<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[ ] 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.
-------------------
(Name of small business issuer in its charter)
California 68-0313739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26836 County Road 12A, Esparto, California 95627
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (530) 662-3215
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
No Par Common Stock
- ----------------------------------------------------------------------
(Title of Class)
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $21,720,132
Aggregate market value of the voting stock held by non-affiliates
based on the closing price at which the stock was sold on the Nasdaq
National Market as of March 15, 1999 was approximately
$13,894,971.
Number of shares outstanding of each of the issuer's classes of
common equity as of March 15, 1999: 6,582,559
Documents incorporated by reference: Proxy Statement for the 1999
Annual Meeting of Shareholders
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE> 2
PART I
Item 1. Description of Business
General
R.H. Phillips, Inc. ("R.H. Phillips" or "the Company") makes
and sells popular premium and super premium varietal table wines.
The Company's vineyard, winery and corporate headquarters are
located in the Dunnigan Hills region of California, approximately 30
miles northeast of the Napa Valley wine region. Founded in the early
1980's, the R.H. Phillips' wines are sold throughout the United States
and in several other countries. Sales of R.H. Phillips' wines have
increased from 4,500 cases in 1984 to 405,000 cases in 1998.
For purposes of the following discussion, a "case" means a
nine liter case of wine. All numbers are approximate.
Business of Issuer
Strategy
R.H. Phillips is a leading California estate bottled producer of
super premium and popular premium wines. R.H. Phillips specializes
in the production of Chardonnay, the Rhone Valley varietals Syrah
and Viognier, and Zinfandel. R.H. Phillips owns or leases
approximately 1,550 acres of grapes in the Dunnigan Hills viticultural
region. R.H. Phillips' strategy is to combine low cost fruit
production from the Dunnigan Hills with high quality viticultural and
enological practices common to Napa and Sonoma in order to create
wines that compete on a quality basis with those produced from
California's coastal regions. Through major vineyard and winery
investments made over the last four years, the Company intends to
increase the production and sale of higher profit super premium
wines. R.H. Phillips' Syrah plantings make it one of the leading
producers of Rhone Valley varietals in the United States.
Products
R.H. Phillips produces and sells wines in the category known
as "table wines." Table wines contain 7% to 14% alcohol by volume,
and are generally consumed with foods. Table wines that retail for
less than $6 per 750 ml (milliliter) bottle are generally referred to as
"fighting varietals". Table wines which retail in the $6 to $9 range
are referred to as "premium" or "popular premium" wines. Wines
which retail between $10 and $15 per bottle are considered "super
premium" wines and those which retail above $15 per bottle are
considered "ultra premium" wines.
R.H. Phillips has developed a diverse line of products
including popular premium, super premium and ultra premium
varietal table wines. R.H. Phillips markets its products under five
brands, each of which is defined by a type of wine and price
structure.
EXP. The EXP brand consists of a Syrah and an estate
bottled Viognier, which are varietals traditionally grown in France's
southern Rhone Valley. Rhone Valley varietals adapt well to the
warm Dunnigan Hills climate. EXP Syrah is fermented using several
yeast strains to encourage a broad range of flavor development.
Warm fermentation temperatures are employed to aid in the
development of soft tannins and intense color. EXP Viognier is
estate bottled. After pressing and cold settling, Viognier juice
<PAGE> 3
is fermented at cool temperatures, creating slow fermentation in barrels
and tanks. The wine is left in contact with fermentation lees to
encourage yeasty, toasty characteristics. The EXP wines, which are
produced in 750 ml bottles and have a suggested retail price of $13,
are "super premium" wines that have gained recognition for quality.
Kempton Clark. R.H. Phillips' Zinfandel products are sold
under the Kempton Clark label. The first product, which was
introduced in 1998, is a super premium wine made from grapes
grown on Lopez Ranch, a southern California vineyard. The wine
has a suggested retail price of $18. R.H. Phillips introduced MAD
Zin in 1999. MAD ("Multiple Appellation Designate) Zin utilizes
grapes grown throughout California, including the Dunnigan Hills,
and has a suggested retail price of $13.
Toasted Head. The Toasted Head brand was introduced
in 1997. Toasting is a method used by coopers to alter and influence
the impact of wood barrel aging on the quality of wine. Woody
aromas are subdued by toasting, while spicy, sweet, burnt and vanilla
aromas are increased by the process. For Toasted Head wines, the
barrel staves and heads are moderately toasted. This series includes
a 100% estate bottled Chardonnay which is fermented in French and
American oak barrels and is allowed to age sur lie to develop
richness. Part of the wine goes through malolactic fermentation to
soften its texture. Toasted Head Chardonnay is aged up to ten
months in oak. The series also includes a Cabernet Sauvignon/Syrah
blend, which is aged approximately eighteen months in French and
American oak barrels. The wines are kept in small individual lots
until the final blend is assembled. The Toasted Head Series is
packaged in a 750 ml bottle and has a suggested retail price of $13.
R.H. Phillips. R.H. Phillips markets Chardonnay, Cabernet
Sauvignon, Sauvignon Blanc, Mistura and White Zinfandel under
its R.H. Phillips label. Chardonnay and Cabernet Sauvignon products
comprise the R.H. Phillips Barrel Cuvee Series. R.H. Phillips is a
recognized quality leader for Chardonnay and Cabernet Sauvignon
priced under $10 per bottle and has received significant positive
recognition from well-known wine critics. Approximately 40% of
Barrel Cuvee Chardonnay is either fermented or aged in a
combination of French and American oak barrels. The wine is left in
contact with fermentation lees in order to encourage yeasty, toasty
characteristics. These processes give the wines a competitive quality
edge within their price structure. Wines in the Barrel Cuvee Series
are bottled in 750 ml and 1.5 liter bottles. The 750 ml bottle has a
suggested retail price of $8 per bottle. R.H. Phillips intends to
introduce a Merlot product in the year 2000.
The R.H. Phillips Night Harvest Series consists of
Sauvignon Blanc, Mistura and White Zinfandel products.
Sauvignon Blanc is fermented and aged in stainless steel tanks to
preserve maximum fruit flavors. Mistura is a blend produced from
several Rhone Valley varietals from the Dunnigan Hills and other
select areas of California. R.H. Phillips' White Zinfandel is cold
fermented to preserve its fruity fermentation esters, and blended with
Chenin Blanc and Muscat to showcase its fruit flavors. Night
Harvest wines are bottled in 750 ml and 1.5 liter bottles. The 750 ml
bottle has a suggested retail price of $7 per bottle. R.H. Phillips
intends to discontinue its Mistura and White Zinfandel products over
the next few years in order to increase emphasis on higher margin
products.
Chateau St. Nicholas. The Chateau St. Nicholas Series
is sold only during the holiday season, and consists of Chardonnay
and White Zinfandel. The wines are sold in 500 ml or 750 ml bottles.
Chateau St. Nicholas has a suggested retail price of $6 to $8 for the
750 ml bottles.
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Sales By Product
Chardonnay, which historically has been R.H. Phillips' largest
selling varietal, accounted for 56% of 1998 sales. Cabernet
Sauvignon was the next largest varietal, with 12% of sales. Sales by
product brand have been dominated by the R.H. Phillips Series,
which generated 72% of 1998 sales. Over 16,800 cases of EXP
wines were sold in 1998, an increase from 8,600 cases in 1997. Sales
of Toasted Head wines increased from 6,600 cases in 1997 to over
37,300 cases in 1998, primarily due to sales of Toasted Head
Chardonnay. R.H. Phillips plans to emphasize sales of its higher
priced EXP, Toasted Head, and Kempton Clark products in the
future.
Distribution
R.H. Phillips' sales strategy has focused on the creation,
retention and expansion of a large, nationwide distributor network
supported by sales personnel and commissioned brokers. R.H.
Phillips' brands are distributed nationwide by a network of over 90
unrelated distributors who purchase from R.H. Phillips at wholesale
prices. R.H. Phillips employs nine sales representatives who work
with certain distributors. R.H. Phillips also uses independent wine
brokers. The brokers, who are paid a commission based on sales
revenue, accounted for 58% of sales during 1998. Each sales
representative and broker is responsible for managing the wholesale
network established in his or her region by facilitating
communication, dealing with special promotions, and monitoring
sales performance.
R.H. Phillips' largest customers in 1998 were Lauber
Imports, M.S. Walker, and Connecticut Distributors, all of which
distribute wines in the northeastern United States. Lauber Imports,
M.S. Walker, and Connecticut Distributors accounted for 13%, 8%
and 6% of R.H. Phillips' sales in 1998, respectively.
R.H. Phillips' wines are sold throughout the United States
and in several other countries. The northeastern United States,
which is R.H. Phillips' largest region, accounted for 33% of sales in
1998. The northern Midwest was the second largest region with
12% of sales. Exports, which constituted 2% of R.H. Phillips' sales,
were primarily to Canada.
R.H. Phillips' standard sales terms provide that payments are
due 30 to 60 days after shipment at prices set forth on R.H. Phillips'
price lists. R.H. Phillips does not have contracts with any of its
distributors which obligate them to purchase any specified amount of
wine over any defined period. It is therefore possible for a
distributor, including one of R.H. Phillips' major distributors, to
cease purchases of R.H. Phillips' wines at any time.
Sales and Marketing
R.H. Phillips' sales and marketing activities take various
forms. Advertising and sales promotional activities are used to
promote products in either a "push" or "pull" manner. "Push"
programs include promotional allowance rebates or discounts and
product samples. "Pull" programs include media advertising, point
of sale materials, a tasting room, and various promotional events.
Management believes that "push" programs are a cost effective
method of generating new sales. Although some pull programs are
more costly to implement, management believes that they may
provide a greater return over the long run by building brand
recognition.
<PAGE> 5
Suppliers
R.H. Phillips purchases raw materials from outside parties to
conduct its business. Raw materials include items such as grapes,
bulk wines and packaging materials. Management believes that it has
strong relationships with all of its major suppliers, is not dependent
on any single supplier, and would be able to find substitute suppliers
if necessary.
Because R.H. Phillips' product sales has exceeded its grape
production in the past several years, it has been necessary to purchase
bulk wine and grapes from outside suppliers. In 1998, approximately
22% of R.H. Phillips' wine production came from bulk grapes and
wine purchased on the open market or through supply contracts.
The supply and price of available grapes have historically been
subject to considerable fluctuations. R.H. Phillips has expanded its
vineyards over the past several years in an effort to improve wine
quality and lessen its dependence on outside sources of bulk wine and
grapes. R.H. Phillips realized some initial benefit from these new
vineyards in 1998 and expects the full benefits to be realized over the
next several years as the vines mature.
Research and Development
R.H. Phillips conducts research in several areas in an effort to
improve vineyard yield, wine quality and processing efficiency.
Vineyard research includes testing irrigation levels, soil amendments,
cover crops, and trellising, clonal and rootstock performance as well
as canopy management techniques. Winemaking research is carried
out on a year round basis, and has included experiments with yeast
strains, enzymes, fermentation techniques, fruit maturities, and
extensive barrel evaluation trials.
R.H. Phillips actively exchanges viticultural and winemaking
information with other firms in the industry and maintains a close
working relationship with the faculty of the Department of Enology
and Viticulture at the University of California at Davis. Staff
members of R.H. Phillips have visited several wineries in Europe and
Australia, and personnel from French, Australian and South African
wineries and vineyards have toured its facilities. These visits have
resulted in a valuable exchange of technical information.
Competition
The California table wine industry in 1998 had approximately
$5.1 billion in sales, according to the December 1998 edition of
WINEDATA published by Gomberg, Fredrikson and Associates.
There are approximately 900 California wineries marketing wines in
the high premium product category, which includes the super
premium and ultra premium categories. The three largest wineries,
known as "the Big Three," are E. & J. Gallo, Canandaigua West, and
The Wine Group. The shipment volume of the Big Three in 1998
accounted for approximately 58% of total wine sales from California
producers. R.H. Phillips is the 22nd largest shipper of wines in
California, according to the 1998 edition of WINEDATA.
The California wine industry is extremely competitive. Many
new wineries have been established in the last few years which
compete to some extent with R.H. Phillips. Management believes
that competition in the wine industry will likely increase, which could
potentially reduce future profits. Plantings of vineyards have
increased over the last several years. As a result, there may be
certain grape varietals that will be in oversupply in the future as the
vineyards begin to produce crops. Such an oversupply may result in
increased pressure on wine prices.
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Trademarks
R.H. Phillips has adopted a program to establish and protect
its trademarks and trade names. R.H. Phillips has obtained federal
registrations for its EXP, Toasted Head, Night Harvest, Mistura and
Chateau St. Nicholas trademarks from the U.S. Patent & Trademark
Office, and has applied to register additional word and design
trademarks.
Employees
R.H. Phillips employs 110 people full-time. In addition, R.H.
Phillips employs temporary labor for vineyard development, pruning
and harvest, and winery crush and bottling. None of R.H. Phillips'
employees are covered by a collective bargaining agreement and R.H.
Phillips is unaware of any labor disputes with its employees.
Agricultural Hazards
Grape growing for wine production is heavily dependent
upon favorable weather conditions. Drought or excessive rain can
adversely affect production. Excessive heat or cold, especially near
the time for harvest, can adversely affect grape quality and,
consequently, the quality of wine. Weather has had a large impact on
the California wine industry in recent years, causing fluctuations in
crop yields.
Phylloxera, Other Diseases
Many California vineyards have been severely damaged by
Phylloxera, an aphid-sized root louse. The pest lives and propagates
in the soil and feeds on the roots of vines. Phylloxera is not harmful
to humans, but it can affect grape quality and causes a progressive
decline in grape production. Chemical insecticides can slow the
progress of vine deterioration, but once a vine is infested it is not
possible to eradicate Phylloxera. Phylloxera has impacted several
grape growing regions, including Napa, Sonoma, Monterey,
Mendocino and Lake counties.
Due to R.H. Phillips' warmer climate and careful farming
practices, the Phylloxera infestation in its vineyards was somewhat
delayed. However, of the 1,555 acres of vineyards currently owned
or leased by R.H. Phillips, 187 acres have rootstock known to be
susceptible to Phylloxera. Based on tests performed by R.H. Phillips,
management believes that portions of these 187 acres show physical
symptoms of decline. R.H. Phillips is using a variety of methods to
combat Phylloxera infestation. Vines which are not severely damaged
or are not yet infested are grafted onto resistant rootstock, or new
vines on resistant rootstock are planted between the Phylloxera
infested vines, which are then allowed to deteriorate. R.H. Phillips
replaced the more severely damaged vines and the Phylloxera
susceptible vines bearing grape varieties which R.H. Phillips has de-
emphasized. All replacement vines have rootstock which is believed
in the industry to be resistant to Phylloxera.
In addition to Phylloxera, grape vines are subject to a variety
of other damaging diseases which have afflicted California vineyards.
Management is unaware of any diseases in R.H. Phillips' vineyards
other than normal grape growing conditions such as mildew and
insect infestation. R.H. Phillips is treating these with chemical
treatments and the use of organic methods, such as natural insect
enemies of the pests.
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Water Supply
R.H. Phillips has several wells on its property which have
historically supplied sufficient quantities of water for irrigation.
However, there can be no assurance that the wells will provide
sufficient water during a severe drought. Future expansion of
vineyards in the Dunnigan Hills region may be limited by the
availability of water.
Regulation
The U.S. wine industry is subject to substantial federal, state
and local regulation. The Bureau of Alcohol, Tobacco and Firearms
("BATF") is the federal agency primarily responsible for regulating
the production and sale of wine. The BATF has promulgated
numerous regulations relating to the wine industry. These
regulations include the licensing of wine producers, limitations on
chemical additives in wines, advertising standards, labeling
requirements and numerous other aspects of wine production and
sales. The BATF also collects federal excise taxes on wine. The
amount of federal excise tax is based on the total volume of wine
shipped and the alcohol content of that wine. The current federal
excise tax on wines shipped by R.H. Phillips is $1.07 per gallon for
wines containing less than 14% alcohol and $1.57 per gallon for
wines containing more than 14% alcohol. Less than 1% of the wine
shipped by R.H. Phillips during 1998 contained more than 14%
alcohol.
State governments also regulate the production, shipment and
marketing of wine. The wine regulatory agency in California is the
Department of Alcoholic Beverage Control. The California state
excise tax is $0.20 per gallon of wine sold into California. Missouri
and Wisconsin also collect excise taxes based on the volume of sales
into those states. Although the laws and regulatory requirements of
other states differ, most states require that wineries be licensed by the
appropriate state authorities before they are allowed to ship wine into
the state. R.H. Phillips has obtained licenses from those other states
in which it believes it is necessary to be licensed. Most states also
require prior state approval of wine labels and set other standards for
the manufacture and sale of wine. Wineries are subject to periodic
inspections and audits by the BATF and state alcohol regulatory
authorities.
In addition to alcohol-related governmental regulations, grape
growers, wine producers and wine shippers are subject to a broad
range of other regulatory requirements, such as local zoning
regulations, and regulations governing the use, storage and
disposition of pesticides, fuels and other chemicals. R.H. Phillips
believes it is in substantial compliance with all material applicable
laws and regulations relating to its business. Management is unaware
of any environmental problems on or near the vineyard or winery that
would have a material adverse effect on the financial condition of
R.H. Phillips.
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. In 1998,
33% of total sales occurred during this period. R.H. Phillips'
expenditures fluctuate throughout the year based on vineyard and
winery activities. Expenditures typically peak during the summer and
early autumn due to harvest and crush activities and to fund vineyard
and winery expansions.
<PAGE> 8
Working Capital
R.H. Phillips typically keeps large amounts of inventories on
hand. Inventories include the current grape crop, bulk wine stored
in tanks and barrels, packaging supplies and bottled wines. R.H.
Phillips generally keeps sufficient finished product on hand to allow
rapid turnaround of wine orders and bottle aging. Management
believes that large inventories are standard in the wine industry for
these reasons.
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 is conducting an 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 has reviewed its critical computer systems in order to
determine whether any software requires updating or replacement,
and has determined that its primary financial and operating software
is 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 it will bear the costs of the modification. Although the
supplier has informed R.H. Phillips that the software will be Year
2000 compliant by mid 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 the first half of 1999. The costs incurred by R.H. Phillips 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.
R.H. Phillips is also reviewing its non-information technology
systems for potential exposure to the Year 2000 Problem. Although
the review is not complete, management expects to complete its
review and any necessary corrections or replacements to its non-
information technology systems by mid 1999. The costs to correct
or modify these systems will be expensed as incurred, while any
<PAGE> 9
replacement costs will be capitalized. Management does not believe
that the total cost of making these systems Year 2000 compliant will
be material.
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.
Item 2. Description of Property
R.H. Phillips owns or leases 2,696 acres of land in California's
Dunnigan Hills region, located in northern Yolo County. A total of
1,555 acres are currently planted in vineyards, of which 1,220 are
mature and produced a crop in 1998. R.H. Phillips planted 347 acres
in 1997, which should mature and produce an initial crop in 1999.
R.H. Phillips' winery facility and administrative headquarters
are located on R.H. Phillips' land. The winery facility includes
bottling, barrel storage and warehouse buildings, wine storage and
fermentation tanks, and grape processing equipment. R.H. Phillips
owns or leases 13,500 oak barrels capable of holding 797,000
gallons. R.H. Phillips' wine tank capacity is 1,721,000 gallons, for
a total capacity of 2,518,000 gallons. The maximum bulk wine on
hand at one time during 1998 was 1,925,000 gallons. R.H. Phillips
leases an off-site warehouse building with storage capacity of
300,000 cases of wine. The maximum number of cases on hand at
one time during 1998 was 162,000. R.H. Phillips plans to purchase
additional tanks, barrels and processing equipment during 1999 to
accommodate planned growth.
In May 1997, R.H. Phillips sold 371 acres of land being
developed into vineyard to John Hancock Mutual Life Insurance
Company ("Hancock"). In connection with that 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. The lease requires R.H.
Phillips to pay rent of $161,000 per calendar quarter beginning in
January 1999.
<PAGE> 10
R.H. Phillips has granted to Metropolitan Life Insurance
Company ("Metropolitan") a deed of trust on certain real property
and a security interest in certain equipment and other assets as
security for a long term loan R.H. Phillips received from
Metropolitan. R.H. Phillips maintains insurance policies with respect
to its principal properties which, in management's opinion, are
adequate in view of the value of the property and the nature of its
business.
Item 3. Legal Proceedings
R.H. Phillips is not the subject of any litigation.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE> 11
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
R.H. Phillips' Common Stock is listed on the Nasdaq
National Market. As of March 9, 1999, there were 349 holders of
record of R.H. Phillips' Common Stock.
The high and low bid prices for the Common Stock by
quarter for the past two years are as follows:
<TABLE>
<S> <C> <C>
Year Ended December 31, 1998
First Quarter . . . . . . . . . . . . . $3.56 $2.50
Second Quarter . . . . . . . . . . . . $3.88 $2.88
Third Quarter . . . . . . . . . . . . . $4.00 $3.00
Fourth Quarter. . . . . . . . . . . . . $3.38 $2.50
Year Ended December 31, 1997
First Quarter . . . . . . . . . . . . . $4.13 $2.75
Second Quarter . . . . . . . . . . . . $4.38 $3.06
Third Quarter . . . . . . . . . . . . . $4.44 $3.44
Fourth Quarter. . . . . . . . . . . . . $4.25 $3.00
</TABLE>
The information concerning the high and low bid prices is
based on information R.H. Phillips obtained from the Nasdaq
National Market.
R.H. Phillips has not paid dividends on its Common Stock to
date. Management intends to reinvest earnings in the development
of its business and does not anticipate paying Common Stock
dividends for the foreseeable future. The Board of Directors may
reevaluate its policies with respect to the payment of Common Stock
dividends in the future.
Payment of dividends on the Common Stock is subject to
certain limitations under R.H. Phillips' loan agreements with
Metropolitan and U.S. Bank of California ("U.S. Bank"). In
addition, the Senior Preferred Stock of R.H. Phillips provides that
semi-annual dividends payable on those shares must be paid in full or
set aside for payment before any dividends are paid on the Common
Stock.
Item 6. 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.
<PAGE> 12
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 facility 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. In 1998,
33% of total sales occurred during this period. R.H. Phillips'
expenditures fluctuate throughout the year based on vineyard and
winery activities.
<PAGE> 14
Expenditures typically peak during the summer and
early autumn due to harvest and crush activities and expenditures to
fund vineyard and winery expansions.
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. R.H. Phillips
anticipates that the full benefit of the vineyard expansion should
continue to be realized over the next several years as the vines
mature.
Results of Operations
Year Ended December 31, 1998
Net Sales
Net sales in 1998 were $21,720,000, a 26% increase over net
sales of $17,258,000 during 1997. Excluding the sales of bulk wines
and other items, net sales were $20,791,000 in 1998, a 28% increase
over net sales of $16,245,000 in 1997. The average selling price per
case increased from $43.73 in 1997 to $51.28 in 1998, due to
increased sales of higher priced super premium products and price
increases on most of R.H. Phillips' products. Sales of R.H. Phillips'
super premium wines increased from 15,000 cases in 1997 to 56,000
cases in 1998. R.H. Phillips sold 405,000 cases in 1998, an increase
of 9% from 371,000 cases in 1997. The increase in sales volume was
primarily due to more favorable weather conditions during 1997 as
compared to 1996, which increased wine available for sale in 1998.
Gross profit
Gross profit was $10,442,000 in 1998, a 45% increase over
$7,204,000 in 1997. Excluding the sales of bulk wines and other
items, and inventory write downs, gross profit was $11,115,000 in
1998, compared to $7,046,000 in 1997. Gross margins were 48% in
1998, compared to 42% in 1997. The higher gross margin in 1998 as
compared to 1997 was primarily due to the higher average price per
case. Excluding inventory write downs, the cost per case was
substantially the same in 1998 as 1997.
During 1998 R.H. Phillips wrote down inventory by $597,000
and recorded a $123,000 charge associated with inventory purchase
commitments. The adjustments were largely due to bulk wine
inventory and bulk wine purchase commitments associated with two
low margin products R.H. Phillips plans to discontinue. R.H. Phillips
intends to sell these bulk wines in 1999.
Selling Expenses
Selling expenses were $4,747,000, or 22% of sales, in 1998,
an increase from $3,359,000, or 19% of sales, in 1997. The
$1,388,000 increase is primarily due to higher sales promotion and
labor costs.
General and Administrative Expenses
General and administrative expenses in 1998 were $962,000,
an increase from $918,000 in 1997. The $44,000 increase is
primarily due to higher labor costs. As a percentage of net sales,
general and administrative expenses declined from 5% in 1997 to 4%
in 1998.
Interest Expense
Interest expense in 1998 was $1,271,000, compared to
$908,000 in the prior year. R.H. Phillips capitalized $420,000 of
additional interest pertaining to vineyard and winery development
during 1998, and $624,000 during 1997. The increase in total
interest in 1998 is primarily due to borrowings to fund winery and
vineyard expansion and working capital increases. The interest is
attributable to R.H. Phillips' borrowings on R.H. Phillips' bank line
of credit and other debt obligations.
Other Income, net
Other income was $17,000 in 1998, compared to $105,000
in 1997. The income in both years was primarily from vineyard
management fees, and was partly offset in 1998 by the charges
resulting from the removal of nonperforming vineyards.
Provision for Income Taxes
Income tax expense for the year ended December 31, 1998 was
$1,388,000, and increase of $598,000 over 1997. The increase in
income tax expense is primarily due to higher income in 1998 as
compared to 1997. R.H. Phillips' effective income tax rate alo
increased from 37% in 1997 to 40% in 1998. The increase in the
effective rate is due to a decrease in the state manufacturer's
investment tax credit available to R.H. Phillips as a percent of
taxable income.
Net Income
R.H. Phillips generated net income of $2,091,000 in 1998,
compared to $1,334,000 in 1997. The $757,000 or 57% increase
was primarily due to higher gross profit, which was partially offset by
increased selling expenses.
Year Ended December 31, 1997
Net Sales
Net sales in 1997 were $17,258,000, an increase of 2% over
net sales of $16,928,000 during 1996. Excluding the sales of bulk
wines and other items, net sales were $16,245,000 in 1997, an
increase of 3% over sales of $15,820,000 in 1996. The average
selling price per case increased from $39.33 in 1996 to $43.73 in
1997. R.H. Phillips sold 371,000 cases in 1997, a decrease of 8%
from 402,000 cases in 1996. The decrease was primarily due to
adverse weather conditions during the 1996 growing season which
reduced the availability of wine to sell in 1997.
<PAGE> 15
Gross profit
Gross profit was $7,204,000 in 1997, a 6% increase over
$6,792,000 in 1996. Excluding the sales of bulk wines and other
items, gross profit was $7,046,000 in 1997, compared to $6,554,000
in 1996. Gross margins were 42% in 1997, compared to 40% in
1996. The cost per case increased during 1997 primarily due to
higher prices of bulk wines and grapes purchased from outside
parties and the below average harvest experienced by R.H. Phillips
in 1996. R.H. Phillips implemented price increases during 1997 to
compensate for higher prices of bulk wine and grapes. As a result,
gross margins increased in 1997 despite higher costs.
Selling Expenses
Selling expenses were $3,359,000, or 19% of sales, in 1997,
an increase from $3,054,000, or 18% of sales, in 1996. The
$305,000 increase is primarily due to higher labor costs.
General and Administrative Expenses
General and administrative expenses were $918,000, or 5%
of sales, in 1997, an increase from $800,000, or 5% of sales, in 1996.
The $118,000 increase is primarily due to higher labor costs.
Interest Expense
Interest expense in 1997 was $908,000, compared to
$862,000 in 1996. R.H. Phillips capitalized $624,000 of additional
interest pertaining to vineyard and winery development during 1997,
and $599,000 during 1996. The increase in total interest in 1997 is
primarily due to borrowings to fund winery and vineyard expansions.
The interest is attributable to R.H. Phillips' borrowings on its bank
lines of credit and other debt obligations.
Other Income, net
Other income was $105,000 in 1997, compared to other
expense of $152,000 in 1996. The expense in 1996 was primarily
due to an adjustment to accelerated depreciation of phylloxerated
vineyards. The income in 1997 was primarily from vineyard
management fees.
Net Income
R.H. Phillips generated net income of $1,334,000 in 1997,
compared to $1,293,000 in 1996. The $41,000 increase was
primarily due to higher gross profit, which was partially offset by
increases in selling, general, and administrative 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 in order to obtain
production efficiencies through vertical integration and increased
product sales. R.H. Phillips' cash flows from operations have not
been sufficient to satisfy all of the working capital
<PAGE> 16
and capital expenditure requirements needed to keep pace with its
growth. Consequently, R.H. Phillips has depended upon debt, equity,
and lease financing for its expansion needs.
R.H. Phillips had cash totaling $151,000 on December 31,
1998, an increase from $109,000 on December 31, 1997. Sources
of cash during 1998 included cash from operations of $2,119,000
and proceeds from long-term debt of $17,450,000. Cash used during
1998 included $6,603,000 invested in plant and equipment and
$11,954,000 to repay long-term debt.
Current assets increased by $3,528,000 during 1998,
primarily due to an increase in inventories from $9,928,000 on
December 31, 1997 to $12,674,000 on December 31, 1998. The
increase is primarily due to larger quantities of bulk and case wine.
Current liabilities increased by $742,000 during 1998, primarily due
to an increase in accrued selling expenses. These factors caused net
working capital to increase $2,786,000, from $9,999,000 on
December 31, 1997 to $12,785,000 on December 31, 1998.
R.H. Phillips has several long-term loans, the largest of which
was obtained from Metropolitan Life Insurance Company
("Metropolitan"). R.H. Phillips borrowed $7,500,000 from
Metropolitan in January 1995. In December 1997, R.H. Phillips
refinanced the loan at a lower interest rate and borrowed additional
funds from Metropolitan, making the total principal amount
$11,000,000. The unpaid principal under the loan accrued interest
at an annual rate of 7.79% until March 15, 1999, at which date the
annual rate increased to 8.04%. R.H. Phillips is required to make
monthly principal payments of $60,000 plus accrued 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 $10,000,000 with U.S.
Bank of California ("U.S. Bank") to finance its working capital
requirements. The line of credit is secured by accounts receivable,
inventory and unencumbered farm equipment, and matures in April
2000. 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 December 31, 1998 was $7,997,000.
In May 1997, R.H. Phillips sold 371 acres of land being
developed into vineyard to John Hancock Mutual Life Insurance
Company ("Hancock"). In connection with that 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 from the sale of $5,384,000. The lease provides that R.H.
Phillips pay rent of $161,000 per calendar quarter beginning in 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.
<PAGE> 17
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
semi-annually. 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 expanded its winery production facilities in 1998
at a cost of $3,287,000. The items purchased include stainless steel
storage and fermentation tanks, presses, barrels and grape handling
equipment. R.H. Phillips also began construction on a tasting room
and conference facility during 1998. R.H. Phillips invested $684,000
in the tasting room during 1998, and estimates that the final cost,
including costs incurred prior to 1998, will be approximately
$900,000. Management plans to invest an estimated $5,000,000 in
tanks, barrels and other equipment during 1999. Additional winery
expansion projects are anticipated for the future to handle increased
production from R.H. Phillips' recently planted vineyards. R.H.
Phillips invested $1,652,000 in 1998 to continue development of
vineyards, and plans to invest an estimated $800,000 during 1999.
R.H. Phillips financed 1998 capital projects primarily with the
proceeds from the Metropolitan refinance and other term debt, and
plans to fund 1999 capital projects with internally generated funds
and additional debt.
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 root
stock 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.
Item 7. Financial Statements
The audited financial statements of R.H. Phillips are set forth
in this report beginning at page F-1.
<PAGE> 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Form 8-K, Item 4. Changes in Registrant's Certifying
Accountants, dated November 30, 1998, was filed with the Securities
and Exchange Commission on December 3, 1998 and is incorporated
herein by reference.
<PAGE> 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act is
presented in R.H. Phillips' Proxy Statement for the 1999 Annual
Meeting of Shareholders, and is incorporated by reference herein.
Item 10. Executive Compensation
Executive Compensation is presented in R.H. Phillips'
Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders, and is incorporated by reference herein.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Security Ownership of Certain Beneficial Owners and
Management is presented in R.H. Phillips' Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders, and is
incorporated by reference herein.
Item 12. Certain Relationships and Related Transactions
Certain Relationships and Related Transactions is presented
in R.H. Phillips' Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders, and is incorporated by reference herein.
Item 13. Exhibits and Reports on Form 8-K
(a) Audited Financial Statements of R.H. Phillips are
attached to this annual report beginning on page F-1. Other exhibits
attached to this annual report are as follow:
(a) Exhibits
<TABLE>
Exhibit No. Description
<S> <C>
3.1 (A) Articles of Incorporation
3.2 (B) Bylaws
4.1 (B) Form of Common Stock Certificate
10.1 (I) Loan Agreement between R.H. Phillips and
Metropolitan Life Insurance Company and
Related Agreements, dated December 22,
1997
10.2 (F) Loan Agreement between R.H. Phillips and
U.S. Bank and Related Agreements, dated
May 1, 1998.
10.3 (A) Loan Agreement between R.H. Phillips and
Heller Financial and Related Documents,
dated October 20, 1995
10.4 (B) Promissory Note, dated December 31,
1993, by RHP Vineyards, Inc., payable to
R.H. Phillips Partners
<PAGE> 20
10.5 (C) R.H. Phillips, Inc. 1995 Stock Option Plan
and Forms of Incentive Stock Option and
Nonstatutory Stock Option Agreements
10.6 (B) Securities Purchase Agreement between
R.H. Phillips and John Hancock Mutual Life
Insurance Company, dated March 27, 1996
10.7 (B) Form of Common Stock Purchase Warrant
issued to John Hancock Mutual Life
Insurance Company, dated March 27, 1996
10.8 (G) Common Stock Purchase Warrant, dated
July 30, 1996, issued to Van Kasper &
Company
10.9 (D) Underwriting Agreement, dated July 30,
1996, between R.H. Phillips and Van
Kasper & Company
10.10 (B) Common Stock Purchase Warrant issued to
Capitol Bay Securities, dated March 31,
1995.
10.11 (E) Description of Compensation Arrangements
with Victor Motto, director of R.H. Phillips
10.12 (G) Loan agreement between R.H. Phillips and
U.S. Bancorp and Related Agreements,
dated December 31, 1996
10.13 (H) Real Estate Purchase Contract, Agricultural
Sublease and Related Agreements between
R.H. Phillips and Farmland Management
Services, dated January 24, 1997
10.14 (H) Amendment to the Real Estate Purchase
Contract, Agricultural Sublease and Related
Agreements between R.H. Phillips and
Farmland Management Services, dated
January 24, 1997
10.15 (I) Employment Agreement between R.H.
Phillips and John Giguiere, dated March 3,
1998
10.16 (I) Employment Agreement between R.H.
Phillips and Karl Giguiere, dated March 3,
1998
10.17 Securities Exchange Agreement between R.H. Phillips
and John Hancock Mutual Life Insurance Company,
dated March 12, 1999
10.18 Form of Subordinated Note between R.H. Phillips
and John Hancock Mutual Life Insurance Company,
dated March 15, 1999
16.1 (J) Letter from KPMG regarding the change in R.H.
Phillips' Certifying Accountants
23.1 Consent of KPMG LLP, Certified Public Accountants
23.2 Consent of Ernst and Young LLP, Independent Auditors
27.1 Financial Data Schedule
</TABLE>
<PAGE> 21
(A) Filed as an exhibit to R.H. Phillips' Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995 and
incorporated by reference herein.
(B) Filed as an exhibit to R.H. Phillips' Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994 and
incorporated by reference herein.
(C) Filed as an exhibit to R.H. Phillips' Quarterly Report on Form
10-QSB for the nine month period ended September 30, 1995 and
incorporated by reference herein.
(D) Filed as an exhibit to R.H. Phillips' Registration Statement on
Form SB-2, dated June 5, 1996, and incorporated by reference
herein.
(E) Filed as an exhibit to R.H. Phillips' Registration Statement on
Form SB-2, Amendment No. 2, dated July 16, 1996, and
incorporated by reference herein.
(F) Filed as an exhibit to R.H. Phillips' Quarterly Report on Form
10-QSB for the three month period ended March 31, 1998 and
incorporated by reference herein.
(G) Filed as an exhibit to R.H. Phillips' Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996 and
incorporated by reference herein.
(H) Filed as an exhibit to R.H. Phillips' Quarterly Report on Form
10-QSB for the six month period ended June 30, 1997 and
incorporated by reference herein.
(I) Filed as an exhibit to R.H. Phillips' Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1997 and
incorporated by reference herein.
(J) Filed as an exhibit to R.H. Phillips' Form 8-K dated November
30, 1998 and incorporated by reference herein.
(b) Current Reports on Form 8-K.
Form 8-K, Item 4. Changes in Registrant's
Certifying Accountants, dated November 30, 1998, was filed with
the Securities and Exchange Commission on December 3, 1998
and is incorporated by reference.
<PAGE> 22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
R.H. PHILLIPS, INC.
By://s//John E. Giguiere
--------------------------------
John E. Giguiere, Co-President and
Co-Chief Executive Officer
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each
person whose signature appears below appoints John E. Giguiere
and Michael J. Motroni, substitution, for them in any and all
capacities, to sign any amendments to other documents in
connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conferring all that each of said
attorney-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
//s//John E. Giguiere Co-President, Co-Chief 3/31/99
- --------------------- Executive Officer, Director -------
John E. Giguiere (Principal Executive Officer)
//s// Karl E. Giguiere Co-President, Co-Chief 3/26/99
- ---------------------- Executive Officer, Director -------
Karl E. Giguiere (Principal Executive Officer)
//s// Michael J. Motroni Vice President, Finance 3/25/99
- ------------------------ (Principal Financial -------
Michael J. Motroni Officer)
//s//Richard A. Pierce Controller (Principal 3/25/99
- ---------------------- Accounting Officer) -------
Richard A. Pierce
//s//Lane C. Giguiere Vice President, 3/31/99
- --------------------- Secretary, Director -------
Lane C. Giguiere
//s// R. Ken Coit Director 3/31/99
- --------------------- -------
R. Ken Coit
//s//Victor L. Motto Director 3/31/99
- ---------------------- -------
Victor L. Motto
<PAGE> 23
R.H. PHILLIPS, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
with
REPORT OF INDEPENDENT AUDITORS
<PAGE> 24
R.H. Phillips, Inc.
Financial Statements
December 31, 1998 and 1997
Reports of Independent Auditors...........................................F2
Audited Financial Statements
Balance Sheet...........................................................F4
Statements of Income....................................................F5
Statements of Shareholders' Equity......................................F6
Statements of Cash Flows................................................F7
Notes to Financial Statements...........................................F8
<PAGE> 25
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
R.H. Phillips, Inc.
We have audited the accompanying balance sheet of R.H. Phillips,
Inc. as of December 31, 1998, and the related statements of income,
shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of R.H. Phillips,
Inc. at December 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally
accepted accounting principles.
//s//ERNST & YOUNG LLP
Sacramento, California
March 18, 1999
<PAGE> 26
Independent Auditors' Report
The Board of Directors
R.H. Phillips, Inc.:
We have audited the accompanying statements of operations,
shareholders' equity, and cash flows of R.H. Phillips, Inc. for the year
ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash
flows of R.H. Phillips, Inc. for the year ended December 31, 1997,
in conformity with generally accepted accounting principles.
//s//KPMG LLP
Sacramento, California
March 13, 1998
<PAGE> 27
<TABLE>
R.H. Phillips, Inc.
Balance Sheet
(In thousands, except share information)
<CAPTION> December
31, 1998
--------
<S> <C>
Assets
Current assets:
Cash $ 151
Accounts receivable 2,982
Inventories 12,674
Prepaid expenses and other current assets 1,117
-------
Total current assets 16,924
Property, plant and equipment, net 33,213
Other assets 711
-------
$50,848
=======
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 1,794
Accounts payable 1,058
Accrued payroll and related 329
Accrued selling expenses 482
Other accrued liabilities 476
-------
Total current liabilities 4,139
Long-term debt 21,728
Deferred income taxes 2,082
Deferred gain and vineyard development costs 212
Commitments and contingencies (Note 7)
Redeemable preferred stock, redeemable at $5,000,000 4,554
Shareholders' equity:
Non-redeemable preferred stock, no par value, 4,500,000
shares authorized, none issued and outstanding
Common stock, no par value, 12,500,000 shares
authorized, 6,531,831 shares issued and outstanding 14,341
Additional paid-in capital 337
Retained earnings 3,455
-------
Total shareholders' equity 18,133
-------
$50,848
=======
</TABLE>
[FN]
See accompanying notes.
<PAGE> 28
<TABLE>
R.H. Phillips, Inc.
Statements of Income
(In thousands, except share information)
<CAPTION>
Year ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Net sales $21,720 $17,258
Cost of sales 11,278 10,054
------- -------
Gross profit 10,442 7,204
Selling expenses 4,747 3,359
General and administrative expenses 962 918
------- -------
Operating income 4,733 2,927
Interest expense (1,271) (908)
Other income, net 17 105
------- -------
Income before provision for income taxes 3,479 2,124
Provision for income taxes (1,388) (790)
------- -------
Net income $ 2,091 $ 1,334
======= =======
Net income $ 2,091 $ 1,334
Dividends and accretion on Redeemable Preferred Stock (343) (337)
------- -------
Net income applicable to Common Shareholders $ 1,748 $ 997
======= =======
Net income per share - basic and diluted $ .27 $ .15
======= =======
Shares used in per share calculations:
- Basic 6,582,559 6,468,800
- Diluted 6,583,105 6,469,514
</TABLE>
[FN]
See accompanying notes.
<PAGE> 29
<TABLE>
R.H. Phillips, Inc.
Statements of Shareholders' Equity
Years ended December 31, 1998 and 1997
(In thousands, except share information)
<CAPTION>
Common Stock Additional Retained Total
------------ Paid-in Earnings
Shares Amount Capital
------ ------ --------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 5,957,550 $12,323 $ 337 $ 1,310 $13,970
Accretion of Redeemable Preferred Stock -- -- -- (37) (37)
Issuance of Common Stock 393,163 1,418 -- -- 1,418
Dividend on Redeemable Preferred Stock -- -- -- (300) (300)
Issuance of stock dividend 82,469 300 -- (300) --
Net income -- -- -- 1,334 1,334
--------- ------- -------- ------- -------
Balance at December 31, 1997 6,433,182 14,041 337 2,007 16,385
Accretion of Redeemable Preferred Stock -- -- -- (43) (43)
Dividend on Redeemable Preferred Stock -- -- -- (300) (300)
Issuance of stock dividend 98,649 300 -- (300) --
Net income -- -- -- 2,091 2,091
--------- ------- -------- ------- -------
Balance at December 31, 1998 6,531,831 $14,341 $ 337 $ 3,455 $18,133
========= ======= ======== ======= =======
</TABLE>
[FN]
See accompanying notes.
<PAGE> 30
<TABLE>
R.H. Phillips, Inc.
Statements of Cash Flows
(In thousands)
<CAPTION>
Year ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,091 $ 1,334
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 485 355
Depreciation and amortization 2,206 1,829
Loss on disposal of property, plant and equipment 136 55
Net changes in assets and liabilities:
Accounts receivable (469) 618
Inventories (2,746) (1,722)
Prepaid expenses and other current assets (85) (254)
Other assets (101) (83)
Accounts payable 241 (1,360)
Accrued payroll and related 64 108
Accrued selling expenses 258 51
Other accrued liabilities 39 (246)
------- -------
Net cash provided by operating activities 2,119 685
Cash flows from investing activities:
Purchase of property, plant and equipment (6,603) (6,910)
Proceeds from sale of property, plant and equipment 14 5,419
------- -------
Net cash used in investing activities (6,589) (1,491)
Cash flows from financing activities:
Cash dividends paid (300) (300)
Proceeds from long-term debt and notes payable 17,450 26,222
Principal payments on long-term debt and notes payable (11,954) (24,598)
Payment for development of leased vineyards and related fees (680) (637)
Other financing activities, net (4) (81)
------- -------
Net cash provided by financing activities 4,512 606
------- -------
Increase (decrease) in cash 42 (200)
Cash at beginning of year 109 309
------- -------
Cash at end of year $ 151 $ 109
======= =======
Other cash flow information:
Interest paid (including capitalized interest of
$420 and $624 in 1998 and 1997, respectively) $ 1,520 $ 1,438
Income taxes paid $ 1,118 $ 649
Noncash transactions:
Issuance of notes payable to finance inventory,
property, plant and equipment purchased $ 4 $ 552
Issuance of stock dividend $ 300 $ 300
Accretion of redeemable preferred stock $ 43 $ 37
Conversion of subordinated debt to common stock (net of
issuance costs of $105) $ -- $ 1,395
</TABLE>
[FN]
See accompanying notes.
<PAGE> 31
R.H. Phillips, Inc.
Notes to Financial Statements
December 31, 1998
1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies
R.H. Phillips, Inc. (the "Company"), a California corporation, was
formed in February 1994. The predecessor to the Company, a family
farm operation, began farming grapes during 1981 and sold its first
wine during 1984. The predecessor formed a limited partnership
during 1989, which was merged into the Company in 1994. R.H.
Phillips produces, markets, and sells popular premium and super
premium California table wines. R.H. Phillips also farms vineyards
which supply most of its annual grape requirements. R.H. Phillips
sells most of its products to distributors for resale to restaurants,
food service, wine shops, independent liquor stores and, to a lesser
degree, grocery stores.
Inventories
Inventories are stated at the lower of FIFO (first-in, first-out) cost
or market. Cost includes the cost of grown and purchased grapes
and wines, production costs, and packaging materials. Wine
inventories are classified as current assets in accordance with
recognized trade practice although certain inventories are aged for
periods longer than one year. Crop costs associated with farming
vineyards prior to the harvest are deferred and recognized in the year
the grapes are harvested.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the
assets. Vineyard lives range from 10 to 25 years, buildings and
improvements lives range from 12 to 45 years, and equipment lives
range from 5 to 30 years.
Costs of planting new vines and ongoing cultivation costs for vines
not yet bearing, including interest, are capitalized. Depreciation
commences in the first year the vineyard yields a commercial crop,
generally in the third year after development began.
R.H. Phillips' long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the
assets exceed the estimated fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Estimates and Certain Risks
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
The Company's three largest distributors accounted for 13%, 8% and
6% of sales in 1998 and 12%, 11% and 7% in 1997. Accounts
receivable in the aggregate from the three largest distributors on
December 31, 1998 was $1,226,000.
<PAGE> 32
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies (continued)
R.H. Phillips' wines are sold throughout the United States and in
several other countries. The northeastern United States, which is the
Company's largest region, accounted for 33% of sales in 1998. The
northern Midwest was the second largest region with 12% of sales.
R.H. Phillips employs nine sales representatives who work with
certain distributors to sell the Company's products. In addition, R.H.
Phillips uses independent wine brokers. R.H. Phillips' largest sales
volume is attributable to a broker whose organization generated
$9,803,000, or 45% of total sales, in 1998 and $7,793,000, or 45%
of total sales, in 1997.
Income taxes
The liability method is used to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
General business tax credits will be accounted for as a reduction of
federal income taxes payable under the flow-through method.
Net income per share
The Company has adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", which requires the
presentation of basic and diluted net income per share. Basic net
income per share for the years ended December 31, 1997 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 from common stock options and
warrants. Potential common shares outstanding which could have a
dilutive effect in the future, but were anti-dilutive for the year ended
December 31, 1998, totaled 2,332,951. Basic and diluted net
income per share and the weighted average number of common
shares outstanding for the year ended December 31, 1997 have been
restated to reflect stock dividends of 48,071 shares issued in
September 1998 and 50,728 shares issued in March 1999.
Fair value of financial instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments. The carrying
amounts of cash, notes receivable from shareholders, accrued
liabilities and notes payable approximate fair value because of the
short maturity of those instruments. The fair value of the Company's
long-term debt is estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company
for debt of the same remaining maturities, and is approximately the
same as the carrying value.
Prospective Accounting Developments
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". The Statement
will require the Company to recognize all derivatives on the balance
sheet at fair value. The Statement is effective for periods beginning
after June 15, 1999. Management believes that the adoption of the
Statement will not have a material impact on the Company's financial
position, results of operations, or cash flows.
<PAGE> 33
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies (continued)
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified
to conform with the current year's presentation.
2. Inventories
Inventories consist of the following at December 31, 1998: (In thousands)
<TABLE>
<S> <C>
Bulk wine $ 9,239
Bottled wine 2,195
Bottling supplies and other 501
Deferred crop costs 739
-------
Total $12,674
=======
</TABLE>
3. Property, plant and equipment
Property, plant and equipment consists of the following at December
31, 1998:
<TABLE>
(In thousands)
<S> <C>
Land $ 2,619
Vineyard improvements 10,250
Buildings 5,458
Machinery and equipment 17,112
Vehicles and office fixtures 1,013
--------
Total 36,452
Less accumulated depreciation 7,853
--------
Total 28,599
Construction in progress 4,614
--------
Property, plant, and equipment - net $ 33,213
========
</TABLE>
Total depreciation expense during the years ended December 31,
1998 and 1997 was approximately $2,114,000 and $1,693,000,
respectively.
Construction in progress at December 31, 1998 consists of vineyard
development of approximately $3,829,000, winery improvements of
approximately $773,000 and vineyard equipment of approximately
$12,000. Vineyard development consists of 347 acres planted in
1997, 37 acres planted in 1998, 185 acres interplanted in 1997, and
23 off-site acres planted in 1997. Management estimates the cost to
complete development of these vineyards will be approximately
$800,000.
<PAGE> 34
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
3. Property, plant and equipment (continued)
Plant and equipment under capital leases as of December 31, 1998 is
as follows:
<TABLE>
(In thousands)
<S> <C>
Machinery and equipment $ 708
Less accumulated depreciation 385
----------
$ 323
==========
</TABLE>
Depreciation expense for machinery and equipment under capital
leases was approximately $93,000 and $100,000 for the years ended
December 31, 1998 and 1997, respectively.
4. Long-term debt
<TABLE>
(In thousands)
Long-term debt consists of the following at December 31, 1998:
<S> <C>
Note payable to insurance company, interest at 7.79%, $10,340
principal and interest payable monthly through January 2013,
secured by various assets of the Company
Note payable to bank, interest at prime or IBOR plus 150 7,997
basis points, principal due April 2000, interest payable monthly,
collateralized by accounts receivable and inventory (1)
Note payable to bank, interest at one month LIBOR plus 330 basis 1,490
points, principal and interest due in 42 monthly payments of
$19,911 followed by 42 monthly payments of $29,867,
balance due December 2003, secured by certain equipment
Notes payable to finance company, interest between 6.66% and 7.95%, 3,078
principal and interest payable in sixty monthly payments totaling
$64,961 per month, balance due December 2002 through
November 2003, secured by certain equipment
Note payable to finance company, payable in sixty monthly 241
installments of $10,744 plus interest at one month LIBOR plus 332
basis points, due November 2000, secured by certain equipment
Capital lease obligations, interest between 5.13% and 20.17%, 266
monthly payments totaling $15,934, balance due May 1999 through
October 2002
Other 110
-------
Total 23,522
Less current maturities 1,794
-------
Long-term portion $21,728
=======
</TABLE>
(1) Maximum amount that can be borrowed on the note is
$10,000,000. The amount outstanding as of December 31, 1998
consists of $7,472,000 borrowed against the line and $525,000 in
outstanding checks. $2,003,000 was available at December 31,
1998.
<PAGE> 35
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
3. Long-term debt (continued)
Principal payments required on long-term debt (other than capital
leases) for each of the next five years ending December 31, are as
follows:
<TABLE>
(In thousands)
<S> <C>
1999 $ 1,597
2000 9,645
2001 1,664
2002 1,726
2003 1,778
Thereafter 6,846
-------
Total $23,256
=======
</TABLE>
The $9,645,000 due in 2000 consists primarily of the $7,997,000
payable to U.S. Bank.
The Company leases certain winery and other equipment under
noncancellable capital leases. Future minimum lease payments under
these leases for each of the next five years ending December 31 are
as follows:
<TABLE>
(In thousands)
<S> <C>
1999 $ 218
2000 34
2001 27
2002 14
2003 --
Total 293
Less amounts representing interest 27
--------
Net minimum lease payments $ 266
========
</TABLE>
5. Income taxes
The provision for income taxes consists of the following for the years
ended December 31:
<TABLE>
(In thousands)
Current: 1998 1997
---- ----
<S> <C> <C>
Federal $ 903 $ 439
State -- (4)
------ -----
Total current provision 903 435
Deferred:
Federal 284 259
State 201 96
------ -----
Total deferred provision 485 355
------ ------
$1,388 $ 790
====== ======
</TABLE>
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
<PAGE> 36
5. Income taxes (continued)
Deferred income taxes included in the balance sheet at December 31,
1998 are as follows:
<TABLE>
(In thousands)
Current deferred tax assets:
<S> <C>
Nondeductible reserves and difference between
book and tax basis of inventory $ 684
State manufacturer's investment credit 6
Noncurrent deferred tax assets:
Difference between book and tax basis of
intangible assets 136
-------
Total deferred tax asset 826
Noncurrent deferred tax liability:
Difference between book and tax basis
of property, plant and equipment 2,218
-------
Net deferred tax liability $ 1,392
=======
</TABLE>
Management believes that it is more likely than not that all the
deferred tax assets as of December 31, 1998 will be realized and,
therefore, no allowance for deferred tax assets was made as of
December 31, 1997 or December 31, 1998.
The provision for income taxes is at an effective rate different from
the statutory tax rate of 34% when applied to the pretax income of
$3,479,000 and $2,124,000 for the years ended December 31, 1998
and 1997, respectively, as a result of the following:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Expected U.S. Federal income tax 34% 34%
State franchise tax, net of federal benefit 6% 6%
Permanent difference in basis of assets 2% 1%
State manufacturer's investment credit (2%) (6%)
Other -- 2%
---- ----
Total 40% 37%
==== ====
</TABLE>
The Company utilized $119,000 of the state manufacturer's
investment credit in 1997 and $235,000 in 1998. The remaining
carry forward of $6,000 is due to expire in 2007.
6. Deferred gain and vineyard development costs
In May 1997, the Company sold 371 acres of land being developed
into vineyard to John Hancock Mutual Life Insurance Company
("Hancock"). In connection with that transaction, the Company 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. The Company received proceeds from the
sale of $5,384,000. The lease provides that the Company will pay
rent of $161,000 per calendar quarter beginning in 1999. At June 30,
1997, the Company held an option to repurchase the land and
vineyard at the end of the lease term. The lease was accounted for
as a long-term capital lease.
<PAGE> 37
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
7. Commitments and contingencies (continued)
On September 30, 1997, the Company renegotiated the lease
agreement with Hancock whereby the option to repurchase the land
and vineyard at the end of the lease was given up by the Company in
exchange for a right of first refusal. The lease is therefore accounted
for as an operating lease.
The Company recognized deferred gain and vineyard development
costs of $1,529,000 at the time of closing, which consisted of the
difference between the actual costs of the property sold and the funds
received by the Company. The Sale and Leaseback agreement with
Hancock requires that the Company complete the vineyards that are
still under development. The Company expended $1,317,000
between the date of closing and December 31, 1998 on the
development of the vineyards and related expenses, decreasing the
deferred gain to $212,000 at December 31, 1998. This amount will
be amortized to income over the remaining life of the lease.
7. Commitments and contingencies
Lease commitments
The Company leases certain vineyards, facilities and vehicles under
operating leases. Aggregate future minimum lease payments as of
December 31, 1998 are as follows:
(In thousands)
<TABLE>
<S> <C>
1999 $ 810
2000 810
2001 725
2002 645
2003 645
Thereafter 5,805
-------
Total $ 9,440
=======
</TABLE>
Total rent expense for all operating leases amounted to $103,000 for
the year ended December 31, 1998.
Other contingencies
As of December 31, 1998, the Company believes that up to 187 acres
of vineyard are susceptible to Phylloxera. Based on tests
performed, management believes that portions of these 187 acres
show physical symptoms of decline. The Company is using a variety
of methods to combat Phylloxera infestation. Although this acreage
will ultimately require replacement, management estimates that these
vineyards will remain commercially productive for five more years.
The Company has reduced the depreciable life of these vineyards to
reflect the expected remaining commercial productivity.
The Company is party to various legal proceedings arising in the
ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
impact on the Company's financial position, results of operation, or
cash flows.
<PAGE> 38
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
8. Redeemable preferred stock
In March 1996, the Company completed a private placement sale of
500,000 shares of Senior Preferred Redeemable Stock ("Senior
Preferred Stock") and warrants to purchase up to 1,346,788 shares
of Common Stock. 500,000 shares of Senior Preferred Stock were
issued and outstanding as of December 31, 1998. The net proceeds
the Company derived from the sale of the Senior Preferred Stock and
the warrants, after offering expenses, totaled $4,785,000. The Senior
Preferred Stock bore a 12% cumulative annual dividend, 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 20 consecutive trading
days before the dividend payment date or $4.00 per share.
Thereafter, the dividend was payable in cash. The carrying value of
the Senior Preferred Stock was originally $4,449,000, net of offering
expenses and the estimated value of the warrants. The carrying value
was $4,554,000 at December 31, 1998, and the Senior Preferred
Stock was redeemable at $5,000,000. The difference between the
carrying value and the redemption value is being accreted over the
life of the Senior Preferred Stock using the interest method.
In March 1999, the Company 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
semi-annually. 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, the Company 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 dividend will become payable in cash. The subordinated
debt, including any amount converted from Exchangeable Preferred,
can be paid, at the Company's option, after March 15, 2001. The
Company 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 2005 and
$1,666,667 in 2006.
9. Shareholders' equity
In April 1997, the Company converted subordinated promissory
notes in the aggregate amount of $1,500,000 into 387,077 shares of
Common Stock. The notes became automatically convertible into
Common Stock at a price of $3.875 when the average of the closing
bid and ask price for the Common Stock exceeded $3.50 for five
consecutive trading days subsequent to December 6, 1996. All
outstanding interest and fractional shares were paid in cash at the
same time. In connection with the conversion, the Company charged
the remaining deferred issuance costs of $105,000 resulting in a net
value of $1,395,000 being recorded in the Statement of
Shareholders' Equity.
The Company has issued warrants to purchase Common Stock to the
underwriters of both public offerings and to the holder of its
Redeemable Preferred Stock. The Company issued warrants to
purchase 98,713 shares of Common Stock to the underwriter of the
initial public offering. These warrants are exercisable at $5.57 per
share. The Company issued warrants to purchase 122,000 shares of
Common Stock at a price of $5.25 to the underwriter of its
secondary public offering. The holder of the Company's Redeemable
Preferred Stock received warrants to purchase 1,381,321 shares of
Common Stock at a price of $3.90. All underwriter warrants and
warrants held by the holder of the Company's Redeemable Preferred
Stock are currently exercisable. The total number of warrants
outstanding as of December 31, 1998 was 1,602,034.
<PAGE> 39
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
In connection with its March 1995 initial public offering, the Company
issued warrants to purchase 493,563 shares of Common Stock.
Warrants to purchase 2,000 shares of Common Stock were exercised
in 1997, with net proceeds to the Company of approximately $8,000.
The shareholder warrants expired on October 31, 1998. The
Company has issued 269,346 shares of Common Stock to the holder
of its Redeemable Preferred Stock as stock dividends.
Payment of dividends on the Common Stock is subject to certain
limitations under the Company's loan agreements. In addition, the
Senior Preferred Stock of the Company provides that semi-annual
dividends payable on those shares must be paid in full or set aside for
payment before any dividends are paid on the Common Stock.
10. Stock compensation plan
The Company applies APB Opinion No. 25 in accounting for its
stock compensation plans. Accordingly, no compensation cost has
been recognized for its fixed stock option plan. Had compensation
cost for the Company's stock-based compensation plan been
recognized consistent with FASB Statement No. 123, the Company's
net income and earnings per share would have the pro forma amounts
indicated below. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the
options' vesting periods.
10. Stock compensation plan (continued)
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Net income (in thousands):
As reported $2,091 $1,334
Pro forma 1,943 1,243
Earnings per share:
As reported $ 0.27 $ 0.15
Pro forma 0.24 0.14
</TABLE>
Fixed Stock Option Plan - Under the 1995 Employee Stock Option
Plan, the Company may grant options to its employees for up to
815,000 shares of Common Stock. The exercise price of each option
is no less than the market price of the Company's stock on the date
of the grant and an option's maximum term is ten years. Options
generally vest ratably over the four years following the date of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The fair value of
options granted during the year ended December 31, 1998 assumed
a dividend yield of 0%, an expected volatility of 36%, a risk-free
interest rate of 5.16% and an expected term of six years.
The fair value of options granted during the year ended December
31, 1997 assumed a dividend yield of 0%, an expected volatility of
37%, a risk free interest rate of 5.71% and an expected term of six
years. All assumptions in the Black-Scholes option pricing model were
based on weighted averages.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee
stock options.
<PAGE> 40
R.H. Phillips, Inc.
Notes to Financial Statements (continued)
10. Stock compensation plan (continued)
A summary of the status of the Company's stock option plan as of
December 31, 1998 and 1997 and changes during the years ended on
those dates is presented below:
<TABLE>
1998 1997
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 561,564 $ 4.01 427,668 $ 3.90
Granted 170,000 5.25 196,548 4.14
Exercised -- -- (4,086) 3.75
Forfeited -- -- (58,566) 3.75
------- --------- ------- ---------
Outstanding at end of year 731,564 $ 4.29 561,564 $ 4.01
======= ========= ======= =========
Options exercisable at year end 447,901 $ 4.27 202,509 $ 3.96
======= ========= ======= =========
Weighted average fair value of
options granted during year $ .80 $ 1.26
======== =========
</TABLE>
The following summarizes information about fixed options
outstanding at December 31, 1998:
<TABLE>
Number outstanding at
December 31, 1998
-----------------------
<S> <C> <C>
Range of exercise prices:
$2.97 - $3.99 215,956
$4.00 - $4.99 365,608
$5.00 - $6.05 150,000
-------
731,564
Options outstanding:
Weighted average remaining contractual life 8 years
Weighted average exercise price $4.29
Options exercisable:
Number exercisable at December 31, 1998 447,901
Weighted average exercise price $4.27
</TABLE>
<PAGE> 1
=======================================
R.H. PHILLIPS, INC.
$2,500,000 AGGREGATE PRINCIPAL AMOUNT
OF
14% UNSECURED SUBORDINATED NOTES
AND
12% SERIES A SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK
=============================
SECURITIES EXCHANGE AGREEMENT
=============================
Dated as of March 12, 1999
===========================================
<PAGE> 2
TABLE OF CONTENTS
Page
SECTION 1. AUTHORIZATION AND EXCHANGE
OF SECURITIES.................1
1.1 Authorization of Securities........1
1.2 Exchange of Securities.............2
1.3 Definitions, etc...................2
SECTION 2. GENERAL REPRESENTATIONS
AND WARRANTIES................2
2.1 Capital Stock;Subsidiaries.........3
2.2 Organization and Authority.........3
2.3 Corporate Proceedings..............4
2.4 Validity of Agreement and
Securities.........................4
2.5 Consent, etc.......................4
2.6 Business...........................4
2.7 Financial Statements...............4
2.8 No Material Adverse Change.........5
2.9 Licenses, Registrations, etc.......5
2.10 Properties.........................5
2.11 Compliance with Other
Instrument, etc....................5
2.12 No Conflict, etc...................6
2.13 No Materially Adverse
Contracts, etc.....................6
2.14 Compliance with Law, etc...........6
2.15 Compliance with ERISA;
Multiemployer Plans................6
2.16 Pending Litigation, etc............7
2.17 Taxes..............................7
2.18 Holding Company Act;
Investment Company Act.............8
2.19 No Margin Regulation Violation.....8
2.20 Compliance with Environmental Laws.9
2.21 Labor Relations......................9
2.22 Insurance............................9
2.23 Offerees.............................9
2.24 Other Names..........................9
2.25 Investments..........................9
<PAGE> 3
TABLE OF CONTENTS
(continued)
Page
2.26 Broker's or Finder's Commissions....10
2.27 Full Disclosure.....................10
SECTION 3. REPRESENTATIONS OF THE
PURCHASER........................10
3.1 Investment Intent, etc..............10
SECTION 4. CONDITIONS OF OBLIGATION TO
PURCHASE SECURITIES..............10
4.1 Opinion of Special Counsel..........10
4.2 Opinions of Counsel for the Company.10
4.3 Performance of Obligations..........11
4.4 Representations True................11
4.5 Certificate of Company..............11
4.6 Private Placement Number............11
4.7 Fees and Disbursements of Your
Special Counsel.....................11
4.8 Legality............................11
4.9 Certificate of Determination........11
4.10 Consents and Approvals..............11
4.11 No Material Adverse Change..........12
4.12 Securities..........................12
4.13 Insurance...........................12
4.14 Proceedings, Instruments, etc.......12
SECTION 5. SERIES A PREFERRED STOCK.........12
5.1 Mandatory Redemption................12
5.2 Optional Redemption.................12
5.3 Exchange of Series A Preferred
Stock for Notes.....................12
5.4 Home Office Payment.................13
5.5 Remedies............................14
SECTION 6. NOTE PAYMENTS....................14
6.1 Required Amortizing Payments........14
6.2 Optional Prepayments with Premium...14
6.3 Restrictions on Prepayment..........15
6.4 Application of Payments.............15
6.5 Method of Payment...................16
<PAGE> 4
TABLE OF CONTENTS
(continued)
Page
6.6 No Set-off or Counterclaim..........16
6.7 Taxes...............................16
6.8 Acquisition of Notes................17
SECTION 7. REGISTRATION, EXCHANGE AND
REPLACEMENT OF NOTES.............17
7.1 Registration........................17
7.2 Exchange............................17
7.3 Replacement.........................17
7.4 Effect of Transfer of Exchange......18
SECTION 8. DEFAULTS AND REMEDIES............18
8.1 Events of Default; Acceleration
of Notes............................18
8.2 Remedies of Note holders Upon an
Event of Default....................20
8.3 Rescission of Acceleration..........21
8.4 Remedies Cumulative.................21
8.5 Costs and Expenses, Attorney Fees,
etc. of the Note holders............22
8.6 No Waiver, etc......................22
SECTION 9. CERTAIN COVENANTS OF THE
COMPANY..........................22
9.1 Maintenance of Office...............22
9.2 Corporate Existence.................22
9.3 General Maintenance of Properties
and Business, etc...................23
9.4 Inspection..........................23
9.5 Compliance with Law, etc............24
9.6 Payment of Taxes and Claims.........24
9.7 ERISA...............................24
9.8 Transactions with Affiliates........24
9.9 Merger or Consolidation.............25
9.10 Indemnification.....................25
9.11 Subsidiary Dividends................26
9.12 Tax Consolidation...................26
9.13 Environmental Law Compliance........26
9.14 Insurance...........................27
9.15 Additional Equity; Dilution.........28
<PAGE> 5
TABLE OF CONTENTS
(continued)
Page
9.16 Transfer and Sale of Assets.........28
9.17 Acquisition, etc. of Preferred
Stock...............................28
9.18 Reporting Company Status............28
9.19 Nasdaq Listing......................29
9.20 Right of First Refusal..............29
SECTION 10. EXPENSES........................29
10.1 General Expenses....................29
10.2 Costs and Expenses, Attorneys Fees,
etc. of Holders of Securities.......30
10.3 Delivery Expenses...................30
10.4 Issuance Taxes......................30
10.5 Survival............................31
SECTION 11. INFORMATION TO BE FURNISHED
TO HOLDERS OF SECURITIES........31
11.1 Financial Statements of the
Company.............................31
11.2 Notice of Certain Events and
Conditions..........................32
11.3 Other Information...................32
SECTION 12. INTERPRETATION OF AGREEMENT
AND SECURITIES..................33
12.1 Definitions.........................33
12.2 Directly or Indirectly..............41
12.3 Accounting Terms....................41
12.4 Governing Law.......................41
12.5 Independence of Covenants...........42
12.6 Saturdays, Sundays, Holidays, etc...42
SECTION 13. MISCELLANEOUS...................42
13.1 Notices.............................42
13.2 Survival............................42
13.3 Successors and Assigns; Transfer
of Securities.......................42
13.4 Amendment and Waiver................43
13.5 Confidentiality.....................43
13.6 Integration.........................43
13.7 Consent to Jurisdiction and Venue...44
<PAGE> 6
TABLE OF CONTENTS
(continued)
Page
13.8 Waiver of Jury Trial................44
13.9 Counterparts........................44
13.10Reproduction of Documents...........44
<PAGE> 7
SCHEDULE I Purchaser of the Securities
SCHEDULE II Information Provided by the
Company
SCHEDULE III
Opinion of Counsel to the
Company
EXHIBIT A FORM OF SUBORDINATED NOTE
EXHIBIT B FORM OF CERTIFICATE OF
DETERMINATION
EXHIBIT C FORM OF SERIES A PREFERRED
STOCK CERTIFICATE
<PAGE> 8
R.H. PHILLIPS, INC.
26836 County Road 12A
Esparto, California 95627
Facsimile: (916) 662-2880
------------------
SECURITIES EXCHANGE AGREEMENT
------------------
Dated as of March 12, 1999
To John Hancock Mutual Life Insurance Company
Ladies and Gentlemen:
The undersigned, R.H. Phillips, Inc., a California
corporation (the "Company"), hereby agrees with you
as follows:
SECTION 1. AUTHORIZATION AND EXCHANGE OF SECURITIES.
1.1 Authorization of Securities.
(a) Existing Securities. The Company has sold to you
500,000 shares of its 12% Senior Redeemable Preferred
Stock (the "Senior Preferred Stock") and warrants to
purchase up to 1,346,788 Shares of its Common Stock
(the "Warrants") pursuant to that certain Securities
Purchase Agreement dated as of March 27, 1996, by and
between you and the Company.
(b) Subordinated Notes. The Company has duly
authorized the issuance and sale of up to $2,500,000
in aggregate principal amount of its 14% Unsecured
Subordinated Notes substantially in the form annexed
hereto as Exhibit A (the "Notes").
(c) Series A Preferred Stock. The Company has duly
authorized the issuance and sale of up to 250,000
shares of its 12% Series A Senior Redeemable
Exchangeable Preferred Stock (the "Series A Preferred
Stock") having the rights and privileges specified in
the Certificate of Determination annexed hereto as
Exhibit B (the "Certificate of Determination"). The
Notes and the Series A Preferred Stock are referred
to herein as the "Securities."
<PAGE> 9
(d)No Effect on Warrants. The Warrants remain in
full force and effect and shall not be affected by
the transactions contemplated by this Securities
Exchange Agreement; provided, however, that
references to the Senior Preferred Stock contained in
the Warrants shall refer to the Series A Preferred
Stock.
1.2 Exchange of Securities.
(a)The Company agrees to sell to you, and upon and
subject to the terms and conditions hereof and in
reliance upon the representations and warranties of
the Company contained herein, you agree to purchase
from the Company (i) $2,500,000 in principal amount
of Notes and (ii) 250,000 shares of Series A
Preferred Stock, for an aggregate purchase price of
500,000 shares of the Senior Preferred Stock (the
"Purchase Price"). The 500,000 shares of Senior
Preferred Stock shall be cancelled upon their
delivery to you and may not be reissued. The
Securities are to be sold and delivered together at a
closing to be held on March 15, 1999 at 10:00 A.M.,
California time, or such other date and time as shall
be agreed upon by you and the Company (such date and
time being hereinafter called the "Closing Date"), at
the offices of Orrick, Herrington & Sutcliffe LLP,
400 Sansome Street, San Francisco, CA 94111.
(b)On the Closing Date, the Company will deliver to
you one or more duly executed Notes dated the Closing
Date, registered in your name or the name of your
nominee, in such principal amounts as are specified
on Schedule I, and one or more stock certificates
representing 250,000 shares of Series A Preferred
Stock, registered in your name or the name of your
nominee as specified on Schedule I. The delivery of
such Securities to you shall be made against your
delivery to the Company of the shares of Senior
Preferred Stock representing the Purchase Price.
(c)If at the closing the Company shall fail to tender
any of the Securities to you as provided above in
this 1.2 or any of the conditions specified in
Section 4 hereof shall not have been fulfilled to
your satisfaction, at your election you shall be
relieved of all obligations under this Securities
Exchange Agreement, without thereby waiving any other
rights you may have by reason of such failure or such
nonfulfillment.
1.3 Definitions, etc. Certain terms used in this
Securities Exchange Agreement are defined in 12.1
hereof; references to a "Schedule" or "Exhibit" are,
unless otherwise specified, to the Schedules and
Exhibits attached to this Securities Exchange
Agreement; and "hereof", "herein", "hereunder" and
other words of similar import shall be construed to
refer to this Securities Exchange Agreement as a
whole and not to any particular Section or other
subdivision. All of the Schedules and Exhibits
attached to this Securities Exchange Agreement are
hereby incorporated by reference herein in their
entirety.
SECTION 2. GENERAL REPRESENTATIONS AND WARRANTIES.
The Company hereby represents and warrants to you, as
of the Closing Date, as follows:
<PAGE> 10
2.1 Capital Stock; Subsidiaries.
(a) After giving effect to the filing of the
Certificate of Determination on or prior to the
Closing Date, and the exchange contemplated hereby on
the Closing Date, the authorized and outstanding
capital stock of the Company consists of: 12,500,000
shares of Common Stock, which is vested with 100% of
the present right to elect directors of the Company,
of which 6,531,831 shares are issued and outstanding;
250,000 shares of Series A Preferred Stock, of which
250,000 shares are issued and outstanding; and
4,750,000 shares of other Preferred Stock (the
"Junior Preferred Stock"), of which no shares are
issued and outstanding. All such outstanding shares
have been duly authorized, validly issued and are
fully paid, nonassessable and free of preemptive
rights. No shares of stock are held in the treasury
of the Company. The Company has no Subsidiaries.
(b) All issued and outstanding securities (as defined
in the Securities Act) of the Company have been
offered, issued, sold and delivered in compliance
with, or pursuant to exemptions from, all applicable
federal and state laws, and the rules and regulations
of federal and state regulatory bodies governing the
offering, issuance, sale and delivery of securities.
(c) Except as specified on Item 2.1(c) of
Schedule II, there are no subscriptions, options,
warrants or calls relating to the issuance by the
Company of any shares of its capital stock, including
any right of conversion or exchange under any
outstanding security or other instrument. There are
no voting trusts or other agreements or
understandings with respect to the voting of the
capital stock of the Company to which the Company is
a party. To the knowledge of the Company, there are
no voting trusts or other agreements or
understandings with respect to the voting of the
capital stock of the Company. The Company is not
subject to any obligation (contingent or otherwise)
to repurchase or otherwise acquire or retire any
shares of its capital stock or any security
convertible into or exchangeable for any of its
capital stock. The Company has not granted
registration rights to any holders of its securities
except as specified on Item 2.1(c) of Schedule II.
2.2 Organization and Authority. The Company:
(a) is a corporation duly organized, validly existing
and in good standing under the laws of the
jurisdiction of its incorporation;
(b) has all requisite power and authority (corporate
and other) (i) to own and operate its properties,
(ii) to conduct its business as currently conducted
and as currently proposed to be conducted, (iii) to
offer, issue, sell and deliver the Securities,
(iv) to enter into this Securities Exchange Agreement
and (v) to perform its respective obligations under
such agreement and the Articles of Incorporation; and
(c) has made all filings and holds all franchises,
licenses, permits and registrations which are
required under the laws of each jurisdiction in which
the properties owned (or held under lease) by it or
the nature of its activities makes such filings,
franchises, licenses, permits or registrations
necessary, except for filings, franchises, licenses,
permits or registrations which individually or in the
aggregate are not material to the Company.
<PAGE> 11
2.3 Corporate Proceedings. The Company has taken all
corporate action necessary to be taken by it to
authorize the execution and delivery of this
Securities Exchange Agreement, the offer, issuance,
sale and delivery of the Securities and the
performance of all obligations to be performed by it
hereunder and thereunder.
2.4 Validity of Agreement and Securities. This
Securities Exchange Agreement has been duly executed
and delivered by each of the Company and constitutes
the legal, valid and binding obligation of the
Company, enforceable against the Company in
accordance with its terms, except as limited by
applicable bankruptcy, insolvency, fraudulent
conveyance and similar laws regarding debtor/creditor
relationships and the effect of general principles of
equity. The Notes, when executed and delivered by
the Company will constitute the legal, valid and
binding obligation of the Company, enforceable
against the Company in accordance with its terms,
except as limited by applicable bankruptcy,
insolvency, fraudulent conveyance and similar laws
regarding debtor/creditor relationships and the
effect of general principles of equity. Upon receipt
by the Company of payment for the Series A Preferred
Stock and issuance of the Series A Preferred Stock as
herein provided, the Series A Preferred Stock will be
duly issued, fully paid and nonassessable and free
from preemptive rights in favor of the holders of
other shares of capital stock of the Company.
2.5 Consent, etc. No prior consent, approval or
authorization of, registration, qualification,
designation, declaration or filing with, or notice to
any federal, state or local governmental or public
authority or agency including, without limitation,
any filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, is or was
required for (a) the valid execution, delivery or
performance of this Securities Exchange Agreement by
the Company or (b) the valid offer, execution,
issuance, sale or delivery of the Securities or the
performance of the Securities by the Company. The
Company has obtained all consents, approvals or
authorizations of, made all declarations or filings
with, and given all notices to, all applicable
federal, state or local governmental or public
authorities or agencies which are necessary for the
continued conduct by the Company of its businesses as
now conducted or as proposed to be conducted and
which the failure to so obtain, make or give could
have a Material Adverse Effect.
2.6 Business.
(a) The Company does not presently contemplate
conducting a business other than the business
presently conducted by it.
(b) The address of the principal place of business
and chief executive office of the Company is the same
as the address for notices to the Company provided in
13.1 hereof.
(c) The primary business of the Company is the
production and distribution of premium wine.
2.7 Financial Statements.
The Company has heretofore furnished to you complete
and accurate copies of: (i) audited consolidated
financial statements of the Company or its
predecessor for the Fiscal Years ended December 31,
1995, December 31, 1996 and December 31, 1997,
including audited
<PAGE> 12
consolidated balance sheets of the Company as of the
end of each such Fiscal Year and statements of
income, changes in stockholders' equity and cash
flows of the Company for each such Fiscal Year,
together with the opinion thereon of KPMG Peat
Marwick LLP, independent public accountants (the
"Financial Statements"). The Financial Statements
have been prepared in accordance with generally
accepted accounting principles applied on a
consistent basis during the respective periods,
except as therein noted. The Financial Statements
are complete and present fairly the financial
position of the Company as of such dates and the
results of their operations and changes in their
financial position or cash flows, as the case may be,
for such periods in all material respects. The
Company does not have any material obligation or
liability, individually or in the aggregate, of the
nature required to be disclosed on a balance sheet
prepared in accordance with generally accepted
accounting principles that is not disclosed by the
Financial Statements referred to above.
2.8 No Material Adverse Change. Since December 31,
1997, there has been no material adverse change in
the business, earnings, properties or condition
(financial or other) of the Company.
2.9 Licenses, Registrations, etc. The Company owns
or possesses, and holds free from burdensome
restrictions or known conflicts with the rights of
others, all licenses, registrations, permits,
copyrights, trademarks, service marks, trade names
and patents, and all rights with respect to the
foregoing, necessary for the conduct of its business
as now conducted and as proposed to be conducted, and
is in full compliance with the terms and conditions,
if any, of all such licenses, registrations,
franchises, permits, copyrights, trademarks, service
marks, trade names, patents and all rights with
respect to the foregoing and the terms and conditions
of any agreements relating thereto, except for such
restrictions, conflicts or noncompliance which,
either individually or in the aggregate, do not have,
and in the future will not have, a Material Adverse
Effect.
2.10 Properties.
(a) The Company has good and valid fee title to the
Real Property described under the heading "Fee Real
Property" in Item 2.10(a) of Schedule II and leases
the other Real Property described under the heading
"Leased Real Property" in such schedule.
(b) Set forth on Item 2.10(b) of Schedule II is a
list of all grower agreements to which the Company is
a party, copies of which have been provided to you.
2.11 Compliance with Other Instruments, etc. The
Company is not: (a) in violation of any term of its
charter or by-laws; or (b) in default in the
performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in,
and is not otherwise in default under, (i) any
evidence of Indebtedness for Money Borrowed, or any
other evidence of Indebtedness or any instrument or
agreement under or pursuant to which any evidence of
Indebtedness for Money Borrowed or other evidence of
Indebtedness has been issued; or (ii) any other
instrument or agreement to which it is a party or by
which it is bound or any of its properties is
affected any which default would have a Material
Adverse Effect.
<PAGE> 13
2.12 No Conflict, etc. Neither the execution,
delivery or performance of this Securities Exchange
Agreement by the Company nor the offer, issuance,
sale or delivery of the Securities by the Company or
the performance of the Securities by the Company does
or will: (a) conflict with or violate the charter or
by-laws of the Company; (b) conflict with or result
in a breach of any of the terms, conditions or
provisions of, or constitute a default under, or
result in the creation of any Lien on any of the
properties or assets of the Company pursuant to the
terms of, any evidence of Indebtedness, or any
instrument or agreement under or pursuant to which
any evidence of Indebtedness has been issued, or any
other instrument or agreement to which the Company is
a party or by which it is bound in each case
resulting in a Material Adverse Effect; or
(c) require the consent of, or other action by, any
stockholder, trustee or any creditor of, any lessor
to or any investor in, the Company or any other non-
governmental Person.
2.13 No Materially Adverse Contracts, etc.
(a) The Company is not a party to or bound by (nor
are any of its properties affected by) any contract
or agreement, or subject to any order, writ,
injunction or decree or other action of any court or
any governmental department, commission, bureau,
board or other administrative agency or official, or
any charter or other corporate or contractual
restriction, which has a Material Adverse Effect.
(b) The Company is not a party to any contract or
agreement with any Affiliate the terms of which are
not commercially reasonable or are less favorable to
it than it would obtain in a comparable arm's length
transaction with a person other than an Affiliate.
2.14 Compliance with Law, etc. The Company is in
full compliance with all laws and ordinances and all
governmental rules and regulations to which it is
subject, the violation of which would have a Material
Adverse Effect. Neither the execution, delivery or
performance of this Securities Exchange Agreement by
the Company, the offer, issuance, sale or delivery of
the Securities by the Company nor the performance of
the Securities, does or will cause the Company to be
in violation of any statute, law or ordinance or any
judgment, decree, writ, injunction, order, award or
other action of any court or governmental authority
or arbitrator or any order, rule or regulation, of
any federal, state, county, municipal or other
governmental or public authority or agency. The
Company uses and operates the Real Property for
lawful purposes in full compliance in all material
respects with all laws and ordinances and all
governmental rules and regulations to which it is
subject.
2.15 Compliance with ERISA; Multiemployer Plans.
(a) Neither (i) the execution and delivery of this
Securities Exchange Agreement by the Company,
(ii) the offer, issuance, sale and delivery of the
Securities by the Company, (iii) the acquisition of
the Securities by you, (iv) the application by the
Company of the proceeds of the sale of the Securities
nor (v) the consummation of any of the other
transactions contemplated by this Securities Exchange
Agreement will neither result in a "prohibited
transaction" as described in Section 406(a) of ERISA
nor a tax under Section 4975 of the Code. The
Company has delivered to you a complete and correct
list of all "employee benefit plans" (within the
meaning of Section 3(3) of ERISA) with respect to
which the Company or any ERISA Affiliate of the
Company is a "party in interest" (within the meaning
of Section 3(14) of ERISA) or with respect to which
its securities are "employer securities" (within the
meaning of
<PAGE> 14
Section 407(d)(1) of ERISA).
(b)Each Plan is in compliance in all respects with
applicable provisions of ERISA, the Code and
applicable foreign law. The Company and each ERISA
Affiliate has made all contributions to the Plans
required to be made by it.
(c) Except for liabilities to make contributions and
to pay PBGC premiums and administrative costs,
neither the Company nor any ERISA Affiliate of the
Company has incurred any material liability to or on
account of any Plan or Pension Plan under applicable
provisions of ERISA, the Code or applicable foreign
law, and no condition exists which presents a
material risk to the Company or any ERISA Affiliate
of the Company of incurring any such liability. No
Pension Plan has an "accumulated funding deficiency"
(within the meaning of Section 412 of the Code),
whether or not waived. None of the Company, any
ERISA Affiliate of the Company, the PBGC or any other
Person has instituted any proceedings or taken any
other action to terminate any Pension Plan.
(d) The actuarial present value of all accrued
benefit liabilities under each Pension Plan based on
the assumptions used in the funding of such Pension
Plan, which assumptions are reasonable, and
determined as of the last day of the most recent plan
year of such Pension Plan for which an annual report
has been filed with the Internal Revenue Service did
not exceed the current fair market value of the
assets of such Pension Plan as of such last day.
(e)None of the Plans is a Multiemployer Plan, and
neither the Company nor any ERISA Affiliate of the
Company has contributed or been obligated to
contribute to any Multiemployer Plan at any time
within the preceding six years and (ii) neither the
Company nor any ERISA Affiliate of the Company
maintains or has any obligation to maintain any plan,
program or other arrangement for the provision of
post-employment group health or other welfare
benefits for its retired or former employees except
to the extent required under Section 601 et seq. of
ERISA or Section 4980B of the Code.
2.16 Pending Litigation, etc. Except as specified in
Item 2.16 of Schedule II, there is no action at law,
suit in equity or other proceeding or, to the
Company's knowledge, investigation (whether or not
purportedly on behalf of the Company), in any court
or by or before any other governmental or public
authority or agency, or any arbitrator or arbitration
panel pending or, to the best knowledge of the
Company, threatened against or affecting the Company,
or any of their properties that, either individually
or in the aggregate, (a) could reasonably be expected
to have a Material Adverse Effect or (b) could
reasonably be expected to question the validity or
enforceability of this Securities Exchange Agreement
or the Securities. The Company is not in default
with respect to any order, writ, injunction, judgment
or decree of any court or other governmental or
public authority or agency or arbitrator or
arbitration panel.
2.17 Taxes. All federal, state and other tax returns
of the Company required by law to be filed have been
duly filed or a valid extension for such filing has
been obtained, and all federal, state and other
taxes, assessments, fees and other governmental
charges upon the Company or upon any of its
properties, income or assets that are due and payable
have been
<PAGE> 15
paid, except where they are being protested or
contested in good faith by appropriate proceedings.
No extensions of the time for the assessment of
deficiencies have been granted by the Company. The
Company does not know of any proposed, asserted or
assessed tax deficiency against the Company. The
Company is not a party to or bound by or obligated
under any tax sharing or similar agreement. There
are no Liens on any properties or assets of the
Company imposed or arising as a result of the
delinquent payment or the non-payment of any tax,
assessment, fee or other governmental charge other
than Permitted Liens. Federal and state income tax
returns for the Company have never been audited by
the Internal Revenue Service or the appropriate state
authorities. The Company (a) has not assumed and is
not liable for any federal, state or other income tax
liability of any other Person, including any
predecessor corporation, as a result of any purchase
of assets or other business acquisition transaction
and (b) has not indemnified any other Person or
otherwise agreed to pay on behalf of any other Person
tax liability growing out of or which may be asserted
on the basis of any tax treatment adopted with
respect to all or any aspect of such a business
acquisition transaction. The charges, accruals and
reserves, if any, on the books of the Company in
respect of federal, state and local corporate
franchise and income taxes for all fiscal periods to
date are adequate in accordance with generally
accepted accounting principles, and the Company does
not know of any additional unpaid assessments for
such periods or of any basis therefor. There are no
applicable taxes, fees or other governmental charges
payable by the Company in connection with the
execution and delivery of this Securities Exchange
Agreement or the offer, issuance, sale and delivery
of the Securities.
2.18 Holding Company Act; Investment Company Act.
(a) The Company is not, and the ownership of its
properties by the Company does not cause it to be,
(i) a "public utility company" or a "holding
company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or
of a "subsidiary company" of a "holding company", as
such terms are defined in the Public Utility Holding
Company Act of 1935, as amended or (ii) a "public
utility" within the meaning of the Federal Power Act,
as amended.
(b) The Company is not an "investment company" or an
"affiliated person" of an "investment company" or a
company "controlled" by an "investment company," as
such terms are defined in the Investment Company Act
of 1940, as amended, that is subject to registration
and regulation under such act. The Company is not an
"investment adviser" or an "affiliated person" of an
"investment adviser" as such terms are defined in the
Investment Advisers Act of 1940, as amended.
2.19 No Margin Regulation Violation. None of the
transactions contemplated by this Securities Exchange
Agreement (including, without limitation, the direct
or indirect use of the proceeds from the sale of the
Securities) will violate or result in a violation of
Section 7 of the Exchange Act or any regulations
issued pursuant thereto, including, without
limitation, Regulation T (12 C.F.R., Part 220), as
amended, Regulation U (12 C.F.R., Part 221), as
amended and Regulation X (12 C.F.R., Part 224), as
amended, of the Board of Governors of the Federal
Reserve System, or will require you to obtain a
statement in conformity with the requirements of
Federal Reserve Form FR G-3 or to register on Federal
Reserve Form FR G-1 under such
<PAGE> 16
regulations. The proceeds from the sale of the
Securities by the Company will not be used to
purchase or carry any "margin securities" within the
meaning of such regulations.
2.20 Compliance with Environmental Laws. The Company
is, and will continue to be in full compliance in all
material respects with all applicable Environmental
Laws, regulations and ordinances governing its
business, products, properties or assets with respect
to all Hazardous Materials.
2.21 Labor Relations. The Company is not engaged in
any unfair labor practice which could have a Material
Adverse Effect. There is (a) no unfair labor
practice complaint pending or, to the best knowledge
of the Company, threatened against the Company before
the National Labor Relations Board or any court or
labor board, and no grievance or arbitration
proceedings arising out of or under collective
bargaining agreements is so pending or, to the best
knowledge of the Company, threatened; (b) no strike,
labor dispute, slowdown or stoppage pending or, to
the best knowledge of the Company, threatened against
the Company; and (c) to the best of the Company's
knowledge, no union representation question existing
with respect to the employees of the Company and no
union organizing activities are taking place with
respect to any thereof. The Company is not a party
to any collective bargaining agreement.
2.22 Insurance. The Company has obtained insurance,
with respect to its properties and businesses, with
financially sound insurers of nationally recognized
stature and responsibility, of such a nature, with
such terms and in such amounts as a reasonably
prudent person would maintain with respect to similar
properties and a similar business and which otherwise
satisfies the requirements of 9.14 hereof.
2.23 Offerees. Neither the Company nor any other
Person authorized by the Company to act as an agent,
broker, dealer or otherwise in connection with the
offering or sale of the Securities has, either
directly or through any agent, offered any of the
Securities or any similar securities for sale to, or
solicited any offers to buy any thereof from, or
otherwise approached or negotiated in respect thereof
with, any Person or Persons other than you and not
more than 16 other Institutional Investors. The
Company agrees that neither it, nor any agent on
behalf of it, will sell or offer any of the
Securities or any similar securities to, or solicit
offers to buy any thereof from, or otherwise approach
or negotiate in respect thereof with, any other
Person or Persons whomsoever, or take any other
action, so as to bring the issuance and sale of any
of the Securities within the provisions of Section 5
of the Securities Act or the provisions of any state
securities law requiring registration of securities,
notification of the issuance and sale thereof or
confirmation of the availability of any exemption
from registration thereof.
2.24 Other Names. Except as specified on Item 2.24
of Schedule II, the businesses conducted by the
Company prior to the date hereof have not been
conducted under any corporate, trade or fictitious
name.
2.25 Investments. The Company has no Investment in
any Person and is not engaged in any joint venture or
partnership with any other Person.
<PAGE> 17
2.26 Broker's or Finder's Commissions. No broker's
or finder's placement fee or commission will be
payable by the Company with respect to the issuance,
sale and delivery of the Securities or any of the
transactions contemplated hereby.
2.27 Full Disclosure. Neither this Securities
Exchange Agreement or any report or financial
statement referred to in 11.1 hereof, nor any
certificate, report or other written statement
delivered to you by or on behalf of the Company in
connection with the negotiation of this Securities
Exchange Agreement or the transactions contemplated
hereby or the sale of the Securities, contains any
untrue statement of a material fact or omits to state
a material fact necessary to make the statements
contained herein or therein not misleading in light
of the circumstances under which such statements were
made. There is no fact known to the Company (other
than general economic, environmental, horticultural
and weather conditions known to the public generally)
that has not been disclosed to you in writing that
(a) could reasonably be expected to have a Material
Adverse Effect or (b) adversely affects in any
material respect or could reasonably be expected to
adversely affect in any material respect the ability
of the Company to perform its obligations under this
Securities Exchange Agreement.
SECTION 3. REPRESENTATIONS OF THE PURCHASER.
3.1 Investment Intent, etc. This Securities Exchange
Agreement is made with you in reliance upon the
following representations to the Company, which by
your acceptance hereof you confirm:
(a) You are purchasing the Securities for your own
account for investment and not with a view to or for
sale in connection with any distribution thereof;
provided that the disposition of your property shall
be at all times within your own control, and that
your right to sell or otherwise dispose of all or any
part of the Securities purchased or acquired by you
pursuant to an effective registration statement under
the Securities Act or under an exemption from such
registration available under the Securities Act
(including but not limited to the exemption provided
by Rule 144A of the SEC thereunder) and in accordance
with any applicable state securities law shall not be
prejudiced.
(b)You are an "accredited investor" as defined in
Rule 501 under the Securities Act.
SECTION 4. CONDITIONS OF OBLIGATION TO PURCHASE
SECURITIES.
Your obligation to purchase and pay for the
Securities to be purchased by you hereunder on the
Closing Date shall be subject to the satisfaction,
prior to or concurrently with such purchase and
payment, of the following conditions:
4.1 Opinion of Special Counsel. You shall have
received from Orrick, Herrington & Sutcliffe LLP,
your special counsel, such assurances as you may
request with respect to the Securities to be
purchased by you hereunder and the transactions
contemplated hereby.
4.2 Opinions of Counsel for the Company. You shall
have received from Evers & Hendrickson, LLP, counsel
for the Company, an opinion, dated the Closing Date,
in form and substance satisfactory to you and your
special counsel, to the effect set forth in
Schedule III
<PAGE> 18
hereto. The Company hereby instructs such counsel to
prepare and deliver such opinion to you pursuant to
this 4.2.
4.3 Performance of Obligations. The Company shall
have performed all of its obligations to be performed
hereunder prior to or on the Closing Date, and you
shall have received an Officer's Certificate of the
Company, dated the Closing Date, to such effect.
4.4 Representations True. The representations and
warranties of the Company contained herein shall be
true on and as of the Closing Date with the same
effect as though such representations and warranties
had been made on and as of the Closing Date, except
for changes contemplated by the terms hereof
occurring in the ordinary course of business between
the date hereof and the Closing Date. You shall have
received an Officer's Certificate of the Company,
dated the Closing Date, to the effect of the
foregoing.
4.5 Certificate of Company. You shall have received
a certificate from the Company, dated the Closing
Date and in form and substance satisfactory to you,
certifying (i) that attached thereto are true,
correct and complete copies of (A) its Articles of
Incorporation, by-laws and any amendments thereto and
(B) the resolutions of its Board authorizing the
issuance and sale of the Securities, and (ii) the
incumbency, specimen signatures and corporate
authority of those officers executing such agreements
and instruments and other instruments contemplated
therein.
4.6 Private Placement Number. The CUSIP Service
Bureau of Standard & Poor's Ratings Group shall have
assigned private placement numbers to the Notes and
the Series A Preferred Stock and evidence thereof
shall have been delivered to you and your special
counsel.
4.7 Fees and Disbursements of Your Special Counsel.
Your special counsel shall have received payment of
any invoice rendered for its reasonable fees and
disbursements posted through the date of such invoice
(with the understanding that a supplemental statement
for fees and disbursements subsequently posted is to
be rendered at a later date) in connection with its
representation of you.
4.8 Legality. The Securities shall qualify as a
legal investment for you under all applicable laws
(without resort to any so-called "basket clause" of
any such law) and your purchase thereof shall not
cause you to be subject to any onerous or burdensome
legal requirement or penalty.
4.9 Certificate of Determination. A Certificate of
Determination in the form set forth in Exhibit B
annexed hereto shall have been filed with the
appropriate officials of the State of California and
shall have become effective and be in full force and
effect without further amendment or modification
thereto. You shall have received evidence
satisfactory to you and your special counsel of such
filing and effectiveness.
Consents and Approvals. The Company shall have
delivered to the Purchaser an Officer's Certificate,
dated the Closing Date, certifying that any necessary
consents, waivers, approvals, authorizations,
registrations, filings and notifications of the
character referred to in 2.5 hereof have been
obtained or made and are in full force and effect.
<PAGE> 19
4.11 No Material Adverse Change. There shall have
been no material adverse change in the financial
condition, business, earnings, properties, or
operations of the Company since December 31, 1997,
and you shall have received an Officer's Certificate
of the Company, dated the Closing Date and in form
and substance satisfactory to you, to such effect.
4.12 Securities. The Company shall have executed and
delivered stock certificates representing the shares
of Series A Preferred Stock registered in your name
or such nominee as shall be indicated on Schedule I
hereto. The Company shall have executed and
delivered Notes registered in your name or such
nominee as shall be indicated on Schedule I hereto.
4.13 Insurance. The Company shall have furnished to
you (a) a certificate of an insurance broker,
effective through the Closing Date, which certificate
shall be satisfactory in substance to you and your
special counsel, and shall certify that the Company
is in compliance with the requirements of 9.14
hereto, and (b) copies of all applicable policies,
endorsements and riders.
4.14 Proceedings, Instruments, etc. All proceedings
and actions taken on or prior to the Closing Date in
connection with the transactions contemplated by this
Securities Exchange Agreement and all instruments
incident thereto shall be in form and substance
satisfactory to you and your special counsel, and you
and your special counsel shall have received copies
of all documents that you or they may request in
connection with such proceedings, actions and
transactions (including, without limitation, copies
of court documents, certifications and evidence of
the correctness of the representations and warranties
contained herein and certifications and evidence of
the compliance with the terms and the fulfillment of
the conditions of this Securities Exchange Agreement,
in form and substance satisfactory to you and your
special counsel).
SECTION 5. SERIES A PREFERRED STOCK.
5.1 Mandatory Redemption. The Series A Preferred
Stock shall be issued subject to the mandatory
redemption provisions set forth in the Certificate of
Determination.
5.2 Optional Redemption. The Series A Preferred
Stock shall be issued subject to the optional
redemption provisions set forth in the Certificate of
Determination.
5.3 Exchange of Series A Preferred Stock for Notes.
(a) The Company, at its option, may at any time after
March 15, 2000, require the holders of all of the
then outstanding shares of Series A Preferred Stock
to exchange the shares of Series A Preferred Stock
held by them for Notes (a "Stock Exchange") in
accordance with this 5.3 which Notes shall be
identical to the Notes issued pursuant to, and
governed by the terms and conditions of, this
Securities Exchange Agreement, except that the
interest rate payable upon Notes issued pursuant to a
Stock Exchange shall be determined by the Purchaser
at least twenty (20) days prior to the time of such
Stock Exchange. The Company may not elect to
exchange Notes for less than all outstanding shares
of Series A Preferred Stock. Holders of outstanding
shares of Series A Preferred Stock shall be entitled
to receive $10.00 in principal amount of Notes in
exchange for each share of Series A Preferred Stock
to be exchanged by them at the time of exchange.
<PAGE> 20
(b) The Company shall mail to the Purchaser and each
holder of record of the shares of Series A Preferred
Stock written notice (an "Exchange Notice") of its
intention to effect an exchange pursuant to this 5.3
not less than thirty (30) nor more than ninety (90)
days prior to the Dividend Payment Date fixed for the
exchange (the "Exchange Date"). Each such Exchange
Notice shall state: (i) the Exchange Date, (ii) the
place or places where certificates for such shares of
Series A Preferred Stock are to be surrendered for
exchange into Notes, (iii) the number of shares of
Series A Preferred Stock held by such holder to be
exchanged and (iv) that dividends on the shares of
Series A Preferred Stock to be exchanged shall cease
to accrue on such Exchange Date.
(c) Following its receipt of the Exchange Notice, the
Purchaser shall, at least twenty (20) days prior to
the Exchange Date, notify the Company of the proposed
interest rate that would be payable on the Notes to
be issued on the Exchange Date (such notice, the
"Interest Rate Notice"). Upon its receipt of the
Interest Rate Notice, the Company may rescind the
Exchange Notice by notifying the Purchaser and each
holder of record of the shares of Series A Preferred
Stock of its decision to rescind the Stock Exchange,
provided such notice is received by the Purchaser and
each holder of record of the shares of Series A
Preferred Stock at least five (5) days prior to the
proposed Exchange Date.
(d) On or not more than four (4) days prior to the
Exchange Date, each holder of shares of Series A
Preferred Stock shall surrender to the Company, at
the office maintained by the Company pursuant to 13.1
hereof, certificates evidencing the number of shares
of Series A Preferred Stock specified in the Exchange
Notice, duly endorsed or assigned pursuant to a
separate instrument, against delivery in exchange
therefor on the Exchange Date of an aggregate
principal amount of Notes equal to the Liquidation
Value of the shares of Series A Preferred Stock being
surrendered and payment in cash of accrued but unpaid
dividends through the Exchange Date on the Series A
Preferred Stock being surrendered. The Company shall
issue to each Person surrendering Series A Preferred
Stock one or more Notes, registered in the name of
such Person or such nominee as may be specified by
such Person, dated the Exchange Date; provided that
the Exchange Date shall not be deemed to occur and a
Stock Exchange shall not be deemed to be effective
with respect to the Series A Preferred Stock held by
a holder until the issuance to such holder of the
Notes to be received by it in the Stock Exchange.
(e) Upon issuance of the Notes to be issued pursuant
to this 5.3, dividends on the shares of the Series A
Preferred Stock to be exchanged shall cease to
accrue, said shares shall no longer be deemed to be
issued and outstanding, and all rights of the holders
thereof as stockholders of the Company shall cease
and terminate, except the right to receive from the
Company payment of any accrued and unpaid dividends,
including without limitation the final dividend, on
such shares.
5.4 Home Office Payment. Notwithstanding any
provision to the contrary in this Securities Exchange
Agreement, the Certificate of Determination or the
Series A Preferred Stock, the Company shall
punctually pay in immediately available funds by
12:00 P.M. Boston time on the date payment is due all
amounts payable to you with respect to any Series A
Preferred Stock held by you or your nominee (without
the necessity for any presentation or surrender
thereof or any notation of such payment thereon other
than upon payment of the Liquidation Value thereof)
in the manner and at the address for such purpose
specified below
<PAGE> 21
your name in Schedule I hereto, or at any other
address within the continental United States as you
may from time to time direct in writing.
5.5 Remedies. With respect to any material
misrepresentation or breach of warranty or covenant
made by the Company in this Securities Exchange
Agreement, the holder of any Security may exercise
any right, power or remedy permitted to it by law,
either by suit, in equity or by action at law or
both, whether for specific performance of any
covenant or agreement contained in this Securities
Exchange Agreement, or for an injunction against a
violation of any of the terms of this Securities
Exchange Agreement, or in aid of the exercise of any
power granted in this Securities Exchange Agreement,
or may proceed to enforce any other legal or
equitable right of the holder of such Security. No
remedy herein conferred upon any holder of a Security
is intended to be exclusive of any other remedy and
each and every remedy shall be cumulative and shall
be in addition to every other remedy given hereunder
or now or hereafter existing at law, in equity, by
statute or otherwise. No course of dealing on the
part of any holder of a Security, or any delay or
failure on the part of any such holder to exercise
any right or power, shall operate as a waiver of such
right or power or otherwise prejudice the rights,
powers and remedies of such holder or of any other
holder. No failure to insist upon strict compliance
with any covenant, term, condition or other provision
of this Securities Exchange Agreement shall
constitute a waiver by any holder of a Security of
any such covenant, term, condition or other provision
or of any default in connection therewith. To the
extent effective under applicable law, the Company
hereby agrees to waive, and does hereby absolutely
and irrevocably waive and relinquish, the benefit and
advantage of any valuation, stay, appraisement,
extension or redemption laws now existing or that may
hereafter exist that, but for this provision, might
be applicable to any sale made under any judgment,
order or decree of any court, or otherwise.
SECTION 6 NOTE PAYMENTS.
6.1 Required Amortizing Payments. The Company shall
on March 15 and September 15 of each year, commencing
on March 15, 1999 (each such date, a "Note Payment
Date") make the payments of principal and interest on
the Notes as set forth in, and subject to the terms
and conditions of, the Notes.
6.2 Optional Prepayments with Premium.
(a) Upon the terms and subject to the conditions
hereinafter set forth and in the Notes, the Company,
at its option, upon notice as provided in 6.2(c)
hereof, may prepay the outstanding principal amount
of the Notes on any Note Payment Date occurring on or
after March 15, 2001, either in whole or from time to
time in any part (but, if in part, then in partial
payments of not less than $100,000), at a prepayment
price equal to the sum of (i) the aggregate principal
amount of the Notes so to be prepaid, together with
interest accrued on such principal amount to the date
fixed for prepayment, and (ii) the Note Make-Whole
Amount for such principal amount (as defined below)
(the "Optional Note Prepayment Price").
(b) The "Note Make-Whole Amount" for any principal
amount shall equal the net present value (if
positive) of the payment stream equal to the
difference between (i) each payment of principal and
interest the Purchaser would have received on account
of such principal amount at the interest rate set
forth in the Notes and (ii) each corresponding
payment of principal
<PAGE> 22
and interest the Purchaser would have received on
account of such principal amount at a rate equal to
the rate then being paid on United States Treasury
Notes with maturities equal to the Weighted Average
Life to Maturity of the remaining aggregate principal
amount of Notes at the time of prepayment (the "Note
Treasury Rate"), discounted at the Note Treasury
Rate; provided, however, that in no event shall the
Note Make-Whole Amount be less than zero.
(c) Notice of any prepayment of Notes pursuant to
this Section 6 shall be given to each holder of the
Notes not less than thirty (30) nor more than sixty
(60) days before the date fixed for prepayment (the
"Optional Note Prepayment Date") and shall be
accompanied by an Officer's Certificate of the
Company certifying as to: (i) the Optional Note
Prepayment Date, (ii) the aggregate principal amount
of the Notes to be prepaid on such Optional Note
Prepayment Date, (iii) the principal amount of each
Note held by such holder to be prepaid on such
Optional Note Prepayment Date, (iv) the Optional Note
Prepayment Price to be paid in respect of each Note
held by such holder on such Optional Note Prepayment
Date and (v) the amount of accrued interest to be
paid to such holder on such Optional Note Prepayment
Date. Any notice of prepayment pursuant to this
6.2(c) having been so given, the aggregate Optional
Note Prepayment Price payable in respect of the
aggregate principal amount of Notes specified in such
notice shall become due and payable on such Optional
Note Prepayment Date.
(d) The aggregate principal amount of any partial
prepayment of Notes pursuant to this Section 6 shall
be allocated among the holders of the Notes to be
prepaid in proportion, as nearly as practicable, to
the respective unpaid principal amounts of Notes then
held thereby, with adjustments, to the extent
practicable, to compensate for any prior prepayments
not made in exactly such proportion.
6.3 Restrictions on Prepayment. Except as otherwise
provided in this Section 6, there shall be no
prepayment, in whole or in part, of the principal of
all or any of the Notes. The Company waives any
right to prepay the Notes except under the terms and
conditions as set forth in this Section 6 and agrees
that if the Notes are prepaid, the Company shall pay
the Note Make-Whole Amount (to the extent required by
the terms hereof). The Company hereby acknowledges
that (a) the inclusion of this waiver of prepayment
rights and agreement to pay the Note Make-Whole
Amount upon prepayment of the Notes was separately
negotiated with the Purchaser, (b) the economic value
of the various elements of this waiver and agreement
was discussed between the Company and the Purchaser,
(c) the consideration given by the Purchaser for the
Notes was adjusted to reflect the specific waiver and
agreement negotiated between the Company and the
Purchaser and contained herein and (d) this waiver is
intended to comply with California Civil Code
2954.10.
The Company's Initials
//s//JG
-------
6.4 Application of Payments. Each payment on a Note
shall be applied, first, to the payment of accrued
interest on such Note to the date of such payment,
second, to the payment of any principal of and
premium, if any, on such Note then due thereunder,
and third, to the payment of the installments of
principal of and premium, if any, on such Note
remaining unpaid in the inverse order of the maturity
thereof.
<PAGE> 23
6.5 Method of Payment. The principal of, premium, if
any, and interest on each Note shall be payable to
each Note holder by wire transfer of such amount in
immediately available funds to the banking
institution with bank wire transfer facilities
designated in such notice for the account of such
Note holder, with telephonic and/or written
confirmation of such transfer, to the extent
specified by such Note holder. All amounts payable
with respect to any Notes held by a Purchaser or its
nominee (without the necessity for any presentation
or surrender thereof or any notation of such payment
thereon) shall be paid in immediately available funds
by 12:00 p.m., Boston time, on the date payment is
due in the manner and at the address for such purpose
specified below the Purchaser's name in Schedule I to
this Securities Exchange Agreement, or at any other
address as the Purchaser may from time to time direct
in writing.
6.6 No Set-off or Counterclaim. Each Note holder
shall be entitled to the principal of and premium, if
any, and interest on such Note free from all equities
or rights of set-off or counterclaims of the Company
or any prior Note holder and all Persons may act
accordingly. The receipt by such Note holder of any
payment of principal, premium or interest shall be a
good discharge to the Company for the same, and the
Company shall not be bound to inquire into the title
of any such Note holder.
6.7 Taxes.
(a) The Company shall make any and all payments
hereunder or under the Notes free and clear of, and
without deduction or withholding for or on account
of, any present or future taxes, levies, imposts,
duties, fees, deductions, charges or withholdings,
and all liabilities with respect thereto, excluding,
in the case of any Note holder, net income and
franchise taxes imposed on it by any jurisdiction
(all such non-excluded taxes, levies, imposts,
duties, fees, deductions, charges, withholdings and
liabilities being hereinafter referred to as
"Taxes"). The Company understands that the
transactions contemplated by this Securities Exchange
Agreement are not the Purchaser's only connections
with the State of California. If the Company shall
be required by law to deduct any Taxes from or in
respect of any sum payable hereunder or under any
Note to any Note holder, (i) the sum payable shall be
increased to the extent necessary so that after
making all required deductions (including deductions
applicable to additional sums payable under this 6.7)
such Note holder receives an amount equal to the sum
it would have received had no such deductions been
made, (ii) the Company shall make such deductions and
(iii) the Company shall pay the full amount deducted
to the relevant taxation authority or other authority
in accordance with applicable law.
(b) In addition, the Company agrees to pay any
present or future stamp or documentary taxes or any
other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or
under the Securities or from the execution or
delivery or otherwise with respect to this Securities
Exchange Agreement or the Securities (hereinafter
referred to as "Other Taxes").
(c) The Company shall indemnify each Note holder for
the full amount of Taxes or Other Taxes (including,
without limitation, any Taxes or Other Taxes imposed
by any jurisdiction on amounts payable under this
6.7) paid by any Note holder or any liability
(including penalties, additions to tax, interest and
expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were
correctly or legally asserted. This
<PAGE> 24
indemnification shall be made within thirty (30) days
from the date such Note holder makes written demand
therefor. Each Note holder shall send to the Company
copies of any notices it receives regarding Taxes and
Other Taxes promptly upon receipt, provided that any
failure to send any such copies shall not affect any
Note holder's rights to indemnification hereunder.
(d) Within thirty (30) days after the date of any
payment of Taxes by the Company, the Company shall
furnish to the Note holders the original or a
certified copy of a receipt evidencing payment
thereof. The Company shall compensate each Note
holder for all reasonable losses and expenses
sustained by such Note holder as a result of any
failure by the Company so to furnish such copy of
such receipt.
(e) The agreements and obligations of the Company
contained in this 6.7 shall survive the payment of
the Notes, the redemption of the Series A Preferred
Stock and the termination of this Securities Exchange
Agreement.
6.8 Acquisition of Notes. The Company shall not, and
shall not permit any Subsidiary or Affiliate to,
purchase, prepay, redeem or otherwise acquire any
Note except (a) as expressly permitted by the terms
hereof and of such Note or (b) pursuant to an offer
that is offered to all holders of Notes, as
applicable, on a pro rata basis.
SECTION 7. REGISTRATION, EXCHANGE AND REPLACEMENT OF
NOTES.
7.1 Registration. The Notes issued on the Closing
Date and the Notes issued in exchange for the Senior
Preferred Stock, if any, shall be registered notes.
The Company shall keep, at its office required to be
maintained pursuant to 13.1 hereof, books for the
registration and registration of transfer of Notes.
Prior to presentation of any Note for registration of
transfer, the Company shall treat the Person in whose
name such Note is registered as the owner and holder
of such Note for all purposes whatsoever, whether or
not such Note shall be overdue, and the Company shall
not be affected by notice to the contrary.
7.2 Exchange. Any Note holder, at its option, may in
person or by duly authorized attorney surrender the
same for exchange at the office maintained pursuant
to 13.1 hereof, and promptly thereafter and at the
expense of the Company, except as provided below,
receive in exchange therefor one or more new Notes,
each in the denomination requested by such holder,
dated the date to which interest shall have been paid
on the Note so surrendered or, if no interest shall
have yet been so paid, dated the date of the Note so
surrendered and registered in the name of such Person
or Persons as shall have been designated in writing
by such holder or its attorney for the same principal
amount as the then unpaid principal amount of the
Note so surrendered. Subject to 6.7 hereof, the
Company may require payment of a sum sufficient to
cover any stamp or other tax or governmental charge
imposed in respect of any transfer involved in such
exchange.
7.3 Replacement. Upon receipt by the Company of
evidence reasonably satisfactory to it of the
ownership of and the loss, theft, destruction or
mutilation of any Note and (a) in the case of loss,
theft or destruction, of indemnity reasonably
satisfactory to it; provided that if the holder of
such Note is the original Purchaser listed on
Schedule I hereto of the Notes or any Affiliate or
nominee thereof or any Institutional Investor or any
nominee thereof, its own
<PAGE> 25
unsecured agreement of indemnity shall be deemed to
be satisfactory; or (b) in the case of mutilation,
upon surrender thereof, the Company, at its expense,
shall execute and deliver in lieu thereof a new Note
executed in the same manner as the Note being
replaced, in the same principal amount as the unpaid
principal amount of such Note and dated the date to
which interest shall have been paid on such Note or,
if no interest shall have yet been so paid, dated the
date of such Note.
7.4 Effect of Transfer or Exchange. All Notes issued
upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company
evidencing the same obligations as the Notes
surrendered upon such registration of transfer or
exchange.
SECTION 8. DEFAULTS AND REMEDIES.
8.1 Events of Default; Acceleration of Notes. Each
of the following conditions or events shall be deemed
an Event of Default hereunder:
(a) the Company shall fail to make any payment or
prepayment of principal of or premium or interest on
any Note when the same becomes due and payable,
whether at maturity, at a date fixed for prepayment,
upon acceleration or otherwise; or
(b) any representation or warranty of the Company
contained in this Securities Exchange Agreement or in
any agreement, instrument, certificate, statement or
other writing furnished in connection herewith or
pursuant hereto shall prove to have been false or
inaccurate in any material respect on the date as of
which such representation or warranty was made; or
(c) the Company shall default in the due and punctual
performance of or compliance with any covenant,
condition or agreement to be performed or observed by
it under this Securities Exchange Agreement; or
(d) any of the insurance policies required pursuant
to 9.14 shall lapse or expire without being replaced
by other insurance policies that comply with 9.14
prior to such lapse or expiration; or
(d) a final judgment or judgments entered by a court
of competent jurisdiction for the payment of money in
excess of $500,000 in the aggregate shall be rendered
against the Company and shall remain in force
undischarged and unstayed for a period of more than
thirty (30) days; or
(e) the Company shall (i) commence a voluntary case
under any chapter of the Federal Bankruptcy Code (11
U.S.C. 101, et seq., as amended) as now or
hereafter in effect, or shall consent to (or fail to
controvert in a timely manner) the commencement of an
involuntary case against the Company under said Code;
(ii) institute proceedings for liquidation,
rehabilitation, readjustment or composition (or for
any related or similar purpose) under any law (other
than the Federal Bankruptcy Code as now or hereafter
in effect) relating to financially distressed
debtors, their creditors or property, or shall
consent to (or fail to controvert in a timely manner)
the institution of any such proceedings against the
Company; (iii) make an assignment for the benefit of
creditors or enter into any arrangement for the
adjustment or composition of debts or claims; (iv)
apply for or consent to the appointment of, or the
taking possession by, a
<PAGE> 26
receiver, liquidator, assignee, trustee, custodian or
sequestrator (or other similar official) of itself or
any of its property; or (v) take corporate action for
the purpose or with the effect of authorizing,
acknowledging or confirming the taking or existence
of any action or condition specified in clause (i),
(ii), (iii) or (iv) above; or
(g) the Company shall be insolvent (within the
meaning of any applicable law), or shall be unable,
or shall admit in writing its inability, to pay its
debts as they become due, or take corporate action
for the purpose or with the effect of authorizing or
confirming the taking or existence of any action or
condition specified in this 8.1; or
(h) a court or other governmental authority or agency
having jurisdiction in the premises shall enter a
decree or order (i) for the appointment of a
receiver, liquidator, assignee, trustee, custodian or
sequestrator (or other similar official) of the
Company of any part of its property, or for the
winding-up or liquidation of its affairs, and such
decree or order shall remain in force undischarged
and unstayed for a period of more than thirty (30)
days or (ii) for the sequestration or attachment of
any material part of the property of the Company
without its unconditional return to the possession of
the Company or its unconditional release from such
sequestration or attachment within thirty (30) days
thereafter; or
(i) a court having jurisdiction in the premises shall
enter an order for relief in any involuntary case
commenced against the Company under the Federal
Bankruptcy Code as now or hereafter in effect, and
such order shall remain in force undischarged and
unstayed for a period of more than thirty (30) days;
or
(j) a court or other governmental authority or agency
having jurisdiction in the premises shall enter a
decree or order approving or acknowledging as
properly filed or commenced against the Company a
petition or proceedings for liquidation,
rehabilitation, readjustment or composition (or for
any related or similar purpose) under any law (other
than the Federal Bankruptcy Code as now or hereafter
in effect) relating to financially distressed
debtors, their creditors or property, and such
petition or proceedings shall not be dismissed within
thirty (30) days of the date of filing or
commencement; or
(k) the Federal Trade Commission or any other federal
or state governmental authority shall impose
sanctions or other penalties on the Company for fraud
or any other unlawful business practice; or
(l) (i) any Pension Plan (other than a Multiemployer
Plan) shall incur an "accumulated funding deficiency"
(within the meaning of Section 412 of the Code) with
respect to any plan year; or (ii) any waiver shall be
sought or granted under Section 412(d) of the Code;
or (iii) any Pension Plan shall be, have been or be
likely to be terminated or the subject of termination
proceedings under ERISA unless terminated in
accordance with law without incurring an obligation
to contribute funds to make the pension plan's assets
sufficient to cover its benefit liabilities upon its
termination; or (iv) the Company or any ERISA
Affiliate shall incur or be likely to incur a
liability to or on account of a Pension Plan under
Section 4062, 4063, 4064 or 4201 of ERISA or any
comparable provision of applicable foreign law, and
there shall result from one or more of the events set
forth in the foregoing clauses (i) through (iv)
either a liability or a material risk of incurring a
liability to the PBGC, any foreign governmental
entity or a
<PAGE> 27
Pension Plan, which, in the opinion of the holders of
51% of the aggregate outstanding principal amount of
the Notes, could have a Material Adverse Effect; or
(m) the holder of any Indebtedness of at least
$100,000 of the Company accelerates the date for
payment of such Indebtedness.
8.2 Remedies of Note holders Upon an Event of
Default.
(a) Upon the occurrence and continuance of any of the
Events of Default set forth in subsections (f)
through (j), inclusive, of 8.1, the Notes shall
automatically mature and become due and payable,
together with interest accrued thereon, plus any
premium, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly
waived.
(b) Upon the occurrence of any other Event of Default
hereunder, holders of at least 51% of the outstanding
principal balance of the Notes may, at their option
and subject to the subordination provisions of the
Notes, by written notice or notices to the Company,
declare all of the Notes to be due and payable,
whereupon the same shall mature and become due and
payable, together with interest accrued thereon, plus
any premium, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly
waived. If the maturity of the Notes shall be
accelerated under this Section 8, there shall become
due and payable (and the Company shall pay), as
compensation to the holders of the Notes for the loss
of their investment opportunity and not as a penalty,
an additional amount equal to the Note Make-Whole
Amount. A final determination of the Note Make-Whole
Amount payable on a prepayment pursuant to any
acceleration of the Notes pursuant to this Section 8
shall be made by the Note holders as of the date of
any prepayment. The Company hereby acknowledges that
(1) its agreement to pay the Note Make-Whole Amount
if the Notes are accelerated under this Section 8 was
separately negotiated with the Purchaser, (2) the
economic value of the various elements of this waiver
and agreement was discussed between the Company and
the Purchaser, (3) the consideration given by the
Purchaser for the Notes was adjusted to reflect the
specific waiver and agreement negotiated between the
Company and the Purchaser and contained herein and
(4) this waiver is intended to comply with California
Civil Code 2954.10.
The Company's Initials
//s//JG
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(c) The holder of any Note then outstanding may,
subject to the subordination provisions of the Notes,
exercise any right, power or remedy permitted to it
by law, either by suit in equity or by action at law,
or both, whether for specific performance of any
covenant or agreement contained in this Securities
Exchange Agreement or in such Note, or for an
injunction against a violation of any of the terms of
this Securities Exchange Agreement or in such Note,
or may proceed to enforce payment of such Note or to
enforce any other legal or equitable right of the
holder of such Note. No remedy herein conferred upon
any holder of a Note is intended to be exclusive of
any other remedy and each and every remedy shall be
cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing
at law, in equity, by statute or otherwise. No
course of dealing on the part of any holder of any
Note, or any delay or failure on the part of any
holder of any Note to exercise any right or power,
shall operate as a waiver of such right or power or
otherwise prejudice the rights, powers and remedies
of such holder or of any other holder. No failure to
insist upon strict compliance with any covenant,
<PAGE> 28
term, condition or other provision of this Securities
Exchange Agreement or the Notes shall constitute a
waiver by any holder of any of the Notes of any such
covenant, term, condition or other provision or of
any Default or Event of Default in connection
therewith. To the extent effective under applicable
law, the Company hereby agrees to waive, and does
hereby absolutely and irrevocably waive and
relinquish, the benefit and advantage of any
valuation, stay, appraisement, extension or
redemption laws now existing or that may hereafter
exist that, but for this provision, might be
applicable to any sale made under any judgment, order
or decree of any court, or otherwise, based on the
Notes or on any claim for interest on the Notes. If
an Event of Default shall occur, the Company will pay
to the holders of the Notes, to the extent not
prohibited by applicable law, such further amount as
shall be sufficient to cover the reasonable costs and
expenses of collection, including, without
limitation, reasonable attorneys' fees and expenses.
(d) The Indebtedness of the Company under the Notes
shall be subordinated and junior in right of payment,
to the extent and in the manner set forth in the
Notes, to all Senior Debt of the Company. The term
"Senior Debt" shall mean the principal of, premium,
if any, and interest on any present or future
Indebtedness of the Company that is not, by the
express terms of the instrument that evidences the
Indebtedness or any related agreement, subordinated
in right of payment to any other Indebtedness of the
Company.
8.3 Rescission of Acceleration. If (a) the
outstanding principal amount of the Notes shall have
become immediately due and payable, (b) no judgment
or decree for any amounts so becoming due and payable
shall have been entered, (c) all amounts of
principal, premium, if any, and interest that shall
have become due and payable in respect of all of the
Notes otherwise than pursuant to any acceleration
shall have been paid in full, including interest on
all overdue principal, premium, if any, and interest
at the applicable rate or rates provided for in the
Notes, (d) the Note holders shall have been paid an
amount sufficient to cover all costs and expenses of
collection incurred by or on behalf of the Note
holders (including, without limitation, reasonable
counsel fees and expenses) and (e) every other Event
of Default shall have been remedied or waived to the
satisfaction of the Note holders, then the Note
holders may, with the written consent of the holders
of 66 2/3% of the aggregate outstanding principal
amount of the Notes, by written notice or notices to
the Company, rescind and annul any acceleration of
the Notes and its consequences, but no such
rescission and annulment shall extend to or affect
any subsequent Default or Event of Default or impair
any right consequent thereon, or shall require any
Note holder to repay any interest, principal or
premium actually paid as a result of such
acceleration.
8.4 Remedies Cumulative. Each and every right, power
and remedy herein specifically given to the Note
holders shall be cumulative and shall be in addition
to every other right, power and remedy herein
specifically given or now or hereafter existing at
law, in equity or by statute or otherwise, and each
and every right, power and remedy whether
specifically herein given or otherwise existing may
be exercised from time to time and as often and in
such order as may be deemed expedient by the Note
holders, and the exercise or the beginning of the
exercise of any right, power or remedy shall not be
construed to be a waiver of the right to exercise at
the same time or thereafter any other right, power or
remedy. No delay or omission by the Note holders in
the exercise of any right, power or remedy or in the
pursuance of any remedy shall impair any such right,
power or remedy or be construed to be a waiver of any
default on the part of the Company or to be an
acquiescence therein.
<PAGE> 29
8.5 Costs and Expenses, Attorneys Fees, etc. of the
Note holders. The Company shall pay all reasonable
costs, fees and expenses of the Note holders, their
agents and counsel in connection with the enforcement
of their rights hereunder and under the Notes. The
Company shall pay to the Note holders on demand any
reasonable costs and expenses, including reasonable
attorneys fees and expenses, but excluding any costs
attributable to in-house counsel or any overhead
costs, paid or incurred by the Note holders in
connection with the collection of any amount payable
by the Company to the Note holders hereunder, whether
or not any legal proceeding is commenced hereunder
and whether or not any Default or Event of Default
shall have occurred and is continuing, together with
interest thereon at the higher applicable rate on the
Notes plus one percent from the date of payment or
incurring by the Note holders until paid by the
Company.
8.6 No Waiver, etc. No failure by any Note holder to
insist upon the strict performance of any term hereof
or under the Notes, or to exercise any right, power
or remedy consequent upon a breach hereof or thereof,
shall constitute a waiver of any such term or of any
such breach. No waiver of any breach shall affect or
alter this Securities Exchange Agreement, which shall
continue in full force and effect with respect to any
other then existing or subsequent breach. No waiver
by any Note holder of any Default or Event of Default
shall be deemed to be a waiver of any other or
similar, previous or subsequent Default or Event of
Default. By accepting payment of any amount after
its due date, the Note holders shall not be deemed to
waive their right either to require prompt payment
when due of all other amounts payable hereunder or to
declare a default for failure to effect such prompt
payment.
SECTION 9. CERTAIN COVENANTS OF THE COMPANY.
The Company covenants and agrees for the benefit of
each holder of Securities that so long as any of the
Securities shall remain outstanding:
9.1 Maintenance of Office. The Company shall
maintain at the office located at the address for
notices to the Company provided in 13.1 hereof an
office where notices, presentations and demands in
respect of this Securities Exchange Agreement and the
Securities may be given to and made upon the Company;
provided that the Company may, upon fifteen (15)
Business Days' prior written notice to the holders of
the Securities, move such office to any other
location within the continental boundaries of the
United States. The Company hereby agrees that it
shall pay, and shall save any holder of a Security
issued by it harmless against liability for, any
stamp or other tax or governmental charge imposed in
respect of any transfer of the Security resulting
from such change in office; and said obligation of
the Company shall survive the redemption of the
Series A Preferred Stock, the payment of the Notes
and the termination of this Securities Exchange
Agreement.
9.2 Corporate Existence. Each of the Company and the
Subsidiaries shall take and fulfill, or cause to be
taken and fulfilled, all actions and conditions
necessary to preserve and keep in full force and
effect its existence, rights and privileges as a
corporation, shall not liquidate or dissolve and
shall take and fulfill, or cause to be taken and
fulfilled, all actions and conditions necessary to
qualify, and to preserve and keep in full force and
effect its qualification to do business as a foreign
corporation in the jurisdictions in which the failure
to so qualify would have a Material Adverse Effect.
<PAGE> 30
9.3 General Maintenance of Properties and Business,
etc.
(a) Each of the Company and the Subsidiaries shall:
(i)maintain its property in good condition, subject
to wear and tear in the ordinary course of business,
and make all reasonable and necessary renewals,
replacements, additions, betterments and improvements
thereof and thereto, so that the business carried on
in connection therewith may be conducted properly at
all times;
(ii) keep proper books of record and accounts in
which entries shall be made of its business
transactions in accordance with and to the extent
required by generally accepted accounting principles;
and
(iii) set aside on its books from its earnings for
each Fiscal Year, in amounts deemed adequate in the
reasonable opinion of the Company, as the case may
be, all proper accruals and reserves that, in
accordance with generally accepted accounting
principles, should be set aside from such earnings in
connection with its business, including reserves for
depreciation, obsolescence and/or amortization, third
party insurance payment and claims and accruals for
taxes based on or measured by income or profits and
for all other taxes.
(b) Neither the Company nor any Subsidiary shall
engage in any material line of business other than
the lines of business in which the Company and its
Subsidiaries are engaged on the Closing Date as
generally described in 2.6 or in related extensions
of such lines of business.
9.4 Inspection. The Company shall permit, and shall
cause each of the Subsidiaries to permit, any holder
of at least 15% of the outstanding Series A Preferred
Stock or at least 15% of the outstanding Notes (any
such Person, a "Qualified Holder"), by its
representatives, agents or attorneys, (a) to examine
all of its books of account, records, reports and
other papers, (b) to make copies and take extracts
from any thereof, (c) to discuss its affairs,
finances and accounts with its officers and
independent certified public accountants (and by this
provision the Company hereby authorizes said
accountants to discuss with any such holder the
finances and accounts of the Company and the
Subsidiaries) and (d) to visit and inspect, at
reasonable times, upon reasonable prior notice, the
properties of each of the Company and the
Subsidiaries, in each case to the extent permitted by
applicable federal and state law. Each such
inspection shall be at the expense of the Person
making the inspection; provided that (i) each
Qualified Holder shall be entitled to have its
expenses of one such inspection during each Fiscal
Year paid or reimbursed by the Company and (ii) for
so long as the Company is not in compliance with any
of its covenants or agreements specified herein, in
the Notes or the Articles of Incorporation, each
Qualified Holder shall be entitled to have its
expenses of any additional inspections paid or
reimbursed by the Company. For purposes of the
foregoing proviso, no visit or inspection by any
representative, agent or designee of any Qualified
Holder attending any meeting of the Board as a member
of the Board at or around the time of such meeting of
the Board shall be deemed to constitute an inspection
for the purposes of this 9.4. Notwithstanding the
foregoing sentence, it is understood and agreed by
the Company that all expenses in connection with any
such inspection incurred by the Company or any
Subsidiary, any officers and employees thereof
<PAGE> 31
and the attorneys and independent certified public
accountants therefor shall be expenses payable by the
Company and shall not be expenses of the Person
making any inspection. Any information acquired in
the course of any such inspection shall not be used
in violation of any securities laws.
9.5 Compliance with Law, etc. Neither the Company
nor any Subsidiary shall (a) violate any laws,
ordinances or governmental rules or regulations to
which it is or may become subject, the violation of
which is reasonably likely, in the aggregate, to have
a Material Adverse Effect, or (b) fail to obtain or
maintain any patents, trademarks, service marks,
trade names, copyrights, design patents, licenses,
permits, franchises or other governmental
authorizations necessary to the ownership of its
property or to the conduct of its business, except
where the failure so to obtain or maintain the
foregoing, either individually or in the aggregate,
is not reasonably likely to have a Material Adverse
Effect. The Company shall use and operate its
properties for lawful purposes in full compliance in
all material respects with all laws and ordinances
and all governmental rules and regulations to which
it is subject.
9.6 Payment of Taxes and Claims TC . The Company
shall pay and discharge promptly when due prior to
delinquency, all taxes, assessments, levies and
charges imposed by any public or quasi-public
authority or utility company upon the Company, its
income or profits or any of its properties; provided
that none of the foregoing need be paid while the
same is being contested in good faith by appropriate
proceedings diligently conducted. The Company shall
not be a party to or bound by or obligated under any
tax sharing or similar agreement.
9.7 ERISA.
(a) The Company and the ERISA Affiliates each shall
take all actions and fulfill all conditions necessary
to maintain any and all Plans in substantial
compliance with applicable requirements of ERISA, the
Code and applicable foreign law until such Plans are
terminated, and the liabilities thereof discharged,
in accordance with applicable law.
(b) No Pension Plan shall have any "accumulated
funding deficiency" (within the meaning of
Section 412 of the Code), which deficiency could have
a Material Adverse Effect.
9.8 Transactions with Affiliates. Except as
specified in Item 9.8 of Schedule II, neither the
Company nor any of the Subsidiaries shall enter into
any transaction (including, without limitation, the
purchase, sale or exchange of property, the rendering
of any services or the payment of management fees)
with any Affiliate except in the ordinary course of,
and pursuant to the reasonable requirements of, its
business, and in good faith and upon terms that are
commercially reasonable to the Company, directly or
indirectly, and that are no less favorable to the
Company, directly or indirectly, than it would obtain
in a comparable arm's-length transaction with a
Person other than an Affiliate.
9.9 Merger or Consolidation. The Company shall, and
each shall not permit any of its Subsidiaries to,
merge into or consolidate with any other Person or
permit any other Person to merge into or consolidate
with it unless the Company is the surviving entity or
(b) the surviving
<PAGE> 32
entity assumes all obligations of the Company
hereunder, under the Notes and under the terms of the
Series A Preferred Stock.
9.10 Indemnification.
(a) Except as provided in subsection (c) below, the
Company shall defend, protect, indemnify and hold
harmless you, your directors, officers, employees,
attorneys and agents and each Person, if any, who
controls you within the meaning of the Securities Act
or the Exchange Act (any and all of whom are referred
to as the "Indemnified Party") against, and shall
protect, save and hold harmless each Indemnified
Party from and against, any and all claims, demands,
loss, damage, liability (joint or several), expense
or cost (including all legal fees or other expenses
incurred by any Indemnified Party in connection with
the preparation for or defense of any pending or
threatened claim, action or proceeding, whether or
not resulting in any liability) imposed on, incurred
by or asserted against such Indemnified Party
(whether or not such Indemnified Party is a party
thereto) under any applicable federal or state law or
otherwise caused by or arising out of, or allegedly
caused by or arising out of this Securities Exchange
Agreement and any amendments, modifications, consents
or supplements hereto or any transaction contemplated
hereby, other than losses, claims, damages or
liabilities resulting from any misrepresentation made
by you in Section 2 hereof, subject to subsection (c)
below.
(b) The matters covered by the indemnification
provided for in subsection (a) above shall include,
without limitation, any claim or penalty arising from
(i) violations of laws, or in tort (by application of
the doctrine of strict liability or otherwise),
(ii) the negligence of any Indemnified Party,
(iii) latent or other defects, whether or not
discoverable by such Indemnified Party, the Company
or any other Person, (iv) loss of or damage to any
property or the environment, (v) death of or injury
to any person and (vi) any claim for patent,
trademark or copyright infringement. In addition,
each Indemnified Party shall be entitled to indemnity
hereunder whether such indemnity arises because of an
act or omission by such Indemnified Party or
otherwise, whether or not the claims giving rise to
indemnity hereunder are also indemnified against by
any other Person under any other document, and
whether or not the transactions contemplated hereby
are consummated.
(c) Notwithstanding any of the indemnities set forth
above, the Company shall not indemnify any
Indemnified Party for any loss, damage, liability,
cost or expense (i) arising from the bad faith,
willful misconduct or gross negligence of such
Indemnified Party or (ii) resulting from any untrue
statement of a material fact contained in a
registration statement, prospectus, preliminary
prospectus or any amendment or supplement thereto or
any omission of a material fact required to be stated
therein or necessary to make the statements therein
not misleading, to the extent that such untrue
statement or omission is contained in any information
or affidavit furnished in writing by an Indemnified
Party.
(d) Promptly after receipt by an Indemnified Party of
notice of any claim, action or proceeding with
respect to which an Indemnified Party is entitled to
indemnity hereunder, such Indemnified Party shall
notify the Company of such claim or the commencement
of such action or proceeding; provided that the
failure of an Indemnified Party to give notice as
provided herein shall not relieve the Company of its
obligations under this 9.10 with respect to such
Indemnified Party, except to the extent that the
Company is actually prejudiced by such
<PAGE> 33
failure. The Company shall assume the defense of
such claim, action or proceeding and shall employ
counsel satisfactory to the Indemnified Party and
shall pay the fees and expenses of such counsel.
Notwithstanding the preceding sentence, the
Indemnified Party shall be entitled, at the expense
of the Company, to employ counsel separate from
counsel for the Company and for any other party in
such action if the Indemnified Party reasonably
determines that a conflict of interest or other
reasonable basis exists which makes representation by
counsel chosen by the Company not advisable. If an
Indemnified Party (or any of its officers, directors,
employees or attorneys) appears as a witness in any
action or proceeding brought against the Company in
which an Indemnified Party is not named as a
defendant, the Company agrees to reimburse such
Indemnified Party for all out-of-pocket expenses
incurred by it (including fees and expenses of
counsel) in connection with its appearing as a
witness. The obligations of the Company under this
9.10 shall survive the redemption of the Series A
Preferred Stock, the payment of the Notes and
termination of this Securities Exchange Agreement.
9.11 Subsidiary Dividends. The Company shall not and
shall not permit any Subsidiary to enter into any
agreement, instrument or other document that
prohibits or restricts in any way the payment of
dividends or other distributions on or with respect
to the capital stock of any Subsidiary if the effect
thereof is (or could reasonably be expected) to
reduce the amount of cash payments to be made (or
permitted to be made), directly or indirectly, to the
Company.
9.12 Tax Consolidation. The Company shall not and
shall not permit any of its Subsidiaries to file or
consent to the filing of any consolidated income tax
return with any Person other than a Subsidiary.
9.13 Environmental Law Compliance.
(a) Hazardous Substances. The Company shall at all
times comply and cause each Subsidiary to comply, in
all material respects, with all Environmental Laws
applicable to it, except to the extent that the
failure to comply therewith is not, individually or
in the aggregate, reasonably likely to have a
Material Adverse Effect and indemnify, pay and hold
each holder of Securities harmless from and against
any and all losses, costs (including attorneys'
fees), liabilities and damages whatsoever incurred by
such holder of Securities by reason of (i) any
liability of the Company or any of the Subsidiaries
under any applicable Environmental Laws, (ii) any
violation of any applicable Environmental Laws for
which the Company or any of the Subsidiaries is
liable or which is related to any real estate or
other facility owned, leased or operated by the
Company or any of the Subsidiaries or (iii) the
imposition of any governmental Lien for the recovery
of environmental cleanup or response costs expended
by reason of any such liability or violation.
(b) Cleanup Orders; Further Assurance. The Company
shall provide each holder of Securities promptly with
a copy of any notice received by the Company or any
Subsidiary from any governmental agency stating that
the Company or such Subsidiary has become liable for
the cost of investigating, removing or remediating
Hazardous Materials or subject to a cleanup order or
decree, or a fine or penalty issued or imposed, by an
agency having jurisdiction over the Company or any
such Subsidiary if the Company believes or reasonably
should believe that the matter that is the subject of
such notice is, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect.
<PAGE> 34
(c) The Company agrees that, with respect to all of
its properties, it will engage in such environmental
monitoring and, if necessary, remediation, as is
prudent under the circumstances.
9.14 Insurance. The Company shall maintain, or cause
to be maintained, in full force and effect, with such
insurers, amounts, coverages and forms reasonably
satisfactory to and approved by the Purchaser,
insurance as follows:
(a) Required Insurance Coverages and Limits. The
Company agrees that it shall at its own cost and
expense and at all times during the term carry and
maintain or cause to be carried and maintained:
(i) Casualty Insurance -- "all risk" property
insurance on its property in any amount equal to the
replacement cost of such properties, provided that
flood and earthquake insurance shall be subject to
availability on commercially practicable terms;
(ii) Liability Insurance -- comprehensive general
liability insurance (including, without limitation,
blanket contractual, personal injury, XCU hazards,
products/completed operations, independent
contractors, sudden and accidental pollution
liability, gradual pollution liability, "failure to
supply" and broad form property damage) applicable to
its properties in such amounts as from time to time
are usually carried by corporations similar to the
Company owning or leasing and operating similar
properties in similar locations, provided that
gradual pollution liability, sudden and accidental
pollution liability and "failure to supply" shall be
subject to availability on commercially practicable
terms; and provided further that the Company shall be
required to carry and maintain liability insurance in
a minimum amount equal to $9,000,000;
(iii) Worker's Compensation -- worker's compensation
insurance with respect to employees of the Company
sufficient to meet the statutory requirements of the
State of California; and
(iv) Other Insurance -- such other insurance with
respect to its property and business of such a
nature, with such terms and in such amounts, as a
reasonably prudent person would maintain with respect
to similar properties and a similar business, and, in
any event, shall maintain insurance on all its
property of a character usually insured by
corporations engaged in the same or a similar
business similarly situated against loss or damage of
the kinds and in the amounts customarily insured
against and for by such corporations.
All the foregoing insurance policies shall be subject
to such deductible amounts and retentions as are
usual and customary for corporations similar to the
Company owning or leasing and operating similar
properties, but in no event greater than reasonably
acceptable to the Purchaser. In addition, the
Company shall require worker's compensation and
liability coverage by contractors and major
subcontractors at all times that any of the foregoing
shall be performing services on all or any portion of
the property of the Company.
(b) Acceptable Insurers. The Company agrees to
effect all insurance provided for in this 9.14
(i) with the insurance companies presently providing
insurance to the Company
<PAGE> 35
specified in the certificate of insurance delivered
pursuant to 4.13, (ii) with insurance companies with
ratings from A.M. Best & Co. that are at least as
high as the higher of A+ or the ratings of the
insurance companies currently providing the same
insurance or (iii) with such other insurance
companies as are reasonably acceptable to the
Purchaser. No Purchaser shall, by reason of
accepting, rejecting, approving or obtaining
insurance incur any liability for the existence,
nonexistence, form or legal sufficiency thereof, the
solvency of any insurer, or the payment of any
losses.
(c) Certificate. On or prior to the Closing Date,
and thereafter not less than thirty (30) days prior
to the expiration dates of the expiring policies
required pursuant to this 9.14, the Company shall
deliver to you certificates of insurance issued by
the insurers thereunder or by an insurance broker
authorized to bind such insurers evidencing the
insurance maintained pursuant to this 9.14.
9.15 Additional Equity; Dilution. The Company shall
not sell or issue (a) any additional shares of
Series A Preferred Stock or (b) any other equity
securities or securities convertible into equity that
are senior to the Series A Preferred Stock with
respect to rights to dividends or upon liquidation or
redemption.
9.16 Transfer and Sale of Assets. Neither the
Company nor any Subsidiary shall, directly or
indirectly, in a single transaction or a series of
transactions, sell, lease, transfer, abandon or
otherwise dispose of or suffer to be sold, leased,
transferred, abandoned or otherwise disposed of, all
or any part of its assets other than in the ordinary
course of its business; provided that the Company or
any Subsidiary may sell, lease, transfer or otherwise
dispose of any of its assets if the proceeds thereof
are, within 180 days of receipt, (a) used to redeem
the Series A Preferred Stock and/or the Notes in
accordance with the terms thereof or (b) reinvested
in useful assets of the Company.
9.17 Acquisition, etc. of Preferred Stock. The
Company shall not, and shall not permit any
Subsidiary or Affiliate (other than a director) to,
purchase, redeem or otherwise acquire any shares of
Series A Preferred Stock except as expressly
permitted by the terms hereof and of the Articles of
Incorporation and unless not prohibited by applicable
law.
9.18 Reporting Company Status. The Company shall
file with the Securities and Exchange Commission all
reports required to be filed by issuers registered
under Section 13 or Section 15(d) of the Exchange
Act.
9.19 Nasdaq Listing. The Company shall at all times
cause its Common Stock to be listed for trading on
the Nasdaq National Market or a national securities
exchange.
9.20 Right of First Refusal. If at any time the
Company offers newly issued shares of Common Stock or
any securities convertible or exchangeable for shares
of Common Stock (the "New Securities"; it being
understood that shares issued as stock dividends or
capital stock issued upon exercise or conversion of
securities do not constitute New Securities), the
Company shall first offer for sale to the Purchaser
such New Securities upon the same terms and
conditions as the Company is proposing to issue such
New Securities to others; provided, however, that the
Purchaser shall have no right to purchase New
Securities pursuant to this 9.20 in the case of
<PAGE> 36
New Securities (a) issued for a consideration other
than money or cash equivalents; (b) issued to
employees, directors or consultants of the Company or
any of its Subsidiaries pursuant to a stock option
plan or other compensation plan; (c) issued pursuant
to a bona fide public offering of the Company's
securities that has been registered under the
Securities Act; or (d) issued pursuant to a plan of
reorganization approved by a court of competent
jurisdiction; and provided further, that the Company
shall provide notice of not less than thirty (30)
days to the Purchaser prior to issuance of any New
Securities, which notice shall state the terms on
which the New Securities will be offered. To the
extent that the Purchaser does not elect to purchase
all or some of such New Securities by giving written
notice of its election to purchase within twenty (20)
days of receipt of notice from the Company of the
proposed issuance of any New Securities, the Company
may, for a period of one hundred twenty (120) days
thereafter, offer the remaining New Securities to
third parties, provided that any such third party may
not purchase the New Securities on terms more
favorable than the terms to such third party set
forth in the notice to the Purchaser.
SECTION 10. EXPENSES.
10.1 General Expenses. Whether or not the Securities
shall be sold or this Securities Exchange Agreement
shall be terminated, the Company agrees to pay, and
to hold you harmless against liability for, all costs
and expenses relating to this Securities Exchange
Agreement, any other documents prepared in connection
herewith and the Securities and to any modification,
amendment, alteration or enforcement of this
Securities Exchange Agreement, any additional
documents prepared in connection herewith, the
Securities or any agreement or instrument
contemplated hereby (whether or not the same shall
have come into effect), including, without
limitation:
(a) the cost of preparing and reproducing this
Securities Exchange Agreement, any other documents
prepared in connection herewith, the Securities and
every instrument of modification, amendment or
alteration hereof or thereof;
(b) the fees and disbursements of your special
counsel, which fees and disbursements the Company
shall pay on the Closing Date to the extent reflected
on any invoices delivered on or prior to such date,
and of all counsel for the Company;
(c) the cost of delivering to your home office, to
your depository or as you may otherwise instruct in
writing, insured to your reasonable satisfaction, the
Securities purchased by you on the Closing Date;
(d) all costs and expenses (including, without
limitation, legal fees and any disbursements and
other out-of-pocket expenses) relating to any
modifications, amendments, waivers or consents
involving the provisions of this Securities Exchange
Agreement, any other documents prepared in connection
herewith, or the Securities or relating to the
enforcement of this Securities Exchange Agreement or
any other documents prepared in connection herewith
or the Securities;
<PAGE> 37
(e) the fees of Standard & Poor's CUSIP Service
Bureau required to be paid in connection with the
assignment of a private placement number by it with
respect to the Series A Preferred Stock and the
Notes; and
(f) any issuance or similar taxes payable by the
Company pursuant to 10.4 hereof.
10.2 Costs and Expenses, Attorneys Fees, etc. of
Holders of Securities. The Company shall pay all
costs, fees and expenses of the holders of
Securities, their agents and counsel in connection
with the enforcement of their rights hereunder and
under the Articles of Incorporation and the Notes,
including, without limitation, the costs attributable
to in-house counsel, and shall pay all taxes (except
federal and state income taxes) or other governmental
charges or impositions imposed on the holders of
Securities by reason of their interest in the
Securities or this Securities Exchange Agreement.
The Company shall pay to the holders of Securities on
demand any costs and expenses, including attorneys
fees and expenses, paid or incurred by the holders of
Securities in connection with the collection of any
amount payable by the Company to the holders of
Securities, whether or not any legal proceeding is
commenced hereunder, together with interest thereon
at the higher applicable rate on the Notes plus one
percent per annum from the date of payment or
incurring by the holders of Securities until paid by
the Company.
10.3 Delivery Expenses. If you shall surrender any
certificate representing any Series A Preferred Stock
or Note to the Company pursuant to this Securities
Exchange Agreement, or if the Company shall issue any
new Security pursuant to this Securities Exchange
Agreement, the Company shall pay all costs and
expenses of delivery of the surrendered Security and
any Security or Securities issued in exchange or
replacement for, or on registration of transfer of,
the surrendered Security or any such new Security, as
the case may be, in each case insured to your
satisfaction. The obligations of the Company under
this 10.3 shall survive the redemption of the
Series A Preferred Stock, the payment of the Notes
and the termination of this Securities Exchange
Agreement.
10.4 Issuance Taxes. The Company shall pay all
issuance and similar taxes, if any, in connection
with the execution and delivery of this Securities
Exchange Agreement, the issuance and sale of the
Securities by the Company and any modification of
this Securities Exchange Agreement or the Securities
issued by it, and shall save you and any subsequent
holder of the Securities harmless, without limitation
as to time, against any and all liabilities
(including, without limitation, any interest or
penalty for nonpayment or delay in payment, or any
income taxes paid by you in connection with any
reimbursement by the Company of any such taxes paid
by you) with respect to all such taxes. The
obligations of the Company under this 10.4 shall
survive the redemption of the Series A Preferred
Stock, the payment of the Notes and the termination
of this Securities Exchange Agreement.
10.5 Survival. The obligations of the Company under
this Section 10 shall survive the redemption of the
Series A Preferred Stock, the payment of the Notes
and the termination of this Securities Exchange
Agreement.
<PAGE> 38
SECTION 11. INFORMATION TO BE FURNISHED TO
HOLDERS OF SECURITIES.
11.1 Financial Statements of the Company. The
Company shall deliver to each holder of Securities
one (1) copy of the following:
(a) as soon as practicable and, in any case, within
ninety (90) days after the close of each Fiscal Year
of the Company, the Company's Report on Form 10-K (or
any successor form) filed with the Securities and
Exchange Commission, which shall include the audited
consolidated financial statements of the Company and
its Subsidiaries consisting of the audited
consolidated balance sheet of the Company and its
Subsidiaries as of the end of such Fiscal Year and
the audited consolidated statements of income,
changes in stockholders' equity and cash flows of the
Company and its Subsidiaries for such Fiscal Year,
setting forth in each case, in comparative form, the
figures for the preceding Fiscal Year, all in
reasonable detail, such consolidated financial
statements to be accompanied by an opinion thereon of
KPMG Peat Marwick LLP or another firm of independent
certified public accountants of recognized national
standing in the United States, which opinion
(i) shall be unqualified as to application of GAAP
and unqualified as to audit scope, and (ii) shall
state that (A) the examination of such accountants in
connection with such financial statements has been
made in accordance with generally accepted auditing
standards and, accordingly, included such tests of
the accounting records and such other auditing
procedures as were considered necessary in the
circumstances, and (B) such financial statements
present fairly the financial position of the Company
and its Subsidiaries at such date and the results of
operations and cash flows thereof for such period and
have been prepared in accordance with generally
accepted accounting principles consistently applied
(except as otherwise disclosed therein with respect
to changes in application in which such accountants
concur), and also accompanied by management's
discussion and analysis of variances;
(b) as soon as practicable and, in any case, within
forty-five (45) days after the end of each of the
first three (3) Fiscal Quarters in each Fiscal Year
of the Company, the Company's Report on Form 10-K (or
any successor form) filed with the Securities and
Exchange Commission, which shall include the
unaudited consolidated financial statements of the
Company and its Subsidiaries, consisting of the
unaudited consolidated balance sheet of the Company
and its Subsidiaries as of the end of such Fiscal
Quarter and the unaudited consolidated statements of
income, changes in stockholders' equity and cash
flows of the Company and its Subsidiaries for such
Fiscal Quarter and for the Fiscal Year to date,
setting forth in each case in comparative form, the
figures for the corresponding periods of the
preceding Fiscal Year, all in reasonable detail and
certified by the chief financial officer or the
treasurer of the Company as being a complete and
correct copy of the Company's financial statements
which have been prepared in accordance with generally
accepted accounting principles consistently applied
(except as otherwise disclosed therein) and which
present fairly the financial position of the Company
and its Subsidiaries and results of operations and
cash flows thereof subject, in each case, to changes
resulting from year-end audit adjustments, together
with management's discussion and analysis of
variances; and
<PAGE> 39
(c)contemporaneously with the filing thereof with the
Securities and Exchange Commission, all other reports
filed by the Company with the Securities and Exchange
Commission including, without limitation, Reports on
Form 8-K and proxy statements.
11.2 Notice of Certain Events and Conditions. The
Company shall give prompt written notice to each
holder of Securities of the following:
(a) upon the Company's knowledge, (i) any Default or
Event of Default or (ii) any default or event of
default (whether by the Company or any other party)
under any other agreement to which the Company is a
party, if such default or event of default would
cause, or in the future may cause, a Material Adverse
Effect;
(b) any (i) ERISA Termination Event; (ii) "prohibited
transaction" (within the meaning of Section 4975 of
the Code or Section 406 of ERISA) with respect to any
Plan maintained by the Company or any of its
Subsidiaries, other than one to which an exemption
applies; (iii) failure to make a timely contribution
to any Plan, if such failure has given rise to a Lien
imposed upon the Company or any of its Subsidiaries
under Section 412(n) of the Code; or (iv) actual,
asserted or alleged violation of ERISA or the Code
that, with respect to any of the events set forth in
the foregoing clauses (i) through (iv), is reasonably
likely to result in the imposition of a tax or other
penalty on the Company or any Subsidiary in
connection with any Plan that would result in a
Material Adverse Effect, including, when known, a
description of any action taken by the Internal
Revenue Service, the U.S. Department of Labor or the
PBGC with respect thereto;
(c) the institution of any suit, action or proceeding
(i) against the Company or any Subsidiary which is
reasonably likely to have a Material Adverse Effect,
(ii) in which the amount involved exceeds $250,000 or
in which injunctive or similar relief is sought or
(iii) between the Company and any governmental
authority (such notice shall in any event be given
within thirty (30) days after any officer of the
Company shall have knowledge of such event or
condition);
(d) any failure by the Company to comply with any of
its covenants or agreements specified herein, in the
Notes or in the Articles of Incorporation; and
(e) since the date hereof, to the knowledge of the
Company, any Material Adverse Effect.
Each notice pursuant to this 11.2 shall be in the
form of an Officer's Certificate of the Company
specifying (A) the nature and period of existence of
the particular event, (B) what action the Company has
taken or is taking or proposes to take with respect
thereto and (C) if appropriate, an estimate of the
time necessary to cure such condition or event.
11.3 Other Information. The Company shall deliver to
each holder of any Security the following:
(a) promptly after the submission thereof to the
Company, copies of any detailed reports (including
the auditors' comment letter to management, if any
such letter is
<PAGE>40
prepared) submitted to the Company by its independent
auditors in connection with each annual or interim
audit of the accounts of the Company made by such
accountants;
(b) promptly upon distribution thereof, copies of all
financial or other statements (including proxy
statements), reports and notices as the Company shall
send to any class of its shareholders, any of its
bank lenders or any holder of any of its Indebtedness
for Money Borrowed;
(c) promptly upon the formation or the acquisition
thereof, notice of the formation or acquisition, as
the case may be, of any new Subsidiary of the
Company;
(d) promptly, and in any event within ten (10) days
after transmission thereof, copies of all material
press releases and other statements made available
generally by the Company or any of its Subsidiaries
to the public concerning material developments in the
business, earnings, prospects, properties or
condition (financial or other) of the Company or any
of its Subsidiaries;
(e) prompt notice of any proposed amendment,
modification or supplement to the charter or bylaws
of the Company at least fifteen (15) days prior to
the proposed execution and delivery thereof by the
shareholders; and
(f) promptly upon request therefor, such other data,
filings and information concerning the Company or any
Subsidiary as any holder of a Security that is a
Purchaser or an Institutional Investor may from time
to time reasonably request.
Any information provided pursuant to this 11.3 shall
not be used in violation of any securities laws.
SECTION 12. INTERPRETATION OF AGREEMENT AND
SECURITIES.
12.1 Definitions. Except as the context shall
otherwise require, the following terms shall have the
following meanings for all purposes of this
Securities Exchange Agreement (the definitions to be
applicable to both the singular and the plural form
of the terms defined, where either such form is used
in this Securities Exchange Agreement):
"Affiliate", with respect to any Person, shall mean
(a) any director, officer or employee of such Person,
(b) any Person directly or indirectly controlling or
controlled by or under direct or indirect common
control with such Person, and (c) any Person
beneficially owning or holding 10% or more of the
Voting Stock of such Person or any corporation of
which such Person beneficially owns or holds, in the
aggregate, 10% or more of the Voting Stock; provided
that neither you nor any Person directly or
indirectly controlled by you nor any other Person
which is an institution shall be deemed to be an
Affiliate of the Company or any Subsidiary solely by
reason of ownership of the Series A Preferred Stock,
the Warrants, the Warrant Shares (as defined in the
Warrants) or other securities issued in exchange for
any of such Securities or by reason of having the
benefits of any agreements or covenants of the
Company contained in this Securities Exchange
Agreement. The term "control" means the possession,
directly or indirectly, of the power to direct or
cause the direction of the management and policies of
a Person, whether through the ownership of Voting
Stock, by contract or
<PAGE> 41
otherwise. The term "Affiliate", when used herein
without reference to any Person, shall mean an
Affiliate of the Company.
"Articles of Incorporation" shall mean the Articles
of Incorporation of the Company, as amended from time
to time.
"Beneficially Owned" shall mean beneficial ownership
of capital stock determined in the manner set forth
in Rule 13d-3 of the Securities Exchange Act of 1934,
as amended.
"Board" shall mean the Board of Directors of the
Company.
"Business Day" shall mean any day on which commercial
banks are not authorized or required to close in San
Francisco, California, or Boston, Massachusetts.
"Capital Lease" shall mean any lease which is
required to be capitalized on a balance sheet of the
lessee in accordance with generally accepted
accounting principles or for which the amount of the
asset and liability thereunder as if so capitalized
should be disclosed in a note to such balance sheet.
"Capitalized Lease Obligations" with respect to any
Person, shall mean the aggregate amount which, in
accordance with generally accepted accounting
principles, is required to be reported as a liability
on the balance sheet of such Person at such time in
respect of such Person's interest as lessee under a
Capital Lease.
"Certificate of Determination" shall have the meaning
set forth in 1.1(c) hereof.
"Closing Date" shall have the meaning set forth in
1.2(a) hereof.
"Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time. Reference to a
specific section of the Code shall include such
section, any regulations promulgated thereunder and
any comparable provision of any future legislation
amending, supplementing or superseding such section.
"Commission" shall mean the Securities and Exchange
Commission (or any successor thereto performing
similar functions).
"Common Stock" shall mean the Common Stock, no par
value, of the Company.
"Company" shall have the meaning set forth in the
preamble hereto.
"Default" shall mean an event or circumstance that,
with the passage of time or giving of notice, would
become an Event of Default.
"Dividend Payment Date" shall mean any date on which
dividends are payable on the Series A Preferred
Stock, which dates are March 15 and September 15 of
each year.
<PAGE> 42
"Environmental Laws" shall mean each applicable
statute referred to in the definition of "Hazardous
Material" below, and all applicable federal, state
and local environmental laws, rules, regulations and
ordinances, whether currently in existence or
hereinafter enacted, governing the Real Property and
its business, products, properties or assets with
respect to all Hazardous Materials, discharges into
the ground and surface water, emissions into the
ambient air and generation, control, accumulation,
storage, treatment, transportation, removal, labeling
or disposal of waste materials or process by-
products, the existence, cleanup and/or remedy of
contamination on property, the protection of the
environment from soil, air or water pollution, or
from spilled, deposited or otherwise emplaced
contamination.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time.
Reference to a specific section of ERISA shall
include such section, any regulations promulgated
thereunder and any comparable provision of any future
legislation amending, supplementing or superseding
such section.
"ERISA Affiliate" shall mean any Person (other than
the Company or any of its Subsidiaries) which is
under "common control" (within the meaning of
Section 414(b) or (c) of the Code or
Section 4001(a)(14) of ERISA) with the Company or any
Subsidiary thereof.
"ERISA Termination Event" shall mean (a) a
"reportable event" (within the meaning of
Section 4043 of ERISA) with respect to a Pension Plan
(other than a "reportable event" as to which the PBGC
has by regulation waived the 30-day notice
requirement under Section 4043(a) of ERISA); provided
that a failure to meet the minimum funding standards
of Section 412 of the Code shall be an ERISA
Termination Event regardless of the issuance of any
waiver under Section 412(d) of the Code; (b) the
withdrawal of the Company, any Subsidiary or any
ERISA Affiliate from a Pension Plan which is subject
to Section 4063 of ERISA during a plan year in which
it was a "substantial employer" (within the meaning
of Section 4001(a)(2) of ERISA); (c) the complete or
partial withdrawal of the Company, any Subsidiary or
any ERISA Affiliate from a Multiemployer Plan under
Section 4201 or 4204 or ERISA; (d) the receipt by the
Company, any Subsidiary or any ERISA Affiliate of
notice from a Multiemployer Plan that it is in
reorganization or insolvent under Section 4241 or
4245 of ERISA or that it intends to terminate or has
terminated under Section 4041A or ERISA; (e) the
providing of a notice of intent to terminate a
Pension Plan maintained by the Company or any of its
Subsidiaries pursuant to Section 4041(a)(2) of ERISA
or the treatment of a Pension Plan amendment as a
termination under Section 4041(e) of ERISA; (f) the
institution of proceedings by the PBGC to terminate a
Pension Plan or the appointment of a trustee to
administer any such Pension Plan under Section 4042
of ERISA; (g) the receipt by the Company or any
Subsidiary of a notice from any Multiemployer Plan
that any action described in clause (f) has been
taken with respect to that Multiemployer Plan; or
(h) any other event or condition which might
constitute grounds under Section 4042 of ERISA for
the termination of, or the appointment of a trustee
to administer, any Pension Plan.
"Event of Default" shall have the meaning specified
in 8.1 hereof.
"Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended from time to time.
<PAGE> 43
"Exchange Date" shall have the meaning set forth in
5.3(b) hereof.
"Exchange Notice" shall have the meaning set forth in
5.3(b) hereof.
"Financial Statements" shall have the meaning set
forth in 2.7 hereof.
"Fiscal Quarter" shall mean a fiscal quarter of the
Company, which shall be any quarterly period ending
on March 31, June 30, September 30 and December 31 of
any year.
"Fiscal Year" shall mean a fiscal year of the
Company, which as at the Closing Date is a fiscal
year ending December 31.
"generally accepted accounting principles" shall
mean, as of the date of any determination with
respect thereto, generally accepted accounting
principles as used by the Financial Accounting
Standards Board and/or the American Institute of
Certified Public Accountants, consistently applied
and maintained throughout the periods indicated.
"Guaranty", with respect to any Person, shall mean
all obligations of such Person guaranteeing or in
effect guaranteeing any Indebtedness, dividend or
other obligation or investment of any other Person
(the "primary obligor") in any manner, whether
directly or indirectly, including without limitation,
obligations for which such Person is liable by reason
of such Person being a partner in or of the primary
obligor or a member of a joint venture that is the
primary obligor, and obligations incurred through an
agreement, contingent or otherwise, (a) to purchase
such Indebtedness, obligation or investment or any
property or assets constituting security therefor;
(b) to advance or supply funds (i) for the purchase
or payment of such Indebtedness, obligation or
investment or (ii) to maintain working capital or
equity capital, or otherwise to advance or make
available funds for the purchase or payment of such
Indebtedness, obligation or investment; (c) to
purchase property, securities or services primarily
for the purpose of assuring the owner of such
Indebtedness, obligation or investment of the ability
of the primary obligor to make payment of such
Indebtedness, obligation or investment; or
(d) otherwise to assure the owner of such
Indebtedness, obligation or investment against loss
in respect thereof.
"Hazardous Materials" shall mean any hazardous or
toxic substance, material, pollutant, chemical, or
waste which is regulated by any applicable federal,
state or local governmental authority, including, but
not limited to, the following, in each case, as
applicable: (a) hazardous substances as defined
under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C.
9601 et seq.; (b) hazardous waste as defined under
the Solid Waste Disposal Act, as amended, 42 U.S.C.
6901 et seq.; (c) air pollutants regulated under
the Clean Air Act as amended, 42 U.S.C. 7401 et
seq.; (d) pollutants as defined under the Clean Water
Act, as amended, 33 U.S.C. 1251 et seq.; (e) any
pesticide as defined by the Federal Insecticide,
Fungicide, and Rodenticide Act, as amended, 7 U.S.C.
136 et seq.; (f) any hazardous chemical substance
or mixture or imminently hazardous substance or
mixture regulated by the Toxic Substances Control
Act, as amended, 15 U.S.C. 2601 et seq.; (g) any
hazardous material regulated by the Resource
Conservation and Recovery Act ("RCRA"), 42 USC 6901
et seq.; (h) any hazardous material regulated by the
Hazardous Materials Transportation Act, 49 USC 1801
et seq.; (i) any hazardous material regulated by the
Federal Water Pollution Control Act, 33 USC 1251 et
seq.; (j) any substance listed in the
<PAGE> 44
United States Department of Transportation Table at
49 CFR 172.101; (k) any substance regulated by the
California Hazardous Waste Control Law ("HWCL"), Cal.
Health & Safety 25100 et seq.; (l) any substance
regulated by the Hazardous Substance Account Act
("HSAA"), Cal. Health & Safety Code 25300 et seq.;
(m) any substance regulated by the Underground
Storage of Hazardous Substances Act, Cal. Health &
Safety 25280 et seq.; (n) any material regulated
by the Porter-Cologne Water Quality Control Act (the
"Porter-Cologne Act"), Cal. Water Code 13000 et
seq.; (o) any products regulated by the Safe Drinking
Water and Toxic Enforcement Act of 1986
(Proposition 65); (p) any materials regulated by
Title 22 of the California Code of Regulations,
Division 4, Chapter 30; (q) any hazardous or toxic
chemical or substance regulated by the Emergency
Planning and Community Right to Know Act, 42 U.S.C.
11001, et seq.; (r) any petroleum product, any
explosives, any radioactive material, any asbestos
containing material, any urea formaldehyde foam
insulation, any transformer or other equipment which
contain dielectric fluid containing levels of
polychlorinated biphenyls, or radon gas, any other
chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental
authority or agency or may or could pose a hazard to
the health and safety of the occupants of the Real
Property or the owners and/or occupants of property
adjacent to or surrounding the Real Property, or any
other person coming upon the Real Property or
adjacent property; and (s) any other chemical,
materials or substance regulated by any governmental
authority which may or could pose a hazard to the
environment.
"holder", with respect to any of the Securities,
shall mean the Person in whose name such Securities
shall be registered.
"Indebtedness," with respect to any Person, shall
mean all items (other than capital stock, capital
surplus, retained earnings and deferred credits),
which in accordance with generally accepted
accounting principles would be included in
determining total liabilities of such Person as shown
on the liability side of a balance sheet of such
Person as at the date on which Indebtedness is to be
determined. The term "Indebtedness" shall also
include, whether or not so reflected,
(a) indebtedness, obligations and liabilities secured
by any Lien on property of such Person whether or not
the indebtedness secured thereby shall have been
assumed by such Person, (b) all obligations in
respect of Capital Leases and (c) all Guaranties of
any of the above. Notwithstanding the foregoing, in
determining the indebtedness of the Company and its
Subsidiaries, there shall be included all
indebtedness of the Company or such Subsidiaries of
the character referred to in the foregoing
clauses (a), (b) and (c) deemed to be extinguished
under generally accepted accounting principles but
for which such Person remains legally liable.
"Indebtedness for Money Borrowed", with respect to
any Person, shall mean and include the aggregate
amount of, without duplication: (a) all obligations
of such Person for borrowed money; (b) all
obligations of such Person evidenced by bonds,
debentures, notes, or other similar instruments, and
all reimbursement or other obligations of such Person
in respect of letters of credit or banker's
acceptances; (c) all obligations of such Person to
pay the deferred purchase price of assets or
services; (d) all Capitalized Lease Obligations of
such Person; (e) all obligations or liabilities of
others secured by a Lien on any asset owned by such
Person, irrespective of whether such obligation or
liability is assumed, to the extent of the lesser of
such obligation or liability or the fair market value
of such asset; and (f) any Guaranties of such Person
of any Indebtedness for Money Borrowed of another
Person.
<PAGE> 45
"Indemnified Party" shall have the meaning set forth
in 9.10 hereof.
"Institutional Investor" shall mean any one or more
of the following Persons: (a) any bank, savings
institution, trust company or national banking
association, acting for its own account or in a
fiduciary capacity; (b) any charitable foundation;
(c) any insurance company or Affiliate thereof or
fraternal benefit association; (d) any pension,
retirement or profit-sharing trust or fund; (e) any
public employees' pension or retirement system or any
other governmental agency supervising the investment
of public funds; or (f) any investment fund owned or
managed by a Person described in clause (a), (b),
(c), (d) or (e) above, or by an Affiliate of such
Person.
"Investment" shall mean, with respect to any Person,
any investment made by such Person in any other
Person by stock purchase, capital contribution, loan,
advance, acquisition of Indebtedness (other than
acquisition of accounts receivable in the ordinary
course of business), Guaranty or otherwise.
"Junior Stock" shall mean common stock or any other
class or series of stock ranking junior to the
Series A Preferred Stock with regard to rights to
receive dividends and distributions upon dissolution,
liquidation or winding up of the Company.
"Lien" shall mean any interest in property securing
an obligation owed to, or a claim by, any Person
other than the owner of the property, whether such
interest shall be based on the common law, statute or
contract, whether or not such interest shall be
recorded or perfected and whether or not such
interest shall be contingent upon the occurrence of
some future event or events or the existence of some
future circumstance or circumstances, and including
the lien or security interest arising from a
mortgage, encumbrance, pledge, adverse claim or
charge, conditional sale or trust receipt, or from a
lease, consignment or bailment for security purposes.
The term "Lien" shall also include reservations,
exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other
title exceptions and encumbrances affecting property.
For the purposes of this Securities Exchange
Agreement, a Person shall be deemed to be the owner
of any property that such Person shall have acquired
or shall hold subject to a conditional sale agreement
or other arrangement (including a leasing
arrangement) pursuant to which title to the property
shall have been retained by or vested in some other
Person for security purposes.
"Liquidation Value" shall mean $10 per share of
Series A Preferred Stock.
"Material Adverse Effect" shall mean, with respect to
any event or occurrence, an effect that is materially
adverse to (a) the business, prospects, earnings,
properties or condition (financial or other) of the
Company or its Subsidiaries; (b) the ability of the
Company to perform its obligations hereunder, under
the Notes or under the Articles of Incorporation; or
(c) the enforceability of this Securities Exchange
Agreement, the Notes or the rights of the holders of
Series A Preferred Stock.
"Multiemployer Plan" shall mean any Pension Plan that
is a "multiemployer plan" (within the meaning of
Section 4001(a)(3) of ERISA).
"NAIC" shall mean the National Association of
Insurance Commissioners.
<PAGE> 46
"Note" shall have the meaning specified in 1.1(b)
hereof.
"Note Make-Whole Amount" shall have the meaning
specified in 6.2(b) hereof.
"Note Payment Date" shall have the meaning specified
in 6.1 hereof.
"Note Treasury Rate" shall have the meaning specified
in 6.2(b) hereof.
"Officer's Certificate" shall mean a certificate
executed on behalf of a corporation by any of its
chief executive officer, president or chief financial
officer.
"Optional Note Prepayment Date" shall have the
meaning specified in 6.2(c) hereof.
"Optional Note Prepayment Price" shall have the
meaning specified in 6.2(a) hereof.
"outstanding", with respect to any of the Securities
shall mean, as of the date of determination, all
Securities theretofore delivered pursuant to this
Securities Exchange Agreement, except (a) Securities
theretofore cancelled or delivered for cancellation
and (b) Securities in exchange or replacement for
which other Securities have been delivered pursuant
to this Securities Exchange Agreement; provided that
in determining whether the requisite holders of
Series A Preferred Stock outstanding have given any
notice or taken any action hereunder, Series A
Preferred Stock held or owned, directly or
indirectly, by the Company, or by any Subsidiary or
any Affiliate of the Company shall be disregarded and
deemed not to be outstanding.
"PBGC" shall mean the Pension Benefit Guaranty
Corporation or any successor thereto.
"Pension Plan" shall mean any Plan that is an
"employee pension benefit plan" (within the meaning
of Section 3(2) of ERISA) subject to Title IV of
ERISA.
"Permitted Liens" shall mean:
(a) Liens securing taxes, assessments, governmental
charges or levies, statutory Liens of landlords and
Liens of carriers, warehousemen, materialmen,
mechanics and other like Persons not yet due or the
payment of which is not then required; provided that
this clause (a) shall not be deemed to permit any
Liens which may be imposed pursuant to Section 4068
of ERISA or Section 412(n) of the Code;
(b) Liens of or resulting from any judgment or award,
the time for the appeal or petition for rehearing of
which shall not have expired, or in respect of which
the obligor shall at any time in good faith be
prosecuting an appeal or proceeding for a review and
in respect of which a stay of execution pending such
appeal or proceeding for review shall have been
secured;
(c) Liens incurred or deposits made in the ordinary
course of business (i) in connection with workers'
compensation, unemployment insurance and other types
of social
<PAGE> 47
security, or (ii) to secure (or to obtain letters of
credit that secure) the performance of tenders,
statutory obligations, surety and appeal bonds, bids,
leases, performance bonds, purchase, construction or
sales contracts and other similar obligations;
provided that (A) any such Lien shall not be created
in connection with and shall not secure Indebtedness
for Money Borrowed; (B) any obligation secured by any
such Lien shall not be overdue or, if overdue, is
being contested in good faith by appropriate actions
or proceedings during which there is no right to
exercise remedies and adequate book reserves have
been established in accordance with generally
accepted accounting principles; and (C) all such
Liens, pledges and deposits shall not in the
aggregate materially impair the use or value of the
properties of the Company or any Subsidiary in the
operation of its respective businesses; and, provided
further that this clause (c) shall not be deemed to
permit any Liens which may be imposed pursuant to
Section 4068 of ERISA or Section 412(n) of the Code;
(d) current real property taxes and assessments not
yet delinquent; and
(e) encumbrances, easements or reservations,
encroachments or rights of others for rights-of-way,
utilities and easements and other similar purposes,
or zoning or other covenants, conditions or
restrictions as to the use of real properties which
could not have a material adverse effect on the
current use and enjoyment of all or any portion of
the Real Property.
"Person" shall mean any individual, corporation,
partnership, joint venture, association, joint stock
company, trust, estate, unincorporated organization
or government (or any agency or political subdivision
thereof), or any other entity, whether acting in an
individual, fiduciary or other capacity.
"Plan" shall mean any "employee benefit plan" (within
the meaning of Section 3(3) of ERISA) that the
Company, any Subsidiary or any ERISA Affiliate
maintains, contributes to or is obligated to
contribute to for the benefit of employees or former
employees of the Company, any Subsidiary or any ERISA
Affiliate.
"Purchaser" shall mean the purchasers of Securities
named in Schedule I hereto.
"Purchase Price" shall have the meaning set forth in
1.2 hereof.
"Qualified Holder" shall have the meaning set forth
in 9.4 hereof.
"Real Property" shall mean the real property
described in Items 2.10(a) and 2.10(b) of
Schedule II.
"Rule 144A" shall mean Rule 144A under the Securities
Act, as presently in effect and as hereafter amended
from time to time, or any superseding or substituted
rule adopted by the Commission from time to time.
"Securities" shall have the meaning set forth in
1.1(c) hereof.
"Securities Act" shall mean the Securities Act of
1933, as amended from time to time.
<PAGE> 48
"Securities Exchange Agreement" shall mean this
Securities Exchange Agreement (including the annexed
Exhibits and Schedules), as it may from time to time
be amended, supplemented or modified in accordance
with its terms.
"Senior Debt" shall have the meaning specified in
8.2(d) hereof.
"Senior Preferred Stock" shall have the meaning set
forth in 1.2(a) hereof.
"Series A Preferred Stock" shall have the meaning set
forth in 1.1(c) hereof.
"Stock Exchange" shall have the meaning set forth in
5.3(a) hereof.
"Subsidiary", with respect to any corporation (the
"parent"), shall mean a corporation or partnership of
which the parent, at the time in respect of which
such term is used, owns directly, or controls with
power to vote, indirectly through one or more
Subsidiaries, shares comprising more than fifty
percent (50%) of its Voting Stock. The term
"Subsidiary", when used herein without reference to
any particular Person, shall mean a Subsidiary of the
Company. Notwithstanding the foregoing, for purposes
of 2.15, 9.17 and 11.2(b), and for the definitions of
ERISA Affiliate, ERISA Termination Event and Plan
hereunder, the term "Subsidiary" shall be defined by
substituting the words "at least eighty percent
(80%)" for "greater than fifty percent (50%)" in the
immediately preceding sentence.
"Voting Stock" shall mean the stock or other
securities of a corporation, partnership or other
entity the holders of which are ordinarily, in the
absence of contingencies, entitled to elect members
of the board of directors (or other governing body)
of such entity.
"Warrant" shall have the meaning set forth in 1.1(a)
hereof.
12.2 Directly or Indirectly. Any provision in this
Securities Exchange Agreement referring to action to
be taken by any Person, or that such Person if
prohibited from taking, shall be applicable whether
such action is taken directly or indirectly by such
Person.
12.3 Accounting Terms. All accounting terms used
herein that are not otherwise expressly defined shall
have the respective meanings given to them in
accordance with generally accepted accounting
principles at the particular time.
12.4 Governing Law. THIS AGREEMENT AND THE
SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF CALIFORNIA
WITHOUT REFERENCE TO CONFLICTS OF LAW RULES.
12.5 Independence of Covenants. Each covenant made
by the Company herein is independent of each other
covenant so made and independent of restrictions
placed on the Company by law. The fact that the
operation of any such covenant permits a particular
action to be taken or condition to exist does not
mean that such action or condition is not prohibited,
restricted or conditioned by the operation of the
provisions of any other covenant herein or by law.
<PAGE> 49
12.6 Saturdays, Sundays, Holidays, etc. If the last
or appointed day for the taking of any action
required or permitted hereby or by the Articles of
Incorporation (including, but not limited to, the
payment of dividends on the Series A Preferred Stock)
shall be a Saturday, Sunday or a day which is not a
Business Day, then such action may be taken on the
next succeeding day which is a Business Day in such
city.
SECTION 13. MISCELLANEOUS.
13.1 Notices.
(a) All communications under this Securities Exchange
Agreement or any of the Securities shall be in
writing and shall be delivered, mailed or sent by
overnight air courier (i) if to you, to you at your
address set forth in Schedule I hereto, marked for
attention as there indicated, or at such other
address as you may have furnished to the Company in
writing, (ii) if to any other holder of Series A
Preferred Stock or Notes, to it at its address listed
in the books for registration and registration of
transfer of the Series A Preferred Stock and Notes to
be maintained by the Company, or at such other
address as such holder shall have furnished to the
Company in writing, and (iii) if to the Company, to
it at the address shown at the head of this
Securities Exchange Agreement, or at such other
address as it shall have given notice of to you and
all other holders of Securities issued by it and at
the time outstanding in accordance with the terms of
this 13.1.
(b) Any written communication so addressed shall be
deemed to have been given upon receipt thereof, and
if delivery is refused, receipt shall be deemed to
have been given when such delivery is refused.
13.2 Survival. All representations, warranties and
covenants made by the Company herein or in any
certificate or other instrument delivered under or in
connection with this Securities Exchange Agreement
shall be considered to have been relied upon by you
and shall survive the delivery to you of the
Securities regardless of any investigation made by
you or on your behalf. All statements in any such
certificate or other instrument shall constitute
representations and warranties of the Company as
applicable hereunder.
13.3 Successors and Assigns; Transfer of Securities.
This Securities Exchange Agreement shall be binding
upon the parties hereto and their respective
successors and permitted assigns and shall inure to
the benefit of and be enforceable by the parties
hereto and their respective successors and permitted
assigns hereunder.
13.4 Amendment and Waiver.
(a) This Securities Exchange Agreement may be amended
or supplemented, and the observance of any term
hereof or thereof may be waived, with the written
consent of the Company and (A) on or prior to the
Closing Date, you, and (B) after the Closing Date,
the holders of 51% of the outstanding Series A
Preferred Stock and 51% of the outstanding Notes.
(b) The Company shall not solicit, request or
negotiate for or with respect to any proposed waiver
or amendment of any of the provisions of this
Securities Exchange Agreement or the Securities
unless each holder of the Securities (irrespective of
the amount of
<PAGE> 50
Securities then owned by it) shall be informed
thereof by the Company and shall be afforded the
opportunity, if eligible to participate, of
considering the same and shall be supplied by the
Company with sufficient information to enable it to
make an informed decision with respect thereto.
Executed or true and correct copies of any waiver
effected pursuant to the provisions of this 13.4
shall be delivered by the Company to each holder of
outstanding Securities forthwith following the date
on which the same shall have been executed and
delivered by the holder or holders of the requisite
percentage of outstanding Securities. The Company
shall not, directly or indirectly, pay or cause to be
paid any remuneration, whether by way of supplemental
or additional interest, fee or otherwise, to any
holder of the Securities as consideration for or as
an inducement to the entering into by any holder of
the Securities of any waiver or amendment of any of
the terms and provisions of this Securities Exchange
Agreement unless such enumeration is concurrently
paid, on the same terms, ratably to the holders of
all of the Securities then outstanding.
13.5 Confidentiality. The information contained in
the financial statements and any information
contained in any other document and delivered by the
Company to, and any other information received by,
any holder of Securities pursuant to this Securities
Exchange Agreement that shall have been designated in
writing as confidential shall be held in confidence
by such holder in accordance with such internal
procedures as such holder shall apply generally to
confidential information; provided that such holder
may disclose any such information (a) as has become
generally available to the public, (b) as may be
required in any report, statement or testimony
required to be submitted to any municipal, state or
federal regulatory body having or claiming to have
jurisdiction over such holder including, without
limitation, the NAIC or similar organizations or
their successors, (c) as may be required in response
to any summons or subpoena or in connection with any
litigation, (d) to the extent that such holder
believes it appropriate in order to comply with any
law, order, regulation or ruling applicable to such
holder, (e) to a prospective transferee in connection
with any contemplated transfer of a Security by such
holder (provided that such prospective transferee
agrees to be bound by the terms of this 13.5) and
(f) as such holder deems appropriate in connection
with the enforcement of any rights hereunder, under
the Notes or under the Articles of Incorporation.
13.6 Integration. This Securities Exchange Agreement
together with all exhibits and schedules hereto and
the Securities constitute the entire agreement among
the parties hereto pertaining to the subject matter
hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether
oral or written, of the parties.
13.7 Consent to Jurisdiction and Venue. The Company
hereby irrevocably (a) agrees that any suit, action
or other legal proceeding arising out of or relating
to this Securities Exchange Agreement or any Security
may be brought in a court of record in the State of
California or in the courts of the United States of
America located in such State, (b) consents to the
jurisdiction of each such court in any such suit,
action or proceeding, and (c) waives any objection
which it may have to the laying of venue of any such
claim that any such suit, action or proceeding has
been brought in an inconvenient forum and covenants
that it shall not seek to challenge the jurisdiction
of any such court or seek to oust the jurisdiction of
any such court, whether on the basis of inconvenient
forum or otherwise. The Company irrevocably consents
to the service of any and all process in any such
suit, action or proceeding by mail copies of such
process to the Company at its address for notices
provided in 13.1 hereof. The Company agrees
<PAGE> 51
that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any
other manner provided by law. All mailings under
this 13.7 shall be by registered or certified mail,
return receipt requested. Nothing in this 13.7
shall affect your right to serve legal process in any
other manner permitted by law or affect your right to
bring any suit, action or proceeding against the
Company or any of its properties in the courts of any
other jurisdiction.
13.8 Waiver of Jury Trial. ALL PARTIES HERETO
IRREVOCABLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION ARISING OUT OF OR IN CONNECTION WITH THIS
SECURITIES EXCHANGE AGREEMENT OR ANY DEALINGS BETWEEN
THEM RELATING TO THE SUBJECT MATTER OF THIS
SECURITIES EXCHANGE AGREEMENT. The scope of this
waiver is intended to be all-encompassing of any and
all disputes that may be filed in any court and that
relate to the subject matter of this Securities
Exchange Agreement, including, without limitation,
contract claims, tort claims, breach of duty claims,
and all other common law and statutory claims. The
parties each acknowledge that this waiver is a
material inducement to enter into a business
relationship, that each party will rely on this
waiver, and that each will continue to rely on this
waiver in their related future dealings. Each party
further warrants and represents that each has
reviewed this waiver with its legal counsel, and that
each knowingly and voluntarily waives its jury trial
rights following consultation with legal counsel.
THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT
BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS
WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
SECURITIES EXCHANGE AGREEMENT. In the event of
litigation, this Securities Exchange Agreement may be
filed as a written consent to a trial by the court.
13.9 Counterparts. This Securities Exchange
Agreement may be executed and delivered to you
simultaneously in one or more counterparts, each of
which shall be deemed an original, but all such
counterparts shall together constitute but one and
the same instrument.
13.10 Reproduction of Documents. This Securities
Exchange Agreement, and all documents relating hereto
(other than the Series A Preferred Stock and the
Notes), including, without limitation, (a) consents,
waivers and modifications that may hereafter be
executed, (b) documents received by you at the
closing of your purchase of Securities, and
(c) financial statements, certificates and other
information heretofore or hereafter furnished to you,
may be reproduced by you by any photographic or other
similar process and you may destroy any original
document so reproduced. The Company agrees and
stipulates that, to the extent permitted by
applicable law and court or agency rules, any such
reproduction shall be admissible in evidence as the
original itself in any judicial or administrative
proceeding (whether or not the original is in
existence and whether or not such reproduction was
made by you in the regular course of business) and
that any enlargement, facsimile or further
reproduction of such reproduction shall be admissible
in evidence to the same extent.
<PAGE> 52
If the foregoing is satisfactory to you, please sign
the form of acceptance on the enclosed counterparts
hereof and return the same to the Company, whereupon
this Securities Exchange Agreement, as so accepted,
shall become a binding contract between you and the
undersigned.
Very truly yours,
R.H. PHILLIPS, INC.
By://s//John Giguiere
--------------------
Name: John Giguiere
Title: Co-CEO
The foregoing Securities
Exchange Agreement is
hereby accepted.
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By://s//Dwayne Bertrand
--------------------------
Name: Dwayne Bertrand
Title: Investment Officer
<PAGE> 53
SCHEDULE I
To Securities Exchange
Agreement
PURCHASER OF THE SECURITIES
---------------------------
1. Name and Address Number of Shares Aggregate
of Purchaser of Series A Principal
Preferred Stock Amount of
to be Purchased Notes
----------------- --------------- ----------
JOHN HANCOCK MUTUAL 250,000 $2,500,000
LIFE INSURANCE COMPANY
John Hancock Place
200 Clarendon Street
Boston, Massachusetts
02117
a.
All payments on account of the Series A Preferred
Stock or other obligations in accordance with the
provisions thereof shall be made no later than 12:00
noon, Boston time, in immediately available funds at
the opening of business on the due date by electronic
funds transfer, properly identified, through the
Automated Clearing House system to the following
account:
The First National Bank of Boston
ABA No. 011000390
Boston, Massachusetts 02110
Account of John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number: 541-55417
On Order of: [Name of Issuer] [PPN No.]
b.
Contemporaneous with such wire transfer, a notice
setting forth (i) the full name, interest rate and
maturity date of the Series A Preferred Stock,
(ii) allocation of payment between redemption price
and dividends and interest and any other charges, and
(iii) the name and address of the bank from which the
wire transfer was sent, shall be mailed or delivered
as follows:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117
Attn: Securities Accounting Division T-10
<PAGE> 54
with a copy to:
John Hancock Mutual Life Insurance Company
2520 Venture Oaks Way
Suite 120
Sacramento, CA 95833
Attn: Office Manager
c.
All notices with respect to prepayments, both
scheduled and unscheduled, whether partial or in
full, and notice of maturity shall be delivered or
mailed to:
John Hancock Mutual Life Insurance Company John
Hancock Place 200 Clarendon Street Boston,
Massachusetts 02117 Attn: Securities Accounting
Division T-10
with a copy to:
John Hancock Mutual Life Insurance Company 2520
Venture Oaks Way Suite 120 Sacramento, CA 95833
Attn: Office Manager
d.
All other communications which shall include, but not
be limited to, financial statements and certificates
of compliance with financial covenants, shall be
delivered or mailed to:
John Hancock Mutual Life Insurance Company John
Hancock Place 200 Clarendon Street Boston,
Massachusetts 02117 Attn:
Bond & Corporate Finance Department T-57
with a copy to:
John Hancock Mutual Life Insurance Company 2520
Venture Oaks Way Suite 120 Sacramento, CA 95833
Attn: Office Manager
e.
All securities shall be registered in the name of
John Hancock Mutual Life Insurance Company, Tax I.D.
No. 04-1414660.
<PAGE> 55
SCHEDULE II
INFORMATION PROVIDED
BY THE COMPANY
<PAGE> 56
SCHEDULE III
FORM OF OPINION OF EVERS & HENDRICKSON, LLP
(i)
The Company:
(a) is a corporation duly organized, validly existing
and in good standing under the laws of the
jurisdiction of its incorporation;
(b) has all requisite power and authority (corporate
and other) (1) to own and operate its properties,
(2) to conduct its business as currently conducted
and as currently proposed to be conducted, (3) to
offer, issue, sell and deliver the Securities, (4) to
enter into the Agreement and (5) to perform its
respective obligations under the Agreement and the
Articles of Incorporation; and
(c) has made all filings and holds all franchises,
licenses, permits and registrations which are
required under the laws of each jurisdiction in which
the properties owned (or held under lease) by it or
the nature of its activities makes such filings,
franchises, licenses, permits or registrations
necessary, except for filings, franchises, licenses,
permits or registrations which individually or in the
aggregate are not material to the Company.
(ii)
All of the outstanding capital stock of the Company
has been duly authorized and validly issued and is
fully paid, nonassessable and free of preemptive
rights. All issued and outstanding securities (as
defined in the Securities Act) of the Company have
been offered, issued, sold and delivered in
compliance with, or pursuant to exemptions from, all
applicable federal and state laws, and the rules and
regulations of federal and state regulatory bodies
governing the offering, issuance, sale and delivery
of securities.
(iii) The Company has taken all corporate action
necessary to be taken by it to authorize the
execution and delivery of the Agreement, the offer,
issuance, sale and delivery of the Securities and the
performance of all obligations to be performed by it
under each of them.
(iv)
The Agreement has been duly executed and delivered by
the Company and constitutes the legal, valid and
binding obligation of the Company, enforceable
against the Company in accordance with its terms,
except as limited by applicable bankruptcy,
insolvency, fraudulent conveyance and similar laws
regarding debtor/creditor relationships and the
effect of general principles of equity. The Notes,
when executed and delivered by the Company, will
constitute the legal, valid and binding obligation of
the Company, enforceable against the Company in
accordance with their terms, except as limited by
applicable bankruptcy, insolvency, fraudulent
conveyance and similar laws regarding debtor/creditor
relationships and the effect of general principles of
equity. Upon receipt by the Company of payment for
the shares of Series A Preferred Stock (the "Shares")
and issuance of the Shares as herein provided, the
Shares will be duly issued, fully paid and
nonassessable and free from preemptive rights in
favor of the holders of other shares of capital stock
of the Company.
(v) No prior consent, approval or authorization of,
registration, qualification, designation, declaration
or filing with, or notice to any federal, state or
local governmental or public authority or agency
including, without limitation, any filing under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, is or was required for (a) the valid
execution, delivery or performance of the Agreement
by the Company or (b) the valid offer, execution,
<PAGE> 57
issuance, sale or delivery of the Securities or the
performance of the Securities by the Company. The
Company has obtained all consents, approvals or
authorizations of, made all declarations or filings
with, and given all notices to, all applicable
federal, state or local governmental or public
authorities or agencies which are necessary for the
continued conduct by the Company of its businesses as
now conducted or as proposed to be conducted and
which the failure to so obtain, make or give could
have a Material Adverse Effect.
(vi)
Neither the execution, delivery or performance of the
Agreement by the Company nor the offer, issuance,
sale or delivery of the Securities by the Company or
the performance of the Securities by the Company does
or will: (a) conflict with or violate the charter or
by-laws of the Company; (b) conflict with or result
in a breach of any of the terms, conditions or
provisions of, or constitute a default under, or
result in the creation of any Lien on any of the
properties or assets of the Company pursuant to the
terms of, any evidence of Indebtedness, or any
instrument or agreement under or pursuant to which
any evidence of Indebtedness has been issued, or any
other instrument or agreement to which the Company is
a party or by which it is bound in each case
resulting in a Material Adverse Effect; or
(c) require the consent of, or other action by, any
stockholder, trustee or any creditor of, any lessor
to or any investor in, the Company or any other non-
governmental Person.
(vii) Neither the execution, delivery or performance
of the Agreement by the Company, the offer, issuance,
sale or delivery of the Securities by the Company nor
the performance of the Securities, does or will cause
the Company to be in violation of any statute, law or
ordinance or any judgment, decree, writ, injunction,
order, award or other action of any court or
governmental authority or arbitrator or any order,
rule or regulation, of any federal, state, county,
municipal or other governmental or public authority
or agency.
(viii) Neither (a) the execution and delivery of the
Agreement by the Company, (b) the offer, issuance,
sale and delivery of the Securities by the Company,
(c) the acquisition of the Securities by you, (d) the
application by the Company of the proceeds of the
sale of the Securities nor (e) the consummation of
any of the other transactions contemplated by the
Agreement will result in either a "prohibited
transaction" as described in Section 406(a) of ERISA
or a tax under Section 4975 of the Code.
(ix)
There is no action at law, suit in equity or other
proceeding or investigation (whether or not
purportedly on behalf of the Company) in any court or
by or before any other governmental or public
authority or agency, or any arbitrator or arbitration
panel pending or, to the best knowledge of the
Company, threatened against or affecting the Company,
or any of their properties that, either individually
or in the aggregate, (a) could reasonably be expected
to have a Material Adverse Effect or (b) could
reasonably be expected to question the validity or
enforceability of the Agreement or the Securities.
The Company is not in default with respect to any
order, writ, injunction, judgment or decree of any
court or other governmental or public authority or
agency or arbitrator or arbitration panel.
(x)
The Company is not, and the ownership of its
properties by the Company does not cause it to be,
(a) a "public utility company" or a "holding
company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or
of a "subsidiary company" of a "holding company", as
such terms are defined in the Public Utility Holding
Company Act of
<PAGE> 58
1935, as amended or (b) a "public utility" within the
meaning of the Federal Power Act, as amended.
(xi)
The Company is not an "investment company" or an
"affiliated person" of an "investment company" or a
company "controlled" by an "investment company," as
such terms are defined in the Investment Company Act
of 1940, as amended, that is subject to registration
and regulation under such act. The Company is not an
"investment adviser" or an "affiliated person" of an
"investment adviser" as such terms are defined in the
Investment Advisers Act of 1940, as amended.
(xii) None of the transactions contemplated by the
Agreement (including, without limitation, the direct
or indirect use of the proceeds from the sale of the
Securities) will violate or result in a violation of
Section 7 of the Exchange Act or any regulations
issued pursuant thereto, including, without
limitation, Regulation T (12 C.F.R., Part 220), as
amended, Regulation U (12 C.F.R., Part 221), as
amended, and Regulation X (12 C.F.R., Part 224), as
amended, of the Board of Governors of the Federal
Reserve System, or will require you to obtain a
statement in conformity with the requirements of
Federal Reserve Form FR G-3 or to register on Federal
Reserve Form FR G-1 under such regulations.
(xiii) The offer and sale of the Securities pursuant
to the terms of the Agreement are exempt from the
registration requirements of Section 5 of the
Securities Act of 1933 and from the qualification
requirements of the California Corporate Securities
Law of 1968.
<PAGE> 59
EXHIBIT A
To Securities
Exchange Agreement
FORM OF SUBORDINATED NOTE
-------------------------
R.H. PHILLIPS, INC.
Subordinated Note
due March 15, 2006
$2,500,000.00
CUSIP PPN No:
San Francisco, California
R.H. Philips, Inc., a California corporation (the
"Company"), for value received, hereby promises to
pay to John Hancock Mutual Life Insurance Company or
registered assigns, the principal sum of TWO MILLION
FIVE HUNDRED THOUSAND DOLLARS ($2,500,000.00) as
specified herein; and to pay interest on the unpaid
principal balance hereof until this Note shall become
due and payable in accordance with the terms hereof
and of that certain Securities Exchange Agreement
dated as of March 15, 1999 (the "Securities Exchange
Agreement") between the Company and John Hancock
Mutual Life Insurance Company at the rate of 14% per
annum. If any installment of principal, premium or
interest is not paid as and within the date when such
payment is due or following acceleration or maturity,
the provisions of Section 8 of the Securities
Exchange Agreement shall apply.
1. Interest and Principal Payments. If the Company
shall have paid or agreed to pay any interest or
premium on this Note in excess of that permitted by
law, then it is the express intent of the Company and
the holder hereof that all excess amounts previously
paid or to be paid by the Company be applied to
reduce the principal balance of this Note, and the
provisions hereof immediately be deemed reformed and
the amounts thereafter collectable hereunder reduced,
without the necessity of the execution of any new
document, so as to comply with the then applicable
law, but also so as to permit the recovery of the
fullest amount otherwise called for hereunder.
Interest shall be due and payable on each March 15
and September 15 beginning March 15, 1999 and ending
when all outstanding amounts hereunder have been
paid. Principal in the amount of $833,333 shall be
due and payable on each of March 15, 2004 and March
15, 2005 and in the amount of $833,334 shall be due
and payable on March 15, 2006. Notwithstanding
anything to the contrary contained herein or in the
Securities Exchange Agreement, however, the final
payment due hereunder (whether at maturity, by
acceleration or otherwise) shall be in an amount
sufficient to pay in full all outstanding principal,
together with all accrued interest and premiums due
hereon.
The interest rate payable on this Note shall increase
by one percent upon any failure of the Company to
make payments when due hereunder.
Interest on this Note shall be computed on the basis
of a 360-day year of twelve 30-day months.
<PAGE> 60
2. Series. This Note is one of a series of
Unsecured Subordinated Notes issued pursuant to the
Securities Exchange Agreement and is entitled to the
benefits thereof. All capitalized terms not
otherwise defined herein shall have the meanings set
forth therein in the Securities Exchange Agreement.
The Company agrees to perform and observe duly and
punctually each of the covenants and agreements set
forth in the Securities Exchange Agreement. All such
covenants and agreements are incorporated by
reference in this Note, and this Note shall be
interpreted and construed as if all such covenants
and agreements were set forth in full in this Note at
this place.
3. Prepayment. As and to the extent provided in the
Securities Exchange Agreement, this Note is subject
to prepayment, in whole or in part, with premium.
The Company agrees to make required prepayments on
account of this Note in accordance with the
provisions of the Securities Exchange Agreement.
Under certain circumstances, as specified in the
Securities Exchange Agreement, the principal of and
accrued interest on this Note may be declared due and
payable in the manner and with the effect provided in
the Securities Exchange Agreement.
4. Restrictions on Transfer. This Note has not been
registered under the Securities Act of 1933, as
amended, or the laws of any state and may be
transferred in whole or in part only pursuant to an
effective registration statement under such Act and
applicable state laws or under an exemption from such
registration available under such Act and applicable
state law. Subject to the foregoing, transfers of
this Note shall be registered upon registration books
maintained for such purpose by or on behalf of the
Company as provided in the Securities Exchange
Agreement.
5. Method of Payment. Payment of principal,
premium, if any, and interest shall be made to the
registered holder hereof by direct wire transfer of
immediately available funds pursuant to the
instructions provided by the registered holder or
shall otherwise be made by such other method as
directed by the registered holder hereof in
accordance with the Securities Exchange Agreement.
Prior to presentation of this Note for registration
of transfer, the Company shall treat the registered
holder hereof as the owner and holder of this Note
for the purpose of receiving all payments of
principal and interest hereon and for all other
purposes whatsoever, whether or not this Note shall
be overdue, and the Company shall not be affected by
notice to the contrary.
6. Subordination. Anything in this instrument to
the contrary notwithstanding, the indebtedness
evidenced by this instrument shall be subordinated
and junior in right of payment, to the extent and in
the manner hereinafter set forth, to all Senior Debt
of the Company and its Subsidiaries. The term
"Senior Debt" shall mean the principal of, premium,
if any, and interest on any present or future
Indebtedness of the Company that is not, by the
express terms of the instrument that evidences the
Indebtedness or any related agreement, subordinated
in right of payment to any other Indebtedness of the
Company.
6.1. Payments on Subordinated Notes. The Company
will not, and will not permit any of its Subsidiaries
to, directly or indirectly, make or agree to make,
and neither the holder nor any assignee or successor
holder of any Notes will demand, accept or receive,
(a) any payment (by set-off or otherwise), direct or
indirect, of or on account of any principal, premium,
if any, or interest in respect of any Notes, or (b)
any payment for the purpose of any redemption,
purchase or other acquisition, direct or indirect, of
any Notes, and no such payment shall be due, if, at
the
<PAGE> 61
time of making any such payment a default (a "Payment
Default") in the payment when due (whether at the
stated maturity thereof, by acceleration or
otherwise) of all or any portion of any of the Senior
Debt shall have occurred and be continuing.
Following an acceleration of the maturity of any
Senior Debt, and as long as such acceleration shall
continue unrescinded and unannulled, such Senior Debt
shall first be paid in full in cash, securities or
other property before any payment is made on account
of or applied on the Notes.
6.2. Insolvency, etc. In the event of (a) any
insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other
similar proceeding relating to the Company, its
Subsidiaries or its property, (b) any proceeding for
the liquidation, dissolution or other winding-up of
the Company, voluntary or involuntary, and whether or
not involving insolvency or bankruptcy proceedings,
(c) any assignment for the benefit of creditors, or
(d) any distribution, division, marshalling or
application of any of the properties or assets of the
Company or the proceeds thereof to creditors,
voluntary or involuntary, and whether or not
involving legal proceedings, then and in any such
event:
(i) all Senior Debt shall first be paid in full
(including all principal, premium, if any, and
interest, including interest accruing after the
commencement of any such proceeding) before any
payment or distribution of any character, whether in
cash, securities or other property shall be made in
respect of any Notes;
(ii)
all principal or premium, if any, and interest on the
Notes shall forthwith become due and payable, and any
payment or distribution of any character, whether in
cash, securities or other property, which would
otherwise (but for the terms hereof) be payable or
deliverable in respect of any Notes, shall be paid or
delivered directly to the holders of the Senior Debt,
for application to the payment of the Senior Debt,
until all Senior Debt shall have been paid in full,
and the holders of the Notes at the time outstanding
irrevocably authorize, empower and direct all
receivers, trustees, liquidators, conservators,
fiscal agents and other having authority in the
premises to effect all such payments and deliveries;
(iii) each holder of the Notes at the time
outstanding irrevocably authorizes and empowers each
holder of the Senior Debt and such holder's
representatives (without imposing any obligation on
any holder of the Senior Debt or such holder's
representative) to demand, sue for, collect and
receive such holder's ratable share of all such
payments and distributions and to receipt therefor,
and to file and prove all claims therefor and take
all such other action (including the right to vote
the Notes) in the name of such holder or otherwise,
as such holder of the Senior Debt or such holder's
representative may determine to be necessary or
appropriate for the enforcement of this 6.2; and
(iv)
the holders of the Notes shall execute and deliver to
each holder of the Senior Debt or such holder's
representative all such further instruments
confirming the above authorization, and all such
powers of attorney, proofs of claim, assignments of
claim and other instruments, and shall take all such
other action as may be reasonably
<PAGE> 62
requested by such holder of the Senior Debt or such
holder's representative to enforce all claims upon or
in respect of the Notes.
For all purposes of this instrument, Senior Debt
shall not be deemed to have been paid in full unless
the holders thereof shall have received cash,
securities or other property equal to the amount of
principal, premium, if any, and interest in respect
of all Senior Debt at the time outstanding, and in
case there are two or more holders of the Senior Debt
any payment or distribution required to be paid or
delivered to the holders of the Senior Debt shall be
paid or delivered to such holders ratably according
to the respective aggregate amounts remaining unpaid
on the Senior Debt held by such holders.
6.3. Payments and Distributions Received. If any
payment or distribution of any character, whether in
cash, securities or other property, shall be received
by any holder of any of the Notes, or such holder's
representative, in contravention of any of the terms
of this instrument, such payment or distribution or
security shall be held in trust for the benefit of,
and shall be paid over or delivered and transferred
to, the holders of the Senior Debt or such holders'
representative or representatives for application to
the payment of all Senior Debt remaining unpaid, to
the extent necessary to pay all such Senior Debt in
full. In the event of the failure of any holder of
any of the Notes to endorse or assign any such
payment or distribution, any holder of the Senior
Debt or such holder's representative is hereby
irrevocably authorized to endorse or assign the same.
6.4. Subrogation. In case cash, securities or other
property otherwise payable or deliverable to the
holders of the Notes shall have been applied pursuant
to 6.2 or 6.3 hereof to the payment of Senior Debt
in full, then and in each such case, the holders of
the Notes shall be subrogated to any rights of any
holders of Senior Debt to receive any further
payments or distributions in respect of or applicable
to the Senior Debt.
6.5. Security. So long as any of the Senior Debt
shall not have been paid in full, the Company shall
not, and shall not permit any of its Subsidiaries to,
give, and the holders of the Notes shall not demand,
accept or receive, any security, direct or indirect,
for any Notes.
6.6. Limitation on Exercise of Remedies. Each holder
of all or any part of the Notes shall not exercise
any right or remedy available to it on account of any
Default or Event of Default unless (a) payment on any
Senior Debt shall have been accelerated or (b) at
least six months have elapsed from the date the
holder of such Notes otherwise would have had the
right to exercise any such right or remedy. If the
acceleration of any Senior Debt is subsequently
rescinded, then each holder of Notes shall also
rescind its exercise of any right or remedy available
to it only if the Default or Event of Default giving
rise to such right is cured within six months of the
occurrence of such Default or Event of Default.
6.7. Right to Current Payments on Notes. Nothing in
this Section 6 shall limit the right of any Note
holder to receive payments and prepayments on the
Notes when no payment default has occurred with
respect to the Senior Debt or when any acceleration
of the payment of any Senior Debt has been rescinded
as provided in 6.6.
<PAGE> 63
7. Governing Law. This Note shall be governed by and
construed in accordance with the law of the State of
California without reference to conflicts of law
rules.
IN WITNESS WHEREOF, the Company has caused this Note
to be duly executed.
R.H. PHILLIPS, INC.,
a California corporation
By://s//John Giguiere
-------------------------
Name: John Giguiere
Title: Co-CEO
<PAGE> 64
EXHIBIT B
To Securities
Exchange Agreement
FORM OF CERTIFICATE OF DETERMINATION
<PAGE> 65
CERTIFICATE OF DETERMINATION
OF
12% SERIES A SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK
OF
R.H. PHILLIPS, INC.
(Pursuant to Section 401 of the
Corporations Code of the State
of California)
John E. Giguiere and Lane C. Giguiere hereby certify
that:
I. They are the President and the Secretary,
respectively, of R.H. PHILLIPS, INC., a corporation
organized and existing under the laws of the State of
California (the "Corporation").
II. The Articles of Incorporation of the
Corporation authorize the Corporation to issue up to
5,000,000 shares of Preferred Stock, of which 500,000
shares of a single series of 12% Senior Redeemable
Preferred Stock (the "12% Senior Stock") are
presently outstanding.
III. The Articles of Incorporation of the
Corporation allow the Board of Directors to create
and determine the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and to fix the
authorized number of shares of such series of stock.
IV. The Board of Directors of the Corporation
has authorized the issuance of up to 250,000 shares
of a series of Preferred Stock designated the 12%
Series A Senior Redeemable Exchangeable Preferred
Stock of the Corporation (the "Series A Preferred
Stock").
V. The holders of all of the outstanding
shares of 12% Senior Stock have approved the issuance
of the Series A Preferred Stock upon the terms
specified herein.
VI. No shares of Series A Preferred Stock
have been issued prior to the date hereof.
VII. The following resolution was duly adopted
on March 2, 1999 by the Board of Directors of the
Corporation pursuant to the authority conferred upon
the Board of Directors of the Corporation by the
Articles of Incorporation of the Corporation and by
the Corporations
<PAGE> 66
Code of the State of California, which resolution
remains in full force and effect as of the date
hereof:
RESOLVED, that the Board of Directors of the
Corporation (the "Board of Directors"), pursuant to
authority conferred upon the Board of Directors by
the provisions of the Articles of Incorporation of
the Corporation, which authorize the issuance of up
to 5,000,000 shares of Preferred Stock, does hereby
create and provide for the issuance of up to 250,000
shares of a series of Preferred Stock designated the
12% Series A Senior Redeemable Exchangeable Preferred
Stock, no par value (the "Series A Preferred Stock"),
and does hereby fix and determine the voting powers,
designations, preferences and relative,
participating, optional and other special rights, and
the qualifications, limitations and restrictions of
such series of Series A Preferred Stock as follows:
1. Rank. All shares of Series A Preferred
Stock shall, with respect to payments of dividends
and distributions of assets upon liquidation,
dissolution or winding up of the Corporation, whether
voluntary or involuntary, rank prior to all of the
Corporation's other series of Preferred Stock and
Common Stock and any other class or series of stock
authorized and issued by the Corporation
(collectively, "Junior Stock"). The foregoing
notwithstanding, the Series A Preferred Stock will
rank subordinate to the 12% Senior Stock with respect
to payments of dividends and distributions.
2. Cumulative Annual Dividends.
(a) The holders of Series A Preferred Stock
shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds at
the time legally available therefor, annual dividends
at the rate (the "Dividend Rate") of $1.20 per annum
per share, which shall be fully cumulative, shall
accrue on a daily basis without interest with respect
to each share of Series A Preferred Stock from the
date of first issuance of such share and shall be
payable semi-annually in arrears on March 15 and
September 15 of each year (except that if any such
date is a Saturday, Sunday or legal holiday, then
such dividend shall be payable on the next day that
is not a Saturday, Sunday or legal holiday) (a
"Dividend Payment Date") to holders of record as they
appear on the stock transfer books of the Corporation
on such record date, not more than 60 days nor less
than 10 days preceding the relevant Dividend Payment
Date, as is fixed by the Board of Directors (or, to
the extent permitted by applicable law, a duly
authorized committee thereof) at the time such
dividend is declared. For purposes hereof, the term
"legal holiday" shall mean any day on which banking
institutions are authorized to close in San
Francisco, California, or Boston, Massachusetts.
(b) Unpaid dividends in arrears for any past
dividend period may be declared and paid at any time,
without reference to any regular Dividend Payment
Date.
(c) The semi-annual dividend amount shall be
computed by dividing the annual dividend amount by
two. The amount of dividends payable for the initial
dividend period and any period shorter than a full
semi-annual dividend period shall be computed on the
basis of
<PAGE> 67
a 360-day year of twelve 30-day months. The first
Dividend Payment Date shall be March 15, 1999.
(d) On each of the Dividend Payment Dates
specified below, the semi-annual dividend shall be
payable in shares of Common Stock of the Corporation
valued at the lesser of $4.00 per share or the Fair
Market Value thereof; provided, however, that the
Corporation shall not be required to issue any
fractional shares but shall pay to holders of the
Series A Preferred Stock in lieu thereof cash based
on the Fair Market Value of any resulting fractional
shares:
March 15, 1999
September 15, 1999
March 15, 2000
(e) As used herein, the "Fair Market Value"
of a share of Common Stock on any Dividend Payment
Date shall mean the following:
(i) If the Common Stock is regularly traded
in the organized securities markets, the price per
share of Common Stock equal to the average of the
daily market prices over a period of twenty (20)
consecutive business days before such date. The
market price for each such business day shall be the
last sale price on such day on the principal
securities exchange on which the Common Stock is then
listed or admitted to trading, or, if no sale takes
place on such day on any such exchange, the average
of the closing bid and asked prices on such day as
officially quoted on any such exchange, or if the
Common Stock is not then listed or admitted on any
stock exchange, the market price for each such
business day shall be the last sale price on such
day, or, if no sale takes place on such day, the
average of the closing bid and asked prices on such
day in the over-the-counter market, in either case as
reported through NASDAQ, or, if such prices are not
at the time so reported, as furnished by any member
of the National Association of Securities Dealers,
Inc. selected by the Corporation.
(ii) If the Common Stock is not regularly
traded in the organized securities markets, the fair
market value of the equity of the Corporation taken
as a whole after deducting the value of all preferred
stock outstanding, as determined in good faith by the
Board of Directors of the Corporation at the time it
authorizes each semi-annual dividend, divided by the
aggregate number of shares of Common Stock (A)
outstanding on such date, assuming the conversion on
the last day of the quarter next preceding the date
of determination of all securities convertible into
shares of Common Stock or (B) issuable upon exercise
of any warrants, options and other rights then
outstanding, assuming the exercise on such date of
all then outstanding warrants, options and similar
rights to acquire shares of Common Stock exercisable
on such date, and assuming the receipt by the
Corporation of any consideration required in
connection with any such conversion or exercise
without premium for control or discount for minority
interests or restrictions on transfer; provided,
however, that, at the election of holders of a
majority of the outstanding Series A Preferred Stock,
the Fair Market Value of a share of Common Stock
shall be determined as follows:
For a period of thirty (30) days after each
Dividend Payment Date (the "Negotiation Period"), the
Corporation and the holders of the Series A Preferred
Stock agree to
<PAGE> 68
negotiate in good faith to reach agreement upon the
Fair Market Value of a share of the Common Stock as
of the Dividend Payment Date. If the parties are
unable to agree upon the Fair Market Value of a share
of the Common Stock by the end of the Negotiation
Period, then the Corporation, on the one hand, and
such holders of Series A Preferred Stock, on the
other, shall each designate an independent investment
bank or accounting firm of recognized national
standing (any such Person, an "Appraiser"), which
shall attempt in good faith to agree on the Fair
Market Value of the Common Stock within forty-five
(45) days after the end of the Negotiation Period.
The Corporation and the holders of Series A Preferred
Stock agree to disclose to each other all material
business or personal relationships with such
investment banks or accounting firms. If the two
Appraisers fail to agree on the Fair Market Value of
such securities or other property before the end of
such 45-day period, they shall expeditiously agree
upon a third Appraiser which shall determine the Fair
Market Value of such securities within thirty (30)
days of the end of such 45-day period, taking into
account the work and opinions of the two original
Appraisers. The agreement of the investment banks
and accounting firms or, failing such agreement, the
determination of the third investment bank or
accounting firm, shall be conclusive and binding on
the Corporation and the holders of Series A Preferred
Stock. The fees and expenses of the Appraisers shall
be borne by the Corporation.
In no event shall the Fair Market Value of the Common
Stock be less than the per share consideration
received or receivable with respect to the Common
Stock in connection with a pending transaction
involving a sale, merger, or liquidation of the
Corporation, a sale of all or substantially all of
its assets, or similar transaction.
(f) On the Dividend Payment Date occurring on
September 15, 2000 and on each Dividend Payment Date
thereafter, all dividends on the Series A Preferred
Stock shall be payable entirely in cash.
(g) After payment of each dividend set forth
in this Section 2 (and, to the extent applicable, any
increased amount due to a Missed Payment as described
in Section 4) is made in full on or prior to the
applicable Dividend Payment Date, the Series A
Preferred Stock shall not participate with the Junior
Stock in any additional dividends which the Board of
Directors may from time to time declare and pay.
3. Effect of Payment Default. If (a) any
dividends accumulated on the Series A Preferred Stock
are in arrears (any semi-annual dividend or unpaid
portion thereof, a "Missed Dividend"), or (b) the
Corporation is in default with respect to any of the
redemption provisions of Section 6 of this
Certificate of Determination, then:
(i) The Corporation may not, and may not
permit any corporation or entity directly or
indirectly controlled by the Corporation to, declare
or pay any cash dividend or make any distributions in
cash on, or directly or indirectly redeem or satisfy
any sinking obligation in respect of, any Junior
Stock or any warrants, rights or options exercisable
for or convertible into any of the Junior Stock.
<PAGE> 69
(ii) The Corporation may not, and may not
permit any corporation or other entity directly or
indirectly controlled by the Corporation to, acquire,
redeem (pursuant to a sinking fund or otherwise),
purchase or otherwise acquire any Junior Stock.
(iii) The provisions of Section 4 and Section 8
hereof shall apply.
4. Increase in Dividend Rate Upon Default.
(a) If one Missed Dividend or any redemption
price payable under Section 6(a) hereof (either of
such amounts, a "Missed Payment") is outstanding, the
Dividend Rate payable on the Series A Preferred Stock
shall be increased to $1.25, effective on the date
when such Missed Payment was due, until the earlier
of such time as all Missed Payments, along with the
additional amount payable as a result of the
increased Dividend Rate, are paid in full or the time
when Section 4(b) applies. Unless Section 4(b)
applies, when all Missed Payments, along with the
additional amount payable as a result of the
increased Dividend Rate, have been paid in full, the
Dividend Rate shall be decreased to $1.20.
(b) If two or more consecutive Missed
Payments are outstanding, then the Dividend Rate
payable on the Series A Preferred Stock shall be
increased to $1.30, effective on the date when the
second Missed Payment was due, until such time as (i)
all Missed Payments, along with the additional amount
payable as a result of the increased Dividend Rate,
are paid in full or (ii) only one Missed Payment is
outstanding, in which case the Dividend Rate shall be
decreased to $1.25.
5. Liquidation Preference. In the event of
a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the
holders of Series A Preferred Stock shall be entitled
to receive out of the assets of the Corporation
available for distribution to stockholders, whether
such assets are stated capital or surplus of any
nature, an amount in cash equal to the sum of (a) the
amount of dividends accrued and unpaid thereon to the
date of final distribution to such holders, whether
or not declared to the date of such final
distribution, (b) Ten Dollars ($10) per share and (c)
the Optional Redemption Premium (as defined in
Section 7(b)), before any payment shall be made or
any assets distributed to the holders of Junior
Stock. After payment in full of the foregoing
amounts is made, the Series A Preferred Stock shall
not participate in any additional payments or
distributions of assets made to the Junior Stock upon
liquidation, dissolution or winding up of the
Corporation.
6. Mandatory Redemption.
(a) To the extent that funds are legally
available, the Corporation shall redeem on each date
set forth below (a "Mandatory Redemption Date"), the
applicable specified number of shares of Series A
Preferred Stock set forth opposite the respective
Mandatory Redemption Dates at the redemption price of
Ten Dollars ($10) per share, payable in cash, plus
all dividends accrued and unpaid on such Series A
Preferred Stock up to the Mandatory Redemption Date:
<PAGE> 70
Mandatory Redemption Date Number of Shares
to be Redeemed
March 15, 2004 83,333
March 15, 2005 83,333
March 15, 2006 83,334
(b) In determining the ability of the
Corporation to redeem the Series A Preferred Stock
under Section 500 of the General Corporation Law of
the State of California, the Corporation shall value
its assets at the highest amount permissible under
applicable law. If the Corporation has insufficient
funds to discharge its mandatory redemption
obligation pursuant to Section 6(a) above, the shares
to be redeemed shall be selected pro rata based on
the holdings as of such record date for the
redemption, not more than 60 days nor less than 10
days preceding the Mandatory Redemption Date, as the
Board of Directors shall determine. The Corporation
shall give at least 30 days' but not more than 60
days' prior written notice to each holder whose
shares are to be redeemed pursuant to this Section 6
of the record date of redemption and the shares to be
redeemed.
(c) If, for any reason, the Corporation fails
to discharge its mandatory redemption obligation
pursuant to Section 6(a) above, such mandatory
redemption obligation shall be discharged as soon as
the Corporation is able to discharge such obligation.
(d) On each Mandatory Redemption Date, the
shares to be redeemed shall be selected pro rata
based on the holdings as of the record date for the
redemption, which shall be not more than 60 days nor
less than 10 days preceding the Mandatory Redemption
Date, as the Board of Directors shall determine.
7. Optional Redemption.
(a) Upon the terms and subject to the
conditions hereinafter set forth, the Corporation, at
its option, upon notice as provided in Section 7(c)
hereof, may redeem the Series A Preferred Stock, at
any time after March 15, 2001, either in whole or
from time to time in any part (but, if in part, then
with respect to at least 10,000 shares at any one
time) at a redemption price equal to the sum of Ten
Dollars ($10) per share (the "Liquidation Value") and
the Optional Redemption Premium (as defined below)
for such Liquidation Value, together with accrued and
unpaid dividends with respect to the shares of
Series A Preferred Stock so to be redeemed to the
date fixed for redemption (collectively, the
"Optional Redemption Price").
(b) The "Optional Redemption Premium" for any
Liquidation Value shall equal the net present value
(if positive) of the payment stream equal to the
difference between (i) each payment of dividends and
mandatory redemption price the holders of Series A
Preferred Stock would have received through the date
of mandatory redemption on account of such
Liquidation Value at an annual 12% per annum dividend
rate and (ii) each corresponding
<PAGE> 71
payment of dividends and mandatory redemption price
the holders of Series A Preferred Stock would have
received through the date of mandatory redemption on
account of such Liquidation Value at an annual
dividend rate equal to the rate, on the date of the
redemption, being paid on United States Treasury
Notes with maturities equal to the Weighted Average
Life to Maturity (as defined below) of the remaining
aggregate Liquidation Value of Series A Preferred
Stock at the time of prepayment (the "Treasury
Rate"), discounted at the Treasury Rate.
For purposes hereof, the term "Weighted Average
Life to Maturity" means, with respect to the
remaining aggregate Liquidation Value of Series A
Preferred Stock, as of the date of the determination
thereof, the number of years obtained by dividing the
then Remaining Dollar-years of such amount by the
then outstanding principal amount thereof. The term
"Remaining Dollar-years" of such amount means the
amount obtained by (i) multiplying the amount of each
then remaining mandatory redemption price by the
number of years (calculated to the nearest one-
twelfth) which will elapse between the time in
question and the date of the redemption and (ii)
totaling all of the products obtained in clause (i).
(c) Written notice of any redemption of
Series A Preferred Stock pursuant to this Section 7
shall be given to each holder of the Series A
Preferred Stock by overnight delivery service not
less than 30 nor more than 60 days before the date
fixed for redemption (the "Optional Redemption Date")
and shall be accompanied by an officer's certificate
of the Corporation certifying as to: (i) the
Optional Redemption Date; (ii) the aggregate
Liquidation Value of all of the shares of Series A
Preferred Stock to be so redeemed on such Optional
Redemption Date; (iii) the number of shares of
Series A Preferred Stock held by such holder to be
redeemed on such Optional Redemption Date; (iv) the
Optional Redemption Price to be paid in respect of
each share of Series A Preferred Stock held by such
holder on such Optional Redemption Date and an
estimate of such Optional Redemption Premium; and (v)
the amount of accrued and unpaid dividends to be paid
to such holder on such Optional Redemption Date. Any
notice of redemption pursuant to this Section 7
having been so given, the aggregate Optional
Redemption Price payable in respect of the shares of
Series A Preferred Stock specified in such notice
shall become due and redeemable on such Optional
Redemption Date.
(d) If less than all of the outstanding
shares of Series A Preferred Stock are to be redeemed
pursuant to this Section 7, the shares to be redeemed
shall be selected pro rata based on the holdings as
of the record date for the redemption, which shall be
not more than 60 days nor less than 30 days preceding
the Optional Redemption Date, as the Board of
Directors shall determine.
(e) Notwithstanding the foregoing provisions
of this Section 7 an optional redemption of Series A
Preferred Stock pursuant to this Section 7 may only
be made if, on the Optional Redemption Date, such
optional redemption is permitted by applicable law.
(f) If any shares of Series A Preferred Stock
are redeemed other than on a Mandatory Redemption
Date (other than as a result of a failure to redeem
on a Mandatory Redemption Date), the number of such
shares so redeemed shall be applied first to reduce
the number of shares redeemable on March 15, 2006
until such number equals zero, then to the
<PAGE> 72
number of shares redeemable on March 15, 2005 until
such number equals zero, and then to the number of
shares redeemable on March 15, 2004.
8. Voting Rights.
(a) General. The holders of Series A
Preferred Stock shall not have any voting rights
except as set forth below or as otherwise from time
to time required by law. In connection with any
right to vote, each holder of Series A Preferred
Stock shall have one vote for each share of Series A
Preferred Stock held. Shares of Series A Preferred
Stock held by the Corporation or any entity
controlled by the Corporation shall not have voting
rights hereunder and shall not be counted in
determining the presence of a quorum.
(b) Default Voting Rights.
(i) If at any time two consecutive Missed
Payments are outstanding, then the holders of the
Series A Preferred Stock, voting as a class, shall
immediately thereafter have the exclusive right to
elect one member of the Board of Directors of the
Corporation. Such director or any successor elected
by holders of the Series A Preferred Stock shall have
the right to serve on the Board of Directors of the
Corporation until the latest of (A) one year from the
date of election of such director, (B) the date when
no Missed Payments are outstanding and (C) the date
when a successor director is elected pursuant to
Section 8(b)(v). The right of the holders of the
Series A Preferred Stock to elect such additional
director shall continue until the later of (x) one
year from the date of election of such director and
(y) the date when no Missed Payments are outstanding.
(ii) If at any time three consecutive Missed
Payments are outstanding, then the holders of the
Series A Preferred Stock, voting as a class, shall
immediately thereafter have the exclusive right to
elect an additional member of the Board of Directors
of the Corporation, in addition to the member elected
pursuant to Section 8(b)(i). Such director or any
successor elected by holders of the Series A
Preferred Stock shall have the right to serve on the
Board of Directors of the Corporation until the
latest of (A) one year from the date of election of
such director, (B) the date when no Missed Payments
are outstanding and (C) the date when a successor
director is elected pursuant to Section 8(b)(v). The
right of the holders of the Series A Preferred Stock
to elect such additional director shall continue
until the later of (x) one year from the date of
election of such director and (y) the date when no
Missed Payments are outstanding.
(iii) If at any time four consecutive Missed
Payments are outstanding, then the holders of the
Series A Preferred Stock, voting as a class, to have
the exclusive right to elect a majority of the
members of the Board of Directors of the Corporation.
Such directors or any successors elected by holders
of the Series A Preferred Stock shall have the right
to serve on the Board of Directors of the Corporation
until the latest of (A) one year from the date of
election of such director, (B) the date when no
Missed Payments are outstanding and (C) the date when
successor directors are elected pursuant to Section
8(b)(v). The right of the holders of the Series A
Preferred Stock to elect a majority of the directors
shall continue until the later of (x) one year from
the date of election of such directors and (y) the
date when no Missed Payments are outstanding.
<PAGE> 73
(iv) At any time after (A) the exclusive right
to elect a director or directors is vested in the
holders of the Series A Preferred Stock or (B) the
term of all directors elected by the Series A
Preferred Stock shall end and the exclusive right to
elect directors reverts to the holders of the Common
Stock, then the holders of 10% or more of the
Series A Preferred Stock or Common Stock, as the case
may be, shall have the right to call a special
meeting of shareholders for the purpose of electing
members of the Board of Directors by delivering a
request in writing for the calling of the special
meeting to the Secretary of the Corporation. The
Secretary shall forthwith cause a notice to be given
to the shareholders entitled to vote at that meeting,
which shall be held at a time requested by those
shareholders calling the meeting not less than 35 nor
more than 60 days after the receipt of the request.
Notwithstanding the foregoing, any action to be taken
by holders of Series A Preferred Stock with respect
to the election of such directors may be taken
without a meeting, without prior notice and without a
vote, if taken by the written consent of the holders
of a majority of the Series A Preferred Stock
pursuant to Section 603 of the General Corporation
Law of the State of California or any successor
statute.
(v) Upon the election of the directors by the
holders of the Series A Preferred Stock as provided
in Section 8(b)(iv), the terms of all persons who
were directors immediately prior thereto shall
terminate. If directors are elected by means of the
written consent of the Series A Preferred Stock
without a meeting, the remaining directors shall be
elected by the Common Stock at a special or annual
meeting of the holders of Common Stock or by the
written consent of the holders of a majority of the
Common Stock. Upon the election of directors by the
holders of Common Stock at a special meeting after
the exclusive right to elect directors shall have
reverted to the Common Stock, the terms of all
persons who were directors immediately prior thereto
shall terminate and the directors elected by the
Common Stock at the special meeting shall constitute
the directors of the Corporation until the next
annual meeting.
(vi) The holders of the Series A Preferred
Stock, voting as a class, shall have the sole right
to remove, with or without cause, at any time and
from time to time and to replace any director such
holders have elected pursuant to this Section 8 by
electing a new director pursuant to this Section 8.
(vii) Directors elected by the holders of the
Series A Preferred Stock shall be entitled to receive
the same compensation as other directors of the
Corporation. The Corporation shall pay the
reasonable expenses of all directors elected by
holders of the Series A Preferred Stock incurred in
connection with attending meetings or performing
other duties as directors of the Corporation.
(c) Class Voting Rights. So long as any of
the Series A Preferred Stock is outstanding, the
Corporation (and, where applicable, the Board of
Directors) shall not, without the affirmative vote or
consent of the holders of at least 51% of all then
outstanding Series A Preferred Stock voting
separately as a class, (i) amend, alter or repeal any
provision of the Articles of Incorporation,
Certificate of Determination or Bylaws of the
Corporation (A) increasing or decreasing the
authorized number of shares of the Series A Preferred
Stock, (B) granting voting rights to holders of any
bonds, debentures or other debt obligations of the
<PAGE> 74
Corporation or (C) otherwise adversely affecting the
relative rights, preferences, qualifications,
limitations, restrictions, powers or rights of the
Series A Preferred Stock; (ii) effect any
reclassification of the Series A Preferred Stock;
(iii) effect a voluntary liquidation, dissolution or
winding up of the Corporation; or (iv) merge or
consolidate into any corporation where the
Corporation is not the survivor of such merger or
consolidation.
9. Outstanding Shares. For purposes of the
Certificate of Determination, shares of Series A
Preferred Stock shall be deemed outstanding upon
issuance except (a) from the date fixed for
redemption pursuant to Section 6 or Section 7 hereof,
all shares of Series A Preferred Stock that have been
so called for redemption under any of such
provisions; (b) from the date of registration of
transfer, all shares of Series A Preferred Stock held
of record by the Corporation or any subsidiary of the
Corporation; and (c) from the effective date of an
exchange of Series A Preferred Stock for subordinated
notes of the Corporation, all shares of Series A
Preferred Stock.
10. Status of Acquired Shares. Shares of
Series A Preferred Stock redeemed by the Corporation
or otherwise acquired by the Corporation shall be
retired and cancelled and shall not be restored to
the status of authorized but unissued shares of
Series A Preferred Stock or reissued thereafter.
11. Severability of Provisions. Whenever
possible, each provision hereof shall be interpreted
in a manner as to be effective and valid under
applicable law, but if any provision of this
Certificate of Determination is held to be prohibited
by or invalid under applicable law, such provision
shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or
otherwise adversely affecting the remaining
provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof
would be valid or enforceable if a period of time
were extended or shortened or a particular percentage
were increased or decreased, then such court may make
such change as shall be necessary to render the
provision in question effective and valid under
applicable law.
<PAGE> 75
We further declare under penalty of perjury
under the laws of the State of California that the
matters set forth in this certificate are true and
correct of our own knowledge.
Date: March 3, 1999
----------------
//s//John E. Giguiere
-------------------------
Name: John E. Giguiere
Title: President
//s//Lane C. Giguiere
-------------------------
Name: Lane C. Giguiere
Title: Secretary
The Board of Directors
R.H. Phillips, Inc.:
We consent to incorporation by reference in the registration
statement (No. 33-93654) on Form S-8 of R.H. Phillips, Inc. of our report
dated March 13, 1998, relating to the statements of operations,
shareholders' equity, and cash flows of R.H. Phillips, Inc. for the year
ended December 31, 1997, which report appears in the December 31,
1998 annual report on Form 10-KSB of R.H. Phillips, Inc.
//s//KPMG LLP
March 26, 1999
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-93654) pertaining to the 1995 Stock
Option Plan of R.H. Phillips, Inc. of our report dated March 18,
1999, with respect to the financial statements of R.H. Phillips, Inc.
included in the Annual Report (Form 10-KSB) for the year ended
December 31, 1998.
//s//ERNST & YOUNG LLP
Sacramento, California
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1998 BALANCE SHEET, STATEMENTS OF
INCOME AND STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<S> <C>
<CASH> 151
<SECURITIES> 0
<RECEIVABLES> 3,066
<ALLOWANCES> 84
<INVENTORY> 12,674
<CURRENT-ASSETS> 16,924
<PP&E> 41,066
<DEPRECIATION> 7,853
<TOTAL-ASSETS> 50,848
<CURRENT-LIABILITIES> 4,139
<BONDS> 21,940
<COMMON> 14,341
4,554
0
<OTHER-SE> 3,792
<TOTAL-LIABILITY-AND-EQUITY> 50,848
<SALES> 21,720
<TOTAL-REVENUES> 21,720
<CGS> 11,278
<TOTAL-COSTS> 11,278
<OTHER-EXPENSES> 5,709
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 1,271
<INCOME-PRETAX> 3,479
<INCOME-TAX> 1,388
<INCOME-CONTINUING> 2,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,091
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
