<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File No.: 0-26276
R.H. PHILLIPS, INC.
-------------------
(Exact name of small business issuer in its charter)
California 68-0313739
- -------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26836 County Road 12A, Esparto, California 95627
- -------------------------------------------------------------------------
(Address of principal executive offices)
(530) 662-3215
- -------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of
common equity as of October 31, 1999: 6,633,137
Transitional Small Business Disclosure Format: Yes No X
--- ---
This document consists of 18 pages, excluding exhibits. The
Exhibit Index is on page 18.
<PAGE> 2
R.H. PHILLIPS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements ..............................3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............9
Part II. Other Information
Item 1. Litigation........................................15
Item 6. Exhibits and Reports on Form 8-K..................16
Signatures ..........................................................17
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE> 4
<TABLE>
R.H. Phillips, Inc.
Balance Sheet
(In thousands, except share information)
<CAPTION>
September
30, 1999
---------
(Unaudited)
<S> <C>
Assets
Current assets:
Cash $ 1,162
Accounts receivable 4,710
Inventories 17,234
Prepaid expenses and other current assets 1,120
-------
Total current assets 24,226
Property, plant and equipment, net 37,305
Other assets 708
-------
$62,239
=======
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 2,117
Accounts payable 4,042
Accrued payroll and related 533
Accrued selling expenses 804
Accrued income taxes 462
Other accrued liabilities 518
-------
Total current liabilities 8,476
Long-term debt 27,541
Subordinated debt 2,295
Deferred income taxes 2,082
Deferred gain and vineyard development costs 16
Commitments and contingencies
Redeemable preferred stock, redeemable at $2,500,000 2,295
Shareholders' equity:
Non-redeemable preferred stock, no par value,
4,750,000 shares authorized, none issued
and outstanding --
Common stock, no par value, 12,500,000 shares
authorized, 6,633,137 shares issued and outstanding 14,641
Additional paid-in capital 337
Retained earnings 4,556
-------
Total shareholders' equity 19,534
-------
$62,239
=======
</TABLE>
[FN]
See accompanying notes.
<PAGE> 5
<TABLE>
R.H. Phillips, Inc.
Statements of Income
(In thousands, except share information)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 17,498 $ 14,810 $ 6,594 $ 5,156
Cost of sales 8,117 7,373 3,148 2,432
-------- -------- -------- --------
Gross profit 9,381 7,437 3,446 2,724
Selling expenses 4,550 3,423 1,655 1,205
General and administrative expenses 809 735 243 250
-------- -------- -------- --------
4,022 3,279 1,548 1,269
Interest expense (1,442) (901) (583) (338)
Other expense, net (73) (29) (178) (111)
-------- -------- -------- --------
Income before provision for
income taxes 2,507 2,349 787 820
Provision for income taxes (1,009) (945) (317) (330)
-------- -------- -------- --------
Net income $ 1,498 $ 1,404 $ 470 $ 490
======== ======== ======== ========
Net income $ 1,498 $ 1,404 $ 470 $ 490
Dividends and accretion on
Redeemable Preferred Stock (97) (256) (6) (86)
-------- -------- -------- --------
Net income applicable to Common
Shareholders $ 1,401 $ 1,148 $ 464 $ 404
======== ======== ======== ========
Net income per share -
basic and diluted .21 .17 .07 .06
Shares used in per share calculations:
- - Basic 6,633,137 6,633,137 6,633,137 6,633,137
- - Diluted 6,633,325 6,633,714 6,633,244 6,634,341
</TABLE>
[FN]
See accompanying notes
<PAGE> 6
<TABLE>
R.H. Phillips, Inc.
Statements of Cash Flows
(In thousands)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,498 $ 1,404 $ 470 $ 490
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 2,064 1,570 742 577
Loss on disposal of property, plant
and equipment 179 136 181 147
Net changes in assets and liabilities:
Accounts receivable (1,727) (497) (1,393) (179)
Inventories (4,561) (3,018) (2,114) (1,866)
Prepaid expenses and other current assets (3) 195 (49) 35
Other assets (46) (42) (29) 7
Accounts payable 2,984 621 1,901 235
Accrued payroll and related 200 30 (1) (122)
Accrued selling expenses 322 397 32 193
Accrued income taxes 462 219 218 (82)
Other accrued liabilities (14) (160) (62) (149)
------- ------- ------- -------
Net cash provided by (used in) operating
activities 1,358 855 (104) (714)
Cash flows from investing activities:
Purchase of property, plant and equipment (6,055) (5,658) (1,939) (2,468)
Proceeds from sale of property,
plant and equipment 1,001 14 996 --
------- ------- ------- -------
Net cash used in investing activities (5,054) (5,644) (943) (2,468)
Cash flows from financing activities:
Cash dividends paid (150) (300) -- (150)
Proceeds from long-term debt and notes payable 12,816 13,868 5,124 6,580
Principal payments on long-term debt and
notes payable (7,398) (8,237) (2,854) (3,133)
Payment for development of leased vineyards
and related fees (561) (508) (365) (193)
Other financing activities, net -- (4) -- --
------- ------- ------- -------
Net cash provided by financing activities 4,707 4,819 1,905 3,104
------- ------- ------- -------
Increase (decrease) in cash 1,011 30 858 (78)
Cash at beginning of period 151 109 304 217
------- ------- ------- -------
Cash at end of period $ 1,162 $ 139 $ 1,162 $ 139
======= ======= ======= =======
Other cash flow information:
Interest paid (including capitalized
interest of $217 and $350 in 1999
and 1998, respectively) $ 1,548 $ 1,172 $ 689 $ 492
Income taxes paid $ 552 $ 726 $ 99 $ 413
Noncash transactions:
Issuance of notes payable to finance
property, plant and equipment purchased $ 719 $ 4 $ 719 $ --
Issuance of stock dividend $ 300 $ 300 $ 150 $ 150
Accretion of redeemable preferred stock $ 22 $ 31 $ 6 $ 11
Conversion of preferred stock to
subordinated debt $ 2,281 $ -- $ -- $ --
</TABLE>
[FN]
See accompanying notes
<PAGE> 7
R.H. Phillips, Inc.
Notes to Financial Statements
September 30, 1999
1. Summary of Significant Accounting Policies
The interim financial statements as of September 30, 1999 and for
each of the nine and three month periods ended September 30, 1999
and 1998 have been prepared by R.H. Phillips, Inc. ("R.H. Phillips"),
and are unaudited. In the opinion of management, the financial
statements include all adjustments (which include only normal
recurring entries) necessary for a fair presentation. The operating
results for the nine and three month periods ended September 30,
1999 and 1998 are not necessarily indicative of the results which
might be realized for the full year. Certain information and footnote
disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to generally accepted
accounting principles applicable for interim periods. These statements
should be read in conjunction with the financial statements and notes
included in R.H. Phillips' Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
2. Computation of Net Income per Share
Basic net income per share for the nine and three month periods
ended September 30, 1999 and 1998 was computed using the
weighted average number of common shares outstanding during each
period. Diluted net income per share was computed using the
weighted average number of common shares and dilutive potential
common shares outstanding during each period. There were 188 and
107 dilutive potential common shares outstanding for the nine and
three month periods ended September 30, 1999, respectively.
Potential common shares outstanding which could have a dilutive
effect in the future, but were anti-dilutive for the nine and three
month periods ended September 30, 1999, totaled 2,327,962 and
2,328,043, respectively. Basic and diluted net income per share and
the weighted average number of common shares outstanding for the
nine and three month periods ended September 30, 1998 have been
restated to reflect stock dividends of 50,728 shares issued in March
1999 and 50,578 shares issued in September 1999.
3. Long-term Debt
R.H. Phillips obtained three long-term loans totaling $876,000 from
General Electric Capital Corporation (General Electric) during the
nine month period ended September 30, 1999. The first loan bears
interest at annual rate of 7.41%, and principal and interest are due in
84 monthly installments. The second loan bears interest at annual
rate of 7.23%, and principal and interest are due in 60 monthly
installments. The third loan bears interest at annual rate of 8.06%,
and principal and interest are due in 84 monthly installments. The
loans are all collateralized by equipment.
R.H. Phillips also obtained five capital leases totaling $2,461,000
from General Electric during the nine month period ended September
30, 1999. The leased assets consist of recently purchased winery and
vineyard equipment. Two of the leases are due in 72 monthly
payments, and three of the leases require 96 monthly payments.
<PAGE> 8
4. Subordinated Debt and Preferred Stock
In March 1999, R.H. Phillips exchanged, at par, 500,000 shares of
Senior Redeemable Preferred Stock for unsecured subordinated debt
with a principal amount of $2,500,000 and 250,000 shares of
Redeemable Exchangeable Preferred Stock ("Exchangeable
Preferred"). The subordinated debt carries an annual interest rate of
14%, payable semiannually. The Exchangeable Preferred bears a
cumulative annual dividend of $1.20 per share payable semiannually
in shares of Common Stock at a price equal to the lower of the
average daily market price over a period of twenty consecutive
trading days before the dividend payment date or $4.00 per share.
After March 15, 2000, R.H. Phillips has the option to convert the
Exchangeable Preferred to unsecured subordinated debt at an interest
rate to be determined at the time of conversion. If the Exchangeable
Preferred is not converted at March 15, 2000, the $1.20 per share
dividend will become payable in cash. The subordinated debt,
including any amount converted from Exchangeable Preferred, can
be paid, at R.H. Phillips' option, after March 15, 2001. R.H. Phillips
is required to make principal payments (including redemption
payments if the Exchangeable Preferred is not converted to
subordinated debt) of $1,666,666 in 2004, $1,666,667 in 2005 and
$1,666,667 in 2006.
5. Litigation
Phillips Farms, a partnership operating a winery in Lodi, California,
filed a lawsuit against R.H. Phillips on August 5, 1999 in the
Superior Court of the State of California, County of San Joaquin.
Phillips Farms is suing R.H. Phillips for trademark infringement,
dilution and unfair competition arising out of R.H. Phillips' use of the
name "Phillips" in connection with the sale of wine. Phillips Farms
also alleges that R.H. Phillips has publicly disparaged the quality of
the wine Phillips Farms sells. Phillips Farms is seeking damages in an
amount to be determined by the court at trial, but in no event less
than $500,000, and a preliminary and permanent injunction
prohibiting R.H. Phillips' use of any infringing trademarks among
other relief.
R.H. Phillips believes that it has meritorious defenses to the claims of
Phillips Farms and also has legal claims against Phillips Farms. On
October 4, 1999, R.H. Phillips filed a cross complaint against Phillips
Farms for infringement of R.H. Phillips' trademarks and trade dress,
among other actions. If Phillips Farms is successful in its suit, R.H.
Phillips could be required to cease use of the "R.H. Phillips"
trademarks, which could have an adverse effect upon the business
and financial condition of R.H. Phillips.
6. Vineyard Development
On September 15, 1999, R.H. Phillips purchased 370 acres of land
for $490,000, and immediately began development of 115 acres of the
land into vineyard. On September 29, 1999, R.H. Phillips sold the
land and improvements to David L. Gemmer and Shirley A. Gemmer ("Gemmer")
for $989,000, and entered into a Vineyard Development and Lease Agreement
(the "Agreement") with Gemmer. Mr. Gemmer is a shareholder of R.H. Phillips,
attends meetings of the Board of Directors, and serves as an advisor.
Under the terms of the Agreement, R.H. Phillips is required to complete
the development of the 115 acre vineyard. The development period begins
September 29, 1999 and ends December 31, 2001 (the "Development
Period"). Subject to certain limitations, Gemmer shall reimburse all
costs incurred by R.H. Phillips during the Development Period. R.H.
Phillips is required to lease and operate the vineyards for the ten year
period ended December 31, 2011, and is entitled to all crop produced
during this period. Rent payments are due quarterly beginning
January 1, 2002, and are equal to 2.8% of (i) development costs and
(ii) finance costs equal to 11.2% per annum of vineyard development
and land costs.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
In reviewing the following management's discussion and
analysis, the reader should refer to the historical financial statements
of R.H. Phillips, Inc. The discussion of the results and trends does
not necessarily imply that these results and trends will continue. For
the following discussion, a "case" means a 9-liter case of wine. All
numbers are approximate.
Forward-Looking Statements
R.H. Phillips provides in this report and elsewhere from time
to time forward-looking statements regarding R.H. Phillips, its
products, the wine business, and general business and economic
conditions. Examples of forward-looking statements include
projections regarding future expansion, trends in the wine industry,
sources of supply, costs of production, profit margins, and
availability and sources of financing. The actual results of R.H.
Phillips may vary due to a variety of factors, including the following:
Availability of Future Financing. R.H. Phillips may continue
to heavily depend upon its ability to raise additional debt or equity
financing for its working capital and capital expansion needs. The
ability to raise financing is in turn dependent upon a variety of
factors, some of which are outside the control of R.H. Phillips.
These factors include, but are not limited to, interest rates, the
availability of financing sources, and general economic conditions.
If interest rates increase or other financing becomes unavailable or
more costly to obtain, R.H. Phillips may not be able to raise sufficient
capital to supply its needs.
Costs of Expansion. Management has based its assumptions
concerning the costs of expansion on assumptions which it believes
are reasonable. However, there can be no assurance that R.H.
Phillips' estimates will prove to be correct. If costs are higher than
anticipated, R.H. Phillips may be required to raise an even greater
amount of financing or reduce the rate of expansion.
Costs of Production. Statements with respect to 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. For example, if R.H. Phillips' sales increase
at a faster rate than anticipated or R.H. Phillips' grape production is
lower than projected, R.H. Phillips could be forced to make
additional purchases of grapes and wine on the spot market.
Management believes that such events could increase R.H. Phillips'
costs of production.
Market Conditions. Assumptions as to the desirability of
expansion are based to a great extent on management's beliefs
concerning the current status of and trends within the wine industry.
Market conditions in the wine industry have changed substantially
from time to time. To the extent market conditions change
substantially in the future, the rate at which R.H. Phillips deems it
advisable to expand its vineyard and winery facilities may be
adjusted.
Other Factors. A variety of other factors could affect the
actual results of R.H. Phillips. These include changes in economic
conditions, unexpected adverse weather or growing conditions,
reduction or increases in consumer demand, changes in governmental
regulation concerning the production and sale of wine, and increased
competition from foreign or domestic wine producers.
Seasonality
R.H. Phillips usually experiences substantial seasonal
fluctuations in revenue and expenditures. Sales volumes generally
increase during the holiday season, which causes a large percentage
of sales to occur during the last three months of each year. R.H.
Phillips' expenditures fluctuate throughout the year based on
vineyard and winery activities. Expenditures typically peak during
the summer and early autumn.
<PAGE> 10
Costs of Production
R.H. Phillips' vineyards produced 9,500 tons of grapes in
1999, compared to 7,700 tons in 1998. The increase was primarily
due to production from vineyards planted in recent years. R.H.
Phillips has expanded the size of its vineyards to lessen its
dependence on outside sources of bulk wines and grapes and reduce
its cost of goods. Management anticipates that the full benefit of the
vineyard expansion should continue to be realized over the next
several years as the vines mature.
The Dunnigan Hills region experienced an unusual period of
below freezing weather during early April 1999. The cold weather
damaged some of the fruit producing buds in R.H. Phillips'
Chardonnay vineyards. The 1999 Chardonnay crop was 19% less
than anticipated, which will negatively impact Chardonnay product
margins in 2000. Management believes that other varietals were not
significantly affected by the freeze.
Results of Operations
Net Sales
Net sales for the nine month period ended September 30,
1999 were $17,498,000, an 18% increase over net sales of
$14,810,000 for the corresponding period of the prior year. Net
sales included sales of bulk wines and other items totaling $1,404,000
for the nine month period ended September 30, 1999, compared to
$776,000 for the corresponding period in 1998. The increase in net
sales was primarily due to a greater proportion of higher priced,
super premium wines. Sales of super premium wines increased from
33,000 cases for the nine month period ended September 30, 1998
to 52,000 cases for the same period in 1999. This resulted in an
average price per case of $54.77 for the nine month period ended
September 30, 1999, compared to $51.12 for the same period in
1998. Higher sales volumes also contributed to the increase in net
sales. R.H. Phillips sold 294,000 cases during the nine month period
ended September 30, 1999, compared to 275,000 in the
corresponding period of the prior year.
Gross Profit
Gross profit was $9,381,000 for the nine month period ended
September 30, 1999, a 26% increase over $7,437,000 for the same
period in 1998. Excluding sales of bulk wines and other items, gross
profit was $9,024,000 in 1999, compared to $7,442,000 in 1998.
Gross margins were 54% for the nine month period ended September
30, 1999, compared to 50% for the same period in 1998. The
increase in gross margins is primarily attributable to the higher
average selling prices discussed above. The average cost per case
was substantially the same for both periods at $24.06 for the nine
month period ended September 30, 1999 and $24.01 for the same
period in 1998.
Selling Expenses
Selling expenses were $4,550,000, or 26% of net sales, for
the nine month period ended September 30, 1999, an increase from
$3,423,000, or 23% of net sales, for the same period in 1998. The
$1,127,000 increase is primarily due to increased sales promotion and
labor costs.
General and Administrative Expenses
General and administrative expenses were $809,000, or 5%
of net sales, for the nine month period ended September 30, 1999.
General and administrative expenses were $735,000, or 5% of sales,
for the nine month period ended September 30, 1998. The $74,000
increase is primarily due to higher maintenance expenses and legal
fees.
<PAGE> 11
Interest Expense
Interest expense for the nine month period ended September
30, 1999 was $1,442,000, compared to $901,000 for the same period
in 1998. R.H. Phillips capitalized $217,000 of additional interest
pertaining to vineyard and winery development during the nine month
period ended September 30, 1999, and $350,000 during the same
period in 1998. R.H. Phillips had fewer vineyards under development
during the first nine months of 1999 than during the same period in
1998, causing capitalized interest to decrease. The increase in total
interest cost is primarily due to borrowings to fund capital
improvements, and the conversion of $2,500,000 of preferred stock
to subordinated debt in March 1999. The interest is attributable to
R.H. Phillips' debt obligations and bank line of credit.
Provision for Income Taxes
Provision for income taxes for the nine month period ended
September 30, 1999 was $1,009,000, compared to $945,000 for the
same period in 1998. The $64,000 increase is due to higher income.
Net Income Applicable to Common Shareholders
R.H. Phillips generated net income of $1,498,000 for the nine
month period ended September 30, 1999, compared to $1,404,000
for the same period in 1998. The $94,000 increase was primarily due
to higher gross profit, which was partially offset by increased selling
expenses and interest expense.
Net income applicable to common shareholders was
$1,401,000 for the nine month period ended September 30, 1999,
compared to $1,148,000 for the same period in 1998. The $253,000
increase was primarily due to higher net income. The March 1999
exchange of 250,000 shares of Senior Redeemable Preferred Stock
for unsecured subordinated debt also contributed to the increase by
decreasing dividends payable to the holder of the Senior Redeemable
Preferred Stock.
Liquidity and Capital Resources
R.H. Phillips has financed its working capital and capital
expansion needs through internally generated funds, outside credit
facilities, equity financing, and the sale and leaseback of certain
assets. R.H. Phillips has made substantial capital expenditures to
expand its vineyards and winery facilities, obtain production
efficiencies, and improve wine quality. R.H. Phillips' cash flows from
operations have not been sufficient to satisfy all of the working
capital and capital expenditure requirements needed to keep pace
with its growth.
R.H. Phillips had cash totaling $1,162,000 on September 30,
1999, an increase from $151,000 on December 31, 1998. Sources
of cash during the nine month period ended September 30, 1999
included cash from operations of $1,358,000 and proceeds from
long-term debt of $12,816,000. Cash used during that period
included $6,055,000 invested in property, plant and equipment and
$7,398,000 to repay debt.
Current assets increased by $7,302,000 during the nine month
period ended September 30, 1999, primarily due to an increase in
inventories from $12,674,000 on December 31, 1998 to $17,234,000
on September 30, 1999. The increase is primarily due to the
seasonality of the grape harvest. Current liabilities increased by
$4,337,000 during the nine month period ended September 30, 1999,
primarily due to the timing
<PAGE> 12
of accounts payable. These factors
caused net working capital to increase $2,965,000, from $12,785,000
on December 31, 1998 to $15,750,000 on September 30, 1999.
R.H. Phillips has several long-term loans, the largest of which
was obtained from Metropolitan Life Insurance Company
("Metropolitan"). R.H. Phillips has borrowed $11,000,000 from
Metropolitan, of which $9,800,000 was outstanding at September 30,
1999. The unpaid principal under the loan accrues interest at an
annual rate of 8.04%. The interest rate is subject to adjustment by
Metropolitan every three years, beginning on January 1, 2001. R.H.
Phillips is required to make monthly principal payments of $60,000
plus accrued interest. The loan matures in January 2013, at which
time R.H. Phillips will be required to make a balloon payment of
$200,000.
R.H. Phillips has a line of credit of $15,000,000 with U.S.
Bank National Association ("U.S. Bank") to finance its working
capital requirements. The line of credit is secured by accounts
receivable, inventory, the grape crop, and unencumbered farm
equipment, and matures April 2001. The annual interest rate on the
line is either U.S. Bank's prime rate or IBOR plus 150 basis points,
at R.H. Phillips' option. The balance on the line at September 30,
1999 was $12,159,000.
In addition to loans with Metropolitan and U.S. Bank, R.H.
Phillips has several smaller loans, which are generally secured by
equipment, and capital leases. The maturity dates range from
December 1999 to August 2007 and, excluding capital leases, the
interest rates range from 7.0% to 10.9%. The balances due on these
items totaled $7,699,000 at September 30, 1999.
In May 1997, R.H. Phillips sold 371 acres of land partially
developed into vineyard to John Hancock Mutual Life Insurance
Company ("Hancock"). In connection with the transaction, R.H.
Phillips now manages, operates and leases the land and vineyards
from a subtenant of Hancock, Farmland Management Services, for
a term that expires on December 31, 2012. R.H. Phillips received
proceeds of $5,384,000 from the sale, and began paying rent of
$161,000 per calendar quarter in January 1999. The lease is
accounted for as an operating lease.
On September 15, 1999, R.H. Phillips purchased 370 acres of land
for $490,000, and immediately began development of 115 acres of the
land into vineyard. On September 29, 1999, R.H. Phillips sold the
land and improvements to David L. Gemmer and Shirley A. Gemmer ("Gemmer")
for $989,000, and entered into a Vineyard Development and Lease Agreement
(the "Agreement") with Gemmer. Mr. Gemmer is a shareholder of R.H. Phillips,
attends meetings of the Board of Directors, and serves as an advisor.
Under the terms of the Agreement, R.H. Phillips is required to complete
the development of the 115 acre vineyard. The development period begins
September 29, 1999 and ends December 31, 2001 (the "Development
Period"). Subject to certain limitations, Gemmer shall reimburse all
costs incurred by R.H. Phillips during the Development Period. R.H.
Phillips is required to lease and operate the vineyards for the ten year
period ended December 31, 2011, and is entitled to all crop produced
during this period. Rent payments are due quarterly beginning
January 1, 2002, and are equal to 2.8% of (i) development costs and
(ii) finance costs equal to 11.2% per annum of vineyard development
and land costs.
In March 1996, R.H. Phillips sold 500,000 shares of Senior
Redeemable Preferred Stock (the "Senior Preferred Stock") and
warrants to purchase up to 1,346,788 shares of Common Stock to
Hancock. The net proceeds R.H. Phillips derived from the sale of the
Senior Preferred Stock and the warrants, after payment of offering
expenses, were $4,785,000. The Senior Preferred Stock bore a
cumulative annual dividend of $1.20 per share, payable semiannually.
During the first four years after issuance, 50% of the dividend was
payable in cash and 50% of the dividend was payable in shares of
Common Stock at a price equal to the lower of the average daily
market price over a period of twenty consecutive trading days before
the dividend payment date or $4.00 per share.
In March 1999, R.H. Phillips exchanged, at par, all shares of
the Senior Preferred Stock for unsecured subordinated debt with a
principal amount of $2,500,000 and 250,000 shares of Redeemable
Exchangeable Preferred Stock ("Exchangeable Preferred"). The
subordinated debt carries an annual interest rate of 14%, payable
semiannually. The Exchangeable Preferred bears a cumulative annual
dividend of $1.20
<PAGE> 13
per share payable semiannually in shares of
Common Stock at a price equal to the lower of the average daily
market price over a period of twenty consecutive trading days before
the dividend payment date or $4.00 per share. After March 15,
2000, R.H. Phillips has the option to convert the Exchangeable
Preferred to unsecured subordinated debt at an interest rate to be
determined at the time of conversion. If the Exchangeable Preferred
is not converted at March 15, 2000, the $1.20 per share dividend will
become payable in cash. The subordinated debt, including any
amount converted from Exchangeable Preferred, can be paid, at R.H.
Phillips' option, after March 15, 2001. R.H. Phillips is required to
make principal payments (including redemption payments if the
Exchangeable Preferred is not converted to subordinated debt) of
$1,666,666 in 2004, $1,666,667 in 2005 and $1,666,667 in 2006.
R.H. Phillips has invested in substantial improvements to its
winery facility and vineyards over the past several years, and plans to
continue the expansion. R.H. Phillips invested $5,400,000 during the
first nine months of 1999 in tanks, barrels, other equipment and
buildings, and plans to invest approximately $200,000 more during
the balance of the year. Additional winery expansion projects are
planned for the future to handle the increased production from R.H.
Phillips' recently planted vineyards. R.H. Phillips has invested
$1,100,000 during the first nine months of 1999 in farm equipment
and the continued development of recently planted vineyards, and
plans to invest an additional $300,000 during the remainder of 1999.
R.H. Phillips is funding 1999 capital projects with internally
generated funds, proceeds from the U.S. Bank line of credit increase,
and long-term debt and lease financing.
Management believes that cash flows generated from
operations, together with borrowing availability, will be adequate to
fund R.H. Phillips' operations, capital expansion efforts and debt
service requirements over the next twelve months. However, a
significant decline in R.H. Phillips' expected operating performance
could have a material adverse effect on R.H. Phillips' liquidity. In
such case, R.H. Phillips would adjust its level of capital expenditures
as necessary, obtain additional debt financing or issue equity
securities. However, there can be no assurance that such financing
will be available and, if available, that it could be obtained in terms
favorable to R.H. Phillips.
Phylloxera infestation has had a negative impact on R.H.
Phillips' grape production. Phylloxera is a root louse which feeds on
grape roots, causing reduced production and eventual vine death.
Many of R.H. Phillips' first vineyards contained rootstock which was
susceptible to Phylloxera. As of October 1999, R.H. Phillips has
removed or replaced all Phylloxera infested or susceptible vines.
Management believes that the replacement rootstocks are resistant to
Phylloxera.
Year 2000
R.H. Phillips has reviewed its potential exposure to the "Year
2000 Problem", which results from computer programs being written
using two digits rather than four to define the applicable year. As a
result of this problem, computer programs that are not "Year 2000
compliant" may recognize a date using "00" as the year 1900 rather
than 2000. The impact of the Year 2000 Problem on R.H. Phillips is
difficult to assess at this time, but the Year 2000 Problem could
result in a system failure or miscalculation causing disruptions of
operations, including a temporary inability to process sales, send
invoices, retain accurate data or engage in normal business activities.
The Year 2000 Problem may also affect the operations of suppliers,
distributors, vendors and others with whom R.H. Phillips does
business, thereby adversely affecting R.H. Phillips as well.
R.H. Phillips has completed its internal assessment of its own
information technology systems and non-information technology
systems to ascertain whether they are Year 2000 compliant. R.H.
Phillips has also assessed 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 has
implemented 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.
<PAGE> 14
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 determined that its primary financial and operating software was
not Year 2000 compliant. The software supplier has advised
management that it has updated the software to Year 2000
compliance. R.H. Phillips was not charged for the reprogramming.
R.H. Phillips also tested the software for Year 2000 compliance. The
costs associated with the testing were less than $5,000, and were
expensed as incurred. Management believes that the software is now
materially Year 2000 compliant, and that any problems which may
occur in 2000 will be immaterial and easily correctable.
R.H. Phillips also reviewed its non-information technology
systems for potential exposure to the Year 2000 Problem, and
invested approximately $10,000 to upgrade certain non-information
technology systems to Year 2000 compliance. These replacement
costs were capitalized. Although management cannot be certain all
problems have been corrected, management believes that R.H.
Phillips' non-information technology systems are now Year 2000
compliant.
Outside parties whose exposure to Year 2000 Problems may
have a material impact on R.H. Phillips' operations include its bank,
major customers, and major suppliers. Management has reviewed the
issue with bank representatives, and believes that the Year 2000
Problem will not materially affect R.H. Phillips' banking operations.
Management believes that one or more of R.H. Phillips' customers
could have their operations interrupted or terminated by Year 2000
problems. Such an event could result in the delay of payments to
R.H. Phillips. Management believes that it would be impractical to
attempt to measure the potential risk of such an occurrence, and that
correction of Year 2000 Problems R.H. Phillips' customers
experience is outside of R.H. Phillips' control. Similarly, R.H.
Phillips' major suppliers may experience Year 2000 Problems,
potentially delaying the shipment of necessary materials.
Management believes that it would be able to find alternate suppliers
should this occur.
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Litigation
Phillips Farms, a partnership operating a winery in Lodi,
California, filed a lawsuit against R.H. Phillips on August 5, 1999 in
the Superior Court of the State of California, County of San Joaquin.
Phillips Farms is suing R.H. Phillips for trademark infringement,
dilution and unfair competition arising out of R.H. Phillips' use of the
name "Phillips" in connection with the sale of wine. Phillips Farms
also alleges that R.H. Phillips has publicly disparaged the quality of
the wine Phillips Farms sells. Phillips Farms is seeking damages in an
amount to be determined by the court at trial, but in no event less
than $500,000, and a preliminary and permanent injunction
prohibiting R.H. Phillips' use of any infringing trademarks among
other relief.
R.H. Phillips believes that it has meritorious defenses to the
claims of Phillips Farms and also has legal claims against Phillips
Farms. On October 4, 1999, R.H. Phillips filed a cross complaint
against Phillips Farms for infringement of R.H. Phillips' trademarks
and trade dress, among other actions. If Phillips Farms is successful
in its suit, R.H. Phillips could be required to cease use of the "R.H.
Phillips" trademarks, which could have an adverse effect upon the
business and financial condition of R.H. Phillips.
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Vineyard Development and Lease Agreement, dated
September 29, 1999, between R.H. Phillips and
David L. and Shirley A. Gemmer, and related agreements
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to the signed on its
behalf by the undersigned, thereunto duly authorized.
R.H. PHILLIPS, INC.
(Registrant)
Date: November 12, 1999
By//s//John E. Giguiere
-------------------------------
John E. Giguiere, Co-President
Co-Chief Executive Officer
By//s//Michael J. Motroni
-------------------------------
Michael J. Motroni, Chief Financial Officer
Principal Financial Officer
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
10.1 Vineyard Development and Lease Agreement, dated
September 29, 1999, between R.H. Phillips and
David L. and Shirley A. Gemmer, and related agreements
27.1 Financial Data Schedules
VINEYARD DEVELOPMENT AND LEASE AGREEMENT
THIS VINEYARD DEVELOPMENT AND LEASE
AGREEMENT, dated September 29, 1999, (the "Agreement") is
entered into between David L. Gemmer and Shirley A. Gemmer,
husband and wife, (hereafter referred to jointly and severally as the
"Lessor") and R.H. Phillips, Inc., a California corporation, (the
"Lessee"), with respect to the following facts:
The Lessor and the Lessee have entered into an
agreement (the "Purchase Agreement") whereby the
Lessor has agreed to purchase from the Lessee
certain real estate located in the County of Yolo,
California, and which is more particularly described
in Exhibit A of this Agreement (the "Mast Property").
In connection with the purchase and sale of that real
estate, the Lessee wishes to lease from the Lessor an
approximately 115 acre portion of the Mast Property
for the purpose of developing and managing
vineyards and to harvest and use the grapes
therefrom, and the Lessor wishes to lease that portion
of the Mast Property for that purpose.
IN VIEW OF THE FOREGOING FACTS, the parties hereby agree
as follows:
1. Lease of Property/Development. The Lessor agrees to lease to
the Lessee that portion of the Mast Property described as the
"Leased Property" in Exhibit A to this Agreement (the "Leased
Property"), and the Lessee agrees to lease the Leased Property from
the Lessor, for the purpose of developing and maintaining vineyards
and for harvesting the crop produced from those vineyards (the
"lease"). The Lessee further agrees to develop vineyards on the
Leased Property, subject to the terms and conditions set forth below.
2. Development of Vineyards.
a. Performance of Work. As a material part of the
consideration for the Lessor's agreement to enter into the lease, the
Lessee agrees that it will develop approximately 110 acres of
vineyards on the Leased Property. All work shall be performed in
accordance with good farming practices in accordance with the
standards the Lessee uses in developing vineyards on property which
it owns or manages. The work to be performed shall include, but not
be limited to, the preparation of land for vineyards, the installation of
trellises, the planting of grape vines, the drilling of wells and the
placement of necessary irrigation equipment and water delivery
systems on the Leased Property. For the purposes of this
Agreement, the development of vineyards and all capital
improvements placed on the Leased Property by the Lessee pursuant
to this Agreement shall be referred to as "Vineyard Developments
and Improvements."
b. Schedule. The parties acknowledge that the Lessee has
given the Lessor a proposed schedule and budget for development of
the vineyards. The Lessee agrees to use commercially reasonable
efforts to develop the vineyards in accordance with the time periods
specified in the schedule and budget. The foregoing notwithstanding,
the Lessee will not be responsible for any delays in initiating or
completing vineyard development due to adverse weather, labor
disturbances and shortages, acts of God or other circumstances
outside of the control of the Lessee which make it impossible or
inadvisable, in the reasonable judgment of the Lessee, to delay the
development of the vineyards beyond that time. For the purposes of
this Agreement, the period beginning as of the date of this Agreement
until December 31, 2001 is referred to as the "Development Period."
c. Costs. Subject to the provisions set forth below regarding
the costs incurred in excess of those in the schedule and budget, the
Lessor shall be responsible for paying all costs of the Vineyard
Development and Improvements on the Leased Property during the
term of the lease and shall pay the costs that the Lessee incurs
operating and maintaining the vineyards and any other improvements
on the Leased Property during the Development Period. For the
purposes of this Agreement, the costs described in this Section 2.c
are referred to as "Vineyard Development Costs."
d. Limitation on Payments.
i. General Limitation. If the Lessee believes that the
Vineyard Development Costs will exceed the budgeted amount by
more than 5%, the Lessee shall so inform the Lessor of this fact as
soon as reasonably possible prior to the date those costs are incurred.
The parties agree that the Lessor shall not be obligated to pay
Vineyard Development Costs which exceed the budgeted amount by
5% without the Lessor's consent.
ii. Overhead. In addition to the 5% limitation set
forth above, the Lessee agrees that the total Vineyard Development
Costs which constitute its overhead expenses shall not exceed: (i)
the Lessee's total overhead for the operation of its vineyards minus
the amount of overhead the Lessee attributed for its Rolling Hills and
Dunnigan Hills projects; multiplied by (ii) a fraction, the numerator
of which is the number of acres constituting the Leased Property and
the denominator of which is the total number of acres of vineyards
farmed by the Lessee excluding the Dunnigan Hills and Rolling Hills
projects.
e. Procedure for Payments -- Limitations. The Lessee shall
submit to the Lessor invoices on no more frequently than on a semi-
monthly basis, setting forth the Vineyard Development Costs
incurred during the period covered by the invoice. Each invoice shall
be accompanied by a statement of the costs so incurred and, in the
case of overhead, the statement of the amount constituting overhead.
Payment on the invoices shall be due 10 days following the delivery
of the invoice. All payments which are more than 10 days overdue
shall accrue interest at a rate of 1% per month until paid in full.
f. Inspection of Records. At the request of the Lessor, the
Lessee shall make available for inspection by the Lessor or the
Lessor's accountants or representatives, supporting documentation
evidencing the Vineyard Development Costs. Such inspection shall
occur at the principal offices of the Lessee during the Lessee's
normal business hours upon no less than 72 hours notice to the
Lessee. The Lessor shall pay all expenses the Lessor incurs
(including the fees of the Lessor's accountants or representatives) in
conducting such review unless the review accurately reveals that the
Lessee has overstated the amounts owing by in excess of 5%, in
which case the Lessee shall pay for the Lessor's costs of the review.
g. Improvements. Costs which the Lessee incurs in the
development of vineyards and other capital improvements to the
Leased Property after the Development Period shall be reimbursed
in the manner described in this Section 2 and shall be deemed
"Vineyard Development Costs", provided that the Lessor shall not be
required to reimburse the Lessee for any such charge without the
Lessor's written consent.
3. Term of Lease. The term of this lease shall begin upon the
effective date of the sale of the Mast Property by the Lessee to the
Lessor and shall expire on December 31, 2011, unless earlier
terminated pursuant to this Agreement. The term of the lease may be
extended only by means of a written agreement of the parties.
4. Rent.
a. Calculation -- Time of Payment. The Lessee shall pay the
Lessor rent for the use of the Leased Property, which amount will be
determined in accordance with the formula attached to this
Agreement as Exhibit B. Rental payments shall be paid quarterly in
advance on January 1, April 1, July 1 and October 1 of each year
during the term of the lease, beginning on January 1, 2002. Rent
shall be paid by check or wire transfer to the Lessor or by such other
means as the Lessor and Lessee mutually agree.
b. Reduction in Rental Payment for Water Usage. As
provided in Section 7.e below, the Lessor and the Lessee shall enter
into a water sharing agreement for water from wells located on the
Property or on adjacent properties. To the extent that the Lessor (or
any other tenant of the Lessor) receives water from wells or from
other water delivery equipment installed on the Leased Property by
the Lessee and as a part of the Vineyard Development Costs, the
total rental payments shall be reduced by the amount specified in
Exhibit B to this Agreement.
c. Interest on Late Payments. Rental payments which are
more than 10 days overdue shall accrue interest at a rate of 1% per
month until paid in full.
5. Use of the Property. The Lessee shall use the Leased Property for
the purposes of: (i) developing, maintaining and operating vineyards;
(ii) harvesting the grapes produced from the vineyards; and (iii)
removing the harvested grapes from the Leased Property. Subject to
the restrictions contained elsewhere in this Agreement, the Lessee
shall also have the right to conduct such activities on the Leased
Property as are reasonably necessary to conduct the operations
described herein.
6. Ownership of Harvested Crops.
a. General. Except as provided in Section 6.b below, all
grapes harvested from the vineyards on the Leased Property during
the term of this lease shall be the property of the Lessee and the
Lessee shall not be required to pay the Lessor any amount for the
grapes. All growing crops present upon the expiration of the lease
or the earlier termination of the lease (unless such termination was
due to the material breach of this lease by the Lessor) shall be the
property of the Lessor. If the Lessor sells any grapes grown on the
Leased Property after the expiration or termination of the lease, the
Lessor shall reimburse the Lessee an amount equal to the actual costs
the Lessee incurred in growing that crop. The Lessor shall make the
reimbursement payment described above to the Lessee no later than
30 days after the Lessee presents the Lessor with an invoice for the
costs to be reimbursed.
b. Grapes Harvested During Development Period. The
Lessee shall purchase from the Lessor all grapes harvested from the
vineyards on the Leased Property during the Development Period.
The purchase price for the grapes shall be determined as a result of
good faith negotiations between the parties. No later than 30 days
after the purchase price for the grapes is determined, the Lessee shall
make payment to the Lessor for the grapes at the agreed upon price.
The rental "Base Amount" described in Exhibit B to this Agreement
shall be reduced by the purchase price the Lessee pays for the grapes.
If the parties do not agree on the purchase price of the grapes within
30 days after the grapes have been harvested, either party may refer
the issue of determining the price of the grapes to binding arbitration.
Unless the parties otherwise agree, the arbitration shall be conducted
pursuant to the rules of the American Arbitration Association in
Woodland, California. The decision of the arbitrator will be binding
on all parties and enforceable in any court of competent jurisdiction.
Each party will bear its own costs in connection with the arbitration.
7. Water.
a. Irrigation. The Lessee shall install, maintain, service and
repair such irrigation, drainage, or pumping items and equipment and
any and all appurtenances thereto situated on the Leased Property
(the "Water Delivery Items") as the Lessee deems necessary for the
proper irrigation, drainage and operation of the vineyards to be
placed on the Leased Property. Except as provided in Section 7.c,
Water Delivery Items shall be Vineyard Developments and
Improvements, shall be paid for by the Lessor and the cost thereof
shall be considered Vineyard Development Costs. With the exception
of those items brought onto the Leased Property to temporarily
replace a piece of equipment which has been removed for repair and
those items specifically stated in Section 7.c below as belonging to
the Lessee, all Water Delivery Items shall become a part of the
Leased Property. The Lessee shall not remove any Water Delivery
Items described in the previous sentence from the Leased Property
and shall return same to the Lessor in good working condition upon
the expiration or earlier termination of this Lease, normal wear and
tear excepted.
b. Wells. The Lessee may at its option drill one or more
wells on the Leased Property for the purpose of irrigation of the
vineyards located on the Leased Property. All pumps and water
delivery equipment for the well or installed for the purpose of
delivering water from the well shall be subject to the same limitations
on use and removal as described in Section 7.a above.
c. Ownership of Water Delivery Equipment -- Payment. The
Lessor shall not be obligated to pay for any Water Delivery Systems
if the cost thereof would be 5% more than provided in the schedule
and budget. If the Lessee wishes to install any additional Water
Delivery Items on the Leased Property that are not provided for in
the schedule and budget or whose cost is in excess of the budgeted
amount, the Lessor shall have the option of paying for those Water
Delivery Items, in which case they shall become the property of the
Lessor and the costs therefor shall be Vineyard Development Costs.
If the Lessor does not agree to pay for the installation of the
additional Water Delivery Items, the Lessee may install those items
at its own expense and those Water Delivery Items shall be the
property of the Lessee. The Lessee may replace or remove any
Water Delivery Items belonging to the Lessee from the Leased
Property at any time in its sole discretion.
d. Installation of Water Delivery Items on Adjacent Property.
The Lessor has received an easement from Jack and Charlotte Mast,
the owners of a parcel of land adjacent to the Leased Property, to
install wells and water delivery equipment on that property for the
purpose of delivering water to the Mast Property. The parties agree
that any wells and water delivery equipment which the Lessee installs
on that property shall be considered "Water Delivery Items" for the
purposes of this Agreement.
e. Water Sharing Agreement. The Lessor shall have the right
to use water from the wells the Lessee places on the Leased Property
for agricultural irrigation purposes on the Mast Property. The rights
of the parties with respect to the use of the water shall be as set forth
in a water sharing agreement in the form attached to this Agreement
as Exhibit C.
f. Water District Access Fees. Any front-end fees or similar
charges assessed by the Yolo County Flood Control and Water
Conservation District (the "District") to allow the Lessee to access
water on the Leased Property from the District shall be paid by the
Lessor; provided, however, that only 36.8% of these fees and charges
will be considered Vineyard Development Costs. Fees and other
charges assessed by the District for water used on the Leased
Property during the Development Period will be deemed Vineyard
Development Costs and paid by the Lessor. Responsibility for
payment for water from the District which is used on the Mast
Property after the Development Period shall be allocated between the
Lessor and Lessee in accordance with the Water Sharing Agreement.
g. No Warranty of Availability of Water. The Lessor makes
no warranty or agreement of any kind concerning the amount or
quality of water or water rights on or available to the Leased
Property or whether drainage or irrigation of the Leased Property is
feasible or necessary, and the Lessee shall in no way hold Lessor
responsible for any shortage or excess of water for any intended
purposes or for any deficiency in the quality of water on the Leased
Property. The Lessee agrees that water or water rights related to the
Leased Property shall be preserved and used solely in connection
with the operation of the Leased Property. The Lessee shall not
remove any water from the Leased Property or otherwise dispose of
any water, except in connection with the proper drainage of the
Leased Property, without the express prior written consent of the
Lessor.
8. Condition of Leased Property. The Lessee has inspected the
Leased Property, is fully familiar with the physical condition thereof
and has received the same in good order and condition. The Lessor
makes no representation or warranty with respect to the condition of
the Leased Property or its fitness or availability for any particular use,
and the Lessor shall not be liable for any latent or patent defect
therein as of the date of this Agreement. The Lessee shall not do or
permit any act or thing which is contrary to any legal or insurance
requirement, which might impair the value or usefulness of the
Leased Property or any part thereof, or which constitutes a public or
private nuisance or waste. This Lease shall be subject to any existing
rights of others, including but not limited to easements, rights of way,
water rights, mineral rights, oil and gas leases and restrictions on use
of the Leased Property presently in effect and which are disclosed on
the Preliminary Title Insurance Report delivered by the Lessee to the
Lessor in connection with the Lessor's purchase of the Mast
Property.
9. Payment of Taxes and Utilities. All of the following incurred
during the Development Period shall be Vineyard Development Costs
and paid by the Lessor: (i) real property general, special taxes and
assessments related to the Leased Property and any improvements
now or located thereon; (ii) all personal property taxes or
assessments related to the Leased Property; and (iii) utilities,
including but no limited to gas, telephone, electricity and water
rendered to or used in connection with the Leased Property. All of
the charges described in the previous sentence that are incurred after
the Development Period shall be paid by the Lessee. If water is
furnished to the Leased Property by a water company or public
district, the Lessor does not warrant that water charges and the total
cost for water will remain the same as in preceding years.
10. Repairs to Leased Premises.
a. Obligation to Repair The Lessee shall repair, maintain and
keep the Leased Property and all improvements thereon in good
condition and repair during the term of the lease.
b. Cost and Expenses. All repair and maintenance costs
incurred during the Development Period shall be considered Vineyard
Development Costs for the purposes of this Agreement. The Lessee
shall be responsible for the payment of all repair and maintenance
costs for the vineyards and the repair and maintenance costs of the
improvements on the Leased Property which are incurred after the
Development Period through the end of the term of the lease.
11. Operations.
a. Use of the Leased Property. The Lessee shall use due
diligence and farming practices consistent with high-quality farming
practices in all aspects pertaining to the management of the vineyards
and in the general conduct of operations and use of the Leased
Property. The Lessee shall operate and use the Leased Property for
the sole purpose of conducting an agricultural operation under the
terms and conditions provided in this Agreement. The Lessee shall
care for, protect and maintain the vineyards in a good and
workmanlike manner consistent with high quality farming practices.
b. Equipment, Tools. The Lessee shall use and furnish
necessary equipment, tools and labor proper or necessary to conduct
high quality vineyard operations on the Leased Property. The Lessor
shall pay the costs incurred for the use of that equipment, tools and
labor during the Development Period, and the Lessee shall be
responsible for paying all such costs thereafter.
c. Pests, Diseases, Weeds and Erosion. The Lessee shall use
commercially reasonable efforts for the controlling and curing of
pests and diseases which hinder and menace growing vineyards,
supply and use commercially reasonable means to rid the Leased
Property of same, and keep the Leased Property and vineyards
reasonably free from weeds in accordance with high quality farming
practices. The Lessee agrees to adopt low-input sustainable
agricultural practices with respect to the Leased Property when said
practices can be implemented without any adverse impact on the
investment returns from the Leased Property. Lessee shall take
reasonable care to prevent soil erosion by strip-cropping and
contouring, as well as by filling in or otherwise controlling small
washes or ditches that may form on the Leased Property. The Lessee
shall keep in good repair all terraces, open ditches and inlets and
outlets of tile drains and shall preserve all established watercourses
or ditches, including grass waterways, situated or lying on the Leased
Property. Before performing any drainage work, the Lessee agrees
to check with the county Soil Conservation Service office in regard
to the wetland status of the area affected and obtain prior approval
for the drainage work to be performed. The Lessee shall cut and
remove or spray and destroy all noxious weeds before they revert to
seed and shall cut and spray all other weeds and grasses growing on
the Leased Property, in the fields, farmstead, roadsides, irrigation
ditches and fence rows; and in all other respects, shall attend to the
care and maintenance of the Leased Property in a good and prudent
manner. The Lessee shall obtain any burning permits necessary in
compliance herewith. If the Leased Property contains any Highly
Erodible Land (HEL) as determined by the local Soil Conservation
Service office, the Lessee agrees to farm the Leased Property in a
manner as to comply with the stated conservation plan.
12. Quiet Enjoyment. The Lessor agrees that the Lessor will not
take any action, and will exercise reasonable care to prevent any
action from being taken, which interferes with the Lessee's permitted
use of the Leased Premises or causes any damage to the vineyards or
the improvements located thereon.
13. Destruction. In the case of a destruction of all or any portion
of the Leased Property, there shall be no abatement or reduction of
rent. The Lessee waives the provisions of California Civil Code
Section 1932(2) and Civil Code section 1933(4) with respect to any
destruction of the Leased Property. The foregoing notwithstanding,
in the event that the Leased Property or the vineyards placed thereon
(or such a significant portion thereof so as to make it economically
unfeasible to use the Leased Property or vineyards for their intended
purpose) are destroyed due to fire, flood, disease, war, riot or other
calamity, either party may, upon notice to the other, terminate the
lease. The foregoing notwithstanding, the Lessee shall not have the
right to terminate this lease pursuant to this Section 13 if the
destruction of the Leased Property or vineyards was caused solely or
in part by the Lessee's breach of this Agreement, including but not
limited to a failure to operate and manage the vineyards in
accordance with good farming practices or due to the Lessee's willful
misconduct.
14. Inspection. The Lessor or the Lessor's representatives may
enter the Leased Premises at any time for the purpose of inspecting
same or for the purpose of doing any work and taking any action
thereon as may be necessary or appropriate for the purpose (but
nothing contained in this Lease shall create or imply any duty on the
part of the Lessor to make any inspection or do any work) and for
the purpose of showing the Leased Premises to prospective
purchasers. Entry for the purposes specified herein shall not
constitute an eviction of the Lessee nor termination of this Lease. At
all times, the Lessor shall have access to the Leased Premises and to
all reports, records, and information of the Lessee in respect thereto,
for the purposes of inspecting, determining, and ascertaining that all
of the requirements of this Agreement have been fulfilled; including,
without limitation, operation and maintenance procedures, and the
public liability insurance requirements. The Lessee shall maintain
accurate and complete records of its operations on the Leased
Premises and make them available at any time for inspection and
examination by the Lessor. The Lessee agrees to provide
information as requested by the Lessor with regard to fertilizer used,
tillage practices, acreage reports, chemical usage, and crop yields in
a timely manner.
15. Legal Requirements. The Lessee, at its expense, shall promptly
and diligently comply with all legal requirements pertaining to the
operation of the Leased Property and the farming thereof.
a. Permits, Licenses, Franchises, and Other Authorizations.
The Lessee shall promptly and diligently procure, maintain and
comply with all permits, licenses, franchises and other authorizations
which are now or at any time hereafter may be required for the use
and operation of the Leased Property contemplated hereby. All fees
incurred for such permits, licenses, franchises and other
authorizations during the Development Period shall be paid by the
Lessor and shall be Vineyard Development Costs for the purposes of
this Agreement. All such fees incurred thereafter shall be paid by the
Lessee.
b. Compliance with Laws. The Lessee, at its expense, shall
promptly and diligently comply strictly and in all respects with any
and all current and future federal, state, and local laws, statutes,
rules, regulations and ordinances, orders, judgments, decrees,
injunctions, authorizations, directions, and requirements of all
governments, departments, commissions, boards, courts, authorities,
agencies, officials and officers as amended and modified from time to
time which are now, or at any time hereafter, may be applicable to
the operation of the Leased Property and the farming thereof,
including but not limited to full compliance with government
A.S.C.S. programs and with federal, state, and local common law.
16. Condemnation. In the event of a taking by condemnation,
eminent domain or other legal proceedings of the entire Leased
Property, this lease shall terminate as of the date of the taking. Any
award shall be payable to the Lessor, provided that the Lessor shall
pay to the Lessee out of that award an amount equal to the crop
costs of the Lessee for any crop that was lost as a result of that
taking. A partial taking which makes it economically unfeasible to
continue a farming operation on the remaining acreage shall be
considered a total taking and shall be covered by the preceding
sentence. In the event of a partial taking leaving a unit of economical
farming size, this Lease shall continue in full force and effect on the
remaining acreage, with proportionate reduction in rent on a per
farmable acre basis and with any condemnation award to be paid to
the Lessor.
17. Indemnification and Insurance. Lessee shall protect, indemnify
and hold harmless the Lessor from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and
expenses (including, without limitation, attorneys' fees and expenses)
imposed upon, incurred by, or asserted against the Lessor or the
Leased Property by reason of the operations conducted by the Lessee
on the Leased Property or as a result of any failure on the part of the
Lessee to perform or comply with any of the terms of this
Agreement. The Lessee agrees, during the term of this Agreement
or any renewals thereof, to carry general liability insurance for
personal injury and property damage liability. The insurance policy
shall name the Lessor (or his assignees) as insureds and be with an
insurance carrier reasonably acceptable to the Lessor. The insurance
shall provide for property damage liability coverage of not less than
one hundred percent (100%) of the replacement value of the property
insured (at least $500,000) and public liability coverage of at least
($1,000,000) for each occurrence, subject to a deductible customary
for such policies. The insurance shall provide protection against any
peril included within the classification "Fire and Extended Coverage"
together with coverage against vandalism and malicious mischief.
Written documentation of the coverage shall be provided by the
Lessee to the Lessor. The insurance policies shall name the Lessor
and the Lessee as insureds as their respective interests appear and
shall include an effective waiver by the carrier of all rights of
subrogation against any named insured of the insured's interest in the
Leased Property or any income derived from the Leased Property
and shall provide that insurance proceeds shall be payable for the
benefit of the Lessor, and the Lessee as their respective interests may
appear. The insurance policies shall also provide that any losses shall
be payable to the Lessor, notwithstanding any act or failure to act or
negligence of the Lessor, the Lessee, or any other person,
corporation or other business entity, and that no cancellation,
reduction in amount or material change in coverage shall be made
effective until at least 30 days after receipt by the Lessor and the
Lessee of written notice thereof.
18. Waste and Protection of the Leased Property. The Lessee shall
not commit or permit waste or strip, shall supervise the Leased
Property at all times, and shall exercise every reasonable effort to
prevent theft, vandalism and other damage to the Leased Property.
19. No Claims Against Lessor, Etc. The Lessee shall not take any
action which results in the placement of any liens on the Leased
Property (including but not limited to materialmen's and
subcontractors liens) in connection with the performance of services
on or the furnishing of materials or other property in respect of the
Leased Property. It is understood and agreed that the relationship
between the parties hereunder shall consist solely as that of landlord
and tenant; and in no event and under no circumstances shall the
relationship be considered or construed as an agency, partnership,
joint venture, or any similar relationship.
20. Assignment Sublease. The Lessee may not sublease the
Leased Property or any portion thereof, nor assign its rights under
this Agreement in whole or in part or in any way encumber this lease
or the Leased Property, without the prior written consent of the
Lessor, whose consent will not be unreasonably withheld. No
agreement by the Lessor to any assignment or sublease shall act to
relieve the Lessee of its obligations under this Agreement. For the
purposes of this Agreement, an assignment by operation of law
(including but not limited to by means of a merger of the Lessee, the
sale of a controlling ownership interest in the Lessee or the sale of
substantially all of the assets of the Lessee) shall not be considered an
"assignment," provided that the surviving business entity or the entity
that acquires the Lessee's assets (as the case may be) shall expressly
assume in writing all of the obligations of the Lessee under this
Agreement. Nothing herein shall restrict the right of the Lessee to
allow for the placement of a lien on the grapes growing on the
Leased Property to finance the crop costs the Lessee incurs in
growing and harvesting the grapes, provided that: (i) no loan may be
of a duration in excess of one year and each such security interest
shall be terminated no later than 30 days after the grapes are
harvested during that year; (ii) the amount of the obligation secured
by the growing crops shall not exceed the Lessee's reasonable crop
costs for the Leased Property for the year in which the obligation is
incurred; and (iii) the Lessee will reimburse the Lessor in full for any
costs, claims, liabilities and damages the Lessor may incur as a result
of the enforcement of any security interest by the lender due to the
default of the Lessee.
21. Right of First Refusal. Provided that the Lessee is not in
material default of any of its obligations under this Agreement, the
Lessee shall have a right of first refusal to purchase the Property from
the Lessor in the event that the Lessor receives a bona fide offer to
sell the Property, or any portion thereof, which the Lessor intends to
accept. In addition, if the Lessor wishes to lease the Leased Property
following the completion of the term of this lease to a third party, the
Lessor shall first offer to lease the Leased Property to the Lessee
under the same terms and conditions as the Lessor is proposing to
lease the Leased Property to that third party. The terms of the right
of first refusal and right of first offer shall be as set forth in the Right
of First Refusal Agreement, which is attached to this Agreement as
Exhibit D.
22. Purchase of Grapes After Lease. For a period of five years
following the termination or expiration of this lease (unless the lease
is terminated due to a material breach of this Agreement by the
Lessee), the Lessee shall have a right to purchase the grapes grown
on the Leased Property. The rights of the Lessee to purchase the
grapes shall be governed by the following provisions.
a. Right of First Refusal to Purchase Grapes. If the Lessor
receives an offer to purchase some or all of the grapes grown on the
Leased Property which the Lessor wishes to accept, or the Lessor
wishes to offer to sell the grapes to a third party, the Lessee shall
have the right to purchase those grapes at the same price and under
the same terms (including but not limited to the duration of the
proposed contract) as contained in that offer. The Lessor shall
provide the Lessee with written notice of any offer that he wishes to
accept, which offer shall include the principal terms thereof. If the
Lessee provides written notice that it wishes to purchase the grapes
being offered, the Lessee shall provide notice of acceptance within 10
days of the date the Lessee received the notice from the Lessor. If
the Lessee provides timely notice of acceptance, the purchase and
sale shall then take place in accordance with that proposal. If the
Lessee does not provide timely notice of acceptance, the Lessor may
sell the grapes in accordance with the offer from the third party. Any
change in an offer which makes the terms more favorable to the third
party shall be deemed a new offer for the purposes of this Section
22.a which must be then offered to the Lessee.
b. Purchase From User. If the Lessor does not intend to sell
the grapes to a third party but instead intends to retain the grapes for
the Lessor's own use, or indicates that the Lessor wishes to sell the
grapes to the Lessee, the Lessor shall provide the Lessee with prompt
notice of its intention to retain the grapes or sell the grapes to the
Lessee. The Lessee and Lessor shall then promptly negotiate the
price and other terms governing the purchase of the grapes in good
faith. If the parties do not reach an agreement on the price of the
grapes within 30 days of the date the Lessor notifies the Lessee of the
Lessor's intention to retain the grapes, either party may refer the
issue of determining the price and other terms governing the purchase
of the grapes to binding arbitration. The arbitration will be
conducted in Woodland, California under the rules of the American
Arbitration Association unless the parties otherwise agree. The
arbitrator shall set the price and other terms of the under which the
Lessor must sell the grapes to the Lessee in view of the quality of the
grapes being sold, prevailing prices for grapes grown in the region,
the practices in the industry and such other factors which the
arbitrator deems relevant in arriving at terms which are fair and
reasonable to the parties. After the arbitrator renders his decision,
the Lessee shall have the option of purchasing the grapes at the price
and under the terms specified by the arbitrator or not proceeding with
the purchase. If the Lessee does not purchase the grapes, the Lessor
may proceed to use the grapes for its own purposes as stated in its
initial notice to the Lessee. If the Lessor subsequently determines
that it will sell some or all of the grapes to a third party, the Lessee
shall have a right of first refusal to purchase those grapes pursuant to
Section 22.a.
23. Defaults, Termination, Repossession and Reletting. If any Event
of Default, as defined below, shall have occurred and be continuing,
the Lessor, whether or not the term of this lease shall have expired,
may enter upon and repossess the Leased Property or any part
thereof by summary proceeding, ejection or otherwise, and may
remove the Lessee and all other persons and any and all property
therefrom. The Lessor shall be under no liability for or by reason of
any entry, repossession or removal. At any time or from time to time
after the repossession of the Leased Property or any part thereof,
whether or not the Lease term shall have been terminated pursuant
to this Section 23, Lessor may (but shall be under no obligation to)
re-lease the Leased Property or any part thereof for the account of
the Lessee, in the name of the Lessee or the Lessor or otherwise,
without notice to the Lessee, for the term or terms and on the
conditions and for the uses as the Lessor in its uncontrolled
discretion, may determine and may collect and receive the rents
therefor. The Lessor shall not be responsible or liable for any failure
to re-lease the Leased Property or any part thereof or for any failure
to collect any rent due upon any re-leasing. The Lessee shall
reimburse the Lessor for all costs and expenses incurred by or on
behalf of the Lessor (including, without limitation, reasonable
attorneys' fees and expenses) occasioned by any default by the
Lessee under this lease. The following events ("Events of Default")
constitute a default under this lease:
a. Failure to Pay Rent. The Lessee fails to pay any rent when
and as same becomes due and payable, and such default is not cured
within 10 days after the Lessor delivers notice of nonpayment to the
Lessee;
b. Failure to Comply with Other Terms of this Agreement.
The Lessee fails to perform or comply with any of the other terms
hereof, and the failure continues for more than 15 days after notice
thereof from the Lessor and the Lessee has not within that period
commenced with due diligence and dispatch the curing of the default
and thereafter pursues such cure to completion;
c. Insolvency. The Lessee:
i. makes a general assignment for the benefit of
creditors;
ii. admits in writing the inability to pay debts as they
become due;
iii. files a petition in bankruptcy;
iv. is adjudicated a bankrupt or insolvent;
v. files a petition seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or
similar relief under any present or future statute, law or regulation;
vi. files an answer admitting, or fails seasonably to
contest, the material allegations of a petition filed against the Lessee
in any bankruptcy or insolvency proceedings;
vii. seeks, consents to, or acquiesces in the
appointment of any trustee, receiver or liquidator of the Lessee or
any material part of its properties; or
viii. elects to dissolve, wind-up its business and
liquidate its assets.
d. Proceedings against Lessee. Within 60 days after the
commencement of any proceeding against the Lessee seeking any
reorganization, arrangement, composition, readjustment, dissolution
or liquidation of the Lessee, or any similar relief under any present or
future statute, law or regulation, the proceeding has not been
dismissed; or within 60 after the appointment, without the consent or
acquiescence of the Lessee, or any trustee, receiver, or liquidator of
Lessee or of any material part of its properties, the appointment has
not been vacated.
24. Effect of Termination of Lease Upon Default of Lessee. If the
Lessor terminates the lease due to a default by the Lessee, the Lessee
shall continue to be liable for all rents and other sums required to be
paid by Lessee up to the time of the expiration, termination or
repossession; and thereafter the Lessee (until the end of what would
have been the full term of this Lease in the absence of the expiration,
termination or repossession and whether or not the Leased Property
or any part thereof shall have been re-lease) shall be liable to the
Lessor for and shall pay to the Lessor as liquidated and agreed
current damages for the Lessee's default the following amount:
a. all rent and other sums which would be payable under
this lease by the Lessee in the absence of the
expiration, termination or repossession; LESS
b. all net rents collected by the Lessor from any re-
leasing after the termination of the lease but before
the scheduled expiration of the term of this lease,
after deducting from the proceeds all of Lessor's
expenses in connection with the re-leasing (including,
without limitation, all repossession costs, brokerage
commissions, legal and accounting expenses,
attorney's fees and expenses, employees' expenses,
promotional expenses, and expenses of preparation
for the re-leasing) or, if the Lessor does not re-lease
the Leased Property, the price the Lessor receives
from the sale of the grapes grown on the Leased
Property after the termination of the lease but prior to
the expiration of the lease, after deducting from the
proceeds all costs incurred in the growing, harvesting
and sale of those grapes.
The Lessee shall pay current damages annually on the rent
payment dates applicable in the absence of the expiration, termination
or repossession; and Lessor shall be entitled to recover the same from
Lessee on each applicable date.
25. Performance on Behalf of Lessee. If the Lessee shall fail to
make any payment or perform any act required hereunder to be made
or performed by Lessee, then the Lessor may, but shall be under no
obligation to, after notice to Lessee as may be reasonable under the
circumstances, make a payment or perform an act with the same
effect as if made or performed by Lessee. Entry by the Lessor upon
the Leased Property for the above purpose shall not waive or release
the Lessee from any obligation or default hereunder. Lessee shall
reimburse the Lessor, with interest at the rate specified in Exhibit B,
for all sums so paid by the Lessor and all costs and expenses incurred
by the Lessor in connection with the performance of any act which
the Lessee fails to perform as required by this lease.
26. Remedies. Each right, power and remedy of the Lessor provided
in this Agreement, or now or hereafter existing at law or in equity or
by statute or otherwise, shall be cumulative and concurrent and shall
be in addition to every other right, power or remedy provided for in
this lease, or now or hereafter existing at law or in equity or by
statute; and the exercise or beginning of the exercise by Lessor of any
one or more of the rights, powers, or remedies provided for in this
Lease or now or hereafter existing at law or in equity or by statute or
otherwise shall not preclude the simultaneous or later exercise by
Lessor of any or all other rights, powers or remedies.
27. Effect of Termination or Expiration of Lease. Upon the
termination or expiration of the lease, the rights of the Lessee to
enter and use the Leased Property and the obligations of the Lessee
to repair and maintain the Leased Property as provided in this
Agreement shall terminate. Unless the lease is terminated due to the
occurrence of an Event of Default, all obligations of the Lessee to
pay rent on the Leased Property for any period after the expiration
or termination of the lease shall cease. The foregoing
notwithstanding, all monetary obligations which were incurred prior
to the termination or expiration of the lease, and all liabilities of the
parties for actions or omissions prior to the termination or expiration
of the lease, shall survive the lease's expiration or termination. All
other rights and obligations of the parties under this Agreement shall
survive the termination or expiration of the lease.
28. Waiver. No failure by the Lessor or the Lessee to insist upon the
strict performance of any term hereof or to exercise any right, power
or remedy consequent upon a default thereof, and no submission by
Lessee or acceptance by Lessor of full or partial rent during the
continuance of any default, shall constitute a waiver of any default or
any term. No waiver of any default shall affect or alter this lease
which shall continue in full force and effect or affect the respective
rights of the Lessor or the Lessee with respect to any other
then-existing or subsequent default.
29. Notices. Any notices provided for herein shall be in writing and
delivered personally, sent via recognized overnight courier (such as
Federal Express, Airborne Express, UPS Overnight or Express Mail)
or sent via first class mail. Notices may also be delivered via
facsimile, provided that prompt confirmation of that notice is
delivered to the recipient by the means described in the previous
sentence. Notices shall be sent to the addresses and facsimile
numbers set forth below the signatures of the parties to this
Agreement or to such other address and numbers as the party to
whom the notices are to be sent informs the other in writing.
30. Provisions Subject to Applicable Law/Severability. All rights,
powers and remedies provided herein may be exercised only to the
extent that the exercise thereof does not violate any applicable law
and are intended to be limited to the extent necessary so that they will
not render this lease invalid or unenforceable. If any term of this
Lease shall be held to be invalid, illegal or unenforceable, the validity
of the other terms of this Lease shall in no way be affected thereby.
This Agreement shall be governed by and construed according to the
laws of the state of California.
31. Conveyance by Lessor. In case the original or any successor
Lessor shall convey or otherwise dispose of its interest in the Leased
Property, it shall thereupon be released from all liabilities and
obligations of Lessor under this lease; and the liabilities and
obligations shall be binding solely on the then Lessor of the Leased
Property.
32. Hazardous Materials.
a. Use of Hazardous Materials and Indemnification.
i. The Lessee covenants that it shall not cause or
permit any Hazardous Material to be generated, stored, used, treated,
handled, processed, transferred, transported or disposed of or
otherwise released on the Leased Property by the Lessee, its agents,
employees, or contractors without the prior written consent of the
Lessor. In no event shall Lessee allow or otherwise authorize
discharge or release of any Hazardous Materials to any sewer, storm
water system, stream, or other unauthorized point, on the Leased
Property.
ii. If the Lessee breaches the obligations stated in the
previous paragraph, or if contamination of the Leased Property by
Hazardous Material occurs as a result of the action or inaction of the
Lessee, its agents, employees, or contractors, then the Lessee shall
indemnify, defend, and hold the Lessor and his assignees harmless
from any and all claims, judgments, damages, penalties, fines, costs,
liabilities or losses (including, without limitation, damages and
expenses suffered or incurred by the Lessor, as the owner of the
Leased Property, by virtue of any assertion of Federal or State lien
or claim brought or filed against the Lessor or his assignees or the
Leased Property, diminution in value of the Leased Property, damage
arising from any adverse impact on marketing of the Leased
Property, and sums paid in settlement of claims, attorneys' fees,
consultant fees and expert fees) which arise during or after the term
of this lease as a result of the contamination.
iii. The indemnification of the Lessor and his
assignees by the Lessee, includes, without limitation, costs incurred
in connection with any investigation of site conditions or any
clean-up or remediation work required by any federal, state or local
governmental agency because of Hazardous Material(s) present in the
soil or groundwater on or under the Leased Property. In the event
of any contamination of the Leased Property or release or disposal of
any quantity of Hazardous Material(s) on the Leased Property,
Lessee shall promptly notify the Lessor, shall comply with all
applicable laws, and shall promptly take all actions, in accordance
with the provisions of all applicable environmental laws, at its sole
expense, as are necessary to return the Leased Property to the
condition existing prior to the presence of any Hazardous Material(s)
on the Leased Property. The Lessee shall receive certification from
the appropriate state environmental agency that the Leased Property,
and any other affected property, has been cleaned up to the
satisfaction of the agency.
iv. The Lessee shall be unconditionally and absolutely
liable for all losses and damages sustained by the Lessor and his
assignees as a result of any breach of, or the failure by the Lessee to
perform under, any environmental representation, warranty,
covenant, obligation and indemnification provided in this Agreement.
The Lessee shall pay any costs, expenses, claims, damages and
attorney's fees due under this Section 32 regardless of whether the
amounts occur pre-petition or post-petition after the filing for any
bankruptcy or reorganization relief under state or federal laws.
b. Hazardous Materials Definition. As used herein,
"Hazardous Materials" means:
i. any hazardous or toxic substance, material or
waste, including, but not limited to, any substance, product, or other
material of any nature whatsoever which is or becomes listed,
regulated or addressed pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601, et seq. ("CERCLA"); the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801 et seq.; the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.
("RCRA"); the Toxic Substances Control Act, 15 U.S.C. Sections
2601 et seq.; the Clean Water Act, 33 U.S.C. Section 1251 et seq.,
all as amended; or any other federal, state or local statute, law,
ordinance, resolution, code, rule, regulation, order or decree
regulating, relating to, or imposing liability or standards of conduct
concerning, any hazardous, toxic or dangerous waste, substance or
material, as now or at any time hereafter in effect; and
ii. any substance, product, waste or other material of
any nature whatsoever which may give rise to liability under any of
the above statutes or under any statutory or common law theory
based on negligence, trespass, intentional tort, nuisance, equitable
indemnity, or strict liability or under any reported decisions of a state
or federal court.
c. Disclosure. At the commencement of this lease and
annually thereafter, the Lessee covenants to disclose to the Lessor
the names and amounts of all Hazardous Materials, or any
combination thereof, which are or will be generated, stored, used or
disposed of on the Leased Property. The Lessee shall promptly
provide the Lessor with all notices and other communications
received from any federal, state, and local department and/or agency
which enforces and administers environmental laws.
d. Inspection. The Lessor and his agents and assignees shall
have the right, but not the duty, to inspect the Leased Property at any
time to determine whether the Lessee is complying with the terms of
this Section 32. If the Lessor or his agents or assignees reasonably
determine that the Lessee is not in compliance with this Section 32,
the Lessor and his agents and assignees may immediately enter the
Leased Property to remedy, at the Lessee's sole expense, any
contamination of Hazardous Material(s) caused by the Lessee's
failure to comply with applicable laws and to take any and all other
actions as are necessary to cure the failure of compliance,
notwithstanding any other provision of this Agreement. The Lessee
shall promptly reimburse the Lessor or his assignees for any amounts
paid by them together with interest thereon at the maximum rate
allowed by applicable state law from the date of the payment. Entry
by the Lessor or his assignees upon the Leased Property for the
above purpose shall not waive or release the Lessee from any
obligations or default hereunder.
33. Time is of the Essence. Time is of the essence in the
performance by the Lessee of the agreements and obligations as
provided by this Agreement.
34. End of Lease Term. Upon expiration or other termination of the
terms of the lease, Lessee shall immediately quit and surrender to the
Lessor the Leased Property (including but not limited to all vineyards
and all improvements) in good order and condition, ordinary wear
and tear excepted, and shall remove all of the Lessee's equipment.
The Lessee shall restore any damage to the Leased Property caused
by the removal of the Lessee's equipment. No holding over shall be
permitted without the Lessor's prior written consent. If the Lessee
should remain in possession of the Leased Property after the
expiration or earlier termination of the lease such possession by the
Lessee shall be deemed to be a month to month tenancy terminable
on thirty (30) days notice given at any time by either party with rent
during such tenancy to be One Hundred Fifty Percent (150%) of the
rental payable during the initial term of the lease prorated to be paid
on a monthly basis.
35. Payments Are Rent. All sums of money or charges required to
be paid by the Lessee under this Agreement shall be deemed rental
for the Leased Property and may be designated as such in any
statutory notice to pay rent or quit the Leased Property.
36. Attorneys' Fees. If any action is commenced to enforce or
construe this Agreement, the party who substantially prevails shall be
entitled to recover the costs that party incurred in prosecuting or
defending that action, including but not limited to reasonable
attorneys' fees, in addition to any other relief to which that party is
entitled.
37. Miscellaneous. This Agreement, including the all attachments,
exhibits and agreements referred to herein, constitutes the complete
and entire agreement of the parties with respect to the subject matter
described in this Agreement, and supersedes all prior or
contemporaneous agreements, whether oral or written, with respect
to that subject matter. This Agreement may be amended, waived,
discharged or terminated only by an instrument in writing, signed by
both parties. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the respective successors and assigns
of the parties hereto. The headings of this Agreement are for
purposes of reference only and shall not limit or define the meaning
hereof.
IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date first above written.
THE LESSOR
//s//David L. Gemmer
________________________________
David L. Gemmer
//s//Shirley A. Gemmer
________________________________
Shirley A. Gemmer
Address:
2441 Alamo Glen Drive
Alamo, CA 94507
(fax) (925) 933-6165
THE LESSEE
R.H. PHILLIPS, INC.
By://s//Mike Motroni
_____________________________
Title: Chief Financial Officer
_____________________________
Address:
26836 County Road 12A
Esparto, CA 95627
(fax) (530) 662-2880
Attention: Chief Financial Officer
EXHIBIT A
LEGAL DESCRIPTION OF MAST PROPERTY
The South one-half (South 1/2) of Section 34, and the
Southwest Quarter (Southwest 1/4) of Section 35, Township 11
North, Range 1 West, M.D.B & M., lying Westerly of the West
boundary line of State Highway 505.
Excepting therefrom all that real property described in deed
executed by Vernon A. Mast, et al., to the State of California, dated
June 29, 1954, and recorded November 30, 1954, in Book 439 of
Official Records, at page 45, and recorded December 6, 1971 in
Book 999 of Official Records, page 482.
APN: 54-220-07, 54-220-08 54-220-10
DESCRIPTION OF LEASED PROPERTY
The Leased Property shall consist of 115 acres located on
the east side of the Mast Property.
EXHIBIT B
RENT CALCULATIONS
1. Calculation of Rent. The annual rent for the Leased Property
shall equal 11.2% of the "Base Amount", which is determined in
the manner described below. The Base Amount shall equal:
(a) the pro-rata portion of the Lessor's purchase price for
the Leased Property; plus
(b) Vineyard Development Costs paid by the Lessor to the
Lessee, less the price the Lessee pays to the Lessor for
grapes harvested on the Leased Property during the
Development Period; plus
(c) interest accruing at a rate of 11.2% per annum on the
unpaid pro-rata portion of the purchase price for the
Leased Property and the Vineyard Development Costs
through January 1, 2002, with such interest compounding
annually on each anniversary date of this Agreement in
2000 and 2001 and on December 31, 2001.
For the purposes of these calculations:
(a) The pro-rata portion of the Lessor's purchase price for
the Leased Property shall be the total price the Lessor paid
to purchase the Mast Property (including but not limited to
title, escrow and other closing costs) multiplied by a
fraction, the numerator of which is the total acreage
represented by the Leased Property and the denominator of
which is the total acreage represented by the Mast
Property, including the Leased Property. Solely for the
purpose of determining the rental payments, the portion of
the purchase price attributable to vineyard developments
on the Mast Property as of the date the Lessor purchased
that property shall not be taken into account in determining
the pro-rata portion of the purchase price; instead the cost
of those improvements shall be considered Vineyard
Development Costs.
(b) "Vineyard Development Costs" shall have the same
meaning as is set forth in the Agreement.
(c) Interest shall accrue on each of the payments described
above beginning on the date that the Lessor makes a
payment of those amounts. For example, if the Lessor
makes a Vineyard Development Cost payment on January
1, 2000, interest will accrue on that payment beginning as
of that date.
2. Quarterly Rental Payments. The amount of each quarterly rent
payment shall be determined by dividing the annual rent by four.
3. Adjustment for Later Vineyard Improvements. If the Lessee
makes additional improvements to the vineyards on the Leased
Property which constitute Vineyard Development and
Improvements as defined in the Agreement, the Base Amount will
be increased by the amount the Lessor has paid the Lessee for
these improvements. The rental payments will be increased
accordingly, beginning during the quarter in which the Lessor paid
for such improvements.
4. Reduction in Rental Payments Water Use from Delivery
Systems.
(a) If, in any year during the term of the lease, the Lessor
uses water from Water Delivery Systems that the Lessee installed
and whose cost is included in the Base Amount, the rent for the
following year shall be reduced as set forth below.
(b) The amount of the reduction shall be determined by
reducing the Base Amount during that year by an amount equal to:
(i) The total Vineyard Development Costs
represented by the Water Delivery Systems multiplied by;
(ii) a fraction, the numerator of which is the total
amount of water the Lessor uses during any year (but excluding
any use of water on the Leased Property) and the denominator of
which is the total amount of water used on the Mast Property as a
whole during that year using the Water Delivery Systems,
including the Leased Property.
(c) The calculation of the reduction of the Base Amount
shall be made annually, based on the total water usage during each
year. The reduction shall enter into effect beginning with the
payment on January 1 of the year following that for which the
calculation has been made. If the Lessor uses water from the
Water Delivery Systems during the last year of the lease, the
Lessor shall refund to the Lessee an amount equal to the reduction
in the Base Amount which would have otherwise been attributable
to that year by operation of this Section 4.
(d) In addition to the adjustments described above, if the
Lessor uses water from Water Delivery Systems which the Lessee
installed at the Lessee's expense as provided in Section 7.c of the
Agreement, the Base Amount shall be immediately reduced by
61.4% of the total costs the Lessee incurred in installing that
Water Delivery System.
REAL ESTATE PURCHASE AGREEMENT
This Real Estate Purchase Agreement, dated September 29,
1999, is entered into by and between R.H. Phillips, Inc. (the "Seller")
and David L. Gemmer and Shirley A. Gemmer, husband and wife
(jointly and severally the "Purchaser"), with respect to the following
facts.
The Seller is the owner of certain improved real
property located on in the County of Yolo, State of
California and which is more particularly described in
Exhibit A to this Agreement (the "Property") on
which the Seller is in the process of installing
vineyards and making capital improvements. The
Purchaser wishes to purchase the Property, including
the improvements, and the Seller wishes to sell the
Property to the Purchaser, subject to the terms and
conditions set forth below.
IN VIEW OF THE FOREGOING FACTS, the parties agree as
follows:
38. Purchase and Sale. Subject to the terms and conditions set
forth in this Agreement, the Seller shall sell to the Purchaser, and the
Purchaser shall buy from the Seller, all right, title and interest of the
Seller in and to the Property upon the payment by the Purchaser to
the Seller of $989,310. For the purposes of this Agreement, the
consummation of the conveyance of the Property to the Purchaser,
the payment of the Purchaser Price to the Seller and the completion
of the other transactions described in this Agreement shall be called
the "Closing."
39. Creation of Escrow. The parties have created an escrow for
the purposes of consummating the purchase and sale of the Property
with Fidelity National Title of Woodland, California (the "Escrow
Holder"). The parties agree to execute and deliver to the Escrow
Holder such additional agreements, instructions and documents
which the Escrow Holder shall reasonably request as a condition to
establishing the escrow and allowing the Escrow Holder to perform
its duties hereunder.
40. Deposit. The Purchaser has deposited with the Escrow Holder
$5,000 in cash as a good faith deposit (the "Deposit"). If the Closing
does not take place on or prior to the Closing Date (as specified in
Section 11), other than due to the breach of this Agreement by the
Purchaser or due to the failure of the condition specified in this
Agreement, the Deposit (plus any interest thereon) shall be returned
to the Purchaser less any charges assessed by the Escrow Holder for
the performance of its services.
41. Condition of Title -- Inspection. The Seller shall convey full
title to the Property, fee and clear of all liens, encumbrances and
other rights of others, other than: (i) liens and encumbrances set forth
in the policy of title insurance issued set forth in the attached CLTA
Title Insurance Report, attached to this Agreement as Exhibit B-1,
and those exceptions not appearing in the Title Report which are
listed in Exhibit B-2 (the "Permitted Exceptions").
42. Title Insurance. At the Closing and as a condition to the
Purchaser's obligation to purchase the Property, the Escrow Holder
shall commit to issue a CLTA Owner's Policy of Title Insurance,
with liability in the amount of the Purchase Price, showing title to the
Property vested in the Purchaser upon the Closing, subject only to
the Permitted Exceptions (the "Title Insurance Policy").
43. Condition of Property. The Purchaser has carefully and
thoroughly inspected the property, and conducted drilling and testing
for water and the presence of toxic substances on the Property, and
is thoroughly familiar with the Property. In view of these facts, the
Purchaser represents that the Purchaser is acquiring the Property "AS
IS", with all faults and defects, whether latent or patent, and without
any warranty whatsoever except as set forth in Section 5 above.
Without limiting the foregoing, the Seller disclaims any warranty
whatsoever as to:
a. The quality, condition, engineering or design of any
systems or improvements, natural or artificial, for the conveyance and
control of irrigation and flood waters to and from the Property,
including any ditches, wells, canals, levees, or pumps included in such
systems whether on or off the Property;
b. the availability, quantity or quality of water on or to the
Property and the cost thereof;
c. the suitability of the Property, including without limitation
soils and other natural conditions for any cultivation, development,
sale, lease or other use contemplated by the Purchaser;
d. the existence, sufficiency and legal status of all rights of
way, easements, licenses and other appurtenances necessary or
desirable for the Purchaser's intended use of the Property;
e. the existence of any solid waste, toxic, hazardous or
potential nuisance causing substance, on the Property, in the soil,
ground water or on any neighboring Property; or
f. the status and nature of any laws, regulations or permits
pertaining to the Property or the Purchaser's intended use of the
Property and the Property's compliance therewith.
The Purchaser acknowledges that the Purchaser has been
represented by legal counsel who explained the consequences of this
Section at the time the Purchaser signed this Agreement. The
Purchaser acknowledges that the disclaimers of warranties are
"conspicuous" for the purposes of any applicable law, rule, regulation
or order. The Purchaser further agrees to release the Seller and its
officers, directors, shareholders and agents from any and all claims or
liabilities relating to in any manner connected with the foregoing
conditions or risks regarding the Property.
44. Indemnification Hazardous Substances. As a term and
condition to the purchase of the Property and as a part of the
consideration therefor, the Purchaser hereby agrees to indemnify,
defend and hold the Seller harmless for all costs, claims, judgments,
damages, penalties, fines, liabilities or losses of any kind whatsoever
which the Seller may incur as a result of the presence of any solid
waste, toxic, hazardous or nuisance-causing materials on the
Property or in the soil or groundwater under the Property. The
foregoing notwithstanding, the Purchaser shall not be obligated to
indemnify and hold the Seller harmless if, and to the extent that, the
substances described in this Section were placed on the Property by
the Seller, whether intentionally accidentally.
45. Brokers. Each party represents to the other that they or it have
not or has not retained the services of a real estate broker, agent or
finder in connection with the purchase and sale of the Property. If
either party has retained a broker, agent or finder to whom a
commission or finder's fee is owing, the party through whom such
broker, agent or finder makes such claim shall be responsible for the
payment in full of that commission or fee and shall indemnify and
hold the other party and the Property harmless from all costs, claims,
liabilities and damages incurred by the other party as a result of that
claim.
46. Representations and Warranties of Seller. The Seller represents
and warrants to the Purchaser as follows:
a. The Seller has the power and authority to sell, convey
and transfer the Property to the Purchaser in accordance with this
Agreement.
b. The Seller's execution and full performance of this
Agreement will not violate any agreement, option, covenant,
condition, obligation or undertaking of the Seller nor will it violate
any law or order of any court or administrative body.
c. The Seller is not a "foreign person" as defined in
Section 1445(f) of the Internal Revenue Code of 1986 or any
successor provision of federal income taxation law currently in effect.
47. Representations of Purchaser. The Purchaser represents and
warrants to the Seller as follows:
a. The Purchaser has the power and authority to purchase
the Property in accordance with this Agreement.
b. The Purchaser's execution and full performance of this
Agreement will not violate any agreement, option, covenant,
condition, obligation or undertaking of the Purchaser, nor will it
violate any law or order of any court or administrative body.
c. The Purchaser has made his own independent inspection
and evaluation of the Property and has not relied on any statement or
representations of the Seller except for those set forth herein.
48. Conditions to Closing. The parties acknowledge that they are
entering into this Agreement as a part of a transaction pursuant to
which the Purchaser will lease back to the Seller a portion of the
Property for the continued development of and operation of
vineyards. As a condition to the Closing, the parties shall execute
and deliver to each other the Vineyard Development and Lease
Agreement in a form attached to this Agreement as Exhibit C, a
Right of First Refusal Agreement in the form attached as Exhibit D
and a Water Sharing Agreement in a form attached as Exhibit E to
this Agreement. In addition, the parties agree that the Closing shall
be conditioned upon the execution and delivery to the Seller by Jack
and Charlotte Mast an Easement Agreement, in the form attached
hereto as Exhibit F.
49. Closing Date. Unless the parties specify a different time and
date for the Closing to occur, the Closing shall take place on
September 29, 1999 at 9:00 a.m. at the office of the Escrow Holder
or, if that day falls on a weekend or a holiday, on the next business
day thereafter (the "Closing Date").
50. Deposits into Escrow. The parties shall deposit the following
with the Escrow Agent prior to the Closing Date:
a. The Seller shall deposit the following into escrow:
i. a grant deed conveying all of right, title and interest
in the Property to the Purchaser (the "Grant Deed");
ii. an Affidavit of Non-Foreign Status; and
iii. executed memoranda of the Vineyard
Development and Lease Agreement, Right of First Refusal
Agreement and Water Sharing Agreement.
b. The Purchaser shall deposit the following into escrow:
i. In addition to the Deposit described in Section 3,
the Purchaser shall deposit the balance of the Purchase Price in
immediately available funds, plus an additional amount equal to the
Closing Costs as defined below; and
ii. executed memoranda of the Vineyard
Development and Lease Agreement, the Right of First Refusal
Agreement and the Water Sharing Agreement.
51. Closing Costs. The Purchaser shall be responsible for the
payment of recordation and filing fees, transfer taxes, fees and
charges of the Escrow Holder and all premiums on the Title
Insurance Policy (the "Closing Costs"). The Purchaser agrees to pay
the attorneys' fees of the Seller incurred in connection with the
conveyance of the Property under this Agreement.
52. Procedure for Closing. On the Closing Date, on the condition
that all of the deposits have been made and all of the other conditions
to Closing have been satisfied, the Escrow Holder shall:
a. Record the Grant Deed in the Official Records of Yolo
County and, following the recordation of the Grant Deed, deliver the
recorded Grant Deed to the Purchaser;
b. Record the memoranda of the Vineyard Development
and Lease Agreement, the Right of First Refusal Agreement and the
Water Sharing Agreement in the Official Records of Yolo County,
and following such recordation, deliver the recorded memoranda to
the Seller;
c. Deliver the Affidavit of Non-Foreign Status to the
Purchaser;
d. Issue the Title Insurance Policy to the Purchaser; and
e. After payment of the Closing Costs, pay the Purchase
Price to the Seller in accordance with the instructions given by the
Seller to the Escrow Holder.
53. Assignment of Rights. Effective as of the Closing, the Seller
shall assign all of its rights and liabilities under an Agreement for the
Purchase and Sale of Real Property, dated July 19, 1999, between the
Seller and Calvin Cowles Mast, Jack D. Mast, Jean Marie Kelly,
Michaell Dewitt Kelly and David Howard Kelly, pursuant to which
the Seller acquired the Property. The Purchaser shall accept the
assignment and shall assume the liabilities of the Seller under that
agreement as of the Closing.
54. Notices. All notices under this Agreement shall be in writing
and delivered personally, by nationally recognized overnight courier
service (delivery charges paid by sender) or by first class mail,
postage prepaid. Notices may also be sent via facsimile, provided
that written confirmation of that notice is sent via any of the methods
described in the previous sentence. Notices shall be sent to the
addresses or facsimile numbers set forth below or to such other
addresses or facsimile numbers as the party to whom the notice is
addressed designates:
If to the Purchaser:
David L. Gemmer
2441 Alamo Glen Drive
Alamo, CA 94507
(fax) (925) 933-6165
If to the Seller:
R.H. Phillips, Inc.
26836 County Road 12A
Esparto, California 95627
Attention: Chief Financial
Officer
(fax) (530) 662-2880
55. Attorneys' Fees. If any action is commenced to enforce or
construe this Agreement, the party who substantially prevails shall be
entitled to recover the costs that party incurred in prosecuting or
defending that action, including but not limited to reasonable
attorneys' fees, in addition to any other relief to which that party is
entitled.
56. Miscellaneous. This Agreement shall be governed by and
construed in accordance with the laws of the State of California
excluding its conflicts of laws principles. This Agreement, together
with all attachments and exhibits hereto and thereto, constitutes the
entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior or contemporaneous
agreements, whether oral or written, of the parties pertaining to that
subject matter. This Agreement may not be amended except in the
form of a writing signed by both parties to this Agreement. No right
of either party under this Agreement shall be waived unless that
waiver is in a written document signed by the party who has waived
that right. No waiver of any right in any specific instance will be
deemed a waiver of that right in any subsequent instance or any other
right. This Agreement may be executed in one or more counterparts,
which together shall constitute one original.
57. Time of Essence. Time is of the essence in the performance of
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
THE PURCHASER
//s//David L. Gemmer
_____________________________
David L. Gemmer
//s//Shirley A. Gemmer
_____________________________
Shirley A. Gemmer
THE SELLER
R.H. PHILLIPS, INC.
By://s//Mike Motroni
_______________________________
Title: Chief Financial Officer
_____________________________
EXHIBIT A
LEGAL DESCRIPTION OF PROPERTY
The South one-half (South 1/2) of Section 34, and the
Southwest Quarter (Southwest 1/4) of Section 35, Township 11
North, Range 1 West, M.D.B & M., lying Westerly of the West
boundary line of State Highway 505.
Excepting therefrom all that real property described in
deed executed by Vernon A. Mast, et al., to the State of
California, dated June 29, 1954, and recorded November 30, 1954,
in Book 439 of Official Records, at page 45, and recorded
December 6, 1971 in Book 999 of Official Records, page 482.
APN: 54-220-07, 54-220-08 54-220-10
RIGHT OF FIRST REFUSAL AGREEMENT
THIS AGREEMENT, dated September 29, 1999, is entered
into by and between David L. Gemmer and Shirley A. Gemmer,
husband and wife, ( the "Gemmers") and R.H. Phillips, Inc., a
California corporation, ("RHP") with respect to the following facts:
The Gemmers and RHP are parties to a real estate
transaction pursuant to which RHP sold to the
Gemmers certain real property located in the County
of Yolo, State of California (the "Mast Property")
and the Gemmers leased back to RHP a portion of
that property (the "Leased Property"). Specific
descriptions of the Mast Property and Leased
Property are set forth in Exhibit A to this Agreement.
In connection with that transaction, RHP is to receive
a right of first refusal to repurchase the Mast
Property in the event the Gemmers wish to sell it and
to have a right to re-lease the Leased Property in the
event that the Gemmers wishes to lease that property
to a third party after the term of the lease expires.
IN VIEW OF THE FOREGOING FACTS, and in exchange for the
mutual covenants and agreements set forth herein and other good and
valuable consideration, the parties hereby agree as follows:
58. Right of First Refusal. The Gemmers hereby grant to RHP, and
RHP hereby accepts, the right to purchase the Mast Property and a
right to re-lease from the Gemmers the Leased Property (hereafter
defined as the "Right of First Refusal") under the circumstances set
forth below:
a. Offer to Sell. If the Gemmers receive a bona fide good
faith offer from any person pursuant to which Gemmer proposes to
sell, assign or transfer all or a portion of the Mast Property or any of
the Gemmers' interest therein, which offer Gemmers intend to accept
(the "Purchase Offer"), Gemmers shall first offer to sell, assign or
transfer the Mast Property (or that portion thereof or interest therein
specified in the Purchase Offer) to RHP under the same terms and
conditions as contained in the Purchase Offer, in accordance with the
procedures set forth in Section 2.
b. Offer to Lease. If prior to or upon the expiration of the
term of the lease for the Leased Property, the Gemmers receive a
bona fide good faith offer from any person to lease the Leased
Property or any portion thereof from the Gemmers, which the
Gemmers intends to accept (the "Lease Offer"), the Gemmers shall
first offer to lease the Leased Property (or that portion thereof
specified in the Lease Offer), to RHP under the same terms and
conditions as contained in the Lease Offer.
59. Procedures. The Right of First Refusal shall be exercised in
accordance with the following procedures:
a. Notices. If the Gemmers wish to accept a Purchase Offer
or Lease Offer, the Gemmers shall deliver a notice to RHP setting
forth the material terms and conditions of that offer as well as any
agreements or letters of intent stating the terms and conditions of that
offer (the "Offer Notice"). If RHP wishes to purchase or lease the
Mast Property or Leased Property (as the case may be) under the
terms set forth in the Offer Notice, RHP shall deliver a notice of
acceptance of that offer (an "Acceptance Notice") to the Gemmers
no later than 15 days after the date the Offer Notice was delivered to
RHP.
b. Date and Manner of Purchase. If RHP delivers an
Acceptance Notice to the Gemmers, the purchase of the Mast
Property or the commencement of the new lease shall then take place
in accordance with terms and conditions set forth in the Offer Notice.
The closing of the purchase and sale of the Mast Property, or the
commencement of the new lease, shall take place at such date and
time as the parties mutually agree or, if the parties do not agree upon
a date or time, upon the later of: (i) thirty days following the date the
Acceptance Notice was delivered to the Gemmers; or (ii) the date for
the closing of the transaction contained in the Offer Notice.
c. Failure to Accept Offer, New Offer. If RHP chooses not
to purchase the Mast Property or lease the Leased Property in
accordance with the Offer Notice, or does not deliver an Acceptance
Notice in a timely manner to the Gemmers, the Gemmers may
proceed with the sale or lease to the person who made the Purchase
Offer or Lease Offer in accordance with that offer. If the terms and
conditions under which the Gemmers intend to sell or lease the Mast
Property or Leased Property change in any manner which are more
favorable to the proposed purchaser or lessee, or if the identity of the
person proposing to purchase or lease that property changes, that
change will be deemed to be a new offer. If Gemmer wishes to
accept that new offer, the Gemmers must again offer to sell or lease
that property to RHP under that new offer in the manner described
in this Section 2.
60. Effect of Failure to Exercise. The sale, assignment or transfer of
the Mast Property or any portion thereof by Gemmer shall not cause
a termination of the Right of First Refusal. If the Gemmers sell,
assign or transfer the Mast Property, the Gemmers shall require the
purchaser to agree to assume all of the Gemmers' obligations under
this Agreement, regardless of the fact that RHP may not have
exercised its rights to purchase the Property in connection with that
sale. The Right of First Refusal shall be deemed a covenant which
runs with the Mast Property and any purchaser of the Mast Property
shall have the rights of and be subject to the obligations of the
Gemmers under this Agreement.
61. Duration. The Right of First Refusal shall remain in full force
and effect for the following period:
a. Duration of Right to Purchase Option. Subject to earlier
termination pursuant to Section 5 of this Agreement, the Right of
First Refusal shall remain in effect with respect to all offers to
purchase the Mast Property made to the Gemmers by any person on
or prior to December 31, 2011, after which date the Right of First
Refusal shall expire.
b. Duration of Right to Lease. The Right of First Refusal
shall apply with respect to any offer to lease the Leased Property
made on or prior December 31, 2011; provided, however, that the
Right of First Refusal shall expire immediately if: (i) any such lease
is to enter into effect after December 31, 2011; (ii) RHP does not
submit an Acceptance Notice with respect to that offer within the
time specified in Section 2; and (iii) the Gemmers and the new lessee
enter into a lease agreement incorporating the terms of that offer and
begin to perform their obligations under the terms thereof.
62. Termination of Right of First Refusal. The Right of First Refusal
will terminate immediately regardless of whether the applicable
periods described in Section 4 have expired if the agreement under
which RHP leases the Leased Property is terminated due to the
breach of that Agreement by RHP.
63. No Default. RHP may only exercise the Right of First Refusal
if it is not in default of any material obligation under which RHP
leases the Lease Agreement as of the date that RHP is required to
deliver the Acceptance Notice to the Gemmers or as of the date that
RHP is to purchase the Mast Property or re-lease the Leased
Property.
64. Exercise at Discretion of R.H. Phillips. RHP shall have the sole
and exclusive right to determine whether to exercise the Right of
First Refusal. Nothing in this Agreement shall limit in any way the
right of RHP to make the decision as to whether it will or will not
exercise the Right of First Refusal in its sole discretion. However, if
RHP does submit an Acceptance Notice to the Gemmers, RHP will
be legally obligated to purchase or lease the Mast Property or Leased
Property (as the case may be).
65. Recordation of Memorandum of Agreement. Upon the
execution of this Agreement, the parties shall execute, acknowledge
and cause to be recorded in the Official Records of Yolo County a
Memorandum of Agreement, substantially in the form of Exhibit B
to this Agreement, sufficient to give notice of the Right of First
Refusal, the term of the Right of First Refusal and the rights of RHP
hereunder. Upon expiration or termination of the Right of First
Refusal, RHP shall execute, acknowledge and deliver to the
Gemmers, no later than three days after the termination or expiration
of the Right of First Refusal, a quitclaim deed or other reasonable
documentation in recordable form to verify the termination or
expiration of the Right of First Refusal.
66. Notices. All notices under this Agreement shall be in writing
and delivered personally, by nationally recognized overnight courier
service (delivery charges paid by sender) or by first class mail,
postage prepaid, to the following addresses:
If to the Gemmers:
David L. Gemmer
2441 Alamo Drive
Alamo, CA 94507
Fax: (925) 933-6165
<PAGE>
If to RHP
R.H. Phillips, Inc.
26836 County Road 12A
Esparto, California 95627
Attention: Chief Financial
Officer
Fax: (530) 662-2880
For the purposes of this Agreement, notices will be deemed
delivered upon receipt if delivered personally, on the next business
day following deposit with an overnight courier if delivered by
overnight courier or on the third business day following deposit with
the U.S. Postal Service if sent via first class mail. Notices may also
be delivered via facsimile, provided that prompt confirmation of that
notice is delivered to the recipient by the means described in the
previous sentence. Notices shall be sent to the addresses and
facsimile numbers set forth below the signatures of the parties to this
Agreement or to such other address and numbers as the party to
whom the notices are to be sent informs the other in writing.
67. Attorneys' Fees. If any action is commenced to enforce or
construe this Agreement, the party who substantially prevails shall be
entitled to recover the costs that party incurred in prosecuting or
defending that action, including but not limited to reasonable
attorneys' fees, in addition to any other relief to which that party is
entitled.
68. Miscellaneous. This Agreement shall be governed by and
construed in accordance with the laws of the State of California,
excluding that state's conflicts of laws principles. This Agreement,
together with the Vineyard Development and Lease Agreement, the
Real Estate Purchase Agreement and all attachments and exhibits
hereto and thereto, constitute the entire agreement between the
parties with respect to the subject matter hereof and supersede all
prior or contemporaneous agreements, whether oral or written, of the
parties pertaining to that subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
DAVID L. AND SHIRLEY A. GEMMER
//s//David L. Gemmer
_____________________________
David L. Gemmer
Shirley A. Gemmer
_____________________________
Shirley A. Gemmer
R.H. PHILLIPS, INC.
By: //s//Mike Motroni
_______________________________
Title: Chief Financial Officer
_____________________________
EXHIBIT A
LEGAL DESCRIPTION OF MAST PROPERTY
The South one-half (South 1/2) of Section 34, and the
Southwest Quarter (Southwest 1/4) of Section 35, Township 11
North, Range 1 West, M.D.B & M., lying Westerly of the West
boundary line of State Highway 505.
Excepting therefrom all that real property described in
deed executed by Vernon A. Mast, et al., to the State of
California, dated June 29, 1954, and recorded November 30, 1954,
in Book 439 of Official Records, at page 45, and recorded
December 6, 1971 in Book 999 of Official Records, page 482.
APN: 54-220-07, 54-220-08 54-220-10
DESCRIPTION OF LEASED PROPERTY
The Leased Property shall consist of 115 acres located on
the east side of the Mast Property.
EXHIBIT B
[FORM OF MEMORANDUM OF AGREEMENT]
WATER SHARING AGREEMENT
THIS AGREEMENT, dated September 29, 1999, is entered
into between David L. and Shirley A. Gemmer (the "Owners") and
R.H. Phillips, Inc. ("R.H. Phillips") with respect to the following
facts:
The Owners own certain real estate located in an
unincorporated area of Yolo County, California,
which is described in greater detail in Exhibit A to
this Agreement (the "Property"). The Owners and
R.H. Phillips have entered into a Vineyard
Development and Lease Agreement (the "Lease
Agreement") pursuant to which R.H. Phillips has
agreed to develop, maintain and operate vineyards on
a 115 acre portion of the Property. As a part of the
development work on that portion of the Property,
R.H. Phillips will install and operate a well and water
delivery systems for the purpose of irrigating the
vineyards.
The Owners may wish to use water from the well and
water delivery systems for agricultural purposes on
the Property. R.H. Phillips and the Owners may also
wish to use water supplied to the Property by the
Yolo County Water District.
The parties wish to set forth their agreement
concerning the manner in which the water and the
costs incurred in obtaining the water will be allocated
between the parties as well as other matters
pertaining to the sharing of and use of water on the
premises.
IN VIEW OF THE FOREGOING FACTS, the parties agree as
follows:
69. Agreement to Share Water. The Owners and R.H. Phillips
hereby agree to allocate water located on or delivered to the Property
subject to the terms and conditions set forth below.
70. Definitions. For the purposes of this Agreement, the following
words and phrases shall have the meanings set forth below:
a. "District" shall mean the Yolo County Flood Control and
Water Conservation District.
b. "District Water" shall mean water obtained for use on the
Property from the District.
c. "Leased Portion" shall mean that portion of the Property
that R.H. Phillips is leasing from the Owners.
d. "Property Water" shall mean: (i) water obtained from
wells located on the Property; and (ii) water obtained for use on the
Property from a neighboring parcel, described in Exhibit B (the
"Mast Property"), pursuant to an easement agreement with the
owners of that property.
e. "Unleased Portion" shall mean that portion of the Property
which R.H. Phillips is not leasing from the Owners.
71. Installation of Water Delivery Systems. The obligations of R.H.
Phillips and the Owners with respect to the installation and
maintenance of wells and water delivery systems on the Leased
Portion are set forth in the Lease. The Owners may use Property
Water obtained from any well on the Property or the Mast Property
that R.H. Phillips has installed and maintains, provided that the
Owners shall install and maintain, at the Owners' expense, all water
delivery systems for transporting the water to the Unleased Portion.
72. Allocation of Water. If water delivery timing conflicts or supply
shortages occur between the Owners and R.H. Phillips, water shall
be allocated as between the Leased Portion and the Unleased Portion
as follows:
a. The portion of the Property on which vineyards are
planted shall be allocated all available water to the extent that the
party managing that portion of the Property deems reasonably
necessary for the vineyards.
b. If vineyards are planted on more than one portion of the
Property, available water shall be allocated among the portions based
upon the number of acres of vineyards under cultivation in each
portion, with the portion having a greater number of vineyards being
allocated proportionately more water.
73. Allocation of Costs. The Owners will reimburse R.H. Phillips
for the pro-rata share of the operating and maintenance costs of the
well or wells located on the Leased Portion and utility and other
charges based on the operation of the well(s) during each month. For
the purposes of this Agreement, the pro-rata share of the operating
and maintenance costs shall equal a fraction, the numerator of which
will be the total amount of water used on the Unleased Premises and
the denominator shall be the total water used on the Property. If
R.H. Phillips installs a well and water delivery systems on the Mast
Property for obtaining water for use on the Property, the Owners will
reimburse R.H. Phillips for the pro-rata share of the operating and
maintenance costs of the well and the water delivery systems.
74. District Water. If either R.H. Phillips or the Owners use District
Water on the Property (other than during the "Development Period",
as defined in the Lease), the party using the water will be responsible
for paying all charges assessed by the District for the use of the
water. If both parties use District Water, each party shall be
responsible for that portion of the total payment assessed by the
District which equals that party's pro-rata share of the District
Water. The party who receives an invoice or other statement of
charges from the District shall promptly notify the other party of the
total charges assessed. If either party pays all or any portion of a
payment obligation to the District which is properly owned by the
other party, the other party shall reimburse the party paying the
invoice for that amount by no later than 15 days after receipt of
notice of the amount paid.
75. Use of Water. R.H. Phillips agrees that it will use the Property
Water solely for the purposes of irrigating vineyards located on the
Property. The Owners agree that they will use Property Water solely
for agricultural purposes on the Property. The Owners and R.H.
Phillips agree that they will not remove from the Property any
District Water which is delivered to the Property without the prior
written consent of the other party.
76. Term of Agreement/Termination.
a. Expiration. This Agreement shall expire upon the
occurrence of any of the following:
i. The expiration or termination of the Lease if R.H.
Phillips and the Owners do not extend the Lease;
ii. The purchase of the Property by R.H. Phillips
pursuant to a Right of First Refusal Agreement, dated as of the date
of this Agreement, between R.H. Phillips and the Owners (the "Right
of First Refusal Agreement"); or
iii. The mutual written consent of the parties.
b. Termination. The foregoing notwithstanding, either party
may terminate this Agreement at any time upon 30 days notice to the
other party if the other party has committed a material breach of its
obligations under this Agreement and the party in breach has not
cured that breach within that 30 day period.
77. Assignment and Assumption of Obligations.
a. By R.H. Phillips. R.H. Phillips may not assign its rights or
obligations under this Agreement without the written consent of the
Owners unless: (i) R.H. Phillips assigns its rights under the Lease or
subleases the Leased Property and the Owners consent to the
assignment or sublease in accordance with the Lease; or (ii) R.H.
Phillips assigns its rights by operation of law in the manner permitted
under the Lease. This Agreement shall be binding upon the permitted
assigns or permitted sublessees of R.H. Phillips.
b. By Owners. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the Owners,
including all subsequent owners of the Property. In the event that the
Owners lease some or all of the Unleased Premises to any person
other than R.H. Phillips, the Owners shall require that lessee to
execute a written agreement to be bound by the terms of this
Agreement.
78. Effective Date of Agreement. This Agreement shall enter into
effect upon the later of: (i) the date of this Agreement; or (ii) such
date as the Lease and Right of First Refusal Agreement are executed
and enter into effect.
79. Miscellaneous.
a. Recordation of Agreement. The parties agree to execute
a memorandum of agreement with respect to this Agreement for
recordation with the Recorder of the County of Yolo. Upon the
termination or expiration of this Agreement, the parties agree to
execute a memorandum of termination of this Agreement for
recordation with the Recorder of the County of Yolo. Such
memoranda of agreement will be executed and notarized in a form
that will allow them to be recorded with the Recorder of the County
of Yolo.
b. Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the parties with respect to the
subject matter of this Agreement and supersedes all other prior and
contemporaneous agreements, whether oral or written, between the
parties regarding that subject matter. The foregoing notwithstanding,
nothing in this Agreement shall amend to supersede any provision of
the Lease or Right of First Refusal Agreement.
c. Amendment. This Agreement may be amended or
modified solely only by means of a written instrument signed by both
parties.
d. Attorneys Fees. If any action is commenced to construe
or enforce this Agreement, the party who substantially prevails in that
action shall be entitled to recover the costs which that party incurred
in prosecuting or defending that action, including but not limited to
reasonable attorneys fees, in addition to any other relief to which that
party may be entitled.
e. Notice. All notices shall be delivered personally, via
recognized overnight courier (such as Federal Express, Airborne
Express, UPS or the United States Postal Service Express Mail Next
Day Service) or by first class mail, postage prepaid. Notices may be
delivered via facsimile, provided that prompt confirmation of such
notice shall be sent by one of the methods described in the previous
sentence. All notices shall be delivered to the addresses and facsimile
numbers set forth below the parties' signatures to this Agreement or
to such other address or facsimile number as the party to whom the
notice is sent informs the other in writing.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date
first above written.
THE OWNERS
//s//David L. Gemmer
_________________________________
David L. Gemmer
//s//Shirley A. Gemmer
_________________________________
Shirley A. Gemmer
Address:
2441 Alamo Glen Drive
Alamo, CA 94507
fax: (925) 933-6165
R.H. PHILLIPS, INC.
By://s//Mike Motroni
_____________________________
Title: Chief Financial Officer
____________________________
Address:
26836 County Road 12A
Esparto, CA 95627
Attention: Chief Financial Officer
fax: (530) 662-2880
EXHIBIT A
LEGAL DESCRIPTION OF PROPERTY
The South one-half (South 1/2) of Section 34, and the
Southwest Quarter (Southwest 1/4) of Section 35, Township 11
North, Range 1 West, M.D.B & M., lying Westerly of the West
boundary line of State Highway 505.
Excepting therefrom all that real property described in deed
executed by Vernon A. Mast, et al., to the State of California, dated
June 29, 1954, and recorded November 30, 1954, in Book 439 of
Official Records, at page 45, and recorded December 6, 1971 in
Book 999 of Official Records, page 482.
APN: 54-220-07, 54-220-08 54-220-10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE SEPTEMBER 30,
1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<S> <C>
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<SECURITIES> 0
<RECEIVABLES> 4,748
<ALLOWANCES> 38
<INVENTORY> 17,234
<CURRENT-ASSETS> 1,120
<PP&E> 47,243
<DEPRECIATION> 9,938
<TOTAL-ASSETS> 62,239
<CURRENT-LIABILITIES> 8,476
<BONDS> 29,836
<COMMON> 14,641
2,295
0
<OTHER-SE> 4,893
<TOTAL-LIABILITY-AND-EQUITY> 62,239
<SALES> 17,498
<TOTAL-REVENUES> 17,498
<CGS> 8,117
<TOTAL-COSTS> 8,117
<OTHER-EXPENSES> 5,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,442
<INCOME-PRETAX> 2,507
<INCOME-TAX> 1,009
<INCOME-CONTINUING> 1,498
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,498
<EPS-BASIC> .21
<EPS-DILUTED> .21
</TABLE>
