<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________ to __________
Commission File No.: 0-26276
R.H. PHILLIPS, INC.
(Exact name of small business issuer in its charter)
California 68-0313739
- --------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26836 County Road 12A, Esparto, California 95627
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(Address of principal executive offices)
(530) 662-3215
- --------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Number of shares outstanding of each of the issuer's classes of
common equity as of July 31, 1999: 6,582,559
Transitional Small Business Disclosure Format: Yes No X
--- ---
This document consists of 18 pages, excluding exhibits. The
Exhibit Index is on page 18.
<PAGE> 2
R.H. PHILLIPS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements ................................3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................9
Part II. Other Information
Item 1. Litigation..........................................15
Item 4. Submission of Matters to a Vote of Security Holders.15
Item 6. Exhibits and Reports on Form 8-K....................16
Signatures .............................................................17
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE> 4
<TABLE>
R.H. Phillips, Inc.
Balance Sheet
(In thousands, except share information)
June
30, 1999
--------
(Unaudited)
<S> <C>
Assets
Current assets:
Cash $ 304
Accounts receivable 3,317
Inventories 15,121
Prepaid expenses and other current assets 1,071
-------
Total current assets 19,813
Property, plant and equipment, net 36,043
Other assets 696
-------
$56,552
=======
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 1,832
Accounts payable 2,141
Accrued payroll and related 534
Accrued selling expenses 772
Accrued income taxes 244
Other accrued liabilities 446
-------
Total current liabilities 5,969
Long-term debt 24,839
Subordinated debt 2,288
Deferred income taxes 2,082
Deferred gain and vineyard development costs 16
Commitments and contingencies
Redeemable preferred stock, redeemable at $2,500,000 2,288
Shareholders' equity:
Non-redeemable preferred stock, no par value,
4,750,000 shares authorized, none issued
and outstanding --
Common stock, no par value, 12,500,000 shares
authorized, 6,582,559 shares issued and outstanding 14,491
Additional paid-in capital 337
Retained earnings 4,242
-------
Total shareholders' equity 19,070
-------
$56,552
=======
</TABLE>
[FN]
See accompanying notes.
<PAGE> 5
<TABLE>
R.H. Phillips, Inc.
Statements of Income
(In thousands, except share information)
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 10,904 $ 9,654 $ 5,903 $ 5,666
Cost of sales 4,969 4,941 2,631 2,941
-------- -------- -------- --------
Gross profit 5,935 4,713 3,272 2,725
Selling expenses 2,895 2,218 1,584 1,200
General and administrative expenses 566 485 306 223
-------- -------- -------- --------
Operating income 2,474 2,010 1,382 1,302
Interest expense (859) (563) (481) (285)
Other income, net 105 82 42 34
-------- -------- -------- --------
Income before provision for
income taxes 1,720 1,529 943 1,051
Provision for income taxes (692) (615) (379) (423)
-------- -------- -------- --------
Net income $ 1,028 $ 914 $ 564 $ 628
======== ======== ======== ========
Net income $ 1,028 $ 914 $ 564 $ 628
Dividends and accretion on
Redeemable Preferred Stock (91) (170) (6) (85)
-------- -------- -------- --------
Net income applicable to
Common Shareholders $ 937 $ 744 $ 558 $ 543
======== ======== ======== ========
Net income per share -
basic and diluted .14 .11 .08 .08
Shares used in per share calculations:
- - Basic 6,582,559 6,582,559 6,582,559 6,582,559
- - Diluted 6,582,787 6,582,824 6,583,016 6,582,991
</TABLE>
[FN]
See accompanying notes
<PAGE> 6
<TABLE>
R.H. Phillips, Inc.
Statements of Cash Flows
(In thousands)
<CAPTION>
Six months Three months
ended June 30, ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,028 $ 914 $ 564 $ 628
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,322 993 653 509
Gain on disposal of property,
plant and equipment (2) (11) (2) (6)
Net changes in assets and liabilities:
Accounts receivable (334) (318) (508) (383)
Inventories (2,447) (1,152) (1,792) (393)
Prepaid expenses and other
current assets 46 160 233 58
Other assets (17) (49) 4 (13)
Accounts payable 1,083 386 1,060 609
Accrued payroll and related 201 152 298 153
Accrued selling expenses 290 204 223 62
Accrued income taxes 244 301 (74) 178
Other accrued liabilities 48 (11) 21 20
------- ------- ------- -------
Net cash provided by operating
activities 1,462 1,569 680 1,422
Cash flows from investing activities:
Purchase of property, plant and
equipment (4,116) (3,190) (2,869) (2,179)
Proceeds from sale of property,
plant and equipment 5 14 5 9
------- ------- ------- -------
Net cash used in investing activities (4,111) (3,176) (2,864) (2,170)
Cash flows from financing activities:
Cash dividends paid (150) (150) -- --
Proceeds from long-term debt and
notes payable 7,692 7,288 4,449 3,854
Principal payments on long-term debt
and notes payable (4,544) (5,104) (2,100) (2,807)
Payment for development of leased
vineyards and related fees (196) (315) (87) (219)
Other financing activities, net -- (4) -- --
------- ------- ------- -------
Net cash provided by financing
activities 2,802 1,715 2,262 828
------- ------- ------- -------
Increase in cash 153 108 78 80
Cash at beginning of period 151 109 226 137
------- ------- ------- -------
Cash at end of period $ 304 $ 217 $ 304 $ 217
======= ======= ======= =======
Other cash flow information:
Interest paid (including capitalized
interest of $166 and $244 in 1999
and 1998, respectively) $ 859 $ 680 $ 427 $ 380
Income taxes paid $ 453 $ 313 $ 453 $ 244
Noncash transactions:
Issuance of notes payable to finance
inventory, property, plant and
equipment purchased $ -- $ 4 $ -- $ --
Issuance of stock dividend $ 150 $ 150 $ -- $ --
Accretion of redeemable preferred stock $ 16 $ 20 $ 6 $ 10
Conversion of preferred stock to
subordinated debt $ 2,281 $ -- $ -- $ --
</TABLE>
[FN]
See accompanying notes
<PAGE> 7
R.H. Phillips, Inc.
Notes to Financial Statements
June 30, 1999
1. Summary of Significant Accounting Policies
The interim financial statements as of June 30, 1999 and for each of
the six and three month periods ended June 30, 1999 and 1998 have
been prepared by R.H. Phillips, Inc. ("R.H. Phillips"), and are
unaudited. In the opinion of management, the financial statements
include all adjustments (which include only normal recurring entries)
necessary for a fair presentation. The operating results for the six
and three month periods ended June 30, 1999 and 1998 are not
necessarily indicative of the results which might be realized for the
full year. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to generally accepted accounting principles
applicable for interim periods. These statements should be read in
conjunction with the financial statements and notes included in R.H.
Phillips' Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statement and accompanying notes. Actual results could
differ from those estimates.
2. Computation of Net Income per Share
Basic net income per share for the six and three month periods ended
June 30, 1999 and 1998 was computed using the weighted average
number of common shares outstanding during each period. Diluted
net income per share was computed using the weighted average
number of common shares and dilutive potential common shares
outstanding during each period. There were 228 and 457 dilutive
potential common shares outstanding for the six and three month
periods ended June 30, 1999, respectively. Potential common shares
outstanding which could have a dilutive effect in the future, but were
anti-dilutive for the six and three month periods ended June 30, 1999,
totaled 2,333,370 and 2,333,141, respectively. Basic and diluted net
income per share and the weighted average number of common
shares outstanding for the six and three month periods ended June
30, 1998 have been restated to reflect stock dividends of 48,071
shares issued in September 1998 and 50,728 shares issued in March
1999.
3. Long-term Debt
R.H. Phillips obtained three long-term loans totaling $876,000 from
General Electric Capital Corporation during the six month period
ended June 30, 1999. The first loan bears interest at annual rate of
7.41%, and principal and interest are due in 84 monthly installments.
The second loan bears interest at annual rate of 7.23%, and principal
and interest are due in 60 monthly installments. The third loan bears
interest at annual rate of 8.06%, and principal and interest are due in
84 monthly installments. The loans are all collateralized by
equipment.
4. Subordinated Debt and Preferred Stock
In March 1999, R.H. Phillips exchanged, at par, 500,000 shares of
Senior Redeemable Preferred Stock for unsecured subordinated debt
with a principal amount of $2,500,000 and 250,000 shares of
Redeemable Exchangeable Preferred Stock ("Exchangeable
Preferred"). The subordinated debt carries an annual interest rate of
14%, payable semiannually. The Exchangeable Preferred bears a
cumulative annual dividend of $1.20 per share payable semiannually
in shares of Common Stock at a price equal to the lower of the
average daily
<PAGE> 8
market price over a period of twenty consecutive
trading days before the dividend payment date or $4.00 per share.
After March 15, 2000, R.H. Phillips has the option to convert the
Exchangeable Preferred to unsecured subordinated debt at an interest
rate to be determined at the time of conversion. If the Exchangeable
Preferred is not converted at March 15, 2000, the $1.20 per share
dividend will become payable in cash. The subordinated debt,
including any amount converted from Exchangeable Preferred, can
be paid, at R.H. Phillips' option, after March 15, 2001. R.H. Phillips
is required to make principal payments (including redemption
payments if the Exchangeable Preferred is not converted to
subordinated debt) of $1,666,666 in 2004, $1,666,667 in 2005 and
$1,666,667 in 2006.
5. Litigation
Phillips Farms, a partnership operating a winery in Lodi,
California, filed a lawsuit against R.H. Phillips on August 5, 1999
in the Superior Court of the State of California, County of San
Joaquin. Phillips Farms is suing R.H. Phillips for trademark
infringement, dilution and unfair competition arising out of R.H.
Phillips' use of the name "Phillips" in connection with the sale of
wine. Phillips Farms also alleges that R.H. Phillips has publicly
disparaged the quality of the wine Phillips Farms sells. Phillips
Farms is seeking damages in an amount to be determined by the
court at trial, but in no event less than $500,000, and a preliminary
and permanent injunction prohibiting R.H. Phillips' use of any
infringing trademarks among other relief.
R.H. Phillips believes that it has meritorious defenses to the
claims of Phillips Farms and also has legal claims against Phillips
Farms for infringement of R.H. Phillips' trademarks and trade
dress among other actions. R.H. Phillips has not yet responded to
the complaint of Phillips Farms but intends to do so shortly. If
Phillips Farms is successful in its suit, R.H. Phillips could be
required to cease use of the "R.H. Phillips" trademarks, which
could have an adverse effect upon the business and financial
condition of R.H. Phillips.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
In reviewing the following management's discussion and
analysis, the reader should refer to the historical financial
statements of R.H. Phillips, Inc. The discussion of the results and
trends does not necessarily imply that these results and trends
will continue. For the following discussion, a "case" means a 9-liter
case of wine. All numbers are approximate.
Forward-Looking Statements
R.H. Phillips provides in this report and elsewhere from time
to time forward-looking statements regarding R.H. Phillips, its
products, the wine business, and general business and economic
conditions. Examples of forward-looking statements include
projections regarding future expansion, trends in the wine industry,
sources of supply, costs of production, profit margins, and
availability and sources of financing. The actual results of R.H.
Phillips may vary due to a variety of factors, including the
following:
Availability of Future Financing. R.H. Phillips may continue
to heavily depend upon its ability to raise additional debt or equity
financing for its working capital and capital expansion needs. The
ability to raise financing is in turn dependent upon a variety of
factors, some of which are outside the control of R.H. Phillips.
These factors include, but are not limited to, interest rates, the
availability of financing sources, and general economic conditions.
If interest rates increase or other financing becomes unavailable or
more costly to obtain, R.H. Phillips may not be able to raise
sufficient capital to supply its needs.
Costs of Expansion. Management has based its assumptions
concerning the costs of expansion on assumptions which it believes
are reasonable. However, there can be no assurance that R.H.
Phillips' estimates will prove to be correct. If costs are higher than
anticipated, R.H. Phillips may be required to raise an even greater
amount of financing or reduce the rate of expansion.
Costs of Production. Statements with respect to the general
decline in R.H. Phillips' cost of production are based on
management's assumptions concerning the likely levels of future sales
by R.H. Phillips, projected yields from R.H. Phillips' vineyards and
the cost and availability of bulk wine and grapes from the spot
market. For example, if R.H. Phillips' sales increase at a faster rate
than anticipated or R.H. Phillips' grape production is lower than
projected, R.H. Phillips could be forced to make additional
purchases of grapes and wine on the spot market. Management believes that
such events could increase R.H. Phillips' costs of production.
Market Conditions. Assumptions as to the desirability of
expansion are based to a great extent on management's beliefs
concerning the current status of and trends within the wine
industry. Market conditions in the wine industry have changed substantially
from time to time. To the extent market conditions change
substantially in the future, the rate at which R.H. Phillips deems it
advisable to expand its vineyard and winery facilities may be
adjusted.
Other Factors. A variety of other factors could affect the
actual results of R.H. Phillips. These include changes in economic
conditions, unexpected adverse weather or growing conditions,
reduction or increases in consumer demand, changes in
governmental regulation concerning the production and sale of wine, and
increased competition from foreign or domestic wine producers.
Seasonality
R.H. Phillips usually experiences substantial seasonal
fluctuations in revenue and expenditures. Sales volumes generally
increase during the holiday season, which causes a large
percentage of sales to occur during the last three months of each year.
R.H. Phillips' expenditures fluctuate throughout the year based on
vineyard and winery activities. Expenditures typically peak during
the summer and early autumn.
<PAGE> 10
Costs of Production
R.H. Phillips' vineyards produced 7,700 tons of grapes in
1998, compared to 5,100 tons in 1997. The increase was primarily
due to production from new vineyards. R.H. Phillips has expanded
the size of its vineyards to lessen its dependence on outside
sources of bulk wines and grapes and reduce its cost of goods.
Management anticipates that the full benefit of the vineyard expansion
should continue to be realized over the next several years as the vines
mature.
The Dunnigan Hills region experienced an unusual period of
below freezing weather during early April 1999. The cold weather
damaged some of the fruit producing buds in R.H. Phillips'
Chardonnay vineyards. Management estimates that the 1999
Chardonnay yield per acre will be 35% below average, which
would negatively affect Chardonnay product margins in 2000.
Management believes that production from recently planted Chardonnay
vineyards will partially offset the crop damage, and that overall
Chardonnay yields will be approximately 15% less than 1998. Management
believes that other varietals were not significantly affected.
Despite the anticipated lower Chardonnay yields, the total 1999 crop
for all varietals combined should be larger than the 1998 crop due to
production from recently planted vineyards.
Results of Operations
Net Sales
Net sales for the six month period ended June 30, 1999 were
$10,904,000, a 13% increase over net sales of $9,654,000 for the
corresponding period of the prior year. Net sales included sales of
bulk wines and other items totaling $536,000 for the six month
period ended June 30, 1999, compared to $503,000 for the
corresponding period in 1998. The increase in net sales was
primarily due to a greater proportion of higher priced, super
premium wines. Sales of super premium wines increased from 20,000 cases
for the six month period ended June 30, 1998 to 30,000 cases for
the same period in 1999. This resulted in an average price per case of
$54.56 for the six month period ended June 30, 1999, compared to
$50.44 for the same period in 1998. Higher sales volumes also
contributed to the increase in net sales. R.H. Phillips sold 190,000
cases during the six month period ended June 30, 1999, compared
to 181,000 in the corresponding period of the prior year.
Gross Profit
Gross profit was $5,935,000 for the six month period ended
June 30, 1999, a 26% increase over $4,713,000 for the same
period in 1998. Excluding sales of bulk wines and other items, gross
profit was $5,860,000 in 1999, compared to $4,790,000 in 1998. Gross
margins were 54% for the six month period ended June 30, 1999,
compared to 49% for the same period in 1998. The increase in
gross margins is primarily attributable to the higher average selling
prices discussed above and, to a lesser degree, to a decrease in the
average cost per case. The average cost per case for the six month period
ended June 30, 1999 was $23.72, compared to $24.04 for the
same period in 1998.
Selling Expenses
Selling expenses were $2,895,000, or 27% of net sales, for
the six month period ended June 30, 1999, an increase from
$2,218,000, or 23% of net sales, for the same period in 1998. The
$677,000 increase is primarily due to increased sales promotion
and labor costs.
General and Administrative Expenses
General and administrative expenses were $566,000, or 5%
of net sales, for the six month period ended June 30, 1999.
General and administrative expenses were $485,000, or 5% of sales,
for the six month period ended June 30, 1998. The $81,000 increase is
primarily due to higher repair and maintenance expense.
<PAGE> 11
Interest Expense
Interest expense for the six month period ended June 30,
1999 was $859,000, compared to $563,000 for the same period in
1998. R.H. Phillips capitalized $166,000 of additional interest
pertaining to vineyard and winery development during the six
month period ended June 30, 1999, and $244,000 during the same period
in 1998. R.H. Phillips had fewer vineyards under development
during the first six months of 1999 than during the same period in 1998,
causing capitalized interest to decrease. The increase in total
interest cost is primarily due to borrowings to fund 1998 capital
improvements, and the conversion of $2,500,000 of preferred
stock to subordinated debt in March 1999. The interest is attributable to
R.H. Phillips' debt obligations and bank line of credit.
Other Income, net
Other income, net for the six month period ended June 30,
1999 was $105,000, compared to $82,000 for the same period in
1998. The income was primarily from crop subsidies and vineyard
management fees.
Provision for Income Taxes
Provision for income taxes for the six month period ended
June 30, 1999 was $692,000, compared to $615,000 for the same
period in 1998. The $77,000 increase is due to higher income.
Net Income
R.H. Phillips generated net income of $1,028,000 for the six
month period ended June 30, 1999, compared to $914,000 for the
same period in 1998. The $114,000 increase was primarily due to
higher gross profit, which was partially offset by increased selling
expenses.
Liquidity and Capital Resources
R.H. Phillips has financed its working capital and capital
expansion needs through internally generated funds, outside credit
facilities, equity financing, and the sale and leaseback of certain
assets. R.H. Phillips has made substantial capital expenditures to
expand its vineyards and winery facilities, obtain production
efficiencies, and improve wine quality. R.H. Phillips' cash flows
from operations have not been sufficient to satisfy all of the working
capital and capital expenditure requirements needed to keep pace
with its growth.
R.H. Phillips had cash totaling $304,000 on June 30, 1999,
an increase from $151,000 on December 31, 1998. Sources of
cash during the six month period ended June 30, 1999 included cash
from operations of $1,462,000 and proceeds from long-term debt of
$7,692,000. Cash used during that period included $4,116,000
invested in property, plant and equipment and $4,544,000 to repay
debt.
Current assets increased by $2,889,000 during the six month
period ended June 30, 1999, primarily due to an increase in
inventories from $12,674,000 on December 31, 1998 to
$15,121,000 on June 30, 1999. The increase is primarily due to inventoried
work in progress pertaining to the 1999 grape crop. Current liabilities
increased by $1,830,000 during the six month period ended June
30, 1999, primarily due to accounts payable relating to winery
expansion. These factors caused net working capital to increase
$1,059,000, from $12,785,000 on December 31, 1998 to $13,844,000 on June
30, 1999.
R.H. Phillips has several long-term loans, the largest of which
was obtained from Metropolitan Life Insurance Company
("Metropolitan"). R.H. Phillips has borrowed $11,000,000 from
Metropolitan, of which $9,980,000 was outstanding at June 30,
1999. The unpaid principal under the loan accrues interest at an
annual rate of 8.04%. The interest rate is subject to adjustment by
Metropolitan every three years, beginning on January 1, 2001.
R.H. Phillips is required to make monthly principal payments of $60,000
plus accrued
<PAGE> 12
interest. The loan matures in January 2013, at which
time R.H. Phillips will be required to make a balloon payment of
$200,000.
R.H. Phillips has a line of credit of $15,000,000 with U.S.
Bank National Association ("U.S. Bank") to finance its working
capital requirements. The line of credit is secured by accounts
receivable, inventory, the grape crop, and unencumbered farm
equipment, and matures April 2001. The annual interest rate on
the line is either U.S. Bank's prime rate or IBOR plus 150 basis points,
at R.H. Phillips' option. The balance on the line at June 30, 1999
was $11,116,000.
In addition to loans with Metropolitan and U.S. Bank, R.H.
Phillips has several smaller loans, which are generally secured by
equipment, and capital leases. The maturity dates range from July
1999 to June 2006 and, excluding capital leases, the interest rates
range from 7.0% to 10.9%. The balances due on these items
totaled $5,575,000 at June 30, 1999.
In May 1997, R.H. Phillips sold 371 acres of land partially
developed into vineyard to John Hancock Mutual Life Insurance
Company ("Hancock"). In connection with the transaction, R.H.
Phillips now manages, operates and leases the land and vineyards
from a subtenant of Hancock, Farmland Management Services, for
a term that expires on December 31, 2012. R.H. Phillips received
proceeds of $5,384,000 from the sale, and began paying rent of
$161,000 per calendar quarter in January 1999. The lease is
accounted for as an operating lease.
In March 1996, R.H. Phillips sold 500,000 shares of Senior
Redeemable Preferred Stock (the "Senior Preferred Stock") and
warrants to purchase up to 1,346,788 shares of Common Stock to
Hancock. The net proceeds R.H. Phillips derived from the sale of
the Senior Preferred Stock and the warrants, after payment of offering
expenses, were $4,785,000. The Senior Preferred Stock bore a
cumulative annual dividend of $1.20 per share, payable
semiannually. During the first four years after issuance, 50% of
the dividend was payable in cash and 50% of the dividend was payable
in shares of Common Stock at a price equal to the lower of the average daily
market price over a period of twenty consecutive trading days
before the dividend payment date or $4.00 per share.
In March 1999, R.H. Phillips exchanged, at par, all shares of
the Senior Preferred Stock for unsecured subordinated debt with a
principal amount of $2,500,000 and 250,000 shares of Redeemable
Exchangeable Preferred Stock ("Exchangeable Preferred"). The
subordinated debt carries an annual interest rate of 14%, payable
semiannually. The Exchangeable Preferred bears a cumulative
annual dividend of $1.20 per share payable semiannually in shares of
Common Stock at a price equal to the lower of the average daily
market price over a period of twenty consecutive trading days
before the dividend payment date or $4.00 per share. After March 15,
2000, R.H. Phillips has the option to convert the Exchangeable
Preferred to unsecured subordinated debt at an interest rate to be
determined at the time of conversion. If the Exchangeable
Preferred is not converted at March 15, 2000, the $1.20 per share dividend
will become payable in cash. The subordinated debt, including any
amount converted from Exchangeable Preferred, can be paid, at
R.H. Phillips' option, after March 15, 2001. R.H. Phillips is required to
make principal payments (including redemption payments if the
Exchangeable Preferred is not converted to subordinated debt) of
$1,666,666 in 2004, $1,666,667 in 2005 and $1,666,667 in 2006.
R.H. Phillips has invested in substantial improvements to its
winery facility and vineyards over the past several years, and plans
to continue the expansion. R.H. Phillips has invested $3,200,000
during 1999 in tanks, barrels, other equipment and buildings, and plans to
invest approximately $1,800,000 more during the balance of the
year. Additional winery expansion projects are planned for the future to
handle the increased production from R.H. Phillips' recently
planted vineyards. R.H. Phillips has invested $900,000 during 1999 in
farm equipment and the continued development of recently planted
vineyards, and plans to invest an additional $500,000 during the
remainder of 1999. R.H. Phillips is funding 1999 capital projects
with internally generated funds, proceeds from the U.S. Bank line
of credit increase, and long-term debt and lease financing.
<PAGE> 13
Phylloxera infestation may have a negative impact on R.H.
Phillips' future grape production. Phylloxera is a root louse which
feeds on grape roots, causing reduced production and eventual
vine death. Of R.H. Phillips' 1,555 acres of vineyard, 187 acres have
rootstock which is susceptible to Phylloxera. Management estimates
these vineyards will be commercially productive for ten years (until
2004), as compared with twenty-five years generally estimated for
vineyards without Phylloxera. The reduction in vineyard useful life
causes an increase in depreciation and maintenance expense. The
increased expenses are added to the cost of grapes harvested, thus
increasing cost of sales. R.H. Phillips has replaced the majority of
Phylloxera-infested or susceptible vines with rootstock believed to
be resistant to Phylloxera.
R.H. Phillips expects that cash flows generated from
operations, together with borrowing availability, will be adequate
to fund R.H. Phillips' operations, capital expansion efforts and debt
service requirements over the next twelve months. However, a
significant decline in R.H. Phillips' expected operating performance
could have a material adverse effect on R.H. Phillips' liquidity. In
such case, R.H. Phillips would adjust its level of capital expenditures
as necessary, obtain additional debt financing or issue equity
securities. However, there can be no assurance that such financing
will be available and, if available, that it could be obtained in terms
favorable to R.H. Phillips.
Year 2000
R.H. Phillips is reviewing its potential exposure to the "Year
2000 Problem", which results from computer programs being written
using two digits rather than four to define the applicable year. As a
result of this problem, computer programs that are not "Year 2000
compliant" may recognize a date using "00" as the year 1900 rather
than 2000. The impact of the Year 2000 Problem on R.H. Phillips is
difficult to assess at this time, but the Year 2000 Problem could
result in a system failure or miscalculation causing disruptions of
operations, including a temporary inability to process sales, send
invoices, retain accurate data or engage in normal business activities.
The Year 2000 Problem may also affect the operations of suppliers,
distributors, vendors and others with whom R.H. Phillips does
business, thereby adversely affecting R.H. Phillips as well.
R.H. Phillips has completed its internal assessment of its own
information technology systems and non-information technology
systems to ascertain whether they are Year 2000 compliant. R.H.
Phillips is also in the process of assessing the potential effect upon its
operations of Year 2000 Problems encountered by its suppliers,
customers, bank and others with whom it does business. Although
R.H. Phillips is implementing measures to reduce its potential
exposure to the Year 2000 Problem, due to the general uncertainty
over the Year 2000 readiness of third parties, R.H. Phillips is unable
to determine at this time whether the consequences of Year 2000
failures will have a material impact.
R.H. Phillips uses several information technology systems,
some of which may be affected by the Year 2000 Problem.
Management reviewed its critical computer systems in order to
determine whether any software requires updating or replacement
and determined that its primary financial and operating software was
not Year 2000 compliant. The software supplier is in the process of
making the software Year 2000 compliant, and has advised R.H.
Phillips that the software supplier will bear the costs of the
modification. The supplier has informed R.H. Phillips that the
reprogramming for Year 2000 compliance is over 90% complete, and
that the estimated completion date is September 1999. R.H. Phillips
cannot be certain that the supplier will be able to meet this deadline.
R.H. Phillips has also agreed to provide personnel to assist in
software testing scheduled for September 1999. The costs R.H.
Phillips incurs in connection with this testing will be expensed as
incurred. Management does not believe that these costs will have a
material impact on R.H. Phillips' financial condition. If the supplier
does not make the software Year 2000 compliant within a reasonable
time, it may be necessary for R.H. Phillips to purchase alternate
financial and operating software. Management believes that the cost
of purchasing and installing new financial and operating software will
not have a material impact on R.H. Phillips' financial condition,
results of operations or cash flows.
<PAGE> 14
R.H. Phillips also reviewed its non-information technology
systems for potential exposure to the Year 2000 Problem, and
invested approximately $10,000 to upgrade certain non-information
technology systems to Year 2000 compliance. These replacement
costs were capitalized. Although management cannot be certain all
problems have been corrected, management believes that R.H.
Phillips' non-information technology systems are now Year 2000 compliant.
Outside parties whose exposure to Year 2000 Problems may
have a material impact on R.H. Phillips' operations include its bank,
major customers, and major suppliers. Management has reviewed the
issue with bank representatives, and believes that the Year 2000
Problem will not materially affect R.H. Phillips' banking operations.
Management believes that one or more of R.H. Phillips' customers
could have their operations interrupted or terminated by Year 2000
problems. Such an event could result in the delay of payments to
R.H. Phillips. Management believes that it would be impractical to
attempt to measure the potential risk of such an occurrence, and that
correction of Year 2000 Problems R.H. Phillips' customers
experience is outside of R.H. Phillips' control. Similarly, R.H.
Phillips' major suppliers may experience Year 2000 Problems,
potentially delaying the shipment of necessary materials.
Management believes that it would be able to find alternate suppliers
should this occur.
The costs of the project and the date on which R.H. Phillips
believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of
certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability
to locate and correct all relevant computer codes, and similar
uncertainties.
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Litigation
Phillips Farms, a partnership operating a winery in Lodi,
California, filed a lawsuit against R.H. Phillips on August 5, 1999
in the Superior Court of the State of California, County of San
Joaquin. Phillips Farms is suing R.H. Phillips for trademark
infringement, dilution and unfair competition arising out of R.H.
Phillips' use of the name "Phillips" in connection with the sale of
wine. Phillips Farms also alleges that R.H. Phillips has publicly
disparaged the quality of the wine Phillips Farms sells. Phillips
Farms is seeking damages in an amount to be determined by the
court at trial, but in no event less than $500,000, and a preliminary
and permanent injunction prohibiting R.H. Phillips' use of any
infringing trademarks among other relief.
R.H. Phillips believes that it has meritorious defenses to the
claims of Phillips Farms and also has legal claims against Phillips
Farms for infringement of R.H. Phillips' trademarks and trade
dress among other actions. R.H. Phillips has not yet responded to
the complaint of Phillips Farms but intends to do so shortly. If
Phillips Farms is successful in its suit, R.H. Phillips could be
required to cease use of the "R.H. Phillips" trademarks, which
could have an adverse effect upon the business and financial
condition of R.H. Phillips.
Item 4. Submission of Matters to a Vote of Security Holders
R.H. Phillips held its 1999 Annual Meeting of Shareholders
on May 25, 1999 at the winery. A total of 4,184,859 shares, or
approximately 64% of the outstanding shares of Common Stock,
were present or represented at the meeting.
The following persons were elected to the Board of Directors
of the Corporation, each of whom was an existing director of the
Corporation at that time: John E. Giguiere, Karl E. Giguiere, Lane
C. Giguiere, R. Ken Coit and Victor L. Motto. No other persons
were nominated for election to the Board of Directors.
The number of shares voting for and withheld from each nominee
is set forth below:
<TABLE>
<CAPTION>
Director Votes for Votes withheld
-------- --------- --------------
<S> <C> <C>
John E. Giguiere 4,169,509 15,350
Karl E. Giguiere 4,169,509 15,350
Lane C. Giguiere 4,169,509 15,350
Victor L. Motto 4,169,509 15,350
R. Ken Coit 4,169,009 15,850
</TABLE>
The shareholders also voted to reappoint Ernst & Young LLP
(Ernst & Young) as R.H. Phillips' independent auditors and to
implement the 1999 Employee Stock Purchase Plan (Stock Purchase
Plan). A total of 4,177,713 shares voted in favor of Ernst & Young,
4,000 shares voted against, and 3,146 shares abstained. A total of
4,139,579 shares voted in favor of the Stock Purchase Plan, 34,330
shares voted against, and 10,950 shares abstained.
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Loan Agreement dated May 1, 1999 between R.H.
Phillips, Inc. and U.S. Bank National Association
10.2 R.H. Phillips 1999 Employee Stock Purchase Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to the signed on
its behalf by the undersigned, thereunto duly authorized.
R.H. PHILLIPS, INC.
(Registrant)
Date: August 12, 1999
By//s//John E. Giguiere
-----------------------------------
John E. Giguiere, Co-President
Co-Chief Executive Officer
By//s//Michael J. Motroni
-----------------------------------
Michael J. Motroni, Chief Financial Officer
Principal Financial Officer
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
10.1 Loan Agreement dated May 1, 1999 between R.H. Phillips, Inc.
and U.S. Bank National Association
10.2 R.H. Phillips 1999 Employee Stock Purchase Plan
27.1 Financial Data Schedules
<PAGE> 1
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is entered into as
of May 1, 1999, by and between R.H. PHILLIPS, INC., a
California corporation ("Borrower"), and U.S. BANK
NATIONAL ASSOCIATION (the "Lender").
RECITALS
A. Borrower has heretofore borrowed up to Ten Million
and No/100 Dollars ($10,000,000.00) from Lender (the "Previous
Loan") pursuant to that certain Loan Agreement between Borrower
and Lender dated as of May 1, 1998, that certain Alternative Rate
Options Promissory Note made by Borrower dated May 1, 1998,
that certain Agricultural Security Agreement executed by Borrower
dated as of May 1, 1998, and certain other loan documents
related thereto (collectively, the "Previous Loan Documents").
B. Borrower has requested from Lender a loan in the
amount of Fifteen Million and No/100 Dollars ($15,000,000.00)
(the "Loan") to replace the Previous Loan and to be used in
connection with certain business activities of Borrower.
C. The Loan shall be secured by a perfected first
priority security interest in certain collateral.
D. Subject to the terms and conditions stated in this
Agreement, Lender has agreed to make the Loan to Borrower.
NOW, THEREFORE, in consideration of the promises
contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. TERM. This Agreement shall be effective as of May
1, 1999, and shall continue thereafter until (a) all Indebtedness of
Borrower to Lender has been paid in full and all obligations of
Borrower to Lender have been fully performed, (b) the parties
terminate this Agreement in writing, or (c) April 30, 2001,
whichever occurs first. Upon execution of this Agreement and all
Related Documents, this Agreement and the Related Documents
shall supersede, replace and terminate the Previous Loan and all
Previous Loan Documents.
2. DEFINITIONS. The following words shall have the
following meanings when used in this Agreement. Terms not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money
of the United States of America.
(a) Agreement. The word "Agreement" means
this Loan Agreement, as it may be amended or modified from time
to time, together with all exhibits and schedules attached hereto
and made a part hereof.
(b) Account. The word "Account" means a trade
account, account receivable, or other right to payment for goods
sold or services rendered owing to Borrower (or to a third party
grantor acceptable to Lender).
(c) Account Debtor. The words "Account
Debtor" mean the person or entity obligated upon an Account.
(d) Advance. The word "Advance" means a
disbursement of Loan funds by Lender to Borrower under this
Agreement.
<PAGE> 2
(e) Borrower. The word "Borrower" means R.H.
PHILLIPS, INC., a California corporation.
(f) Borrower's Properties. The words
"Borrower's Properties" shall mean any real property owned by
Borrower and on which all or any part of the Collateral is stored
or located.
(g) Borrowing Base. The words "Borrowing
Base" means, as determined by Lender from time to time, the
lesser of (1) Fifteen Million and No/100 Dollars ($15,000,000.00);
or (2) the sum of (i) Eighty Percent (80.000%) of the aggregate
amount of Eligible Accounts, plus (ii) Fifty-Five Percent (55.000%)
of the aggregate amount of Eligible Inventory consisting of bulk
and bottled wine, plus (iii) Thirty Percent (30.000%) of the
aggregate amount of Eligible Inventory consisting of non-wine
inventory used in bottling (not to exceed in corresponding Loan
amount based on Eligible Inventory of Thirteen Million Dollars
[$13,000,000.00]).
(h) Business Day. The words "Business Day"
mean a day on which commercial banks are open for business in
the State of California.
(i) CERCLA. The word "CERCLA" means the
Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
(j) Cash Flow. The words "Cash Flow" mean
net income after taxes, and exclusive of extraordinary gains and
income, plus depreciation and amortization.
(k) Collateral. The word "Collateral" means and
includes all property and assets of Borrower of the type of class
described (1) in Exhibit A attached hereto and made a part hereof
or (2) in any financing statement executed by Borrower in favor of
and delivered to Lender, in each case granted by Borrower to
Lender as collateral security for the Loan, whether granted directly
or indirectly and whether granted now or in the future.
(l) Debt. The word "Debt" means all of
Borrower's liabilities (as shown on Borrower's balance sheet from
time to time), excluding Subordinated Debt and preferred stock.
(m) EBIT. The word "EBIT" shall mean the net
income or loss of Borrower, plus the amounts (if any) which, in the
determination of net income (or net loss) for such period, have
been deducted for: (i) Interest Expense, (ii) income tax expense,
(iii) rent expense under leases of property, and (iv) permitted non-
cash charges made by Borrower to write down goodwill or
research or development costs permitted by Lender.
(n) Eligible Accounts. The words "Eligible
Accounts" mean, at any time, all of Borrower's Accounts which
contain selling terms and conditions reasonably acceptable to
Lender. The net amount of any Eligible Accounts against which
Borrower may borrow shall exclude all returns, discounts, credits,
and offsets of any nature. Unless otherwise agreed to by Lender
in writing, Eligible Accounts shall not include the following:
(1) Accounts with respect to which the
Account Debtor is an officer, employee or agent of Borrower.
(2) Accounts with respect to which the
Account Debtor is a subsidiary of, or affiliated with or related to
Borrower or its shareholders, officers, or directors.
(3) Accounts with respect to which goods
are placed on consignment, guaranteed sale, or other terms
pursuant to which payment by the Account Debtor is conditional.
<PAGE> 3
(4) Accounts with respect to which the
Account Debtor is not a resident of the United States, except to
the extent such Accounts are supported by a letter of credit issued
by a United States lending institution, insurance, bonds or other
assurances reasonably satisfactory to Lender.
(5) Accounts based in barter, with respect
to which Borrower is or may become liable to the Account Debtor
for goods sold or services rendered by the Account Debtor to
Borrower.
(6) Accounts which are the subject of
actual or threatened dispute, counterclaim, or setoff.
(7) Accounts with respect to which the
goods have not been shipped or delivered, or the services have
not been rendered, to the Account Debtor.
(8) Accounts with respect to which Lender,
in its reasonable discretion, deems the creditworthiness or
financial condition of the Account Debtor to be unsatisfactory.
(9) Accounts of any Account Debtor who
within the previous year has (i) filed or has had filed against it a
petition in bankruptcy or an application for relief under any
provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; (ii) had appointed a trustee, custodian, or
receiver for the assets of such Account Debtor; or (iii) made an
assignment for the benefit of creditors or has become insolvent or
fails generally to pay its debts (including its payrolls) as such
debts become due.
(10) Accounts with respect to which the
Account Debtor is the United States government or any
department or agency of the United States.
(11) Accounts which have not been paid in
full within sixty (60) days past the invoice due date. The entire
balance of any Account of any single Account Debtor will be
ineligible whenever the portion of the Account which has not been
paid within sixty (60) days past the invoice due date is in excess
of Ten Percent (10.000%) of the total amount outstanding on the
Account.
(12) That portion of Accounts arising from
datings; progress billings; retainages; cash sales; C.O.D. sales;
and service charges, with the exception of the following: credit
card receivables.
(13) That portion of the Accounts of any
single Account Debtor (with the exception of the Account Debtors
named in Section 2(m)(14) hereof (which shall be governed by
that section) which exceeds either (i) Ten Percent (10.00%) of all
Borrower's Accounts, or (ii) the sum of Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00).
(14) That portion of the Accounts of the
following named Account Debtors which exceeds either (i) Twenty
Five Percent (25.00%) of all Borrower's Accounts, or (ii) the sum
of Five Hundred Thousand and No/100 Dollars ($500,000.00):
M.S. Walker, Lauber Imports, and Young's Markets.
(o) Eligible Inventory. The words "Eligible
Inventory" mean, at any time, all of Borrower's Inventory as
defined below except:
(1) Inventory which is not owned by
Borrower free and clear of all security interests, liens, and
encumbrances.
(2) Inventory which Lender, in its
reasonable discretion, deems to be obsolete, unsalable,
damaged, defective, or unfit for further processing.
<PAGE> 4
(3) Red wines aged over sixty (60) months
and white wines aged over thirty-six (36) months. In addition,
Eligible Inventory will be reduced to the extent there are
outstanding liens or storage accounts payable against wines
which are a part of the inventory.
(p) ERISA. The word "ERISA" means the
Employee Retirement Income Security Act of 1974, as amended.
(q) Event of Default. The words "Event of
Default" mean and include without limitation any of the Events of
Default set forth below in the section titled "EVENTS OF
DEFAULT."
(r) Expiration Date. The words "Expiration
Date" mean the date of termination of this Agreement pursuant to
Section 1 hereof.
(s) Grantor. The word "Grantor" means and
includes without limitation each and all of the persons or entities
granting a Security Interest in any Collateral for the purpose of
securing repayment of the Indebtedness, including without
limitation Borrower.
(t) Indebtedness. The word "Indebtedness
means and includes the Loan, together with all other valid and
enforceable obligations, debts and liabilities of Borrower to
Lender.
(u) Interest Bearing Debt. The words "Interest
Bearing Debts" mean any and all debts and liabilities of Borrower
other than Subordinated Debt on which Interest accrues on a
regular basis.
(v) Interest Coverage. The words "Interest
Coverage" shall mean the ratio of EBIT to Interest Expense.
(w) Interest Expense. The words "Interest
Expense" shall mean payments of interest due by Borrower on a
monthly basis under any Interest Bearing Debt.
(x) Inventory. The word "Inventory" means all of
Borrower's raw materials, work in process, finished goods,
merchandise, parts and supplies, of every kind and description,
and goods held for sale in which Borrower now has or hereafter
acquires any right, whether held by Borrower or others, and all
documents of title, warehouse receipts, bills of lading, and all
other documents of every type covering all or any part of the
foregoing. Inventory includes inventory temporarily out of
Borrower's custody or possession and all returns on Accounts.
(y) Line of Credit. The words "Line of Credit"
mean the credit facility described in the Section titled "LINE OF
CREDIT" below.
(z) Liquid Assets. The words "Liquid Assets"
mean Borrower's cash on hand plus Borrower's readily marketable
securities.
(aa) Loan. The word "Loan" means and includes
the loan from Lender to Borrower described herein and/or
described on any exhibit or schedule attached to this Agreement,
as amended in writing from time to time by Borrower and Lender.
(bb) Note. The word "Note" means and includes
Borrower's promissory note or notes evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute,
replacement or refinancing note or notes therefor.
(cc) Permitted Liens. The words "Permitted
Liens" shall mean: (1) liens and security interests securing
Indebtedness owed by Borrower to Lender; (2) liens for taxes,
assessments, or similar charges either not yet due or being
contested in good faith; (3) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the
ordinary course of business and securing
<PAGE> 5
obligations which are
not yet delinquent; (4) purchase money liens or purchase money
or leasehold security interests upon or in any new assets and/or
other property acquired or held by Borrower in the ordinary course
of business to secure indebtedness outstanding on the date of this
Agreement or permitted to be incurred under the paragraph of this
Agreement titled "Indebtedness and Liens"; (5) liens and security
interests which, as of the date of this Agreement, have been
disclosed to Lender in writing (whether by the December 31, 1998,
audited financial statements, applicable UCC searches, or
otherwise); (6) the loan to Borrower from Metropolitan Life
Insurance Company as evidenced by a certain Loan Agreement
and Promissory Note each dated December 22, 1997, as the
same may be amended from time to time with Lender's reasonable
written approval; and (7) those liens and security interests which
in the aggregate constitute an immaterial and insignificant
monetary amount with respect to the net value of Borrower's assets.
(dd) Related Documents. The words "Related
Documents" mean and include without limitation all promissory
notes, credit agreements, loan agreements, environmental
agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Loan.
(ee) Security Agreement. The words "Security
Agreement" mean and include without limitation any agreements,
promises, covenants, arrangements, understandings or other
agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security
Interest.
(ff) Security Interest. The words "Security
Interest" mean and include any type of collateral security given to
secure repayment of the Loan, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factors lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security
or lien interest whatsoever, whether created by law, contract, or
otherwise.
(gg) SARA. The word "SARA" means the
Superfund Amendments and Reauthorization Act of 1986 as now
or hereafter amended.
(hh) Subordinated Debt. The words
"Subordinated Debt" mean indebtedness and liabilities of
Borrower which have been subordinated by written agreement to
the Indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
(ii) Tangible Net Worth. The words "Tangible
Net Worth" mean Borrower's total assets, including without
limitation leaseholds and leasehold improvements but excluding
all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items)
less total Debt.
(jj) Total Capitalization Ratio. The words "Total
Capitalization Ratio" shall mean the ratio of Interest Bearing Debt
to the sum of Interest Bearing Debt plus Borrower's Tangible Net
Worth.
(kk) Working Capital. The words "Working
Capital" mean Borrower's current assets, excluding prepaid
expenses, less Borrower's current liabilities.
3. LINE OF CREDIT. Lender agrees to make
Advances to Borrower from time to time from the date of this
Agreement to the Expiration Date, provided that the aggregate
amount of such Advances outstanding and unpaid at any time
does not exceed the Borrowing Base. Within the foregoing limits,
Borrower may borrow, partially or wholly prepay, and reborrow
under this Agreement as follows:
(a) Conditions Precedent To First Advance.
Lender's obligation to make the first Advance to or for the account
of Borrower under this Agreement is subject to the following
conditions precedent, with all documents, instruments, opinions,
reports, and other items required under this Agreement to be in
form and substance reasonably satisfactory to Lender:
<PAGE> 6
(1) Lender shall have received evidence
that this Agreement and all Related Documents have been duly
authorized, executed, and delivered by Borrower to Lender.
(2) Lender shall have received such
opinions of counsel, supplemental opinions, and documents
regarding the due incorporation and authorizations of Borrower
and the enforceability of the Loan against Borrower as Lender
may reasonably request.
(b) Conditions Precedent To Any Advance.
Lender's obligation to make any Advance to or for the account of
Borrower under this Agreement is subject to the following
conditions precedent, with all documents, instruments, opinions,
reports, and other items required under this Agreement to be in
form and substance reasonably satisfactory to Lender:
(1) The Security Interest(s) in the
Collateral shall have been duly authorized, created, and perfected
with first lien priority (if appropriate) and shall be in full force and
effect.
(2) Lender, at its option and for its sole
benefit (but not more often than quarterly [except in the case of an
Event of Default]), shall have conducted an audit of Borrower's
Accounts, Inventory, books, records, and operations, and Lender
shall be reasonably satisfied as to their condition.
(3) Borrower shall have paid to Lender all
fees, costs, and expenses specified in this Agreement and the
Related Documents as are then due and payable.
(4) There shall not exist at the time of any
Advance a condition which would constitute an Event of Default
under this Agreement beyond any applicable notice and cure
period.
(5) Borrower shall have delivered to
Lender the most recently required compliance certificate called for
in the paragraph below titled "Compliance Certificate."
(6) Borrower's representations and
warranties made in Section 5 of this Agreement shall be true and
correct as of the date of said Advance, without material exception.
(c) Making Loan Advances. Advances under
the Line of Credit may be requested in writing by persons
authorized by Borrower. Each Advance shall be conclusively
deemed to have been made at the request of and for the benefit
of Borrower (1) when credited to any deposit account of Borrower
maintained with Lender or (2) when advanced in accordance with
the instructions of an authorized person. Lender, at its option,
may set a cutoff time, after which all requests for Advances will be
treated as having been requested on the next succeeding
Business Day.
(d) Mandatory Loan Repayments. If at any time
the aggregate principal amount of the outstanding Advances shall
exceed the applicable Borrowing Base, Borrower, immediately
upon written notice from Lender, shall pay to Lender an amount
equal to the difference between the outstanding principal balance
of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal
amount of all Advances then outstanding and all accrued unpaid
interest, together with all other applicable fees, costs and charges
due under this Agreement, if any, not yet paid.
4. COLLATERAL. To secure repayment of the Line of
Credit and Loan and performance of all other obligations and
duties owed by Borrower to Lender under this Agreement,
Borrower (and others, if required) shall grant to Lender Security
Interests in the Collateral described in Exhibit A attached hereto
as Lender may from time to time require. Lender's Security
Interests in the Collateral shall be continuing liens and shall
include the proceeds and products of the Collateral, including
without limitation the proceeds of any insurance. With respect to
the Collateral, Borrower agrees and represents and warrants to
Lender as follows:
<PAGE> 7
(a) Perfection of Security Interests. Borrower
agrees to execute such financing statements and to take whatever
other actions are requested by Lender to perfect and continue
Lender's Security Interests in the Collateral described in Exhibit
A. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral,
and Borrower will note Lender's interest upon any and all chattel
paper if not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this Agreement, Borrower
will execute one or more UCC financing statements and any
similar statements as may be required by applicable law, and will
file such financing statements and all such similar statements in
the appropriate location or locations. In the event Borrower fails
or refuses to comply with Lender's written request therefor,
Borrower hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender
may at any time, and without further authorization from Borrower,
file a carbon, photograph, facsimile, or other reproduction of any
financing statement executed by Borrower for use as a financing
statement. Borrower will reimburse Lender for all reasonable
expenses for the perfection, termination, and the continuation of
the perfection of Lender's Security Interest. Borrower promptly
will notify Lender of any change in Borrower's name including any
change to the assumed business names of Borrower. Borrower
also promptly will notify Lender of any change in Borrower's
Employer Identification Number. Borrower further agrees to notify
Lender in writing prior to any change in address or location of
Borrower's principal governance office or should Borrower merge
or consolidate with any other entity
(b) Collateral Records. Borrower does now, and
at all times hereafter shall, keep correct and accurate records of
the Collateral, all of which records shall be available to Lender or
Lender's representative upon demand for inspection and copying
at any reasonable time. With respect to the Accounts, Borrower
agrees to keep and maintain such records as Lender may
reasonably require, including without limitation information
concerning Eligible Accounts and Account balances and agings.
With respect to the Inventory, Borrower agrees to keep and
maintain such records as Lender may reasonably require,
including without limitation information concerning Eligible
Inventory and records itemizing and describing the kind, type,
quality, and quantity of Inventory, Borrower's Inventory costs and
selling prices, and the daily withdrawals and additions to
Inventory.
(c) Collateral Schedules. Concurrently with the
execution and delivery of this Agreement, if Lender so requests,
Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible
Inventory, in form and substance reasonably satisfactory to the
Lender. Thereafter, Borrower shall execute and deliver to Lender
such supplemental schedules of Eligible Accounts and Eligible
Inventory and such other matters and information relating to the
Accounts and Inventory as Lender may request, which
supplemental schedules shall be delivered not more frequently
than according to the following schedule: (1) monthly Accounts
Payable aging and Accounts Receivable aging within twenty (20)
days after the end of each month (the format of aging will be sixty
(60) days past due); (2) the value of Eligible Inventory consisting
of wine shall be reported monthly, based on market cost as
determined by then-current market prices published by industry
expert Joseph Ciatti (value not to exceed 100.00% of cost),
submitted to Lender on a Certification Worksheet; (3) fair market
value adjustments shall be made on a quarterly basis; (4) private
label wine to be valued based on cost, not market value.
Borrower shall be subject to two collateral audits per year, to be
performed by Lender's staff or Lender approved external
examiners. Direct verifications shall be required. Borrower
agrees to pay all Lender's expenses reasonably incurred in
connection with each collateral audit. Borrower shall furnish
Lender with a complete Account Debtor name and address list
upon request (which requests shall be made with not more than
a reasonable frequency) and a Borrower's Certificate monthly.
(d) Representations And Warranties
Concerning Certain Accounts. With respect to the Accounts,
Borrower represents and warrants to Lender: (1) each Account
represented by Borrower to be an Eligible Account for purposes
of this Agreement conforms to the requirements of the definition
of an Eligible Account set forth in this Agreement; (2) all Account
information listed on schedules delivered to Lender from time to
time will be true and correct as of the date delivered, subject to
immaterial variance; and (3) Lender, its assigns, or agents shall
have the right at any time (upon written request) and at Borrower's
expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
<PAGE> 8
(e) Representations And Warranties
Concerning Inventory. With respect to the Inventory, Borrower
represents and warrants to Lender (1) all Inventory represented
by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of
Eligible Inventory set forth in this Agreement; (2) all Inventory
values listed on schedules delivered to Lender will be true and
correct as of the date delivered, subject to immaterial variance; (3)
the value of the Inventory will be determined on a consistent
accounting basis; (4) except as agreed to the contrary by Lender
in writing, all Eligible Inventory is now and at all times hereafter
will be in Borrower's physical possession and shall not be held by
others on consignment, sale on approval, or sale or return; (5)
except as reflected in the Inventory schedules delivered to
Lender, all Eligible Inventory is now and at all times hereafter will
be of good and merchantable quality, free from material defects;
(6) Eligible Inventory is not now and will not at any time hereafter
be stored with a bailee, warehouseman, or similar party without
Lender's prior written consent, and, in such event, Borrower will
concurrently at the time of bailment cause any such bailee,
warehouseman, or similar party to issue and deliver to Lender, in
form acceptable to Lender, warehouse receipts in Lenders name
evidencing the storage of Inventory; and (9) Lender, its assigns,
or agents shall have the right at any time and at Borrower's
expense (upon written request with no more than reasonable
frequency) to inspect and examine the Inventory and to check and
test the same as to quality, quantity, value, and condition.
5. GENERAL REPRESENTATIONS AND
WARRANTIES. Borrower represents and warrants to Lender as
follows:
(a) Organization. Borrower is a corporation
which is duly organized, validly existing, and in good standing
under the laws of the state of California and is validly existing and
in good standing in all states in which Borrower is doing business.
Borrower has the full power and authority to own its properties
and to transact the businesses in which it is presently engaged or
presently proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all states in which
the failure to so qualify would have a material adverse effect on its
businesses or financial condition.
(b) Authorization. The execution, delivery, and
performance of this Agreement and all Related Documents by
Borrower, to the extent to be executed, delivered or performed by
Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other
person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under
(1) any provision of its articles of incorporation or organization, or
bylaws, or any agreement or other instrument binding upon
Borrower or (2) any law, governmental regulation, court decree,
or order applicable to Borrower.
(c) Financial Information. Each financial
statement of Borrower supplied to Lender truly and completely
disclosed Borrower's financial condition as of the date of the
statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most
recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such
financial statements.
(d) Legal Effect. This Agreement constitutes,
and any instrument or agreement required hereunder to be given
by Borrower when delivered will constitute legal, valid and binding
obligations of Borrower enforceable against Borrower in
accordance with their respective terms, except as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other
similar laws from time to time in effect which affect the rights of
creditors generally or by limitations upon the availability of
equitable remedies.
(e) Properties. Except for Permitted Liens,
Borrower owns and has good title to all of the Collateral free and
clear of all Security Interests, and has not executed any security
documents or financing statements relating to the same. All of the
Collateral is titled in Borrower's legal name, and Borrower has not
used, or filed a financing statement under, any other name for at
least the last five (5) years.
<PAGE> 9
(f) Hazardous Substances. The terms
"hazardous waste," "hazardous substance," "disposal," "release,"
and "threatened release," as used in this Agreement, shall have
the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801,
et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of
the California Health and Safety Code, Section 25100, et seq., or
other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to
and acknowledged by Lender in writing, Borrower represents and
warrants that: (1) during the period of Borrower's ownership of
Borrower's Properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on,
under, about or from any of Borrower's Properties; (2) Borrower
has no knowledge of, or reason to believe that there has been (i)
any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or
substance on, under, about or from Borrower's Properties by any
prior owners or occupants thereof, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such
matters; (c) with the exception of pesticides and other materials
used in compliance with laws in the normal course of Borrower's
business, neither Borrower nor, to the best of Borrower's
knowledge after diligent investigation, any tenant, contractor,
agent or other authorized user of any of Borrower's Properties
shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or
from any of the properties; and any such permitted activity shall
be conducted in compliance with all applicable federal, state, and
local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon
Borrower's Properties at reasonable times upon reasonable
advance written notice to make such reasonable inspections and
tests as Lender may deem appropriate to determine compliance
of said properties with the provisions of this section of the
Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not
be construed to create any responsibility or liability on the part of
Lender to Borrower or to any other person. The representations
and warranties contained herein are based on the present actual
knowledge of the President of the corporation which constitutes
Borrower, without further due diligence or investigations.
Borrower hereby (A) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws,
and (B) agrees to indemnify and hold harmless Lender against
any and all claims, losses, liabilities, damages, penalties, and
expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage,
disposal, release or threatened release occurring prior to
Borrower's ownership or interest in the Borrower's Properties,
whether or not the same was or should have been known to
Borrower. The provisions of this section of the Agreement,
including the obligation to indemnify, shall survive the payment of
the Indebtedness and the termination or expiration of this
Agreement and shall not be affected by Lender's acquisition of
any interest in any of the Collateral or Borrower's Properties,
whether by foreclosure or otherwise.
(g) Litigation and Claims. No litigation, claim,
investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Borrower is pending or
(to the best knowledge of Borrower) threatened, and no other
event has occurred which may materially adversely affect
Borrower's financial condition or properties, other than litigation,
claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
(h) Taxes. To the best of Borrower's knowledge,
all tax returns and reports of Borrower that are or were required to
be filed, have been filed, and all taxes, assessments and other
governmental charges currently due and payable have been paid
in full, except those presently being or to be contested by
Borrower in good faith in the ordinary course of business and for
which adequate reserves have been provided.
(i) Lien Priority. Unless otherwise previously
disclosed to Lender in writing, and with the exception of Permitted
Liens, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrowers Loan and Note, that would be
prior or that may in any way be superior to Lender's Security
Interests and rights in and to such Collateral.
<PAGE> 10
(j) Binding Effect. This Agreement, the Note,
all Security Agreements directly or indirectly securing repayment
of Borrower's Loan and Note and all of the Related Documents
are binding upon Borrower as well as upon Borrower is
successors, representatives and assigns, and are legally
enforceable in accordance with their respective terms, except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other
similar laws from time to time in effect which affect the rights of
creditors generally or by limitations upon the availability of
equitable remedies.
(k) Commercial Purposes. Borrower intends to
use the Loan proceeds solely for business or commercial related
purposes.
(l) Employee Benefit Plans. Each employee
benefit plan as to which Borrower may have any liability complies
in all material respects with all applicable requirements of law and
regulations, and (1) no Reportable Event nor Prohibited
Transaction (as defined in ERISA) has occurred with respect to
any such plan, (2) Borrower has not withdrawn from any such plan
or initiated steps to do so, (3) no steps have been taken to
terminate any such plan, and (4) there are no unfunded liabilities
other than those previously disclosed to Lender in writing.
(m) Location of Borrower's Offices and
Records. Borrower's place of business, or Borrower's chief
executive office, if Borrower has more than one place of business,
is located at 26836 County Road 12A, Esparto, CA 95627.
Unless Borrower has designated otherwise in writing this location
is also the office or offices where Borrower keeps its records
concerning the Collateral.
(n) Information. All information heretofore or
contemporaneously herewith furnished by Borrower to Lender for
the purposes of or in connection with this Agreement or any
transaction contemplated hereby is, and all information hereafter
furnished by or on behalf of Borrower to Lender will be, true and
accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is
or will be incomplete by omitting to state any material fact
necessary to make such information not misleading.
(o) Survival of Representations and
Warranties. Borrower understands and agrees that Lender,
without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing
representations and warranties shall be continuing in nature and
shall remain in full force and effect until such time as Borrower's
Indebtedness shall be paid in full, or until this Agreement shall be
terminated in the manner provided above, whichever is the last to
occur.
6. AFFIRMATIVE COVENANTS. Borrower covenants
and agrees with Lender that, while this Agreement is in effect
Borrower will:
(a) Litigation. Promptly inform Lender in writing
of (1) all material adverse changes in Borrower's financial
condition, and (2) all existing and all known threatened litigation,
claims, investigations, administrative proceedings or similar
actions affecting Borrower which could materially affect the
financial condition of Borrower.
(b) Financial Records. Maintain its books and
records in accordance with generally accepted accounting
principles, applied on a consistent basis, and permit Lender to
examine and audit Borrower's books and records at all reasonable
times upon reasonable advance written notice.
(c) Financial Statements. Furnish Lender with,
as soon as available, but in no event later than one hundred
twenty (120) days after the end of each fiscal year, Borrower's
balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event later than forty five (45) days
after the end of each fiscal quarter, Borrower's balance sheet and
profit and loss statement for the period ended, prepared and
certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or
<PAGE> 11
person acceptable to
Lender. All financial reports required to be provided under this
Agreement shall be prepared in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
(d) Additional Information. Furnish such
additional information and statements, lists of assets and
liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations
as Lender may request from time to time.
(e) Financial Covenants and Ratios. Comply
with the following financial covenants and ratios:
(1) Tangible Net Worth. Maintain a
minimum Tangible Net Worth of not less than Twenty-One Million
and No/100 Dollars ($21,000,000.00).
(2) Debt to Capital. Maintain a Total
Capitalization Ratio of not more than 55.7%.
(3) Current Ratio. Maintain a ratio of
current assets to current liabilities (in each case as defined by
generally accepted accounting principles) in excess of 1.15 to
1.00.
(4) Interest Coverage. Maintain Interest
Coverage at not less than 2.00 to 1.00. This ratio will be
measured on a rolling four (4) fiscal quarter basis.
The following provisions shall apply for purposes of determining
compliance with the foregoing financial covenants and ratios:
Borrower's Tangible Net Worth to increase by Twenty-Five
Percent (25.000%) of the previous fiscal year's Consolidated Net
Income plus One Hundred Percent (100.000%) of additional paid
in capital. Current Ratio to include line of credit balances.
Borrower's compliance will be tested quarterly. Borrower agrees
to furnish to Lender 10-K's and 10-Q's within thirty (30) days of
filing with Security Exchange Commission. Except as provided
above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied
on a consistent basis, and certified by Borrower as being true and
correct.
(f) Insurance. Maintain fire and other risk
insurance, public liability insurance, and such other insurance as
Lender may reasonably and in writing require with respect to the
Collateral and Borrower's operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
Borrower, upon request of Lender, will deliver to Lender from time
to time the policies or certificates of insurance in form reasonably
satisfactory to Lender, including stipulations that coverages will
not be cancelled or diminished without at least ten (10) days' prior
written notice to Lender. Each insurance policy also shall include
an endorsement providing that coverage in favor of Lender will not
be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies
covering assets in which Lender holds or is offered a security
interest for the Loan, Borrower will provide Lender with such loss
payable or other endorsements as Lender may reasonably
require.
(g) Insurance Reports. Furnish to Lender, upon
the written request of Lender, reports on each existing insurance
policy showing such information as Lender may reasonably
request, including without limitation the following: (1) the name of
the insurer; (2) the risks insured; (3) the amount of the policy; (4)
the properties insured; (5) the then current property values on the
basis of which insurance has been obtained, and the manner of
determining those values; and (6) the expiration date of the policy.
In addition, upon the written request of Lender (however not more
often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash
value or replacement cost of any Collateral [excluding equipment
and supplies]. The cost of such appraisal shall be paid by
Borrower.
<PAGE> 12
(h) Other Agreements. Comply with all material
terms and conditions of all other agreements, whether now or
hereafter existing, between Borrower and any other party if and to
the extent that a failure to comply would materially impact
Borrower's ability to satisfy its ability to repay the Loan, and notify
Lender immediately in writing of any such default in connection
with any other such agreements.
(i) Loan Proceeds. Use all Loan proceeds
solely for business and commercially related purposes, unless
specifically consented to the contrary by Lender in writing.
(j) Taxes, Charges and Liens. Pay and
discharge when due all assessments, taxes, governmental
charges, levies and liens, of every kind and nature, imposed upon
Borrower or Borrower's Properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that,
if unpaid, might become a lien or charge upon any of Borrower's
Properties, income, or profits; provided however, Borrower will not
be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (1) the legality of the same
shall be contested in good faith by appropriate proceedings, and
(2) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge,
levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will
furnish to Lender evidence of payment of the assessments, taxes,
charges, levies, liens and claims and will authorize the
appropriate governmental official to deliver to Lender at any
reasonable time upon Lender's written request a written statement
of any assessments, taxes, charges, levies, liens and claims
against Borrower's Properties, income, or profits.
(k) Performance. Perform and comply with all
terms, conditions, and provisions set forth in this Agreement and
in the Related Documents in a timely manner.
(l) Operations. Maintain executive and
management personnel with substantially the same qualifications
and experience as the present executive and management
personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance
with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters,
businesses and operations, including without limitation,
compliance with the Americans with Disabilities Act and with all
minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
(m) Inspection. Upon Lender's prior written
request, permit employees or agents of Lender at any reasonable
time (and with not more than reasonable frequency) to inspect any
and all Collateral for the Loan and Borrower's Properties and (to
the extent relevant to the Collateral or Borrower's obligation under
this Agreement) to examine or audit Borrowers books, accounts,
and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time
hereafter maintains any records (including without limitation
computer generated records and computer software programs for
the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit
Lender free access to such records at all reasonable times (with
not more than reasonable frequency) and to provide Lender with
copies of any records it may request, all at Borrower's expense.
(n) Compliance Certificate. Unless waived in
writing by Lender, provide Lender at the start of each fiscal
quarter with a certificate, executed by Borrower's chief financial
officer or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
(o) Environmental Compliance and Reports.
With respect to Borrower's Properties and/or the Collateral,
Borrower (1) shall comply in all respects with all environmental
protection, federal, state and local laws, statutes, regulations and
ordinances; (2) shall not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the
part of
<PAGE> 13
any third party, any environmental activity where damage
may result to the environment, unless such environmental activity
is pursuant to and in compliance with law or with the conditions of
a permit issued by the appropriate federal, state or local
governmental authorities; (3) shall furnish to Lender promptly and
in any event within thirty (30) days after receipt thereof a copy of
any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentally
concerning any intentional or unintentional action or omission on
Borrower's part in connection with any environmental activity
whether or not there is damage to the environment and/or other
natural resources.
(p) Additional Assurances. Make, execute and
deliver to Lender such promissory notes, security agreements,
financing statements, and other instruments, documents and
agreements as Lender or its attorneys may reasonably request to
evidence and secure the Loans and to perfect all Security
Interests in accordance with the terms hereof.
7. RECOVERY OF ADDITIONAL COSTS. If the
imposition of or any change in any law, rule, regulation or
guideline, or the interpretation or application of any thereof by any
court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify
or make applicable any taxes (except U.S. federal, state or local
income or franchise taxes imposed on Lender), reserve
requirements, capital adequacy requirements or other obligations
which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates,
(b) reduce the amounts payable to Lender under this Agreement
or the Related Documents, or (c) reduce the rate of return on
Lender's capital as a consequence of Lender's obligations with
respect to the credit facilities to which this Agreement relates, then
Lender shall promptly notify Borrower in writing of said fact. Upon
receipt of said notice from Lender, Borrower shall have the option
either (i) to terminate this Agreement and repay all amounts due
to Lender hereunder in accordance with the terms of the Loan
Documents, or (ii) to agree to pay to Lender such additional
amounts as will compensate Lender therefor, within five (5) days
after Lender's written demand for such payment, which demand
shall be accompanied by an explanation of such imposition or
charge and a calculation in reasonable detail of the additional
amounts payable by Borrower.
8. NEGATIVE COVENANTS. Borrower covenants and
agrees with Lender that while this Agreement is in effect, Borrower
shall not, without the prior written consent of Lender:
(a) Indebtedness and Liens.
(1) Except for trade debt incurred in the
normal course of business and indebtedness to Lender
contemplated by this Agreement, create, incur or assume
indebtedness for borrowed money, including capital leases, in
excess of Seven Million Dollars ($7,000,000.00).
(2) Except as allowed as a Permitted Lien,
sell, transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of the Collateral.
(3) Sell with recourse any of Borrower's
Accounts, except to Lender.
(b) Continuity of Operations.
(1) Engage in any business activities
substantially different than those in which Borrower is presently
engaged.
(2) Cease operations, liquidate, merge,
transfer, acquire or consolidate with any other entity, change
ownership, change its name, dissolve or transfer or sell Collateral
out of the ordinary course of business.
(3) Pay any dividends on Borrower's stock
(other than dividends payable on its public or preferred stock).
<PAGE> 14
(4) Purchase or retire any of Borrower's
outstanding shares or amend Borrower's capital structure.
(c) Loans, Acquisitions and Guaranties.
[Other than in the ordinary course of business,] (1) loan, invest in
or advance money or assets, (2) purchase, create or acquire any
interest in any other enterprise or entity, or (3) incur any obligation
as surety or guarantor.
9. CESSATION OF ADVANCES. Lender shall have no
obligation to make Loan Advances or to disburse Loan proceeds
to Borrower if and so long as: (a) Borrower is in default under the
terms of this Agreement or any of the Related Documents or any
other agreement that Borrower has with Lender; (b) Borrower
becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; or (c) there occurs a
material adverse change in Borrower's financial condition or in the
value of any Collateral securing the Loan.
10. ACCESS LAWS. Without limiting the generality of
any provision of this Agreement requiring Borrower to comply with
applicable laws, rules, and regulations, Borrower agrees that it will
at all times comply with applicable laws relating to disabled
access including, but not limited to, all applicable titles of the
Americans with Disabilities Act of 1990.
11. RIGHT OF SETOFF. Borrower grants to Lender a
contractual possessory security interest in, and hereby assigns,
conveys, delivers, pledges, and transfers to Lender all Borrower's
right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and
all accounts Borrower may open in the future, excluding however
all IRA, 401k and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable
law, to charge or setoff all sums owing on the Indebtedness
against any and all such accounts, and, at Lenders option, to
administratively freeze all such accounts to allow Lender to
protect Lender's charge and setoff rights provided on this
paragraph.
12. EVENTS OF DEFAULT. Each of the following shall
constitute an Event of Default on the part of Borrower under this
Agreement:
(a) Default on Indebtedness. Failure of
Borrower to make any payment when due on the Loan, if such
failure shall continue for five (5) days after written notice from
Lender of said failure.
(b) Other Defaults. Failure of Borrower to
comply with or to perform when due any other term, obligation,
covenant or condition contained in this Agreement or in any of the
Related Documents, if such failure shall continue for more than
thirty (30) days after written notice from Lender of said failure
(unless such failure cannot be cured within said thirty (30) days,
in which case it shall be an Event of Default if Borrower fails to
commence a cure within thirty (30) days after written notice from
Lender or to diligently prosecute said cure thereafter).
(c) Default in Favor of Third Parties. Should
Borrower default under any loan, extension of credit, security
agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may
materially affect the Collateral or Borrower's ability to repay the
Loan or perform its obligations under this Agreement or any of the
Related Documents.
(d) False Statements. If any warranty,
representation or statement made or furnished to Lender by
Borrower under this Agreement or the Related Documents is false
or misleading in any material respect at the time made or
furnished or becomes false or misleading at any time thereafter.
(e) Defective Collateralization. This Agreement
or any of the Related Documents ceases to be in full force and
effect (including failure of any Security Agreement to create a
valid and perfected Security Interest) at any time and for any
reason.
<PAGE> 15
(f) Insolvency. The dissolution or termination of
Borrower's existence as a going business, the insolvency of
Borrower, the appointment of a receiver for any part of Borrower's
property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under
any bankruptcy or insolvency laws by or against Borrower, unless
in each case any such proceeding or action is vacated or
terminated within sixty (60) days after commencement.
(g) Creditor or Forfeiture Proceedings.
Commencement of foreclosure or forfeiture proceedings, whether
by judicial proceeding, self-help, repossession or any other
method, by any creditor of Borrower, against any Collateral, or by
any governmental agency, including a garnishment, attachment,
or levy on or of any of Borrower's deposit accounts with Lender.
(h) Change In Ownership. Any change in
ownership of twenty-five percent (25%) or more of the common
stock of Borrower [ provided, however, Lender acknowledges that
Borrower is a publicly held company, and any changes in
ownership caused by trades of common stock via public market
transactions shall not constitute changes of ownership for this
section.]
(i) Adverse Change. A material adverse
change occurs in Borrower's financial condition, or Lender
reasonably and in good faith believes that the prospect of
payment or performance of the Indebtedness is impaired.
(j) Met Life Default. The occurrence of any
material event of default by Borrower under any agreement
between Metropolitan Life Insurance Company and Borrower,
including without limitation that certain Loan Agreement and
Promissory Note each dated December 22, 1997.
13. EFFECT OF AN EVENT OF DEFAULT. If any
Event of Default shall occur, except where otherwise provided in
this Agreement or the Related Documents, all commitments and
obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate
(including any obligation to make Loan Advances or
disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of
any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection
above, such acceleration shall be automatic and not optional. In
addition, Lender shall have all the rights and remedies provided
in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be
exercised singularly or concurrently. Election by Lender to pursue
any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an
obligation of Borrower shall not affect Lender's right to declare a
default and to exercise its rights and remedies.
14. MISCELLANEOUS PROVISIONS. The following
miscellaneous provisions are a part of this Agreement:
(a) Amendments. This Agreement, together with
any Related Documents, constitutes the entire understanding and
agreement of the parties as to the matters set forth in this
Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or
amendment.
(b) Applicable Law. This Agreement has been
delivered to Lender and accepted by Lender in the State of
California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Sacramento
County, the State of California. Subject to the provisions on
arbitration, THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA.
(c) Arbitration.
(1) Lender and Borrower require that all
disputes, claims, counterclaims and defenses, including those
based on or arising from any alleged tort ("Claims"), relating in
any way to this
<PAGE> 16
Agreement or any transaction of which this
Agreement is a part, be settled by binding arbitration In
accordance with the Commercial Arbitration Rules of the American
Arbitration Association and Title 9 of the U.S. Code. All Claims
will be subject to the statutes of limitation applicable if they were
litigated. This provision is void if the Loan, at the time of the
proposed submission to arbitration, is secured by real property
located outside of Oregon or Washington, or if the effect of the
arbitration procedure (as opposed to any Claims of Borrower)
would be to materially impair Lender's ability to realize on any
collateral securing the Loan.
(2) If arbitration occurs and each party's
Claim is less than One Hundred Thousand Dollars ($100,000),
one neutral arbitrator will decide all issues; if any party's Claim is
One Hundred Thousand Dollars ($100,000) or more, three neutral
arbitrators will decide all issues. All arbitrators will be active
California State Bar members in good standing. All arbitration
hearings will be held in Sacramento, California. In addition to all
other powers, the arbitrator(s) shall have the exclusive right to
determine all issues of arbitrability. Judgment on any arbitration
award may be entered in any court with jurisdiction.
(3) If either party institutes any judicial
proceeding relating to the Loan, such action shall not be a waiver
of the right to submit any Claim to arbitration. In addition, each
has the right before, during and after any arbitration to exercise
any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self help repossession; (iii) judicial or
nonjudicial foreclosure against real or personal property collateral;
and (iv) provisional remedies, including injunction, appointment of
receiver, attachment, claim and delivery and replevin.
(d) Caption Headings. Caption headings in this
Agreement are for convenience purposes only and are not to be
used to interpret or define the provisions of this Agreement.
(e) Costs and Expenses. Borrower agrees to
pay upon demand all of Lender's reasonable expenses, including
without limitation attorneys' fees, incurred in connection with the
preparation, execution, enforcement, modification and collection
of this Agreement or in connection with the Loan made pursuant
to this Agreement. Lender may pay someone else to help collect
the Loan and to enforce this Agreement, and Borrower will pay
that amount. This includes, subject to any limits under applicable
law, Lender's attorneys' fees and Lenders legal expenses,
whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated
postjudgment collection services. Borrower also will pay any court
costs, in addition to all other sums provided by law.
(f) Loan Participations. The Lender may sell
participation interests in any or all of the Loan to any Person. The
Lender may furnish any information concerning the Borrower in
the possession of the Lender from time to time to participants and
prospective participants and may furnish information in response
to credit inquiries consistent with general banking practice.
(g) Notices. All notices, consents, approvals and
other communications under this Agreement shall be in writing
and shall be deemed to have been duly given or made (1) upon
delivery if hand delivered; (2) one (1) business day after delivery
to any nationally recognized overnight courier service for next
business day delivery, fee prepaid; (3) one business day after
facsimile transmission, with transmission verified and a hard copy
of the transmission promptly sent by U. S. Mail; or (4) three (3)
days after deposit with the United States Postal Service as
registered or certified mail, postage prepaid, and in each case
addressed as follows:
To Lender: U.S. Bank National Association
980 9th Street, Suite 1200
Sacramento, California 95814
Attention: Ms. Karen McManus
<PAGE> 17
To Borrower: Mr. Mike Motroni, CFO
R. H. Phillips, Inc.
26836 County Road 12A
Esparto, California 95627
(h) Severability. If a court of competent
jurisdiction finds any provision of this Agreement to be invalid or
unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending
provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions
of this Agreement in all other respects shall remain valid and
enforceable provided that the severance of such provision(s) does
not result in a material failure of consideration under this
Agreement to either party hereto.
(i) Subsidiaries and Affiliates of Borrower. To
the extent the context of any provisions of this Agreement makes
it manifestly appropriate, including without limitation any
representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of
Borrower. Notwithstanding the foregoing however, under no
circumstances shall this Agreement be construed to require
Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower. For purposes hereof, an
affiliate of Borrower shall be a party which controls, is controlled
by, or is under common control with Borrower.
(j) Successors and Assigns. All covenants
and agreements contained by or on behalf of Borrower shall bind
its successors and assigns and shall inure to the benefit of
Lender, its successors and assigns. Borrower shall not, however,
have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
(k) Survival. All warranties, representations, and
covenants made by Borrower in this Agreement or in any
certificate or other instrument delivered by Borrower to Lender
under this Agreement shall be considered to have been relied
upon by Lender and will survive the making of the Loan and
delivery to Lender of the Related Documents, regardless of any
investigation made by Lender or on Lender's behalf.
(l) Time Is of the Essence. Time is of the
essence in the performance of this Agreement.
(m) Waiver. Neither party shall be deemed to
have waived any rights under this Agreement unless such waiver
is given in writing and signed by the party to be charged. No
delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver
by Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Borrower, shall constitute a waiver of any of
Lender's rights or of any obligations of Borrower as to any future
transactions. Whenever the consent of Lender is required under
this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent
instances where such consent is required.
<PAGE> 18
IN WITNESS WHEREOF, the parties to this Agreement
have executed this Agreement as of the date first written above.
BORROWER: LENDER:
R.H. PHILLIPS, INC. U.S. BANK NATIONAL
ASSOCIATION
By://s//Mike Motroni By://s//Karen McManus
----------------- ----------------------
Name:Mike Motroni Name:Karen McManus
--------------- --------------------
Title:Chief Financial Officer Title:Vice President
----------------------- -------------------
By://s//Karl Giguiere
-------------------
Name:Karl Giguiere
-----------------
Title:Co-President
----------------
<PAGE> 19
DESCRIPTION OF COLLATERAL
All of Borrower's right, title and interest in and to the
following:
(1) All inventory, chattel paper, accounts,
unencumbered farm equipment, and general intangibles;
(2) All attachments, accessions, accessories, tools,
parts, supplies, increases, and additions to and all replacements
of and substitutions for any property described above;
(3) All products and produce of any of the property
described in this Collateral section;
(4) All accounts, instruments, rents, monies, payments,
and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section, whether in cash, farm products, or otherwise, and whether
from or through any federal or state government agency or
program or otherwise, including without limitation, all easements,
profits, rights of storage, irrigation and water rights; all
entitlements, rights to payment, and payments, in whatever form
received, including but not limited to, payments under any
governmental agricultural diversion programs, governmental
agricultural assistance programs, the Farm Services Agency
Wheat Feed Grain Program, and any other such program of the
United States Department of Agriculture; warehouse receipts;
letters of entitlement; and storage payments.
(5) All proceeds (including insurance proceeds) from the
sale, destruction, loss, or other disposition of any of the property
described in this Collateral section up to the outstanding principal
and interest of the Indebtedness.
(6) All records and data relating to any of the property
described in this Collateral section, whether in the form of a
writing, photograph, microfilm, microfiche, or electronic media,
together with all of Grantor's right, title, and interest in and to all
computer software required to utilize, create, maintain, and
process any such records or data on electronic media.
(7) All crops and crop products, whether stored, planted,
growing or to be grown by Grantor or to be acquired from third
parties, including crops hereafter grown, owned or acquired, and
all supplies, including without limitation all seed, fertilizer,
fungicides, and pesticides located on approximately 1,540 acres
located 8.5 miles southwest of Dunnigan on County Road 12A
and County Road 87, Yolo County, State of California, and more
particularly described in Exhibit A attached hereto (the "Land").
<PAGE> 20
AGRICULTURAL SECURITY AGREEMENT
THIS AGRICULTURAL SECURITY AGREEMENT (this
"Agreement") is entered into as of May 1, 1999, between R. H.
PHILLIPS, INC., a California corporation ("Grantor"), and U.S.
BANK NATIONAL ASSOCIATION ("Lender").
For valuable consideration, Grantor grants to Lender a
security interest in the Collateral to secure the Indebtedness and
agrees that Lender shall have the rights stated in this Agreement
with respect to the Collateral, in addition to all other rights which
Lender may have by law.
1. DEFINITIONS. The following words shall have the
following meanings when used in this Agreement. Terms not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the Loan Agreement, or if not defined
therein, then in the Uniform Commercial Code. All references to
dollar amounts shall mean amounts in lawful money of the United
States of America.
(a) Agreement. The word "Agreement" means
this Agricultural Security Agreement, as it may be amended or
modified from time to time, together with all exhibits and
schedules attached hereto from time to time.
(b) Collateral. The word "Collateral" means
Grantor's interest in the following described property, whether now
owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located:
(1) All inventory, chattel paper, accounts,
unencumbered farm equipment, and general intangibles;
(2) All attachments, accessions,
accessories, tools, parts, supplies, increases, and additions to
and all replacements of and substitutions for any property
described above;
(3) All products and produce of any of the
property described in this Collateral section;
(4) All accounts, instruments, rents,
monies, payments, and all other rights, arising out of a sale, lease,
or other disposition of any of the property described in this
Collateral section, whether in cash, farm products, or otherwise,
and whether from or through any federal or state government
agency or program or otherwise, including without limitation, all
easements, profits, rights of storage, irrigation and water rights; all
entitlements, rights to payment, and payments, in whatever form
received, including but not limited to, payments under any
governmental agricultural diversion programs, governmental
agricultural assistance programs, the Farm Services Agency
Wheat Feed Grain Program, and any other such program of the
United States Department of Agriculture; warehouse receipts;
letters of entitlement; and storage payments.
(5) All proceeds (including insurance
proceeds) from the sale, destruction, loss, or other disposition of
any of the property described in this Collateral section up to the
outstanding principal and interest of the Indebtedness.
(6) All records and data relating to any of
the property described in this Collateral section, whether in the
form of a writing, photograph, microfilm, microfiche, or electronic
media, together with all of Grantor's right, title, and interest in and
to all computer software required to utilize, create, maintain, and
process any such records or data on electronic media.
(7) All crops and crop products, whether
stored, planted, growing or to be grown by Grantor or to be
acquired from third parties, including crops hereafter grown,
owned or acquired, and all supplies, including without limitation all
seed, fertilizer, fungicides, and pesticides located on
approximately 1,540 acres located 8.5 miles southwest of
Dunnigan on County Road 12A and County
<PAGE> 21
Road 87, Yolo County, State of California, and more particularly described
in Exhibit A attached hereto (the "Land").
(c) Event of Default. The words "Event of
Default mean and include without limitation any of the Events of
Default set forth below in the section titled "Events of Default."
(d) Indebtedness. The word "Indebtedness"
means the indebtedness evidenced by the Note, including all
principal and interest, together with all other indebtedness and
costs and expenses for which Grantor is responsible under this
Agreement or under any of the Related Documents.
(e) Loan Agreement. The words "Loan
Agreement" mean that certain Loan Agreement of date herewith
between Lender and Borrower.
(f) Note. The word "Note" means the
Promissory Note dated of even date herewith in the principal
amount of Fifteen Million Dollars ($15,000,000.00) from Grantor
to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of and
substitutions for said Promissory Note.
(g) Related Documents. The words "Related
Documents" mean and include without limitation all promissory
notes, credit agreements, loan agreements, security agreements,
and all other instruments, agreements and documents, whether
now or hereafter existing, executed in connection with the
Indebtedness.
2. RIGHT OF SETOFF. Grantor hereby grants Lender
a contractual possessory security interest in and hereby assigns,
conveys, delivers, pledges, and transfers all of Grantor's right, title
and interest in and to Grantor's accounts with Lender (whether
checking, savings, or some other account), including all accounts
held jointly with someone else and all accounts Grantor may open
in the future, excluding, however, all IRA, 401k and Keogh
accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Grantor authorizes Lender,
to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts, and, at Lender's
option, to administratively freeze all such accounts to allow
Lender to protect Lender's charge and setoff rights provided in
this paragraph.
3. OBLIGATIONS OF GRANTOR. Grantor warrants
and covenants to Lender as follows:
(a) Perfection of Security Interest. Grantor
agrees to execute such financing statements and to take whatever
other actions are reasonably requested by Lender to perfect and
continue Lender's security interest in the Collateral. Upon request
of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and if
appropriate Grantor will note Lender's interest upon any and all
chattel paper if not delivered to Lender for possession by Lender.
In the event Grantor fails or refuses to comply with Lender's
written request therefor, Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue the security
interest granted in this Agreement. Lender may at any time, and
without further authorization from Grantor, file a carbon,
photographic or other reproduction of any financing statement
executed by Grantor or of this Agreement for use as a financing
statement. Grantor will reimburse Lender for all reasonable
expenses for the perfection and the continuation of the perfection
of Lender's security interest in the Collateral. Grantor promptly will
notify Lender before any change in Grantor's name including any
change to the assumed business names of Grantor. This is a
continuing security agreement and shall continue in effect until the
maturity date of the Note even though all or any part of the
Indebtedness is paid in full and even though for a period of time
Grantor may not be indebted to Lender.
(b) No Violation. The execution and delivery of
this Agreement will not violate any law or agreement governing
Grantor or to which Grantor is a party, and its certificate or articles
of incorporation and bylaws do not prohibit any term or condition
of this Agreement.
<PAGE> 22
(c) Enforceability of Collateral. To the extent
the Collateral consists of accounts, chattel paper, or general
intangibles, the Collateral is enforceable in accordance with its
terms, is genuine, and complies with applicable laws concerning
form, content and manner of preparation and execution, and all
persons appearing to be obligated on the Collateral have authority
and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject
to a security interest in favor of Lender, the account shall be a
good and valid account representing an undisputed, bona fide
indebtedness incurred by the account debtor, for merchandise
held subject to delivery instructions or theretofore shipped or
delivered pursuant to a contract of sale, or for services theretofore
performed by Grantor with or for the account debtor, without
setoffs or counterclaims against any such account. No agreement
under which any deductions or discounts may be claimed shall be
made with the account debtor except those disclosed to Lender in
writing.
(d) Location of the Collateral. Grantor, upon
request of Lender (but not more often than quarterly), will deliver
to Lender in form reasonably satisfactory to Lender a schedule of
real properties and Collateral locations relating to Grantor's
operations, including without limitation the following: (1) all real
property owned or being purchased by Grantor upon which any
Collateral is located; (2) all real properly being rented or leased
by Grantor upon which any Collateral is located; (3) all storage
facilities owned, rented, leased, or being used by Grantor upon
which Collateral is located; and (4) all other properties where
Collateral is or may be located. Grantor shall promptly procure
the execution, acknowledgement and delivery by the holders of
any encumbrances upon or owners of such lands where Collateral
is or will be located, a consent to Lender's rights of access for
cultivation of crops or care of stock upon an Event of Default and
upon such terms as Lender may deem reasonably satisfactory,
and Grantor hereby consents to such rights of access. Except in
the ordinary course of business, Grantor shall not remove the
Collateral from its existing locations without the prior written
consent of Lender. Collateral consisting of crops now or hereafter
harvested or removed from the real property shall not be stored
with a bailee, warehouseman, or similar party without Lender's
prior written consent and shall be kept only at locations approved
by Lender.
(e) Transactions Involving Collateral. Except
for inventory sold or accounts collected in the ordinary course of
Grantor's business, Grantor shall not sell, offer to sell, or
otherwise transfer or dispose of the Collateral. While Grantor is
not in default under this Agreement, Grantor may sell inventory,
but only in the ordinary course of its business and only to buyers
who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a
transfer in partial or total satisfaction of a debt or any bulk sale.
Grantor shall not pledge, mortgage, encumber or otherwise permit
the Collateral to be subject to any lien, security interest,
encumbrance, or charge, other than the security interest provided
for in this Agreement, without the prior written consent of Lender,
which consent shall not be unreasonably withheld. The foregoing
includes security interests even if junior in right to the security
interests granted under this Agreement. Unless waived by
Lender, all proceeds from any improper disposition of the
Collateral (for whatever reason) shall be held in trust for Lender
and shall not be commingled with any other funds; provided
however, this requirement shall not constitute consent by Lender
to any sale or other disposition. Upon receipt, Grantor shall
immediately deliver any such proceeds to Lender.
(f) Sale of Collateral. The following provisions
relate to any sale, consignment or transfer of crops, livestock, or
other farm products ("Farm Collateral") included as all or a part
of the Collateral:
(1) Grantor shall sell, consign or transfer
the Farm Collateral only to those persons whose names and
addresses have been set forth on sales schedules delivered to
Lender or parties otherwise reasonably approved by Lender.
Such schedules shall be in such form as Lender may reasonably
require, including identification of each type of Farm Collateral.
All such schedules and notifications shall be in writing and shall
be delivered to Lender not less than seven (7) days prior to any
such sale, consignment or transfer of the Farm Collateral.
(2) Grantor shall cause all net proceeds of
any sale, consignment or transfer of Farm Collateral outside of the
ordinary course of business to be made immediately available to
Lender
<PAGE> 23
in a form jointly payable to Grantor and Lender. All chattel
paper, contracts, warehouse receipts, documents of sale, or other
evidences of ownership or obligations, whether issued by a co-op,
grain elevator, or other warehouse or marketing entity, and all
accounts receivable and other non-cash proceeds relating to such
a sale of such Farm Collateral shall be endorsed, assigned and
delivered immediately to Lender as security for the Indebtedness.
All the net proceeds of any such disposition of the Farm
Collateral, when and if received by Lender, may at Lender's option
be applied to the Indebtedness. In addition, Lender may collect
at any time the proceeds of any or all such accounts or other
non-cash proceeds of any sale without notice to Grantor.
(g) Care and Preservation of the Crops. With
regard to crops which are part of Collateral under this Agreement,
Grantor shall (1) at seasonable and proper times and in
accordance with the best practices of good husbandry attend to
and care for the crops and the tillage of the Land and do, or cause
to be done, any and all acts that may at any time be reasonably
appropriate or necessary to grow, farm, cultivate, irrigate, fertilize,
fumigate, prune, harvest, pick, clean, preserve, and protect the
crops; (2) not commit or affirmatively allow to be committed any
material damage to, destruction of, or waste of the crops; (3)
permit Lender and any of its employees and agents to enter upon
the Land where the crops are located at any reasonable time and
from time to time for the purpose of examining and inspecting the
crops and the Land (provided that Lender provides Grantor with
reasonable advance notice of such entry, except in case of
emergency); (4) keep the crops separate and always capable of
being identified; and (5) promptly give Lender written notice of any
disease to, any destruction of, any depreciation in the value of, or
any material damage to more than five percent (5%) of the crops
in the aggregate.
(h) Title. Grantor represents and warrants to
Lender that it holds good and marketable title to the Collateral,
free and clear of all liens and encumbrances except for the lien of
this Agreement and any other liens or encumbrances approved by
Lender in writing. No financing statement covering any of the
Collateral is on file in any public office other than those which
reflect the security interest created by this Agreement or to which
Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
(i) Collateral Schedules and Locations. As
often as Lender shall reasonably request in writing (but not more
often than quarterly), and insofar as the Collateral consists of
accounts and general intangibles, Grantor shall deliver to Lender
schedules of such Collateral, including such information as
Lender may reasonably require, including without limitation names
and addresses of account debtors and agings of accounts and
general intangibles. Insofar as the Collateral consists of inventory
and equipment, Grantor shall deliver to Lender, as often as
Lender shall reasonably request in writing (but not more often
than quarterly), such lists, descriptions, and designations of such
Collateral as Lender may reasonably require to identify the nature,
extent, and location of such Collateral. Such information shall be
submitted for Grantor and each of its subsidiaries or related
companies.
(j) Maintenance and Inspection of Collateral.
Grantor shall maintain all tangible Collateral in good condition and
repair. Grantor will not commit or knowingly permit damage to or
destruction of the Collateral or any part of the Collateral. Lender
and its designated representatives and agents shall have the right
at all reasonable times to examine, inspect, and audit the
Collateral wherever located (provided that Lender provides
Grantor with reasonable advance notice of such inspection,
except in case of emergency). Grantor shall promptly notify
Lender of all cases involving the return, rejection, repossession,
loss or damage of or to any material portion of Collateral; of any
material request for credit or adjustment or of any other dispute
arising with respect to the Collateral; and generally of all material
happenings and events affecting the Collateral or the value or the
amount of the Collateral.
(k) Taxes, Assessments and Liens. Grantor
will pay prior to delinquency all taxes, assessments and liens due
and payable in connection with or upon the Collateral, its use or
operation, upon this Agreement, upon any promissory note or
notes evidencing the Indebtedness, or upon any of the other
Related Documents. Grantor may withhold any such payment or
may elect to contest any lien if Grantor is in good faith conducting
an appropriate proceeding to contest the obligation to pay and so
long as Lender's interest in the Collateral is not jeopardized, in
Lender's reasonable opinion. If the Collateral is
<PAGE> 24
subjected to a
lien which is not discharged within fifteen (15) days, Grantor shall
deposit with Lender cash, a sufficient corporate surety bond or
other security satisfactory to Lender in an amount adequate to
provide for the discharge of the lien plus any interest, costs,
attorneys' fees or other charges that could accrue as a result of
foreclosure or sale of the Collateral. In any contest Grantor shall
defend itself and Lender and shall satisfy any final adverse
judgment before enforcement against the Collateral. Grantor shall
name Lender as an additional obligee under any surety bond
furnished in the contest proceedings.
(l) Compliance With Governmental
Requirements. Grantor shall comply promptly with all laws,
ordinances, rules and regulations of all governmental authorities,
now or hereafter in effect, applicable to the ownership, production,
disposition, or use of the Collateral. Grantor may contest in good
faith any such law, ordinance or regulation and withhold
compliance during any proceeding, including appropriate appeals,
so long as Lender's interest in the Collateral, in Lender's
reasonable opinion, is not jeopardized.
(m) Hazardous Substances. Grantor represents
and warrants that the Collateral never has been, and agrees that
it shall not be so long as this Agreement remains a lien on the
Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release
of any hazardous waste or substance (except for Permitted
Substances), as those terms are defined in the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"),
the Superfund Amendments and Reauthorization Act of 1986,
Pub. L. No. 99-499 ("SARA"), the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.,
Chapters 6.5 through 7.7 of Division 20 of the California Health
and Safety Code, Section 25100, et seq., or other applicable state
or Federal laws, rules, or regulations adopted pursuant to any of
the foregoing. The terms "hazardous waste" and "hazardous
substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. For
purposes hereof, "Permitted Substances" shall mean materials
and supplies which might otherwise be defined as hazardous
wastes or hazardous substances but which are used in limited
quantities in the normal course of Grantor's business and in
compliance with laws, including without limitation pesticides,
cleaning solvents, vehicle fuels, and office supplies. The
representations and warranties contained herein are based on
Grantor's actual knowledge as of the date of this Agreement.
Grantor hereby (1) releases and waives any future claims against
Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (2)
agrees to indemnify and hold harmless Lender against any and all
claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the
payment of the Indebtedness and the satisfaction of this
Agreement.
(n) Maintenance of Casualty Insurance.
Grantor shall procure and maintain all-risk property insurance,
including without limitation fire, hail, theft and liability coverage
together with such other insurance as Lender may reasonably
require with respect to the tangible property which constitutes the
Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. Grantor, upon the written
request of Lender, will deliver to Lender from time to time copies
of the policies or certificates of insurance in form reasonably
satisfactory to Lender, including stipulations that coverages will
not be canceled or diminished without at least ten (10) days' prior
written notice to Lender and not including any disclaimer of the
insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage
in favor of Lender will not be impaired in any way by any act,
omission or default of Grantor or any other person. In connection
with all polices covering assets in which Lender holds or is offered
a security interest, Grantor will provide Lender with such loss
payable or other endorsements as Lender may reasonably
require. If Grantor at any time fails to obtain or maintain any
insurance as required under this Agreement, Lender may (but
shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if it so chooses "single interest insurance,"
which will cover only Lender's interest in the Collateral.
(o) Application of Insurance Proceeds.
Grantor shall promptly notify Lender of any material loss or
damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so
<PAGE> 25
within fifteen (15) days of the casualty. All
proceeds of any insurance for the Collateral, including accrued
proceeds thereon, shall be held by Lender as part of the
Collateral. If Lender consents to repair or replacement of the
damaged or destroyed Collateral, Lender shall, upon satisfactory
proof of expenditure, pay or reimburse Grantor from the proceeds
for the reasonable cost of repair or restoration. If Lender does not
consent to repair or replacement of the Collateral, Lender shall
retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months
after their receipt and which Grantor has not committed to the
repair or restoration of the Collateral shall be used to prepay the
Indebtedness.
(p) Insurance Reports. Grantor, upon the
written request of Lender, shall furnish to Lender reports on each
existing policy of insurance maintained pursuant to Section 3(n)
hereof, showing such information as Lender may reasonably
request, including the following: (1) the name of the insurer; (2)
the risks insured; (3) the amount of the policy; (4) the property
insured; (5) the then current value on the basis of which insurance
has been obtained and the manner of determining that value; and
(6) the expiration date of the policy. In addition Grantor shall
upon request by Lender (however not more often than annually)
have an independent appraiser satisfactory to Lender determine,
as applicable, the cash value of replacement cost of the Collateral
consisting of Grantor's inventory.
4. GRANTOR'S RIGHT TO POSSESSION AND TO
COLLECT ACCOUNTS. Until default and except as otherwise
provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use
of all the Collateral and may use it in any lawful manner not
inconsistent with this Agreement or the Related Documents,
provided that Grantor's right to possession and beneficial use
shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security
interest in such Collateral. Until default and otherwise notified by
Lender, Grantor may collect any of the Collateral consisting of
accounts. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be
deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that
purpose as Grantor shall request or as Lender, in Lender's
reasonable discretion, shall deem appropriate under the
circumstances, but failure to honor any request by Grantor shall
not of itself be deemed to be a failure to exercise reasonable care.
Lender shall not be required to take any steps necessary to
preserve any rights in the Collateral against prior parties, nor to
protect, preserve or maintain any security interest given to secure
the Indebtedness.
5. EXPENDITURES BY LENDER. If not discharged or
paid prior to delinquency (and after reasonable notice to Grantor
by Lender), Lender may (but shall not be obligated to) discharge
or pay any amounts required to be discharged or paid by Grantor
under this Agreement, including without all taxes, liens, security
interests, encumbrances, and other claims, at any time levied or
placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving
the Collateral. All such expenditures incurred or paid by Lender
for such purposes shall then bear interest at the rate charged
under the Note from the date incurred or paid by Lender to the
date of repayment by Grantor. All such expenses shall become
a part of the Indebtedness and, at Lender's option, will (1) be
payable on demand, (2) be added to the balance of the Note and
be apportioned among and be payable with any installment
payments to become due during the remaining term of the Note,
or (3) be treated as a balloon payment which will be due and
payable at the Note's maturity. This Agreement also will secure
payment of these amounts. Such right shall be in addition to all
other rights and remedies to which Lender may be entitled upon
the occurrence of an Event of Default.
6. EVENTS OF DEFAULT. Each of the following shall
constitute an "Event of Default" under this Agreement:
(a) Default on Indebtedness. Failure of Grantor
to make any payment when due on the Indebtedness in
accordance with the terms of the Note or the Loan Agreement.
(b) Other Defaults. Failure of Grantor to comply
with or to perform any other term, obligation, covenant or
condition contained in this Agreement if such failure shall continue
for thirty (30) days after written notice of such failure from Lender
to Grantor (unless such failure cannot be cured within
<PAGE> 26
said thirty
(30) days, in which case it shall be an Event of Default if Grantor
fails to commence a cure within thirty (30) days after written notice
from Lender or to diligently prosecute said cure thereafter).
Failure of Grantor to comply with or perform any term, obligation,
covenant or condition in any of the Related Documents after
expiration of applicable grace periods.
(c) Default in Favor of Third Parties. Should
Grantor be in default (after expiration of applicable cure periods)
under any loan, extension of credit, security agreement, purchase
or sales agreement, or any other agreement, in favor of any other
creditor or person that may materially affect the Collateral or
Grantor's ability to repay the Loan or perform Grantor's
obligations
under this Agreement or any of the Related Documents.
(d) False Statements. Any warranty,
representation or statement made or furnished to Lender by or on
behalf of Grantor under this Agreement, the Note or the Related
Documents is false or misleading in any material respect at the
time made or furnished.
(e) Defective Collateralization. This Agreement
or any of the Related Documents ceases to be in full force and
effect (including failure of any collateral documents to create a
valid and perfected security interest or lien) at any time and for
any reason.
(f) Insolvency. The dissolution or termination of
Grantor's existence as a going business, the insolvency of
Grantor, the appointment of a receiver for any part of Grantor's
property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under
any bankruptcy or insolvency laws by or against Grantor, in each
case if said actions or proceedings are not vacated or terminated
by Borrower within sixty (60) days after commencement.
(g) Creditor or Forfeiture Proceedings.
Commencement of foreclosure or forfeiture proceedings, whether
by judicial proceeding, self-help, repossession or any other
method, by any creditor of Grantor or by any governmental
agency against the Collateral (including a garnishment of any of
Grantor's deposit accounts with Lender), in each case if said
actions or proceedings are not vacated or terminated by Borrower
within sixty (60) days after commencement, if possible.
(h) Cross Default. Any default by Grantor
beyond any applicable cure period under any other indebtedness
now or hereafter owed by Grantor or an affiliate thereof to
Lender.
7. RIGHTS AND REMEDIES ON DEFAULT. If an
Event of Default occurs under this Agreement, at any time
thereafter, Lender shall have all the rights of a secured party
under the California Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the
following rights and remedies to the extent allowed by applicable
law:
(a) Accelerate Indebtedness. Lender may
declare the entire Indebtedness, including any prepayment
penalty which Grantor would be required to pay, immediately due
and payable, without notice (except notices required by applicable
law).
(b) Assemble Collateral. Lender may require
Grantor to deliver to Lender all or any portion of the Collateral and
any and all certificates of title and other documents relating to the
Collateral. Lender may require Grantor to assemble the Collateral
and make it available to Lender at a place to be designated by
Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the
Collateral.
(c) Care and Possession of the Crops. Lender
may enter upon the Land where any Collateral consisting of crops
is located and, using any and all of Grantor's equipment,
machinery, tools, farming implements, and supplies, and
improvements located on the Land: (1) farm, cultivate, irrigate,
fertilize, fumigate, prune, and perform any other act or acts
reasonably appropriate or necessary to grow, care for, maintain,
preserve and protect the crops (using any water located in, on or
adjacent to the premises); (2) harvest, pick, clean, and remove the
crops from the Land; and (3) to the extent then
<PAGE> 27
permitted under
California law, appraise, store, prepare for public or private sale,
exhibit, market and sell the crops and any products of the crops;
provided that Grantor hereby agrees that if Grantor is the owner
of record of the Land upon which the crops and any products of
the crops are located, Lender shall not be responsible or liable for
restoring the Land to its condition immediately preceding the use
of the Land as provided herein or for doing such acts as may be
necessary to permit future crops to be maintained on the Land.
(d) Sell the Collateral. Lender shall have full
power to sell, lease, transfer, or otherwise deal with the Collateral
or proceeds thereof in its own name or that of Grantor. Lender
may sell the Collateral at public auction or private sale. Unless
the Collateral threatens to decline speedily in value or is of a type
customarily sold on a recognized market, Lender will give Grantor
reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is
given at least ten (10) days, or such greater or lesser time as
required by state law, before the time of the sale or disposition.
All expenses incurred by Lender relating to the disposition of the
Collateral, including without limitation the expenses of retaking,
holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this
Agreement and shall be payable on demand, with interest at the
Note rate from date of expenditure until repaid.
(e) Appoint Receiver. To the extent permitted
by applicable law, Lender shall have the following rights and
remedies regarding the appointment of a receiver: (1) Lender may
have a receiver appointed as a matter of right, and (2) all
reasonable fees of the receiver and his or her attorney shall
become part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from
date of expenditure until repaid.
(f) Collect Revenues, Apply Accounts.
Lender, either itself or through a receiver, may collect the
payments, rents, income, and revenues from the Collateral.
Lender may at any time in its discretion transfer any Collateral into
its own name or that of its nominee and receive the payments,
rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the
Indebtedness in such order of preference as Lender may
determine. Insofar as the Collateral consists of accounts, general
intangibles, insurance policies, instruments, chattel paper, choses
in action, or similar property, Lender may demand, collect, receipt
for, settle, compromise, adjust, sue for, foreclose, or realize on the
Collateral as Lender may reasonably determine, whether or not
Indebtedness is then due. To facilitate collection, Lender may
notify account debtors and obligors on any Collateral to make
payments directly to Lender.
(g) Obtain Deficiency. Subject to applicable
laws, if Lender chooses to sell any or all of the Collateral, Lender
may obtain a judgment against Grantor for any deficiency
remaining on the Indebtedness due to Lender after application of
all amounts received from the exercise of the rights provided in
this Agreement. Grantor shall be liable for a deficiency even if the
transaction described in this subsection is a sale of accounts or
chattel paper.
(h) Other Rights and Remedies. Lender shall
have all the rights and remedies of a secured creditor under the
provisions of the Uniform Commercial Code, as may be amended
from time to time. In addition, Lender shall have and may exercise
any or all other rights and remedies it may have available at law,
in equity, or otherwise.
(i) Cumulative Remedies. All of Lender's rights
and remedies, whether evidenced by this Agreement or the
Related Documents or by any other writing, shall be cumulative
and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any
other remedy, and an election to make expenditures or to take
action to perform an obligation of Grantor under this Agreement,
after Grantor's failure to perform, shall not affect Lender's right to
declare a default and to exercise its remedies.
8. MISCELLANEOUS PROVISIONS. The following
miscellaneous provisions are a part of this Agreement:
<PAGE> 28
(a) Amendments. This Agreement, together with
any Related Documents, constitutes the entire understanding and
agreement of the parties as to the matters set forth in this
Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or
amendment.
(b) Applicable Law. This Agreement has been
delivered to Lender and accepted by Lender in the State of
California. If there is a lawsuit, Grantor agrees upon Lender's
request to submit to the jurisdiction of the courts of Sacramento
County, the State of California. Subject to the provisions on
arbitration, this Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(c) Arbitration.
(1) Lender and Grantor require that all
disputes, claims, counterclaims and defenses, including those
based on or arising from any alleged tort ("Claims"), relating in
any way to this Agreement or any transaction of which this
Agreement is a part, be settled by binding arbitration In
accordance with the Commercial Arbitration Rules of the
American
Arbitration Association and Title 9 of the U.S. Code. All Claims
will be subject to the statutes of limitation applicable if they were
litigated. This provision is void if the Loan, at the time of the
proposed submission to arbitration, is secured by real property
located outside of Oregon or Washington, or if the effect of the
arbitration procedure (as opposed to any Claims of Borrower)
would be to materially impair Lender's ability to realize on any
collateral securing the Loan.
(2) If arbitration occurs and each party's
Claim is less than One Hundred Thousand Dollars ($100,000),
one neutral arbitrator will decide all issues; if any party's Claim is
One Hundred Thousand Dollars ($100,000) or more, three neutral
arbitrators will decide all issues. All arbitrators will be active
California State Bar members in good standing. All arbitration
hearings will be held in Sacramento, California. In addition to all
other powers, the arbitrator(s) shall have the exclusive right to
determine all issues of arbitrability. Judgment on any arbitration
award may be entered in any court with jurisdiction.
(3) If either party institutes any judicial
proceeding relating to the Loan, such action shall not be a waiver
of the right to submit any Claim to arbitration. In addition, each
has the right before, during and after any arbitration to exercise
any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self help repossession; (iii) judicial or
nonjudicial foreclosure against real or personal property collateral;
and (iv) provisional remedies, including injunction, appointment of
receiver, attachment, claim and delivery and replevin.
(d) Attorneys' Fees; Expenses. In any legal
action, arbitration, or other proceeding brought to enforce or
interpret the terms of this Agreement or the Related Documents,
the prevailing party shall be entitled to reasonable attorneys' fees
and any other costs incurred in that proceeding in addition to any
other relief to which it is entitled. The provisions of this section
constitute a distinct and severable agreement from the contractual
rights created by this Agreement and the Related Documents. In
the event of a judgment against one parry concerning any aspect
of this Agreement and the Related documents, the right to recover
post judgment attorneys' fees incurred in enforcing the judgment
shall not be merged into and extinguished by any money
judgment. Grantor will reimburse the Lender for all reasonable
attorneys' fees and expenses incurred in the representation of the
Lender in any aspect of any bankruptcy or insolvency proceeding
initiated by or on behalf of the Grantor that concerns any of its
obligations to the Lender under this Agreement or the Related
Documents or otherwise in connection with the Loan or any
security given therefore.
(e) Caption Headings. Caption headings in this
Agreement are for convenience purposes only and are not to be
used to interpret or define the provisions of this Agreement.
(f) Notices. All notices, consents, approvals and
other communications under this Agreement shall be in writing
and shall be deemed to have been duly given or made (1) upon
delivery if
<PAGE> 29
hand delivered; (2) one (1) business day after delivery
to any nationally recognized overnight courier service for next
business day delivery, fee prepaid; (3) one business day after
facsimile transmission, with transmission verified and a hard copy
of the transmission promptly sent by U. S. Mail; or (4) three (3)
days after deposit with the United States Postal Service as
registered or certified mail, postage prepaid, and in each case
addressed as follows:
To Lender: U.S. Bank National Association
980 9th Street, Suite 1200
Sacramento, California 95814
Attention: Ms. Karen McManus
To Borrower: Mr. Mike Motroni
R.H. Phillips, Inc.
26836 County Road 12A
Esparto, California 95627
Any party may change its address for notices under this
Agreement by giving formal written notice to the other party,
specifying that the purpose of the notice is to change the party's
address. For notice purposes, Grantor will keep Lender informed
at ail times of Grantor's current address(es).
(g) Power of Attorney. Upon the occurrence of
any Event of Default hereunder, Grantor hereby appoints Lender
as its true and lawful attorney-in-fact, irrevocably, with full power
of substitution to do the following: (1) to demand, collect, receive,
receipt for, sue and recover all sums of money or other property
which may now or hereafter become due, owing or payable from
the Collateral; (2) to execute, sign and endorse any and all claims,
instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (3) to settle or compromise any and all
claims arising under the Collateral, and, in the place and stead of
Grantor, to execute and deliver its release and settlement for the
claim; and (4) to file any claim or claims or to take any action or
institute or take part in any proceedings, either in its own name or
in the name of Grantor, or otherwise, which in the discretion of
Lender may seem to be necessary or advisable. This power is
given as security for the Indebtedness, and the authority hereby
conferred is and shall be irrevocable and shall remain in full force
and effect until renounced by Lender.
(h) Preference Payments. Any monies Lender
pays because of an asserted preference claim in Borrower's
bankruptcy will become a part of the Indebtedness and, at
Lender's option, shall be payable by Borrower as provided above
in the "EXPENDITURES BY LENDER" paragraph.
(i) Severability. If a court of competent
jurisdiction finds any provision of this Agreement to be invalid or
unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending
provision shall be deemed to be modified to be within the limes of
enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions
of this Agreement in all other respects shall remain valid and
enforceable, provided that the severance of such provision(s)
does not result in a material failure of consideration under this
Agreement to either party hereto.
(j) Successor Interests. Subject to the
limitations set forth above on transfer of the Collateral, this
Agreement shall be binding upon and inure to the benefit of the
parties, their successors and assigns.
(k) Waiver. Lender shall not be deemed to have
waived any rights under this Agreement unless such waiver is
given in writing and signed by Lender. No delay or omission on
the part of Lender in exercising any right shall operate as a waiver
of such right or any other right. A waiver by Lender of a provision
of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior
waiver by Lender, nor any course of dealing between Lender and
Grantor, shall constitute a waiver
<PAGE> 30
of any of Lender's rights or of
any of Grantor's obligations as to any future transactions.
Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent to subsequent
instances where such consent is required.
(l) Supersedes Prior Agreement. Upon
execution and delivery to Lender, this Agreement shall (1)
replace, supersede and terminate that certain Agricultural Security
Agreement made by Grantor in favor of Lender dated as of May
1, 1998 (the "Previous Agreement"), and (2) constitute Grantor's
grant to Lender of a security interest pursuant to the terms hereof
in all collateral which was the subject of the Previous Agreement
and which is within the definition of Collateral in this Agreement.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE
PROVISIONS OF THIS AGRICULTURAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS.
THIS
AGREEMENT IS DATED MAY 1, 1999.
GRANTOR:
R.H. PHILLIPS, INC.
By://s//Mike Motroni
--------------------------
Name:Mike Motroni
------------------------
Title:Chief Financial Officer
-----------------------
By://s//Karl Giguiere
--------------------------
Name:Karl Giguiere
------------------------
Title:Co-President
-----------------------
<PAGE> 31
PROMISSORY NOTE
$15,000,000.00 May 1, 1999
For value received R.H. PHILLIPS, INC., a California
corporation ("Borrower"), promises to pay to the order of U.S.
BANK NATIONAL ASSOCIATION ("Lender"), at the Lender's
address at 980 9th Street in Sacramento, California the Principal
Balance of this Promissory Note (this "Note"), with interest
thereon at the rate(s) specified in Sections 3 and 10 below.
1. TYPE OF CREDIT. This Note is given to evidence
Borrower's obligation to repay all sums which Lender may from
time to time advance to Borrower ("Advances") under a revolving
line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the
maximum amount shown in Section 2. However, Advances
hereunder may be borrowed, repaid and reborrowed, and the
aggregate Advances loaned hereunder from time to time may
exceed such maximum amount.
2. PRINCIPAL BALANCE. The unpaid principal
balance of all Advances outstanding under this Note ("Principal
Balance") at one time shall not exceed Fifteen Million Dollars
($15,000,000).
3. INTEREST RATE. The interest rate on the Principal
Balance outstanding may vary from time to time pursuant to the
provisions of this Note. Subject to the provisions of this Note,
Borrower shall have the option from time to time of choosing to
pay interest at the rates and for the applicable periods of time
based on the rate options provided herein; provided, however,
that once Borrower notifies Lender of the rate option chosen in
accordance with the provisions of this Note, such notice shall be
irrevocable unless and/or until otherwise expressly provided
herein. The rate options are the Prime Borrowing Rate and the
LIBOR Borrowing Rate, each as defined herein.
(a) Certain Definitions. The following terms
shall have the following meanings:
(1) "Business Day" means any day other
than a Saturday, Sunday, or other day that commercial banks in
Sacramento, California, Portland, Oregon or New York City are
authorized or required by law to close, provided, however that
when used in connection with a LIBOR Rate, LIBOR Amount or
LIBOR Interest Period such term shall also exclude any day on
which dealings in U.S. dollar deposits are not carried on in the
London interbank market.
(2) "LIBOR Amount" means each
principal amount for which Borrower chooses to have the LIBOR
Borrowing Rate apply for any specified LIBOR Interest Period.
(3) "LIBOR Interest Period" means as to
any LIBOR Amount, a period of one, two, or three months
commencing on the date the LIBOR Borrowing Rate becomes
applicable thereto; provided, however, that: (i) the first day of each
LIBOR Interest Period must be a Business Day; (ii) no LIBOR
Interest Period shall be selected which would extend beyond April
30, 2001; (iii) no LlBOR Interest Period shall extend beyond the
date of any principal payment required under Section 5 of this
Note, unless the sum of the Prime Rate Amount, plus LIBOR
Amounts with LIBOR Interest Periods ending on or before the
scheduled date of such principal payment, plus principal amounts
remaining unborrowed under a line of credit, equals or exceeds
the amount of such principal payment; (iv) any LIBOR Interest
Period which would otherwise expire on a day which is not a
Business Day, shall be extended to the next succeeding Business
Day, unless the result of such extension would be to extend such
LIBOR Interest Period into another calendar month, in which
event
the LIBOR Interest Period shall end on the immediately preceding
Business Day; and (v) any LIBOR Interest Period that begins on
the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month
at the end of such LIBOR Interest Period) shall end on the last
Business Day of a calendar month.
<PAGE> 32
(4) "LIBOR Rate" means, for any LIBOR
Interest Period, the rate per annum (computed on the basis of a
360-day year and the actual number of days elapsed and rounded
upward to the nearest 1/16 of 1%) established by Lender as its
LIBOR Rate, based on Lender's determination, on the basis of
such factors as Lender deems relevant, of the rate of interest at
which U.S. dollar deposits would be offered to Lender in the
London Interbank market at approximately 11:00 a.m. London time
on the date which is two Business Days prior to the first day of
such LIBOR Interest Period for delivery on the first day of such
LIBOR Interest Period for the number of months therein; provided,
however, that the LIBOR Rate shall be adjusted to take into
account the maximum reserves required to be maintained for
Eurocurrency liabilities by banks during each such LIBOR Interest
Period as specified in Regulation D of the Board of Governors of
the Federal Reserve System or any successor regulation.
(5) "Prime Rate" means the rate of
interest which Lender from time to time establishes as its prime
rate and is not, for example, the lowest rate of interest which
Lender collects from any borrower or class of borrowers. When
the Prime Rate is applicable under Section 3(b) or 10(b) of this
Note, the interest rate hereunder shall be adjusted without notice
effective on the day the Prime Rate changes, but in no event shall
the rate of interest be higher than allowed by law.
(6) "Prime Rate Amount" means any
portion of the Principal Balance bearing interest at the Prime
Borrowing Rate.
(b) The Prime Borrowing Rate.
(1) The "Prime Borrowing Rate" is a per
annum rate equal to the Prime Rate plus Zero Percent (0.00%)
per annum.
(2) Whenever Borrower desires to use the
Prime Borrowing Rate option, Borrower shall give Lender notice
orally or in writing in accordance with Section 14 of this Note,
which notice shall specify the requested effective date (which
must be a Business Day) and principal amount of the Advance
which is to accrue interest at the Prime Borrowing Rate or of the
increase in the then outstanding Prime Rate Amount, and whether
Borrower is requesting a new Advance under the Loan or
conversion of a LIBOR Amount to the Prime Borrowing Rate.
(3) Subject to Section 10 of this Note,
interest shall accrue on the unpaid Principal Balance at the Prime
Borrowing Rate unless and except to the extent that the LIBOR
Borrowing Rate is in effect.
(c) The LIBOR Borrowing Rate.
(1) The "LIBOR Borrowing Rate" is the
LIBOR Rate plus One and One-half Percent (1.50%) per annum.
(2) Borrower may obtain LIBOR Borrowing
Rate quotes from Lender between 8:00 a.m. and 10:00 a.m.
(Portland, Oregon time) on any Business Day. Borrower may
request an Advance, conversion of any portion of the Prime Rate
Amount to a LIBOR Amount or a new LIBOR Interest Period for an
existing LIBOR Amount, at such Libor Borrowing Rate only by
giving Lender notice in accordance with Section 3(c)(3) before
10:00 a.m. (Portland, Oregon time) on such day.
(3) Whenever Borrower desires to use the
LIBOR Borrowing Rate option, Borrower shall give Lender
irrevocable notice (either in writing or orally and promptly
confirmed in writing) between 8:00 a.m. and 10:00 a.m. (Portland,
Oregon time) two (2) Business Days prior to the desired effective
date of such rate. Any oral notice shall be given by, and any
written notice or confirmation of an oral notice shall be signed by,
the person(s) authorized in Section 14 of this Note, and shall
specify the requested effective date of the rate, LIBOR Interest
Period and LIBOR Amount, and whether Borrower is requesting
a new Advance at the LIBOR Borrowing Rate under the Loan,
conversion of all or any portion of the Prime Rate Amount to a
LIBOR Amount, or a new LIBOR Interest Period for an
outstanding LIBOR
<PAGE> 33
Amount. Notwithstanding any other term of this Note,
Borrower may elect the LIBOR Borrowing Rate in the minimum
principal amount of Five Hundred Thousand Dollars
($500,000.00) and in multiples of One Hundred Thousand Dollars
($100,000.00) above such amount; provided, however, that no
more than ten (10) separate LIBOR Interest Periods may be in
effect at any one time.
(4) If at any time the LIBOR Rate is
unascertainable or unavailable to Lender or if LIBOR Rate loans
become unlawful, then the option to select the LIBOR Borrowing
Rate shall terminate immediately. If the LIBOR Borrowing Rate is
then in effect, (A) it shall terminate automatically with respect to
all LIBOR Amounts (i) on the last day of each then applicable
LIBOR Interest Period, if Lender may lawfully continue to maintain
such loans, or (ii) immediately if Lender may not lawfully continue
to maintain such loans through such day, and (B) subject to
Section 10, the Prime Borrowing Rate automatically shall become
effective as to such amounts upon such termination.
(5) If at any time after the date hereof (A)
any revision in or adoption of any applicable law, rule, or
regulation or in the interpretation or administration thereof (i) shall
subject Lender or its Eurodollar lending office to any tax, duty, or
other charge, or change the basis of taxation of payments to
Lender with respect to any loans bearing interest based on the
LIBOR Rate, or (ii) shall impose or modify any reserve, insurance,
special deposit, or similar requirements against assets of,
deposits with or for the account of, or credit extended by Lender
or its Eurodollar lending office, or impose on Lender or its
Eurodollar lending a fee or any other condition affecting any such
loans, and (B) the result of any of the foregoing is (i) to increase
the cost to Lender of making or maintaining any such loans, or (ii)
to reduce the amount of any sum receivable under this Note by
Lender or its Eurodollar lending office, then Lender shall promptly
notify Borrower of said facts and provide Borrower with a
statement of and demand for such additional amounts, and
Borrower shall pay Lender within fifteen (15) days after demand
by Lender such additional amount to compensate Lender for such
increased cost or reduction. The determination hereunder by
Lender of such additional amount shall be conclusive in the
absence of manifest error. If Lender demands compensation
under this Section 4(c)(5), then Borrower shall, within fifteen (15)
days after receipt of such notice and demand from Lender, either
(A) pay the amount of such demand, or (B) in lieu of paying said
compensation, upon three (3) Business Days' notice to Lender
pay the accrued interest on all LIBOR Amounts. Subject to
Section 10, upon Borrower's paying such accrued interest, the
Prime Borrowing Rate immediately shall be effective with respect
to the unpaid principal balance of such LIBOR Amounts.
(6) Borrower shall pay to Lender, on
demand, such amount as Lender reasonably determines
(determined as though 100% of the applicable LIBOR Amount had
been funded in the London interbank market) is necessary to
compensate Lender for any direct losses, expenses, liabilities,
costs, expenses or reductions in yield to Lender, whether incurred
in connection with liquidation or re-employment of funds or
otherwise, incurred or sustained by Lender as a result of: (A) any
payment or prepayment of a LIBOR Amount, termination of the
LIBOR Borrowing Rate or conversion of a LIBOR Amount to the
Prime Borrowing Rate on a day other than the last day of the
applicable LIBOR Interest Period (including as a result of
acceleration or a notice pursuant to Section 3(c)(5)); or (B) any
failure of Borrower to borrow, continue or prepay any LIBOR
Amount or to convert any portion of the Prime Rate Amount to a
LIBOR Amount after Borrower has given a notice thereof to
Lender.
(7) If Borrower chooses the LIBOR
Borrowing Rate, Borrower shall pay interest based on such rate,
plus any other applicable taxes or charges hereunder, even
though Lender may have obtained the funds loaned to Borrower
from sources other than the London interbank market. Lender's
determination of the LIBOR Borrowing Rate and any such taxes
or charges shall be conclusive in the absence of manifest error.
(8) Notwithstanding any other term of this
Note, Borrower may not select the LIBOR Borrowing Rate if an
Event of Default hereunder has occurred and is continuing.
(9) Nothing contained in this Note,
including without limitation the determination of any LIBOR
Interest Period or Lender's quotation of any LIBOR Borrowing
Rate, shall be
<PAGE> 34
construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on
demand.
4. COMPUTATION OF INTEREST. All interest under
Section 3 and Section 10 will be computed at the applicable rate
based on a three hundred sixty (360) day year and applied to the
actual number of days elapsed.
5. PAYMENT SCHEDULE.
(a) Principal. Subject to the prepayment
provisions of Section 6 of this Note, all outstanding principal and
accrued but unpaid interest shall be paid in its entirety on or
before April 30, 2001.
(b) Interest.
(1) Interest on the Prime Rate Amount
shall be paid on the first (1st) day of the first full month following
the date of this Note, and on the same day of each month
thereafter prior to maturity and at maturity.
(2) Interest on all LIBOR Amounts shall be
paid on the first (1st) day of the first full month following the date
of this Note, and on the same day of each month thereafter prior
to maturity and at maturity.
6. PREPAYMENT.
(a) Prepayments of all or any part of the Prime
Rate Amount may be made at any time without penalty.
(b) Except as otherwise specifically set forth
herein, Borrower may not prepay all or any part of any LIBOR
Amount or terminate any LIBOR Borrowing Rate, except on the
last day of the applicable LIBOR Interest Period.
(c) Principal prepayments will not postpone the
date of or change the amount of any regularly scheduled payment.
At the time of any principal prepayment, all accrued interest, fees,
costs and expenses shall also be paid.
7. [RESERVED]
8. ALTERNATE PAYMENT DATE. Notwithstanding
any other term of Note, if in any month there is no day on which a
scheduled payment would otherwise be due (e.g. February 31),
such payment shall be paid on the last banking day of that month.
9. PAYMENT BY AUTOMATIC DEBIT. Borrower
hereby authorizes Lender to automatically deduct the amount of
all principal and interest payments, when due, from account
number 81 10 012690 at a branch of Lender. If there are
insufficient funds in the account to pay the automatic deduction in
full, Lender may allow the account to become overdrawn, or
Lender may reverse the automatic deduction. Borrower will pay
all the fees on the account which result from the automatic
deductions, including any overdraft and non-sufficient funds
charges. If for any reason Lender does not charge the account for
a payment, or if an automatic payment is reversed, the payment
is still due according to this Note. If the account is a Money
Market Account, the number of withdrawals from that account is
limited as set out in the account agreement. Lender may cancel
the automatic deduction at any time in its discretion upon
reasonable advance written notice to Borrower.
10. DEFAULT.
<PAGE> 35
(a) Without prejudice to any right of Lender to
require payment on demand or to decline to make any requested
Advance, each of the following shall be an event of default ("Event
of Default") under this Note:
(1) Borrower fails to make any payment
when due, and such failure continues for five (5) days after written
notice from Lender of said failure;
(2) Borrower fails to perform or comply
with any term, covenant or obligation in this Note or any
agreement related to this Note, and said failure shall continue for
thirty (30) days after written notice from Lender of said failure
(unless such failure cannot be cured within said thirty (30) days,
in which case it shall be an Event of Default if Borrower fails to
commence a cure within thirty (30) days after written notice from
Lender or to diligently prosecute said cure thereafter);
(3) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any Collateral securing
repayment of this Note or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any related
documents;
(4) Any representation or statement made
or furnished to Lender by Borrower or on Borrower's behalf is
false or misleading in any material respect at the time made or
furnished;
(5) Borrower becomes insolvent, liquidates
or dissolves, a receiver is appointed for any portion of Borrower's
property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws, and
in each case said actions are not vacated or terminated by
Borrower within sixty (60) days after commencement, if possible;
(6) Any creditor brings a legal action to
take any of Borrower's property on or in which Lender has a lien
or security interest, including a garnishment of any of Borrower's
accounts with Lender, and Borrower does not promptly exercise
available rights to contest said action;
(7) There is any material adverse change
in the financial condition or management of Borrower which
Lender reasonably and in good faith believes will materially impair
Borrower's ability to repay this Note, or Lender otherwise in
reasonably and in good faith deems itself insecure with respect to
the payment or performance of Borrower's obligations to Lender
under or related to this Note.
If this Note is payable on demand, the inclusion of specific events
of default shall not prejudice Lender's right to require payment on
demand or to decline to make any requested Advance
(b) Without prejudice to any right of Lender to
require payment on demand, upon the occurrence of an Event of
Default, Lender may declare the entire unpaid Principal Balance
on this Note and all accrued unpaid interest immediately due and
payable, without notice. Upon default, including failure to pay
upon final maturity, Lender, at its option, may also, if permitted
under applicable law, increase the interest rate on this Note to a
rate equal to the Prime Borrowing Rate plus five percent (5.00%).
The interest rate will not exceed the maximum rate permitted by
applicable law. In addition, if any payment of principal or interest
is fifteen (15) or more days past due, Borrower will be charged a
late charge of five percent (5.00%) of the delinquent payment.
11. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT
ON DEMAND. Absent manifest error or Borrower's proof to the
contrary, Lender's records shall, at any time, be conclusive
evidence of the unpaid Principal Balance and interest owing on
this Note. Notwithstanding any other provisions of this Note, in the
event holder makes Advances hereunder which result in an
unpaid Principal Balance on this
<PAGE> 36
Note which at any time exceeds
the maximum amount specified in Section 2, then Borrower agrees
that all such Advances, with interest, shall be payable on demand.
12. LINE OF CREDIT PROVISIONS; LOAN
AGREEMENT. Borrower agrees that Lender's obligations to
make any Advances hereunder are subject to the terms and
conditions of that certain Loan Agreement dated of even date
herewith between Borrower and Lender, which Loan Agreement
concerns the making of the loan (the "Loan") which is the subject
of this Note.
13. DEMAND NOTE. If this Note is payable on demand,
Borrower acknowledges and agrees that (a) Lender is entitled to
demand Borrower's immediate payment in full of all amounts
owing hereunder, and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not
limited to, provisions relating to defaults, rights of cure, default
rate of interest, installment payments, late charges, periodic
review of Borrower's financial condition, and covenants) nor any
act of Lender pursuant to any such provisions shall limit or impair
Lender's right or ability to require Borrowers payment in full of all
amounts owing hereunder immediately upon Lender's demand.
14. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate
option selected upon the request of any officer of Borrower, any
person or persons authorized in subsection (b) of this Section 14,
and any person or persons otherwise authorized to execute and
deliver promissory notes to Lender on behalf of Borrower.
(b) Borrower hereby authorizes any one (1) of the
following individuals to request Advances and to select interest
rate options: John Giguiere, Karl E. Giguiere, Lane Giguiere, Mike
Motroni, and Beth Brady, unless Lender is otherwise instructed In
writing.
(c) All Advances shall be disbursed by deposit
directly to Borrower's account number 81 10-012690 at a branch
of Lender, or by cashier's check issued to Borrower.
(d) Borrower agrees that Lender shall have no
obligation to verify the identity of any person making any request
pursuant to this Section 14 (provided that the party making the
request has identified himself or herself as an authorized party or
Lender has inquired of and been given the name of the requesting
party and confirmed that said name is among those authorized),
and Borrower assumes all risks of the validity and authorization of
such requests. In consideration of Lender agreeing, at its sole
discretion to make Advances upon such requests, Borrower
promises to pay holder, in accordance with the provisions of this
Note, the Principal Balance together with interest thereon and
other sums due hereunder, although any Advances may have
been requested by a person or persons not authorized to do so,
unless said requests were honored by Lender in an instance
where Lender had actual knowledge that the party identified as
making the request was not authorized to make the request.
15. PERIODIC REVIEW. Lender shall have the right to
review Borrower's credit accommodations periodically. At the time
of the review, Borrower will furnish Lender with any additional
information regarding Borrower's financial condition and business
operations that Lender reasonably requests. This information
may include but is not limited to, financial statements, tax returns,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets and forecasts. If upon review,
Lender determines that there has been a failure of the financial
covenants and ratios set forth in the Loan Agreement or a material
adverse change in Borrower's financial condition, then Borrower
will be in default under this Note. Upon default, Lender shall have
all rights specified herein.
16. NOTICES. All notices, consents, approvals and
other communications under this Note shall be in writing and shall
be deemed to have been duly given or made (1) upon delivery if
hand delivered; (2) one (1) business day after delivery to any
nationally recognized overnight courier service for next business
day delivery, fee prepaid; (3) one business day after facsimile
transmission, with transmission verified and a hard copy of the
transmission promptly sent by U. S. Mail; or (4) three (3)
<PAGE> 37
days after deposit with the United States Postal Service as registered
or certified mail, postage prepaid, and in each case addressed as
follows:
To Lender: U.S. Bank National Association
980 9th Street, Suite 1200
Sacramento, California 95814
Attention: Ms. Karen McManus
To Borrower: Mr. Mike Motroni, CFO
R.H. Phillips, Inc.
26836 County Road 12A
Esparto, California 95627
17. ATTORNEY FEES. Whether or not litigation or
arbitration is commenced, Borrower promises to pay all
reasonable costs of collecting overdue amounts. Without limiting
the foregoing in the event that holder consults attorney regarding
the enforcement of any of its rights under this Note or any
document securing the same, or if this Note is placed in the hands
of an attorney for collection or if suit or litigation is brought to
enforce this Note or any document securing the same, and if
Lender is the prevailing party in any such action, then Borrower
promises to pay all reasonable costs thereof including such
additional sums as the court or arbitrator(s) may adjudge
reasonable as attorney fees, including without limitation,
reasonable costs and attorney fees incurred in any appellate
court, in any proceeding under the bankruptcy code, or in any
receivership and post judgment attorney fees incurred in enforcing
any judgment.
18. WAIVERS; CONSENT. Unless notice is specifically
required hereunder, each party hereto waives diligence, demand,
presentment for payment, notice of non-payment, protest and
notice of protest and waives all defenses based on suretyship or
impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations
hereunder, Lender may deal in any manner with any person who
at any time is liable for, or provides any real or personal property
collateral for, any indebtedness of Borrower to Lender, including
the indebtedness evidenced by this Note. Without limiting the
foregoing, Lender may, in its sole discretion: (a) make secured or
unsecured loans to Borrower and agree to any number of waivers,
modification, extensions and renewals of any length of such loans,
including the loan evidenced by this Note; (b) impair, release (with
or without substitution of new collateral), fail to perfect a security
interest in, fail to preserve the value of, fail to dispose of in
accordance with applicable law, any collateral provided by any
person; (c) sue, fail to sue, agree not to sue, release, and settle
or compromise with, any person.
19. JOINT AND SEVERAL LIABILITY; REMEDIES
CUMULATIVE. All undertakings of the undersigned Borrower are
joint and several. Lender's rights and remedies under this Note
shall be cumulative.
20. SEVERABILITY. If any term or provision of this
Note is declared by a court of competent jurisdiction to be illegal,
invalid or unenforceable for any reason whatsoever, such
illegality, invalidity or unenforceability shall not affect the balance
of the terms and provisions hereof, which terms and provisions
shall remain binding and enforceable, and this Note shall be
construed as if such illegal, invalid or unenforceable provision had
not been contained herein, provided that provided that the
severance of such provision(s) does not result in a material failure
of consideration under this Agreement to either party hereto.
21. ARBITRATION.
(a) Either Lender or Borrower may require that all
disputes, claims, counterclaims and defenses, including those
based on or arising from any alleged tort ("Claims"), relating in
any way to this Note or any transaction of which this Note is a
part, be settled by binding arbitration In accordance with the
Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be
subject to the statutes of limitation applicable if they were litigated.
This
<PAGE> 38
provision is void if the Loan, at the time of the proposed
submission to arbitration, is secured by real property located
outside of Oregon or Washington, or if the effect of the arbitration
procedure (as opposed to any Claims of Borrower) would be to
materially impair Lender's ability to realize on any collateral
securing the Loan.
(b) If arbitration occurs and each party's Claim is
less than One Hundred Thousand Dollars ($100,000), one neutral
arbitrator will decide all issues; if any party's Claim is One
Hundred Thousand Dollars ($100,000) or more, three neutral
arbitrators will decide all issues. All arbitrators will be active
California State Bar members in good standing. All arbitration
hearings will be held in Sacramento, California. In addition to all
other powers, the arbitrator(s) shall have the exclusive right to
determine all issues of arbitrability. Judgment on any arbitration
award may be entered in any court with jurisdiction.
(c) If either party institutes any judicial
proceeding relating to the Loan, such action shall not be a waiver
of the right to submit any Claim to arbitration. In addition, each
has the right before, during and after any arbitration to exercise
any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self help repossession; (iii) judicial or
nonjudicial foreclosure against real or personal property collateral;
and (iv) provisional remedies, including injunction, appointment of
receiver, attachment, claim and delivery and replevin.
22. GOVERNING LAW. This Note shall be governed by
and construed and enforced in accordance with the laws of the
State of California without regard to conflicts of law principles;
provided, however, that to the extent that Lender has greater
rights or remedies under Federal law, this provision shall not be
deemed to deprive Lender of such rights and remedies as may be
available under Federal law.
23. SUPERSEDES PRIOR NOTE. Upon execution and
delivery to Lender, this Note shall (a) replace, supersede and
terminate that certain Alternative Rate Options Promissory Note
(Prime Rate, Libor) made by Borrower in favor of Lender dated as
of May 1, 1998 (the "Previous Note"), and (b) evidence and
constitute Borrower's promise to pay all loan amounts outstanding
and unpaid under the Previous Note as of the date hereof.
"Borrower"
R.H. PHILLIPS, INC., a California corporation
By://s//Mike Motroni
------------------------
Name:Mike Motroni
----------------------
Title:Chief Financial Officer
-----------------------
For valuable consideration, Lender agrees to the terms of the
arbitration provision set forth In this Note.
"Lender"
U.S. BANK, NATIONAL ASSOCIATION
By://s//Karen McManus
--------------------------
Name:Karen McManus
------------------------
Title:Vice President
-----------------------
<PAGE> 1
R.H. PHILLIPS
1999 EMPLOYEE STOCK PURCHASE PLAN
JULY 26, 1999
Summary
We, R.H. Phillips, Inc., have prepared this document to
provide our employees with a general description of the R.H.
Phillips 1999 Employee Stock Purchase Plan, which we refer to
as the "Plan." This document is a prospectus relating to the
shares of common stock we are offering to our employees
under the Plan within the meaning of the regulations of the
Securities and Exchange Commission and federal securities
laws. Our goal is to provide all employees eligible to buy shares
of our common stock under the Plan with a description of the
Plan and how they may subscribe to purchase shares from us.
The Plan is intended to qualify as an "Employee Stock
Plan" within the meaning of Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Plan is
not a qualified deferred compensation plan under Section
401(a) of the Code, and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974.
We will offer all eligible employees the right to purchase
shares of our common stock through payroll deductions. When
we decide to offer shares for sale to our employees, we will set
an offering period lasting no more than 6 months and will
provide you with notice of the offering. If you wish to
participate in the offering, you will fill out and return a
subscription agreement stating the percentage of your after-tax
salary (between 2%-10%) that you would like withheld to
purchase shares. At the end of the offering period, you will
receive the number of whole shares that your payroll deductions
can purchase at a purchase price of 85% of the fair market
value of the shares on the closing date of the offering period.
Administration
The Committee
The Board of Directors' Compensation Committee,
which we refer to as the "Committee" will administer the Plan.
The Committee makes all decisions about how the Plan
operates, including the dates during which we will offer shares
under the Plan, and all of their decisions are final and binding
upon all participants. A majority of the members of the
Committee are not employees of the Company and Committee
members receive no additional compensation for administering
the Plan.
<PAGE> 2
Number of Shares Issuable Under Plan.
We may sell a maximum of 150,000 shares of common
under the Plan. We are not required to issue any minimum
number of shares under the Plan.
Who May Buy Shares
General.
With some exceptions, all employees are eligible to
participate in the Plan if they have been employed for at least
five days before the offering period begins. The following
employees are not eligible to participate in the Plan.
Part-time employees whose customary
employment is less than 20 hours per week;
Seasonal employees whose customary
employment is for not more than five months in any
calendar year.
Employees who are "highly compensated
employees" within the meaning of Section 414(q) of the Code.
An employee is highly compensated if his or her
annual compensation for the year before an offering
period exceeds the greater of: (1) $100,000 in
salaries, commissions and overtime payments, but
excluding bonuses, long term incentives and other
compensation; or (2) the annual compensation
amount specified in Section 414(q) of the Code and
the rules of the Department of Treasury enacted
pursuant to that Section of the Code.
Limitations on Participation.
There are some limitations on the number of shares any
individual employee can purchase under the Plan.
You may not buy shares under this Plan if you
own 5% or more of the outstanding shares of R.H. Phillips'
common stock.
You may not buy shares under this Plan if you have
the right to acquire R.H. Phillips' stock with a fair
market value of more than $15,000 under all stock
purchase plans within any single year. We compute
fair market value as of the date on which an offering
period begins.
You may not buy more than 2,500 shares during any
offering.
<PAGE> 3
Operation of Plan - Procedures for Subscribing.
Announcement of Offering.
When we announce that there will be an offering, you
will be given option to purchase as many shares as your
specified payroll deduction will be able to purchase upon the
closing of that offering period.
You may participate in an offering by completing a
subscription agreement and any other documents we require
and returning them to the corporate Secretary within five days
before an offering commences. Each subscription agreement
will give you the right to purchase shares in that offering only,
and if you want to participate in any subsequent offering, you
will need to sign and complete a new subscription agreement.
Purchase Price.
The purchase price for the shares shall be 85% of the
fair market value of the R.H. Phillips common stock as of the
last day of the offering period in which those shares are being
purchased. The fair market value of the common stock is
defined as the daily closing price of the common stock as
quoted on the Nasdaq National Market or on any other
securities exchange where the common stock is traded during
the offering period.
Offering Period.
When we decide to offer shares for sale under this Plan,
we will set the beginning date and length of an offering period.
The offering period may last for up to six months, although the
offering period may be shorter than that if the Committee so
determines. After the Committee has set the beginning date and
offering period, we will notify you of the date the offering
period will begin and the duration of the offering period.
Payroll Deductions.
If you decide to participate in the offering, you must
send us a written authorization to allow us to deduct a
percentage of your after-tax annual compensation, to be used
for the purchase of shares under the Plan. The exact percentage
of this deduction must be between 2% and 10% of your annual
compensation and specified in the subscription agreement given
to the corporate Secretary. Annual compensation includes your
base salary, overtime payments and sales commissions for the
calendar year immediately prior to the beginning of the offering
period, but does not include your bonuses, profit-sharing
payments or other forms of compensation.
Withdrawal.
You may withdraw your participation from an offering
at any time prior to the end of the last business day of the
offering period, by giving written notice to the corporate
Secretary. Upon written notice of your decision to withdraw
from an offering,
<PAGE> 4
we will promptly forward payment to you in
cash equal to the amount deducted from your wages during the
offering period without interest.
Interest.
You will not be entitled to any interest on your
authorized payroll deductions for purposes of purchasing shares
in any offering under this Plan, even if your participation in an
offering is terminated for any reason. Any interest which may
be earned on payroll deductions shall belong to us.
Termination of Employment.
If your employment is terminated for any reason other
than death or disability, or if you resign, your rights to purchase
shares under this Plan shall terminate immediately and we will
pay in cash to you any amounts deducted from your wages
during the offering period for the purchase of shares. If you
should die or become disabled during an offering period, we
will issue shares at the end of the offering period to you, your
estate or personal representative, as the case may be. You are
considered "disabled" if you have suffered a mental or physical
impairment within the meaning of Section 22 of the Code.
Capital Changes - Adjustments in Shares
Capital Changes.
In we should have any stock splits, stock dividends, or
similar changes to our common stock, we will make appropriate
adjustments to the number of shares subject to purchase and to
the purchase price per share under the Plan to reflect your
relative rights and status prior to that change.
Employee's Rights as a Shareholder.
You will not be considered an owner of any shares that
your are purchasing under the Plan until the offering period
concludes and we have issued you the shares.
Over-Subscription.
If we receive subscriptions for more than the maximum
number of shares of common stock available for issuance under
this Plan, we will allocate the maximum number of shares
available on a pro-rata basis among all the participating
employees in that offering. We will refund to you any unused
payroll deductions as a result of such pro-rata distribution.
<PAGE> 5
Reports.
We will maintain an individual account for you pursuant
to the Plan. You will receive a report of your account setting
forth your total amount of payroll deductions accumulated, the
per share purchase price, the number of shares purchased and
the remaining cash balance, if any, as promptly as practicable
after each purchase date.
No Assignment of Rights
You may not sell, assign or otherwise transfer your
rights to purchase shares under this Plan to any person, except
by Will or under the laws of descent and distribution.
Furthermore, you may exercise your right to purchase common
stock under this Plan only during your lifetime. If you violate
this provision, or if any claim is asserted by another party in
respect of such right and interest by garnishment, levy,
attachment, or otherwise, we will treat such violation or claim
as an election to withdraw your participation and your funds
from that offering.
Amendments and Discontinuance of Plan
We have the right to amend, modify or terminate this
Plan at any time without notice; provided that your then
existing rights to purchase shares in an offering already being
conducted will not be adversely affected by that action. The
following amendments must be approved by our shareholders
before they can go into effect:
Any amendment increasing the maximum number of
shares of common stock which may be offered under
this Plan.
Any amendment changing the method for determining
the purchase price per share of shares offered under
the Plan.
Any amendment increasing the maximum number of
shares which an individual employee may purchase.
Restrictions on Resale
The shares we are selling under the Plan have been
registered under the Securities Act of 1933, as amended, and
therefore may be resold without limitation under federal law.
However, certain officers who are deemed to be "affiliates" of
R.H. Phillips may only resell those shares pursuant to SEC Rule
144 or another exemption from the registration requirements of
the Securities Act.
Tax Information
The following is a brief summary of the federal income
tax consequences to you when you sell stock you acquired
under the Plan. You should bear in mind that this information is
incomplete and is subject to change upon any amendment to the
federal tax
<PAGE> 6
laws. In addition, the summary does not discuss the
provisions of the income tax laws of any municipality, state or
foreign country in which you may reside. We recommend that
you discuss with your own tax adviser the tax consequences to
you of any sale of shares under the Plan.
The Plan is intended to qualify under the provisions of
Sections 421 and 423 of the Code. Under these provisions, you
will realize no taxable gain or loss when you agree to participate
in an offering. When you sell some or all of the shares you
acquired under the Plan, you will be subject to federal income
tax in the manner described below:
Special Tax Treatment:
If you satisfy all of the following conditions,
you qualify for special tax treatment:
You held your shares for at least two years after
the offer for those shares began;
You held your shares for more than one year after
the date on which you bought those shares; and
You have been an employee of the Company up to at
least three months before you purchased the shares.
If you qualify for special tax treatment, the smaller of
the following amounts will be deemed to be ordinary income to
you for federal income tax purposes in the year you sell the
shares:
The excess of the fair market value of the shares
at the time of sale or disposition over the original purchase
price of the shares; or
15% of the fair market value of the shares on
the day the offering for your shares began.
If you have any additional gain from the sale of your
shares, the amount of that gain will be deemed capital gains
from federal income tax purposes. This amount will be taxed as
long-term or short-term capital gains based on how long you
owned the shares. Under current federal income tax law, if you
owned the shares for more than 12 months, the maximum tax
rate on the amount of your gain will be 20%. If you held the
shares for less than 12 months, the gains will be taxed at short-
term capital gain rates, which are currently the same as ordinary
income rates.
If the price at which you sold your shares is less than the
amount you paid for them, you will recognize no ordinary
income and instead, realize a capital loss for the difference.
Any capital losses are allowed in full against capital gains plus
$3,000 of other income.
<PAGE> 7
Other Tax Treatment:
If you do not satisfy the conditions for special tax
treatment, the excess of the fair market value of the shares on
the date you purchased the shares over the price you paid for
them will be taxed as ordinary income. You will recognize this
ordinary income in the year you disposed of the shares,
even if you do not realize any gain on the sale of the shares
or made a gratuitous transfer of the shares. If you do realize
any further gain, it will be treated as capital gain and treated as
long-term capital gain if you held the shares for more than one
year.
Directors and Officers Subject to Section 16(b) Liability:
If you are an executive officer or other person subject to
Section 16(b) of the Exchange Act who prematurely disposes of
your shares purchased under the Plan, you will be treated as if
you exercised a nonqualified option for purposes of determining
the amount of ordinary income you will be taxed. Accordingly,
the calculation of the amount of compensation income you will
recognize and the beginning of your capital gains holding period
may be deferred for up to six months, the deferral date. You
will recognize ordinary income in the year of sale or disposition,
generally equal to the excess of the fair market value of the
shares on the deferral date over the purchase price. You should
consult with your personal tax advisors before buying or selling
shares under the Plan.
Basis in Stock -- Deductions
Your tax basis for purposes of determining capital gain
or loss on the shares purchased under the Plan is equal to the
ordinary income reported under the rules described above,
added to the actual purchase price of the shares.
We are entitled to a deduction for the amounts you are
taxed as ordinary income to the extent that ordinary income
must be reported upon your sale or disposition of the shares
before the expiration of the holding periods described above.
Approvals
Our obligation to offer, sell and deliver the common stock
under this Plan is subject to the approval of any governmental
authority required in connection with the authorized issuance or
sale of those shares.
Additional Information
We are incorporating the following documents by
reference into this prospectus.
Our Annual Report on Form 10-KSB for the
year ended December 31, 1998
<PAGE> 8
Our Quarterly Report on Form 10-QSB for
the period ended March 31, 1999
A Registration Statement for the common
stock filed with the Securities and Exchange
Commission on Form 8-A, dated April 14,
1999.
We are also incorporating by reference all future annual
and quarterly reports, proxy statements and other filings we
send to the Securities and Exchange Commission under
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange
Act of 1934. You may obtain copies of the documents
incorporated by reference and other information about the Plan
and its administrators without charge by making a written or
oral request to the Chief Financial Officer of the Company at
the following address:
Michael J. Motroni,
Chief Financial Officer
R.H. Phillips, Inc.
26836 County Road 12A
Esparto, CA 95627
(530) 662-3215
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2,288
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