<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-4923
WESTMINSTER CAPITAL, INC.
(Exact name of the Registrant as Specified in its Charter)
Delaware 95-2157201
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
9665 Wilshire Boulevard, M-10, Beverly Hills, California 90212
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 278-1930
Title of Each Class
Common Stock, Name of Each Exchange on which Registered
$1.00 Par Value Per Share Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non affiliates of the
Registrant, based upon the closing sale price on the Pacific Stock Exchange of
its common stock on March 16, 1998 was approximately $8,577,606. For purposes
of the foregoing calculation, certain persons that have filed reports on
Schedule 13D with the Securities and Exchange Commission with respect to the
beneficial ownership of more than 5% of the Registrant's outstanding voting
stock and directors and executive officers of the Registrant have been excluded
from the group of stockholders deemed to be non affiliates of the Registrant.
The number of shares of common stock, $1.00 par value per share, of the
Registrant outstanding as of March 16, 1998, was 7,834,607.
<PAGE>
WESTMINSTER CAPITAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 10
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
CORPORATION 44
ITEM 11. EXECUTIVE COMPENSATION 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 44
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 44
Index of Exhibits 48
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
THROUGHOUT THIS ANNUAL REPORT, WESTMINSTER CAPITAL, INC. (THE
"CORPORATION") MAKES FORWARD LOOKING STATEMENTS REGARDING VARIOUS ASPECTS OF ITS
BUSINESS AND AFFAIRS, INCLUDING STATEMENTS IN ITEM 3 -"LEGAL PROCEEDINGS"
REGARDING THE MERITS OF CLAIMS AND DEFENSES IN LITIGATION AND STATEMENTS IN ITEM
7 -"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" ABOUT FUTURE REVENUES AND INCOME OF GLOBAL TELECOMMUNICATIONS LTD,
THE ADEQUACY OF COLLATERAL FOR A LOAN IN DEFAULT AND THE FUTURE CASH NEEDS OF
THE CORPORATION. THESE FORWARD LOOKING STATEMENTS INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
IN THE FORWARD LOOKING STATEMENTS. STATEMENTS ABOUT CLAIMS AND DEFENSES IN
LITIGATION MAY TURN OUT TO BE INCORRECT BECAUSE ALL OF THE FACTS THAT WILL BE
PRESENTED AT TRIAL ARE NOT KNOWN NOW, CERTAIN ASPECTS OF THE APPLICABLE LAW MAY
BE UNCERTAIN AND THE JUDGEMENT OF THE JUDGE OR JURY IS SUBJECTIVE AND INCAPABLE
OF BEING PREDICTED ACCURATELY. STATEMENTS ABOUT FUTURE EARNINGS AND REVENUES
AND THE ADEQUACY OF CASH RESOURCES FOR FUTURE NEEDS ARE UNCERTAIN BECAUSE OF THE
UNPREDICTABILITY OF FUTURE EVENTS AFFECTING SUCH STATEMENTS. STATEMENTS ABOUT
THE ADEQUACY OF REAL ESTATE COLLATERAL INVOLVE PREDICTIONS AS TO WHAT A BUYER
WILL BE WILLING TO PAY FOR THE PROPERTY IN THE FUTURE, WHICH CANNOT BE KNOWN
WITH CERTAINTY.
GENERAL
Westminster Capital, Inc. ("the Corporation") owns all or a substantial
interest in several operating businesses and also engages in the secured lending
business. The Corporation owns a 100% interest in a company which provides
group purchasing of goods and services for new car dealers (See "Westland
Associates" below), and a majority interest in a telephone company serving
military personnel (See "Telephone Company," below). At December 31, 1997, the
Corporation owned a substantial interest in a home delivery shopping company
which was sold on February 26, 1998 (See "Pink Dot," below). The Corporation
also engages in lending activity, originating or purchasing secured loans that
generally do not exceed thirty-six months in duration. The Corporation invests
its assets not employed in its operations in securities available-for-sale.
These securities consist principally of U.S. Government securities, but to a
limited extent include investments in common and preferred stocks, warrants, and
convertible debentures.
The Corporation intends to pursue the acquisition of one hundred percent or
substantial interests in additional operating businesses. However, no
assurances can be given that the Corporation will be able to identify attractive
opportunities, or if it does, that it will be able to complete acquisitions on
acceptable terms. As the Corporation acquires interests in other operating
businesses or originates or purchases loans, it intends to liquidate securities
available-for-sale as may be necessary to consummate acquisitions or fund loans.
The Corporation is a Delaware corporation formed in 1959. The executive
office of the Corporation is located at 9665 Wilshire Boulevard, Suite M-10,
Beverly Hills, California 90212 and its telephone number is (310) 278-1930.
3
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WESTLAND ASSOCIATES
On November 12, 1997, the Corporation acquired 100% of the common stock of
Westland Associates, Inc. ("Westland Associates"). Westland Associates was
founded in 1957 and provides group purchasing of goods and services for new car
dealers in California, Arizona, and Nevada. Westland Associates sells to more
than 600 dealers and has relationships with over 120 vendors. Included on
Westland Associates' list of vendors are nationally recognized companies such as
Reynolds & Reynolds, Safety-Kleen, Sherwin Williams and National Sanitary.
Westland Associates reviews new products, negotiates competitive pricing
for its dealers, and assists in the introduction of new products to its dealers.
For most vendors, Westland Associates also acts as the accounts receivable
agency. Products are shipped directly to dealers by the vendors and Westland
Associates is billed by the vendors for the items ordered by the dealers.
Westland Associates then consolidates all of the vendor bills and sends a single
statement to each dealer.
The acquisition of Westland Associates has been accounted for using the
purchase method of accounting and the consolidated financial statements include
Westland Associates' financial position as of December 31, 1997 and its results
of operations from the date of the acquisition through December 31, 1997 on a
consolidated basis. See Note 6 of Notes to Consolidated Financial Statements for
additional information relating to the acquisition of Westland Associates.
TELEPHONE COMPANY
Pursuant to contracts with four military bases, Global Telecommunications
Systems, LTD ("Global Telecommunications") operates telephone network systems to
serve officers and enlisted personnel with local and long distance telephone
service. Global Telecommunications installed and owns the switches, wiring and
individual telephone equipment at each of the bases, and maintains and operates
that equipment with its personnel. Telephone system revenue is generated
through the use of the system by the individual military personnel who are
subscribers. Revenue is partially offset by time charges from the long distance
telephone provider to Global Telecommunications.
The Corporation acquired a limited partnership interest in Global
Telecommunications in October, 1993. All four systems were completed and have
been operating since 1994. Under the Global Telecommunications partnership
agreement the Corporation is entitled to 75% of the partnership distributions
(which is proportional to its investment). The consolidated financial statements
include this investment on a consolidated basis.
During 1997, Global Telecommunications received notice of cancellation from
the Navy regarding the closure of the Miramar base in California. Although the
U.S. Marines will be occupying the Miramar base in the future, that service
branch has decided to use the services of another telephone company. The
Corporation is currently in negotiations with the Navy for compensation for
discontinuance of business or transfer of assets. Global Telecommunications is
continuing to service the Miramar base in 1998 until the other telephone company
is in place.
4
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See Management's Discussion and Analysis of Financial Condition and Results of
Operations for further information on the Miramar base closure.
PINK DOT
Pink Dot, Inc. ("Pink Dot") provides home delivery service of grocery,
delicatessen, bakery, salad bar, pasta bar, liquor, video and non-prescription
pharmacy items through company-owned stores. Pink Dot accepts orders from
customers by telephone, fax, or the Internet and delivers the orders within 30
minutes. Pink Dot charges a delivery fee in addition to the price of the goods
delivered.
Pink Dot opened its first store in 1988 and its second store in 1995 in the
west Los Angeles area. Following the opening of the second store, Pink Dot and
the Corporation entered into a Loan and Stock Purchase Agreement in November,
1995, which was amended in September, 1996. Under the agreement, the
Corporation provided $3,000,000 in financing to Pink Dot to open additional
stores in the Los Angeles area and to establish infrastructure necessary for the
growth of Pink Dot. The financing consisted of loans of $2,500,000 and an
investment of $500,000 in common stock representing 40% of the issued and
outstanding shares of Pink Dot. In July 1997, the Corporation committed to loan
an additional $1 million to Pink Dot, of which $415,000 had been advanced at
December 31, 1997. The consolidated financial statements include this
investment on the equity method.
The Corporation recorded a loss of $686,000 in 1997 in connection with its
40% equity investment in Pink Dot. As this loss exceeded the carrying amount of
the Corporation's investment account and goodwill related to Pink Dot, the
carrying amount of the loans receivable from Pink Dot was reduced by $391,000.
On February 26, 1998, the Corporation sold its 40% investment in Pink Dot
to the owner of the other 60% of the common stock of Pink Dot for a purchase
price of $6,000,000. The purchase price is evidenced by the buyer's promissory
note in the principal amount of $6,000,000 that is due and payable on May 27,
1998 together with accrued interest. The note is secured by a pledge of 100% of
the issued and outstanding stock of Pink Dot.
The sale of the Corporation's investment in Pink Dot was pursuant to an
Option and Stock Purchase Agreement dated November 10, 1997. The agreement gave
the Corporation the right to purchase the remaining common stock of Pink Dot
prior to March 10, 1998 for a purchase price of $7,000,000, and further provided
that, in the event that the Corporation elected not to purchase the remaining
common stock of Pink Dot, the Corporation would be obligated to sell and the
majority owner of Pink Dot would be obligated to purchase the Corporation's
interest in Pink Dot for $6,000,000.
In connection with the sale of the Corporation's investment in Pink Dot,
the loans outstanding to Pink Dot in the principal amounts of $2,500,000 and
$415,000, plus accrued interest, have been replaced by two new promissory notes,
in the amounts of $2,802,640, and $436,193, respectively. Both notes provide
for the payment of monthly interest commencing 30 days after February 26, 1998
and are due in their entirety in March 2000. Both of the replacement notes are
secured by all of the tangible and intangible assets of Pink Dot.
5
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LOANS
The Corporation originates and, from time to time, purchases loans that are
secured by real estate, personal property or other collateral. In connection
with each loan proposal, the Corporation considers the value and quality of the
real estate or other collateral available to secure the loan compared to the
loan amount requested, the proposed interest rate and repayment terms and the
quality of the borrower. The Corporation holds the loans it originates or
purchases in its portfolio to maturity or earlier payoff.
At December 31, 1997, the Corporation's loans outstanding consisted of
loans secured by automobile leases in the amount of $132,000, net of the
discount at which the loans were purchased, loans secured by trust deeds or
mortgages in the amount of $1,543,000 including loan fees, loans secured by real
estate and other collateral in the principal amount of $5,306,000, and an
unsecured loan in the amount of $100,000. In addition, during 1997, the
Corporation originated a loan secured by real estate in the amount of $2,142,000
and two unsecured loans which totalled $70,000, all of which were repaid prior
to December 31, 1997.
The loans secured by automobile leases were purchased in 1995 for a
purchase price of $3,551,000 net of a discount of $742,000. The remaining
average maturity of these loans was approximately four months at December 31,
1997. The loans secured by trust deeds or mortgages outstanding at December 31,
1997, include notes of $1,050,000 and $520,000 that originated in 1996 and that
were originally due in 1998, but that were in default as of December 31, 1997.
The Corporation commenced foreclosure proceedings in October 1997 on the loan in
the principal amount of $1,050,000, and commenced foreclosure proceedings on the
loan in the principal amount of $520,000 in February of 1998. See "Legal
Proceedings" for further information concerning foreclosure proceedings for the
loan of $1,050,000.
The loans secured by other collateral as of December 31, 1997, include a
$1,900,000 note due in July 1999, bearing interest at 15% per annum which is
secured in part by real estate, and a note with a remaining principal balance of
$132,000 as of December 31, 1997 that was paid off in January 1998. As of
December 31, 1997, there were also two loans secured by other collateral due
from Pink Dot. One of these loans was in the principal amount of $2,500,000
with a variable rate of interest equal to the lesser of Bank of America's "prime
rate" or 10%. The other loan was in the principal amount of $415,000 with an
interest rate of 8%. See "Pink Dot" above, for further details on the Pink Dot
loans.
A short-term loan secured by a second trust deed in the amount of $225,000
was made in June 1997 but went into default in August 1997. The loan was
foreclosed in December 1997 and, as a result, the Corporation became the owner
of the collateral, a single-family residence located in Newport Beach,
California. The residence was subject to a first mortgage in the amount of
$655,000, which the Corporation paid off in January 1998. It is the
Corporation's intention to sell this property during 1998.
CONVERTIBLE LOANS
During 1997, the Corporation executed two convertible loan agreements. The
first agreement is with Touch Controls, Inc., ("Touch Controls"), and provides
for a secured
6
<PAGE>
convertible loan of up to $800,000, that is convertible into a 50% ownership
interest in Touch Controls. The promissory note bears interest at a variable
rate of interest equal to the "prime rate" of Wells Fargo Bank, compounded
monthly, is due on September 1, 1999, and is secured by certain personal
property of Touch Controls. Touch Controls is using the loan proceeds to expand
its sales and marketing activities, finance accounts receivable and for product
refinement. As of December 31, 1997, there were initial advances of $300,000
made in connection with the secured convertible promissory note; and at February
28, 1998 advances totalled $400,000. The loan is convertible at any time prior
to maturity. If the entire $800,000 has not yet been advanced at the time of
the conversion, the Corporation is required to advance the remaining amount of
the commitment in order to convert.
Touch Controls, headquartered in Oceanside, California, is a privately-held
company that specializes in the design, development and manufacture of enhanced
infrared touch displays and workstations for industrial and public access
environments. Touch Controls' products provide a simple and intuitive
man/machine interface with the customers' personal computer and/or operating
system in a wide range of industries and applications. Touch Controls'
customers are end users, original equipment manufacturers and a select number of
systems integrators.
The second convertible loan was made to Physician Advantage LLC ("Physician
Advantage") and provides for a secured convertible loan of up to $2,000,000 of
which $270,000 is convertible into a 55% ownership interest in Physician
Advantage. The loan bears interest at a variable rate equal to the "prime rate"
plus one percent per annum, compounded monthly. The principal balance and all
unpaid accrued interest are due in 24 equal monthly installments beginning on
November 20, 2000. Advances on the loan are conditioned on Physician Advantage's
ability to maintain certain numbers of physician-customers and certain levels of
net income before taxes. As of December 31, 1997, the Corporation had advanced
$450,000. At February 28, 1998, advances to Physician Advantage totalled
$550,000.
Physician Advantage, located in Encino California, was formed in November
1997, to carry on the business of providing group purchasing services for
physicians started in September 1996 by Access Managed Care, Inc., now a wholly
owned subsidiary of Physician Advantage. Physician Advantage has an exclusive,
five year contract with a major national hospital operator ("Hospital
Operator"), pursuant to which the Hospital Operator will identify for Physician
Advantage the Hospital Operator's staff physicians and Physician Advantage will
solicit them to purchase medical supplies, office supplies and other products
and services. The Hospital Operator has arranged for Physician Advantage to use
the Hospital Operator's vendors of medical supplies and office supplies and
offer those products to all physicians who purchase through Physician Advantage
at the same discounts the Hospital Operator enjoys with those suppliers, which
are not otherwise available to physicians. Physician Advantage also has
contracts with other physician affinity groups, such as preferred provider
organizations and health maintenance organizations to offer group purchasing
services to their member-physicians. Physician Advantage is in the early stages
of operations. It is in the process of enrolling physicians to use its group
purchasing services and has advised the Corporation that approximately 10,000
physicians were enrolled at February 28, 1998. Physician Advantage will not
maintain inventories or handle billing or collections, but will monitor
transactions between the physicians and the vendors and will be paid a rebate
related to the volume of business that is done. Because of the early stage of
Physician Advantage's operations, its revenues through February 28, 1998 have
been minimal.
7
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SECURITIES AVAILABLE-FOR-SALE
The Corporation invests its assets not employed in its operations in
securities available-for-sale. These securities consist principally of U.S.
Government securities, but also include investments in common and preferred
stocks, warrants, and convertible debentures. The Corporation does not actively
engage in investing in equity securities, but from time to time makes
investments as opportunities arise which the Corporation believes are consistent
with its operations. Certain of the equity securities owned by the Corporation
were received by it as additional compensation for loans extended by the
Corporation.
INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES
The Corporation has invested in limited partnerships that invest in
securities. Each of the partnerships seeks to achieve returns through
investments in equity and debt securities following identified strategies. The
Corporation invests in limited partnerships based on their past performance, the
past performance of their general partners, and diversification of identified
strategies.
EMPLOYEES
As of December 31, 1997, the Corporation had 27 salaried employees
(including nine Global Telecommunications employees and 14 Westland Associates
employees). Two of the Corporation's employees are executive officers.
ITEM 2. PROPERTIES
The executive office of the Corporation is located at 9665 Wilshire
Boulevard, Suite M-10, Beverly Hills, California 90212, telephone (310)
278-1930. The Corporation's executive office is leased for a five year term
ending in October, 2002. As of December 31, 1997, the Corporation's
wholly-owned subsidiary, Westland Associates, owned and occupied an 11,000
square-foot facility in Santa Fe Springs, California used for office and
warehouse space. This facility was subsequently sold on March 11, 1998.
Westland Associates entered into a lease agreement for a five year term
commencing in April 1998 for a facility in Anahiem, California which will serve
as its new headquarters.
ITEM 3. LEGAL PROCEEDINGS
During 1997, the Corporation received $950,000 in net proceeds from a
settlement of claims asserted on behalf of the Corporation and similarly
situated parties, in a class action against Drexel Burnham Lambert Inc.
("Drexel"), Michael Milken ("Milken") and other related parties in an action
filed in the Los Angeles County Superior Court in 1989 ("Drexel Litigation").
The action involved claims of various violations of federal and state securities
laws by Drexel, Milken and the other parties. The $950,000 represents a
recovery of approximately $1.45 million, less court directed attorneys' fees of
approximately $500,000. From 1993 through 1996, the Corporation received
approximately $22.3 million in net proceeds, which represents a recovery of
approximately $34.4 million, less court directed attorneys' fees of
approximately $12.1 million.
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A wholly-owned subsidiary of the Corporation is a party to litigation
entitled Bures v. Silver Ridge Apartments, Ltd. filed in March, 1993 pending in
the Eighth Judicial District Court of Clark County, Nevada. The case relates to
an apartment house project which was sold in October, 1993 by the Corporation's
wholly-owned subsidiary, as successor general partner. The prior general
partner had conveyed a security interest in its partnership interest to the
Corporation's wholly-owned subsidiary. After a default on the secured
obligation, the Corporation's wholly-owned subsidiary exercised its rights as a
secured creditor, and, as a result, the partnership interest was acquired by the
Corporation's wholly-owned subsidiary, which became the successor general
partner. The plaintiff, who is a creditor of the prior general partner, alleges
that he acquired a 69% interest in the partnership prior to the sale of the
project as a result of judgment enforcement proceedings against the prior
general partner. The Corporation believes that the judicial enforcement
proceedings brought by the plaintiff were improper and had no legal effect on
the ownership of the general partnership interest and that the security interest
held by the Corporation's wholly-owned subsidiary was senior in priority to the
interest claimed by the plaintiff. The plaintiff is seeking an order declaring
that he is the general partner of the partnership and entitled to possession of
its property, a judgment quieting title to general and limited partnership
interests representing a 69% interest in the partnership and other relief
determined by the court to be appropriate. No trial date has been set for the
matter in State District Court but such a date may be set at any time prior to
May, 1998. The Corporation believes that the claims asserted are without merit
and intends to vigorously contest the case.
In November 1996, the Corporation made a loan of $1,050,000 ("Defaulted
Note") to a borrower and took as security for the loan a mortgage on certain
real property ("Default Collateral"), title to which was held by a trust of
which the borrower was trustee. On October 9, 1997, the Corporation commenced
foreclosure proceedings on the Default Collateral, in an action entitled
Westminster Capital, Inc. v. Susan Wagner Trenham, individually, and Susan
Wagner Trenham, as Trustee, in the Court of Common Pleas, County of Berkeley,
South Carolina, seeking to sell the Default Collateral and apply the proceeds of
sale to pay the principal and unpaid interest on the Defaulted Note. On January
2, 1998, certain beneficiaries of the trust that holds title to the Default
Collateral filed a Motion to Intervene seeking to prevent the foreclosure,
alleging that the Corporation acted improperly in lending money to the borrower,
individually, and accepting as security real property owned by the trust of
which the borrower was the trustee. The Motion to Intervene is pending before
the court. If the court allows the beneficiaries to intervene, there will be a
full hearing of the beneficiaries' allegations.
In a separate action filed January 2, 1998 entitled Joseph Read, Paul Read,
Sephra Read and Leah Read Barkowitz, as beneficiaries of the Read Family Trust
v. Susan Wagner Trenham, individually, and Susan Wagner Trenham, as trustee of
the Read Family Trust, and Westminster Capital, Inc., filed in the Court of
Common Pleas, County of Berkeley, South Carolina, the beneficiaries assert
causes of action similar to those set forth in the Motion to Intervene in the
foreclosure action initiated by the Corporation. The beneficiaries of the trust
allege that the borrower, as trustee, did not have authority to enter into the
trust and that the Corporation acted improperly in allowing the loan funds to be
advanced to the trustee personally, as the borrower. On January 13, 1998, the
beneficiaries filed a motion to consolidate the foreclosure proceedings with the
case initiated by the beneficiaries. That motion is pending.
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In accepting the Default Collateral as security for the Defaulted Note, the
Corporation relied on the trust documents granting the borrower absolute
authority to mortgage the Default Collateral and obtained title insurance for
the mortgage it received. The Corporation believes that it acted properly in
dispersing the loan proceeds to the borrower. The Corporation intends to pursue
vigorously its right to the Default Collateral. The title insurance company
which insured the mortgage has appeared in the pending actions to defend on the
issue of the trustee's lack of authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
EXECUTIVE OFFICERS OF REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following
information is included as an unnumbered item in Part I of the Report in lieu of
being included in the Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1998.
The following table sets forth certain information with respect to the
executive officers of the Corporation:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William Belzberg 65 Chairman of the Board
Chief Executive Officer
Keenan Behrle 55 Executive Vice President
Chief Financial Officer
</TABLE>
The term of office of the officers may be terminated at any time by the
Board of Directors.
Mr. William Belzberg has served as Chairman of the Board of Directors of
the Corporation since 1977. Mr. Belzberg was also President and Chief Executive
Officer of the Corporation in 1987 and 1988 and has served as Chief Executive
Officer since September, 1990.
Mr. Keenan Behrle became Executive Vice President and Chief Financial
Officer of the Corporation in February, 1997. From November, 1993 to February,
1997, Mr. Behrle was engaged in real estate development activities for his own
account. From 1991 to November, 1993, Mr. Behrle was President and Chief
Executive Officer of Metropolitan Development, Inc., a real estate development
company located in Los Angeles, California. Mr. Behrle has been a director of
the Corporation since 1985.
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PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded on the Pacific Stock Exchange
under the symbol "WI." The following table sets forth the range of high and low
sales prices for the common stock of the Corporation for the periods indicated,
as reported by the Pacific Stock Exchange.
<TABLE>
<CAPTION>
High Low
---- ---
1997
----
<S> <C> <C>
First Quarter $ 2 5/8 $ 2 1/8
Second Quarter 2 5/16 1 13/16
Third Quarter 2 3/8 2 1/4
Fourth Quarter 2 1/2 2 1/4
1996
----
First Quarter $ 2 3/16 $ 1 5/8
Second Quarter 2 1/16 1 7/8
Third Quarter 2 1/16 1 15/16
Fourth Quarter 2 1 3/4
</TABLE>
The Corporation had approximately 995 holders of record of its common stock
as of March 9, 1998.
The Corporation has not paid cash dividends since 1989 and intends to
retain all excess cash resulting from its business operations, if any, for
future acquisitions and investments.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Total assets $34,870 $33,212 $28,199 $29,473 $27,311
Cash and cash
equivalents 1,738 2,310 1,715 845 23,257
Loans receivable, net 7,081 4,636 2,513 716 1,410
Securities available-
for-sale 18,405 22,502 21,747 25,402 -
Telephone systems, net 834 1,080 1,333 1,579 546
Total liabilities 8,902 7,745 5,099 7,990 4,015
Shareholders' equity 25,968 25,467 23,100 21,483 23,296
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EARNINGS DATA:
Total revenues $ 7,996 $ 5,234 $ 4,596 $ 6,706 $ 17,250
Interest income 2,026 2,228 1,467 1,139 219
Loan fees 639 751 320 75 -
Lawsuit settlement, net 950 813 1,209 3,528 16,819
Telephone system revenue 1,444 1,528 1,522 1,102 14
Gain (loss) on sale
of securities 332 (3) 15 - -
Gain on sale of loans - - - - 150
Loss from equity investment (686) (169) - - -
Refund of litigation costs - - - 757 -
Income (loss) from
continuing operations 1,371 1,571 1,308 (1,608) 12,844
(Loss) from discontinued
operations - - - - (410)
Net income (loss) 1,371 1,571 1,308 (1,608) 12,434
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-------------------------------------------------------------------------
PER SHARE DATA:
Net income (loss) per share
from continuing operations $ .17 $ .20 $ .17 $(.21) $1.64
Net (loss) per share from
discontinued operations - - - - $(.05)
Net income (loss) per
share $ .17 $ .20 $ .17 $(.21) $1.59
Book value per share
(end of period) $3.31 $3.25 $2.96 $2.75 $2.98
Weighted average diluted
shares outstanding 7,866 7,822 7,840 7,815 7,815
Cash dividends per share - - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At December 31, 1997, the Corporation's principal assets consisted of a
100% ownership interest in the capital stock of Westland Associates, a company
which performs group purchasing of goods and services for new car dealers in
California, Arizona, and Nevada (See "Business - Westland Associates"); a
majority ownership interest in Global Telecommunications, a limited partnership
engaged in constructing and operating local and long distance telephone services
for military residential quarters (See "Business-Telephone Company"); a
substantial ownership interest in a home delivery shopping company (See
"Business-Pink Dot"); loans, the majority of which are secured by real estate,
personal property or other collateral; securities available-for-sale; limited
partnerships that invest in securities; and cash and cash equivalents.
The Corporation's primary sources of income during the year ended
December 31, 1997 included interest earned on its loan portfolio, interest on
securities available-for-sale, unrealized gains on limited partnerships that
invest in securities, loan fees, gains on sales of securities, income from
Global Telecommunications, and income from lawsuit settlements. The
Corporation's wholly-owned subsidiary, Westland Associates, generated a loss
of $54,000 from the date of its acquisition by the Corporation on November
12, 1997 through December 31, 1997, and the Corporation's equity investment
in Pink Dot generated a loss of $686,000 during the year ended December 31,
1997.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues for the year ended December 31, 1997 were $7,996,000 as
compared to $5,234,000 for the year ended December 31, 1996. The increase in
revenues resulted primarily from the Corporation's acquisition of Westland
Associates on November 12, 1997, which generated revenues of $2,711,000
during the period from the date of the acquisition through December 31, 1997.
In addition, there were gains on sales of securities of $332,000 in the
current year versus a loss of $3,000 in the prior year; there were unrealized
gains on limited partnerships that invest in securities of $529,000 in the
current year with no such gains recorded in the prior year; and there was an
increase of $137,000 in lawsuit settlement recoveries in the current year.
Partially offsetting these favorable impacts on revenues were a $517,000
greater loss recorded on the Corporation's equity investment in Pink Dot in
the current year, a $112,000 decrease in loan fees, a $112,000 decrease in
interest on securities available-for-sale and money market funds, a $90,000
decrease in interest on loans, an $84,000 decrease in telephone system
revenue, and a decrease of $35,000 in other income.
The revenues of $2,711,000 generated by Westland Associates, reported under
the caption of "Sales to auto dealers" in the consolidated financial statements,
were offset by direct costs of $2,539,000, reported under the caption of "Cost
of sales to auto dealers". As a result, Westland Associates generated gross
profit before operating expenses of $172,000.
13
<PAGE>
The $332,000 gain on sale of securities in the current year resulted from a
gain of $186,000 on the sale of a convertible debenture, gains of $146,000 on
sales of stock, and gains of $100,000 from the sales of certain of the
Corporation's U.S. government and agency securities. These gains were partially
offset by the recording of a permanent impairment write-down of $100,000 on an
equity security. In the prior year, gains of $147,000 on the sale of various
securities were more than offset by the recording of a permanent impairment
write-down of $150,000 on an equity security.
During 1997, the Corporation recorded unrealized gains on limited
partnerships that invest in securities of $529,000 with no such gains recorded
in 1996. These limited partnerships invest in equity and debt securities and
the Corporation records gains and losses on these investments based upon the
equity method of accounting.
The increase of $137,000 in lawsuit settlement recoveries reflects receipt
of $950,000, net of court related legal costs, from the Drexel Litigation during
the year ended December 31, 1997, as compared to $813,000, net of court related
legal costs, received during the year ended December 31, 1996. While additional
settlement payments may be received in the Drexel Litigation over time, the
timing of payments is not determinable and amounts that might be received may
not be as great as amounts previously received.
The Corporation recorded a loss of $686,000 in 1997 in connection with its
40% equity investment in Pink Dot as compared to a loss of $169,000 in 1996. As
this loss exceeded the carrying amount of the Corporation's investment account
and goodwill related to Pink Dot, the carrying amount of the loans receivable
from Pink Dot was reduced by $391,000. In February 1998, the Corporation sold
its 40% interest in Pink Dot to the majority owner of Pink Dot and received a
secured promissory note due May 27, 1998 in the principal amount of $6,000,000
as payment. See "Business - Pink Dot" for further details on the sale of Pink
Dot.
Loan fees of $639,000 in the current year included a fee of $350,000
received in connection with the early payoff of a loan in October 1997 and a fee
of $187,000 received in connection with a financing accommodation that was
repaid in January 1997. Loan fees of $751,000 in the prior year included fees
of approximately $700,000 that actually related to fees due in 1995 and 1994 but
that were not recognized as income until 1996 because of severe delinquency
problems and doubt as to ultimate collectibility.
Interest on loans decreased from $1,184,000 in 1996 to $1,094,000 in 1997.
Although the balance of loans receivable increased significantly from December
31, 1996 to December 31, 1997, the amount of interest earned by the Corporation
during 1996 was higher than in 1997 primarily because the effective interest
rates on certain loans outstanding in 1996 were significantly higher than
interest rates on loans outstanding during 1997. In addition, a significant
portion of the loans that were outstanding as of December 31, 1997 were funded
during the latter part of 1997.
Interest on securities available-for-sale and money market funds decreased
from $1,044,000 during 1996 to $932,000 during 1997. Although the amortized
cost of U.S. government and agency securities held by the Corporation increased
from $16,723,000 as of December 31, 1996 to $17,387,000 as of December 31, 1997,
the average monthly balance of such securities held decreased from $19,380,000
in 1996 to $16,084,000 in 1997.
14
<PAGE>
The $84,000 decline in telephone system revenues resulted primarily from a
temporary loss of some of the military personnel while residential quarters were
being rebuilt by the Navy at two of the bases served by Global
Telecommunications. Future revenues and income realized by the Corporation in
connection with its 75% interest in Global Telecommunications may be reduced as
Global Telecommunications has received notice of cancellation from the Navy
regarding its closure of the Miramar base. Although the U.S. Marines will be
occupying the Miramar base, that service branch has decided to use the services
of another long distance telephone carrier. The Corporation is currently in
negotiations with the Navy for compensation for discontinuance of business or
transfer of assets. Global Telecommunications will continue to service the
Miramar base in 1998 until the other telephone company is in place. Revenues
for the Miramar base were $478,000 and $618,000 for the years ended December 31,
1997 and 1996, respectively. Income before income taxes for the Miramar base
was $58,000 and $147,000 for the years ended December 31, 1997 and 1996,
respectively.
Although Global Telecommunication's revenues declined from 1996 to 1997,
its expenses remained relatively unchanged due to the fact that the most
significant decline in revenues occurred at a base where long distance royalties
are not incurred.
General and administrative expenses increased $366,000 from $1,424,000 in
1996 to $1,790,000 in 1997. The major portion of this increase, or $225,000,
resulted from the Corporation's acquisition of Westland Associates. The
remaining $141,000 of the increase resulted from the Corporation's increased
operating activities and the corresponding need to increase its overhead.
The Corporation's effective tax rate increased from 34% in 1996 to 40% in
1997. The increase in the effective tax rate was due to increased taxable
interest income in 1997 as compared to 1996 because the Corporation held
tax-free state and municipal securities for a portion of 1996 and did not during
any of 1997.
Net income for the year ended December 31, 1997 was $1,371,000 as compared
to $1,571,000 for the year ended December 31, 1996. Both basic and diluted
earnings per share were $0.17 for the year ended December 31, 1997 as compared
to $0.20 for the year ended December 31, 1996. The lower earnings per share in
1997 reflects the lower net income in 1997, as well as higher weighted average
shares outstanding in 1997.
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues for the year ended December 31, 1996 were $5,234,000 as compared
to $4,596,000 for the year ended December 31, 1995. This increase resulted
primarily from an increase of $566,000 in interest on loans, a $431,000 increase
in loan fees, and a $195,000 increase in interest on securities
available-for-sale and money market funds. These increases in revenues were
partially offset by a decrease of $396,000 in the amount received from the
Drexel Litigation, and a loss of $169,000 in 1996 from the Corporation's equity
investment in Pink Dot, with no such loss occurring in 1995 as the Corporation's
investment in Pink Dot occurred in 1996.
15
<PAGE>
Interest on loans increased in 1996 as compared to 1995 because of a
significant increase in average loans outstanding. Loan fees increased
primarily as a result of recognizing $700,000 of previously unrecognized loan
fees in 1996. Although these fees were due in 1995 and 1994, they were not
recognized as income in those years because of severe delinquency problems and
doubt as to ultimate collectibility. Interest on securities available-for-sale
and money market funds increased in 1996 as the Corporation sold its state and
municipal securities in April, 1996 and invested the funds in higher yielding
(pre-tax) U.S. government and agency securities.
In 1996, the Corporation received $813,000, net of court directed legal
costs, from the Drexel Litigation as compared to $1,209,000, net of court
directed legal costs, in 1995. The loss of $169,000 in 1996 from the
Corporation's equity investment in Pink Dot resulted from the Corporation's
share of Pink Dot's loss from the date of its investment. The loss was
attributable to the opening of additional stores in 1996 which had not yet
reached a break-even point.
General and administrative expenses decreased from $1,460,000 in 1995 to
$1,424,000 in 1996. All expense categories included in general and
administrative expenses were comparable from year to year.
The Corporation's effective tax rate increased from 24% in 1995 to 34% in
1996. The higher effective tax rate in 1996 was due to a lower proportion of
tax free state and municipal securities outstanding in 1996 as compared to 1995.
Net income for the year ended December 31, 1996 was $1,571,000 as compared
to $1,308,000 for the year ended December 31, 1995. Both basic and diluted
earnings per share were $0.20 for the year ended December 31, 1996 as compared
to $0.17 for the year ended December 31, 1995.
LOANS RECEIVABLE AND PAST DUE LOANS
The Corporation's loans receivable balance at December 31, 1997 was
$7,081,000 as compared to $4,636,000 at December 31, 1996. The increase in
loans receivable outstanding was due primarily to the funding during 1997 of
loan commitments that were in existence as of December 31, 1996 and to the
origination of new commitments and loans during 1997. Loan fundings during 1997
were $8,302,000, while principal collected during the year was $5,519,000. Loan
originations occur as opportunities arise which management of the Corporation
believes to be attractive after considering the proposed terms, including yield,
duration, collateral coverage and qualifications of the borrower. For further
information on loan collateral, see Note 5 of Notes to Consolidated Financial
Statements.
At December 31, 1997, certain loans were in default as to the payment of
principal and interest. Once a loan goes into default, the Corporation
continues to accrue interest on the loan but records a loss reserve for any of
these additional interest accruals. When necessary, the Corporation also
records reserves for impaired principal, as well as previously accrued interest.
The Corporation commenced foreclosure proceedings in October 1997 on a loan
secured by real estate in the amount $1,050,000 plus accrued interest of $66,000
as of December 31, 1997. Management believes that the real estate collateral
will be sufficient to cover the principal and interest owing on this loan, and
as a result, should not incur any losses in excess of the
16
<PAGE>
interest reserve recorded on this loan. See "Legal Proceedings" for additional
information on the foreclosure of this loan.
A second loan in the amount of $520,000 went into default in October 1997
but was brought current in January 1998. This same loan again went into default
in February 1998. Foreclosure proceedings have been initiated and management
believes that the real estate collateral held by the Corporation should be
sufficient to cover the principal and any interest owing on the loan.
A third loan in the amount of $225,000 plus accrued interest of $12,000
went into default in August 1997. This loan was foreclosed on December 15, 1997
and the Corporation became the owner of the collateral, a single-family
residence subject to a first mortgage in the amount of $655,000. The
Corporation paid off the first mortgage in January 1998. The debtor was asked
to vacate the residence, but refused to do so. As a result, the Corporation has
initiated an unlawful detainer action. When full possession of the residence is
obtained by the Corporation, the residence will be listed for sale. In addition
to reserves recorded in connection with interest accrued subsequent to the
default on this loan, the Corporation had recorded additional reserves which
resulted in a net amount of principal and interest owing at the time of the
foreclosure of $178,000. Management does not anticipate incurring any further
losses in connection with this transaction.
The Corporation had loans receivable from Pink Dot as of December 31, 1997
in the principal amounts of $2,500,000 and $415,000. Due to the fact that the
Corporation's share of Pink Dot's loss for 1997 exceeded the Corporation's
investment account and goodwill related to Pink Dot, the carrying amount of
these loans was reduced by $391,000.
LIQUIDITY
The Corporation's cash and cash equivalents decreased by $572,000 during
the year ended December 31, 1997. The Corporation's sources of cash during 1997
were $1,851,000 from operating activities and $2,968,000 from the net change in
its investment security portfolio in that sales of securities of $34,759,000
exceeded purchases of securities of $31,791,000. The Corporation's primary uses
of cash during 1997 were $2,783,000 in connection with its loans receivable, in
that loan originations of $8,302,000 were higher than principal collected on
loans of $5,519,000; a $1,200,000 payment of a liability to a broker for
securities purchased that was outstanding as of December 31, 1996; and
$1,269,000 for the purchase of Westland Associates. In addition to having
$1,738,000 of cash and cash equivalents on hand as of December 31, 1997, the
Corporation also held U.S. government and agency securities with a market value
of $17,407,000.
In April 1997, the Corporation's line of credit in the amount of
$10,000,000 expired and management elected not to renew it because the
Corporation's liquidity is strong without the line, no part of the line had been
drawn upon during its entire term, and the lender required certain fees to renew
the line. Management believes financing can be obtained on suitable terms if
additional liquidity is needed.
17
<PAGE>
The Corporation continues to seek investments in or acquisitions of other
business. No assurances can be given that any further acquisitions or
investments will be made or, if made, that they will be profitable.
In the opinion of management, the Corporation has sufficient cash and
liquid assets to fund its growth and operating plans for the foreseeable future.
INFLATION
The Corporation cannot accurately determine the precise effects of
inflation. However, it does not believe that inflation has had a material
impact on its results of operations
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. This Statement established standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in equity
[net assets] of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners". The Corporation will adopt the reporting requirements
of SFAS No. 130 during 1998 and the impact on the Corporation of the adoption of
this new accounting standard is considered immaterial to the Corporation's
financial statements.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No.
131 is also effective for fiscal years beginning after December 15, 1997. This
Statement requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. The Corporation will adopt the
reporting requirements of SFAS No. 131 in 1998 and the impact of the adoption of
this new accounting standard is the potential redefinition of the Corporation's
segments.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and process data fields containing a 2 digit year
is commonly referred to as the Year 2000 Compliance issue. As the Year 2000
approaches, some systems may be unable to accurately process certain
information.
The Corporation does not anticipate any significant costs associated with
Year 2000 software requirements for the Corporation or the companies for
which the Coporation holds a significant investment.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Westminster Capital, Inc.
Beverly Hills, California
We have audited the accompanying consolidated statement of financial condition
of Westminster Capital, Inc. and its subsidiaries (the "Corporation") as of
December 31, 1997 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Corporation for the years ended
December 31, 1996 and December 31, 1995 were audited by other auditors whose
report, dated March 1, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Westminster Capital, Inc. and its
subsidiaries as of December 31, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 11, 1998
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Westminster Capital, Inc.
Beverly Hills, California:
We have audited the accompanying consolidated statements of financial condition
of Westminster Capital, Inc. and subsidiaries (the "Corporation") as of December
31, 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westminster Capital,
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
March 1, 1997
20
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,738,000 $ 2,310,000
Securities available-for-sale, at fair value 18,405,000 22,502,000
Investments in limited partnerships
that invest in securities 2,314,000 1,660,000
Loans receivable, net 7,081,000 4,636,000
Accounts receivable 1,002,000 225,000
Income tax refunds receivable 1,954,000 1,954,000
Less: allowance for doubtful receivable (1,954,000) (1,954,000)
----------------------------------------
Income tax refunds receivable, net - -
Accrued interest receivable 801,000 422,000
Real estate acquired through foreclosure 833,000 -
Telephone systems, net 834,000 1,080,000
Property and equipment, net 710,000 48,000
Goodwill, net 881,000 278,000
Other assets 271,000 51,000
----------------------------------------
TOTAL ASSETS $34,870,000 $33,212,000
----------------------------------------
----------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
LIABILITIES:
Accounts payable $ 669,000 $ 77,000
Accrued expenses 1,915,000 1,029,000
Mortgage payable 655,000 -
Due to broker - 1,200,000
Income taxes 5,366,000 5,085,000
Minority interest in limited partnership 297,000 354,000
----------------------------------------
TOTAL LIABILITIES 8,902,000 7,745,000
----------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value: 30,000,000 shares
authorized: 7,835,000 shares issued
and outstanding in 1997 and 1996 7,835,000 7,835,000
Capital in excess of par value 55,943,000 55,943,000
Accumulated deficit (37,823,000) (39,194,000)
Unrealized holding gains on securities
available-for-sale, net of taxes 13,000 883,000
----------------------------------------
TOTAL SHAREHOLDERS' EQUITY 25,968,000 25,467,000
----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $34,870,000 $33,212,000
----------------------------------------
----------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
REVENUES: 1997 1996 1995
- --------- ---- ---- ----
<S> <C> <C> <C>
Interest on loans $ 1,094,000 $ 1,184,000 $ 618,000
Loan fees 639,000 751,000 320,000
Interest on securities available-
for-sale and money market funds 932,000 1,044,000 849,000
Unrealized gains on limited partner-
ships that invest in securities 529,000 - -
Gain (loss) on sale of securities
available-for-sale 332,000 (3,000) 15,000
Lawsuit settlement, net 950,000 813,000 1,209,000
Telephone system revenue 1,444,000 1,528,000 1,522,000
Sales to auto dealers 2,711,000 - -
Loss from equity investment (686,000) (169,000) -
Other income 51,000 86,000 63,000
-----------------------------------------------
Total Revenues 7,996,000 5,234,000 4,596,000
-----------------------------------------------
EXPENSES:
Telephone time charges 733,000 725,000 723,000
Cost of sales to auto dealers 2,539,000 - -
Other telephone system charges 605,000 614,000 636,000
General and administrative 1,790,000 1,424,000 1,460,000
-----------------------------------------------
Total Expenses 5,667,000 2,763,000 2,819,000
-----------------------------------------------
INCOME BEFORE INCOME
TAXES AND MINORITY INTEREST 2,329,000 2,471,000 1,777,000
INCOME TAX PROVISION (932,000) (840,000) (420,000)
MINORITY INTEREST IN INCOME
OF CONSOLIDATED PARTNERSHIP (26,000) (60,000) (49,000)
-----------------------------------------------
NET INCOME $ 1,371,000 $ 1,571,000 $ 1,308,000
-----------------------------------------------
-----------------------------------------------
Net Income Per Common Share:
Basic $.17 $.20 $ .17
Diluted .17 .20 .17
-----------------------------------------------
-----------------------------------------------
Weighted Average Shares Outstanding:
Basic 7,835,000 7,818,000 7,815,000
Diluted 7,866,000 7,822,000 7,840,000
-----------------------------------------------
-----------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNREALIZED HOLDING
GAINS (LOSSES)
CAPITAL IN ON SECURITIES
COMMON EXCESS OF ACCUMULATED AVAILABLE-FOR-SALE,
STOCK PAR VALUE DEFICIT NET OF TAXES
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 7,815,000 $ 55,946,000 $ (42,073,000) $ (205,000)
Net income - - 1,308,000 -
Change in unrealized holding gains on
securities available-for-sale, net of taxes - - - 309,000
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 7,815,000 55,946,000 (40,765,000) 104,000
Net income - - 1,571,000 -
Change in unrealized holding gains
on securities available-for-sale,
net of taxes - - - 779,000
Exercise of stock options 20,000 (3,000) - -
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 7,835,000 55,943,000 (39,194,000) 883,000
Net income - - 1,371,000 -
Change in unrealized holding gains
on securities available-for-sale,
net of taxes - - - (870,000)
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 7,835,000 $ 55,943,000 $ (37,823,000) $ 13,000
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,371,000 $ 1,571,000 $ 1,308,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses and doubtful receivables 92,000 50,000 30,000
Depreciation, amortization and accretion, net 33,000 40,000 264,000
(Gain) loss on sales of securities available
for sale (332,000) 3,000 (15,000)
Unrealized (gains) on limited partnerships that
invest in securities (529,000) - -
Loss from equity investment 686,000 169,000 -
Change in assets and liabilities net of effects
from purchase of Westland Associates:
Decrease (increase) in accounts receivable 159,000 46,000 (64,000)
(Increase) decrease in accrued interest receivable (422,000) 100,000 89,000
Net change in income taxes 835,000 840,000 456,000
(Increase) decrease in other assets (93,000) (2,000) 2,000
Net change in accounts payable (197,000) (104,000) 116,000
Net change in accrued expenses 305,000 302,000 (3,640,000)
Net change in minority interest (57,000) (111,000) (30,000)
---------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,851,000 2,904,000 (1,484,000)
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (31,791,000) (43,321,000) (15,999,000)
Proceeds from maturities of securities - 2,010,000 5,519,000
Proceeds from sales of securities 34,759,000 41,659,000 14,456,000
Purchases of limited partnership interests (125,000) (1,660,000) -
Loan originations and purchases (8,302,000) (7,760,000) (4,687,000)
Principal collected on loans receivable 5,519,000 6,046,000 3,065,000
Net change in due to broker (1,200,000) 1,200,000 -
Proceeds from exercise of options - 17,000 -
Payment for purchase of Westland Associates (1,269,000) - -
Purchase of equity investment - (500,000) -
Purchase of telephone systems and office
equipment (14,000) - -
---------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (2,423,000) (2,309,000) 2,354,000
---------------------------------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (572,000) 595,000 870,000
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 2,310,000 1,715,000 845,000
---------------------------------------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 1,738,000 $ 2,310,000 $ 1,715,000
---------------------------------------------
---------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
WESTMINSTER CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(See Independent Auditors' Report)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
The consolidated financial statements of Westminster Capital, Inc. (the
"Corporation") include the accounts of the Corporation and its wholly owned
subsidiaries, Westland Associates, Inc., Westminster Finance, Inc., FarWest
Financial Insurance Agency, Silver Ridge Apartments, G.P., Inc. and Silver Ridge
Apartments, L.P., Inc. Both Silver Ridge Apartments G.P., Inc. and Silver Ridge
Apartments L.P., Inc. have been inactive since 1993 and FarWest Financial
Insurance Agency has been inactive since 1991. The consolidated financial
statements also include the accounts of Global Telecommunications, a limited
partnership in which the Corporation has a 75% limited partnership interest.
All material intercompany accounts and transactions have been eliminated in
consolidation. References to the Corporation may include one or more of its
wholly owned subsidiaries.
On September 23, 1996, the Corporation acquired a 40% interest in Pink Dot, Inc.
("Pink Dot"), a home delivery shopping company. The Corporation accounts for
this investment under the equity method of accounting. Under the equity method
of accounting, income or loss is recognized in the Corporation's Statements of
Operations based on its proportionate share of Pink Dot's income or loss. On
February 26, 1998, the Corporation sold its 40% interest in Pink Dot (see Note
20).
On November 12, 1997, the Corporation acquired 100% of the common stock of
Westland Associates, Inc. (Westland Associates), a corporation that provides
group purchasing of goods and services for new car dealers in California,
Arizona and Nevada. The acquisition has been accounted for using the purchase
method of accounting.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are short-term, highly
liquid investments with original maturities of three months or less. They are
readily convertible to cash and are so near maturity that no significant risk of
changes in value exists because of changes in interest rates.
SECURITIES AVAILABLE-FOR-SALE - The Corporation classifies its securities as
held to maturity securities, trading securities and available-for-sale
securities, as applicable. The Corporation did not hold any held to maturity
securities or trading securities at December 31, 1997 or 1996.
Securities available-for-sale are carried at estimated fair value. The
Corporation classifies investments as available-for-sale when it determines that
such securities may be sold at a future date or if there are foreseeable
circumstances under which the Corporation would sell such securities.
25
<PAGE>
Changes in the estimated fair value of securities available-for-sale are
included in shareholders' equity as unrealized holding gains or losses, net of
the related tax effect. Declines in the fair value of individual securities
available-for-sale below their cost that are other than temporary are
written-down to their estimated fair value with the resulting write-down
included in net income as realized losses. Realized gains or losses on
available-for-sale securities are computed on a specific identification basis.
Amortized premiums and accreted discounts are included in interest income using
the interest method.
INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES - The Corporation
has invested in limited partnerships that invest in securities. Each of these
partnerships seeks to achieve returns through investments in equity and debt
securities following identified strategies. Gains or losses on these
investments are recorded based upon the equity method of accounting.
WARRANTS - In connection with the funding of loans and purchase of securities,
the Corporation has received warrants to purchase common stock of the debtor.
Certain warrants are not assigned a value as no estimated fair value is readily
obtainable. Such warrants are recorded at their estimated fair value when a
market is established.
PURCHASE DISCOUNT ON AUTOMOBILE LEASING PORTFOLIO - The discount received on the
purchase of the automobile leasing portfolio is recognized in income over the
lives of the loans using a method which approximates the interest method.
LOANS RECEIVABLE - Loans receivable are carried at the amount funded, less
principal payments received, adjusted for net deferred loan fees and allowances
for loan losses. Loans are identified as impaired when it is deemed probable
that the borrower will be unable to meet the scheduled principal and interest
payments under the terms of the loan agreement. Impairment is generally
measured based upon the estimated fair value of the collateral. Allowances for
loan losses is increased by charges to income and decreased by charge-offs (net
of recoveries). The accompanying financial statements require the use of
management estimates to calculate allowances for loan losses. These estimates
are inherently uncertain and depend on the outcome of future events.
Management's estimates are based upon identified losses on impaired loans;
previous loan loss experience; current economic conditions; the value of the
collateral; and other relevant factors. Management believes the level of the
allowances at December 31, 1997 are adequate to absorb losses inherent in the
loan portfolio.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE - Real estate acquired through
foreclosure is recorded at estimated fair value at the time of the foreclosure.
Any subsequent operating expenses or income, reduction in estimated values, and
gains or losses on disposition of such property are included in current
operations.
LONG-LIVED ASSETS - The Corporation evaluates the recoverability of the carrying
value of property and equipment and intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF. The Corporation
considers historical performance and anticipated future results
26
<PAGE>
in its evaluation of potential impairment. Accordingly, when indicators of
impairment are present, the Corporation evaluates the carrying value of these
assets in relation to the operating performance of the business and future and
undiscounted cash flows expected to result from the use of these assets.
Impairment losses are recognized when the sum of future cash flows are less than
the assets'carrying value. No such impairment losses have been recognized to
date.
TELEPHONE SYSTEMS - Telephone systems are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets which is seven years. Telephone system
revenue is recognized on the accrual basis for charges incurred on a monthly
basis.
PROPERTY AND EQUIPMENT - In connection with the Corporation's purchase of
Westland Associates on November 12, 1997, the historical cost basis of Westland
Associates' land and building were adjusted to their estimated fair value
through a purchase accounting adjustment. The adjustment that was recorded
resulted in an increase in the carrying value of the land and building of
approximately $482,000, which was based upon an escrow and subsequent sale of
the land and building on March 11, 1998.
All other components of property and equipment are stated at cost, less
accumulated depreciation. Provisions for depreciation are made using
straight-line and accelerated methods over the estimated useful lives of the
assets.
GOODWILL - Goodwill represents the excess of the purchase price over the
estimated fair value of net assets associated with investments using the
purchase and equity methods of accounting. Goodwill is amortized on a
straight-line basis over a ten year period and is evaluated periodically for
other than temporary impairment. During this evaluation, management takes into
consideration the value of the recorded goodwill and any event or circumstances
that might have diminished fair value. Should such an assessment indicate
permanent impairment, the net book value would be adjusted accordingly. In
connection with the Corporation's acquisition of Westland Associates on November
12, 1997, goodwill of $887,000 was recorded - see Note 6. Accumulated
amortization of goodwill was $44,000 and $7,000 at December 31, 1997 and 1996,
respectively. See Note 9 regarding the write-off of goodwill related to Pink
Dot in 1997.
LOAN FEES - Loan fees are deferred net of direct incremental loan origination
costs. Net deferred fees are accreted into income using the interest method or
straight line method if not materially different. Loan fees due at the maturity
of a loan are also deferred and accreted to income, unless collectibility is in
doubt, in which case they are then recognized on the cash basis.
REVENUE RECOGNITION (WESTLAND ASSOCIATES) - Westland Associates, the
Corporation's wholly-owned subsidiary, recognizes revenue when its vendors
drop-ship products directly to its dealers.
INCOME TAXES - The Corporation joins with its subsidiaries in filing
consolidated federal income and state franchise tax returns. In the tax
returns, taxable income or loss is consolidated with the taxable income or loss
of the subsidiaries.
27
<PAGE>
Under the asset and liability method of accounting for income taxes, income tax
expense (benefit) is recognized by establishing deferred tax assets and
liabilities for the estimated future tax consequences attributable to the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Corporation's
evaluation of the realizability of deferred tax assets includes consideration of
the amount and timing of future reversals of existing temporary differences.
STOCK OPTION PLAN - Prior to January 1, 1996, the Corporation accounted for its
stock option plan in accordance with the provision of Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Corporation adopted Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), ACCOUNTING FOR
STOCK-BASED COMPENSATION, which encourages but does not require entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma income per share disclosures for employee stock option
grants issued in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Corporation has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
requirements of SFAS No. 123.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications were made to prior year
consolidated financial statements to conform to current year presentation.
2. YEAR 2000
Management does not anticipate any significant costs associated with Year 2000
software requirements.
3. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are carried at estimated fair value. The
amortized cost and estimated fair value of securities available-for-sale at
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
<S><C>
GROSS GROSS
28
<PAGE>
<CAPTION>
Unrealized Unrealized Estimated
Amortized Cost Gains Losses Fair Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
U.S. Treasury and Agency
Securities $ 17,387 $ 20 $ -- $ 17,407
Equity and Debt Securities 991 52 (45) 998
Total $ 18,378 $ 72 $ (45) $ 18,405
1996:
U.S. Treasury and Agency
Securities $ 16,723 $ 35 $ -- $ 16,758
Equity and Debt Securities 4,307 1,437 -- 5,744
Total $ 21,030 $ 1,472 $ -- $ 22,502
</TABLE>
Unrealized holding gains on securities available-for-sale of $13,000 at
December 31, 1997 and $883,000 at December 31, 1996 are net of taxes of $14,000
and $589,000, respectively.
Maturities of U.S. Treasury and Agency Securities were as follows at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------- ---------------
<S> <C> <C>
Due within one year $ 8,884 $ 8,885
Due after one year through
five years 8,503 8,522
--------------- ---------------
$ 17,387 $ 17,407
--------------- ---------------
--------------- ---------------
</TABLE>
Gross unrealized gains include the value ascribed to warrants which have a
readily determinable value, whether detached or attached to securities.
Gross gains and (losses) of $432,000 and ($100,000) were realized on sales in
1997, $221,000 and ($224,000) in 1996, and $16,000 and ($1,000) in 1995,
respectively. During 1997, the market value of one non-tradeable security
declined below its cost to a level that was considered to be other than
temporary. A resulting write-down of $100,000 was recorded by the
Corporation, which is included in the caption "gain (loss) on sale of
securities available-for-sale" on the Consolidated Statement of Operations
for the year ended December 31, 1997. During the year ended December 31,
1996, the Corporation recorded a permanent impairment write-down of $150,000
on an equity security. The Corporation determines the cost of securities sold
using the specific identification method in computing realized gains or
losses.
4. INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES
The Corporation has invested in limited partnerships that invest in securities.
Gains or losses on these investments are recorded based upon the equity method
of accounting which approximates
29
<PAGE>
fair value. During the year ended December 31, 1997, the Corporation recorded
unrealized gains of $529,000 in connection with these investments in the
Consolidated Statements of Operations. No such gains were recorded during the
years ended December 31, 1996 and 1995.
5. LOANS RECEIVABLE
The composition of the Corporation's loans receivable at December 31, 1997 and
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans secured by automobile
leases, net of discount $ 132 $ 742
Loans, net of loan fees, secured
by trust deeds or mortgages 1,543 1,892
Loans secured by other collateral 5,306 2,002
Unsecured loans 100 -
--------------------------
Total $ 7,081 $ 4,636
--------------------------
--------------------------
</TABLE>
The loans secured by automobile leases represent a portfolio of loans purchased
by the Corporation in 1995. The purchase price was $3,551,000 net of discount
of $742,000. The remaining average maturity of the portfolio was approximately
four months at December 31, 1997. At December 31, 1997 all loans secured by
automobile leases were performing in accordance with their contractual terms.
The loans secured by trust deeds or mortgages as of December 31, 1997, include
notes of $1,050,000 and $520,000 that originated in 1996 and that were
originally due in 1998, but that were in default as of December 31, 1997.
The loans secured by other collateral as of December 31, 1997, include a
$2,500,000 note and a $415,000 note representing advances made to Pink Dot, Inc.
(Pink Dot), a home delivery shopping company, in which the Corporation had a 40%
equity investment at December 31, 1997. The $2,500,000 note bears interest at
the lesser of the prime rate or 10% and is due in December 2001. The $415,000
note bears interest at the rate of 8% and is due in July 1999. Each of these
notes is subject to accelerated payment terms upon the occurrence of certain
events. Due to the fact that the Corporation's share of Pink Dot's loss for
1997 exceeded the Corporation's investment account and goodwill related to Pink
Dot, the carrying amount of these loans was reduced by $391,000. Both of these
notes were replaced by new notes on February 26, 1998 (see Note 20).
Additional loans secured by other collateral as of December 31, 1997, include a
$1,900,000 note, a portion of which is secured by real estate, which bears
interest at the rate of 15% per annum that is due in July 1999 and a note with a
remaining principal balance of $132,000 as of December 31, 1997 that was paid
off in January 1998. In addition, there is a $450,000 note that is part of a
$2,000,000 loan commitment, a portion of which is convertible into 55% of the
30
<PAGE>
debtor's common stock, and a $300,000 note that is part of an $800,000 loan
commitment that is convertible into 50% of the debtor's common stock.
The unsecured note of $100,000 that was outstanding as of December 31, 1997 was
in default as to the payment of interest as of that date. The principal balance
and accrued interest was subsequently paid in February 1998.
A loan is impaired when it is probable that the Corporation will be unable to
collect all principal and accrued interest due according to the contractual
terms of the loan agreement. The average balance of impaired loans and
interest income recognized on impaired loans were $1,670,000 and $213,000,
respectively for the year ended December 31, 1997. The components of impaired
loans and accrued interest at December 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Impaired loans and
accrued interest $1,744 $ -
Less: valuation allowances (31) -
------------ -------------
Net carrying value of
impaired loans and
accrued interest $1,713 $ -
------------ -------------
</TABLE>
Activity in the valuation allowance for all loans and accrued interest for the
years ended December 31, 1997 and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Balance at January 1 $ - $ -
Additions 31 -
Direct write-downs - -
Balance at December 31 $ 31 $ -
</TABLE>
6. PURCHASE ACCOUNTING ADJUSTMENTS
As discussed in Note 1, the Corporation purchased 100% of the common stock of
Westland Associates on November 12, 1997. The acquisition was accounted for
under the purchase method of accounting. The following table summarizes the
fair value of assets and liabilities of Westland Associates as of the date of
the acquisition and the computation of the excess of the purchase price over the
fair value of the net assets acquired (in thousands):
<TABLE>
<CAPTION>
Fair Value of
Assets Acquired
and Liabilities
Assumed
-----------------
<S> <C>
Accounts receivable, net $ 936
31
<PAGE>
<CAPTION>
Property and equipment, net 663
Other assets 173
-----------------
Total assets 1,772
-----------------
Accounts payable 789
Accrued expenses and other liabilities 581
Deferred income taxes 20
-----------------
Total liabilities 1,390
-----------------
Fair value of net assets acquired 382
Purchase price 1,269
-----------------
Excess of purchase price over the fair value
of net assets acquired $ 887
-----------------
-----------------
</TABLE>
The excess of the purchase price over the fair value of the net, assets
acquired, goodwill, is being amortized using the straight-line method over 10
years.
In connection with the Corporation's purchase of Westland Associates, employment
agreements were executed with Westland Associates' president and another key
employee. The agreements run for terms of 24 months and 12 months,
respectively, and call for compensation levels equal to the levels that were
paid to each of them prior to the acquisition of Westland Associates by the
Corporation.
7. TELEPHONE SYSTEMS, NET
The following is a summary of telephone systems, net, at December 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Telephone systems $ 1,740 $ 1,740
Less accumulated depreciation (906) (660)
---------------------------
Telephone systems, net $ 834 $ 1,080
---------------------------
---------------------------
</TABLE>
Depreciation expense of telephone systems was approximately $246,000, $253,000
and $246,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
During 1997, the telephone company received notice of cancellation at one of the
military bases at which it operates a telephone system. While the telephone
company continues to provide service at that military base until a successor
telephone company begins operations, the telephone company is currently in
negotiations with the military for compensation for discontinuation of its
business or transfer of its assets.
32
<PAGE>
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
<S> <C> <C>
Building $395 $ -
Land 255 -
Furniture and equipment 71 43
Automobiles 28 29
-------------------------
749 72
Less: Accumulated depreciation (39) (24)
-------------------------
$710 $48
-------------------------
-------------------------
</TABLE>
In connection with the Corporation's acquisition of 100% of the common stock of
Westland Associates on November 12, 1997, the Corporation acquired the following
property and equipment, which was recorded at estimated fair value (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Building $ 395
Land 255
Furniture and equipment 13
-----
Total $ 663
-----
-----
</TABLE>
Depreciation expense related to property and equipment was approximately
$15,000, $12,000, and $13,000 for the years ended December 31, 1997, 1996 and
1995, respectively. For the year ended December 31, 1997, depreciation expense
related to Westland Associates' property and equipment was recorded from the
date of the acquisition through December 31, 1997.
9. EQUITY INVESTMENT
On September 23, 1996, the Corporation acquired a 40% interest in Pink Dot, Inc.
("Pink Dot"), a home delivery shopping Corporation for $500,000. The excess of
the cost of the investment over 40% of equity at the date of investment was
recorded as goodwill and was being amortized over a ten year period. The
Corporation recorded a loss of $686,000 in 1997 in connection with its 40%
equity investment in Pink Dot. As a result, the investment account and goodwill
related to Pink Dot were reduced to zero by adjustments of $46,000 and $249,000,
respectively. As this loss exceeded the carrying amount of the Corporation's
investment account and goodwill related to Pink Dot, the carrying amount of the
loans receivable from Pink Dot was reduced by $391,000. See Note 20 in regard
to the Corporation's sale of its 40% interest in Pink Dot in February 1998.
33
<PAGE>
The summarized assets and liabilities of Pink Dot on December 31, 1997 and
December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
(unaudited) (unaudited)
------------------ -------------------
<S> <C> <C>
Total assets $ 3,056 $ 2,300
------------------ -------------------
------------------ -------------------
------------------ -------------------
Total liabilities $ 4,520 $ 1,985
------------------ -------------------
------------------ -------------------
Total liabilities and
shareholders' equity $ 3,056 $ 2,300
------------------ -------------------
------------------ -------------------
</TABLE>
Included in liabilities at December 31, 1997 are $2,500,000 and $415,000 notes
payable to the Corporation.
For the year ended December 31, 1997, Pink Dot had revenues of $9,493,000 and
costs and expenses of $11,217,000, resulting in a pre-tax loss of $1,724,000.
10. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
In December 1997, the Corporation acquired a single-family residence located in
Newport Beach, California in connection with a foreclosure on a defaulted loan
that was secured by a second trust deed on the property. The principal and
accrued interest owing to the Corporation at the time of the foreclosure, net of
reserves, was $178,000. The property was acquired subject to a first mortgage
in the amount of $655,000, which the Corporation paid off in January 1998. It
is the Corporation's intention to sell the property during 1998.
11. INCOME TAXES
The Corporation made no income tax payments during 1997, 1996 or 1995, except
for the minimum state franchise tax.
The provision for income taxes for the years ended December 31, 1997, 1996, and
1995 includes the following ( in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current tax provision $ - $ - $ -
Deferred tax provision
Federal 716 610 255
State 216 230 165
----------------------------------
Total provision for income taxes $ 932 $ 840 $ 420
----------------------------------
----------------------------------
</TABLE>
34
<PAGE>
The Corporation's deferred tax receivables resulting from the utilization of net
operating loss carryforwards are offset in future years by deferred tax
payables. The Corporation's tax net operating loss carryforwards at December
31, 1997 of approximately $8,600,000 and $2,000,000 for federal and state
purposes, respectively, expire at various dates through 2012 for federal income
tax purposes and through 2002 for state income tax purposes.
The income tax provision reflects effective rates of 40%, 34%, and 24% for the
years ended December 31, 1997, 1996, and 1995 on income before income taxes,
respectively. The income tax provision differed from the amounts computed by
applying the statutory federal income tax rate of 34% to the income before
income taxes for the following reasons (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory Federal income tax rate $ 792 $ 840 $ 588
California franchise tax, net of Federal benefit 126 144 109
State and municipal securities interest - (148) (289)
Minority interest (10) (24) (17)
Other, net 24 28 29
- --------------------------------------------------------------------------------
$ 932 $ 840 $ 420
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996 the Corporation had cumulative deferred taxes
payable of $5,366,000 and $5,085,000, respectively. The Corporation had no
current taxes payable at December 31, 1997 and 1996. Tabulated below are the
significant components of the net deferred tax liability at December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Components of the deferred tax asset:
Net operating loss carryforward $ 3,124 $ 3,793
State taxes 595 516
Loan fee income 39 28
Equity in Pink Dot 416 109
Other 212 69
------------------------
Deferred tax asset 4,386 4,515
------------------------
Components of the deferred tax liability:
Legal settlements (9,307) (9,011)
Unrealized gains on limited partnerships
that invest in securities (227) -
Unrealized holding gains on
securities available-for-sale (14) (589)
Purchase adjustment-Westland Associates (204) -
------------------------
35
<PAGE>
Deferred tax liability (9,752) (9,600)
------------------------
Net deferred tax liability $ (5,366) $ (5,085)
------------------------
------------------------
Net state deferred tax liability $ (1,707) $ (1,639)
Net federal deferred tax liability (3,659) (3,446)
------------------------
$ (5,366) $ (5,085)
------------------------
------------------------
</TABLE>
In evaluating the realizability of its deferred tax assets, management has
considered the turnaround of deferred tax liabilities during the periods in
which those temporary differences become deductible. Additionally, the
Corporation has not considered income from future operations in evaluating
realizability of its deferred tax assets.
Subsequent to December 31, 1997, the Franchise Tax Board of the State of
California ("FTB") submitted a settlement agreement to the Corporation proposing
a settlement of the Corporation's claims for refund in the amounts of $2,959,619
for the income year ended December 31, 1987 and $412,119 for the income year
ended December 31, 1988, and on February 23, 1998, the Corporation signed the
settlement agreement, indicating its willingness to accept the proposed
settlement.
Under procedures of the FTB for settlement of refund claims, the settlement is
not binding on the state until the office of the Attorney General of the State
of California and the executive board of the FTB each makes an independent
review of the claim for refund and the bases for the proposed settlement and
accepts the proposed settlement agreement. While the Corporation has signed the
proposed settlement agreement, no assurance can be given that the settlement
will be accepted by the office of the Attorney General or the executive board of
the FTB.
Under the terms of the proposed settlement agreement, the State of California
would refund 50% of the amounts claimed for refund by the Corporation plus
interest on those amounts from the date the taxes were originally paid. The
settlement agreement calculates the amount of taxes and interest through June
30, 1997 to be refunded as $4,051,407. If the settlement is approved,
additional interest will be due calculated from July 1, 1997 to the date the
settlement is accepted by the Attorney General and the executive board of the
FTC, computed at the rate of 9% compounded daily.
In 1992, the Corporation established a valuation allowance of 50% of the refund
claims plus accrued interest, adjusting the carrying value of the claims to
$1,954,000 at December 31, 1992 to reflect the uncertainties attributable to the
FTB's objections to the refund claims. In the fourth quarter of 1994, the
Corporation received preliminary audit results from the FTB which proposed to
deny the refund claims. Due to uncertainties and the length of time the
Corporation recognized it would take to resolve the matter, the Corporation
established an additional provision for unresolved tax issues of $1,954,000
during 1994, effectively fully reserving the refund claims.
36
<PAGE>
12. SUPPLEMENTAL CASH FLOW INFORMATION
The tax effect of unrealized (losses) gains on securities available-for-sale for
the years ended December 31, 1997, 1996 and 1995 was ($575,000), $519,000, and
$207,000, respectively.
In connection with the Corporation's purchase of 100% of the common stock of
Westland Associates on November 12, 1997 for a purchase price of $1,269,000,
liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired and goodwill $2,659,000
Cash paid for the common stock (1,269,000)
----------
Liabilities assumed $1,390,000
----------
----------
</TABLE>
In connection with a loan foreclosure on December 15, 1997, the Corporation
acquired real estate, net of a first mortgage payable, in the amount of
$178,000. Including the mortgage payable of $655,000, the real estate was
recorded at a carrying value of $833,000.
See Note 1 for the Corporation's accounting policy in regards to cash and cash
equivalents.
13. LAWSUIT SETTLEMENT
During 1997, the Corporation received $950,000 in net proceeds from the
settlement of claims asserted on behalf of the Corporation against Drexel
Burnham Lambert, Inc. and Michael Milken and other related parties. In 1996 and
1995, the Corporation received $813,000 and $1,209,000, respectively in net
proceeds from the same settlement.
14. NET INCOME PER COMMON SHARE
Net income per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), EARNINGS PER SHARE, and
is calculated on the basis of the weighted average number of common shares
outstanding during each period plus the additional dilutive effect of common
stock equivalents. The dilutive effect of outstanding stock options is
calculated using the treasury stock method. As a result of the income per share
methods required to be disclosed by the Corporation under SFAS No. 128, the
Statement also requires disclosure of a reconciliation from Basic Net Income Per
Common Share to Diluted Net Income Per Common Share for the years ended
December, 31 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
WEIGHTED
NET AVERAGE NET INCOME
INCOME SHARES PER SHARE
---------- ---------------- --------------
<S> <C> <C> <C>
DECEMBER 31, 1997
BASIC NET INCOME PER COMMON SHARE
37
<PAGE>
Income available to common stockholders $1,371,000 7,835,000 $0.17
Dilutive effect of common equivalents shares of
stock options 31,000
DILUTED NET INCOME PER COMMON SHARE
Income available to common stockholders $1,371,000 7,866,000 $0.17
DECEMBER 31, 1996
BASIC NET INCOME PER COMMON SHARE
Income available to common stockholders $1,571,000 7,818,000 $0.20
Dilutive effect of common equivalents shares of
stock options 4,000
DILUTED NET INCOME PER COMMON SHARE
Income available to common stockholders $1,571,000 7,822,000 $0.20
DECEMBER 31, 1995
BASIC NET INCOME PER COMMON SHARE
Income available to common stockholders $1,308,000 7,815,000 $0.17
Dilutive effect of common equivalents shares of
stock options 25,000
DILUTED NET INCOME PER COMMON SHARE
Income available to common stockholders $1,308,000 7,840,000 $0.17
</TABLE>
15. STOCK OPTION PLAN
During 1997, the Corporation's Board of Directors adopted the 1997 Stock
Incentive Plan (the "1997 Plan"). The 1997 Plan is subject to shareholder
approval at the 1998 annual meeting of shareholders and replaces the 1986
Incentive Stock Option Plan and the 1986 Non-statutory Stock Option Plan
(collectively "1986 Plan"), both of which expired in 1996. An aggregate of one
million shares of the Corporation's common stock may be issued under the 1997
Plan.
During 1997, the Executive Vice President and Chief Financial Officer was
granted an option to purchase up to 100,000 shares of common stock under the
1997 Plan at a price of $2.37 per share. The option is exercisable in five
equal annual installments commencing in February 1998. The option expires in
2002.
38
<PAGE>
During 1995, the Chairman of the Board and Chief Executive Officer was granted
an option to purchase up to 250,000 shares of common stock under the 1986 Plan
at $1.99 per share, which is equal to 110% of the market price on the date of
grant as specified in that plan. The option is exercisable in four equal annual
installments commencing with the first anniversary of the grant date. The
option expires five years from the date of grant. At December 31, 1997, the
option was exercisable as to 125,000 shares.
During 1995, five outside Directors of the Corporation were granted options to
purchase up to 10,000 shares each under the 1986 Plan at $1.8125 per share,
which is equal to the market price on the date of grant as specified in that
plan. The options are exercisable in four equal annual installments commencing
with the first anniversary of the grant date. The options expire five years
from the date of grant. During 1997, 10,000 of these options were cancelled.
At December 31, 1997, these options were exercisable as to an aggregate of
20,000 shares.
The per share weighted-average fair value of stock options granted during 1997
and 1995 was $1.17 and $0.85, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
expected dividend yield 0%, risk-free interest rate of 6.25%, expected
volatility of 47%, and an expected life of 5 years.
The Corporation applies APB Opinion No. 25 in accounting for stock option plans
and, accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Corporation determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Corporation's net income would have been reduced
to the pro forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $1,371 $1,571 $1,308
Pro forma 1,323 1,548 1,285
Net income per share
(diluted) As reported $.17 $.20 $.17
Pro forma .17 .20 .17
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Option Price
Shares Price Per Share
-------------- -------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1995 350,000 $.88 - 1.99 $1.81
Granted -- -- --
Exercised (20,000) .88 .88
Cancelled (30,000) .88 .88
39
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Expired -- -- --
-------------- -------------- ----------------
Balance at December 31, 1996 300,000 1.81 - 1.99 1.96
Granted 100,000 2.37 2.37
Exercised -- -- --
Cancelled (10,000) 1.81 1.81
Expired -- -- --
-------------- -------------- ----------------
Balance at December 31, 1997 390,000 $ 1.81 - 2.37 $ 2.07
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
At December 31, 1997, the weighted-average remaining contractual life of
outstanding options was 2.87 years.
At December 31, 1997 and 1996, the number of options exercisable was 145,000 and
75,000 respectively, and the weighted-average exercise price of those options
was $1.96.
16. COMMITMENTS AND CONTINGENCIES
The Corporation had outstanding loan commitments at December 31, 1997 totaling
$2.6 million. At December 31, 1996, outstanding loan commitments were $1
million.
The Corporation has filed an action to foreclose a mortgage held by the
Corporation as security for a $1,050,000 loan that is in default. The mortgage
is on real property, title to which is held in the name of a trust of which the
borrower is trustee. Certain beneficiaries of the trust have filed a Motion to
Intervene in the foreclosure action and have filed a separate lawsuit seeking to
prevent the foreclosure, alleging that the trustee did not have authority to
enter into the trust and that the Corporation acted improperly in lending money
to the borrower, individually, and accepting as security real property owned by
the trust. The Corporation believes, based on the trust documents, that the
trustee had absolute authority to grant the mortgage and the Corporation
obtained title insurance for the mortgage. The Corporation intends to pursue
vigorously its right to foreclose the mortgage. The title insurer is defending
on the issue of the authority of the trustee to enter into the trust.
The Corporation is a defendant in various other lawsuits arising from the normal
course of business. Management believes, based upon the opinion of legal
counsel, that the ultimate resolution of the pending litigation will not have a
material effect upon the financial condition or results of operations of the
Corporation.
17. LEASE COMMITMENTS
Aggregate minimum lease commitments under long-term operating leases as of
December 31, 1997 are as follows (table in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $97
1999 91
40
<PAGE>
<CAPTION>
<S> <C>
2000 75
2001 75
2002 and thereafter 62
----------
$400
----------
----------
</TABLE>
Minimum lease payments for the Corporation's corporate offices are under a
non-cancelable operating lease which expires in October 2002 and which provides
for a stated nominal rent increase in the thirty-first month of the lease. The
Corporation recorded $78,548, $62,365, and $67,784 in rent expense for the
years ended December 31, 1997, 1996, and 1995, respectively.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 requires disclosures of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. Fair
value amounts represent estimates of value at a point in time. Significant
estimates regarding economic conditions, loss experience, risk characteristics,
and other factors are used in estimating fair value. These estimates can be
subjective in nature and involve matters of judgment. Changes in the
assumptions could have a material impact on the amounts disclosed. The methods
and assumptions for determining fair value of the Corporation's financial
instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying amount is a reasonable estimate of fair value.
SECURITIES AVAILABLE-FOR-SALE
Fair value has been determined based on quoted market prices, when available.
If a quoted market price is not available, recent market trading prices or the
value at which interests may currently be redeemed are used to estimate fair
value.
INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES
The fair value of investments in limited partnerships that invest in securities
is estimated based upon the underlying value of the securities which the limited
partnerships invest in.
LOANS RECEIVABLE, NET
Loans held by the Corporation are performing in accordance with their
contractual terms, with the exception of two loans secured by real estate in the
amounts of $1,050,000 and $520,000, which were in default as of December 31,
1997 and an unsecured loan in the amount of $100,000 that was also in default as
of December 31, 1997 (but which was repaid in full in February 1998). Based on
the type of loans, interest rate characteristics, credit risk, collateral,
subsequent payments received, and maturity, the carrying value of the loans has
been determined to be a reasonable estimate of fair value.
MORTGAGE PAYABLE
The carrying amount approximates fair value because of the short life of this
instrument.
41
<PAGE>
19. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in equity
[net assets] of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners". The Corporation will adopt the reporting requirements
of SFAS No. 130 during 1998 and the impact on the Corporation of the adoption of
this new accounting standard is considered immaterial to the Corporation's
financial statements.
Also in June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 is also
effective for fiscal years beginning after December 15, 1997. This Statement
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods to shareholders. It
also requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate, and
their major customers. The Corporation will adopt the reporting requirements of
SFAS No. 131 in 1998 and the impact of the adoption of this new accounting
standard is the potential redefinition of the Corporation's segments.
20. SUBSEQUENT EVENTS
On February 26, 1998, the Corporation sold the 40% of the issued and outstanding
stock of Pink Dot owned by the Corporation to the majority owner of Pink Dot
("the buyer") for a purchase price of $6,000,000. The purchase price is
evidenced by the buyer's promissory note ("Purchase Note") in the principal
amount of $6,000,000 due and payable on May 27, 1998 together with interest at
the rate of 9% per annum accruing from March 28, 1998 to the due date. The
Purchase Note is secured by a pledge by the buyer of 100% of the issued and
outstanding common stock of Pink Dot.
In connection with the sale of the Corporation's Pink Dot stock, two outstanding
promissory notes payable to the Corporation by Pink Dot were replaced by two new
promissory notes ("Replacement Notes"). One promissory note in the original
principal amount of $2,500,000 together with accrued but unpaid interest through
February 26, 1998 in the amount of $302,640, was replaced by a Replacement Note
in the principal amount $2,802,640. The second promissory note in the nominal
original principal amount of $1,000,000, of which $415,000 had been advanced
through February 26, 1998, together with accrued and unpaid interest in the
amount of $21,193, was replaced with a Replacement Note in the principal amount
of $436,193. The Replacement Note in the principal amount of $2,802,640 bears
interest at the "Prime Rate" of Bank of America, not to exceed 10% per annum,
and the Replacement Note in the principal amount $436,193 bears interest at the
rate of 8% per annum. Both Replacement Notes provide
42
<PAGE>
for payment of interest monthly commencing March 28, 1998 and provide for
payment of the entire principal balances on March 26, 2000. Both Replacement
Notes are secured by all tangible and intangible assets of Pink Dot.
On March 11, 1998, the Corporation's wholly-owned subsidiary, Westland
Associates, sold its land and building for a purchase price of $650,000. No
gain or loss will be recognized on the sale of these assets in 1998 as the land
and building were recorded at their estimated fair values at the date of the
Corporation's purchase of Westland Associates, which was November 12, 1997,
through the purchase accounting adjustments that are described in Note 6.
21. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED)
The following quarterly summary of operations is unaudited. In the opinion of
the Corporation's management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the interim periods
presented, have been included (in thousands, except per share data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Total
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/97
- -------------------
Total revenues $1,681 $ 831 $1,112 $4,372 $7,996
Total expenses 726 694 678 3,569 5,667
Income before income taxes
and minority interest 955 137 434 803 2,329
Net income 555 78 244 494 1,371
Diluted earnings per share 0.07 0.01 0.03 0.06 0.17
Year Ended 12/31/96
- -------------------
Total revenues $1,711 $1,256 $978 $1,289 $5,234
Total expenses 714 671 606 772 2,763
Income before income taxes
and minority interest 997 585 372 517 2,471
Net income 639 394 214 324 1,571
Diluted earnings per share 0.08 0.05 0.03 0.04 0.20
</TABLE>
The increase in revenues and expenses in the fourth quarter of 1997 were the
result of the Corporation's acquisition of Westland Associates on November 12,
1997. From the date of the acquisition to December 31, 1997, Westland
Associates generated revenues of $2,711,000 and incurred costs and expenses of
$2,765,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Corporation reported changes in its independent auditors in Form 8-K's that
were filed on May 5, 1997 and August 19, 1997.
43
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
CORPORATION
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders pursuant to instruction G(3) to
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders pursuant to instruction G(3) to Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders pursuant to instruction G(3) to
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders pursuant to instruction G(3) to
Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1) The following financial statements are included in Item 8:
Consolidated Statements of Financial
Condition as of December 31, 1997 and 1996
Consolidated Statements of Operations
for the Three Years Ended December 31, 1997
Consolidated Statements of Shareholders'
Equity for the Three Years Ended December 31, 1997
Consolidated Statements of Cash Flows
for the Three Years Ended December 31, 1997
Notes to Consolidated Financial Statements
44
<PAGE>
for the Three Years Ended December 31, 1997
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is
inapplicable or is presented in the consolidated financial statements or
related notes.
(b) Reports of Form 8-K
No reports were filed on Form 8-K during the fourth quarter of
1997.
(c) Exhibits
See "Index to Exhibits."
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTMINSTER CAPITAL, INC.
March 27, 1998 By: /s/ William Belzberg
---------------------
William Belzberg,
Chairman of the Board
Chief Executive Officer
By: /s/ Keenan Behrle
---------------------
Keenan Behrle,
Executive Vice President,
Chief Financial Officer, and
Principal Accounting Officer
46
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITY DATE
/s/William Belzberg Chairman of the Board March 27, 1998
- ---------------------- of Directors and
William Belzberg Chief Executive Officer
/s/Keenan Behrle Director March 27, 1998
- ----------------------
Keenan Behrle
/s/Hyman Belzberg Director March 27, 1998
- ----------------------
Hyman Belzberg
/s/Samuel Belzberg Director March 27, 1998
- ----------------------
Samuel Belzberg
/s/Gerald E. Finnell Director March 27, 1998
- ----------------------
Gerald E. Finnell
/s/Barbara C. George Director March 27, 1998
- ----------------------
Barbara C. George
/s/Monty Hall Director March 27, 1998
- ----------------------
Monty Hall
/s/Lester Ziffren Director March 27, 1998
- ----------------------
Lester Ziffren
47
<PAGE>
INDEX OF EXHIBITS
EXHIBIT
NO. SEQUENTIALLY NUMBERED DESCRIPTION
2.1 Option and Stock Purchase Agreement dated November 10, 1997 between the
Corporation and William Toro (filed as Exhibit 2.1 to the Registrant's
Report on Form 8-K dated March 5, 1998 and incorporated herein by this
reference).
2.2 Amendment to Option and Stock Purchase Agreement dated December 16, 1997
between the Corporation and William Toro (filed as Exhibit 2.2 to the
Registrant's Report on Form 8-K dated March 5, 1998 and incorporated
herein by this reference).
2.3 Secured Promissory Note in the amount of $6,000,000 dated February 26,
1998 between the Corporation and William Toro (filed as Exhibit 2.3 to
the Registrant's Report on Form 8-K dated March 5, 1998 and incorporated
herein by this reference).
2.4 Stock Purchase Agreement dated as of September 30, 1997 between the
Corporation and the shareholders of Westland Associates, Inc., a
California corporation.
3.1 Certificate of Incorporation of the Registrant as amended through July
12, 1992 (filed as Exhibit 3.1 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by this
reference).
Certificate of amendment of Certificate of Incorporation of the
Registrant dated July 13, 1992 (filed as Exhibit 3.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by this reference).
3.2 By-Laws of the Registrant as amended in their entirety effective April 4,
1995 (filed as Exhibit 4.4 to the Registrant's Post Effective Amendment
No. 1 to Form S-8 filed on June 23, 1995 as Registration No. 33-21177 and
incorporated herein by this reference).
10.1 Sales Agreement between The Sumitomo Bank of California and Purchasers
dated August 17, 1995 (filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated
herein by this reference).
10.2 1986 Incentive Stock Option Plan and 1986 Nonstatutory Stock Option Plan
(filed as Exhibit 4.1 to the Registrants' Post Effective Amendment No.1
to Form S-8 filed on June 23, 1995 as Registration No. 33-21177 and
incorporated herein by this reference).
10.3 Form of Stock Option Agreement (filed as Exhibit 4.2 to the Registrants'
Post Effective Amendment No.1 to Form S-8 filed on June 23, 1995 as
Registration No. 33-21177 and incorporated herein by this reference).
48
<PAGE>
10.4 Restated and Amended Limited Partnership Agreement for Global
Telecommunications Systems, Ltd. dated December 31, 1993 (filed as
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by this reference).
10.5 Loan and Stock Purchase Agreement dated November 20, 1995 between the
Corporation and Pink Dot, Inc., a California Corporation ("Pink Dot")
(filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by this
reference).
10.6 Amendment to Loan and Stock Purchase Agreement dated September 20, 1996
between the Corporation and Pink Dot (filed as Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by this reference).
10.7 Convertible Secured Note Purchase Agreement dated November 20, 1997
between the Corporation and Physician Advantage LLC, Michael H. Burnam
and Sheldon A.E. Rosenthal.
10.8 Loan Agreement dated September 23, 1997 between the Corporation and Touch
Controls, Inc., a California Corporation.
10.9 Secured Convertible Promissory Note dated September 23, 1997 between the
Corporation and Touch Controls, Inc., a California Corporation.
10.10 1997 Stock Incentive Plan.
16.1 Letter from KPMG as of May 9, 1997 (filed as an Exhibit to the
Registrant's Report on Form 8-K dated May 5, 1997 and incorporated herein
by this reference).
21 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent - Deloitte & Touche LLP
23.2 Independent Auditors' Consent - KPMG Peat Marwick LLP
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Financial Data Schedule for the fiscal years ended December 31, 1996 and
1995, the three months ended March 31, 1996, the six months ended June
30, 1996 and the nine months ended September 30, 1996.
27.3 Financial Date Schedule for the three months ended March 31, 1997, the
six months ended June 30, 1997 and the nine months ended September 30,
1997.
49
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") dated as of September
30, 1997, is made by and among the individuals and entities listed on the
execution page hereof each being shareholder of Westland Associates, Inc., a
California corporation ("Sellers"), and Westminster Capital, Inc., a Delaware
corporation ("Buyer").
R E C I T A L S:
A. Sellers are each owners of either one-half of a share or one
share of common stock (in either case, individually, a "Share" and collectively,
the "Shares") in Westland Associates, Inc., a California corporation (the
"Corporation").
B. Buyer desires to purchase 100% of the stock in the Corporation
on the terms and conditions set forth in this Agreement.
C. Buyer also desires to contract for the services of Donald
Francis and Virginia Gardner on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties agree as follows:
ARTICLE 1
SALE AND TRANSFER OF STOCK
1.1 PURCHASE PRICE. Buyer agrees to purchase and each Seller
agrees to sell its Share on the basis of Thirty-Three Thousand Dollars
($33,000.00) per whole Share ("Per Share Purchase Price") for an aggregate
purchase price of One Million One Hundred Eighty Eight Thousand Dollars
($1,188,000.00)("Total Purchase Price") for 36 Shares. The Total Purchase
Price shall be paid as follows:
1.1.1 Upon the execution of this Agreement, Buyer shall
deposit by wire transfer one-half of the Total Purchase Price into the Trust
Account of Arter & Hadden (the "Deposit") to be delivered on the Closing Date
(as defined below). The Deposit shall be placed in an interest-bearing
account acceptable to Buyer. The Deposit, plus interest earned thereon, shall
be delivered to the Sellers on the Closing Date to be applied to the Total
Purchase Price or refunded to Buyer in full, together with interest earned
thereon, on the date this Agreement is terminated by either party.
<PAGE>
1.1.2 At the Closing, Buyer shall
(a) Deliver to Arter & Hadden, as agent for each of
the Sellers, the remaining balance of the Total Purchase Price. Such delivery
shall be by wire transfer.
(b) Authorize Arter & Hadden to deliver the Per
Share Purchase Price to each of the Sellers.
1.2 INFORMATION TO BE HELD IN CONFIDENCE. Buyer agrees that,
unless and until the closing has been consummated, Buyer and Buyer's Principals,
will hold in strict confidence, and will not use to the detriment of Sellers or
the Corporation, any data or information with respect to the business of the
Corporation obtained in connection with this transaction or Agreement, except
insofar as disclosure of the data and information may be required by law. If the
transaction contemplated by this Agreement is not consummated, Buyer will return
to Sellers all data and information that Sellers may reasonably request
including, but not limited to, worksheets, test reports, manuals, lists,
memorandums and other documents prepared by, or made available to Buyer, in
connection with this transaction.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES BY SELLERS
Sellers represent and warrant that:
2.1 ORGANIZATION, STANDING, AND QUALIFICATION OF THE CORPORATION.
The Corporation is a corporation duly organized, validly existing, and in good
standing under the laws of California, has all necessary corporate powers to own
its properties and to carry on its business as now owned and operated by it.
2.2 STOCK OF THE CORPORATION.
2.2.1 CAPITAL STRUCTURE. The authorized capital stock of the
Corporation consists of 100 shares of no par value common stock, of which 36
shares (the "Shares") are issued and outstanding. All the Shares are validly
issued, fully paid, and nonassessable, and have been issued in full compliance
with all federal and state securities laws. There are no outstanding
subscriptions, options, rights, warrants, convertible securities, or other
agreements or commitments obligating the Corporation to issue or to transfer
from treasury and additional shares of its capital stock of any class, except
for a Right of First Refusal contained in the Corporation's Bylaws.
2.2.2 TITLE TO SHARES. Each Seller listed on the Execution
Pages hereto is the owner, beneficially and of record, of one Share, or one-half
Share, of stock of the Corporation free and clear of all liens, encumbrances,
security agreements, equities, options, claims, charges, and restrictions. Each
Seller has full right, power and authority to transfer the Share owned by Seller
to Buyer without obtaining the consent or approval of any other person or
governmental
2
<PAGE>
authority and delivery of each such Share, or one-half Share, to Buyer pursuant
to this Agreement will transfer valid title thereto, free and clear of all
encumbrances, claims and restrictions of every kind.
2.3 SUBSIDIARIES. The Corporation does not own, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, trust or other entity.
2.4 FINANCIAL STATEMENTS. Schedule 2.4 to this Agreement sets forth
(a) the balance sheet of the Corporation as of December 31, 1996, and the
related statement of income and retained earnings for the year ending on that
date, reviewed by Robert M. Moss, CPA, of Moss, Levy & Hartzheim, 9465 Wilshire
Boulevard, Suite 915, Beverly Hills, California, 90212, the Corporation's
independent public accountants and (b) the balance sheet and related statement
of income and retained earnings as of and for the eight months ended August 31,
1997 (the "Financial Statements"). The Financial Statements (i) are in
accordance with the books and records of the Corporation; (ii) fairly present
the financial condition of the Corporation at the balance sheet dates and the
results of operations and stockholder's equity for the periods then ended; and
(iii) have been prepared in accordance with generally accepted accounting
principles consistently applied (as to the interim, unreviewed financial
statements, except for normal year end adjustments and only as such principles
apply to interim unaudited statements). Sellers have no knowledge of any (i)
material inaccuracy or misstatement, or (ii) omission to state a material fact
necessary to make the statements therein in the light of all the circumstances
under which they were made, not misleading, in any of the Financial Statements.
2.5 ACCOUNTS RECEIVABLE. A true and complete list of all outstanding
accounts receivable of the Corporation as of August 31, 1997 has been delivered
to Buyer. All of the accounts receivable held by the Corporation are valid and
enforceable claims and are not subject to any defense, offsets, claims or
counterclaims. Sellers do not know of any reason why such accounts receivable
will not be collected on a timely basis. The allowances for doubtful accounts
reflected in the Balance Sheet are based upon historic collection activities of
the Corporation and generally accepted accounting principals consistently
applied.
2.6 ABSENCE OF SPECIFIED CHANGES. Since December 31, 1996, up to and
including the Closing Date, there has not been any:
2.6.1 Transaction by the Corporation except in the ordinary
course of business as conducted on that date;
2.6.2 Capital expenditure by the Corporation exceeding five
thousand dollars ($5,000.00);
2.6.3 Destruction, damage to, or loss of any asset of the
Corporation (whether or not recovered by insurance) that materially and
adversely affects the financial condition, business, or prospects of the
Corporation;
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2.6.4 Change in accounting methods or practices (including
without limitation, any changes in depreciation or amortization policies or
rates) by the Corporation;
2.6.5 Declaration, setting aside or payment of a dividend or
other distribution in respect to the capital stock of the corporation, or nay
direct or indirect redemption, purchase, or other acquisition by the Corporation
on any of its shares of capital stock;
2.6.6 Increase in salary or other compensation payable to the
Corporation to any of its officers, directors, or employees;
2.6.7 Sale or transfer of any asset of the Corporation, except
in the ordinary course of business;
2.6.8 Amendment or termination of any contract, agreement, or
license to which the Corporation is a party, except in the ordinary course of
business;
2.6.9 Except to an advance of $7,500 to Mr. Scott Ferguson,
Loan by the Corporation to any person or entity, or guaranty by the Corporation
of any loan;
2.6.10 Mortgage, pledge, or other encumbrance of any asset of
the corporation;
2.6.11 Waiver or release of any right or claim of the
Corporation, except in the ordinary course of business;
2.6.12 Notice or threat of commencement of any civil litigation
or any governmental proceeding against investigation of the corporation or its
affairs;
2.6.13 Labor trouble or claim of wrongful discharge;
2.6.14 Issuance or sale by the corporation of any shares of its
capital stock of any class, or of any other of its securities;
2.6.15 Agreement by the Corporation to do any of the things
described in the preceding clauses (2.5.1 through 2.5.14), except (i) a Stock
Purchase Agreement dated June 23, 1995 between the Sellers and CFM Financial
Group, Inc., and related documents, and (ii) a Stock Purchase Agreement dated as
of May 16, 1997, between Sellers and Westland Acquisition Company LLC, and
related documents as to each of which the respective obligations of purchase and
sale have terminated without fault or obligation of the Sellers or the
Corporation;
2.6.16 Other event or condition which has had a material
adverse effect on the financial condition, business, assets, or liabilities of
the Corporation.
2.7 ABSENCE OF UNDISCLOSED LIABILITIES. To the best of Seller's
knowledge, the Corporation has no debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or to
become due, that is not reflected or reserved against in the Corporation's
balance sheets as of December 31, 1996 (Schedule 2.4 to this Agreement), except
for (i) those that may have been incurred after the date of that consolidated
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balance sheet; and (ii) that are not required by generally accepted accounting
principles to be included in a balance sheet. All debts, liabilities, and
obligations incurred after that date were incurred in the ordinary course of
business and are usual and normal in amount both individually and in the
aggregate and the corporation is current on all obligations incurred in the
ordinary course of business.
2.8 TAX RETURNS AND AUDITS. the Corporation has (i) accurately
prepared and filed when due, with all appropriate governmental agencies, all tax
returns, estimates, reports and statements required to be filed by it, all of
which are true and correct, and (ii) paid, when due and payable as reflected by
such returns, estimates, reports and statements, all requisite income taxes,
sales, use, property and transfer taxes, levies, duties, licenses and
registration fees and charges of any nature whatsoever and worker's compensation
and unemployment taxes, including interest and penalties thereon. The
Corporation has withheld all tax required to be withheld under applicable tax
laws and regulations, and such withholdings have either been paid to the
respective governmental agencies or set aside in accounts for such purpose or
accrued, reserved against and entered upon in the books of the Corporation.
Except as set forth on Schedule 2.8, the Corporation has never had any tax
deficiency proposed or assessed against it and has not executed any waiver or
any statue of limitations on the assessment of collection of any tax.
2.9 REAL PROPERTY.
2.9.1 DESCRIPTION. Schedule 2.9.1A to this Agreement is a
complete and accurate legal description of the real property owned by the
Corporation. Schedule 2.91B contains a description of all buildings, fixtures,
and other improvements located on the properties, the current amount of the note
against the properties, and a list of policies of title insurance issued to the
Corporation for these properties.
2.9.2 ZONING. The real property is in compliance with all
applicable zoning ordinances and consummation of the transactions contemplated
herein will not result in the violation of any applicable zoning ordinance or
termination of any applicable zoning variance now existing. The zoning of the
real property described in Schedule 2.9.1A permits the presently existing
improvements and the continuation of the business presently being conducted on
such parcel. The Corporation has not commenced, nor have the Sellers received
notice of the commencement of, any preceding that would effect the present
zoning classification of any such parcel.
2.9.3 HAZARDOUS MATERIALS.
(a) The Corporation is and at all times has been in
compliance with all Environmental Laws (as defined below), which compliance
includes, without limitation, the possession by the Corporation of all permits
and other governmental authorizations required under applicable Environmental
Laws to operate a business as currently operated and the Corporation is and at
all times has been in compliance with the terms and conditions thereof. To the
best of the Sellers' knowledge, there are no (i) underground storage tanks
located on the real property described in Schedule 2.9.1A (the "Real Property")
in which any Hazardous Material, as defined below, has been or is being stored,
nor has there been any other storage of Hazardous
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Material on the Real Property or any spill, disposal, discharge, or release of
any Hazardous Material into, upon, from, or over the Real Property or into or
upon ground or surface water on the Real Property or any adjacent real property,
(ii) asbestos-containing materials incorporated into the buildings or interior
improvements that are part of that real property, or into other asset of the
Corporation, or (iii) electrical transformer, fluorescent light fixture with
ballasts, or other equipment containing PCVs on that real property.
(b) The Corporation has not received any written
communication, whether from a governmental authority, citizen's group, employee,
consultant or otherwise that alleges that the Real Property is not in full
compliance with the Environmental Laws (as defined below), and there is no
Environmental Claim (as defined below) pending or, to the best of Sellers'
knowledge, threatened against the Corporation.
(c) The following definitions apply for purposes of
this Section 2.9.3:
(i) "Environmental Claims" means any claim,
action, cause of action, investigation or notice by any person or entity
alleging potential liability (including without limitation potential liability
for investigatory costs, cleanup costs, governmental repose costs, natural
resources damages, property damages, personal injuries or penalties) arising out
of, based on or resulting from (A) the presence or release on or from the Real
Property of any Hazardous Material or (B) circumstances forming the basis of any
violation or alleged violation of any Environmental Laws.
(ii) "Environmental Laws" means federal,
state, regional, county or local environmental, health or safety laws,
regulations, ordinances, rules and policies and common law in effect on the date
of this Agreement and on the Closing Date relating to the use, refinement,
handling, treatment, removal, storage, production, manufacture, transportation
or disposal, emissions, discharges, releases or threatened releases of Hazardous
Material, or otherwise relating to protection of human health or the environment
(including without limitation ambient air, surface water, ground water, land
surface or subsurface strata).
(iii) "Hazardous Material" means any hazardous
or toxic substance, material, or waste, any asbestos containing materials and
substances and any substances defined or listed as "hazardous," toxic" or
similarly identified substance or pollutant in or pursuant to applicable
Environmental Law.
2.10 INVENTORY. The inventories of raw materials, work in process,
and finished goods (collectively called inventories) shown on the Financial
Statements consist of items of a quality and quantity usable ans salable in the
ordinary course of business by the Corporation. All items included in the
inventories are the property of the Corporation, except for sales made in the
ordinary course of business since the date of the balance sheet; for each of
these sales made in the ordinary course of business since the date of the
balance sheet; for each of these sales, either the purchaser has made full
payment or the purchaser's liability to make payment is reflected in the books
of the Corporation on consignment from others.
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2.11 TRADE NAMES, TRADEMARKS, AND COPYRIGHTS. Schedule 2.11 to this
Agreement is a schedule of all trade names, trademarks, service marks, and
copyrights and their registrations, owned by the Corporation or in which they
have any rights or licenses, together with a brief description of each. To the
best of Sellers' knowledge, there has been no infringement or alleged
infringement by others of any trade name, trademark, service mark, or copyright.
To the best of Sellers' knowledge, the Corporation has not infringed, and is not
now infringing, on any trade name, trademark, service mark, or copyright
belonging to any other person, firm, or corporation. Except as set forth in
Schedule 2.11, the Corporation is not a party to any license, agreement, or
arrangement, whether as licensor, licensee, franchisor, franchisee, or
otherwise, with respect to any trademarks, service marks, trade names, and
copyrights necessary for its business such as now conducted (including, without
limitation, those listed in Schedule 2.11), and such use does not, and will not,
conflict with, infringe on, or otherwise violate any rights of others. The
corporation has the right to sell or assign to Buyer all such trademarks, trade
names, service marks, and all such licenses and other rights and, upon Closing
under this Agreement, all such rights will remain with the Corporation.
2.12 TITLE TO ASSETS. Schedule 2.12 to this Agreement is a schedule
of all of the Corporation's assets and interest in assets, whether real,
personal, mixed, tangible, or intangible, which constitute all the assets and
interests in assets that are used in the business of the Corporation (the
"Assets"). The Corporation has good and marketable title to the Assets. All
the Assets are free and clear of restrictions on or conditions to transfer or
assignment, and free and clear of mortgages, liens, pledges, charges,
encumbrances, equities, claims, easements, rights of way, covenants, conditions,
or restrictions, except for (i) those disclosed in the Corporation's Financial
Statements attached to this Agreement, (ii) the lien of current taxes not yet
due and payable; and (iii) possible minor matters that, in the aggregate, are
not substantial in amount and do not materially detract from or interfere with
the present or intended use of any of these assets or materially impair business
operations. The Corporation is not in default or in arrears in any material
respect under any lease. All real property and tangible personal property of
the Corporation is in good operating condition and repair, ordinary wear and
tear excepted. To the best of Sellers' knowledge, no Seller, nor any officer,
director, or employee of the Corporation, nor any spouse, child, or other
relative of any of these persons, owns, or has any interest, directly or
indirectly, in any of the real or personal property owned by or leased to the
Corporation or any copyrights, patents, trademarks, trade names, or trade
secrets licensed by the Corporation.
3.13 INSURANCE POLICIES. Schedule 2.13 to this Agreement is a
description of all insurance policies under which the Corporation, its business,
employees and properties are insured. All these policies are in the respective
coverage amounts with the deductibles set forth in Schedule 2.13. The
Corporation has maintained and now maintains (i) insurance on all its assets and
businesses of a type and in amounts customarily insured, covering property
damage and loss of income by fire or other casualty, and (ii) insurance
protection against all liabilities, claims, and risks against which it is
customary to insure. Such coverage is not in default on any such policy and
Sellers have no reason to believe that any such policy would not be renewed if
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the Corporation desires to do so. To the knowledge of Sellers, no facts exist
which have been or should be reported under any professional liability insurance
policy covering the Corporation.
2.14 MATERIAL CONTRACTS. Attached hereto as Schedule 2.14 is a true
and complete list of all material contracts to which the Corporation is a party
or by which the Corporation or any of its property is bound. The Corporation is
not a party to, nor is the property of the Corporation bound by any
distributor's or manufacturer's representative or agency agreement; any output
or requirements agreement; any agreement not entered into in the ordinary course
of business; any indenture, mortgage, deed of trust, or lease; or any agreement
that is unusual in nature, duration, or amount (including, without limitation,
any agreement requiring the performance by the Corporation of any obligation for
a period of time extending beyond one year from Closing Date or calling for
consideration of more than Five Thousand Dollars ($5,000.00); except the
agreements listed in Schedule 2.14, copies of which have been furnished or made
available to Buyer. There is no default or event that, with notice or lapse of
time or both, would constitute a default by any party to any of these
agreements. The Corporation has not received notice that any party to any of
these agreements. The Corporation is not a party to , nor is the property of
the Corporation, bound by any agreement that is materially adverse to the
businesses, properties, or financial condition of the Corporation.
2.15 COMPLIANCE WITH LAWS.
2.15.1 To the best of Seller's knowledge, the Corporation has
complied with all requirements of the Occupational Safety and Health Act and its
California equivalents and regulations promulgated under any such legislation,
the consequences of a violation of which could have a material adverse effect on
their operations, and with all orders, judgments, and decrees of any tribunal
under such legislation that apply to their business or properties.
2.15.2 To the best of Sellers' knowledge, the Corporation has
complied with, and is not in violation of, any applicable federal, state, or
local statute, law, or regulation (including, without limitation, any applicable
building, zoning, environmental protection, or other law, ordinance, or
regulation) affecting its properties or the operation of its business.
2.15.3 The Corporation has not received notice of any violation
of any applicable federal, state, or local statute, law or regulation
(including, without limitation, any applicable building, zoning, environmental
protection, or other law, ordinance, or regulation) affecting their properties
or the operation of their business; and to the best of Sellers' knowledge, there
are no such violations.
2.16 LITIGATION. Except as set forth in Schedule 2.16, there is not
pending, or, to the best of Sellers' knowledge, threatened , any claim, suit,
action, arbitration, or legal, administrative, or other proceeding, or
governmental investigation against or affecting the Corporation, or any of its
business, assets, or financial condition. The Corporation is not in default
with respect to any order, writ, injunction, or decree of any federal, state,
local, or foreign court, department, agency, or instrumentality. Except as set
forth in Schedule 2.16, neither the
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Corporation nor Sellers are presently engaged in any legal action to recover
moneys due to any of them or damages sustained by any of them.
2.17 AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. The consummation
of the transactions contemplated by this Agreement will not result in or
constitute any of the following: (i) a breach of any term or provision of the
Agreement; (ii) a default or an event that, with notice or lapse of time or
both, would be a default, breach, or violation of the articles of incorporation
or bylaws of the Corporation or any lease, license, promissory note, conditional
sales contract, commitment, indenture, mortgage, deed of trust, or other
agreement, instrument, or arrangement to which the Corporation or any Seller is
a party or by which any of them or the property of any of them is bound; (iii)
an event that would permit any party to terminate any agreement or to accelerate
the maturity of any indebtedness or other obligation of the Corporation; or (iv)
the creation or imposition of any lien, charge, or encumbrance on any of the
Assets of the Corporation.
2.18 AUTHORITY AND CONSENTS. Sellers have the right, power, legal
capacity, and authority to enter into, and perform their respective obligations
under, this Agreement; and no approvals or consents of any persons other than
Sellers are necessary in connection with it. The execution and delivery of this
Agreement and consummation of the transactions provided for herein will not
require any governmental consent, review or other process, or the consent of any
party to any lease, contracted, agreement or instrument to which the Corporation
is a party or by which any of its assets is bound.
Sellers have notified the Buyer, and Buyer acknowledges receipt
of notice from the Sellers, of that certain Revision Agreement (Call Dates Added
Fixed Rate) by and among the Corporation and Bank of America National Trust an
Savings Association ("BofA") effective July 1, 1994 ("Revision Agreement") which
provides, in part, that is a beneficial interst in the owner of the porperty is
sold or transferred, note holder may, at its option, declare the entire unpaid
amounts under the Note immediately due and payable. Sellers have notified BofA
of the proposed sale and BofA has agreed in writing that it will not exercise
its right to accelerate the loan as a consequence of the sale.
2.19 CORPORATE DOCUMENTS. Sellers have caused the Corporation to
furnish to Buyer for its examination true and complete (i) copies of the
Articles of Incorporation and Bylaws of the Corporation; (ii) the minute books
of the Corporation containing all records required to be set forth of all
proceedings, consents, actions, and meeting of the shareholders and Board of
Directors of the Corporation; (iii) all permits, orders, and consents issued by
the California Commissioner of Corporations with respect to the Corporation, or
any security of either of them , and all applications for such permits, orders,
and consents; and (iv) the stock transfer books of the Corporation setting forth
all transfer books of the Corporation setting forth all transfers of any capital
stock.
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2.20 PERSONNEL.
2.20.1 IDENTIFICATION AND COMPENSATION. Schedule 2.20.1 is a
list of the names and addresses of all officers, directors and employees of the
Corporation, stating the rates of compensation payable to each.
2.20.2 EMPLOYMENT CONTRACTS AND BENEFITS. Schedule 2.20.2 to
this Agreement is a list of all emplyment contracts, and all pension, bonus,
profit-sharing, stock option, or other agreements or arrangements providing for
employee remuneration or benefits to which the Corporation is a party or by
which the Corporation is bound. True and complete copies of such contracts and
other agreements have been provided to Buyer. All these contracts and
arrangements are in full force and effect, and neither the Corporation nor, to
the best of Sellers' knowledge, any other party, is in default under them.
There have been no claims of defaults and, to the best of Sellers' knowledge,
there are no facts or conditions that is continued, or on notice, will result in
a default under these contracts or arrangements. There is no pending or, to the
best of Seller's knowledge, threatened labor dispute, strike, or work stoppage
affecting the Corporation's business. The Corporation has complied with all
applicable laws for each of its employee benefit plans, including the provisions
of the Employee Retirement Income Security Act (ERISA) if and to the extent
applicable, and has made all required filings and reports under such laws.
There are no threatened or pending claims by or on behalf of any such benefit
plan, by or on behalf of any employee covered under any such plan, or otherwise;
involving any such benefit plan, that allege a breach of fiduciary duties or
violation of other applicable state or federal law, nor is there, to the best of
Sellers' knowledge, any basis of such a claim. Except as set forth in Schedule
2.20.2, the Corporation has not entered into any severance or similar
arrangement in respect of any present or former employee that will result in any
obligation, absolute or contingent, or Buyer or the Corporation, to make any
payment to any present or former employee following termination of employment.
No employee of the Corporation has ever (i) petitioned for a representation
election; (ii) filed with any governmental authority any claim asserting sexual
harassment, age or racial discrimination or violation of OSHA by the
Corporation, any Seller or any officer, director, employee or agent of Seller.
2.21 SALES AND EMPLOYMENT TAXES. To the best of Seller's knowledge,
the Corporation has satisfied and paid all sales and use tax and employment
taxes due from the Corporation as a result of the Operation of the Corporation.
2.22 RELATIONS WITH VENDORS. To the best of Sellers' knowledge, no
vendor intends to alter the terms on which it does business with the
Corporation, cease doing business with the Corporation, or following the
consummation of the transactions contemplated by this Agreement, would not do
business with the Buyer on the same terms and conditions, including credit,
payment and allocation terms, as it currently does business with the
Corporation.
2.23 FULL DISCLOSURE. None of the representations and warranties made
by Sellers, or made in any certificate or memorandum furnished or to be
furnished by Sellers or on Sellers' behalf, contains or as of the Closing Date
will contain any untrue statement of material fact,
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necessary to make the statements made, in the light of the circumstances under
which they were made, not misleading.
2.24 LIMITATIONS ON REPRESENTATIONS. The representations and warranties
of Sellers shall be made severally by each Seller only as to that particular
Seller and the extent of liability for each particular Seller shall be limited
to the sales price of each Share, or one-half Share, of stock of the Corporation
sold by that particular Seller pursuant to the terms of this Agreement, I.E.,
$33,000.00 per Share or $16,500 per one-half Share.
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As used in this Agreement, "to the best of Sellers' knowledge" shall mean
all matters reflected in any document or files of the Corporation, any Seller or
any of their affiliates and the actual knowledge after due inquiry of the
officers and directors of Seller, including Don Francis, the President of
Seller.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer represents and warrants to Sellers that as of the Closing Date:
3.1 ORGANIZATION, STANDING AND CORPORATE AUTHORITY OF BUYER. Buyer is a
Delaware corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware, and will have at the Closing Date all
necessary power and authority to acquire the shares of stock of the Corporation.
The execution and delivery of this Agreement and the consummation by Buyer of
the transactions contemplated hereby have been duly authorized, and no further
authorization is necessary on the part of Buyer for such execution, delivery or
performance.
3.2 AUTHORITY OF BUYER. Buyer has the right, power, legal capacity and
authority to enter into, and perform the obligations under this Agreement, and
no approvals or consents of any federal, state or local authority or
administrative agency, are necessary to authorize the execution of this
Agreement Buyer or the consummation by Buyer of the transactions
contemplated hereby.
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ARTICLE 4
SELLERS' OBLIGATIONS BEFORE CLOSING
Sellers covenant that from the date of this agreement until the Closing:
4.1 CONDUCT OF BUSINESS IN NORMAL COURSE. The Corporation will carry on
its respective businesses and activities diligently and in substantially the
same manner as they previously have been carried out and shall not make or
institute any unusual or novel methods of manufacture, purchase, sale, lease,
management, accounting, or operation that vary materially from those methods
used by the Corporation as of the date of this Agreement.
4.2 PRESERVATION OF BUSINESS AND RELATIONSHIPS. The Corporation will use
its best efforts, to preserve its business organization intact, to keep
available to the Corporation its present officers and employees, and to
preserve its present relationships with suppliers, customers, and having
business relationships with them.
4.3 CORPORATE MATTERS. The Corporation will not (i) amend its Articles of
Incorporation or Bylaws; (ii) issue any shares of its capital stock; (iii) issue
or create any warrants, obligations subscriptions, options, convertible
securities, or other commitments under which any additional shares of its
capital stock of any class might be directly or indirectly authorized, issued,
or transferred from treasury; or (iv) agree to do any of the acts listed above.
4.4 MAINTENANCE OF INSURANCE. The Corporation will continue to carry its
existing insurance, subject to variations in amounts required by the ordinary
operations of its business. At the request of Buyer, and at Buyer's sole
expense, the amount of insurance against fire and other casualties that, at the
date of this Agreement, the Corporation carries on any of its properties or in
respect of its operations shall be increased by the amount or amounts Buyer
shall specify.
4.5 EMPLOYEES AND COMPENSATION. The Corporation will not do, or agree to
do, any of the following acts: (i) make any change in compensation payable or to
become payable by the Corporation, to any officer, employee, sales agent, or
representative; (ii) make any change in benefits payable to any officer,
employee, sales agent, or representative under any bonus or pension plan or
other contract or commitment; or (iii) modify any collective bargaining
agreement to which it is a party or by which it may be bound.
4.6 NEW TRANSACTIONS. The Corporation will not, without Buyer's written
consent, do or agree to do any of the following acts:
4.6.1 Enter into any contract, commitment, or transaction not in the
usual and ordinary course of its business; or
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4.6.2 Enter into any contract, commitment, or transaction or series
of transactions in the usual and ordinary course of business involving an amount
exceeding Five Thousand Dollars ($5,000.00), individually, or Twenty-Five
Thousand Dollars ($25,000.00) in the aggregate;
4.6.3 Make any capital expenditures in excess of Five Thousand
Dollars ($5,000.00) for any single item or Five Thousand Dollars ($5,000.00) in
the aggregate, or enter into any leases of capital equipment or property under
which the annual lease charge is in excess of Five Thousand Dollars ($5,000.00);
or
4.6.4 Sell of dispose of any capital assets with a net book value
exceeding Five Thousand Dollars ($5,000.00), individually, or Ten Thousand
Dollars ($10,000.00) in the aggregate.
4.7 DIVIDENDS, DISTRIBUTIONS, AND ACQUISITIONS OF STOCK. The Corporation
will not:
4.7.1 Declare, set aside, or pay any dividend or make any
distribution in respect of its capital stock;
4.7.2 Directly or indirectly purchase, redeem, or otherwise acquire
any shares of its capital stock; or
4.7.3 Enter into any agreement obligating it to do any of the
foregoing prohibited acts.
4.8 PAYMENT OF LIABILITIES AND WAIVER OF CLAIMS. The Corporation will
not do, or agree to do, any of the following acts: (i) pay any obligation or
liabilities, fixed or contingent, other than current liabilities; (ii) waive or
compromise any right or claim; or (iii) cancel, without full payment, any note,
loan, or other obligation owing to the Corporation.
4.9 EXISTING AGREEMENT. The Corporation will not modify, amend, cancel or
terminate any of its existing contracts, or agreements, or agree to do any of
those acts.
4.10 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. All representations
and warranties of Sellers set forth in this Agreement and in any written
statements delivered to Buyer by Sellers under this Agreement will also be true
and correct as of the Closing Date as if made on that date.
4.11 WAIVER OF FIRST RIGHT OF REFUSAL. Each Seller, by execution of the
Agreement, hereby waives any and all rights that the Seller may have for any
Right of First Refusal contained in Article IX of the Bylaws of the Corporation,
and agrees to allow all Sellers to enter into and perform their individual
obligations hereunder without reference to said Right of First Refusal.
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ARTICLE 5
CONDITIONS TO OBLIGATIONS OF BUYER
The obligation of Buyer to consummate the transactions set forth herein is
expressly subject to satisfaction of each and every of the following conditions,
any of which may be waived by Buyer:
5.1 REPRESENTATIONS AND WARRANTIES OF SELLERS. Except as otherwise
permitted by this Agreement, all representations and warranties of Sellers
contained in this Agreement shall be true and correct in all material respects
on the Closing Date with the same effect as though made at and as of such date.
5.2 NO MATERIAL CHANGE IN THE CORPORATION. There shall be no material
adverse change in the Corporation, its assets and liabilities, business,
operations, financial condition or prospects from the time of initial disclosure
of such information to the Buyer to the Closing.
5.3 COVENANTS OF THE SELLERS. The Sellers shall have performed or
satisfied all covenants and obligations required by this Agreement to be
performed or satisfied by the Sellers.
5.4 OPINION OF SELLERS' COUNSEL. Buyer shall receive from counsel for
Sellers' counsel's opinion dated the Closing Date of a form and substance
satisfactory to Buyer and its counsel that:
The Corporation is a corporation duly organized, validly existing, in
good standing under the laws of California, and has all necessary corporate
powers to own properties now and then operate its business now operating.
The authorized capital stock consists of 100 shares of common stock,
no par value, of which 36 shares and no more are issued and outstanding. All
outstanding shares are validly issued, fully paid, and non-assessable. There
are no outstanding subscriptions, options, rights, warrants, convertible
securities, or other agreements or commitments obligating the Corporation to
issue or transfer from its treasury any additional shares of its capital stock
of any class.
This Agreement has been duly and validly authorized and when executed
and delivered by Sellers, it will be valid and binding on each of them and
enforceable in accordance with its terms, except as limited by bankruptcy, and
insolvency laws, and by other laws affecting rights of creditors generally, and
by general principles of equity.
The execution and delivery of the Agreement, and the consummation of
the transactions contemplated herein, will not violate the terms of the Stock
Purchase Agreement, dated as of May 16, 1997, between Sellers and Westland
Acquisition Company, LLC, and the said Stock Purchase Agreement has been duly
terminated by the Sellers.
14
<PAGE>
Except as set forth in Schedule 2.16 to this Agreement, in reliance
upon the certificates of officers and counsel's files, and without any effort to
search court indices, such counsel does not know of any suit, action,
arbitration, legal, administrative, or other governmental investigation, pending
or threatened against or affecting the Corporation, or any of its businesses,
properties, or financial condition.
5.5 DELIVERY OF SHARE CERTIFICATES. The Sellers shall have delivered
stock certificates for all 36 Shares to the Corporation with such documents
executed by Sellers to transfer ownership of the shares to Buyer.
5.6 NO CASUALTY. Prior to the Closing Date, there shall not have occurred
any damage, destruction or loss (whether or not covered by insurance) materially
and adversely affecting the Assets, financial condition, the business operations
or prospects of the Seller.
5.7 DEEDS AND TITLE POLICIES. Buyer shall have received from the
Corporation the title insurance policy now in effect, insuring the fee simple
title of Seller to the real property of the Corporation described in Schedule
2.9.1A, subject only to (i) the lien, if any, of current real property taxes,
payment of which is not delinquent; (ii) liens and encumbrances, referred to in
the Financial Statements of the Corporation attached as part of Schedule 2.4;
and (iii) objections and exceptions noted in these title insurance policies that
have been approved in writing by Buyer.
5.8 EMPLOYMENT AGREEMENTS. The Buyer shall receive copies of executed
employment agreements between the Corporation and Donald Francis and Virginia
Gardner.
ARTICLE 6
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Sellers to consummate the transactions set forth herein
are expressly subject to satisfaction of each and every of the following
conditions, any of which may be waived by Sellers:
6.1 REPRESENTATIONS AND WARRANTIES OF BUYER. Except as otherwise
permitted by this Agreement, all representations and warranties of Buyer
contained in this Agreement shall be true and correct in all material respects
on the Closing Date with the same effect as if made at and as of such date.
6.2 COVENANTS OF THE BUYER. The Buyer shall have performed or satisfied
all covenants and obligations required by this Agreement to be performed or
satisfied by the Buyer.
6.3 OPINION OF BUYER'S COUNSEL. Seller shall receive from counsel for
Buyer counsel's opinion dated the Closing Date of a form of substance
satisfactory to Sellers and their counsel.
15
<PAGE>
Buyer is a Delaware corporation duly organized, validly existing, in good
standing under the laws of Delaware and California, and has all necessary powers
to perform its obligations under this Agreement and own the shares of stock to
be purchased under this Agreement.
The Agreement has been duly and validly authorized and when executed and
delivered by Buyer and will be valid and binding on Buyer and enforceable in
accordance with its terms, except as limited by bankruptcy and insolvency laws,
and by other laws affecting rights of creditors generally, and by general
principles of equity.
ARTICLE 7
CLOSING DATE AND CLOSING PROCEDURES
7.1 CLOSING. The closing of the transaction contemplated herein shall
take place 45 days after this Agreement is executed by Buyer (the "Closing" or
"Closing Date"), at a location mutually agreed upon by the parties, or such
other time and place as the parties may agree.
7.2 BUYER'S CLOSING OBLIGATIONS. On the Closing Date, Buyer shall:
7.2.1 Deliver to Arter & Hadden, as agent for the Sellers, by wire
transfer, the balance of the total Purchase Price.
7.2.2 Authorize Arter & Hadden to deliver the Per Share Purchase
Price to the Sellers.
7.2.3 Deliver any other documents, instruments, or agreements called
for hereunder which have not been delivered.
7.2.4 Deliver the opinion of counsel described in Section 6.3 above.
7.3 SELLER'S CLOSING OBLIGATIONS. On the Closing Date, Sellers shall:
7.3.1 Deliver stock certificates representing 36 shares of Westland
Associates, Inc. with attached Assignments, as required, executed in favor of
Buyer.
7.3.2 Deliver the Employment Agreement executed by Donald Francis.
7.3.3 Deliver the Employment Agreement executed by Virginia Gardner.
7.3.4 Deliver the opinion of counsel described in Section 5.4 above.
7.3.5 Deliver any other documents, instruments, records,
correspondence, or agreements called for hereunder which have not been
delivered.
7.3.6 Deliver the letter agreement of BoFA referred to in
Section 2.18 hereof.
16
<PAGE>
7.4 BROKERS AND FINDERS. Neither Buyer nor Sellers shall pay any
brokerage or other commission or fee in connection with the sale of the Shares
to Buyer. Buyer and Sellers hereby indemnify and hold each other free and
harmless from and against all costs and liabilities including, without
limitation, reasonable attorneys' fees and the costs and expenses of litigation,
for causes of action or proceedings which may be instituted by any broker, agent
or finder, licensed or otherwise, claiming through, under or by reason of the
conduct of Buyer or Sellers, respectively, in connection with this transaction.
The foregoing representation and indemnity shall survive the closing of this
transaction.
ARTICLE 8
SURVIVAL OF REPRESENTATIONS AND INDEMNIFICATION
8.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION. All
representations, warranties, covenants and indemnification provisions in this
Agreement or pursuant hereto shall be deemed and construed to be continuing
representations, warranties, covenants and indemnifications which shall survive
the Closing Date and the execution and delivery of all instruments and documents
herein provided for a period of three years.
8.2 INDEMNIFICATION BY SELLERS. Sellers agree to indemnify, defend, and
hold harmless Buyer against and in respect of any and all claims, demands,
losses, costs, expenses, obligations, liabilities, damages, recoveries, and
deficiencies, including interest, penalties, and reasonable attorney's fees,
that Buyer shall incur or suffer, that arise, result from, or relate to any
breach of, or failure by Sellers to perform, any of its representations,
warranties, covenants, or agreements in this agreement or in any schedule,
exhibit, or other instrument furnished or to be furnished by Sellers under this
agreement.
Buyer agrees that prior to settling any indemnified claim, Buyer will
(i) notify Sellers in writing of the nature of the claim, (ii) give Sellers an
opportunity to settle, defend, and/or otherwise dispose of the dispute, and
(iii) give Sellers reasonable access to any and all records and documents
necessary to the resolution of said dispute.
8.3 INDEMNIFICATION BY BUYER. Buyer agrees to indemnify, defend, and hold
harmless Sellers against and in respect of any and all claims, demands, losses,
costs, expenses, obligations, liabilities, damages, recoveries, and
deficiencies, including interest, penalties, and reasonable attorneys fees that
Sellers shall incur or suffer, that arise, result from, or relate to any breach
of, or failure by, Buyer to perform, any of its representations, warranties,
covenants, or agreements in this Agreement or in any schedule, exhibit, or other
instrument furnished or to be furnished by Buyer under this Agreement.
Sellers agree that prior to settling any indemnified claim, Sellers
will (i) notify Buyer in writing of the nature of the claim, (ii) give buyer an
opportunity to settle, defend, and/or otherwise dispose of the dispute, and
(iii) give Buyer reasonable access to any and all records and documents
necessary to the resolution of said dispute.
17
<PAGE>
ARTICLE 9
MISCELLANEOUS
9.1 TERMINATION. Any party may terminate this Agreement, without
liability to the other, if the transaction contemplated by this Agreement has
not been consummated as of the closing date set forth in Section 7.1 hereof.
However, none of the Sellers may terminate this Agreement as to the Shares
owned by them if the Buyer elects to close the transaction with respect to
less than all 36 Shares. In such event, the Total Purchase Price shall be
adjusted to reflect the actual number of Shares being purchased and sold.
Upon the lapse of the Closing Date described in Section 7.1 hereof, the
parties may, but shall have no obligation to, agree to an extension of the
Closing Date. Any party may also terminate this Agreement on the Closing
Date, without liability to the other, if any bona fide action or proceeding
shall be pending against any party on the Closing Date that could result in
an unfavorable judgment, decree or order that would prevent or make unlawful
the performance of this Agreement, or if any agency of any government shall
have objected at or before the Closing Date to this transaction or any other
action required by or in connection with this Agreement. In addition, if
either Buyer or Sellers, collectively, are in material default in the due and
timely performance of any of its or their warranties, covenants or agreements
under this Agreement, the non-defaulting party or parties may, on the Closing
Date, give notice of termination of this Agreement. The notice shall specify
the default or defaults on which the notice is based. Th termination shall
be effective three business days after the Closing Date, unless the specified
default or defaults have been cured on or before the effective date for
termination. Termination of this Agreement pursuant to this Section 9.1 will
be deemed to be an order from all parties to Arter & Hadden to immediately
release the funds held in its Trust Account, including accrued interest
thereon, from its client trust account to the Buyer.
9.2 NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally, given by prepaid
telegram or mailed first class, postage prepaid, registered or first class,
postage prepaid, registered or certified mail as follows:
If to Sellers: To the parties at the addresses set forth on
Schedule 9.2 hereof
with a copy to: Kenneth Murphy, Esq.
Arter & Hadden
700 South Flower Street, Suite 3000
Los Angeles, California 90017
If to Buyer: Westminster Capital, Inc.
9665 Wilshire Boulevard, Suite M-10
Beverly Hills, California 90212
Attention: Keenan Behrle
18
<PAGE>
with a copy to: Richman, Lawrence, Mann, Greene,
Chizever, Friedman & Phillips
9601 Wilshire Boulevard, Penthouse
Beverly Hills, California 90210
Attention: Bruce Greene, Esq.
Each of the foregoing shall be entitled to specify a different address by giving
notice of the aforesaid to the other.
9.2 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the subject matter hereof and
supersedes all prior or contemporaneous agreements, understandings, negotiations
and discussions, whether oral or written, of the parties in connection with the
subject matter hereof, except as specifically set forth herein and Buyer and
Sellers make no representations and warranties except as provided herein. No
supplements or modifications or waivers or terminations of this Agreement shall
be binding unless executed in writing by the parties to be bound thereby. No
waiver of any provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provision herein (whether or not similar, nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
9.3 INTERPRETATION. The parties hereto acknowledge and agree that each
has been given the opportunity to independently review this Agreement with
legal counsel, and/or has the requisite experience and sophistication to
understand, interpret, and agree to the particular language of the provisions
hereof. In the event of an ambiguity in or dispute regarding the
interpretation of same, the interpretation of this Agreement shall not be
resolved by any rule of interpretation providing for interpretation against
the party who causes the uncertainty to exist or against the draftsman.
9.4 AUTHORITY. The undersigned individuals and/or entities executing this
Agreement on behalf of their respective parties represent and warrant that said
individuals are authorized to enter into this Agreement on behalf of such
parties, the appropriate corporate or other resolutions have been passed and
obtained, and that this Agreement shall be binding on same.
9.5 SCHEDULES. The documents referred to hereinabove and Schedules
attached hereto are incorporated herein by reference as if set forth in full.
9.6 FURTHER ASSURANCES. Each party agrees to execute and deliver such
other documents and instruments and to take such further actions as may be
reasonably necessary to fully carry out the intent and purposes of this
Agreement.
9.7 HEADINGS. The headings contained in this Agreement have been inserted
for convenience of reference only and in no way define or limit the scope of
interpretation of this Agreement.
9.8 COUNTERPARTS; FACSIMILE EXECUTION. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one and the same Agreement. This
Agreement may be executed by
19
<PAGE>
facsimile, provided that each party so executing shall deliver manually executed
copies of the signature page to the other party as soon as practicable
thereafter.
9.9 ATTORNEYS' FEES. In the event either party hereto shall commence
legal proceedings against the other to enforce the terms hereof, or to
declare rights hereunder, as the result of a breach of any covenant or
condition of this Agreement, the prevailing party in any such proceeding
shall be entitled to recover from the losing party its costs of suit,
including reasonable attorneys' fees, as may be fixed by the Court.
9.10 GOVERNING LAW. This Agreement has been entered into and executed
in the State of California and shall be interpreted in accordance with the
laws of said State with regard to conflicts of law rules.
9.11 TIME. Time is of the essence of this Agreement.
9.12 AUTHORIZATION TO ARTER & HADDEN. By execution of this Agreement,
each of the Sellers hereby authorizes the law firm of Arter & Hadden to (i)
act as its agent for receipt of the sums described in Sections 1.1.1 and 7.2
of this Agreement, and (ii) remit to each Seller, NET OF COSTS OF SALE, the
Per Share Purchase Price.
9.13 RATIFICATION. Each Seller, by execution of this Agreement, hereby
ratifies the termination of the Stock Purchase Agreement between Sellers and
Westland Acquisition Company, LLC, dated as of May 16, 1997.
IN WITNESS WHEREOF, the parties have executed this Agreement in one or more
counterparts which, taken together, shall constitute one agreement.
"BUYER"
WESTMINSTER CAPITAL, INC.,
a Delaware corporation
By: /s/ Keenan Behrle
--------------------------------
Printed Name Keenan Behrle
--------------------
Title Exec. V.P.
---------------------------
20
<PAGE>
"SELLERS"
Walter R. Nordin, Successor Trustee of
John P. and Patricia Ann Bryant 1980 Trusts
-------------------------------
CAMERON W. LUTHER, Executor
C.H. Wilkins Estate
By /s/ Walter R. Nordin
-----------------------------------------
WALTER R. NORDIN, Successor Trustee -------------------------------
JOHN McCONICA
- ------------------------------------------- -------------------------------
LA RUE THOMAS CHARLES McCONICA
- ------------------------------------------- -------------------------------
JAMES CROOKER MARTIN JACOBS
- ------------------------------------------- -------------------------------
NICHOLAS H. SHAMMAS DONALD G. FRANCIS
- ------------------------------------------- -------------------------------
IRV WHITE ALAN RUEFF
- ------------------------------------------- -------------------------------
EMANUEL WILLIAMS PAMELA RUH
- ------------------------------------------- -------------------------------
MICHAEL READE WARREN BIGGS
John B. Allen and Carol H. Allen, Trustees, James E. Brown as Trustee of
the Allen Family Trust U/D/T 9/29/94, as the JEB-JHB Revocable Trust
the sole and separate property of John B. U/D/T 6/22/97
Allen
By By
----------------------------------------- -----------------------------
JOHN B. ALLEN, Trustee JAMES E. BROWN, Trustee
By
----------------------------------------- -----------------------------
CAROL H. ALLEN, Trustee R. PAUL ROBB
21
<PAGE>
/s/ James A. Willinham
- ------------------------------------------- -------------------------------
JAMES A. WILLINHAM RALPH THORSON
- ------------------------------------------- -------------------------------
RAY HOVEY D. WILLIAM BADER
Joseph P. Dallas, Successor Trustee of the -------------------------------
Jack P. Dallas Trust U/D/T 06/15/82 GUY SCHMIDT
By
----------------------------------------- -------------------------------
JOSEPH P. DALLAS, Trustee WARREN A. PERSON
- ------------------------------------------- WONDRIES LIVING TRUST
LEWIS SOKOLOW U/D/T 11/11/69
- -------------------------------------------
STEPHEN AUTH By
-----------------------------
ROBERT R. WONDRIES, Trustee
- -------------------------------------------
LOUIS H. FRAHM By
-----------------------------
MARILY G. WONDRIES, Trustee
- ------------------------------------------- LONGPRE FAMILY TRUST
JAMES B. FINNEY U/D/T 6/30/88
- ------------------------------------------- By
IRVEN G. REYNOLDS, JR. -----------------------------
ROBERT R. LONGPRE, Trustee
Kathleen Hoffman & Leo J. & Kathleen Gwynn G. Bacon and Virginia L.
Hoffman Trust Bacon as Co-Trustees of the
Gwynn G. & Virginia L. Bacon
Living Trust U/D/T 08/30/98
By
-----------------------------
By GWYNN G. BACON, Co-Trustee
-----------------------------------------
TOM L. HOFFMAN, Trustee
By
-----------------------------
VIRGINIA L. BACON, Co-Trustee
22
<PAGE>
DONALD E. WOOD FAMILY TRUST -------------------------------
U/D/T 7/28/87 MICHAEL A. PADILLA
-------------------------------
By /s/ Donald E. Wood TINA DIANE GRAY CLIPPINGER
-----------------------------------------
DONALD E. WOOD, Trustee
James Kresl, as Trustee of the James Kresl
Separate Property Living Trust U/D/T
8/16/91
By
-----------------------------------------
JAMES KRESL, Trustee
23
<PAGE>
CONVERTIBLE SECURED NOTE
PURCHASE AGREEMENT
BY AND AMONG
WESTMINSTER CAPITAL, INC.,
PHYSICIAN ADVANTAGE LLC,
MICHAEL H. BURNAM
AND
SHELDON A.E. ROSENTHAL
NOVEMBER 20, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1 PURCHASE OF THE NOTE. . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Purchase from Seller. . . . . . . . . . . . . . . . . . . . 2
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2 REPRESENTATIONS AND WARRANTIES OF INVESTOR. . . . . . . . . . . . 2
2.1 Due Incorporation or Formation; Authorization of
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 No Conflict . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Investigation . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3 REPRESENTATIONS AND WARRANTIES OF SELLER AND
THE PHYSICIANS. . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Due Authorization and Execution . . . . . . . . . . . . . . 4
3.2 Organization. . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Capital Stock; Units. . . . . . . . . . . . . . . . . . . . 5
3.4 Financial Statements. . . . . . . . . . . . . . . . . . . . 5
3.5 No Undisclosed Liabilities. . . . . . . . . . . . . . . . . 6
3.6 Absence of Certain Changes. . . . . . . . . . . . . . . . . 6
3.7 Contracts and Commitments . . . . . . . . . . . . . . . . . 6
3.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.9 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 7
3.10 Consents; No Conflicts. . . . . . . . . . . . . . . . . . . 7
3.11 Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.12 Accounts Receivable . . . . . . . . . . . . . . . . . . . . 8
3.13 Compliance with Law . . . . . . . . . . . . . . . . . . . . 8
3.14 Operation of the Business; Title to Assets. . . . . . . . . 8
3.15 Seller's Units. . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Indemnification by Seller, Burnam and Rosenthal . . . . . . 9
4.2 Indemnification by Investor . . . . . . . . . . . . . . . .10
4.3 General Provisions. . . . . . . . . . . . . . . . . . . . .11
SECTION 5 CONDUCT OF BUSINESS
PENDING REPAYMENT OF NOTE . . . . . . . . . . . . . . . . . . . .12
5.1 Ordinary Course . . . . . . . . . . . . . . . . . . . . . .12
5.2 No Acquisitions . . . . . . . . . . . . . . . . . . . . . .12
5.3 No Dispositions . . . . . . . . . . . . . . . . . . . . . .12
i
<PAGE>
TABLE OF CONTENTS (Continued)
Page
----
5.4 Employees . . . . . . . . . . . . . . . . . . . . . . . . .12
5.5 Mortgages, Liens and Other Encumbrances . . . . . . . . . .12
5.6 Material Agreements . . . . . . . . . . . . . . . . . . . .12
5.7 Capital Expenditures. . . . . . . . . . . . . . . . . . . .12
5.8 Limitation on Restricted Payments . . . . . . . . . . . . .12
5.9 Limitation on Incurrence of Indebtedness. . . . . . . . . .13
5.10 Board of Directors. . . . . . . . . . . . . . . . . . . . .13
5.11 Physician Advantage LLC . . . . . . . . . . . . . . . . . .13
5.12 Maintenance of Property, Insurance. . . . . . . . . . . . .13
5.13 Corporate Franchise . . . . . . . . . . . . . . . . . . . .13
5.14 Compliance With Law . . . . . . . . . . . . . . . . . . . .13
5.15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.16 Transactions With Affiliates. . . . . . . . . . . . . . . .14
5.17 Restriction On Fundamental Changes. . . . . . . . . . . . .14
5.18 Agreements Affecting Units. . . . . . . . . . . . . . . . .14
SECTION 6 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . .14
6.1 Survival. . . . . . . . . . . . . . . . . . . . . . . . . .14
6.2 Successors and Assigns. . . . . . . . . . . . . . . . . . .14
6.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . .14
6.4 Counterparts. . . . . . . . . . . . . . . . . . . . . . . .15
6.5 Titles and Subtitles. . . . . . . . . . . . . . . . . . . .15
6.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . .15
6.7 Amendments and Waivers. . . . . . . . . . . . . . . . . . .16
6.8 Attorney's Fees . . . . . . . . . . . . . . . . . . . . . .16
6.9 Entire Agreement. . . . . . . . . . . . . . . . . . . . . .16
ii
<PAGE>
SCHEDULES
Schedule 3.4 - Financial Statements
Schedule 3.7 - Contracts and Commitments
Schedule 3.8 - Taxes
Schedule 3.10 - Consents, No Conflicts
Schedule 3.11 - Assets
EXHIBIT
Exhibit A - Convertible Secured Note
iii
<PAGE>
CONVERTIBLE SECURED NOTE PURCHASE AGREEMENT
This CONVERTIBLE SECURED NOTE PURCHASE AGREEMENT (this "Agreement") is
made and entered into this 20th day of November, 1997, by and among Physician
Advantage LLC, a Delaware limited liability company ("Seller"), Michael H.
Burnam ("Burnam") and Sheldon A.E. Rosenthal (Rosenthal, and collectively with
Burnam, the "Physicians") and Westminster Capital, Inc., a Delaware corporation
("Investor").
The parties hereby agree as follows:
SECTION 1
PURCHASE OF THE NOTE
1.1 PURCHASE FROM SELLER. Subject to the terms and conditions of
this Agreement, Investor agrees to purchase from Seller, and Seller agrees to
sell to Investor, that certain Convertible Secured Note of Seller (the "Note")
attached as EXHIBIT A hereto.
1.2 CLOSING. The purchase and sale of the Note (the "Closing") shall
take place at the offices of Investor, Suite M-10, 9665 Wilshire Boulevard,
Beverly Hills, California on November 20, 1997. At the Closing,
(a) Seller shall deliver to Investor the Note (duly endorsed to
Investor), along with an addition to the Schedule of Loans attached thereto that
shows the First Loan; and
(b) Investor will make an initial Advance to Seller in the
amount of $ 450,000 (the "Initial Advance").
SECTION 2
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor hereby represents and warrants to Seller that:
2.1 DUE INCORPORATION OR FORMATION; AUTHORIZATION OF AGREEMENT.
Investor is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to own, operate and lease the properties of its business and to
carry on its business as now conducted. Investor is duly licensed or qualified
to do business and is in good standing in each of the jurisdictions in
<PAGE>
which the failure to be so licensed or qualified would have a material adverse
effect on its ability to perform its obligations hereunder and under the Note.
Investor has the corporate power and authority necessary to execute and deliver
this Agreement and to perform its obligations hereunder, and the execution,
delivery and performance of this Agreement has been duly authorized by all
necessary corporate action. This Agreement has been duly and validly executed
and delivered by Investor, and constitutes the legal, valid, and binding
obligation of Investor, enforceable against it in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, moratorium,
reorganization and other similar laws of applicability relating to creditors
rights and general equity principles.
2.2 NO CONFLICT.
(a) Neither the execution, delivery and performance of this
Agreement nor the consummation by Investor of the transactions contemplated
hereby, will (y) violate any provision of the Certificate of Incorporation or
Bylaws of Investor; or (z) violate any judgment, order, decree, statute, law,
ordinance, rule of regulation applicable to Investor or its properties or
assets, other than such violations which individually or in the aggregate would
not have a material adverse effect on the ability of Investor to consummate the
transactions contemplated by this Agreement and under the Note.
(b) No authorization, consent or approval of, or filing with,
any public body or governmental authority is necessary for the consummation
by Investor of the transactions contemplated by this Agreement.
2.3 LITIGATION.
(a) There are no actions, suits, proceedings, or investigations
pending or, to the knowledge of Investor, threatened against or affecting
Investor or any of its properties, assets, or businesses in any court or before
or by any governmental department, board, agency, or instrumentality, domestic
or foreign, or any arbitrator which could, if adversely determined (or, in the
case of an investigation could lead to any action, suit, or proceeding, which if
adversely determined could) reasonably be expected to materially impair
Investor's ability to perform its obligations under this Agreement; and Investor
has not received any currently effective notice of any default, and Investor is
not in default, under any applicable order, writ, injunction, decree, permit,
determination, or award of any court, any governmental department, board,
agency, or instrumentality, domestic or foreign, or any arbitrator which could
reasonably be expected to materially impair Investor's ability to perform its
obligations under this Agreement.
2.4 INVESTIGATION. Investor is acquiring the Note based upon its own
investigation, and the exercise by Investor of its rights and the performance of
its obligations under this Agreement will be based upon its own investigation,
analysis and expertise, except with respect to the information contained in
SECTION 2 and SECTION 3 hereof. Investor's
3.
<PAGE>
acquisition of the Note is being made or was made for its own account for
investment, and not with a view to the sale of distribution thereof. Investor
is a sophisticated investor possessing an expertise in analyzing the benefits
and risks associated with acquiring investments that are similar to the
acquisition of the Note
SECTION 3
REPRESENTATIONS AND WARRANTIES OF SELLER AND THE PHYSICIANS
Seller and each of the Physicians hereby represents and warrants to
Investor, jointly and severally, as follows:
3.1 DUE AUTHORIZATION AND EXECUTION. Seller has the power and
authority necessary to execute and deliver this Agreement and the Note and to
perform its obligations hereunder and thereunder. Seller has undertaken all
actions necessary to authorize this Agreement and the Note and the performance
of its obligations hereunder and thereunder. This Agreement and the Note have
been duly and validly executed and delivered by Seller, and constitute the
legal, valid and binding obligations of Seller, enforceable against it in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, moratorium, reorganization and other similar laws of applicability
relating to creditors rights and to general equity principles.
3.2 ORGANIZATION. Seller is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite power and authority to own, operate and lease the
properties of its business and to carry on its business as now conducted.
Seller is duly licensed or qualified to do business and is in good standing in
each of the jurisdictions in which the failure to be so licensed or qualified
would have a material adverse effect, individually or in the aggregate, on the
condition (financial or otherwise), results of operations, prospects,
properties, assets or business of Seller (a "Material Adverse Effect"). True
and complete copies of the Certificate of Formation and Operating Agreement of
Seller have been delivered to Investor. Such Certificate of Formation and
Operating Agreement are in full force and effect. Seller is not in violation
of any provision of its Certificate of Formation and Operating Agreement. Other
than Access Managed Care, Inc. ("AMC") there are no subsidiaries, direct or
indirect, of Seller. AMC is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has all requisite
corporate power and authority to own, operate and lease the properties of its
business and to carry on it business as now conducted. AMC is duly licensed or
qualified to do business and is in good standing in each of the jurisdictions in
which the failure to be so licensed or qualified would have Material Adverse
Effect, individually or in the aggregate, on the condition (financial or
otherwise), results of operations, prospects, properties, assets or business of
AMC. True and complete copies of the Certificate of Incorporation and the
Bylaws of AMC have been delivered to Investor. Such
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Certificate of Incorporation and Bylaws are in full force and effect. AMC is
not in violation of any provision of its Certificate of Incorporation or Bylaws.
There are no subsidiaries, direct or indirect, of AMC.
3.3 CAPITAL STOCK; UNITS.
(a) The authorized Units (as defined in the Operating
Agreement) of Seller consists in its entirety of one-thousand one hundred
eleven (1,111) Units, of which, as of the date hereof, four hundred fifty
(450) are issued and outstanding and none are held in Seller's treasury.
Seller's outstanding Units were duly authorized and validly issued and are
fully paid and non-assessable. Seller's Units were issued in compliance with
all applicable federal and state securities laws and none of Seller's
outstanding Units were issued in violation of the preemptive or other similar
rights of any securityholder of Seller. There is not outstanding any
subscription, option, warrant, call, right or other agreement or commitment
obligating Seller to issue, sell, deliver or transfer (including any right of
conversion or exchange under any outstanding security or other instrument)
any interest of Seller to any party.
(b) The authorized capital stock of AMC consists in its entirety
of 1,000,000 shares of Common Stock, $.001 par value per share, of which, as of
the date hereof, 10,000 are issued and outstanding and 990,000 are held in AMC's
treasury. The shares of AMC Stock contributed by Burnam and Rosenthal to Seller
were duly authorized and validly issued and are fully paid and non-assessable.
The AMC stock contributed by Burnam and Rosenthal to Seller constitutes all of
the issued and outstanding capital stock of AMC. The AMC stock was issued in
compliance with all applicable federal and state securities laws and none of the
outstanding shares of AMC stock was issued in violation of the preemptive or
other similar rights of any securityholder of AMC. The stock powers or other
instruments of transfer and conveyance executed and delivered by Rosenthal and
Burnam to Seller were valid and binding obligations of Burnam and Rosenthal,
enforceable in accordance with their terms, and effectively vest in Seller good
and marketable title to all of the AMC stock, free and clear of any and all
claims, liens, pledges, options, charges, security interests, restrictions,
encumbrances or other rights of third parties of any kind or nature whatsoever.
There is not outstanding any subscription, option, warrant, call, right or other
agreement or commitment obligating AMC to issue, sell, deliver or transfer
(including any right of conversion or exchange under any outstanding security or
other instrument) any interest of AMC to any party.
3.4 FINANCIAL STATEMENTS. The balance sheet of Seller as of October
31, 1997 (the "Balance Sheet Date"), and the related statement of income for the
ten (10) month period ended October 31, 1997, correct and complete copies of all
of which are attached hereto as SCHEDULE 3.4 present fairly, in all material
respects, the financial position and results of operations of Seller (including
AMC) as of the date and for the periods indicated, and have
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been prepared in accordance with generally accepted accounting principles
consistently applied.
3.5 NO UNDISCLOSED LIABILITIES. Since the Balance Sheet Date, Seller
has not assumed or incurred any liabilities or obligations except liabilities or
obligations assumed or incurred in the ordinary course of business.
3.6 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date,
there has not occurred: (i) any material adverse change in the condition
(financial or otherwise), results of operations, properties, assets or
business of Seller; (ii) any damage, destruction or loss, which is not
adequately covered by insurance, which could have a Material Adverse Effect;
(iii) any increase in compensation payable or to become payable by Burnam or
Rosenthal to the employees of Seller, other than increases made in the
ordinary course of business; (iv) any sale or other disposition of any assets
of Seller, other than sales or dispositions made in the ordinary course of
business; (v) any creation of a pledge, security interest, encumbrance, lien
or charge of any kind upon any properties or assets of Seller, except in the
ordinary course of business; (vi) any material change in the method of
allocation of expenses, liabilities or income between Seller and Burnam or
Rosenthal or any other material change in the method of accounting or
accounting practice; (vii) any material write-offs or write-downs of accounts
receivable of Seller other than in the ordinary course of business; (viii)
any discharge or payment of any material obligation or liability of Seller
other than in the ordinary course of business; (ix) any material borrowings
of Seller; (x) any capital expenditures or commitments for which Seller is
liable for any addition to property, plant or equipment exceeding $5,000;
(xi) any material cancellation or waiver of any debts or any claims of Seller
except in the ordinary course of business; (xii) any material increase in
accounts payable of Seller; or (xiii) any agreement to take any action
described in this SECTION 3.6.
3.7 CONTRACTS AND COMMITMENTS. SCHEDULE 3.7 hereto sets forth all
material contracts, commitments, leases, permits and other instruments binding
upon Seller, Burnam, Rosenthal or AMC or that otherwise relate to Seller
(including without limitation AMC's contracts with Tenet, NHMA and PHCA), other
than purchase and sales orders entered into in the ordinary course of business.
For purposes of this SECTION 3.7, "material" shall mean any contract, agreement,
commitment, arrangement or understanding involving payment or receipt by Seller,
Burnam, Rosenthal or AMC of an amount greater than or equal to $5,000 or having
a duration or more than one (1) year, or otherwise material to Seller. Prior to
the date of this Agreement Seller delivered to Investor true and complete copies
of all items listed in SCHEDULE 3.7 hereto. Except as disclosed in SCHEDULE 3.7
hereto, all such contracts, commitments, leases, permits and instruments are in
full force and effect and, to the best of Seller's knowledge, are valid, binding
and enforceable in all material respects in accordance with their respective
provisions, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights and to general equity principles, and neither
Seller, Burnam, Rosenthal or AMC, nor to the best of Seller's knowledge, any
other party, is in default, nor has there
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occurred an event or condition which, with the passage of time or giving of
notice (or both), would constitute a default with respect to the payment or
performance of any obligation thereunder, and no claim of such a default has
been asserted and there is no reasonable basis upon which such a claim could
validly be made.
3.8 TAXES. Except as set forth on SCHEDULE 3.8 hereto, Burnam and
Rosenthal have filed when due all federal, state, local and foreign tax returns
required by applicable law to be filed with respect to the operations and assets
of Seller and AMC, and have paid all amounts set forth thereon; there is no
action, suit, proceeding, investigation, audit or claim now pending against, or
with respect to Seller or AMC, in respect of any tax of assessment, nor is any
claim for additional tax or assessment asserted or, to Burnam's or Rosenthal's
knowledge, threatened by any such authority; and all tax liabilities with
respect to Seller and AMC (including, without limitation, federal, state, local,
foreign, and other income, franchise, capital stock, employee's income
withholding, foreign pension withholding, social security, unemployment,
disability, payroll, real property, personal property, sales, use, transfer, or
other tax, plus any interest, penalties or other charges in respect of the
foregoing) have been or will be paid for all periods up to and including the
Balance Sheet Date.
3.9 LITIGATION. There is no action, suit, proceeding or
investigation pending or, to Seller's knowledge, threatened against any of
Burnam, Rosenthal, the Business or AMC, at law or in equity, before any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality which would have a Material Adverse Effect or have a
material adverse effect on the ability of either Seller, Burnam or Rosenthal to
consummate the transactions contemplated by this Agreement; nor is there any
judgment, decree, injunction, rule or order of any public body or governmental
authority outstanding against Seller, Burnam, Rosenthal or AMC having any such
effect.
3.10 CONSENTS; NO CONFLICTS. Except as set forth on SCHEDULE 3.10
hereto,
(a) none of Seller, Burnam, Rosenthal or AMC is a party to or
bound by any mortgage, indenture, lien, deed of trust, lease, agreement, permit,
concession, franchise, license, instrument, order, judgment or decree which
would require the consent of another to the execution of this Agreement or the
transactions contemplated hereby;
(b) neither the execution, delivery and performance of this
Agreement nor the consummation by Seller, Burnam and Rosenthal of the
transactions contemplated hereby, will (w) violate any provision of the
Certificate of Formation or Operating Agreement of Seller, (x) violate any
provision of the Certificate of Incorporation or Bylaws of AMC, or (y) conflict
with, or result (immediately or upon the giving of notice or the passage of time
or both) in any violation of or default under, or give rise to a right of
modification, termination, cancellation or acceleration of any obligation or to
a loss of a benefit under, any mortgage, indenture, lease, instrument, permit,
concession, franchise,
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license or other agreement to which any of Seller, Burnam, Rosenthal, the
properties or assets of Seller or AMC are parties to, beneficiaries of, or bound
by, or violate any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Seller, Burnam, Rosenthal, AMC or the properties or
assets of the Seller other than such conflicts, violations, defaults,
modifications, terminations, cancellations, or accelerations which individually
or in the aggregate would not have a Material Adverse Effect or a material
adverse effect on the ability of either Burnam or Rosenthal to consummate the
transactions contemplated by this Agreement; and
(c) no authorization, consent or approval of, or filing with,
any public body or governmental authority is necessary for the consummation by
either Burnam or Rosenthal of the transactions contemplated by this Agreement.
3.11 ASSETS. The items listed on SCHEDULE 3.11 attached hereto
include all of the personal property (or interests therein), machinery, tools,
equipment, inventory and other property in which any of Seller, Burnam,
Rosenthal or AMC has any right, title and interest and which are used in the
conduct of the business by Seller, Burnam, Rosenthal and AMC.
3.12 ACCOUNTS RECEIVABLE. All of the accounts received of Seller
which are reflected on SCHEDULE 3.4 hereto and all of the accounts receivable of
Seller which have arisen since the Balance Sheet Date (except such accounts
receivable as have been collected since the Balance Sheet Date) are valid and
enforceable claims, and the goods and services sold and delivered which gave
rise to such accounts were sold and delivered in conformity in all material
respects with the applicable purchase orders, agreements and specifications, and
there are no rights of setoff or claims against such accounts receivable
possessed by the account debtors of Seller and AMC. The allowance for doubtful
accounts contained on SCHEDULE 3.4 hereto has been determined in accordance with
GAAP.
3.13 COMPLIANCE WITH LAW. Each of Seller, Burnam, Rosenthal and AMC
is in compliance in all material respects with all applicable federal, state,
local and foreign laws, statutes, licensing requirements, rules and regulations,
and judicial or administrative decisions applicable to Seller, Burnam, Rosenthal
and AMC. Except for any such licenses, permits, authorizations or approvals
which are not individually or in the aggregate material to the conduct of
Seller, Burnam and Rosenthal have been granted any and all licenses, permits
(temporary and otherwise), authorizations and approvals from federal, state,
local and foreign government regulatory bodies necessary to carry on the
business as currently conducted, all of which are valid and in full force and
effect. As of the date of this Agreement, there has been no order issued,
investigation or proceeding pending or, to the best knowledge of Seller,
threatened, or notice served with respect to, any violation of any law,
ordinance, order, writ, decree, rule or regulation issued by any federal, state,
local or foreign court or governmental agency or instrumentality applicable to
the Business of AMC.
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3.14 OPERATION OF THE BUSINESS; TITLE TO ASSETS. The assets and
agreements set forth on SCHEDULE 3.7 and SCHEDULE 3.11 hereto constitute all
that is required to operate the Business as presently conducted. Seller owns
and has good and marketable title to, or has valid leasehold interests as to,
all of the assets listed on SCHEDULE 3.11 attached hereto, (collectively, the
"Assets") and except for liens for the payment of state, local and foreign taxes
not yet due or payable, all such Assets are free and clear of any conditions or
restrictions on transfer or assignment and of any liens, pledges, charges,
encumbrances, claims, security interests, easements, covenants or restrictions
which could to any material extent interfere with the present use of such
properties or assets or impair the operations of Seller.
3.15 SELLER'S UNITS. The Units of Seller issuable upon the conversion
of the Note are duly authorized and, if issued upon conversion of the Note, will
be validly issued, fully paid and non-assessable, and not subject to any
preemptive rights.
SECTION 4
INDEMNIFICATION
4.1 INDEMNIFICATION BY SELLER, BURNAM AND ROSENTHAL.
(a) Each of Seller, Burnam and Rosenthal agree, jointly and
severally, and subject to the other terms and conditions of this Agreement, to
indemnify Investor against, and hold it harmless from, all liabilities, damages,
losses, taxes and costs, including without limitation attorneys' fees
("Indemnified Losses") incurred by it arising out of (i) the breach of any
representation or warranty of Seller, Burnam or Rosenthal herein and (ii) the
formation of Seller. Anything in SECTION 6.1 hereof to the contrary
notwithstanding, no claim may be asserted nor any action commenced against
Seller, Burnam or Rosenthal for breach of any representation or warranty
contained herein unless written notice of such claim or action is received by
Seller, Burnam or Rosenthal describing in detail the facts and circumstances
with respect to the subject matter of such claim or action on or prior to the
date on which the representation or warranty on which such claim or action is
based ceases to survive as set forth in SECTION 6.1 hereof, irrespective of
whether the subject matter of such claim or action shall have occurred before or
after such date.
(b) Investor agrees to give Seller, Burnam and Rosenthal
prompt written notice of any claim, assertion, event or proceeding by or in
respect of a third party of which it has knowledge concerning any Loss as to
which it may request indemnification hereunder. Seller, Burnam and Rosenthal
shall have the right to direct, through counsel of their own choosing, the
defense or settlement of any such claim or proceeding at their own expense,
which counsel shall be reasonably satisfactory to Investor. If Seller,
Burnam and Rosenthal elect to assume the defense of any such claim or
proceeding, Investor may participate in such defense, but in such case the
expenses of Investor shall be paid by Investor. Investor shall provide Burnam
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and Rosenthal with access to its records and personnel relating to any such
claim, assertion, event or proceeding during normal business hours and shall
otherwise cooperate with Burnam and Rosenthal in the defense or settlement
thereof, and Seller, Burnam and Rosenthal shall reimburse Investor for all
its reasonable out-of-pocket expenses in connection therewith. If Seller,
Burnam and Rosenthal elect to direct the defense of any such claim or
proceeding, Investor shall not pay, or permit to be paid, any part of any
claim or demand arising from such asserted liability unless Seller, Burnam
and Rosenthal consent in writing to such payment or unless Seller, Burnam and
Rosenthal, subject to the last sentence of the SECTION 4.1 (b), withdraw from
the defense of such asserted liability or unless a final judgment from which
no appeal may be taken by or on behalf of Seller, Burnam and Rosenthal is
entered against Investor for such liability. If Seller, Burnam and Rosenthal
shall fail to defend, or if after commencing or undertaking any such defense,
fail to prosecute or withdraw from such defense, or if (x) any claim seeks an
injunction, restraining order, declaratory relief or other non-monetary
relief and, if decided adversely, such claim would have a material adverse
effect on the financial condition, prospects, assets, liabilities,
operations, results of operations or business or Investor or (y) the named
parties to any such action or proceeding (including any impleaded parties)
include Investor and Seller, Burnam or Rosenthal and Investor shall have
been advised by counsel that there are one or more legal or equitable
defenses available to Investor which are different from or additional to
those available to Seller, Burnam or Rosenthal, then Investor shall have the
right to undertake the defense or settlement thereof, at Seller's, Burnam's
and Rosenthal's expense. If Investor assumes the defense of any such claim
or proceeding pursuant to this SECTION 4.1(b) and proposes to settle such
claim or proceeding prior to a final judgment thereon or to forego any appeal
with respect thereto, then Investor shall give Seller, Burnam and Rosenthal
prompt written notice thereof.
(c) Except as set forth in this Agreement, neither Seller,
Burnam nor Rosenthal are making any representation or warranty with respect to
the matters contained herein.
4.2 INDEMNIFICATION BY INVESTOR.
(a) Investor agrees, subject to the other terms and Conditions
of this Agreement to indemnify Seller against, and hold Seller harmless from,
all Indemnified Losses incurred by Seller arising out of the material breach of
any representation and warranty of Investor herein. Anything in SECTION 6.1
hereof to the contrary notwithstanding, no claim may be asserted nor may any
action be commenced against Investor for breach of any representation or
warranty contained herein unless written notice of such claim or action is
received by Investor describe in detail the facts and circumstances with respect
to the subject matter of such claim or action on or prior to the date on which
the representation or warranty on which such claim or action is based ceases to
survive as set forth in SECTION 6.1 hereof, irrespective of whether the subject
matter of such claim or action shall have occurred before or after such date.
(b) Seller Agrees to give Investor prompt written notice of any
claim, assertion, event or proceeding by or in respect of a third party of which
they have knowledge concerning Indemnified Losses as to which it may request
indemnification hereunder. Investor
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shall have the right to direct, through counsel of its own choosing, the
defense or settlement of any such claim or proceeding at its own expense,
which counsel shall be reasonably satisfactory to Seller. If Investor elects
to assume the defense of any such claim or proceeding, Seller may participate
in such defense, but in such case the expenses of Seller shall be paid by
Seller. Seller shall provide Investor with access to its records relating to
any such claim, assertion, event or proceeding during normal business hours
and shall otherwise cooperate with Investor in the defense or settlement
thereof and Investor shall reimburse Seller for all reasonable out-of-pocket
expenses in connection therewith. If Investor elects to direct the defense
of any such claim or proceeding, Seller shall not pay, or permit to be paid,
any part of any claim or demand arising from such asserted liability, unless
Investor consents in writing to such payment or unless Investor, subject to
the last sentence of the is SECTION 4.2(b), withdraws from the defense of
such asserted liability, or unless a final judgment from which no appeal may
be taken by or on behalf of Investor is entered against Seller for such
liability. If Investor shall fail to defend, or if, after commencing or
undertaking any such defense, Investor fails to prosecute or withdraws from
such defense or if (x) any claim seeks an injunction, restraining order,
declaratory relief or other non-monetary relief and, if decided adversely,
such claim would have a material adverse effect on the financial condition,
prospects, assets, liabilities, operations, results of operations or business
of Seller of (y) the named parties to any such action or proceeding
(including any impleaded parties) include Investor, Seller shall have been
advised by counsel that there are one or more legal or equitable defenses
available to Seller which are different from or additional to those available
to Investor, then Seller shall have the right to undertake the defense or
settlement thereof at Investor's expense. If Seller assumes the defense of
any such claim or proceeding pursuant to this SECTION 4.2(b) and propose to
settle such claim or proceeding prior to a final judgment thereon or to
forego appeal with respect to thereto, then Seller shall give Investor prompt
written notice thereof.
(c) Except as set forth in this Agreement, Investor is not
making any representation or warranty with respect to the matters contained
herein. Anything herein to the contrary notwithstanding, no breach of any
representation or warranty contained herein shall give rise to any right on the
part of Seller, after the Closing, to rescind this Agreement or any of the
transactions contemplated hereby.
4.3 GENERAL PROVISIONS. If the indemnifying party is controlling the
defense of a claim, the indemnifying party will not, without the prior written
consent of the indemnified party, enter into any settlement of such claim which
could reasonably be expected to lead to liability or create any financial or
other obligation on the part of the indemnified party. If the indemnified party
is controlling the defense of a claim, the indemnified party will not enter into
any settlement of such claim without the consent of the indemnifying party,
which consent shall not be unreasonably withheld. The controlling party shall
deliver, or cause to be delivered, to the other party copies of all
correspondence, pleadings, motions, briefs, appeals or other written statements
relating to or submitted in connection with the defense of any such claim and
timely notices of, and the right to participate in (as observer), any hearing or
other court proceeding relating to such claim.
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SECTION 5
CONDUCT OF BUSINESS
PENDING REPAYMENT OF NOTE
From the date of this Agreement and so long as any principal, interest
or other amounts remain outstanding under the Note, the Seller, Burnam,
Rosenthal and Investor covenant that, except as otherwise consented to in
writing by Investor in its sole discretion, they shall either satisfy or cause
to be satisfied the following:
5.1 ORDINARY COURSE. Seller shall carry on its business in
accordance with that certain Business Plan dated as of July 7, 1997, as amended
October 8, 1997, previously approved by Investor.
5.2 NO ACQUISITIONS. Seller shall not acquire or agree to acquire
assets of any business or acquire or agree to acquire any corporation,
partnership, association or other business organization or division thereof,
except in the ordinary course of business.
5.3 NO DISPOSITIONS. Seller shall not sell, lease or otherwise
dispose of any assets of its business.
5.4 EMPLOYEES. Seller shall not grant any material increase in the
Compensation payable to any of its employees except for increases made in the
ordinary course of business.
5.5 MORTGAGES, LIENS AND OTHER ENCUMBRANCES. Seller shall not
create, assume of incur any mortgage, lien, pledge or other encumbrance of any
kind in respect of any of its properties other than immaterial mortgages, liens,
pledges or other encumbrances incurred in the ordinary course of business.
5.6 MATERIAL AGREEMENTS. Seller shall not enter into any lease
property for equipment or any agreement that is material to its business, except
in the ordinary course of business.
5.7 CAPITAL EXPENDITURES. Seller shall not make or commit to any
capital expenditures or commitments exceeding $5,000 in the aggregate.
5.8 LIMITATION ON RESTRICTED PAYMENTS. Seller shall not, directly or
indirectly, (i) declare or pay any dividend, or make any distribution on account
of Seller's capital stock or Units (or on the capital stock or Units of any
subsidiary thereof); (ii) purchase, redeem or otherwise acquire or retire for
value any capital stock of Seller or any subsidiary or other affiliate thereof;
or (iii) purchase, redeem or otherwise acquire or retire for value prior
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to maturity Indebtedness that is subordinated to the Note (other than those two
prior loans from the Physicians to Seller in the aggregate principal amount of
$70,000 (the "Physician Loans") or those prior loans from Tokai Bank to Seller
in the aggregate principal amount of approximately $70,000 (the "Tokai Loans")).
5.9 LIMITATION ON INCURRENCE OF INDEBTEDNESS. Seller shall not,
directly or indirectly, create, incur, assume or suffer to exist any
Indebtedness. For purposes of this Agreement, "Indebtedness" means, (i) all
indebtedness for borrowed money or for the deferred purchase price of property
or services, excluding any trade payables and other accrued current liabilities
in the ordinary course of business, but including, without limitation, all
obligations, contingent or otherwise, in connection with any letters of credit
issued under letter of credit facilities, acceptance facilities or other
similar facilities, (ii) all obligations evidenced by bonds, notes, debentures
or other similar instruments, (iii) all indebtedness created or arising under
any conditional sale or other title retention agreement with respect to property
acquired, but excluding trade payables arising in the ordinary course of
business; provided, that the term "Indebtedness" shall not include the Note, the
Physician Loans or the Tokai Loans.
5.10 BOARD OF DIRECTORS Seller shall cause two seats on Seller's
Board of Directors (including the position of chairman) to be filled at all
times by individuals nominated by Investor.
5.11 PHYSICIAN ADVANTAGE LLC. Neither Seller, Burnam nor Rosenthal
shall cause the Certificate of Formation or Operating Agreement of Physician
Advantage LLC to be amended in any way without the prior written consent of
Investor.
5.12 MAINTENANCE OF PROPERTY, INSURANCE. Seller shall (i keep all
property useful and necessary in its business in good working order and
condition, (ii) maintain with financially sound and reputable insurance
companies insurance on all its property and (iii) furnish to Investor, upon
written request, full information as to the insurance carried.
5.13 CORPORATE FRANCHISE. Seller shall do or cause to be done all
things necessary to preserve and keep in full force and effect the existence and
the material rights, franchises, licenses and patents of Seller.
5.14 COMPLIANCE WITH LAW. Seller shall comply with all applicable
statutes, regulations and orders of, and all applicable restrictions imposed by,
all governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards and
controls).
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5.15 TAXES. Seller shall pay when due all taxes, except as contested
in good faith and by appropriate proceedings if adequate reserves (in the good
faith judgment of the management of Seller) have been established with respect
thereto.
5.16 TRANSACTIONS WITH AFFILIATES. Seller shall not enter into any
transaction with any affiliate on terms that are less favorable to Seller than
those that might be obtained in an arm's length transaction at the time from a
person who is not an affiliate (except for with respect to transactions with
Investor or its affiliates).
5.17 RESTRICTION ON FUNDAMENTAL CHANGES. Seller shall not (i) enter
into any merger or consolidation, (ii) liquidate, wind-up or dissolve, (iii)
convey, lease, sell, transfer or otherwise dispose of, in one transaction or a
series of transactions, all or substantially all of Seller's business or assets,
(iv) change its capital or legal structure or (v) issue, or reserve for
issuance, pursuant to an employee equity incentive plan Units of Seller not
presently provided for in Seller's Operating Agreement. Seller shall not issue
any Units or other equity securities of Seller for cash (except with regard to
transactions with Investor or its affiliates).
5.18 AGREEMENTS AFFECTING UNITS. Neither Seller, Burnam nor Rosenthal
shall enter into voting agreements, voting trusts, irrevocable proxies or other
agreements affecting the voting rights of Units of Seller or any agreements to
which Seller, Burnam or Rosenthal is a party or by which it is bound providing
for any call or put option, right of first refusal or offer or other rights to
acquire or dispose of any Units of Seller or any convertible securities or
option rights.
SECTION 6
MISCELLANEOUS
6.1 SURVIVAL. Subject to the limitations and other provisions of
this Agreement, the representations and warranties of the parties hereto
contained herein shall survive the execution of this Agreement (the "Closing"),
regardless of any investigation made by on behalf of any Member, for a period of
three (3) years after the Closing; provided, however, that the representations
and warranties set forth in SECTION 3.8 hereof shall survive the Closing until
the applicable period under the statute of limitations (and any extension
thereof), if any, therefore has expired, and the representations and warranties
set forth in SECTION 3.14 hereof shall be unlimited as to duration.
6.2 SUCCESSORS AND ASSIGNS. The Terms and conditions of this
Agreement shall insure to the benefit of and be binding upon the respective
successors and assigns of the parties.
14.
<PAGE>
6.3 GOVERNING LAW. This Agreement shall be interpreted and enforced
in accordance with, and its validity and performance shall be governed by, the
laws of the State of California, without reference to conflicts of laws
principles thereof.
6.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
6.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience of reference only and are not be considered
in construing or interpreting this Agreement.
6.6 NOTICES. Except as otherwise provided herein, all notices,
requests, demands and other communications under this Agreement shall be in
writing, and if by telegram or telecopy, shall be deemed to have been validly
served, given or delivered when sent, or if by personal delivery or messenger or
courier service, shall be deemed to have been validly served, given or delivered
upon actual delivery (but in no event may notice be given by deposit in the
United States mail), at the following addresses, telephone and facsimile numbers
(or such other address(es), telephone and facsimile numbers a party may
designate for itself by like notice):
If to Investor: Westminster Capital, Inc.
Suite M-10
9665 Wilshire Boulevard
Beverly Hills, California 90212
Attention: Keenan Behrle
Telephone: (310) 278-1930
Fax: (310) 271-6274
With a copy to: Riordan & McKinzie
29th Floor
300 South Grand Avenue
Los Angeles, California 90071
Attention: Ronn S. Davids
Telephone: (213) 229-8562
Fax: (213) 229-8550
15.
<PAGE>
If to Seller: Physician Advantage LLC
Suite 711
16133 Ventura Boulevard
Encino, California 91436
Attention: Michael H. Burnam
Sheldon A.E. Rosenthal
Telephone: (818) 906-7999
Fax: (818) 906-3098
With a copy to: Phillips, Nizer, Benjamin, Krim and Ballon
LLP
666 5th Avenue
New York, New York 10103
Attention: Stephen M. Nagler
Telephone: (212) 841-0529
Fax: (212) 262-5152
6.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived only
with the written consent of the party against which such amendment or waiver
is to be enforced.
6.8 ATTORNEYS' FEES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.9 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement among the parties pertaining to the
subject matter hereof and supersedes all prior agreements and understandings of
the parties in connection herewith, including, without limitation, that certain
letter from Investor to Dr. Michael H. Burnam and Dr. Sheldon A.E. Rosenthal,
dated May 6, 1997.
16.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INVESTOR:
WESTMINSTER CAPITAL, INC.,
a Delaware corporation
By: /s/ Keenan Behrle
-------------------------------
Name: Keenan Behrle
----------------------
Title: E.V.P.
----------------------
SELLER:
PHYSICIAN ADVANTAGE LLC,
a Delaware limited liability company
By: /s/ Michael H. Burnam
-------------------------------
Name: Michael H. Burnam
----------------------
Title: CEO
----------------------
BURNAM:
/s/ Michael H. Burnam, M.D.
----------------------------------
Michael H. Burnam, M.D.
ROSENTHAL:
/s/ Sheldon A.E. Rosenthal M.D.
----------------------------------
Sheldon A.E. Rosenthal, M.D.
17.
<PAGE>
SCHEDULE 3.8
TAXES
No exceptions.
<PAGE>
SCHEDULE 3.10
CONSENTS, NO CONFLICTS
No exceptions.
<PAGE>
EXHIBIT A
CONVERTIBLE SECURED NOTE
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT IN COMPLIANCE WITH SUCH ACT
AND ALL APPLICABLE STATE SECURITIES LAWS.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURED NOTE
- --------------------------------------------------------------------------------
Up to $2,000,000.00 November 20, 1997
FOR VALUE RECEIVED, PHYSICIAN ADVANTAGE LLC, a Delaware limited liability
company (the "Company"), hereby promises to pay to the order of WESTMINSTER
CAPITAL, INC., a Delaware corporation ("WCI," and together with any assignee or
transferee of WCI, the "Holder"), the principal sum of TWO MILLION DOLLARS
($2,000,000.00), or such lesser amount of the outstanding unpaid principal
balance as shall have been borrowed from time to time (an "Advance") as
indicated on the Schedule of Loans ("Loan Schedule") attached hereto as SCHEDULE
1 and incorporated herein by reference, as such schedule may be amended from
time to time. This Convertible Secured Note (this "Note") has been issued
pursuant to the terms of that certain Convertible Secured Note Purchase
Agreement between the Company, the Physicians and the Holder dated as of
November 20, 1997 (the "Purchase Agreement") and is subject to and entitled to
the benefits of the Purchase Agreement. Capitalized terms used in this Note
which are not defined in this Note shall have the meanings given to such terms
in the Purchase Agreement.
1. INTEREST. Interest on Advances made under this Note shall accrue
at a floating rate equal to the Prime Rate plus one percent (1.0%) per annum,
compounded monthly, with respect to the principal amount of each Advance from
the date such Advance is made until the date such Advance is repaid or
converted into shares of the Company's Units as set forth herein and as
provided for in the Purchase Agreement. Subject to the provisions regarding
payment contained in SECTION 3 below, interest payments on an Advance shall
be required on a monthly basis commencing on the first year anniversary of
the relevant Advance.
2. BORROWINGS. Advances hereunder shall each be conditioned upon the
receipt by the Company of a written Notice of Borrowing in the form of EXHIBIT A
attached hereto. Such Advances must be for at least One Hundred Thousand
Dollars ($100,000) or such amount plus a whole multiple of Fifty Thousand
Dollars ($50,000) in excess thereof. The date and the amount of each Advance
shall be recorded on the Schedule of Loans. No amounts may be borrowed under
this Note after the Due Date. The maximum unpaid principal balance outstanding
at any time under this Note shall not exceed Two Million Dollars ($2,000,000).
Notwithstanding the foregoing, WCI's obligation to make Advances under this
Note shall terminate immediately as of any one of the dates set forth in the
chart below, unless as of such date the Company shall have (i) enrolled not less
than the number of physicians set forth next to such date, and (ii) shall have
produced net income before taxes for the three month period ending on such date
of not less than the amount set forth next to such date:
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NET INCOME
DATE PHYSICIANS BEFORE TAXES
--------------------- -------------- ---------------
<S> <C> <C>
March 31, 1998 4,880 $0
June 30, 1998 7,800 $125,000
September 30, 1998 10,800 $200,000
December 31, 1998 13,800 $300,000
March 31, 1999 17,800 $375,000
June 30, 1999 25,800 $450,000
September 30, 1999 29,800 $500,000
December 31, 1999 33,800 $500,000
March 31, 2000 37,800 $500,000
June 30, 2000 41,800 $500,000
September 30, 2000 50,800 $500,000
December 31, 2000 54,800 $500,000
</TABLE>
3. PAYMENT. The outstanding principal of and all accrued and unpaid
interest on all outstanding Advances shall be immediately due and payable on the
occurrence of an Acceleration Event. If no Acceleration Event has occurred
prior to the third anniversary of the issuance of this Note, then the
outstanding and unpaid principal of and all accrued and unpaid interest on all
outstanding Advances shall be payable in 24 equal monthly installments beginning
on the date of such third anniversary.
4. PREPAYMENT. The Company may prepay all or any portion of the
outstanding and unpaid principal balance of this Note at any time following
thirty days prior written notice to Holder, without premium or penalty;
provided, however, that Holder may, at its sole option at any time prior to the
expiration of such thirty day notice period and in lieu of such prepayment,
require the Company to convert this Note in accordance with the provisions of
SECTION 7; provided, further, that with any prepayment, the Company shall also
prepay all accrued but unpaid interest on the portion of the outstanding and
unpaid principal which is being prepaid. The date and the amount of each
payment of principal and accrued interest shall be recorded on the Schedule of
Loans.
5. MANNER OF PAYMENT. Payments of principal and interest by the Company
shall be made in lawful money of the United States of America (by wire transfer
in funds immediately available at the place of payment) to such account as
Holder may designate in writing to the Company and, if to WCI, to: Wells Fargo
Bank, California 90210, ABA No. 121000248; Account No. 0645025297 (or such
other place of payment that WCI may designate in writing to the Company). Any
payments due hereunder which are due on a day which is not a business day shall
be payable on the first succeeding business day and such extension of time shall
be included in the computation of interest due hereunder.
6. DEFINITIONS. As used in this Note, the following terms shall have the
meanings set forth below.
2
<PAGE>
6.1 The term "Acceleration Event" shall mean the first to occur of
the following:
(a) The consummation of the sale of additional debt or equity
financing by the Company;
(b) Any consolidation or merger of the Company with or into
any other corporation or other entity or person, or any other corporate
reorganization in which the Company shall not be the continuing or surviving
entity of such consolidation, merger or reorganization or any transaction or
series of related transactions by the Company in which in excess of 50% of
the Company's voting power is transferred (except for a conversion of this
Note pursuant to SECTION 7 hereof, provided that such conversion is not in
connection with a transfer by the Holder of all or substantially all of its
interests in the Company), or a sale of all or substantially all of the
assets of the Company; or
(c) The Company's dissolution or liquidation.
6.2 The term "Due Date" shall mean the earlier of an Acceleration
Event or the third anniversary of the issuance of this Note.
6.3 The term "Event of Default" shall mean any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) Default in the payment of any interest upon this Note as
and when the same shall become due and payable, and continuance of such
default for a period of five (5) business days;
(b) Default in the payment of the principal of this Note as and
when the same shall become due and payable at maturity, by declaration or
otherwise, and continuance of such default for a period of five (5) business
days;
(c) A material default or breach (after any applicable cure
period) in the Company's performance of any of its obligations under this Note
(other than as set forth in (a) or (b), above, and the continuance of such
default for a period of fifteen (15) business days following notification of
such default or breach by the Holder), the Purchase Agreement or the Pledge and
Security Agreement;
(d) A payment or other default by the Company under any
indebtedness in an aggregate principal amount in excess of $50,000, if such
default causes or results in the acceleration of the maturity of such
indebtedness or the failure to pay any such indebtedness as its final maturity,
and the continuance of such default for a period of five (5) business days;
(e) An involuntary case or other proceeding shall be
commenced against the Company seeking liquidation, reorganization or other
relief with respect to it or its debts under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or seeking the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Company or for any substantial part
of the property of the Company or the winding up or liquidation of the
affairs of the Company: and such case or proceeding shall remain unstayed and
undismissed for a period of sixty (60) days, or an order for relief shall be
entered against the Company under the Federal bankruptcy laws as now or
hereafter in effect;
3
<PAGE>
(f) The Company shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consent to the entry of an order for relief in an involuntary case
under any such law, or consent to the appointment or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of the Company or for any substantial part of the property of the
Company, or the Company shall make any general assignment for the benefit of
creditors; or shall fail generally to pay its debts as they become due, or shall
take any corporate action to authorize any of the foregoing; or
(g) Upon the death or Permanent Disability (within the meaning
of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended) or the
resignation or withdrawal from the Company of either of Michael H. Burnam or
Sheldon A.E. Rosenthal.
6.4 The term "Prime Rate" shall mean the interest rate that is quoted
as the "prime rate" by Wells Fargo Bank, as such interest rate shall change from
time to time.
7. CONVERSION.
(a) VOLUNTARY CONVERSION. At the option of the Holder, in the
event that, at any time, (i) the unpaid principal balance of and all accrued
and unpaid interest on all outstanding Advances made pursuant to this Note
equals or exceeds Two Hundred Seventy Thousand Dollars ($270,000.00) (the
"Unpaid Amount"), (ii) the Holder contributes the difference between Two
Hundred Seventy Thousand Dollars ($270,000) and the unpaid principal balance
of and all accrued and unpaid interest on all outstanding Advances to the
Company (collectively with the Unpaid Amount, the "Converted Amount"), or
(iii) an Acceleration Event or Event of Default has occurred, Holder shall
have the right, at its option, at any time thereafter, to convert the
Converted Amount into that number of Units of the Company that, when divided
by the total number of Units that are then outstanding (after giving effect
to the conversion of this Note, the conversion of any outstanding convertible
debt instruments, and the exercise of any outstanding options or warrants to
purchase Units), will equal fifty-five percent (55%), expressed as a decimal.
Units into which such amount is converted shall be credited as fully paid
and shall rank in PARI PASSU in all respects and form one class with all
other Units outstanding at the date of such conversion. For example, if, the
Company has outstanding 1,000,000 Units and no options, warrants or
convertible debt instruments, Holder may, at its option, convert this Note
into 1,222,222 Units.
(b) MECHANICS OF CONVERSION. Upon written notice of conversion of
the Note pursuant to an Election to Convert in the form of EXHIBIT B attached
hereto, the Company will, as soon as practicable thereafter, issue and deliver
to the Holder (i) a certificate for the number of Units to which the Holder
shall be entitled, and (ii) an amended and restated promissory note in
substantially the same form as this Note, but with the outstanding principal and
interest amounts included on the attached Schedule of Loans reduced by the
Converted Amount. In the case of exercise pursuant to SECTION 7 hereof, such
conversion shall be deemed to have occurred as of the close of business on the
date of the surrender of this Note as provided for above, the Holder shall be
treated as the record holder of the Units received upon conversion as of the
close of business on such date and the Holder shall promptly execute a signature
page to the Company's Operating Agreement whereby the Holder shall become a
Member of the Company (as defined in the Operating Agreement) as of the close of
business on such date. Notwithstanding anything contained in this Note to the
contrary, Holder may only exercise its right of conversion pursuant to this
SECTION 7 on one occasion.
(c) PAYMENT OF TAXES. The Company will pay all taxes that may be
payable in respect of the issue or delivery of Units upon conversion of this
Note; provided, that Holder shall pay any tax
4
<PAGE>
which may be payable in respect of any transfer involved in the issue and
delivery of Units in a name other than that in which this Note so converted was
registered.
8. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of any Event of
Default, the principal of and all accrued and unpaid interest on all Advances
made pursuant to this Note shall become immediately due and payable without any
declaration or other act on the part of the Holder and all without demand,
presentment, notice, or protest, all of which are hereby expressly waived, and
the Holder may exercise any right or power available to it under this Note, at
law or in equity, all of which rights and powers may be exercised cumulatively
and not alternatively. No delay or omission of the Holder of this Note to
exercise any right or power accruing upon any Event of Default occurring and
continuing shall impair any such right or power or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein, and every power
and remedy given by this Note or by law may be exercised from time to time, and
as often as shall be deemed expedient, by the Holder.
9. SECURITY. This Note is secured by a first priority security in all of
the assets of the Company (including the stock of AMC) and all of the Units of
the Company held by Michael H. Burnam and Sheldon A.E. Rosenthal pursuant to a
Pledge and Security Agreement of even date herewith among the Company, Drs.
Burnam and Rosenthal, and Holder.
10. NO SETOFFS; WAIVERS, ETC. The Company's obligations under this Note
shall be paid and performed by the Company without any defenses, claims,
setoffs, counterclaims, recoupments, reductions, limitations, impairments or
terminations which the Company may now have or hereafter has or could have
against Holder, and the Company hereby waives all of the same. The Company
hereby waives the benefit of all laws now or hereafter enacted affording any
right to any appraisement, any stay of execution or extension of time for
payment. Except as set forth herein, notice of demand, presentation for
payment, notice of non-payment or dishonor, protest and notice of protest and
notice of protest are hereby waived by the Company. The Company agrees that the
granting, without notice of any extensions or extensions of time for payment of
any sum or sums due hereunder, of for the performance of any covenant, condition
or agreement contained herein, or the granting of any other indulgences to the
Company, or any other modification or amendment of this Note, or the acceptance,
release or substitution by Holder of any security, shall in no way release or
discharge the liability of the Company.
11. HIGHEST RATE PERMITTED. Notwithstanding anything in this Note to the
contrary, no provision of this Note shall require the payment or permit the
collection of interest in excess of the highest rate permitted by applicable
law, and any portion of the interest otherwise payable under this Note which is
in excess of the highest rate permitted by applicable law shall be cancelled
automatically or (if heretofore paid) shall, at the option of the Company, be
either refunded to the Company or credited to the principal amount of this Note.
12. REMEDIES. The Company stipulates that the remedies at law of the
Holder in the event of any default by the Company in the performance of or
compliance with any of the terms of this Note are not and will not be adequate,
and that such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
13. COVENANT TO RESERVE SECURITIES. The Company shall at all times
reserve, for the purpose of issuance upon the conversion into Units, such number
of its duly authorized Units as shall from time to time be sufficient to comply
with the terms of this Note ("Reserved Units"), and if at any time the number of
authorized but unissued Units shall not be sufficient, the Company will take
such action as may
5
<PAGE>
in the opinion of its counsel be necessary to increase its authorized but
unissued Units to such number of Units as shall be sufficient for such purpose.
14. COVENANT TO TAKE ALL PROPER LEGAL STEPS FOR CONVERSION. The Company
represents and covenants that it will at all times promptly do any and all
lawful things necessary to permit the conversion into Units of the Converted
Amount as provided herein and, among other things, to that end will
expeditiously and by proper action take all steps necessary to have available to
meet full conversion a sufficient number of Units.
15. ASSIGNMENT. Subject to compliance with all applicable federal and
state securities laws, Holder may assign all or any portion of this Note at
any time or from time to time without the consent of the Company, provided
that the Holder may not assign its rights pursuant to SECTION 7 hereof other
than to a Permitted Transferee (as defined in the Operating Agreement). Each
assignment of this Note, whole or in part, shall be registered on the books
of the Company to be maintained for such purpose, upon surrender of this Note
at the Company's offices, together with appropriate instruments of
assignment, duly completed and executed. Upon such surrender and delivery,
the Company shall execute and deliver within three (3) business days a new
Note or Notes in the name of the assignee or assignees specified in such
assignment and in the denominations specified therein, and this Note shall
promptly be cancelled. In the event any portion of this Note is not being
assigned, the Company shall issue to Holder within three (3) business days a
new Note evidencing the portion not so assigned. In the event the Note
originally issued has been divided and is held at any time by more than one
(1) holder, any payments of principal and interest made pursuant to this Note
shall be made pro rata with respect to all outstanding Notes in accordance
with the respective principal amounts of such Notes.
16. MISCELLANEOUS.
(a) NOTICES. Except as otherwise provided herein, all notices,
requests, demands and other communications under this Note shall be in writing,
and if by telegram or telecopy, shall be deemed to have been validly served,
given or delivered when sent, or if by personal delivery or messenger or courier
service, shall be deemed to have been validly served, given or delivered upon
actual delivery (but in no event may notice be given by deposit in the United
States mail), at the following addresses, telephone and facsimile numbers (or
such other address(es), telephone and facsimile numbers a party may designate
for itself by like notice):
If to the Holder: Westminster Capital, Inc.
Suite M-10
9665 Wilshire Boulevard
Beverly Hills, California 90212
Attention: Keenan Behrle
Telephone: (310) 278-1930
Fax: (310) 271-6274
With a copy to: Riordan & McKinzie
29th Floor
300 South Grand Avenue
Los Angeles, California 90071
Attention: Ronn S. Davids
Telephone: (213) 229-8562
Fax: (213) 229-8550
6
<PAGE>
If to the Company: Physician Advantage LLC
Suite 711
16133 Ventura Boulevard
Encino, California 91436
Attention: Michael H. Burnam
Sheldon A.E. Rosenthal
Telephone: (818) 906-7999
Fax: (818) 906-3098
With a copy to: Phillips, Nizer, Benjamin, Krim and
Ballon LLP
666 5th Avenue
New York, New York 10103
Attention: Stephen M. Nagler
Telephone: (212) 841-0529
Fax: (212) 262-5152
(b) COSTS OF COLLECTION. If any default is made in the payment of
this Note, the Company shall pay the Holder all costs of collection, including,
without limitation, reasonable attorneys' fees. Additionally, if any party
undertakes legal action to enforce any of the terms of this Note, the
unsuccessful party to such action shall pay the successful party's expenses,
including reasonable attorneys' fees, incurred in such action.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California without giving effect to the
principles of conflict of laws.
(d) MODIFICATION. Neither this Note nor any provision hereof may be
amended unless in an instrument in writing signed by the Holder and the Company.
(e) SEVERABILITY. If any provision of this Note is held to be
invalid, illegal, or unenforceable, such invalidity, illegality, and/or
unenforceability shall not affect any other provision of this Note.
(f) REPLACEMENT OF NOTE. Upon receipt of evidence reasonably
satisfactory to the Company of the ownership and the loss, theft, destruction,
or mutilation of this Note, and (in the case of loss, theft, or destruction)
upon delivery of an indemnity agreement in an amount reasonably satisfactory to
the Company, or (in the case of mutilation) upon surrender and cancellation of
the mutilated Note, the Company shall execute and deliver within three (3)
business days, in lieu thereof, a new Note of like tenor.
(g) SUCCESSORS. Except as set forth to the contrary herein, all the
covenants, agreements, representations, and warranties contained in this Note
shall bind the parties hereto and their respective heirs, executors,
administrators, distributees, successors, and assignees.
7
<PAGE>
(h) HEADINGS. The section headings in this Note are inserted for
purposes of convenience only and shall have no substantive effect.
IN WITNESS WHEREOF, Physician Advantage LLC has executed this Note on
November 20, 1997.
PHYSICIAN ADVANTAGE LLC
By:
---------------------------
Michael H. Burnam
Chief Executive Officer
8
<PAGE>
SCHEDULE I
Schedule of Loans
<TABLE>
<CAPTION>
Amount of Outstanding
Amount of Loan Principal Paid Principal Balance
Date Made This Date This Date This Date Notation Made By
- --------------- ---------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
November 21, $ 450,000.00 0 $ 450,000.00 Keenan Behrle;
1997 Michael Burnam
</TABLE>
9
<PAGE>
EXHIBIT A
NOTICE OF BORROWING
Pursuant to that certain Convertible Secured Note (as amended from time to
time, the "Note") dated as of November 20, 1997, made by Physician Advantage LLC
(the "Company") in favor of Westminster Capital, Inc. ("Investor"), this
represents Company's request to borrow on November 20, 1997 from Investor the
amount of $_______ (the "Advance"). The proceeds of such Advance are to be
deposited in Company's account at the office of _______ located
at __________________.
The undersigned officer, on behalf of the Company, certifies that (i) the
representations and warranties of the Company contained in the Note and in that
certain Convertible Secured Note Purchase Agreement by and among Investor, the
Physicians and the Company dated as of November 20, 1997 (the "Note Purchase
Agreement") are true, correct and complete in all material respects on and as of
the date hereof to the same extent as though made on and as of the date hereof,
except to the extent such representations and warranties specifically relate to
an earlier date, in which case such representations and warranties were true,
correct and complete in all material respects on and as of such earlier date;
(ii) no Acceleration Event, Event of Default or potential Event of Default has
occurred and is continuing or will result from the proposed borrowing; (iii) the
Company has performed in all material respects all agreements and satisfied all
conditions under the Note and the Note Purchase Agreement provided to be
performed by it on or before the date hereof; and (iv) the Company has not
violated any of the negative covenants contained in SECTION 5 of the Note
Purchase Agreement.
Dated: PHYSICIAN ADVANTAGE LLC
---------------
By:
-------------------------------
Title:
-----------------------------
<PAGE>
EXHIBIT B
Notice of Election to Convert
The undersigned, as Holder of the Convertible Secured Note (the "Note")
issued by Physician Advantage LLC (the "Company"), hereby elects to convert
$270,000 of the outstanding and unpaid principal and accrued interest under
Advances made pursuant to the Note into that number of Units of the Company,
that, when divided by the total number of Units that are then outstanding (after
giving effect to the conversion of the Note, the conversion of any outstanding
convertible debt instruments, and the exercise of any outstanding options or
warrants to purchase Units), will equal fifty-five percent (55%), expressed as a
decimal. The undersigned further acknowledges that the Schedule of Loans shall
be updated to indicate that the amount of principal and accrued interest
outstanding under the Note has been reduced by $270,000 as of this date, in
consideration of the conversion of the Converted Amount.
Date:
-------------
"Holder"
Westminster Capital, Inc.
By:
---------------------------
Please Print or Typewrite Name and
Address, Including Zip Code, and
Social Security or Other Taxpayer
Identifying Number
-----------------------------------
Name
-----------------------------------
Address
-----------------------------------
Taxpayer Identification Number
<PAGE>
EXHIBIT 10.8
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into this 23rd day of
September 1997, by and between WESTMINSTER CAPITAL, INC., a Delaware Corporation
("Westminster"), and TOUCH CONTROLS, INC., a California Corporation ("TCI").
RECITALS
A. TCI is engaged in the business of inventing, designing, manufacturing,
assembling and marketing enhanced infra-red "touch screens", designing,
assembling and marketing computer work stations used in connection with said
"touch screens", and designing, developing, assembling and marketing computer
peripherals, software and hardware as part of "touch control solutions" for
industrial, public access and other applications.
B. TCI desires to borrow funds for the purpose of financing its
marketing, product development, financing new purchases of materials and
inventory, and for other purposes.
C. Westminster is interested in loaning funds to TCI for such purposes,
on the terms and conditions set forth herein.
NOW, THEREFORE in consideration of the premises and the mutual covenants
contained herein, the parties agree as follows:
1. Westminster agrees to loan up to Eight Hundred Thousand Dollars
($800,000) to TCI (the "Loan") on the terms and conditions set forth in this
Agreement. The Loan will be evidenced by a Secured Convertible Promissory Note
(the "Note") in the form of Exhibit "A" attached hereto and made a part hereof
by reference. The Note will be secured as provided in this Agreement.
2. The proceeds of the Loan shall be used solely for marketing, product
development, financing new purchases of materials and inventory, the specific
uses set forth in Exhibit "B" attached hereto and made a part hereof by
reference, and such other uses as may be approved in advance in writing by
Westminster.
3. The Note will be secured by a first priority security interest in
certain assets of TCI, as set forth in the Security Agreement, a copy of which
is attached hereto, marked Exhibit "C" and made a part hereof by reference.
Prior to the funding of the Loan, all senior liens and security interests in
such assets, including but not limited to any liens and security interests held
by the shareholders of TCI, and family members of such shareholders, must be
released.
4. The Note will be convertible, at the option of Westminster, into
capital stock of TCI, as provided therein. Upon such conversion, the
shareholders of TCI and Westminster shall execute a Shareholder's Agreement,
a copy of which is attached hereto, marked Exhibit "D" and made a part hereof
by reference.
5. TCI represents and warrants to Westminster as follows:
(a) TCI is a corporation duly organized, validly existing and in good
standing under the laws of the State of California; has all requisite power to
own, lease and operate its assets, properties and business and to carry on its
business as now conducted and as proposed to be conducted; and is duly qualified
and licensed to do business in the State of California (which is the only state
in which TCI has assets, employees and a place of business).
<PAGE>
(b) TCI has all requisite power, authority and approvals required to
enter into, execute and deliver this Agreement and all other agreements and
instruments to be executed by TCI in connection herewith and to perform fully
TCI's obligations hereunder and thereunder.
(c) TCI has taken all actions necessary to authorize it to enter into
and perform its obligations under this Agreement and all other agreements and
instruments to be executed by TCI in connection herewith and to consummate the
transactions contemplated hereby and thereby. This Agreement is, and all such
other agreements and instruments are, the legal, valid and binding obligations
of TCI, enforceable in accordance with their respective terms.
(d) The authorized capital stock of the TCI consists solely of five
hundred thousand (500,000) shares of common stock of which one hundred one
thousand (101,000) shares are issued and outstanding, fully paid and
nonassessable and, except for such outstanding shares, there are no shares of
capital stock or other securities or other equity interests of TCI outstanding.
Except as indicated in Section 5(d) of the Disclosure Schedule (which is
attached hereto, marked Exhibit "E" and made a part hereof by reference):
(i) There are no outstanding subscriptions, warrants, options,
calls or commitments of any character relating to or entitling any person
or entity to purchase or otherwise acquire any capital stock or other
securities or other equity interests of TCI;
(ii) There are no outstanding obligations or securities
convertible into or exchangeable for shares of any capital stock or other
securities or other equity interests of TCI, or any commitments of any
character relating to or entitling any person or entity to purchase or
otherwise acquire any such obligations or securities;
(iii) There are no preemptive or similar rights to subscribe
for or to purchase any capital stock or other securities or other equity
interests of TCI;
(iv) There are no other commitments of any kind or type for the
issuance of any capital stock or other securities or other equity interests
of TCI.
(e) TCI has no subsidiaries and does not own, directly or indirectly,
any interest or investment (whether equity or debt) in any corporation,
partnership, business, trust or other entity.
(f) Except as disclosed in Section 5(f) of the Disclosure Schedule,
and subject to obtaining the necessary contents specified in Section 5(g)
hereof, neither the execution or delivery by TCI of this Agreement or any other
agreement or instrument to be executed by it in connection herewith, nor the
consummation of the transactions contemplated herein or therein will: (i)
violate any provision of the Articles of Incorporation, Bylaws or other charter
documents of TCI; (ii) violate, or constitute a default under, or permit the
termination or acceleration of the maturity of, any indebtedness of TCI; (iii)
violate, conflict with or constitute a default under, permit the termination or
acceleration of, or cause the loss of any rights or options material to the
business, operations, properties or financial condition of TCI under, any
contract or other agreement to which TCI is a party or by which its property is
bound; or (iv) violate any statute or law or any judgment, decree, order,
regulation or rule of any court or governmental authority to which TCI or its
property is subject.
(g) Section 5(g) of the Disclosure Schedule sets forth a complete and
accurate description of each consent, approval, authorization or other
requirement, whether prescribed by law, rule, regulation or court order or
decree or required pursuant to the terms of any contract or agreement to which
TCI is a party or by it or its property is bound, which must be obtained from
any governmental body, court or person or which must otherwise be satisfied by
TCI and which is necessary for (i) the execution or delivery by TCI of this
Agreement or any other agreement or instrument to be executed by it in
connection herewith, or (ii) the consummation of the transactions contemplated
herein or therein. Each such consent, approval, authorization or other
requirement will be obtained or satisfied prior to the funding of the loan.
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(h) Section 5(h) of the Disclosure Schedule sets forth (i) the
unaudited balance sheet of TCI as of December 31, 1996, and the related
statements of income and retained earnings and changes of financial position for
the fiscal year then ended, and (ii) the unaudited balance sheet and statement
of income of TCI for the eight (8) month period ended August 31, 1997. Said
financial statements (1) were prepared in accordance with the books and records
of TCI; (2) were prepared in accordance with good accounting practices and
principles (except for manual adjustments to inventory) consistently applied;
(3) fairly present TCI's financial condition and the results of its operations
as of the relevant dates thereof and for the periods covered thereby; (4)
contain and reflect all necessary adjustments and accruals for a fair
presentation of TCI's financial condition and the result of its operations for
the periods covered by said financial statements; (5) contain and reflect
adequate provisions for all reasonably anticipated liabilities for all taxes,
federal, state, local or foreign, with respect to the period then ended and all
prior periods; and (6) with respect to contracts and commitments for the sale of
goods or the provision of services by TCI, contain and reflect adequate reserves
for all reasonably anticipated material losses and costs and expenses in excess
of expected receipts. The unaudited balance sheet and statements of income of
TCI as of and for the eight (8) month period ended August 31, 1997, are
hereinafter referred to as the "Financial Statements". August 31, 1997 is
hereinafter referred to as the "Balance Sheet Date".
(i) Except (1) as and to the extent specifically reflected or
reserved against the balance sheet included in the Financial Statements, (2)
incurred in the ordinary course of business after the Balance Sheet Date, (3)
otherwise disclosed in the Disclosure Schedule, TCI has no direct or indirect
indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility, known or unknown, fixed or unfixed, choate or inchoate,
liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent
or otherwise, including, without limitation, liabilities on account of taxes,
other governmental charges or lawsuits brought whether or not of a kind required
by generally accepted accounting principles to be set forth on a financial
statement, which in the aggregate are material to the condition (financial or
otherwise), properties, business, assets or prospects of TCI. TCI has no
knowledge of any circumstances, conditions, events or arrangements which may
hereafter give rise to any liabilities of TCI except in the ordinary course of
business or as otherwise set forth in this Section 5(i).
(j) The inventories shown on the balance sheet included in the
Financial Statements consist of items of a quality and quantity useable and
saleable in the ordinary course of business by TCI, except for obsolete and
slow-moving items and items below standard quality (which in any event do not
exceed normal commercial standards in amount), all of which have been written
down on the books of TCI to net realizable market value or have been provided
for by adequate reserves. All items included in the inventories are the property
of TCI, except for sales made in the ordinary course of business since the
Balance Sheet Date; for each of these sales either the purchaser has made full
payment or the purchaser's liability to make payment is reflected in the books
of TCI. No items included in the inventories have been pledged as collateral or
are held by TCI on consignment from others. The inventories shown on all the
balance sheets included in the Financial Statements are based on quantities
determined by physical count or measurement, taken within the preceding twelve
(12) months, and are valued at cost on a basis consistent with that of prior
years.
(k) The accounts and notes receivable reflected in the balance sheet
included in the Financial Statements arose from valid sales in the ordinary
course of business and have been collected in full since the Balance Sheet Date,
or are collectible at their full amounts, less the reserve set forth in the
balance sheet included in the Financial Statements, which reserve is accurate
and consistent with past practices. All such accounts and notes receivable are
owned by TCI free and clear of any security interests, claims or other
encumbrances of any nature.
(l) No account payable of TCI which has arisen subsequent to the
Balance Sheet Date has exceeded Ten Thousand Dollars ($10,000), nor has the
aggregate of such accounts payable exceeded Fifty Thousand Dollars ($50,000).
(m) Except as indicated in Section 5(m) of the Disclosure Schedule,
since the Balance Sheet Date, there has not been any:
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(i) Transaction by TCI except in the ordinary course of
business as conducted on that date, or execution of any contract or
commitment (whether or not in the usual and ordinary course of
business) involving a potential liability of TCI exceeding Ten
Thousand Dollars ($10,000), individually, or Fifty Thousand Dollars
($50,000), in the aggregate;
(ii) Capital expenditure by TCI exceeding Five Thousand Dollars
($5,000) in the aggregate, or lease of capital equipment or property under
which the annual lease charges exceed Five Thousand Dollars ($5,000) in the
aggregate;
(iii) Material adverse change in the condition (financial or
otherwise), liabilities, assets, business or prospects of TCI;
(iv) Destruction, damage to or loss of any asset of TCI (whether
or not covered by insurance) which materially and adversely affects the
condition (financial or otherwise), business or prospects of TCI;
(v) Labor trouble, strike or other event or condition of any
character materially and adversely affecting the condition (financial or
otherwise), business or prospects of TCI;
(vi) Change in the accounting methods or practices
(including, without limitation, any change in depreciation or amortization
policies or rates) of TCI;
(vii) Re-evaluation by TCI of any of its assets;
(viii) Declaration, setting aside or payment of a dividend or
other distribution in respect of, or any direct or indirect redemption,
repurchase, or other acquisition by TCI, of any of its capital stock of any
class or of any other of its securities;
(ix) Increase in the salary or other compensation payable or to
become payable by TCI to any of its officers, directors or employees, the
adoption of a plan or agreement or amendment to any plan or agreement
providing any new or additional "fringe benefits", or the declaration or
payment by TCI of a bonus or other additional salary or compensation to any
such person;
(x) Sale or transfer of any asset of TCI, except sales in the
ordinary course of business of inventories or immaterial amounts of other
tangible personal property not required by the business and operations of
TCI;
(xi) Amendment or termination of any Material Contract (as
defined herein);
(xii) Loan by TCI to any person or entity, or guaranty by TCI of
any loan;
(xiii) Payment by TCI of any obligation or liability, fixed or
contingent, other than current liabilities;
(xiv) Cancellation by TCI without full payment, of any note,
loan, or other obligation owing to TCI;
(xv) Mortgage, pledge or other encumbrance of any asset of TCI,
except for liens for taxes not due;
(xvi) Incurment of, assumption of, or taking any properties
subject to, any liability, except for liabilities incurred or assumed or
property taken in the ordinary course of business of TCI and consistent
with past practice;
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<PAGE>
(xvii) Waiver or release of any right or claim of TCI, except in
the ordinary course of business;
(xviii) Amendment of the Articles of Incorporation, Bylaws or
other charter documents of TCI, issuance of any shares of capital stock or
other securities or other equity interests of TCI, or issuance or creation
of any warrants, obligations, subscriptions, options, convertible
securities or other commitments under which any additional shares of
capital stock or other securities or other equity interests of TCI may be
directly or indirectly authorized, issued, or transferred from treasury;
(xix) Other event or condition of any character which has
or might reasonably be expected to have a material and adverse effect on
the financial condition, business, assets or prospects of TCI.
(n) To the best of TCI's knowledge, except as indicated in Section
5(n) of the Disclosure Schedule:
(i) Within the times and in the manner prescribed by law, TCI
has filed all income tax, excise tax, sales tax, use tax, gross receipts
tax, franchise tax, employment and payroll-related tax, property tax, and
all other tax returns which TCI is required to file, has paid or provided
for all taxes shown thereon to be due and owing by it and has paid or
provided for all deficiencies or other assessments of tax, interest or
penalties owed by it; no taxing authority has asserted, or will
successfully assert, any claim for the assessment of any additional tax
liability of any nature with respect to any periods covered by any such
returns;
(ii) Each tax return filed by TCI fully and accurate reflects its
tax liability for such year and accurate sets forth all items (to the
extent required to be included or reflected in such returns) relevant to
its future tax liabilities, including the tax bases of its properties and
assets.
(iii) No penalties are, or will become, due with respect to the
late filing of any such return and no audit of any tax return of TCI is in
progress or, to the best knowledge of TCI, threatened;
(iv) No extensions of time with respect to any date on which any
tax return was or is to be filed by TCI is in force, and no waiver or
agreement by TCI is in force for the extension of time for the assessment
or payment of any tax;
(v) TCI has not waived or extended any applicable statute of
limitations relating to the assessment of federal, state, local or foreign
taxes;
(vi) TCI has delivered to Westminster true and correct copies of
all federal and state income tax returns of TCI for the last complete
fiscal year.
(o) (i) TCI has complied with all federal, state, county, local and
foreign laws, ordinances, regulations and orders applicable to TCI and no
material capital expenditures will be required in order to insure continued
compliance therewith. Except as indicated in Section 5(o) of the Disclosure
Schedule, no franchise, license, permit, order or approval of any
governmental or regulatory body is material to or necessary for the conduct
of the business of TCI. Section 5(o) of the Disclosure Schedule sets forth
each franchise, license, permit, order and approval necessary to the
conduct of the business of TCI. Each is in full force and effect, no
violations are or have been recorded in respect of any thereof, and no
proceeding is pending or to the best knowledge of TCI, threatened, to
revoke, amend or limit any thereof.
(ii) TCI is not in violation of any federal, state or local law,
ordinance or regulation relating to industrial hygiene or to the
environmental conditions on, under or about any real property occupied by
TCI including, but not limited to, soil and groundwater condition. During
the time in
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<PAGE>
which TCI occupied its real property, neither TCI, nor, to the best
knowledge of TCI, any third party has used, generated, manufactured, stored
or disposed of on, under or about such property or transported to or from
such property any flammable explosives, radioactive materials, hazardous
wastes, toxic substances or related materials ("Hazardous Materials"). For
the purposes hereof, Hazardous Materials shall include, but not be limited
to substances defined as "hazardous substances," "hazardous materials", or
"toxic substances" in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 1803,
ET SEQ.
(p) Except as set forth in Section 5(p) of the Disclosure Schedule,
to the best knowledge of TCI, there is no pending or threatened adverse claim,
dispute, governmental investigation, suit, action (including, without
limitation, nonjudicial personal property foreclosure actions), arbitration,
legal, administrative or other proceeding of any nature, criminal or civil, at
law or in equity, by or against or otherwise affecting TCI or its businesses,
prospects, assets, properties or financial conditions.
(q) TCI owns no real property, or any interest in real property,
other than leases set forth in Section 5(o) of the Disclosure Schedule. All such
leases are in full force in effect and as respects the performance of TCI,
there is no default or event of default or event which, with notice or lapse of
time or both, would constitute a default thereunder and no consent need be
obtained from any person in respect of any such lease in connection with the
transactions contemplated hereby.
(r) Section 5(f) of the Disclosure Schedule sets forth (1) a
description of each item of tangible personal property owned by TCI having on
the date hereof either a depreciated book value or estimated fair market
value per unit in excess of One Thousand Dollars ($1,000), or not owned by
TCI but in the possession of or used in the business of TCI and having rental
payments therefor in excess of Two Hundred Fifty Dollars ($250) per month or
Three Thousand Dollars ($3,000) per year; and (2) a description of the owner
of, and any agreement relating to the use of, each such item of tangible
personal property not owned by TCI and the circumstances under which such
property is used. Except as indicated in Section 5(r) of the Disclosure
Schedule:
(i) TCI has good and marketable title to each time of such
tangible personal property free and clear of all liens, leases,
encumbrances, claims under bailment and storage agreements, equities,
conditional sales contracts, security interests, charges and restrictions,
except for liens, if any, for personal property taxes not due and liens of
repairmen or bailees or other similar liens incurred in the ordinary
course of business in respect of obligations which are not overdue;
(ii) No officer, director, shareholder or employee of TCI, nor
any spouse, child or other relative or affiliate thereof, owns directly or
indirectly, in whole or in part, any of the items of tangible personal
property described in Section 5(r) of the Disclosure Schedule;
(iii) Each material lease, conditional sale contract, franchise
or license pursuant to which TCI holds or uses any interest owned or
claimed by it in or to each item of such tangible personal property is
valid, binding and in full force and effect, and, as respects the
performance of TCI, there is no default or event of default or event
which, with notice or lapse of time or both, would constitute a default
thereunder and no consent need be obtained from any person in respect of
any such lease, conditional sale contract, franchise or license in
connection with the transactions contemplated hereby;
(iv) Each item of such tangible personal property is in good
operating condition and repair, and the operation thereof as presently
conducted is not in violation of any applicable law or regulation.
(s) Section 5(s) of the Disclosure Schedule sets forth (1) a true and
accurate identification of each fictitious business name, trademark,
servicemark, trade name, copyright and all registrations and applications for
any of the foregoing owned by TCI or used by it in the conduct of its business,
(2) a true and complete schedule of each patent, invention, industrial model,
process, design and all registrations and
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<PAGE>
applications for any of the foregoing owned by TCI or used by it in the conduct
of its businesses, (3) a true and complete list, without extensive or revealing
descriptions, of all trade secrets of TCI, including all processes, know-how and
other technical data, and includes, as to each such trade secret, the specific
location of each writing, computer program or other tangible medium containing
its complete description, specifications, source codes, charges, procedures,
manuals and other descriptive material relating to it, and (4) a true and
complete list of all licenses or similar agreements or arrangements to which TCI
is a party either as licensee or licensor for each such item of intangible
personal property. Except as indicated in Section 5(s) of the Disclosure
Schedule:
(i) TCI is the owner of all right, title and interest in and to
each such item of intangible personal property, free and clear of all
liens, security interests, charges, encumbrances, equities and other
adverse claims;
(ii) No officer, director, shareholder or employee of TCI, nor
any spouse, child or other relative or affiliate thereof, owns directly or
indirectly, in whole or in part, any of the items of intangible personal
property described in Section 5(s) of the Disclosure Schedule;
(iii) The patents and applications for patents listed in Section
5(s) of the Disclosure Schedule are valid and in full force and effect and
are not subject to any taxes, maintenance fees, or actions falling due
within ninety (90) days after the date of this Agreement;
(iv) There have not been any actions or other judicial or
adversary proceedings involving TCI concerning any of such items of
intangible personal property, there is no basis for any such action or
proceeding, and to the best knowledge of TCI, no such action or proceeding
is threatened. If any such action or proceeding is initiated concerning
such items of intangible personal property, patents or other proprietary
rights, TCI will diligently defend its rights thereto at TCI's expense;
(v) TCI has the right and authority to use each such item of
intangible personal property in connection with the conduct of its business
in the manner presently conducted, and such use does not conflict with,
infringe upon, or violate any patent or other proprietary rights of any
other person; TCI has not infringed and/or is now infringing on any
proprietary rights belonging to any other person;
(vi) TCI has the right and authority to use such proprietary
rights as are necessary to enable it to conduct and to continue to conduct
all phases of its respective business in the manner presently conducted and
contemplated to be conducted by it;
(vii) There are no outstanding nor to the best knowledge of TCI,
any threatened, disputes or disagreements with respect to any licenses or
similar agreements or arrangements described in Section 5(s) of the
Disclosure Schedule;
(viii) Each trade secret's documentation is reasonably current,
accurate, and in a form that is usable by an experienced electrical
engineer with programming experience in "assembly" programming language;
(ix) TCI has taken all reasonable security measures to protect
the secrecy, confidentiality and value of its trade secrets; and
(x) All trade secrets of TCI are presently valid and
protectable, and are not part of the public knowledge or literature, nor to
the best knowledge of TCI have they been used, divulged, or appropriated
for the benefit of any person other than TCI or to the detriment of TCI.
(t) Section 5(t) of the Disclosure Schedule sets forth a true and
correct list of all contracts and other agreements to which TCI is a party or by
which any of their assets are bound or subject except purchase of sales
contracts made in the ordinary course of business and not involving a commitment
for a
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duration greater than twelve (12) months or an aggregate amount in excess of
Five Thousand Dollars ($5,000); and any other contract made in the ordinary
course of business and not providing for a duration in excess of six months or
involving aggregate payments or potential liabilities in excess of Three
Thousand Dollars ($3,000).
The contracts and other agreements which are required to be identified
anywhere in the Disclosure Schedule are hereinafter referred to as the "Material
Contracts". Except as indicated in Section 5(t) of the Disclosure Schedule;
(i) Each Material Contract is valid, binding, enforceable and in
full force and effect and there is no default or event which, with notice
or lapse of time or both, would constitute a default by any party
thereunder;
(ii) TCI has fulfilled all material obligations required pursuant
to each material Contract to have been performed by it prior to the date
hereof, and TCI has no reason to believe that TCI will not be able to
fulfill, when due, all of its obligations under each Material Contract
which remain to be performed after the date hereof;
(iii) TCI has not received any notice that any party to any of
the Material Contracts intends to cancel or terminate any such Material
Contract or to exercise or not to exercise any option thereunder; and
(iv) TCI is not a party to, nor is any of its property bound by,
any contract or other agreement which [a] restricts the conduct of its
businesses anywhere in the world, [b] is materially adverse to its
businesses and operations, or [c] which contains any unusual or burdensome
provisions which may materially adversely affect or impair the conduct of
its businesses and operations in any way.
(u) Section 5(u) of the Disclosure Schedule sets forth a true and
current list of each (i) employment agreement, collective bargaining agreement,
or other labor agreement to which TCI is a party or by which it is bound; (ii)
pension, profit sharing, deferred compensation, bonus, stock option, stock
purchase, savings, retainer, consulting, retirement, welfare or incentive plan
or contract to which TCI is a party or by which it is bound; and (iii) plan or
agreement under which "fringe benefits" (including, but not limited to,
hospitalization plans or programs, medical insurance, vacation plans or
programs, sick leave plans or programs and related benefits) are afforded any
employees of TCI (each of the foregoing is hereinafter referred to as a "Labor
Agreement"). Section 5(u) of the Disclosure Schedule also includes a true and
complete schedule listing the names, total annual compensation, total accrued
vacation and other fringe benefits of each person employed by TCI presently
receiving compensation aggregating in excess of Fifteen Thousand Dollars
($15,000) per year.
Except as set forth in Section 5(u) of the Disclosure Schedule:
[a] Each Labor Agreement is valid, binding, enforceable and in
full force and effect and there is no default or event which, with notice
or lapse of time or both, would constitute a default by any party
thereunder;
[b] TCI has not received any notice that any party to any of the
Labor Agreements intends to cancel or terminate any such Labor Agreement or
to exercise or not to exercise any option thereunder; and
[c] The employment of each employee of TCI (except Roberto
Frulla who is employed under contract) may be terminated immediately by TCI
except as otherwise provided by statute or decisional authority.
(v) To the best of its knowledge, TCI has complied in all material
respects with all applicable laws, rules and regulations relating to the
employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate governmental authorities or is holding for payment not
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yet due to such authorities, all amounts required to be withheld from such
employees of TCI and is not liable for any arrears of wages, taxes, penalties or
other sums for failure to comply with any of the foregoing. No present or former
employee, officer or director of TCI has any claim against TCI for any matter,
including but not limited to (i) overtime pay; (ii) wages or salary; (iii)
vacation time off or pay in lieu of vacation time off; (iv) any violation of any
statute, ordinance or regulation relating to minimum wages or maximum hours,
work place conditions, or any other matter; or (v) injuries or other damages
which are not fully covered by the TCI's insurance policies. Except as disclosed
in Section 5(v) of the Disclosure Schedule, there is no:
[a] Unfair labor practice complaint against TCI pending before
the National Labor Relations Board or any state or local agency;
[b] Material labor grievance pending against TCI.
In addition, to the best knowledge of TCI: (i) none of the matters
specified in clauses [a] and [b] above is threatened against TCI; (ii) no union
organizing activities have taken place with respect to TCI; (iii) no base exists
for which a claim may be made under any collective bargaining agreement to which
TCI is a party; and (iv) all key employees of TCI are in good health.
(w) All accrued obligations of TCI applicable to its employees,
whether arising by operation of law, by contract or past custom, for payments by
TCI to trusts or other funds or to any governmental agency, with respect to
unemployment compensation benefits, social security benefits or any other
benefits for its employees, with respect to the employment of said employees
through the date hereof have been paid or adequate accruals therefor have been
made in the Financial Statements. Except as disclosed in Section 5(w) of the
Disclosure Schedule:
(i) Neither TCI nor any entity that is a member of a group of
which TCI is a member and that is under common control with TCI
("Affiliate"), as defined in Section 414(b) or (c) of the Internal Revenue
Code (the "Code"), maintains or has any obligations to contribute to, or
has in effect or has committed to adopt any "Employee Pension Benefit Plan"
within the meaning of Section 3(2) of ERISA ("Pension Plan") or any
"Employee Welfare Benefit Plan" within the meaning of Section 3(1) of ERISA
("Welfare Plan");
(ii) Neither TCI nor any entity that is a member of a group of
which TCI is a member and that is under common control with TCI maintains
or has any obligation to contribute to any multi-employer plan.
(x) Section 5(x) of the Disclosure Schedule sets forth a true and
correct list of all policies or binders of fire, liability, workers'
compensation, vehicular or other insurance held by or on behalf of TCI
specifying the insurer, the policy number or covering note number with respect
to binders, and describing each pending claim thereunder of more than Five
Thousand Dollars ($5,000). Such policies and binders are in full force and
effect and are in all material respects in accordance with the customary
insurance requirements for the industry of TCI. TCI is not in default with
respect to any provision contained in any such policy or binder or has failed to
give any notice or present any claim under any such policy or binder in due and
timely fashion. There are no outstanding unpaid claims under any such policy or
binder. TCI has not received a notice of cancellation or non-renewal of any such
policy or binder. TCI has no knowledge of any inaccuracy in any application for
such policies or binders, any failure to pay premiums when due, or any similar
state of facts which may form the basis for termination of any such insurance.
No such policy is terminable or cancelable by the insurer by virtue of the
consummation of the transactions contemplated herein.
(y) Except as indicated in Section 5(y) of the Disclosure Schedule,
no single supplier, lessee or customer of TCI is of material importance to TCI.
The relationships of TCI with its suppliers, lessees and customers are good
commercial working relationships and no person who was such supplier, lessee or
customer of TCI at any time since the date of the balance sheet included in the
Financial Statements has cancelled or otherwise terminated, or threatened to
cancel or otherwise terminate its relationship with TCI or has since such date
decreased or limited materially, or threatened to decrease or limit materially,
its services, supplies or
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materials to TCI or its usage of services or products of TCI, as the case may
be. TCI has no notice that any such supplier, lessee or customer intends to
cancel or otherwise modify its relationship with TCI or to decrease materially
or limit its services or products to TCI or its usage of services or products of
TCI.
(z) Except as indicated in Section 5(z) of the Disclosure Schedule,
no officer, director or shareholder of TCI and no key employee of TCI (i) owns,
directly or indirectly, any interest in (excepting not more than a one percent
(1%) share holdings for investment purposes in securities of publicly held and
traded companies), or is an officer, director, employee or consultant of, any
person which is a competitor, lessor, lessee, customer or supplier of TCI; (ii)
holds a beneficial interest in any contract, instrument, obligation, commitment
or agreement to which TCI is a party or under which any of them is obligated or
bound or to which their respective properties may be subject (other than stock
options nd other contracts, commitments or agreements between TCI and such
persons in their capacities as employees, officers or directors of TCI; (iii)
owns, directly or indirectly, in whole or in part, any tangible or intangible
property (including, without limitation, any patent, trademark, trade name,
servicemark, franchise, patent, invention, permit, license or secret or
confidential information) which TCI is using or the use of which is necessary
for the business and operations of TCI; or (iv) has an cause of action or other
claim whatsoever against, TCI, except for claims in the ordinary course of
business, such as for accrued vacation pay, accrued benefits under employee
benefits plans and similar matters and agreements existing on the date hereof.
(aa) Except as indicated in the Section 5(aa) of Disclosure Schedule,
TCI is not indebted, directly or indirectly, to any person who is an officer,
director or shareholder of TCI nor to any affiliate of any such person in any
amount whatsoever other than for salaries for services rendered or reimbursable
business expenses, all of which have been accrued on the Financial Statements,
and no such officer, director, shareholder or affiliate is indebted to TCI,
except for advances made to employees of TCI in the ordinary course of business
to meet reimbursable business expenses anticipated to be incurred by such
obliger.
(ab) TCI has no general or special powers of attorney outstanding
(whether as grantor or grantee thereof) or any obligation or liability (whether
actual, accrued, accruing, contingent or otherwise) as guarantor, surety,
co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture, association,
organization or other entity.
(ac) Except as indicated in Section 5(ac) of the Disclosure Schedule,
since July 8, 1997 (the date of the letter of intent between TCI and Westminster
with respect to the Loan), there have been no material modifications or
amendments to any contract or other agreement, to which TCI and any officer,
director, employee or shareholder of TCI is a party, which would benefit,
directly or indirectly, any such officer, director, employee or shareholder.
(ad) TCI has furnished or made available to Westminster for its
examination the following, each of which is accurate and complete in all
material respects:
(i) Copies of the Articles of Incorporation, Bylaws or other
charter documents of TCI as in effect on the date hereof;
(ii) The minute books of TCI containing all proceedings,
consents, actions and meetings of its Board of Directors;
(iii) Copies of all permits, orders and consents with respect to
TCI and its securities issued by any administrative agency or governmental
body regulating the issuance or transfer of such securities and all
applications for such permits, orders and consents;
(iv) The transfer books of TCI setting forth all transfers of its
securities;
(v) All ledgers, financial records, books of account and files
of TCI.
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(ae) TCI does not know or have reason to know of any material facts or
contingencies which might adversely affect the financial condition, business,
operations or prospects of TCI or the value or condition of its properties and
assets.
(af) TCI has made available or delivered to Westminster true and
current copies of all agreements and documents referred to in the Disclosure
Schedule.
(ag) To the best of its knowledge, all documents and other papers
delivered by or on behalf of TCI in connection with this Agreement and the
transactions contemplated hereby are true, complete and authentic. The
information furnished to Westminster by or on behalf of TCI in connection with
this Agreement and the transactions contemplated hereby does not contain any
untrue statement of a material fact and does not omit to state any material fact
necessary to make the statements made, in the context in which made, not false
or misleading. There is no fact which TCI has not disclosed to Westminster in
writing which materially adversely affects, or so far as TCI can now foresee
will materially adversely affect, the business or condition (financial or
otherwise) of TCI.
(ah) The representations and warranties contained in this section
shall be due and complete on and as of the date of funding of the Loan with
the same force and effect as though such representations and warranties had
been made on and as of that date.
6. As long as any portion of the Loan remains unpaid, TCI agrees as
follows:
(a) It will keep and maintain full and accurate books, accounts and
records of operations of its business in accordance with generally accepted
accounting principles, consistent with principles heretofore applied by TCI and
it will permit Westminster, by its duly authorized agents, to inspect and copy
such books, accounts and records at any reasonable time.
(b) It will furnish to Westminster, promptly after any written
request, such periodic financial information concerning TCI and its business
including, without limitation, internally generated monthly operating
statements, as Westminster shall request. TCI shall furnish to Westminster,
promptly after the same becomes available, but in any event within sixty (60)
days after the end of each fiscal year of TCI, a balance sheet and income
statement covering TCI for the preceding fiscal year, which statements shall
be certified by an executive officer of TCI as having been prepared in
accordance with generally accepted accounting principals and as being true,
correct, complete and accurate. If any such certified annual statement is not
furnished as required hereunder, Westminster shall have the right, but not
the obligation, to obtain any of such statements by means of an audit by an
independent certified public accounting firm selected by Westminster, in
which event TCI covenants and agrees to pay, or to reimburse Westminster for,
any expense of said accounting firm and further agrees to provide all
necessary information to said accountant and to otherwise cooperate in the
making of such audit.
(c) It will maintain and preserve its existence and its right to
transact business in the State of California and in all other states in which it
conducts business, and it will not merge or consolidate with any other unrelated
entity.
(d) It will notify Westminster in writing of the occurrence of any of
the following within five (5) days of obtaining knowledge thereof: (i) any
material adverse change in the business, property, assets, operations or
condition, financial or otherwise, of TCI, (ii) receipt of notice of any default
under any Material Contract, or (iii) the pendency or threat of any material
litigation or arbitration and of any tax deficiency or other proceeding before
any governmental body or official affecting TCI.
(e) It will not incur any indebtedness, secured or unsecured, except
for (i) trade indebtedness incurred in the ordinary course of business or (ii) a
loan facilitated by the City of San Diego under the EM-TEK program, such loan
not to exceed Two Hundred Thousand Dollars ($200,000).
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(f) It will not extend incentive stock options to its employees
except under a "phantom stock plan" approved by Westminster, and any such
incentive stock options shall not exceed in the aggregate fifteen percent (15%)
of the "capital stock" of TCI prior to the conversion of the Loan by
Westminster.
(g) It will not amend or modify in any respect any of the new notes
described in Paragraph 7(c) hereof, or give any security for any of said notes,
or prepay any of said notes in whole or in part (except as expressly provided in
said notes).
(h) It will not increase any compensation or fringe benefits payable
to any of the shareholders of TCI, or any spouse, child or other relative or
affiliate thereof.
(i) It will not make any loans to or guarantee the obligations of
any of the shareholders of TCI, or any spouse, child or other relative or
affiliate thereof.
(j) It will not declare and/or pay any dividends to any of the
shareholders of TCI.
7. The following constitute conditions, for the benefit of Westminster,
to the funding of the Loan:
(a) All of the representations and warranties of TCI herein shall
have been true and correct in all material respects when made, and on the date
of the Loan funding. If requested by Westminster, an officer of TCI shall
execute a certificate to this effect on the date of the funding of the Loan.
(b) TCI shall have performed all of its obligations and covenants
under this Agreement.
(c) All existing loans made to TCI by Maria L. Frulla, Stefano G.
Frulla, and Enrica F. Frulla (being approximately Seven Hundred Fifty Thousand
Dollars ($750,000) in the aggregate) shall have been novated and recast, and
shall have been evidenced by new notes, which shall be in the form of Exhibit
"F" attached hereto and made a part hereof by reference. The new notes shall
not be secured (any security held under the existing loans shall be released)
and shall be and remain subordinate to the Loan.
8. In addition to and without limitation of any other obligation of TCI
hereunder or under any of the documents evidencing the Loan, TCI shall and does
hereby indemnify, defend and agree to hold Westminster harmless from and against
all claims, injury, damage, liability loss, cost and expense of any and every
kind (including attorneys' fees and costs) arising out of or in connection with
the business or operations of TCI, including, but not limited to, product
liability claims. The obligations of TCI under this paragraph shall survive the
repayment of the Loan, but shall not apply to any events which occur subsequent
to the conversion of the Note into capital stock, as described in Paragraph 4
hereof.
9. All notices required or permitted to be given pursuant to this
Agreement shall be in writing, and shall be delivered either personally, by
overnight delivery service or by U.S. certified or registered mail, postage
prepaid, return-receipt requested and addressed to the parties at their
respective addresses as they appear below their signatures hereon. Notices may
also be given by facsimile transmission to the facsimile telephone numbers which
appear below the parties' respective signatures hereon, provided that either (a)
receipt of the facsimile transmission is acknowledged in writing by the
receiving party, which may also be by a facsimile transmission, or (b) the
transmitting party obtains a written confirmation from its own facsimile machine
showing that the entire transmission was transmitted to the receiving party,
without interruption, and a copy of the notice is also sent by one of the other
above-described methods of service. The parties may change their addresses or
facsimile telephone numbers for notice by giving notice of such change in
accordance with this section. Notices sent by overnight delivery service shall
be deemed received on the business day following the date of deposit with the
delivery service. Mailed notices shall be deemed received upon the earlier of
the date of delivery shown on the return-receipt, or the second business day
after the date of mailing. Notices sent by facsimile transmission shall be
deemed served on the date of transmission, provided that such notices are sent
during regular business hours, otherwise on the next business day.
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10. This Agreement has been executed in and is to be performed in the
State of California, and this Agreement shall be interpreted in accordance with
the laws of the State of California.
11. This Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective heirs, assigns, successors-in-interest, and
legal representatives.
12. This Agreement may not be amended, modified or altered except by a
written instrument executed by all parties hereto.
13. No party has made any representations, warranties, covenants or
promises relating to the subject matter of this Agreement except as set forth
herein, and any prior agreements or understandings not specifically set forth
herein shall be of no force or effect. This Agreement constitutes the entire
agreement of the parties relative to the subject matter hereof. Without limiting
the generality of the foregoing, it is understood and agreed that this Agreement
supersedes that written letter of intent dated July 8, 1997.
14. If any provision of this Agreement is declared by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall nevertheless be given full force and effect.
15. As used herein, the masculine, feminine or neuter gender, and the
singular or plural number, shall each be deemed to include the others whenever
the context so indicates.
16. Should any party be required to bring legal action (including
arbitration) to enforce his rights under this Agreement or under the Note or any
of the Loan Documents (as defined in the Note), the prevailing party in such
action shall be entitled to recover from the losing party his reasonable
attorneys' fees and costs in addition to any other relief to which he is
entitled. Such recovery of attorneys' fees shall include any attorneys' fees
incurred in connection with any bankruptcy or reorganization proceeding,
including stay litigation. The parties further agree that any attorneys' fees
incurred in enforcing any judgment are recoverable as a separate item, and that
this provision is intended to be severable from the other provisions of this
Agreement, shall survive the judgment, and is not to be deemed merged into the
judgment.
17. This Agreement may be executed in one (1) or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one (1) and the same instrument.
18. The failure of any party, at any time, to require timely
performance by any other party of any provision of this Agreement shall not
affect such party's rights thereafter to enforce the same, nor shall the
waiver by any party of any breach of any provision of this Agreement, whether
or not agreed to in writing, be taken or held to be a waiver of the breach of
any other provision or a waiver of any subsequent breach of the same
provision of this Agreement. No extension of time for the performance of any
obligation or act hereunder shall be deemed to be an extension of time for
the performance of any other obligation or act hereunder.
19. The parties agree to perform such further acts and to execute,
acknowledge and deliver such documents as may be necessary to effectuate the
provisions of this Agreement.
20. Any controversy or claim arising out of or relating to this Agreement,
or breach thereof, shall be settled by binding arbitration in Los Angeles,
California, in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect, and judgment upon the award rendered by
the arbitrator(s) may be entered in any court of competent jurisdiction. The
cost of arbitration shall be borne by the losing party, or, if there is no
losing party, as the arbitrator(s) shall determine.
In any arbitration proceedings relative to this Agreement, or breach
thereof, all parties shall have the right to take depositions and to obtain
discovery regarding the subject matter of the arbitration pursuant to California
Code of Civil Procedure Section 1283.05, or any successor statute.
Service of any Petition to confirm or vacate the Arbitration award and
Notice of Hearing thereon may be made by certified or registered mail,
return-receipt requested, or by personal delivery.
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<PAGE>
The arbitrator'(s) award may be limited to a statement that one party pay
to the other a sum of money. The arbitrator(s) will not be deemed to exceed
their powers (per California Code of Civil Procedure Sections 1286.2 or 1286.6)
by committing an error of law or legal reasoning, it being agreed that the
decision of the arbitrator(s) shall be final and unreviewable for error of law
or legal reasoning of any kind.
21. Notwithstanding the provisions of Paragraph 20 of this Agreement,
before either party files a demand for arbitration, or commences any legal
action (except to the extent that legal action may reasonably be required to
obtain provisional remedies, such as injunctive relief) both parties agree to
mediate, in good faith, any dispute or claim arising between them out of this
Agreement or under the Note or the Loan Documents (as defined in the Note). Such
mediation shall take place in Los Angeles, California before an impartial and
neutral professional mediator selected by mutual agreement of the parties, who
will be authorized to facilitate resolution of the dispute, but who will not be
empowered to impose a settlement on the parties. Mediation fees shall be divided
equally between the parties. If any party commences arbitration or legal action
based on a dispute or claim which should be mediated pursuant to this Paragraph
without first offering to mediate such dispute or claim, and if such party
thereafter refuses to submit to mediation upon written demand by the other
party, then in the discretion of the arbitrator or judge, as the case may be,
such party shall not be entitled to recover its attorneys' fees even if it is
the prevailing party in such arbitration or legal action.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
WESTMINSTER CAPITAL, INC., TOUCH CONTROLS, INC.,
a Delaware Corporation a California Corporation
By /s/ Keena Behrle By /s/ Marie L. Frulls
--------------------------- ------------------------
Its E.V.P. Its President
Address: Address:
9665 Wilshire Boulevard, Mezzanine Suite 4168 Avenida de la Plata
Beverly Hills, California 90212 Building 101
Oceanside, CA 92056
Fax No.: (310) 271-6274
Fax No.: (760) 631-7910
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EXHIBIT 10.9
SECURED CONVERTIBLE PROMISSORY NOTE
$800,000 Beverly Hills, California
FOR VALUE RECEIVED, the undersigned TOUCH CONTROLS, INC., a California
Corporation ("Maker"), promises to pay to the order of WESTMINSTER CAPITAL,
INC., a Delaware Corporation ("Holder", which term shall include any subsequent
holder of this Note), at 9665 Wilshire Boulevard, Mezzanine, Beverly Hills,
California 90212 (or at such other place as Holder shall designate in writing)
in lawful money of the United States of America, the principal sum of Eight
Hundred Thousand Dollars ($800,000), or so much thereof as may be advanced by
Holder to Maker, together with interest on the Outstanding Principal Balance (as
defined herein) at the rate (the "Interest Rate") described below.
1. INTEREST RATE. Except as otherwise provided herein, the Interest
Rate shall be a variable rate of interest equal to the "Prime Rate" as
publicly announced from time to time by Wells Fargo Bank, N.A. Any change in
the Interest Rate resulting from a change in the Prime Rate shall be
effective on the first (1st) day of the month after the date of such change.
If the Prime Rate of Wells Fargo Bank, N.A. is no longer available, then the
Interest Rate shall be determined by reference to the prime rate of another
nationally recognized bank selected by Holder. Maker acknowledges that the
Prime Rate is a discretionary rate publicly announced by Wells Fargo Bank,
N.A. from time to time and does not necessarily reflect the rate of interest
that Wells Fargo Bank, N.A. charges to its best or most credit-worthy
customers. Interest shall be computed at the Interest Rate on the basis of
the actual number of days which the Outstanding Principal Balance is
outstanding divided by three hundred sixty (360), which shall, for the
purposes of this Note, be considered to be one (1) year.
2. ADVANCES; OUTSTANDING PRINCIPAL BALANCE. The principal amount of this
Note shall be disbursed by Holder to Maker, in periodic payments ("Advances") of
not less than Fifty Thousand Dollars ($50,000), as Maker shall request by giving
notice to Holder from time to time. All references to the "Outstanding Principal
Balance" shall mean, at any time, the sum of all Advances made hereunder, less
any principal repaid by Maker to Holder (subject to the prepayment restrictions
set forth herein), plus all interest which accrues under this Note between the
date of this Note and September 1, 1998.
3. PAYMENTS. Prior to October 1, 1998, there shall be no payments due
under this Note. On October 1, 1998, there shall be a payment in the amount of
the interest which has accrued under this Note from September 1, 1998 through
September 30, 1998. Thereafter, this Note shall be payable in installments (the
"Installments") of interest only on the first (1st) day of each and every
calendar quarter (January 1, April 1, July 1, and October 1). Installments shall
continue to be paid until the Maturity Date (as defined herein). The Outstanding
Principal Balance and all accrued but unpaid interest thereon, shall be due and
payable on September 1, 1999 (the "Maturity Date").
<PAGE>
4. APPLICATION OF PAYMENTS. All payments on this Note shall be applied
first to the payment of any sums advanced by Holder pursuant to the Loan
Documents (as defined herein), together with interest thereon from the date of
advance until repaid at the Default Rate, then to the payment of accrued but
unpaid interest, and then to the reduction of the Outstanding Principal Balance.
5. PREPAYMENT RESTRICTION. Maker may not repay the Outstanding Principal
Balance, or any part thereof, prior to the Maturity Date.
6. MODIFICATIONS. From time to time, without affecting the obligation of
Maker to pay the Outstanding Principal Balance or to observe the covenants of
Maker contained herein, without affecting the guaranty of any person for payment
of this Note, and without giving notice to or obtaining the consent of Maker or
any guarantor of this Note, Holder may, at the option of Holder, extend the time
for payment of the Outstanding Principal Balance or any part thereof, reduce the
payments hereunder, release any person liable hereunder, accept a renewal or
extension of this Note, join in any extension or subordination agreement,
release any security given herefor, take or release other or additional
security, or agree in writing with Maker to modify the Interest Rate or any
other provision of this Note.
7. EVENTS OF DEFAULT. Time is of the essence hereof. Upon the occurrence
of any of the following events (the "Events of Default"), payment of the entire
Outstanding Principal Balance and accrued interest on this Note shall, at the
option of Holder, be accelerated and shall be immediately due and payable upon
demand, irrespective of the Maturity Date. In such event, Holder shall have the
right, in addition to all other rights and remedies hereunder or under the Loan
Documents, to foreclose or to require foreclosure of any or all liens, pledges
or other security interests securing the payment hereof:
(a) Failure of Maker to pay any Installment when due, subject to a
ten (10) day "grace" period.
(b) Failure of Maker to pay the Outstanding Principal Balance or any
part thereof, or any accrued interest thereon, on the Maturity Date, subject to
a ten (10) day "grace" period.
(c) Default by Maker in the performance of any other obligation of
Maker under this Note, which is not cured within ten (10) days after notice is
given by Holder to Maker; or
(d) Default by Maker under any provision of any of the Loan
Documents, which is not cured within any applicable grace period specified
therein.
8. DEFAULT INTEREST. In the event that Maker fails to pay any
Installment when due, or the Outstanding Principal Balance and all accrued
interest in full on the Maturity Date, the amount past due (including any
acceleration of the Outstanding Principal Balance), and unpaid shall bear
interest at an annual rate equal to the lesser of (i) the then applicable
Interest Rate plus five percent (5%), or (ii) the greater of ten percent (10%)
per annum or the rate established by the Federal Reserve Bank of San Francisco
on advances to member banks
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under Section 13 and 13(a) of the Federal Reserve Act in effect on the
twenty-fifth (25th) day of the month immediately preceding the date of this Note
plus five percent (5%) per annum (the "Default Rate"), computed from the date on
which said amount was due and payable until paid. The charging or collecting of
interest at the Default Rate shall not limit any of Holder's other rights or
remedies under this Note.
9. SECURITY. The payment of this Note is secured by, among other things,
a certain security agreement of even date herewith executed by Maker and Holder
(the "Security Agreement") liening and encumbering certain personal property of
Maker, as more particularly described therein. The Security Agreement, and all
other documents securing or relating to the indebtedness evidenced by this Note
are collectively referred to herein as the "Loan Documents".
10. GOVERNING LAW. Maker, and each endorser, cosigner or guarantor of
this Note, acknowledges and agrees that this Note is made and is intended to be
paid and performed in the State of California and the provisions hereof will be
construed in accordance with the laws of the State of California and, to the
extent that federal law may preempt the applicability of state laws, federal
law. Maker, and each endorser, cosigner and guarantor of this Note further agree
that upon the occurrence of an Event of Default, this Note may be enforced in
any court of competent jurisdiction in the County of Los Angeles, State of
California, and they do hereby submit to the jurisdiction of such courts
regardless of their residence.
11. REMEDIES CUMULATIVE; WAIVER. The remedies of Holder, as provided
herein or in the Loan Documents, shall be cumulative and concurrent, and may
be pursued singularly, successively or together, in the sole discretion of
Holder, and may be exercised as often as occasion therefor shall arise. No
act of omission or commission of Holder, including specifically any failure
to exercise any right, remedy or recourse, shall be deemed to be a waiver or
release of the same; such waiver or release to be affected only through a
written document executed by Holder and then only to the extent specifically
recited therein. Without limiting the generality of the preceding sentence,
acceptance by Holder of any payment with knowledge of the occurrence of an
Event of Default by Maker shall not be deemed a waiver of such Event of
Default, and acceptance by Holder of any payment in an amount less than the
amount then due hereunder or under the Loan Documents shall be an acceptance
on account only and shall not in any way affect the existence of an Event of
Default hereunder or under any of the Loan Documents. A waiver or release
with reference to any one Event of Default shall not be construed as
continuing, as a bar to, or as a waiver or release of, any subsequent right,
remedy or recourse as to a subsequent Event of Default.
12. NOTICES. Any notice, request, demand or other communication required
or permitted hereunder or required by law shall be in writing and shall be given
by delivery of the same in person to the intended addressee, or by depositing
same with an overnight courier service (such as Federal Express) for delivery to
the intended addressee at its address set forth in this Paragraph 12, or by
depositing same in the United States mail, postage prepaid, certified mail,
return-receipt requested, sent to the intended addressee as follows:
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Maker: TOUCH CONTROLS, INC.
4168 Avenida de la Plata
Building 101
Oceanside, California 92056
Holder: WESTMINSTER CAPITAL, INC.
9665 Wilshire Boulevard, Suite M-10
Beverly Hills, California 90212
Attention: William Belzberg, President
The address of any party to this Note may be changed by written notice of such
other address given in accordance herewith at least ten (10) days in advance of
the date upon which such change of address shall be effective. Notices sent by
overnight courier service shall be deemed delivered on the business day
following the date of deposit with such service. Notices sent by certified mail
shall be deemed delivered on the earlier of the date of delivery shown on the
return-receipt, or on the second business day after mailing.
13. NO USURY INTENDED. All agreements between Maker and Holder are
expressly limited so that in no contingency or event whatsoever, whether by
reason of: error of fact or law; payment, prepayment or advancement of the
proceeds hereof; acceleration of maturity of the Outstanding Principal Balance,
or otherwise, shall the amount paid or agreed to be paid to Holder hereof for
the use, forbearance or retention of the money to be advanced hereunder,
including any charges collected or made in connection with the indebtedness
evidenced by this Note which may be treated as interest under applicable law, if
any, exceed the maximum legal limit (if any such limit is applicable) under
United States federal law or state law (to the extent not preempted by federal
law, if any), now or hereafter governing the interest payable in connection with
such agreements. If, from any circumstances whatsoever, fulfillment of any
provision hereof at the time performance of such provision shall be due shall
involve transcending the limit of validity (if any) prescribed by law which a
court of competent jurisdiction may deem applicable hereto, then IPSO FACTO, the
obligation to be fulfilled shall be reduced to the limit of such validity, and
if from any circumstances, Holder shall ever receive as interest an amount which
would exceed the maximum legal limit (if any such limit is applicable), such
amount which would be excessive interest shall be applied to the reduction of
the Outstanding Principal Balance due hereunder and not to the payment of
interest or, if necessary, rebated to Maker. This provision shall control every
other provision of all agreements between Maker and Holder.
14. PURPOSE OF LOAN. Maker certifies that the loan evidenced by this Note
is obtained for business or commercial purposes and that the proceeds thereof
shall not be used for personal, family, household or agricultural purposes.
15. CONVERSION RIGHTS. Holder shall have the right, at any time
commencing on January 1, 1998 (or prior to January 1, 1998 in the event that (a)
Maker sells or enters into an agreement to sell all or substantially all of its
assets, or (b) the shareholders of Maker sell or enter into an agreement to sell
more than fifty percent (50%) collectively of the capital stock of Maker, or (c)
Maker merges or consolidates with another entity, or enters into an
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<PAGE>
agreement to do so) and continuing through the Maturity Date (and subsequent
to the Maturity Date and continuing until this Note has been paid in full if
this Note is not paid in full on the Maturity Date), to convert the entire
Outstanding Principal Balance plus the difference between the face value of
this note and the Outstanding Principal Balance of this Note into a number of
shares of capital stock of Maker such that, immediately after such
conversion, Holder will own fifty percent (50%) of the then outstanding and
issued shares of capital stock of Holder, on a fully-diluted basis (including
any capital stock which is issued as a result of the conversion of those
certain Subordinated Convertible Promissory Notes of even date herewith
executed by Maker in favor of Maria L. Frulla and Stefano G. Frulla). To that
extent that at the time of Holder's exercise of its conversion rights, any
third parties hold options, warrants or other instruments which are
convertible into capital stock of Maker, Holder shall have a continuing right
(which shall survive the cancellation of this Note resulting from Holder's
conversion) to receive additional shares of capital stock equal to fifty
percent (50%) of the total amount of capital stock which is issued as a
result of any such conversion by such third parties, such additional capital
stock to be issued to Holder immediately upon the issuance of such additional
capital stock to such third parties. Maker will promptly notify Holder when
and if any third parties exercise such rights to convert. Provided, however,
that Holder's conversion rights shall not apply to any common stock which may
be issued to Vivid Technology Corp. ("Vivid") as a result of the exercise of
certain purchase rights of Vivid as set forth in that certain Agreement dated
March 1, 1996 between Maker and Vivid. Holder shall exercise its conversion
right by giving at least thirty (30) days' prior written notice to Maker, and
Holder and Maker shall thereafter execute all documents necessary to
effectuate such conversion. At the time of conversion, Maker shall pay to
Holder all accrued but unpaid interest due under the Note, irrespective of
whether the next Installment is then due and payable. Upon the consummation
of the conversion and payment of all accrued but unpaid interest thereon,
this Note shall be deemed paid in full, and all security held under the Loan
Documents will be immediately released. Maker shall at all times reserve and
keep available out of its authorized but unissued shares of capital stock,
solely for the purpose of issuance upon the exercise of the conversion rights
contained in this Note, such number of shares of capital stock as shall be
issuable at all times upon the conversion hereof. Maker covenants and agrees
that, upon conversion of this Note, all shares of capital stock issuable upon
such conversion shall be duly and validly issued, fully paid and
nonassessable. Maker will not, by amendment of its articles of incorporation
or through reorganization, consolidation, merger, dissolution, sale of assets
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Note, but will at all times, in good
faith, assist in any action as may be necessary or appropriate in order to
protect the rights of the Holder against any impairment. Without limiting the
generality of the foregoing, Maker will take all such action as may be
necessary or appropriate in order that Maker may validly and legally issue
fully-paid and nonassessable shares of capital stock upon the exercise of the
conversion rights contained in this Note.
16. FAILURE OF HOLDER TO MAKE ADVANCES - LIQUIDATED DAMAGES. Advances
shall be made by Holder to Maker within two (2) business days after receipt of
notice from Maker requesting such Advance. In the event that Holder fails or
refuses to make any Advance when Maker is not in default under this Note or any
of the other Loan Documents, then it is agreed that as Maker's sole and
exclusive remedy for Holder's breach, interest shall be abated for a period of
six (6) months, commencing on the date that the Advance was due to be made, and
during such six (6) month period Maker may pay off this Note (in full but not in
part)
-5-
<PAGE>
without penalty or premium. After such six (6) month period has elapsed, if this
Note has not been paid in full, interest shall again accrue, and the prepayment
restrictions set forth in Paragraph 5 hereof shall be reinstated. The parties
acknowledge that the actual damages which would be sustained by Maker as a
result of Holder's breach of its obligations under this Note would be extremely
difficult and impractical to ascertain, and that the abatement of interest and
the lifting of the prepayment restrictions represents fair and reasonable
compensation to Maker as a result of such breach. The parties intend that this
provision constitute liquidate damages pursuant to California Civil Code Section
1671.
17. MISCELLANEOUS PROVISIONS.
(a) Maker, and each endorser, cosigner and guarantor of this Note
expressly grants to Holder the right to release or to agree not to sue any other
person, or to suspend the right to enforce this Note against such other person
or to otherwise discharge such person; and Maker, and each endorser, cosigner
and guarantor agrees that the exercise of such rights by Holder will have no
effect on the liability of any other person, primarily or secondarily liable
hereunder. Maker, and each endorser, cosigner and guarantor of this Note waives,
to the fullest extent permitted by law, demand for payment, presentment for
payment, protest, notice of protest, notice of dishonor, notice of nonpayment,
notice of acceleration of maturity, diligence in taking any action to collect
sums owing hereunder, any duty or obligation of Holder to effect, protect,
perfect, retain or enforce any security for the payment of this Note or to
proceed against any collateral before otherwise enforcing this Note, and the
right to plead as a defense to the payment hereof any statute of limitations.
(b) This Note and each payment of principal and interest hereunder
shall be paid when due in lawful money of the United States, without deduction
or setoff of any kind or nature whatsoever.
(c) Maker agrees to reimburse Holder for all costs, including,
without limitation, reasonable attorneys' fees, incurred to collect this Note if
this Note is not paid when due, including, but not limited to, attorneys' fees
incurred in connection with any bankruptcy proceedings instituted by or against
Maker (including relief from stay litigation).
(d) If Maker shall fail to perform or cause to be performed any of
the terms, agreements or covenants of Maker contained in this Note or in any
of the Loan Documents, Holder may, in Holder's sole discretion, but without
any duty to do so and without waiving any default, perform any of such terms,
agreements or covenants, and all sums advanced or expended by Holder in the
performance thereof, together with interest thereon from the date of the
respective advance or expenditure at the Default Rate, shall be due and
payable on demand and such sums and interest thereon shall be secured by the
applicable Loan Documents securing this Note.
(e) If any provision hereof or of any of the Loan Documents is, for
any reason and to any extent, invalid or unenforceable, then neither the
remainder of the document in which such provision is contained, nor the
application of the provision to other persons, entities or circumstances, nor
any of the Loan Documents, shall be affected thereby, but instead shall be
enforceable to the maximum extent permitted by law.
-6-
<PAGE>
(f) This Note shall be a joint and several obligation of Maker, and
all endorsers, cosigners and guarantors, if any, hereof, and shall be binding
upon them and their respective heirs, personal representatives, successors and
assigns.
(g) This Note may not be modified or amended orally, but only by a
modification or amendment in writing signed by Holder and Maker.
(h) 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. The word
"person" as used herein shall include any individual, company, firm,
association, partnership, corporation, limited liability company, trust or other
legal entity of any kind whatsoever.
(i) The headings of the paragraphs and sections of this Note are for
convenience of reference only, are not to be considered a part hereof and shall
not limit to otherwise affect any of the terms hereof.
(j) In the event that at any time any payment received by Holder
hereunder shall be deemed by final order of a court of competent jurisdiction to
have been a voidable preference or fraudulent conveyance under the bankruptcy or
insolvency laws of the United States, or shall otherwise be deemed to be due to
any party other than Holder, then, in any such event, the obligation to make
such payment shall survive any cancellation of this Note and/or return thereof
to Maker and shall not be discharged or satisfied by any prior payment thereof
and/or cancellation of this Note, but shall remain a valid and binding
obligation enforceable in accordance with the terms and provisions hereof, and
the amount of such payment shall bear interest at the Default Rate from the date
of such final order until repaid hereunder.
///
///
///
///
///
///
///
///
///
///
///
///
///
///
///
///
///
///
///
-7-
<PAGE>
18. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
MAKER AND EACH ENDORSER, CO-SIGNER AND GUARANTOR HEREOF HEREBY EXPRESSLY
WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY ACTION, CAUSE OF ACTION, CLAIM,
DEMAND, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO THIS NOTE, OR IN ANY
WAY CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
WITH RESPECT TO THIS NOTE, OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, TO THE MAXIMUM EXTENT PERMITTED BY
LAW, EACH OF SUCH PARTIES HEREBY AGREES THAT ANY SUCH ACTION, CAUSE OF
ACTION, CLAIM, DEMAND, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL
WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OF THIS
SECTION WITH ANY COURT OR OTHER TRIBUNAL AS WRITTEN EVIDENCE OF THE CONSENT
OF ANY OTHER PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF Maker has executed this Secured Convertible
Promissory Note as of the day and year first above written.
"MAKER"
TOUCH CONTROLS, INC., a California
Corporation
By /s/ Marie L. Frulls
--------------------------------
Its President
-------------------------------
-8-
<PAGE>
WESTMINSTER CAPITAL, INC.
1997 STOCK INCENTIVE PLAN
Section 1. PURPOSE OF PLAN
The purpose of this 1997 Stock Incentive Plan ("Plan") of Westminster
Capital, Inc., a Delaware corporation (the "Company"), is to enable the Company
and its subsidiaries to attract, retain and motivate their directors, employees
and consultants by providing for or increasing the proprietary interests of such
persons in the Company.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any person, including any director of the Company, who is a director,
employee, consultant or adviser of the Company or any of its subsidiaries (a
"Grantee") shall be eligible to be considered for the grant of Awards (as
hereinafter defined) hereunder, PROVIDED HOWEVER, that only those Grantees who
are employees of the Company or any of its subsidiaries shall be eligible to be
considered for the grant of Incentive Stock Options (as hereinafter defined)
hereunder.
Section 3. AWARDS
(a) The Board of Directors of the Company (the "Board") or the
Committee (as hereinafter defined), on behalf of the Company, is authorized
under this Plan to enter into any type of arrangement with a Grantee that is
not inconsistent with the provisions of this Plan and that, by its terms,
involves or might involve the issuance of (i) shares of Common Stock, par
value $.01 per share, of the Company (the "Common Shares") or (ii) a
Derivative Security (as such term is defined in Rule 16a-1 promulgated under
the Securities Exchange Act of 1934, as such Rule may be amended from time to
time) with an exercise or conversion privilege at a price related to the
Common Shares or with a value derived from the value of the Common Shares.
The entering into of any such arrangement is referred to herein as the
"grant" of an "Award."
(b) Awards are not restricted to any specified form or structure
and may include, without limitation, sales or bonuses of stock, restricted
stock, stock options, reload stock options, stock purchase warrants, other
rights to acquire stock, securities convertible into or redeemable for stock,
stock appreciation rights, limited stock appreciation rights, phantom stock,
dividend equivalents, performance units or performance shares, and an Award
may consist of one such security or benefit, or two or more of them in tandem
or in the alternative.
(c) Common Shares may be issued pursuant to an Award for any lawful
consideration as determined by the Committee, including, without limitation,
services rendered by the recipient of such Award.
(d) Awards in the form of options shall provide for an exercise
price which is not less than 85% of the fair value of the stock at the time
the option is granted, except that the price shall be 110% of the fair value
in the case of any person who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company. For
purposes of this Paragraph (d) the fair value of stock issuable upon exercise
of an option shall be determined by the Board of Directors of the Company or
Committee taking into account the following:
(i) If stock of the same class is publicly traded in an active
market of substantial depth, the recent market price of such securities.
<PAGE>
(ii) If stock of the same class has not been so publicly traded,
the price at which securities of reasonably comparable corporations (if
any) in the same industry are being traded, subject to appropriate
adjustment for the dissimilarities between the corporations being compared.
(iii) In the absence of any reliable indicator under subparagraph
(i) of (ii) above, the earnings history, book value and prospects of the
Company in the light of market conditions generally.
(e) The exercise period for awards granted in the form of options
shall be not more than 120 months from the date the option is granted.
(f) Awards granted in the form of options shall provide that neither
the option nor any interest therein may be sold, assigned, conveyed, gifted,
pledged, hypothecated or otherwise transferred in any manner other than by will
or the laws of descent and distribution.
(g) Awards granted in the form of options shall be exercisable at the
rate of at least 20% per year over five years from the date the option is
granted.
(h) Awards granted in the form of options shall provide that the
holder of the option shall have the right to exercise in the event of
termination of employment to the extent that the holder is entitled to exercise
on the date employment terminates as follows:
(i) At least six months from the date of termination if
termination was caused by death or disability.
(ii) At least 30 days from the date of termination if
termination was caused other than by death or disability.
(i) Subject to the other specific provisions of this Plan, the Board
or the Committee, in its sole and absolute discretion, shall determine all of
the terms and conditions of each Award granted under this Plan, which terms and
conditions may include, among other things:
(i) a provision permitting the recipient of such Award,
including any recipient who is a director or officer of the Company, to pay
the purchase price of the Common Shares or other property issuable pursuant
to such Award, or such recipient's tax withholding obligation with respect
to such issuance, in whole or in part, by any one or more of the following:
(A) the delivery of previously owned shares of capital
stock of the Company (including "pyramiding") or other property,
(B) a reduction in the amount of Common Shares or other
property otherwise issuable pursuant to such Award, or
(C) the delivery of a promissory note, the terms and
conditions of which shall be determined by the Committee; or
(ii) a provision required in order for such Award to qualify as
an incentive stock option under Section 422 of the Internal Revenue Code
(an "Incentive Stock Option").
2
<PAGE>
(j) No Awards shall be granted pursuant to this Plan if, after the
granting of the Award, the number of Common Shares subject to such Award and all
other Awards then outstanding under this Plan and all other stock option, stock
bonus, stock purchase and other similar plans for employees, directors and/or
consultants exceeds 30% of the then outstanding shares of Common Stock of all
classes (determined by treating all shares of convertible preferred or
convertible senior common stock as if they had been converted but not taking
into account any shares subject to promotional waivers under Section 260.141 of
Title 10 of the California Code of Regulations), unless a percentage higher than
30% is approved by at least two-thirds of the outstanding shares entitled to
vote. All calculations under this Section 4(i) shall be made in accordance with
the conditions and exclusions of Rule 260.140.45 of Title 10 of the California
Code of Regulations.
Section 4. STOCK SUBJECT TO PLAN
(a) The aggregate number of Common Shares that may be issued pursuant
to all Incentive Stock Options granted under this Plan shall not exceed
1,000,000. Such maximum number does not include the number of Common Shares
subject to the unexercised portion of any Incentive Stock Option granted under
this Plan that expires or is terminated. Such maximum number of Common Shares
is subject to adjustment as provided in Section 7 hereof (and is referred to
herein as the "Share Limitation").
(b) At any time, the aggregate number of Common Shares issued and
issuable pursuant to all Awards (including all Incentive Stock Options) granted
under this Plan shall not exceed the Share Limitation, subject to adjustment as
provided in Section 7 hereof.
(c) For purposes of Section 4(b) hereof, the aggregate number of
Common Shares issued and issuable pursuant to Awards granted under this Plan
shall at any time be deemed to be equal to the sum of the following:
(i) the number of Common Shares which were issued prior to such
time pursuant to Awards granted under this Plan excluding (except for
purposes of computing the Share Limitation applicable to Incentive Stock
Options granted under this Plan) shares which were reacquired by the
Company pursuant to provisions in the Awards with respect to which those
shares were issued giving the Company the right to reacquire such shares
upon the occurrence of certain events; plus
(ii) the number of Common Shares which are or may be issuable at
or after such time pursuant to outstanding Awards granted under this Plan
prior to such time.
(d) The maximum number of shares as to which Awards can be made to
any employee in any calendar year under this Plan is 500,000.
Section 5. DURATION OF PLAN
No Awards shall be granted under this Plan after ______, 2007.
Although Common Shares may be issued after ______, 2007 pursuant to Awards
granted prior to such date, no Common Shares shall be issued under this Plan
after _______, 2017.
Section 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by the Board or a committee
thereof (the "Committee") consisting of two or more directors.
3
<PAGE>
(b) Subject to the provisions of this Plan, the Board or the
Committee shall be authorized and empowered to do all things necessary or
desirable in connection with the administration of this Plan, including, without
limitation, the following:
(i) adopt, amend and rescind rules and regulations relating
to this Plan;
(ii) determine which persons meet the requirements of
Section 2 hereof for eligibility under this Plan and to which of such
eligible persons, if any, Awards shall be granted hereunder;
(iii) grant Awards to eligible persons and determine the terms
and conditions thereof, including the number of Common Shares issuable
pursuant thereto;
(iv) determine whether, and the extent to which adjustments
are required pursuant to Section 7 hereof; and
(v) interpret and construe this Plan and the terms and
conditions of any Award granted hereunder.
Section 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan
are increased, decreased or exchanged for or converted into a different number
or kind of shares or securities of the Company as a result of a reorganization,
merger, consolidation, recapitalization, restructuring, reclassification, stock
dividend, stock split, reverse stock split or the like, then appropriate and
proportionate adjustments shall be made in (a) the number and type of shares or
other securities of the Company that may be acquired, and the exercise price at
which they may be acquired, pursuant to Incentive Stock Options and other Awards
theretofore granted under this Plan and (b) the maximum number and type of
shares or other securities of the Company that may be issued pursuant to
Incentive Stock Options and other Awards thereafter granted under this Plan.
Section 8. AMENDMENT AND TERMINATION OF PLAN
The Board may amend or terminate this Plan at any time and in any
manner, PROVIDED, HOWEVER, that (a) no such amendment or termination shall
deprive the recipient of any Award theretofore granted under this Plan,
without the consent of such recipient, of any of his or her rights thereunder
or with respect thereto; and (b) no such amendment shall increase the
aggregate number of Common Shares that may be issued to all Incentive Stock
Options granted under this Plan (except pursuant to Section 7 hereof) or
change, alter or modify the employees or class of employees eligible to
receive Incentive Stock Options under the Plan without the approval of the
stockholders of the Company, which approval must be obtained within 12 months
after the adoption of such amendment by the Board.
Section 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of _______, 1997, the date upon which
it was approved by the Board and the holders of a majority of Common Stock of
the Company; PROVIDED, HOWEVER, that no Common Shares may be issued under this
Plan until it has been approved, directly or indirectly, by a majority vote of
the holders of the outstanding shares of Common Stock of the Company at a
meeting duly held or by written consent in accordance with the laws of the State
of Delaware. If an Award granted under this Plan takes the form of an option,
it shall be rescinded if such stockholder approval is not obtained within 12
months before or after the date set forth above upon which this Plan was
approved by the Board. No shares
4
<PAGE>
subject to any such option shall be counted in determining whether such
stockholder approval is obatined.
Section 10. STOCK EXCHANGE REQUIREMENTS; APPLICABLE LAW
Notwithstanding anything to the contrary in this Plan, no Common
Shares purchased upon exercise of an Award, and no certificate representing all
or any part of such shares, shall be issued or delivered if (a) such shares have
not been admitted to listing upon official notice of issuance on each stock
exchange or interdealer quotation system upon which shares of that class are
then listed or (b) in the opinion of counsel to the Company, such issuance or
delivery would cause the Company to be in violation of or to incur liability
under any Federal, state or other securities law, or any requirement of any
listing agreement to which the Company is a party, or any other requirement of
law or of any administrative or regulatory body having jurisdiction over the
Company.
Section 11. INFORMATION TO GRANTEES
The Company will provide to all Grantees of Awards under this Plan for
so long as such Awards remain outstanding financial statements of the Company at
least annually on or before 120 days after the end of each fiscal year of the
Company. Such financial statements shall consist of a balance sheet, income
statement and statement of cash flows and shall be audited if the Company is
then employing independent certified public accountants to audit its financial
statements. Such financial statements need not comply with Section 260.613 of
Title 10 of the California Code of Regulations.
5
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Name State of Incorporation
- ------------------------------------------ --------------------------
Westland Associates, Inc. California
Global Telecommunications Systems, Ltd. N/A - Limited Partnership
Westminster Finance, Inc. California
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
No. 33-21177 of Westminster Capital, Inc. on Form S-8 of our report dated
March 11, 1998, appearing in this Annual Report on Form 10-K of Westminster
Capital, Inc. for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------
DELOITTE & TOUCHE LLP
Los Angeles, California
March 30, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Westminster Capital, Inc.:
We consent to incorporation by reference in the registration statement No.
33-21177 on Form S-8 of Westminster Capital, Inc. of our report dated March
1, 1997, relating to the consolidated statements of financial condition of
Westminster Capital, Inc. and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1996,
which report appears in the December 31, 1997, annual report on Form 10-K of
Westminster Capital, Inc.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF REGISTRANT AS OF DECEMBER 31,
1997 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS OF REGISTRANT FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,738,000
<SECURITIES> 20,719,000
<RECEIVABLES> 8,094,000
<ALLOWANCES> 11,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,721,000
<DEPRECIATION> 1,177,000
<TOTAL-ASSETS> 34,870,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 7,835,000
<OTHER-SE> 18,133,000
<TOTAL-LIABILITY-AND-EQUITY> 34,870,000
<SALES> 2,711,000
<TOTAL-REVENUES> 7,996,000
<CGS> 2,539,000
<TOTAL-COSTS> 5,667,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,329,000
<INCOME-TAX> 932,000
<INCOME-CONTINUING> 1,371,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,371,000
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND CONSOLIDATED STATEMENTS OF
OPERATIONS OF REGISTRANT FOR THE TWO YEARS ENDED 12-31-1996, THE THREE MONTHS
ENDED 3-31-1996 AND THE SIX MONTHS ENDED 6-30-1996 AND THE NINE MONTHS ENDED
9-30-1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996
JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 2,310,000 1,715,000 1,246,000 1,796,000
792,000
<SECURITIES> 24,162,000 20,247,000 21,194,000 21,317,000
21,762,000
<RECEIVABLES> 4,861,000 2,834,000 3,101,000 2,845,000
3,427,000
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 0 0 0 0
0
<CURRENT-ASSETS> 0 0 0 0
0
<PP&E> 1,818,000 1,791,000 1,823,000 1,823,000
1,811,385
<DEPRECIATION> 690,000 413,000 510,000 580,000
633,762
<TOTAL-ASSETS> 33,212,000 28,199,000 29,198,000 29,630,000
29,836,000
<CURRENT-LIABILITIES> 0 0 0 0
0
<BONDS> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 7,835,000 7,815,000 7,815,000 7,815,000
7,815,000
<OTHER-SE> 17,632,000 15,285,000 15,924,000 16,250,000
16,380,000
<TOTAL-LIABILITY-AND-EQUITY> 33,212,000 28,199,000 29,199,000 29,630,000
29,836,000
<SALES> 0 0 0 0
0
<TOTAL-REVENUES> 5,234,000 4,596,000 1,711,000 2,967,000
3,945,000
<CGS> 0 0 0 0
0
<TOTAL-COSTS> 2,763,000 0 0 0
0
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 50,000 0 0 0
0
<INTEREST-EXPENSE> 0 0 0 0
0
<INCOME-PRETAX> 2,471,000 1,777,000 997,000 1,582,000
1,954,000
<INCOME-TAX> 840,000 420,000 340,000 506,000
645,000
<INCOME-CONTINUING> 1,571,000 1,302,000 639,000 1,033,000
1,247,000
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 1,571,000 1,308,000 639,000 1,033,000
1,247,000
<EPS-PRIMARY> .20 .17 .08 .13
.16
<EPS-DILUTED> .20 .17 .08 .13
.16
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND CONSOLIDATED STATEMENTS OF
OPERATIONS OF REGISTRANT FOR THE THREE MONTHS ENDED MARCH 31, 1997, THE SIX
MONTHS ENDED JUNE 30, 1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 523,000 1,275,000 694,000
<SECURITIES> 20,998,000 21,307,000 20,817,000
<RECEIVABLES> 9,063,000 8,421,000 9,604,000
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 1,812,000 1,812,000 1,812,000
<DEPRECIATION> 748,000 813,000 877,000
<TOTAL-ASSETS> 32,547,000 32,654,000 32,908,000
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 7,835,000 7,835,000 7,835,000
<OTHER-SE> 17,943,000 18,015,000 18,128,000
<TOTAL-LIABILITY-AND-EQUITY> 32,547,000 32,654,000 32,908,000
<SALES> 0 0 0
<TOTAL-REVENUES> 1,681,000 2,512,000 3,624,000
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 0 1,420,000 2,098,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 955,000 1,092,000 1,526,000
<INCOME-TAX> 390,000 445,000 625,000
<INCOME-CONTINUING> 555,000 633,000 877,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 555,000 633,000 877,000
<EPS-PRIMARY> .07 .08 .11
<EPS-DILUTED> .07 .08 .11
</TABLE>
