with respect to Mr. Riseam, as discussed above,
there are no restrictions on any outstanding shares of Preferred
Stock. However, shares of Common Stock held by officers and directors
including holders of shares of Common Stock issued pursuant to the
Company's stock option plans are restricted by agreement with the
Underwriters such that no officer, director or other shareholders
receiving shares issued pursuant to the stock option plans may sell
any stock for a period of twenty-four months without the written
consent of the Underwriters. Moreover any common stock issuable
pursuant to the Company Stock Option Plans will be non-registered
stock and, therefore, will be restricted by applicable securities
laws. In addition, any common stock to be sold through Rule 144 under
the Securities Act of 1933, as amended, or otherwise by the holders of
the common stock shall be executed through the Underwriters.
<PAGE>
NOTE: Equity investors should be aware that unless the Company is able
to complete a further public offering or the Company is able to be
sold for cash and merged with a public company that their investment
in the Company may be illiquid indefinitely.
27
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS
28. If the Company has within the last five (5) years paid dividends, made
distributions upon its stock or redeemed any securities, explain how
much and when: N/A
NOTE: After reviewing the amount of compensation to the selling agents or
finders for selling the securities, and the nature of any relationship
between the selling agents or finders and the Company, a potential investor
should assess the extent to which it may be inappropriate to rely upon the
recommendation by the selling agents or finders to buy the securities.
OFFICERS AND KEY PERSONNEL OF THE COMPANY
29. Chief Executive Officer: Title: President
Name: Mack H. Jennings Age: 55
Office Street Address: 4162 Big Ranch Road, Napa, CA 94558
Telephone No.: (707) 259-6777
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities:
President of the Company - 1996 to Present
Stags' Leap Winery - Controller - 1996
Pokka Beverages, Inc., General Manager, Executive Vice President,
Director 1989-1996
Education (degrees, schools, and dates):
B.A. Westminster College, Fulton, MO 1964
M.B.A. (with honors) University of Oregon, 1970
Also a Director of the Company : [x] Yes [ ] No
Indicate amount of time to be spent on Company matters if less than
full time.
30. Chief Operating Officer: N/A Title:_________________
Name: __________________ Age: _____________________
Office Street Address: Telephone No.:
________________________ ( ) -
31. Chief Financial Officer Title: President
Name: Mack H. Jennings Age: 55
Office Street Address: 4162 Big Ranch Road, Napa, CA 94558
Telephone No.: (707) 259-6777
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities:
President of the Company - 1996 to Present
Stags' Leap Winery - Controller - 1996
Pokka Beverages, Inc., General Manager, Executive Vice President,
Director 1989-1996
Education (degrees, schools, and dates):
B.A. Westminster College, Fulton, MO 1964
M.B.A. (with honors) University of Oregon, 1970
Also a Director of the Company : [x] Yes [ ] No
Indicate amount of time to be spent on Company matters if less than
full time.
28
<PAGE>
32. Other Key Personnel:
(a) Name: John P. Caponigro Age: 41
Title: Secretary, General Counsel
Office Street Address: 36800 Woodward Ave., Suite 239,
Bloomfield Hills, MI 48304
Telephone No.: (248) 647-6860
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Principal of The Law Firm of Frasco and Caponigro, P.C. from 1989 to
present.
President and CEO of Sports Management Network, a sports and
entertainment legal and marketing firm based in Bloomfield Hills,
Michigan; from 1989 to present.
Education (degrees, schools, and dates):
BBA University of Toledo 1978
MBA University of Toledo 1982
JD University of Toledo 1982
Also a Director of Company? [X] Yes [ ] No
Indicate amount of time to be spent on Company matters if less than
full time:
As needed, less than 10 hours per week.
(b) Name: Robert L. Pepi, Jr Age: 47
Title: Winemaker
Office Street Address: 4162 Big Ranch Road, Napa, CA 94558
Telephone No.: (707) 259-6777
Names of employers, titles and dates of positions held during
past five years with an indication of job responsibilities:
Winery Consultant - 1995 - Present
Stinson Lane, Ltd. (winery) - General Manager of California
Operations - 1991-1995
Robert Pepi Winery - General Partner and General Manager -
1980-1991
Education (degrees, schools, and dates):
B.A. Pomona College 1972
University of California at San Francisco 1975-1976 -
Bus/Acctg. Courses
University of California at Davis - 1980-1983 - Enology and
Vitacultural Courses
The Wine Lab - 1981-1984 - Enology Courses
Also a Director of Company? [ ] Yes [x] No
Indicate amount of time to be spent on Company matters if less
than full time:
Approximately 1/2 time.
DIRECTORS OF THE COMPANY
33. Number of Directors: 5. If Directors are not elected annually, or are
elected under a voting trust or other arrangement, explain:
34. Information concerning outside or other Directors (i.e. those not
described above):
(a) Name: Joseph E. Antonini Age: 56
Office Street Address: 1800 West Maple Road, Troy, MI 48084
Telephone No.: (248) 614-3880
29
<PAGE>
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Consultant and Private Investor
Former Chairman, President and CEO of Kmart Corporation - 1986 - 1995
held various positions at Kmart Corporation - 1964-1986
Chairman of the Board - AWG, Ltd. - 1996 - Present
Director - Shell Oil Company
- Ziebart
- American Speedy Printing
Education (degrees, schools, and dates):
B.S. in Business Administration from West Virginia University in 1964
(b)Name: Mario Andretti Age: 58
Office Street Address: 53 Victory Lane, Nazareth, PA 18064
Telephone No.: (610) 759-5118
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Race car driver: 1956 - present
Consultant and private investor: 1996 - Present
Education (degrees, schools, and dates):
N/A
(c) Name: Bruce Williams Age: 37
Office Street Address: 141 West Jackson, Suite 4220-B,
Chicago, IL 60604
Telephone No.: (312) 341-7370
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Since 1982, Mr. Williams has been a market maker at the Chicago Board
of Trade and specializes in agricultural products. Since 1988, he has
been a full member of the Chicago Board of Trade and a principal of
Williams Trading, a commodities trading company.
Vice Chairman of Chicago Board of Trade, Membership Committee (1996 -
present) Chairman of the Dow Jones Futures Committee (1997-1998)
Education (degrees, schools, and dates):
N/A
35. (a) Have any of the Officers or Directors ever worked for or managed a
company (including a separate subsidiary or division of a larger enterprise)
in the same business as the Company?
[x] Yes [ ] No
Explain: Mr. Jennings previously served as General Manager, Executive Vice
President and Director of Pokka Beverages, Inc. from 1989 to 1996 and was
Controller of Stags' Leap Winery during a portion of 1996.
(b) If any of the Officers, Directors or other key personnel have ever
worked for or managed a company in the same business or industry as the
Company or in a related business or industry, describe what precautions, if
any, (including the obtaining of releases or consents from prior employers)
have been taken to preclude claims by prior employers for conversion or theft
of trade secrets, know-how or other proprietary information.
30
<PAGE>
Mr. Jennings is not subject to any noncompetition Agreement. The
Company is not using any proprietary information obtained from his prior
employers.
(c) If the Company has never conducted operations or is otherwise in
the development stage, indicate whether any of the Officers or Directors has
ever managed any other company in the start up or development stage and
described the circumstances, including relevant dates. N/A
(d) If any of the Company's key personnel are not employees but are
consultants or other independent contractors, state the details of their
engagement by the Company.
Robert Pepi is an independent contractor who is working without a
written contract. He is compensated at the rate of $2,000 per month. He has
also been awarded 25,000 shares of the Company's Common Stock.
(e) If the Company has key man life insurance policies on the any of
its Officers, Directors or key personnel, explain, including the names of the
persons insured, the amount of insurance, whether the insurance proceeds are
payable to the Company and whether there are arrangements that require the
proceeds to be used to redeem securities or pay benefits to the estate of the
insured person or a surviving spouse. N/A
36. If a petition under the Bankruptcy Act or any State insolvency law was
filed by or against the Company or its Officers, Directors or other key
personnel, or a receiver, fiscal agent or similar officer was appointed by a
court for the business or property of any such persons, or any partnership in
which any of such persons was a general partner at or within the past five
years, or any corporation or business association of which any such person
was an executive officer at or within the past five years, set forth below
the name of such persons, and the nature and date of such actions. N/A
PRINCIPAL STOCKHOLDERS
37. Principal owners of the Company (those who beneficially own directly
or indirectly 10% or more of the common and Preferred Stock presently
outstanding) starting with the largest Common Stockholder. Include
separately all Common Stock issuable upon conversion of convertible
securities (identifying them by asterisk) and show average price per
share as if conversion has occurred. Indicate by footnote if the price
paid was for a consideration other than cash and the nature of any
such consideration.
<TABLE>
<CAPTION>
COMMON STOCK
Name Average No. of Shares
Office Street Address Price Held After
Telephone Number Per Shares % of Offering if % of
Principal Occupation Share Now Held Total All Securities Sold Total
- -------------------- ------- -------- ----- ------------------- -----
<S> <C> <C> <C> <C> <C>
Mario Andretti $ .19 - .33 1,944,211 23.79 1,944,211 23.79
53 Victory Lane
Nazareth, PA 18064
(610) 759-5118
Race Car Driver; Investor
Joseph Antonini $ .19 - .33 1,196,158 14.63 1,196,158 14.63
1800 West Maple Road.
Troy, MI 48084
(248) 614-3880
Consultant, Investor
Bruce Williams $ .19 - .33 884,211 10.82 884,211 10.82
141 West Jackson
Suite 4220-B
Chicago, IL 60604
Commodities trader;
investor
John P. Caponigro $ .19 - .27 284,211 3.48 284,211 3.48
26800 Woodward Avenue
Suite 239
Bloomfield Hills, MI 48304
Attorney; Consultant
31
<PAGE>
Mack Jennings $.58 150,000 1.84 150,000 1.84
4162 Big Ranch Road $.25* 35,000 35,000
Napa, CA 94558
President of the Company
<FN>
*Assumes exercise of options to purchase 35,000 shares at $0.25 per share.
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK
Name Average No. of Shares
Office Street Address Price Held After
Telephone Number Per Shares % of Offering if % of
Principal Occupation Share Now Held Total All Securities Sold Total
- -------------------- ------- -------- ----- ------------------- -----
<S> <C> <C> <C> <C> <C>
Colin Frank Riseam -0- 500,000 100 500,000 50
110 Park Road
Hampton Hill
England TW 12 1HR
</TABLE>
38. Number of shares beneficially owned by Officers and Directors as a
group: Before Offering: 4,458,791 (54.55% of total outstanding)
MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND REMUNERATION
39. (a) If any of the Officers, key personnel or principal stockholders
are related by blood or marriage, please describe. N/A
(b) In connection with their initial acquisition of stock in the
Company, Messrs. Antonini and Andretti are currently indebted to
the Company in the amount of $84,190 each. The loan from Mr.
Antonini is recorded in the Company's financial statements as a
receivable recorded in equity. The other note is included in
amounts due from stockholders.
The Company has entered into an informal oral consulting
agreement with Joseph Antonini pursuant to which Mr. Antonini has
agreed to provide consulting services to the Company. This oral
agreement extends through January 2002. However, this oral
agreement can be terminated by either party. Compensation for
such consulting services shall be $50,000 per year payable in
Common Stock of the Company as of the end of each calendar year.
The stock will be valued based on the trading price of the stock
as of December 31, of each year. Subject to election by the
Shareholders on an annual basis, Mr. Antonini has also agreed to
serve as Chairman of the Board of the Company at no additional
compensation. There is no minimum or maximum amount of time in
which Mr. Antonini has agreed to devote to the Company's
business. Currently, Mr. Antonini and the Company estimate that
he devotes approximately 20 hours per week to Company affairs.
There is no assurance that he will continue to devote this amount
of time to the Company and he is under no obligation to do so.
In addition, in 1998 the Company entered into a revised licensing
agreement with Mario Andretti to utilize the name and image of
Mr. Andretti in connection with the marketing of the Company's
products. The term of the License Agreement is indefinite unless
otherwise terminated for cause (as defined below). The License is
exclusive as to the business and products of the Company and the
territory is world wide. Pursuant to the License Agreement, Mr.
Andretti has agreed to participate in advertising and promotional
activities on behalf of the Company including, but not limited
to, radio, television and print media advertising spots, trade
relations activities and personal appearances. The Company will
pay all expenses of Mr. Andretti including, if requested by Mr.
Andretti, the expenses of his personal aircraft. Mr. Andretti
will make himself available at various auto race venues and will
provide the Company with his traveling itinerary so that the
Company can coordinate promotional activities.
In addition, Mr. Andretti shall receive a royalty equal to 5% of
the gross revenues and sales of all products bearing his name or
likeness. As to all other products sold by the Company, Mr.
Andretti shall be entitled to the lesser of 2% of Company profits
on all other wine sales or $150,000 per year. In the event of the
death of Mr. Andretti, the Company can either negotiate similar
agreements with his son, Michael or at its option, reduce royalty
payments by 25%.
<PAGE>
Mr. Andretti may terminate the Agreement for cause which is
defined to include failure to make royalty payments, solvency of
the Company, breach of Agreement, use of Mr. Andretti's likeness
or name on any
32
<PAGE>
product without his prior consent or the failure to maintain
product liability insurance. In addition, subject to approval by
the shareholders on a yearly basis, Mr. Andretti shall be
entitled during the term of the Agreement to a position on the
Company's Board of Directors and to be compensated at the same
rate as other Directors.
Finally, in exchange for legal consulting services, Mr. Caponigro
has been granted 100,000 shares of the Company's Common Stock at
no cost. Mr. Caponigro is under no obligation to continue to
provide legal services for the Company in connection with the
grant of the stock.
(c) If any of the Company's Officers, Directors, key personnel or 10%
stockholders has guaranteed or co- signed any of the Company's
bank debt or other obligations, including any indebtedness to be
retired from the proceeds of this Offering, explain and state the
amounts involved.
Joseph Antonini, the Chairman of the Board of the Company has
guaranteed $850,000 of the Company's indebtedness to Bank of
Bloomfield Hills, Michigan.
In December 1996, Messrs. Joseph Antonini, Bruce Williams (each
of whom are Directors of the Company) and Carl Haas loaned the
Company an aggregate amount of $350,000 in exchange for the right
to receive Convertible Preferred Stock of the Company at such
time as such stock was authorized by the shareholders. Such
Preferred Stock would have been Convertible into Common Stock of
the Company at any time the Company conducted a public offering
of its Common Stock at a price equal to eighty (80%) percent of
the contemplated Offering price per share. Since the Company has
no plans to offer its Common Stock and in order to alleviate the
debt burden of the Company, Messrs. Antonini, Williams and Haas
agreed to convert their debt into Common Stock at a price of $.33
per share which approximated the trading price of the stock at
the time of the conversion in early December 1997.
In addition, Mario Andretti, a Director of the Company, exchanged
his right to receive $220,000 worth of royalties for the years
1995 and 1996 for Common Stock of the Company at $.33 per share
in early December 1997.
Section 78.751 of the Nevada Revised Statutes provides for the
indemnification of officers, directors, and other corporate
agents for actions taken by reason of the fact that such person
is or was an officer, director or other corporate agent, if such
person acted in good faith and in a manner reasonably believed to
be in, or not opposed to the best interests of the Corporation
and had no reasonable cause to believe such conduct was unlawful.
These terms are sufficiently broad to indemnify such persons
under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities
Act of 1933, as amended (the "Act"). The Company's Certificate of
Incorporation and the Company's Bylaws provide for
indemnification of the Company's directors, officers, employees
and other agents to the extent and under the circumstances
permitted by the Nevada Revised Statutes. INSOFAR AS
INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE ACT MAY BE
PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF THE
COMPANY, PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE, THE
COMPANY HAS BEEN ADVISED THAT IN THE OPINION OF THE SECURITIES
AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC
POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE.
40. (a) List all remuneration by the Company to Officers, Directors and key
personnel for the last fiscal year:
Cash Other
---- -----
Chief Executive Officer: Mack Jennin $65,000 $ 58,000(1)
Key Personnel: Robert Pepi, Jr. $24,000 $ 6,750(1)
Others: Joseph Antonini $ -0- $ 50,000(2)
- --------
1 Estimated fair market value of 100,000 shares granted to Mack
Jennings and 25,000 shares granted to Robert Pepi. On January 13,
1998, Mr. Jennings' salary was increased to $75,000 per annum and
he was granted a bonus of $20,000 contingent upon the Company
reaching profitability during 1998. In addition, in 1998 Mr.
Jennings was granted options to purchase 35,000 shares of the
Company's Common Stock at an exercise price of $0.25 per share.
<PAGE>
2 All the Directors are paid in Common Stock of the Company.
Payment is made as of December 31st of each year based on the
fair market value of the Common Stock of the Company as of that
time. In addition, in exchange for legal consultation services
provided during 1997, Mr. Caponigro was issued 100,000 shares of
the Company's Common Stock. Such stock was valued at $27,000.
In addition to the foregoing, Mr. Antonini was granted a bonus of
$150,000 payable in shares of the Company's common stock in
exchange for Mr. Antonini's agreement to loan funds to the
Company and guarantee third party bank indebtedness. As in the
case of the compensation for director's shares, the price of the
stock is determined based on the closing price of the common
stock as of December 31, 1998. The bonus to Mr. Antonini is
contingent upon approval of the Underwriters which has not yet
been obtained.
33
<PAGE>
Mario Andretti $ -0- $ 35,000(2)
John P. Caponigro $ -0- $ 62,000(2)
Bruce Williams $ -0- $ 35,000(2)
Total $89,000 $246,750(2)
======= ========
Officers, Directors and Key Personnel as
a group (6 persons) $65,000 $246,750
(b) The Company currently has an Employment Agreement with Mack
Jennings as its President and Chief Executive Officer. The
Employment Agreement which was executed on January 1, 1997 is for
a term of 1 year renewable annually thereafter. In calendar year
1998, Mr. Jennings is entitled to a base salary of $75,000 per
annum plus a bonus of $20,000 which is contingent upon the
Company achieving profitability in 1998. Since the Company did
not achieve profitability for the year ended December 31, 1998,
Mr. Jennings will not be entitled to a bonus. Bonus arrangements,
if any, for future years will be determined by negotiation
between Mr. Jennings and the Company's Board of Directors. In
addition to a salary, Mr. Jennings will be entitled to
participate in any health insurance provided to employees of the
Company, of which none is currently available. Mr. Jennings shall
be entitled to 1 week of vacation during his first year of
employment, 2 weeks of vacation during years 2-5, and 3 weeks of
vacation thereafter. Pursuant to the terms of the Employment
Agreement, Mr. Jennings was granted 100,000 shares of the Common
Stock which vested immediately. In the event that the contract is
terminated for any reason other than for breach of the contract
by the Company, Mr. Jennings shall be restricted for a period of
6 months from competing with the Company. It should be noted that
the enforceability of non-competition clauses are dependent in
large part on the facts and circumstances surrounding the need
for such a provision. The Company believes that due to the
relatively short duration of the covenant that it would be
enforceable. However, any challenge by Mr. Jennings would be
determined by arbitration (as set forth below).
In the event that the contract is terminated without cause, Mr.
Jennings shall be entitled to a severance payment equal to the
greater of the balance of the 1 year term remaining on the
contract or 6 months. There will be no severance payments in the
event that the Agreement is terminated for cause. Pursuant to the
terms of the Employment Contract, for cause is defined to include
(1) employee's willful material and irreparable breach of the
Employment Agreement; (2) employee's gross negligence on the
performance or intentional non-performance of his material duties
and responsibilities; (3) employee's willful dishonesty, fraud or
misconduct with respect to the business or affairs of the Company
which conduct materially and adversely affects the operations or
reputation of the Company; (4) employee's conviction of a felony;
or (5) chronic alcohol abuse or illegal drug abuse. Finally, the
Company and employee have agreed to settle any disputes under the
Agreement by means of binding arbitration.
In addition to his Employment Agreement, in January of 1998, Mr.
Jennings was granted options to purchase 35,000 shares of the
Company's Common Stock with an exercise price of $.25 per share
exercisable any time through January 13, 2008, assuming
continuous employment with the Company.
The Company has an oral consulting agreement with its winemaker
Robert Pepi, Jr. who manages the Company's wine making
operations. Mr. Pepi is being paid at the rate of $2,000 per
month. In addition, Mr. Pepi has been granted 25,000 shares of
the Company's Common Stock at no cost. The Company has also
agreed to issue an additional 75,000 shares to Mr. Pepi in the
event he terminates consulting activities with other wineries.
This Agreement may be terminated by either party.
41. (a) Number of shares subject to issuance under presently
outstanding stock purchase agreements, stock options, warrants or
rights: 37,500 shares (.53% of total shares to be outstanding
after the completion
- -----------
2 All the Directors are paid in Common Stock of the Company.
Payment is made as of December 31st of each year based on the
fair market value of the Common Stock of the Company as of that
time. In addition, in exchange for legal consultation services
provided during 1997, Mr. Caponigro was issued 100,000 shares of
the Company's Common Stock. Such stock was valued at $27,000.
34
<PAGE>
of the Offering if all securities sold, assuming exercise of
options and conversion of convertible securities).
Indicate which have been approved by shareholders. State the
expiration dates, exercise prices and other basic terms for these
securities:
The Company currently has options outstanding for 37,500 shares
under its Incentive Stock Option Plan. The options were granted
on January 13, 1998 and expire on January 13, 2008. The options
are exercisable at $0.25 per share as long as each of the
recipients remain in the employ of the Company. As of the date of
this Prospectus, no options have been exercised. The Company has
outstanding The AWG, Inc. Incentive Stock Option Plan (
"Incentive Stock Option Plan") and The AWG, Inc. Nonqualified
Stock Option Plan ("Nonqualified Plan"). These plans were adopted
by the Board of Directors of the Company in November, 1997 and
were approved by the shareholders of the Company on January 13,
1998. Employees, directors and consultants of the Company are
eligible for the grant of options under the Nonqualified Stock
Option Plan. Only employees are eligible for the grant of options
under the Incentive Stock Option Plan. A total of 1,500,000
shares have been reserved for the Nonqualified Stock Option Plan,
and 500,000 shares for the Incentive Stock Option Plan. Under
each plan, the Board of Directors determines the recipients and
the number of options granted to such recipients. Each plan is
intended to comply with Rule 16b-3 of the Securities Exchange Act
of 1934, as amended ("Exchange Act"). The consideration for each
option granted under each plan will be established by the Board
of Directors. The shares issued under the Nonqualified Stock
Option Plan will have such terms and be exercisable at such times
as the Board of Directors may determine. Each option plan
provides that, in the event of a merger or reorganization of the
Company, outstanding options shall be subject to the Agreement of
Merger or reorganization.
(b) Number of common shares subject to issuance under existing stock
purchase or option plans but not yet covered by outstanding
purchase agreements, options or warrants: 0 shares.
(c) Describe the extent to which future stock purchase agreements,
stock options, warrants or rights must be approved by
shareholders.
Any amendments to the existing stock option plans or the adoption
of any future stock option plans will be subject to shareholder
approval as required in order to comply with the provisions of
Rule 16b-3 of the Exchange Act.
42. If the business is highly dependent on the services of certain key
personnel, describe any arrangement to assure that these persons will
remain with the Company and not compete upon any termination:
See description of Employment Agreement of Mack Jennings in Question
40 (b).
LITIGATION
43. Describe any past, pending or threatened litigation or administrative
action which has held or may have a material effect upon the Company's
business, financial condition, or operations, including any litigation
or action involving the Company's Officers, Directors or other key
personnel. State the names of the principal parties, the nature and
current status of the matters, and the amounts involved. Give an
evaluation by management or counsel, to the extent feasible, of the
merits of the proceedings or litigation and the potential impact on
the Company's business, financial condition or operations. N/A
LEGAL MATTERS
The validity of the Preferred Stock offered hereby and certain other legal
matters will be passed upon for the Company by Jackier, Gould, Bean, Upfal &
Eizelman, 1533 North Woodward Avenue, Suite 250, Bloomfield Hills, MI
48304-2863. Certain legal matters in connection with this Offering will be
passed upon for the Underwriters by Doros & Brescia, 1140 Avenue of the
Americas, Penthouse 22nd Floor, New York, NY 10036.
FEDERAL TAX ASPECTS
44. This provision is not applicable as the Company is not a Subchapter S
Corporation.
35
<PAGE>
MISCELLANEOUS FACTORS
45. Describe any other material factors, either adverse or favorable, that
will or could affect the Company or its business (for example, discuss
any defaults under major contracts, any breach of bylaw provisions,
etc.) or which are necessary to make any other information in this
Prospectus not misleading or incomplete.
Sales of Unregistered Securities
THE FOLLOWING DESCRIBES EVENTS WHICH OCCURRED UNDER PRIOR MANAGEMENT.
From March 5, 1996 through November 27, 1996, the Company sold shares
of its Common Stock to three (3) consultants retained by the Company
("Consultants") as well as to approximately seven (7) investors not
affiliated with the Company ("Investors"). It appears that approximately
$860,000 was raised from Investors and approximately $500,000 was raised from
the Consultants. The securities sold were not registered. According to
Company records, sales of the securities to Investors were sold pursuant to
the registration exemption afforded by Rule 504 under Regulation D adopted by
the Securities and Exchange Commission ("SEC") pursuant to the Securities Act
of 1933, as amended (the "Act"). Although Company records do not discuss the
sale of securities to the Consultants, it is presumed that such sales were
made pursuant to the exemption afforded by Rule 701 adopted by the SEC
pursuant to the Act.
Rule 504 exempts an offering of securities from federal registration
requirements if an issuer meets certain requirements including, among other
things, (1) that the Offering does not exceed $1,000,000 within a 12 month
period (less sales of certain other exempt securities but not including sales
pursuant to Rule 701); and the issuer is not a reporting company pursuant to
the Securities Exchange Act of 1934, as amended ("Exchange Act"). Rule 701
provides an exemption from the registration provisions under the Act for
sales of securities to, among others, consultants of an issuer if, among
other things, the issuer is not a reporting company; aggregate sales do not
exceed the greater of $500,000 or 15% of the outstanding Common Stock of the
issuer; and sales are made pursuant to a plan or an agreement with the
consultant. It appears from the Company records that approximately $500,000
in securities were sold to Consultants during the period in question. This
amount did not exceed the 15% limitation required by Rule 701. It further
appears that the sales to the consultants were pursuant to a consulting and
stock option agreement between the Company and the Consultants dated March
10, 1996.
It should be noted that with respect to the Rule 504 Offering, no Form
D was filed in connection therewith. The primary effect of failure to file
this form would not be to necessarily invalidate the Offering. Such failure
may prevent the Company from using certain exemptions for an indefinite time
in the future. In connection with the sales pursuant to Section 701, such
securities are restricted and cannot be resold by a party without an
applicable exemption from registration. It appears from the Company's stock
records that many of the shares of stock sold to the Consultants were in fact
resold shortly after the initial sale to such persons. As a result, it can be
argued that the exemption afforded by Rule 701 may not be available for those
sales. In the event that Rule 701 is not available, such shares would have
been issued without registration and without an applicable exemption
therefrom. Such shares, could in turn be added to the aggregate Offering
amount pursuant to the Rule 504 Offering thereby increasing the aggregate
Offering amount under Rule 504 beyond $1,000,000 and therefore potentially
invalidating the Rule 504 Offering.
In the event that the entire Offering is found to be invalid as a
result of the failure to qualify for an applicable exemption from
registration under the Act, the sale of such securities would violate Section
12(a)(1) of the Act. Section 12(a)(1) of the Act provides that any person who
offers or sells a security in violation of Section 5 [Registration Provisions
of the Act] is liable to the person purchasing such security for an amount
equal to the consideration paid for such security together with interest
thereon. Pursuant to Section 13 of the Act, no action may be brought to
enforce a liability under Section 12(a)(1) unless such action is brought
within one (1) year after the violation upon which it is based. Since the
last sale of the securities occurred on November 19, 1996, the statute of
limitations with respect to any registration violations terminated on
November 19, 1997.
<PAGE>
Section 12(a)(2) of the Act prohibits the use of a prospectus or oral
communication which includes an untrue statement of material fact or omits to
state a material fact necessary in order to make the statements, in light of
the circumstances under which they were made, not misleading. As in the case
of a violation of 12(a)(1), in the event of a violation of 12(a)(2), a
purchaser would be entitled to seek the consideration for his or her
investment plus interest thereon. Such an action must be brought within one
(1) year of the date Purchaser discovered the untrue statement or omission
(or should have been discovered by the exercise of reasonable diligence) but
in no event beyond three (3) years after the sale. It is unclear from Company
records what information was given to Purchasers of the stock. However, it
appears that a business plan was prepared and was distributed. A copy of the
business plan is not available from the Company. Moreover, the Company did
have information in the marketplace pursuant to Rule 15c-2-11 under the
Exchange Act. Since it cannot be determined what information was provided
each investor, no determination can be made as to whether the information
provided an investor was misleading or whether any material information was
omitted. However, the Company has represented that no Investor or Consultant
has instituted any action against the Company nor has any such threat been
communicated to the Company. In connection with any securities offering, a
threat always exists, that a purchaser can bring an action under Section
12(a)(2) alleging that the information (whether
36
<PAGE>
written or oral) provided to such investor is misleading or omits to
statement of material fact. However, in absence of any shareholder complaints
nor any evidence that misleading information was provided to an investor, the
Company has no current liability under Section 12(a)(2).
Based on the Company records, compliance with applicable state
securities laws is unclear. However, to the extent sales were made to the
State of California, it does not appear that any applicable exemption from
registration has been satisfied. In the event that the Company has been found
to violate the registration provisions of the California securities laws, any
action must be brought within two (2) years after the violation or one (1)
year after the discovery of the facts constituting such violation.
Notwithstanding the Company's possible exposure under California securities
laws, it should be noted that the Company believes that each of the
Consultants who acquired their shares in the Company are no longer
shareholders and are believed to have sold their stock at or above the prices
at which they were acquired. As to the other Investors who purchased stock in
the Company, most are believed to have sold their shares and the remaining
purchasers are not believed to be California residents or entities.
In addition to investor actions, there is an issue as to potential
penalties the Company could incur either from the SEC or from an applicable
state regulatory agency. In this regard, various exemptions from registration
adopted by the SEC as well as by various states do provide that such
exemptions may be unavailable to companies as a result of prior violations of
securities laws and for financial penalties. However, such prohibitions may
be waived upon application by the Company for good cause. The Company would
argue that since each of the potential violations alleged to have occurred
happened under former management and since current management has endeavored
to comply with the securities laws, the Company should not be prohibited from
use of various exemptive provisions under applicable federal and state laws.
However, there can be no assurance that any such prohibitions would be waived
and it is very possible that such exemptions would not be available to the
Company for an extended period of time. Moreover, since the individuals who
were responsible for any securities violations are no longer employed by the
Company, there may be strong, credible arguments that no financial penalties
should be imposed on the Company for any violations. There is no financial
civil liability under the Act. Under California law, a $2,500 fine can be
imposed for any violation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CERTAIN RELEVANT FACTORS
46. If the Company's financial statements show losses from operations,
explain the causes underlying these losses and what steps the Company
has taken to address these causes.
The Company has experienced losses from operations for several
reasons. First and foremost, the Company has not generated sufficient
sales of its wines. While in fiscal year 1997, the Company sold 7,300
cases of its wine as compared to 250 cases in 1996, the Company must
sell a minimum of 15,000 cases of wine and generate approximately
$200,000 in operating profits from its newly constructed tasting room
and hospitality center in order to break even in operations from a
cash flow standpoint. The Company did not derive any revenue from the
tasting room and hospitality center in 1997. To the extent that the
Company does generate revenue from the tasting room and hospitality
center, this will have the effect of reducing the pressure of
achieving higher wine sales. The Company believes it will be able to
secure sufficient wine grapes and bulk juice inventory to permit it
to produce sufficient wine to meet the 15,000 case threshold.
Moreover, the Company believes that its expanding distributor network
will help in achieving desired sales levels. This strategy has been
demonstrated by the increase in sales and revenues from fiscal year
1996 to fiscal year 1997.
In addition to insufficient sales, the Company also experienced
unusual legal and accounting expenses in 1997 incurred as a result of
a lack of experience and organization of prior management and in
connection with the preparation of this offering.
Finally, as a result of a lack of capital for operations, the Company
was forced to obtain a significant amount of debt financing to cover
ongoing cash flow deficits. This in turn has resulted in the Company
incurring excessive interest expenses, which expenses represented
approximately 30% of the negative cash flow experienced by the
Company. The Company believes it will be able to refinance its
existing indebtedness, reducing a portion of the principal amount of
the debt and reducing the interest rate resulting in an overall
savings of approximately $70,000 per year.
The Company believes that through increased production capability, an
increased distribution network together with the operation of the
wine tasting room and the hospitality center, it will be able to
achieve a break even cash flow prior to debt service by the end of
fiscal year 1999.
<PAGE>
47. Describe any trends in the Company's historical operating results.
Indicate any changes now occurring in the underlying economics of the
industry or the Company's business which, in the opinion of
Management, will have a significant impact (either favorable or
adverse) upon the Company's results of operations within the next 12
months, and give a rough estimate of the probable extent of the
impact, if possible.
37
<PAGE>
Due to the fact that the Company has only minimal operating history,
any trends in the Company's historical operating results are not
meaningful. While the Company made great strides in fiscal year 1997
as compared to fiscal year 1996, the difference in management and
operations are so different as to make any comparison meaningless.
During fiscal year 1996, the Company's management was very
inexperienced and exhibited serious operational and organizational
problems. In the fiscal year 1997, the Company, upon the acquisition
of a controlling interest by Messrs. Andretti and Antonini together
with the retention of Messrs. Jennings and Pepi experienced a
turnaround on several levels. First, the Company began a program of
replanting its vineyard which is a necessary prerequisite in order
for the Company to achieve its long term goals. Second, the Company
began the process of securing sources for the acquisition of wine
grapes and bulk juice to enable it to produce wines and to enable it
to establish long term relationships with wine grape growers to
assure a supply of wine grapes in the future. This is a necessary
component to enable the Company to grow even after its vineyard is
mature since the vineyard will not produce enough wine grapes to
allow the Company to produce all of the wine it may produce under its
permit. Third, the Company has established a distributor network in
over 20 states and in Japan to not only sell the modest amount of
wine that the Company is currently producing but to establish a
larger and more formidable distribution network which will be able to
handle the Company's wine production as it increases over the next
several years. Finally, the Company has established what it believes
is a strong organizational and administrative structure which will
support the Company through its growth phases.
The Company's accomplishments during 1997 and 1998 will, in the
opinion of management, have a favorable and significant impact on the
Company's results of operations during the fiscal year 1999 and
beyond. The development of the tasting room and hospitality facility
will create new avenues of revenue for the Company that were
previously non-existent . The Company believes that gross profits
from the wine tasting room and hospitality center could ultimately
reach $600,000 per year, thereby providing a potential significant
contribution to the profitability of the Company. This is based upon
two events per week averaging 150 people per event at an average of
$40 per person. The Company is one of the few facilities in Napa
Valley which can accommodate this size of event. However, since the
Company has had no prior experience with the wine tasting room or the
hospitality center, it is uncertain as to the results the Company
will achieve in the future years. Moreover, the Company did not
achieve the gross profits stated above in fiscal year 1998 and it is
possible that the Company will not achieve such gross revenues for
several years. Through the Company's efforts in establishing its
expanded distribution network, the Company believes that it is in a
position to significantly increase its sales assuming that it is able
to increase its wine production levels. As indicated above, the
Company now has a presence in almost half of the United States as
well as in Japan. In addition, the Company intends on expanding its
distributorship network to the States of v Colorado, Georgia and v
Oregon v during fiscal years 1998 and 1999, which, if achieved, would
result in the Company penetrating markets in over half of the United
States and more specifically, in the largest wine consuming states.
Finally, the Company believes that through the work of Robert Pepi,
that it has made significant progress in both the replanting of its
vineyard and in increasing its potential inventory of wine grapes and
bulk juice. The Company has replanted approximately one third (1/3)
of its vineyard and will complete the replanting of the remaining
vineyard during fiscal year 1999. However, as indicated under
"Business", the vineyard will not achieve maturity until
approximately three (3) to five (5) years after the replanting is
complete. Until such time, the Company will be dependent upon its
ability to obtain wine grapes at the harvest level as well as bulk
juice. It is hoped that the need to obtain bulk juice will decrease
as the replanted vineyard matures and as the Company's ability to
obtain grapes at the harvest level increases. In this connection, it
is expected that an improvement in the Company's profit margin will
occur when the Company moves the production of wine from bulk juice
to purchase grapes. In addition, a further increase in profit margin
is expected when the Company produces wine from grapes harvested in
its own vineyard as opposed to grapes purchased from third party
sources. While the Company will attempt to acquire as many grapes as
possible at the harvest levels as opposed to bulk juice, it can be
anticipated that for the next several years, the Company will
continue to need to acquire bulk juice and therefore it will continue
to produce a significant amount of wine at lower profit margins.
However, as the Company's vineyard matures and the Company is able to
enter into longer term contracts with grape growers, the Company will
be able to increase its profit margin on its wine production. During
fiscal year 1998, the Company made only modest progress in this
regard.
<PAGE>
The Company intends on purchasing necessary equipment in order to
produce wine at its Big Ranch Road facility. This equipment would
include a crush tank, fermentation equipment and storage barrels.
This equipment will serve the Company's needs as the newly planted
vineyard matures. The Company's management information system is very
modest and is not utilized to communicate electronically either with
its suppliers or distributors. As a result, the Company does not need
to update its operating systems to address many of the complex year
2000 issues. While the Company's current software used internally is
not fully year 2000 compliant, the Company believes that software
that is fully compliant is available for purchase on reasonable terms
and such software can be implemented with only minor expenditures.
Moreover, since the Company is not dependent on single vendor, any
vendor who is not Year 2000 compliant could be replaced.
In March 1998, the Company entered into subscription agreements to
sell five Units, each consisting of a $10,000 promissory note and
100,000 shares of the Company's Series A Preferred Stock for
consideration of
38
<PAGE>
$10,000 per Unit. These shares were sold at a substantial discount
from the proposed offering price of $10 per share. In November 1998,
the Company received NASD approval to issue these shares of preferred
stock subject to a "lock-up" provision which restricts the Unit
holder's rights to sell these shares until 13-months after the
effective date of the proposed offering. Upon completion of the
Company's proposed offering, a non-cash charge to earnings will be
recognized for the value of these restricted shares. The registration
of these shares in addition to the 500,000 shares being offered
pursuant to the Company's proposed public offering will result in a
substantial decrease in the liquidation value available to existing
shareholders and potential shareholders.
48. If the Company sells a product or products and has had significant
sales during its last fiscal year, state the existing gross margin
(net sales less cost of such sales as presented in accordance with
generally accepted accounting principles) as a percentage of sales
for the last fiscal year: 29%. What is the anticipated gross margin
for next year of operations? Approximately 29%. If this is expected
to change, explain. Also, if reasonably current gross margin figures
are available for the industry, indicate these figures and the source
or sources from which they are obtained.
The Company is currently operating on a gross profit margin on its
case sales of approximately 32%. As indicated in the discussion under
Question 48, the Company's long term goal is to obtain wine grapes
first from its own vineyard and secondarily from grapes at the
harvest level from third party growers. Assuming that the Company is
able to produce 42,000 cases of wine per year (which is the maximum
allowed under its production permit at the Big Ranch Road facility)
and to the extent the grapes utilizing such production come from its
own vineyard and from third party growers, the Company's profit
margin could increase over time. This further assumes the overall
market for super premium wines remains stable. However, it should be
noted that such a level of gross profit margin, if ever achieved,
will not occur for approximately five (5) years. It is hoped,
however, that the Company will continue to move in this direction
commencing in fiscal year 1998 and each year thereafter such that the
Company will become more dependent on its own vineyard and from
grapes grown from third party sources and that profit margins in each
year will increase from current levels. However, the Company is
unable to project any specific increases in profit margins over the
next several years and anticipates that due to the fact that the
Company is still in the process of replanting its vineyard, that
profit margins will not increase in the short term.
49. Foreign sales as a percent of total sales for last fiscal year: 0.5%
Domestic government sales as a percent of total domestic sales for
last fiscal year: 0%. Explain the nature of these sales, including
any anticipated changes:
While the Company does have a distributor in Japan, sales in Japan
during the last fiscal year were insignificant and not expected to be
material in fiscal year 1998.
39
<PAGE>
AWG, LTD.
Consolidated Financial Statements for the
Years Ended December 31, 1997 and 1996
and Independent Auditors' Report
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of AWG, Ltd.
We have audited the accompanying consolidated balance sheets of AWG, Ltd. (a
Nevada corporation) and its subsidiary (the "Company") as of December 31,
1997 and 1996, and the consolidated related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note
10, claims may be made against the Company resulting from the sale of
unregistered stock. The Company has a working capital deficiency and limited
capital resources, has had negative cash flow from operations, and is having
difficulty sustaining its operations and meeting its obligations as they come
due, as discussed in Note 2. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans concerning these matters are also described in Notes 2 and 10. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Oakland, California
January 28, 1998
(February 23, 1998 as to the last paragraph of Note 13)
F-2
<PAGE>
AWG, LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 18,327 $ 18,776
Accounts receivable 74,037 3,427
Inventories 728,529 448,728
Receivables from stockholders 93,380 150,000
Other current assets 67,506 14,978
----------- -----------
Total current assets 981,779 635,909
PROPERTY, PLANT AND EQUIPMENT - Net 2,734,443 2,037,685
OTHER ASSETS - Net 369,905 352,814
----------- -----------
TOTAL ASSETS $ 4,086,127 $ 3,026,408
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 160,787 $ 78,726
Other accrued liabilities 165,658 83,745
Payable to stockholder -- 220,000
Current portion of long-term debt 1,149,000 14,600
Loans payable to related parties 305,000 350,000
----------- -----------
Total current liabilities 1,780,445 747,071
LONG-TERM DEBT 1,665,400 1,665,400
----------- -----------
Total liabilities 3,445,845 2,412,471
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 50,000,000 shares authorized;
7,157,337 and 5,222,337 shares issued and outstanding 7,157 5,222
Additional capital 2,112,473 1,452,658
Additional capital - employee stock awards 155,000 --
Due from stockholder (75,000) --
Accumulated deficit (1,559,348) (843,943)
----------- -----------
Stockholders' equity - net 640,282 613,937
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,086,127 $ 3,026,408
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUE:
Wine sales $ 513,676 $ 27,853
Cost of wine sold (363,929) (46,621)
Provision for loss on wine inventory -- (73,925)
--------- ---------
Gross profit (loss) 149,747 (92,693)
--------- ---------
OPERATING EXPENSES:
Administration 408,916 199,573
Marketing 239,346 120,197
--------- ---------
Total operating expenses 648,262 319,770
--------- ---------
OPERATING LOSS (498,515) (412,463)
OTHER EXPENSES (INCOME):
Abandoned acquisition costs -- 299,675
Interest (net of interest capitalized of $15,181 in 1997) 222,304 107,620
Other (6,214) 13,385
--------- ---------
LOSS BEFORE INCOME TAXES (714,605) (833,143)
STATE INCOME TAXES 800 800
--------- ---------
NET LOSS $(715,405) $(833,943)
========= =========
NET LOSS PER SHARE (BASIC AND DILUTED) $ (0.13) $ (0.21)
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Capital - Due
------------------------- Additional Employee from Accumulated Stockholders'
Shares Amount Capital Stock Awards Stockholder Deficit Equity
----------- ----------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 2,600,000 $ 2,600 $ 7,400 $ (10,000) $ --
ISSUANCE OF STOCK 2,622,337 2,622 1,445,258 1,447,880
NET (LOSS) (833,943) (833,943)
----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 5,222,337 5,222 1,452,658 (843,943) 613,937
EMPLOYEE STOCK
AWARDS $ 246,750 246,750
ISSUANCE OF STOCK:
Stock awards 225,000 225 91,525 (91,750) -- --
Settlement of
liabilities 1,710,000 1,710 568,290 $ (75,000) 495,000
NET (LOSS) (715,405) (715,405)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1997 7,157,337 $ 7,157 $ 2,112,473 $ 155,000 $ (75,000) $(1,559,348) $ 640,282
=========== =========== =========== =========== =========== =========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (715,405) $ (833,943)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 81,254 62,554
Compensation expense - employee stock awards 240,000
Provision for loss on wine inventory -- 73,925
Changes in assets and liabilities:
Accounts receivable (70,610) (3,427)
Inventories (273,051) (522,653)
Other current assets (113,101) (14,978)
Accounts payable - trade 81,913 78,726
Other accrued liabilities 82,061 83,745
----------- -----------
Net cash used in operating activities (686,939) (1,076,051)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (734,530) (2,061,582)
Other assets -- (171,471)
----------- -----------
Net cash used in investing activities (734,530) (2,233,053)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party borrowings 305,000 350,000
Proceeds from long-term debt and bank line of credit 1,149,000 1,680,000
Proceeds from sale of stock -- 1,447,880
Payment of long-term debt (14,600) --
Advances to stockholders (18,380) (150,000)
----------- -----------
Net cash provided by financing activities 1,421,020 3,327,880
----------- -----------
INCREASE (DECREASE) IN CASH (449) 18,776
CASH AT BEGINNING OF YEAR 18,776 --
----------- -----------
CASH AT END OF YEAR $ 18,327 $ 18,776
=========== ===========
OTHER CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 232,585 $ 100,800
=========== ===========
Income taxes $ 800 $ 800
=========== ===========
Liability assumed upon acquisition of licensing agreement $ -- $ 220,000
=========== ===========
Loans payable to related parties cancelled in exchange for
issuance of common stock $ 570,000 $ --
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
AWG, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
AWG, Ltd. (the "Company") acquired property, plant and equipment
comprised of a 53-acre vineyard and winery site and began production of
premium wines in the Napa Valley of California in 1996. Wine is
currently produced at another facility on a contract basis.
Approximately 58% of 1997's production represents bulk wine and grapes
purchased from independent growers and wineries. The Company generally
markets and sells its wines through independent distributors located on
the East Coast, in the Midwest and in the Southwest. During 1997, sales
to one retailer totaled approximately 26% of total sales.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company's financial statements are prepared
using the accrual method of accounting in accordance with generally
accepted accounting principles and have been prepared on a going
concern basis which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company
is currently building its brand name and is in the process of
establishing contracts with distributors and grape growers. Management
has and expects to continue to incur substantial expenditures to
complete construction of a winery building and replant Phylloxera
infested vineyards. The Company has a working capital deficiency and
limited capital resources, has had negative cash flow from operations,
and is having difficulty sustaining its operations and meeting its
obligations as they come due. In addition, the Company expects that
operating expenses will again significantly exceed revenues in 1998.
The Company also faces potential claims from stockholders due to
violations of securities laws resulting from the sale of approximately
$1,360,000 of unregistered stock (see Note 10). These issues raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
Management plans to obtain the needed capital to enable the Company to
remain in business by raising equity capital in a public offering. The
Company has entered into a letter of intent with an underwriter to
conduct a "best efforts" public offering of the Company's proposed
Series A 6% Preferred Stock ("Preferred Stock"). The Company intends to
offer a maximum of 500,000 shares, and a minimum of 300,000 shares, of
Preferred Stock. The net proceeds from this public offering assuming it
is successful, after payment of underwriting commissions and offering
expenses, will be utilized to:
a. increase inventory production through the acquisition of bulk
wine until such time as grapes harvested from the Company's
vineyards and grape contracts are sufficient to meet the
Company's needs,
b. complete a vineyard replanting and maintenance program,
c. complete a winery construction and refurbishment program which
will result in a fully productive crush, tank and barrel storage
facility, a tasting room and a hospitality center
F-7
<PAGE>
d. position itself to obtain additional capital to acquire other
wineries and vineyards, and
e. repay certain indebtedness to officers and directors and a bank
loan guaranteed by a Director.
There are no assurances that management will be able to raise this
capital, and further, there can be no assurance, assuming the Company
successfully raises additional funds, that the Company will ultimately
achieve profitability and positive cash flow.
Principles of Consolidation - The consolidated financial statements
include AWG Ltd. and its wholly owned subsidiary AWG, Inc. All
significant intercompany balances and transactions have been
eliminated.
Inventories are recorded at lower of cost or market. Wine inventory is
determined by specific cost by vintage and variety. Costs include
grapes, purchased wine, winemaking and bottling costs. Wine inventories
are classified as current assets in accordance with industry practice
although some wine will be aged for periods longer than one year. Costs
associated with the next year's harvest are deferred and included in
wine inventory when the crop is harvested in the following year.
Property and equipment is stated at cost. Depreciation is computed by
the straight-line method over estimated useful lives of 3 to 20 years
for vineyards, 40 years for buildings and improvements, and 5 to 10
years for machinery and equipment. Interest capitalized during
construction of the winery facility totaled $15,181 in 1997.
Other assets consist primarily of licensing rights, organization and
label design costs that are amortized using the straight-line method
over the 10-year term of the agreement for licensing rights and 5 years
for organization costs and label design costs. Other assets also
include costs of $42,011 incurred in connection with the Company's
planned preferred stock offering. Such amounts will be charged to
stockholders' equity at the completion of offering.
Revenue Recognition - The Company recognizes wine sales at the time of
shipment. The Company evaluates customer credit terms on an ongoing
basis and provides for estimated credit losses.
Abandoned Acquisition Costs - During 1996, the Company incurred certain
due diligence and other costs in an attempt to acquire another winery.
The planned acquisition was unsuccessful and the related costs incurred
were charged to expense at the time the potential acquisition was
abandoned.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, ("FAS 109"). Under FAS 109, deferred income taxes are
provided for the temporary differences between the tax basis of assets
and liabilities and their related financial statement amounts using
current income tax rates. A valuation allowance is recorded, if, based
on the weight of available evidence, it is more likely than not that
some portion of the deferred tax assets will not be realized.
Use of Estimates - Preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect amounts
reported in the financial statements and related notes. Actual results
could differ from those estimates.
Earnings Per Share - Earnings per share is computed by dividing the net
loss by the weighted average number of common shares outstanding during
each year. The weighted average number of shares outstanding used to
calculate earnings per share were 5,383,246 and 4,055,673 in 1997 and
1996,
F-8
<PAGE>
respectively. Diluted earnings per share have not been adjusted for the
effect of employee stock awards and convertible debt as their impact is
antidilutive.
3. INVENTORIES
Inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Bulk wine $ 414,257 $ 185,964
Bottled wine 272,558 299,541
Merchandise inventory 41,714 37,148
Inventory valuation reserve -- (73,925)
--------- ---------
Total $ 728,529 $ 448,728
========= =========
</TABLE>
During 1996, the Company made a provision of $73,925 to reduce certain
wine inventories to their estimated net realizable value. These wines
were sold in 1997.
4. OTHER CURRENT ASSETS
Other current assets at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Prepaid expenses $24,961 $ 5,144
Deferred farming costs 42,545 9,834
------- -------
Total $67,506 $14,978
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 1,445,880 $ 1,445,880
Vineyards 122,567 46,452
Buildings and improvements 492,164 492,164
Construction in progress 620,002 31,242
Machinery and equipment 100,015 45,844
----------- -----------
Total 2,780,628 2,061,582
Less accumulated depreciation (46,185) (23,897)
----------- -----------
Property and equipment, net $ 2,734,443 $ 2,037,685
=========== ===========
</TABLE>
Certain portions of the Company's vineyards are approximately 25 years
old and are infested with Phylloxera, leaf roll and Pierce's disease.
As a result, these vineyards will be replanted in order to remain
commercially productive. During 1997, approximately 15 acres were
removed from production
F-9
<PAGE>
and 12 were replanted using rootstalk management believes will be
resistant to these infestations in the future. It is expected that half
of the remaining vineyard acreage will be replanted in 1998 with the
remaining acreage replanted in 1999.
6. OTHER ASSETS
Other assets at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Licensing rights $ 337,320 $ 337,320
Organization costs 30,301 30,301
Printing dies 18,950 18,950
Deferred stock issuance costs 42,011
Other 19,561 4,900
--------- ---------
Total 448,143 391,471
Less accumulated amortization (78,238) (38,657)
--------- ---------
Other assets - net $ 369,905 $ 352,814
========= =========
</TABLE>
7. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage note dated April 12, 1996, renegotiated in 1997. Monthly interest
only payments at the rate of 9%, 10%, and 11% for the first
three years increasing to 12% until maturity in 2002 $ 1,665,400 $ 1,680,000
Bank line of credit agreement, dated January 28, 1997. Monthly
interest only payments at the rate of .5% in excess of the prime rate
of Citibank, N.A. (9% at December 31, 1997), maturing December 23,
1998, guaranteed by the Company's Chairman of the Board 950,000 --
Bank line of credit agreement, dated July 15, 1997. Monthly interest
only payments at 1% over the Vintage Bank borrowing rate (9.5% at December
31, 1997), borrowings collateralized by accounts receivable, inventory,
supplies, and general intangibles, principal
due and payable no later than July 15,1998 199,000 --
----------- -----------
Total 2,814,400 1,680,000
Less current portion (1,149,000) (14,600)
----------- -----------
Long-term portion $ 1,665,400 $ 1,665,400
=========== ===========
</TABLE>
The long-term portion of debt as of December 31, 1997 matures in 2002.
F-10
<PAGE>
8. LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties at December 31, 1997 and 1996 consist
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans payable to stockholders - loaned to the Company in exchange for the
right to receive Convertible Preferred Stock of the Company,
noninterest-bearing through April 1997, interest at 9%, thereafter
converted to common stock in December 1997 $ -- $350,000
Notes payable to stockholders, officers and affiliates of the
Company - interest only at 9%, principal due upon demand 205,000 --
Second mortgage note payable to the Chairman of the Board, dated
December 24, 1997. Borrowings available of up to $500,000. Monthly
installments of interest only at 9%, principal due July 1, 1998 100,000 --
-------- --------
Total $305,000 $350,000
======== ========
</TABLE>
In December 1996, three of the Company's stockholders loaned the
Company an aggregate amount of $350,000 in exchange for the right to
receive Convertible Preferred Stock at such time as the stock was
authorized by the stockholders. In December 1997, these stockholders
agreed to cancel their loan in exchange for the issuance of 1,050,000
shares of common stock, valued at $.33 per share, the approximate
trading price of the stock at the time of the conversion.
9. RELATED PARTY TRANSACTIONS
Loans Receivable from Stockholders - In 1996, the Company loaned its
two principal stockholders each $75,000 from proceeds obtained from the
three stockholder loans totaling $350,000. These loans receivable are
due on demand. As discussed in Note 8, in 1997, the $350,000 in
stockholder loans were canceled in exchange for the issuance of common
stock. One of the receivables from a stockholder who received stock in
the exchange was reclassified and shown as a reduction in stockholder's
equity in 1997.
Licensing Rights - The Company has acquired and subsequently
renegotiated a License Agreement with Mario Andretti, a Director of the
Company, to utilize his name and image in conjunction with the
packaging, distribution and promotion of the Company's products. The
initial term of the License Agreement is 10 years, and may be extended
for two additional terms of 5 years, each at the option of the Company.
Pursuant to the License Agreement, Mr. Andretti has agreed to
participate in advertising and promotional activities on behalf of the
Company including, but not limited to, radio, television and print
media advertising spots, trade relations activities and personal
appearances.
As compensation for his services under the License Agreement, Mr.
Andretti receives a royalty equal to 5% of the gross revenues and sales
of all products bearing his name or likeness. As to all other products
sold by the Company, Mr. Andretti shall be entitled to the lesser of 2%
of Company profits on all other wine sales or $150,000 per year.
Licensing fees owed to Mr. Andretti in 1997 totaled $25,225, and
$13,286 of this amount was payable at December 31, 1997.
During 1997, Mr. Andretti exchanged $220,000 in royalties due him under
the License Agreement and assumed by the Company on the date of
acquisition for 660,000 shares of common stock, valued at $.33 per
share, which approximated the trading price of the stock at the time of
the exchange in December 1997.
F-11
<PAGE>
Consulting and Employment Contracts- The Company's Chairman of the
Board provides consulting services to the company pursuant to an
agreement effective as of January 1, 1997. Compensation for such
consulting services in 1997 was $50,000 payable in common stock. The
Company has also agreed to pay certain Company Directors $35,000 each
for services provided during 1997, payable in common stock. The number
of shares of stock to be issued to these Directors is based on the
trading price of the stock as of December 31, 1997. Compensation
expense of $155,000 was recognized in 1997 relating to these
agreements. The shares are expected to be issued in the first quarter
of 1998.
The Company has a one-year renewable employment contract with its Chief
Executive Officer. In addition to his base salary, he was issued
100,000 shares of Company common stock at no cost in December 1997.
Such shares became fully vested by action of the Board of Directors in
1997. As a result, compensation expense of $58,000 was recognized in
1997 based on the stock price on the date the contract was approved by
the Board.
In exchange for legal consultation services provided during 1997, a
Company Director was issued 100,000 shares of the Company's common
stock at no cost in December 1997. This Director is under no obligation
to continue to provide any additional legal services to the Company in
connection with this stock grant. Compensation expense of $27,000 was
recognized in 1997 as a result of this stock grant based on the stock
price at the date the stock was issued.
The Company has an unwritten agreement with its winemaker, who manages
the Company's wine making operations. In addition, to a fixed monthly
salary, the winemaker was issued 25,000 shares of the Company's common
stock at no cost in December 1997. As a result of this stock award,
compensation cost of $6,750 was recognized in 1997 based on the stock
price at the date the stock was issued.
10. STOCKHOLDERS' EQUITY
From March 5, 1996 through November 27, 1996, the Company sold shares
of its common stock to certain consultants retained by the Company
("Consultants") as well as to approximately seven investors not
affiliated with the Company ("Investors"). Approximately $860,000 was
raised from Investors and approximately $500,000 was raised from the
Consultants. In December 1996, the Company management was replaced in
connection with the acquisition of stock by two major stockholders. The
shares sold by former management were not registered, but, according to
Company records, sales to Investors were made pursuant to the
registration exemption afforded by Rule 504 under Regulation D adopted
by the Securities Exchange Commission ("SEC") pursuant to the
Securities Act of 1933 (the "Act"). Although Company records are not
clear with respect to the sale of securities to Consultants, the
Company believes that such sales may have been made pursuant to the
exemption afforded by Rule 701 adopted by the SEC pursuant to the Act.
Rule 504 exempts an offering of securities from federal registration
requirements if an issuer meets certain requirements including, among
other things, that (1) the offering does not exceed $1,000,000 within a
12-month period (less sales of certain other exempt securities but not
including sales pursuant to Rule 701); and (2) the issuer is not a
reporting company pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Rule 701 provides an exemption from the
registration provisions under the Act for sales of securities to, among
others, consultants of an issuer if, among other things, the issuer is
not a reporting company; aggregate sales do not exceed the greater of
$500,000 or 15% of the outstanding common stock of the issuer; and
sales are made pursuant to a plan or an agreement with the consultant.
Company records indicate that approximately $500,000 in
F-12
<PAGE>
securities were sold to Consultants during the period in question. This
amount did not exceed the 15% limitation required by Rule 701. In
addition, sales to the Consultants were pursuant to a consulting and
stock option agreement between the Company and the Consultants dated
March 10, 1996.
With respect to the Rule 504 offering, no Form D was filed with the
SEC. The primary effect of failure to file this form would not
necessarily be to invalidate the offering. Such failure may prevent the
Company from using certain exemptions for an indefinite time in the
future. In connection with the sales pursuant to Section 701, such
securities are restricted and cannot be resold by a party without an
applicable exemption from registration. Company stock records indicate
that many of the shares of stock sold to the Consultants were in fact
resold shortly after the initial sale to such persons. As a result, the
exemption afforded by Rule 701 may not be available for those sales. In
the event that Rule 701 is not available, such shares would have been
issued without registration and without an applicable exemption
therefrom. Such shares would, in turn, be added to the aggregate
offering amount pursuant to the Rule 504 offering, thereby increasing
the aggregate offering amount under Rule 504 beyond $1,000,000 and
therefore potentially invalidating the Rule 504 offering.
In the event that the entire offering is found to be invalid as a
result of the failure to qualify for an applicable exemption from
registration under the Act, the sale of such securities would violate
Section 12(a) of the Act. Section 12(a)(1) of the Act provides that any
person who offers or sells a security in violation of Section 5
[Registration Provisions of the Act] is liable to the person purchasing
such security, for an amount equal to the consideration paid for such
security together with interest thereon. Pursuant to Section 13 of the
Act, no action may be brought to enforce a liability under Section
12(a)(1) unless such action is brought within one (1) year after the
violation upon which it is based. Since the last sale of the securities
occurred on November 19, 1996, the statute of limitations with respect
to any registration violations terminated on November 19, 1997.
Additionally, Section 12(a)(2) of the Act prohibits the use of a
prospectus or oral communication which includes an untrue statement of
material fact or omits to state a material fact necessary in order to
make the statements, in light of the circumstances under which they
were made, not misleading. As in the case of a violation of 12(a)(1),
in the event of a violation of 12(a)(2), a purchaser would be entitled
to seek the consideration for his or her investment plus interest
thereon. Such an action must be brought within one (1) year of the date
Purchaser discovered any untrue statement or possible omission (or
should have been discovered by the exercise of reasonable diligence)
but in no event beyond three (3) years after the sale. It is unclear
from Company records what information was given to Purchasers of the
stock. However, management believes that a business plan was prepared
and was distributed. A copy of the business plan is not available from
the Company. Moreover, the Company did have information in the
marketplace pursuant to Rule 15c-2-11 under the Exchange Act. Since it
cannot be determined what information was provided each investor, no
determination can be made as to whether the information provided an
investor was misleading or whether any material information was
omitted. However, no investor or Consultant has instituted any action
against the Company nor has any such threat been communicated to the
Company. In connection with any securities offering, a threat always
exists that a purchaser can bring an action under Section 12(a)(2)
alleging that the information (whether written or oral) provided to
such investor is misleading or omits to state a material fact. However,
in absence of any shareholder complaints nor any evidence that
misleading information was provided to an investor, management believes
the Company has no current liability under Section 12(a)(2).
Based on the Company's records, compliance with applicable state
securities laws is unclear. However, to the extent sales were made in
the State of California, it does not appear that any applicable
exemption from registration has been satisfied. In the event that the
Company is found to have violated
F-13
<PAGE>
the registration provisions of the California securities laws, any
action must be brought within two years after the violation or one year
after the discovery of the facts constituting such violation.
Notwithstanding the Company's possible exposure under California
securities laws, the Company believes that each of the Consultants who
acquired their shares in the Company are no longer shareholders and are
believed to have sold their stock at or above the prices at which they
were acquired. As to the other investors who purchased stock in the
Company, most are believed to have sold their shares and the remaining
purchasers are not believed to be California residents or entities.
In addition to investor actions, there is an issue as to potential
penalties the Company could incur either from the SEC or from an
applicable state regulatory agency. In this regard, various exemptions
from registration adopted by the SEC as well as by various states do
provide that such exemptions may be unavailable to companies as a
result of prior violations of securities laws and for financial
penalties. However, in most cases, such prohibitions can be waived upon
application by the Company for good cause. In this case, since each of
the potential violations alleged to have occurred happened under former
management and since current management has endeavored to comply with
the securities laws, management believes that the Company would not be
prohibited from use of various exemptive provisions under applicable
federal and state laws. Moreover, since the individuals who were
responsible for any securities violations are no longer within the
Company, there may be strong credible arguments that no financial
penalties should be imposed on a Company for any violations. There is
no financial civil liability under the Act. Under California law, a
$2,500 fine can be imposed for any violation. The full financial impact
which may result from these potential violations is unknown at this
time but could include actions requiring the Company to return funds to
certain stockholders, along with interest and brokerage fees.
11. INCOME TAXES
Deferred tax assets and liabilities at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets:
Operating loss carryforwards $ 579,983 $ 309,878
Inventory costs 24,419
Intangibles 13,244
Other 1,154
Valuation allowance (597,559) (304,181)
--------- ---------
Total 21,241 5,697
--------- ---------
Liabilities:
Accelerated depreciation (17,542) (5,697)
Other (3,699) --
--------- ---------
Total (21,241) (5,697)
--------- ---------
Deferred tax assets - net $ -- $ --
========= =========
</TABLE>
Due to current and expected future operating losses, a valuation
allowance equal to the net deferred tax assets has been recorded as of
December 31, 1997 and 1996 as it is more likely than not that such net
deferred tax assets will not be realized.
F-14
<PAGE>
The provision for income taxes for the years ended December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current - state $800 $800
Deferred -- --
---- ----
Total $800 $800
==== ====
</TABLE>
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory rate 34% 34%
State income taxes, net of federal benefit 5 5
Other 2 (2)
Valuation allowance (41) (37)
--- ---
Effective tax rate 0% 0%
=== ===
</TABLE>
As of December 31, 1997, the Company had federal net operating loss
carryforwards which expire in taxable years ended December 31 as
follows:
<TABLE>
<S> <C>
2011 $ 716,678
2012 733,279
----------
Total $1,449,957
==========
</TABLE>
12. LEGAL PROCEEDINGS
As of December 31, 1997, two consultants allege that the Company owes
them certain amounts for services provided to the Company in 1996. The
Company is in settlement discussions with respect to one claim for
$28,000 and has a verbal agreement to settle the matter for $22,000.
This amount has been recognized as an expense in 1996. With respect to
the other claim, for $67,000, the Company believes it has no obligation
to the consultant and will dispute such claims. In addition, a
shareholder has made a claim for approximately 500,000 shares allegedly
due him in exchange for cash payments made and services provided to the
Company. The Company disputes the claim alleging that a substantial
portion of the proceeds allegedly paid to the Company were never
received. No amounts have been accrued with respect to the latter two
claims. The Company believes that the ultimate outcome of all these
matters will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
13. SUBSEQUENT EVENTS
In January 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to authorize the issuance of up
to 1,600,000 shares of Series A, 6% preferred stock and up to
10,000,000 shares of an additional class of preferred stock in
contemplation of the Company's planned public stock offering in 1998.
In addition, the shareholders approved the Company's adoption of an
incentive stock option plan and a nonqualified stock option plan.
Pursuant to these plans, 42,500
F-15
<PAGE>
options, exercisable at $.25 per share, were granted to certain
employees on January 13, 1998. These options are exercisable through
January 13, 2008.
Also in January 1998, the Company borrowed an additional $150,000 on
its second mortgage note payable to the Chairman of the Board (see Note
8).
On February 23, 1998, the Company received $50,000 in bridge loan
financing to help the Company maintain its operations pending the
completion of the public offering referred to in Note 1. The terms of
this financing have been agreed to in principle. As partial
consideration for the financing, the lender will receive 500,000 shares
of Preferred Stock with a liquidation preference of $10.00 per share
($5,000,000 in total). This resulted in a substantial decrease in the
liquidation value available to other investors and potential investors.
Completion of the final loan documents is expected in the first quarter
of 1998.
******
F-16
<PAGE>
<TABLE>
<CAPTION>
AWG, LTD.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 70,827
Accounts receivable 133,801
Inventories 672,552
Receivables from stockholders 93,380
Other current assets 37,534
-----------
Total current assets 1,008,094
PROPERTY, PLANT AND EQUIPMENT - Net 3,065,153
OTHER ASSETS - Net 546,172
-----------
TOTAL ASSETS $ 4,619,419
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 224,130
Accrued interest 71,655
Other accrued liabilities 469,239
Deferred hospitality revenue 42,998
Current portion of long-term debt 1,584,000
Loans payable to related parties 550,000
-----------
Total current liabilities 2,942,022
LONG-TERM DEBT 1,665,400
-----------
Total liabilities 4,607,422
-----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 50,000,000 shares authorized;
8,173,128 shares issued and outstanding 8,173
Additional capital 2,350,857
Due from stockholder (75,000)
Accumulated deficit (2,272,033)
-----------
Stockholders' equity - net 11,997
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,619,419
===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
AWG, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- -----------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------
1998 1997
---- ----
REVENUE:
<S> <C> <C>
Bottled wine sales $ 388,105 $ 330,578
Bulk wine sales 73,744 4,800
Grape sales 40,884 17,937
Hospitality 178,564 --
--------- ---------
Total 681,297 353,315
COST OF SALES 552,943 269,874
--------- ---------
GROSS PROFIT 128,354 83,441
--------- ---------
OPERATING EXPENSES:
Administration 243,516 138,424
Hospitality and tasting room 74,413 --
Marketing 197,315 157,995
--------- ---------
Total operating expenses 515,244 296,419
--------- ---------
OPERATING LOSS (386,890) (212,978)
INTEREST EXPENSE 227,208 159,656
LITIGATION SETTLEMENT COSTS
84,400 --
OTHER
13,387 9,217
--------- ---------
LOSS BEFORE INCOME TAXES (711,885) (381,851)
STATE INCOME TAXES 800 800
--------- ---------
NET LOSS $(712,685) $(382,651)
========= =========
NET LOSS PER SHARE
(BASIC AND DILUTED) $ (.09) $ (.07)
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
AWG, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------
Additional
Common Stock Capital - Due
------------------------- Additional Employee from Accumulated Stockholders'
Shares Amount Capital Stock Awards Stockholder Deficit Equity
------ ------ ------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1998 7,157,337 $ 7,157 $ 2,112,473 $ 155,000 $ (75,000) $(1,559,348) $ 640,282
ISSUANCE OF
STOCK:
Stock awards 815,791 816 154,184 (155,000) -- -- --
Litigation settlement 200,000 200 84,200 -- -- -- 84,400
NET (LOSS) -- -- -- -- -- (712,685) (712,685)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 1998 8,173,128 $ 8,173 $ 2,350,857 $ -- $ (75,000) $(2,272,033) $ 11,997
=========== =========== =========== =========== =========== =========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
AWG, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- -----------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(712,685) $(382,651)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 68,277 55,006
Litigation settlement 84,400
Compensation expense - employee stock awards -- 14,500
Changes in assets and liabilities:
Accounts receivable (59,764) (27,378)
Inventories 55,977 (341,989)
Other current assets 29,972 5,585
Accounts payable - trade 63,343 149,037
Accrued interest 46,625 3,233
Deferred hospitality revenue 42,998
Other accrued liabilities 186,167 34,338
--------- ---------
Net cash used in operating activities (194,690) (490,319)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (366,299) (334,400)
Other assets (24,127)
--------- ---------
Net cash used in investing activities (390,426) (334,400)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party loans 245,000 205,000
Advances to stockholders -- (18,380)
Proceeds from long-term debt and bank line of credit 435,000 634,400
Deferred stock issuance costs (42,384)
--------- ---------
Net cash provided by financing activities 637,616 821,020
--------- ---------
INCREASE (DECREASE) IN CASH 52,500 (3,699)
CASH AT BEGINNING OF PERIOD 18,327 18,776
--------- ---------
CASH AT END OF PERIOD $ 70,827 $ 15,077
========= =========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 221,946 $ 156,423
========= =========
State income taxes $ 800 $ 800
========= =========
Deferred stock issuance costs accrued $ 142,444 $
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-20
<PAGE>
AWG, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
AWG, Ltd. (the "Company") acquired property, plant and equipment
comprised of a 53-acre vineyard and winery site and began production of
super-premium wines in the Napa Valley of California in 1996. Wine is
currently produced at another facility on a contract basis.
Approximately 58% of 1997's production represents bulk wine and grapes
purchased from independent growers and wineries. The Company generally
markets and sells its wines through independent distributors located on
the East Coast, in the Midwest and in the Southwest. During the nine
months ended September 30, 1998 and 1997, sales to one customer totaled
approximately 33% and 40% of total sales, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company's financial statements are prepared
using the accrual method of accounting in accordance with generally
accepted accounting principles and have been prepared on a going
concern basis which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company
is currently building its brand name and is in the process of
establishing contracts with distributors and grape growers. Management
has incurred substantial expenditures to complete construction of a
winery building and expects to continue to incur substantial
expenditures to replant Phylloxera infested vineyards. The Company has
a working capital deficiency and limited capital resources, has had
negative cash flow from operations, and is having difficulty sustaining
its operations and meeting its obligations as they come due. In
addition, the Company expects that operating expenses will
significantly exceed revenues during the remaining months of 1998 and
1999. The Company also faces potential claims from stockholders due to
violations of securities laws resulting from the sale of approximately
$1,360,000 of unregistered stock (see Note 9). These issues raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
Management plans to obtain the capital needed to enable the Company to
remain in business by raising equity capital in a public offering. The
Company has entered into a co-underwriting agreement with two
underwriters to conduct a public offering of 600,000 shares of the
Company's Series A 6% Preferred Stock ("Preferred Stock"). The net
proceeds from this public offering, assuming it is successful, after
payment of underwriting commissions and offering expenses, will be
utilized to:
a. increase inventory production through the acquisition of bulk
wine until such time as grapes harvested from the Company's
estate-owned vineyards and grape contracts are sufficient to meet
the Company's needs,
b. complete a vineyard replanting and maintenance program,
c. complete a winery construction and refurbishment program which
will result in a fully productive crush, tank and barrel storage
facility, a tasting room and a hospitality center
F-21
<PAGE>
d. position itself to obtain additional capital to acquire other
wineries and vineyards, and
e. repay certain indebtedness to officers and directors and a bank
loan guaranteed by a director.
There are no assurances that management will be able to raise this
capital, and further, there can be no assurance, assuming the Company
successfully raises additional funds, that the Company will ultimately
achieve profitability and positive cash flow.
In March 1998, the Company entered into subscription agreements to sell
an additional 500,000 shares of the Company's Series A Preferred Stock
subject to approval by the National Association of Securities Dealers,
Inc. ("NASD") in connection with the Company's planned public stock
offering. The issuance of these shares in addition to the 600,000
shares being offered pursuant to the Company's planned public offering
will result in substantial decrease in the liquidation value available
to existing shareholders and potential shareholders (see Note 12).
Principles of Consolidation - The consolidated financial statements
include AWG Ltd. and its wholly owned subsidiary AWG, Inc. All
significant intercompany balances and transactions have been
eliminated.
Unaudited Interim Information - In the opinion of management, the
financial information with respect to the nine month periods ended
September 30, 1997 and 1998 contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
Company's results of operations for such periods. The results of
operations for these nine month periods are not necessarily indicative
of results for the full calendar year.
Inventories are recorded at lower of cost or market. Wine inventory is
determined by specific cost by vintage and variety. Costs include
grapes, purchased wine, winemaking and bottling costs. Wine inventories
are classified as current assets in accordance with industry practice
although some wine will be aged for periods longer than one year. Costs
associated with the next year's harvest are deferred and included in
wine inventory when the crop is harvested in the following year.
Property and equipment is stated at cost. Depreciation is computed by
the straight-line method over estimated useful lives of 3 to 20 years
for vineyards, 40 years for buildings and improvements, and 5 to 10
years for machinery and equipment. Interest capitalized during
construction of the winery facility for the nine months ended September
30, 1998 totaled $41,363 (none in 1997).
Other assets consist primarily of licensing rights, organization and
label design costs that are amortized using the straight-line method
over the 10-year term of the licensing agreement and over 5 years for
organization and label design costs. Other assets at September 30, 1998
also include costs of $226,839 incurred in connection with the
Company's planned public stock offering. Such amounts will be charged
to stockholders' equity at the completion of offering.
Asset Impairment - Management periodically reviews long-lived assets
for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset might not be recoverable.
Revenue Recognition - The Company recognizes wine sales at the time of
shipment. The Company evaluates customer credit terms on an ongoing
basis and provides for estimated credit losses. Revenue from the
Company's hospitality center is recognized as the events occur and the
related costs are incurred. Deposits received on future events are
recorded as deferred hospitality revenue.
F-22
<PAGE>
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, ("FAS 109"). Under FAS 109, deferred income taxes are
provided for the temporary differences between the tax basis of assets
and liabilities and their related financial statement amounts using
current income tax rates. A valuation allowance is recorded if, based
on the weight of available evidence, it is more likely than not that
some portion of the deferred tax assets will not be realized.
Use of Estimates - Preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect amounts
reported in the financial statements and related notes. Actual results
could differ from those estimates.
Earnings Per Share - Earnings per share is computed by dividing the net
loss by the weighted average number of common shares outstanding during
each period. The weighted average number of shares outstanding used to
calculate earnings per share were 7,745,642 and 5,221,996 for the nine
months ended September 30, 1998 and 1997, respectively. Diluted
earnings per share have not been adjusted for the effect of employee
stock awards and convertible debt as their impact is antidilutive.
3. INVENTORIES
Inventories at September 30, 1998 consist of the following:
Bulk wine $300,017
Bottled wine 287,302
Deferred farming costs 85,233
--------
Total $672,552
========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1998 consist of the
following:
Land $ 1,445,880
Vineyards 148,501
Buildings and improvements 1,386,706
Machinery and equipment 165,840
-----------
Total 3,146,927
Less accumulated depreciation (81,774)
-----------
Property and equipment, net $ 3,065,153
===========
Certain portions of the Company's vineyards are approximately 25 years
old and are infested with Phylloxera, leaf roll and Pierce's disease.
As a result, these vineyards must be replanted in order to remain
commercially productive. During 1997, approximately 15 acres were
removed from production and 12 acres were replanted using rootstalk
management believes will be resistant to these infestations in the
future. It is expected that the remaining acreage will be replanted in
1999. No replanting occurred during the nine months ended September 30,
1998.
F-23
<PAGE>
5. OTHER ASSETS
Other assets at September 30, 1998 consist of the following:
Licensing rights $ 337,320
Deferred stock issuance costs 226,839
Organization costs 30,301
Printing dies 21,632
Other 41,006
---------
Total 657,098
Less accumulated amortization (110,926)
---------
Other assets - net $ 546,172
=========
6. LONG-TERM DEBT
Long-term debt at September 30, 1998 consists of the following:
<TABLE>
<S> <C>
Mortgage note dated April 12, 1996, renegotiated in 1997. Monthly
interest only payments at the rate of 9%, 10%, and 11% for the
first three years increasing to 12% until maturity in 2002 $1,665,400
Bank line of credit agreement, dated January 28, 1997. Monthly
interest only payments at the rate of .5% in excess of the prime
rate of Citibank, N.A., 9.5% at September 30, 1998, maturing
January 22, 1999, guaranteed by the Company's Chairman of the
Board 1,335,000
Bank line of credit agreement, dated July 15, 1997. Monthly interest
only payments at 1% over the Vintage Bank borrowing rate 9.1% at
September 30, 1998, borrowings collateralized by accounts
receivable, inventory, supplies, and general intangibles,
principal due and payable no later than March 1, 1999 199,000
Promissory note, dated March 2, 1998. Quarterly principal and
interest payments at 6%, maturing January 1, 1999 50,000
----------
Total 3,249,400
Less current portion 1,584,000
----------
Long-term portion (matures in 2002) $1,665,400
==========
</TABLE>
In December 1998, the Company obtained two term loans from Comerica
Bank in Detroit, Michigan in the aggregate amount of $2,500,000. The
first term loan in the principal amount of $1,650,000 has a term of 7
years with principal and interest payments based on a fifteen-year
amortization, with a final balloon payment due in 2005. Interest
accrues at the rate of 7.1% per annum. The second term loan in the
amount of $850,000 is payable over a seven-year period at 7% per annum.
Each of these term loans are guaranteed by the Company's Chairman of
the Board and a Director. These loans were used to pay off the
Company's $1,665,400 mortgage note, the $199,000 bank line of credit,
and $500,000 of its $1,335,000 bank line of credit originally maturing
in January 1999. The Company has obtained an extension of this
agreement until March 1, 1999.
The Company also secured a $200,000 line of credit to pay off $200,000
of the loan from the Company's Chairman of the Board (see Note 7). The
line of credit is due in full in December 1999 and bears interest at
Comerica's prime rate.
7. LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties of $550,000 at September 30, 1998
include $250,000 in interest only (at 9%) notes payable to
stockholders, officers and affiliates of the Company. Loans payable to
related parties also include a $300,000 loan obtained from the
Company's Chairman of the Board through a line of credit he has with
Comercia Private Banking. These loans are due on demand.
In connection with the Company's long-term debt refinancing in December
1998, $200,000 of this loan was repaid (see Note 6). In addition, in
December the Company secured an additional $250,000 line of credit from
the Chairman of the Board. This line bears interest at the rate of 8%
per annum and matures in March 1999. The Company borrowed the full
amount available under this line during December 1998.
8. RELATED PARTY TRANSACTIONS
Loans Receivable from Stockholders - In 1996, the Company loaned its
two principal stockholders each $75,000 from proceeds obtained from
three stockholder loans totaling $350,000. These loans
F-24
receivable are due on demand. In 1997, these stockholder loans were
canceled in exchange for the issuance of common stock. One of the
receivables from a stockholder who received stock in the exchange was
reclassified and shown as a reduction in stockholder's equity in 1997.
Licensing Rights - The Company has acquired and subsequently
renegotiated a License Agreement with Mario Andretti, a Director and
significant shareholder of the Company, to utilize his name and image
in conjunction with the packaging, distribution and promotion of the
Company's products. The initial term of the License Agreement was 10
years, and could be extended for two additional terms of 5 years, each
at the option of the Company. Pursuant to the License Agreement, Mr.
Andretti has agreed to participate in advertising and promotional
activities on behalf of the Company including, but not limited to,
radio, television and print media advertising spots, trade relations
activities and personal appearances. In March 1998, the License
Agreement was amended to provide for an indefinite term unless
otherwise terminated for cause as described in the License Agreement.
As compensation for his services under the License Agreement, Mr.
Andretti receives a royalty equal to 5% of the gross revenues and sales
of all products bearing his name or likeness. As to all other products
sold by the Company, Mr. Andretti shall be entitled to the lesser of 2%
of Company profits on all other wine sales or $150,000 per year.
Licensing fees earned by Mr. Andretti for the nine months ended
September 30, 1998, and 1997 totaled $20,495 and $16,345, respectively,
and $33,780 was payable to him at September 30, 1998.
During 1997, Mr. Andretti exchanged $220,000 in royalties due him under
the License Agreement and assumed by the Company on the date of
acquisition for 660,000 shares of common stock, valued at $.33 per
share, which approximated the trading price of the stock at the time of
the exchange in December 1997.
Consulting and Employment Contracts - The Company's Chairman of the
Board provides consulting services to the Company pursuant to an
agreement effective as of January 1, 1997. Compensation for such
consulting services in 1997 was $50,000 payable in common stock. In
December 1998, the Company's Chairman of the Board was granted a bonus
of $150,000 payable in shares of the Company's common stock in exchange
for the Chairman of the Board's agreement to loan funds to the Company
and guarantee third party bank indebtedness. The number of shares
issued is determined based on the closing price of the common stock as
of December 31, 1998. The bonus is contingent upon approval of the
Underwriters (see Note 1) which has not yet been obtained. The Company
has also agreed to pay certain Company Directors $35,000 each for
services provided during 1997, payable in common stock. The number of
shares of stock issued to these Directors was based on the trading
price of the stock as of December 31, 1997. There was no stock
compensation cost recognized pursuant to these agreements during the
nine-month period ended September 30, 1997. Compensation costs of
approximately $116,000 were recognized during the nine month period
ended September 30, 1998 which will also be payable in common stock.
The Company has a one-year renewable employment contract with its Chief
Executive Officer. In addition to his base salary, he was issued
100,000 shares of Company common stock at no cost in 1997. Such shares
became fully vested by action of the Board of Directors in December
1997, and compensation cost of $14,500 was recognized at that time.
The Company has an unwritten agreement with its winemaker, who manages
the Company's wine making operations. In addition to a fixed monthly
salary, the winemaker was issued 25,000 shares of the Company's common
stock at no cost in December 1997. There was no stock compensation cost
recognized pursuant to this agreement during the nine-month periods
ended September 30, 1998 or 1997.
In exchange for legal consultation services provided during 1997, a
Company Director was issued 100,000 shares of the Company's common
stock at no cost in December 1997. This Director is under
F-25
<PAGE>
no obligation to continue to provide any additional legal services to
the Company in connection with this stock grant.
9. STOCKHOLDERS' EQUITY
From March 5, 1996 through November 27, 1996, the Company sold shares
of its common stock to certain consultants retained by the Company
("Consultants") as well as to approximately seven investors not
affiliated with the Company ("Investors"). Approximately $860,000 was
raised from Investors and approximately $500,000 was raised from the
Consultants. In December 1996, the Company management was replaced in
connection with the acquisition of stock by two major stockholders. The
shares sold by former management were not registered, but, according to
Company records, sales to Investors were made pursuant to the
registration exemption afforded by Rule 504 under Regulation D adopted
by the Securities Exchange Commission ("SEC") pursuant to the
Securities Act of 1933 (the "Act"). Although Company records are not
clear with respect to the sale of securities to Consultants, the
Company believes that such sales may have been made pursuant to the
exemption afforded by Rule 701 adopted by the SEC pursuant to the Act.
Rule 504 exempts an offering of securities from federal registration
requirements if an issuer meets certain requirements including, among
other things, that (1) the offering does not exceed $1,000,000 within a
12-month period (less sales of certain other exempt securities but not
including sales pursuant to Rule 701); and (2) the issuer is not a
reporting company pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Rule 701 provides an exemption from the
registration provisions under the Act for sales of securities to, among
others, consultants of an issuer if, among other things, the issuer is
not a reporting company; aggregate sales do not exceed the greater of
$500,000 or 15% of the outstanding common stock of the issuer; and
sales are made pursuant to a plan or an agreement with the consultant.
Company records indicate that approximately $500,000 in securities were
sold to Consultants during the period in question. This amount did not
exceed the 15% limitation required by Rule 701. In addition, sales to
the Consultants were pursuant to a consulting and stock option
agreement between the Company and the Consultants dated March 10, 1996.
With respect to the Rule 504 offering, no Form D was filed with the
SEC. The primary effect of failure to file this form would not
necessarily be to invalidate the offering. Such failure may prevent the
Company from using certain exemptions for an indefinite time in the
future. In connection with the sales pursuant to Section 701, such
securities are restricted and cannot be resold by a party without an
applicable exemption from registration. Company stock records indicate
that many of the shares of stock sold to the Consultants were in fact
resold shortly after the initial sale to such persons. As a result, the
exemption afforded by Rule 701 may not be available for those sales. In
the event that Rule 701 is not available, such shares would have been
issued without registration and without an applicable exemption
therefrom. Such shares would, in turn, be added to the aggregate
offering amount pursuant to the Rule 504 offering, thereby increasing
the aggregate offering amount under Rule 504 beyond $1,000,000 and
therefore potentially invalidating the Rule 504 offering.
In the event that the entire offering is found to be invalid as a
result of the failure to qualify for an applicable exemption from
registration under the Act, the sale of such securities would violate
Section 12(a) of the Act. Section 12(a)(1) of the Act provides that any
person who offers or sells a security in violation of Section 5
[Registration Provisions of the Act] is liable to the person purchasing
such security, for an amount equal to the consideration paid for such
security together with interest thereon. Pursuant to Section 13 of the
Act, no action may be brought to enforce a liability under Section
12(a)(1) unless such action is brought within one (1) year after the
violation upon which it is
F-26
<PAGE>
based. Since the last sale of the securities occurred on November 19,
1996, the statute of limitations with respect to any registration
violations terminated on November 19, 1997.
Additionally, Section 12(a)(2) of the Act prohibits the use of a
prospectus or oral communication which includes an untrue statement of
material fact or omits to state a material fact necessary in order to
make the statements, in light of the circumstances under which they
were made, not misleading. As in the case of a violation of 12(a)(1),
in the event of a violation of 12(a)(2), a purchaser would be entitled
to seek the consideration for his or her investment plus interest
thereon. Such an action must be brought within one (1) year of the date
Purchaser discovered any untrue statement or possible omission (or
should have been discovered by the exercise of reasonable diligence)
but in no event beyond three (3) years after the sale. It is unclear
from Company records what information was given to Purchasers of the
stock. However, management believes that a business plan was prepared
and was distributed. A copy of the business plan is not available from
the Company. Moreover, the Company did have information in the
marketplace pursuant to Rule 15c-2-11 under the Exchange Act. Since it
cannot be determined what information was provided each investor, no
determination can be made as to whether the information provided an
investor was misleading or whether any material information was
omitted. However, no investor or Consultant has instituted any action
against the Company nor has any such threat been communicated to the
Company. In connection with any securities offering, a threat always
exists that a purchaser can bring an action under Section 12(a)(2)
alleging that the information (whether written or oral) provided to
such investor is misleading or omits to state a material fact. However,
in absence of any shareholder complaints nor any evidence that
misleading information was provided to an investor, management believes
the Company has no current liability under Section 12(a)(2).
Based on the Company's records, compliance with applicable state
securities laws is unclear. However, to the extent sales were made in
the State of California, it does not appear that any applicable
exemption from registration has been satisfied. In the event that the
Company is found to have violated the registration provisions of the
California securities laws, any action must be brought within two years
after the violation or one year after the discovery of the facts
constituting such violation. Notwithstanding the Company's possible
exposure under California securities laws, the Company believes that
each of the Consultants who acquired their shares in the Company are no
longer shareholders and are believed to have sold their stock at or
above the prices at which they were acquired. As to the other investors
who purchased stock in the Company, most are believed to have sold
their shares and the remaining purchasers are not believed to be
California residents or entities.
In addition to investor actions, there is an issue as to potential
penalties the Company could incur either from the SEC or from an
applicable state regulatory agency. In this regard, various exemptions
from registration adopted by the SEC as well as by various states do
provide that such exemptions may be unavailable to companies as a
result of prior violations of securities laws and for financial
penalties. However, in most cases, such prohibitions can be waived upon
application by the Company for good cause. In this case, since each of
the potential violations alleged to have occurred happened under former
management and since current management has endeavored to comply with
the securities laws, management believes that the Company would not be
prohibited from use of various exemptive provisions under applicable
federal and state laws. Moreover, since the individuals who were
responsible for any securities violations are no longer within the
Company, there may be strong credible arguments that no financial
penalties should be imposed on a Company for any violations. There is
no financial civil liability under the Act. Under California law, a
$2,500 fine can be imposed for any violation. The full financial impact
which may result from these potential violations is unknown at this
time but could include actions requiring the Company to return funds to
certain stockholders, along with interest and brokerage fees.
F-27
<PAGE>
In January 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to authorize the issuance of up
to 1,600,000 shares of Series A, 6% preferred stock and up to
10,000,000 shares of an additional class of preferred stock in
contemplation of the Company's planned public stock offering in 1998.
In addition, the shareholders approved the Company's adoption of an
incentive stock option plan and a nonqualified stock option plan.
Pursuant to these plans, 42,500 options, exercisable at $.25 per share,
were granted to certain employees on January 13, 1998. These options
are exercisable through January 13, 2008. During the nine months ended
September 30, 1998, 5,000 of these shares were forfeited.
10. INCOME TAXES
Deferred tax assets and liabilities at September 30, 1998 are as
follows:
Assets:
Operating loss carryforwards $ 913,000
Inventory costs 35,000
Intangibles 21,000
Other 1,000
Valuation allowance (876,000)
---------
Total 94,000
---------
Liabilities:
Accelerated depreciation (27,000)
Other (67,000)
---------
Total (94,000)
---------
Deferred tax assets - net $ --
=========
Due to current and expected future operating losses, a valuation
allowance equal to the net deferred tax assets has been recorded as of
September 30, 1998 as it is more likely than not that such net deferred
tax assets will not be realized.
The provision for income taxes for the nine month periods ended
September 30, 1998 and 1997 are as follows:
1998 1997
---- ----
Current - state $800 $800
Deferred
-- --
---- ----
Total $800 $800
==== ====
F-28
<PAGE>
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
1998 1997
---- ----
Statutory rate 34% 34%
State income taxes, net of federal benefit 5 5
Other (1) 2
Valuation allowance (38) (41)
--- ---
Effective tax rate 0% 0%
=== ===
As of December 31, 1997, the Company had federal net operating loss
carryforwards which expire in taxable years ended December 31 as
follows:
2011 $ 716,678
2012 733,279
----------
Total $1,449,957
==========
The net operating loss carryforwards do not include tax losses incurred
through September 30, 1998. To the extent the Company incurs a tax loss
for the year ending December 31, 1998, such amount would represent
additional net operating loss carryforwards which would expire in 2013.
11. LEGAL PROCEEDINGS
During the nine months ended September 30, 1998, certain prior claims
against the Company were dismissed, or settled. Amounts provided in the
prior two years for these matters were adequate to cover the settlement
amounts and related legal costs and no additional amounts were expensed
during the period.
A shareholder made a claim for approximately 500,000 shares allegedly
due to him in exchange for cash payments made and services provided to
the Company. The Company disputed the claim alleging that a substantial
portion of the proceeds allegedly paid to the Company were never
received. In July 1998, this claim was settled and litigation
settlement costs of $84,400 were recognized, with a corresponding
increase in stockholders' equity. Such amount represents the fair value
of the 200,000 shares of common stock issued to settle the claim based
on the trading price of the stock on the date of settlement.
12. CONTINGENCIES
In March 1998, the Company entered into subscription agreements to sell
five Units, each consisting of a $10,000 promissory note and 100,000
shares of the Company's Series A Preferred Stock for consideration of
$10,000 per Unit. The Company had the right to redeem the units at cost
if the Company's proposed public stock offering failed to occur prior
to August 25, 1998. This right was not exercised by the Company.
Issuance of these shares of Preferred Stock is also contingent upon the
Company obtaining approval from the NASD in connection with the
Company's proposed public offering (see Note 2). In October 1998, the
Company received preliminary NASD approval to issue these shares of
Preferred Stock subject to a "lock-up" provision restricting the Unit
holder's rights to sell these shares until 13 months after the
effective date of the proposed public stock offering. Since
F-29
<PAGE>
these shares were sold at a substantial discount from the proposed
public stock offering price of $10 per share, upon completion of the
Company's proposed offering, a non-cash charge to earnings will be
recognized for the value of these restricted shares. Registration of
these shares in addition to the 600,000 shares being offered pursuant
to the Company's planned public stock offering will result in a
substantial decrease in the liquidation value available to existing
shareholders and potential shareholders.
******
F-30
<PAGE>
EXHIBIT A
<PAGE>
DESCRIPTION OF PREFERRED STOCK
I. Series A 6% Preferred Stock. The Corporation shall have the authority
to issue one million six hundred thousand (1,600,000) shares of Series A 6%
Preferred Stock each having a par value of one-tenth of one cent ($0.001). A
statement of all or any of the relative rights, preferences and limitations
of the shares of the Series A 6% Preferred Stock is as follows:
A. Dividends. The holders of the Series A 6% Preferred Stock
are entitled to and shall receive Dividends as follows:
Cumulative, annual dividends at the rate of six percent
(6%) per annum, payable on or before January 30 of each
year that any Series A 6% Preferred Stock shall be
outstanding. The Corporation will pay Dividends to the
person who is the holder of record on the preceding
December 31. Dividends shall begin to accrue on the date a
written subscription for shares of Series A 6% Preferred
Stock is accepted by the Corporation. The Dividend shall be
payable in additional shares of Series A 6% Preferred Stock
only.
B. Redemption.
(1) The Corporation may, at any time and at the option of the
Board of Directors, and subject to the approval of the
holders of a majority of the issued and outstanding shares
of Series A 6% Preferred Stock, redeem all or part of the
outstanding shares of the Series A 6% Preferred Stock for
such consideration as the Company and the holders of Series
A 6% Preferred Stock may agree (the "Redemption Price").
The Corporation shall give written notice by mail, postage
prepaid, to the holders of the Series A 6% Preferred Stock
to be redeemed at least sixty (60) days prior to the date
specified for redemption (the "Redemption Date"). Such
notice shall be addressed to each such shareholder at the
address of such holder appearing on the books of the
Corporation or given by such holder to the Corporation for
the purpose of notice, or if no such address appears or is
so given, at the place where the principal office of the
Corporation is located. Such notice shall state the
proposed Redemption Date, the Redemption Price and the
number of shares of Series A 6% Preferred Stock of such
holder proposed to be redeemed and the date, time and place
of a meeting of the holders of the Series A 6% Preferred
Stock for purposes of approving such redemption, which date
shall be no less than twenty (20) days following the
mailing of the notice. On or after the Redemption Date, if
such redemption is approved by the holders of the Series A
6% Preferred Stock in the manner specified herein, each
holder of shares of Series A 6% Preferred Stock called for
redemption shall surrender the certificate evidencing such
shares to the Corporation at the place designated in such
2
<PAGE>
notice and shall thereupon be entitled to receive payment
of the Redemption Price. If less than all of the
outstanding shares of Series A 6% Preferred Stock are to be
redeemed, then the Corporation shall redeem a pro rata
portion from each holder of Series A 6% Preferred Stock
according to the respective number of shares of Series A 6%
Preferred Stock held by such holder.
(2) From and after the Redemption Date (unless default shall be
made by the Corporation in duly paying the Redemption Price
in which case all the rights of the holders of such shares
shall continue) the holders of the shares of the Series A
6% Preferred Stock called for redemption shall cease to
have any rights as stockholders of the Corporation except
the right to receive, without interest, the Redemption
Price thereof upon surrender of certificates representing
the shares of Series A 6% Preferred Stock, and such shares
shall not thereafter be transferred (except with the
consent of the Corporation) on the books of the Corporation
and shall not be deemed outstanding for any purpose
whatsoever. Any money deposited for the redemption of
shares of Series A 6% Preferred Stock thereafter converted
shall be returned to the Corporation upon such conversion.
Any money so deposited which is unclaimed by a holder of
Series A 6% Preferred Stock for two (2) years after the
Redemption Date thereof shall be returned to this
Corporation.
(3) There shall be no redemption of any shares of Series A 6%
Preferred Stock of the Corporation where such action would
be in violation of applicable law.
C. Liquidation.
(1) In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, the holders of
shares of the Series A 6% Preferred Stock then outstanding
shall be entitled to be paid, out of the assets of the
Company available for distribution to its stockholders,
whether from capital, surplus or earnings, before any
payment shall be made in respect of the Company's Common
Stock an amount equal to ten dollars ($10.00) per share,
plus all accumulated but unpaid dividends thereon to the
date fixed for distribution. After setting apart or paying
in full the preferential amounts due the holders of the
Series A 6% Preferred Stock, the remaining assets of the
Company available for distribution to stockholders, if any,
shall be distributed exclusively to the holders of Common
Stock, each such issued and outstanding share of Common
Stock entitling the holder thereof to receive an equal
proportion of said remaining assets. If upon liquidation,
dissolution, or winding up of the Company, the assets of
the Company available for distribution to its shareholders
shall be insufficient to pay the holders of the Series A 6%
Preferred Stock the full amounts to which they respectively
shall be entitled, the holders of the Series A 6% Preferred
Stock
3
<PAGE>
shall share ratably in any distribution of assets according
to the respective amounts which would be payable in respect
of the shares held by them upon such distribution if all
amounts payable on or with respect to said shares were paid
in full.
(2) In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Corporation, the
Corporation shall within ten (10) days after the date the
Board of Directors approves such action, or within twenty
(20) days prior to any shareholder's meeting called to
approve such action, or within twenty (20) days after the
commencement of any involuntary proceeding, whichever is
earlier, give each holder of shares of Series A 6%
Preferred Stock initial written notice of the proposed
action. Such initial written notice shall describe the
material terms and conditions of such proposed action,
including a description of the stock, cash, and property to
be received by the holders of shares of Series A 6%
Preferred Stock upon consummation of the proposed action,
and the date of delivery thereof. If any material change in
the facts set forth in the initial notice shall occur, the
Corporation shall promptly given written notice to each
holder of shares of Series A 6% Preferred Stock of such
material change.
The Corporation shall not consummate any voluntary or
involuntary liquidation, dissolution, or winding up of the
Corporation before the expiration of thirty (30) days after
the mailing of the initial notice or ten (10) days after
the mailing of any subsequent written notice, whichever is
later.
(3) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation which will
involve the distribution of assets other than cash, the
Corporation shall promptly engage competent independent
appraisers to determine the value of the assets to be
distributed to the holders of shares of Series A 6%
Preferred Stock and the holders of shares of Common Stock
(it being understood that with respect to the valuation of
securities, the Corporation shall engage such appraiser as
shall be approved by the holders of a majority of shares of
the Corporation's outstanding Series A 6% Preferred Stock).
The Corporation shall, upon receipt of such appraiser's
valuation, give prompt written notice to each holder of
shares of Series A 6% Preferred Stock of the appraiser's
valuation.
D. Voting. Except as otherwise expressly provided herein or in
the Nevada Revised Statutes, the holders of the Series A 6%
Preferred Stock shall have no voting powers and no holder thereof
shall be entitled to receive notice of any meeting of the
shareholders.
E. Seniority. The dividend and liquidation rights of the Series
A 6% Preferred Stock shall be senior and superior to those of the
Common Stock. Unless and until all accumulated but unpaid dividends
on the Series A 6% Preferred Stock shall be
4
<PAGE>
paid in full, (a) no cash or stock dividends, or other distributions
of any kind, may be paid or declared or set aside for payment upon
the Common Stock, and (b) the Company may not redeem, purchase, or
otherwise acquire any shares of Common Stock, for any consideration
whatsoever.
II. Additional Preferred Stock. The Corporation shall have the authority
to issue ten million (10,000,000) shares of Additional Preferred Stock each
having a par value of one-tenth of one cent ($0.001). The Directors shall
have the power to designate the Additional Preferred Stock as being of one or
more series, to issue any such series, to fix the terms, preferences, voting
powers, restrictions and qualifications of any such series, and, without
limiting the generality of the foregoing, to fix, as to each series: (a) the
designation of the series and the number of the shares to constitute the
series, which number of shares may, from time to time, be increased (except
as otherwise provided by resolution of the Board of Directors providing for
the issue of the series) or decreased (to a number not less than the number
of shares then outstanding) by resolution of the Board of Directors; (b) the
dividend rate of the series, the conditions and dates upon which the
dividends shall be payable, the relation which the dividend shall bear to the
dividends payable on any other class or on any other series of any class of
shares, and whether the dividend shall be cumulative or non-cumulative; (c)
whether the shares of the series shall be redeemable by the Company and, if
subject to redemption, the times, prices and other terms and conditions of
the redemption and whether shares which have been redeemed may be reissued or
must be canceled; (d) the terms and amount of any sinking fund provided for
the purchase or redemption of the shares of the series; (e) whether or not
the shares of the series shall be convertible into or exchangeable for shares
of any other class or any other series of any other class of shares of the
Company, and, if provision is made for conversion or exchange, the times,
prices, rates of exchange, adjustment and other terms and conditions of the
conversion or exchange; (f) the extent of the voting powers, if any,
including shares entitled to more than one vote per share, of the shares of
the series; (g) whether, and if so the extent to which, shares of the series
may participate with the Common Shares or with any other series in any other
dividends in excess of the preferential dividend fixed for shares of the
series; (h) the rights of the holders of shares of the series upon the
dissolution of, or upon the distribution of the assets of, the Company, and
whether, and if so the extent to which, shares of a series may participate
with the Common Shares or with any other series in any dissolution of, or
upon the distribution of the assets of, the Company, in excess of the
preferential amount fixed per shares of a series; and (i) any other
preferences and any relative optional or other special rights, and any
qualifications, limitations or restrictions of the preferences or rights of
shares of the series.
5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
THE COMPANY............................................................... 4
RISK FACTORS.............................................................. 4
BUSINESS AND PROPERTIES.................................................. 10
OFFERING PRICE FACTORS................................................. 21
USE OF PROCEEDS........................................................ 22
CAPITALIZATION......................................................... 24
DESCRIPTION OF SECURITIES.............................................. 25
PLAN OF DISTRIBUTION................................................... 25
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS............................... 27
OFFICERS AND KEY PERSONNEL OF THE COMPANY.............................. 27
DIRECTORS OF THE COMPANY............................................... 28
PRINCIPAL STOCKHOLDERS................................................. 30
MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND REMUNERATION................ 31
LITIGATION............................................................. 34
LEGAL MATTERS...........................................................35
FEDERAL TAX ASPECTS.................................................... 35
MISCELLANEOUS FACTORS.................................................. 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CERTAIN RELEVANT FACTORS......... 36
CONSOLIDATED FINANCIAL STATEMENTS....................................... F-1
EXHIBITS:
A - Description of Preferred Stock
THIS PROSPECTUS CONTAINS ALL OF THE REPRESENTATIONS BY THE COMPANY CONCERNING
THIS OFFERING, AND NO PERSON SHALL MAKE DIFFERENT OR BROADER STATEMENTS THAN
THOSE CONTAINED HEREIN. INVESTORS ARE CAUTIONED NOT TO RELY UPON ANY
INFORMATION NOT EXPRESSLY SET FORTH IN THIS PROSPECTUS.
This Prospectus, together with Financial Statements and other
Attachments, consists of a total of ______ pages.
UNTIL ________ , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the Nevada Revised Statutes provides for the
indemnification of officers, directors, and other corporate agents for
actions taken by reason of the fact that such person is or was an officer,
director or other corporate agent, if such person acted in good faith and in
a manner reasonably believed to be in, or not opposed to the best interests
of the Corporation and had no reasonable cause to believe such conduct was
unlawful. These terms are sufficiently broad to indemnify such persons under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article XI of the Company's Certificate of Incorporation (Exhibit 2.2 hereto)
and Article IV, Section 10 of the Company's Bylaws (Exhibit 2.3 hereto)
provide for indemnification of the Company's directors, officers, employees
and other agents to the extent and under the circumstances permitted by the
Nevada Revised Statutes.
The Underwriting Agreement (Exhibit 1) provides for indemnification by the
Underwriters of the Company, its directors and officers, and by the Company
of the Underwriters, for certain liabilities, including liabilities arising
under the Act, and affords certain rights of contribution with respect
thereto.
Item 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Company in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
All amounts are estimated except for the Securities and Exchange Commission
registration fee, and the National Association of Securities Dealers, Inc.
filing fee.
PAYABLE BY
COMPANY
----------
SEC registration fee ............................................. $ 3,714
National Association of Securities Dealers, Inc. filing fee ...... 1,500
Blue Sky fees and expenses ....................................... 25,000
Accounting fees and expenses ..................................... 65,000
Legal fees and expenses .......................................... 160,000
Printing and engraving expenses .................................. 20,000
Registrar and Transfer Agent's fees .............................. 2,000
Miscellaneous fees and expenses .................................. 5,000
--------
Total ............................................................ $282,214
========
<PAGE>
Item 3. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Company hereby undertakes that it will provide to the
underwriters at the closing(s) specified in the underwriting agreement
certificates in such denomination and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any Prospectus required by Section 10(a)(3) of
The Securities Act of 1933;
(b) To reflect in any Prospectus any facts or events which,
individually or together represent a fundamental change in
information in the Registration Statement; and
(c) To include any additional or changed material information
on the Plan of Distribution.
(2) For determining liability under The Securities Act of 1933, to treat
each post-effective amendment as a new Registration Statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) To file a post-effective amendment to renew from registration any of
the securities that remain unsold at the end of the Offering.
<PAGE>
Item 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR
Since March 1997, the issuer has sold and issued the following unregistered
securities:
(a) In February 1998, the Company issued 500,000 shares of preferred
stock in connection with bridge loan financing provided by a single
investor who has no presence in the United States. This investor is
Colin Frank Riseam. The Company relied on the exemption provided by
Section 4(2) of the Act. Mr. Riseam is an accredited investor as
that term is defined in Section 2(15) of the Act.
(b) In December 1997, three investors who previously contributed an
aggregate of $350,000 to the Company in exchange for yet to be
authorized class of preferred stock elected to acquire common stock
of the Company in lieu of the preferred stock in order to facilitate
this offering. Three investors, Joseph Antonini, Bruce Williams
(each of which is a director of the Company) and Carl Haas, an
associate of Messrs. Antonini and Mario Andretti received an
aggregate of 1,050,000 shares of the common stock of the Company.
The Company relied on the exemption provided by Section 4(2) of the
Act.
(c) In December 1997, Mario Andretti, a director of the Corporation,
exchanged $220,000 of royalties due and payable to him for 660,000
shares of common stock in the Company. The Company relied on the
exemption provided by Section 4(2) of the Act.
(d) In 1997, securities were issued to John Caponigro, Mack Jennings and
Robert Pepi without consideration and without deduction from any
compensation under any employment or other agreement. To the extent
that any of the shares could be deemed issued in exchange for
services, the Company relied on the exemption provided by Section
4(2) of the Act. Mr. Jennings received one hundred thousand
(100,000) shares of Common Stock which were valued at $.58 per
share. These were granted to Mr. Jennings as an inducement to become
the chief executive officer of the Company. Mr. Caponigro received
one hundred thousand (100,000) shares of Common Stock valued at $.27
per share in exchange for legal consulting services performed on
behalf of the Company. Finally, Mr. Pepi was granted twenty-five
thousand (25,000) shares valued at $.27 per share as partial
consideration for services performed as the Company's winemaker.
<PAGE>
The recipients of the above-described securities received certificates which
are restricted as to sale. All recipients had adequate access, through
employment or other relationships, to information about the Company.
Item 5. INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1. Form of Underwriters Agreement and Warrant
Agreement (New)
2.1* Certificate of Incorporation
2.2* Certificate of Amendment to
Articles of Incorporation as
filed with the Secretary of State
of the State of Nevada on May 4,
1995, December 15, 1995 and
February 12, 1998.
2.3* Bylaws of the Company as amended to date.
3.* Form of Preferred Stock Certificate
6.1* License Agreement Between Mario Andretti and the
Company
6.2* Note and Mortgage dated April 12, 1996 by and
between the Company and Bar K, Inc. in connection
with the acquisition of the Company's winery
6.3* Line of Credit Agreement by and between the
Company and Vintage Bank
6.3.1* Amendment to Line of Credit Agreement by and
between the Company and Vintage Bank
6.4* Line of Credit Agreement between the Company and
Bank of Bloomfield Hills, Michigan
6.5* Promissory Note on the Company in favor of Mack
Jennings
<PAGE>
6.5.1* Second Promissory Note in favor of Mack Jennings
6.6* Promissory Note in favor of Robert Pepi
6.7* Two (2) Promissory Notes in favor of Mario Andretti
6.7.1* Third Promissory Note in favor of Mario Andretti
6.8* Promissory Note in favor of Sports Management
Network, Inc.
6.8.1* Second Promissory Note in favor of Sports
Management Network, Inc.
6.10* Promissory Note and Registration Rights Agreement
in favor of Colin Frank Riseam
6.10.1 Lock-Up Agreement between Colin Frank Riseam,
AWG, Ltd., Klein, Maus and Shire, Inc. and Nutmeg
Securities, Ltd (NEW)
6.11* Employment Agreement by and between AWG, Ltd.
and Mack Jennings
6.12* Amendment to Employment Agreement by and
between AWG, Ltd. and Mack Jennings
6.13* AWG, Ltd. Incentive Stock Option Plan (ISO Plan)
6.14* Form of Incentive Stock Option Agreement under the
ISO Plan
6.15* AWG, Ltd. Non-Qualified Stock Option Plan ("Non-
Qualified Plan")
6.16* Promissory Note in favor of Joseph Antonini
6.16.1 Second Promissory Note in favor of Joseph Antonini
6.17* Loan Commitment from Comerica Bank
6.18 Loan Documents with Comerica Bank
10.1 Consent of Deloitte and Touche, LLP
10.2* Consent of Jackier, Gould, Bean, Upfal & Eizelman
(contained in Legal Opinion filed as Exhibit 11)
<PAGE>
11.* Legal Opinion of Jackier, Gould, Bean, Upfal &
Eizelman
27.* Financial Data Schedule Required By Item 601(b)(27)
of Regulation S-B
* previously filed
<PAGE>
Item 6. DESCRIPTION OF EXHIBITS
See Item 5.
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-1 and authorizes this Amendment to
Registration Statement to be signed on its behalf by the undersigned in the
City of Napa, State of California on January 26, 1999.
AWG, LTD.
By:/s/ Mack Jennings
Mack Jennings
Its: President
In accordance with the requirements of the Securities Act of 1933, this
Amendment to Registration Statement was signed by the following persons in
the capacities and on the dates stated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Joseph Antonini
- --------------------------
Joseph Antonini Chairman of the Board January 26, 1999
Mario Andretti Vice Chairman of the Board
/s/ Mack Jennings
- --------------------------
Mack Jennings President, Chief Executive
Officer (Its Principal Executive
Officer; Principal Financial
Officer and Principal
Accounting Officer) and
Director January 26, 1999
Bruce Williams Director
/s/ John Caponigro
- --------------------------
John Caponigro Secretary, General Counsel
and Director January 26, 1999
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1. Form of Underwriters Agreement and Warrant
Agreement (New)
6.10.1 Lock-Up Agreement between Colin Frank Riseam,
AWG, Ltd., Klein, Maus and Shire, Inc. and Nutmeg
Securities, Ltd. (New)
6.16.1 Second Promissory Note in favor of Joseph Antonini
6.18 Loan Documents with Comerica Bank
10.1 Consent of Deloitte and Touche, LLP
Form of Underwriting Agreement
--------------------------------------------------------------
1,100,000 Shares of Series A 6% Preferred Stock
--------------------------------------------------------------
AWG, LTD.
UNDERWRITING AGREEMENT
New York, New York
___________ ___, 1999
Nutmeg Securities, Ltd.
495 Post Road East
Westport, Connecticut 06880
Klein Maus and Shire, Inc.
110 Wall Street
New York, New York 10005
As Representatives of the
Several Underwriters listed on Schedule A hereto
Ladies and Gentlemen:
AWG, Ltd., a Nevada corporation (the "Company"), confirms
its agreement (the "Agreement") with Nutmeg Securities, Ltd. ("Nutmeg") and
Klein Maus and Shire, Inc., ("KMS") (collectively, the "Underwriters," which
term shall also include any underwriter substituted as hereinafter provided
in Section 11), for whom Nutmeg and KMS are acting as representatives (in
such capacity, Nutmeg and KMS shall hereinafter be collectively referred to
as "you" or the "Representatives"), with respect to the sale (the "Offering")
by the Company and the purchase by the Underwriters, acting severally and not
jointly, of the respective numbers of securities set forth in Schedule A
consisting of 600,000 shares (the "Shares") of the Company's Series A 6%
Preferred Stock, $.001 par value per share (the "Preferred Stock"). Such
600,000 shares of Preferred Stock
<PAGE>
are hereinafter also referred to as the "Firm Securities." Upon your request,
as provided in Section 2(b) of this Agreement, the Company shall also issue
and sell to you up to an additional 90,000 shares of Preferred Stock for the
purpose of covering over-allotments, if any, in the sale of the Firm
Securities. Such additional 90,000 shares of Preferred Stock are hereinafter
referred to as the "Option Securities." The Firm Securities and the Option
Securities are hereinafter collectively referred to as the "Securities." The
Company also proposes to issue and sell to the Underwriters warrants (the
"Representatives' Warrants") pursuant to the Representatives' Warrant
Agreement (as defined in Section (xxxii) hereof) to purchase an aggregate of
60,000 shares of Preferred Stock (and additionally up to 9,000 shares of
Preferred Stock if the over-allotment is exercised). The 60,000 shares of
Preferred Stock (or up to 69,000 shares if the over-allotment is exercised)
issuable upon exercise of the Representatives' Warrants are hereinafter
referred to as the "Representatives' Securities" or the "Warrant Shares". The
Securities, the Representatives' Warrants and the Representatives' Securities
are more fully described in the Registration Statement and the Prospectus
referred to below. Additionally, 500,000 shares of Preferred Stock are being
registered on behalf of a single shareholder.
1. Representations and Warranties. (a) The Company, a
Nevada corporation, which has one wholly owned subsidiary, AWG, Inc., a
Delaware corporation (the "Subsidiary") represents and warrants to, and
agrees with, each of the Underwriters' as of the date hereof, and as of the
Closing Date (hereinafter defined) and the Option Closing Date (hereinafter
defined), if any, as follows:
(i) The Company has prepared and filed with the
Securities and Exchange Commission (the "Commission") a Registration
Statement, and an amendment or amendments
-2-
<PAGE>
thereto, on Form SB-1 (No. 333-48165), including any related preliminary
prospectus ("Preliminary Prospectus"), for the registration of the Preferred
Stock, the Representatives' Warrants and the Representatives' Securities
under the Securities Act of 1933, as amended (the "Act"), which registration
statement and amendment or amendments have been prepared by the Company in
conformity with the requirements of the Act, and the Rules and Regulations of
the Commission thereunder. The Company will promptly file a further amendment
to said registration statement in the form heretofore delivered to the
Underwriters and will not file any other amendment thereto to which the
Underwriters shall have objected in writing after having been furnished with
a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time
the Registration Statement, becomes effective (including the Prospectus,
financial statements, schedules, exhibits and all other documents or
information incorporated by reference therein) and all information deemed to
be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of
the rules and regulations), is hereinafter called the "Registration
Statement", and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the rules and regulations, is
hereinafter called the "Prospectus." For purposes hereof, "Rules and
Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(ii) Neither the Commission nor any state
regulatory authority has issued any order preventing or suspending the use of
any Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof and no proceedings for a stop order suspending the
effectiveness of the Registration Statement or any of the Company's
securities have been
-3-
<PAGE>
instituted or are pending or threatened. Each of the Preliminary Prospectus,
the Registration Statement and Prospectus at the time of filing thereof
conformed with the requirements of the Act and the Rules and Regulations, and
none of the Preliminary Prospectus, the Registration Statement or Prospectus
at the time of filing thereof contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein and
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that this representation and
warranty does not apply to statements made in reliance upon and in conformity
with written information furnished to the Company with respect to the
Underwriters by or on behalf of the Underwriters expressly for use in such
Preliminary Prospectus, Registration Statement or Prospectus or any amendment
or supplement thereto.
(iii) When the Registration Statement becomes
effective and at all times subsequent thereto up to the Closing Date
(hereinafter defined) and each Option Closing Date (hereinafter defined), if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus will contain all statements which
are required to be stated therein in accordance with the Act and the Rules
and Regulations, and will conform to the requirements of the Act and the
Rules and Regulations; neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, contains or will contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein and necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided,
however, that this representation and warranty does not apply to statements
made or statements omitted in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of any
-4-
<PAGE>
Underwriter (as set forth in paragraph 1(a)(ii) hereof) expressly for use in
the Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(iv) The Subsidiary is a wholly-owned subsidiary
of the Company. Each of the Company and the Subsidiary has been duly
organized and is validly existing as a corporation in good standing under the
laws of the state of its incorporation. Except as set forth in the
Prospectus, neither the Company nor the Subsidiary own an equity interest in
any corporation, partnership, trust, joint venture or other business entity.
Each of the Company and the Subsidiary is each duly qualified and licensed
and in good standing as a foreign corporation in each jurisdiction in which
its ownership or leasing of any properties or the character of its operations
require such qualification or licensing except where the failure(s) to be so
qualified, licensed and in good standing, individually or in the aggregate,
would not materially and adversely affect the condition, financial or
otherwise, or the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the Company and
the Subsidiary. Each of the Company and the Subsidiary has all requisite
power and authority (corporate and other), and has obtained any and all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental
or similar matters), necessary to own or lease its properties and conduct its
business as described in the Prospectus, or is subject to no material
liability or disability by reason of the failure to obtain such
authorizations, approvals, orders, licenses, certificates, franchises and
permits; each of the Company and the Subsidiary is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state, local
and foreign laws, rules and regulations and neither
-5-
<PAGE>
the Company nor the Subsidiary have received any notice of proceedings
relating to the revocation or modification of any such authorization,
approval, order, license, certificate, franchise, or permit which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the condition, financial or
otherwise, or the earnings, business affairs, position, prospects, value,
operations, properties, business, or results of operations of the Company and
the Subsidiary. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and regulations on
the business of the Company and the Subsidiary as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact necessary to make the statements contained therein not
misleading in light of the circumstances in which they were made.
(v) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and will have the
adjusted capitalization set forth therein on the Closing Date (hereinafter
defined) and the Option Closing Date(hereinafter defined), if any, based upon
the assumptions set forth therein, and the Company is not a party to or bound
by any instrument, agreement or other arrangement providing for it to issue
any capital stock, rights, warrants, options or other securities, except for
this Agreement and as described in the Prospectus. The Securities, the
Representatives' Warrants and the Representatives' Securities (collectively,
hereinafter sometimes referred to as the "IPO Securities") and all other
securities issued or issuable by the Company conform or, when issued and paid
for, will conform, in all material respects to all statements with respect
thereto contained in the Registration Statement and the Prospectus. All
issued and outstanding securities of the Company and its Subsidiary have been
duly authorized and validly issued and are fully paid and non-assessable and
the holders thereof have no rights of
-6-
<PAGE>
rescission with respect thereto, and are not subject to personal liability by
reason of being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any security of the
Company or the Subsidiary or similar contractual rights granted by the
Company or the Subsidiary. The IPO Securities are not and will not be subject
to any preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and non-assessable and will
conform to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale
of the IPO Securities has been duly and validly taken; and the certificates
representing the IPO Securities are in due and proper form. Upon the issuance
and delivery pursuant to the terms hereof of the IPO Securities to be sold by
the Company hereunder, the Underwriters or the Representatives, as the case
may be, will acquire good and marketable title to such IPO Securities free
and clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever.
(vi) The consolidated financial statements of the
Company together with the related notes and schedules thereto, included in
the Registration Statement, each Preliminary Prospectus and the Prospectus
fairly present the financial position, income, changes in cash flow, changes
in stockholders' equity and the results of operations of the Company and the
Subsidiary at the respective dates and for the respective periods to which
they apply and the pro forma financial information included in the
Registration Statement, each Preliminary Prospectus and the Prospectus
presents fairly on a basis consistent with that of the audited financial
statements included therein, the Company's and the Subsidiary's pro forma net
income or loss per share, as the case may be, pro
-7-
<PAGE>
forma net tangible book value, and the pro forma capitalization and such
financial statements have been prepared in conformity with generally accepted
accounting principles and the Rules and Regulations, consistently applied
throughout the periods involved. There has been no material adverse change or
development involving a material change in the condition, financial or
otherwise, or in the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operation of the Company or the
Subsidiary whether or not arising in the ordinary course of business, since
the date of the financial statements included in the Registration Statement
and the Prospectus, and the outstanding debt, the property, both tangible and
intangible, and the business of the Company and the Subsidiary conforms in
all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus.
(vii) The Company and its Subsidiary (A) have each
paid all federal, state, local, and foreign taxes for which it is liable,
including, but not limited to, withholding taxes and amounts payable under
Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the
"Code"), and has furnished all information returns it is required to furnish
pursuant to the Code, (B) has established adequate reserves for such taxes
which are not due and payable, and (C) does not have any tax deficiency or
claims outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other
similar tax is payable by or on behalf of the Underwriters in connection with
(A) the issuance by the Company of the Securities, (B) the purchase by the
Underwriters of the Securities and the purchase by the Representatives of the
Representatives' Warrants from the Company, (C) the consummation by the
Company of any of its obligations under this Agreement, or (D) resales of the
Securities in connection with the
-8-
<PAGE>
distribution contemplated hereby.
(ix) The Company and its Subsidiary maintain
insurance policies, including, but not limited to, general liability, product
liability if applicable and property insurance, which insures the Company and
its Subsidiary and their employees, against such losses and risks generally
insured against by comparable businesses. The Company and its Subsidiary (A)
have not failed to give notice or present any insurance claim with respect to
any matter, including but not limited to the Company's or the Subsidiary's
business, property or employees, under the insurance policy or surety bond in
a due and timely manner, (B) do not have any disputes or claims against any
underwriter of such insurance policies or surety bonds or has not failed to
pay any premiums due and payable thereunder, and (C) have not failed to
comply with all conditions contained in such insurance policies and surety
bonds. To the Company's knowledge there are no facts or circumstances under
any such insurance policy or surety bond which would relieve any insurer of
its obligation to satisfy in full any valid claim of the Company and/or its
Subsidiary.
(x) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties or
business of the Company or its Subsidiary which (A) questions the validity of
the capital stock of the Company, its Subsidiary or this Agreement, the
Representatives' Warrant Agreement, (as defined in Section 1(xxxii) below) or
of any action taken or to be taken by the Company or its Subsidiary pursuant
to or in connection with this Agreement or the Representatives' Warrant
Agreement, (B) is required
-9-
<PAGE>
to be disclosed in the Registration Statement which is not so disclosed (and
such proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), or (C) if adversely
determined, might materially and adversely affect the condition, financial or
otherwise, or the business affairs or business prospects, earnings,
liabilities, prospects, stockholders' equity, value, properties, business or
assets of the Company and its Subsidiary.
(xi) The Company has full legal right, power and
authority to authorize, issue, deliver and sell the IPO Securities, enter
into this Agreement and the Representatives' Warrant Agreement and to
consummate the transactions provided for herein and therein; and each of this
Agreement and the Representatives' Warrant Agreement have been duly and
properly authorized, executed and delivered by the Company. This Agreement
and the Representatives' Warrant Agreement each constitute a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, and neither the Company's issue and sale of the
IPO Securities or execution or delivery of this Agreement and the
Representatives' Warrant Agreement or its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto,
conflicts with or will conflict with or results or will result in any breach
or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company or its Subsidiary pursuant to the
terms of, (A) the certificate of incorporation or by-laws of the Company or
its Subsidiary, (B) any license, contract, indenture, mortgage, deed of
trust, voting trust agreement, stockholders
-10-
<PAGE>
agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company or its Subsidiary are a party or by which
they are or may be bound or by which their properties or assets (tangible or
intangible) are or may be subject, or any indebtedness, or (C) any statute,
judgment, decree, order, rule or regulation applicable to the Company or its
Subsidiary by any arbitrator, court, regulatory body or administrative agency
or other governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or its Subsidiary or any of
their activities or properties, in each case except as described in the
Prospectuses and except for conflicts, breaches, violations, defaults,
creations or impositions which do not and would not have a material adverse
effect on the condition, financial or otherwise, or the earnings, business
affairs, position, shareholder's equity, value, operation, properties,
business or results of operations of the Company and its Subsidiary.
(xii) No consent, approval, authorization or order
of, and no filing with, any court, regulatory body, government agency or
other body, domestic or foreign which has not theretofore been obtained, is
required for the issuance of the IPO Securities pursuant to the Prospectus
and the Registration Statement, the issuance of the Representatives'
Warrants, the execution, delivery or performance of this Agreement and the
Representatives' Warrant Agreement, and the transactions contemplated hereby
and thereby, including, without limitation, any waiver of any preemptive,
first refusal or other rights that any entity or person may have for the
issue and/or sale of any of the IPO Securities, except such as have been or
may be obtained under the Act or may be required under state securities or
Blue Sky laws in connection with the Underwriters' purchase and distribution
of the Securities and the Representatives' purchase of the Representatives'
Warrants
-11-
<PAGE>
to be sold by the Company hereunder and thereunder.
(xiii) All executed agreements, contracts or other
documents or copies of executed agreements, contracts or other documents
filed as exhibits to the Registration Statement to which the Company and/or
its Subsidiary are a party or by which they may be bound or to which their
assets, properties or business may be subject have been duly and validly
authorized, executed and delivered by the Company and/or its Subsidiary and
constitute the legal, valid and binding agreements of the Company and its
Subsidiary, enforceable against the Company and its Subsidiary, in accordance
with their respective terms. The descriptions in the Registration Statement
of agreements, contracts and other documents and statutes and regulations are
accurate and fairly present the information required to be shown with respect
thereto by Form SB-1, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct
copies of the documents of which they purport to be copies.
(xiv) Subsequent to the respective dates as of
which information is set forth in the Registration Statement and Prospectus,
and except as may otherwise be indicated or contemplated herein or therein,
neither the Company nor its Subsidiary has (A) issued any securities or
incurred any liability or obligation, direct or contingent, for borrowed
money, (B) entered into any transaction other than in the ordinary course of
business, or (C) declared or paid any dividend or made any other distribution
on or in respect of its capital stock of any class, and there has not been
any change in the capital stock, or any change in the debt (long or short
term) or liabilities or
-12-
<PAGE>
material change in or affecting the business affairs or prospects,
management, stockholders' equity, properties, business, financial operations
or assets of the Company and its Subsidiary.
(xv) Except as described in the Prospectuses no
default exists in the due performance and observance of any term, covenant or
condition of any license, contract, indenture, mortgage, installment sale
agreement, lease, deed of trust, voting trust agreement, stockholders
agreement, partnership agreement, note, loan or credit agreement, purchase
order, or any other material agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which
the Company or its Subsidiary is a party or by which the Company or its
Subsidiary may be bound or to which the property or assets (tangible or
intangible) of the Company or its Subsidiary is subject or affected, which
default would have a material adverse effect on the condition, financial or
otherwise, earnings, business affairs, position, stockholder's equity, value,
operation, properties, business or results of operations of the Company and
the Subsidiary.
(xvi) Each of the Company and its Subsidiary has
generally enjoyed a satisfactory employer-employee relationship with its
employees and is in compliance in all material respects with all federal,
state, local, and foreign laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours.
There are no pending investigations involving the Company or the Subsidiary
by the U.S. Department of Labor, or any other governmental agency responsible
for the enforcement of such federal, state, local, or foreign laws and
regulations. There is no unfair labor practice charge or complaint against
the Company or the Subsidiary pending before the National Labor Relations
Board or any strike,
-13-
<PAGE>
picketing, boycott, dispute, slowdown or stoppage pending or threatened
against or involving the Company or the Subsidiary, or any predecessor
entity, and none has ever occurred. No representation question exists
respecting the employees of the Company or the Subsidiary and no collective
bargaining agreement or modification thereof is currently being negotiated by
the Company or its Subsidiary. No grievance or arbitration proceeding is
pending under any expired or existing collective bargaining agreements of the
Company or its Subsidiary. No labor dispute with the employees of the Company
or its Subsidiary exists, or, to the knowledge of the Company is imminent.
(xvii) Except as described in the Prospectus, each
of the Company and the Subsidiary does not maintain, sponsor or contribute to
any program or arrangement that is an "employee pension benefit plan," an
"employee welfare benefit plan," or a "multiemployer plan" as such terms are
defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans").
The Company and/or its Subsidiary does not maintain or contribute, now or at
any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or
Section 4975 of the Code, which could subject the Company or the Subsidiary
to any tax penalty on prohibited transactions and which has not adequately
been corrected. Each ERISA Plan is in compliance with all material reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply
with Code Section 401(a), stating that such ERISA Plan and the attendant
trust are qualified thereunder. Neither the Company or the Subsidiary
-14-
<PAGE>
has ever completely or partially withdrawn from a "multiemployer plan."
(xviii) The Company and the Subsidiary has not
taken, and will not take, directly or indirectly, and the Company and the
Subsidiary will use their best efforts to ensure that, any of their
employees, directors, nor any of its employees, directors, stockholders, or
affiliates (within the meaning of the Rules and Regulations) of any of the
foregoing has not taken or will not take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in, under the Exchange Act, or otherwise, stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the IPO Securities or otherwise.
(xix) None of the patents, patent applications,
trademarks, service marks, trade names and copyrights, and licenses and
rights to the foregoing presently owned or held by the Company or its
Subsidiary are in dispute or are in any conflict with the right of any other
person or entity. The Company and its Subsidiary (i) own or have the license
or other right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents, trademarks, service marks,
trade names and copyrights, technology and licenses and rights with respect
to the foregoing, used in the conduct of their business as now conducted or
proposed to be conducted without infringing upon or otherwise acting
adversely to the right or claimed right of any person, corporation or other
entity under or with respect to any of the foregoing, except as set forth in
the Prospectuses and (ii) except as set forth in the Prospectus, are not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant
to, any
-15-
<PAGE>
patent, trademark, service mark, tradename, copyright, know-how, technology
or other intangible asset, with respect to the use thereof or in connection
with the conduct of their business or otherwise.
(xx) Neither the Company or its Subsidiary have
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademark, service mark, trade name or copyright
or other intangible asset used or held for use by it in connection with the
conduct of its business which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, might have a material adverse
effect on the condition, financial or otherwise, or the business affairs,
position, properties, results of operations or net worth of the Company and
its Subsidiary.
(xxi) The Company and its Subsidiary have good and
marketable title to, or valid and enforceable leasehold estates in, all items
of real and personal property stated in the Prospectus, to be owned or leased
by them free and clear of all liens, charges, claims, encumbrances, pledges,
security interest, defects, or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and liens for
taxes not yet due and payable.
(xxii) The Company has caused to be duly executed
legally binding and enforceable agreements pursuant to which each of its
officers, directors or any person or entity deemed to be an affiliate of the
Company and any stockholders, noteholders and any other parties holding, or
in the future holding, securities, instruments or contract rights convertible
into common shares or preferred shares and/or any other securities of the
Company, including common shares issued pursuant to the Company's two Stock
Option Plans, has agreed or shall agree prior to issuance
-16-
<PAGE>
as the case may be, not to, directly or indirectly, offer to sell, grant any
option for the sale of, assign, transfer, pledge, hypothecate or otherwise
encumber or dispose of any securities issued by the Company including,
without limitation, common shares or preferred shares (either pursuant to
Rule 144 of the Rules and Regulations or otherwise), or dispose of any
beneficial interest therein for a period of not less than 24 months following
the effective date of the Registration Statement without the prior written
consent of the Representatives except only with respect to 3,495,000 shares
of common stock of the Company held by unaffiliated persons which constitute
the tradeable "public float" on the NASD Electronic Bulletin Board, and that
for a period of 2 years following the effective date of the Registration
Statement any such security which has been issued and is outstanding on the
effective date of the Registration Statement and is to be sold or otherwise
disposed of pursuant to such Rule 144 with the consent of the Representatives
shall only be sold or otherwise disposed of through the Representatives. The
Company will cause the Transfer Agent, as defined below, to mark an
appropriate legend on the face of stock certificates representing all of such
securities and to place "stop transfer" orders on the Company's stock
ledgers.
(xxiii) The Company has caused to be duly executed
binding and enforceable agreements with respect to all of the outstanding
loans made to the Company from time to time from affiliated persons wherein
the Company and each such lender has agreed that the Company will not make
payment of principal or accumulated interest thereon for an eighteen (18)
month period commencing from the effective date of the Registration Statement
except that $750,000 in presently outstanding loans to the Company including
interest thereon from affiliated persons and no more may be repaid at any
time and a Bridge Loan in the principal sum of $50,000 plus accumulated
interest thereon which is being repaid to a Bridge Lender out of the proceeds
of the Offering.
-17-
<PAGE>
(xxiv) There are no claims, payments, issuances,
arrangements or understandings, whether oral or written, for services in the
nature of a finder's or origination fee with respect to the sale of the IPO
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company, the Subsidiary or any of
its officers, directors, stockholders, partners, employees or affiliates that
may affect the Underwriters' compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD") except for the sum of
$25,000 previously paid by the Company to KMS and the Company is aware that
the Representatives and each of the Underwriters shall compensate any of
their respective personnel who may have acted in such capacities as they
shall determine in their sole discretion.
(xxv) The Preferred Stock has been approved for
quotation on the Nasdaq SmallCap Market.
(xxvi) Neither the Company, the Subsidiary nor any
of their respective officers, employees, agents or any other person acting on
behalf of the Company or the Subsidiary has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate
for office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company or the Subsidiary (or
assist the Company or the Subsidiary in connection with any actual or
proposed transaction) which (A) might subject the Company or the Subsidiary,
or any other such person to any damage or penalty in any civil, criminal
-18-
<PAGE>
or governmental litigation or proceeding (domestic or foreign), (B) if not
given in the past, might have had a materially adverse effect on the assets,
business or operations of the Company or the Subsidiary, or (C) if not
continued in the future, might adversely affect the assets, business,
operations or prospects of the Company or the Subsidiary. The Company's and
the Subsidiary's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(xxvii) Except as set forth in the Prospectus, no
officer, director, or stockholder of the Company or the Subsidiary, or any
"affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons
or entities has or has had, either directly or indirectly, (A) an interest in
any person or entity which (1) furnishes or sells services or products which
are furnished or sold or are proposed to be furnished or sold by the Company
or the Subsidiary, or (2) purchases from or sells or furnishes to the Company
or the Subsidiary any goods or services, or (B) a beneficiary interest in any
contract or agreement to which the Company or the Subsidiary is a party or by
which it may be bound or affected. Except as set forth in the Prospectus
under "Certain Transactions," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company or any
Subsidiary, and any officer, director, and 50% or more stockholders (as such
term is defined in the Prospectus) of the Company or any Subsidiary, or any
partner, affiliate or associate of any of the foregoing persons or entities.
(xxviii) Any certificate signed by any officer of
the Company and delivered to the Underwriters or to Underwriters' Counsel (as
defined herein) shall be deemed a
-19-
<PAGE>
representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
(xxix) The minute books of the Company and the
Subsidiary have been made available to the Underwriters and contains a
complete summary of all meetings and actions of the directors and
stockholders of the Company and the Subsidiary, since the time of its
incorporation, and reflects all transactions referred to in such minutes
accurately in all material respects.
(xxx) Except and to the extent described in the
Prospectus, no holders of any securities of the Company or the Subsidiary or
of any options, warrants or other convertible or exchangeable securities of
the Company have the right to include any securities issued by the Company or
the Subsidiary in the Registration Statement or any registration statement
under the Act and no person or entity holds any anti-dilution rights with
respect to any securities of the Company or the Subsidiary.
(xxxi) The Company has as of the effective date of
the Registration Statement (a) entered into employment agreements with its
President Mack H. Jennings and a consulting agreement with its Chairman,
Joseph E. Antonini, on terms and conditions satisfactory to the
Representatives, and (ii) purchased "Key-Man" insurance on the life of Mack
H. Jennings in the sum of $1,000,000 which names the Company as the sole
beneficiary on terms and conditions satisfactory to the Representatives.
(xxxii) The Company has entered into a
Representatives' Warrant Agreement with respect to the Representatives'
Warrants in the form filed as Exhibit "1." to the Registration
-20-
<PAGE>
Statement, with American Stock Transfer and Trust Company in form and
substance satisfactory to the Underwriters.
(xxxiii) Immediately prior to the effective date
of the Registration Statement there shall be no more than an aggregate of
7,973,635 shares of Common Stock and 500,000 shares of Preferred Stock issued
and outstanding including any and all (a) securities with equivalent rights
as the Common Stock or Preferred Stock, (b) Common Stock or Preferred Stock
or such equivalent securities, issuable upon the exercise of options,
warrants and other contract rights, and (c) securities convertible directly
or indirectly into Common Stock or Preferred Stock or such equivalent
securities, but excluding a maximum of 1,957,500 shares of Common Stock which
are issuable upon exercise of options which may be granted pursuant to the
Company's two Stock Option Plans.
(xxxiv) Except for fair market value the Company
shall not issue any shares, options, warrants or any other equity or debt
security within three (3) years following the Effective Date of the
Registration Statement without the express written consent of the
Representatives except for a maximum of 1,957,500 shares of common stock
which may be issued pursuant to the Company's stock option plans nor shall
the Company, during such three (3) year period, effect a reverse split or
reclassification of shares of its capital stock without the express written
consent of the Representatives. Notwithstanding the foregoing, the Company
shall not issue any shares of preferred stock or securities convertible into
preferred stock during such three (3) year period without the express written
consent of the Representatives.
-21-
<PAGE>
(xxxv) Services currently being provided to the
Company by affiliated companies, if any, shall continue to be provided to the
Company without charge except for reasonable disbursements incurred on behalf
of the Company.
2. Purchase, Sale and Delivery of the Securities. (a) On
the basis of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, and each Underwriter, severally
and not jointly, agrees to purchase from the Company at a price of $9.00 per
share of Preferred Stock that number of Firm Securities set forth in Schedule
A opposite the name of such Underwriter, subject to such adjustment as the
Underwriters in their sole discretion shall make to eliminate any sales or
purchases of fractional shares, plus any additional number of Firm Securities
which such Underwriters may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the
terms and conditions herein set forth, the Company hereby grants an option to
the Underwriters, severally and not jointly, to purchase all or any part of
an additional 90,000 shares of Preferred Stock at a price of $9.00 per share.
The option granted hereby will expire 45 days after (i) the date the
Registration Statement becomes effective, if the Company has elected not to
rely on Rule 430A under the Rules and Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the Rules
and Regulations, and may be exercised in whole or in part from time to time
only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Firm
-22-
<PAGE>
Securities upon notice by the Underwriters to the Company setting forth the
number of Option Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for any
such Option Securities. Any such time and date of delivery (an "Option
Closing Date") shall be determined by the Underwriters, but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Date (hereinafter defined), unless otherwise
agreed upon in writing by the Underwriters and the Company. Nothing herein
contained shall obligate the Underwriters to make any over-allotments. No
Option Securities shall be delivered unless the Firm Securities shall be
simultaneously delivered or shall theretofore have been delivered as herein
provided.
(c) Payment of the purchase price for, and delivery of
certificates evidencing the Firm Securities shall be made at the offices of
Klein Maus and Shire, Inc., at 110 Wall Street, New York, New York 10005, or
at such other place as shall be agreed upon in writing by the Underwriters
and the Company. Such delivery and payment shall be made at 10:00 a.m. (New
York City time) on ___________________, 1999 or at such other time and date
as shall be agreed upon by the Underwriters and the Company, but not less
than five (5) nor more than ten (10) full business days after the effective
date of the Registration Statement (such time and date of payment and
delivery being herein called the "Closing Date"). In addition, in the event
that any or all of the Option Securities are purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for, such
Option Securities shall be made at the above mentioned office of the
Underwriters or at such other place as shall be agreed upon by the
Underwriters and the Company on each Option Closing Date as specified in the
notice from the Representatives to the Company. Delivery of the certificates
for the Firm Securities and the Option Securities if any, shall be made
-23-
<PAGE>
to the Underwriters against payment by the Underwriters, severally and not
jointly, of the purchase price for the Firm Securities and the Option
Securities if any, to the order of the Company by New York Clearing House
Funds. In the event such option is exercised, each of the Underwriters,
acting severally and not jointly, shall purchase that proportion of the total
number of Option Securities then being purchased which the number of Firm
Securities set forth in Schedule A hereto opposite the name of such
Underwriter bears to the total number of Firm Securities, subject in each
case to such adjustments as the Underwriters in their discretion shall make
to eliminate any sales or purchases of fractional shares. Certificates for
the Firm Securities and the Option Securities if any, shall be in definitive,
fully registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two (2) business days prior to the Closing Date or the
relevant Option Closing Date, as the case may be. The certificates for the
Firm Securities and the Option Securities if any, shall be made available to
the Underwriters at such office or such other place as the Underwriters may
designate for inspection, checking and packaging no later than 9:30 a.m. on
the last business day prior to the Closing Date or the relevant Option
Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell
to the Representatives the Representatives' Warrants at a purchase price of
$.0001 per warrant, which warrants shall entitle the holders thereof to
purchase an aggregate of 60,000 shares of Preferred Stock (or 69,000 shares
if the over-allotment is exercised). The Representatives' Warrants shall be
exercisable for a period of four (4) years commencing one (1) year from the
Closing Date at a price equal to 165% of the initial public offering price of
one (1) share of the Preferred Stock. The Representatives' Warrant Agreement
and Warrant Certificate shall be substantially in the form filed as Exhibit
"1." to the
-24-
<PAGE>
Registration Statement. Payment for the Representatives' Warrants shall be
made on the Closing Date or the relevant Option Closing Date as the case may
be.
3. Public Offering of the Securities. As soon after the
Registration Statement becomes effective as the Underwriters deem advisable,
the Underwriters shall make a public offering of the Firm Securities and such
of the Option Securities as they may determine (other than to residents of or
in any jurisdiction in which qualification of the Securities is required and
has not become effective) at the price and upon the other terms set forth in
the Prospectus. The Underwriters may enter into one or more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or
more broker-dealers who shall act as dealers in connection with such public
offering.
4. Covenants and Agreements of the Company. The Company
covenants and agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable (such Registration Statement to be in form and
substance satisfactory to the Representatives and their counsel) and will not
at any time, whether before or after the effective date of the Registration
Statement, file any amendment to the Registration Statement or supplement to
the Prospectus or file any document under the Act or Exchange Act before
termination of the offering of the Securities by the Underwriters of which
the Representatives shall not previously have been advised and furnished with
a copy, or to which the Representatives shall have objected unless required
under the Act, the Exchange Act or the Rules
-25-
<PAGE>
and Regulations thereunder or which is not in compliance with the Act, the
Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representatives and confirm the notice
in writing, (i) when the Registration Statement, as amended, becomes
effective, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A and when any post-effective amendment to the Registration Statement
becomes effective, (ii) of the issuance by the Commission of any stop order
or of the initiation, or the threatening, of any proceeding, suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, or the institution of proceedings for that
purpose (iii) of the issuance by the Commission or by any state securities
commission of any proceedings for the suspension of the qualification of any
of the Securities for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose, (iv) of
the receipt of any comments from the Commission; and (v) of any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. If
the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Representatives and their counsel) or transmit
the Prospectus by a means reasonably calculated
-26-
<PAGE>
to result in filing with the Commission pursuant to Rule 424 (b) (or, if
applicable and if consented to by the Representatives, pursuant to Rule 424
(b)(47) not later than the Commission's close of business on the earlier of
(i) the second business day following the execution and delivery of this
Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Representatives notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to
the Prospectus (including any revised prospectus which the Company proposes
for use by the Underwriters in connection with the offering of the IPO
Securities which differs from the corresponding prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether
or not such revised prospectus is required to be filed pursuant to Rule
424(b) of the Rules and Regulations), and will furnish the Representatives
with copies of any such amendment or supplement a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file
any such prospectus to which the Representatives or Doros & Brescia, P.C.
("Underwriters' Counsel"), shall reasonably object unless required under the
Act or the Rules and Regulations thereunder.
(e) The Company shall take all action, in cooperation with
the Underwriters, at or prior to the time the Registration Statement becomes
effective, to qualify the IPO Securities for offering and sale under the
securities laws of such jurisdictions as the Underwriters may designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to
-27-
<PAGE>
qualify as a foreign corporation or file a general or limited consent to
service of process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Underwriters
agree that such action is not at the time necessary or advisable, use all
reasonable efforts to file and make such statements or reports at such times
as are or may reasonably be required by the laws of such jurisdiction to
continue such qualification. It is agreed that Underwriters' Counsel (or its
designees) shall perform all such required Blue Sky legal services.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to
comply with all requirements imposed upon it by the Act and the Exchange Act,
as now and hereafter amended and by the Rules and Regulations, as from time
to time in force, so far as necessary to permit the continuance of sales of
or dealings in the IPO Securities in accordance with the provisions hereof
and the Prospectus, or any amendments or supplements thereto. If at any time
when a prospectus relating to the IPO Securities is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
reasonable opinion of counsel for the Company or Underwriters' Counsel, the
Prospectus, as then amended or supplemented, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act and the
Rules and Regulations, the Company will notify the Representatives promptly
and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be reasonably satisfactory to Underwriters' Counsel, and the
Company will furnish to the Underwriters copies of such amendment or
supplement as soon as available and in such quantities as the
-28-
<PAGE>
Underwriters may reasonably request.
(g) During the time when a prospectus relating to the IPO
Securities is required to be delivered under the Act, the Company will use
its best efforts to comply with all requirements imposed upon it by the Act
and the Securities Exchange Act of 1934 (the "Exchange Act"), as now and
hereafter amended and by the Regulations, as from time to time in force, as
necessary to permit the continuance of sales of or dealings in the IPO
Securities in accordance with the provisions hereof and the Prospectus and
the Company shall use its best efforts to keep the Registration Statement
current and effective so long as a Prospectus is required to be delivered in
connection with the sale of the IPO Securities by the Underwriters or by
dealers effecting transactions therein in connection with the initial public
offering thereof. If at any time when a prospectus relating to the IPO
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the reasonable opinion of counsel for the
Company or counsel for the Underwriters, the Prospectus as then amended or
supplemented (or the prospectus contained in a new registration statement
filed by the Company pursuant to Paragraph 4(x), includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if, in the
reasonable opinion of either such counsel, it is necessary at any time to
amend the Prospectus (or the prospectus contained in such new registration
statement) to comply with the Act, the Company will notify the
Representatives promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the Act
and will furnish to the Representatives copies thereof.
-29-
<PAGE>
(h) The Company will reserve and keep available for
issuance that maximum number of its authorized but unissued shares of
Preferred Stock which are issuable upon exercise of the Representatives'
Warrants (including the underlying securities) outstanding from time to time.
(i) The Company will timely prepare and file at its sole
cost and expense one or more post-effective amendments to the Registration
Statement or a new registration statement as required by law as will permit
holders of the Representatives' Warrants to be furnished with a current
prospectus in the event and at such time as the Representatives' Warrants are
exercised, and the Company will use its best efforts and due diligence to
have the same be declared effective (with the intent that the same be
declared effective as soon as the Representatives' Warrants become
exercisable) and to keep the same effective so long as the Representatives'
Warrants are outstanding. The Company will deliver a draft of each such
post-effective amendment or new registration statement to the Representatives
at least ten days prior to the filing of such post-effective amendment or
registration statement.
(j) So long as any of the Representatives' Warrants remain
outstanding, the Company will timely deliver and supply to its Warrant Agent
sufficient copies of the Company's current Prospectus, as will enable such
Warrant Agent to deliver a copy of such Prospectus to any holder of the
Representatives' Warrants where such Prospectus delivery is by law required
to be made.
(k) So long as any of the Representatives' Warrants remain
outstanding, the Company shall continue to employ the services of a firm of
independent certified public accountants reasonably acceptable to the
Representatives in connection with the preparation of the financial
-30-
<PAGE>
statements to be included in any registration statement to be filed by the
Company hereunder, or any amendment or supplement thereto. During the same
period, the Company shall employ the services of a law firm(s) reasonably
acceptable to the Representatives in connection with all legal work of the
Company, including the preparation of a registration statement to be filed by
the Company hereunder, or any amendment or supplement thereto.
(l) So long as any of the Representatives' Warrants remain
outstanding, the Company shall continue to appoint a Warrant Agent for the
Representatives' Warrants, who shall be reasonably acceptable to the
Representatives.
(m) As soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of such
fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Underwriters, an
earnings statement which will be in the detail required by, and will
otherwise comply with, the provisions of Section 11(a) of the Act and Rule
158(a) of the Rules and Regulations, which statement need not be audited
unless required by the Act, covering a period of at least 12 consecutive
months after the effective date of the Registration Statement.
(n) During a period of seven years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings, and will deliver to
the
-31-
<PAGE>
Underwriters:
(i) concurrently with furnishing such quarterly
reports to its stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders and certified by
the Company's principal financial or accounting officer;
(ii) concurrently with furnishing such annual
reports to its stockholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate thereon of independent certified
public accountants;
(iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission,
the NASD or any securities exchange;
(v) every press release and every material news
item or article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by or on behalf of the
Company; and
(vi) any additional information of a public nature
concerning the Company (and any future Subsidiary) or its businesses which
the Underwriters may reasonably request.
-32-
<PAGE>
During such seven-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(o) The Company will maintain a Transfer Agent, designated
American Stock Transfer and Trust Company, counsel, accounting firm,
financial printer and, if necessary under the jurisdiction of incorporation
of the Company, a Registrar (which shall be the same entity as the Transfer
Agent) for its Common Stock and Preferred Stock all of whom shall be
reasonably acceptable to the Underwriters. Such Transfer Agent shall, for a
period of two years following the Closing Date, deliver to the Underwriters
the daily securities position of the Company's stockholders of record and for
a period of three (3) years thereafter the monthly securities position.
(p) The Company will furnish to the Representatives or on
the Representatives' order, without charge, at such place as the
Representatives may designate, copies of each Preliminary Prospectus, the
Registration Statement, any pre-effective or post-effective amendments
thereto (two of which copies will be signed and will include all financial
statements and exhibits), the Prospectus, and all amendments and supplements
thereto, including any Prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such
quantities as the Representatives may reasonably request.
(q) On or before the effective date of the Registration
Statement, the Company shall provide the Representatives with true copies of
duly executed, legally binding and enforceable
-33-
<PAGE>
agreements pursuant to which for a period of not less than 24 months after
the effective date of the Registration Statement (except only with respect to
3,495,000 shares of common stock held by unaffiliated persons which
constitute the tradeable "public float" on the NASD Electronic Bulletin
Board), each holder of securities issued by the Company and outstanding at
the effective date of the Registration Statement (including, without
limitation, after the effective date of the Registration Statement securities
issued under the Company's stock option plans, Common Stock, Preferred Stock
and securities convertible into Common Stock or Preferred Stock of the
Company) agrees that it or he or she will not, directly or indirectly, issue,
offer to sell, sell, grant an option for the sale of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any of such
securities (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) or dispose of any beneficial interest therein without the prior
written consent of the Representatives (collectively, the "Lock-up
Agreements"). During the two (2) year period commencing with the effective
date of the Registration Statement, the Company shall not issue any
securities under Regulation S and will not, without the prior written consent
of the Representatives, sell, contract or offer to sell, issue, transfer,
assign, pledge, distribute, or otherwise dispose of, directly or indirectly,
any debt security of the Company or any shares of Common Stock or Preferred
Stock or any options, rights or warrants with respect to any shares of Common
Stock of Preferred Stock (other than upon exercise of options or warrants
referred to in the Registration Statement, or with respect to transactions
between the Company and its lenders and purchasers of mortgage backed
securities). On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate
legends on the certificates representing the securities subject to the
Lock-up Agreements and to place appropriate stop transfer orders on the
Company's ledgers.
-34-
<PAGE>
(r) The Company and the Subsidiary have not taken and will
not take, directly or indirectly, and the Company and the Subsidiary will use
their best efforts to ensure that any of their employees, officers,
directors, stockholders or affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or
which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company
or the Subsidiary.
(s) The Company shall apply the net proceeds from the sale
of the IPO Securities in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus. No portion of the net proceeds
will be used, directly or indirectly, to acquire any securities issued by the
Company or the Subsidiary except as described in the Prospectuses.
(t) The Company shall timely file all such reports, forms
or other documents as may be required (including, but not limited to, a Form
SR as may be required pursuant to Rule 463 under the Act) from time to time,
under the Act, the Exchange Act and the Rules and Regulations, and all such
reports, forms and documents filed will comply as to form and substance with
the applicable requirements under the Act, the Exchange Act and the Rules and
Regulations.
(u) The Company shall furnish to the Underwriters as early
as practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two (2) full business days
prior thereto, a copy of the latest available unaudited interim financial
statements of the Company (which in no event shall be as of a date more than
thirty (30) days prior to the date of the Registration Statement) which have
been read by the Company's independent
-35-
<PAGE>
public accountants, as stated in their letters to be furnished pursuant to
Section 6(j) hereof.
(v) The Company shall cause the Preferred Stock to be
listed on the Nasdaq SmallCap Market, and for a period of seven (7) years
from the date hereof, use its best efforts to maintain such listing of the
Preferred Stock to the extent outstanding.
(w) For a period of five (5) years from the Closing Date,
the Company shall furnish to the Underwriters at the Underwriters' request
and at the Company's sole expense, (i) the list of holders of all of the
Company's securities, (ii) a Blue Sky "Trading Survey" for secondary sales of
the Company's securities prepared by counsel to the Company, and (iii) daily
consolidated transfer sheets relating to the Preferred Stock but not more
than six (6) times per year.
(x) As soon as practicable, (i) but in no event more than
five business days before the effective date of the Registration Statement,
file a Form 8-A with the Commission providing for the registration under the
Exchange Act of the Securities and (ii) but in no event more than 30 days
from the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation Records
Service in order to satisfy the requirements for "manual exemption" in those
states where available and to maintain such inclusion for as long as the IPO
Securities are outstanding.
(y) Until the completion of the distribution of the IPO
Securities, the Company shall not without the prior written consent of the
Underwriters and Underwriters' Counsel, issue, directly or indirectly any
press release or other communication or hold any press conference with
-36-
<PAGE>
respect to the Company or its activities or the offering contemplated hereby,
other than trade releases issued in the ordinary course of the Company's
business consistent with past practices with respect to the Company's
operations.
(z) For a period of three (3) years after the effective
date of the Registration Statement, the Representatives, jointly, shall have
the right to designate, one (1) individual for election to the Company's
Board of Directors ("Board") and the Company shall cause such individual to
be elected to the Board. In the event the Representatives shall not have
designated such individual at the time of any meeting of the Board or such
person is unavailable to serve, the Company shall notify the Representatives
of each meeting of the Board and an individual designated by the
Representatives shall be permitted to attend all meetings of the Board and to
receive all notices and other correspondence and communications sent by the
Company to members of the Board. Such individual shall be reimbursed for all
out-of-pocket expenses incurred in connection with his or her service on, or
attendance at meetings of, the Board. The Company shall provide its outside
directors with compensation in the form of cash and/or options on its Common
Stock and/or Preferred Stock as deemed appropriate and similar for similar
companies.
(aa) The Company and the Subsidiary hereby grant to the
Representatives a right of first refusal on the terms and subject to the
conditions set forth in this paragraph, for a period of five years from the
effective date of the Registration Statement, to purchase for its account or
to sell for the account of the Company or its present or future Subsidiary,
any securities of the company or any of its present or future Subsidiary,
with respect to which the Company or any of its present or future Subsidiary
may seek a public or private sale. The Company, for a period of five years
from
-37-
<PAGE>
the effective date of the Registration Statement, will consult, and will
cause such present or future Subsidiary to consult with the Representatives
with regard to any such offering or placement and will offer, or cause any of
its present or future Subsidiary to offer, to the Representatives the
opportunity, on terms not more favorable to the Company or such present or
future subsidiary than they can secure elsewhere, to purchase or sell any
such securities. If the Representatives fail to accept in writing such
proposal made by the Company or any of its present or future Subsidiary
within fifteen business days after receipt of a notice containing such
proposal, then the Representatives shall have no further claim or right with
respect to the proposal contained in such notice. If, thereafter, such
proposal is materially modified, the Company shall again consult, and cause
each present or future subsidiary to consult, with the Representatives in
connection with such modification and shall in all respects have the same
obligations and adopt the same procedures with respect to such proposal as
are provided hereinabove with respect to the original proposal.
(bb) For a period equal to the lesser of (i) seven (7)
years from the date hereof, and (ii) the date of the sale to the public of
the securities issuable upon exercise of the Representatives' Warrants and
the Representatives' Securities, the Company will not take any action or
actions which may prevent or disqualify the Company's use of Form SB-1 for
the registration under the Act of the securities issuable upon exercise of
the Representatives' Warrants and the Representatives' Securities.
(cc) On or before the effective date of the Registration
Statement, the Company shall have retained a financial public relations firm
reasonably satisfactory to the Underwriters, which shall be continuously
engaged from such engagement date to a date twelve (12) months from
-38-
<PAGE>
the Closing Date.
5. Payment of Expenses. (a) The Company hereby agrees to
pay on each of the Closing Date and the Option Closing Date (to the extent
not paid at the Closing Date) all expenses and fees (other than fees of
Underwriters' Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the Company under this Agreement and the
Representatives' Warrant Agreement including, without limitation, (i) the
fees and expenses of accountants and counsel for the Company, (ii) all costs
and expenses incurred in connection with the preparation, duplication,
printing, (including mailing and handling charges) filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the printing, mailing (including the payment of postage with
respect thereto) and delivery of this Agreement, the Representatives' Warrant
Agreement, and related documents, including the cost of all copies thereof
and of the Preliminary Prospectuses and of the Prospectus and any amendments
thereof or supplements thereto supplied to the Underwriters and such dealers
as the Underwriters may reasonably request, in quantities as hereinabove
stated, (iii) the printing, engraving, issuance and delivery of the IPO
Securities, including, but not limited to, (x) the purchase by the
Underwriters of the IPO Securities and the purchase by the Representatives of
the Representatives' Warrants from the Company, (y) the consummation by the
Company of any of its obligations under this Agreement, and the
Representatives' Warrant Agreement and (z) resale of the IPO Securities by
the Underwriters in connection with the distribution contemplated hereby to
the extent that expenses relate to the printing, engraving, issuance and
delivery of the IPO Securities, (iv) the qualification of the IPO Securities
under state or foreign securities or "Blue Sky" laws and determination of the
status of such
-39-
<PAGE>
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and legal fees of counsel
Doros & Brescia, P.C., of $75,000 less $20,000 heretofore paid plus
disbursements incurred by them in connection therewith, (v) advertising costs
and expenses, (not to exceed $5,000) including but not limited to costs and
expenses in connection with the "road show", information meetings and
presentations, bound volumes and prospectus memorabilia and "tomb-stone"
advertisement expenses, (vi) costs, fees and expenses in connection with due
diligence investigations, including but not limited to the costs of
background checks on key management and/or personnel of the Company, (vii)
fees and expenses of the transfer agent, warrant agent and registrar, (viii)
applications for assignments of a rating of the IPO Securities by qualified
rating agencies, (ix) the fees payable to the Commission, Nasdaq and the
NASD, and (x) the fees and expenses incurred in connection with the listing
of the IPO Securities on the Nasdaq SmallCap Market and any exchange.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Underwriters for all of their
actual out-of-pocket expenses, including the fees and disbursements of
Underwriters' Counsel (and in addition to fees and expenses of Underwriters'
Counsel incurred pursuant to Section 5(a)(iv) above for which the Company
shall remain liable), provided, however, that in the event of a termination
pursuant to Section 10(a) hereof such obligation of the Company shall not
exceed $50,000.
(c) The Company further agrees that, in addition to the
expenses payable pursuant
-40-
<PAGE>
to subsection (a) of this Section 5, it will pay to the Underwriters on the
Closing Date by certified or bank cashier's check or, at the election of the
Underwriters, by deduction from the proceeds of the Offering a
non-accountable expense allowance equal to two percent (2%) of the gross
proceeds of the Offering less the amount of $25,000 previously paid by the
Company to KMS. In the event the Underwriters elect to exercise the
over-allotment option described in Section 2(b) hereof, the Company further
agrees to pay to the Underwriters on the Option Closing Date (by certified or
bank cashier's check or, at the Underwriters' election, by deduction from the
proceeds of the Offering) a non-accountable expense allowance equal to two
percent (2%) of the gross proceeds of this Offering in connection with the
sale of the Option Securities.
(d) The Underwriters shall not be responsible for any
expense of the Company or others or for any charge or claim related to the
Offering in the event that the sale of the IPO Securities as contemplated
hereunder is not consummated.
6. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company and its
Subsidiary herein as of the date hereof and as of the Closing Date and each
Option Closing Date, if any, as if they had been made on and as of the
Closing Date or each Option Closing Date, as the case may be; the accuracy on
and as of the Closing Date or Option Closing Date, if any, of the statements
of the officers of the Company made pursuant to the provisions hereof; and
the performance by the Company on and as of the Closing Date and each Option
Closing Date, if any, of its covenants and obligations hereunder and to the
following further conditions:
-41-
<PAGE>
(a) The Registration Statement, which shall be in form and
substance satisfactory to the Representatives and Underwriters' Counsel,
shall have become effective no later than 12:00 p.m., New York time, on the
date of this Agreement or such later date and time as shall be consented to
in writing by the Representatives, and, at the Closing Date and each Option
Closing Date, if any, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of
the Rules and Regulations, the price of the IPO Securities and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Underwriters of such timely
filing, or a post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Rules and Regulations.
(b) The Representatives shall not have advised the Company
that the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representatives' opinion, is material, or
omits to state a fact which, in the Underwriters' opinion, is material and is
required to be stated therein or is necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement
of fact which, in the Representatives' opinion, is material and is required
to be stated therein or is necessary to make the statements therein, in light
-42-
<PAGE>
of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representatives
shall have received from Underwriters' Counsel, such opinion or opinions with
respect to the organization of the Company and its Subsidiary, the validity
of the IPO Securities, the Representatives' Warrants, the Registration
Statement, the Prospectus and other related matters as the Representatives
may request and Underwriters' Counsel shall have received such papers and
information as they request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have
received the favorable opinion of Jackier, Gould, Bean, Upfal & Eiselman,
counsel to the Company, dated as of the Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel,
to the effect that:
(i) each of the Company and the Subsidiary (A) has
been duly organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction; (B) to such counsel's knowledge has all
requisite corporate power and authority, and has obtained any and all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental
or similar matters), to own or lease its properties and conduct its business
as described in the Prospectus; (C) to such counsel's knowledge is duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing;
-43-
<PAGE>
and (D) to such counsel's knowledge, has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the business,
operations, condition, financial or otherwise, or the earnings, business
affairs or prospects, properties, business, assets or results of operations
of the Company and the Subsidiary taken as a whole. The disclosures in the
Registration Statement concerning the effects of federal, state and local
laws, rules and regulations on the Company's or the Subsidiary's business as
currently conducted and as contemplated are correct in all material respects
and do not omit to state a fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they were made:
(ii) to such counsel's knowledge, except as set
forth in the Prospectus neither the Company nor the Subsidiary owns an equity
interest in any other corporation, partnership, joint venture, trust or other
business entity except with respect to the Company the Subsidiary;
(iii) to such counsel's knowledge the Company has
a duly authorized, issued and outstanding capitalization as set forth in the
Prospectus, and any amendment or supplement thereto, under "Capitalization",
and, to such counsel's knowledge, neither the Company nor the Subsidiary is a
party to or bound by any instrument, agreement or other arrangement providing
for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Representatives' Warrant Agreement
and as described in the Prospectus. The IPO Securities, and all other
securities issued or issuable by the Company, conform in all material
-44-
<PAGE>
respects to all statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding securities of the
Company and the Subsidiary have been duly authorized and validly issued and
are fully paid and non-assessable; the holders thereof have no rights of
rescission with respect thereto, and are not subject to personal liability
under the laws of the State of Nevada as currently in effect by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company. The IPO
Securities to be sold by the Company hereunder and under the Representatives'
Warrant Agreement are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; the holders thereof will not be subject
to any liability solely as such holders; all corporate action required to be
taken for the authorization, issue and sale of the IPO Securities has been
duly and validly taken; and the certificates representing the IPO Securities
are in due and proper form. The Representatives' Warrants constitute valid
and binding obligations of the Company to issue and sell, upon exercise
thereof and payment therefore the number and type of securities of the
Company called for thereby. Upon the issuance and delivery pursuant to this
Agreement of the IPO Securities to be sold by the Company, the Underwriters
will acquire good and marketable title to the IPO Securities free and clear
of any pledge, lien, charge, claim, encumbrance, pledge, security interest,
or other restriction or equity of any kind whatsoever. No transfer tax is
payable by or on behalf of the Underwriters in connection with (A) the
issuance by the Company of the IPO Securities, (B) the purchase by the
Underwriters of the IPO Securities from the Company, (C) consummation by the
Company of any of its obligations under this Agreement, or (D) resales of the
Securities in connection with the distribution contemplated hereby;
-45-
<PAGE>
(iv) the Registration Statement is effective under
the Act, and, if applicable, filing of all pricing information has been
timely made in the appropriate form under Rule 430A, and, to such counsel's
knowledge, no stop order suspending the use of the Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending,
threatened or contemplated under the Act;
(v) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments or supplement
thereto (other than the financial statements and other financial and
statistical data included therein, as to which no opinion need be rendered)
comply as to form in all material respects with the requirements of the Act
and the Rules and Regulations.
(vi) to the best of such counsel's knowledge, (A)
there are no agreements, contracts or other documents required by the Act to
be described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed under the Exchange Act if
upon such filing they would be incorporated, in whole or in part, by
reference therein) and the Prospectus and filed as exhibits thereto, and the
exhibits which have been filed are correct copies of the documents of which
they purport to be copies; (B) the descriptions in the Registration Statement
and the Prospectus and any supplement or amendment thereto of contracts and
other documents to which the Company or the Subsidiary is a party or by which
it is bound, including any document to which the Company or the Subsidiary is
a party or by which it is bound, incorporated by reference into the
Prospectus and any supplement or amendment thereto, are accurate in all
material respects and fairly represent the
-46-
<PAGE>
information required to be shown by Form SB-1; (C) there is not pending or
threatened against the Company or the Subsidiary any action, arbitration,
suit, proceeding, inquiry, investigation, litigation, governmental or other
proceeding (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or threatened
against (or circumstances that may give rise to the same), or involving the
properties or business of the Company or the Subsidiary which (1) is required
to be disclosed in the Registration Statement which is not so disclosed (and
such proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), (2) questions the validity of the
capital stock of the Company or the Subsidiary or this Agreement or the
Representatives' Warrant Agreement or of any action taken or to be taken by
the Company pursuant to or in connection with any of the foregoing; (D) no
statute or regulation or legal or governmental proceeding required to be
described in the Prospectus is not described as required; and (E) except as
disclosed in the Prospectus, there is no action, suit or proceeding pending,
or threatened, against or affecting the Company or the Subsidiary before any
court or arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which an adverse decision which may result
in a material adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company and the
Subsidiary taken as a whole, which could adversely affect the present or
prospective ability of the Company to perform its obligations under this
Agreement, or the Representatives' Warrant Agreement or which in any manner
draws into question the validity or enforceability of this Agreement or the
Representatives' Warrant Agreement;
(vii) the Company has full legal right, power and
authority to enter into this
-47-
<PAGE>
Agreement and the Representatives' Warrant Agreement and to consummate the
transactions provided for herein and therein; and this Agreement and the
Representatives' Warrant Agreement have been duly authorized, executed and
delivered by the Company. Each of this Agreement, the Representatives'
Warrant Agreement assuming due authorization, execution and delivery by each
other party hereto constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms (except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights
to indemnity or contribution may be limited by applicable law), and neither
the Company's execution or delivery of this Agreement and the
Representatives' Warrant Agreement, its performance hereunder or thereunder,
its consummation of the transactions contemplated herein or therein, or the
conduct of their business as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of any of
the terms or provisions of, or constitutes or will constitute a default
under, or result in the creation or imposition of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity
of any kind whatsoever upon, any property or assets (tangible or intangible)
of the Company or the Subsidiary pursuant to the terms of, (A) the
certificate of incorporation or by-laws of the Company or the Subsidiary, (B)
any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any
other agreement or instrument to which the Company or the Subsidiary is a
party or by which it is or may be bound or to which any of its properties or
assets (tangible or intangible) is or may be subject, or any indebtedness, or
(C) any statute, judgment, decree, order, rule or regulation applicable to
the
-48-
<PAGE>
Company or the Subsidiary of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or the
Subsidiary or any of its activities or properties, except for conflicts,
breaches, violations, defaults, creations or impositions which do not and
would not have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs, position, shareholder's equity,
value, operations, properties, business or results of operations of the
Company and the Subsidiary taken as a whole;
(viii) except as described in the Prospectus, no
consent, approval, authorization or order, and no filing with, any court,
regulatory body, government agency or other body (other than such as may be
required under Blue Sky laws, as to which no opinion need be rendered) is
required in connection with the issuance of the IPO Securities pursuant to
the Prospectus and the Registration Statement, the issuance of the
Representatives' Warrants, the performance of this Agreement and the
Representatives' Warrant Agreement and the transactions contemplated hereby
and thereby;
(ix) the properties and business of the Company
and the Subsidiary conform to the description thereof contained in the
Registration Statement and the Prospectus;
(x) to such counsel's knowledge and except as
described in the Prospectus neither the Company nor the Subsidiary is in
breach of, or in default under, any term or provision of any license,
contract, indenture, mortgage, installment sale agreement, deed of trust,
lease, voting
-49-
<PAGE>
trust agreement, stockholders' agreement, partnership agreement, note, loan
or credit agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which
the Company or the Subsidiary is a party or by which the Company or the
Subsidiary may be bound or to which the property or assets (tangible or
intangible) of the Company or the Subsidiary is subject or affected, which
could materially adversely affect the Company or the Subsidiary; and neither
the Company nor the Subsidiary is in violation of any term or provision of
its Certificate of Incorporation or By-Laws, or in violation of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation the result of which would materially and adversely affect the
condition, financial or otherwise, or the earnings, business affairs,
position, shareholders' equity, value, operation, properties, business or
results of operations of the Company and the Subsidiary taken as a whole;
(xi) to the knowledge of such counsel except as
described in the Prospectus each of the Company and the Subsidiary owns or
possesses, free and clear of all liens or encumbrances and rights thereto or
therein by third parties, the requisite licenses or other rights to use all
trademarks, service marks, copyrights, service names, trade names, patents,
patent applications and licenses necessary to conduct its business
(including, without limitation any such licenses or rights described in the
Prospectus as being owned or possessed by the Company or the Subsidiary), and
to the best of such counsel's knowledge after reasonable investigation, there
is no claim or action by any person pertaining to, or proceeding, pending, or
threatened, which challenges the exclusive rights of the Company or the
Subsidiary with respect to any trademarks, service marks, copyrights, service
names, trade names, patents, patent applications and licenses used in the
conduct of the Company's or the Subsidiary's business (including, without
limitations, any such licenses or
-50-
<PAGE>
rights described in the Prospectus as being owned or possessed by the Company
or the Subsidiary);
(xii) except as described in the Prospectus,
neither the Company nor the Subsidiary (A) maintains, sponsors, or
contributes to any ERISA Plans, (B) maintains or contributes now or at any
time previously, to a defined benefit plan, as defined in Section 3(35) of
ERISA, and (C) has ever completely or partially withdrawn from a
"multiemployer plan";
(xiii) the IPO Securities have been approved for
listing on the Nasdaq SmallCap Market, and the Company's Registration
Statement on Form 8-A under the Exchange Act has become effective;
(xiv) to such counsel's knowledge, the persons
listed under the caption "PRINCIPAL SHAREHOLDERS" in the Prospectus are the
respective "beneficial owners" (as such phrase is defined in regulation 13d-3
under the Exchange Act) of the securities set forth opposite their respective
names thereunder as and to the extent set forth therein;
(xv) to such counsel's knowledge, except as
described in the Prospectus, no person, corporation, trust, partnership,
association or other entity has the right to include and/or register any
securities of the Company or the Subsidiary in the Registration Statement,
require the Company or the Subsidiary to file any registration statement or,
if filed, to include any security in such registration statement;
(xvi) to such counsel's knowledge, except as
described in the Prospectus,
-51-
<PAGE>
there are no claims, payments, issuances, arrangements or understandings for
services in the nature of a finder's or origination fee with respect to the
sale of the IPO Securities hereunder or the financial consulting arrangement
or any other arrangements, agreements, understandings, payments or issuances
that may affect the Underwriters' compensation, as determined by the NASD;
(xvii) the Lock-up Agreements are legal, valid and
binding obligations of the parties thereto, enforceable against each such
party and any subsequent holder of the securities subject thereto in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action, legal or
equitable); and
Such counsel shall state that such counsel has participated
in conferences including telephone conferences with officers and other
representatives of the Company, the Subsidiary and representatives of the
independent public accountants for the Company and the Subsidiary, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters were discussed
and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Preliminary Prospectus, the Registration Statement and
Prospectus, on the basis of the foregoing, no facts have come to the
attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such
Registration Statement or amendment became effective or the Preliminary
Prospectus or Prospectus or amendment or
-52-
<PAGE>
supplement thereto as of the date of such opinion contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein not misleading
(it being understood that such counsel need express no opinion with respect
to the financial statements and schedules and other financial and statistical
data included in the Preliminary Prospectus, the Registration Statement or
Prospectus).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and substance satisfactory to
Underwriters' Counsel) of other counsel acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent
they deem proper, on certificates and written statements of responsible
officers of the Company or the Subsidiary and certificates or other written
statements of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the
Company or the Subsidiary, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel if requested. The
opinion of such counsel for the Company shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and that the
Representatives and the Underwriters are justified in relying thereon.
At each Option Closing Date, if any, the Underwriters shall
have received the favorable opinion of Jackier, Gould, Bean, Upfal &
Eiselman, counsel to the Company, dated the Option Closing Date, addressed to
the Underwriters and in form and substance satisfactory to Underwriters'
Counsel confirming as of such Option Closing Date the statements made in its
opinion
-53-
<PAGE>
delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriters' Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company, or herein contained.
(f) Prior to each Closing Date and each Option Closing
Date, if any, (i) there shall have been no adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company and
the Subsidiary taken as a whole, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in
the Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company or the Subsidiary, (iii) neither the Company nor the Subsidiary shall
be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) neither the Company nor the Subsidiary shall
have issued any securities (other than the IPO Securities and the
Representatives' Warrants) or declared or paid any dividend or made any
distribution in respect of its capital stock of any class and there has not
been any change in the capital or any change in the debt (long or short term)
or liabilities or obligations of the Company or the Subsidiary (contingent or
otherwise); (v) no material amount of the assets of the Company or the
Subsidiary shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no
-54-
<PAGE>
action, suit or proceeding, at law or in equity, shall have been pending or
threatened (or circumstances giving rise to same) against the Company or the
Subsidiary, or affecting any of its properties or business before or by any
court or federal, state or foreign commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding may adversely
affect the business, operations, management prospects or financial condition
or assets of the Company or the Subsidiary taken as a whole, except as set
forth in the Registration Statement and Prospectus: and (vii) no stop order
shall have been issued under the Act and no proceedings therefor shall have
been initiated, threatened or contemplated by the Commission.
(g) At each Closing Date and each Option Closing Date, if
any, the Underwriters shall have received a certificate of the principal
executive officer and the chief financial or chief accounting officer of the
Company, dated the Closing Date or Option Closing Date, as the case may be,
to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties in this
Agreement of the Company are true and correct, as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and the Company
has complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or satisfied at or
prior to such Closing Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been
-55-
<PAGE>
instituted or are pending or, are contemplated or threatened under the Act;
(iii) The Registration Statement and the
Prospectus and, if any, each amendment and each supplement thereto, contain
all statements and information required to be included therein, and none of
the Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and neither the Preliminary Prospectus or
any supplement thereto included any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading; and
(iv) Since the dates as of which information is
given in the Registration Statement and the Prospectus, (A) there must not
have been any material change in the shares of Common Stock, Preferred Stock
or liabilities of the Company or the Subsidiary except as set forth in or
contemplated by the Prospectus; (B) there must not have been any material
adverse change in the general affairs, management, business, financial
condition or results of operations of the Company or the Subsidiary, whether
or not arising from transactions in the ordinary course of business, as set
forth in or contemplated by the Prospectus; (C) the Company and the
Subsidiary must not have sustained any material loss or interference with its
business from any court or from legislative or other governmental action,
order or decree, whether foreign or domestic, or from any other occurrence,
not described in the Registration Statement and Prospectus; (D) there must
not have occurred any event that makes untrue or incorrect in any material
respect any statement or information contained in the Registration Statement
or Prospectus or that is not reflected in the
-56-
<PAGE>
Registration Statement or Prospectus but should be reflected therein in order
to make the statements or information therein, in light of the circumstances
in which they were made, not misleading in any material respect; (E) the
Company and the Subsidiary must not have incurred up to and including the
Closing Date or the Option Closing Date, as the case may be, other than in
the ordinary course of its business, any material liabilities or obligations,
direct or contingent; (F) the Company and the Subsidiary must not have paid
or declared any dividends or other distributions on its capital stock; (G)
the Company and the Subsidiary must not have entered into any transactions
not in the ordinary course of business; (H) there has not been any change in
the capital stock or long-term debt or any increase in the short-term
borrowings (other than any increase in the short-terms borrowings in the
ordinary course of business) of the Company or the Subsidiary; (i) the
Company and the Subsidiary must not have sustained any material loss or
damage to its property or assets, whether or not insured; and (J) there has
occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus
in this subsection (g) are to such documents as amended and supplemented at
the date of such certificate.
(h) By the Closing Date, the Underwriters will have
received clearance from the NASD as to the amount of compensation allowable
or payable to the Underwriters, as described in the Registration Statement.
(i) At the time this Agreement is executed, the
Underwriters shall have received a letter, dated such date, addressed to the
Underwriters in form and substance satisfactory (including
-57-
<PAGE>
the non-material nature of the changes or decreases, if any, referred to in
clause (iii) below) in all respects to the Underwriters and Underwriters'
Counsel, from Deloitte & Touche:
(i) confirming that they are independent
accountants with respect to the Company and the Subsidiary within the meaning
of the Act and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the
financial statements of the Company and the Subsidiary included in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations
thereunder and that the Representatives may rely upon the opinion of Deloitte
& Touche with respect to the financial statements and supporting schedules
included in the Registration Statement;
(iii) stating that, on the basis of a limited
review which included a reading of the latest available unaudited interim
financial statements of the Company and the Subsidiary (with an indication of
the date of the latest available unaudited interim financial statements), a
reading of the latest available minutes of the stockholders and board of
directors and the various committees of the boards of directors of the
Company and the Subsidiary, consultations with officers and other employees
of the Company and the Subsidiary responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come to
their attention which would lead them to believe that (A) the unaudited
financial statements, if any, of the Company and the Subsidiary included in
the Registration Statement do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the Rules and
Regulations or
-58-
<PAGE>
are not fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements of the Company and the Subsidiary included in
the Registration Statement, or (B) at a specified date not more than five (5)
days prior to the effective date of the Registration Statement, there has
been any change in the capital stock or long-term debt of the Company and the
Subsidiary, or any decrease in the stockholders' equity or net current assets
or net assets of the Company and the Subsidiary as compared with amounts
shown in the __________________ balance sheet included in the Registration
Statement, other than as set forth in or contemplated by the Registration
Statement, or, if there was any change or decrease, setting forth the amount
of such change or decrease;
(iv) setting forth, at a date not later than five
(5) days prior to the date of the Registration Statement, the amount of
liabilities of the Company and the Subsidiary (including a breakdown of
commercial paper and notes payable to banks);
(v) stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company and the
Subsidiary set forth in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may be derived from
the general accounting records, including work sheets, of the Company and the
Subsidiary and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
-59-
<PAGE>
(vi) stating that they have in addition carried
out certain specified procedures, not constituting an audit, with respect to
certain pro forma financial information which is included in the Registration
Statement and the Prospectus and that nothing has come to their attention as
a result of such procedures that caused them to believe such unaudited pro
forma financial information does not comply in form in all respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of that information;
(vii) stating that they have not during the
immediately preceding five (5) year period brought to the attention of any of
the Company's or the Subsidiary's management any "weakness," as defined in
Statement of Auditing Standard No. 60 "Communication of Internal Control
Structure Related Matters Noted in an Audit," in any of the Company's
internal controls; and
(viii) statements as to such other matters
incident to the transaction contemplated hereby as the Representatives may
reasonably request.
(j) At the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received from Deloitte & Touche, a letter,
dated as of the Closing Date or the Option Closing Date, as the case may be,
to the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (i) of this Section, except that the specified date in
the letter referred to shall be a date not more than five days prior to the
Closing Date or the Option Closing Date, as the case may be, and, if the
Company has elected to rely on Rule 430A of the Rules and Regulations,
-60-
<PAGE>
to the further effect that they have carried out procedures as specified in
clause (v) of subsection (i) of this Section with respect to certain amounts,
percentages and financial information as specified by the Representatives and
deemed to be a part of the Registration Statement pursuant to Rule 430A(b)
and have found such amounts, percentages and financial information to be in
agreement with the records specified in such clause (v).
(k) On each of the Closing Date and the Option Closing
Date, if any, there shall have been duly tendered to the several
Underwriters' accounts the appropriate number of IPO Securities.
(l) No order suspending the sale of the IPO Securities in
any jurisdiction designated by the Underwriters pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the
Option Closing Date, if any, and no proceedings for that purpose shall have
been instituted or shall be contemplated.
(m) On or before Closing Date, the Preferred Stock shall
have been approved for quotation on the Nasdaq SmallCap Market.
(n) On or before the Closing Date, three shall have been
delivered to the Underwriters the Lock-up Agreements in form and substance
satisfactory to Underwriters' Counsel.
(o) On or before the Closing Date, the Company shall have
executed and delivered to the Underwriters, (i) the Representatives' Warrant
Agreement substantially in the form
-61-
<PAGE>
filed as Exhibit "1." to the Registration Statement in final form and
substance satisfactory to the Underwriters, and (ii) the Representatives'
Warrants in such denominations and to such designees as shall have been
provided to the Company.
If any condition to the Underwriters' obligations hereunder
to be fulfilled prior to or at the Closing Date or the relevant Option
Closing Date, as the case may be, is not so fulfilled, the Underwriters may
terminate this Agreement or, if the Underwriters so elect, they may waive any
such conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification. (a) The Company and its Subsidiary,
jointly and severally,agree to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for
an Underwriter as provided in Section 11 hereof), and each person, if any,
who controls the Underwriters ("controlling person") within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, from and against
any and all losses, claims, damages, expenses or liabilities, joint or
several (and actions in respect thereof), whatsoever (including but not
limited to any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriters or such controlling person may become subject under the Act, the
Exchange Act, or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon any untrue statement
or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time
-62-
<PAGE>
amended and supplemented); (ii) in any post-effective amendment or amendments
or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the IPO
Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively called "Application") executed
by the Company or based upon written information furnished by the Company in
any jurisdiction in order to qualify the IPO Securities under the securities
laws thereof or filed with the Commission, any securities commission or
agency, NASDAQ or any securities exchange; or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to any
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any Application, as the case
may be.
The indemnity agreement in this subsection (a) shall be in
addition to any liability which the Company may have at common law or
otherwise.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the Registration Statement, and each
other person, if any, who controls the Company within the meaning of the Act,
to the same extent as the foregoing indemnity from the Company to the
Underwriters but only with respect to statements or omissions, if any, made
in any Preliminary Prospectus, the Registration
-63-
<PAGE>
Statement or Prospectus or any amendment thereof or supplement thereto or in
any Application made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to any Underwriter by such
Underwriter expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any such Application, provided that such written information or
omissions only pertain to disclosures in the Preliminary Prospectus, the
Registration Statement or Prospectus directly relating to the transactions
effected by the Underwriters in connection with this offering.
(c) Promptly after receipt by an indemnified party under
this Section 7 of notice of the commencement of any action, suit or
proceeding, such indemnified party shall, if a claim in respect thereof is to
be made against one or more indemnifying parties under this Section 7, notify
each party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure so to notify an indemnifying party
shall not relieve it from any liability which it may have under this Section
7 except to the extent that it has been prejudiced in any material respect by
such failure or from any liability which it may have otherwise). In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent
it may elect by written notice delivered to the indemnified party promptly
after receiving the aforesaid notice from such indemnified party, to assume
the defense thereof with counsel reasonably satisfactory to such indemnified
party. Notwithstanding the foregoing, the indemnified party or parties shall
have the right to employ its or their own counsel in any such case but the
fees and expenses of such counsel shall be at the expense of such indemnified
party or parties unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying parties in
-64-
<PAGE>
connection with the defense of such action at the expense of the indemnifying
party, (ii) the indemnifying parties shall not have employed counsel
reasonably satisfactory to such indemnified party to have charge of the
defense of such action within a reasonable time after notice of commencement
of the action, or (iii) such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event
shall the indemnifying parties be liable for fees and expenses of more than
one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out
of the same general allegations or circumstances. Anything in this Section 7
to the contrary notwithstanding, an indemnifying party shall not be liable
for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution
in any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of
a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 7 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as
-65-
<PAGE>
a result of such losses, claims, damages, expenses or liabilities (or actions
in respect thereof) (A) in such proportion as is appropriate to reflect the
relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the IPO Securities or (B) if the allocation provided by clause (A) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of each of the contributing parties, on the one hand,
and the party to be indemnified on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable
considerations. In any case where the Company is a contributing party and the
Underwriters are the indemnified party, the relative benefits received by the
Company, on the one hand, and the Underwriters, on the other, shall be deemed
to be in the same proportion as the total net proceeds from the offering of
the Securities (before deducting expenses) bear to the total underwriting
discounts received by the Underwriters hereunder, in each case as set forth
in the Prospectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact necessary
to make the statements made, in light o the circumstances under which they
were made, not misleading relates to information supplied by the Company, or
by the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, expenses or liabilities (or actions in respect
thereof) referred to above in this subdivision (d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subdivision (d) the Underwriters shall
not be required to
-66-
<PAGE>
contribute any amount in excess of the underwriting discount applicable to
the IPO Securities purchased by the Underwriters hereunder. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, each
person, if any, who controls the Company within the meaning of the Act, each
officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to this subparagraph (d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation
it or they may have hereunder or otherwise than under this subparagraph (d),
or to the extent that such party or parties were not adversely affected by
such omission. The contribution agreement set forth above shall be in
addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant
hereto, shall be deemed to be representations, warranties and agreements at
the Closing Date and any Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the respective
indemnity agreements contained in Section 7 hereof, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any Underwriter, the Company, any controlling person of any
-67-
<PAGE>
Underwriter or the Company, and shall survive termination of this Agreement
or the issuance and delivery of the IPO Securities to the Underwriters.
9. Effective Date. This Agreement shall become effective at
10:00 a.m., New York City time, on the next full business day following the
date hereof, or at such earlier time after the Registration Statement becomes
effective as the Underwriters, in their discretion, shall release the
Securities for the sale to the public; provided, however, that the provisions
of Sections 5, 7 and 10 of this Agreement shall at all times be effective.
For purposes of this Section 9, the Securities to be purchased hereunder
shall be deemed to have been so released upon the earlier of dispatch by the
Underwriters of telegrams to securities dealers releasing such shares for
offering or the release by the Underwriters for publication of the first
newspaper advertisement which is subsequently published relating to the
Securities.
10. Termination. (a) Subject to subsection (b) of this
Section 10, the Underwriters shall have the right to terminate this Agreement
based upon any of the following events which result in a material impairment
of this Agreement to offer the Securities for sale: , (i) if any domestic or
international event or act or occurrence has disrupted, or in the
Underwriters' opinion will in the immediate future disrupt the financial
markets; or (ii) any material adverse change in the financial markets shall
have occurred; or (iii) if trading on the New York Stock Exchange, the
American Stock Exchange, or in the over-the-counter market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any
other government authority having jurisdiction; or (iv) if the United States
shall
-68-
<PAGE>
have become involved in a war or major hostilities, or if there shall have
been an escalation in an existing war or major hostilities or a national
emergency shall have been declared in the United States; or (v) if a banking
moratorium has been declared by a state or federal authority; or (vi) if a
moratorium in foreign exchange trading has been declared; or (vii) if the
Company shall have sustained a loss material or substantial to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have been
insured, will, in the Underwriters' opinion, make it inadvisable to proceed
with the delivery of the IPO Securities; or (vii) if there shall have been
such a material adverse change in the condition (financial or otherwise),
business affairs or prospects of the Company and/or the Subsidiary, whether
or not arising in the ordinary course of business, which would render, in the
Underwriters' judgment, either of such parties unable to perform
satisfactorily its respective obligations as contemplated by this Agreement
or the Registration Statement, or such material adverse change in the general
market, political or economic conditions, in the United States or elsewhere
as in the Underwriters' judgment would make it inadvisable to proceed with
the offering, sale and/or delivery of the IPO Securities.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Underwriters for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel for
the Underwriters in an amount not to exceed $50,000 (less amounts previously
paid pursuant to Section 5(c) above). Notwithstanding any contrary provision
contained in this Agreement, if this Agreement shall not be carried out
within the time specified herein, or any extension thereof granted to the
Underwriters, by reason of any failure on the part of the Company to perform
any undertaking
-69-
<PAGE>
or satisfy any condition of this Agreement by it to be performed or satisfied
(including, without limitation, pursuant to Section 6 or Section 12) then,
the Company shall promptly reimburse and indemnify the Underwriters for all
of their actual out-of-pocket expenses, including the fees and disbursements
of counsel for the Underwriters (less amounts previously paid pursuant to
Section 5 (c) above). In addition, the Company shall remain liable for all
Blue Sky counsel fees and expenses and Blue Sky filing fees. Notwithstanding
any contrary provision contained in this Agreement, any election hereunder or
any termination of this Agreement (including, without limitation, pursuant to
Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement is
otherwise carried out, the provisions of Section 5 and Section 7 shall not be
in any way affected by such election or termination or failure to carry out
the terms of this Agreement or any part hereof.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section 6, Section
10 or Section 12 hereof) to purchase the Securities which it or they are
obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the remaining Underwriters shall have the right, within 24
hours thereafter, to make arrangement for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than
all, of the Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth; if, however, the remaining Underwriters
shall not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed
10% of the total number of Firm Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated
-70-
<PAGE>
to purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of
the total number of Firm Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the remaining Underwriters shall have the
right to postpone the Closing Date for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements.
12. Default by the Company. If the Company shall fail at
the Closing Date or any Option Closing Date, as applicable, to sell and
deliver the number of Securities which it is obligated to sell hereunder on
such date, then this Agreement shall terminate (or, if such default shall
occur with respect to any Option Securities to be purchased on an Option
Closing Date, the Underwriters may at their option, by notice from the
Underwriters to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any
liability on the part of any non-defaulting party other than pursuant to
Section 5, Section 7 and Section 10 hereof. No action taken pursuant to this
Section shall relieve the Company from liability,
-71-
<PAGE>
if any, in respect of such default.
13. Notices. All notices and communications hereunder,
except as herein otherwise specifically provided, shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the Underwriters shall be
directed to the Representatives at Nutmeg Securities, Ltd., 495 Post Road
East, Westport, Connecticut 06880, Attention: Daniel T. Guilfoile, Director
of Investment Banking and Klein Maus and Shire, Inc., 110 Wall Street, New
York, New York 10005, Attention: Mohammad Ali Khan, President, with a copy to
Doros & Brescia, P.C., 1140 Avenue of the Americas, New York, New York 10036,
Attention: Ronald J. Brescia, Esq. Notices to the Company shall be directed
to the Company at 4162 Big Ranch Road, Napa, California 94558, Attention:
Mack H. Jennings, President, with a copy to Jackier, Gould, Bean, Upfal &
Eiselman, 1533 North Woodward, Suite 250, Bloomfield Hills, Michigan 48304,
Attention: Michael J. Eiselman, Esq.
14. Parties. This Agreement shall inure solely to the
benefit of and shall be binding upon, the Underwriters, the Company and the
controlling persons, directors and officers referred to in Section 7 hereof,
and their respective successors, legal representatives and assigns and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provisions herein contained. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
-72-
<PAGE>
15. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and
all of which taken together shall be deemed to be one and the same
instrument.
17. Entire Agreement; Amendments. This Agreement and the
Representatives' Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof.
This Agreement may not be amended except in a writing, signed by the
Underwriters and the Company.
If the foregoing correctly sets forth the understanding
between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter
-73-
<PAGE>
shall constitute a binding agreement among us.
Very truly yours,
AWG, LTD.
By: ________________________________
Mack H. Jennings, President
Confirmed and accepted as of
the date first above written
For themselves and as Representatives of the several
Underwriters named in Schedule A hereto
NUTMEG SECURITIES, LTD.
By: ______________________________________________
Name: Daniel T. Guilfoile
Title: Director of Investment Banking
KLEIN MAUS AND SHIRE, INC.
By: ______________________________________________
Name: Mohammad Ali Khan
Title: President
-74-
<PAGE>
SCHEDULE A
Number of Firm Securities
Name of Underwriters to be purchased
- ----------------------------------- --------------------------------
Nutmeg Securities, Ltd.
Klein Maus and Shire, Inc.
-75-
<PAGE>
AWG, LTD.
AND
NUTMEG SECURITIES, LTD.
and
KLEIN MAUS AND SHIRE, INC.
REPRESENTATIVES'
WARRANT AGREEMENT
Dated as of _______________, 1999
<PAGE>
REPRESENTATIVES' WARRANT AGREEMENT dated as of __________,
1999 (the "Agreement") between AWG, LTD., a Nevada corporation (the
"Company") and NUTMEG SECURITIES, LTD. ("Nutmeg") and KLEIN MAUS AND SHIRE,
INC. ("KMS"), their successors, designees and assigns (hereinafter referred
to collectively as the "Representatives" or the "Underwriters").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to Nutmeg
Securities, Ltd. and Klein Maus and Shire, Inc. (collectively the
"Representatives" or the "Underwriters") warrants (the "Representatives'
Warrants") entitling the holder(s) to purchase up to an aggregate of 60,000
shares (or up to 69,000 shares if the over-allotment is exercised), of the
Company's Series A 6% Preferred Stock, $.001 par value per share (the
"Preferred Stock"), at a purchase price of $.0001 per Representatives'
Warrant ($6.00 in aggregate) ($6.90 in aggregate if the over-allotment is
exercised in full) (the Representatives' Warrants and Preferred Stock into
which the Representatives' Warrants are exercisable being collectively
referred to as the "Warrant Securities"); and
WHEREAS, the Representatives have agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
hereof among the underwriters named therein and the Company to act as the
representatives of such underwriters, in connection with the Company's
proposed public offering of 600,000 shares of Preferred Stock at a public
offering price of $10.00 per share of Preferred Stock (the "Public
Offering"); and
<PAGE>
WHEREAS, the Representatives' Warrants to be issued
pursuant to this Agreement will be issued on the Closing Date and each Option
Closing Date (s), if any, (as such terms are defined in the Underwriting
Agreement) by the Company to the Underwriters in consideration for, and as
part of the Underwriters' compensation in connection with, and pursuant to
the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the
payment by the Underwriters to the Company of an aggregate six dollars
($6.00), ($6.90 in aggregate if the over-allotment is exercised in full) the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Underwriters are hereby granted the right to
purchase, at any time from ____________, 2000 until 5:00 P.M., New York time,
on _______________, 2004, up to an aggregate of 60,000 shares of Preferred
Stock (69,000 shares if the over-allotment is exercised in full) (the
"Shares") at an initial exercise price (subject to adjustment as provided in
Section 8 hereof) of $16.50 per share of Preferred Stock subject to the terms
and conditions of this Agreement. Except as set forth herein, the shares of
Preferred Stock issuable upon exercise of the Representatives' Warrants are
in all respects identical to the shares of Preferred Stock being purchased by
the Underwriters for resale to the public pursuant to the terms and
provisions of the Underwriting Agreement.
2
<PAGE>
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this
Agreement shall be in the form set forth in Exhibit A, attached hereto and
made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this
Agreement.
3. Exercise of Warrant.
3.1 Method of Exercise. The Representatives' Warrants
initially are exercisable at an aggregate initial exercise price (subject to
adjustment as provided in Section 8 hereof) per share of Preferred Stock as
set forth in Section 6 hereof payable by certified or official bank check in
New York Clearing House funds, subject to adjustment as provided in Section 8
hereof. Upon surrender of a Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise
Price (as hereinafter defined) for the shares of Preferred Stock purchased at
the Company's principal offices (presently located at 4162 Big Ranch Road,
Napa, California 94558) the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the shares of Preferred Stock so purchased. The purchase
rights represented by each Warrant Certificate are exercisable at the option
of the Holders thereof, in whole or part (but not as to fractional shares of
the Preferred Stock). In the case of the purchase of less than all of the
Preferred Stock purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and shall execute
and deliver a new Warrant Certificate of like tenor for the balance of the
shares of Preferred Stock purchasable thereunder.
3
<PAGE>
3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Representatives' Warrants shall
have the right at any time and from time to time to exercise the
Representatives' Warrants in full or in part by surrendering the Warrant
Certificate in the manner specified in Section 3.1. The number of shares of
Preferred Stock to be issued pursuant to this Section 3.2 shall be equal to
the difference between (a) the number of shares of Preferred Stock in respect
of which the Representatives' Warrants are exercised and (b) a fraction, the
numerator of which shall be the number of shares of Preferred Stock in
respect of which the Representatives' Warrants are exercised multiplied by
the Exercise Price (as hereinafter defined) and the denominator of which
shall be the Market Price.
3.3 Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be (i) when referring to the
Preferred Stock, the last reported sale price, or, in case no such reported
sale takes place on such day, the average of the last reported sale prices
for the last three (3) trading days, in either case as officially reported by
the principal securities exchange on which the Preferred Stock is listed or
admitted to trading or by the Nasdaq National Market ("NNM") or the Nasdaq
Small Cap Market ("NSCM"), or, if the Preferred Stock is not listed or
admitted to trading on any national securities exchange or quoted by NNM or
NSCM, the average closing bid price as furnished by a similar organization
including the National Association of Securities Dealers, Inc. ("NASD")
through the NASD Electronic Bulletin Board if Nasdaq is no longer reporting
such information, or if the Preferred Stock is not quoted on Nasdaq, or such
similar organization as determined in good faith by resolution of the Board
of Directors of the Company, based on the best information available to it.
Notwithstanding the foregoing, for purposes of Section 8, the Market Price of
a share of Preferred Stock
4
<PAGE>
shall be determined by reference to the relevant information set forth above
during the thirty (30) trading days immediately preceding the date of the
event requiring the determination of the Market Price (except that, in the
event of a public offering of shares of Preferred Stock, the Market Price of
a share of Preferred Stock shall be determined by reference to the trading
day immediately preceding the effective date of the public offering and not
such thirty (30) trading day period).
4. Issuance of Certificates. Upon the exercise of the
Representatives' Warrants, the issuance of certificates for shares of
Preferred Stock and/or other securities, properties or rights underlying such
Representatives' Warrants, shall be made forthwith (and in any event within
five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall
not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
The Warrant Certificates and the certificates representing
the shares of Preferred Stock (and/or other securities, property or rights
issuable upon the exercise of the Representatives' Warrants) shall be
executed on behalf of the Company by the manual or facsimile signature of the
then present
5
<PAGE>
Chairman or Vice Chairman of the Board of Directors or President or Vice
President of the Company under its corporate seal reproduced thereon,
attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary of the Company. Warrant Certificates shall
be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Representatives' Warrants are being acquired as an investment and not with a
view to the distribution thereof; that the Representatives' Warrants may not
be sold, transferred, assigned, hypothecated or otherwise disposed of, in
whole or in part, for a period of one (1) year from the date hereof, except
to officers of the Underwriters.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as
otherwise provided in Section 8 hereof, the initial exercise price of each
Underwriters Warrant shall be $16.50 per share of Preferred Stock. The
adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending
upon the context.
7. Registration Rights.
6
<PAGE>
7.1 Current Registration Under the Securities Act of 1933.
The Representatives' Warrants and the shares of Preferred Stock issuable upon
exercise of the Representatives' Warrants have been registered under the
Securities Act of 1933, as amended (the "Act"), pursuant to the Company's
Registration Statement on Form SB-1 (Registration No. 333-48165) (the
"Registration Statement"). The Company covenants and agrees to use its best
efforts to maintain the effectiveness of the Registration Statement for a
period of five (5) years from its effective date.
7.2 Contingent Registration Rights. In the event that, for
any reason whatsoever, the Company shall fail to maintain the effectiveness
of the Registration Statement for a period of five (5) years from its
effective date and, in any event, from and after the fifth (5th) anniversary
of the effective date of the Registration Statement, the Representatives' and
other Holders shall have, commencing the date of any such occasion, the
contingent registration rights ("Registration Rights") set forth in Sections
7.3 and 7.4 hereof.
7.3 Piggyback Registration. (a) If, at any time commencing
after the effective date of the Registration Statement and expiring on the
seventh (7th) anniversary of the effective date of the Registration
Statement, the Company proposes to register any of its securities under the
Act, either for its own account or the account of any other security holder
or holders of the Company possessing registration rights ("Other
Stockholders") (other than pursuant to Form S-4, Form S-8 or comparable
registration statement), it shall give written notice, at least thirty (30)
days prior to the filing of each such registration statement, to the
Representatives and to all other Holders of Representatives' Warrants and/or
shares of Preferred Stock issuable upon exercise of the Representatives'
Warrants (collectively
7
<PAGE>
the "Registrable Securities") of its intention to do so. If the
Representatives or other Holders of Registrable Securities notify the Company
within twenty-one (21) days after the receipt of any such notice of its or
their desire to include any such securities in such proposed registration
statement, the Company shall afford the Representatives and such other
Holders of such securities the opportunity to have any such securities
registered under such registration statement.
(b) If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Representatives and such other Holders as part of
the written notice given pursuant to Section 7.3(a) hereof. The right of the
Representatives or any such other Holders to registration pursuant to this
Section 7.3 shall be conditioned upon their participation in such
underwriting and the inclusion of their Registrable Securities in the
underwriting to the extent hereinafter provided. The Representatives and all
other Holders proposing to distribute their securities through such
underwriting shall (together with the Company and any officers, directors or
other stockholders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the
representatives of the underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 7.3, if the
representatives of the underwriter or underwriters advises the Company in
writing that marketing factors require a limitation or elimination of the
number of shares of Preferred Stock or other securities to be underwritten,
the representatives may limit the number of shares of Preferred Stock or
other securities to be included in the registration and underwriting. The
Company shall so advise the Representatives and all other Holders of
Registrable Securities requesting registration, and the number of shares of
Preferred Stock or other securities that are entitled to be included in the
registration and underwriting shall be allocated among the Representatives
and other Holders requesting registration, in
8
<PAGE>
each case, in proportion, as nearly as practicable, to the respective amounts
of securities which they had requested to be included in such registration at
the time of filing the registration statement.
(c) Notwithstanding the provisions of this Section
7.3, the Company shall have the right at any time after it shall have given
written notice pursuant to Section 7.3(a) hereof (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw
the same after the filing but prior to the effective date thereof.
7.4 Demand Registration. (a) At any time commencing after
the effective date of the Registration Statement and ending on the fifth
(5th) anniversary of the effective date of the Registration Statement, the
Holders of Registrable Securities representing a "Majority" (as hereinafter
defined) of such securities (assuming the exercise of all of the
Representatives' Warrants) (the "Initiating Holders") shall have the right
(which right is in addition to the registration rights under Section 7.3
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Commission, on one occasion, a registration
statement and such other documents, including a prospectus, as may be
necessary in the opinion of both counsel for the Company and counsel for the
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale of their respective Registrable Securities for up to
two hundred and seventy (270) days by such Holders and any other Holders of
Registrable Securities, as well as any other security holders possessing
similar registration rights, who notify the Company within twenty-one (21)
days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give
written notice of any
9
<PAGE>
registration request under this Section 7.4 by any Holder or Holders to all
other registered Holders of Registrable Securities, as well as any other
security holders possessing similar registration rights, within ten (10) days
after the date of the receipt of any such registration request.
(c) If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request
made pursuant to Section 7.4(a) hereof. The right of any Holder to
registration pursuant to this Section 7.4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent and subject
to the limitations provided herein. A Holder may elect to include in such
underwriting all or a part of the Registrable Securities it holds.
(d) The Company shall (together with all Holders,
officers, directors and other stockholders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representatives of the underwriters selected for such
underwriting by the Initiating Holders, which underwriter(s) shall be
reasonably acceptable to the Representatives. Notwithstanding any other
provision of this Section 7.4, if the representatives of the underwriter or
underwriters advises the Initiating Holders in writing that marketing factors
require a limitation or elimination of the number of shares of Preferred
Stock or other securities to be underwritten, the representatives may limit
the number of shares of Preferred Stock or other securities to be included in
the registration and underwriting. The Company shall so advise the
Representatives and all Holders of Registrable Securities requesting
registration, and the number of shares of Preferred Stock or other securities
that are entitled to be included in the registration and underwriting shall
be allocated among the Representatives and other Holders requesting
registration, in each case, in
10
<PAGE>
proportion, as nearly as practicable, to the respective amounts of securities
which they had requested to be included in such registration at the time of
filing the registration statement. If the Company or any Holder of
Registrable Securities who has requested inclusion in such registration as
provided above disapproves of the terms of any such underwriting, such person
may elect to withdraw its securities therefrom by written notice to the
Company, the Representatives and the Initiating Holders. Any securities so
excluded shall be withdrawn from such registration. No securities excluded
from such registration by reason of such underwriters' marketing limitations
shall be included in such registration. To facilitate the allocation of
shares in accordance with this Section 7.4(d), the Company or underwriter or
underwriters selected as provided above may round the number of securities of
any holder which may be included in such registration to the nearest 100
shares.
(e) In the event that the Initiating Holders are
unable to sell all of the Registrable Securities for which they have
requested registration due to the provisions of Section 7.4(d) hereof and if,
at that time, the Initiating Holders are not permitted to sell Registrable
Securities under Rule 144(k), the Initiating Holders shall be entitled to
require the Company to afford the Initiating Holders an opportunity to effect
one additional demand registration under this Section 7.4.
(f) In addition to the registration rights under
Section 7.3 and subsection (a) of Section 7.4 hereof, at any time commencing
on the date hereof and expiring five (5) years thereafter any Holder of
Registrable Securities shall have the right, exercisable by written request
to the Company, to have the Company prepare and file, on one occasion, with
the Commission a registration statement so as to permit a public offering and
sale for 270 days by any such Holder of its Registrable Securities provided,
however, that the provisions of Section 7.5(b) hereof, shall not apply to any
such registration request and registration and all costs incident thereto
shall be at the expense of the Holder or Holder's
11
<PAGE>
making such request.
(g) Notwithstanding anything to the contrary
contained herein, if the Company shall not have filed a registration
statement for the Registrable Securities of the Initiating Holders or the
Holder(s) referred to in Section 7.5(f) above (the "Paying Holders"), within
the time period specified in Section 7.5(a) below, the Company shall upon the
written notice of election of the Initiating Holders or the Paying Holders,
as the case may be, repurchase (i) any and all shares of Preferred Stock at
the higher of the Market Price per share of Preferred Stock on (x) the date
of the notice sent to the Company under Section 7.4(a) or (f), as the case
may be, or (y) the expiration of the period specified in Section 7.5(a) and
(ii) any and all Representatives' Warrants at such Market Price less the
Exercise Price of such Representatives' Warrant. Such repurchase shall be in
immediately available funds and shall close within five (5) business days
after the expiration of the period specified in Section 7.5(a).
7.5 Covenants of the Company With Respect to Registration.
In connection with any registration under Sections 7.3 and 7.4 hereof, the
Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file
a registration statement within sixty (60) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each
Holder desiring to sell Registrable Securities such number of prospectuses as
shall reasonably be requested.
(b) The Company shall pay all costs (excluding
fees and expenses of Holder(s)' counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.3 and 7.4 hereof including, without
limitation, the Company's legal and accounting fees, printing expenses, blue
sky fees and expenses. If the Company
12
<PAGE>
shall fail to comply with the provisions of Section 7.5(a), the Company
shall, in addition to any other equitable or other relief available to the
Holder(s), extend the exercise period of the Representatives' Warrants by
such number of days as shall equal the delay caused by the Company's failure.
(c) The Company will take all necessary action
which may be required in qualifying or registering the Registrable Securities
included in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are requested by the
Holder(s); provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of
the Registrable Securities to be sold pursuant to any registration statement
and each person, if any, who controls such Holders within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended ("Exchange Act"), against all loss, claim, damage, expense
or liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from
such registration statement but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to
indemnify each of the Underwriters contained in Section 7 of the Underwriting
Agreement.
(e) The Holder(s) of the Registrable Securities to
be sold pursuant to a registration statement, and their successors and
assigns, shall severally, and not jointly, indemnify the Company, its
officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage or expense or liability (including all
expenses reasonably incurred in investigating, preparing or
13
<PAGE>
defending against any claim whatsoever) to which they may become subject
under the Act, the exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns,
for specific inclusion in such registration statement to the same extent and
with the same effect as the provisions contained in Section 7 of the
Underwriting Agreement pursuant to which the Underwriters have agreed to
indemnify the Company.
(f) For a period of one hundred eighty (180) days
after the effectiveness of any registration statement filed pursuant to
Section 7.4 hereof, the Company shall not permit any other registration
statement (other than (1) a registration statement relating to the securities
for which the Company has granted demand registration rights, as described in
the Prospectus included in the Registration Statement, (2) a registration
statement relating to the securities for which the Company has granted
piggyback registration rights, as described in the Prospectus included in the
Registration Statement and (3) a registration statement filed on Forms S-4 or
S-8 to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 7.4 hereof, without the prior written
consent of the Holders of the Registrable Securities representing a Majority
of such securities.
(g) The Company shall furnish upon request to each
Holder participating in the offering and to each underwriter, if any, a
signed counterpart, addressed to such Holder or underwriter, of (i) an
opinion of counsel to the Company, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under
the underwriting agreement) signed by the independent public
14
<PAGE>
accountants who have issued a report on the Company's financial statements
included in such registration statement, in each case covering substantially
the same matters with respect to such registration statement (and the
prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements,
as are customarily covered in opinions of issuer's counsel and in
accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(h) The Company shall as soon as practicable after
the effective date of any registration statement filed pursuant to Sections
7.3 and 7.4 hereof, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12
consecutive months beginning after the effective date of the registration
statement.
(i) The Company shall deliver promptly to each
Holder participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriters, copies of all
written correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the registration statement and permit each Holder and
underwriters to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the registration
statement as it deems reasonably necessary to comply with applicable
securities laws or rules of the NASD. Such investigation shall include access
to books, records and properties and opportunities to discuss the business of
the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such
Holder or underwriter shall reasonably
15
<PAGE>
request.
(j) With respect to any registration under Section
7.4 hereof, the Company shall enter into an underwriting agreement with the
managing underwriter selected for such underwriting by the Initiating Holders
or the Paying Holders, as the case may be. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such
managing underwriters, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter. The Holders shall
be parties to any underwriting agreement relating to an underwritten sale of
their Registrable Securities and may, at their option, require that any or
all the representations, warranties and covenants of the Company to or for
the benefit of such underwriters shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any representations
or warranties to or agreements with the Company or the underwriters, except
as they may relate to such Holders and their intended methods of
distribution.
(k) For purposes of this Agreement, the term
"Majority" in reference to the Holders of Registrable Securities, shall mean
in excess of fifty percent (50%) of the then outstanding Representatives'
Warrants and/or Shares of Preferred Stock issued upon exercise of the
Representatives' Warrants that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public pursuant to
a registration statement filed with the Commission under the Act.
(l) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their Representatives'
Warrants prior to the initial filing of any registration
16
<PAGE>
statement or the effectiveness thereof.
(m) In addition to the Registrable Securities,
upon the written request therefor, by any Holder(s), the Company shall
include in the registration statement any other securities of the Company
held by such Holder(s) as of the date of filing of such registration
statement, including without limitation restricted shares of Preferred Stock,
options, warrants or any other securities convertible into shares of
Preferred Stock.
7.6 Restrictive Legends. In the event that the Company
fails to maintain the effectiveness of the Registration Statement, such that
the exercise, in part or in whole, of the Representatives' Warrants are not,
at the time of such exercise, registered under the Act, any certificates
representing the shares of Preferred Stock underlying the Representatives'
Warrants and any of the other securities issuable upon exercise of the
Representatives' Warrants shall bear the following restrictive legend:
The securities represented by this certificate have not
been registered under the Securities Act of 1933, as amended ("Act"), and may
not be offered or sold except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent applicable, Rule 144 under the
Act (or any similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
8. Adjustments to Exercise Price and Number of Securities.
8.1 Computation of Adjusted Exercise Price. Except as
hereinafter provided, in the
17
<PAGE>
event the Company shall at any time after the date hereof issue or sell any
shares of Preferred Stock (other than the issuances or sales referred to in
Section 8.7 hereof), including shares held in the Company's treasury and
shares of Preferred Stock issued upon the exercise of any options, rights or
warrants to subscribe for shares of Preferred Stock and shares of Preferred
Stock issued upon the direct or indirect conversion or exchange of securities
for shares of Preferred Stock, for a consideration per share less than the
Market Price in effect immediately prior to the issuance or sale of such
shares, or without consideration, then forthwith upon such issuance or sale,
the Exercise Price shall (until another such issuance or sale) be reduced to
the price (calculated to the nearest full cent) equal to the quotient derived
by dividing (i) an amount equal to the sum of (a) the total number of shares
of Preferred Stock outstanding immediately prior to the issuance or sale of
such shares, multiplied by the Exercise Price in effect immediately prior to
such issuance or sale, and (b) the aggregate of the amount of all
consideration, if any, received by the Company upon such issuance or sale, by
(ii) the total number of shares of Preferred Stock outstanding immediately
after such issuance or sale; provided, however, that in no event shall the
Exercise Price be adjusted pursuant to this computation to an amount in
excess of the Exercise Price in effect immediately prior to such computation,
except in the case of a combination of outstanding shares of Preferred Stock,
as provided by Section 8.3 hereof.
For the purposes of this Section 8 the term Exercise Price
shall mean the Exercise Price per share of Preferred Stock set forth in
Section 6 hereof, as adjusted from time to time pursuant to the provisions of
this Section 8.
For the purposes of any computation to be made in
accordance with this Section 8.1, the following provisions shall be
applicable:
(i) In case of the issuance or sale of shares of
Preferred Stock for a consideration
18
<PAGE>
part or all of which shall be cash, the amount of the cash consideration
therefor shall be deemed to be the amount of cash received by the Company for
such shares (or, if shares of Preferred Stock are offered by the Company for
subscription, the subscription price, or, if either of such securities shall
be sold to underwriters or dealers for public offering without a subscription
offering, the initial public offering price) before deducting therefrom any
compensation paid or discount allowed in the sale, underwriting or purchase
thereof by underwriters or dealers or other performing similar services, or
any expenses incurred in connection therewith.
(ii) In case of the issuance or sale (other than
as a dividend or other distribution on any stock of the Company) of shares of
Preferred Stock for a consideration part or all of which shall be other than
cash, the amount of the consideration therefor other than cash shall be
deemed to be the value of such consideration as determined in good faith by
the Board of Directors of the Company and shall include any amounts payable
to security holders or any affiliates thereof, including without limitation,
pursuant to any employment agreement, royalty, consulting agreement, covenant
not to compete, earnout or contingent payment right or similar arrangement,
agreement or understanding, whether oral or written; all such amounts being
valued for the purposes hereof at the aggregate amount payable thereunder,
whether such payments are absolute or contingent, and irrespective of the
period or uncertainty of payment, the rate of interest, if any, or the
contingent nature thereof; provided, however, that if any Holder(s) does not
agree with such evaluation, a mutually acceptable independent appraiser shall
make such evaluation, the cost of which shall be borne by the Company.
(iii) Shares of Preferred Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day
following the record date for the determination of stockholders entitled to
receive
19
<PAGE>
such dividend or other distribution and shall be deemed to have been issued
without consideration.
(iv) The reclassification of securities of the
Company other than shares of Preferred Stock into securities including shares
of Preferred Stock shall be deemed to involve the issuance of such shares of
Preferred Stock for a consideration other than cash immediately prior to the
close of business on the date fixed for the determination of security holders
entitled to receive such shares, and the value of the consideration allocable
to such shares of Preferred Stock shall be determined as provided in
subsection (ii) of this Section 8.1.
(v) The number of shares of Preferred Stock at any
one time outstanding shall include the aggregate number of shares issued or
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights, warrants and upon the conversion or exchange of
convertible or exchangeable securities.
8.2 Options, Rights, Warrants and Convertible and
Exchangeable Securities. In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Preferred
Stock, or issue any securities convertible into or exchangeable for shares of
Preferred Stock, for a consideration per share less than the Market Price in
effect immediately prior to the issuance of such options, rights or warrants,
or such convertible or exchangeable securities, or without consideration, the
Exercise Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the
case may be, shall be reduced to a price determined by making a computation
in accordance with the provisions of Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares of
Preferred Stock, as the case
20
<PAGE>
may be, issuable under such options, rights or warrants shall be deemed to be
issued and outstanding at the time such options, rights or warrants were
issued, and for a consideration equal to the minimum purchase price per share
provided for in such options, rights or warrants at the time of issuance,
plus the consideration (determined in the same manner as consideration
received on the issue or sale of shares in accordance with the terms of the
Representatives' Warrants), if any, received by the Company for such options,
rights or warrants.
(b) The aggregate maximum number of shares of
Preferred Stock issuable upon conversion or exchange of any convertible or
exchangeable securities shall be deemed to be issued and outstanding at the
time of issuance of such securities, and for a consideration equal to the
consideration (determined in the same manner as consideration received on the
issue or sale of shares of Preferred Stock in accordance with the terms of
the Representatives' Warrants) received by the Company for such securities,
plus the minimum consideration, if any, receivable by the Company upon the
conversion or exchange thereof.
(c) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
subsection (a) of this Section 8.2, or in the price per share at which the
securities referred to in subsection (b) of this Section 8.2 are convertible
or exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be, shall be deemed to have expired or terminated on
the date when such price change became effective in respect of shares not
theretofore issued pursuant to the exercise or conversion or exchange
thereof, and the Company shall be deemed to have issued upon such date new
options, rights or warrants or convertible or exchangeable securities at the
new price in respect of the number of shares issuable upon the exercise of
such options, rights or warrants or the conversion or exchange of such
convertible or exchangeable securities.
21
<PAGE>
8.3 Subdivision and Combination. In case the Company shall
at any time subdivide or combine the outstanding shares of Preferred Stock,
the Exercise Price shall forthwith be proportionately decreased in the case
of subdivision or increased in the case of combination.
8.4 Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Section
8, the number of Warrant Securities issuable upon the exercise at the
adjusted exercise price of each Representatives' Warrant shall be adjusted to
the nearest full amount by multiplying a number equal to the Exercise Price
in effect immediately prior to such adjustment by the number of Warrant
Securities issuable upon exercise of the Representatives' Warrants
immediately prior to such adjustment and dividing the product so obtained by
the adjusted Exercise Price.
8.5 Definition of Preferred Stock. For the purpose of this
Agreement, the term "Preferred Stock" shall mean those shares of Series A 6%
Preferred Stock, $.001 par value per share (the "Preferred Stock") of the
Company authorized for issuance in the Company's Certification of
Incorporation by the Company's Board of Directors, which do not have voting
rights except as may be required by applicable law, entitles the holders
thereof to a Preferred Annual Return of 6% per annum payable in Preferred
Stock in an amount equivalent to 6% of the number of shares of Preferred
Stock registered in the name of each of the holders as of the close of
business on December 31 of each year and will have a preference upon
liquidation of the Company in the amount of $10.00 per share.
8.6 Merger or Consolidation. In case of any
consolidation of the Company with, or
22
<PAGE>
merger of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger which does not result in
any reclassification or change of the outstanding Preferred Stock), the
corporation formed by such consolidation or merger shall execute and deliver
to the Holder a supplemental warrant agreement providing that the holder of
each Representatives' Warrant then outstanding or to be outstanding shall
have the right thereafter (until the expiration of such Representatives'
Warrant) to receive, upon exercise of such warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of shares of Preferred
Stock of the Company for which such Representatives' Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall
be identical to the adjustments provided in Section 8. The above provision of
this subsection shall similarly apply to successive consolidations or
mergers.
8.7 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the
Representatives' Warrants or the shares of Preferred Stock issuable upon the
exercise of the Representatives' Warrants; or
(b) If the amount of said adjustment shall be less
than two cents (2(cent)) per Warrant Security, provided, however, that in
such case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents (2(cent)) per Warrant Security.
23
<PAGE>
8.8 Dividends and Other Distributions. In the event that
the Company shall at any time prior to the exercise of all Representatives'
Warrants declare a dividend (other than a dividend consisting solely of
shares of Preferred Stock) or otherwise distribute to its stockholders any
assets, property, rights, evidences of indebtedness, securities (other than
shares of Preferred Stock), whether issued by the Company or by another, or
any other thing of value, the Holders of the unexercised Representatives'
Warrants shall thereafter be entitled, in addition to the shares of Preferred
Stock or other securities and property receivable upon the exercise thereof,
to receive, upon the exercise of such Representatives' Warrants, the same
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of
such dividend or distribution as if the Representatives' Warrants had been
exercised immediately prior to such dividend or distribution. At the time of
any such dividend or distribution, the Company shall make appropriate
reserves to ensure the timely performance of the provisions of this
subsection 8.8.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender
thereof by the registered Holder at the principal executive office of the
Company, for a new Warrant Certificate of like tenor and date representing in
the aggregate the right to purchase the same number of Warrant Securities in
such denominations as shall be designated by the Holder thereof at the time
of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any
Warrant Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to it, and reimbursement to the Company
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Representatives' Warrants, if
24
<PAGE>
mutilated, the Company will make and deliver a new Warrant Certificate of
like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall
not be required to issue fractional shares of Preferred Stock upon the
exercise of Representatives' Warrants. Representatives' Warrants may only be
exercised in such multiples as are required to permit the issuance by the
Company of one or more whole shares of Preferred Stock. If one or more
Representatives' Warrants shall be presented for exercise in full at the same
time by the same Holder, the number of whole shares of Preferred Stock which
shall be issuable upon such exercise thereof shall be computed on the basis
of the aggregate number of shares of Preferred Stock purchasable on exercise
of the Representatives' Warrants so presented. If any fraction of a share of
Preferred Stock would, except for the provisions provided herein, be issuable
on the exercise of any Representatives' Warrant (or specified portion
thereof), the Company shall pay an amount in cash equal to such fraction
multiplied by the then current market value of a share of Preferred Stock,
determined as follows:
(1) If the Preferred Stock is listed or admitted to
unlisted trading privileges on the NYSE or the AMEX, or is traded on the NNM,
the current market value of a share of Preferred Stock shall be the closing
sale price of the Preferred Stock at the end of the regular trading session
on the last business day prior to the date of exercise of the
Representatives' Warrants on whichever of such exchanges or NNM had the
highest average daily trading volume for the Preferred Stock on such day; or
(2) If the Preferred Stock is not listed or admitted to
unlisted trading privileges, on either the NYSE or the AMEX and is not traded
on NNM, but is quoted or reported on the Nasdaq
25
<PAGE>
SmallCap Market ("NSCM"), the current market value of a share of Preferred
Stock shall be the average of the closing bid and asked prices (or the last
sale price, if then reported by the NSCM) of the Preferred Stock at the end
of the regular trading session on the last business day prior to the date of
exercise of the Representatives' Warrants as quoted or reported on the NSCM,
as the case may be; or
(3) If the Preferred Stock is not listed, or admitted to
unlisted trading privileges, on either of the NYSE or the AMEX, and is not
traded on NNM or the NSCM, but is listed or admitted to unlisted trading
privileges on any national securities exchange (other than the NYSE or the
AMEX), the current market value of a share of Preferred Stock shall be the
closing sale price of the Preferred Stock at the end of the regular trading
session on the last business day prior to the date of exercise of the
Representatives' Warrants on whichever of such exchanges has the highest
average daily trading volume for the Preferred Stock on such day; or
(4) If the Preferred Stock is not listed or admitted to
unlisted trading privileges on any national securities exchange, or listed
for trading on NNM or NSCM, but is traded in the over-the-counter market
including the NASD Electronic Bulletin Board, the current market value of a
share of Preferred Stock shall be the average of the last reported bid and
asked prices of the Preferred Stock reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of exercise of the
Representatives' Warrants; or
(5) If the Preferred Stock is not listed, admitted to
unlisted trading privileges on any national securities exchange, or listed
for trading on NNM or NCSM, and bid and asked prices of the Preferred Stock
are not reported by the National Quotation Bureau, Inc., the current market
value of a share of Preferred Stock shall be an amount, not less than the
book value thereof as of the end of the most recently completed fiscal
quarter of the Company ending prior to the date of exercise, determined
26
<PAGE>
in accordance with generally acceptable accounting principles, consistently
applied.
11. Reservation and Listing of Securities. The Company
shall at all times reserve and keep available out of its authorized shares of
Preferred Stock, solely for the purpose of issuance upon the exercise of the
Representatives' Warrants, such number of shares of Preferred Stock or other
securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the
Representatives' Warrants and payment of the Exercise Price therefor, all
shares of Preferred Stock and other securities, if any, issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the
Representatives' Warrants shall be outstanding, the Company shall use its
best efforts to cause all shares of Preferred Stock issuable upon the
exercise of the Representatives' Warrants to be listed (subject to official
notice of issuance) on all securities exchanges on which the Preferred Stock
issued to the public in connection herewith may then be listed and/or quoted.
12. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote
or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter,
or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Representatives' Warrants
and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Preferred Stock for the purpose of entitling them to receive a
dividend or distribution payable other than in cash, or a
27
<PAGE>
cash dividend or distribution payable other than out of current or retained
earnings, as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its
Preferred Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock of
the Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) days prior to the date
fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer
book, as the case may be. Failure to give such notice or any defect therein
shall not affect the validity of any action taken in connection with the
declaration or payment of any such dividend, or the issuance of any
convertible or exchangeable securities, or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
13. Representatives' Warrants.
The form of the certificate representing the
Representatives' Warrants (and the form of election to purchase shares of
Preferred Stock upon the exercise of Representatives' Warrants and the form
of assignment printed on the reverse thereof) shall be substantially as set
forth in Exhibit "A" to the Representatives' Warrant Agreement. Each
Representatives' Warrant shall entitle the Holder to
28
<PAGE>
purchase one fully paid and non-assessable share of Preferred Stock at an
initial purchase price of $16.50 per share from ______________, 2000 until
5:00 P.M. New York time on _____________, 2004 at which time the
Representatives' Warrants shall expire. The exercise price of the
Representatives' Warrants and the number of shares of Preferred Stock
issuable upon the exercise of the Representatives' Warrants are subject to
adjustment, whether or not the Representatives' Warrants have been exercised,
in the manner and upon the occurrence of the events set forth in Section 8 of
this Agreement. Subject to the provisions of this Agreement and upon issuance
of the Representatives' Warrants, each registered holder of such
Representatives' Warrants shall have the right to purchase from the Company
(and the Company shall issue to such registered holders) up to the number of
fully paid and non-assessable shares of Preferred Stock (subject to
adjustment as provided herein and in the Warrant Agreement), free and clear
of all preemptive rights of stockholders, provided that such registered
holder complies with the terms governing exercise of the Representatives'
Warrants set forth in the Warrant Agreement, and pays the applicable exercise
price, determined in accordance with the terms of the Warrant Agreement. Upon
exercise of the Representatives' Warrants, the Company shall forthwith issue
to the registered holder of any such Representatives' Warrant in his name or
in such name as may be directed by him, certificates for the number of shares
of Preferred Stock so purchased. Except as otherwise provided herein and in
Section 6.1 hereof, the Representatives' Warrants shall be governed in all
respects by the terms of the Warrant Agreement. The Representatives' Warrants
shall be transferable in the manner provided in the Warrant Agreement, and
upon any such transfer, a new Warrant Certificate shall be issued promptly to
the transferee. The Company covenants to, and agrees with, the Holder(s) that
without the prior written consent of the Holder(s), which will not be
unreasonably withheld, the Warrant Agreement will not be modified, amended,
canceled, altered or superseded, and that the Company will
29
<PAGE>
send to each Holder, irrespective of whether or not the Representatives'
Warrants have been exercised, any and all notices required by the Warrant
Agreement to be sent to holders of the Representatives' Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of the Representatives'
Warrants, to the address of such Holder as shown on the books of the Company;
or
(b) If to the Company, to the address set forth in Section
3 hereof or to such other address as the Company may designate by notice to
the Holders.
15. Supplements and Amendments. The Company and the
Representatives may from time to time supplement or amend this Agreement
without the approval of any Holders of Warrant Certificates in order to cure
any ambiguity, to correct or supplement any provision contained herein which
may be defective or inconsistent with any provisions herein, or to make any
other provisions in regard to matters or questions arising hereunder which
the Company and the Underwriters may deem necessary or desirable and which
the Company and the Representatives deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
16. Successors. All the covenants and provisions of this
Agreement shall be binding
30
<PAGE>
upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the
close of business on ___________, 2004. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until
the close of business on ___________, 2009.
18. Governing Law; Submission to Jurisdiction. This
Agreement and each Warrant Certificate issued hereunder shall be deemed to be
a contract made under the laws of the State of New York and for all purposes
shall be construed in accordance with the laws of said State of New York
without giving effect to the rules of said State of New York governing the
conflicts of laws.
The Company, the Representatives and any other registered
Holders hereby agree that any action, proceeding or claim against it arising
out of, or relating in any way to, this Agreement shall be brought and
enforced in the courts of the State of New York or of the District Court of
the United States of America for the Southern District of New York, and
irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representatives and any other registered Holders
hereby irrevocably waive any objection to such exclusive jurisdiction or
inconvenient forum. Any such process or summons to be served upon any of the
Company, the Representatives and the Holders (at the option of the party
bringing such action, proceeding or claim) may be served by transmitting a
copy thereof, by registered or certified mail, return receipt requested,
postage prepaid, addressed to it at the address set forth in Section 14
hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim. The
31
<PAGE>
Company, the Representatives and any other registered Holders agree that the
prevailing party(ies) in any such action or proceeding shall be entitled to
recover from the other party(ies) all of its their reasonable legal costs and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
19. Entire Agreement; Modification. This Agreement
(including the Underwriting Agreement and the Warrant Agreement to the extent
portions thereof are referred to herein) contains the entire understanding
between the parties hereto with respect to the subject matter hereof and may
not be modified or amended except by a writing duly signed by the party
against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall
be held to be invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor
should they be construed as, a part of this Agreement and shall be given no
substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the
Company and the Representatives and any other registered Holder(s) of the
Warrant Certificates or Warrants Securities any legal or equitable right,
remedy or claim under this Agreement; and this Agreement shall be for the
sole benefit of the Company and the
32
<PAGE>
Representatives and any other registered Holders of Warrant Certificates or
Warrant Securities.
23. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and such counterparts shall together constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] AWG, LTD.
By: ______________________________________
Mack H. Jennings, President
Attest:
_____________________________
John Caponigro, Secretary
NUTMEG SECURITIES, LTD.
By: ______________________________________
Daniel T. Guilfoile,
Director of Investment Banking
KLEIN MAUS AND SHIRE, INC.
By: ______________________________________
Mohammad Ali Khan, President
33
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
(i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______________, 2004
No. RW-______ ______ Warrants to Purchase
______ Shares of Series A 6% Preferred Stock
34
<PAGE>
WARRANT CERTIFICATE
This Warrant Certificate certifies that _________________,
or registered assigns, is the registered holder of Warrants to purchase
initially, at any time from _________, 2000 until 5:00 p.m. New York time on
___________, 2004 (the "Expiration Date"), up to ___________ fully-paid and
non-assessable shares of Series A 6% Preferred Stock, $.001 par value per
share ("Preferred Stock") of AWG, Ltd., a Nevada corporation (the "Company"),
at the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $16.50 per share of Preferred Stock upon surrender of
this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in
the Representatives' Warrant Agreement dated as of ________________, 1999
between the Company and Nutmeg Securities, Ltd. and Klein Maus and Shire,
Inc. (the "Representatives' Warrant Agreement"). Payment of the Exercise
Price shall be made by certified or official bank check in New York Clearing
House funds payable to the order of the Company or by surrender of this
Warrant Certificate.
No Warrant may be exercised after 5:00 p.m., New York time,
on the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Warrants issued pursuant to the
Representatives' Warrant Agreement, which Representatives' Warrant Agreement
is hereby incorporated by reference in and made a part of this instrument and
is hereby referred to for a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Representatives' Warrant Agreement provides that upon
the occurrence of certain events the Exercise Price and the type and/or
number of the Company's securities issuable thereupon may, subject to certain
conditions, be adjusted. In such event, the Company will, at the request of
the holder, issue a new Warrant Certificate evidencing the adjustment in the
Exercise Price and the number and/or type of securities issuable upon the
exercise of the Warrants; provided, however, that the failure of the Company
to issue such new Warrant Certificates shall not in any way change, alter, or
otherwise impair, the rights of the holder as set forth in the
Representatives' Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Representatives' Warrant Agreement, without any charge
except for any tax or other governmental charge imposed in connection with
such transfer.
Upon the exercise of less than all of the Warrants
evidenced by this Warrant Certificate, the Company shall forthwith issue to
the holder hereof a new Warrant Certificate representing such
35
<PAGE>
numbered unexercised Warrants.
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the holder(s)
hereof, and for all other purposes, and the Company shall not be affected by
any notice to the contrary.
All terms used in this Warrant Certificate which are
defined in the Representatives' Warrant Agreement shall have the meanings
assigned to them in the Representatives' Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ____________, 1999
[SEAL] AWG, LTD.
By: __________________________________
Mack H. Jennings, President
Attest:
______________________________
John Caponigro, Secretary
36
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
_______________ Warrant Securities
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House Funds to the order of AWG, Ltd.
in the amount of $ _____ , all in accordance with the terms of Section 3.1 of
the Representatives' Warrant Agreement dated as of ___________________, 1999
between AWG, Ltd., Nutmeg Securities, Ltd. and Klein Maus and Shire, Inc. The
undersigned request that a certificate for such Warrant Securities be
registered in the name of ___________________ whose address is
___________________ and that such Certificate be delivered to
___________________ whose address is ___________________.
Signature _______________________________________________
(Signature must conform in all respects to name of holder
as specified on the face of the Warrant Certificate)
_________________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
37
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________________ hereby sells,
assigns and _______________ unto
_______________________________________________________________________
(Please print name and address of transferee)
_______ Warrant Certificate, together with all right, title and interest
therein, and does hereby reasonably constitute and appoint _____________,
as Attorney, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
Date: _______________ Signature: ____________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant Certificate)
____________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
38
6.10.1 Lock-Up Agreement between Colin Frank Riseam, AWG, Ltd.,
Klein, Maus and Shire, Inc. and Nutmeg Securities, Ltd.
January 12, 1999
Klein Maus and Shire, Inc.
110 Wall Street
New York, New York 10005
Nutmeg Securities, Ltd.
495 Post Road East
Westport, Connecticut 06880
AWG, Ltd.
4162 Big Ranch Road
Napa, California 94558
Gentlemen:
The undersigned holder of five hundred thousand (500,000)
shares of the Series A 6% Preferred Stock, $.001 par value per share (the
"Preferred Stock"), of AWG, Ltd., a Nevada corporation (the "Company"), which
shall in addition also include any shares of Preferred Stock issuable to the
holder upon the exercise of options or warrants, or acquired upon conversion
of any other securities owned by the undersigned holder, in consideration of
the underwriting of a public offering (the "Public Offering") of securities
of the Company by J.P. Turner & Company, L.L.C. and Klein Maus and Shire,
Inc. (the "Underwriters"), hereby irrevocably agrees that for a period
commencing as of the date hereof and thereafter for a continuous period
expiring thirteen (13) months (the "Lock-up Period") from the effective date
(the "Effective Date") of the Company's Registration Statement on Form SB-1
(Registration No. 333-48165) which relates to the Public Offering of its
securities by the Underwriters, the undersigned holder will not offer, sell,
transfer, hypothecate or otherwise depose of any shares of Preferred Stock of
the Company now owned or hereafter acquired, whether beneficially or of
record, by the undersigned holder, including, but not limited to shares of
Preferred Stock acquired upon exercise of options or warrants or acquired
upon conversion of any other securities owned by the undersigned holder
(collectively, the "Securities"), except by means of a private
<PAGE>
-2- January 12, 1999
transaction in connection with which the proposed transferee agrees in
writing to be bound by all of the provisions of this agreement prior to the
consummation of such private transaction; provided that the foregoing shall
not apply to shares of Preferred Stock acquired by the undersigned in the
Public Offering or to Securities acquired by the undersigned in the after
market after the closing date of the Public Offering.
The undersigned acknowledges that he will cause:
1. A copy of this Agreement to be available from the
Company or the Company's transfer agent upon request
and without charge;
2. A notice to be placed on the face of each certificate
for the Securities stating that the transfer of the
Securities is restricted in accordance with the
conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each
certificate representing the Securities which states
that the sale or transfer of the Securities is subject
to certain restrictions pursuant to a Lock-up Agreement
between the shareholder, the Company and the
Underwriters, which agreement is on file with the
Company and the stock transfer agent, from which a copy
is available upon request and without charge.
4. A copy of this Agreement to be filed with NASD
Regulation, Inc., Corporate Financing Department.
It is further understood and agreed by the undersigned that
the 500,000 shares of Preferred Stock being included for registration in the
Public Offering will not be offered for sale during the Lock-up Period.
Upon the expiration of the Lock-up Period any NASD member
acquiring the released shares of Preferred Stock shall notify the NASD of the
Lock-up release and disclose the purchase price and other material terms of
the sale of such released shares.
Notwithstanding anything to the contrary in this Agreement,
this Agreement shall terminate upon the termination of the Letter of Intent
dated November 25, 1997 between the Company and the Underwriters relating to
the Public Offering in accordance with the provisions of the Letter of Intent
or, if the Company
<PAGE>
-3- January 12, 1999
and the Underwriters enter into an underwriting agreement with respect to the
Public Offering, upon termination of the underwriting agreement without
consummation of the Public Offering.
This Agreement may be executed in multiple counterparts and on
facsimile paper and by facsimile transmission as necessary. When each of the
parties has signed and delivered at least one such counterpart, each
counterpart will be deemed an original and, when taken together with the
other signed counterpart(s), shall constitute one fully executed copy of this
Agreement, which shall be binding upon and effective as to the parties
according to its terms.
Very truly yours,
----------------------------
Name: Colin Frank Riseam
Address: 110 Park Road
Hampton Hill
England TW 12 1 HR
<PAGE>
-4- January 12, 1999
Acknowledged and Agreed:
KLEIN MAUS AND SHIRE, INC.
By:
---------------------------------
Mohammad Ali Khan, President
NUTMEG SECURITIES, LTD.
By:
------------------------------------
Daniel P. Guilfoile, Director of
Investment Banking
AWG, LTD.
By:
- -----------------------------------
Mack H. Jennings, President
6.16.1 Second Promissory Note in favor of Joseph Antonini
<PAGE>
PROMISSORY NOTE
up to $250,000.00
1800 West Maple Road
Troy, MI 48084
December 10, 1998
FOR VALUE RECEIVED, the undersigned, AWG, Ltd. ("Obligor") promises to pay to
the order of Joseph E. Antonini, ("Payee"), the principal amount of Two
Hundred Fifty Thousand and 00/100 Dollars ($250,000.00) or so much of such
amount as may be outstanding from time to time and interest on the unpaid
principal balance at a rate equal to eight percent (8%) per annum. Interest
only shall be payable monthly with the first interest only payment commencing
on February 1, 1999.
The principal of this note and the accrued interest on this note
shall be paid in full either upon the acquisition of capital funding by
Obligor or by March 1, 1999, whichever shall first occur. Obligor may prepay
all or part of the principal on this note at any time without penalty of any
kind.
Each payment upon this note shall be made at the Payee's address as
set forth above or at such other place as the holder of this note may direct
in writing.
If default occurs in the payment of any principal or interest and if
the default continues for thirty (30) days after Payee gives Obligor written
notice specifying the basis of the default, or if a voluntary or involuntary
case in bankruptcy, receivership, or insolvency is at any time instituted by
or against Obligor, then the indebtedness evidenced by this note shall, at
the option of the holder, become immediately due and payable, without notice
or demand.
Obligor agrees to pay any and all expenses, including reasonable
attorney fees and legal expense paid or incurred by the holder in attempting
to collect this note.
This note shall be governed by and interpreted according to the law
of the State of Michigan.
OBLIGOR:
AWG, Ltd.
By:/s/ Mack Jennings
---------------------------
Mack Jennings
Its: President
Dated: December 10, 1998
6.18 Loan Documents with Comerica Bank
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made as of this 10th day of
December, 1998, by and between AWG, Ltd., a Nevada corporation ("Borrower"),
and COMERICA BANK, a Michigan Banking Corporation ("Lender").
1. DEFINITIONS OF TERMS USED IN THIS AGREEMENT.
1.1 Borrower's Interest: The rate of interest to be paid to Lender in
respect to the Loan as set forth in the Notes.
1.2 Default Interest: That rate of interest specified in the Notes
which shall be in effect in the event of default hereunder.
1.3 Environmental Indemnity: The unsecured environmental indemnity
agreement executed in favor of Lender of even date herewith.
1.4 Financial Statements: Financial statements of the Borrower and
Guarantor and such other entity required by Lender including operating
statements, balance sheets and such other financial reports that Lender may
require.
1.5 Governmental Authority: The authority of the United States, the
State in which the Property is located, any political subdivision thereof,
any city and any governmental or quasi-governmental agency, department,
commission, board, bureau or instrumentality of any of them, or any court,
administrative tribunal, or public utility.
1.6 Governmental Requirements: Any present or future law, ordinance,
order, rule or regulation of a Governmental Authority applicable to Borrower
or the construction, maintenance, use, operation or sale of the Property.
1.7 Guarantor(s): The Guarantor(s) of the obligations evidenced by
the Notes, the Trust Deed and the Environmental Indemnity, i.e.: Joseph E.
Antonini and Mario Andretti.
1.8 Guaranty: The guaranty, if any, executed by the person or persons
named herein as Guarantor(s), which guarantees the performance of Borrower's
obligations specified herein.
1.9 Improvements: the buildings/structures located on the Property.
1.10 Litigation Amount: Fifty Thousand Dollars ($50,000).
1.11 Loan: The total amount evidenced by the Notes, i.e.: up to Two
Million Seven Hundred Thousand Dollars ($2,700,000), representing the First
Non-Revolving Loan, the Second Non-Revolving Loan, and the Revolving Loan.
1.12 Loan Documents: This Agreement, the loan documents and
instruments listed in Paragraph 4.1 of this Agreement, and all documents
given to Lender from time to time to secure the Loan, provided, however, that
the Guaranty and the Environmental Indemnity are not Loan Documents.
Notwithstanding any provision of any Loan Document, Borrower's obligations
under the Environmental Indemnity are not secured by the Trust Deed.
1.13 Loan Fee: The fee to be paid to Lender in consideration for
Lender agreeing to make the Loan and entering into this Agreement, which fee
shall not be subject to reduction or be refundable under any and all
circumstances, and which fee is the sum of Twelve Thousand Five Hundred
Dollars ($12,500), payable upon Recordation.
1
<PAGE>
1.14 Loan-to-Value Ratio: On the First Non-Revolving Loan shall be
seventy-five percent (75%). On the Second Non-Revolving Loan shall be
sixty-five percent (65%).
1.15 Major Leases: Those Leases, if any, described on Exhibit A
attached hereto and made a part hereof.
1.16 Notes: The First Non-Revolving Note, the Second Non-Revolving
Note, and the Revolving Note, collectively, of even date herewith executed by
Borrower as maker and payable to Lender or order, in the aggregate principal
amount of the Loan.
1.17 Personal Property: That personal property described in the Trust
Deed and which is collateral for the Loan.
1.18 Project: The Property, the Improvements and the Personal
Property.
1.19 Property: That certain real property legally described in the
Trust Deed and the Improvements thereon.
1.20 Recordation: The act of recording the Trust Deed in the official
records of the County in which the Property is situated.
1.21 Title Insurer: The issuer of the title insurance policy required
by Paragraph 7.2, i.e.: Chicago Title Company.
1.22 Trust Deed: The deed of trust in favor of Lender of even date
herewith encumbering the Property and given to secure the Notes.
2. LOAN.
2.1 Borrower has applied to Lender for the Loan for the purpose of
refinancing the current mortgage and for other debt obligations, and for
working capital.
2.2 Lender and Borrower agree that Lender shall make the Loan to
Borrower and Borrower shall accept the Loan upon the terms, conditions,
covenants, representations and warranties contained herein. All Loan funds
disbursed hereunder shall be evidenced by the Notes, bear interest at the
rate of Borrower's Interest or Default Interest, as the case may be, and be
secured by the Trust Deed.
3. LOAN PROCEEDS. Upon Recordation, Lender is authorized to disburse the
Loan Proceeds pursuant to the instructions given by Borrower in the Loan
Disbursement Authorization in the form attached as Exhibit B hereto and made
a part hereof.
4. CONDITIONS PRECEDENT TO RECORDATION. Prior to Recordation the
following conditions shall have been satisfied:
4.1 Lender shall have received:
4.1.1 this executed Agreement;
4.1.2 the executed Notes;
4.1.3 the executed Trust Deed;
4.1.4 the executed Security Agreement;
2
<PAGE>
4.1.5 the executed Environmental Indemnity;
4.1.6 executed UCC-1 Financing Statements;
4.1.7 UCC-3 search for Borrower and its general partner(s), if
any;
4.1.8 the Financial Statements;
4.1.9 a counterpart original of insurance policies or
certificates thereof for the insurance required by
Paragraph 7.5 hereof;
4.1.10 Preliminary title report issued by Title Insurer showing
the condition of title to the Property with the
Property's legal description and a copy of all documents
listed as exceptions to said Report;
4.1.11 [Intentionally omitted.]
4.1.12 a "phase one" environmental assessment, in form and
substance satisfactory to Lender ("Environmental
Assessment") prepared by a qualified licensed
environmental consultant acceptable to Lender confirming
the absence of hazardous or toxic materials in, on,
under or around the Property. The Environmental
Assessment shall, at a minimum, include a description of
current and former uses of the Property and the results
of an inspection of the Property and adjacent and
neighboring property sufficient to form a basis for a
reasoned opinion concerning the existence of, or
potential for, hazardous material contamination on or in
the vicinity of the Property. In the event the
Environmental Assessment indicates that the Property may
be affected by hazardous or toxic materials, or is
otherwise unsatisfactory to Lender, in Lender's sole
discretion, Lender may require additional or further
environmental testing, inspection and/or assessment of
the Property.
4.2 If required by Lender as indicated by an "X" in the box opposite
the required item, Lender shall have received:
/x/ 4.2.1 Executed Guaranty;
/ / 4.2.2 A current ALTA/ACSM Land Title Survey of the Property
including dimensions, delineations and locations of all
easements thereon, satisfactory to the Title Insurer if
required by it and to Lender;
/ / 4.2.3 A complete set of the "as built" plans and
specifications for the Improvements;
/ / 4.2.4 An Opinion Letter from Borrower's counsel to the effect
set forth in Paragraphs 6.1, 6.2, 6.3, 6.4, 6.5, 6.7,
6.8, 6.9, 6.11 and 6.15 hereof, and containing such
other opinions as may be required by Lender;
/x/ 4.2.5 If Borrower or a general partner of Borrower or any
Guarantor is a corporation:
(a) a certified copy of its Articles of Incorporation and
by-laws and all amendments thereof, as filed with the
Office of the Secretary of State;
(b) a Certificate of Status; and
(c) certified Resolution of Board of Directors of Borrower
authorizing the consummation of the transactions
contemplated hereby and providing for the
3
<PAGE>
execution of a written direction of payment if Loan
proceeds are to be paid to a person other than Borrower;
/ / 4.2.6 If Borrower or any Guarantor is a limited liability
company:
(a) a certified copy of its Articles of Organization, as
filed with the Office of the Secretary of State, and all
amendments, restatements and corrections thereto;
(b) a copy of its by-laws and all amendments thereof, if any;
(c) a copy of its Operating Agreement, and all amendments,
restatements and corrections thereto;
(d) a Certificate of Status;
(e) in the case of a member-managed limited liability
company, the consent of all of the members of the
limited liability company authorizing the transactions
contemplated hereby and the execution of the documents
contemplated by this Agreement; and
(f) in the case of a manager-managed limited liability
company, the consent of all of the managers of the
limited liability company authorizing the transactions
contemplated hereby and the execution of the documents
contemplated by this Agreement.
/ / 4.2.7 If Borrower or a general partner of Borrower or any
Guarantor is a General Partnership or Joint Venture, the
Partnership or Joint Venture Agreement;
/ / 4.2.8 If Borrower or a general partner of Borrower or any
Guarantor is a Limited Partnership:
(a) the Limited Partnership Agreement;
(b) a certified copy of the Certificate of Limited
Partnership (LP-1), as filed with the Office of the
Secretary of State; and
(c) a Certificate of Good Standing;
/ / 4.2.9 If Borrower or a general partner of Borrower or any
Guarantor is a Trust, a copy of the Trust indenture;
/ / 4.2.10 Copy of executed Major Leases;
/x/ 4.2.11 Executed Assignment of Real Property Leases and Rents;
/ / 4.2.12 Subordination, Attornment and Non-disturbance Agreements
from each tenant under a Major Lease executed in
recordable form and an estoppel certificate acceptable
to Lender from each tenant under a Major Lease; and
/ / 4.2.13 If the Property is situated outside the State of
California, an opinion of local counsel of Lender's
selection to the effect that (i) upon due authorization
and execution by the parties thereto and upon such
recording or filing thereof as may be specified in the
opinion, the Notes, Trust Deed, this Agreement, the
Guaranty, and the Completion
4
<PAGE>
Agreement will be legal, valid and binding instruments,
enforceable against the makers thereof in accordance
with their respective terms; (ii) the Trust Deed creates
the lien it purports to create on the Property, and
effectively assigns the leases purported to be assigned
thereby, and stating the manner of recording or filing
to be effected in order to establish, preserve and
protect the Lender's interest therein, and whether there
is any necessity for the re-recording of the Trust Deed
or re-filing requirements, if any; (iii) upon due
recording or filing of the Trust Deed, it will, to the
extent of all advances made hereunder, be prior to all
subsequently filed constitutional or statutory liens for
services rendered or materials furnished to the Property
regardless of the time such services were rendered or
materials furnished as the case may be; (iv) in the
event of the foreclosure or other method of enforcement
of the remedies provided for in the Trust Deed, any
leases of the Property will, at Lender's option, remain
in full force and effect between the lessees thereunder
and the Lender or any purchaser of the Property pursuant
to such remedial action; (v) all rights of redemption of
Borrower shall be extinguished upon the consummation of
the foreclosure sale of the Trust Deed; (vi) Lender, by
making the Loan, (a) shall not be deemed to be doing
business in that state or, if the making of the Loan
constitutes doing business in that state, that the
Lender has been duly qualified to do business in that
state, (b) shall not become subject to the payment of
any income, franchise, capital or other similar taxes or
assessments with respect to its ownership of the Notes
or the receipt of principal or interest thereunder other
than customary corporate income taxes on the interest
received thereon, (c) shall not be violating the usury
laws of that state, and (vii) as to such other matters,
incident to the transactions contemplated hereby, as
Lender may require.
4.3 To comply with California legislation, the title company handling
funds in an escrow capacity is required to have deposited into its escrow
depository account before recording a transaction immediately available funds
representing disbursements to be made by it.
5. CONDITIONS PRECEDENT TO DISBURSEMENT. Prior to the disbursement of the
Loan Proceeds, the following conditions shall have been satisfied:
5.1 Title Insurer shall have issued or agreed to issue the title
policy described in Paragraph 7.2 hereof, naming Lender as insured to the
extent of the Loan amount.
5.2 Lender shall have received the Loan Disbursement Authorization.
5.3 UCC-1 Financing Statements shall have been filed with the
Secretary of State for the state where the Property is situated describing
the Personal Property.
5.4 Lender shall have been furnished with a Certificate issued by the
filing officer of the Secretary of State for the state in which the Property
is situated showing Lender's Financing Statement as prior to all other
Financing Statements in Borrower's name relative to the Personal Property.
5.5 The representations and warranties of Borrower made in Paragraph
6 hereof shall be true and correct on and as of the date of the disbursement
with the same effect as if made on such date.
6. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and
warrants, which representations and warranties shall survive any
investigations, inspections or inquiries made by Lender or any of its
representatives or the disbursement of Loan proceeds hereunder, that:
6.1 If Corporation: If a corporation, it is duly organized and
validly existing, in good standing under the laws of the state of its
incorporation, has stock outstanding which has been duly and validly issued,
is qualified to do business, and is in good standing under the laws of the
state in which the Property is situated, with full power and authority to
consummate the transactions contemplated hereby.
5
<PAGE>
6.2 If Limited Liability Company: If a limited liability company, it
is duly organized and validly existing, in good standing under the laws of
the state of its formation, and is in good standing under the laws of the
state in which the Property is situated, with full power and authority to
consummate the transactions contemplated hereby.
6.3 If General Partnership: If a general partnership, it is duly
organized and validly existing, with full power and authority to consummate
the transactions contemplated hereby.
6.4 If Limited Partnership: If a limited partnership, it is duly
organized and validly existing, in good standing under the laws of the state
in which the Property is situated, with full power and authority to
consummate the transactions contemplated hereby, and each of Borrower's
ownership interests has been issued in compliance with all federal and state
securities laws and regulations.
6.5 If Trust: If a trust, it is duly organized, validly existing and
the trustees thereof are qualified to act as trustee, with full power and
authority to consummate the transactions contemplated hereby.
6.6 Financial Statements: The Financial Statements heretofore
delivered to Lender are true and correct in all respects, have been prepared
in accordance with generally accepted accounting practice, fairly present the
respective financial conditions of the subjects thereof as of their
respective dates; no materially adverse change has occurred in the financial
conditions reflected therein since their respective dates and no additional
borrowings have been made by Borrower or any Guarantor since the date thereof
other than the borrowing contemplated hereby or approved by Lender.
6.7 Litigation: There are no actions, suits or proceedings pending
or, to the knowledge of Borrower, threatened against or affecting it, the
Property or Guarantor, or involving the validity or enforceability of the
Trust Deed or the priority of the lien thereof, at law or in equity, or
before or by any Governmental Authority. To Borrower's knowledge, it is not
in default with respect to any order, writ, injunction, decree or demand of
any court or any Governmental Authority.
6.8 No Breach: The consummation of the transaction hereby
contemplated and performance of this Agreement and the other Loan Documents
and the Environmental Indemnity will not result in any breach of, or
constitute a default under any mortgage, deed of trust, lease, bank loan or
security agreement, corporate charter, by laws or other instrument to which
the Borrower or any Guarantor is a party or by which it may be bound or
affected.
6.9 Other Liens: Borrower has made no contract or arrangement of any
kind, the performance of which by the other party thereto would give rise to
a lien on the Property.
6.10 Major Leases: The Major Leases, if any, are in full force and
effect, there are no defaults under any of the provisions thereof, and all
conditions to the effectiveness or continuing effectiveness thereof required
to be satisfied as of the date hereof have been satisfied.
6.11 No Default: There is no default on the part of Borrower under
this Agreement, any other Loan Document, or the Environmental Indemnity and
no event has occurred and is continuing which with notice or the passage of
time or either would constitute a default under any thereof.
6.12 CC&R's, Zoning: It has examined, is familiar with, and the
Improvements in all respects conform to and comply with, all covenants,
conditions, restrictions, reservations and zoning ordinances affecting the
Property.
6.13 Title to Personal Property: Any personal property required by
Lender as additional security for the Notes is vested in Borrower free and
clear of all liens, encumbrances and adverse claims and that the security
interest of Lender in the personal property shall be a first lien thereon.
6
<PAGE>
6.14 Other Financing: It has not received other financing for the
Property and/or the Improvements except as has been specifically disclosed to
and approved by Lender prior to Recordation.
6.15 Borrower's Powers; Enforceability: Borrower has full power and
authority to execute this Agreement, the Notes, and the other Loan Documents
and to undertake and consummate the transactions contemplated hereby and
thereby, and to pay, perform and observe its conditions, covenants,
agreements and obligations herein and therein contained. Each of the Loan
Documents, the Environmental Indemnity and the Guaranty, if any, when
executed and delivered to Lender, will constitute a legal, binding and valid
obligation, enforceable in accordance with its terms.
6.16 Finder's Fees: Borrower hereby warrants and represents that it
has not dealt with any person, firm or corporation who is or may be entitled
to any finder's fee, brokerage commission, loan commission or other sum in
connection with the execution of this Agreement, consummation of the
transactions contemplated hereby and the making of the Loan by Lender to
Borrower, and Borrower does hereby indemnify and agree to hold Lender
harmless from and against any and all loss, cost, liability or expense,
including reasonable attorney's fees Lender may suffer or sustain should such
warranty or representation prove inaccurate in whole or in part.
6.17 Accuracy: All documents, reports, instruments, papers,
information and forms of evidence delivered to Lender by Borrower with
respect to the Loan are accurate and correct, are complete insofar as
completeness may be necessary to give Lender true and accurate knowledge of
the subject matter thereof, and do not contain any misrepresentations or
omissions. Lender may rely on such documents, reports, instruments, papers,
information and forms of evidence without investigation or inquiry, and any
payment made by Lender in reliance thereon shall be a complete release in its
favor of all sums so paid.
7. BORROWER'S COVENANTS. Borrower covenants and agrees until the full and
final payment of the Loan, unless Lender waives compliance in writing, that
it will
7.1 Inspection: Permit Lender, or its representatives (and Lender
shall have the right) to enter upon the Property and inspect the Property and
the Improvements to determine Borrower's compliance with the Loan Documents,
and will cooperate with Lender in making its inspections. Inspections by
Lender shall be for the purpose of protecting the security of Lender and
preserving Lender's rights under the Loan Documents. No inspection shall be
deemed to constitute a waiver of any default of Borrower.
7.2 Title Insurance: Deliver or cause to be delivered to Lender at
Recordation or within a reasonable time thereafter a 1970 ALTA Lender's
Policy of Title Insurance or its equivalent with a liability limit of not
less than the face amount of the Notes, issued by Title Insurer, insuring
Lender's interest under the Trust Deed as a valid first lien on the Property,
together with such reinsurance or coinsurance agreements or endorsements to
said policy as Lender may require. Said policy shall contain only such
exceptions from its coverage as shall have been approved in writing by
Lender. After Recordation, Borrower shall, at its own cost and expense,
maintain the Trust Deed as a first lien on the Property. Borrower shall
furnish to Title Insurer surveys and any other information required to enable
it to issue such policy and endorsements.
7.3 Leases: Lender has approved all of the Major Leases identified on
Exhibit A. Borrower shall submit to Lender for its written approval a pro
forma schedule setting forth Borrower's projections regarding leasing of the
individual tenant spaces within the Improvements including, without
limitation, "effective" rental rate, triple net (i.e., exclusive of all
expenses, taxes, insurance, common area or other reimbursements or
recoveries) or gross rents, tenant improvement allowances, lease term, and
"free rent" or rent deferral periods ("Pro Forma Schedule"). All new leases
and tenants of the Improvements shall be subject to Lender's written approval
prior to execution of any such lease. For purposes hereof, an "Approved
Lease" shall mean a lease fully executed by the tenant thereunder and
Borrower on Borrower's current standard form lease for the Project, as
approved by Lender, and meeting the following criteria (except as may be
specifically approved otherwise by Lender):
7
<PAGE>
7.3.1 the minimum overall average "effective" rental rate over
the term of the lease shall be not less than the amount set forth in the Pro
Forma Schedule, on a triple net or gross rents basis as set forth in the Pro
Forma Schedule;
7.3.2 the lease term shall be for at least the minimum term set
forth in the Pro Forma Schedule;
7.3.3 any "free rent" period or other rent deferral period
provided for in the lease shall not exceed the maximum period or amount set
forth in the Pro Forma Schedule;
7.3.4 any material modifications to the approved standard form
lease shall be subject to the approval of Lender; and
7.3.5 Lender shall have approved the financial statements of the
proposed tenant, which approval shall be in the sole discretion of Lender. In
addition, Lender may require additional financial information concerning the
proposed tenant to be provided, which shall include a minimum of one (1)
year's operating statements.
Borrower shall deliver all proposed leases to Lender for review and
approval prior to execution. Proposed leases shall be delivered to Lender,
Attention: Real Estate Loan Department, or to such specific individual as may
designated in writing by Lender. Lender shall approve or disapprove any lease
so submitted by Borrower within ten (10) working days after Lender's receipt
thereof. Failure by Lender to approve or disapprove a lease within said ten
(10) day period shall be deemed an approval of said lease.
Borrower shall use its best and diligent efforts to lease all of
the Project, in accordance with the standards for Approved Leases set forth
above, and to keep the Project fully leased under leases complying with such
standards. Borrower shall fully and faithfully perform each and every
covenant, agreement, or obligation of lessor under any and all leases
covering any portion of the Project. Upon the request of Lender, Borrower
shall provide Lender with a current rent roll supplying the name of the
lessee and the net monthly rental for each space and such other information
as Lender may request.
7.4 Personal Property Installation: Not install materials, personal
property, equipment, or fixtures subject to any security agreement or other
agreement or contract wherein the right is reserved to any person, firm or
corporation to remove or repossess any such material, equipment or fixtures,
or whereby title to any of the same is not completely vested in Borrower at
time of installation, without Lender's written consent.
7.5 Insurance: Prior to Recordation, procure and deliver to Lender
and thereafter maintain a policy or policies of insurance in form and content
and by an insurer or insurers satisfactory to Lender, including a clause
giving Lender a minimum of thirty (30) days' notice if such insurance is
cancelled, as follows: (i) hazard insurance in an amount not less than the
face amount of the Notes or the full insurable value of the Improvements on a
replacement cost basis, whichever amount is lesser, with the normal
conditions including fire, extended coverage, vandalism, malicious mischief,
and a lender's loss payable endorsement naming Lender as loss payee; (ii)
comprehensive liability insurance on an "occurrence" basis, indicating
coverage satisfactory to Lender, and naming Lender as an additional insured;
(iii) any additional or different coverage as may be specified in Lender's
insurance letter; and (iv) any and all additional insurance that Lender in
its reasonable judgment may from time to time require (including, without
limitation, earthquake and/or flood coverage), against insurable hazards
which at the time are commonly insured against in the case of property
similarly situated. At Lender's request, Borrower shall supply Lender with a
counterpart original of any policy.
7.6 Maintain Records: Keep and maintain full and accurate books,
accounts and records of its operations according to generally accepted
accounting principles and practices for its type of business. All records
relating to the income, expenses, management, operation, maintenance, repair,
construction, alteration of or addition to the Property shall be kept at the
principal business office of Borrower for not less than three (3) years after
delivery of the annual statement required to be delivered pursuant to
Paragraph 7.7. Borrower shall permit Lender and its representatives or agents
to audit and/or examine from time to time upon reasonable written notice, all
books
<PAGE>
and accounts and records pertaining to the Property and to make extracts
therefrom and copies thereof. Borrower shall make all such books and records
specified in the notice available at the time specified in the notice and at
the place where the records are kept, or at the election of Lender, at
Lender's office. If Borrower defaults in any obligations under this Agreement
or the Loan Documents, Lender may perform any of the acts authorized by this
paragraph at the sole cost of Borrower. Borrower shall promptly reimburse
Lender for its costs and such costs shall be secured by the Trust Deed.
7.7 Financial Information: Furnish to Lender at least annually,
within ninety (90) days after the end of its fiscal year, or more frequently
if requested by Lender, a full and complete financial statement concerning
income, expenses, assets, and liabilities applicable or attributable to the
Property and the operations thereof. Such statement shall be prepared in
accordance with generally accepted accounting principles and shall be
certified as true, complete and correct by Borrower.
7.8 Taxes: Pay and discharge all lawful claims, including taxes,
assessments, and governmental charges or levies imposed upon it or its income
or profits or upon any properties belonging to it prior to the date upon
which penalties attach thereto; provided that Borrower shall not be required
to pay any such tax, assessment, charge, or levy, the payment of which is
being contested in good faith and by proper proceedings.
7.9 Notification of Default: Promptly notify Lender in writing of the
occurrence of any event of default under this Agreement, the Notes, the Trust
Deed or the Environmental Indemnity or of any facts then in existence which
would become an event of default hereunder or thereunder upon the giving of
notice or the lapse of time or both.
7.10 Payment of Costs: Pay all costs and expenses required to satisfy
the conditions of this Agreement. Without limitation of the generality for
the foregoing, Borrower will pay:
7.10.1 all taxes and recording expenses, including stamp taxes,
if any;
7.10.2 the fees and commissions lawfully due to brokers in
connection with this transaction and hold Lender harmless from all such
claims; and
7.10.3 the fees of Lender's counsel in connection with the
negotiation and preparation of this Agreement and the Loan Documents.
7.11 No Conveyance or Encumbrance: Not to sell, convey, transfer,
dispose of or further encumber the Property or the Improvements or any part
thereof or any interest therein or enter into a lease covering all or any
portion thereof or an undivided interest therein, either voluntarily,
involuntarily or otherwise, or enter into an agreement so to do without the
prior written consent of Lender being first had and obtained. All easements,
declarations of covenants, conditions and restrictions, and private or public
dedications affecting the Property shall be submitted to Lender for its
approval and such approval shall be obtained prior to the execution or
granting of any thereof by Borrower, accompanied by a drawing or survey
showing the precise location of each thereof.
7.12 Loan-to-Value Ratio: Maintain the ratio of (i) the then
outstanding principal balance of the First Non-Revolving Loan to (ii) the
value of the Property at stabilized occupancy at less than or equal to its
respective Loan-to-Value Ratio; and maintain the ratio of (i) the then
outstanding principal balance of the Second Non-Revolving Loan to (ii) the
value of the Property at stabilized occupancy at less than or equal to its
respective Loan-to-Value Ratio. Lender may from time to time determine the
value of the Property at stabilized occupancy using a method which (a)
conforms to then-current regulatory requirements, (b) is determined by Lender
to be reasonable and appropriate under the circumstances, and (c) takes into
account then-current market conditions, including vacancy factors, estimated
date of stabilization, rental rates and concessions, all as determined by
Lender. If Lender at any time determines that the Loan-to-Value Ratio has
been exceeded, Lender may, at Lender's option, make written demand on
Borrower to repay principal of the Loan in an amount sufficient to reduce the
then outstanding principal balance of the Loan so that the Loan-to-Value
Ratio is not exceeded. Borrower shall make any such payment of principal
within fifteen (15) days after delivery of such demand by Lender.
9
<PAGE>
7.13 Compliance with Governmental Requirements: Comply promptly with
any Governmental Requirement. Within ten (10) days after Borrower's receipt
of any governmental permits, approvals or disapprovals, Borrower shall
deliver copies of all such matters to Lender.
7.14 Satisfy Conditions: Cause all conditions hereof to be satisfied
at the time and in the manner herein provided.
7.15 Furnishing Notices: Borrower shall promptly furnish Lender with
copies, or notify Lender in writing, of the following:
7.15.1 any litigation affecting Borrower or any Guarantor, or if
Borrower is a partnership, any general partner of Borrower, where the amount
claimed is in excess of the Litigation Amount.
7.15.2 any communication, whether written or oral, that Borrower
may receive from any governmental, judicial or legal authority, giving notice
of any claim or assertion that the Improvements fail in any respect to comply
with any Governmental Requirements, or of any dispute which may exist between
Borrower and any governmental, judicial or legal authority that may adversely
affect Borrower, the Property or the Project;
7.15.3 any material adverse change in Borrower's or any
Guarantor's financial condition or operations or in the physical condition of
the Property and if Borrower is a partnership, in the financial condition or
operation of its general partner(s);
7.15.4 any filings (with true copies thereof) with any
Governmental Authority regarding or pursuant to any law related to Hazardous
Materials (as defined in the Trust Deed) or the environment;
7.15.5 any proceeding or inquiry by any Governmental Authority
(including, without limitation, the California State Department of Health
Services) with respect to the presence of any Hazardous Materials on the
Property or the migration thereof from or to other property;
7.15.6 all claims made or threatened by any third party against
Borrower or the Property relating to any loss or injury resulting from any
Hazardous Materials;
7.15.7 Borrower's discovery of any occurrence or condition on
any real property adjoining or in the vicinity of the Property or any part
thereof to be subject to any restriction on the ownership, occupancy,
transferability or use of the Property under any Hazardous Materials Laws; or
7.15.8 any proposed or contemplated change in the organization
or management of Borrower or in the nature of its business.
7.16 Organization and Management: Without the prior written consent
of Lender, Borrower shall not permit or suffer any management, organizational
or other material changes in its structure or operations and if Borrower is a
partnership, in the structure or operations of its general partner(s).
8. DEFAULT. At the option of Lender, the following shall constitute events of
default hereunder (including, if Borrower consists of more than one person,
the occurrence of any of such events which respect to any one or more of said
persons):
8.1 Any default in the performance of any covenant, condition or
agreement set forth herein, in the Trust Deed, Notes or other Loan Documents
or in any ground lease if the Property is a leasehold estate.
8.2 Borrower voluntarily suspends the transaction of business or
there is an attachment, execution or other judicial seizure of any portion of
Borrower's assets and such seizure is not discharged within ten (10) days.
10
<PAGE>
8.3 Borrower becomes insolvent or unable to pay its debts as they
mature or makes an assignment for the benefit of creditors.
8.4 Borrower files or there is filed against Borrower a petition to
have Borrower adjudicated a bankrupt or a petition of reorganization or
arrangement under any law relating to bankruptcy unless, in the case of a
petition filed against Borrower, the same is dismissed within ten (10) days.
8.5 Borrower applies for or consents to the appointment of a
receiver, trustee or conservator for any portion of Borrower's property or
such appointment is made without Borrower's consent and is not vacated within
ten (10) days.
8.6 Any representation by Borrower to Lender concerning Borrower's
financial condition or credit standing or any representation or warranty
contained herein proves to be false or misleading.
8.7 Default by Borrower on any other debt at Comerica
Bank-California.
8.8 The imposition, voluntary or involuntary, of any lien or
encumbrance upon the Property without Lender's written consent or unless an
adequate counter bond is provided and such lien is accordingly released
within ten (10) days of the imposition of such lien.
8.9 The occurrence of any event enumerated in Paragraphs 8.2, 8.3,
8.4, 8.5, 8.6, and 8.7 hereof with respect to any Guarantor.
9. REMEDIES. If any of the events of default set forth in Paragraph 8 occur,
then Lender, in addition to its other rights hereunder, may at its option,
without prior demand or notice:
9.1 Declare the Notes immediately due and payable.
9.2 Proceed as authorized by law to satisfy the indebtedness of
Borrower to Lender and in that regard, Lender shall be entitled to all of the
rights, privileges and benefits contained in the Trust Deed or other Loan
documents.
10. SECURITY INTEREST. Borrower does hereby give and grant to Lender a
security interest in all funds and deposits of Borrower on deposit at Lender
or any branch of Lender, as additional security for the obligations of
Borrower contained in the Notes, Trust Deed and the other Loan Documents.
11. RELEASE AND INDEMNITY. Borrower agrees to release and indemnify, defend
and hold Lender harmless from and against all liabilities, claims, actions,
damages, costs and expenses (including all reasonable legal fees and expenses
of Lender's counsel) arising out of or resulting from any failure to satisfy
any of the Governmental Requirements; Lender's performance of any act
permitted under the Loan Documents (excluding Lender's willful misconduct);
breach of any representation or warranty made or given by Borrower to Lender;
breach of any obligation of Borrower contained in any of the Loan Documents;
or any claim or cause of action of any kind by any party that Lender is
liable for any act or omission committed or made by Borrower or any other
person or entity in connection with the ownership or operation of the
Property, whether on account of any theory of derivative liability,
comparative negligence or otherwise. Upon demand by Lender, Borrower shall
defend any action or proceeding brought against Lender arising out of or
alleging any claim or cause of action covered by this indemnity, all at
Borrower's own cost and by counsel to be approved by Lender in the exercise
of its reasonable judgment. In the alternative, Lender may elect to conduct
its own defense at the expense of Borrower. The provisions of this Paragraph
11 shall survive the termination of this Agreement, the repayment of the
Loan, and the release of the Property or any portion of it from the Trust
Deed.
11
<PAGE>
12. GENERAL CONDITIONS.
12.1 No Waiver: No delay or omission of Lender in exercising any
right or power arising from any default by Borrower shall be construed as a
waiver of such default or as an acquiescence therein, nor shall any single or
partial exercise thereof preclude any further exercise thereof. Lender may,
at its option, waive any of the conditions herein and any such waiver shall
not be deemed a waiver of Lender's rights hereunder but shall be deemed to
have been made in pursuance of this Agreement and not in modification
thereof. No waiver of any event of default shall be construed to be a waiver
of or acquiescence in or consent to any preceding or subsequent event of
default.
12.2 No Third Party Benefits: This Agreement is made for the sole
benefit of Borrower and Lender, their successors and assigns and no other
person or persons shall have any rights or remedies under or by reason of
this Agreement nor shall Lender owe any duty whatsoever to any claimant to
exercise any right or power of Lender hereunder or arising from any default
by Borrower.
12.3 Notice: All notices or demands of any kind which either party
may be required or desire to serve upon the other under the terms of this
Agreement shall be in writing and shall be given by personal delivery,
national overnight courier, or by certified or registered United States mail,
postage prepaid, to the address for the party to be served set forth below
its signature. Notices shall be effective upon receipt or when proper
delivery is refused. In case of service by mail, notices shall be deemed
complete at the expiration of the second day after the date of mailing. If
Borrower consists of more than one person, service of any notice or demand of
any kind by Lender upon any one of said persons in the manner hereinabove
provided shall be complete service upon all. Either party may change its
address for purposes of notice by giving notice of such change of address to
the other party in accordance with the provisions of this paragraph.
12.4 Entire Agreement: This Agreement, the other Loan Documents and
the Environmental Indemnity constitute the entire understanding between the
parties regarding the matters mentioned in or incidental to this Agreement.
The Loan Documents and the Environmental Indemnity supersede all oral
negotiations and prior writings concerning the subject matter of the Loan
Documents and the Environmental Indemnity, including any inconsistent terms
of Lender's loan commitment to Borrower, if any; provided, however, that all
obligations of Borrower under the loan commitment (including, without
limitation, the obligation to pay any fees to Lender and any costs and
expenses relating to the Loan) shall survive the execution and delivery of
this Agreement, the other Loan Documents and the Environmental Indemnity, and
any failure by Borrower to perform any such obligation shall constitute an
event of default hereunder. If there is any conflict between the terms,
conditions and provisions of this Agreement and those of any other agreement
or instrument, including any of the Loan Documents or the Environmental
Indemnity, the terms, conditions and provisions of this Agreement shall
prevail. This Agreement may not be modified, amended or terminated except by
a written agreement signed by each of the parties hereto.
12.5 Documentation: In addition to the instruments and documents
mentioned or referred to herein, Borrower will, at its own cost and expense,
supply Lender with such other instruments, documents, information and data as
may, in Lender's opinion, be reasonably necessary for the purposes hereof,
all of which shall be in form and content acceptable to Lender.
12.6 Borrower Information: Borrower agrees that Lender may provide
any financial or other information, data or material in Lender's possession
relating to Borrower, the Loan, this Agreement, the Property or the
Improvements, to Lender's parent, affiliate, subsidiary, participants or
service providers, without further notice to Borrower.
12.7 Not Assignable: Neither this Agreement nor any right of Borrower
to receive any sums, proceeds or disbursements hereunder, or under the Notes
may be assigned, pledged, hypothecated, anticipated or otherwise encumbered
by Borrower without the prior written consent of Lender. Subject to the
foregoing restrictions, this Agreement shall inure to the benefit of Lender,
its successors and assigns and bind Borrower, its heirs, executors,
administrators, successors and assigns.
12.8 Time is of the Essence: Time is hereby declared to be of the
essence of this Agreement and of every part hereof.
12
<PAGE>
12.9 Supplement to Loan Documents: The provisions of this Agreement
are not intended to supersede the provisions of the Trust Deed or any other
Loan Document or the Environmental Indemnity but shall be construed as
supplemental thereto.
12.10 Joint and Several Obligations: If Borrower consists of more
than one person, the obligations of Borrower shall be the joint and several
obligations of all such persons, and any married person who executes this
Agreement agrees that recourse may be had against his or her separate
property for satisfaction of his or her obligations hereunder. When the
context and construction so require, all words used in the singular herein
shall be deemed to have been used in the plural and the masculine shall
include the feminine and neuter and vice versa.
12.11 Governing Law: This Agreement (and any and all disputes between
the parties arising directly or indirectly from the transaction or from the
lending relationship contemplated hereunder) shall be governed by and
construed in accordance with the laws of the State of California.
12.12 Governmental Regulations: If payment of the indebtedness
secured by the Trust Deed is to be insured or guaranteed by any governmental
agency, Borrower shall comply with all rules, regulations, requirements and
statutes relating thereto or provided in any commitment issued by any such
agency to insure or guarantee payment of such indebtedness.
12.13 Collection Costs: Borrower shall pay promptly to Lender without
demand, with interest thereon from date of expenditure at the Default
Interest rate, reasonable attorneys' fees and all costs and other expenses
paid or incurred by Lender in enforcing or exercising its rights or remedies
created by, connected with or provided in this Agreement, and payment thereof
shall be secured by the Trust Deed.
12.14 Survival: The representations, warranties and covenants herein
shall survive the disbursement of the Loan and shall remain in force and
effect until the Loan is paid in full.
12.15 Waiver of Jury Trial: LENDER AND BORROWER EACH ACKNOWLEDGE AND
AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE
LENDING RELATIONSHIP ESTABLISHED HEREBY WOULD BE BASED UPON DIFFICULT AND
COMPLEX ISSUES, AND THEREFORE, BORROWER AND LENDER EACH HEREBY WAIVE ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING ACTIONS
SOUNDING IN TORT) TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT RELATING HERETO OR ARISING FROM THE TRANSACTION
CONTEMPLATED HEREUNDER OR THE LENDING RELATIONSHIP ESTABLISHED HEREBY AND
AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED IN A COURT OF
COMPETENT JURISDICTION BY A JUDGE AND NOT BY A JURY.
13. SEVERABILITY. Invalidation of any one or more of the provisions of this
Agreement, the Trust Deed, the other Loan Documents or the Environmental
Indemnity by judgment or court order shall in no way affect any of the other
provisions thereof which shall remain in force and effect.
14. SPECIAL CONDITIONS. The special conditions, if any, are set forth in
Exhibit C attached hereto and made a part hereof and are, by this reference,
incorporated herein.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the
day and year first above written.
COMERICA BANK,
a Michigan Banking Corporation
By: ____________________________________
Lora A. McEachern, Vice President
Address:
1400 North Woodward Avenue, Suite 255
Bloomfield Hills, MI 48304
Attn: Lora McEachern
BORROWER
AWG, LTD.
By: ____________________________________
John P. Caponigro, Secretary
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph E. Antonini
14
<PAGE>
SCHEDULE OF MAJOR LEASES
(Exhibit A)
Square Term of
Premises Date of Lease Tenant Feet Lease
- -------- ------------- ------ ------ -------
15
<PAGE>
LOAN DISBURSEMENT AUTHORIZATION
(Exhibit B)
THE LOAN PROCEEDS IN THE AMOUNT OF $______________ SHALL BE
DISBURSED AS FOLLOWS:
Lender is hereby authorized and directed to make disbursements for
the purposes, in the amounts, and to the persons indicated:
1. As a non-refundable Loan Fee to COMERICA BANK-CALIFORNIA, a
California Banking Corporation, the sum of $12,500.
2. To Chicago Title Company, for payment of title policy premiums
and recording fees, the approximate sum of $________________.
3. For payment of taxes, the sum of $_______________.
4. Upon demand of _______________________________________, pay the
principal sum of $______________ plus interest thereon, if any,
to _______________________ for the credit of Borrower for use in
their escrow number _______________.
5. To COMERICA BANK-CALIFORNIA, a California Banking
Corporation, for appraisal fees and other costs of
processing the Loan the approximate sum of $___________.
6. Credit Account No. __________________ at COMERICA BANK-
CALIFORNIA, a California Banking Corporation, in the sum
of $_____________.
7. Pay to COMERICA BANK-CALIFORNIA, a California Banking
Corporation, for credit to Loan No. _______________ the
sum of $_______________.
8. Other: _______________________________________________________.
THIS LOAN DISBURSEMENT AUTHORIZATION IS EXECUTED BY BORROWER AND LENDER AS OF
THIS 10TH DAY OF DECEMBER, 1998.
BORROWER LENDER
AWG, LTD. COMERICA BANK,
a Michigan Banking Corporation
By: ____________________________ Address:
John P. Caponigro, Secretary 1400 North Woodward Avenue, Suite 255
Bloomfield Hills, MI 48304
Attn: Lora McEachern
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph E. Antonini
16
<PAGE>
SPECIAL CONDITIONS
(Exhibit C)
1. In addition to the definitions under Paragraph 1 of the Agreement, the
following definitions shall be used in the Agreement:
(a) First Non-Revolving Loan: That certain loan evidenced by the
First Non-Revolving Note in the principal amount of One Million Six Hundred
Fifty Thousand Dollars ($1,650,000).
(b) First Non-Revolving Note: That promissory note of even date
herewith executed by Borrower as Maker and payable to Lender or order, in the
principal amount of the First Non-Revolving Loan.
(c) Revolving Loan: That certain loan evidenced by the Revolving
Note in the principal amount of up to Two Hundred Thousand Dollars
($200,000).
(d) Revolving Note: The promissory note of even date herewith,
executed by Borrower as Maker and payable to Lender or order, in the
principal amount of the Revolving Loan.
(e) Second Non-Revolving Loan: That certain loan evidenced by the
Second Non-Revolving Note in the principal amount of Eight Hundred Fifty
Thousand Dollars ($850,000).
(f) Second Non-Revolving Note: The promissory note of even date
herewith, executed by Borrower as Maker and payable to Lender or order, in
the principal amount of the Second Non-Revolving Loan.
2. In addition to the conditions to disbursement in Paragraph 5 of the
Agreement, the following conditions shall have been satisfied prior to any
disbursements under the Revolving Loan pursuant to the Revolving Note:
(a) Borrower shall have received no less than Three Million
Dollars ($3,000,000) in proceeds from the sale or issuance of its equity
securities in an initial public offering of its preferred stock under SEC
Registration No. 333.
(b) Lender shall have received copies of all equipment invoices
from equipment that was puchased on or after December 31, 1997. Further
Borrower shall deliver to Lender copies of all equipment invoices for
equipment purchased within six months after the date of the Agreement.
(c) Borrower shall have furnished Lender with details, satisfactory
to Lender, of the operating expenses for Borrower's fiscal years 1996 and
1997.
(d) Borrower has completed construction of the Improvements and
paid for the Improvements, and has delivered evidence thereof satisfactory to
Lender to clear title to the Property.
(e) Lender shall have received copies of the individual tax returns
of Joseph E. Antonini for the years 1996 and 1997.
(f) Lender has received evidence, satisfactory to Lender, of
Borrower's debt repayment for the refinancing of Borrower's debt existing on
the date of the Agreement.
17
<PAGE>
FIRST NON-REVOLVING NOTE
(SECURED BY DEED OF TRUST/FLOATING OR FIXED RATE OPTION, AMORTIZING)
==============================================================================
BORROWER'S NAME AND ADDRESS OFFICER MATURITY DATE
==============================================================================
AWG Ltd. Lora McEachern December 9, 2005
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
==============================================================================
$1,650,000 San Jose, California December 10, 1998
FOR VALUE RECEIVED, AWG, Ltd. ("Borrower"), jointly and severally, promise(s)
to pay to the order of COMERICA BANK, a Michigan Banking Corporation
("Lender"), at its office at 1400 North Woodward Avenue, Suite 255,
Bloomfield Hills, MI 48304 or at such other place as the holder of this Note
may from time to time designate in writing, the principal sum of One Million
Six Hundred Fifty Thousand Dollars ($1,650,000), or so much thereof as may be
advanced from time to time, together with interest from the date hereof
computed on the principal balances hereof from time to time outstanding at
the rate of one of the following options to be chosen by Borrower and notice
thereof shall be given to Lender prior to the initial advance hereunder: the
(i) fixed rate of seven and one-tenth percent (7.1%) per annum or (ii) rate
equal to the Base Rate (as herein defined) of interest, adjusted daily.
Principal and interest shall be payable in monthly installments of
__________________________ Dollars ($__________) each on the first day of
each calendar month commencing with the first day of January, 1999 and
continuing until December 9, 2005 (the "Maturity Date"), on which date the
entire balance of principal and interest then unpaid shall be due and
payable. For the purpose of this Note, the Base Rate is that rate so
announced by Lender as its "base rate" from time to time and which serves as
the basis upon which effective rates of interest are calculated for those
loans making reference thereto. If applicable, the interest rate payable
hereunder shall fluctuate with any change in the Base Rate, and such
fluctuation in the interest rate shall be effective on the effective date of
each and every change in the Base Rate as, from time to time, announced by
Lender at its corporate headquarters in Detroit, Michigan.
Any amounts borrowed hereunder and repaid may not be readvanced.
Interest shall be computed daily based upon a three hundred sixty (360) day
year for the actual number of days elapsed. Should interest not be paid when
due, it shall become part of the principal and thereafter bear interest as
herein provided. Each payment shall be credited first to interest then due
and the remainder to principal. If, on the due date of the first installment
of principal and interest, interest is due and accrued for a period of more,
or less, than one month, the amount of said installment shall be increased or
decreased to the extent that the amount of interest due and accrued exceeds
or is less than one month's interest.
Should default be made in the payment of principal or interest when due or in
the performance or observance when due of any term, covenant or condition of
any deed of trust, security agreement or other agreement (including
amendments and extensions thereof) securing or pertaining to this Note, then,
at the option of the holder hereof and without notice or demand, the entire
balance of principal and accrued interest then remaining unpaid shall become
immediately due and payable and thereafter bear interest, until paid in full,
at the increased rate of five percent (5%) per annum over and above the
interest rate contracted for herein as it may vary from time to time.
Borrower acknowledges and agrees that during the time that any payment of
principal, interest or other amounts due under this Note is delinquent, the
holder will incur additional costs and expenses attributable to its loss of
use of the money due and to the adverse impact on the holder's ability to
avail itself of other opportunities. Borrower acknowledges and agrees that it
is extremely difficult and impractical to ascertain the extent of such costs
and expenses and that proof of actual damages would be costly or
inconvenient. Borrower therefore agrees that interest
1
<PAGE>
at the increased rate of five percent (5%) per annum over and above the
interest rate contracted for in this Note represents a reasonable sum
considering all the circumstances existing on the date of this Note and
represents a fair and reasonable estimate of such costs and expenses. No
delay or omission on the part of the holder hereof in exercising any right
hereunder or under any such deed of trust, security agreement or other
agreement shall operate as a waiver of such right or of any other right under
this Note or under any such deed of trust, security agreement or other
agreement.
If any payment of principal or interest under this Note shall not be made
within ten (10) calendar days of the date due, a late charge of five percent
(5%) of the overdue amount may be charged by the holder for the purpose of
defraying the expenses incident to handling such delinquent payments.
Borrower acknowledges and agrees that it is extremely difficult and
impractical to ascertain the extent of such expenses and that proof of actual
damages would be costly or inconvenient. Borrower therefore agrees that such
late charge represents a reasonable sum considering all of the circumstances
existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by the holder due to the failure
of the undersigned to make timely payments. Such late charge shall be paid
without prejudice to the right of the holder to collect any other amounts
provided to be paid or to declare a default under this Note or under the Deed
of Trust referred to in this Note or from exercising any of the other rights
and remedies of the holder, including, without limitation, the right to
declare the entire balance of principal and accrued interest then remaining
unpaid immediately due and payable.
In no event shall interest accrue or be payable hereon or under any such deed
of trust, security agreement or other agreement in excess of the maximum
amount of interest permitted on the date hereof by the laws of the State of
California.
If this Note is not paid when due, whether at its specified or accelerated
maturity date, Borrower promises to pay all costs of collection and
enforcement of this Note, including, but not limited to, reasonable
attorneys' fees and costs incurred by the holder hereof on account of such
collection or enforcement, whether or not suit is filed hereon.
Principal and interest shall be payable in lawful money of the United States
without setoff, demand or counterclaim. Borrower waives the defense of the
statute of limitations in any action on this Note. Presentment, notice of
dishonor, and protest are waived by all makers, sureties, guarantors and
endorsers of this Note. Such parties expressly consent to any extension of
the time of payment hereof or any installment hereof, to any renewal, and to
the release of any or all of the security given for the payment of this Note
or the release of any party liable for this obligation.
Borrower agrees that Lender may provide any financial or other information,
data or material in Lender's possession relating to Borrower, the Loan, this
Note, the property or the improvements, to Lender's parent, affiliate,
subsidiary, participants or service providers, without further notice to
Borrower.
This Note is secured by, among other things, a deed of trust ("Deed of
Trust") bearing even date herewith encumbering certain property located in
the County of Napa, State of California. This Note shall be governed and
construed in accordance with the laws of the State of California.
The Deed of Trust securing the obligation evidenced hereby contains the
following provision: "That should Trustor sell, convey, transfer, dispose of
or further encumber said property or any part thereof or any interest therein
or enter into a lease covering all or any portion thereof or an undivided
interest therein, either voluntarily, involuntarily or otherwise, or enter
into an agreement so to do, without the prior written consent of Beneficiary
being first had and obtained, then Beneficiary may, at its option, declare
all sums secured hereby immediately due and payable. Consent to one such
transaction shall not be deemed to be a waiver of the right to require such
consent to future or successive transactions."
Lender does not have to accept any prepayment of principal under this Note
except as described below. The undersigned may prepay principal of this Note
in increments of Five Hundred Dollars ($500) at any time as long as Lender is
provided written notice of the prepayment at least five (5) business days
prior to the date of prepayment. The notice of prepayment shall contain the
following information: (a) the date of prepayment (the "Prepayment
2
<PAGE>
Date") and (b) the amount of principal to be prepaid. On the Prepayment Date,
the undersigned will pay to Lender, in addition to the other amounts then due
on this Note, the Prepayment Amount described below. Lender, in its sole
discretion, may accept any prepayment of principal even if not required to do
so under this Note and may deduct from the amount to be applied against
principal the other amounts required as part of the Prepayment Amount.
The Prepaid Principal Amount (as defined below) will be applied to this Note
in the reverse order of which the principal payments would have been due
under this Note's principal amortization schedule. In other words, if this
Note requires multiple principal payments, then as opposed to prepaying the
next Principal Payment due, the Prepaid Principal Amount will be applied
beginning with the final principal payment due on this Note.
If Lender exercises its right to accelerate the payment of this Note prior to
the Maturity Date, the undersigned will pay to Lender, in addition to the
other amounts then due on this Note, on the date specified by Lender as the
Prepayment Date, the Prepayment Amount.
Lender's determination of the Prepayment Amount will be conclusive in the
absence of obvious error or fraud. If requested in writing by the
undersigned, Lender will provide the undersigned a written statement
specifying the Prepayment Amount.
The following (the "Prepayment Amount") shall be due and payable in full on
the Prepayment Date:
(a) If the face amount of this Note exceeds Seven Hundred Fifty
Thousand Dollars ($750,000) (regardless of what the outstanding
principal balance may be on the Prepayment Date), then the Prepayment
Amount is the sum of: (i) the amount of principal which the
undersigned has elected to prepay or the amount of principal which
Lender has required the undersigned to prepay because of
acceleration, as the case may be (the "Prepaid Principal Amount");
(ii) interest accruing on the Prepaid Principal Amount up to, but not
including, the Prepayment Date; (iii) Five Hundred Dollars ($500)
plus (iv) the present value, discounted at the Reinvestment Rates (as
defined below) of the positive amount by which (A) the interest
Lender would have earned had the Prepaid Principal Amount been paid
according to the Note's amortization schedule at the Note's interest
rate exceeds (B) the interest Lender would earn by reinvesting the
Prepaid Principal Amount at the Reinvestment Rates.
"Reinvestment Rates" mean the per annum rates of interest equal to one-half
percent (1/2%) above the rates of interest reasonably determined by Lender to
be in effect not more than seven days prior to the Prepayment Date in the
secondary market for United States Treasury Obligations in amount(s) and with
maturity(ies) which correspond (as closely as possible) to the principal
installment amount(s) and the payment date(s) against which the Prepaid
Principal Amount will be applied.
THE UNDERSIGNED ACKNOWLEDGE(S) AND AGREE(S) THAT: (A) THERE IS NO RIGHT TO
PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT PAYING THE PREPAYMENT AMOUNT;
(B) THE UNDERSIGNED SHALL BE LIABLE FOR PAYMENT OF THE PREPAYMENT AMOUNT IF
LENDER EXERCISES ITS RIGHT TO ACCELERATE PAYMENT OF THIS NOTE, INCLUDING
WITHOUT LIMIT ACCELERATION UNDER A DUE-ON-SALE PROVISION; (C) THE UNDERSIGNED
WAIVE(S) ANY RIGHTS UNDER SECTION 2954.10 OF THE CALIFORNIA CIVIL CODE, OR
ANY SUCCESSOR STATUTE; AND (D) LENDER HAS MADE THE LOAN EVIDENCED BY THIS
NOTE IN RELIANCE ON THESE AGREEMENTS.
INITIALS: __________ __________
3
<PAGE>
No partial prepayment shall affect the obligation of Borrower to pay the next
and subsequent regular installments payable hereunder until the entire
balance of principal and interest shall have been paid in full.
BORROWER
AWG, LTD.
By: _______________________________
John P. Caponigro, Secretary
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph E. Antonini
4
<PAGE>
SECOND NON-REVOLVING NOTE
(SECURED BY DEED OF TRUST/FLOATING OR FIXED RATE OPTION, AMORTIZING)
==============================================================================
BORROWER'S NAME AND ADDRESS OFFICER MATURITY DATE
==============================================================================
AWG Ltd. Lora McEachern December 9, 2005
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
==============================================================================
$850,000 San Jose, California December 10, 1998
FOR VALUE RECEIVED, AWG, Ltd. ("Borrower"), jointly and severally, promise(s)
to pay to the order of COMERICA BANK, a Michigan Banking Corporation
("Lender"), at its office at 1400 North Woodward Avenue, Suite 255,
Bloomfield Hills, MI 48304 or at such other place as the holder of this Note
may from time to time designate in writing, the principal sum of Eight
Hundred Fifty Thousand Dollars ($850,000), or so much thereof as may be
advanced from time to time, together with interest from the date hereof
computed on the principal balances hereof from time to time outstanding at
the rate of one of the following options to be chosen by Borrower and notice
thereof shall be given to Lender prior to the initial advance hereunder: the
(i) the fixed rate of seven percent (7%) per annum or (ii) rate equal to the
Base Rate (as herein defined) of interest, adjusted daily. Principal and
interest shall be payable in monthly installments of
_________________________ Dollars ($_______) each on the first day of each
calendar month commencing with the first day of January, 1999 and continuing
until December 9, 2005 (the "Maturity Date"), on which date the entire
balance of principal and interest then unpaid shall be due and payable. For
the purpose of this Note, the Base Rate is that rate so announced by Lender
as its "base rate" from time to time and which serves as the basis upon which
effective rates of interest are calculated for those loans making reference
thereto. If applicable, the interest rate payable hereunder shall fluctuate
with any change in the Base Rate, and such fluctuation in the interest rate
shall be effective on the effective date of each and every change in the Base
Rate as, from time to time, announced by Lender at its corporate headquarters
in Detroit, Michigan.
Any amounts borrowed hereunder and repaid may not be readvanced.
Interest shall be computed daily based upon a three hundred sixty (360) day
year for the actual number of days elapsed. Should interest not be paid when
due, it shall become part of the principal and thereafter bear interest as
herein provided. Each payment shall be credited first to interest then due
and the remainder to principal. If, on the due date of the first installment
of principal and interest, interest is due and accrued for a period of more,
or less, than one month, the amount of said installment shall be increased or
decreased to the extent that the amount of interest due and accrued exceeds
or is less than one month's interest.
Should default be made in the payment of principal or interest when due or in
the performance or observance when due of any term, covenant or condition of
any deed of trust, security agreement or other agreement (including
amendments and extensions thereof) securing or pertaining to this Note, then,
at the option of the holder hereof and without notice or demand, the entire
balance of principal and accrued interest then remaining unpaid shall become
immediately due and payable and thereafter bear interest, until paid in full,
at the increased rate of five percent (5%) per annum over and above the
interest rate contracted for herein as it may vary from time to time.
Borrower acknowledges and agrees that during the time that any payment of
principal, interest or other amounts due under this Note is delinquent, the
holder will incur additional costs and expenses attributable to its loss of
use of the money due and to the adverse impact on the holder's ability to
avail itself of other opportunities. Borrower acknowledges and agrees that it
is extremely difficult and impractical to ascertain the extent of such costs
and expenses and that proof of actual damages would be costly or
inconvenient. Borrower therefore agrees that interest at the increased rate
of five percent (5%) per annum over and above the interest rate contracted
for in this Note
1
<PAGE>
represents a reasonable sum considering all the circumstances existing on the
date of this Note and represents a fair and reasonable estimate of such costs
and expenses. No delay or omission on the part of the holder hereof in
exercising any right hereunder or under any such deed of trust, security
agreement or other agreement shall operate as a waiver of such right or of
any other right under this Note or under any such deed of trust, security
agreement or other agreement.
If any payment of principal or interest under this Note shall not be made
within ten (10) calendar days of the date due, a late charge of five percent
(5%) of the overdue amount may be charged by the holder for the purpose of
defraying the expenses incident to handling such delinquent payments.
Borrower acknowledges and agrees that it is extremely difficult and
impractical to ascertain the extent of such expenses and that proof of actual
damages would be costly or inconvenient. Borrower therefore agrees that such
late charge represents a reasonable sum considering all of the circumstances
existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by the holder due to the failure
of the undersigned to make timely payments. Such late charge shall be paid
without prejudice to the right of the holder to collect any other amounts
provided to be paid or to declare a default under this Note or under the Deed
of Trust referred to in this Note or from exercising any of the other rights
and remedies of the holder, including, without limitation, the right to
declare the entire balance of principal and accrued interest then remaining
unpaid immediately due and payable.
In no event shall interest accrue or be payable hereon or under any such deed
of trust, security agreement or other agreement in excess of the maximum
amount of interest permitted on the date hereof by the laws of the State of
California.
If this Note is not paid when due, whether at its specified or accelerated
maturity date, Borrower promises to pay all costs of collection and
enforcement of this Note, including, but not limited to, reasonable
attorneys' fees and costs incurred by the holder hereof on account of such
collection or enforcement, whether or not suit is filed hereon.
Principal and interest shall be payable in lawful money of the United States
without setoff, demand or counterclaim. Borrower waives the defense of the
statute of limitations in any action on this Note. Presentment, notice of
dishonor, and protest are waived by all makers, sureties, guarantors and
endorsers of this Note. Such parties expressly consent to any extension of
the time of payment hereof or any installment hereof, to any renewal, and to
the release of any or all of the security given for the payment of this Note
or the release of any party liable for this obligation.
Borrower agrees that Lender may provide any financial or other information,
data or material in Lender's possession relating to Borrower, the Loan, this
Note, the property or the improvements, to Lender's parent, affiliate,
subsidiary, participants or service providers, without further notice to
Borrower.
This Note is secured by, among other things, a deed of trust ("Deed of
Trust") bearing even date herewith encumbering certain property located in
the County of Napa, State of California. This Note shall be governed and
construed in accordance with the laws of the State of California.
The Deed of Trust securing the obligation evidenced hereby contains the
following provision: "That should Trustor sell, convey, transfer, dispose of
or further encumber said property or any part thereof or any interest therein
or enter into a lease covering all or any portion thereof or an undivided
interest therein, either voluntarily, involuntarily or otherwise, or enter
into an agreement so to do, without the prior written consent of Beneficiary
being first had and obtained, then Beneficiary may, at its option, declare
all sums secured hereby immediately due and payable. Consent to one such
transaction shall not be deemed to be a waiver of the right to require such
consent to future or successive transactions."
Lender does not have to accept any prepayment of principal under this Note
except as described below. The undersigned may prepay principal of this Note
in increments of Five Hundred Dollars ($500) at any time as long as Lender is
provided written notice of the prepayment at least five (5) business days
prior to the date of prepayment. The notice of prepayment shall contain the
following information: (a) the date of prepayment (the "Prepayment Date") and
(b) the amount of principal to be prepaid. On the Prepayment Date, the
undersigned will pay to Lender,
2
<PAGE>
in addition to the other amounts then due on this Note, the Prepayment Amount
described below. Lender, in its sole discretion, may accept any prepayment of
principal even if not required to do so under this Note and may deduct from
the amount to be applied against principal the other amounts required as part
of the Prepayment Amount.
The Prepaid Principal Amount (as defined below) will be applied to this Note
in the reverse order of which the principal payments would have been due
under this Note's principal amortization schedule. In other words, if this
Note requires multiple principal payments, then as opposed to prepaying the
next Principal Payment due, the Prepaid Principal Amount will be applied
beginning with the final principal payment due on this Note.
If Lender exercises its right to accelerate the payment of this Note prior to
the Maturity Date, the undersigned will pay to Lender, in addition to the
other amounts then due on this Note, on the date specified by Lender as the
Prepayment Date, the Prepayment Amount.
Lender's determination of the Prepayment Amount will be conclusive in the
absence of obvious error or fraud. If requested in writing by the
undersigned, Lender will provide the undersigned a written statement
specifying the Prepayment Amount.
The following (the "Prepayment Amount") shall be due and payable in full on
the Prepayment Date:
(a) If the face amount of this Note exceeds Seven Hundred Fifty
Thousand Dollars ($750,000) (regardless of what the outstanding
principal balance may be on the Prepayment Date), then the Prepayment
Amount is the sum of: (i) the amount of principal which the
undersigned has elected to prepay or the amount of principal which
Lender has required the undersigned to prepay because of
acceleration, as the case may be (the "Prepaid Principal Amount");
(ii) interest accruing on the Prepaid Principal Amount up to, but not
including, the Prepayment Date; (iii) Five Hundred Dollars ($500)
plus (iv) the present value, discounted at the Reinvestment Rates (as
defined below) of the positive amount by which (A) the interest
Lender would have earned had the Prepaid Principal Amount been paid
according to the Note's amortization schedule at the Note's interest
rate exceeds (B) the interest Lender would earn by reinvesting the
Prepaid Principal Amount at the Reinvestment Rates.
"Reinvestment Rates" mean the per annum rates of interest equal to one-half
percent (1/2%) above the rates of interest reasonably determined by Lender to
be in effect not more than seven days prior to the Prepayment Date in the
secondary market for United States Treasury Obligations in amount(s) and with
maturity(ies) which correspond (as closely as possible) to the principal
installment amount(s) and the payment date(s) against which the Prepaid
Principal Amount will be applied.
THE UNDERSIGNED ACKNOWLEDGE(S) AND AGREE(S) THAT: (A) THERE IS NO RIGHT TO
PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT PAYING THE PREPAYMENT AMOUNT;
(B) THE UNDERSIGNED SHALL BE LIABLE FOR PAYMENT OF THE PREPAYMENT AMOUNT IF
LENDER EXERCISES ITS RIGHT TO ACCELERATE PAYMENT OF THIS NOTE, INCLUDING
WITHOUT LIMIT ACCELERATION UNDER A DUE-ON-SALE PROVISION; (C) THE UNDERSIGNED
WAIVE(S) ANY RIGHTS UNDER SECTION 2954.10 OF THE CALIFORNIA CIVIL CODE, OR
ANY SUCCESSOR STATUTE; AND (D) LENDER HAS MADE THE LOAN EVIDENCED BY THIS
NOTE IN RELIANCE ON THESE AGREEMENTS.
INITIALS: __________ __________
3
<PAGE>
No partial prepayment shall affect the obligation of Borrower to pay the next
and subsequent regular installments payable hereunder until the entire
balance of principal and interest shall have been paid in full.
BORROWER
AWG, LTD.
By: _______________________________
John P. Caponigro, Secretary
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph E. Antonini
4
<PAGE>
REVOLVING NOTE
(SECURED BY DEED OF TRUST/FLOATING RATE NOTE)
==============================================================================
BORROWER'S NAME AND ADDRESS OFFICER MATURITY DATE
==============================================================================
AWG Ltd. Lora McEachern, Vice December 9, 1999
c/o J.E.A. Enterprises, L.L.C. President
1800 West Maple Road, Suite 100
Troy, MI 48084
==============================================================================
$200,000 San Jose, California December 10, 1998
On December 9, 1999 (the "Maturity Date"), for value received, AWG, Ltd.
("Borrower"), jointly and severally, promise(s) to pay to the order of
COMERICA BANK, a Michigan Banking Corporation ("Lender"), at its office at
1400 North Woodward Avenue, Suite 255, Bloomfield Hills, MI 48304, or at such
other place as the holder of this Note may from time to time designate in
writing, the principal sum of Two Hundred Thousand Dollars ($200,000), or so
much thereof as may be advanced and re-advanced from time to time and not
repaid as provided below (but not to exceed a maximum principal amount at any
given time of Two Hundred Thousand Dollars ($200,000), together with interest
from the date hereof computed on the principal balances hereof outstanding,
adjusted daily to the rate equal to the Base Rate of interest (as herein
defined) being charged by Lender. For the purpose of this Note, the Base Rate
is that rate so announced by Lender as its "base rate" from time to time and
which serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto. The interest rate
payable hereunder shall fluctuate with any change in the Base Rate, and such
fluctuation in the interest rate shall be effective on the effective date of
each and every change in the Base Rate as, from time to time, announced by
Lender at its corporate headquarters in _____________________________________
_________________________ Detroit, Michigan.
Interest shall be payable on the first day of each calendar month following
the date hereof. Interest shall be computed daily based upon a three hundred
sixty (360) day year for the actual number of days elapsed. Should interest
not be paid when due, it shall become part of the principal and thereafter
bear interest as herein provided.
The principal amount payable under this Note shall be the sum of all advances
made by Lender to or at the request of Borrower, less principal payments
actually received in cash by Lender. The books and records of Lender shall be
the best evidence of the principal amount and the unpaid interest amount
owing at any time under this Note and shall be conclusive absent manifest
error. No interest shall accrue under this Note until the date of the first
advance made by Lender, thereafter interest on all advances shall accrue and
be computed on the principal balance outstanding from time to time under this
Note until the same is paid in full.
Should default be made in the payment of principal or interest when due or in
the performance or observance when due of any term, covenant or condition of
any deed of trust, security agreement or other agreement (including
amendments and extensions thereof) securing or pertaining to this Note, then,
at the option of the holder hereof and without notice or demand, the entire
balance of principal and accrued interest then remaining unpaid shall become
immediately due and payable and thereafter bear interest, until paid in full,
at the increased rate of five percent (5%) per annum over and above the
interest rate contracted for herein as it may vary from time to time.
Borrower acknowledges and agrees that during the time that any payment of
principal, interest or other amounts due under this Note is delinquent, the
holder will incur additional costs and expenses attributable to its loss of
use of the money due and to the adverse impact on the holder's ability to
avail itself of other opportunities. Borrower acknowledges and agrees that it
is extremely difficult and impractical to ascertain the extent of such costs
and expenses and that proof of actual damages would be costly or
inconvenient. Borrower therefore agrees that interest
1
<PAGE>
at the increased rate of five percent (5%) per annum over and above the
interest rate contracted for in this Note represents a reasonable sum
considering all the circumstances existing on the date of this Note and
represents a fair and reasonable estimate of such costs and expenses. No
delay or omission on the part of the holder hereof in exercising any right
hereunder, or under any such deed of trust, security agreement or other
agreement shall operate as a waiver of such right or of any other right under
this Note or under any such deed of trust, security agreement or other
agreement.
If any payment of principal or interest under this Note shall not be made
within ten (10) calendar days of the date due, a late charge of five percent
(5%) of the overdue amount may be charged by the holder for the purpose of
defraying the expenses incident to handling such delinquent payments.
Borrower acknowledges and agrees that it is extremely difficult and
impractical to ascertain the extent of such expenses and that proof of actual
damages would be costly or inconvenient. Borrower therefore agrees that such
late charge represents a reasonable sum considering all of the circumstances
existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by the holder due to the failure
of Borrower to make timely payments. Such late charge shall be paid without
prejudice to the right of the holder to collect any other amounts provided to
be paid or to declare a default under this Note or under the Deed of Trust
referred to in this Note or from exercising any of the other rights and
remedies of the holder, including, without limitation, the right to declare
the entire balance of principal and accrued interest then remaining unpaid
immediately due and payable.
In no event shall interest accrue or be payable hereon or under any such deed
of trust, security agreement or other agreement in excess of the maximum
amount of interest permitted on the date hereof by the laws of the State of
California.
If this Note is not paid when due, whether at its specified or accelerated
maturity date, Borrower promises to pay all costs of collection and
enforcement of this Note, including, but not limited to, reasonable
attorneys' fees and costs, incurred by the holder hereof on account of such
collection or enforcement, whether or not suit is filed hereon.
Principal and interest shall be payable in lawful money of the United States
without setoff, demand or counterclaim. Borrower waives the defense of the
statute of limitations in any action on this Note. Presentment, notice of
dishonor, and protest are waived by all makers, sureties, guarantors and
endorsers of this Note. Such parties expressly consent to any extension of
the time of payment hereof or any installment hereof, to any renewal, and to
the release of any or all of the security given for the payment of this Note
or the release of any party liable for this obligation.
Borrower agrees that Lender may provide any financial or other information,
data or material in Lender's possession relating to Borrower, the Loan, this
Note, the property or the improvements, to Lender's parent, affiliate,
subsidiary, participants or service providers, without further notice to
Borrower.
This Note is secured by, among other things, a deed of trust ("Deed of
Trust") bearing even date herewith encumbering certain property located in
the County of Napa, State of California. This Note shall be governed and
construed in accordance with the laws of the State of California.
The Deed of Trust securing the obligation evidenced hereby contains the
following provision: "That should Trustor sell, convey, transfer, dispose of
or further encumber said property or any part thereof or any interest therein
or enter into a lease covering all or any portion thereof or an undivided
interest therein, either voluntarily, involuntarily or otherwise, or enter
into an agreement so to do, without the prior written consent of Beneficiary
being first had and obtained, then Beneficiary may, at its option, declare
all sums secured hereby immediately due and payable. Consent to one such
transaction shall not be deemed to be a waiver of the right to require such
consent to future or successive transactions."
2
<PAGE>
Borrower may prepay this Note in whole or in part on any interest payment
date without penalty upon thirty (30) days prior written notice to holder. No
partial prepayment shall affect the obligation of Borrower to pay the next
and subsequent regular installments payable hereunder until the entire
balance of principal and interest shall have been paid in full.
BORROWER
AWG, LTD.
By: _____________________________________
John P. Caponigro, Secretary
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph Antonini
NOTICE: THIS NOTE CONTAINS PROVISIONS FOR A VARIABLE INTEREST RATE WHICH MAY
RESULT IN INCREASES IN THE INTEREST RATE AND IN MONTHLY INSTALLMENTS.
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO
Name COMERICA BANK
Street 1400 North Woodward Avenue,
Address Suite 255
City Bloomfield Hills, MI 48304
State Attn: Lora McEachern
Zip
SPACE ABOVE THIS LINE FOR RECORDER'S USE
--------------------------------------------------------------
DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING
(WITH ASSIGNMENT OF RENTS AND LEASES)
This Deed of Trust, Security Agreement and Fixture Filing (With Assignment of
Rents and Leases) is made as of this 10th day of December, 1998, by AWG, Ltd.
(hereinafter called "Trustor") whose address is c/o J.E.A. Enterprises,
L.L.C., 1800 West Maple Road, Suite 100, Troy, Michigan 48084, to Chicago
Title Company (hereinafter called "Trustee"), whose address is 2140 Jefferson
Street, Napa, California 94559, for the benefit of COMERICA BANK, a Michigan
Banking Corporation (hereinafter called "Beneficiary"), whose address is 1400
North Woodward Avenue, Suite 255, Bloomfield Hills, MI 48304.
Witnesseth: That Trustor IRREVOCABLY GRANTS, TRANSFERS AND ASSIGNS to
Trustee, its successors and assigns, in Trust, with POWER OF SALE TOGETHER
WITH RIGHT OF ENTRY AND POSSESSION the following property (the "Trust
Estate"):
I. all that certain real property now or hereafter acquired, in
the County of Napa, State of California (the "Land"), more particularly
described as follows:
See attached Exhibit A.
II. all buildings, structures and other improvements now or in the
future located or to be constructed on the Land (the "Improvements");
III. all tenements, hereditaments, appurtenances, privileges,
franchises and other rights and interests now or in the future benefitting or
otherwise relating to the Land or the Improvements, including easements,
rights-of-way, development rights, mineral rights, water and water rights,
pumps and pumping plants and all shares of stock evidencing the same (the
"Appurtenances," and together with the Land and the Improvements, the "Real
Property");
IV. subject to the assignment to Beneficiary set forth in
Paragraph 11 below, all rents, issues, income, revenues, royalties and
profits now or in the future payable with respect to or otherwise derived
from the Trust Estate or the ownership, use, management, operation, leasing
or occupancy of the Trust Estate, including those past due and unpaid (the
"Rents");
V. all present and future right, title and interest of Trustor in
and to all inventory, equipment, fixtures and other goods (as those terms are
defined in Division 9 of the California Uniform Commercial Code (the "UCC"),
and whether existing now or in the future) now or in the future located at,
upon or about, or affixed or attached to or installed in, the Real Property,
or used or to be used in connection with or otherwise relating to the Real
Property or the ownership, use, development, construction, maintenance,
management, operation, marketing, leasing or occupancy of the Real Property,
including furniture, furnishings, machinery, appliances, building materials
and supplies, generators, boilers, furnaces, water tanks, heating,
ventilating and air conditioning equipment and all other
1
<PAGE>
types of tangible personal property of any kind or nature, and all
accessories, additions, attachments, parts, proceeds, products, repairs,
replacements and substitutions of or to any of such property (the "Goods,"
and together with the Real Property, the "Property"); and
VI. all present and future right, title and interest of Trustor in
and to all accounts, general intangibles, chattel paper, deposit accounts,
money, instruments and documents (as those terms are defined in the UCC) and
all other agreements, obligations, rights and written materials (in each case
whether existing now or in the future) now or in the future relating to or
otherwise arising in connection with or derived from the Property or any
other part of the Trust Estate or the ownership, use, development,
construction, maintenance, management, operation, marketing, leasing,
occupancy, sale or financing of the Property or any other part of the Trust
Estate, including (to the extent applicable to the Property or any other
portion of the Trust Estate) (i) permits, approvals and other governmental
authorizations, (ii) improvement plans and specifications and architectural
drawings, (iii) agreements with contractors, subcontractors, suppliers,
project managers, supervisors, designers, architects, engineers, sales
agents, leasing agents, consultants and property managers, (iv) takeout,
refinancing and permanent loan commitments, (v) warranties, guaranties,
indemnities and insurance policies (whether or not required to be carried by
Trustor pursuant to the terms hereof), together with insurance payments and
unearned insurance premiums, (vi) claims, demands, awards, settlements and
other payments arising or resulting from or otherwise relating to any
insurance (whether or not Beneficiary is named as a loss payee of such
insurance) or any loss or destruction of, injury or damage to, trespass on or
taking, condemnation (or conveyance in lieu of condemnation) or public use of
any of the Property, (vii) license agreements, service and maintenance
agreements, purchase and sale agreements and purchase options, together with
advance payments, security deposits and other amounts paid to or deposited
with Trustor under any such agreements, (viii) reserves, deposits, bonds,
deferred payments, refunds, rebates, discounts, cost savings, escrow
proceeds, sale proceeds and other rights to the payment of money, trade
names, trademarks, goodwill and all other types of intangible personal
property of any kind or nature, and (ix) all supplements, modifications,
amendments, renewals, extensions, proceeds, replacements and substitutions of
or to any of such property (the "Intangibles").
Trustor further grants to Trustee and Beneficiary, pursuant to the
UCC, a security interest in all present and future right, title and interest
of Trustor in and to all Goods and Intangibles and all of the Trust Estates
described above in which a security interest may be created under the UCC
(collectively, the "Personal Property"). This Deed of Trust constitutes a
security agreement under the UCC, conveying a security interest in the
Personal Property to Trustee and Beneficiary. Trustee and Beneficiary shall
have, in addition to all rights and remedies provided herein, all the rights
and remedies of a "secured party" under the UCC and other applicable
California law. Trustor covenants and agrees that this Deed of Trust
constitutes a fixture filing under Section 9313 and 9402(6) of the UCC.
FOR THE PURPOSE OF SECURING, in such order of priority as Beneficiary may
elect, (1) payment of an indebtedness in the sum of TWO MILLION SEVEN HUNDRED
THOUSAND DOLLARS ($2,700,000), evidenced by that certain First Non-Revolving
Note of even date herewith, in the original principal amount of ONE MILLION
SIX HUNDRED FIFTY THOUSAND DOLLARS ($1,650,000), that certain Second
Non-Revolving Note of even date herewith, in the original principal amount of
EIGHT HUNDRED FIFTY THOUSAND DOLLARS ($850,000) and that certain Revolving
Note of even date herewith, in the original principal amount of up to TWO
HUNDRED THOUSAND DOLLARS ($200,000), executed by Trustor to the order of
Beneficiary and any and all modifications, extensions or renewals thereof,
whether hereafter evidenced by said notes or otherwise; (2) payment of
interest on said indebtedness according to the terms of said promissory
notes; (3) payment of all other sums, with interest as herein provided,
becoming due or payable under the provisions hereof to Trustee or
Beneficiary; (4) due, prompt and complete observance, performance and
discharge of each and every condition, obligation, covenant and agreement
contained herein, or in said notes, or in any loan agreement relative to any
indebtedness evidenced by said notes or in any document or instrument
evidencing, securing or pertaining to the indebtedness evidenced by said
notes, excluding, however, any guaranty or unsecured environmental indemnity
("Loan Documents") and all modifications, renewals or extensions of any of
the foregoing; and (5) payment of such additional sums with interest thereon
as may be hereafter borrowed from Beneficiary, its successors or assigns by
Trustor or the then record owner or owners of the Trust Estate when evidenced
by another promissory note or notes, which are by the terms thereof secured
by this Deed of Trust.
2
<PAGE>
TO PROTECT AND MAINTAIN THE SECURITY OF THIS DEED OF TRUST, TRUSTOR AGREES:
(1) To pay, perform, observe and discharge each and every
condition, obligation, covenant and agreement for which this Deed of Trust
has been given as security as provided above.
(2) To keep the Property in good condition and repair; not to
remove or demolish any improvement thereon; to complete or restore promptly
and in good and workmanlike manner any improvement which may be constructed,
damaged or destroyed thereon and to pay when due all claims for labor
performed and materials furnished therefor; to comply with all laws affecting
the Trust Estate or requiring any alterations or improvements to be made
thereon; not to commit or permit waste thereof; to perform, in the event all
or any portion of the Trust Estate constitutes a leasehold estate belonging
to Trustor, each and every obligation of Trustor under the terms of the lease
agreement relating to the demise of such property; not to commit, suffer or
permit any act upon the Trust Estate in violation of law; to do all acts
which from the character or use of the Property may be reasonably necessary,
the specific enumerations herein not excluding the general.
(3) To fully insure, or cause to be insured, the Property against
loss or damage by fire, earthquake, flood, and such other risks as
Beneficiary shall, from time to time, require. Trustor shall carry public
liability and other insurance as Beneficiary may require. Trustor shall
maintain all required insurance in companies, amounts, coverages,
deductibles, and forms satisfactory to the Beneficiary and at least equal to
that required on the date of this Deed of Trust. Such insurance shall be
carried in amounts not less than amounts determined by the insurance company
or Beneficiary to prevent the application of co-insurance or similar clauses,
or in such greater amounts as Beneficiary may require. Neither Beneficiary
nor Trustee, by reason of accepting, rejecting, approving or obtaining
insurance, shall incur any liability for (i) the existence, nonexistence,
form or legal sufficiency thereof, (ii) the solvency or insolvency of any
insurer, or (iii) the payment of losses. All property insurance policies
shall name Beneficiary as the primary loss payee, all liability insurance
policies shall name Beneficiary as an additional insured, and all policies
shall provide that they cannot be terminated as to Beneficiary except upon
thirty (30) days' prior written notice to Beneficiary. Trustor shall deliver
to Beneficiary the original of all such policies, or with Beneficiary's
consent certificates, together with receipts satisfactory to the Beneficiary,
evidencing payment of the premiums therefor. Should Trustor fail to insure or
fail to pay the premiums on any required insurance or fail to deliver the
policies or renewals of them as provided above, Beneficiary may (but is not
obligated to) have the insurance issued or renewed (and pay the premiums on
it for the account of Trustor) in amounts and with companies and at premiums
as Beneficiary deems appropriate. If Beneficiary elects to have insurance
issued or renewed to insure Beneficiary's interest, Beneficiary shall have no
obligation to also insure Trustor's interest or to notify Trustor of
Beneficiary's actions. All sums advanced by Beneficiary to pay premiums on
insurance policies which Trustor is required to maintain hereunder shall be
due and payable by Trustor to Beneficiary upon demand, and failing prompt
reimbursement, shall be added to the indebtedness secured by this Deed of
Trust and earn interest at the default rate set forth in the notes secured
hereby until paid in full.
As of the date this Deed of Trust is recorded and continuously
until this Deed of Trust is fully reconveyed, the insurance policies shall
conform to the following requirements:
(a) All insurance policies must be underwritten by insurers with a
Best's rating of B+, VI or better;
(b) In the event all or any portion of the Real Property secured
by this Deed of Trust constitutes rental or non-residential property, Trustor
shall maintain a Commercial General Liability insurance policy, including
broad form coverages or their equivalents, with One Million Dollars
($1,000,000) combined single limit coverage for bodily injury and property
damage; provided, however, if improvements similar to the Improvements
secured hereby are generally insured at higher limits of coverage, such
higher limits shall be obtained. In all other cases, Trustor shall maintain
such liability insurance coverages as Beneficiary may require from time to
time;
(c) Trustor shall provide, as required by Beneficiary, additional
property and rental income insurance coverages as follows:
<PAGE>
3
1. All risk coverage (including earthquake insurance) in the
amount of the full replacement cost of the Improvements;
2. A waiver of co-insurance endorsement or agreed value
endorsement (relative to casualty);
3. A replacement cost coverage endorsement (relative to
casualty);
4. A standard mortgage clause (438BFU or CP12-18) with
Beneficiary named as loss payee in the Declarations;
5. A waiver of subrogation clause;
6. To the extent that any portion of the Real Property
constitutes rental property, loss of rents coverage in an amount equal to at
least twelve (12) months of rentals from the Real Property secured hereby and
any expenses that are payable or reimbursable by tenants;
7. Flood insurance in an amount sufficient to provide full
replacement cost coverage of the Real Property in the event the Real Property
is located within any flood hazard area; and
8. Such other coverages as Beneficiary may request from time
to time.
The amount collected under any fire or other insurance policy maintained by
Trustor with respect to the Property (whether or not required hereunder and
whether or not Beneficiary is named as loss payee) may be applied by
Beneficiary upon any indebtedness secured hereby and in such order as
Beneficiary may determine, or at option of Beneficiary the entire amount so
collected or any part thereof may be released to Trustor. Such application or
release shall not cure or waive any default or notice of default hereunder or
invalidate any act done pursuant to such notice.
(4) To appear in and defend any action or proceeding purporting to
affect the security hereof or the rights or powers of Beneficiary or Trustee;
and to pay all costs and expenses, including cost of evidence of title and
attorney's fees in a reasonable sum, in any such action or proceeding in
which Beneficiary or Trustee may appear, and in any suit brought by
Beneficiary to foreclose this Deed of Trust.
(5) To pay and discharge, at least ten days prior to delinquency,
all taxes of every kind and nature, including real and personal property
taxes and income, franchise, withholding, profits and gross receipts taxes,
all general and special assessments, including assessments on appurtenant
water stock, levies, permits, inspection and license fees, all water and
sewer rents and charges, and all other public charges whether of a like or
different nature, imposed upon or assessed against Trustor or the Trust
Estate or any part thereof or upon the revenues, rents, issues, income and
profits thereof or upon this Deed of Trust or the indebtedness now or
hereafter secured hereby; when due, all encumbrances, charges and liens, with
interest, on the Trust Estate or any part thereof, which appear to be prior
or superior hereto or subject or subordinate hereto; all costs, fees and
expenses of this Trust; or, if and as required by Beneficiary, to pay to
Beneficiary in equal installments on the day on which monthly payments of
principal and interest are due under said notes, sufficient funds (as
estimated by Beneficiary from time to time) to pay when due the next maturing
taxes, assessments and hazard insurance (including flood insurance, if
required) premiums. When so provided with sufficient funds, Beneficiary shall
pay such taxes, assessments and hazard insurance premiums before delinquency.
Any excess over the amount required for such purposes shall be held for
future use, applied to any indebtedness hereby secured or refunded to Trustor
at Beneficiary's option.
To promptly and completely observe, perform, and discharge each
and every condition, obligation, covenant and agreement affecting the Trust
Estate, whether the same is prior and superior or subject and subordinate
hereto including, if the security hereunder is or will be a condominium,
community apartment or part of a planned development, each and every
provision to be performed by Trustor under any Declaration of Covenants,
Conditions and Restrictions pertaining to the condominium, community
apartment or planned development project and, upon
4
<PAGE>
written request of Beneficiary, to pay maintenance charges, if the same have
not been paid or legal steps have not been initiated to enforce such payment
within ninety (90) days after such written request is made.
Should Trustor fail to make any payment or to do any act as herein
provided, then Beneficiary or Trustee, but without obligation so to do and
without notice to or demand upon Trustor and without releasing Trustor from
any obligation hereof, may: make or do the same in such manner and to such
extent as either may deem necessary to protect the security hereof,
Beneficiary or Trustee being authorized to enter upon the Real Property for
such purposes; appear in and defend any action or proceeding purporting to
affect the security hereof or the rights or powers of Beneficiary or Trustee;
pay, purchase, contest or compromise any encumbrance, charge or lien which in
the judgment of either appears to be prior or superior hereto; and, in
exercising any such powers, pay necessary expenses, employ counsel and pay
reasonable attorneys' fees and costs in connection therewith.
(6) To pay immediately and without demand all sums so expended by
Beneficiary or Trustee, with interest from date of expenditure until paid in
full by Trustor at a rate equal to five percent (5%) per annum over and above
the rate set forth in the promissory notes secured hereby, which sums shall
be secured by this Deed of Trust to the same extent and with the same
priority as the principal and interest payable under the promissory notes
hereby secured, and such sums shall be deemed mandatory advances required for
the preservation and protection of the lien of this Deed of Trust and
Trustee's and Beneficiary's rights hereunder.
(7) That any award of damages in connection with any condemnation
for public use of or injury to the Property or any part thereof is hereby
assigned and shall be paid to Beneficiary who may apply or release such
moneys received by him in the same manner and with the same effect as above
provided for disposition of proceeds of fire or other insurance.
Notwithstanding the fact that the security given hereby may not be impaired
by a partial condemnation, Beneficiary, in its sole and absolute discretion,
shall have the right to apply all compensation, award or other payments or
relief therefor made on account thereof to either the payment of accrued but
unpaid interest and second to the prepayment of principal under said
promissory notes or reimbursement of Trustor for expenses incurred by it in
the restoration of the Property, and in respect thereto, Trustor hereby
waives the benefit of any statute or rule of law which may be contrary
thereto.
(8) That by accepting the payment, performance or observance of
any condition, obligation, covenant or agreement contained herein after the
date to be paid, performed or observed as provided hereunder, Beneficiary
does not waive its right either to require prompt payment, performance or
observance when due of all other conditions, obligations, covenants or
agreements contained herein or to declare a default for failure so to do.
(9) That at any time or from time to time, without liability
therefor and without notice, upon written request of Beneficiary and
presentation of this Deed of Trust and said notes for endorsement, and
without affecting the personal liability of any person for payment of the
indebtedness secured hereby, Trustee may: reconvey any part of the Trust
Estate; consent to the making of any map or plat thereof; join in granting
any easement thereon; join in the execution of or subordination of the lien
or charge hereof to any covenants, conditions or restrictions affecting said
property; or join in any extension agreement or any agreement subordinating
the lien or charge hereof.
(10) That upon written request of Beneficiary stating that all
sums secured hereby have been paid, and upon surrender of this Deed of Trust
and said notes to Trustee for cancellation and retention and upon payment by
Trustor of its fees, Trustee shall reconvey, without warranty, the Trust
Estate then held hereunder. The recitals in such reconveyance of any matters
or facts shall be conclusive proof of the truthfulness thereof. The grantee
in such reconveyance may be described as "the person or persons legally
entitled thereto."
(11) That Trustor absolutely and unconditionally hereby assigns,
transfers, conveys and sets over to Beneficiary all the Rents; provided,
however, prior to any default by Trustor in the payment, observance,
performance and discharge of any condition, obligation, covenant or agreement
of Trustor contained herein, Trustor shall have the right as the agent and
fiduciary representative of Beneficiary for collection and distribution
purposes only, to collect and receive the Rents as they become due and
payable to be applied by Trustor to the payment of the principal and interest
and all other sums due or payable on said promissory notes and to the payment
of all other sums payable under this Deed of Trust and, thereafter, so long
as no default as aforesaid has occurred, the balance
5
<PAGE>
shall be distributed to the account of Trustor. Upon any such default,
Beneficiary may at any time without notice, either in person, by agent or by
a receiver to be appointed by a court, and without regard to the adequacy of
any security for the indebtedness hereby secured, enter upon and take
possession of the Property or any part thereof, in its own name or in the
name of Trustor, sue for or otherwise collect the Rents, including those past
due and unpaid and apply the same, less costs and expenses of operation and
collection, including reasonable attorneys' fees and expenses, to the payment
of the principal and interest and all other sums due or payable on said
promissory notes and to the payment of all other sums payable under this Deed
of Trust and in such order as Beneficiary may determine. The entering upon
and taking possession of the Property, the collection of the Rents and the
application thereof as aforesaid, shall not cure or waive any default or
notice of default hereunder or invalidate any act done pursuant to such
notice.
All leases and rental agreements now or hereafter affecting the
Real Property, including all oil and gas leases and other subsurface leases
and the royalties derived therefrom, are hereby assigned and transferred to
Beneficiary by the Trustor, and Trustor hereby agrees and covenants that none
of said leases or rental agreements will be modified or terminated without
the consent in writing of Beneficiary. Trustor shall provide to Beneficiary a
non-disturbance and attornment agreement, in form acceptable to Beneficiary,
executed by each tenant under a lease or rental agreement for a portion of
said Real Property executed after the date hereof.
Trustor agrees that it will not (a) execute any further assignment
of any of its right, title and interest in the Rents without the prior
written consent of Beneficiary; (b) accept prepayments of any installments of
Rents to become due under any leases or rental agreements in excess of one
(1) month except prepayments in the nature of security which security will
not exceed an amount equal to one (1) month's rent under the lease or rental
agreement; (c) with respect to any lease or rental agreement having a term of
two (2) years or more, Trustor will not terminate, amend or modify any such
lease or rental agreement without the prior written consent of the
Beneficiary or (d) accept a surrender of any such lease or rental agreement.
(12) Trustor hereby represents, warrants and covenants that:
(a) Neither the Real Property which is the subject of this Deed of
Trust nor any other real property occupied and/or owned by Trustor has ever
been used by Trustor or any other previous owner and/or operator in
connection with the disposal of or to refine, generate, manufacture, produce,
store, handle, treat, transfer, release, process or transport flammable
explosives, radioactive materials, asbestos, PCB, hazardous wastes, toxic
substances or related materials, including, without limitation, any
substances defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," or "toxic substances"
under any Hazardous Materials Laws (defined below) (collectively, "Hazardous
Materials"), and Trustor will not at any time use the Real Property or such
other real property for the disposal, refining, generating, manufacturing,
producing, storing, handling, treating, transferring, releasing, processing
or transporting of any Hazardous Materials.
(b) After diligent investigation including, but not limited to,
engineering reports and an environmental assessment report provided to
Beneficiary, Trustor warrants and represents that the Real Property is free
of Hazardous Materials and contaminants which are or could be detrimental to
the Real Property, human health or the environment or in violation of any
governmental laws or regulations.
(c) Neither the Real Property or any other real property owned
and/or occupied by Trustor has been designated, listed or identified in any
manner by the United States Environmental Protection Agency ("EPA") or under
and pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, set forth at 42 U.S.C. 9601 et seq.
("CERCLA"), the Resource Conservation and Recovery Act of 1986, as amended,
set forth at 42 U.S.C. 6901 et seq. ("RCRA"), or any other environmental
protection statute as a hazardous waste or hazardous substance disposal or
removal site, superfund or cleanup site or candidate for removal of closure
pursuant to RCRA, CERCLA or any other environmental protection statute.
(d) Trustor has not received a notice, summons, citation,
directive, letter or other communication, written or oral (collectively,
"Notice") from the EPA or any other federal or state governmental agency or
instrumentality, authorized pursuant to an environmental protection statute,
concerning any intentional or
6
<PAGE>
unintentional action or omission by Trustor resulting in the releasing,
spilling, leaking, pumping, pouring, emitting, emptying, dumping or otherwise
disposing of Hazardous Materials into the environment resulting in damage
thereto or to the fish, shellfish, wildlife, biota or other natural
resources.
Trustor shall, and shall cause all tenants, employees, agents,
contractors and subcontractors of Trustor and any other persons present on or
occupying the Real Property to, keep and maintain the Real Property,
including the soil and groundwater thereof, in compliance with, and not cause
or permit the Real Property, including the soil and groundwater thereof, to
be in violation of, any federal, state or local laws, ordinances or
regulations relating to industrial hygiene or to the environmental conditions
thereon, including but not limited to any Hazardous Materials Laws. Neither
Trustor nor tenants, employees, agents, contractors and subcontractors of
Trustor nor any other persons occupying or present on the Real Property shall
use, generate, manufacture, store or dispose of on, under or about the Real
Property or transport to or from the Real Property any Hazardous Materials.
The intended use of the Real Property is for raising vineyards and
producing wine purposes ("Permitted Use") and Trustor shall not change or
alter the Permitted Use unless Trustor shall have first notified Beneficiary
thereof in writing and Beneficiary shall have determined, in its sole and
absolute discretion, that such change or modification will not result in the
presence of Hazardous Materials on the Real Property in such a level that
would increase the potential liability for Hazardous Materials Claims.
Trustor shall immediately advise Beneficiary in writing of: (a)
any Notices (whether such Notices are received from the EPA, the Occupational
Safety and Health Agency, the Department of Health Services, the State Water
Quality Control Board, the Department of Sanitation, the Department of Public
Works or any other federal, state or local governmental agency or regional
office thereof) of violation or potential violation which are received by
Trustor of any applicable federal, state or local laws, ordinances or
regulations relating to any Hazardous Materials, including but not limited to
CERCLA, RCRA, the Hazardous Materials Transportation Act, the Hazardous
Substances Account Act, the Hazardous Substances Act, the Occupational Health
and Safety Act, the Porter-Cologne Water Quality Control Act, the Solid Waste
Management Act of 1980, the Toxic Pit Cleanup Act, the Underground Tank Act
of 1984, and the California Water Quality Improvement Act (collectively,
"Hazardous Materials Laws"); (b) any and all enforcement, cleanup, removal or
other governmental or regulatory actions instituted, completed or threatened
pursuant to any Hazardous Materials Laws; (c) all claims made or threatened
by any third party against Trustor or the Trust Estate relating to damage,
contribution, cost recovery compensation, loss or injury resulting from any
Hazardous Materials (the matters set forth in clauses (a), (b) and (c) above
are collectively referred to herein as "Hazardous Materials Claims"); and (d)
Trustor's discovery of any occurrence or condition on any real property
adjoining or in the vicinity of the Real Property that could cause the Real
Property or any part thereof to be classified as "border-zone property" under
the provisions of California Health and Safety Code, Sections 25220 et seq.,
or any regulation adopted in accordance therewith, or to be otherwise subject
to any restrictions on the ownership, occupancy, transferability or use of
the Real Property under any Hazardous Materials Laws.
To the extent Beneficiary has a reasonable basis to believe its
security for the Loan is or might be impaired by any Hazardous Materials
Claims or in the event of any default hereunder or under any other Loan
Document, Beneficiary shall have the right but not the obligation to join and
participate in, as a party if it so elects, any legal proceedings or actions
initiated in connection with any Hazardous Materials Claims and to have its
reasonable attorneys' and consultants' fees in connection therewith paid by
Trustor upon demand.
Trustor shall be solely responsible for, and shall indemnify and
hold harmless Beneficiary, its directors, officers, employees, agents,
successors and assigns, from and against any loss, damage, cost, expense or
liability directly or indirectly arising out of or attributable to the use,
generation, storage, release, threatened release, discharge, disposal or
presence (whether prior to or during the term of the Loan) of Hazardous
Materials on, under or about the Real Property (whether by Trustor or a
predecessor in title or any employees, agents, contractor or subcontractors
of Trustor, or any predecessor in title, any third persons at any time
occupying or present on the Real Property, or from any other cause
whatsoever), including, without limitation: (a) all foreseeable and
unforeseeable consequential damages including third party claims; (b) the
costs of any required or necessary repair, cleanup or detoxification of the
Real Property, including the soil and groundwater thereof, and the
preparation and
7
<PAGE>
implementation of any closure, remedial or other required plans; (c) damage
to any natural resources; and (d) all reasonable costs and expenses incurred
by Beneficiary in connection with clauses (a), (b) and (c), including but not
limited to reasonable attorneys' and consultants' fees.
Any costs or expenses incurred by Beneficiary for which Trustor is
responsible or for which Trustor has indemnified Beneficiary shall be paid to
Beneficiary on demand, and failing prompt reimbursement, shall be added to
the indebtedness secured by this Deed of Trust and earn interest at the
default rate set forth in the notes secured hereby until paid in full.
Trustor shall not undertake any cleanup, containment, restoration,
removal or other remedial work (collectively, "Remedial Work") in response to
the presence of any Hazardous Materials on, under or about the Real Property
without prior written notice to Beneficiary of the scope and nature of such
Remedial Work; provided, however, that prior written notice shall not be
necessary in the event that the presence of Hazardous Materials on, under or
about the Real Property either poses an immediate threat to the health,
safety or welfare of any individual or is of such a nature that an immediate
remedial response is necessary and it is not possible to notify Beneficiary
before taking such action. In such event, Trustor shall notify Beneficiary as
soon as practicable of any action so taken. Trustor shall not, without
Beneficiary's prior written consent, which shall not be unreasonably
withheld, enter into any settlement agreement, consent decree or other
compromise in respect to any Hazardous Material Claims, which remedial
action, settlement, consent or compromise might, in Beneficiary's reasonable
judgment, impair the value of Beneficiary's security hereunder.
In the event any investigation or monitoring of conditions on the
Real Property or any Remedial Work is required under any applicable Hazardous
Materials Laws, by any judicial order, by any governmental entity, or in
order to comply with any agreements affecting the Real Property because of or
in connection with any Hazardous Material Claims, Trustor shall perform or
cause to be performed the Remedial Work in compliance with such Hazardous
Material Laws or agreement. All Remedial Work shall be performed by one or
more contractors, selected by Trustor and approved in advance in writing by
Beneficiary, and under the supervision of a consulting engineer, selected by
Trustor and approved in writing by Beneficiary. All costs and expenses of
such Remedial Work shall be paid by Trustor, including, without limitation,
the charges of such contractors and/or the consulting engineer, and
Beneficiary's reasonable attorneys' fees and costs incurred in connection
with monitoring or reviewing such Remedial Work. In the event Trustor shall
fail to timely commence or cause to be commenced, or fail to diligently
prosecute to completion, such Remedial Work, Beneficiary may, but shall not
be required to, cause such Remedial Work to be performed, and all costs and
expenses thereof shall be due and payable upon demand therefor by Trustor.
If during the term of the loan secured by this Deed of Trust
Beneficiary has reasonable cause to believe that Hazardous Materials have
migrated onto the Real Property or have otherwise come onto the Real Property
in violation of the terms of this Deed of Trust or there has been a default
by Trustor hereunder with respect to Hazardous Materials, at Beneficiary's
request, Trustor shall retain, at Trustor's sole cost and expense, a licensed
geologist, industrial hygienist or an environmental consultant (a
"Consultant") acceptable to Beneficiary to conduct an environmental site
assessment of the Real Property for the presence of Hazardous Materials
("Environmental Audit"). The Environmental Audit shall be performed in a
manner reasonably calculated to discover the presence of Hazardous Materials
contamination. The Consultant shall concurrently deliver the results of its
investigation in writing directly to Trustor and Beneficiary without prior
consultation with either party unless conducted in the presence of the other
party.
If Trustor fails to pay for or obtain an Environmental Audit as
provided for herein, Beneficiary may, but shall not be obligated to, obtain
the Environmental Audit, and either demand reimbursement from Trustor or add
the cost thereof to the indebtedness secured by this Deed of Trust, in which
case interest shall accrue on such sum at the default rate set forth in the
notes secured hereby. Furthermore, Trustor hereby grants Beneficiary, its
employees and agents the right, exercisable at any time and at Beneficiary's
sole cost and expense, to enter upon the Real Property for the purpose of
conducting an inspection, sampling and testing to determine whether there
have been any violations of the covenants contained in this Paragraph 12.
8
<PAGE>
Trustor's liability under this Paragraph 12 shall not terminate
until the earlier of (i) the sale of the Real Property pursuant to the
enforcement of the lien of this Deed of Trust, the proceeds of which are
applied to the indebtedness secured hereby, or (ii) the payment in full of
the indebtedness.
(13) Trustor agrees to indemnify, defend and hold harmless Trustee
and Beneficiary from and against any and all losses, liabilities, suits,
obligations, fines, damages, judgments, penalties, claims, charges, costs and
expenses (including attorneys' fees and disbursements) which may be imposed
on, incurred or paid by or asserted against Trustee and/or Beneficiary by
reason or on account of, or in connection with (a) any willful misconduct of
Trustor or any default or event of default by Trustor hereunder or under any
other Loan Document; (b) Trustee's and/or Beneficiary's good faith and
commercially reasonable exercise of any of their rights and remedies, or the
performance of any of their duties hereunder or under the other Loan
Documents to which Trustor is a party; (c) Trustor's failure to perform or
comply with any of the covenants set forth in Paragraph 12 above; (d) the
construction, reconstruction or alteration of the Real Property; (e) any
negligence of Trustor, or any negligence or willful misconduct of any lessee
of the Real Property or any portion thereof, or any of their respective
agents, contractors, employees, licensees or invitees; or (f) any accidents,
injury, death or damage to any person or property occurring in, on or about
the Real Property or any street, drive, sidewalk, curb or passageway adjacent
thereto, except for the willful misconduct or gross negligence of Beneficiary
or Trustee. Upon demand by Trustee and/or Beneficiary, Trustor shall defend
any action or proceeding brought against Trustee and/or Beneficiary arising
out of or alleging any claim or cause of action covered by this indemnity,
all at Trustor's own cost and by counsel to be approved by Beneficiary in the
exercise of its reasonable judgment. In the alternative, Trustee and/or
Beneficiary may elect to conduct its own defense at the expense of Trustor.
The provisions of this Paragraph 13 shall survive the foreclosure or the
delivery of a deed in lieu of foreclosure of this Deed of Trust or the
payment in full of the indebtedness secured hereby and the termination and
reconveyance of this Deed of Trust, as the case may be.
Any amount payable to Trustee or Beneficiary under Paragraph 12 or
this Paragraph 13 shall be due and payable immediately after demand therefor
and receipt by Trustor of a statement setting forth in reasonable detail the
amount claimed and the basis therefor, and such amounts shall bear interest
at the rate specified in Paragraph 6 hereof from and after the date such
amounts are paid by Beneficiary or Trustee, as the case may be, until paid in
full by Trustor.
(14) That upon default by Trustor in payment of any indebtedness
secured hereby or in performance of any agreement hereunder, Beneficiary may
take any action or pursue any right or remedy permitted under applicable law
specifically including, without limiting, impairing or otherwise affecting
its other rights and remedies declare all sums secured hereby immediately due
and payable by delivery to Trustee written declaration of default and demand
for sale and of written notice of default and of election to cause to be sold
the Real Property, which notice Trustee shall cause to be filed for record.
Beneficiary also shall deposit with Trustee this Deed of Trust, said notes
and all documents evidencing expenditures secured hereby.
After the lapse of such time as may then be required by law
following the recordation of said notice of default, and notice of the sale
having been given as then required by law, Trustee, without demand on
Trustor, shall sell the Real Property at the time and place fixed by it in
said notice of sale, either as a whole or in separate parcels, and in such
order as it may determine, at public auction to the highest bidder for cash
in lawful money of the United States, payable at time of sale. Trustee may
postpone sale of all or any portion of said Real Property by public
announcement at such time and place of sale, and from time to time thereafter
may postpone such sale by public announcement at the time fixed by the
preceding postponement. Trustee shall deliver to such purchaser its deed
conveying the Real Property so sold, but without any covenant or warranty,
express or implied. The recitals in such deed of any matters or facts shall
be conclusive proof of the truthfulness thereof. Any person, including
Trustor, Trustee, or Beneficiary as herein defined, may purchase at such
sale.
After deducting all costs, fees and expenses of Trustee and of
this Trust, including cost of evidence of title in connection with sale,
Trustee shall apply the proceeds of sale to payment of: all sums expended
under the terms hereof, not then repaid, with accrued interest at the rate
specified in Paragraph 6 hereof; all other sums then secured hereby; and the
remainder, if any, to the person or persons legally entitled thereto.
10
<PAGE>
If this Deed of Trust or any notes secured hereby provides for any
charge for prepayment of any indebtedness secured hereby, Trustor agrees to
pay said charge if any of said indebtedness shall be paid prior to the date
thereof stated in said notes or this Deed of Trust, even if and
notwithstanding Trustor shall have defaulted in payment thereof, or in
performance of any agreement hereunder, and Beneficiary, by reason thereof,
shall have declared all sums secured hereby immediately due and payable.
(15) Following recordation of a notice of default, Beneficiary and
prospective bidders at any foreclosure sale shall have the right to enter and
inspect said Real Property at reasonable times and upon reasonable notice to
Trustor. Trustor shall, promptly following the recordation of a notice of
default, but in any event prior to the date of sale set in the notice of
sale, disclose to Beneficiary in writing all material facts regarding said
Real Property.
Trustor hereby waives any claims against Beneficiary or Trustee
arising out of or in connection with any disclosures regarding said Real
Property which may be made by Beneficiary or Trustee to prospective bidders
at or prior to the foreclosure sale. In addition, Trustor shall indemnify,
defend and hold harmless Trustee and Beneficiary from and against all losses,
liabilities, suits, damages claims or judgments which may arise out of or in
connection with any disclosures regarding said Real Property which may be
made by Beneficiary or Trustee to prospective bidders at or prior to the
foreclosure sale. All costs, fees and expenses incurred by Beneficiary or
Trustee in connection with such inspections and disclosures shall be payable
by Trustor upon demand therefor, and such amounts shall bear interest at the
rate specified in Paragraph 6 hereof from the date paid by Beneficiary until
paid in full by Trustor, and if not so paid shall be added to the amount
secured hereby.
(16) That if the Trustor, or any subsequent owner of the Real
Property covered hereby, shall occupy said property, or any part thereof,
after any default in payment of any amount secured by this Deed of Trust, the
Trustor, or such owner, shall pay to the Beneficiary in advance on the first
day of each month a reasonable rental for the premises so occupied, and upon
failure to pay such reasonable rental, the Trustor, or such owner, may be
removed from said premises by summary dispossess proceedings or by any other
appropriate action or proceeding.
(17) Trustor hereby represents and warrants: (a) that it is or
will be the lawful owner of all of the Trust Estate free of all claims, liens
or encumbrances whatsoever, other than the security interests granted
pursuant hereto and such other matters as may be approved in writing by
Beneficiary in Beneficiary's sole and absolute discretion; (b) all
information, including but not limited to financial statements furnished by
Trustor to Beneficiary heretofore or hereafter, whether oral or written, is
and will be correct and true as of the date given; and (c) if Trustor is a
business entity, the execution, delivery and performance hereof are within
its powers and have been duly authorized.
(18) With respect to the Personal Property and the security interest granted
to Beneficiary under the Deed of Trust, the following shall apply:
(a) Trustor shall: (i) execute such financing statements and other
documents and do such other acts and things, all as Beneficiary may from time
to time require, to establish and maintain a valid security interest in the
Personal Property, including payment of all costs and fees in connection with
any of the foregoing when deemed necessary by Beneficiary; (ii) keep the
Personal Property separate and identifiable and at the location described
herein and permit Beneficiary and its representatives to inspect the Personal
Property and/or records pertaining thereto from time to time during normal
business hours; (iii) at Trustor's expense upon Beneficiary's request remove
any unauthorized lien or security interest and defend any claim affecting the
Personal Property; (iv) reimburse Beneficiary for any expenses including but
not limited to reasonable attorneys' fees and legal expenses, incurred by
Beneficiary in seeking to protect, collect or enforce any rights in the
Personal Property; (v) maintain the Personal Property in good condition and
not use the Personal Property for any unlawful purpose; and (vi) at its own
expense, upon request of Beneficiary, notify any parties obligated to Trustor
on any of the Personal Property to make payment to Beneficiary, and Trustor
hereby irrevocably grants Beneficiary power of attorney to make said
notifications and collections. Trustor does hereby authorize Beneficiary to
perform any and all acts which Beneficiary in good faith deems necessary for
the protection and preservation of the Personal
10
<PAGE>
Property or its value or Beneficiary's security interest therein, including
transferring any of the Personal Property into its own name and receiving the
income thereon as additional security hereunder.
(b) Whenever a default exists under this Deed of Trust,
Beneficiary, at its option may: (i) transfer any of the Personal Property
into its own name or that of its nominee; (ii) notify any parties obligated
on any of the Personal Property consisting of accounts, instruments, chattel
paper, choses in action or the like to make payment to Beneficiary and
enforce collection of any of the Personal Property herein; (iii) require
Trustor to assemble and deliver any of the Personal Property to Beneficiary
at a reasonable convenient place designated by Beneficiary. No delay on the
part of Beneficiary in the exercise of any right or remedy shall constitute a
waiver thereof and any exercise, or partial exercise, by Beneficiary of any
right or remedy under this Paragraph 18 shall not preclude the exercise of
any other right or remedy of Beneficiary under this Paragraph 18, this Deed
of Trust or at law or in equity or the further exercise of the same remedy.
This Paragraph 18 shall not be construed to derogate or impair the lien or
provisions of any other provision of the Deed of Trust with respect to any
property described in the Deed of Trust that is real property or which the
parties have agreed to treat as real property. Beneficiary's rights, power
and remedies as to the Personal Property shall be exercisable as to any part
or all of the Personal Property as Beneficiary may elect.
(c) Trustor hereby assumes, and releases Beneficiary from, all
risk of loss, destruction or damage to all or any part of the Personal
Property by reason of any casualty or cause whatsoever except as caused by
the intentional misconduct of Beneficiary, and Trustor shall indemnify and
hold Beneficiary harmless from and against all liabilities, obligations,
claims, damages, penalties, causes of action, costs and expenses (including,
reasonable attorneys' fees and costs) imposed upon or incurred by or asserted
against Beneficiary by reason of (i) any failure by Trustor to perform or
comply with the terms of this Deed of Trust or (ii) the exercise by
Beneficiary of any rights or remedies provided hereunder or at law or in
equity, except as caused by Beneficiary's intentional misconduct.
(d) Upon transfer by Beneficiary of any part of the obligations
secured hereby, Beneficiary shall be fully discharged from all liability with
respect to the Personal Property transferred therewith.
(e) The grant of a security interest in proceeds, replacements,
substitutions or the like does not imply any right of Trustor to sell or
dispose of any Personal Property described herein without the express written
consent by Beneficiary.
(19) Beneficiary, acting alone, may from time to time, by
instrument in writing, substitute a successor or successors to any Trustee
named herein or acting hereunder, which instrument, executed and acknowledged
by each and recorded in the office of the recorder of the county or counties
where said property is situated, shall be conclusive proof of proper
substitution of such successor Trustee or Trustees, who shall, without
conveying from the Trustee predecessor, succeed to all its title, estate,
rights, powers and duties. Said instrument must contain the name of the
original Trustor, Trustee and Beneficiary hereunder, the book and page or
document number where this Deed of Trust is recorded, and the name and
address of the new Trustee. If notice of default shall have been recorded,
this power of substitution cannot be exercised until after the costs, fees
and expenses of the then acting Trustee shall have been paid to such Trustee,
who shall endorse receipt thereof upon such instrument of substitution.
(20) That any Trustor who is a married person hereby expressly
agrees that recourse may be had against his or her separate property, but
without hereby creating any lien or charge thereon, for any deficiency after
sale of the property hereunder.
(21) If requested, that Trustor shall furnish at least annually,
within ninety (90) days after the end of its fiscal year, or more frequently
if requested by Beneficiary, a full and complete financial statement
concerning income, expenses, assets and liabilities of Trustor, and/or
applicable or attributable to the Trust Estate encumbered hereby and the
operations thereof, and such other information as Beneficiary may request.
Such statement shall be prepared in accordance with generally accepted
accounting principles and shall be certified as true, complete and correct by
Trustor. Trustor shall keep true and correct records upon which annual
statements are based for not less than three (3) years after delivery of the
required annual statement. Beneficiary shall have the right, at its cost and
at any time and from time to time after giving prior written notice to
Trustor, to do or cause to be done any of the
11
<PAGE>
following: to audit the records; to cause an audit of the records to be made;
to make abstracts from the records; to make copies of any or all of the
records; to examine any or all leases and rental agreements (if such leases
and rental agreements exist); and to make copies of any or all leases and
rental agreements (to the extent such leases and rental agreements exist).
Trustor shall make all records specified in the notice available at the time
specified in the notice and at the place where the records are customarily
kept, or at Beneficiary's option at Beneficiary's office. Upon any default
under the notes described above, this Deed of Trust or other Loan Documents,
Beneficiary may perform any of the acts authorized by this paragraph at the
sole cost of Trustor. Trustor shall promptly reimburse Beneficiary for its
costs and such costs shall be secured by this Deed of Trust.
(22) That the pleading of any statute of limitations as a defense
to any and all obligations secured by this Deed of Trust is hereby waived to
the full extent permissible by law.
(23) That this Deed of Trust applies to, inures to the benefit of,
and binds all parties hereto, their heirs, legatees, devisees,
administrators, executors, successors and assigns. The term Beneficiary shall
mean the owner and holder, including pledgees, of the notes secured hereby,
whether or not named as Beneficiary herein. In this Deed of Trust, whenever
the context so requires, the masculine gender includes the feminine and
neuter, and the singular number includes the plural. If more than one (1)
person executes this Deed of Trust as Trustor, the obligations of such
persons are joint and several.
(24) Trustor agrees that Lender may provide any financial or other
information, data or material in Beneficiary's possession relating to
Trustor, the Loan, this Deed of Trust, the Property or the Improvements, to
Beneficiary's parent, affiliate, subsidiary, participants or service
providers, without further notice to Trustor.
(25) That Trustee accepts this Trust when this Deed of Trust, duly
executed and acknowledged, is made a public record as provided by law.
Trustee is not obligated to notify any party hereto of pending sale under any
other deed of trust or of any action or proceeding in which Trustor,
Beneficiary or Trustee shall be a party unless brought by Trustee.
(26) To pay Beneficiary for each and every beneficiary statement
furnished at Trustor's request the maximum fee allowed by law and if there be
no maximum, then in accordance with Beneficiary's schedule therefor. Such fee
shall be computed as of the time said statement is furnished.
(27) That should Trustor sell, convey, transfer, dispose of or
further encumber the Trust Estate or any part thereof or any interest therein
or enter into a lease covering all or any portion thereof or an undivided
interest therein, either voluntarily, involuntarily or otherwise, or enter
into an agreement so to do, without the prior written consent of Beneficiary
being first had and obtained, then Beneficiary may, at its option, declare
all sums secured hereby immediately due and payable. Consent to one such
transaction shall not be deemed to be a waiver of the right to require such
consent to future or successive transactions.
(28) Should any of the following occur, then Beneficiary may, at
its option, declare all sums secured hereby immediately due and payable
unless Beneficiary shall have given its prior written consent thereto:
(a) If Trustor is a corporation, and should there occur a sale,
conveyance, transfer, disposition or encumbrance, either voluntary or
involuntary, or should an agreement be entered into to accomplish any
thereof, with respect to more than ten percent (10.0%) of the issued and
outstanding capital stock of Trustor; or
(b) If Trustor is a trust, and should there occur a sale,
conveyance, transfer, disposition or encumbrance, either voluntary or
involuntary, or should an agreement be entered into to accomplish any
thereof, with respect to the beneficial interest of Trustor; or
(c) If Trustor is a limited partnership, a general partnership or
a joint venture, and should there occur a sale, conveyance, transfer,
disposition or encumbrance, either voluntary or involuntary, or should an
agreement be entered into to accomplish any thereof, with respect to a change
in any general partner of Trustor; or
12
<PAGE>
(d) If Trustor is a limited liability company, and should there
occur a sale, conveyance, transfer, disposition or encumbrance, either
voluntary or involuntary, or should an agreement be entered into to
accomplish any thereof, with respect to a change in any membership interest.
Consent to one such transaction shall not be deemed to be a waiver of
Beneficiary's right to require such consent to future or successive
transactions.
(29) That in the event of the passage after the date hereof of any
law deducting from the value of real property, for taxation purposes, any
lien thereon or changing in any way the laws now in force for the taxation of
deeds of trust or debts whether or not secured thereby for federal, state or
local purposes or the manner of the collection of any such taxes so as to
affect this Deed of Trust or the obligations hereby secured, Trustor agrees
to pay any thereof and if Trustor fails to so do or if it would be illegal
for Trustor so to do then, the whole of the principal sum secured by this
Deed of Trust, together with accrued interest thereon shall, at the option of
Beneficiary, without demand or notice, immediately become due and payable.
(30) To the fullest extent permitted by law, Trustor hereby waives
the provisions of Section 431.70 of the California Code of Civil Procedure
and all amendments thereto.
(31) That no remedy herein conferred upon, reserved to Trustee or
Beneficiary is intended to be exclusive of any other remedy herein or by law
provided, but each shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity
or by statute. No delay or omission of Trustee or Beneficiary in the
exercising of any right or power accruing upon any event of default hereunder
shall impair such right or power or any other right or power nor shall the
same be construed to be a waiver of any default or any acquiescence therein;
and every power and remedy given by this Deed of Trust to Trustee or
Beneficiary may be exercised from time to time as often as may be deemed
expedient by Trustee or Beneficiary. If there exists additional security for
the obligations secured hereby, Beneficiary, at its sole option, and without
limiting or affecting any of the rights or remedies hereunder, may exercise
any of the rights or remedies to which it may be entitled hereunder either
concurrently with whatever rights it may have in connection with such other
security or in such order and in such manner as Beneficiary may deem fit
without waiving any rights with respect to any other security. The granting
of consent by Beneficiary to any transaction as required by the terms
hereunder shall not be deemed a waiver of the right to secure the consent of
Beneficiary to future or successive transactions.
(32) That in the event any one or more of the provisions contained
in this Deed of Trust or in the promissory notes hereby secured shall for any
reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Deed of Trust or said promissory notes, but this Deed of
Trust and said promissory notes shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein or
therein.
(33) TRUSTOR ACKNOWLEDGE(S) AND AGREE(S) THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS AGREEMENT OR THE LENDING RELATIONSHIP ESTABLISHED
HEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES, AND THEREFORE,
TRUSTOR HEREBY WAIVE(S) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING (INCLUDING ACTIONS SOUNDING IN TORT) TO ENFORCE OR DEFEND ANY
RIGHTS UNDER THIS DEED OF TRUST OR ANY OTHER LOAN DOCUMENT OR ARISING FROM
THE TRANSACTION CONTEMPLATED HEREUNDER OR THE LENDING RELATIONSHIP
ESTABLISHED HEREBY AND AGREE(S) THAT ANY SUCH ACTION OR PROCEEDING SHALL BE
TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE AND NOT BY A JURY.
(34) This Deed of Trust has been executed and delivered in the
State of California and is to be construed and enforced according to and
governed by the laws thereof except that with respect to any portion of the
Trust Estate covered hereby located outside of the State of California, only
to the extent required for Trustee or Beneficiary to enforce or realize upon
the rights and remedies hereunder with respect thereto, the laws of the state
in which such property is located shall be applicable hereto.
13
<PAGE>
The undersigned Trustor requests that a copy of any notice of
default and of any notice of sale hereunder be mailed to him at his address
hereinbefore set forth.
TRUSTOR:
AWG, LTD.
By: _______________________________
John P. Caponigro, Secretary
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph E. Antonini
14
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF _________________________ )
On ___________________, 19__, before me, the undersigned, a Notary
Public in and for said State, personally appeared
___________________________________________________________, personally known
to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
___________________________
NOTARY PUBLIC
15
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
COMMENCING AT A POINT ON THE NORTHEASTERN LINE OF THE COUNTY ROAD
COMMONLY KNOWN AS THE "BIG RANCH ROAD", WHERE THE SAME IS INTERSECTED BY THE
CENTER LINE OF A CERTAIN STONE DITCH RUNNING THROUGH LOT 12 AS SAID LOT IS
SHOWN UPON THE MAP HEREINAFTER REFERRED TO, SAID POINT OF COMMENCEMENT BEING
FURTHER DESCRIBED AS BEING THE POINT OF INTERSECTION OF SAID NORTHEASTERN
LINE OF THE "BIG RANCH ROAD" WITH THE SOUTHEASTERN LINE OF THE 39.25 ACRE
TRACT HERETOFORE CONVEYED TO L. L. JORDAN BY DEED OF RECORD IN BOOK 112 OF
DEEDS, AT PAGE 18, RECORDS OF SAID NAPA COUNTY AND RUNNING THENCE FROM SAID
POINT OF COMMENCEMENT, AND ALONG THE NORTHEASTERN LINE OF SAID COUNTY ROAD
SOUTH 30(degree) 30' EAST 849.5 FEET TO THE SOUTHEASTERN LINE OF SAID LOT 12,
THENCE NORTH 55(degree) EAST AND ALONG THE SOUTHEASTERN LINE OF SAID LOT 12,
A DISTANCE OF 46.90 CHAINS, MORE OR LESS, TO THE CENTER OF NAPA RIVER; THENCE
UP SAID RIVER AND FOLLOWING MEANDERINGS OF THE CENTER LINE THEREOF TO THE
SOUTHEASTERN LINE OF THE 33 ACRE TRACT CONVEYED TO E.C. GADDINI BY DEED OF
RECORD IN BOOK 110 OF DEEDS, AT PAGE 362, SAID NAPA COUNTY RECORDS, THENCE
WESTERLY ALONG THE SOUTHEASTERN LINE OF SAID 33 ACRE TRACT TO A LARGE OAK
TREE AND THENCE SOUTH 55 3/4(degree) WEST AND ALONG THE SOUTHEASTERN LINE OF
SAID GADDINI AND THE SOUTHEASTERN LINE OF PREMISES CONVEYED TO JORDAN
HEREINABOVE REFERRED TO, 1697 FEET TO THE POINT OF COMMENCEMENT. BEING A
PORTION OF LOT 12, AS SHOWN ON THAT CERTAIN MAP, DUPLICATE PLAT OF THE SAUSAL
RANCHO, RECORDED NOVEMBER 21, 1864 IN BOOK 1 OF DEEDS AT PAGE 99, NAPA COUNTY
RECORDS, AND BEING THE SAME AS SET FORTH ON RECORD OF SURVEY MAP NO. 3998,
FILED FEBRUARY 2, 1987 IN BOOK 25 OF SURVEYS, PAGE 62, NAPA COUNTY RECORDS.
APN 036-170-038
16
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO
Name COMERICA BANK
Street 1400 North Woodward Avenue, Suite 255
City/St/Zip Bloomfield Hills, MI 48304 SPACE ABOVE THIS LINE
Attn: Lora McEachern FOR RECORDER'S USE
ASSIGNMENT OF
REAL PROPERTY LEASES AND RENTS
For value received, AWG, Ltd. ("Assignor") does hereby sell,
assign, transfer and set over to COMERICA BANK, a Michigan Banking
Corporation (hereinafter referred to as "Lender"), (1) those certain lease
agreements for the lease of real property commonly known as 4162 Big Ranch
Road, City of Napa, State of California, more particularly described on
Exhibit A attached hereto and incorporated herein by this reference (the
"Property"), such lease agreements being set forth in Exhibit B attached
hereto and incorporated herein by this reference, entered into by and between
Assignor (or any predecessor in interest of Assignor), and the lessees
identified therein; (2) any other leases, rental agreements or use agreements
of all or any portion of the Property, whether now existing or hereafter
entered into; (3) any and all extensions renewals, modifications, supplements
and amendments thereof or thereto; (4) any and all guaranties of any of the
lessees' obligations under the terms and conditions of said leases and under
any extensions, renewals, modifications and amendments thereof or thereto
((1) through (4) are hereinafter collectively referred to as the "Leases" and
singularly referred to as a "Lease"); (5) any cash or securities deposited
with the lessor under any Lease to secure performance of the lessees'
obligations thereunder; and (6) all rentals and sums due and to become due
under the Leases ("Rents").
Assignor does hereby consent that, without further notice and
without releasing the liability of Assignor, Lender may, at its discretion,
give grace or indulgence in the collection of all Rents due or to become due
on or under the Leases and grant extensions of time for the payment of the
same before, at or after maturity. Assignor warrants that all rental payments
and other sums due under the Leases as well as the right to collect same are
hereby vested in Lender; that the Leases are genuine; that the lessees
thereunder have capacity to contract; that Assignor has the right to make
this assignment and that rental payments and other sums due thereunder are
free from liens, encumbrances, claims and set-offs of every kind whatsoever,
and that as of the date hereof, the unpaid balance of rental payments
specified in the Leases are as is set forth in each of the Leases.
Assignor agrees that Lender may proceed against Assignor directly
or independently of the lessees and that the cessation of the liability of
the Lessees under said Leases for any reason other than full payment, shall
not in any way affect the liability of Assignor hereunder, nor any extension,
forbearance of acceptance, release or substitution of security or any
impairment of suspension of Lender's remedies or rights against the lessees
shall not in any way affect the liability of Assignor hereunder.
Lender does not assume any of the obligations arising under said
Leases, and Assignor does hereby covenant and agree: (a) to keep and perform
all of the obligations of the lessor under the Leases and to save Lender
harmless from the consequences of any failure to do so; (b) to preserve the
Property free and clear of liens and encumbrances, except with the consent of
Lender; (c) to neither consent to nor enter into any alteration, amendment,
cancellation, renewal or extension of the Leases without first having
obtained the written consent of Lender.
1
<PAGE>
Assignor hereby irrevocably constitutes and appoints Lender its
true and lawful attorney to demand, receive and enforce payment and to give
receipts, releases and satisfactions, and to sue for all sums payable either
in the name of Assignor, or in the name of the Lender, with the same force
and effect as Assignor could do if this assignment had not been made.
Assignor hereby represents and warrants to Lender that it is the
lawful owner of the Leases and all rights and interests therein, and that it
will not assign any other interest in the Leases.
Notwithstanding any provision herein to the contrary, this
Assignment of Real Property Leases and Rents is intended to be an absolute
assignment from Assignor to Lender and not the granting of a security
interest. The Rents and Leases are hereby assigned absolutely by Assignor to
Lender.
Lender shall have the present right to collect and receive any and
all Rents assigned hereunder; provided, that so long as no event of default
has occurred hereunder or under (1) that certain promissory note of even date
herewith in the amount of One Million Six Hundred Fifty Thousand Dollars
($1,650,000) (the "First Non-Revolving Note"), that certain promissory note
of even date herewith in the amount of Eight Hundred Fifty Thousand Dollars
($850,000) (the "Second Non-Revolving Note"), and that certain promissory
note of even date herewith in the amount of Two Hundred Thousand Dollars
($200,000) (the "Revolving Note") (collectively, the "Notes"); (2) that
certain deed of trust of even date herewith executed by Assignor, as trustor,
in favor of Lender, as beneficiary (the "Deed of Trust"); and (3) that
certain loan agreement of even date herewith executed by and between Assignor
and Lender (collectively, the "Loan Documents"), Lender shall forebear from
collecting such Rents and Assignor shall have the duty to collect all Rents
for so long as Lender forebears. If an event of default has occurred under
any of the Loan Documents, any Rents received by Assignor shall be held in
trust for Lender and shall be paid over to Lender immediately. If an event of
default has occurred, Lender may, without thereby becoming or being deemed a
mortgagee in possession, notify any lessee, tenant or other occupant of any
part of the Property to pay Rents to Lender and all such rents shall
thereafter be paid directly to Lender until Lender agrees otherwise. The
obligation of any such lessee, tenant or occupant shall be satisfied and
discharged to the extent of any such payment to Lender without regard to
whether an event of default has in fact occurred, the application of the
Rents made by Lender, or otherwise. If an event of default has occurred under
the terms of any of the Loan Documents, to facilitate Lender's collection of
Rents, Assignor hereby irrevocably authorizes and empowers Lender to endorse
on behalf of Assignor and in Assignor's name or checks and other instruments
received by Lender as payment of Rents.
Lender shall be entitled to apply the Rents (in such order of
priority as Lender desires) to the payment of: (1) all expenses of managing
the Property, including without limitation, the salaries, fees and wages of
the managing agent and such other employees as Lender may deem necessary or
desirable, and all expenses of operating and maintaining the Property,
including without limitation, all taxes, charges, claims, assessments,
utility charges and insurance premiums, and the cost of all alterations,
renovations, repairs or replacements, and all expenses incident to taking and
retaining possession of the Property; (2) the principal and interest and
other sums due under the Notes together with all costs and attorneys' fees
(to the extent permitted by law); and (3) payment of any other obligations of
Assignor under the Loan Documents.
Notice of this assignment may be given to the lessees under the
Leases at any time at Lender's option. In the event any payment or payments
of Rents under the Leases are made to Assignor, Assignor agrees promptly to
transmit such payment or payments to Lender in the same manner as it is
received by Assignor except that Assignor will endorse checks so received
which are payable to Assignor.
Assignor agrees to indemnify and hold Lender harmless from all
liability, loss, damage or expense which it may incur by reason of this
assignment, or any action taken by Lender hereunder, except for the gross
negligence or willful misconduct of Lender. Should Lender incur any such
liability, loss, damage or expense, Assignor shall pay the amount thereof
(including reasonable attorneys' fees), with interest thereon at the default
rate provided in the Notes, to Lender immediately and without demand, and
such payment shall be secured by the Deed of Trust.
2
<PAGE>
In the event the Assignor fails to perform any of the covenants or
agreements herein contained or any of the warranties or representations
herein contained prove to be untrue, then Lender, at its option, may
accelerate any indebtedness secured by the Deed of Trust and demand that
payment in full immediately be made.
In the event either party hereto shall bring any action or legal
proceeding for damages for an alleged breach of any provision of this
assignment, to enforce an indemnity obligation, or to enforce, protect,
interpret or establish any term, condition or covenant of this assignment or
right or remedy of either party, the prevailing party shall be entitled to
recover as a part of such action or proceeding, reasonable attorneys' fees
and court costs, including attorneys' fees and costs for appeal, as may be
fixed by the court or jury.
Assignor has granted Lender an assignment of rents in the Deed of
Trust which assignment supplements and is not intended to supersede, modify
or vary this assignment. Both assignments shall be construed together, but in
the event of a conflict, this assignment shall control.
This assignment is irrevocable and shall remain in full force and
effect until and unless either of the following shall occur: (1) payment in
full of the indebtedness secured by the Deed of Trust; or (2) execution by
Lender of a written release of this assignment.
Assignor agrees that Lender may provide any financial or other
information, data or material in Lender's possession relating to Assignor,
the Loan, this Assignment, the Property or the improvements, to Lender's
parent, affiliate, subsidiary, participants or service providers, without
further notice to Assignor.
Whenever the context so requires, the singular number includes the
plural.
Dated at San Jose, California this 10th day of December, 1998.
ASSIGNOR:
AWG, LTD.
By: ____________________________
John P. Caponigro, Secretary
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph E. Antonini
3
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF _______________________ )
On ________________, 19___, before me, the undersigned, a Notary
Public in and for said State, personally appeared
_______________________________________________________, personally known to
me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
______________________________
NOTARY PUBLIC
4
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
COMMENCING AT A POINT ON THE NORTHEASTERN LINE OF THE COUNTY ROAD
COMMONLY KNOWN AS THE "BIG RANCH ROAD", WHERE THE SAME IS INTERSECTED BY THE
CENTER LINE OF A CERTAIN STONE DITCH RUNNING THROUGH LOT 12 AS SAID LOT IS
SHOWN UPON THE MAP HEREINAFTER REFERRED TO, SAID POINT OF COMMENCEMENT BEING
FURTHER DESCRIBED AS BEING THE POINT OF INTERSECTION OF SAID NORTHEASTERN
LINE OF THE "BIG RANCH ROAD" WITH THE SOUTHEASTERN LINE OF THE 39.25 ACRE
TRACT HERETOFORE CONVEYED TO L. L. JORDAN BY DEED OF RECORD IN BOOK 112 OF
DEEDS, AT PAGE 18, RECORDS OF SAID NAPA COUNTY AND RUNNING THENCE FROM SAID
POINT OF COMMENCEMENT, AND ALONG THE NORTHEASTERN LINE OF SAID COUNTY ROAD
SOUTH 30(degree) 30' EAST 849.5 FEET TO THE SOUTHEASTERN LINE OF SAID LOT 12,
THENCE NORTH 55(degree) EAST AND ALONG THE SOUTHEASTERN LINE OF SAID LOT 12,
A DISTANCE OF 46.90 CHAINS, MORE OR LESS, TO THE CENTER OF NAPA RIVER; THENCE
UP SAID RIVER AND FOLLOWING MEANDERINGS OF THE CENTER LINE THEREOF TO THE
SOUTHEASTERN LINE OF THE 33 ACRE TRACT CONVEYED TO E.C. GADDINI BY DEED OF
RECORD IN BOOK 110 OF DEEDS, AT PAGE 362, SAID NAPA COUNTY RECORDS, THENCE
WESTERLY ALONG THE SOUTHEASTERN LINE OF SAID 33 ACRE TRACT TO A LARGE OAK
TREE AND THENCE SOUTH 55 3/4(degree) WEST AND ALONG THE SOUTHEASTERN LINE OF
SAID GADDINI AND THE SOUTHEASTERN LINE OF PREMISES CONVEYED TO JORDAN
HEREINABOVE REFERRED TO, 1697 FEET TO THE POINT OF COMMENCEMENT. BEING A
PORTION OF LOT 12, AS SHOWN ON THAT CERTAIN MAP, DUPLICATE PLAT OF THE SAUSAL
RANCHO, RECORDED NOVEMBER 21, 1864 IN BOOK 1 OF DEEDS AT PAGE 99, NAPA COUNTY
RECORDS, AND BEING THE SAME AS SET FORTH ON RECORD OF SURVEY MAP NO. 3998,
FILED FEBRUARY 2, 1987 IN BOOK 25 OF SURVEYS, PAGE 62, NAPA COUNTY RECORDS.
APN 036-170-038
5
<PAGE>
EXHIBIT "B"
SCHEDULE OF LEASES
6
<PAGE>
SECURITY AGREEMENT
(Chattel Mortgage)
COMERICA BANK
1400 NORTH WOODWARD AVENUE
SUITE 255
BLOOMFIELD HILLS, MI 48304
This Security Agreement (this "Agreement") is executed at San Jose,
California, on December 10, 1998, by AWG, Ltd., a Nevada corporation (herein
called "Debtor").
As security for the payment and performance of the following obligations: (i)
payment to COMERICA BANK, a Michigan Banking Corporation ("Lender"), of all
sums at any time owing under that certain First Non-Revolving Note of even
date herewith, in the original principal amount of ONE MILLION SIX HUNDRED
FIFTY THOUSAND DOLLARS ($1,650,000), that certain Second Non-Revolving Note
of even date herewith, in the original principal amount of EIGHT HUNDRED
FIFTY THOUSAND DOLLARS ($850,000) and that certain Revolving Note of even
date herewith, in the original principal amount of up to TWO HUNDRED THOUSAND
DOLLARS ($200,000) (collectively, the "Notes"), executed by Debtor and
payable to the order of Lender, and any and all modifications, extensions or
renewals thereof, whether hereafter evidenced by said Notes or otherwise;
(ii) payment and performance of all obligations of Debtor under that certain
Term Loan Agreement (the "Loan Agreement") and that certain Deed of Trust,
each of even date herewith, and all modifications, extensions or renewals of
either of the foregoing; and (iii) payment of such additional sums with
interest thereon as may be hereafter borrowed from Lender, its successors or
assigns by Debtor or the then record owner of the Collateral (defined below)
when evidenced by a promissory note or notes, which are by the terms thereof
secured by this Agreement; Debtor does hereby grant to Lender a continuing
security interest in all of the following described property (herein called
"Collateral"):
A. All of the personal property, fixtures and furnishings described
in Exhibit "A" and situated on or used in connection with the real
property described in Exhibit "B," commonly known as 4162 Big
Ranch Road, County of Napa, State of California, and all other
property of the same character which Debtor may hereafter acquire
at any time, including, but not limited to, all accretions,
additions, replacements, improvements, repairs and increases to
such property;
B. All personal property of any kind which is delivered to or in the
possession or control of Lender or its agents, including any
accounts established pursuant to the Loan Agreement;
C. Proceeds of any of the above-described property; provided,
however, that the grant of a security interest in proceeds does
not imply any right of Debtor to sell or dispose of any Collateral
described herein without the express written consent by Lender.
All of the terms and conditions set forth on pages 2 and 3 hereof are
incorporated herein as though set forth in full above.
AGREEMENT
1. The term credit is used throughout this Agreement in its
broadest and most comprehensive sense. Credit may be granted at the request
of any one Debtor without further authorization or notice to any other
Debtor, including an Accommodation Debtor. Collateral shall be security for
all obligations of Debtor to Lender in accordance with the terms and
conditions herein.
2. Debtor will: (a) execute such Financing Statement(s) and other
documents and do such other acts and things, all as Lender may from time to
time require, to establish and maintain a valid security interest in
Collateral, including payment of all costs and fees in connection with any of
the foregoing when deemed necessary
1
<PAGE>
by Lender; (b) pay promptly when due all indebtedness to Lender; (c) furnish
Lender such information concerning Debtor and Collateral as Lender may from
time to time request, including but not limited to current financial
statements; (d) keep Collateral separate and identifiable and at the location
described herein and permit Lender and its representatives to inspect
Collateral and/or records pertaining thereto from time to time during normal
business hours; (e) not sell, assign or create or permit to exist any lien on
or security interest in Collateral in favor of anyone other than the Lender
unless Lender consents thereto in writing and at Debtor's expense upon
Lender's request remove any unauthorized lien or security interest and defend
any claim affecting the Collateral; (f) pay all charges against Collateral
prior to delinquency including but not limited to taxes, assessments,
encumbrances, insurance and drivers claims, and upon Debtor's failure to do
so Lender may pay any such charge as it deems necessary and add the amount
paid to the indebtedness of Debtor hereunder, (g) reimburse Lender for any
expenses including but not limited to reasonable attorneys' fees and legal
expenses, incurred by Lender in seeking to protect, collect or enforce any
rights in Collateral; (h) when required, provide insurance in form and
amounts and with companies acceptable to Lender and when required assign the
policies or the rights thereunder to Lender; (i) maintain Collateral in good
condition and not use Collateral for any unlawful purpose; (j) at its own
expense, upon request of Lender, notify any parties obligated to Debtor on
any Collateral to make payment to Lender and Debtor hereby irrevocably grants
Lender power of attorney to make said notifications and collections; (k) and
does hereby authorize Lender to perform any and all acts which Lender in good
faith deems necessary for the protection and preservation of Collateral or
its value or Lender's security interest therein, including transferring any
Collateral into its own name and receiving the income thereon as additional
security hereunder. Lender may not exercise any right under any corporate
security which might constitute the exercise of control by Lender so as to
make any such corporation an affiliate of Lender within the meaning of the
banking laws until after default.
3. The term default shall mean the occurrence of any of the
following events: (a) non-payment of any indebtedness when due or
non-performance of any obligation when due, whether required hereunder, under
the Notes or otherwise; (b) deterioration or impairment of the value of
Collateral; (c) default by Debtor under this Agreement, the Loan Agreement or
the Deed of Trust or under of any other agreement with Lender dealing with
the extension of credit or with debt owing Lender or any misrepresentation of
Debtor or its representative to Lender whether or not contained herein; or
(d) a change in or the actual existence of, any deterioration or impairment
in the ability of Debtor to meet any of its obligations to Lender.
4. Whenever a default exists, Lender, at its option may: (a)
without notice accelerate the maturity of any part or all of the secured
obligations and terminate any agreement for the granting of further credit to
Debtor; (b) sell, lease or otherwise dispose of Collateral at public or
private sale; unless Collateral is perishable and threatens to decline
speedily in value or is a type customarily sold on a recognized market,
Lender will give Debtor at least five (5) days prior written notice of the
time and place of any public sale or of the time after which any private sale
or any other intended disposition may be made; (c) transfer any Collateral
into its own name or that of its nominee; (d) retain Collateral in
satisfaction of obligations secured hereby, with notice of such retention
sent to Debtor as required by law; (e) notify any parties obligated on any
Collateral consisting of accounts, instruments, chattel paper, chooses in
action or the like to make payment to Lender and enforce collection of any
Collateral herein; (f) require Debtor to assemble and deliver any Collateral
to Lender at a reasonable convenient place designated by Lender; (g) apply
all sums received or collected from or on account of Collateral including the
proceeds of any sales thereof to the payment of the costs and expenses
incurred in preserving and enforcing rights of Lender including but not
limited to reasonable attorneys' fees, and indebtedness secured hereby in
such order and manner as Lender in its sole discretion determines; Lender
shall account to Debtor for any surplus remaining thereafter, and shall pay
such surplus to the party entitled thereto, including any second secured
party who has made a proper demand upon Lender and has furnished proof to
Lender as requested in the manner provided by law, in like manner, Debtor,
unless an Accommodation Debtor only, agrees to pay to Lender without demand
any deficiency after any Collateral has been disposed of and proceeds applied
as aforesaid; and (h) exercise its Lender's lien or right of setoff in the
same manner as though the credit were unsecured. Lender shall have all the
rights and remedies of a secured party under the Uniform Commercial Code of
California in any jurisdiction where enforcement is sought, whether in
California or elsewhere. All rights, powers and remedies of Lender hereunder
shall be cumulative and not alternative. No delay on the part of Lender in
the exercise of any right or remedy shall constitute a waiver thereof and any
exercise, or partial exercise, by Lender of any right or remedy under this
Agreement shall not preclude the exercise of any other right or remedy of
Lender under this Agreement or at law or in equity or the further exercise
2
<PAGE>
of the same remedy. The execution and delivery of this Agreement shall not be
construed to derogate or impair the lien or provisions of the Deed of Trust
with respect to any property described in the Deed of Trust that is real
property or which the parties have agreed to treat as real property. Lender's
rights, power and remedies as to the Collateral shall be exercisable as to
any part or all of the Collateral as Lender may elect.
5. Debtor waives: (a) all right to require Lender to proceed
against any other person including any other Debtor hereunder or to apply any
Collateral Lender may hold at any time or to pursue any other remedy.
Collateral, endorsers or guarantors may be released, substituted or added
without affecting the liability of Debtor hereunder; (b) the defense of the
Statute of Limitations in any action upon any obligations of Debtor secured
hereby; (c) if Debtor is an Accommodation Debtor, all rights under Uniform
Commercial Code Section 9112; and (d)any right of subrogation and any right
to participate in Collateral until all obligations hereby secured have been
satisfied in full.
6. Debtor warrants: (a) that it is or will be the lawful owner of
all Collateral free of all claims, liens or encumbrances whatsoever, other
than the security interest granted pursuant hereto; (b) all information,
including but not limited to financial statements furnished by Debtor to
Lender heretofore or hereafter, whether oral or written, is and will be
correct and true as of the date given; and (c) if Debtor is a business
entity, the execution, delivery and performance hereof are within its powers
and have been duly authorized.
7. Debtor hereby assumes, and releases Lender from, all risk of
loss, destruction or damage to all or any part of the Collateral by reason of
any casualty or cause whatsoever except as caused by the intentional
misconduct of Lender, and Debtor shall indemnify and hold Lender harmless
from and against all liabilities, obligations, claims, damages, penalties,
causes of action, costs and expenses (including, reasonable attorneys' fees
and costs) imposed upon or incurred by or asserted against Lender by reason
of (a) any failure by Debtor to perform or comply with the terms of this
Agreement or (b) the exercise by Lender of any rights or remedies provided
hereunder or at law or in equity, except as caused by Lender's intentional
misconduct.
8. If more than one Debtor executes this Agreement the obligations
hereunder are joint and several. All words used herein in the singular shall
be deemed to have been used in the plural when the context and construction
so require. Any married person who signs this Agreement expressly agrees that
recourse may be had against his/her separate property for all of his/her
obligations to Lender.
9. This Agreement shall inure to the benefit of and bind Lender,
its successors and assigns and each of the undersigned and their respective
heirs, executors, administrators and successors in interest. Upon transfer by
Lender of any part of the obligations secured hereby, Lender shall be fully
discharged from all liability with respect to Collateral transferred
therewith.
3
<PAGE>
10. Whenever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but, if any provision of this Agreement shall be prohibited or invalid under
applicable law, such provisions shall be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such or the
remaining provisions of this Agreement.
DEBTOR
AWG, LTD.
By: ____________________________
John P. Caponigro, Secretary
Address:
c/o J.E.A. Enterprises, L.L.C.
1800 West Maple Road, Suite 100
Troy, MI 48084
Attn: Joseph E. Antonini
4
<PAGE>
EXHIBIT "A"
DESCRIPTION OF PERSONAL PROPERTY
Some of the "Collateral" granted to Secured Party is the following located on
or generated by the real property ("Property") described on Exhibit "B":
(a) All goods, materials, fixtures, furnishings, as well as any
other personal property owned by Debtor, now or hereafter attached to,
installed, incorporated, or placed in, on, or about the Property for use as a
part of the Property or in conjunction with the use and occupancy of the
Property, including, but not limited to, all machinery, vehicles (including
motor vehicles and trailers), motors, fittings, doors, windows, signs,
pylons, store fronts, screenings, awnings, shades, blinds, carpets, floor
coverings, draperies, furnaces, boilers, gas and oil and electric burners and
heaters, ducts, vents, hood, flues and registers, hot water heaters, sinks,
stoves, ovens, cabinets, drainboards, refrigerators, heating, cooling and
air-conditioning equipment, fans, ventilators, wiring, panels, all lighting
fixtures and globes and tubes, time clocks and other electrical equipment,
and all plumbing and plumbing fixtures and equipment, sprinklers and
sprinkler equipment, and all trees, plants, shrubs and other landscaping, and
any interest in any of the foregoing, and all attachments, accessories,
assessions, replacements, substitutions, additions, and improvements to any
of the foregoing, wherever located; subject however, to the right of Debtor
to remove, in the ordinary course of business, such goods, fixtures,
furnishings, and equipment for the purpose of replacement with similar items
of the same quality performing the same functions, which replacements shall,
themselves, become part of the collateral;
(b) All income, rents, issues, profits, earnings, receipts,
accounts, royalties, and revenues, which, after the date of this Agreement
and while any portion of the indebtedness secured by the Security Agreement
remains unpaid, may accrue from the goods, fixtures, furnishings, and
equipment, or any part of them or from the Property or any part of it, or
that may be received or receivable by Debtor from any hiring, using, letting,
leasing, subhiring, subletting, or subleasing of any of the above items or
the Property;
(c) All inventory, farm products and crops, now owned of hereafter
acquired, including, without limitation, all merchandise, raw materials,
vines, grapes, grape juice, wine, parts, supplies, packing and shipping
materials, work in process and finished products including such inventory as
is temporarily out of Debtor's custody or possession or in transit and
including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Debtor's books relating to any of the foregoing;
(d) All reserves, deferred payments, deposits, refunds, cost
savings, and payments of any kind relating to the construction of any
improvements on the Property;
(e) All water stock relating to the Property;
(f) All causes of action, claims, compensation, and recoveries,
for any damage to or condemnation or taking of the Property, or for any
conveyance in lieu thereof, whether direct or consequential, or for any
damage or injury to the Property, or for any loss or diminution in value of
the Property;
(g) All winery permits, and all equipment, including but not
limited to winery equipment;
(h) All architectural, structural, mechanical, and other
improvements on the Property, and all studies, data, and drawings related to
such improvements; and also all contracts and agreements of the debtor
relating to those plans and specifications or to those studies, data, and
drawings, or to the construction of improvements on the Property; and
5
<PAGE>
(i) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer list, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind.
6
<PAGE>
EXHIBIT "B"
DESCRIPTION OF REAL PROPERTY
COMMENCING AT A POINT ON THE NORTHEASTERN LINE OF THE COUNTY ROAD COMMONLY
KNOWN AS THE "BIG RANCH ROAD", WHERE THE SAME IS INTERSECTED BY THE CENTER
LINE OF A CERTAIN STONE DITCH RUNNING THROUGH LOT 12 AS SAID LOT IS SHOWN
UPON THE MAP HEREINAFTER REFERRED TO, SAID POINT OF COMMENCEMENT BEING
FURTHER DESCRIBED AS BEING THE POINT OF INTERSECTION OF SAID NORTHEASTERN
LINE OF THE "BIG RANCH ROAD" WITH THE SOUTHEASTERN LINE OF THE 39.25 ACRE
TRACT HERETOFORE CONVEYED TO L. L. JORDAN BY DEED OF RECORD IN BOOK 112 OF
DEEDS, AT PAGE 18, RECORDS OF SAID NAPA COUNTY AND RUNNING THENCE FROM SAID
POINT OF COMMENCEMENT, AND ALONG THE NORTHEASTERN LINE OF SAID COUNTY ROAD
SOUTH 30(degree) 30' EAST 849.5 FEET TO THE SOUTHEASTERN LINE OF SAID LOT 12,
THENCE NORTH 55(degree) EAST AND ALONG THE SOUTHEASTERN LINE OF SAID LOT 12,
A DISTANCE OF 46.90 CHAINS, MORE OR LESS, TO THE CENTER OF NAPA RIVER; THENCE
UP SAID RIVER AND FOLLOWING MEANDERINGS OF THE CENTER LINE THEREOF TO THE
SOUTHEASTERN LINE OF THE 33 ACRE TRACT CONVEYED TO E.C. GADDINI BY DEED OF
RECORD IN BOOK 110 OF DEEDS, AT PAGE 362, SAID NAPA COUNTY RECORDS, THENCE
WESTERLY ALONG THE SOUTHEASTERN LINE OF SAID 33 ACRE TRACT TO A LARGE OAK
TREE AND THENCE SOUTH 55 3/4(degree) WEST AND ALONG THE SOUTHEASTERN LINE OF
SAID GADDINI AND THE SOUTHEASTERN LINE OF PREMISES CONVEYED TO JORDAN
HEREINABOVE REFERRED TO, 1697 FEET TO THE POINT OF COMMENCEMENT. BEING A
PORTION OF LOT 12, AS SHOWN ON THAT CERTAIN MAP, DUPLICATE PLAT OF THE SAUSAL
RANCHO, RECORDED NOVEMBER 21, 1864 IN BOOK 1 OF DEEDS AT PAGE 99, NAPA COUNTY
RECORDS, AND BEING THE SAME AS SET FORTH ON RECORD OF SURVEY MAP NO. 3998,
FILED FEBRUARY 2, 1987 IN BOOK 25 OF SURVEYS, PAGE 62, NAPA COUNTY RECORDS.
APN 036-170-038
7
10.1 CONSENT OF DELOITTE & TOUCHE, LLP
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-48165 of AWG, Ltd on Form SB-1 of our report dated January 28, 1998
(February 23, 1998 as to the last paragraph of Note 13, which report
expresses an unqualified opinion and includes an explanatory paragraph
relating to substantial doubt about the Company's ability to continue as a
going concern) with respect to the consolidated financial statements of AWG,
Ltd for the years ended December 31, 1997 and 1996, appearing in the
Prospectus, which is part of this Registration Statement.
Deloitte & Touche LLP
January 20, 1999
