-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mu/Y0tDUSuglXu6YozYxlU8BD3cNr8KtEe4xugORCE8RArQk4zJkHSWm69kbW65I 2HUpetztsHf3xLqZOHam8A== 0000898430-99-001006.txt : 19990319 0000898430-99-001006.hdr.sgml : 19990319 ACCESSION NUMBER: 0000898430-99-001006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVENA FOODS INC CENTRAL INDEX KEY: 0000814139 STANDARD INDUSTRIAL CLASSIFICATION: SAUSAGE, OTHER PREPARED MEAT PRODUCTS [2013] IRS NUMBER: 952782215 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10741 FILM NUMBER: 99568022 BUSINESS ADDRESS: STREET 1: 5010 EUCALYPTUS AVE CITY: CHINO STATE: CA ZIP: 91710 BUSINESS PHONE: 7146271082 MAIL ADDRESS: STREET 1: 5010 EUCALYPTUS AVENUE CITY: CHINO STATE: CA ZIP: 91710 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K - -------------------------------------------------------------------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - -------------------------------------------------------------------------------- FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 Commission File Number 1-10741 PROVENA FOODS INC. (Exact name of registrant as specified in its charter) California 95-2782215 - ------------------------------------------------------------- --------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. employer identification number) 5010 Eucalyptus Avenue, Chino, California 91710 - ------------------------------------------------------------- --------------------------------------- (Address of principal executive offices) (ZIP code)
(909) 627-1082 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the act: Title of each class Name of each exchange on which registered - ----------------------------- ----------------------------------------- COMMON STOCK AMERICAN STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the act: None - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The aggregate market value of Provena Foods Inc. Common Stock held by non-affiliates as of February 20, 1999 was $8,402,993. The number of shares of Provena Foods Inc. Common Stock outstanding on February 20, 1999 was 2,922,780. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in any definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] PROVENA FOODS INC. 1998 FORM 10-K ANNUAL REPORT Table of Contents Item Page - ---- PART 1 ---- ------ 1. Business ............................................................................................ 1 2. Properties .......................................................................................... 4 3. Legal Proceedings ................................................................................... 5 4. Submissions of Matters to a Vote of Security Holders ................................................ 5 PART 11 ------- 5. Market for the Registrant's Common Stock and Related Stockholder Matters ............................ 5 6. Selected Financial Data ............................................................................. 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 8 8. Financial Statements and Supplementary Data ......................................................... 11 9. Disagreements on Accounting and Financial Disclosure ................................................ 11 PART 111 -------- 10. Directors and Executive Officers of the Registrant .................................................. 11 11. Executive Compensation .............................................................................. 12 12. Security Ownership of Certain Beneficial Owners and Management ...................................... 14 13. Certain Relationships and Related Transactions ...................................................... 14 PART IV ------- 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K ................................... 15 ------------- Signatures .......................................................................................... 16
PART 1 ------ ITEM 1. BUSINESS General - ------- Registrant (the "Company") is a California-based specialty food processor engaged in the supply of food products to other food processors, distributors and canners. Its primary products are pepperoni and Italian-style sausage sold to frozen pizza processors, pizza restaurant chains and food distributors and dry pasta sold to food processors and canners, private label producers and food distributors. The Company's products are sold throughout the United States but primarily in the Western United States. The Company's meat processing business is conducted through the Swiss American Sausage Co. Division ("Swiss American" or "Swiss"), and its pasta business is conducted through the Royal-Angelus Macaroni Company Division ("Royal-Angelus" or "Royal"). The Company acquired its present businesses between 1972 and 1975. The predecessor of Swiss was founded in 1922 and the two predecessors to Royal, Royal Macaroni Company and Angelus Macaroni Mfg. Co., were founded in 1878 and 1946, respectively. The Company was incorporated in 1972 in California with an initial capitalization of approximately $212,000. The Company's competitive strategy is to emphasize providing products of predictable quality and consistency at competitive prices as well as prompt and reliable service. The Company attempts to establish, refine and maintain procedures to assure that the Company's products comply with its customers' specifications and are delivered in a manner that will satisfy their delivery and production requirements. For financial information about each of the Company's two divisions, see the segment data contained in Note 11 of Notes to Financial Statements. Swiss American Sausage Co. Meat Division - ---------------------------------------- During the years ended December 31, 1998 and 1997, sales by Swiss accounted for 62.7% and 69.3%, respectively, of the Company's net sales. The Company's processed meat products are sold primarily to pizza restaurant chains, pizza processors and food service distributors. Pizza processors produce prepared pizza which is sold primarily as frozen pizza in food markets. Food service distributors supply food to delicatessens, restaurants and other retail businesses offering prepared food. The Company's meat products are sold nationally, but most of its sales are made to customers located in the Western United States. The Company also sells processed meat products to the U.S. Government. The Company does not have supply agreements with its major customers, many of whom purchase some of their meat products from other suppliers. Swiss competes with numerous producers of processed meats, many of which are larger and have greater financial resources than the Company. Swiss's competitors include large national meat packers such as Hormel Foods Corporation, as well as smaller regional meat processors. Pizza processors that manufacture their own meat products diminish the market for Swiss's products. The Company competes in the meat processing business by emphasizing predictable quality and consistency. The meat processing activities of the Company were conducted at its facilities in San Francisco, California, until the main plant was destroyed by a fire on August 1, 1998. A new Company meat plant is under construction in Lathrop, California, scheduled for completion in the 1st half of 1999. The Company estimates the theoretical production capacity of its San Francisco plant was 27,000,000 pounds per year. The Company did not have space within its San Francisco plant to increase its capacity, but the plant's capacity was adequate for the contemplated needs of Swiss. The new plant is intended to be a higher production capacity plant with the capability of expansion. See ITEM 2. PROPERTIES. The meat processing activities of Swiss are typified by its processing of pepperoni, its principal product, which consists of the following steps: (i) the purchase of beef and pork trimmings with a guaranteed lean content; (ii) the blending of the meat into the Company's meat product while carefully controlling the consistency and content of the product; (iii) the addition of spices and preservatives to the product; (iv) the extrusion of the product into sausage casings; (v) the oven cooking of the product in the casings; and (vi) the drying of the cooked product. Throughout the production process, the Company subjects its meat products to quality control inspection for the purposes of satisfying U.S. Department of Agriculture regulations, meeting customer specifications and assuring a consistent quality of the products to the Company's customers. -1- In addition to pepperoni and sausage, the Company processes a relatively small amount of other meat products, including crumbles which are quick-frozen nuggets of a pre-cooked meat product, such as the sausage on a sausage pizza. The crumbles line extrudes the ground and blended ingredients into nuggets which are cooked and quick-frozen in one continuous operation. Royal-Angelus Macaroni Company Pasta Division - --------------------------------------------- During the years ended December 31, 1998 and 1997, sales by Royal-Angelus accounted for 37.3% and 30.7%, respectively, of the Company's net sales. The Company sells its pasta products primarily to food processors and canners, private label customers, food service distributors, and specialty food distributors. Royal's food processor and canner customers use the Company's pasta to produce retail products in which pasta is an ingredient, such as pasta salads, soups and entrees. Royal's private label customers are regional and national food suppliers that sell pasta under their own labels, purchased in bulk from the Company or packaged by the Company. Royal's food service distributor customers supply pasta to restaurants, institutional purchasers, and some retail establishments. The Company also sells its pasta products to government agencies, the military, schools and other pasta manufacturers. Beginning in the latter part of 1987, the Company's pasta products have been produced at Royal-Angelus' production plant in Chino, California. In April 1995, the Company purchased a building adjacent to the pasta plant and currently occupies 40% of the building as part of its pasta plant and leases 60% to a tenant through February 2001. The pasta plant has a theoretical production capacity estimated at 30,000,000 pounds per year, adequate for the foreseeable production needs of Royal. In the basic pasta production process, durum semolina flour is mixed with water and the mixture is extruded into one of many shapes, cut to the proper length, dried, packaged and shipped to the Company's customers. If required by the particular variety of pasta, a different flour is used or flour is blended with egg powder, vegetable powder or other ingredients before the water is added. No preservatives are used in making pasta. Royal-Angelus competes with several national and regional pasta manufacturers, many of which have greater financial resources than the Company. The Company competes in the pasta business by emphasizing predictable quality and consistency and by its capability of producing a larger variety of pastas with shorter lead times and production runs than most of its larger competitors. Suppliers - --------- The primary ingredients used by the Company in processed meat products are beef, pork, spices and casings and in pasta products are flour, egg powder and vegetable powder. The ingredients are purchased from suppliers at prevailing market prices. The Company has not recently experienced any shortages in the supply of ingredients and generally expects the ingredients to continue to be available for the foreseeable future. Since August 1, 1998, when fire destroyed the main meat plant, the meat division has attempted to maintain volume until the new meat plant is operational by purchasing products from other suppliers for its customers, but the meat division's sales have been almost $1,000,000 per month lower since the fire. Business interruption insurance, to a large extent, covers the increased cost of purchasing from suppliers. Patents, Trademarks and Licenses - -------------------------------- The Company owns no patents. It owns the United States registered trademarks "Royal" with the crown design and "Vegeroni" for use on pasta products and licenses from the Del Monte Company until 2009 the United States registered trademark "Capo di Monte" for use on meat products. Registrations of the trademarks owned by the Company must be and are renewed from time to time. Royal, Vegeroni and Capo di Monte are used on consumer products in limited distribution. No substantial portion of the Company's sales is dependent upon any trademark. -2- Commodity Price Fluctuations and Availability - --------------------------------------------- The Company contracts to sell its products at a fixed price for production and delivery in the future (generally four to six months or less). The Company is, therefore, subject to the risk of price fluctuations with respect to its product ingredients from the time the Company contracts with its customers until the time the Company purchases the commodities used to fill the orders. Prices for meat and flour, the Company's major product ingredients, fluctuate widely based upon supply, market speculation, governmental trade and agricultural policies, and other unpredictable factors. The Company is able to contract to fixed prices for delivery of domestic beef and pork up to 30 days in advance, imported beef and sometimes pork up to 90 days in advance, and flour up to 90 days or more in advance. The Company generally covers its committed sales by purchasing commodities at fixed prices for future delivery, but is subject to the risk of commodity price fluctuations when in contracts for sales beyond the period it can cover or when it orders commodities in anticipation of sales. Effects of Inflation - -------------------- It is the Company's general policy, subject to current competitive conditions, to pass on increases in costs of commodities used in production by increasing prices of the products it sells to its customers. However, because the Company agrees on the price of its products to its customers in advance of purchasing the product ingredients, there may be a delay in passing on increasing commodity costs to customers, temporarily decreasing profit margins. Competitive conditions may limit the Company's ability to pass on commodity price increases to its customers, prolonging or increasing the adverse effect on profit margins. Marketing and Distribution - -------------------------- The Company's processed meat and pasta products have been marketed primarily by the Company's management personnel, food brokers, and four full-time salaried sales people. Because the Company sells most of its processed meat and pasta products to customers who either further process the products before they reach the consumer or sell the products under private labels, the Company does not advertise its products in a manner designed to reach the ultimate consumer. Dependency on a Limited Number of Large Customer - ------------------------------------------------ A substantial portion of the Company's revenues has in recent years resulted from sales to a few customers. See Note 11 of Notes to Financial Statements. The Company does not enter into continuing sales contracts with its customers, and has different major customers from time to time. The following table shows, by division and for the Company, the percentage of sales represented by the Company's largest customers for the year ended December 31, 1998:
Number of Division Company Division Customers Sales% Sales% -------- --------- ------ ------ Swiss American 3 54% 34% Royal-Angelus 1 13% 5% --- --- Totals 4 39%
The Company fills orders as they are received from its customers, normally within a few weeks or less, and does not have a meaningful backlog of orders for its products. The Company carries significant inventories of its products for only a few major customers, and does not provide extended payment terms to customers. Food Industry Risks - ------------------- The business of the Company is subject to the risks inherent in the food industry, including the risks that a food product or ingredient may be banned or its use limited or declared unhealthful, that product tampering or contamination will require a recall or reduce sales of a product, or that a product's acceptability will diminish because of generally perceived health concerns or changes in consumer tastes. -3- Employees - --------- As of December 31, 1998, the Company employed 115 full-time employees, 50 in production at Swiss in San Francisco, California, 50 in production at Royal- Angelus in Chino, California, 6 in clerical and office functions, 4 in sales activities, and 5 in management activities. The Company's San Francisco plant employees are represented by the United Food and Commercial Workers Union Local 101, AFL-CIO, under a collective bargaining agreement renewed April 1, 1998 to expire March 31, 2002. There has been no significant labor unrest at the division's plants and the Company believes it has a satisfactory relationship with its employees. Health Benefits - --------------- The Company provides health insurance benefits to its non-union employees and their dependents on a self-funded basis. The Company is insured for the excess over $40,000 of claims of any covered person incurred and paid during the year, but is self-funded for claims up to $40,000. The Company is exposed to the risk of an extraordinary number of significant claims but not one or more very large claims. Regulation - ---------- Food products purchased, processed and sold by the Company are subject to various federal, state and local laws and regulations, including the federal Meat Inspection Act and the Federal Food, Drug and Cosmetic Act. Since January 25, 1999, the Company has qualified for the U.S. Department of Agriculture's Hazardous and Analysis Critical Control Points Program which enables the Company to self-inspect its meat products and production conditions and techniques. As required by law, U.S. Department of Agriculture employees visit the Company's plant to inspect meat products processed by the Company and to review the Company's compliance with the program. The Company is also subject to various federal, state and local regulations regarding workplace health and safety, environmental protection, equal employment opportunity and other matters. The Company maintains quality control departments at both its San Francisco and Chino facilities for purposes of testing product ingredients and finished products to ensure the production of products of predictable quality and consistency, as well as compliance with applicable regulations and standards. ITEM 2. PROPERTIES The Company's original meat processing plant was an approximately 48,000 square foot facility located in San Francisco, which was destroyed by fire on August 1, 1998. In 1990 the Company occupied, under a lease expiring in 2001, an approximately 45,000 square foot facility near its main plant which it improved by building a dryer and relocating its slicing operations. The theoretical production capacity of the meat plant, before the fire, was estimated at 27,000,000 pounds per year, adequate for the currently contemplated needs of the division, but the plant did not have space to increase the production capacity or the variety of meat products which could be produced. The Company has under construction an approximately 85,000 square foot building, planned before the fire and scheduled to be completed in the 1st half of 1999, to provide a more efficient and higher production capacity meat plant, with the capability of expansion to increase capacity or product variety. See Liquidity and Capital Resources under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's pasta production plant is an approximately 41,000 square foot facility located in Chino, California, occupied by the Company since 1987. In April 1995, the Company purchased an approximately 44,000 square foot building adjacent to the pasta plant and currently occupies 40% of the building for pasta warehousing and leases 60% to a cold storage manufacturer through February 2001. The Chino plant, after the addition of a third short goods production line in 1996, has a theoretical production capacity estimated at 30,000,000 pounds annually, adequate to fulfill the foreseeable needs of the of the pasta division, and with the capability of expansion. -4- ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine claims and litigation incidental to its business. Management believes that none will have a material adverse effect on the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on Tuesday, April 21, 1998, at 11:00 a.m. at the Company's principal office. Shareholders representing 2,733,103 or 95.1% of the 2,876,587 shares entitled to vote were present in person or by proxy, with 11,445 broker non-votes. The following persons were nominated and elected directors, with votes for, withheld from specified nominees, or without authority to vote for directors, as indicated:
Without Nominee For Withheld Authority ------- --- -------- --------- John D. Determan 2,723,403 7,200 2,500 Theodore L. Arena 2,730,603 -0- 2,500 Ronald A. Provera 2,729,003 1,600 2,500 Santo Zito 2,730,603 -0- 2,500 Thomas J. Mulroney 2,730,603 -0- 2,500 Louis A. Arena 2,730,403 200 2,500 Joseph W. Wolbers 2,730,603 -0- 2,500 John M. Boukather 2,722,003 8,600 2,500
PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the American Stock Exchange under the symbol "PZA". The following table sets forth high and low prices as traded on the American Stock Exchange:
Quarter of Fiscal Year Ended December 31 First Second Third Fourth ----- ------ ----- ------ 1996 High 4 3-1/4 2-3/4 2-3/4 Low 2-5/16 2-5/16 2-1/4 2-3/8 1997 High 3-1/8 2-13/16 2-5/8 3 Low 2-1/2 2-1/4 2-1/8 2-3/8 1998 High 5-7/16 5-1/16 4 3-1/2 Low 2-5/8 3-3/4 2-5/16 2-7/16
The closing price on December 31, 1998 was $2-15/16. Common Stock - ------------ The Company's Articles of Incorporation as amended authorize the Company to issue up to 10,000,000 shares of common stock, without par value. The Company is not authorized to issue any class or series of shares except shares of common stock. At December 31, 1998 the Company had issued and outstanding 2,913,098 shares held by approximately 240 shareholders of record. In addition, the Company estimates that there are approximately 800 shareholders holding shares in street or nominee names. Holders of the Company's common stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. The Company commenced paying quarterly cash dividends in March 1988, and has paid the following annual amounts per share: -5- 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Dividends $0.12 $0.12 $0.10 $0.18 $0.1725 $0.1625 $0.16 $0.14 $0.125 $0.11 $0.10
The declaration and time of future dividends, if any, will depend on the Company's financial condition and results of operations and other factors deemed relevant by the Board. All outstanding shares of common stock are fully paid and nonassessable and are not subject to redemption. Holders of common stock are entitled to one vote for each share held of record and have cumulative voting rights in the election of directors. Holders of common stock do not have preemptive rights and have no right to convert their shares into any other security. Upon liquidation of the Company, the holders of common stock would share ratably in all assets of the Company after the payment of all liabilities. Shareholder communications regarding transfers, changes of address, missing dividends, lost certificates or similar matters should be directed to the Company's transfer agent and registrar, ChaseMellon Shareholder Services, Stock Transfer Department, Washington Bridge Station, P.O. Box 469, New York, NY 10033, (800) 522-6645, www.chasemellon.com. Common Stock Repurchase and Sales - --------------------------------- The Company has had an announced intention to repurchase shares of its common stock since January 11, 1988. Currently, purchases are authorized up to the number of shares issued under the Company's 1988 Employee Stock Purchase Plan. Purchases are made from time to time on the open market or in privately negotiated transactions. In addition, the Company must accept outstanding shares at fair market value in payment of the exercise price of options under the Company's 1987 Incentive Stock Option Plan. In 1998, the Company purchased no shares under its stock repurchase program, but received 5,842 shares in payment of the exercise price of options at an average fair market value of $3.85 per share. Since January 1988 the Company has repurchased 220,985 shares at an average cost of $3.14 per share, excluding shares used to exercise options. Under the Employee Stock Purchase Plan, in 1998 employees purchased 42,959 newly issued shares at an average price of $3.49 per share. Employees have purchased a total of 437,282 shares under the plan through December 31, 1998, at an average price of $3.04 per share. Employee contributions plus Company matching funds are used monthly to purchase shares at the market price under the plan and are accumulating at a rate of about $150,000 per year. Employees exercised Incentive Stock Options in 1998 to purchase 10,000 shares at an exercise price of $2.25 per share. -6- ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below under the headings Statement of operations data and Balance sheet data for, and as of the end of, each of the years in the five-year period ended December 31, 1998 is derived from the financial statements of the Company, which financial statements have been audited by KPMG LLP, independent certified public accountants. The selected financial data should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements for, and as of the end of, each of the years in the three- year period ended December 31, 1998, included in a separate section at the end of this report beginning on Page F-1. Financial reports are the responsibility of management, and are based on corporate records maintained by management, which maintains an internal control system, the sophistication of which is considered in relation to the benefits received.
Year Ended December 31, ------------------------ 1998 1997 1996 1995 1994 -------- ------- -------- -------- -------- Statement of operations data: (Amounts in thousands except per share data) Net Sales $ 24,503 30,966 28,895 23,424 26,265 Cost of sales 21,794 27,103 26,037 21,348 23,812 -------- ------- -------- -------- -------- Gross profit 2,709 3,863 2,858 2,076 2,453 Distribution, general and administrative expenses 2,253 2,066 2,002 2,021 2,082 -------- ------- -------- -------- -------- Operating income 456 1,797 856 55 371 Interest income (expense), net 18 (58) (75) (66) (7) Other income, net 3,326 279 113 184 156 -------- ------- -------- -------- -------- Earnings before income taxes 3,800 2,018 894 173 520 Income taxes 1,558 764 332 84 200 -------- ------- -------- -------- -------- Net earnings $ 2,242 1,254 562 89 320 ======== ======= ======== ======== ======== Earnings per share: Basic $ .78 .44 .20 .03 .12 ======== ======= ======== ======== ======== Diluted $ .77 .44 .20 .03 .12 ======== ======= ======== ======== ======== Cash Dividends paid per share $ .12 .12 .10 .18 .1725 Weighted average number of shares outstanding (1): Basic 2,891 2,836 2,767 2,705 2,669 Diluted 2,924 2,855 2,775 2,750 2,687 Balance sheet data (end of period): Working capital $ 7,221 4,574 3,564 2,832 3,180 Property and equipment (net) 7,602 4,468 4,705 5,083 4,070 Total assets 17,280 11,539 10,414 10,050 9,036 Long-term debt 4,000 752 960 969 --- Shareholders' equity 10,479 8,435 7,357 6,915 7,245
- -------------------------------------------------------------------------------- (1) The Company sold shares under its employee stock purchase plan, sold shares under its incentive stock option plan, received shares in exercise of incentive stock options and repurchased outstanding shares in the years as shown:
1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Purchase Plan Shares Sold 42,959 55,355 51,990 57,223 54,461 Incentive Option Shares Sold 10,000 20,400 16,000 53,555 52,000 Received in Exercise of Options 5,842 7,795 8,600 18,500 31,457 Outstanding Shares Repurchased --- --- --- 52,289 28,757
-7- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Result of Operations - -------------------- The following table sets forth operating data for the years ended December 31, 1998, 1997 and 1996:
Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 ---- ---- ---- (Dollars in thousands) Net sales $24,503 100.0% $30,966 100.0% $28,895 100.0% Cost of sales 21,794 88.9 27,103 87.5 26,037 90.1 ------ ----- ------ ----- ------ ----- Gross profit 2,709 11.1 3,863 12.5 2,858 9.9 Distribution, general and administrative expenses 2,253 9.2 2,066 6.7 2,002 6.9 ------ ----- ------ ----- ------ ----- Operating income 456 1.9 1,797 5.8 856 3.0 Interest income (expense), net 18 .1 (58) (.2) (75) (.3) Other income, net 3,326 13.6 279 .9 113 .4 ------ ----- ------ ----- ------ ----- Earnings before income taxes 3,800 15.5 2,018 6.5 894 3.1 Income taxes 1,558 6.4 764 2.5 332 1.1 ------ ----- ------ ----- ------ ----- Net earnings $ 2,242 9.2% $ 1,254 4.0% $ 562 1.9% ====== ===== ====== ===== ====== =====
Sales on thousands of pounds by division Swiss American 10,473 13,903 13,475 Royal-Angelus 18,762 21,284 18,213
Comparison of Years Ended December 31, 1998 and 1997 - ---------------------------------------------------- In 1998, sales of $24,503,000 were down 21% from 1997 sales of $30,966,000, primarily because of decreased sales at the meat division following the August 1, 1998 fire which destroyed its main meat plant. The meat division's sales were down about 28% in dollars and 25% in pounds and its operating income was down 152% in 1998 from 1997. Swiss's sales for the 4th quarter of 1998 were down 57% in dollars and 54% in pounds from the 4th quarter of 1997. Sales in dollars decreased proportionately more than in pounds because of lower selling prices reflecting lower meat costs. Swiss was experiencing modest growth and increased profits until the August 1, 1998 fire destroyed its main meat plant. Swiss has attempted to maintain volume until its new plant is operational by purchasing products from other suppliers for its customers, but since the fire, Swiss's sales have been almost $1,000,000 per month lower and Swiss has operated at a loss, realizing a pre-tax profit only after taking into account the benefits of business interruption insurance. The pasta division's sales decreased about 4% in dollars and 12% in pounds but its operating income increased 40% in 1998 from 1997. The pasta division's sales for the 4th quarter of 1998 were down 35% in dollars and 45% in pounds from the same quarter of 1997. The sales decreases in pounds did not result in proportionate decreases in dollars because of higher average selling prices from a lower proportion of high volume-lower priced sales. The decreases in sales in pounds reflect competition resulting from increasing industry capacity. The large decrease in the 4th quarter of 1988 partly reflects a surge in sales a year ago, when sales for the 4th quarter of 1997 were up 44% in dollars and 62% in pounds over the 4th quarter of 1996. Royal's increased operating income resulted from higher production labor efficiency, a lower proportion of high-volume sales and lower flour costs. The cost of semolina flour was near pre-1993 levels after an increase of about 50% in 1993. The Company's gross profit for 1998 was $2,709,000 or 11.1% of net sales compared to $3,863,000 or 12.5% of net sales for 1997. Gross profit decreased absolutely and as a percent of sales because of the higher cost at Swiss of purchasing processed products from other suppliers since the fire. Distribution, general and administrative expenses for 1998 were up about 9% from 1997. Distribution expense was up about $67,000 because of increased sales person payroll and expense, increased officer payroll and commissions at Royal, and increased promotional expense at Swiss, partially offset by lower freight on lower sales at Swiss. Administrative expense was up about $119,000 primarily due to increased officer payroll, health care costs and outside services, partially offset by lower bad debt expense. -8- Net interest changed from an expense to income because of the absence of borrowing under the bank line, a lower balance on the term loan, repayment of the term loan and interest income on higher cash balances. Other income increased because of recognition of $1,747,000 of business interruption insurance proceeds. Comparison of Years Ended December 31, 1997 and 1996 - ---------------------------------------------------- In 1997, sales of $30,966,000 were up 7% from 1966 sales of $28,895,000, as result of increased sales at both divisions. The meat division's sales were up about 9% in dollars and 3% in pounds and its operating income was up 152% in 1997 over 1996. Swiss's sales for the 4th quarter of 1997 were up 25% in dollars and 23% in pounds over the 4th quarter of 1996. Sales increased proportionately more in dollars than in pounds because of higher selling prices reflecting higher meat prices. Swiss's operating income increased in 1997 because of favorable meat purchases and a higher margin product mix throughout the year and increased production labor efficiency and plant utilization resulting from the increased sales volume in the 4th quarter. The Royal pasta division's sales increased about 3% in dollars and 17% in pounds and its operating income increased 56% in 1997 over 1996. The pasta division's sales for the 4th quarter of 1997 were up 44% in dollars and 62% in pounds over the same quarter of 1996. The sales increases in pounds did not result in proportionate increases in dollars because of lower average selling prices caused by price competition and a higher proportion of high-volume sales. The cost of semolina flour increased about 50% in 1993 and had remained well above pre-1993 levels through 1997. Royal had been expecting a tension between high flour prices and increased price competition caused by increasing industry capacity. Flour prices increased slightly in 1997, but Royal succeeded in increasing its sales and operating income. Its operating income increased in 1997 because of higher production labor efficiency and plant utilization throughout the year, increasing in the 4th quarter, and because of lower office payroll. The Company's gross profit for 1997 was $3,863,000 or 12.5% of net sales compared to $2,858,000 or 9.9% of net sales for 1996. Gross profit increased absolutely and as a percent of sales because production costs increased less than proportionately to sales, especially in the 4th quarter, and because of favorable meat purchases and a higher margin product mix at Swiss. Distribution, general and administrative expenses for 1997 were up about 3% from 1996. Distribution expense was up about $94,000 because Swiss' salesmen payroll increased and Royal bore the freight on a higher proportion of its sales. Administrative expense was down about $29,0000 primarily due to a decrease in officer payroll at Royal, as well as lower health care costs and consulting services relating to Swiss and other outside services, partially offset by higher clerical payroll and bad debt expense. Other income increased about $166,000 because of a $164,502 state reimbursement of the cost of 1991 removal of a gasoline storage tank at the former distribution division warehouse. Net interest expense decreased principally because of the lower borrowing under the bank line of credit. Liquidity and Capital Resources - ------------------------------- The August 1, 1998 fire at the Company's main meat plant destroyed $1,112,435 net book value of inventory and $474,835 net book value of equipment and leasehold improvements. The Company recognized $5,204,739 of insurance claim proceeds at December 31, 1998. The insurance company paid $3,000,000 toward the claims by December 31, 1998 and a total of $5,132,462 by February 20, 1999. Included in other income is $1,747,156 of the proceeds for business interruption since the fire. The business interruption claims are ongoing and there has been no final settlement for any of the claims. The Company has generally satisfied its normal working capital requirements with funds derived from operations and borrowings under a bank line of credit. The Company had $2,000,000 unsecured line of credit with Wells Fargo Bank, NA which was replaced by a $2,000,000 line of credit with Comerica Bank-California on September 1, 1998. At December 31, 1998, the Company had had no borrowings under either line for over 18 months. The Company also had a term loan with Well Fargo Bank, NA secured by the 2nd Royal building with a balance of $747,505 at June 30, 1998, which the Company prepaid on July 31, 1998, using funds on hand. The Comerica line of credit is part of a credit facility proposed by Comerica for the Company's financial needs, including the need to finance the acquisition and construction of a new meat plant. The line is payable on demand, is subject to annual review, and bears interest at a variable annual rate, at the Company's option, of either 1.75% over Comerica's cost of funds or 0.25% under its "Base Rate." Also as part of the credit facility, Comerica has issued a $4,060,000 letter of credit which expires October 15, 2003 and secures payment of principal and interest on $4,000,000 of industrial development bonds which were issued October 7, 1998, mature October 1, 2023 and produced $3,909,485 of net proceeds for acquisition and construction of the Company's new meat plant. The Company is obligated to pay principal and interest on the bonds. Comerica is not obligated to renew the letter -9- of credit, but the Company is obligated to maintain a like letter of credit until the bonds mature. The bonds are initially demand obligations remarketed upon repayment and bear a variable rate of interest payable monthly and set weekly at a market rate, initially 3.15% per annum and 2.55% at January 31, 1999. The Company pays a 1.5% per annum fee on the amount of the letter of credit and fees of the bond trustee estimated at 0.5% of the bond principal per year. Beginning May 1, 2000 and continuing until the bonds mature, the Company is obligated to make monthly principal payments into an interest bearing fund, with the principal used annually to redeem the bonds and the interest accruing to the benefit of the Company. The monthly payments aggregate $76,700 the first year and increase about 5.6% each year until May 1, 2022, when $813,500 of remaining principal is payable in 18 equal monthly payments. The Company has the option to convert the bonds to bonds with principal payable at the end of a fixed term and interest payable semi-annually at a fixed rate set at the minimum rate of interest at which the converted bonds are remarketed. The proposed credit facility also contemplates an up to $1,200,000 term loan for a new pasta line, an additional $4,000,000 term loan for completion of the new meat plant and an up to $1,000,000 term loan for equipment at the new meat plant. All parts of the credit facility prohibits mergers, acquisitions, disposal of assets, borrowing, granting security interests, and changes of management and requires a tangible net worth greater than $7,500,000, a debt to tangible net worth ratio less than 2, a quick ratio greater than 0.90, and cash flow coverage greater than 1.30. On September, 30, 1998, the Company purchased a 5.3 acre parcel of land in the city of Lathrop, county of San Joaquin, California, for a purchase price of $484,821 plus fees and commissions, as the site for the new meat plant. Construction of the 85,000 square foot building to house the new meat plant is in progress with the completion scheduled for the 1st half of 1999. The estimated cost of acquisition and construction of the new meat plant is currently over $8,500,000, including over $3,800,000 for general construction by A.P. Thomas Construction, Inc., the general contractor, over $3,300,000 for electrical, refrigeration, and specialty installations by other contractors under direct contract with the Company and the balance primarily for site cost, developer fees, commissions, utility fees, and architectural and engineering fees. The move to the new plant will require charging to expense the net capitalized leasehold improvements and the future rent on the remaining San Francisco building through lease expiration in 2001, reduced by future rent under any agreed sublease, or reduced to termination costs if there is an agreed early termination of the lease. The annual cost to Swiss of the new meat plan will exceed the annual cost of its old meat plant, and reduced volume because of the fire will increase the difficulty of building the volume at the new plant to profitable levels. Additions to property and equipment of about $100,000 are anticipated for 1999, plus the cost of the new meat plant. In 1998 cash, including restricted cash, increased about $2,987,000. The restricted cash is industrial development bond proceeds disbursable for construction costs. Operating activities produced $3,523,000, primarily from earnings, depreciation, large decreases in accounts receivable and inventories, and an increase in deferred taxes, partially offset by an increase in other receivables. Investing activities used about $3,587,000, primarily for land purchase, progress payments and other capitalized costs of a new plant at Swiss. Financing activities produced about $3,051,000 from the proceeds of the industrial development bonds, reduced by prepayment of the term loan and by the excess of cash dividends paid over net stock proceeds. Accounts receivable and inventories decreased because of the fire and subsequent reduced sales at Swiss. The deferred taxes arose from a gain of insurance proceeds exceeding the net book value of leasehold improvements and equipment lost in the fire. The gain is not currently taxable but reduces future tax deductions for depreciation on the replacement improvements and equipment. The other receivables are unpaid insurance proceeds relating to the fire. In 1997 cash increased about $824,000. Operating activities produced about $1,508,000 primarily from earnings, depreciation, a decrease in inventories and an increase in accounts payable, partially offset by an increase in accounts receivable and a decrease in accrued liabilities. Investing activities used about $299,000 of cash for property and equipment at both divisions, including retail packaging and faster sausage linking machines at Swiss. Financing activites used about $385,000 for dividends and the term loan pre-payment, offset by net stock proceeds. Inventories were down and accounts receivable up because the surge of sales in the 4th quarter depleted inventories and generated accounts receivable. In 1996 cash decreased about $85,000. Operating activities produced about $238,000, principally from earnings and depreciation offset by increases in accounts receivable and inventories and a decrease in accounts payable. Investing activities used about $194,000 for net capital expenditures and financing activities used about $129,000 for dividends offset by net stock proceeds. The Company's inventories and accounts receivable normally reflect the level of its sales, and in 1996 sales were up 23%, resulting in about a $165,000 increase in account receivable and about a $631,000 increase in inventories, following about a $502,000 reduction in inventories in 1995 on reduced sales. -10- In 1999 quarterly cash dividends will continue to be paid if the Board believes that earnings and cash flow are adequate. The Company adopted an employee stock purchase plan in 1988 to provide employees with the incentive of participation in the performance of the Company and to retain their services. Under the plan, employees other than officers and directors may authorize weekly payroll deductions which are matched by the Company and used monthly to purchase shares from the Company at the market price. The weekly payroll deduction is from $5 to $50 for each participant. The matching funds are an expense incurred by the Company, but the plan results in net cash flow to the Company because amounts equal to twice the matching funds are used to purchase shares from the Company. Cash flow to the Company from the plan was $149,835 in 1998 and may be as much as $150,000 or more in 1999. The Company believes that is operations and bank line of credit will provide adequate working capital to satisfy the normal ends of its operations for the foreseeable future, including the financing of a new meat plant, assuming the proposed credit facility is fully implemented. New Accounting Standards - ------------------------ The Finance Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" in June 1997 and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. SFAS No. 131 is effective for interim financial statements beginning 1999 and for other financial statements beginning 1998. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Application of these Standards, in the opinion of management, will not have a material effect on the information presented. Year 2000 - --------- Many computer programs use only the last two digits of a year to store or process dates. This is the Y2K defect and programs with it may treat dates after 1999 as earlier than dates before 2000. The Company uses computers for accounting, payroll, display and analysis of information, word processing and other clerical activities, as well as some production process control. The Company has examined its computer usage and found only that is accounting programs exhibit the Y2K defect, which could adversely affect routines such as calculating depreciation or aging accounts receivable. The Company has engaged a computer programmer to correct the defect, which is expected to be corrected before the year 2000 for under $20,000. The Company will be able to manually perform the tasks affected without a material adverse effect on the Company's operations, if the defect is not corrected. Programs being acquired for production at the pasta plant and the new meat plant are specified to be free of the defect. The Company's customers, suppliers and service providers may use computer programs with the Y2K defect which, to the extend not corrected, could adversely affect the Company's operations, such as the receipt of supplies, services, purchase orders and payments of accounts receivable. The Company is not aware of any customers, suppliers or service providers with Y2K problems likely to have a material adverse effect, individually or in the aggregate, on the Company's operations, but the Company has limited information about other companies' Y2K problems and no means to audit or direct correction of them. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data are submitted in a separate section at the end of this report beginning with the Index to Financial Statements and Schedule on Page F-1. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The name, age, principal position for the past five years and other relevant information for each of the current directors and executive officers of the Company is as follows: John D. Determan, age 66, has been a vice president and director of the Company since its formation in 1972, General Counsel from 1986 to 1992, Chief Executive Officer from 1992 to February 21, 1998 and Chairman of the Board since 1992. He is a member of the audit and option committees. -11- Theodore L. Arena, age 56 has been the General Manager of Swiss since 1976, and the President and a director of the Company since 1985. He is the Chief Executive Officer effective February 21, 1998. He is the nephew of Louis A. Arena, a director of the Company. Ronald A. Provera, age 61, has been the secretary and a director of the Company since its formation in 1972 and was the General Manager of Sav-On Food Co., the Company's distribution business, from its formation in 1960 until its liquidation in 1991. He is currently providing sales support to Royal-Angelus. He is a member of the option committee. Santo Zito, age 62, has been the Company's plant engineer since 1976, and a vice president and director of the Company since its formation in 1972. He is currently the General Manager of the pasta division. He is a member of the option committee. Thomas J. Mulroney, age 53, has been the Company's chief accountant since 1976, the Chief Financial Officer since 1987, a vice president since 1991, and a director since 1992. Louis A. Arena, age 76, has been a director of the Company since 1972, a vice president from 1972 to 1989, and General Manager of the Royal-Angelus Macaroni Co. division form 1975 until his retirement in 1989. Joseph W. Wolbers, age 69, has been director of the Company and Chairman of the audit committee since 1990. He retired in 1989 as vice president of the First Interstate Bank where he had been employed since 1950. John M. Boukather, age 62, is a management consultant. He was Director of Operations of PW Supermarkets from 1993 to 1994, Vice President, Retail Sales, of Certified Grocers of California, Ltd. from 1992 to 1993 and president of Pantry Food Markets from 1983 to 1987. He has been director of the Company and member of the audit committee since 1987. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth for the years ended December 31, 1998, 1997 and 1996, all compensation of all executive officers of the Company serving at December 31, 1998. Annual Restricted SEP/IRA Name and Position Year Salary Option Award Contributions ----------------- ---- ------ ------------ ------------- Shares John D. Determan, 1998 $ 80,771 $ 12,116 Chairman of the Board 1997 65,658 9,849 1996 62,791 9,419 Theodore L. Arena, 1998 133,749 29,062 President and 1997 110,790 91,458 16,618 Chief Executive Officer 1996 107,135 16,070 Ronald A. Provera, 1998 129,641 19,466 Secretary 1997 105,414 15,812 1996 103,568 15,535 Santo Zito, 1998 132,806 19,921 Vice President 1997 108,195 16,229 1996 106,246 15,937 Thomas J. Mulroney, 1998 129,793 19,469 Chief Financial Officer 1997 105,552 18,291 15,833 1996 102,161 15,324
See Incentive Stock Option Plan below for information on Incentive Stock --------------------------- Options. See Simplified Employee Pension Plan below for more information on ------------------------------------ SEP/IRA Contributions. -12- The Company does not currently pay bonuses or deferred compensation to any executive officer and does not provide them with automobiles, other perquisites, employment contracts or "golden parachute" arrangements. Effective November 1, 1997, Mr. Determan's basic annual salary was raised from $60,000 to $75,000 and the basic annual salary of each of the other four officers was raised from $100,000 to $125,000. The annual salary is as reported on Form W-2 and includes the cost of life insurance and other costs taxable to the officer. Compensation Committee Interlocks and Insider Participation - ----------------------------------------------------------- The Company has no compensation committee. All executive officers are members of the Board and participate in the Board's deliberations concerning executive compensation. Simplified Employee Pension Plan - -------------------------------- In 1988, the Company adopted a Simplified Employee Pension-Individual Retirement Accounts ("SEP-IRA") plan and executed SEP-IRA Agreements with Wells Fargo Bank, N.A. and Dean Witter Reynolds, Inc., covering all employees at least 18 years old who have worked at least six months and earned at least $300 during the year, except certain union employees. The Company makes contributions under the plan at the discretion of the Board, allocated in proportion to compensation, to an Individual Retirement Account ("IRA") established by each eligible employee. Contributions, up to 15% of eligible compensation. are deductible by the Company and not taxable to the employee. An employee may withdraw SEP-IRA funds from the employee's IRA> Withdrawals are taxable as ordinary income, and withdrawals before age 59-1/2 may be subject to tax penalties. For 1998, the Company contributed $424,327 to IRA's under the plan. Incentive Stock Option Plan - --------------------------- In April 1987, the Company adopted an Incentive Stock Option Plan under Section 422A of the Internal Revenue Code of 1986. Under the plan, as amended in 1988, for a period of ten years from the date of adoption, an Option Committee appointed by the Board of Directors is authorized in its discretion to grant to key management employees options to purchase up to an aggregate of 161,704 shares of common stock of the Company. The options may become exercisable in such installments as may be established by the Option Committee. The purchase price of shares covered by an option may not be less than the market value of the shares on the date of the grant. The term of an option may not exceed 10 years and an option may not become exercisable in any year with respect to the purchase of more than $100,000 worth of shares based on the market value on the date of grant. In 1992, options were granted to purchase 260,000 shares at a price of $2-1/4 per share, 150,000 to Theodore L. Arena, 30,000 to Thomas J. Mulroney, and the balance to four other employees. In April 1997, outstanding options of Messrs. Arena and Mulroney to purchase 60,000 and 12,000 shares, respectively, were terminated and options were granted to Messrs. Arena and Mulroney to purchase 91,458 and 18,291 shares, respectively, at a price of $2-9/16 per share. In 1996, 1997, and 1998, options were exercised to purchase 16,000, 20,400, and 10,000 shares, respectively, none by executive officers. The following table shows, for the two executive officers, the number of unexercised options held on January 1, 1999, the number exercisable and unexercisable and their aggregate value based on the year end closing price of $2-15/16. Option Values at January 1, 1999 --------------------------------
Number of Unexercised Value of Unexercised In-the- Options at 11/1/99 Money Options at 1/199 Names Exercisable/Unexercisable Exercisable/Unexercisable ----- ------------------------- ------------------------- Theodore L. Arena 78,000/13,458 $29,250/5,047 Thomas J. Mulroney 18,291/ -0- $6,859/ -0-
-13- Compensation of Directors - ------------------------- Directors who are not officers or employees are paid a fee of $1,000 for each board meeting or board committee meeting attended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Management Stock Ownership - -------------------------- The following table sets forth, for each officer, director and 5% shareholder of the Company and for all officers and directors as a group (8 persons), the number and percent of outstanding shares of common stock of the Company owned on December 31, 1998.
Shares Beneficially Owned ---------------------------------------------------------- Without Options(4) Options Exercised(5) ------------------------ ------------------------ Name or Category(1) Number Percent Number Percent - ------------------ -------- ------- ------- -------- John D. Determan 335,327 11.5% 335,327 11.1% Penny S. Bolton 378,463 13.0% 378,463 12.5% Theodore L. Arena 140,994 4.8% 232,452 7.7% Ronald A. Provera 322,330 11.1% 322,330 10.7% Santo Zito 352,330 12.1% 352,330 11.7% Thomas J. Mulroney (3) 13,900 .5% 32,191 1.1% Louis A. Arena 288,030 9.9% 288,030 9.5% John M. Boukather 1,778 .1% 1,778 .1% Joseph W. Wolbers 12,250 .4% 12,250 .4% Officers and Directors 1,466,939 50.4% 1,576,688 52.2% Shares Outstanding 2.913,098 100% 3,022,847 100%
- -------------------------------------------------------------------------------- (1) The address for each person is c/o Porvena Foods Inc., 5010 Eucalyptus Avenue, Chino, Ca. 91710. (2) Penny S. Bolton is the widow of James H. Bolton, former chairman of the Company. Her shares are not included in the group's shares. (3) Includes 2,000 shares owned by Marsha Mulroney, wife of Thomas J. Mulroney. (4) Excludes options under the Company's Incentive Stock Option Plan to Theodore L. Arena to purchase 91,458 shares to Thomas J. Mulroney to purchase 18,291 shares and to all officers and directors as a group to purchase 109,749 shares. (5) The options of Messrs. Arena, Mulroney and the group are deemed exercised. No other person is known to the Company to own beneficially more than 5% of the outstanding shares of the Company. Management Stock Transactions - ----------------------------- During the specified quarter of 1998, officers and directors purchased the following numbers of shares of the Company's common stock: 1st quarter, John M. Boukather - 17 shares; 2nd quarter, Mr. Boukather - 12; 3rd quarter, Mr. Boukather - 13, Joseph W. Wolbers - 4,500; 4th quarter, Mr. Boukather - 17, Marsha Mulroney, wife of Thomas J. Mulroney - 2,000. During the 1st quarter of 1998, Thomas J. Mulroney sold 9,000 shares. No other purchases or sales of the Company's common stock by officers or directors were reported ruing the year. Based on copies of filed forms and written representations, the Company believes that all officers, directors and 10% shareholders have timely filed all Forms 3, 4 and 5 required for 1998 and (except as previously disclosed) prior years by Section 16(a) of the Securities Exchange Act. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no transactions with related parties required to be disclosed under the above caption in this report. -14- PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial Statements and Schedules - ---------------------------------- The Financial Statements and Schedule filed with this report are in a separate section at the end of this report beginning with the Index to Financial Statements and Schedule on page F-1. Exhibits - -------- 3.7 Bylaws of the Company, as in effect on January 16, 1989 (1), (3) 3.8 Amended and restated Articles of Incorporation of the Company as filed with the California Secretary of State on June 17, 1987 (2) 3.9 Amendment to Articles of Incorporation of the Company re Liability of Directors and Indemnification as filed with the California of State on January 17, 1989 (6) 3.10 Amendment to Bylaws of the Company re Liability of Directors and Indemnification effective January 17, 1989 (6) 3.11 Amendment to Bylaws of the Company re Annual Meeting in April (7) 3.12 Amendment to Bylaws of the Company re relocating Principal Office to Chino, California (8) 3.13 Amendment to Bylaws of the Company re President as Chief Executive Officer 4.3 Form of Certificate evidencing common stock (8) 10.2 1987 Incentive Stock Option Plan, as amended to date (1) 10.20 1988 Stock Purchase Plan of the Company (4) 10.22 Dean Witter Simplified Employee Pension Plan Employer Agreement dated August 8, 1988 (5) 10.23 Wells fargo Bank Simplified Employee Pension Plan Adoption Agreement dated July 18, 1988 (5) 10.26 Lease Agreement dated May 28, 1990 between the Company and Alexander M. and June L. Maisin, as Lessor, of the second Swiss San Francisco Plant (7) 10.36 Standard Industrial/Commercial Single-Tenant Lease-Gross dated December 18, 1995 between the Company, as Lessor, and R-Cold, Inc. and Therma-Lok, Inc., as Lessee of a portion of 5060 Eucalyptus Avenue, Chino, CA (9) 10.37 First Amendment to lease dated December 18, 1995 between Company and Therma-Lok, Inc. 10.38 Construction/Development Agreement Between Owner, Contractor and Developer dated June 19, 1998 among Swiss as owner, A.P. Thomas Construction Inc. as contractor and Catlin Properties, Inc., as developer 10.39 Master Revolving Note and Security Agreement, both dated July 14, 1998 between the Company and Comerica Bank-California, relating to the Company's $2,000,000 line of credit 10.40 Collective Bargaining Agreement dated April 1, 1998 between Swiss and United Food and COmmercial Workers Union Local 101, AFL-CIO 10.41 Loan Agreement dated October 1, 1998 between the California Economic Development Financing Authority and the Company 10.42 Remarketing Agreement dated October 1, 1998 between the Company and Dain Rauscher Incorporated 10.43 Purchase Contract among the California Economic Development Financing Authority, the Treasurer of State of California and Dain Rauscher Incorporated 10.44 Tax Regulatory Agreement dated October 1, 1998 among the California Economic Development Financing Authority, U.S. Bank Trust National Association, as trustee, and the Company 10.45 Building Loan Agreement dated October 1, 1998 between the Company and Comerica Bank-California 10.46 Reimbursement Agreement dated October 1, 1998 between the Company and Comerica Bank California 23.1 Consent of KPMG LLP 27. EDGAR Financial Data Schedule - -------------------------------------------------------------------------------- (1) Exhibit to Form S-1 Registration Statement filed May 11, 1987 (2) Exhibit to Amendment No. 2 to Form S-1 Registration Statement filed June 17, 1987 (3) Exhibit to Amendment No. 3 to Form S-1 Registration Statement filed July 29, 1987 (4) Exhibit to 1987 Form 10-K Annual Report (5) Exhibit to 1988 Form 10-K Annual Report (6) Exhibit to 1989 Form 10-K Annual Report (7) Exhibit to 1990 Form 10-K Annual Report (8) Exhibit to 1991 Form 10-K Annual Report (9) Exhibit to 1995 Form 10-K Annual Report -15- Reports on Form 8-K During the year ended December 31, 1998 the Company filed reports on Form 8-K dated August 1, 1998 regarding the meat plant fire and October 7, 1998 regarding the issuance of industrial revenue bonds for a new meat plant. SIGNATURES Pursuant to the requirements of section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 20, 1999 PROVENA FOODS INC. By /s/ John D. Determan ------------------------- John D. Determan Chairman of the Board Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ John D. Determan Chairman of the Board and Director February 20, 1999 - ---------------------- John D. Determan /s/ Theodore L. Arena President (Principal Executive February 20, 1999 - ---------------------- Officer) and Director Theodore L. Arena /s/ Ronald A. Provena Vice President, Sales, Security and February 20, 1999 - ---------------------- Director /s/ Santo Zito Vice President and Director February 20, 1999 - ---------------------- Santo Zito /s/ Thomas J. Mulroney Chief Financial Officer (Principal February 20, 1999 - ---------------------- Financial and Accounting Officer) Thomas J. Mulroney /s/ Louis A. Arena Director February 20, 1999 - ---------------------- Louis A. Arena /s/ Joseph W. Wolbers Director February 20, 1999 - ---------------------- Joseph W. Wolbers /s/ John M. Boukather Director February 20, 1999 - ---------------------- John M. Boukather -16- PROVENA FOODS, INC. Financial Statements and Schedule December 31, 1998 and 1997 (With Independent Auditors' Report Thereon) PROVENA FOODS INC. Index to Financial Statements and Schedule
Page Independent Auditors' Report F-2 Balance Sheets December 31, 1998 and 1997 F-3 Statements of Earnings - Years ended December 31, 1998, 1997 and 1996 F-4 Statements of Shareholders' Equity - Years ended December 31, 1998, 1997 and 1996 F-5 Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996 F-6 Notes to Financial Statements F-7 Schedule II - Valuation and Qualifying Accounts and Reserves F-19
F-1 Independent Auditors' Report The Board of Directors Provena Foods Inc.: We have audited the accompanying balance sheets of Provena Foods Inc. as of December 31, 1998 and 1997 and the related statements of earnings, shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1998, as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the accompanying financial statement schedule, as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Provena Foods Inc. at December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Orange County, California February 1, 1999 F-2 PROVENA FOODS INC. Balance Sheets December 31, 1998 and 1997
Assets 1998 1997 -------------- -------------- Current assets: Cash and cash equivalents $ 116,306 1,089,957 Accounts receivable, net of allowance for doubtful accounts of $0 and $10,934 at December 31, 1998 and 1997, respectively (notes 4, 5 and 12) 1,638,022 3,112,520 Insurance recovery receivable (note 15) 2,204,738 -- Inventories (notes 2, 4 and 5) 1,458,369 2,679,118 Prepaid expenses 59,118 45,460 -------------- -------------- Total current assets 5,476,553 6,927,055 Restricted cash (note 5) 3,960,224 -- Deferred tax asset (note 8) 73,504 101,279 Property and equipment, net (notes 3, 4 and 5) 7,602,040 4,467,521 Other assets 167,342 43,203 -------------- -------------- $ 17,279,663 11,539,058 ============== ============== Liabilities and Shareholders Equity Current liabilities: Current portion of long-term debt (note 5) $ -- 8,460 Accounts payable 1,118,294 1,123,820 Accrued liabilities (note 6) 989,443 1,122,068 Income tax payable (note 8) 107,960 98,545 -------------- -------------- Total current liabilities 2,215,697 2,352,893 -------------- -------------- Deferred income -- 7,752 Long-term debt, net of current portion (note 5) 4,000,000 743,275 Deferred tax liability (note 8) 584,519 -- Shareholders equity (notes 7, 9 and 10): Common stock, no par value; authorized 10,000,000 shares; 2,913,098 and 2,865,981 shares issued and outstanding at December 31, 1998 and 1997, respectively 4,572,482 4,422,647 Retained earnings 5,906,965 4,012,491 -------------- -------------- Total shareholders equity 10,479,447 8,435,138 Commitments and contingencies (notes 4, 5, 9, 13 and 14) -------------- -------------- $ 17,279,663 11,539,058 ============== ==============
See accompanying notes to financial statements. F-3 PROVENA FOODS INC. Statements of Earnings Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ----------------- ----------------- ----------------- Net sales (note 11) $ 24,502,571 30,966,339 28,895,372 Cost of sales 21,794,109 27,103,198 26,037,541 ------------- ---------- ---------- Gross profit 2,708,462 3,863,141 2,857,831 ------------- ---------- ---------- Operating expenses: Distribution 1,055,130 987,948 893,834 General and administrative (notes 3 and 15) 1,197,643 1,078,225 1,107,581 ------------- ---------- ---------- 2,252,773 2,066,173 2,001,415 ------------- ---------- ---------- Operating income 455,689 1,796,968 856,416 Interest income (expense), net 18,442 (57,830) (75,437) Other income, net (notes 3 and 15) 3,325,831 279,257 113,339 ------------- ---------- ---------- Earnings before income taxes 3,799,962 2,018,395 894,318 Income taxes (note 8) 1,558,183 763,776 332,416 ------------- ---------- ---------- Net earnings $ 2,241,779 1,254,619 561,902 ============= ========== ========== Earnings per common share (note 11): Basic $ 0.78 0.44 0.20 ================ ========== ========== Diluted $ 0.77 0.44 0.20 ================ ========== ========== Shares used in computing per common share amounts (note 11): Basic 2,890,516 2,836,434 2,767,156 ============= ========== ========== Diluted 2,923,868 2,854,939 2,775,133 ============= ========== ==========
See accompanying notes to financial statements. F-4 PROVENA FOODS INC. Statements of Shareholders Equity Years ended December 31, 1998, 1997 and 1996
Note Common stock receivable Total ------------------------------- Retained from shareholders' Shares issued Amount earnings shareholder equity --------------- ---------- ---------- ------------- ------------- Balance at December 31, 1995 2,738,631 $ 4,104,173 2,814,169 (3,268) 6,915,074 Repurchase of common stock (8,600) (21,500) -- -- (21,500) Sale of common stock 51,990 139,087 -- -- 139,087 Exercise of shares under stock option plan (note 10) 16,000 36,000 -- -- 36,000 Cash dividends paid, $.10 per share -- -- (277,216) -- (277,216) Payment on shareholder note receivable -- -- -- 3,268 3,268 Net earnings -- -- 561,902 -- 561,902 --------------- --------------- --------------- ------------- ----------------- Balance at December 31, 1996 2,798,021 4,257,760 3,098,855 -- 7,356,615 Repurchase of common stock (7,795) (22,498) -- -- (22,498) Sale of common stock 55,355 141,485 -- -- 141,485 Exercise of shares under stock option plan (note 10) 20,400 45,900 -- -- 45,900 Cash dividends paid, $.12 per share -- -- (340,983) -- (340,983) Net earnings -- -- 1,254,619 -- 1,254,619 --------------- --------------- --------------- ------------- ----------------- Balance at December 31, 1997 2,865,981 4,422,647 4,012,491 -- 8,435,138 Repurchase of common stock (5,842) (22,500) -- -- (22,500) Sale of common stock 42,959 149,835 -- -- 149,835 Exercise of shares under stock option plan (note 10) 10,000 22,500 -- -- 22,500 Cash dividends paid, $.12 per share -- -- (347,305) -- (347,305) Net earnings -- -- 2,241,779 -- 2,241,779 --------------- --------------- --------------- ------------- ----------------- Balance at December 31, 1998 2,913,098 $ 4,572,482 5,906,965 -- 10,479,447 ============== ============== ============== ============ ================
See accompanying notes to financial statements. F-5 PROVENA FOODS INC. Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 --------------- -------------- -------------- Cash flows from operating activities: Net earnings $ 2,241,779 1,254,619 561,902 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 452,848 535,119 572,459 Loss on disposal of fixed assets -- 803 -- Provision for bad debts -- 36,241 (43,637) Deferred income taxes 612,294 (94,430) (6,849) Changes in assets and liabilities: Accounts receivable 1,474,498 (740,464) (164,989) Insurance recovery receivable (2,204,738) -- -- Inventories 1,220,749 249,560 (631,356) Prepaid expenses (13,658) 4,850 16,743 Income taxes receivable -- 2,342 Other assets (124,139) 6,378 (197) Accounts payable (5,526) 453,226 (123,161) Accrued liabilities (132,625) (262,857) 101,899 Income tax payable 9,415 74,085 24,460 Deferred income (7,752) (9,305) (71,947) ----------- --------- -------- Net cash provided by operating activities 3,523,145 1,507,825 237,669 ----------- --------- -------- Cash flows from investing activities: Proceeds from sale of property and equipment -- 3,655 1,200 Additions to property and equipment (3,587,367) (302,496) (195,362) ----------- --------- -------- Net cash used in investing activities (3,587,367) (298,841) (194,162) ----------- --------- -------- Cash flows from financing activities: Payments on note payable to bank (751,735) (208,460) (8,460) Issuance of long-term debt 4,000,000 -- -- Increase in restricted cash (3,960,224) -- -- Repurchase of common stock (22,500) (22,498) (21,500) Proceeds from sale of common stock 149,835 141,485 139,087 Exercise of stock options 22,500 45,900 36,000 Payments received on note from shareholder -- -- 3,268 Cash dividends paid (347,305) (340,983) (277,216) ----------- --------- -------- Net cash used in financing activities (909,429) (384,556) (128,821) ----------- --------- -------- Net increase (decrease) in cash and cash equivalents (973,651) 824,428 (85,314) Cash and cash equivalents at beginning of period 1,089,957 265,529 350,843 ----------- --------- -------- Cash and cash equivalents at end of pe$ $ 116,306 1,089,957 265,529 =========== ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 78,484 73,511 81,081 Income taxes 939,589 787,855 287,600 ========== ========= ========
See accompanying notes to financial statements. F-6 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 (1) Summary of Significant Accounting Policies (a) Description of Business Provena Foods Inc. (the Company) is a California-based specialty food processor. The Company grants credit to its customers in the normal course of business. The Company's meat processing business is conducted through its Swiss American Sausage Division (the Swiss American Division), and the Company's pasta business is conducted through its Royal-Angelus Macaroni Division (the Royal-Angelus Division). (b) Inventories Inventories consist principally of food products and are stated at the lower of cost (first-in, first-out) or market. (c) Property and Equipment Property and equipment are stated at cost. Assets acquired prior to 1981 and subsequent to 1986 are depreciated on the straight-line method. For assets acquired during the period from 1981 through 1986, accelerated methods of depreciation are used. Estimated useful lives are as follows: Buildings and improvements 31.5 to 39 years Machinery and equipment 10 years Delivery equipment 5 years Office equipment 7 years (d) Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers investments with maturities of three months or less at date of purchase to be cash equivalents. (e) Earnings per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been restated to conform to the SFAS No. 128 requirements (see note 11). (f) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable F-7 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (h) Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are measured at cost which approximates their fair value because of the short maturity of these instruments. The carrying amount of the Company's long-term debt approximates its fair value because the interest rate on the instrument fluctuates with market interest rates. (i) Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (j) Stock Option Plan Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value- based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. F-8 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 (k) Segment Information In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company adopted in 1998. The Company has two reportable segments; the meat processing division (Swiss American) and the pasta division (Royal-Angelus) (see note 12). (l) Reclassifications Certain amounts in the prior year's financial statements have been reclassified to conform with the current presentation. (m) Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gain and losses) in a full set of general purpose financial statements. SFAS No. 130 is effective for financial statements issued for periods beginning after December 15, 1997. The Company does not have any components of comprehensive income, and accordingly, the Company's comprehensive income is the same as its net income. (2) Inventories A summary of inventories follows:
1998 1997 ----------- ----------- Raw materials $ 335,725 $ 1,220,151 Work in process 115,034 674,400 Finished goods 1,007,610 784,567 ----------- ----------- $ 1,458,369 2,679,118 =========== ===========
(3) Property and Equipment Property and equipment, at cost, consists of the following:
1998 1997 ----------- ----------- Land $ 1,091,706 551,985 Buildings and improvements 2,728,087 3,283,200 Machinery and equipment 4,151,622 5,550,646 Delivery equipment 28,599 28,599 Office equipment 118,338 114,912 Construction in progress 3,225,797 40,861 ----------- ----------- 11,344,149 9,570,203 Less accumulated depreciation (3,742,109) (5,102,682) ----------- ----------- $ 7,602,040 4,467,521 =========== ===========
F-9 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 The Company leases certain real property to outside parties under noncancelable operating leases. Rental income, included in other income, totaled approximately $99,000, $106,000 and $104,000 in 1998, 1997 and 1996, respectively. The Company has under construction a new meat processing plant scheduled for completion in fiscal 1999. (4) Line of Credit The Company has a $2,000,000 secured bank line of credit, due on demand with no stated expiration date, at an interest rate of bank prime minus .25% (7.50% at December 31, 1998). The line of credit is secured by accounts receivable, inventory and equipment. No borrowings were made under this line of credit during 1998. The bank line of credit agreement is subject to certain covenants for which the Company was in compliance with at December 31, 1998. (5) Long-Term Debt Long-term debt at December 31, 1998 and 1997 consist of the following:
1998 1997 ----------- --------- Mortgage note payable, secured by land and building, bearing interest LIBOR plus 2%, payable in installments though the year 2000. The note was paid in full in 1998 $ -- 751,735 Industrial Development Revenue Bonds at variable interest rate (3.85% at December 31, 1998), secured by an irrevocable letter of credit, and requiring monthly principal and interest payments ranging from $6,400 to $45,200 from the year 2000 through the year 2023 4,000,000 -- ----------- ----------- 4,000,000 751,735 Less current portion -- (8,460) ----------- ----------- $ 4,000,000 743,275 =========== ===========
The $4,060,000 irrevocable letter of credit securing the Industrial Development Revenue Bonds, is collateralized by accounts receivable, inventories, equipment and certain real property. The commitment fee is 1.5% per annum, due at the beginning of each year. The proceeds from the Industrial Development Revenue Bonds issued in fiscal 1998 are held in trust and released as qualified capital expenditures are made. At December 31, 1998, $3,960,224 was held in trust and is classified as "restricted cash" in the Company's balance sheet. The installments of long-term debt maturing in each of the next five years are: 1999 - $0.2000 - $51,133, 2001 - $79,566, 2002 - $84,000, 2003 - $88,767. F-10 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 (6) Accrued Liabilities A summary of accrued liabilities at December 31 follows:
1998 1997 --------- ----------- Accrued profit sharing (note 9) $ 424,327 391,762 Accrued retirement 147,444 161,179 Accrued compensation 137,224 253,148 Other 280,448 315,979 --------- ----------- $ 989,443 $ 1,122,068 ========= ===========
(7) Shareholders' Equity In 1998, 1997 and 1996, the Company repurchased shares in negotiated transactions and retired the shares purchased. The Company sold shares to employees under its purchase plan (note 9) in 1998, 1997 and 1996. (8) Income Taxes Income taxes (benefit) consist of the following:
1998 1997 1996 ----------- ----------- ----------- Current: Federal $ 611,799 680,035 233,135 State 334,090 178,171 76,945 Deferred: Federal 577,374 (56,366) 18,366 State 34,920 (38,064) 3,970 ----------- ----------- ----------- $ 1,558,183 763,776 332,416 =========== =========== ===========
F-11 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 The sources and tax effects of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities are as follows:
December 31, December 31, 1998 1997 ------------ ------------ Deferred tax assets: Deferred income $ -- 3,111 Depreciation 3,146 37,590 State taxes 70,358 60,578 --------- --------- Total deferred tax asset $ 73,504 101,279 ========= ========= Deferred tax liability - gain on destroyed equipment $ 584,519 -- ========= =========
Based on the Company's historical pretax earnings, adjusted for significant items such as nonrecurring charges, management believes it is more likely than not that the Company will realize the benefit of deferred tax assets existing at December 31, 1998. Management believes the existing deductible temporary differences will reverse during periods in which the Company generates net taxable income. Nevertheless, certain tax planning or other strategies will be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits. Actual income taxes differ from the "expected" tax amount, computed by applying the US Federal corporate tax rate of 34% to earnings from operations before income taxes, as follows:
1998 1997 1996 ---------------------- --------------------- --------------------- Amount % Amount % Amount % ------------ ------- ------------ ------ ------------ ------ Computed "expected" income taxes $ 1,291,987 34.0% $ 686,254 34.0% $ 304,068 34.0% State income taxes, net of Federal 221,705 5.8 117,593 5.8 50,784 5.7 income tax benefit Change in valuation allowance 0 0 (28,545) (1.4) 19,068 2.1 Other 44,491 1.2% (11,526) (.6) (41,504) (4.6) ----------- --------- --------- --------- --------- --------- $ 1,558,183 41.0% $ 763,776 37.8% $ 332,416 37.2% =========== ========= ========= ========= ========= =========
(9) Employee Benefit Plans In 1988, the Company adopted a Simplified Employee Pension Individual Retirement Account (SEP IRA) plan covering all full-time, nonunion employees. The Company makes contributions under the plan at the discretion of the Board of Directors. The Company's contributions to the SEP IRA for 1998, 1997 and 1996 were $424,327, $391,762 and $393,880, respectively. F-12 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 In 1988, the Company adopted a stock purchase plan, enabling substantially all nonunion employees except officers and directors to purchase shares of the Company's capital stock through periodic payroll deductions. Employees may contribute up to $50 per week and all contributions are 100% matched by the Company; the combined funds are used in the subsequent month to purchase whole shares of capital stock at current market prices. Stock purchases under this Plan result in net cash flow to the Company as the contributions and employer matching contributions are used to purchase stock from the Company. The Company provides partial coverage for medical costs to its employees under a self-insured plan. Additionally, the Company carries a catastrophic policy that covers claims in excess of $40,000 for any covered individual. The Company has accrued the estimated liability for its self-funded costs (see note 13). (10) Incentive Stock Option Plan Under a stock option plan adopted in 1987, the Company has awarded options to certain of its key employees to purchase common stock at prices which approximate the fair market value of the stock at the date of grant. The plan provides for a maximum grant of 261,704 shares. All stock options have a maximum ten-year term and become fully exercisable in accordance with a predetermined vesting schedule that varies by employee. There were no options granted in 1998. The per share weighted-average fair value of stock options granted during 1997 was $0.95 on the date of grant using the Black Scholes option-pricing model with the following weighted- average assumptions: expected dividend yield 1%, risk-free interest rate of 6.7%, and an expected life of 8 years. There were no options granted in 1996. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ----------- --------- ---------- Net earnings As reported $ 2,241,779 1,254,619 561,902 =========== ========== ========== Pro forma $ 2,217,369 1,218,761 561,902 =========== ========== ========== Net earnings per share As reported: Basic $ .78 .44 .20 =========== ========== ========== Diluted $ .77 .44 .20 =========== ========== ========== Pro forma: Basic $ .77 .43 .20 =========== ========== ========== Diluted $ .76 .43 .20 =========== ========== ==========
Pro forma net earnings reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1996 is not considered. F-13 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 Stock option activity during the periods indicated is as follows:
Weighted- Number of average shares exercise price --------- ---------------- Balance at December 31, 1995 154,445 $ 2.25 Exercised (16,000) 2.25 Expired (36,000) 2.25 ----------- ----------- Balance at December 31, 1996 102,445 2.25 Granted 109,749 2.56 Exercised (20,400) 2.25 Terminated (72,045) 2.25 ----------- ----------- Balance at December 31, 1997 119,749 2.54 Exercised (10,000) 2.25 ----------- ----------- Balance at December 31, 1998 109,749 $ 2.56 =========== ===========
At December 31, 1998, exercise price and the remaining contractual life of outstanding options was $2.56 and eight years, respectively. At December 31, 1998 and 1997, the number of options exercisable was 96,291 and 67,291, respectively, and the weighted-average exercise price of those options was $2.56 and $2.54, respectively. F-14 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 (11) Earnings Per Share As discussed in note 1, the Company adopted SFAS No. 128 effective December 31, 1997. The following table illustrates the computation of basic and diluted earnings per share under the provisions of SFAS No. 128:
1998 1997 1996 ----------- ---------- ----------- Numerator: Numerator for basic and diluted earnings per share - net earnings $ 2,241,779 1,254,619 561,902 ============= ========== =========== Denominator: Denominator for basic earnings per share - weighted average number of common shares outstanding during the period 2,890,516 2,836,434 2,767,156 Incremental common shares attributable to exercise of outstanding options 33,352 18,505 7,977 ------------- ------------ ----------- Denominator for diluted earnings per share 2,923,868 2,854,939 2,775,133 ============= ============ =========== Basic earnings per share $ 0.78 0.44 0.20 ============= ============ =========== Diluted earnings per share $ 0.77 0.44 0.20 ============= ============ ===========
Substantially all options were included in the computation of diluted earnings per share for 1998, 1997 and 1996. (12) Segment Data and Major Customers The Company's reportable business segments are strategic business units that offer distinctive products that are marketed through different channels. The Company has two reportable segments; the meat processing division (Swiss American) and the pasta division (Royal-Angelus). The Swiss American division produces meat products that are sold primarily to pizza restaurant chains, pizza processors and food service distributors. The Royal-Angelus division produces pasta that is sold primarily to food processors, private label customers, food service distributors and specialty food distributors. F-15 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 The following table represents financial information about the Company's business segments as of and for the three years ended December 31, 1998:
1998 1997 1996 ------------- ------------ ----------- Net sales to unaffiliated customers: Swiss American Division $ 15,358,867 21,460,415 19,677,706 Royal-Angelus Division 9,143,704 9,505,924 9,217,666 ------------- ------------ ----------- Total sales $ 24,502,571 30,966,339 28,895,372 ============= ============ =========== Operating income (loss): Swiss American Division $ (555,721) 1,072,749 425,280 Royal-Angelus Division 1,111,545 794,617 507,914 Corporate (100,135) (70,398) (76,778) ------------- ------------ ----------- Operating income $ 455,689 1,796,968 856,416 ============= ============ =========== Identifiable assets: Swiss American Division $ 12,651,307 5,214,515 4,920,249 Royal-Angelus Division 4,405,736 5,098,629 5,185,553 Corporate 222,620 1,225,914 308,044 ------------- ------------ ----------- Total assets $ 17,279,663 11,539,058 10,413,846 ============= ============ =========== Capital expenditures: Swiss American Division $ 3,288,356 241,686 -- Royal-Angelus Division 293,413 60,810 194,775 Corporate 5,598 -- 587 ------------- ------------ ----------- Total capital expenditures $ 3,587,367 302,496 195,362 ============= ============ =========== Depreciation and amortization: Swiss American Division $ 155,742 201,537 213,892 Royal-Angelus Division 291,508 327,995 352,669 Corporate 5,598 5,587 5,898 ------------- ------------ ----------- Total depreciation and amortization $ 452,848 535,119 572,459 ============= ============ ===========
F-16 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 The Company had major customers during 1998, 1997 and 1996 that accounted for more than 10% of consolidated sales and purchased products, as follows:
Accounts receivable 1998 1997 1996 balance at December 31 ------------------- -------------------- ------------------- ------------------------- Customer Sales % Sales % Sales % 1998 1997 - -------------- ----------- ----- ----------- ----- ----------- ---- ---------- --------- A $ 2,626,616 11 $ 7,356,414 24 $ 7,043,135 24 $ 206,465 $ 807,982 B 2,987,405 12 3,275,088 11 3,158,942 11 -- -- C $ 2,727,134 11 $ -- - -- - $ 283,106 $ -- =========== ===== ============ ===== =========== ==== ========= =========
(13) Commitments and Contingencies The following table summarizes future minimum lease commitments required under various noncancelable operating leases:
Amount ---------- Year ending December 31: 1999 $ 260,114 2000 270,519 2001 114,552 --------- $ 645,185 =========
Rent expense for all leases was approximately $405,000, $396,000 and $387,000 in the years ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, 37% of the Company's employees are covered by a collective bargaining agreement which expires March 31, 2002. The Company is involved in a legal action arising in the ordinary course of business. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on the Company. (14) Self-Insured Health Benefits The Company is self-funded for Company provided health insurance benefits for its nonunion employees. The profit or loss effects of self-insuring cannot be foreseen and may be adverse. The Company has a reinsurance policy which covers claims in excess of $40,000 for any covered individual. (15) Casualty Loss On August 1, 1998, a fire destroyed one of the Company's two meat processing facilities located in San Francisco, CA. The destroyed facility was being leased under an operating lease expiring on November 1, 1998. The fire destroyed inventory with a net book value of $1,112,435 and certain equipment and leasehold improvements with a net book value of $474,835. The inventory was insured at market value and the equipment and leasehold improvements were insured at replacement cost. The total recovery for F-17 PROVENA FOODS INC. Notes to Financial Statements December 31, 1998 and 1997 inventory, equipment and leasehold improvements totaled $3,117,607. The Company is also being reimbursed for incremental costs under its "Business Interruption & Extra Expense" coverage, which reimbursement totaled $1,954,670 as of December 31, 1998. The business interruption claims are ongoing until the Company's new meat processing facility is completed, which is scheduled to be completed in fiscal 1999. As of December 31, 1998, the Company's total insurance claims were $5,204,738, resulting in a gain of $3,204,542, which is included in "Other income". The Company has received a partial payment of $3,000,000 as of December 31, 1998 and the remaining amount of $2,204,738 is included in the balance sheet as "Insurance recovery receivable," as it was received after December 31, 1998. There has been no final settlement on any of the aforementioned claims. F-18 PROVENA FOODS INC. Schedule II: Valuation and Qualifying Accounts and Reserves Years ended December 31, 1998, 1997 and 1996
Balance at Deductions - beginning of Provision, net uncollectible Balance at end Description period of recoveries accounts of period ----------- ---------------- -------------- ---------------- --------------- Allowance for doubtful receivables: 1998 $10,934 --- 10,934 --- ====== ====== ======= ====== 1997 $ --- 36,241 (25,307) 10,934 ======= ======= ======= ====== 1996 $54,700 (43,637) (11,063) --- ======= ======= ======= =====
See accompanying independent auditors' report. F-19 EX-3.13 2 AMENDMENT TO BYLAWS OF COMPANY Exhibit 3.13 MINUTES OF MEETING OF BOARD OF DIRECTORS OF PROVENA FOODS INC. --------------------- A special meeting of the board of directors of Provena Foods Inc. was held at 9:00 a.m. on February 21, 1998 at 5010 Eucalyptus Avenue, Chino, California 91710. All of the directors were present. John D. Determan and Thomas J. Mulroney reported on the current operations and financial condition of the corporation. Ronald A. Provera and Santo Zito reported on the pasta division and the need for a long goods line, and Theodore A. Arena reported on the meat division and the progress in locating, financing and constructing a new meat plant. The board RESOLVED that the board hereby declares a quarterly dividend of $0.03 per share payable March 31, 1998 to shareholders of record March 10, 1998, with Louis A. Arena dissenting in favor of an increase in the dividend, and unanimously: authorized the pasta division to purchase a long goods line for $1,000,000; approved the Form 10-K 1997 annual report, the 1998 proxy material, the 1998 capital budget of $160,000 for the pasta division and $100,000 for the meat division, plus the cost of a long goods line and a new meat plant; RESOLVED that the officers of the corporation, and any one or more of them are hereby authorized and directed to execute such documents and take such actions as they deem necessary or appropriate to accomplish the financing and construction of a new plant; and RESOLVED, that Section 4.4 of the bylaws be amended to read in full as follows: Section 4.4 Duties of Officers. The principal officers shall ------------------ have the duties normally associated with their titles and such other duties as may be assigned by the board, provided that the president shall be the general manager and chief executive officer and the chairman of the board shall have coextensive executive authority subordinate only to the president. The secondary officers shall have such duties as may be assigned by the board or by any officer empowered by the board to assign such duties. Theodore L. Arena Louis A. Arena - ------------------------------- -------------------------------- Theodore L. Arena Louis A. Arena Thomas J. Mulroney John D. Determan - ------------------------------- -------------------------------- Thomas J. Mulroney John D. Determan Ronald A. Provera Santo Zito - ------------------------------- -------------------------------- Ronald A. Provera Santo Zito Joseph W. Wolbers John M. Boukather - ------------------------------- -------------------------------- Joseph W. Wolbers John M. Boukather EX-10.37 3 FIRST AMENDMENT TO LEASE DATED DECEMBER 18, 1995 EXHIBIT 10.37 June 15, 1998 FIRST AMENDMENT TO THE LEASE DATED DECEMBER 18, 1995 BETWEEN PROVENA FOODS, INC., AS LESSOR, AND R-COLD, INC., AS LESSEE. 5060 EUCALYPTUS AVENUE, CHINO, CALIFORNIA In accordance with Paragraph 47.3 of the above referenced lease (Option to Extend), the terms of the lease shall be modified based on the following terms and conditions: 1. Rental Rate: March 1, 1999 $9,010.00/month ($.34/S.F.) March 1, 2000 $9,407.50/month ($.355/S.F.) 2. Commencement Date: March 1, 1999 3. Expiration Date: February 29, 2001 4. Security Deposit: Security deposit shall be increased from $8,347.50 to $9,407.50. All other terms and conditions of the referenced lease shall remain in full force and effect. Thomas J. Mulroney 6/17/98 M. Mulcahy 6/16/98 - ----------------------------------- ----------------------------------- Lessor Date Lessee Date Provena Foods, Inc. R-Cold, Inc. M. Mulcahy 6/18/98 ----------------------------------- Lessee Date Thermo-Lok, Inc. EX-10.38 4 CONSTRUCTION/DEVELOPMENT AGREEMENT CONSTRUCTION/DEVELOPMENT AGREEMENT BETWEEN OWNER, CONTRACTOR AND DEVELOPER (SWISS AMERICAN SAUSAGE FACILITY/CROSSROADS) THIS CONSTRUCTION/DEVELOPMENT AGREEMENT BETWEEN OWNER, CONTRACTOR, AND DEVELOPER ("AGREEMENT"), dated for reference purposes as June 19, 1998 is made by and between SWISS AMERICAN SAUSAGE CO., DIVISION OF PROVENA FOODS INC., a corporation organized under the laws of the State of California (hereinafter called "OWNER"), A.P. THOMAS CONSTRUCTION, INC., a california corporation (hereinafter called "CONTRACTOR"), and CATLIN PROPERTIES, INC., a California corporation ("DEVELOPER"), with respect to the construction by Contractor of the project (hereinafter the "PROPERTY" or "PROJECT"), described in Exhibit A --------- attached hereto. The date upon which this Agreement is fully executed by all parties shall be referred to hereinafter as the "EFFECTIVE DATE". ARTICLE 1 DEFINITIONS A. The "OWNER" is the person or entity identified as such in the Agreement and is referred to throughout the Contract Documents (as hereinafter defined). B. the "DEVELOPER" is the person or entity identified as such in the Agreement and is referred to throughout the Contract Documents. Pursuant to separate documentation, Developer is the authorized agent of Crossroads CREA Investors LLC, a Delaware limited liability company with regard to the development of the Project known as "Crossroads Commercial Center," located in Lathrop, California, in which the Project is located. C. The "CONTRACTOR" is the person or entity identified as such in the Agreement and is referred to throughout the Contract Documents. D. The "ARCHITECT" shall mean W.B. Clausen Structural Engineers Inc., or any other qualified architect agreed upon by Developer and Owner. E. The "PROJECT" is the total design and construction for which the Contractor is responsible under this Agreement, including, all professional design services and all construction documents, labor, materials, supplies, fixtures, tools, equipment, transportation, and other items to perform all work of whatever nature to construct upon the Property and complete in a workmanlike manner that certain Project generally described in Exhibit A attached hereto. --------- F. The "WORK" is the performance of Contractor's obligations set forth in this Agreement and as provided in Exhibit B attached hereto. --------- -1- G. The "CONTRACT DOCUMENTS" consist of this Agreement, the documents listed in this Agreement, and the documents set forth in Exhibit C attached hereto. --------- ARTICLE 2 PLAN AND ESTIMATE PROCESS 2.1 PRELIMINARY PLANS/PRELIMINARY COST ESTIMATE. The Architect, pursuant ------------------------------------------- to separate documentation entered into directly between Owner and Architect, at Owner's cost, shall prepare preliminary plans and specifications ("PRELIMINARY PLANS AND SPECIFICATIONS") of the Project, which shall be in sufficient detail to enable a preliminary cost estimate to be developed, and deliver such document to Developer and Contractor within one (1) day following the Effective Date. Owner shall cause the Architect to reasonably cooperate with Developer and Contractor with regard to any requested modifications necessary to enable the preparation of a preliminary cost estimate ("PRELIMINARY COST ESTIMATE") of the expense of constructing the Project. The Developer and Contractor shall deliver to Owner the Preliminary Cost Estimate within one (1) day following their receipt of the Preliminary Plans and Specifications. Owner shall approve or disapprove of the Preliminary Cost Estimate within one (1) day following receipt of such document by delivery of written notice ("PRELIMINARY COST NOTICE") to Developer and Contractor. If such notice disapproves of such estimate and such estimate is not amended to the satisfaction of Owner, Developer and Contractor within one (1) day following the date of Developer's and Contractor's receipt of the Preliminary Cost Notice, this Agreement shall automatically terminate and the parties shall have no further obligations hereunder. The failure of Owner to deliver the Preliminary Cost Notice within the specified time period shall be deemed Owner's disapproval of the Preliminary Cost Estimate. In preparing the Preliminary Cost Estimate, Developer and Contractor shall use their collective commercially reasonable efforts to approximate the expected cost of constructing the Project, consulting with subcontractors, materialmen and/or service providers, to determine such estimate, and such analysis shall be summarized and included with the Preliminary Cost Estimate. As a result of the preliminary nature of the Preliminary Cost Estimate, the Developer and Contractor make no representation or warranty regarding such matters, however, if, following delivery of the Preliminary Cost Estimate, Developer and/or Contractor discover that any line item within such estimate is materially inaccurate, Developer or Contractor, as appropriate, shall provide Owner with written notice of such determination. Owner shall evidence its approval of the Preliminary Plans and Specifications, within one (1) day following Developer's and Contractor's receipt of the Preliminary Cost Estimate, by signing such document and delivering it to Developer and Contractor, following which such document shall be referred to as the "APPROVED PRELIMINARY COST ESTIMATE." -2- 2.2 AGREED PRICE. Within three (3) days following Owner's approval of the ------------ Approved Preliminary Cost Estimate, Owner shall cause the Architect to immediately commence the preparation of final plans and specifications ("PLANS AND SPECIFICATIONS"), consisting of technical drawings, schedules, diagrams, material criteria and specifications, for the Project, and deliver such document to Developer and Contractor. Owner shall cause the Plans and Specifications to be delivered to Developer and Contractor not later than ten (10) days following the commencement of preparation of such documents. Owner shall cause the Architect to incorporate any reasonable modifications requested by Developer and/or Contractor necessary to make such document either consistent with the Preliminary Plans and Specifications or necessary to enable a final price proposal to be developed ("FIXED PRICE PROPOSAL"). Within ten (10) days following Developer's and Contractor's receipt of the Plans and Specifications, Developer and Contractor shall prepare and deliver the Fixed Price Proposal to Owner. Such budget shall set forth all costs and expenses necessary to construct the Project consistent with the Plans and Specifications, established customary contingencies for the various stages of construction, and include copies of all bids received from qualified subcontractors utilized by Contractor in preparing and finalizing the Fixed Price Proposal. Within three (3) days following Owner's receipt of the Fixed Price Proposal, Owner shall approve or disapprove such document, which approval shall not be unreasonably withheld, by delivery of written notice to Contractor and Owner. Contractor shall incorporate any reasonable revisions to the Fixed Price Proposal requested by Owner. In the event that Owner, Contractor and Developer cannot agree upon the Fixed Price Proposal within twenty (20) days following Owner's receipt thereof, this Agreement shall automatically terminate and, except as provided herein, the parties shall have no further obligations under this Agreement. Notwithstanding any other provision of this Agreement to the contrary, in the event that the Agreement terminates pursuant to the provisions of this Section 2.2, and the total Fixed Price Proposal is less than or equal to Three Million Eight Hundred Twenty Thousand and No/lOOths Dollars ($3,820,000.00) for the cost of the Project, plus Two Hundred Ninety Thousand and No/lOOths Dollars ($290,000.00) for all fees for utility hookup, and construction permits, within five (5) days of such termination, Owner shall pay Contractor the amount of Twenty Thousand and No/lOOths Dollars ($20,000.00) ("SECTION 2.2 TERMINATION FEE"). Upon Owner's approval of the Fixed Price Proposal, Owner shall evidence such approval by signing such document and deliver it to Developer and Contractor, following which such document shall be referred to as the "FIXED PRICE AGREEMENT." 2.3 PROGRESS SCHEDULE. Concurrent with Contractor's delivery of the Fixed Price Proposal, Contractor shall prepare and deliver to Owner a proposed time schedule ("PROPOSED TIME SCHEDULE") relating to the Work. Within five (5) days following -3- Owner's receipt of the Proposed Time Schedule, Owner shall approve or disapprove such document, which approval shall not be unreasonably withheld, by delivery of written notice to Developer and Contractor. Contractor shall incorporate any reasonable revisions to the Proposed Time Schedule requested by Owner. Owner's approval of the Fixed Price Agreement shall also be deemed Owner's approval of the Proposed Time Schedule, following which, such document shall be referred to as the "APPROVED TIME SCHEDULE." ARTICLE 3 DEVELOPER RESPONSIBILITIES 3.1 DEVELOPER'S SERVICES. The Developer will perform the following -------------------- services under this Agreement in each of the two phases described below. 3.1.1 Design Phase. ------------ (a) Consultation During Project Development. Schedule and attend --------------------------------------- regular meetings with the Architect during the Design Phase (as hereinafter defined) to advise on site use and improvements, selection of materials, building systems and equipment. Provide recommendations on construction feasibility, availability of materials and labor, time requirements for installation and construction, and factors related to cost including costs of alternative designs or materials. (b) Scheduling. Develop, in conjunction with Contractor, the ---------- Proposed Time Schedule, that coordinates and integrates the Architect's design efforts with construction schedules. Update the Proposed Time Schedule incorporating a detailed schedule for the construction operations of the Project, including realistic activity sequences and durations, allocation of labor and materials, processing of shop drawings and samples, and delivery of products requiring long lead-time procurement. (c) Project Construction Budget. Prepare, in conjunction with --------------------------- Contractor, the Fixed Price Proposal as provided in this Agreement. (d) Coordination of Contract Documents. Review the Plans and ---------------------------------- Specifications as they are being prepared, recommending alternative solutions whenever design details affect construction feasibility or schedules without, however, assuming any of the Architect's responsibilities for design. Review the Plans and Specifications with the Architect to eliminate areas of conflict and overlapping in the Work to be performed by the various trade contractors and prepare prequalification criteria for bidders. (e) Equal Employment Opportunity. Determine, or assure ---------------------------- compliance of, applicable requirements for equal -4- employment opportunity programs for inclusion in Project bidding documents. 3.2 CONSTRUCTION PHASE. ------------------ 3.2.1 Project Control. During the Construction Phase (as hereinafter --------------- defined), monitor the Work of the Contractor and coordinate the Work with the activities and responsibilities of the Owner, Architect and Contractor to complete the Project in accordance with the Approved Time Schedule. (a) Establish procedures for coordination among the Owner, Architect, and Contractor with respect to all aspects of the Project and implement such procedures. (b) Schedule and conduct progress meetings at which Contractor, Owner, and Architect with respect to all aspects of the Project and implement such procedures. (c) Provide regular monitoring of the schedule as construction progresses. Identify potential variances between scheduled and Completion Date (as hereinafter defined). Review schedule for Work not started or incomplete and recommend to the Owner and Contractor adjustments in the Approved Time Schedule to meet the Completion Date. 3.2.2 Permits. Process all appropriate documentation to obtain the ------- Building Permit, Health/Safety Permit and all other applicable permits necessary with regard to the Work. Such process shall be subject to Owner's obligation to pay for all requisite fees for such permits. 3.2.3 Intentionally omitted. 3.2.4 Inspection. Inspect the Work of the Contractors for defects and ---------- deficiencies in the Work without assuming any of the Architect's responsibilities for inspection. 3.2.5 Shop Drawings and Samples. In collaboration with the Architect, ------------------------- establish and implement procedures for expediting the processing and approval of shop drawings and samples. 3.2.6 Reports and Project Site Documents. Record the progress of the ---------------------------------- Project. Submit progress reports to the Owner and the Architect. Cause Contractor to maintain at the Project site, on a current basis, records of all necessary contracts, drawings, samples, purchases, materials, equipment, maintenance and operating manuals and instructions, and other construction related documents, including all revisions. At the completion of the Project, cause Contractor to deliver all such records to the Owner. -5- 3.2.7 Start-up. With the Owner's personnel, direct the checkout of -------- utilities, operations systems and equipment for readiness and assist in their initial start-up and testing. 3.2.8 Final Completion. Determine final completion and provide notice ---------------- to the Owner and Architect that the Work is ready for final inspection. Secure and transmit to the Architect required guarantees, affidavits, releases, bonds and waivers. Turn over to the Owner all keys, manuals, record drawings and maintenance stocks. 3.3 COMPENSATION FOR DEVELOPER. As compensation for services rendered by -------------------------- Developer in accordance with the provisions of this Agreement, Owner agrees to pay Developer the amount of Two Hundred Sixty-Nine Thousand and No/l00ths Dollars ($269,000.00) ("DEVELOPER FEE AND PROFIT"). Within ten (10) days following Developer's delivery to Owner of written demand to Owner, in addition to the Developer Fee, Owner shall pay to Developer the amount of Two Thousand Five Hundred and No/l00ths Dollars ($2,500.00) for title services, the amount of Seven Thousand Five Hundred and No/l00ths Dollars ($7,500.00) for soils analysis plus the amount of Fifteen Thousand and No/l00ths Dollars ($15,000.00) for legal services (collectively, "ADDITIONAL FEE"). The Developer Fee shall be paid on a percentage of completion basis of the Work, which completion percentages shall be confirmed in writing by the Architect. Developer shall submit a written invoice for such percentage portion of Developer Fee not more than once every thirty (30) day period during the term of this Agreement. In the event that this Agreement is terminated in accordance with the provisions contained herein, Owner shall pay to Developer the Additional Fee plus the portion of the Developer Fee earned as of the date of such termination, and Owner shall have no obligation to pay Developer the remaining unpaid portion of the Developer Fee. ARTICLE 4 CONSTRUCTION OF THE BUILDING 4.1 SCOPE OF WORK FOR CONTRACTOR. Contractor agrees to furnish all labor, ---------------------------- services, materials, equipment, and supplies required for the prompt and efficient completion of the Project, including all work necessary or incidental thereto, and as more particularly described in the Plans and Specifications (as hereinafter defined). A. BASIC SERVICES - DESIGN PHASE. The Contractor's basic services ----------------------------- during the period of time in which Architect is preparing the Preliminary Plans and Specifications ("DESIGN PHASE") are as described below. (1) The Contractor shall consult the Owner to ascertain requirements of the Project and shall review such requirements with the Owner. -6- (2) The Contractor shall provide, after consultation with the Owner, a preliminary evaluation of the Project. (3) The Contractor shall review with the Owner, alternative approaches to design and construction of the Project. (4) The Contractor shall submit to the Owner for approval a proposal including the proposed schedule for completion of the Work and all other information necessary to complete the Project. B. BASIC SERVICES-CONSTRUCTION PHASE. The Contractor's basic --------------------------------- services following Owner's approval of the Fixed Price Agreement are described below. (1) The Contractor shall obtain necessary approvals of the Plans and Specifications by the governmental authorities having jurisdiction over the Project, which includes the obtaining of a building permit ("BUILDING PERMIT"), the cost for which shall be the obligation of Owner, which cost shall be set forth in the Fixed Price Agreement. Owner agrees that all permits necessary for the handling, processing and/or packaging of food products and/or which are mandated by health and food safety governmental department shall be the obligation of Owner to obtain, which permits are collectively referred to as "HEALTH/FOOD PERMITS." (2) During the course of construction, the Contractor shall prosecute the Work diligently to completion with the sufficient people on the job at all times and shall cooperate with and provide access and coordination for the electrical installation and preparation for and installation of equipment by contractors engaged directly by the Owner. (3) Unless otherwise provided in the Contract Documents, the Contractor shall pay for labor, materials, equipment, tools, construction equipment and machinery, water, heat, utilities, transportation and other facilities and services necessary for proper execution and completion of the Work. (4) The Contractor shall correct Work which does not conform to the Construction Documents, unless approved in writing by Owner. (5) The Contractor shall give notices and comply with laws, ordinances, rules, regulations and lawful orders of public authorities relating to the Project. (6) The Contractor at all times shall keep the Property and surrounding area free from dust which might become a nuisance to other property owners, accumulation of waste materials or rubbish caused by the operations under the Agreement. At the completion of the Work, the Contractor shall -7- remove from and about the Project the Contractor's tools, construction equipment, machinery, surplus materials, waste materials and rubbish. If after first giving seven (7) days written notice to Contractor, the Contractor fails to clean up at the completion of the Work, the Owner may do so as provided in the Contract Documents, and the cost thereof shall be deducted from the Contract Sum. Contractor shall perform the following final cleaning activities for all trades at the completion of the Work: (i) Remove any temporary structures; (ii) Remove to a reasonable standard marks, stains, fingerprints and other soil or dirt from painted, decorated and natural finish woodwork; (iii) Remove spots, plaster, soil and paint from ceramic tile, marble, interior and exterior glass and other finished materials, and wash or wipe clean; (iv) Clean fixtures, cabinet work and equipment, removing stains, paint, dirt and dust, and leave same in undamaged, new condition; (v) Clean aluminum in accordance with recommendations of the manufacturer; and (vi) Mop clean resilient floors thoroughly. (7) The Contractor shall prepare Change Orders (as hereinafter defined) for changes requested by Owner or Contractor for the Owner's written approval and execution in accordance with this Agreement. (8) The Contractor shall maintain in good order at the site one record copy of the drawings, specifications, product data, samples, shop drawings, Change Orders and other modifications, marked currently to record changes made during construction. These shall be delivered to the Owner upon completion of the design and construction and prior to final payment. ARTICLE 5 DATE OF COMMENCEMENT, SUBSTANTIAL COMPLETION AND TIME OF PERFORMANCE 5.1 TIME OF PERFORMANCE. Contractor agrees to begin work as soon as ------------------- reasonably possible following receipt of the Building Permit in accordance with the Approved Time Schedule, to prosecute construction of the Project energetically and in full cooperation with Owner and other contractors. The date set forth in the Approved Time Schedule as commencement of Work shall be referred to as the "COMMENCEMENT DATE" and the completion date set forth therein shall be referred to as the "COMPLETION DATE." -8- All Work as set forth in the Approved Time Schedule shall be subject to delays resulting from a Force Majeure Event. 5.2 COMPLETION OF THE PROJECT ------------------------- A. SUBSTANTIAL COMPLETION. "SUBSTANTIAL COMPLETION" or "SUBSTANTIALLY ---------------------- COMPLETE" shall mean the point in the progress of the Project when (i) construction is sufficiently complete to obtain final inspection and approvals in accordance with applicable law, (ii) all landscaping required by the Plan and Specifications is installed, (iii) all paving for driveways, sidewalks and parking areas required by the Plans and Specifications is completed, (iv) the Project may be utilized for its intended use, and (v) Contractor has cleaned the Project as required by this Agreement. Upon notification by Contractor that the Contractor considers the Project according to the Plans and Specifications as being Substantially Complete, Owner's agent (the "OWNER'S CONSTRUCTION CONSULTANT") and Developer shall promptly inspect the Project to determine whether it is Substantially Complete. If the Owner's Construction Consultant and Developer reasonably determines that the Project is Substantially Complete, the Owner's Construction Consultant shall issue a "CERTIFICATE OF SUBSTANTIAL COMPLETION" indicating that Substantial Completion has been achieved, which shall not relieve Contractor of any ongoing obligation hereunder or certify that the Work was done in accordance with the provisions of this Agreement. If such inspection discloses any item which prevents a determination of Substantial Completion ("MAJOR ITEM"), then Contractor shall complete such item before the Owner's Construction Consultant issues his Certificate of Substantial Completion. All cost and expense for services of the Owner's Construction Consultant shall be paid by Owner over and above the Contract Sum. B. PUNCH LIST. At the time of Substantial Completion, Owner (with the ---------- assistance of Developer) and Contractor shall prepare a written list of minor items ("PUNCH LIST") which must be completed by the Contractor in order to achieve final completion of the Work. In the event such parties are unable to agree upon the minor items to be included on the Punch List, then both parties agree to arbitrate the disagreement in accordance with the provisions of this Agreement. Contractor shall complete Punch List work within thirty (30) days following the date of issuance of the Punch List to the extent such items may be completed within such time period (items which require longer than thirty (30) days shall be completed thereafter using Contractor's due diligence). If Contractor fails to complete the Punch List within thirty (30) days (or immediately thereafter as provided above), Owner shall be entitled to complete the Punch List itself and deduct the cost thereof from any payments remaining to be made by Owner under this Agreement. Contractor, Developer and Owner's -9- Construction Consultant shall review the Punch List and determine the estimated cost of completing the Punch List work. Owner shall be entitled to withhold from payment of the Contract Sum an amount equal to one hundred percent (100%) of the estimated cost of completing the Punch List work pending completion of the Punch List work. Upon completion of the Punch List Items, in the event Owner still fails to make the Final Payment (as hereinafter defined) within thirty (30) days of the date on which such sum is due, then Owner shall incur a penalty for late payment equal to five percent (5%) of the Final Payment due. C. NOTICE OF COMPLETION. Within ten (10) days after issuance of the -------------------- Certificate of Substantial Completion, Owner shall file for record a "NOTICE OF COMPLETION" with the county Recorder, and evidence of such filing shall be submitted to the Contractor. 5.3 FORCE MAJEURE. If Contractor is delayed in the prosecution or ------------- completion of its obligations hereunder by the act, neglect, default or delay of Owner, acts of God, including, but not limited to, flood, earthquake, tornado, wind, and rain delays, lock-outs, war, civil commotion, strikes materials interruptions, fire or other casualty, or any similar unforeseen matters, beyond Contractor's control which prevent access to the job site by workers or prevent work from being done ("FORCE MAJEURE EVENT"), then the time herein fixed for completion of such obligations set forth in the Approved Time Schedule shall be extended by the number of days that Contractor has thus been delayed. Notwithstanding the occurrence of any of the foregoing, Contractor shall use all due diligence to complete the Project by the Completion Date. 5.4 CHANGES/EXTRA WORK. No changes shall be made in the Work, the Plans ------------------ and Specifications, the Contract Sun, the Approved Time Schedule or the Completion Date, unless a written change order ("CHANGE ORDER") specifying the changes has been executed by the Owner and the Contractor, except that Contractor shall effect a change within the general scope of the Project upon written direction of the Owner without a Change Order, and the Contract Sum or Completion Date or both shall be equitably adjusted therefor. Upon any request from the Owner for a change in the Work, the Contractor shall promptly prepare and submit to the Owner a proposed Change Order specifying any changes in the Contract Sum and Completion Date by reason of the requested change. The Contractor shall perform the work in compliance with the inspection and other requirements of any applicable governmental entity with jurisdiction over the Work. If the Contractor claims that any extra work is required by reason of any act of the Owner or defect in the Plans and Specifications, the Contractor shall promptly submit a proposed Change Order to the Owner therefor. -10- 5.5 LIENS. Contractor shall defend, indemnify and hold Owner harmless ----- against any and all claims, liability, loss, damage, cost or expenses, including reasonable attorneys' fees, award and judgments arising by reason of claims, liens, stop notices or bond claims asserted for labor, materials, or equipment used or furnished for use on the Project, arising out of Contractor's, or its subcontractor's work only; provided, however such indemnification obligation is conditioned upon Owner complying with the provisions of this Agreement and making the specified payments expressly set forth herein. Upon any application for a progress payment hereunder Contractor shall provide conditional lien releases acceptable to Owner's lender from the relevant persons or entities having potential lien claims. 5.6 ACCESS TO RECORDS. Contractor agrees that its records shall be kept on ----------------- an "open book basis" and that Owner shall have the right to review Contractor's records relating to the Work upon written request. ARTICLE 6 QUALITY OF THE WORK AND RELATED PROVISIONS 6.1 QUALITY OF THE WORK. All materials, equipment and Work ------------------- furnished by or on behalf of Contractor shall strictly comply with all requirements of this Agreement and the Plans and/or Specifications, be of good and workmanlike quality and free from defects, and shall be subject to inspection and approval by Owner. Defective or nonconforming materials, equipment or work shall, at Owner's option, be repaired or replaced, at Contractor's sole expense immediately upon notification thereof, to the satisfaction of Owner. The cost to repair any adjacent materials, equipment or work disturbed or damaged during or as a result of any such corrective work shall also be paid by Contractor. All corrective materials, equipment and work is similarly guaranteed. No inspection, failure of inspection or payment to Contractor shall be deemed a waiver of the foregoing; and nothing herein shall exclude or limit any warranties implied by law. If Contractor fails, neglects or refuses, within seven (7) days after written demand is made by Owner, to correct any defective materials, equipment or work, Owner may, without further notice or demand, cause such defective materials, equipment or work to be repaired or replaced by others. Contractor shall immediately reimburse Owner for the cost of such repair or replacement. This warranty, which shall be limited for a term of one (1) year following the filing of Notice of Completion, shall not reduce, and is in addition to, Contractor's liability under other provisions of applicable law or for latent defects. 6.2 SUBCONTRACTORS. Contractor may hire subcontractors to perform work on -------------- the Project. Contractor shall have full directing authority over the execution of subcontracts and shall -11- provide Owner with a list of all subcontractors Contractor may use. In the event Owner objects to any subcontractor or the quality of work of any subcontractor, it shall notify Contractor in writing of the identity of the subcontractor and the specific objection warranting the notice. Contractor shall then investigate and report back to Owner and thereafter each shall negotiate in good faith to attempt to rectify the objection. Contractor warrants to Owner that each subcontractor to be used on the Project shall maintain the required licenses in good standing, the required Workers' Compensation coverage for employees, adequate liability insurance and adequate financial strength to complete the Project and shall otherwise comply with Section 6.4(d). 6.3 PROTECTION OF WORK. Contractor shall secure and protect the Work done ------------------ hereunder until Substantial Completion. 6.4 INSURANCE. Contractor shall procure and maintain insurance on all of --------- its operations during the progress of the Work, with reliable insurance companies, on forms reasonably acceptable to Owner, for the following minimum insurance coverages: (a) Workers' compensation insurance and occupational disease insurance as required by law and employer's liability insurance with minimum limits of $1,000,000 covering all workplaces involved in this Agreement. (b) Comprehensive general liability insurance, including Contractor's contingent coverage, with limits of not less than as indicated in either (1) or (2) as follows: (1) Bodily Injury Liability - $1,000,000 each person, $1,000,000 each occurrence; Property Damage Liability - $1,000,000 each occurrence, $2,000,000 aggregate; (2) a single limit for Bodily Injury Liability and Property Damage Liability combined of $1,000,000 each occurrence and $2,000,000 aggregate. (c) The insurance shall be on an occurrence basis and shall cover all operations of Contractor, including, but not limited to, the following: (i) premises and operations; (ii) contractual liability insuring the obligations assumed by Contractor in this Agreement; (iii) explosion, collapse, and underground property damage; (iv) broad form property damage liability endorsement; and (v) personal injury liability endorsement. (d) The policies referred to in subsections (a) and (b) shall be primary and noncontributing and name Owner as an additional insured. Contractor shall also provide Certificates of Insurance, or other evidence of insurance as requested by Owner, to Owner before any Work is commenced hereunder by Contractor. The certificates shall provide that there will be no cancellation, reduction or modification of coverage without thirty (30) days' prior written notice to Owner. -12- 6.5 BUILDER'S RISK. Prior to the commencement of the physical Work of -------------- construction on the Project, or any portion thereof, Contractor shall procure or cause to be procured, the following insurance coverage with respect to the Project. Such insurance shall be issued by insurance carriers to which Owner makes no reasonable objection, and shall be maintained in full force and effect throughout the term of this Agreement. The cost of such insurance shall be paid by Owner, which cost shall be included by Contractor in the Contract Sum. (a) A broad-form builder's risk insurance with course of construction, vandalism, and malicious mischief clauses attached, insuring against all risks of physical loss, in an amount not less than one hundred percent (100%) of the insurable value of the Project, on (1) the structures upon which the Project is to be constructed; (2) the Project; (3) all work in progress including materials to be incorporated in the Project which qualifies for payment under the terms of this Agreement, regardless of whether said materials are stored on the site or actually incorporated into the Project; and (4) all special equipment or forms, owned or rented by Contractor, especially designed for the Project. Owner shall be provided with a duplicate copy of the insurance policy evidencing such coverage, which shall name Owner as additional insured and shall provide that the policy shall not be canceled, reduced or modified by the insurer until after thirty (30) days' written notice to Owner and to Contractor. Contractor assumes the risk and liability of all casualty losses with respect to the risks described above which are within loss deductible clauses. (b) The broad-form builder's risk insurance coverage herein required shall be for the benefit of Contractor and Owner as their interest may appear; and all sums payable thereunder shall be paid to Owner as trustee for the insured and held in a trust fund for the purpose of paying the costs, in whole or in part, or restoring or rebuilding the Project to be constructed in order to assure contractor's compliance with the obligation to complete the Project. (c) Contractor and Owner each hereby grant to the other on behalf of any insurer providing insurance required by this Section, a waiver or any right of subrogation which such insurer may acquire against the other by virtue of payment of any loss under such insurance; provided, however, that any such waiver shall be effective only in the event that, and only so long as, the party waiving subrogation rights is empowered to grant such a waiver under the terms of the policy or policies involved without affecting the insurance coverage. 6.6 INDEMNITY. Contractor shall, with respect to all Work which is covered --------- by or incidental to this Agreement [including, without limitation, all work performed by Contractor's subcontractors, employees and/or agents (collectively, -13- "CONTRACTOR'S AGENTS") and/or incidental thereto], defend, indemnify, and hold Owner and Developer harmless from and against any and all claims, liabilities, losses, damages, costs and/or expenses, including reasonable attorneys' fees, awards, fines or judgments, arising by reason of any claim for compensation, the death or bodily injury to persons (including its employees and employees of Contractor's Agents), injury to property, design defects or other loss, damage or expense of any kind whatsoever, including any of the same resulting from Contractor's and/or Contractor's Agents alleged or actual negligent and/or intentional act or omission, regardless of whether such act or omission is active or passive. In the instance in which Owner and/or Developer suffers any liability, loss, damage, costs or other expense that is in part the fault of Owner or Owner's agents, then Contractor shall remain obligated to indemnify Owner to the extent of Contractor's and/or Contractor's Agents' fault, negligence and/or willful misconduct. 6.7 CLEANUP. Contractor shall perform its Work so as to maintain the site ------- in a clean, safe and orderly condition. Upon Completion of the Project, Contractor shall remove from the site all temporary structures, debris and waste incident to its operation. 6.8 PERMITS, LICENSES AND FEES. On behalf of Owner, Developer shall secure -------------------------- all necessary permits and licenses, including the Building Permit, necessary to comply with all laws, ordinances, rules, regulations, orders and requirements of any city, county, state, federal or other public body having jurisdiction as may be required for the proper execution, performance and completion of the Plans and Specifications under this Agreement. Notwithstanding the foregoing, Owner, at its cost, acknowledges and agrees that it shall be responsible for obtaining any and all Health/Food Permits. Owner shall pay all applicable fees which may be required by law by any public body for the performance and completion of the Work under this Agreement. 6.9 LICENSE. Contractor represents that he is a duly licensed general ------- contractor by the State in which the Project is located, that it shall maintain said license in good standing during the term of this Agreement. Contractor further represents that he is experienced and qualified to perform the construction of the Project in accordance with the Plans and Specifications and that financial information supplied by Contractor to Owner is assurance and representative of Contractor's financial condition. 6.10 BOND. Contractor shall furnish Owner with a payment and performance ---- bond issued by a responsible surety company in the amount of the Contract Sum, indemnifying Owner against the breach of this Agreement by Contractor. Owner shall pay the normal premium on such approved bond. -14- ARTICLE 7 CONTRACT SUM Owner agrees to pay Contractor for Work and materials on the Project, as set out in the Plans and Specifications, in the amounts and on the dates indicated below. 7.1 CONTRACT SUM. For the purpose of this Agreement, the "CONTRACT SUM" ------------ shall be equal to the amount set forth in the Fixed Price Agreement, as such amount is from time to time adjusted by Change Order pursuant to Section 5.4. Such amount is in addition to the Developer Fee paid to Developer as provided in this Agreement. 7.2 BILLINGS. Contractor shall make written application ("BILLING") to -------- Owner for payment of a percentage of completion of each appropriate Line Item during the course of Work upon thirty (30)-day intervals or upon intervals as specified by Owner ("PROGRESS PAYMENTS"). Owner may have its Construction Consultant verify the percentage of completion. ARTICLE 8 PAYMENT 8.1 PROGRESS PAYMENTS. Owner agrees to make Progress Payments to ----------------- Contractor in accordance with the provisions of this Agreement. A. Upon the Billing of percentages of completion for each Line Item, Owner shall pay the amount specified in the Billing, less Retention (as hereinafter defined). B. Contractor shall deliver to Owner an "APPLICATION FOR PAYMENT" showing the occurrence of the event covered by the Application for Payment. Amounts claimed by Contractor for completion of Change Orders or any other additional costs, expenses or contract sums, may be requested at the time of application for other payments or independently thereto. Said Application for Payment shall be submitted on a form approved by Owner (and Owner's lender, where applicable). Materials and equipment not yet incorporated into the Work but delivered and suitably stored either at the site of the Project or at some other appropriate location of which Contractor has given Owner written notice shall be considered partially completed items of Work for purposes of an Application for Payment, and may be included therein, provided that with respect to materials and equipment delivered and suitably stored other than at the job site, Contractor, upon request, will furnish Owner bills of sale or other documentation satisfactory to establish Owner's title to such materials and equipment and otherwise to protect Owner's interest therein and Contractor shall remain responsible for the security of such materials. -15- C. Within twenty (20) days after Owner's receipt of an Application for Payment, Owner shall pay, or cause Owner's lender to pay, to Contractor the amount requested; provided, however, that if any item on the Application for Payment is disputed, Contractor shall be notified of such dispute and shall submit verification of such item or a revised Application for Payment. The interest on such disputed payment shall accrue for the benefit of the prevailing party. The non-disputed amount shall be paid immediately. D. Owner shall hold back ten percent (10.00%) of each payment as a "RETENTION". Such Retention shall be paid to Contractor at the completion of the Project as provided in this Agreement. E. Should Contractor neglect or refuse to pay amounts owing as set forth in Section 8.4 (iii), Owner, after giving five (5) days' written notice to Contractor of his intention to do so, shall have the right but not the obligation to pay any such amount directly. In such event, said payment shall be treated as a Progress Payment made for the benefit of Contractor. 8.2 FINAL PAYMENT. Upon Substantial Completion, Owner shall pay the ------------- remaining balance ("FINAL PAYMENT") of the Contract Sum, including Retention to the Contractor, less one hundred percent (100.00%) of all amounts specified by Owner's Construction Consultant as the estimated cost of completion of Punch List work ("PUNCH LIST RETENTION"). Upon the completion of the Punch List work, the Owner's Construction Consultant shall issue a "CERTIFICATE OF COMPLETION". Within thirty-five (35) days of the issuance of the Certificate of Completion, Owner shall pay to Contractor the Punch List Retention. 8.3 LIEN RELEASES. Contractor agrees to furnish in connection with each ------------- payment application such statutory lien waiver and release forms as Owner may request for work, labor, equipment and/or material used in performance of this Agreement, executed by Contractor and all other individuals, firms and/or entities performing work and/or furnishing labor, equipment and/or materials under this Agreement. No payment hereunder shall be made, except at Owner's option, until and unless Contractor has submitted all waiver and release forms requested by Owner. Any payment made hereunder prior to completion and acceptance of the Work shall not be construed as evidence of acceptance of any part of the Work. 8.4 RIGHT TO WITHHOLD FUNDS. Owner may withhold, or on account of ----------------------- subsequently discovered evidence nullify, the whole or a part of any payment under this Article 8 to such extent as may be necessary to protect Owner from loss, including costs and attorneys' fees, resulting from or in connection with (i) defective work not remedied; (ii) claims filed or reasonable evidence indicating probable filing of a claim or claims; (iii) failure of Contractor to make payments properly to or on -16- behalf or on account of its subcontractors, agents or employees and/or for material, equipment and/or union trust fund benefits; (iv) damage to work of other contractors, subcontractors, agents and/or employees employed by Owner; or (v) failure of Contractor to provide Certificates of Insurance, indicating compliance with the provisions of this Agreement. 8.5 LENDER REQUIREMENTS. Contractor agrees to Comply with the requirements ------------------- of Owner's lender with respect to Progress Payments, Retention, Lien Releases and Applications for payment . ARTICLE 9 TERMINATION OF THIS AGREEMENT 9.1 DEFAULT BY CONTRACTOR. If Contractor at any time (i) refuses or --------------------- neglects to supply a sufficient number of properly skilled workers or a sufficient quantity of materials of proper quality, (ii) is adjudicated a bankrupt, files an arrangement proceeding, commits any act of insolvency, or makes an assignment for the benefit of creditors without Owner's consent, (iii) fails to make prompt payment to persons furnishing labor, equipment and/or materials, or to cause the effect of any suit or lien to be removed within ten (10) days after written demand, (iv) fails in any material respect to properly and diligently prosecute the Work, (v) becomes delinquent with respect to contributions or payment required to be made to any employee benefit program or trust, or (vi) otherwise fails to perform fully and completely all of the agreements herein contained, Contractor shall be in default. If Contractor fails to cure the default within five (5) business days after written notice thereof by Owner, Owner may, at its sole option, (a) remedy such default and deduct the cost thereof from any money then due or thereafter to become due to Contractor under this Agreement; or (b) terminate Contractor's right to proceed with the Work. In the event Owner elects to terminate, Owner shall have the right to enter upon the premises of the Project and, for the purpose of completing the Work, take possession of all materials, tools and equipment of Contractor, and may employ any other person or persons to finish the Work and provide the materials therefor. In case of such default termination, Contractor shall not be entitled to receive any further payment under this Agreement until the Work is completely finished. At that time, if the unpaid balance of the amount to be paid under this Agreement exceeds the expenses incurred by Owner in finishing the Work, such excess shall be paid by Owner to Contractor; but, if such expense shall exceed such unpaid balance, then Contractor shall promptly pay to Owner the amount by which such expense exceeds such unpaid balance. The expense referred to in the last sentence shall include expenses incurred by Owner for furnishing materials, for finishing the Work, for attorneys' fees, and for any damages sustained by Owner by reason of Contractor's default, plus a markup of ten percent (10%) general overhead and five percent (5%) profit on any and all of such expenses; and Owner shall have a lien upon all materials, -17- tools and equipment taken possession of, as aforesaid, to secure the payment thereof. 9.2 UNFORESEEN GOVERNMENT REGULATION. Notwithstanding anything to the -------------------------------- contrary in this Agreement, should the Project be delayed because of governmental regulation not in existence on the Effective Date, or because of intervention by a governmental agency, other than those agencies which issue building permits, for a period of ninety (90) days, Owner shall have a right to terminate and Contractor shall have a right to reimbursement of all costs and expenses of construction to the date of termination, less any amounts previously paid by Owner. ARTICLE 10 MISCELLANEOUS PROVISIONS 10.1 HAZARDOUS SUBSTANCES. In the event Contractor discovers any toxic -------------------- substance or hazardous material, as either of those terms may be defined under state or federal law, or as defined below, Contractor shall promptly advise Owner, in writing, of the existence of such condition. For purposes of this Agreement, "HAZARDOUS MATERIALS" shall include, but not be limited to, substances defined as "hazardous substances", "hazardous materials", "hazardous waste", "toxic substances", regulations under any federal, state or other governmental statute, ordinance, rule, regulation or policy. 10.2 ASSIGNMENT. Contractor shall not without written consent of Owner, ---------- which may be withheld in Owner's sole discretion, assign or transfer Contractor's rights or obligations under this Agreement. Owner may assign or transfer the whole or any part of this Agreement and Owner's rights and obligations hereunder, to any corporation, individual or partnership selected by Owner. Upon the effective date of such assignment by Owner, Owner shall be entirely released from any and all obligations set forth in this Agreement that may arise following such effective date, and Owner's assignee shall thereafter be fully responsible for complying with such obligations. In the event that, following the date of Owner's assignment of its rights and obligations set forth in this Agreement, Owner's assignee defaults in the performance of any of its obligations set forth herein, Contractor agrees that Owner shall have no liability as a result of such default and Contractor shall look solely to Owner's assignee for any of Contractor's available legal and/or equitable remedies. 10.3 PARTIES IN INTEREST. There are no third party beneficiaries of this ------------------- Agreement. None of the provisions of this Agreement or of any other document relating hereto is intended to provide any rights or remedies to any person or entity (including, without limitation, any employees, creditors, or subcontractors of the parties) other than the parties hereto and their respective heirs, successors and permitted assigns, if any. Specifically, this agreement shall not be construed to create any -18- contractual relationship between Contractor and engineer, or between Owner and engineer or Owner and any subcontractor. 10.4 ENTIRE AGREEMENT. This Agreement and all exhibits attached hereto ---------------- contain all of the covenants, conditions and agreements between the Parties and shall supersede all prior correspondence, agreements and understandings, both verbal and written relating to the subject matter of this Agreement. 10.5 ATTORNEYS' FEES. In the event of any legal or equitable proceeding --------------- for enforcement of any of the terms or conditions of this Agreement, or any alleged disputes, breaches, defaults or misrepresentations in connection with any provision of this Agreement, the prevailing party in such action, or the non-dismissing party where the dismissal occurs other than by reason of a settlement, shall be entitled to recover its reasonable costs and expenses, including, without limitation court costs and reasonable attorneys' fees and costs of defense paid or incurred in good faith. 10.6 ARBITRATION OF DISPUTES. All claims, disputes and other matters in ----------------------- question between the parties to this Agreement arising out of or relating to this Agreement or the breach thereof, shall be decided by mandatory and binding arbitration in accordance with the construction industry rules of the American Arbitration Association ("AAA") currently in effect unless the parties mutually agree otherwise. The following procedures shall apply: A. Demand for arbitration shall be filed in writing with the other party to this Agreement and with the AAA. A demand for arbitration shall be made within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. B. In the event that any party to this Agreement becomes a party to an arbitration under rules of the AAA with a third party relating to the Project, each party to this Agreement agrees to become joined as a party to and bound by said arbitration on the demand of any party to said arbitration. The parties hereto agree that all agreements relating to the Project with the Architect, contractors, subcontractors, materialmen and other parties providing work, services, material or equipment shall provide for arbitration under the AAA rules, joinder and arbitration provisions in agreements with third parties, all substantially as set forth in this Section 10.6. C. The award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof. -19- D. Each party to the arbitration shall pay its own filing fees, AAA costs and share of arbitrator compensation. Arbitration compensation shall be borne equally by the parties to the arbitration. The prevailing party or parties shall be entitled to recover from the non-prevailing party or parties all attorneys' fees and costs, including fees and costs for legal assistants and expert witnesses, and including all fees and costs incurred relative to any challenge or appeal of the arbitration award, or confirmation by a court of law. The arbitrator or arbitrators shall specify in the award which party or parties prevailed and include in the amount of the award attorneys' fees and costs assessed. E. NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. "WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION." Owner: __________________ Contractor: /s/ SIGNATURE ILLEGIBLE ----------------------------- F. While any such arbitration is pending, Contractor shall continue to perform under the terms and conditions of this Agreement unless the arbitration involves, nonpayment of Contract Sums when due. 10.7 AUTHORITY. Each person executing this Agreement on behalf of a Party --------- to this Agreement hereby represents and warrants that he or she has authority to execute this Agreement on behalf of a Party. 10.8 AMENDMENT. The provisions of this Agreement may be modified in --------- writing at any time by agreement of the Parties. Any such agreement hereafter made shall be ineffective to modify this Agreement in any respect unless in writing and signed by the parties against whom enforcement of the modification or discharge is sought. 10.9 WAIVER. Any of the terms and conditions of this Agreement may be ------ waived at any time, in writing, by the Party entitled to the benefit thereof, but no such waiver shall affect or impair the rights of a waiving Party to require observance, performance, or satisfaction either of that term or condition as it applies on a subsequent occasion or of any other term or condition hereof. -20- 10.10 CAPTIONS. All paragraph captions are for reference only and shall -------- not be considered in construing this Agreement. 10.11 SEVERABILITY. If any provision of this Agreement is declared ------------ illegal, invalid or unenforceable in any jurisdiction, then such portion or provision shall be deemed to be severable from this Agreement as to such jurisdiction (but, to the extent permitted by law, not elsewhere) and in any event such illegality, invalidity or unenforceability shall not affect the remainder hereof, unless such provision is held to be a material provision or otherwise goes to the essence of the Agreement. 10.12 NOTICES. All notices required to be given pursuant to the terms ------- hereof shall be in writing and either delivered by hand delivery, facsimile machine, or deposited in the United States mail first-class, postage prepaid or with a commercial overnight courier service, and addressed as follows: TO OWNER: Swiss American Sausage Co. 35 Williams Avenue San Francisco, California 94124 Attention: Theodore L. Arena, President WITH COPY TO: Provena Foods Inc. 5010 Eucalyptus Avenue Chino, California 91710 Attention: Thomas J. Malroney, CFO TO CONTRACTOR: A.P. Thomas Construction, Inc. 10293 Rockingham Drive, Suite 101 Sacramento, California TO DEVELOPER: Panattoni Development Company 3620 Fair Oaks Boulevard, Suite 150 Sacramento, California 95864 Notices shall be deemed delivered upon actual receipt of such notices or the refusal to accept delivery of such notices. The foregoing addresses may be changed by written notice to the other Party as provided herein. 10.13 EXHIBITS. All Exhibits attached hereto are made a part hereof and -------- incorporated herein by reference thereto. 10.14 TIME. Time is of the essence of every provision herein contained. ---- 10.15 GOVERNING LAW. This Agreement is executed and intended to be ------------- performed in the State in which the Project is located, and the laws of that State shall govern its interpretation and effect, without regard to the principles of conflicts of laws. -21- 10.16 DRAFTING; EXHIBITS. The drafting and negotiation of this ------------------ Agreement and all exhibits have been participated in by each of the Parties, and for all purposes this Agreement and exhibits shall be deemed to be drafted jointly by each of the Parties. Accordingly, no interpretation will be applied construing any party as the drafting Party. All exhibits referred to herein, whether or not actually attached are fully incorporated by reference as though set forth at length herein. 10.17 INTERPRETATION OF AGREEMENT, PLANS AND SPECIFICATIONS. The ----------------------------------------------------- Agreement and Plans and Specification are intended to supplement one another. In case of conflict, however, the Specifications shall control the Plans, and the provisions of this Agreement shall control both. In the event that the Work is displayed on the Plans but not called for in the Specifications, or in the event the Work is called for in the Specifications but not displayed on the Plans, Contractor shall be required to perform the Work as though it were called for and displayed in both places. IN WITNESS WHEREOF, the parties hereto have executed one or more copies of this Agreement the day and year first above written. OWNER: CONTRACTOR: SWISS AMERICAN SAUSAGE CO., A.P. THOMAS CONSTRUCTION, INC., DIVISION OF PROVENA FOODS INC., a California Corporation a corporation organized under the laws of the State of California By: /s/ SIGNATURE ILLEGIBLE --------------------------------- Its: President -------------------------------- Date: 7/2/98 ------------------------------- By:_____________________________ Its:____________________________ Date:___________________________ DEVELOPER: CATLIN PROPERTIES, INC., a California corporation By: /s/ SIGNATURE ILLEGIBLE ---------------------------- Its: CHIEF FINANCIAL OFFICER --------------------------- Date: 6/25/98 -------------------------- -22- EXHIBIT A DESCRIPTION OF PROJECT ---------------------- Lot 3 of TRACT NO. 2208 CROSSROADS COMMERCIAL/INDUSTRIAL PARK UNIT NO. 1, in the County of San Joaquin, State of California, as per Map thereof recorded in Book 31 of Maps, Page 70, San Joaquin County Records. EXHIBIT B WORK -1- EXHIBIT C CONTRACT DOCUMENTS -1- EX-10.39 5 MASTER REVOLVING NOTE AND SECURITY AGREEMENT [LETTRHEAD OF COMERICA] MASTER REVOLVING NOTE Variable Rate-Demand Obligatory Advances (Business and Commercial Loans Only) - -------------------------------------------------------------------------------- AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION # $2,000,000.00 July 14, 1998 ON DEMAND 95-2782215 - -------------------------------------------------------------------------------- For Value Received, the undersigned promise(s) to pay ON DEMAND to the order of Comerica Bank-California ("Bank"), at any office of the Bank in the State of - ------------------------ California, Two Million and no/100 -------------------------------------------------------------------- Dollars (U.S.) (or that portion of it advanced by the Bank and not repaid as later provided) with interest until demand or an Event of Default, as later defined, at a per annum rate equal to the Bank's base rate from time to time in effect minus ** 0.250 % per annum [Initial Here -- /s/ TM ]and after that at a ----- -------- rate equal to the rate of interest otherwise prevailing under this Note plus 3% per annum (but in no event in excess of the maximum rate permitted by law). The Bank's "base rate" is that annual rate of interest so designated by the Bank and which is changed by the Bank from time to time. Interest rate changes will be effective for interest computation purposes as and when the Bank's base rate changes. Interest shall be calculated on the basis of a 360-day year for the actual number of days the principal is outstanding. Unless sooner demanded, accrued interest on this Note shall be payable on the 14th day of each -------- MONTH commencing August 14, 1998 . If the frequency - -------------------- -------------------------- of interest payments is not otherwise specified, accrued interest on this Note shall be payable monthly on the first day of each month, unless sooner demanded. If any payment of principal or interest under this Note shall be payable on a day other than a day on which the Bank is open for business, this payment shall be extended to the next succeeding business day and interest shall be payable at the rate specified in this Note during this extension. A late payment charge equal to 5% each late payment may be charged on any payment not received by the Bank within 10 calendar days after the payment due date, but acceptance of payment of this charge shall not waive any Default under this Note. [INITIAL HERE /S/ TM ** SEE ADDENDUM ATTACHED FOR RATE OPTION] The principal amount payable under this Note shall be the sum of all advances made by the Bank to or at the request of the undersigned, less principal payments actually received in cash by the Bank. The books and records of the Bank shall be the best evidence of the principal amount and the unpaid interest amount owing at any time under this Note and shall be conclusive absent manifest error. No interest shall accrue under this Note until the date of the first advance made by the Bank; after that interest on all advances shall accrue and be computed on the principal balance outstanding from time to time under this Note until the same is paid in full. This Note and any other indebtedness and liabilities of any kind of the undersigned (or any of them) to the Bank, and any and all modifications, renewals or extensions of it, whether joint or several, contingent or absolute, now existing or later arising, and however evidenced (collectively "indebtedness") are secured by and the Bank is granted a security interest in all items deposited in any account of any of the undersigned with the Bank and by all proceeds of these items (cash or otherwise), all account balances of any of the undersigned from time to time with the Bank, by all property of any of the undersigned from time to time in the possession of the Bank and by any other collateral, rights and properties described in each and every deed of trust, mortgage, security agreement, pledge, assignment and other security or collateral agreement which has been, or will at any time(s) later be, executed by any (or all) of the undersigned to or for the benefit of the Bank (collectively "Collateral"). Notwithstanding the above, (i) to the extent that any portion of the indebtedness is a consumer loan, that portion shall not be secured by any deed of trust or mortgage on or other security interest in any of the undersigned's principal dwelling or any of the undersigned's real property which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place, or (ii) if the undersigned (or any of them) has(have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure this Note or any other indebtedness of the undersigned (or any of them), unless expressly provided to the contrary in another place. If the undersigned (or any of them) or any guarantor under a guaranty of all or part of the indebtedness ("guarantor") (i) fall(s) to pay any of the indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to pay any indebtedness owing on a demand basis upon demand; or (ii) fail(s) to comply with any of the terms or provisions of any agreement between the undersigned (or any of them) or any such guarantor and the Bank; or (iii) become(s) insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy, or a reorganization, arrangement or creditor composition proceeding, (if a business entity) cease(s) doing business as a going concern, (if a natural person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any general partner of it dies, becomes incompetent or becomes the subject of a bankruptcy proceeding or (if a corporation or a limited liability company) is the subject of a dissolution, merger or consolidation; or (a) if any warranty or representation made by any of the undersigned or any guarantor in connection with this Note or any of the indebtedness shall be discovered to be untrue or incomplete; or (b) if there is any termination, notice of termination, or breach of any guaranty, pledge, collateral assignment or subordination agreement relating to all or any part of the indebtedness; or (c) if there is any failure by any of the undersigned or any guarantor to pay when due any of its indebtedness (other than to the Bank) or in the observance or performance of any term, covenant or condition in any document evidencing, securing or relating to such indebtedness; or (d) if the Bank deems itself insecure believing that the prospect of payment of this Note or any of the indebtedness is impaired or shall fear deterioration, removal or waste of any of the Collateral; or (e) if there is filed or issued a levy or writ of attachment or garnishment or other like judicial process upon the undersigned (or any of them) or any guarantor or any of the Collateral, including without limit, any accounts of the undersigned (or any of them) or any guarantor with the Bank, then the Bank, upon the occurrence of any of these events (each a "Default"), may at its option and without prior notice to the undersigned (or any of them), declare any or all of the indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence of it to the contrary), sell or liquidate all or any portion of the Collateral, set off against the indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the document evidencing the relevant indebtedness and exercise any one or more of the rights and remedies granted to the Bank by any agreement with the undersigned (or any of them) or given to it under applicable law. In addition, if this Note is secured by a deed of trust or mortgage covering real property, then the trustor or mortgagor shall not mortgage or pledge the mortgaged premises as security for any other indebtedness or obligations. This Note, together with all other indebtedness secured by said deed of trust or mortgage, shall become due and payable immediately, without notice, at the option of the Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged premises for any other indebtedness or obligations or shall convey, assign or transfer the mortgaged premises by deed, installment sale contract or other instrument, or (b) if the title to the mortgaged premises shall become vested in any other person or party in any manner whatsoever, or (c) if there is any disposition (through one or more transactions) or legal or beneficial title to a controlling interest of said trustor or mortgagor. The undersigned acknowledge(s) that this Note matures upon issuance, and that the Bank, at any time, without notice, and without reason, may demand that this Note be immediately paid in full. The demand nature of this Note shall not be deemed modified by reference to a Default in this Note or in any agreement to a default by the undersigned or to the occurrence of an event of default (collectively an "Event of Default"). For purposes of this Note, to the extent there is reference to an Event of Default this reference is for the purpose of permitting the Bank to accelerate indebtedness not on a demand basis and to receive interest at the default rate provided in the document evidencing the relevant indebtedness. It is expressly agreed that the Bank may exercise its demand rights under this Note whether or not an Event of Default has occurred. The Bank, with or without reason and without notice, may from time to time make demand or partial payments under this Note and these demands shall not preclude the Bank from demanding at any time that this Note be immediately paid in full. All payments under this note shall be in immediately available United States funds, without setoff or counterclaim. If this note is signed by two or more parties (whether by all as makers or by one or more as an accommodation party or otherwise), the obligations and undertakings under this Note shall be that of all and any two or more jointly and also of each severally. This Note shall bind the undersigned, and the undersigned's respective heirs, personal representatives, successors and assigns. The undersigned waive(s) presentment, demand, protest; notice of dishonor, notice of demand or intent to demand, notice of acceleration or intent to accelerate, and all other notices and agree(s) that no extension or indulgence to the undersigned (or any of them) or release, substitution or nonenforcement of any security, or release or substitution of any of the undersigned, any guarantor or any other party, whether with or without notice, shall affect the obligations of any of the undersigned. The undersigned waive(s) all defenses or right to discharge available under Section 3-605 of the California Uniform Commercial Code and waive(s) all other suretyship defenses or right to discharge. The undersigned agree(s) that the Bank has the right to sell, assign, or grant participations, or any interest, in any or all of the Indebtedness, and that, in connection with this right, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has relating to the undersigned or the Indebtedness. The undersigned agree(s) that the Bank may provide information relating to the Note or to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. The undersigned agree(s) to reimburse the holder or owner of this Note for any and all costs and expenses (including without limit, court costs, legal expenses and reasonable attorney fees, whether inside or outside counsel is used, whether or not suit is instituted and, if suit is instituted, whether at the trial court level, appellate level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in collecting or attempting to collect this Note or incurred in any other matter or proceeding relating to this Note. The undersigned acknowledge(s) and agree(s) that there are no contrary agreements, oral or written, establishing a term of this Note and agree(s) that the terms and conditions of this Note may not be amended, waived or modified except in a writing signed by an officer of the Bank expressly stating that the writing constitutes an amendment, waiver or modification of the terms of this Note. As used in this Note, the word "undersigned" means, individually and collectively, each maker, accommodation party, indorser and other party signing this Note in a similar capacity. If any provision of this Note is unenforceable in whole or part for any reason, the remaining provisions shall continue to be effective. THIS NOTE IS MADE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. The maximum interest rate shall not exceed the highest applicable usury ceiling. THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS. THIS NOTE IS CROSS DEFAULTED TO ALL PRESENT AND FUTURE INDEBTEDNESS OF BORROWER. Provena Foods, Inc. By: /s/ Illegible Signature Its: CEO -------------------------------------------------------- SIGNATURE OF TITLE By: /s/ Illegible Signaure Its: Chairman -------------------------------------------------------- SIGNATURE OF TITLE By: /s/ Illegible Signature Its: CFO -------------------------------------------------------- SIGNATURE OF TITLE By: -------------------------------------------------------- SIGNATURE OF TITLE 5010 Eucalyptus Avenue Chino California USA 91710 - ------------------------------------------------------------------------------------------------------------------------------------ STREET ADDRESS CITY STATE COUNTRY ZIP CODE - ------------------------------------------------------------------------------------------------------------------------------------ For Bank Use Only CCAR# - ------------------------------------------------------------------------------------------------------------------------------------
Loan Officer Initials Loan Group Name Obligor(s) Name Provena Foods Inc. MA San Jose Metro II - ------------------------------------------------------------------------------------------------------------------------------------ Loan Officer I.D. No. Loan Group No. Obligor # Note # Amount 48132 95938 $2,000,000.00 - ------------------------------------------------------------------------------------------------------------------------------------
[Letterhead of Comerica] Security Agreement - -------------------------------------------------------------------------------- As --- July 14, 1998, for value received, the undersigned ("Debtor") grants to ------------- Comerica Bank-California ("Bank"), a California banking corporation, a - ------------------------ ---------- continuing security interest in the Collateral (as defined below) to secure payment when due, whether by stated maturity, demand acceleration or otherwise, of all existing and future indebtedness ("Indebtedness") to the Bank of Provena ------- Foods Inc. ("Borrower") and/or Debtor. Indebtedness includes without limit any - ---------- and all obligations or liabilities of the Borrower and/or Debtor to the Bank, whether absolute or contingent, direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, known or unknown; any and all obligations or liabilities for which the Borrower and/or Debtor would otherwise be liable to the Bank were it not for the invalidity or unenforceability of them by reason of any bankruptcy, insolvency or other law, or for any other reason; any and all amendments, modifications, renewals and/or extensions of any of the above; all costs incurred by Bank in establishing, determining, continuing, or defending the validity or priority of its security interest, or in pursuing its rights and remedies under this Agreement or under any other agreement between Bank and Borrower and/or Debtor or in connection with any proceeding involving Bank as a result of any financial accommodation to Borrower and/or Debtor; and all other costs of collecting Indebtedness, including without limit attorney fees. Debtor agrees to pay Bank all such costs incurred by the Bank, immediately upon demand, and until paid all costs shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. Any reference in this Agreement to attorney fees shall be deemed a reference to reasonable fees, costs, and expenses of both in- house and outside counsel and paralegals, whether or not a suit or action is instituted and to court costs if a suit or action is instituted, and whether attorney fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. 1. Collateral shall mean all of the following property Debtor now or later owns or has an interest in, wherever located: . all Accounts Receivable (for purposes of this Agreement, "Accounts Receivable" consists of all accounts, general intangibles, chattel paper, contract rights, deposit accounts, documents and instruments), . all Inventory, . all Equipment and Fixtures, . specific items listed below and/or on attached Schedule A, if any, is/are also included in Collateral: . all goods, instruments, documents, policies and certificates of insurance, deposits, money or other property (except real property which is not a fixture) which are now or later in possession of Bank, or as to which Bank now or later controls possession by documents or otherwise, and . all additions, attachments, accessions, parts, replacements, substitutions, renewals, interest, dividends, distributions, rights of any kind (including but not limited to stock splits, stock rights, voting and preferential rights), products, and proceeds of or pertaining to the above including, without limit, cash or other property which were proceeds and are recovered by a bankruptcy trustee or otherwise as a preferential transfer by Debtor. Warranties, Covenants and Agreements. Debtor warrants, covenants and agrees as follows: 2.1 Debtor shall furnish to Bank, in form and at intervals as Bank may request, any information Bank may reasonably request and allow Bank to examine, inspect, and copy any of Debtor's books and records. Debtor shall, at the request of Bank, mark its records and the Collateral to clearly indicate the security interest of Bank under this Agreement. 2.2 At the time any Collateral becomes, or is represented to be, subject to a security interest in favor of Bank, Debtor shall be deemed to have warranted that (a) Debtor is the lawful owner of the Collateral and has the right and authority to subject it to a security interest granted to Bank; (b) none of the Collateral is subject to any security interest other than that in favor of Bank and there are no financing statements on file, other than in favor of Bank; and (c) Debtor acquired its rights in the Collateral in the ordinary course of its business. 2.3 Debtor will keep the Collateral free at all times from all claims, liens, security interests and encumbrances other than those in favor of Bank. Debtor will not, without the prior written consent of Bank, sell, transfer or lease, or permit to be sold, transferred or leased, any or all of the Collateral, except (where Inventory is pledged as Collateral) for Inventory in the ordinary course of its business and will not return any Inventory to its supplier. Bank or its representatives may at all reasonable times inspect the Collateral and may enter upon all premises where the Collateral is kept or might be located. 2.4 Debtor will do all acts and will execute or cause to be executed all writings requested by Bank to establish, maintain and continue a perfected and first security interest of Bank in the Collateral. Debtor agrees that Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Indebtedness, and Debtor is not relying upon assets in which the Bank may have a lien or security interest for payment of the Indebtedness. 2.5 Debtor will pay within the time that they can be paid without interest or penalty all taxes, assessments and similar charges which at any time are or may become a lien, charge, or encumbrance upon any Collateral, except to the extent contested in good faith and bonded in a manner satisfactory to Bank. If Debtor fails to pay any of these taxes, assessments, or other charges in the time provided above, Bank has the option (but not the obligation) to do so and Debtor agrees to repay all amounts so expended by Bank immediately upon demand, together with interest at the highest lawful default rate which could be charged by Bank on any Indebtedness. 2.6 Debtor will keep the Collateral in good condition and will protect it from loss, damage, or deterioration from any cause. Debtor has and will maintain at all times (a) with respect to the Collateral, insurance under an "all risk" policy against fire and other risks customarily insured against, and (b) public liability insurance and other insurance as may be required by law or reasonably required by Bank, all of which insurance shall be in amount, form and content, and written by companies as may be satisfactory to Bank, containing a lender's loss payable endorsement acceptable to Bank. Debtor will deliver to Bank immediately upon demand evidence satisfactory to Bank that the required insurance has been procured. If Debtor fails to maintain satisfactory insurance, Bank has the option (but not the obligation) to do so and Debtor agrees to repay all amounts so expended by Bank immediately upon demand, together with interest at the highest lawful default rate which could be charged by Bank on any Indebtedness. 2.7 If Accounts Receivable are pledged as Collateral under this Agreement, then on each occasion on which Debtor evidences to Bank the account balances on and the nature and extent of the Accounts Receivable, Debtor shall be deemed to have warranted that except as otherwise indicated (a) each of those Accounts Receivable is valid and enforceable without performance by Debtor of any act; (b) each of those account balances are in fact owing, (c) there are no setoffs, recoupments, credits, contra accounts, counterclaims or defenses against any of those Accounts Receivable, (d) as to any Accounts Receivable represented by a note, trade acceptance, draft or other instrument or by any chattel paper or document, the same have been endorsed and/or delivered by Debtor to Bank, (e) Debtor has not received with respect to any Account Receivable, any notice of the death of the related account debtor, nor of the dissolution, liquidation, termination of existence, insolvency, business failure, appointment of a receiver for, assignment for the benefit of creditors by, or filing of a petition in bankruptcy by or against, the account debtor, and (f) as to each Account Receivable, the account debtor is not an affiliate of Debtor, the United States of America or any department, agency or instrumentality of it, or a citizen or resident of any jurisdiction outside of the United States. Debtor will do all acts and will execute all writings requested by Bank to perform, enforce performance of, and collect all Accounts Receivable. Debtor shall neither make nor permit any modification, compromise or substitution for any Account Receivable without the prior written consent of the Bank. Debtor shall, at Bank's request, arrange for verification of Accounts Receivable directly with account debtors or by other methods acceptable to Bank. 2.8 Debtor at all times shall be in strict compliance with all applicable laws, including without limit any laws, ordinances, directives, orders, statutes, or regulations an object of which is to regulate or improve health, safety, or the environment ("Environmental Laws"). 2.9 If marketable securities are pledged as Collateral under this Agreement and if at any time the outstanding principal balance of the Indebtedness exceeds N/A of the value of the -------------------- Collateral, as such value is determined from time to time by Bank (herein called the "Margin Requirement"), Debtor shall immediately pay or cause to be paid to Bank an amount sufficient to reduce the Indebtedness such that the remaining principal outstanding thereunder is equal to or less than the Margin Requirement. Bank shall apply payments made under this paragraph in payment of the Indebtedness in such order and manner of application as Bank in its sole discretion elects. In the alternative, Debtor may provide or cause to be provided to Bank additional collateral in the form of cash or other property acceptable to Bank and with a value, as determined by Bank, that when added to the Collateral will constitute compliance with the Margin Requirement. 2.10 If Bank, acting in its sole discretion, redelivers Collateral to Debtor or Debtor's designee for the purpose of (a) the ultimate sale or exchange thereof; or (b) presentation, collection, renewal, or registration of transfer thereof; or (c) loading, unloading, storing, shipping, transshipping, manufacturing, processing or otherwise dealing with it preliminary to sale or exchange; such redelivery shall be in trust for the benefit of Bank and shall not constitute a release of Bank's security interest in it or in the proceeds or products of it unless Bank specifically so agrees in writing. If Debtor requests any such redelivery, Debtor will deliver with such request a duly executed financing statement in form and substance satisfactory to the Bank. Any proceeds of Collateral coming into Debtor's possession as a result of any such redelivery shall be held in trust for Bank and immediately delivered to Bank for application on the Indebtedness. Bank may (in its sole discretion) deliver any or all of the Collateral to Debtor, and such delivery by Bank shall discharge Bank from all liability or responsibility for such Collateral. Bank, at its option, may require delivery of any Collateral to Bank at any time with such endorsements or assignments of the Collateral as Bank may request. 2.11 At any time without notice, Bank may, as to Collateral other than Equipment, Fixtures or Inventory, (a) cause any or all of such Collateral to be transferred to its name or to the name of its nominees; (b) receive or collect by legal proceedings or otherwise all dividends, interest, principal payments and other sums and all other distributions at any time payable or receivable on account of such Collateral, and hold the same as Collateral, or apply the same to the Indebtedness, the manner and distribution of the application to be in the sole discretion of Bank; (c) enter into any extension, subordination, reorganization, deposit, merger or consolidation agreement or any other agreement relating to or affecting such Collateral, and deposit or surrender control of such Collateral, and accept other property in exchange for such Collateral and hold or apply the property or money so received pursuant to this Agreement. 2.12 Bank may assign any of the Indebtedness and deliver any or all of the Collateral to its assignee, who then shall have with respect to Collateral so delivered all the rights and powers of the Bank under this Agreement, and after that Bank shall be fully discharged from all liability and responsibility with respect to Collateral so delivered. 2.13 Debtor delivers this Agreement based solely on Debtor's independent investigation of (or decision not to investigate) the financial condition of Borrower and is not relying upon any information furnished by Bank. Debtor assumes full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate now or later. Debtor waives any duty on the part of Bank, and agrees that Debtor is not relying upon or expecting Bank to disclose to Debtor any fact now or later known by Bank, whether relating to the operations or condition of Borrower, the existence, liabilities or financial condition of any guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, not withstanding any effect such fact may have upon Debtor's risk or Debtor's rights against Borrower. Debtor knowingly accepts the full range of risk encompassed in this Agreement, which risk includes without limit the possibility that Borrower may incur Indebtedness to Bank after the financial condition of Borrower, or Borrower's ability to pay debts as they mature, has deteriorated. 2.14 Debtor shall defend, indemnify and hold harmless Bank, its employees, agents, shareholders, affiliates, officers, and directors from and against any and all claims, damages, fines, expenses, liabilities or causes of action of whatever kind, including without limit consultant fees, legal expenses, and attorney fees, suffered by any of them as a direct or indirect result of any actual or asserted violation of any law, including without limit, Environmental Laws, or of any remediation relating to any property required by any law, including without limit Environmental Laws. 3. Collection of Proceeds. 3.1 Debtor agrees to collect and enforce payment of all Collateral until Bank shall direct Debtor to the contrary. Immediately upon notice to Debtor by Bank and at all times after that, Debtor agrees to fully and promptly cooperate and assist Bank in the collection and enforcement of all Collateral and to hold in trust for Bank all payments received in connection with Collateral and from the sale, lease or other disposition of any Collateral, all rights by way of suretyship or guaranty and all rights in the nature of a lien or security interest which Debtor now or later has regarding Collateral. Immediately upon and after such notice, Debtor agrees to (a) endorse to Bank and immediately deliver to Bank all payments received on Collateral or from the sale, lease or other disposition of any Collateral or arising from any other rights or interests of Debtor in the Collateral, in the form received by Debtor without commingling with any other funds, and (b) immediately deliver to Bank all property in Debtor's possession or later coming into Debtor's possession through enforcement of Debtor's rights or interests in the Collateral. Debtor irrevocably authorizes Bank or any Bank employee or agent to endorse the name of Debtor upon any checks or other items which are received in payment for any Collateral, and to do any and all things necessary in order to reduce these items to money. Bank shall have no duty as to the collection or protection of Collateral or the proceeds of it, nor as to the preservation of any related rights, beyond the use of reasonable care in the custody and preservation of Collateral in the possession of Bank. Debtor agrees to take all steps necessary to preserve rights against prior parties with respect to the Collateral. Nothing in this Section 3.1 shall be deemed a consent by Bank to any sale, lease or other disposition of any Collateral. 3.2 If Accounts Receivable are pledged as Collateral, this Section 3.2 shall be applicable and Debtor agrees that immediately upon Bank's request (whether or not any Event of Default exists) the indebtedness shall be on a "remittance basis" as follows: Debtor shall at its sole expense establish and maintain (and Bank, at Bank's option, may establish and maintain at Debtor's expense): (a) an United States Post Office lock box (the "Lock Box"), to which Bank shall have exclusive access and control. Debtor expressly authorizes Bank, from time to time, to remove contents from the Lock Box, for disposition in accordance with this Agreement. Debtor agrees to notify all account debtors and other parties obligated to Debtor that all payments made to Debtor (other than payments by electronic funds transfer) shall be remitted, for the credit of Debtor, to the Lock Box, and Debtor shall include a like statement on all invoices; and (b) a non-interest bearing deposit account with Bank which shall be titled as designated by Bank (the "Cash Collateral Account") to which Bank shall have exclusive access and control. Debtor agrees to notify all account debtors and other parties obligated to Debtor that all payments made to Debtor by electronic funds transfer shall be remitted to the Cash Collateral Account, and Debtor, at Bank's request, shall include a like statement on all invoices. Debtor shall execute all documents and authorizations as required by Bank to establish and maintain the Lock Box and the Cash Collateral Account. 3.3 If Accounts Receivable are pledged as Collateral, this Section 3.3 shall be applicable, and all items or amounts which are remitted to the Lock Box, to the Cash Collateral Account, or otherwise delivered by or for the benefit of Debtor to Bank on account of partial or full payment of, or with respect to, any Collateral shall, at Bank's option, (i) be applied to the payment of the Indebtedness, whether then due or not, in such order or at such time of application as Bank may determine in its sole discretion, or, (ii) be deposited to the Cash Collateral Account. Debtor agrees that Bank shall not be liable for any loss or damage which Debtor may suffer as a result of Bank's processing of items or its exercise of any other rights or remedies under this Agreement, including without limitation indirect, special or consequential damages, loss of revenues or profits, or any claim, demand or action by any third party arising out of or in connection with the processing of items or the exercise of any other rights or remedies under this Agreement. Debtor agrees to indemnify and hold Bank harmless from and against all such third party claims, demands or actions, and all related expenses or liabilities, including, without limitation, attorney fees. 4. Defaults, Enforcement and Application of Proceeds 4.1 Upon the occurrence of any of the following events (each an "Event of Default"), Debtor shall be in default under this agreement: (a) Any failure to pay the Indebtedness or any other indebtedness when due, or such portion of it as may be due, by acceleration or otherwise; or (b) Any failure or neglect to comply with, or breach of or default under, any term of this Agreement, or any other agreement or commitment between Borrower, Debtor, or any guarantor of any of the Indebtedness ("Guarantor") and Bank; or (c) Any warranty, representation, financial statement, or other information made, given or furnished to Bank by or on behalf of Borrower, Debtor, or any Guarantor shall be, or shall prove to have been, false or materially misleading when made, given, or furnished; or (d) Any loss, theft, substantial damage or destruction to or of any Collateral, or the issuance or filing of any attachment, levy, garnishment or the commencement of any proceeding in connection with any Collateral or of any other judicial process of, upon or in respect of Borrower, Debtor, any Guarantor, or any Collateral; or (e) Sale or other disposition by Borrower, Debtor, or any Guarantor of any substantial portion of its assets or property or voluntary suspension of the transaction of business by Borrower, Debtor, or any Guarantor, or death, dissolution, termination of existence, merger, consolidation, insolvency, business failure, or assignment for the benefit of creditors of or by Borrower, Debtor, or any Guarantor; or commencement of any proceedings under any state or federal bankruptcy or insolvency laws or laws for the relief of debtors by or against Borrower, Debtor, or any Guarantor; or the appointment of a receiver, trustee, court appointee, sequestrator or otherwise, for all or any part of the property of Borrower, Debtor, or any Guarantor; or (f) Bank deems the margin of Collateral insufficient or itself insecure, in good faith believing that the prospect of payment of the Indebtedness or performance of this Agreement is impaired or shall fear deterioration, removal, or waste of Collateral. 4.2 Upon the occurrence of any Event of Default, Bank may at its discretion and without prior notice to Debtor declare any or all of the Indebtedness to be immediately due and payable, and shall have and may exercise any one or more of the following rights and remedies: (a) Exercise all the rights and remedies upon default, in foreclosure and otherwise, available to secured parties under the provisions of the Uniform Commercial Code and other applicable law; (b) Institute legal proceedings to foreclose upon the lien and security interest granted by this Agreement, to recover judgment for all amounts then due and owing as Indebtedness, and to collect the same out of any Collateral or the proceeds of any sale of it; (c) Institute legal proceedings for the sale, under the judgment or decree of any court of competent jurisdiction, of any or all Collateral; and/or (d) Personally or by agents, attorneys, or appointment of a receiver, enter upon any premises where Collateral may then be located, and take possession of all or any of it and/or render it unusable; and without being responsible for loss or damage to such Collateral, hold, operate, sell, lease, or dispose of all or any Collateral at one or more public or private sales, leasings or other dispositions, at places and times and on terms and conditions as Bank may deem fit, without any previous demand or advertisement; and except as provided in this Agreement, all notice of sale, lease or other disposition, and advertisement, and other notice or demand, any right or equity of redemption, and any obligation of a prospective purchaser or lessee to inquire as to the power and authority of Bank to sell, lease, or otherwise dispose of the Collateral or as to the application by Bank of the proceeds of sale or otherwise, which would otherwise be required by, or available to Debtor under, applicable law are expressly waived by Debtor to the fullest extent permitted. At any sale pursuant to this Section 4.2, whether under the power of sale, by virtue of judicial proceedings or otherwise, it shall not be necessary for Bank or a public officer under order of a court to have present physical or constructive possession of Collateral to be sold. The recitals contained in any conveyances and receipts made and given by Bank or the public officer to any purchaser at any sale made pursuant to this Agreement shall, to the extent permitted by applicable law, conclusively establish the truth and accuracy of the matters stated (including, without limit, as to the amounts of the principal of and interest on the indebtedness, the accrual and nonpayment of it and advertisement and conduct of the sale); and all prerequisites to the sale shall be presumed to have been satisfied and performed. Upon any sale of any Collateral, the receipt of the officer making the sale under judicial proceedings or of Bank shall be sufficient discharge to the purchaser for the purchase money, and the purchaser shall not be obligated to see to the application of the money. Any sale of any Collateral under this Agreement shall be a perpetual bar against Debtor with respect to that Collateral. 4.3 Debtor shall at the request of Bank, notify the account debtors or obligors of Bank's security interest in the Collateral and direct payment of it to Bank. Bank may, itself, upon the occurrence of any Event of Default so notify and direct any account debtor or obligor. 4.4 The proceeds of any sale or other disposition of Collateral authorized by this Agreement shall be applied by Bank first upon all expenses authorized by the Uniform Commercial Code and all reasonable attorney fees and legal expenses incurred by Bank; the balance of the proceeds of the sale or other disposition shall be applied in the payment of the Indebtedness, first to interest, then to principal, then to remaining Indebtedness and the surplus, if any, shall be paid over to Debtor or to such other persons(s) as may be entitled to it under applicable law. Debtor shall remain liable for any deficiency, which it shall pay to Bank immediately upon demand. 4.5 Nothing in this Agreement is intended, nor shall it be construed, to preclude Bank from pursuing any other remedy provided by law for the collection of the Indebtedness or for the recovery of any other sum to which Bank may be entitled for the breach of this Agreement by Debtor. Nothing in this Agreement shall reduce or release in any way any rights or security interests of Bank contained in any existing agreement between Borrower, Debtor, or any Guarantor and Bank. 4.6 No waiver of default or consent to any act by Debtor shall be effective unless in writing and signed by an authorized officer of Bank. No waiver of any default or forbearance on the part of Bank in enforcing any of its rights under this Agreement shall operate as a waiver of any other default or of the same default on a future occasion or of any rights. 4.7 Debtor irrevocably appoints Bank or any agent of Bank (which appointment is coupled with an interest) the true and lawful attorney of Debtor (with full power of substitution) in the name, place and stead of, and at the expense of, Debtor: (a) to demand, receive, sue for, and give receipts or acquittances for any moneys due or to become due on any Collateral and to endorse any item representing any payment on or proceeds of the Collateral; (b) to execute and file in the name of and on behalf of Debtor all financing statements or other filings deemed necessary or desirable by Bank to evidence, perfect, or continue the security interests granted in this Agreement; and (c) to do and perform any act on behalf of Debtor permitted or required under this Agreement. 4.8 Upon the occurrence of an Event of Default, Debtor also agrees, upon request of Bank, to assemble the Collateral and make it available to Bank at any place designated by Bank which is reasonably convenient to Bank and Debtor. 5. Miscellaneous. 5.1 Until Bank is advised in writing by Debtor to the contrary, all notices, requests and demands required under this Agreement or by law shall be given to, or made upon, Debtor at the first address indicated in Section 5.15 below. 5.2 Debtor will give Bank not less than 90 days prior written notice of all contemplated changes in Debtor's name, chief executive office location, and/or location of any Collateral, but the giving of this notice shall not cure any Event of Default caused by this change. 5.3 Bank assumes no duty of performance or other responsibility under any contracts contained within the Collateral. 5.4 Bank has the right to sell, assign, transfer, negotiate or grant participations or any interest in, any or all of the Indebtedness and any related obligations, including without limit this Agreement. In connection with the above, but without limiting its ability to make other disclosures to the full extent allowable, Bank may disclose all documents and information which Bank now or later has relating to Debtor, the Indebtedness or this Agreement, however obtained. Debtor further agrees that Bank may provide information relating to this Agreement or relating to Debtor to the Bank's parent, affiliates, subsidiaries, and service providers. 5.5 In addition to Bank's other rights, any indebtedness owing from Bank to Debtor can be set off and applied by Bank on any Indebtedness at any time(s) either before or after maturity or demand without notice to anyone. 5.6 Debtor waives any right to require the Bank to: (a) proceed against person or property; (b) give notice of the terms, time and place of any public or private sale of personal property security held from Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the Uniform Commercial Code; or (c) pursue any other remedy in the Bank's power. Debtor waives notice of acceptance of this Agreement and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, any and all other notices to which the undersigned might otherwise be entitled, and diligence in collecting any Indebtedness, and agree(s) that the Bank may, once or any number of times, modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit Borrower to incur additional Indebtedness, all without notice to Debtor and without affecting in any manner the unconditional obligation of Debtor under this Agreement. Debtor unconditionally and irrevocably waives each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of Debtor under this Agreement, and acknowledges that such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or document from Debtor now or later securing the Indebtedness, and acknowledges that as of the date of this Agreement no such defense or setoff exists. 5.7 Debtor waives any and all rights (whether by subrogation, indemnity, reimbursement, or otherwise) to recover from Borrower any amounts paid or the value of any Collateral given by Debtor pursuant to this Agreement. 5.8 In the event that applicable law shall obligate Bank to give prior notice to Debtor of any action to be taken under this Agreement, Debtor agrees that a written notice given to Debtor at least five days before the date of the act shall be reasonable notice of the act and, specifically, reasonable notification of the time and place of any public sale or of the time after which any private sale, lease, or other disposition is to be made, unless a shorter notice period is reasonable under the circumstances. A notice shall be deemed to be given under this Agreement when delivered to Debtor or when placed in an envelope addressed to Debtor and deposited, with postage prepaid, in a post office or official depository under the exclusive care and custody of the United States Postal Service or delivered to an overnight courier, certified, or first class mail. 5.9 Notwithstanding any prior revocation, termination, surrender, or discharge of this Agreement in whole or in part, the effectiveness of this Agreement shall automatically continue or be reinstated in the event that any payment received or credit given by Bank in respect of the Indebtedness is returned, disgorged, or rescinded under any applicable law, including, without limitation, bankruptcy or insolvency laws, in which case this Agreement, shall be enforceable against Debtor as if the returned, disgorged, or rescinded payment or credit had not been received or given by Bank, and whether or not Bank relied upon this payment or credit or changed its position as a consequence of it. In the event of continuation or reinstatement of this Agreement, Debtor agrees upon demand by Bank to execute and deliver to Bank those documents which Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of Debtor to do so shall not affect in any way the reinstatement or continuation. 5.10 This Agreement and all the rights and remedies of Bank under this Agreement shall inure to the benefit of Bank's successors and assigns and to any other holder who derives from Bank title to or an interest in the Indebtedness or any portion of it, and shall bind Debtor and the heirs, legal representatives, successors, and assigns of Debtor. Nothing in this Section 5.10 is deemed a consent by Bank to any assignment by Debtor. 5.11 If there is more than one Debtor, all undertakings, warranties and covenants made by Debtor and all rights, powers and authorities given to or conferred upon Bank are made or given jointly and severally. 5.12 Except as otherwise provided in this Agreement, all terms in this Agreement have the meanings assigned to them in Division 9 (or, absent definition in Division 9, in any other Division) of the Uniform Commercial Code, as of the date of this Agreement. "Uniform Commercial Code" means the California Uniform Commercial Code, as amended. 5.13 No single or partial exercise, or delay in the exercise, of any right or power under this Agreement, shall preclude other or further exercise of the rights and powers under this Agreement. The unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. This Agreement constitutes the entire agreement of Debtor and Bank with respect to the subject matter of this Agreement. No amendment or modification of this Agreement shall be effective unless the same shall be in writing and signed by Debtor and an authorized officer of Bank. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflict of laws ---------- principles. 5.14 To the extent that any of the Indebtedness is payable upon demand, nothing contained in this Agreement shall modify the terms and conditions of that Indebtedness nor shall anything contained in this Agreement prevent Bank from making demand, without notice and with or without reason, for immediate payment of any or all of that Indebtedness at any time(s), whether or not an Event of Default has occurred. 5.15 Debtor's chief executive office is located and shall be maintained at 5010 Eucalyptus Avenue --------------------------------------------- STREET ADDRESS Chino Ca 91710 ---------------------------------------------------------------------- CITY STATE ZIP CODE COUNTY If Collateral is located at other than the chief executive office, such Collateral is located and shall be maintained at Crossroads Commerce Center ------------------------------------------------------------. STREET ADDRESS Lathrop California 95330 San Joaquin ------------------------------------------------------------------. CITY STATE ZIP CODE COUNTY Collateral shall be maintained only at the locations identified in this Section 5.15. 5.16 A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement under the Uniform Commercial Code and may be filed by Bank in any filing office. 5.17 This Agreement shall be terminated only by the filing of a termination statement in accordance with the applicable provisions of the Uniform Commercial Code, but the obligations contained in Section 2.14 of this Agreement shall survive termination. 6. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS. 7. Special Provisions Applicable to this Agreement. (*None, if left blank) DEBTOR: Provena Foods, Inc. ------------------------------------ DEBTOR NAME TYPED/PRINTED By: /s/ Illegible Signature ---------------------------------------- SIGNATURE OF Its: CEO ---------------------------------------- TITLE (if applicable) By: /s/ Illegible Signature ---------------------------------------- SIGNATURE OF Its: Chairman ---------------------------------------- TITLE (if applicable) By: /s/ Illegible Signature ---------------------------------------- SIGNATURE OF Its: CFO ---------------------------------------- TITLE (if applicable) By: ---------------------------------------- SIGNATURE OF Its: ---------------------------------------- TITLE (if applicable) EX-10.40 6 COLLECTIVE BARGAINING AGREEMENT COLLECTIVE BARGAINING AGREEMENT between SWISS-AMERICAN SAUSAGE COMPANY INC. and UNITED FOOD AND COMMERCIAL WORKERS LOCAL 101 208 Miller Avenue, South San Francisco, CA 94080 (415) 871-5730 [LOGO OF UFCW APPEARS HERE] covering APRIL 1, 1998 THROUGH MARCH 31, 2002 SWISS-AMERICAN SAUSAGE COMPANY INC. APRIL 1, 1998 THROUGH MARCH 31, 2002 TABLE OF CONTENTS -----------------
SECTION PAGE - ------- ---- 1. RECOGNITION/JURISDICTION.......................................... 1 2. UNION SECURITY.................................................... 4 3. EMPLOYMENT........................................................ 5 4. DISCHARGE......................................................... 6 5. HOURS............................................................. 7 6. OVERTIME.......................................................... 8 7. HOLIDAYS.......................................................... 9 8. VACATIONS......................................................... 10 9. LEAVES OF ABSENCE................................................. 12 10. WAGES............................................................. 14 11. SUPERANNUATED EMPLOYEES........................................... 15 12. HEALTH AND WELFARE................................................ 16 13. SICK LEAVE........................................................ 17 14. PENSIONS.......................................................... 19 15. JURY DUTY......................................................... 19 16. GENERAL BENEFITS.................................................. 20 17. SENIORITY......................................................... 20 18. GRIEVANCE AND ARBITRATION......................................... 22 19. UNION AFFAIRS..................................................... 24 20. WORKING CONDITIONS AND SAFETY..................................... 24 21. JOB SECURITY...................................................... 25 22. SEPARABILITY...................................................... 26 23. TRANSFER OF OWNERSHIP............................................. 26 24. SAVINGS CLAUSE.................................................... 26 25. DRIVERS........................................................... 27 26. NO STRIKE OR LOCKOUT.............................................. 27 27. EXTENSION AND SCOPE............................................... 27 LETTER OF UNDERSTANDING........................................... 29
COLLECTIVE BARGAINING AGREEMENT between SWISS-AMERICAN SAUSAGE COMPANY INC. and UFCW LOCAL 101 APRIL 1, 1998 through MARCH 31, 2002 THIS AGREEMENT is made and entered into by and between SWISS-AMERICAN SAUSAGE COMPANY, INC., located at 35 Williams Avenue, San Francisco, hereinafter referred to as the "Employer" or "Company" and UNITED FOOD AND COMMERCIAL WORKERS UNION LOCAL 101, AFL-CIO, CLC hereinafter referred to as the "Union". WITNESSETH ---------- In order to establish working conditions which are fair and equitable to all Employers and employees, the parties hereto agree to the following: The parties to this Agreement recognize the competitive nature of the industry and further agree that no employee will be required to work hours in excess of the working hours established in this Agreement. SECTION 1. RECOGNITION, JURISDICTION ------------------------------------ 1.1 Union Recognition. The Employer recognizes the Union as the exclusive ------------------ bargaining agent for all employees employed in the classification set forth in Section 10 working in the plant of the Employer located in the City of San Francisco, County of San Mateo and San Joaquin County. 1 1.2 Classification Definitions. It is understood and agreed that the --------------------------- following groups of employees shall be recognized as: 1.2.1 Sausage Makers. This group shall consist of Journeymen and/or --------------- Apprentices engaged in processing and manufacturing of specialty sausage items, smoked, cooked and cured meats and meat food products involving trimming and boning, grinding, formulating, and other preparation, chopping and mixing, hanging, tying and linking, stuffing casings, loaves and table work, cooking, smokehouse, steam cabinet, curing and other work incidental to the above. The parties agree that all sausage makers or apprentices promoted before August 1, 1998, shall be grandfathered into this classification and shall be credited towards the required number of production specialists. 1.2.2 Production Specialist. This group shall consist of a minimum of ten ---------------------- (10) Production Workers engaged primarily in processing and manufacturing of specialty sausage items, smoked, cooked and cured meats and meat food products involving trimming and boning, grinding, formulating, and other preparation, chopping and mixing, hanging, tying and linking, stuffing casings, loaves and table work, cooking, smokehouse, steam cabinet, curing and other work incidental to the above. Production Specialists shall have seniority as Production Specialists, but shall also have Production Worker seniority and can displaced a less senior Production Worker in the event a layoff as a Production Specialist. It is agreed and understood that the use of Production Worker as herein described shall not result in the displacement of any current employees from his/her current classification of work. It is further agreed that, in the event of a reduction in workforce involving or affecting the kitchen, employees in the Production Worker classification shall be the first removed from the kitchen. 1.2.3 Maintenance Workers. Employees engaged primarily in the maintenance -------------------- and repair of the Employer's equipment. 1.2.4 Sanitation Workers. Employees engaged primarily in the sanitation and ------------------- cleaning of the work place. 1.2.5 Rotation Workers. Employees engaged primarily in the rotation of the ----------------- Employers hanging products throughout the plant. Rotation Workers shall have seniority as a Rotation Worker, but shall also have Production Worker seniority and can displace a less senior Production Worker in the event a layoff as a Rotation Worker. 1.2.6 Working Foreperson. A Working Foreperson shall not be disciplined by ------------------- the Union or discriminated against in any way for exercising discretionary duties on behalf of Management or effectively recommending courses of action to 2 Management. 1.2.7 Supervisors. Supervisors will not be a part of the bargaining unit, ------------ will not be required to join the Union, and will be permitted to perform whatever work the Company assigns; provided however that the number of supervisors shall be limited to a number equal to ten percent (10%) of the number of bargaining unit employees. 1.2.8 Owner's Family Members. It is agreed and understood that officers and ----------------------- their immediate family may, is assigned to perform bargaining unit work, become members of the Union on the same terms and conditions membership is made available to all other bargaining unit employees provided that the officer is stationed in the jurisdiction of this agreement and these family members do not cause the displacement of any current employee. 1.3 Performance of Bargaining Unit Work. The Employer agrees that only ------------------------------------ employees included in the bargaining unit shall perform any of the work coming within the jurisdiction of this Agreement, provided however; that non-bargaining unit work may perform bargaining unit work where necessary for: emergencies beyond the control of the Employer, work in the instruction or training of employees, and testing materials in production. 1.4 Employees Status: ----------------- 1.4.1 Regular Employees. A Regular Employee is one who has completed the ------------------ probationary period for all new employees in accordance with Section 18 hereof. 1.4.2 Extra Employees. Any employee hired to either relieve a regular ---------------- employee or to supplement the existing work force. Extra Employee shall not be employed to displace Regular Employees. An Extra Employee who works forty-five (45) work days for the same Employer within a twelve (12) month period shall become a Regular Employee for the purposes of benefit eligibility. Extra Employees may be scheduled less than forty (40) hours per week. Regular Employees on layoff shall be hired first. No Extra Employees will be hired when Regular Employees in the same classification are on layoff. It is agreed and understood that assignment of employees to work less than forty (40) hours per week within the meaning of this provision, shall not operate to replace any existing employees and, further, the hiring of employees to work less than forty (40) hours per week shall not be done for the purpose of permanently replacing full-time positions. In the event of a reduction in force, those employees regularly scheduled to work less than forty (40) hours per week shall be laid off prior to the layoff of any Regular Employees. 3 1.4.3 Probationary Employees. A Probationary Employee is one who has not yet ----------------------- completed the required forty-five (45) work days of trial employment with the current Employer, as specified in Section 18 (Seniority) herein. New employees to the industry hired on or after April 1, 1988, shall not be entitled to health and welfare contributions, holidays, funeral leave, sick pay and jury duty pay during the probationary period. 1.5 Management Rights. The Employer shall have the right to the general ------------------ management of all operations and the direction of the workforce, including but not limited to, the right to hire, transfer, promote, maintain discipline and efficiency, layoff, establish new processes or use new equipment, establish schedules of production, and to extend, limit or curtail its operations. Nothing in this Agreement shall be construed, by any manner or means, to preclude the subcontracting of work by the Company or to require the Company to perform work at this Plant rather than elsewhere so long as the rights specified herein are not exercised in a manner inconsistent with this Agreement. SECTION 2. UNION SECURITY ------------------------- 2.1 Local Union Membership. Every person performing work covered by this ----------------------- Agreement who is a member of the Union on the effective date of this Section shall, as a condition of employment or continued employment, remain a member of the Union. Every person employed to perform work covered by this Agreement shall, as a condition of employment, be a member of the Union, or shall, within a period of thirty-one (31) days after the effective or execution date of this Agreement, whichever is later, become a member of the Union. 2.2 Maintenance of Membership. The Employer shall discharge every person -------------------------- who has failed to comply with the provision of Section 2.1 at the end of the work day during which notice of such noncompliance is received. The Employer further agrees not to again employ or re-employ any person(s) so discharged until he or she is a member of the Union; provided, however, in the event that the Labor Management Relations Act, as amended, is applicable to this Agreement, the provisions of this sentence of this Section 2.2 shall not be applied until a final administrative or judicial decision has been rendered which would permit its application under the Act. 2.3 Applicants for Membership. Membership in the Union shall be available -------------------------- to person employed in work covered by this Agreement upon terms and qualifications not more burdensome than those applicable generally to other applicants for such membership. 4 SECTION 3. EMPLOYMENT --------------------- 3.1 No Discrimination. The Employer shall have sole responsibility for the ------------------ full freedom in the selection and employment and discharge of persons employed or to be employed in work covered by this Agreement, subject to the provisions of this Agreement; provided, that there shall be no discrimination because of membership or non-membership in or participation or non-participation in the activities of the Union. The Employer will not discharge or discriminate against any employee upholding lawful Union principles such as serving as an officer or other representative of the Union, soliciting membership in the Union, wearing Union buttons, distributing Union literature or attending Union meetings provided that such activity does not interfere with his or her work. The Employer will not discharge or discriminate against any employee for failing or refusing to purchase stock, bonds, securities, or any other interest in any corporation, partnership or company. 3.2 Hiring Notification. An Employer who desires to employ a person in -------------------- work covered under this Agreement shall inform the Union of the number and qualifications of persons desired, the location of the job site, in advance of the time that such persons are required. 3.3 Hiring Consideration. In the hiring of new employees, the Employer --------------------- agrees that it will give equal consideration to all applicants, including those referred by the Union. The Employer and the Union will not discriminate compensation, terms or conditions of employment because of such individual's race, color, religion, sex, age (to the extent provided by law), or national origin; nor will they limit, segregate or classify employees in any way to deprive any individual employee of employment opportunities because of their race, color, religion, sex, age (to the extent provided by law), or national origin. Any reference to the male gender in this Contract shall be in the generic sense and it shall refer equally to either sex without discrimination, as provided above. 3.4 Union Notification. The Employer shall notify the Union within one (1) ------------------- week of the name, address, Social Security Account Number and classification of every such person employed in work covered by this Agreement, together with the date of such employment and location of the place or prospective place of employment. Whenever a person is rejected for or discharged for such work, the Employer shall, upon request of the Union, notify the Union of the reason or reasons therefor. The notice required by this Section shall be made in writing within forty-eight (48) hours after such request. Any employees hired shall report to the Union within one (1) week after the date of employment to fill out and sign applications, forms and papers for health and welfare, dental and pension purposes. 5 SECTION 4. DISCHARGE -------------------- 4.1 Prohibition Against Discharge. No employee covered by this Agreement ------------------------------ shall be suspended, demoted or discharged without just and sufficient cause. Discharge for failure to comply with Section 2.2 of this Agreement shall be deemed a discharge for cause. Before an employee is suspended for more than three (3) days or discharged, he or she shall receive written warning of unsatisfactory conduct and a copy of such notice shall be sent to the Union. Such written warning shall not be effective for suspension actions for more than nine (9) months. The employee receiving such warning shall be given reasonable opportunity to rectify or change such conduct. The notice and warning required by this section need not be given to employees disciplined for, but not limited to any gross violation of reasonably acceptable conduct. 4.2 Notice From Insurance Carrier. When an insurance carrier notifies the ------------------------------ Employer that the Firm's vehicle insurance is being cancelled because of a driver's record of on-the-job driving on file with the California Department of Motor Vehicles, that driver may be transferred to another job, if available, where he or she shall have seniority as a new employee or, if no job is available, he or she may be laid-off pending the results of the grievance procedure. 4.3 Right of Appeal. Any employee claiming unjust dismissal, demotion or ---------------- suspension shall make his or her claim therefor to the Union within ten (10) working days of such dismissal, demotion or suspension and the Union will that day notify the Employer by telephone and confirm in writing, otherwise, no action shall be taken by the Union. If, after proper investigation by the Union and the Employer, it has been found that an employee has been disciplined unjustly, he or she shall be reinstated with full rights and shall be paid his or her wages for the period he or she was suspended, demoted or dismissed. Investigation of any claims shall be made within ten (10) days of the making of such complaint by the employee. Any dispute arising out of such suspension, demotion, or discharge shall be processed under Section 19 (Grievance and Arbitration) of this Agreement. 4.4 Notification of Discharge. When an employee is discharged, the -------------------------- Employer must give written notice to the employee, stating the reasons for such discharge, and the Union shall receive a copy of said notice. Upon written notification by the Union of an employee holding a second job, the Employer will either terminate the employment of the employee or require that he or she resign his or her second job. Where an employee is holding a full-time second job, the Employer, five (5) working days after written notice to the employee requesting he or she resign his or her second job, may terminate him or her if he or she does not do so. 6 SECTION 5. HOURS ---------------- 5.1 Hours of Operation. The hours of operation of the Employer's facility ------------------- shall be as hereunder provided and shall apply to all employees of the Employer covered herein. Hours worked in excess of eight (8) straight- time hours in a day or in excess of forty (40) straight-time hours in any week shall be paid at one and one-half (1 1/2) times the straight- time rate. 5.2 Posting Requirement. All regular employees shall have their schedule -------------------- posted by Friday noon for the following work week. It shall not be changed except by reason of an Act of God or other reason beyond the reasonable control of the Employer. The schedule shall show the full name of the employee, the starting times and the days scheduled for him or her during the following week in ink or typewritten. 5.3 Schedule of Shift. All first shift hours shall be regularly scheduled ------------------ to commence no earlier than 5:00 a.m., and no later than 10:00 a.m. The second shift hours shall commence on or after 10:00 a.m., and no later than 5:00 p.m. The third shift hours shall commence on or after 5:00 p.m., and before 5:00 a.m. All work commenced on or after 10:00 a.m., but no later than 5:00 p.m., shall be paid for at the rate of the second shift premium for all hours worked. All work commenced on or after 5:00 p.m., and before 5:00 a.m., shall be paid at the third shift premium for all hours worked. 5.4 Guaranteed Work Week. Regular Employees shall be guaranteed payment --------------------- for and expected to work eight (8) hours each day, forty (40) hours for each week subject to the addition of all premium and overtime provisions, unless such work ceases to be available by reason of an Act of God, or other reason beyond the control of the Employer. Employees unable to work eight (8) hours a day, forty (40) hours a week shall provide a reasonable explanation and verification of the reason of absence where appropriate and in compliance with the provisions of this Agreement. 5.5 Extra Employees Work Week. Extra Employees may be scheduled to work -------------------------- less than forty (40) hours per week. Extra Employees shall be scheduled to work in accordance with their seniority. Extra Employees scheduled to work less than forty (40) hours shall be scheduled as work is available. 5.6 Regular Work Week. The regular work day shall consist of eight (8) ------------------ hours within nine (9) hours, Monday through Friday, inclusive, provided however, it is agreed and understood that the Employer may, during the course of this Agreement, with seven (7) calendar days notice to the Union, institute a Tuesday through Saturday work week. This work week shall be comprised of a regular 7 crew and established only for the purpose of expanding production capability. This work week shall be offered on a voluntary basis to existing employees and shall not be used to reduce existing Saturday overtime opportunities. 5.7 Minimums. Five (5) days consisting of eight (8) working hours per day, --------- forty (40) hours, Monday through Friday, inclusive, except as otherwise herein provided, shall constitute a work week for all eligible employees except that during a week in which a holiday falls, the work week shall consist of thirty-two (32) hours. Employees called to work will be provided with a minimum of eight (8) hours work or pay in lieu of work, such pay to start from the hour the employee is required to report for work, except in case of matters beyond the control of the Employer. Employees doing security inspection or quality control shall be guaranteed a minimum of one (1) hour work or pay in lieu thereof. 5.8 Bid on Job Shifts. Employees shall have the right to bid on job shift ------------------ assignments in the order of their seniority except that no employee shall have this opportunity more often than once in every six-month period, except when a shift is reestablished within the six (6) months. It is understood that this privilege shall not result in chain bumping. When a shift is discontinued, the senior employee shall have the right to bid on the job classification in the existing shift. 5.9 Call Back. An employee called back to work within twelve (12) hours ---------- from the end of his or her shift shall be paid one and one-half (1 1/2) his or her applicable rate for the hours worked prior to the expiration of such hours. 5.10 Meal Periods. All employees shall receive one (1) full uninterrupted ------------- hour for a meal period or by mutual agreement between the employees, the Employer and the Union one-half (1/2) hour, approximately in the middle of the working day, and in no event shall an employee work more than five (5) hours before any meal period. In agreeing on lunch periods, the parties will consider the requirement set by the USDA for meat inspectors. 5.11 Rest Periods. All employees shall receive two (2), fifteen (15) minute ------------- rest periods in an eight (8) hour day. Employees working beyond nine (9) hours in a day shall receive an additional ten (10) minute rest period. 5.12 Clean Up. Sufficient time shall be allowed to clean up the Plant in --------- order that the employees may leave by their regular quitting time. SECTION 6. OVERTIME ------------------- 6.1 Overtime Pay. All work in excess of eight (8) hours in one (1) day and ------------- all work in excess of forty (40) hours in one (1) week shall be paid for at the overtime rate of one and one-half (1 1/2) time the employee's regular straight time rate of pay. 8 Employees shall be paid at one and one-half (1 1/2) for all work performed on the sixth (6th) day of the employee's work week. All work performed in excess of ten (10) hours in any one (1) day shall be paid for at the overtime rate of two (2) times the employee's regular straight time rate of pay. When overtime work is scheduled for Sundays and Holidays, such work shall be paid for at the overtime rate of (2) times the employee's regular straight time rate of pay (double time). All work performed either before the employee's scheduled eight (8) hour shift or after the completion of his or her scheduled eight (8) hour shift, except as provided above, shall be paid for at the rate of one and one-half (1 1/2) times the employee's regular straight time rate of pay. In the event an employee is required to report for work earlier than his scheduled shift starting time, the Employer shall schedule a minimum thirty (30) minutes of work time in this period. There shall be no pyramiding of overtime under this Agreement. Extra Employees will be given the preference whenever possible to avert overtime. 6.2 Daily Overtime. Preference for overtime work shall be given to --------------- employees performing the work prior to the expiration of the shift. If additional employees are required such overtime work shall be offered to employees by classification seniority within the department, then plantwide. 6.3 Weekend/Holiday Overtime. Preference for overtime work on a weekend or ------------------------- holiday shall be offered to employees performing the work during the regular work week first, next by classification seniority within the department, then plantwide as per current practice. 6.4 Reporting Pay. When an employee is sent out from the Union to a -------------- position at the request of the Employer, or is requested by the Employer to report to work arriving there on time is not permitted to work, the employee reporting to work shall be given a day's pay. If an employee arrives late, then he or she may be sent home and the Employer shall not be obligated to pay him or her for that day; however, if the employee is allowed to work any part of that day, he or she shall be paid only for the hours actually worked on that day and his or her guarantee shall be proportionately reduced by the hours not worked on that day. SECTION 7. HOLIDAYS ------------------- 7.1 Recognized Holidays. The following holidays shall be recognized and -------------------- observed annually under this Agreement and eligible employees as set forth in Section 7.4 shall receive pay for said holidays as if worked. 1. New Year's Day 6. Labor Day 2. Martin Luther King's Birthday 7. Thanksgiving Day 3. President Day 8. Day after Thanksgiving 4. Memorial Day 9. Christmas Day 5. Fourth of July 10. Employee Birthday 9 7.2 Employee's Birthday. Each employee shall give his or her Employer -------------------- notice of his or her birthday at least two (2) weeks prior to the week in which the birthday occurs. When the necessities of the Employer's business preclude the granting of the Holiday on such birthday of the employee, the Employer shall notify the employee during the week in which the employee gave notice of the birthday to the Employer and a change shall be scheduled by mutual agreement in the week preceding or in the week following the week of the employee's birthday. The Birthday holiday shall apply only to Regular Employees who have been employed by the Company for one (1) one full year. If an employee's birthday falls on a day which is otherwise considered as the Holiday, or on a Saturday or Sunday, he or she shall receive an additional day off for the birthday in addition to the Holiday on which it falls or may receive pay (eight (8) hours at the straight time rate of pay) by mutual agreement with the Employer. The Birthday Holiday must be taken within each contract year or it shall be lost. 7.3 Holiday Pay Eligibility. Non-probationary employees working their ------------------------ scheduled work day before and their scheduled work day after the Holiday shall receive pay for the Holiday, except that an employee who is absent due to illness or injury for a period not in excess of thirty (30) days, or death in the immediate family and is, therefore, unable to work the scheduled work day before and the scheduled work day after the Holiday shall receive pay for the Holiday. If a Regular Employee worked in the week before Christmas Week or in the week following New Year's Day Week, he or she shall be paid for both Holidays. Any Regular Employee or temporary layoff who worked any portion of the week preceding, the week of, or the week following the Holiday week shall be paid for the Holiday if temporary layoff has not and does not exceed three (3) weeks. Extra Employees working the work days in the week of the Holiday shall be paid for the Holiday. 7.4 Holidays Falling on Saturday/Sunday. When one of the above enumerated ------------------------------------ Holidays falls on a Sunday, then Monday shall be considered as the Holiday. When one of the above enumerated Holidays falls on a Saturday, then Friday shall be considered as the Holiday. SECTION 8. VACATIONS -------------------- 8.1 Vacation Benefits. All Regular Employees who have been in the employ ------------------ of the Employer for at least one (1) year shall be entitled to receive vacation benefits as specified below. Employees going on vacation shall receive pay for said vacation period prior to leaving on vacation. 8.1.1 One (1) week's (five (5) days) vacation with pay after completion of the first year 10 of service. 8.1.2 Two (2) week's (ten (10) days) vacation with pay after completion of the second year of service. 8.1.3 Three (3) week's (fifteen (15) days) vacation with pay after completion of the five year of service. 8.1.4 Four (4) week's (twenty (20) days) vacation with pay after completion of the fifteenth year of service. Employees with seniority dates prior to October 1, 1982 who are entitled to four (4) or more weeks of vacation with pay shall be frozen at their current entitlement and shall not accrue further additional vacation benefits by virtue of additional years of Company service or otherwise. 8.2 Multiple Week Vacation Schedules. Where an employee is entitled to --------------------------------- three (3) or more weeks of vacation the employee and Employer may, if they mutually agree, provide that two (2) weeks be taken at one time and the balance taken at one other time during the year, or that two (2) weeks may be taken at one time together with payment in lieu of the balance thereof. 8.3 The principle of seniority shall be observed in the choice of vacation periods. The Vacation Schedule for the period March 15 of the current year to March 15 of the following year shall be posted by February First and selection of the first increment of vacation shall be completed by all employees by March First. Selection of the second increment of vacation shall be completed by all employees by March Fifteenth. After this, there shall be no changes in the schedule except is case of severe personal hardship. The Employer shall have the right to designate the number of employees that may be off at any given time, but in no event less than one employee in any one week except for five weeks out of the year marked out by the Employer in consideration of its business needs. If an Employee who is entitled to more than three weeks vacation does not select dates for the fourth, fifth or sixth weeks by March 15, he or she may subsequently select dates after September 30, upon mutual arrangement with the Employer, so long as such selection would not require a change in another employee's scheduled vacation. An employee who fails to select his or her vacation in a timely manner as provided in this Section shall be placed at the bottom of the seniority list for the purpose of selecting vacation dates after the deadline for such selection has passed. In the event the employee has not utilized or made a previous selection of their vacation(s) schedule, the Employer shall have the right to assign those weeks which are remaining within the last three (3) months of the eligible year. 11 8.4 Pro-Rated Vacation Pay Upon Separation From Employment. Upon ------------------------------------------------------- termination of employment or change of ownership of a plant, employees shall receive prorated vacation pay based on each full month worked since the employee's last anniversary date of employment; provided, however, vacation pay shall not be paid during the first year of employment in cases of discharge for cause or voluntary quit, except that on voluntary quits where one week's notice has been given to the Employer, the employee shall receive pro-rated vacation pay. Employment period Rate of Accrual ----------------- --------------- First six (6) months none After six (6) months 1/6 weeks(s) owed per month After four (4) years 1/4 week per month 8.5 Pro-Rated Vacation Formula for Employees Working Less Than a Full ----------------------------------------------------------------- Year. An Employee shall receive full vacation pay at his or her ----- regular weekly rate of pay if he or she works one hundred and eighty (180) days or more during his or her anniversary year. If an employee works less than one hundred and eighty (180) days during his or her anniversary year, he or she shall receive pro-rated vacation pay. Such pro-rated vacation pay shall be computed by taking his or her gross earnings during his or her anniversary year, divided by fifty-two (52) and multiplied by the number of weeks vacation to which the employee is entitled according to his or her length of service. Calculation of vacation under this Section is permitted only on an employee's anniversary date and is not to be used for incomplete years. 8.6 Holiday During Vacation. When a Holiday falls within the employee's ------------------------ vacation period, he or she shall be eligible for a paid day off at a time mutually agreeable to the employee and the Employer, except that, if the employee and the Employer mutually agree, the employee may receive pay in lieu of the Holiday. 8.7 Estate Benefit. In the event of the death of an employee who is --------------- eligible for sick leave and vacation pay, his or her estate, or the person legally entitled thereto, shall receive pro-rated vacation and sick pay computed under the provisions of Section 8.4 and 13.1 of this Agreement. 8.8 Vacation Mobility. The Employer agrees to consider vacation benefits ------------------ earned with a previous industry Employer when hiring employees. SECTION 9. LEAVES OF ABSENCE ---------------------------- 9.1 Approved Leave of Absence. The Employer may grant leaves to employees -------------------------- based on merit of the leave. Request and permission must be in writing. An Employee who fails to report for work at the end of a Leave of Absence shall 12 terminate seniority rights except where the Employer has agreed to extend the Leave of Absence. A thirty (30) days Leave of Absence without pay shall be allowed where necessary in order to care for necessary details resulting from the death of a member of his or her immediate family as defined below. All Leaves of Absence granted in this Agreement shall be considered as part of the continuous service with the Employer subject to the limitation outlined in Section 17.3. When a personal Leave of Absence is granted to an employee by an Employer, a written notice shall be given to evidence such an arrangement. Employees shall use all vacation time and Floating Holidays prior to the start of any leave of absence. 9.2 Union Business. Employees chosen by the Union to attend Union business --------------- outside the Plant shall, with permission of the Employer, be granted leave of absence without pay, not exceeding thirty (30) days. A request for such leave of absence shall be made at least seven (7) working days prior to the first (1st) day of absence, except that such notice need not be provided for absences to attend collective bargaining negotiations. 9.3 Non-Paid Funeral Leave. In the event of a death of a person other than ----------------------- those identified in this Section the employee shall be given one (1) day off upon request, without pay, for the purpose of attending the funeral unless the number of requests for attendance at the funeral would unduly hamper the operation of the Employer's business during the time of the funeral, in which case attendance at the funeral shall be granted on the basis of the order in which the requests were made. 9.4.1 Funeral Leave. When a Regular Full-Time Employee on the active payroll -------------- is absent from work for the purpose of arranging for or attending the funeral of a member of his or her immediate family as defined below, the Employer shall pay him or her for eight (8) hours at his or her regular rate of pay for each day of such absence up to a maximum of three (3) days provided: 9.4.2 The employee notifies the Employer of the purpose of his or her absence on the first day of such absence; 9.4.3 The absence occurs on the day during which the employee would have worked but for the absence; 9.4.4 The day of absence is not later than the day of such funeral except where substantial travel time is required. 9.5 Proof of Relationship. The employee, when requested, furnish proof ---------------------- satisfactory to the Employer of the death, his or her relationship to the deceased, the date of the funeral, and the employee's actual attendance at such funeral. For the purpose of this Agreement, a member of the immediate family means the 13 employee's spouse, child, mother, father, sister, brother, mother-in- law, father-in-law, grandparents, grandchildren, step-parents and step-children. SECTION 10. WAGES ----------------- 10.1 SAUSAGE MAKERS: --------------- 4/01/98 4/01/99 4/01/00 4/01/01 (+25c) (+25c) (+25c) (+25c) $13.80 $14.05 $14.30 $14.55 10.2 PRODUCTION SPECIALIST: ---------------------- 4/01/98 4/01/99 4/01/00 4/01/01 $11.00 $11.25 $11.50 $11.75 10.3 PRODUCTION/SANITATION WORKERS: ------------------------------ Effective April 1, 1998 1st 6 months $7.00 per hour 6th 6 months $ 8.50 per hour 2nd 6 months $7.50 per hour 7th 6 months $ 9.00 per hour 3rd 6 months $7.75 per hour 8th 6 months $ 9.25 per hour 4th 6 months $8.00 per hour 9th 6 months $ 9.50 per hour 5th 6 months $8.25 per hour 10th 6 months $10.00 per hour Effective April 1st of each year, all current employees paid at the top of or over the scale shall receive a 25c per hour, per year increase above their current wage rate. 10.3.1 ROTATION WORKERS: ----------------- 1st 6 months $7.50 per hour 6th 6 months $ 9.00 per hour 2nd 6 months $8.00 per hour 7th 6 months $ 9.50 per hour 3rd 6 months $8.25 per hour 8th 6 months $ 9.75 per hour 4th 6 months $8.50 per hour 9th 6 months $10.00 per hour 5th 6 months $8.75 per hour 10th 6 months $10.50 per hour 10.3.2 MAINTENANCE WORKERS: -------------------- 1st 6 months $10.00 per hour 6th 6 months $11.25 per hour 2nd 6 months $10.25 per hour 7th 6 months $11.50 per hour 3rd 6 months $10.50 per hour 8th 6 months $11.75 per hour 4th 6 months $10.75 per hour 9th 6 months $12.00 per hour 5th 6 months $11.00 per hour 10th 6 months $12.50 per hour 14 Foreperson. 75 cents per hour above Classification Rate ----------- Second Shift 30 cents per hour above Classification Rate Third Shift 35 cents per hour above Classification Rate Leadperson 50 cents per hour above Classification Rate It is also specifically agreed that all employees receiving above scale rates will maintain such rates and also be eligible for any scheduled wage increase. 10.3.3 "Workshare" Program. The Employer agrees to provide for continued ------------------- participation by the Employer in the California Economic Development Department "Workshare" program. 10.4 Records. The Employer agrees to keep records of time worked by all -------- employees in such a manner as is prescribed by the applicable provisions of the Fair Labor Standards Act, whether or not that Act actually applies to the Employer. Every Employer shall install a time clock for the purpose of keeping accurate records of the hours worked by each employee. Upon request, the Employer shall permit the Union to examine the payroll records of the employees in the bargaining unit at reasonable times during the regular scheduled working hours. 10.5 Bonus Payments. The Employer shall pay to each Regular Employee on the --------------- first pay period following April 1, 1998, a bonus not to exceed 50 cents per hour of all straight time hours compensated in addition to wages but subject to payroll taxes. The schedule for the payment of such bonuses is as follows: July 1998 January 2000 July 2000 October 1998 April 2000 October 2000 January 1999 July 2000 January 2001/2002 April 1999 October 2000 April 2001/2002 July 1999 January 2000 July 2001 October 1999 April 2000 October 2001 10.5.1 In all cases the bonuses will be prorated at $20.00 for each week, or portion thereof, worked for the thirteen (13) week period preceding the payments except for the provision in Section 12.1.1. SECTION 11. SUPERANNUATED EMPLOYEES ----------------------------------- 11. Any employee whose earning capacity is limited because of advance age or other handicaps that may interfere with his or her normal employment activities may 15 be employed on suitable work at a wage agreed upon by the employee, the Employer and the Union. SECTION 12. HEALTH AND WELFARE ------------------------------ 12.1 The Employer agrees to continue to make payments to UFCW Wholesale Health Trust Fund for the purpose of paying health and welfare benefits for eligible employees and their eligible dependents. 12.1.1 Contribution. Effective for hours worked in April 1998 and thereafter, ------------- payable in May 1998, the employer will pay Two Dollars and forty-five cents ($2.45) per hour for all straight time hours worked or paid for each eligible employee. The Employer agrees to be signatory to the terms and conditions, including contributions rate set forth by the Trustees of the UFCW Wholesale Health and Welfare Plan for the term of this Agreement. 12.2 Contribution shall be made on all straight-time hours worked and/or compensated for. It is understood that the contributions required on behalf of any employee shall not exceed forty (40) hours per week or two thousand eighty (2080) hours in any calendar year. In order to qualify for health and welfare coverage, employees must work or be compensated for a minimum of eighty (80) straight-time hours per month in addition to meeting other eligibility requirements as established by the current plan of benefits. 12.3 The parties recognize and acknowledge that the regular and prompt payment of Employer contributions to the Fund is essential to the maintenance of the Health and Welfare Plan, and inasmuch as beneficiaries under this Plan are entitled to health and welfare benefits for the period of time that they may have worked while covered by the Plan even though contributions have not been paid on their behalf by the Employer, that it would be extremely difficult, if not impractical, to fix the actual expense and damage to the Fund and to the Health and Welfare Plan which would result from the failure of an individual Employer to pay such monthly contribution in full within the time period provided. Therefore, the amount of damage to the Fund and Health and Welfare Plan resulting from such failure shall be presumed to be the sum of Twenty-Five Dollars ($25.00) per delinquency, or ten percent (10%) of the amount of the contribution or contributions due whichever is greater, which amount shall become due and payable to the Fund as liquidated damages and not as a penalty, upon the day immediately following the date upon which the contribution became delinquent contribution or contributions, as well as any further sums permitted by law. 16 SECTION 13. SICK LEAVE ---------------------- 13.1 Annual Allowance Effective April 1, 1988. All Regular Employees shall ---------------------------------------- be entitled to two-thirds (2/3) of one (1) day of leave for every month in which eighty (80) hours (or more) are worked. Employees who work forty (40) or more hours per month, but less than eighty (80) hours per month, shall be given one-third (1/3) day credit for each such month. Unused sick and accident leave shall be cumulative to twenty (20) days on each anniversary year. 13.2 Sick Leave Pay. Sick leave shall commence with the first (1st) day of --------------- absence for sickness or accident except as prescribed in Section 13.2.1. Sick leave shall always be paid for the first (1st) day of absence when the employee is hospitalized or when the first day of absence is the day following an injury incurred on the job for which the employee required medical treatment. A day's sick and accident benefits shall mean a day's pay at the rate in effect at the time the employee qualifies to receive the sick and accident benefits, and may actually be spread over more than one (1) day to integrate with other payments contemplated in Section 13.3. 13.2.1 Employees who receive a verbal warning because of six (6) absences shall lose the right to sick leave on the first day of absence and shall only be able to collect sick leave on the second day of absence. The collection of sick leave on the second day shall stay in effect until the employees have maintained their record at five (5) or less absences in a twelve (12) month period at which time the employee shall then be eligible for first (1st) day absence sick leave. 13.3 Integration with Worker's Compensation or Unemployment Disability ----------------------------------------------------------------- Insurance. An employee who is collecting unemployment compensation ---------- disability benefits, or workers' compensation temporary disability benefits, or both, shall not receive sick and accident benefits as provided herein; provided, however, if such unemployment compensation disability benefits or workmen's compensation temporary disability benefits, or both are less than the amount of the sick and accident benefits provided herein for such period; such employee shall receive sick and accident benefits in addition to such unemployment compensation disability benefits or workers' compensation temporary disability, or both, in an amount sufficient to equal the amount of sick and accident benefits he or she would have otherwise received as provided herein. All sickness and accident benefit payments due under this Section shall be payable on the employee's regular pay period. 13.4 Proof of Illness. The Employer shall reserve the right to request the ----------------- employee to produce a medical doctor's certificate verifying the fact of such illness. An employee may be excused from the requirement to provide medical verification of illness provided the following criteria are met: 17 13.4.1 The absence does not exceed two (2) days including any Holiday which is the day before or after the day of absence. 13.4.2 Upon request, the employee signs a statement stating he or she was unable to work because of illness which did not require medical attention and that any false statement will be grounds for disciplinary action. The employee and/or doctor must check in at not more than two (2) week intervals with the Company when an employee is out on an illness in order to protect his or her rights under Section 17. 13.4.3 The employee calls his or her supervisor no later than the regular starting time on the day of each such absence stating the reasons for the absence. 13.5 Job Injury. An employee who is injured on the job and does not ----------- complete that day's work or is otherwise not permitted to return to work, shall receive pay for the entire work day and such pay shall not be charged against sick leave or accident leave; provided, the employee is sent home or is otherwise not permitted to work by a medical doctor, chiropractor or osteopath on the approved list of the insurance carrier of the individual company. 13.6 Medical Appointments. Visits to the doctor or dentist shall not --------------------- qualify the employee for sick leave pay. Whenever possible, appointments by reason of illness or non-compensable injury shall be made outside of working hours. Where such appointments must be made during working hours, the employee shall apply to the Employer, in writing, at least two (2) working days prior to his or her appointment date for unpaid time off to keep such an appointment. Time not worked by an employee because of visits to a doctor for an industrial injury shall be paid by the Employer at the employee's applicable rate to pay. Emergency appointments shall not be subject to the two (2) day rule. 13.7 Accumulation. An employee who has accumulated twenty (20) days sick ------------- leave with his current Employer shall be paid in cash by the Employer the amount of any unused sick leave accumulated over twenty (20) days on each anniversary year. On termination of employment, an employee may apply to his or her last Employer for cash payout of all unused sick leave accumulated with that Employer. No employee who has begun a scheduled vacation, may convert the time off to sick leave instead of vacation because of illness incurred after the vacation began. 13.8 Bonus Payment on Worker's Compensation. The Employer will agree that --------------------------------------- employees off the job due to a bona fide industrial injury shall have such time off considered as credited straight-time hours for the purpose of the Bonus calculation under the Collective Bargaining Agreement. 18 SECTION 14. PENSIONS, RETIREMENT BENEFITS ----------------------------------------- 14.1.1 Contributions. Effective for April 1, 1998, the Company will -------------- contribute the sum of One Dollar and Twenty-five cents ($1.25) per hour worked or paid for, exclusive of overtime hours, for each individual employed under this Agreement to an I.R.A. (Simplified Employee Pension). Contributions will be made at year end. The parties agree that the contributions to the I.R.A. shall be made no later than January 31, of the year following the earned credit. 14.1.2 The employer agrees that in the event that an employee terminates anytime prior to year end they shall be eligible for pension contribution earned and payable at year end as per Section 14.1.1. For the purpose of this Section, each hour, other than overtime hours, for which payment is made to an employee, shall be deemed to be an hour worked. 14.2 Waiting Period. Effective April 1, 1988, Pensions/Retirement Benefits --------------- contributions shall commence after six (6) months of employment for new employees in the industry. For the purpose of this Section, each hour, other than overtime hours, for which payment is made to an employee, shall be deemed to be an hour worked. SECTION 15. JURY DUTY --------------------- 15.1 Benefit. An employee who is summoned and reports for jury duty shall -------- receive the difference between jury pay and his or her regular daily rate of pay for each day for which he or she reported for jury duty and/or orientation and on which he or she would normally have worked. 15.2 Return to Work. Day shift employees called for jury duty or --------------- examination and excused by the court prior to 12:00 Noon shall return to work for the balance of their day shift and shall be paid for the difference between jury pay or examination pay, if any, and their straight-time lost. Night or swing shift employees called for jury duty or examination and excused by the court prior to noon shall report for their regular night shift or swing shift work and shall not be eligible for any jury pay under this Section. Night or swing shift employees shall not be required to serve on jury duty in the same day time and work night shift or swing shift on the same calendar day, but shall receive the difference between their jury pay and their regular shift pay lost. 15.3 Proof of Attendance. Employees will present proof of service, -------------------- including time served and amount of pay received. 19 SECTION 16. GENERAL BENEFITS ---------------------------- 16.1 All uniforms, caps, gowns, aprons, with reasonable limited laundry service, oilskin aprons, rubber aprons, rubber boots, knives, steels, whetstones and hoods and other tools of same shall be furnished free of cost to all employees, who use them in the performance of their work and the Employer shall keep the same dressed, sharpened and otherwise in proper order without cost to the employee. 16.2 Computing Overtime. Paid absences from work, such as vacations, ------------------- Holidays and sick leave, shall be considered as time worked for the purpose of this Agreement but shall not be deemed as time worked for the purpose of computing overtime. 16.3 Company Meetings. Time spent in mandatory company meetings called by ----------------- the Employer, before or after the day's work, shall be considered as time worked and shall be paid for in accordance with the provisions of this Agreement. 16.4 Minimum Wage/Benefits. No employee receiving wages, other benefits or ---------------------- privileges either above the minimum herein or not provided for herein shall have such benefits or privileges taken away by reason of any provisions of this Agreement. The Employer agrees that no employee shall be compelled or allowed to enter into any individual contract or agreement with his or her Employer concerning wages, hours or work and/or working conditions that provide benefits less than the terms and provision of this Agreement. Where the basis for amounts paid over the wage rated provided for in Section 10 have specifically set forth in writing to the employee, they may be discontinued when the reason for their payment ceases to exist and the employee has been so advised in writing with a copy to the Union. 16.5 Hand Trucks. The Employer shall provide hand trucks and hooks to those ------------ employees who use them in the performance of their work. Where the Employer provides facilities to lock up the hand truck, the employee shall be held responsible for it. SECTION 17. SENIORITY --------------------- 17.1 Posting. Where a higher wage rate position becomes open, the Employer -------- agrees to post notice of such job opening and further agrees to consider (up to three (3) qualifying) employees who apply for such opening, based upon their seniority, attendance, attitude and work performance. However, in order for an employee to be eligible for the job, application must be made in writing within two (2) working days following posting of the notice. Jobs will be posted according to job title and as commonly known. Employees shall be given a fair trial for all jobs open in the unit. The Employer may promote employees to Working Forepersons without jeopardizing their former rating. 20 17.2 Acquisition of Seniority. There shall be a forty-five (45) work day ------------------------- probationary period for all new employees, during which time they may be discharged for any reason. Following completion of such period the employee shall become a Regular Employee for all purposes under this Agreement and his or her seniority shall date from the first (1st) day of employment. Seniority shall be applicable among probationary employees as a group when an issue of seniority arises between two (2) or more probationary employees. 17.3 Termination of Seniority. Subject to the provision of this Agreement ------------------------- seniority shall be based upon continuous service with the Employer but no employee shall suffer loss of seniority unless he or she: 17.3.1 Is discharged for cause; 17.3.2 Resigns or voluntarily quits; 17.3.3 Is absent from work for six (6) consecutive months, except in cases of approved leaves of absence; 17.3.4 Is absent from work for twenty-four (24) consecutive months due to injury or illness on or off the job; 17.3.5 Is absent from work for more than thirty (30) days due to death in the immediate family (as defined in Section 9) or otherwise; 17.3.6 Fails to return to work within three (3) days after receipt of notice of recall from layoff as provided in Section 17.7 hereof. 17.4 Application of Seniority. Seniority shall be by classification ------------------------- throughout the Employer's plant, unless the Employer and the Union agree that seniority is by classification within designated departments of the Employer's plant. 17.5 Layoff/Recall. In the reduction of the number of employees due to lack -------------- of work, the last employee hired in the classification shall be the first to be laid off and, in recalling, the last employee laid off in that classification shall be the first recalled until the list of employees previously laid off has been exhausted. The Employer shall give written notice of layoff to the employee and the employee shall provide the Employer with his or her current address and telephone number at the time of layoffs, and the employee is to keep the Employer advised of any change in address. The Employer agrees that Regular Employees laid off and not terminated for cause, as defined in Section 4, shall have seniority rights on layoffs, rehiring for extra and/or steady jobs subsequently available with the Employer prior to the hiring of any new employees. 21 17.6 Notification of Recall. When an employee is recalled to return to work ----------------------- after layoff and he or she cannot be reached by telephone, the Employer shall notify the employee of such recall either by telegram or certified letter addressed to his or her last known address appearing in the Employer's records and a copy of such communication shall be sent to the Union. 17.7 Reporting After Recall. When an employee is recalled after layoff, he ----------------------- or she shall have three (3) business days to report after receipt of such recall. If after three (3) such telegram or certified letter is returned to the Employer unclaimed or undeliverable, such employee's seniority shall be considered broken and all rights forfeited three (3) business days after the date such telegram or certified letter would have been received. An employee who is recalled from layoff and who, at the time of recall, is working for another Employer in the meat industry, shall have sufficient time to complete the work week in his or her other employment before reporting on the recall so long as he or she so informs the Employer who is calling him or her. 17.8 Notice of Return. Employees who are absent from work over forty-eight ----------------- (48) hours shall be required to give the Employer twenty-four (24) hours notice of their intention to work. 17.9 Seniority List. A seniority list of all employees in the bargaining --------------- until will be posted in the Plant and a copy will be given to the Union. Such seniority list shall be revised and brought up-to-date every six (6) months and a revised copy shall be furnished to the Union. 17.10 Effect of Leave on Seniority. An employee who accepts employment ----------------------------- elsewhere while on personal leave of absence from his or her Employer shall forfeit his or her seniority rights and he or she shall be considered as a voluntary quit. When a personal leave of absence is granted to an employee by the Employer, a written notice shall be given to evidence such an arrangement. The Employer will abide by the provisions of the Selective Service Act as amended and interpreted or other applicable legislation governing reinstatement rights of employees entering service under such legislation. SECTION 18. GRIEVANCE AND ARBITRATION ------------------------------------- 18.1 Grievances. A grievance shall be defined as a matter of dispute which ----------- arises over the interpretation and application of any of the Sections of this Agreement. 18.1.1 Any matter of dispute shall be addressed directly by the Union with the Employer or by the Employer with the Union and a settlement attempted. 18.1.2 If the dispute is not settled directly, the grievance shall be referred to the other 22 party, in writing, specifying the complaint and setting forth the facts on which the grievance is based and the Contract provision violated. The written grievance must by filed by certified mail or in person within ten (10) calendar days of the date of the occurrence of the dispute, or knowledge thereof, whichever is later. 18.1.3 Unless extended by mutual agreement, an Adjustment Board Hearing shall be held within ten (10) calendar days of the date the grievance was filed, provided however, the parties must have met and attempted to resolve the grievance before any hearing can be convened. The right to an Adjustment Board Hearing or arbitration is lost if the grieving party fails to follow these steps. 18.1.4 An Adjustment Board shall be established and convened for the purpose of hearing and deciding grievances. The Adjustment Board (Board) shall consist of two (2) representatives of the Union and two (2) representatives of the Employer. The Board shall meet within two (2) weeks of such notification and requests, unless the time is mutually extended. In any proceeding before the Adjustment Board, the Employer shall be represented by an Employer representative and the Union member involved shall be represented by the Union. Proceedings before the Board shall be conducted in accordance with the rules of procedure adopted by the Union and the Employer. A majority decision reached by the Board shall be final and binding on all parties. In the event that any matter submitted to the Board cannot be settled within five (5) business days, excluding Saturday, Sunday and Holidays, (unless the time is mutually extended) the parties may choose an impartial arbitrator, and the grievance shall be submitted for disposition to the Arbitrator, whose decision shall be final and binding on all parties, provided the moving party requests arbitration within ten (10) business days from the date the Adjustment Board met, otherwise the right to arbitration is lost. The parties will request a bench decision from the arbitrator at the close of the arbitration hearing. In the event that the parties cannot agree upon the selection of the impartial arbitrator within five (5) business days, exclusive of Saturday, Sunday and holidays, the matter is submitted shall then be referred to the Federal Mediation and Conciliation Service for a list of arbitrators. 18.2 Authority. Neither the Adjustment Board nor an Arbitrator shall have ---------- the authority or power to add to, alter or amend the terms and provisions of this Agreement. 18.3 Expenses. The compensation of the Arbitrator and all expenses incurred --------- by the Arbitrator and any expense incidental to the work of the Adjustment Board and authorized it, shall be borne one-half (1/2) by the Union and one-half (1/2) by the Employer, provided, however, that this shall not be deemed to include any cost or expense of presentation by either of the parties to the dispute. 23 18.4 Money Claims. A claim of any employee for payment of any additional ------------- compensation or sum due under the terms of this Agreement shall not go beyond a thirty (30) day period, unless notified within ten (10) days of the pay period when such claimed sums should have been paid. SECTION 19. UNION AFFAIRS ------------------------- 19.1 Union Visitation. Only authorized representative of the Union shall be ----------------- allowed to visit the places of business of the Employer which are covered by the Agreement for the purpose of observing working conditions and to confirm that the Agreement is being followed, so long as the representative has first informed management that he/she is on the premises. The visitation right shall be exercised so that employees are not interrupted. 19.2 Union Activity. No employee shall be discriminated against for --------------- membership in or legal activity on behalf of the Union. 19.3 Union Shop Card. The Union Shop Card is the property of the United ---------------- Food and Commercial Workers, AFL-CIO & CLC and is loaned for display to the Employer who signs and abides by this Agreement. The Union Shop Card can and may be removed from any establishment by the Secretary or Union Representatives of the Union for any violation of this Agreement. The Union Shop Card shall be displayed prominently and visible to the public. 19.4 Check-Off. The Company, for its employees shall for the duration of ---------- this Agreement between the parties deduct from the first pay of each month union dues for the current month, and promptly remit same to the Union. The initiation fees of the union shall be deducted by the Company and remitted to the Union in the same manner as dues collections. No deduction, either for dues or initiation fees, shall be made by the Employer unless specifically authorized by the individual employee by signed authorization card. 19.5 Stewards. Stewards may be designated by the Union. --------- 19.6 Bulletin Boards. The Employer and the Union shall jointly provide and ---------------- share a glassed in and lockable bulletin board in the employee's lunch room for the purpose of posting notices of official Union business and other information, such as times and places of meetings. SECTION 20. WORKING CONDITIONS AND SAFETY ----------------------------------------- 20.1 First Aid Equipment. The Employer shall be responsible for the -------------------- installation and maintenance of first aid equipment, and it shall be kept throughout the Plant in places readily and conveniently accessible to the employees. 24 20.2 Floor Covering/Protective Clothing. A suitable floor covering shall be ---------------------------------- provided so that no employee shall need to stand or traverse any limited work area on concrete or concrete substitute flooring. The Employer shall furnish mesh gloves and protective aprons for all employees who use a knife in the performance of their work. Such equipment and hard hats where furnished by the Employer, shall be worn by the employees. Where the employees wear cotton gloves on the job, the Employer will provide them at no expense to the employees so long as they are treated with care and benefit is not abused. 20.3 Governmental Regulations. All sanitary and safety regulations of ------------------------ Federal, State and Local governments shall prevail in all departments. Failure to follow such regulations shall be considered insubordination subject to disciplinary action. 20.4 Injurious Working Conditions. Pasteur-Ray lamps or other working ---------------------------- conditions which are injurious to the health and safety of the employees shall be directed to the attention of the Employer at which time the Employer shall immediately investigate the alleged condition, shall meet with representatives of the Union to discuss the alleged condition and shall immediately take the necessary steps and measures to correct such condition if found to be injurious. 20.5 Efficient Operations. Policy regarding speed of operation shall be -------------------- made on the basis of fairness and equity, consistent with quality of workmanship, efficiency of operations, and the reasonable working capacity of normal operation. Any dispute which may arise with respect to work loans shall be subject to the Grievance Procedure under Section 18 of this Agreement. SECTION 21. JOB SECURITY ------------------------ 21. New Methods of Operation. The parties to the Agreement have discussed ------------------------ new methods of operation and subcontracting of work being performed by bargaining unit employees and agree that both parties shall discuss the effects of additional new methods of operation and subcontracting on job security of the employees and will work at that end. When additional subcontracting of any existing operation or new method of operation becomes necessary or desirable the Employer will notify the Union. The Union shall discuss the effects on the job security of the employees and the parties will meet for the purpose. The Employer agrees to delay layoffs caused by subcontracting or new method of operation until at least thirty (30) days subsequent to its notice to the union of its intention so that the parties have ample time to suggest methods of solving layoff problems. The Employer shall furnish the Union facts and suggestions with request to jobs available in the Employer's Plant and methods of solving layoff problems. 25 SECTION 22. SEPARABILITY ------------------------ 22. The provisions of the Agreement are deemed to be separable to the extent that if and when a court of last resort adjudges any provisions of this Agreement in its application between the Union and the undersigned Employer to be in conflict with any law, such decision shall not affect the validity of the remaining provisions of this Agreement, but such remaining provisions shall continue in full force and effect, provided further, that in the event any provision or provisions are so declared to be in conflict with law, both parties shall meet within thirty (30) days for the purpose of re-negotiation and agreement on provision or provisions so invalidated. SECTION 23. TRANSFER OF OWNERSHIP --------------------------------- 23. In the event of change of ownership of the operation, whether it be voluntary, involuntary, or by operation of law, the Employer will immediately pay off all obligations, including accumulated wages, pro- rata of earned vacations, sick and accident contributions, accumulated prior to the date of the change of ownership. If any Owner or Employer hereunder sells, leases or transfers his or her business or any part thereof, whether voluntary, involuntary or by operation of law, it shall be his or her obligation to advise the successor, lessee or transferee of the existence of this Agreement and such successor, lessee or transferee shall be bound fully by the terms of this Agreement and shall be obligated to pay the wages, vacations, sick and accident contributions and comply with all other conditions of this Agreement in effect at the time of the sale, lease or transfer; and in the event the seller or transferror fails to pay his obligations hereunder, shall assume all obligations of this Agreement in the place and stead of the Employer signatory thereto the same as if her or she had been the Owner or Employer from the beginning. Before completion of any such transfer, the Employer shall give written notice to the buyer, with a copy to the Union, of the existence of this Agreement, furnishing him or her with a copy of this Agreement and call his or her attention particularly to this Section concerning Transfer of Ownership. SECTION 24. SAVINGS CLAUSE -------------------------- 24. If any contract provision may not be put into effect because of applicable legislation, Executive order, or Regulations dealing with wage or price stabilization, then such provisions, or any part thereof, shall become effective at such time, in such amounts and for such periods as will be permitted by law at any time during the life of this Agreement and any extension thereof with prospective effect. 26 SECTION 25. DRIVERS ------------------- 25. 1 Protective Gowns. Drivers may be required to wear protective gowns ---------------- which will be provided by the Employer. A driver who is required to handle product which causes excessive soil on the gown may request and the Employer shall provide a second gown and/or oilskin apron to give adequate protection to his clothes. 25.2 Overnight Trips. Drivers who are required to be out of town overnight --------------- in the interest of the Employer shall be paid all reasonable actual expenses for meals and lodging as substantiated with vouchers. 25.3 Night Depository. The Employer will provide a night depository or make ---------------- other arrangements so that drivers will not be required to keep money collected overnight. SECTION 26. NO STRIKE OR LOCKOUT -------------------------------- 26. During the term of this Agreement there shall be no strikes, sympathy strikes, picketing or lockouts pending or following any decision by an Adjustment Board of Arbitrator, nor shall there be a stoppage of work in violation of any other provision of this Agreement. Nothing herein shall preclude the Union or its members from honoring lawful picket lines or strikes during the term of this Agreement. SECTION 27. EXTENSION AND SCOPE ------------------------------- 27. This Agreement shall be binding upon the heirs, executors, administrators and assignees of the parties hereto. This Agreement shall remain in full force and effect from the First (1st) day of April 1, 1998 to and including the Thirty First (31) day of March 31, 2002 and shall be automatically renewed from year-to-year thereafter unless either party, at least sixty (60) days prior to April 1, 2002, or at least sixty (60) days prior to April 1st of any succeeding term, shall notify the other party in writing of its intention and desire to change, modify or terminate 27 this Agreement. In the event the Contract is reopened pursuant to the provision hereof, and no Agreement is reached within sixty (60) days of such reopening, then nothing herein contained shall be construed to prevent the Union from taking strike action or other economic action desired by it, or the Employer the right to lockout. IN WITNESS WHEREOF, the parties hereto, have executed this Agreement on the dates set forth below: SWISS-AMERICAN SAUSAGE CO. INC. UFCW LOCAL 101 - ------------------------------- -------------- /s/ SIGNATURE ILLEGIBLE /s/ SIGNATURE ILLEGIBLE - ------------------------------- -------------------------------- (Signature) (Signature) President President - -------------------------------- -------------------------------- (Title) (Title) 10/2/98 9-30-98 - -------------------------------- -------------------------------- (Date) (Date) 28 LETTER OF UNDERSTANDING between SWISS-AMERICAN SAUSAGE COMPANY INC. and UNITED FOOD AND COMMERCIAL WORKERS UNION LOCAL 101 APRIL 1, 1998 THROUGH MARCH 31, 2002 1. The parties agree that any employees currently in the Sausage Maker Apprenticeship Program shall continue to progress through the wage steps found in the previous Agreement. 1.1 The parties agree that all Production Workers "A" shall receive wages equal to the Sausage Maker classification. 2. PLANT RELOCATION AND INCENTIVE PAY: The Union recognizes the ---------------------------------- Employer's exclusive right to transfer work, relocate or close the plant; in whole or in part. 2.1 The Employer will provide the Union with a ninety (90) day notice prior to transfers of bargaining unit work, plant relocation, or plant closure. All bargaining unit employees shall be offered employment under the terms and conditions of the current Collective Bargaining Agreement in the new plant of the Employer. 3. The employees who are permanently laid off as a direct result of plant closure, plant relocation, or transfer of bargaining unit work shall receive all wages due for hours of work performed during their last week of employment and shall receive pro-rata vacation pay pursuant to Section 8, unused accumulated sick leave pursuant to Section 14, and prorated bonus per Section 10 of the collective bargaining agreement. 3.2 Severance pay that is paid in accordance with paragraph (3.) above shall not be considered as extra-contractual earnings and shall not be considered as hours worked or compensable hours for any purpose such as vacation computation, holiday entitlement, health and welfare, pension, etc. All employees who are subject to permanent layoff shall not be denied unemployment benefits by any action of the Employer, regardless of whether the layoff is voluntary or forced. 29 It is agreed that there shall be no denial of unemployment benefits by any action of the Employer for voluntary layoff by employees for up to six months for those who accept employment in the new facility. 3.3 Employees who are permanently laid off pursuant to this Section shall receive their final paycheck, including pro-rata vacation, accumulated unused holiday and sick leave, and their severance check at the time of their permanent layoff. The final check shall be calculated in forty (40) hour increments for taxation purposes. 3.4 The seniority and employment rights of employees who are permanently laid off pursuant to this Section shall be terminated as of the date of their permanent layoff. Permanently laid off employees who may subsequently be rehired shall be hired as new employees with a new seniority date at the new wage rate, but shall not be subject to delays in health and welfare, pension or holiday benefits. 3.5 Employees that are laid off as a result of a general decline in business and who retain recall rights shall be eligible for severance pay as outlined in this Section if the company institutes a permanent layoff. 3.6 The Employers agrees to pay an incentive payment of a net $250.00 per month or part thereof for up to two months to any employee on the payroll at the San Francisco facility who relocates to any new facility. 4. This Section shall modify and supersede anything to the contrary elsewhere in this Labor Agreement. The parties agree that this Section shall govern and control any disputes that may arise with respect to the Employer's decisions to transfer work, relocate or close the plant, and any effects from the exercise of such rights on employees. The terms and conditions of this Letter of Understanding shall be subject to a ratification of the members of Local 101 employed at Swiss-American Sausage Company. SWISS-AMERICAN SAUSAGE CO. INC. UFCW LOCAL 101 - ------------------------------- -------------- /s/ SIGNATURE ILLEGIBLE /s/ SIGNATURE ILLEGIBLE - ------------------------------- ------------------------------ (Signature) (Signature) President President - -------------------------------- -------------------------------- (Title) (Title) 10/2/98 9/30/98 - -------------------------------- -------------------------------- (Date) (Date) 30 EX-10.41 7 LOAN AGREEMENT Exhibit 10.41 - -------------------------------------------------------------------------------- LOAN AGREEMENT by and between CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY and PROVENA FOODS INC. Dated as of October 1, 1998 All right, title and interest of the CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY (the "Authority") in this Loan Agreement has been assigned (except for amounts payable under Sections 4.02(b), 7.03, 9.02 and 9.03 hereof, its right to receive notices, opinions and other documents required to be delivered to the Authority hereunder and its rights to consent to certain actions) to U.S. Bank Trust National Association, as trustee (the "Trustee") pursuant to the Indenture of Trust, dated as of October 1, 1998, between the Authority and the Trustee, and is subject to such assignment. - -------------------------------------------------------------------------------
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS Section 1.01. Definition of Terms.......................................................... 2 Section 1.02. Number and Gender............................................................ 2 Section 1.03. Articles, Sections, Etc...................................................... 2 ARTICLE II REPRESENTATIONS Section 2.01. Representations of the Authority............................................. 2 Section 2.02. Representations of the Borrower.............................................. 3 Section 2.03. Registered Owners to Benefit................................................. 5 ARTICLE III CONSTRUCTION OF THE PROJECT; ISSUANCE OF THE BONDS Section 3.01. Construction of the Project.................................................. 5 Section 3.02. Disbursements from the Project Fund and Costs of Issuance Fund............... 6 Section 3.03. Establishment of Completion Date; Obligation of Borrower to Complete......... 6 Section 3.04. Investment of Moneys in Funds................................................ 7 ARTICLE IV LOAN OF PROCEEDS; REPAYMENT PROVISIONS Section 4.01. Loan of Bond Proceeds; Issuance of Bonds..................................... 7 Section 4.02. Loan Repayments and Other Amounts Payable.................................... 7 Section 4.03. Purchase of Bonds............................................................ 9 Section 4.04. Unconditional Obligations.................................................... 9 Section 4.05. Assignment of Authority's Rights............................................. 10 Section 4.06. Amounts Remaining in Funds................................................... 10
TABLE OF CONTENTS (continued)
Page ARTICLE V SPECIAL COVENANTS AND AGREEMENTS Section 5.01. Right of Access to the Project............................................... 10 Section 5.02. The Borrower's Maintenance of its Existence.................................. 10 Section 5.03. Records and Financial Statements of Borrower; Employment Practices........... 11 Section 5.04. Insurance.................................................................... 12 Section 5.05. Maintenance and Repair; Taxes; Utility and Other Charges..................... 12 Section 5.06. Qualification in California.................................................. 12 Section 5.07. Alternate Credit Facility.................................................... 13 Section 5.08. Letter of Credit............................................................. 13 Section 5.09. Covenants of the Borrower.................................................... 14 Section 5.10. Capital Expenditures......................................................... 17 Section 5.11. Special Arbitrage Certifications............................................. 18 Section 5.12. Covenant to Enter into Agreement or Contract to Provide Ongoing Disclosure... 18 Section 5.13. No Purchase of Bonds......................................................... 19 ARTICLE VI DAMAGE, DESTRUCTION AND CONDEMNATION; USE OF PROCEEDS Section 6.01. Obligation to Continue Payments.............................................. 19 Section 6.02. Application of Net Proceeds.................................................. 19 Section 6.03. Insufficiency of Net Proceeds................................................ 20 Section 6.04. Damage to or Condemnation of Other Property.................................. 20 ARTICLE VII LOAN DEFAULT EVENTS AND REMEDIES Section 7.01. Loan Default Events.......................................................... 20 Section 7.02. Remedies on Default.......................................................... 21 Section 7.03. Agreement to pay Attorneys' Fees and Expenses................................ 23 Section 7.04. No Remedy Exclusive.......................................................... 23 Section 7.05. Waivers...................................................................... 23
ii TABLE OF CONTENTS (continued)
Page ARTICLE VIII PREPAYMENT Section 8.01. Redemption of Bonds with Prepayment Moneys................................... 23 Section 8.02. Options to Prepay Loan....................................................... 24 Section 8.03. Mandatory Prepayment......................................................... 24 Section 8.04. Amount of Prepayment......................................................... 25 Section 8.05. Notice of Prepayment......................................................... 26 ARTICLE IX NON-LIABILITY OF AUTHORITY; EXPENSES; INDEMNIFICATION Section 9.01. Non-Liability of Authority................................................... 26 Section 9.02. Expenses..................................................................... 26 Section 9.03. Indemnification.............................................................. 26 ARTICLE X MISCELLANEOUS Section 10.01. Notices...................................................................... 27 Section 10.02. Severability................................................................. 28 Section 10.03. Execution of Counterparts.................................................... 28 Section 10.04. Amendments, Changes and Modifications........................................ 29 Section 10.05. Governing Law................................................................ 29 Section 10.06. Authorized Representative of the Borrower.................................... 29 Section 10.07. Term of the Agreement........................................................ 29 Section 10.08. Binding Effect............................................................... 29 Section 10.09. References to Bank........................................................... 29 Section 10.10. Brokerage Confirmations...................................................... 29 EXHIBIT A THE PROJECT
iii LOAN AGREEMENT THIS LOAN AGREEMENT, dated as of October 1, 1998, between the CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY, a body public and corporate, and a public instrumentality of the State of California (the "Authority"), and PROVENA FOODS INC., a corporation duly organized and validly existing under the laws of the State of California (the "Borrower"). W I T N E S S E T H: WHEREAS, the Authority was established for the purpose of promoting and encouraging commerce and industry, and generally to foster economic development in the State of California (the "State") and is authorized to issue tax-exempt revenue bonds to provide financing for private activity economic development projects pursuant to the provisions of Section 15710 et seq. of the California Government Code (constituting Part 10.2 of Division 3 of Title 2 of the Government Code of the State of California, as now in effect) (the "Act"); and WHEREAS, in furtherance of the purposes of the Authority set forth above, the Authority proposes to finance the acquisition, construction, rehabilitation, equipping, installation, improvement and/or furnishing of the manufacturing facilities described in Exhibit A hereto (the "Project") to be owned and operated by the Borrower; and WHEREAS, pursuant to and in accordance with the provisions of the Act, the Authority has authorized and undertaken the issuance of its California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) (the "Bonds") in the aggregate principal amount of Four Million Dollars ($4,000,000) to provide funds to pay a portion of the cost of the Project and a portion of the costs of issuance of the Bonds; and WHEREAS, the Authority proposes to loan the proceeds of the Bonds to the Borrower, and the Borrower desires to borrow the proceeds of the Bonds upon the terms and conditions set forth herein; and WHEREAS, for and in consideration of such loan, the Borrower agrees, inter alia, to make loan payments sufficient to pay on the dates specified in Section 4.02 hereof, the principal of, premium, if any, and interest on, the Bonds; and WHEREAS, the Authority and the Borrower each has duly authorized the execution and delivery of this Agreement; NOW, THEREFORE, for and in consideration of the premises and the material covenants hereinafter contained, the parties hereto hereby formally covenant, agree and bind themselves as follows: ARTICLE I DEFINITIONS Section 1.01. Definition of Terms. Unless otherwise defined herein or the context otherwise requires, the terms used in this Agreement shall have the meanings specified in Section 1.01 of the Indenture of Trust, dated as of October 1, 1998 (the "Indenture"), by and between the Authority and U.S. Bank Trust National Association, as trustee (the "Trustee"), as originally executed or as it may from time to time be supplemented or amended as provided therein. Section 1.02. Number and Gender. The singular form of any word used herein, including the terms defined in Section 1.01 of the Indenture, shall include the plural, and vice versa. The use herein of a word of any gender shall include all genders. Section 1.03. Articles, Sections, Etc. Unless otherwise specified, references to Articles, Sections and other subdivisions in this Agreement are to the designated Articles, Sections and other subdivisions of this Agreement as amended from time to time. The words "hereof," "herein," "hereunder" and words of similar import refer to this Agreement as a whole. The headings or titles of the several Articles and Sections, and the table of contents included herein, shall be solely for convenience of reference and shall not affect the meaning, construction or effect of the provisions hereof. ARTICLE II REPRESENTATIONS Section 2.01. Representations of the Authority. The Authority makes the following representations as the basis for its undertakings herein contained: (a) The Authority is a body public and corporate, and a public instrumentality of the State. Under the provisions of the Act, the Authority has the power to enter into the transactions contemplated by this Agreement and the Indenture and to carry out its obligations hereunder. By proper action, the Authority has been duly authorized to execute, deliver and duly perform its obligations under this Agreement and the Indenture. (b) To finance the Costs of the Project and certain Costs of Issuance, the Authority will issue the Bonds, which will mature, bear interest and be subject to redemption as set forth in the Indenture. (c) The Bonds will be issued under and secured by the Indenture, pursuant to which the Authority's interest in this Agreement (except certain rights of the Authority to payment for expenses and indemnification) will be pledged and assigned to the Trustee as security for payment of the principal of, premium, if any, and interest on the Bonds and to the Bank, on a basis subordinate thereto, as security for the payment of the obligations of the Borrower under the Reimbursement Agreement. 2 (d) The Authority has not pledged and will not pledge its interest in this Agreement for any purpose other than to secure the Bonds under the Indenture and the obligations of the Borrower under the Reimbursement Agreement. (e) The Authority is not in default under any of the provisions of the laws of the State which default would affect its existence or its powers referred to in subsection (a) of this Section. (f) The Authority has found and determined and hereby finds and determines that (i) the Loan to be made hereunder with the proceeds of the Bonds will promote the purposes of the Act by providing funds to finance the Construction of the Project; and (ii) said Loan is in the public interest, serves the public purposes and meets the requirements of the Act. (g) No member, officer or other official of the Authority has any financial interest whatsoever in the Borrower or in the transactions contemplated by this Agreement and the Indenture. (h) Neither the execution and delivery of this Agreement, the Indenture, the Purchase Contract or the Tax Regulatory Agreement, the consummation of the transactions contemplated hereby or thereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, the Indenture, the Purchase Contract or the Tax Regulatory Agreement, conflict with or result in a breach of any of the terms, conditions or provisions of any restriction or any agreement or instrument to which the Authority is now a party or by which it is bound or constitute a default under any of the foregoing or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the Authority under the terms of any instrument or agreement. Section 2.02. Representations of the Borrower. The Borrower makes the following representations as the basis for its undertakings herein contained: (a) The Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the State and is duly qualified to transact business in the State, is not in violation of any provision of any of the Borrower's Organization Documents, has full power and authority to enter into this Agreement, and has duly authorized the execution and delivery of this Agreement by proper action. (b) The execution, delivery and performance by the Borrower of this Agreement, the Reimbursement Agreement, the Remarketing Agreement, the Tax Regulatory Agreement and all other documents contemplated hereby to be executed by the Borrower are within the Borrower's power and have been duly authorized by all necessary action, and neither the execution and delivery of this Agreement, the Reimbursement Agreement, the Remarketing Agreement or the Tax Regulatory Agreement or the consummation of the transactions contemplated hereby and thereby, nor the fulfillment of or compliance with the terms and conditions hereof and thereof, conflicts with or results in a breach of any of the terms, conditions or provisions of any 3 of the Borrower's Organization Documents, or of any law, statute, rule, regulation, order, judgment, award, injunction, or decree or of any material agreement or instrument to which the Borrower is now a party or by which it is bound or affected, or constitutes a default (or would constitute a default with due notice or the passage of time or both) under any of the foregoing, or results in or requires the creation or imposition of any prohibited lien, charge or encumbrance whatsoever upon any of the property or assets of the Borrower under the terms of any instrument or agreement to which the Borrower is now a party or by which it is bound. (c) The estimated Costs of the Project to be paid with the proceeds of the Bonds are as set forth in the Tax Regulatory Agreement and have been determined in accordance with sound engineering, construction, and accounting principles. All the information and representations in the Tax Regulatory Agreement are true and correct as of the date thereof. (d) The Project consists and will consist of those facilities described in Exhibit A and the Borrower shall not make any changes to the Project or to the operation thereof which would affect the qualification of the Project under the Act or would cause interest on the Bonds not to be Tax-exempt. The Borrower intends to own and operate the Project. The Borrower covenants and agrees to operate or cause the operation of the Project as a facility described by the Act until the principal of, the premium, if any, and the interest on the Bonds shall have been paid. (e) The Borrower has and will have title to the Project sufficient to carry out the purposes of this Agreement. (f) At the time of submission of an application to the Authority for financial assistance in connection with the Project and on the dates on which action was taken on such application, permanent financing for the Project had not otherwise been obtained or arranged. (g) To the best knowledge of the Borrower, no member, officer or other official of the Authority has any financial interest whatsoever in the Borrower or in the transactions contemplated by this Agreement. (h) All certificates, approvals, permits and authorizations with respect to the Construction of the Project of the State, the City of Lathrop, California, the federal government and other applicable local governmental agencies have been obtained, or if not yet obtained, are reasonably expected to be obtained in due course. The Project will be consistent with any existing local or regional comprehensive plan. (i) No event has occurred and no condition exists which would constitute a Loan Default Event or which, with the passing of time or with the giving of notice or both, would constitute a Loan Default Event. (j) There is no litigation or proceeding pending or, to the knowledge of the Borrower, threatened against the Borrower which could adversely affect the validity of 4 this Agreement, the Reimbursement Agreement, the Remarketing Agreement or the Tax Regulatory Agreement or the ability of the Borrower to comply with the terms of its obligations under this Agreement, the Reimbursement Agreement, the Remarketing Agreement or the Tax Regulatory Agreement. (k) No consent, authorization or approval, except such consents, authorizations or approvals as have been obtained prior to the execution and delivery of this Agreement, from any governmental, public or quasi- public body or authority of the United States or of the State or any department or subdivision thereof, is necessary for the due execution and delivery by the Borrower of this Agreement. Section 2.03. Registered Owners to Benefit. The Borrower agrees that this Agreement is executed in part to induce the purchase by others of the Bonds. Accordingly, all covenants and agreements on the part of the Borrower set forth in this Agreement are hereby declared to be for the benefit of the Registered Owners from time to time of such Bonds; provided, however, that such covenants and agreements shall create no rights in any parties other than the Authority, the Borrower, the Remarketing Agent, the Bank, the Trustee, the Tender Agent and such Registered Owners. ARTICLE III CONSTRUCTION OF THE PROJECT; ISSUANCE OF THE BONDS Section 3.01. Construction of the Project. The Borrower agrees that, utilizing the proceeds of the Bonds loaned pursuant to Section 4.01 hereof and such other funds as may be necessary, it has or will Construct, or has or will cause the Construction of, the Project, and has or will acquire, rehabilitate, equip, construct and install all other facilities and real and personal property necessary for the operation of the Project as described in the Borrower's application to the Authority for assistance in financing the Project, substantially in accordance with the plans and specifications prepared therefor by the Borrower, including any and all supplements, amendments, additions or deletions thereto or therefrom, it being understood that the approval of the Authority shall not be required for changes in such plans and specifications which do not alter the purpose or description of the Project as set forth in Exhibit A hereto. The Borrower further agrees to proceed with due diligence to complete the Project within three years from the date hereof. In the event that the Borrower desires to modify the Project in a manner which alters the purpose or description of the Project as set forth in Exhibit A hereto, such modification shall be undertaken only upon an amendment to Exhibit A which shall accurately set forth the description and purpose of the Project as so modified and which amendment to Exhibit A shall become effective (without the written consent of the Registered Owners) upon receipt by the Authority and the Trustee of: (a) a certificate of the Authorized Representative of the Borrower describing in detail the proposed changes and stating that they will not have the effect of disqualifying the Project as a facility that may be financed pursuant to the Act nor 5 reduce the employment benefits described in the Borrower's application to the Authority for assistance in financing the Project; (b) an Opinion of Bond Counsel that the proposed changes to the Project will not have the effect of disqualifying the Project as a facility that may be financed pursuant to the Act or cause interest on the Bonds not to be Tax-exempt; (c) a copy of the proposed form of amended or supplemented Exhibit A hereto; and (d) the written approval of the Bank and the Trustee. Section 3.02. Disbursements from the Project Fund and Costs of Issuance Fund. The Borrower will authorize and direct the Trustee, upon compliance with Section 3.03 of the Indenture, to disburse the moneys in the Project Fund to or on behalf of the Borrower only for payment of Costs of the Project. Each of the payments from the Project Fund referred to in this Section shall be made upon receipt by the Trustee of a written Requisition in the form prescribed by Section 3.03 of the Indenture, signed by an Authorized Representative of the Borrower accompanied by the written approval of the Bank. The Trustee may, upon satisfaction by the Borrower of the conditions set forth in Section 3.03(b) of the Indenture, pay each Requisition without the written approval of the Bank unless the Trustee has received written notice from the Bank that the payment of any subsequent Requisition requires the Bank's written approval. Moneys in the Costs of Issuance Fund shall be disbursed by the Trustee as provided in Section 3.03(e) of the Indenture to pay Costs of Issuance. Section 3.03. Establishment of Completion Date; Obligation of Borrower to Complete. As soon as the Construction of the Project is completed, an Authorized Representative of the Borrower, on behalf of the Borrower, shall evidence the completion date by providing a certificate to the Trustee, with a copy to the Authority and the Bank, stating the Costs of the Project and further stating that (a) Construction of the Project has been completed substantially in accordance with the plans and specifications therefor, and all labor, services, materials and supplies used in Construction have been paid for or stating the amount required to be retained in the Project Fund to fully provide for any disputed amounts, and (b) all other equipment and facilities for the operation of the Project have been acquired, constructed and installed in accordance with the plans and specifications therefor and all costs and expenses incurred in connection therewith have been paid or provided for. Notwithstanding the foregoing, such certificate may state that it is given without prejudice to any rights of the Borrower against third parties. At the time such certificate is delivered to the Trustee, moneys remaining in the Project Fund, including any earnings resulting from the investment of such moneys, less an amount representing a reasonable retainage determined by the Borrower, shall be used as provided in Section 3.03(d) of the Indenture. 6 In the event the moneys in the Project Fund available for payment of the Costs of the Project should be insufficient to pay the Costs of the Project in full, the Borrower agrees to pay directly, or to deposit in the Project Fund moneys sufficient to pay, any costs of completing the Construction of the Project in excess of the moneys available for such purpose in the Project Fund, or otherwise cause the Construction of the Project to be completed. The Authority makes no express or implied warranty that the moneys deposited in the Project Fund and available for payment of the Costs of the Project under the provisions of this Agreement will be sufficient to pay all the amounts which may be incurred in connection with the Construction of the Project. The Borrower agrees that if, after exhaustion of the moneys in the Project Fund, the Borrower should pay, or deposit moneys in the Project Fund for the payment of, any portion of the Costs of the Project pursuant to the provisions of this Section, it shall not be entitled to any reimbursement therefor from the Authority, the Trustee or the Registered Owners of any of the Bonds, nor shall it be entitled to any diminution of the amounts payable under Section 4.02 hereof. Section 3.04. Investment of Moneys in Funds. Any moneys in any fund held by the Trustee shall, at the written request of an Authorized Representative of the Borrower, but subject to the restrictions on investments contained in the Indenture, the Tax Regulatory Agreement and applicable law in connection with the Tax-exempt status of interest on the Bonds, be invested or reinvested by the Trustee as provided in the Indenture. Such investments shall be held by the Trustee and shall be deemed at all times a part of the fund from which such investments were made, and the interest accruing thereon, and any profit or loss realized therefrom, shall be credited or charged as provided in Section 5.05 of the Indenture. ARTICLE IV LOAN OF PROCEEDS; REPAYMENT PROVISIONS Section 4.01. Loan of Bond Proceeds; Issuance of Bonds. The Authority covenants and agrees, upon the terms and conditions in this Agreement, to loan the proceeds of the sale of the Bonds to the Borrower for the purpose of financing the Costs of the Project and the Costs of Issuance to the extent permitted by the Indenture. Pursuant to said covenant and agreement, the Authority will issue the Bonds upon the terms and conditions contained in this Agreement and the Indenture and will cause the Bond proceeds to be applied as provided in Article III of the Indenture. Subject to Section 3.02 of the Indenture, such proceeds shall be disbursed to or on behalf of the Borrower as provided in Section 3.02 hereof. The Borrower hereby approves the Indenture, the assignment thereunder to the Trustee of the right, title and interest of the Authority (with certain exceptions) in this Agreement, and the issuance thereunder by the Authority of the Bonds. Section 4.02. Loan Repayments and Other Amounts Payable. (a) On or before each Bond Payment Date, until the principal of, premium, if any, and interest on the Bonds shall have been fully paid or provision for such payment shall have been made as provided in the Indenture, the Borrower covenants and agrees to pay to the Trustee as a Loan Repayment on the Loan made to the 7 Borrower from Bond proceeds pursuant to Section 4.01 hereof, a sum equal to the amount payable on such Bond Payment Date as principal of, and premium, if any, and interest on the Bonds as provided in the Indenture. The Loan Repayments made pursuant to this subsection (a) shall at all times be sufficient to pay the total amount of interest and principal (whether at maturity or upon redemption or acceleration) and premium, if any, becoming due and payable on the Bonds on each Bond Payment Date; provided that any amount held by the Trustee in the Revenue Fund on the due date for a Loan Repayment pursuant to the immediately preceding paragraph shall be credited against the Loan Repayment due on such date to the extent available for such purpose under the terms of the Indenture; and provided further that, subject to the provisions of this paragraph, if at any time the amounts held by the Trustee in the Revenue Fund are sufficient to pay all of the principal of and interest and premium, if any, on the Bonds as such payments become due, the Borrower shall be relieved of any obligation to make any further Loan Repayments under the provisions of this Section. Notwithstanding the foregoing, if on any date the amount held by the Trustee in the Revenue Fund is insufficient to make any required payments of principal of (whether at maturity or upon redemption or acceleration) and interest and premium, if any, on the Bonds as such payments become due, the Borrower, immediately upon receipt of notice of such deficiency from the Trustee, shall forthwith pay such deficiency as a Loan Repayment hereunder. The obligation of the Borrower to make any payment under this subsection (a) shall be deemed to have been satisfied to the extent of any corresponding payment made by the Bank to the Trustee as a result of a drawing under the Letter of Credit. To the extent the Trustee receives a Loan Repayment from the Borrower pursuant to this subsection (a) after any payment obligation hereunder has been satisfied by a drawing under the Letter of Credit, the Trustee shall promptly use such Loan Repayment to reimburse the Bank for such drawing or if the Bank has been reimbursed directly by the Borrower such funds shall be returned to the Borrower. (b) The Borrower covenants and agrees to pay until the principal of, premium, if any, and interest on the Bonds shall have been fully paid or provision for such payment shall have been made as provided in the Indenture, (i) the Trustee's reasonable annual fee for its ordinary services rendered as trustee, and its reasonable ordinary expenses incurred under the Indenture, as and when the same become due, (ii) the Trustee's reasonable fees, charges and expenses, as Bond Registrar, Tender Agent and Paying Agent, and the reasonable fees of any other paying agent for the Bonds as provided in the Indenture, as and when the same become due, (iii) the cost of providing any Bonds required to be provided pursuant to the Indenture, (iv) the reasonable fees of any rating agency then rating the Bonds required to maintain the rating on the Bonds, (v) the reasonable fees of the Remarketing Agent, and (vi) other necessary and ordinary administrative fees and expenses of the Authority. The Borrower covenants and agrees to make all payments for the expenses identified in (i) through (vi) above. In addition, the Borrower agrees to pay such extraordinary expenses incurred by the Trustee, the Tender Agent, the Remarketing Agent and the 8 Authority under the Indenture as and when the same become due. The duties of the Borrower under this subsection (b) shall survive the termination of this Agreement and the termination and discharge of the Indenture. (c) The Borrower also agrees to pay the fees and expenses of the Bank pursuant to the Reimbursement Agreement. (d) In the event the Borrower should fail to make any of the payments required by subsections (a) through (c) of this Section, such payments shall continue as obligations of the Borrower until such amounts shall have been fully paid. Except as provided in the next sentence, the Borrower agrees to pay such amounts, together with interest thereon, from the date such payments were due until paid, to the extent permitted by law, at the rate of 10% per annum. With respect to amounts due the Bank, the Borrower agrees to pay such amounts together with interest thereon at the rates and times established pursuant to the Reimbursement Agreement. Interest on overdue payments required under subsection (a) above shall be paid to Registered Owners as provided in Section 2.02(b)(ii) of the Indenture. Section 4.03. Purchase of Bonds. The Borrower hereby recognizes and agrees that the Indenture provides for the creation of an account or accounts to facilitate the purchase of Bonds by the Tender Agent on the Mandatory Tender Date and upon the optional tender of Bonds in accordance with Section 4.06 of the Indenture, and the Borrower agrees to provide or cause to be provided the Letter of Credit for the payment of amounts necessary to purchase such Bonds. Section 4.04. Unconditional Obligations. The obligations of the Borrower to make the payments required by Section 4.02 hereof and to provide or cause to be provided the Letter of Credit pursuant to Section 4.03 hereof, and to perform and observe the other agreements on its part contained herein, shall be absolute and unconditional, irrespective of any defense or any rights of set-off, recoupment or counterclaim it might otherwise have against the Authority, and during the term of this Agreement, the Borrower shall pay absolutely all payments to be made on account of the Loan made to the Borrower from Bond proceeds pursuant to Section 4.01 hereof, as prescribed in Section 4.02 hereof, the obligation to provide or cause to be provided the Letter of Credit pursuant to Section 4.03 hereof, and all other payments required hereunder, free of any deductions and without abatement, diminution or set-off. Until such time as the principal of, premium, if any, and interest on the Bonds shall have been fully paid, or provision for the payment thereof shall have been made as required by the Indenture, the Borrower (a) will not suspend or discontinue any payments required to be made by the Borrower pursuant to this Agreement, including, without limitation, the payments provided for in Section 4.02 hereof and the obligation to provide or cause to be provided the Letter of Credit pursuant to Section 4.03 hereof; (b) will perform and observe all of its other covenants contained in this Agreement; and (c) except as provided in Article VIII hereof, will not terminate this Agreement for any cause, including, without limitation, failure to complete the Project, the occurrence of any act or circumstances that may constitute failure of consideration, destruction of or damage to the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State, or any political subdivision of either of these, or any failure of the Authority or the Trustee to perform and 9 observe any covenant, whether express or implied, or any duty, liability or obligation arising out of or connected with this Agreement or the Indenture. Section 4.05. Assignment of Authority's Rights. As security for the payment of the Bonds, the Authority will assign to the Trustee the Authority's rights, title and interest under this Agreement, including the right to receive payments hereunder (except the right of the Authority to receive certain payments, if any, with respect to expenses and indemnification under Sections 4.02(b), 7.03, 9.02 and 9.03 hereof, the Authority's right to receive notices, opinions and other documents required to be delivered to the Authority hereunder and the Authority's rights to consent to certain actions taken hereunder), and the Authority hereby directs the Borrower to make the payments required hereunder (except such payments for expenses and indemnification) directly to the Trustee as more fully set forth in this Agreement. The Borrower hereby assents to such assignment, agrees to make such payments directly to the Trustee and agrees that the provisions of Section 4.04 hereof shall apply to its obligation to make such payments. Section 4.06. Amounts Remaining in Funds. It is agreed by the parties hereto that after: (a) payment in full of the principal of, premium, if any, and interest on, the Bonds, or after provision for such payment shall have been made as provided in the Indenture, (b) payment, or provision for payment satisfactory to the Trustee and paying agents, of the fees, charges and expenses of the Trustee and paying agents in accordance with the Indenture, (c) payment, or provision for payment satisfactory to the affected parties, of all other amounts required to be paid under this Agreement and the Indenture by the Borrower and (d) payment to the Bank of any amounts owed to the Bank by the Borrower under the Reimbursement Agreement, any amounts remaining in any fund held by the Trustee under the Indenture shall be paid in accordance with the requirements of Section 10.04 of the Indenture. ARTICLE V SPECIAL COVENANTS AND AGREEMENTS Section 5.01. Right of Access to the Project. The Borrower agrees that during the term of this Agreement, the Authority, the Bank, the Trustee and the duly authorized agents of any of them shall have the right, after reasonable notice to the Borrower, at all reasonable times during normal business hours to enter upon the site of the Project to examine and inspect the Project. The rights of access hereby reserved to the Trustee, and their respective agents, may be exercised only after the Person seeking such access shall have executed such confidentiality or secrecy agreements, if any, as may be requested by the Borrower and which are in the form required of all visitors to the Project site. Nothing contained in this Section or in any other provision of this Agreement shall be construed to entitle the Authority or the Trustee to any information or inspection involving the confidential knowledge, expertise or know-how of the Borrower. Section 5.02. The Borrower's Maintenance of its Existence. The Borrower covenants and agrees that it will maintain its existence and will not dissolve, nor will it sell or otherwise transfer the Project or all or substantially all of its assets, nor will it consolidate with or merge into another entity or permit one or more other entities to consolidate with or merge 10 into it. Notwithstanding the foregoing, the Borrower may, without violating the covenants contained in this Section, consolidate with or merge into another entity, or permit one or more other entities to consolidate with or merge into it, or sell or otherwise transfer to another entity the Project or all or substantially all of its assets as an entirety and thereafter dissolve, if: (a) The surviving, resulting or transferee entity, as the case may be: (i) assumes in writing, if such entity is not the Borrower, all of the obligations of the Borrower under this Agreement; (ii) is not, after such transaction, otherwise in default under any provisions of this Agreement; and (iii) is qualified to do business in the State; (b) The Trustee and the Authority shall have received an Opinion of Bond Counsel to the effect that such merger, consolidation, sale or other transfer will not cause interest on the Bonds not to be Tax-exempt; and (c) The written consent of the Bank has been received by the Trustee, together with an acknowledgment that the Letter of Credit will remain in effect. If a merger, consolidation, sale or other transfer is effected, as provided in this Section, the provisions of this Section shall continue in full force and effect and no further merger, consolidation, sale or transfer shall be effected except in accordance with the provisions of this Section. Section 5.03. Records and Financial Statements of Borrower; Employment Practices. (a) The Borrower covenants and agrees at all times to keep, or cause to be kept, proper books of record and account, prepared in accordance with generally accepted accounting principles, in which complete and accurate entries shall be made of all transactions of or in relation to the business, properties and operations of the Borrower. Such books of record and account shall be available for inspection by the Authority or the Trustee, and the duly authorized agents of either of them, at reasonable hours and under reasonable circumstances. (b) Upon the receipt of the written request of the Authority or the Trustee, the Borrower further covenants and agrees to furnish the requesting party, within 120 days after the end of each Fiscal Year, with copies of its complete financial statements together with a Certificate of an Authorized Representative of the Borrower stating that no event which constitutes a Loan Default Event or which with the giving of notice or the passage of time or both would constitute a Loan Default Event has occurred and is continuing as of the end of such Fiscal Year, or specifying the nature of such event and the actions taken and proposed to be taken by the Borrower to cure such default. 11 (c) The Borrower shall, within 60 days of the receipt of a written request from the Authority or the Trustee, furnish a written report to the requesting party, as of the end of the Borrower's prior Fiscal Year, stating the status of the Project, the outstanding and unpaid balance of the Bonds, the number of full-time and part-time employees of the Borrower employed at the Project during such prior Fiscal Year, and supplying such current information as the Authority shall reasonably request regarding other matters covered in the Borrower's application for industrial revenue bond financing. Section 5.04. Insurance. The Borrower agrees to insure the Project or cause the Project to be insured during the term of this Agreement for such amounts and for such occurrences as are customary for similar facilities within the State, or as may be required by the Bank, by means of policies issued by reputable insurance companies qualified to do business in the State. Upon the written request of the Authority or the Trustee, the Borrower shall deliver to the requesting party, within 60 days of the receipt of such request, memorandum copies of the insurance policies or certificates of insurance which memorandum copies of insurance policies or certificates of insurance shall evidence that all insurance required to be in effect under this Section is then currently in full force and effect. The Trustee and the Authority are not responsible for the adequacy or sufficiency of the coverage evidenced by such policies or certificates. Section 5.05. Maintenance and Repair; Taxes; Utility and Other Charges. The Borrower agrees to maintain the Project, or cause the Project to be maintained, during the term of this Agreement (a) in a safe condition and (b) in good repair and in good operating condition, ordinary wear and tear excepted, making from time to time all necessary repairs thereto and renewals and replacements thereof. The Borrower agrees to pay or cause to be paid during the term of this Agreement all taxes, governmental charges of any kind lawfully assessed or levied upon the Project or any part thereof, including any taxes levied against the Project which, if not paid, will become a charge on the Project, all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Project and all assessments and charges lawfully made by any governmental body for public improvements that may be secured by a lien on the Project; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Borrower shall be obligated to pay only such installments as are required to be paid during the term of this Agreement. The Borrower may, at the Borrower's expense and in the Borrower's name, in good faith, contest any such taxes, assessments and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during that period of such contest and any appeal therefrom unless by such nonpayment the Project or any part thereof will be subject to loss or forfeiture. Section 5.06. Qualification in California. The Borrower agrees that throughout the term of this Agreement it and any lessee of the Project, if any, will be qualified to do business in the State. 12 Section 5.07. Alternate Credit Facility. If the Borrower exercises its option to convert the interest rate borne by the Bonds from the Weekly Interest Rate to the Fixed Interest Rate pursuant to the terms and provisions of the Indenture, the Borrower may cause to be delivered to the Trustee an Alternate Credit Facility, effective as of the Fixed Rate Date, in lieu of keeping the Letter of Credit in place as required by Section 5.08 hereof. Such Alternate Credit Facility must meet the following conditions: (a) the Alternate Credit Facility must be approved by the Authority or any successors; (b) the terms of the Alternate Credit Facility must provide an unconditional obligation of the issuer of the Alternate Credit Facility to pay all amounts with respect to the principal of, premium, if any, and interest on the Bonds when the same shall become due; and (c) the term of the Alternate Credit Facility must extend to the final maturity of the Bonds. On or prior to the date of the delivery of an Alternate Credit Facility to the Trustee, the Borrower shall cause to be furnished to the Authority and the Trustee (i) an Opinion of Bond Counsel stating that the delivery of such Alternate Credit Facility to the Trustee is authorized under this Agreement and complies with the terms hereof and will not cause interest on the Bonds not to be Tax-exempt, (ii) such opinions regarding the validity of the Alternate Credit Facility as the Authority, the Trustee and any rating agency then rating the Bonds may reasonably require, and (iii) written evidence from Moody's, if the Bonds are then rated by Moody's, and S&P, if the Bonds are then rated by S&P, to the effect that such rating agency has reviewed the proposed Alternate Credit Facility and that the substitution of the proposed Alternate Credit Facility for the Letter of Credit will not, by itself, result in a reduction of its long term rating of the Bonds below "A" if the Bonds are rated by S&P or below "A2" if the Bonds are rated by Moody's. Section 5.08. Letter of Credit. The Borrower shall at all times throughout the term of this Agreement (but subject to Section 5.07 hereof) maintain or cause to be maintained the Letter of Credit with respect to the Bonds. The Letter of Credit shall be an obligation of the Bank to pay to the Trustee, against presentation of sight drafts and certificates required by the Bank, up to (a) an amount equal to the aggregate principal amount of the Bonds then Outstanding as necessary to pay the principal of such Bonds, whether at maturity, redemption, acceleration or otherwise or upon the purchase of such Bonds upon the optional tender of the Bonds pursuant to Section 4.06 of the Indenture and on the Mandatory Tender Date, and (b) an amount equal to 45 days (or such other number of days as may be required to obtain a rating on the Bonds) of interest on the Bonds calculated at an interest rate of 12% per annum on the basis of a 365- or 366-day year, as applicable, for the number of days actually elapsed while the Bonds bear interest at the Weekly Interest Rate and an amount equal to 210 days (or such other number of days as may be required to obtain a rating on the Bonds if the Bonds are then rated) of interest on the Bonds calculated at the actual interest rate or rates on the Bonds on the basis of a 360-day year of twelve 30-day months while the Bonds bear interest at the Fixed Interest Rate to pay interest on the Bonds when due. 13 On any Interest Payment Date, the Borrower may, at its option, but with the written approval of the Authority, which written approval shall not be unreasonably withheld, provide or cause to be provided to the Trustee an Alternate Letter of Credit and the Borrower shall, in any event, cause to be delivered to the Trustee an extension of the Expiration Date of the Letter of Credit or an Alternate Letter of Credit at least (a) 23 days before the Expiration Date of the then-existing Letter of Credit while the Bonds bear interest at the Weekly Interest Rate, or (b) 45 days before the Expiration Date of the then existing Letter of Credit while the Bonds bear interest at the Fixed Interest Rate. At least 30 days prior to the Letter of Credit Substitution Date, the Borrower shall provide the Authority, the Trustee, the Bank, the Tender Agent and the Remarketing Agent with a written notice of its intention to provide an Alternate Letter of Credit pursuant to this Section. Such notice shall include the proposed Letter of Credit Substitution Date, which shall be an Interest Payment Date, and identify the provider of the Alternate Letter of Credit. An Alternate Letter of Credit shall be an irrevocable direct-pay letter of credit or other irrevocable credit facility delivered to the Trustee on or prior to 8:00 a.m. (California time) on the Letter of Credit Substitution Date, issued by a commercial bank or other financial institution, the terms of which shall in all material respects be the same as the Letter of Credit. On or prior to the date of the delivery of an Alternate Letter of Credit to the Trustee, the Borrower shall cause to be furnished to the Authority and the Trustee (i) an Opinion of Bond Counsel stating that the delivery of such Alternate Letter of Credit to the Trustee is authorized pursuant to this Agreement, complies with the terms hereof and will not cause the interest on the Bonds not to be Tax- exempt, (ii) such opinions regarding the validity of the Alternate Letter of Credit as the Authority, the Trustee and any rating agency then rating the Bonds may reasonably require, and (iii) written evidence from Moody's, if the Bonds are then rated by Moody's, and S&P, if the Bonds are then rated by S&P, to the effect that such rating agency has reviewed the proposed Alternate Letter of Credit and that the substitution of the proposed Alternate Letter of Credit will not, by itself, result in a reduction of its long-term rating of the Bonds below "A" if the Bonds are rated by S&P or below "A2" if the Bonds are rated by Moody's. It is understood and agreed that with proper notification to the Trustee and the Borrower, the Bank can declare that a default has occurred under the Reimbursement Agreement with the Borrower and such default will cause a mandatory redemption of Bonds pursuant to Section 4.01(g) of the Indenture. Section 5.09. Covenants of the Borrower. It is the intention of the parties hereto that interest on the Bonds shall be and remain Tax-exempt so long as the Bonds are Outstanding, and to that end the representations, covenants, and agreements of the Authority and the Borrower in this Section and in Sections 5.10 and 5.11 hereof are for the benefit of the Trustee and each and every Registered Owner of the Bonds. The Borrower represents, warrants and agrees as follows: (a) The Project consists, and at all times shall consist, of land or property which is subject to the allowance for depreciation provided in Section 167 of the Code, and substantially all (95% or more) of the proceeds of the Bonds including proceeds of investment thereof, shall be used to pay the Costs of the Project which are chargeable to the capital account of the Borrower, and which were paid not earlier than 60 days before January 28, 1998. The Borrower shall allocate the proceeds of the Bonds to the 14 Costs of the Project no later than 18 months after the later of the date the original expenditure is paid or the date the Project is placed in service or abandoned, but in no event more than three years after the original expenditure is paid. (b) No portion of the proceeds of the Bonds shall be used to provide for a private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skate board and ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, race track, automobile sales or service facility, retail food or beverage facility, entertainment facility, airplane, gambling establishment, health club, liquor store, skybox or luxury box. (c) Less than 25% of the net proceeds of the Bonds (after Costs of Issuance) shall be used to purchase land or interests in land. The Borrower covenants to spend sufficient sums from the Project Fund on Costs of the Project to assure compliance with this covenant. (d) No proceeds of the Bonds shall be used to acquire any personal property or facilities unless the first use of such property or facilities shall be pursuant to such acquisition, except that if the Project consists of acquisition of a building, the Borrower shall, within two years after the Date of Delivery or the date of acquisition of such building, whichever is earlier, expend an amount, from proceeds of the Bonds or otherwise, equal to 15% of the cost of acquiring such building financed with proceeds of the Bonds on rehabilitation costs of such building as required by Section 147(d) of the Code. (e) During the three-year period following the date the Project is placed in service, the Borrower shall not allow any other Person to become a "test-period beneficiary" of the Bonds who is a beneficiary of industrial development bonds in an amount which would cause the issuance of the Bonds to exceed such Person's aggregate per-taxpayer limit under Section 144(a)(10) of the Code. (f) No agreement shall be entered into which would result in the payment of principal or interest on the Bonds being "federally guaranteed" within the meaning of Section 149(b) of the Code. (g) There is no outstanding issue of industrial development bonds which was used to finance any facilities which, in relation to the Project, would constitute (i) a single building, (ii) an enclosed shopping mall, or (iii) a strip of offices, stores or warehouses using substantial common facilities. (h) Subject to the provisions of the final paragraph of Section 5.10 hereof, no actions shall be taken, or omitted to be taken, by the Borrower which would have the effect, directly or indirectly, of causing interest on any of the Bonds to not be Tax-exempt. 15 (i) No changes shall be made in the Project or the use of the Project which shall in any way impair the Tax-exempt status of interest on the Bonds. (j) No use or investment of the proceeds of the Bonds or any acquired obligation shall be made which would cause the Bonds to become "arbitrage bonds" within the meaning of Section 148 of the Code and any Regulations thereunder, and the Borrower shall comply with the requirements of said Section of the Code and said Regulations, as the same may be amended from time to time, so long as any Bonds remain Outstanding. (k) To use due diligence to cause the Project to be operated in all material respects in accordance with all applicable laws, rulings, regulations and ordinances. (l) To comply in all material respects with all written conditions imposed by the Authority and any State or local agency in its approval of the Project. (m) To fully and faithfully perform all the duties and obligations which the Authority has covenanted and agreed in the Indenture to cause the Borrower to perform and any duties and obligations which the Borrower is required in the Indenture to perform. The foregoing shall not apply to any duty or undertaking of the Authority which by its nature cannot be delegated or assigned. (n) The rights, duties and obligations imposed on the Borrower pursuant to the Remarketing Agreement are hereby acknowledged, approved and accepted. (o) To faithfully perform at all times any and all covenants, undertakings, stipulations and provisions to be observed or performed by the Borrower contained in the Indenture, in the Bonds, and in all proceedings of the Authority pertaining thereto, or otherwise required of the Borrower to be observed or performed, whether express or implied. (p) To comply with the covenants and obligations of the Borrower contained in the Reimbursement Agreement. (q) To use less than 25% of the net proceeds of the Bonds (after deducting Costs of Issuance) to provide facilities which are directly related and ancillary to the manufacturing facility being financed with the proceeds of the Bonds, in accordance with Section 144(a)(12)(C) of the Code. (r) To not become a Registered Owner of the Bonds, and to not directly or indirectly purchase Bonds from the Remarketing Agent or permit any Related Party to directly or indirectly purchase Bonds from the Remarketing Agent. Notwithstanding any other provision of this Agreement or the Indenture, including in particular Article X of the Indenture, the obligations of the Borrower and the Authority to comply with the covenants set forth in this Section and Section 5.10 hereof shall survive the defeasance or payment in full of the Bonds. 16 Section 5.10. Capital Expenditures. For the purpose of this Section and Section 5.09 hereof the following terms shall have the following meanings: "Facilities" shall mean those facilities described in Section 144(a)(1) of the Code and Regulations thereunder, including Section 1.103-10(b)(2)(ii)(e) and Section 1.103-10(d)(2) of the Regulations, and shall include those facilities any Principal User of which is the Borrower or a related person, as defined in Section 144(a)(3) of the Code, located in the Project Location, and any contiguous or integrated facility treated as being located in the Project Location by reason of the fact that such facility is located on both sides of a border between the Project Location and one or more other political jurisdictions. "Principal User" means any principal user of the Project as defined in Proposed Treasury Regulations Section 1.103-10(h). "Project Location" shall mean the area within the City of Lathrop, California. "Regulations" shall mean those regulations, whether now or hereafter adopted, prepared by the United States Department of the Treasury with respect to Section 103 or Part IV of subchapter B of chapter 1 of the Code. "Section 144 Capital Expenditures" shall mean those expenditures required to be taken into account with respect to the Bonds pursuant to Section 144(a)(1) and (4) of the Code and Regulations thereunder, including Section 1.103- 10(b)(2)(ii) and (iii) of the Regulations, including any expenditure with respect to Facilities, no matter by whom made (regardless of how paid, whether in cash, notes or stock in a taxable or nontaxable transaction), paid or incurred during the six-year period beginning 3 years before the date of issuance and delivery of the Bonds, which may, under any rule or election under the Code, be treated as a capital expenditure (whether or not such expenditure is so treated), and which is not paid or reimbursed out of the original principal proceeds (exclusive of investment income) of the Bonds, but not including excluded expenditures pursuant to Section 144(a)(4)(C) of the Code and Regulations thereunder, including Section 1.103-10(b)(2)(iv) and (v) of the Regulations. Such term shall also include research and development costs properly allocable to the Project no matter where paid or incurred, unless specifically excluded by Section 144(a)(4)(C). The Borrower represents and warrants that substantially all of the proceeds of the Bonds are to be used with respect to the Project to be located in the Project Location; that there are no other outstanding obligations issued subsequent to September 30, 1968, of any state, territory or possession of the United States of America, or any political subdivision of the foregoing or of the District of Columbia, the proceeds of which have been or are to be used primarily with respect to Facilities; and that the sum of the principal amount of the Bonds plus the amount of Section 144 Capital Expenditures for the three- year period ending on the date of issuance and delivery of the Bonds does not exceed $10,000,000. The Authority covenants and agrees that it has not taken and shall not take any action which will cause interest on the Bonds to not be Tax-exempt. The Authority hereby elects to have the provisions of Section 144(a)(4)(A) of the Code apply to the Bonds. The Borrower covenants that it shall furnish to the Authority prior to the 17 issuance and delivery of the Bonds whatever information is necessary for the Authority to make such election. The Borrower further covenants that it shall take, and shall cause any other Principal User to take, such further actions as are required of a Principal User of property financed by an issue of obligations which are subject to the $10,000,000 limitation of Section 144(a)(4)(A) of the Code, which actions are set forth in Section 144(a)(4)(A) of the Code and in the Regulations, including Section 1.103-10(b) of the Regulations. The Borrower further covenants and agrees, so long as any of the Bonds are Outstanding under the Indenture, that the aggregate principal of Bonds being issued plus the aggregate amount of Section 144 Capital Expenditures made or to be made with respect to Facilities during the six-year period beginning three years before the date of issuance and delivery of the Bonds shall not exceed $10,000,000 (or any such larger amount as may be hereafter permitted by law). Notwithstanding anything in Section 5.09(h) hereof or in this Section to the contrary, neither the Borrower nor the Authority shall have violated the covenants contained in Section 5.09(h) hereof or in this Section if the interest on any of the Bonds becomes taxable to a Person solely because such Person is a "substantial user" of the Project or a "related person" within the meaning of Section 147(a) of the Code; and none of the covenants and agreements herein contained shall require either the Borrower or the Authority to enter an appearance or intervene in any administrative, legislative or judicial proceeding in connection with any changes in applicable laws, rules or regulations or in connection with any decisions of any court or administrative agency or other governmental body affecting the taxation of interest on the Bonds. Section 5.11. Special Arbitrage Certifications. (a) The Authority hereby certifies to the Borrower (i) that it has not been notified of any listing or proposed listing of it by the Internal Revenue Service as a bond issuer whose arbitrage certifications may not be relied upon and (ii) that issuance of the Bonds will not violate any provisions of Section 103 of the Code, Section 148 of the Code, or the Regulations issued under such Sections of the Code, such that the interest on the Bonds is not Tax-exempt. (b) The Borrower and the Authority agree to comply with the Tax Regulatory Agreement, as such Tax Regulatory Agreement shall be amended from time to time in order that interest on the Bonds remains Tax-exempt. The Borrower further agrees to cause any other Principal User (as defined in Section 5.10 hereof) of the Project to comply with the terms of this Loan Agreement and the Tax Regulatory Agreement to the extent necessary to insure that interest on the Bonds remains Tax-exempt. Section 5.12. Covenant to Enter into Agreement or Contract to Provide Ongoing Disclosure.The Borrower and the Authority hereby agree that the initial offering and sale of the Bonds is exempt from the requirements of Paragraph (b)(5)(i) of the Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange Act of 1934, as amended (17 CFR Part 240, (S) 240.15c2-12) (the "Rule"). The Borrower hereby covenants and agrees 18 that if as a result of the conversion of the interest rate borne by the Bonds from the Weekly Interest Rate to the Fixed Interest Rate or as a result of any amendment to the Rule or any amendment or supplement to the Indenture or this Agreement, the Bonds cease to be exempt under the Rule, the Borrower will enter into an agreement or contract, constituting an undertaking, to provide ongoing disclosure as may be necessary to comply with the Rule as then in effect. The covenant and agreement contained in this Section is for the benefit of the Registered Owners, any Participating Underwriter and the Beneficial Owners (as defined in the Indenture) as required by the Rule. It is the Borrower's express intention that this Section be assigned pursuant to and in accordance with Section 6.09 of the Indenture to the Trustee for the benefit of the Registered Owners, any Participating Underwriter and the Beneficial Owners and that each Registered Owner, Participating Underwriter and Beneficial Owner be a beneficiary of this Section with the right to enforce this Section against the Borrower. Notwithstanding any other provision of this Agreement, failure of the Borrower to comply with the provisions of this Section shall not be considered a Loan Default Event; provided, however, the Trustee may (and, at the request of any Participating Underwriter or the Registered Owners of at least 25% aggregate principal amount in Outstanding Bonds, shall) or any Beneficial Owner may take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Borrower to comply with its obligations under this Section. Section 5.13. No Purchase of Bonds. The Authority covenants and agrees that it shall not become a Registered Owner of the Bonds and shall not directly or indirectly purchase Bonds from the Remarketing Agent. ARTICLE VI DAMAGE, DESTRUCTION AND CONDEMNATION; USE OF PROCEEDS Section 6.01. Obligation to Continue Payments. If prior to full payment of the Bonds (or provision for payment thereof in accordance with the provisions of the Indenture) (a) the Project or any portion thereof is destroyed (in whole or in part) or is damaged by fire or other casualty, or (b) title to, or the temporary use of, the Project or any portion thereof shall be taken under the exercise of the power of eminent domain by any governmental body or by any Person acting under governmental authority, the Borrower shall nevertheless be obligated to continue to pay the amounts specified in Article IV hereof, to the extent not prepaid in accordance with Article VIII hereof. Section 6.02. Application of Net Proceeds. The Borrower shall be entitled to the Net Proceeds, if any, of any insurance or condemnation awards resulting from the damage, destruction or condemnation of the Project or any portion thereof for application as provided in this Section and in the Reimbursement Agreement. All Net Proceeds shall be deposited by the Borrower in an escrow account with the Bank pursuant to the Reimbursement Agreement and shall be applied in one or more of the following ways at the election of the Borrower, with the written consent of the Bank, by written notice to the Authority and the Trustee: (a) The prompt repair, restoration, relocation, modification or improvement of the damaged, destroyed or condemned portion of the Project to enable such portion 19 of the Project to accomplish at least the same function as such portion of the Project was designed to accomplish prior to such damage or destruction or exercise of such power of eminent domain. If the Borrower elects to proceed as provided in this subsection (a), it shall give the Authority and the Trustee written notice thereof, and evidence of the Bank's written consent, within 90 days of the deposit of the Net Proceeds with the Bank. Any balance of the Net Proceeds remaining after such work has been completed shall be deposited in the Revenue Fund to be applied, with the written consent of the Bank, to the payment of principal of and premium, if any, and interest on the Bonds, or, if the Bonds have been fully paid (or provision for payment thereof has been made in accordance with the provisions of the Indenture), any balance remaining in the Revenue Fund shall be paid in accordance with the requirements of Section 10.04 of the Indenture. (b) The prepayment of all or a portion of the Loan in accordance with Article VIII hereof and redemption of Bonds. If the Borrower fails to give the notice and evidence of the Bank's written consent required by Section 6.02(a) above within 90 days of the deposit of the Net Proceeds with the Bank, the Borrower shall be deemed to have elected to apply the Net Proceeds to the prepayment of all or a portion of the Loan as provided in this subsection (b) in accordance with Section 8.02(a) hereof, the Bank shall be deemed to have consented to such application, and the Authority and the Trustee shall be deemed to have received written notice thereof for purposes of this Section. Section 6.03. Insufficiency of Net Proceeds. If the Project or a portion thereof is to be repaired, restored, relocated, modified or improved pursuant to Section 6.02(a) hereof, and if the Net Proceeds are insufficient to pay in full the cost of such repair, restoration, relocation, modification or improvement, the Borrower will nonetheless complete the work or cause the work to be completed and will pay or cause to be paid any cost thereof in excess of the amount of the Net Proceeds held in escrow. Section 6.04. Damage to or Condemnation of Other Property. Subject to the terms and provisions of the Reimbursement Agreement, the Borrower shall be entitled to the Net Proceeds of any insurance or condemnation award or portion thereof made for damages to or takings of its property not included in the Project. ARTICLE VII LOAN DEFAULT EVENTS AND REMEDIES Section 7.01. Loan Default Events. Any one of the following which occurs and continues shall constitute a Loan Default Event: (a) failure of the Borrower to pay any Loan Repayment when and as the same shall become due and payable pursuant to Section 4.02(a) hereof; (b) failure of the Borrower to pay any amounts payable hereunder, other than Loan Repayments, when and as the same shall become due, which failure 20 continues for a period of 30 days after written notice delivered to the Borrower and the Bank, which notice shall specify such failure and request that it be remedied, given by the Authority or the Trustee, unless the Authority and the Trustee shall agree in writing to an extension of such time; (c) failure of the Borrower to observe and perform any covenant, condition or agreement on its part required to be observed or performed by this Agreement, other than a covenant described in subsection (a) or subsection (b) above or in Section 5.12 hereof, which failure continues for a period of 30 days after written notice delivered to the Borrower and the Bank, which notice shall specify such failure and request that it be remedied, given by the Authority or the Trustee, unless the Authority and the Trustee, with the written approval of the Bank, shall agree in writing to an extension of such time; provided, however, that if the failure stated in the notice cannot be corrected within such period, the Authority and the Trustee will not unreasonably withhold their consent to an extension of such time if corrective action is instituted within such period and diligently pursued until the default is corrected; or (d) existence of an Event of Default under and as defined in Sections 7.01(a) through (e) of the Indenture. The provisions of subsection (c) of this Section are subject to the limitation that the Borrower shall not be deemed in default if and so long as the Borrower is unable to carry out its agreements hereunder by reason of strikes, lockouts or other industrial disturbances; acts of public enemies; orders of any kind of the government of the United States or of the State or any of their departments, agencies, or officials, or any civil or military authority; insurrections, riots, epidemics, landslides; lightning; earthquake; fire; hurricanes; storms; floods; washouts; droughts; arrests; restraint of government and people; civil disturbances; explosions; breakage or accident to machinery, transmission pipes or canals; partial or entire failure of utilities; or any other cause or event (whether similar or dissimilar to the foregoing) not reasonably within the control of the Borrower; it being agreed that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Borrower, and the Borrower shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of the opposing party or parties when such course is, in the judgment of the Borrower, unfavorable to the Borrower. This limitation shall not apply to any default under subsections (a), (b), or (d) of this Section. Notwithstanding any other provision of this Agreement to the contrary, so long as the Bank is not in default under the Letter of Credit, the Trustee shall not without the prior written consent or direction of the Bank exercise any remedies under this Agreement in the case of any Loan Default Event described in subsections (a), (b), or (c) above. Section 7.02. Remedies on Default. Subject to the last sentence of Section 7.01 above, whenever any Loan Default Event shall have occurred and shall be continuing, (a) The Trustee, by written notice to the Borrower and the Bank, shall declare all unpaid amounts payable under Section 4.02(a) hereof to be due and payable immediately, provided that concurrently with or prior to such notice the unpaid principal amount of the Bonds shall have been declared to be due and payable under the Indenture. Upon any such declaration such amount shall become and shall be immediately due and payable in the amount set forth in Section 7.01 of the Indenture. (b) The Trustee shall have access to and may inspect, examine and make copies of the books and records and any and all accounts, data and federal income tax and other tax returns of the Borrower. (c) The Authority or the Trustee may take whatever action at law or in equity as may be necessary or desirable to collect the payments and other amounts then due and thereafter to become due or to enforce performance and observance of any obligation, agreement or covenant of the Borrower under this Agreement. In case the Trustee or the Authority shall have proceeded to enforce its rights under this Agreement and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee or the Authority, then, and in every such case, the Borrower, the Trustee and the Authority shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Borrower, the Trustee and the Authority shall continue as though no such action had been taken. The Borrower covenants that, in case a Loan Default Event shall occur and all unpaid amounts payable under Section 4.02(a) hereof shall have been declared due and payable immediately pursuant to Section 7.02(a) hereof, then, upon demand of the Trustee, the Borrower will pay to the Trustee the whole amount that then shall have become due and payable under said Section, with interest on the amount then overdue at the rate of 10% per annum until such amount has been paid or, if ten percent is greater than the rate then permitted by law, at the greatest rate then permitted. In case the Borrower shall fail forthwith to pay such amounts upon such demand, the Trustee shall be entitled and empowered to institute any action or proceeding at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Borrower and collect in the manner provided by law the moneys adjudged or decreed to be payable. In case proceedings shall be pending for the bankruptcy or for the reorganization of the Borrower under the federal bankruptcy laws or any other applicable law, or in case a receiver or trustee shall have been appointed for the property of the Borrower or in the case of any other similar judicial proceedings relative to the Borrower, or the creditors or property of the Borrower, then the Trustee shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount owing and unpaid pursuant to this Agreement and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee allowed in such judicial proceedings relative to the Borrower, its creditors or its property, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute such amounts as provided in the Indenture after the deduction of its reasonable charges and expenses. Any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized to make such payments to the Trustee, and to pay to the 22 Trustee any amount due it for reasonable compensation and expenses, including reasonable expenses and fees of counsel incurred by it up to the date of such distribution. Section 7.03. Agreement to pay Attorneys' Fees and Expenses. In the event the Borrower should default under any of the provisions of this Agreement, whether or not such default constitutes a Loan Default Event hereunder, and the Authority or the Trustee should employ attorneys or incur other expenses for the collection of the payments due under this Agreement or the enforcement of performance or observance of any obligation or agreement on the part of the Borrower herein contained, the Borrower agrees to pay to the Authority or the Trustee the reasonable fees and expenses of such attorneys and such other reasonable expenses so incurred by the Authority or the Trustee. Section 7.04. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Authority or the Trustee is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. To entitle the Authority or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than such notice as may be herein expressly required. Such rights and remedies as are given the Authority hereunder shall also extend to the Trustee, and the Trustee and the Registered Owners of the Bonds shall be deemed third party beneficiaries of all covenants and agreements herein contained. Section 7.05. Waivers. No delay or omission of the Authority or the Trustee to exercise any right or power arising upon the occurrence of any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; and every power and remedy given by this Agreement to the Authority or the Trustee may be exercised from time to time and as often as may be deemed expedient. In the event any agreement or covenant contained in this Agreement should be breached by the Borrower and thereafter waived by the Authority or the Trustee, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. ARTICLE VIII PREPAYMENT Section 8.01. Redemption of Bonds with Prepayment Moneys. By virtue of the assignment of the rights of the Authority under this Agreement to the Trustee as is provided in Section 4.05 hereof, the Borrower agrees to and shall pay directly to the Trustee any amount permitted or required to be paid by it under this Article. The Indenture provides that the Trustee shall use the moneys so paid to it by the Borrower, pursuant to the written instructions of the Borrower, to redeem the Bonds on the date set for such redemption pursuant to Section 8.05 hereof. 23 Section 8.02. Options to Prepay Loan. The Borrower shall have the option to prepay the Loan by paying to the Trustee the amount set forth in Section 8.04 hereof, for deposit in the Revenue Fund, to be applied to the redemption of Bonds as set forth below on the earliest date such Bonds are subject to redemption pursuant to the Indenture and as to which notice of redemption can be given in accordance with the Indenture, at the redemption prices set forth below, under the following circumstances: (a) The Borrower may prepay such amounts in whole, and cause all of the Outstanding Bonds to be redeemed at the redemption price set forth in Section 4.01(e) of the Indenture, if any of the following shall have occurred: (i) The Project shall have been damaged or destroyed, in whole or in part, by fire or other casualty and the Authority and the Trustee receive a Certificate of the Authorized Representative of the Borrower to the effect that: (A) it is not practicable or desirable to rebuild, repair or restore the Project within a period of six consecutive months following such damage or destruction, (B) the Borrower is or will be thereby prevented from carrying on its normal operations at the Project for a period of at least six consecutive months, or (C) the cost of restoration of the Project would substantially exceed the Net Proceeds of insurance carried thereon; or (ii) Title to, or the temporary use of, all or substantially all of the Project shall have been taken by any governmental authority, or any Person acting under governmental authority, exercising the power of eminent domain and the Authority and the Trustee receive a Certificate of the Authorized Representative of the Borrower to the effect that: (A) the Borrower is thereby prevented from carrying on its normal operations at the Project for a period of at least six consecutive months or (B) the Project is unsuitable for use by the Borrower; (b) The Borrower may prepay all or any part of the Loan from any available funds and cause all or any part of the Outstanding Bonds to be redeemed at the redemption prices set forth in Section 4.01(b) or 4.01(f) of the Indenture, as applicable, but subject to any additional requirements of the Reimbursement Agreement. Section 8.03. Mandatory Prepayment. (a) The Borrower shall have and hereby accepts the obligation to prepay in full the Loan by paying to the Trustee the amount set forth in Section 8.04 hereof for deposit to the Revenue Fund to be used to redeem all the Outstanding Bonds on the earliest date such Bonds are subject to redemption pursuant to the Indenture and as to which notice of the redemption can be given in accordance with the Indenture, at the redemption prices set forth in Section 4.01(e) of the Indenture with respect to subsection (i) below, Section 4.01(c) of the Indenture with respect to subsections (ii) and (iii) below, and in the Indenture Sections noted with respect to subsection (iv) below: 24 (i) if and when as a result of any changes in the Constitution of the United States of America or the California Constitution or as a result of any legislative, judicial or administrative action, this Agreement shall have become void or unenforceable or impossible of performance in accordance with the intention and purposes of the parties hereto, or shall have been declared unlawful; (ii) if, due to the untruth or inaccuracy of any representation or warranty made by the Borrower herein or in connection with the offer and sale of the Bonds, or the breach of any covenant or warranty of the Borrower contained in this Agreement, interest on the Bonds, or any of them, is determined not to be Tax-exempt to the Registered Owners thereof (other than a Registered Owner who is a "substantial user" of the Project or a "related person" within the meaning of Section 147(a) of the Code) by a final administrative determination of the Internal Revenue Service or final judicial decision of a court of competent jurisdiction in a proceeding of which the Borrower received notice and was afforded an opportunity to participate in to the full extent permitted by law. A determination or decision will be considered final for this purpose when all periods for administrative and judicial review have expired; (iii) if either: (A) the Borrower or any other Principal User of the Project files a notice with the Authority and the Trustee to the effect that the capital expenditure limitation of Section 144(a)(4) of the Code has been exceeded, or will be exceeded, within a period of 60 days; or (B) there is a final determination (as defined in subsection (ii) above) by the Internal Revenue Service or a court of competent jurisdiction that such capital expenditures limitation has been exceeded; and (iv) if mandatory redemption is required by any of Sections 4.01(d), (g), or (h) of the Indenture. The amount payable by the Borrower in the event of a prepayment required by this Section shall be determined as set forth in Section 8.04 hereof and shall be deposited in the Revenue Fund upon demand by the Authority or the Trustee. (b) The Borrower shall prepay all or any part of the Loan from Net Proceeds under the circumstances described in Section 6.02(b) hereof, and cause all or any part of the Outstanding Bonds to be redeemed at the redemption price set forth in Section 4.01(e) of the Indenture. Section 8.04. Amount of Prepayment. In the case of a prepayment in full of the Loan by the Borrower under this Agreement pursuant to Section 8.02 or 8.03 hereof, the amount to be paid shall be a sum sufficient, together with other funds deposited with the Trustee and available for such purpose, to pay (a) the redemption price specified in the applicable subsections of Section 8.02 or 8.03 hereof, for all Outstanding Bonds, plus all interest accrued and to accrue to the redemption date, (b) all reasonable and necessary fees and 25 expenses of the Authority, the Trustee and any paying agent allowable pursuant to this Agreement and the Indenture accrued and to accrue through final payment of the Bonds and (c) all other liabilities of the Borrower accrued and to accrue under this Agreement. In the case of partial prepayment of the Loan by the Borrower under this Agreement pursuant to Section 8.02 or 8.03 hereof, the amount to be paid shall be a sum sufficient, together with other funds deposited with the Trustee and available for such purpose, to pay the redemption price specified in the applicable subsections of Section 8.02 or 8.03 hereof, for the Bonds to be redeemed, plus all interest accrued and to accrue to the redemption date, and to pay expenses of redemption of such Bonds. All partial prepayments of the Loan made by the Borrower under this Agreement shall be applied in inverse order of the due dates thereof, or as otherwise provided in the Indenture. Section 8.05. Notice of Prepayment. The Borrower shall give written notice to the Authority, the Bank and the Trustee (a) while the Bonds bear interest at the Weekly Interest Rate, not less than 20 days prior to the date of any prepayment of a Loan Repayment and (b) while the Bonds bear interest at the Fixed Interest Rate, not less than 40 days prior to the date of any prepayment of a Loan Repayment, in each case specifying the date upon which any prepayment will be made, the basis for such prepayment and the amount of such prepayment. If the Borrower fails to give such notice of a prepayment of Loan Repayments, the Indenture provides that the Trustee shall hold such prepayment in the Redemption Fund. ARTICLE IX NON-LIABILITY OF AUTHORITY; EXPENSES; INDEMNIFICATION Section 9.01. Non-Liability of Authority. The Authority shall not be obligated to pay the principal of, premium, if any, or interest on the Bonds, except from Revenues. The Borrower hereby acknowledges that the Authority's sole source of moneys to repay the Bonds will be provided by the payments made by the Borrower pursuant to this Agreement, together with other Revenues, including investment income on certain funds and accounts held by the Trustee under the Indenture, and hereby agrees that if the payments to be made hereunder shall ever prove insufficient to pay all principal of, and premium, if any, and interest on the Bonds as the same shall become due (whether by maturity, redemption, acceleration or otherwise), then upon notice from the Trustee, the Borrower shall pay such amounts as are required from time to time to prevent any deficiency or default in the payment of such principal, premium or interest, including, but not limited to, any deficiency caused by acts, omissions, nonfeasance or malfeasance on the part of the Trustee, the Borrower, the Authority or any third party. Section 9.02. Expenses. The Borrower covenants and agrees to pay, and to indemnify the Authority and the Trustee against, all costs and charges, including reasonable fees and disbursements of attorneys, accountants, consultants and other experts, incurred in good faith in connection with this Agreement, the Bonds or the Indenture. Section 9.03. Indemnification. The Borrower releases the Authority, the State, the Treasurer of the State and the Trustee from, and covenants and agrees that none of the Authority, the State, the Treasurer of the State or the Trustee shall be liable for, and covenants 26 and agrees to indemnify and hold harmless the Authority, the State, the Treasurer of the State and the Trustee and their officers, employees and agents from and against any and all losses, claims, damages, liabilities or expenses, of every conceivable kind, character and nature whatsoever arising out of, resulting from, or in any way connected with (a) the Project, or the conditions, occupancy, use, possession, conduct or management of, or work done in or about, or from the planning, design, acquisition, installation or construction of, the Project or any part thereof; (b) the issuance of any Bonds or any certifications or representations made in connection therewith by the Borrower and the carrying out of any of the transactions contemplated by the Bonds, the Indenture, or this Agreement; (c) the Trustee's acceptance or administration of the trusts under the Indenture, or the exercise or performance of any of its powers or duties under the Indenture; or (d) any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, in the official statement utilized by any underwriter in connection with the sale or offering of any Bonds; provided that in each case such indemnity shall not be required for damages that result from the willful misconduct or negligence on the part of the party seeking such indemnity. The indemnity required by this Section shall be only to the extent that any loss sustained by the Authority or the Trustee exceeds the Net Proceeds the Authority or the Trustee receives from any insurance carried by the Borrower with respect to the loss sustained. The Borrower further covenants and agrees to pay or to reimburse the Authority, the State, the Treasurer of the State and the Trustee and their officers, employees and agents for any and all costs, reasonable attorneys fees, liabilities or expenses incurred in connection with investigating, defending against or otherwise in connection with any such losses, claims, damages, liabilities, expenses or actions, except to the extent that the same arise out of the willful misconduct or negligence of the party claiming such payment or reimbursement. The provisions of this Section shall survive the payment and retirement of the Bonds and the termination of this Agreement. ARTICLE X MISCELLANEOUS Section 10.01. Notices. All notices, certificates, or other communications given hereunder shall be deemed sufficiently given on (a) the day such notices, certificates or other communications are received when sent by personal delivery, including tested telex or facsimile communication, or (b) the third day following the day on which the same have been mailed by first class, postage prepaid, addressed to the Authority, the Borrower, the Trustee, the Tender Agent or the Bank, as the case may be, at the address set forth for such party below. A duplicate copy of each notice, certificate, or other communication given hereunder by either the Authority or the Borrower to the other shall also be given to the Trustee, the Tender Agent, Borrower's counsel and the Bank. The Authority, the Borrower, the Trustee, the Tender Agent and the Bank may, by notice given hereunder, designate any different addresses to which subsequent notices, certificates, or other communications shall be sent. 27 If to the Authority: California Economic Development Financing Authority c/o California Trade and Commerce Agency 801 K Street, Suite 1700 Sacramento, California 95814 Attention: Bond Manager Phone: (916) 322-8520 Fax: (916) 322-7214 If to the Borrower: Provena Foods Inc. 5010 Eucalyptus Avenue Chino, California 91710 Attention: Chief Financial Officer Phone: (909) 627-1082 Fax: (909) 627-7315 If to the Trustee U.S. Bank Trust National Association or Tender Agent: One California Street, 4th Floor San Francisco, California 94111 Attention: Corporate Trust Department Phone: (415) 273-4500 Fax: (415) 273-4590 If to the Bank: Comerica Bank-California 333 West Santa Clara Street San Jose, California 95113 Attention: Michael Archer Phone: (408) 556-5361 Fax: (408) 556-5395 If to the Remarketing Dain Rauscher Incorporated Agent: 2711 N. Haskell Avenue, Suite 2400 Dallas, Texas 75204 Attention: Fixed Income Banking Phone: (214) 989-1834 Fax: (214) 989-1842 Section 10.02. Severability. If any provision of this Agreement shall be held or deemed to be, or shall in fact be, illegal, inoperative or unenforceable, the same shall not affect any other provision or provisions herein contained or render the same invalid, inoperative, or unenforceable to any extent whatever. Section 10.03. Execution of Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument; provided, however, that for purposes of perfecting a security interest in this Agreement by the Trustee and the Bank under Article 9 of the California 28 Uniform Commercial Code, only the counterpart delivered, pledged, and assigned to the Trustee shall be deemed the original. Section 10.04. Amendments, Changes and Modifications. Except as otherwise provided in this Agreement or the Indenture, subsequent to the initial issuance of Bonds and prior to their payment in full, or provision for such payment having been made as provided in the Indenture, this Agreement may not be effectively amended, changed, modified, altered or terminated without the written consent of the Trustee and the Bank. Section 10.05. Governing Law. This Agreement shall be governed exclusively by and construed in accordance with the applicable laws of the State as a contract executed and delivered within the State to be fully performed within the State. Section 10.06. Authorized Representative of the Borrower. Whenever under the provisions of this Agreement the approval of the Borrower is required or the Authority or the Trustee is required to take some action at the request of the Borrower, such approval or such request shall be given on behalf of the Borrower by the Authorized Representative of the Borrower, and the Authority and the Trustee shall be authorized to act on any such approval or request and neither party hereto shall have any complaint against the other or against the Trustee as a result of any such action taken. Section 10.07. Term of the Agreement. This Agreement shall be in full force and effect from the date hereof and shall continue in effect as long as any of the Bonds remain Outstanding or the Letter of Credit remains in effect, whichever is later. All representations and certifications by the Borrower as to all matters affecting the Tax-exempt status of interest on the Bonds and all indemnifications by the Borrower to the Authority, the State, the Treasurer of the State or the Trustee shall survive the termination of this Agreement. Section 10.08. Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon the Authority, the Borrower and their respective successors and assigns; subject, however, to the limitations contained in Section 5.02 hereof. Section 10.09. References to Bank. Notwithstanding any provisions contained herein to the contrary, the Bank shall be entitled to take all actions and exercise all rights hereunder for its own account so long as the Bank has not wrongfully dishonored any drawings under the Letter of Credit and the Bank is not in liquidation, bankruptcy or receivership proceedings. After the expiration or termination of the Letter of Credit and after all obligations owed to the Bank pursuant to the Reimbursement Agreement have been paid in full or discharged, all references to the Bank contained herein shall be null and void and of no further force and effect. Section 10.10. Brokerage Confirmations. The Borrower acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Borrower the right to receive brokerage confirmations of security transactions under the Indenture, the Borrower specifically waives receipt of such confirmations to the extent permitted by law. The Trustee is required under the Indenture to furnish the Borrower with 29 periodic cash transaction statements which include detail for all securities transactions made by the Trustee on behalf of the Borrower thereunder. [End of the Loan Agreement] 30 IN WITNESS WHEREOF, the California Economic Development Financing Authority has caused this Agreement to be executed in its name and the Borrower has caused this Agreement to be executed in its name, all as of the date first above written. CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY By /s/ Christopher S. Holben ---------------------------- Christopher S. Holben, Chair ATTEST By /s/ Blake Fowler ------------------------- Blake Fowler, Secretary PROVENA FOODS INC. By /s/ Illegible Signature ---------------------------- Authorized Signatory [Signature Page to Loan Agreement] EXHIBIT A THE PROJECT The Project consists of (a) the acquisition of real property located at the Crossroads Commercial Industrial Park, Lathrop, California (the "Project Site") and (b) the construction of an approximately 85,000-square-foot meat processing facility at the Project Site. EX-10.42 8 REMARKETING AGREEMENT EXHIBIT 10.42 - -------------------------------------------------------------------------------- REMARKETING AGREEMENT by and between DAIN RAUSCHER INCORPORATED and PROVENA FOODS INC. Dated as of October 1, 1998 $4,000,000 California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) - -------------------------------------------------------------------------------- REMARKETING AGREEMENT THIS REMARKETING AGREEMENT (this "Remarketing Agreement"), dated as of October 1, 1998, by and between PROVENA FOODS INC., a California corporation (the "Borrower") and DAIN RAUSCHER INCORPORATED (the "Remarketing Agent"). W I T N E S S E T H: WHEREAS, the California Economic Development Financing Authority (the "Authority") has issued its Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) in the aggregate principal amount of $4,000,000 (the "Bonds"), pursuant to that certain Indenture of Trust, dated as of October 1, 1998 (the "Indenture"), by and between the Authority and U.S. Bank Trust National Association, as trustee (the "Trustee"); and WHEREAS, to secure the payment of the principal of, interest on and purchase price of the Bonds, Comerica Bank-California (the "Bank") has issued its irrevocable direct pay letter of credit (the "Letter of Credit") to the Trustee; and WHEREAS, the Bonds are subject to purchase upon notice and delivery to the Tender Agent (as such term is defined in the Indenture) as provided in the Indenture; and WHEREAS, the Remarketing Agent has been appointed (and the Remarketing Agent by execution hereby accepts the appointment) as Remarketing Agent pursuant to the Indenture; and WHEREAS, the Borrower and the Remarketing Agent desire to make additional provisions regarding the Remarketing Agent's role as Remarketing Agent for the Bonds. NOW, THEREFORE, for and in consideration of the covenants herein made, the Borrower and the Remarketing Agent hereby agree as follows: Section 1. Definitions. All capitalized terms used in this Remarketing Agreement which are not otherwise defined herein shall have the meanings ascribed to them in the Indenture. Section 2. Duties. (a) In reliance upon the representations and agreements, but subject to the terms and conditions contained in the Indenture and in this Remarketing Agreement, the Remarketing Agent has been appointed, and the Remarketing Agent hereby accepts such appointment, as exclusive remarketing agent in connection with the offering and sale of the Bonds from time to time in the secondary market subsequent to the initial offering, issuance and sale of the Bonds. (b) It is understood and agreed that the Remarketing Agent's responsibilities hereunder and under the Indenture will include (i) exercising its best efforts in its sale of the Bonds (ii) effecting and processing such purchases, (iii) billing and receiving payment of Bond purchases, (iv) causing the proceeds from the secondary sale of the Bonds to be transferred to the Tender Agent, (v) determining the Fixed Interest Rate and the Weekly Interest Rates, and (vi) performing such other related functions as may be provided for in the Indenture of the Remarketing Agent or reasonably requested by the Borrower and agreed to by the Remarketing Agent. (c) The obligations of the Remarketing Agent hereunder and under the Indenture, with respect to the date on which the Bonds are to be remarketed pursuant to this Remarketing Agreement, are also subject to the further condition that on and prior to such date there shall not have been any change in the ownership of the Project except as permitted pursuant to the Agreement and the Indenture, the Indenture, the Agreement and the Letter of Credit shall be in full force and effect and shall not have been amended, modified or supplemented in any way which would materially and adversely affect the duties of the Remarketing Agent, except as may have been agreed to in writing by the Remarketing Agent, and there shall be in full force and effect such additional resolutions, agreements, certificates (including such certificates as may be required by regulations for the Internal Revenue Service in order to establish or preserve the tax-exempt character of interest on the Bonds) and opinions, which resolutions, agreements, certificates and opinions shall be reasonably satisfactory in form and substance to the Trustee, to the Authority, to the Bank and to counsel for the Remarketing Agent. The Remarketing Agent will perform the duties specified as Remarketing Agent under the Indenture and this Remarketing Agreement. In acting as Remarketing Agent, the Remarketing Agent will act as agent and not as principal except as expressly provided in this Section. The Remarketing Agent may, if it determines to do so in its sole discretion, buy as principal any such Bonds but it will not in any event be obligated to do so. Section 3. Disclosure Statement. (a) If the Remarketing Agent reasonably determines that it is necessary or desirable to amend or supplement the Official Statement (as defined below) or to use a new disclosure statement ("Disclosure Statement") in connection with its offering of the Bonds, the Remarketing Agent will notify the Borrower and the Borrower will provide, or cause to be provided to, the Remarketing Agent an amendment or supplement to the Official Statement or a new Disclosure Statement satisfactory to the Remarketing Agent and its counsel with respect to the Bonds. The Borrower will supply, or cause to be supplied to, the Remarketing Agent with such number of copies of the amendment or supplement to the Official Statement or the new Disclosure Statement and documents related thereto as the Remarketing Agent reasonably requests from time to time and will amend or supplement the Official Statement or the Disclosure Statement (and/or the documents incorporated by reference in it) so that at all times the Official Statement or 2 the Disclosure Statement and any documents related thereto will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements in such documents, in the light of the circumstances under which they were made, not misleading. In addition, the Borrower will take all steps reasonably requested by the Remarketing Agent which the Remarketing Agent or its counsel may consider necessary or desirable to register the sale of the Bonds by the Remarketing Agent under any Federal or state securities law or to qualify the Indenture under the Trust Indenture Act of 1939, as amended and as then in effect (the "Trust Indenture Act"), and will provide the Remarketing Agent such officers' certificates, counsel opinions, accountants' letters and other documents as may be customary in similar transactions. If the Borrower does not perform its obligations under this Section, the Remarketing Agent may immediately cease to remarket the Bonds and, in such event, shall resign as Remarketing Agent as provided herein. (b) The Authority has previously prepared and delivered to the Remarketing Agent a copy of the Official Statement, dated October 6, 1998 (the "Official Statement"), including financial and other information in respect of the Authority, the Borrower and the Bank. The Authority has authorized the use by the Remarketing Agent of the Official Statement in connection with the remarketing of Bonds. Section 4. Representations, Warranties, Covenants and Agreements of the Remarketing Agent. The Remarketing Agent, by its acceptance hereof, represents, warrants, covenants and agrees with the Borrower as follows: (a) It is a member of the National Association of Securities Dealers, having a capitalization of at least $15,000,000, otherwise meets the requirements for the Remarketing Agent set forth in the Indenture, is authorized by law to perform all duties imposed upon it by the Indenture and this Remarketing Agreement and has full power and authority to take all actions required or permitted to be taken by the Remarketing Agent hereunder and under the Indenture. (b) The execution and delivery of this Remarketing Agreement and the consummation of the transactions contemplated herein and in the Indenture will not conflict with or constitute on the part of the Remarketing Agent a breach of or default under its charter documents, its bylaws, or any statute, indenture, mortgage, deed of trust, lease, note agreement or other agreement or instrument to which the Remarketing Agent is a party or by which it or its properties are bound, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Remarketing Agent or any of its activities or properties. (c) This Remarketing Agreement has been duly authorized, executed and delivered by the Remarketing Agent and this Remarketing Agreement is a valid and binding obligation of the Remarketing Agent enforceable in accordance with its terms. (d) The Remarketing Agent will use its best efforts to remarket the Bonds pursuant to this Remarketing Agreement and the Indenture. 3 Section 5. Representation, Warranties, Covenants and Agreements of the Borrower. The representations, warranties and agreements of the Borrower set forth in the Letter of Representation, dated October 6, 1998, from the Borrower to Dain Rauscher Incorporated, as the underwriter of the Bonds, the Authority and the Treasurer of the State of California attached to the Purchase Contract are hereby incorporated herein as being made to the Remarketing Agent as of the date hereof. Section 6. Conditions to Remarketing Agent's Obligations. The obligations of the Remarketing Agent under this Remarketing Agreement have been undertaken in reliance on, and shall be subject to, the due performance by the Borrower of its obligations and agreements to be performed hereunder and to the accuracy of and compliance with the representations, warranties, covenants and agreements of the Borrower contained herein, on and as of the date of delivery of this Remarketing Agreement. The obligations of the Remarketing Agent on and as of each date on which Bonds are to be offered and sold pursuant to this Remarketing Agreement are also subject to the following further conditions: (a) Each of the Indenture, the Agreement, the Letter of Credit, the Reimbursement Agreement and all other documents and agreements referenced in the Indenture or relating to the Bonds shall be in full force and effect and shall not have been amended, modified or supplemented in any way which would materially and adversely affect the Bonds, except as may have been agreed to in writing by the Remarketing Agent, and there shall be in full force and effect such additional resolutions, agreements, certificates and opinions, which resolutions, agreements, certificates and opinions shall be satisfactory in form and substance to the Remarketing Agent; and (b) No Event of Default shall have occurred and be continuing and no event shall have occurred and be continuing which, with the passage of time or the giving of notice or both, would constitute such an Event of Default. Section 7. Indemnification and Contribution. (a) To the extent permitted by law, the Borrower will indemnify and hold harmless the Remarketing Agent, each of its directors, officers and employees and each person who controls the Remarketing Agent within the meaning of Section 15 of the Securities Act of 1933, as amended (herein called the "Securities Act" and any such person being herein sometimes called an "Indemnified Party"), against any and all losses, claims, damages or liabilities, joint or several, to which such Indemnified Party may become subject under any statute or at law or in equity or otherwise, and shall reimburse any such Indemnified Party for any legal or other expenses incurred by it in connection with investigating any claims against it and defending any actions, but only to the extent that such losses, claims, damages, liabilities or actions arise out of or are based upon (i) an allegation or determination that the Bonds or the Letter of Credit should have been registered under the Securities Act or the Indenture should have been qualified under the Trust Indenture Act, or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Official Statement or any Disclosure 4 Statement or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, but the Borrower shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Borrower or the Authority by the Remarketing Agent specifically for use in connection with the preparation thereof, or if the person asserting any such loss, claim, damage or liability purchased Bonds from the Remarketing Agent, if delivery to such person of the Official Statement or the Disclosure Statement or any amendment or supplement to it would have been a valid defense to the action from which such loss, claim, damage or liability arose and if the same was not delivered to such person by or on behalf of the Remarketing Agent. This indemnity agreement shall not be construed as a limitation on any other liability which the Borrower may otherwise have to any Indemnified Party. The Remarketing Agent may, in its sole discretion, pursue any rights it may have against any party other than the Borrower to recover any losses, damages or liabilities covered by this Section 7(a); provided, however, that the Borrower's liability under this Section 7(a) shall not be limited by the availability of such rights or the Remarketing Agent's actions with respect to such rights. (b) An Indemnified Party shall, promptly after the receipt of notice of the commencement of any action against such Indemnified Party in respect of which indemnification may be sought against the Borrower (the "Indemnifying Party"), notify the Indemnifying Party in writing of the commencement thereof. In case any such action shall be brought against an Indemnified Party and such Indemnified Party shall notify the Indemnifying Party, the Indemnifying Party may, or if so requested by such Indemnified Party shall, participate therein or assume the defense thereof, with counsel reasonably satisfactory to such Indemnified Party, and after notice from the Indemnifying Party to such Indemnified Party of an election so as to assume the defense thereof, such Indemnified Party shall reasonably cooperate in the defense thereof, including without limitation, the settlement of outstanding claims, and the Indemnifying Party will not be liable to such Indemnified Party under this Section 7 for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation incurred with the consent of the Indemnifying Party, which consent shall not be unreasonably withheld; provided, however, that unless and until the Indemnifying Party assumes the defense of any such action at the request of such Indemnified Party, the Indemnifying Party shall have the right to participate at its own expense in the defense of any such action. If the Indemnifying Party shall not have employed counsel to have charge of the defense of any such action or if any Indemnified Party shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to direct the defense of such action on behalf of such Indemnified Party), legal and other expenses incurred by such Indemnified Party shall be borne by the Indemnifying Party. Any obligation under this Section of an Indemnifying Party to 5 reimburse an Indemnified Party for expenses includes the obligation to make advances to the Indemnified Party to cover such expenses in reasonable amounts and at reasonable periodic intervals not more often than monthly as requested by the Indemnified Party. Notwithstanding the foregoing, the Indemnifying Party shall not be liable for any settlement of any action or claim effected without its consent, which consent shall not be unreasonably withheld. (c) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in paragraph (a) of this Section is due in accordance with its terms but is for any reason held by a court to be unavailable from the Borrower on grounds of public policy or otherwise, the Borrower and the Remarketing Agent shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) to which the Borrower and the Remarketing Agent may be subject (i) in such proportion as is appropriate to reflect the relative benefits received by the Borrower on the one hand and the Remarketing Agent on the other from the remarketing of the Bonds or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Borrower and the Remarketing Agent in connection with the failure to register or qualify certain instruments as described in Section 7(a)(i) or in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant considerations. The relative benefits received by the Borrower on the one hand and the Remarketing Agent on the other shall be deemed to be in the same proportion as the aggregate principal amount of the Bonds remarketed pursuant to this Remarketing Agreement bear to the total remarketing fees received by the Remarketing Agent. The relative fault of the Borrower on the one hand and of the Remarketing Agent on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Borrower or by the Remarketing Agent and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, however, in the case of an allegation or determination that the Bonds or the Letter of Credit should have been registered under the Securities Act or the Indenture should have been qualified under the Trust Indenture Act, the fault shall be deemed to be entirely that of the Borrower. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. (d) The Borrower and the Remarketing Agent agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 7, the Remarketing Agent shall not be 6 required to contribute any amount in excess of the remarketing fee applicable to the Bonds remarketed pursuant to this Remarketing Agreement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (e) For purposes of this Section 7, each person who controls the Remarketing Agent within the meaning of Section 15 of the Securities Act shall have the same rights as the Remarketing Agent. Any party entitled to contribution shall, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under paragraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under paragraph (d) above. Section 8. Fees and Expenses. In consideration of the Remarketing Agent's services under this Remarketing Agreement, the Borrower will pay the Remarketing Agent an annual amount equal to an aggregate of 1/8 of 1.0% of the aggregate principal amount of Bonds outstanding under the Indenture, payable semiannually in arrears on April 1 and October 1, commencing on April 1, 1999 and computed on the basis of the actual number of days elapsed during such calculation period and the aggregate principal amount of the Bonds outstanding during such calculation period. The Borrower also will pay all expenses in connection with the preparation of any amendment or supplement to the Official Statement or the Disclosure Statement, the registration of the Bonds and any other documents relating to the Bonds required to comply with applicable securities laws or required to comply with the Trust Indenture Act and will reimburse the Remarketing Agent for all of its reasonable direct out-of-pocket expenses incurred by it as Remarketing Agent under this Remarketing Agreement and the Indenture, including counsel fees and disbursements. Section 9. Dealing in Bonds by Paying Agent, Tender Agent, Bank, and Remarketing Agent. The Trustee, the Paying Agent, the Tender Agent, the Bank, or the Remarketing Agent, in their respective individual capacities, may in good faith buy, sell, own, hold and deal in any of the Bonds, and may join in any action which Bond owners may be entitled to take with like effect as if it did not act in any capacity hereunder. The Trustee, the Paying Agent, the Tender Agent, the Bank, or the Remarketing Agent, in their respective individual capacities, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Authority, and may act as depositary, trustee or agent for other obligations of the Authority as freely as if it did not act in any capacity hereunder. Section 10. Intention of Parties. It is the intention of the parties hereto that no purchase, sale or transfer of any Bonds, as herein and in the Indenture provided, shall constitute or be construed to be extinguishment of any Bonds or the indebtedness represented thereby or the reissuance of any Bonds. 7 Section 11. Fails. The Remarketing Agent will not be liable to the Authority, the Borrower, the Trustee, the Tender Agent, or the Bank on account of the failure of any person to whom the Remarketing Agent has sold a Bond to pay for such Bond or to deliver any document in respect of the sale. It is understood and agreed that the Remarketing Agent shall not be obligated to advance its own funds to purchase, or to effect the purchase of, any Bonds. Section 12. Remarketing Agent's Performance. (a) The duties and obligations of the Remarketing Agent as Remarketing Agent shall be determined solely by the express provisions of this Remarketing Agreement and the Indenture, and the Remarketing Agent shall not be responsible for the performance of any duties and obligations other than as are specifically set forth in this Remarketing Agreement and the Indenture, and no implied covenants or obligations shall be read into this Remarketing Agreement or the Indenture against the Remarketing Agent. (b) The Remarketing Agent may conclusively rely upon any notice or document given or furnished to the Remarketing Agent and conforming to the requirements of this Remarketing Agreement or the Indenture and shall be protected in acting upon any such notice or document reasonably believed by it to be genuine and to have been given, signed or presented by the proper party or parties. (c) The Remarketing Agent shall not be liable for any actions taken or omitted to be taken pursuant to this Remarketing Agreement, except for its own negligence or willful misconduct. Section 13. Termination. (a) This Remarketing Agreement will terminate automatically at such time as all of the Bonds have been paid or deemed paid under the Indenture and upon the effective resignation or removal of the Remarketing Agent as Remarketing Agent in accordance with the Indenture. The Remarketing Agent will resign as Remarketing Agent under the Remarketing Agreement if requested to do so by the Borrower and the Authority in writing and may resign at any time upon forty-five (45) days written notice delivered to the Authority, the Borrower, the Tender Agent, the Bank, the Trustee, Standard & Poor's Ratings Services and Moody's Investors Service, to the extent each such rating agency is then rating the Bonds. (b) In addition to the provisions of paragraph (a) of this Section, the Remarketing Agent may terminate its obligations under this Remarketing Agreement at any time by notifying the Borrower in writing or by telegram, telex or other electronic communications of its election so to do, if: (i) Legislation shall be favorably reported, recommended by committee or enacted by the Congress or adopted by either House thereof or a decision by a Court of the United States of America or the United States Tax 8 Court shall be rendered, or a ruling, regulation or official statement by or on behalf of the Treasury Department of the United States of America, the Internal Revenue Service or other governmental agency shall be made, with respect to federal taxation of receipts, revenues or other income of the general character expected to be derived by the Authority or of interest received on bonds of the general character of the Bonds or which would have the effect of changing directly or indirectly the federal income tax consequences of interest on bonds of the general character of the Bonds in the hands of the holders thereof, which, in the opinion of the Remarketing Agent, materially adversely affects the market price of the Bonds; (ii) Legislation shall be introduced by committee, by amendment or otherwise, in, or be enacted by, the House of Representatives or the Senate of the Congress of the United States, or a decision by a court of the United States shall be rendered, or a stop order, ruling, regulation or official statement by, or on behalf of, the United States Securities and Exchange Commission or other governmental agency having jurisdiction of the subject matter shall be made or proposed, to the effect that the offering or sale of obligations of the general character of the Bonds, as contemplated hereby, is or would be in violation of any provision of the Securities Act, or the Securities Exchange Act of 1934, as amended and as then in effect, or the Trust Indenture Act, or with the purpose or effect of otherwise prohibiting the offering or sale of obligations of the general character of the Bonds, or the Bonds, as contemplated hereby; (iii) Any information shall have become known, which, in the Remarketing Agent's reasonable opinion, makes untrue, incorrect or misleading in any material respect any statement or information contained in the Official Statement or a Disclosure Statement, as the information contained therein has been supplemented or amended by other information, as of the date furnished or supplemented to the Remarketing Agent in accordance with Section 3 hereof, or causes the Official Statement or the Disclosure Statement, as so supplemented or amended, to contain an untrue, incorrect or misleading statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading; (iv) Except as provided in clause (i) hereof, any legislation, resolution, ordinance, rule or regulation shall be introduced in, or be enacted by, any governmental body, department or agency of the United States or the State of California shall be rendered which, in the Remarketing Agent's reasonable opinion, materially adversely affects the marketability of the Bonds; (v) Additional material restrictions not in force as of the date hereof shall have been imposed upon trading in securities generally by any governmental authority or by any national securities exchange; 9 (vi) Any governmental authority shall impose, as to the Bonds, or obligations of the general character of the Bonds, any material restrictions not now in force, or increase materially those now in force; (vii) A general banking moratorium shall have been established by federal, New York or California authorities; (viii) Any rating of the Bonds shall have been downgraded or withdrawn by a national rating service, which, in the Remarketing Agent's reasonable opinion, materially adversely affects the marketability of the Bonds; (ix) A war involving the United States shall have been declared, or any existing conflict involving the armed forces of the United States shall have escalated, or any other national emergency relating to the effective operation of government or the financial community shall have occurred, which, in the Remarketing Agent's reasonable opinion, materially adversely affects the marketability of the Bonds; (x) An event, including, without limitation, the bankruptcy or default of any other issuer of or obligor on obligations of the general character of the Bonds or on similar commercial paper, shall have occurred which, in the opinion of the Remarketing Agent, makes the marketability of obligations of the general character of the Bonds impossible over an extended period of time. The provisions of Section 7 shall survive the termination of this Remarketing Agreement and the payment or defeasance of the Bonds. Section 14. Miscellaneous. (a) Except as otherwise provided, any notice or other communication herein required or permitted to be given shall be in writing, by facsimile transmission or by telephone with subsequent written confirmation and may be personally served or sent by United States mail, first class mail postage prepaid, and shall be deemed to have been given upon receipt by the party notified. For the purposes hereof, the address of the parties (until notice of a change thereof is delivered as provided in this Section 14(a) shall be as follows: Remarketing Agent: Dain Rauscher Incorporated 2711 N. Haskell Avenue, Suite 2400 Dallas, Texas 75204 Attention: Fixed Income Banking (214) 989-1834 Fax: (214) 989-1842 10 Authority: California Economic Development Financing Authority 801 K Street, Suite 1700 Sacramento, California 95814 Attention: Bond Manager (916) 322-8520 Fax: (916) 322-7214 Bank: Comerica Bank-California 333 W. Santa Clara Street San Jose, California 95113 Attention: Michael Archer (408) 556-5361 Fax: (408) 556-5395 Borrower: Provena Foods Inc. 5010 Eucalyptus Avenue Chino, California 91710 Attention: Chief Financial Officer Phone: (909) 627-1082 Fax: (909) 627-7315 Trustee: U.S. Bank Trust National Association One California Street, 4th Floor San Francisco, California 94111 Attention: Corporate Trust Department (415) 273-4500 Fax: (415) 273-4590 Tender Agent: U.S. Bank Trust National Association One California Street, 4th Floor San Francisco, California 94111 Attention: Corporate Trust Department (415) 273-4500 Fax: (415) 273-4590 The Remarketing Agent, the Authority, the Borrower, the Trustee, the Bank and the Tender Agent may, by notice given under this Remarketing Agreement, designate other addresses to which notices or other communications shall be directed. (b) This Remarketing Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. The terms "successors" and "assigns" shall not include any purchaser of any of the Bonds merely because of such purchase. 11 (c) All of the representations, warranties and covenants made in this Remarketing Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any party hereto, (ii) delivery of and any payment for any Bonds hereunder, or (iii) termination or cancellation of this Remarketing Agreement. (d) Section headings have been inserted in this Remarketing Agreement as a matter of convenience of reference only, and it is agreed that such section headings are not a part of this Remarketing Agreement and will not be used in the interpretation of any provisions of this Remarketing Agreement. (e) If any provision of this Remarketing Agreement shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all jurisdictions because it conflicts with any provisions of any constitution, statute, rule or public policy, or any other reason, such circumstances shall not have the effect of rendering the provisions in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provisions of this Remarketing Agreement invalid, inoperative or unenforceable to any extent whatsoever. (f) This Remarketing Agreement may be executed in several counterparts, each of which shall be regarded as an original and all of which shall constitute one and the same document. (g) The terms of this Remarketing Agreement shall not be waived, altered, modified, amended or supplemented in any manner whatsoever except by written instrument signed by all of the parties hereto. (h) This Remarketing Agreement shall be governed by and construed in accordance with the laws of the State of California. 12 IN WITNESS WHEREOF, the Remarketing Agent and the Borrower have caused this Remarketing Agreement to be signed in their names by the undersigned officers, thereunto duly authorized, all as of the day and year first above written. DAIN RAUSCHER INCORPORATED By /s/ John [Illegible Signature] ---------------------------------------- Managing Director PROVENA FOODS INC. By /s/ Thomas J. Mulroney ---------------------------------------- Authorized Signatory [Signature Page to Remarketing Agreement] EX-10.43 9 PURCHASE CONTRACT EXHIBIT 10.43 - -------------------------------------------------------------------------------- PURCHASE CONTRACT among CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY, TREASURER OF THE STATE OF CALIFORNIA and DAIN RAUSCHER INCORPORATED Dated October 6, 1998 Relating to $4,000,000 California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) - -------------------------------------------------------------------------------- PURCHASE CONTRACT $4,000,000 California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) October 6, 1998 California Economic Development Financing Authority 801 K Street, Suite 1700 Sacramento, California 95814 The Honorable Matt Fong Treasurer of the State of California 915 Capitol Mall, Room 110 Sacramento, California 95814 Ladies and Gentlemen: 1. Dain Rauscher Incorporated (the "Underwriter") offers to enter into this purchase contract (this "Purchase Contract") with the California Economic Development Financing Authority (the "Authority") and the Treasurer of the State of California, solely in his capacity as agent of sale for the Authority (the "Treasurer"), which upon the Authority's and the Treasurer's acceptance hereof will be binding upon the Authority, the Treasurer and the Underwriter. This offer is made subject to the Authority's and Treasurer's acceptance by execution of this Purchase Contract and approval by Provena Foods Inc., a California corporation (the "Borrower") and their delivery of same to the Underwriter at or before 9:00 p.m., New York time, today. Delivered to you herewith as Exhibit A, is the Letter of Representation, dated the date hereof (the "Letter of Representation"), under which the Borrower makes certain representations and undertakes certain obligations with respect to this Purchase Contract. 2. Upon the terms and conditions and upon the basis of the representations, warranties and covenants hereinafter set forth, the Underwriter hereby agrees to purchase from the Authority and the Treasurer for offering to the public, and the Authority and the Treasurer hereby agree to sell to the Underwriter for such purpose, at an interest rate to be determined in accordance with the terms of the Indenture (hereinafter defined), all (but not less than all) of $4,000,000 aggregate principal amount of the Authority's Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project), dated as of the date of delivery thereof (the "Bonds"). The purchase price of the Bonds shall be 100% of the principal amount of the Bonds. 3. The Bonds shall be otherwise as described in, and shall be issued and secured under the provisions of, the Indenture of Trust, dated as of October 1, 1998 (the "Indenture"), by and between the Authority and U.S. Bank Trust National Association, as trustee (the "Trustee"). The proceeds of sale of the Bonds will be loaned to the Borrower pursuant to the Loan Agreement (as hereinafter defined) and will be applied by the Borrower to defray the Borrower's cost of the acquisition, construction and improving of a manufacturing facility (the "Project"). The Project is further described in the Loan Agreement, dated as of October 1, 1998 (the "Loan Agreement"), between the Authority and the Borrower. The Bonds will be secured by an irrevocable direct pay letter of credit (the "Letter of Credit") issued by Comerica Bank-California (the "Bank"), pursuant to the Reimbursement Agreement, dated as of October 1, 1998 (the "Reimbursement Agreement"), between the Bank and the Borrower. The Bonds are more fully described in the Official Statement relating to the Bonds, dated October 6, 1998 (the "Official Statement"). 4. The Underwriter agrees to make a bona fide public offering of all the Bonds at par, plus interest accrued thereon, if any, to the date of delivery. The Bonds may be offered and sold to certain dealers (including the Underwriter and other dealers depositing such Bonds into investment trusts) at a price or at prices lower than such public offering price. 5. As soon as practicable after the execution of this Purchase Contract by the Authority, but no later than the Closing, the Authority shall deliver or use its best efforts to cause to be delivered to the Underwriter manually executed originals of the documents listed below in subparagraphs (a), (b), (d), (e) and (g), a copy of the document listed below in subparagraph (c) and certified copies of the documents listed below in subparagraph (f): (a) the Indenture; (b) the Reimbursement Agreement; (c) the Letter of Credit, issued by the Bank in favor of the Trustee in an amount equal to at least the principal amount of the Bonds and 45 days' interest thereon calculated at the rate of 12% on the basis of a 365/366 day year ; (d) the Loan Agreement; (e) the Tax Regulatory Agreement, dated as of October 1, 1998 (the "Tax Regulatory Agreement"), among the Authority, the Borrower and the Trustee; (f) (i) the resolution of the Authority, adopted on January 28, 1998, expressing the Authority's intention to issue the Bonds and to reimburse certain expenditures incurred by the Borrower from proceeds of the Bonds, certified by the Secretary of the Authority, (ii) the resolution of the Authority, adopted on September 1, 1998, authorizing the issuance, sale and delivery of the Bonds and the execution and delivery of the Indenture, the Loan Agreement, the Tax Regulatory Agreement and this Purchase Contract, certified by the Secretary of the Authority, and (iii) the resolution of the California Infrastructure and Economic Development Bank (the "Infrastructure Bank"), adopted September 1, 1998, approving the issuance of the Bonds by the Authority, certified by the Secretary of the Infrastructure Bank; and 2 (g) the Official Statement. By execution of this Purchase Contract, the Authority consents to the use by the Underwriter of all of the above documents and the information contained therein in connection with the public offering of the Bonds. 6. The Authority represents and warrants to the Underwriter that: (a) The Authority is a body public and corporate, and a public instrumentality of the State of California (the "State"), organized and existing under the laws of the State, specifically Section 15710 et seq. of the California Government Code, as amended, with all necessary power and authority to issue the Bonds and to enter into the Loan Agreement for the purpose of promoting and encouraging commerce and industry, and generally to foster economic development in the State; to enter into the Indenture, the Tax Regulatory Agreement and this Purchase Contract; to issue, sell and deliver the Bonds to the Underwriter as provided herein; and to carry out and consummate all other transactions contemplated by each of the aforesaid documents. (b) The Authority has duly authorized, by all appropriate action, and complied with all provisions of law with respect to, the execution and delivery of the Indenture, the Loan Agreement, the Tax Regulatory Agreement and this Purchase Contract and the issuance, sale, execution and delivery of the Bonds. (c) When delivered to and paid for by the Underwriter in accordance with the terms of this Purchase Contract and the Indenture, the Bonds will have been duly and validly authorized, executed, authenticated, issued and delivered by the Authority and will constitute legal, valid and binding limited obligations of the Authority enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency or other laws affecting creditors' rights and remedies, and will be entitled to the benefits of the Indenture. (d) The execution and delivery of the Bonds, the Indenture, the Loan Agreement, the Tax Regulatory Agreement and this Purchase Contract, and compliance with the provisions thereof, do not and will not conflict with, or constitute on the part of the Authority a violation of, breach of or default under any indenture, mortgage, deed of trust, resolution, note agreement or other agreement or instrument to which the Authority is a party or by which the Authority is bound, or, to its knowledge, any constitutional provision or statute of the State or of the United States of America, any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Authority or any of its activities or properties; and all consents of any governmental authority of the State or of the United States of America required in connection with the issuance or sale of the Bonds by the Authority have been obtained; provided, however, that no representation is made concerning compliance with the federal securities laws or the securities or "Blue Sky" laws of the various states. (e) There is no action, suit, proceeding, inquiry or investigation, at law or in equity, or before or by any court or governmental agency or body pending or, to the best 3 of its knowledge, threatened against or affecting the Authority, nor to the best of its knowledge is there any basis therefor, wherein an unfavorable decision, ruling or finding would materially adversely affect the transactions contemplated by this Purchase Contract, the Indenture, the Loan Agreement or the Tax Regulatory Agreement, or which, in any way, would adversely affect the validity or enforceability of the Bonds, the Indenture, the Loan Agreement, the Tax Regulatory Agreement or this Purchase Contract or any other agreement or instrument to which the Authority is a party, used or contemplated for use in the consummation of the transactions contemplated by this Purchase Contract, the Indenture, the Loan Agreement or the Tax Regulatory Agreement. (f) The Authority will not take or omit to take any action which action or omission will in any way cause the proceeds from the sale of the Bonds to be applied in a manner contrary to that provided for in the Indenture. (g) The Authority has reviewed the statements contained in the Official Statement relating to the Authority under the caption "THE AUTHORITY" and such statements, insofar as they are within the knowledge of the Authority, are true and correct and fairly summarize the matters encompassed thereby to the extent such matters are described therein. If between the date of this Purchase Contract and the date of the Closing (as hereinafter defined) any event shall occur which, in the opinion of the Authority, might or would cause the Official Statement as then supplemented or amended to contain, with respect to statements contained in the Official Statement relating to the Authority under the caption "THE AUTHORITY," any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, the Authority shall notify the Underwriter, and if in the opinion of the Authority or the Underwriter such event requires the preparation and publication of a supplement or amendment to the Official Statement, the Authority, at the expense of the Borrower, will supplement or amend the Official Statement in a form and in a manner approved by the Underwriter. 7. At 11:00 a.m., New York time, on October 7, 1998, or at such other time or on such earlier or later business day as shall have been mutually agreed upon by the Authority, the Borrower and the Underwriter, the Authority will deliver or cause to be delivered to the Underwriter the Bonds, in definitive fully registered form, duly executed and authenticated, at a place in New York, New York, to be mutually agreed upon by the Authority and the Underwriter. The Authority will deliver or cause to be delivered to the Underwriter in Pasadena, California, at such time and on such date and at a place to be mutually agreed upon by the Authority, the Borrower and the Underwriter, the closing documents mentioned in Paragraph 8(d) hereof. The Underwriter will accept such delivery and pay the purchase price of the Bonds as set forth in Paragraph 2 hereof, by a Federal Funds check or wire transfer to the order of "U.S. Bank Trust National Association, as Trustee" unless the Authority shall otherwise direct. This payment and delivery is herein called the "Closing." The Bonds will be delivered in authorized denominations as set forth in the Indenture and registered in the name of CEDE & Co., as nominee of The Depository Trust Company or in such other names as the Underwriter shall have requested. The Bonds will be made available to the Underwriter for checking and 4 packaging by the Underwriter at least one business day before the Closing at a place to be mutually agreed upon by the Authority and the Underwriter. 8. The Underwriter's obligations hereunder to purchase and pay for the Bonds shall be subject to the performance by the Authority of the obligations to be performed by it hereunder at or prior to the Closing, to the performance by the Borrower of the obligations and agreements to be performed by the Borrower at or prior to the Closing under the Letter of Representation and to the accuracy in all material respects of the representations and warranties of the Authority contained herein and of the Borrower contained in the Letter of Representation, as of the date hereof and as of the Closing, and shall also be subject to the following conditions: (a) At the time of the Closing (i) the Indenture, the Letter of Credit, the Loan Agreement, the Reimbursement Agreement, the Tax Regulatory Agreement and the Letter of Representation shall be in full force and effect, and shall not have been amended, modified or supplemented except as may have been agreed to in writing by the Underwriter; and (ii) the Authority shall perform or have performed all of its obligations required under or specified in this Purchase Contract to be performed at or prior to the Closing. (b) The Bonds shall have been duly authorized, executed and authenticated in accordance with the provisions of the Indenture. (c) The Underwriter may terminate this Purchase Contract by notification to the Authority if at any time subsequent to the date hereof and at or prior to the Closing (i) legislation shall have been enacted by the United States or shall have been reported out of committee or being considered by any committee of the Congress of the United States, or a decision shall have been rendered by a court of the United States or the Tax Court of the United States, or a ruling shall have been made or a regulation or a temporary regulation shall have been proposed or made or any other release or announcement shall have been made by the Treasury Department of the United States or the Internal Revenue Service, with respect to federal taxation upon revenues or other income or payments of the general character to be derived by the State or upon interest received on obligations of the general character of the Bonds, which in the reasonable opinion of the Underwriter materially adversely affects the market for the Bonds; (ii) there shall have occurred any new outbreak of hostilities or any national or international calamity or crisis, the effect of such outbreak, calamity or crisis being such as could cause a major disruption in the debt markets and as, in the reasonable judgment of the Underwriter, would make it impracticable for it to market the Bonds or to enforce contracts for the sale of the Bonds; (iii) there shall be in force a general suspension of trading on The New York Stock Exchange, Inc., or minimum or maximum prices for trading shall have been fixed and be in force, or maximum ranges for prices for securities shall have been required and be in force on The New York Stock Exchange, Inc., whether by virtue of a determination by that exchange or by order of the Securities and Exchange Commission or any other governmental authority having jurisdiction; (iv) a general banking moratorium shall have been declared by federal, New York, or California authorities having jurisdiction and be in force; or (v) any event shall have occurred or shall exist which makes untrue or incorrect, as of such time, in any material respect, any material statement or information 5 contained in the Official Statement or which is not reflected in the Official Statement, but should be reflected therein in order to make such material statements and information contained therein not misleading as of such time. (d) At or prior to the Closing, the Underwriter shall receive the following documents: (i) The approving opinion of Kutak Rock ("Bond Counsel"), relating to the Bonds, dated the date of the Closing, in the form set forth as Appendix A to the Official Statement, together with a letter of Bond Counsel, dated the date of the Closing and addressed to the Underwriter stating that the Underwriter may rely on such opinion. (ii) The supplemental opinion of Bond Counsel dated the date of the Closing and addressed to the Underwriter, to the effect that: (A) this Purchase Contract has been duly authorized, executed and delivered by the Authority and, assuming due authorization, execution and delivery by the Underwriter and approval by the Borrower, is a valid and binding agreement of the Authority, subject to laws relating to bankruptcy, insolvency, reorganization or creditors' rights generally and to the application of equitable principles; (B) the statements contained in the Official Statement in the sections thereof entitled: "DESCRIPTION OF THE BONDS," "SECURITY FOR THE BONDS," "THE LOAN AGREEMENT," "THE INDENTURE" and "TAX MATTERS" insofar as such statements purport to summarize certain provisions of the Bonds, the Loan Agreement or the Indenture, and Bond Counsel's opinion concerning certain tax matters relating to the Bonds are accurate in all material respects; and (C) the Bonds are not subject to the registration requirements of the Securities Act of 1933, as amended, and the Indenture is exempt from qualification as an indenture pursuant to the Trust Indenture Act of 1939, as amended. (iii) The opinion of counsel to the Borrower, which may be rendered by one or more firms acceptable to the Authority and the Underwriter, dated the date of the closing and in form and substance acceptable to the Authority and the Underwriter. (iv) A certificate dated the date of the Closing of the Chair of the Authority, or the Chair's designee, to the effect that as of such date, (A) no litigation is pending or, to his knowledge, threatened in any court (1) challenging the creation, organization or existence of the Authority, (2) seeking to restrain or enjoin the issuance or delivery of any of the Bonds, or the collection of revenues or other moneys pledged or to be pledged to pay the principal of and interest on 6 the Bonds, or in any way contesting or affecting the validity of the Bonds or the Indenture or the collection of revenues or other moneys or the pledge thereof, or contesting the powers of the Authority to issue the Bonds or to enter into the Indenture, (3) in any way contesting or affecting the validity of the Loan Agreement, the Tax Regulatory Agreement or this Purchase Contract, or contesting the powers of the Authority to enter into or to execute and deliver the Loan Agreement, the Tax Regulatory Agreement or this Purchase Contract, (B) the representations and warranties of the Authority contained herein are true and correct in all material respects on and as of the date of the Closing as if made on the date of the Closing; and (C) to the best of his knowledge, no event affecting the Authority has occurred since the date of the Official Statement which has not been disclosed therein or by supplement or amendment thereto and which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein not misleading in any material respect. (v) An opinion, dated the date of the Closing and addressed to the Underwriter, the Authority, Bond Counsel and Standard & Poor's Ratings Services ("Standard & Poor's") of counsel to the Bank in form and substance acceptable to the Underwriter, the Authority, Bond Counsel and Standard & Poor's. (vi) A certificate of an authorized officer of the Bank, dated the date of the Closing, to the effect that the information under the captions "THE BANK" and "THE LETTER OF CREDIT AND THE REIMBURSEMENT AGREEMENT" in the Official Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made under such caption, in light of the circumstances under which they were made, not misleading. (vii) A certificate of the Borrower, dated the date of the Closing and signed by an authorized officer of the Borrower, acting solely in his official capacity, to the effect that (A) since the date hereof no material and adverse change has occurred in the financial position or results of operations of the Borrower; (B) the Borrower has not, since the date hereof, incurred any material liabilities other than in the ordinary course of business or as set forth in or contemplated by the Official Statement; (C) no event affecting the Borrower has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which is necessary to be disclosed therein in order to make the statements and information therein in light of the circumstances under which they are made not misleading as of the date of Closing; and (D) the representations and warranties included in the Letter of Representation are true and correct in all material respects as of the date of the Closing, and all obligations to be performed by the Borrower under the Letter of Representation on or prior to the date of the Closing have been performed. (viii) The Official Statement signed on behalf of the Authority. 7 (ix) Executed counterparts of the Indenture, the Loan Agreement, the Remarketing Agreement, the Reimbursement Agreement and the Tax Regulatory Agreement and specimens of the Letter of Credit and the Bonds. (x) Copies of the resolutions or other documents of the Borrower authorizing the execution and delivery of the Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement, the Letter of Representations and the Tax Regulatory Agreement, certified by the Secretary or an Assistant Secretary of the Borrower as having been duly adopted and being in full force and effect. (xi) Copies of the resolutions of the Authority authorizing the issuance of the Bonds, the use of the Official Statement and authorizing or approving the execution and delivery of the documents to which the Authority is a party, certified by the Secretary of the Authority, as having been duly adopted and being in full force and effect. (xii) A certificate of a duly authorized officer of the Authority satisfactory to the Underwriter, dated the date of Closing, stating that such officer is charged, either alone or with others, with the responsibility for issuing the Bonds; setting forth, in the manner permitted by the Treasury Regulations and the Internal Revenue Code of 1986 (the "Code"), the reasonable expectations of the Authority as of such date as to the use of proceeds of the Bonds and of any other funds of the Authority pledged or expected to be used to pay principal or purchase price of, premium, if any, or interest on the Bonds and the facts and estimates on which such expectations are based; and stating that, to the best of the knowledge and belief of the certifying officer, the Authority's expectations are reasonable, which certification may be made in reliance upon a similar certification, dated the date of the Closing, furnished to such person for such purpose by a duly authorized officer or attorneys-in-fact of the Borrower satisfactory to the Underwriter. (xiii) An opinion of counsel to the Authority, dated the date of the Closing, addressed to the Underwriter, the Trustee and Bond Counsel, in form and substance acceptable to the Underwriter, the Trustee and Bond Counsel. (xiv) The letter from Standard & Poor's indicating the rating for the Bonds which is not lower than "A/A-1." (xv) Evidence satisfactory to the Underwriter that the Bonds have been approved by the Governor of the State or other appropriate official or governing body, after a public hearing thereon held after reasonable public notice in accordance with Section 147(f) of the Code. (xvi) Evidence of the filing, as required by Section 149(e) of the Code, of Form 8038. 8 (xvii) A certified copy of the resolution of the California Debt Limit Allocation Committee granting the Authority a portion of the State's volume cap for the Bonds equal to at least the amount of the Bonds purchased pursuant to this Purchase Contract. (xviii) Such additional certificates, instruments and other documents as the Underwriter reasonably may deem necessary to evidence the truth and accuracy as of the time of the Closing of the representations of the Authority, the Borrower and the Bank and the due performance or satisfaction by the Authority, the Borrower and the Bank at or prior to such time of all agreements then to be performed and all conditions then to be satisfied by the Authority, the Borrower and the Bank. If the Authority shall be unable to satisfy the conditions contained in this Purchase Contract, or if the obligations of the Underwriter shall be terminated for any reason permitted by this Purchase Contract, this Purchase Contract shall terminate and neither the Underwriter nor the Authority shall be under further obligation hereunder, except as set forth in Paragraph 10. 9. The Authority covenants with the Underwriter to cooperate with it and the Borrower in qualifying the Bonds for offer and sale under the securities or "Blue Sky" laws of such States as the Underwriter may request; provided that in no event shall the Authority be obligated to take any action which would subject it to general service of process in any State where it is not now so subject. It is understood that the Authority is not responsible for compliance with or the consequences of failure to comply with applicable "Blue Sky" laws. 10. (a) The Underwriter shall be under no obligation to pay any expenses incident to the performance of the Authority's obligations hereunder, including but not limited to (i) the cost of printing and delivering and preparation for printing or other reproduction of the Indenture, the Letter of Credit, the Loan Agreement, the Reimbursement Agreement, this Purchase Contract, the Letter of Representation, the Remarketing Agreement and the Official Statement; (ii) the fees and disbursements of Bond Counsel, the Trustee, counsel to the Authority and any experts or consultants retained by the Authority or the Borrower; (iii) the fees and disbursements of the Bank and its counsel and (iv) the fees of Standard & Poor's. The costs and expenses set forth in the immediately preceding sentence shall be paid out of the proceeds of the Bonds, or other available funds of the Borrower in accordance with the Indenture or if the Bonds are not delivered to the Underwriter by the Authority (unless such delivery be prevented by the Underwriter's default hereunder, in which event the Underwriter shall pay such costs and expenses as and for liquidated damages hereunder), shall be paid by the Borrower pursuant to the Letter of Representation. (b) The Underwriter shall pay (i) all advertising expenses in connection with the public offering of the Bonds and (ii) all other expenses incurred by it in connection with the public offering and distribution of the Bonds. 11. Any notice or other communication to be given to the Authority under this Purchase Contract may be given by delivering the same in writing at its address set forth above, 9 addressed Attention: Chair, and any such notice or other communication to be given to the Underwriter may be given by delivering the same to Dain Rauscher Incorporated, One Market Plaza, 1100 Steuart Street Tower, San Francisco, California 94105, Attention: Public Finance Department. All notices or communications hereunder by any party shall be given and served upon each other party. 12. This Purchase Contract shall constitute the entire agreement between the Authority, the Treasurer and the Underwriter and is made solely for the benefit of the Authority, the Borrower and the Underwriter (including the successors or assigns of the Underwriter). No other person shall acquire or have any rights hereunder or by virtue hereof. All representations, warranties and agreements of the Authority in this Purchase Contract shall remain operative and in full force and effect, regardless of (a) any investigation made by or on behalf of the Underwriter, (b) the delivery of any payment for the Bonds hereunder and (c) any termination of this Purchase Contract. The parties hereto agree to cooperate prior and subsequent to the Closing to take such actions as shall be necessary or desirable in connection with securing the rating of the Bonds by Standard & Poor's. 13. This Purchase Contract may not be amended without the written consent of the Authority, the Treasurer, the Underwriter and the Borrower. 10 14. The validity, interpretation and performance of this Purchase Contract shall be governed by the laws of the State of California. DAIN RAUSCHER INCORPORATED By /s/ Illegible Signature --------------------------------- Authorized Signatory CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY By /s/ Christopher S. Holben --------------------------------- Christopher S. Holben Attest: By /s/ Blake Fowler ---------------------- Blake Fowler OFFICE OF THE STATE TREASURER By /s/ Illegible Signature --------------------------------- Deputy Treasurer Agreed to and Approved by: PROVENA FOODS INC. By /s/ Thomas J. Muloney ---------------------- Authorized Signatory [Signature Page to Purchase Contract] EXHIBIT A LETTER OF REPRESENTATION October 6, 1998 California Economic Development Financing Authority 801 K Street, Suite 1700 Sacramento, California 95814 The Honorable Matt Fong Treasurer of the State of California 915 Capitol Mall, Room 110 Sacramento, California 95814 Dain Rauscher Incorporated One Market Plaza 110 Steuart Street Tower San Francisco, California 94105 Ladies and Gentlemen: Pursuant to a purchase contract dated the date hereof (the "Purchase Contract"), with Dain Rauscher Incorporated (the "Underwriter"), which the undersigned (the "Borrower") has approved, the California Economic Development Financing Authority (the "Authority") and the Treasurer of the State of California propose to sell $4,000,000 aggregate principal amount of the Authority's Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) (the "Bonds"). The offering of the Bonds is described in an Official Statement, dated October 6, 1998 (the "Official Statement"). Certain revenues and other moneys received by the Authority pursuant or with respect to the Loan Agreement, dated as of October 1, 1998 (the "Loan Agreement"), between the Authority and the Borrower will be pledged to secure the payment of the Bonds, including the interest thereon pursuant to an Indenture of Trust, dated as of October 1, 1998 (the Indenture"), between the Authority and U.S. Bank Trust National Association, as trustee (the "Trustee"), relating to the Bonds. In addition, the Bonds shall be payable from funds drawn under an irrevocable direct pay letter of credit (the "Letter of Credit") issued by Comerica Bank-California (the "Bank"), pursuant to a Reimbursement Agreement, dated as of October 1, 1998 (the "Reimbursement Agreement"), between the Borrower and the Bank. In order to induce you to enter into the Purchase Contract and to make the sale and purchase and reoffering of the Bonds therein contemplated, the Borrower hereby represents, warrants and agrees with each of you as follows: (a) The Borrower is a corporation, organized and validly existing under the laws of the State of California, has full legal right, power and authority to enter into this Letter of Representation, the Loan Agreement, the Reimbursement Agreement and the Remarketing Agreement, to approve the Purchase Contract and to carry out and consummate all transactions contemplated by this Letter of Representation, the Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement, the Tax Regulatory Agreement and the Purchase Contract and by proper action has duly authorized the execution and delivery of this Letter of Representation, the Loan Agreement, the Reimbursement Agreement, the Tax Regulatory Agreement and the Remarketing Agreement and the approval of the Purchase Contract. (b) The officer of the Borrower executing this Letter of Representation, the Loan Agreement, the Reimbursement Agreement and the Remarketing Agreement and approving the Purchase Contract is duly and properly authorized to execute the same. (c) The Purchase Contract has been duly approved by, and this Letter of Representation, the Loan Agreement, the Reimbursement Agreement, the Tax Regulatory Agreement and the Remarketing Agreement have been duly authorized, executed and delivered by the Borrower. The Loan Agreement, when assigned to the Trustee pursuant to the Indenture, will constitute the legal, valid and binding obligation of the Borrower to the Trustee enforceable against the Borrower in accordance with its terms for the benefit of the owners of the Bonds; except as enforcement of the Loan Agreement may be limited by bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance laws, laws affecting the enforcement of creditors rights, the application of equitable principles and judicial discretion, and by the covenant of good faith and fair dealing which may be implied by law into contracts. This Letter of Representation, the Reimbursement Agreement, the Remarketing Agreement and the Tax Regulatory Agreement and any rights of the Authority and obligations of the Borrower under the Loan Agreement not so assigned to the Trustee will constitute the legal, valid and binding agreements of the Borrower enforceable against the Borrower in accordance with their respective terms; except as enforcement of each of the above-named documents may be limited by bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance laws, laws affecting the enforcement of creditors rights, the application of equitable principles and judicial discretion, and by the covenant of good faith and fair dealing which may be implied by law into contracts. (d) The Borrower is not in any material way in breach of or default under (i) any applicable law or administrative regulation of the State of California or the United States or any applicable judgment or decree or (ii) any material loan agreement, indenture, bond, note, resolution, agreement or other instrument to which it is a party or is otherwise subject, and no event has occurred and is continuing which, with the passage of time or the giving of notice or both, would constitute an event of default under any such instrument. (e) The approval of the Purchase Contract and the Official Statement; the execution and delivery of the Loan Agreement, the Reimbursement Agreement, the Tax Regulatory Agreement, the Remarketing Agreement and this Letter of Representation; the A-2 consummation of the transactions herein and therein contemplated; and the fulfillment of or compliance with the terms and conditions hereof and thereof will not conflict with or constitute a violation or breach of or default (with due notice or the passage of time or both) under the Borrower's Organization Documents (as defined in the Indenture), or any applicable law or administrative rule or regulation, or any applicable court or administrative decree or order, or, to the knowledge of the Borrower, any indenture, mortgage, deed of trust, loan agreement, lease, contract or other agreement or instrument to which it is a party or by which it or its properties are otherwise subject or bound, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the Borrower's assets, which conflict, violation, breach, default, lien, charge or encumbrance might have consequences that would materially and adversely affect the consummation of the transactions contemplated by the Purchase Contract, the Indenture, the Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement, the Tax Regulatory Agreement, this Letter of Representation or the Official Statement or the financial condition, assets, properties or operations of the Borrower. (f) No consent or approval of any trustee or holder of any indebtedness of the Borrower, and no consent, permission, authorization, order or license of, or filing or registration with, any governmental authority (except in connection with Blue Sky proceedings) is necessary in connection with the execution and delivery of this Letter of Representation, the Loan Agreement, the Reimbursement Agreement, the Tax Regulatory Agreement or the Remarketing Agreement; the approval of the Purchase Contract; or the consummation of any transaction therein or herein contemplated on the part of the Borrower, except as have been obtained or made and as are in full force and effect or, as appropriate, will be in full force and effect at the Closing. The Borrower makes no representation as to any approvals or actions as may be required under any state Blue Sky or federal securities laws. (g) There is no action, suit, proceeding, inquiry or investigation before or by any court or federal, state, municipal or other government authority pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or its assets, properties or operations which, if determined adversely to the Borrower or the interests thereof, would have a material and adverse effect upon the consummation of the transactions contemplated by or the validity of the Purchase Contract, the Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement, the Tax Regulatory Agreement, this Letter of Representation or the Official Statement or upon the financial condition, assets, properties or operations of the Borrower, and the Borrower is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental authority, which default would materially and adversely affect the consummation of the transactions contemplated by the Purchase Contract, the Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement, the Tax Regulatory Agreement, this Letter of Representation, the Official Statement or the financial condition, assets, properties or operations of the Borrower. A-3 (h) The Borrower has obtained or will obtain all variances from applicable zoning ordinances and has obtained or will obtain in due course all building permits and easements or licenses for the acquisition, construction and equipping of the Project (as said term is defined in the Indenture), to the extent and as such Project is described in the Official Statement, and such variances, permits, easements and licenses constitute all approvals required for the Project; and the Project should not be subject to change by any administrative or judicial body so as to materially affect such acquisition and construction. The Project has complied with the requirements of the California Environmental Quality Act. (i) The Borrower hereby agrees to pay the expenses described in Paragraph 10(a) of the Purchase Contract, and to pay any expenses incurred in amending or supplementing the Official Statement pursuant to the Purchase Contract. (j) As of the date hereof, the Official Statement, as amended or supplemented pursuant to the Purchase Contract or this Letter of Representation, if applicable, does not and will not contain as of the Closing any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (k) If between the date hereof and the date of the Closing any event shall occur which might or would cause the Official Statement, as then supplemented or amended, to contain an untrue statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, the Borrower shall notify the Authority and the Underwriter and if in the opinion of the Borrower, the Authority or the Underwriter such event requires the preparation and publication of a supplement or amendment to the Official Statement, the Authority will request the Borrower to cause the Official Statement to be amended or supplemented in a form and in a manner approved by the Underwriter. (l) After the Closing, the Borrower (i) will not participate in the issuance of any amendment of or supplement to the Official Statement to which, after being furnished with a copy, the Underwriter or the Authority shall reasonably object in writing or which shall be disapproved by counsel for the Underwriter or the Authority and (ii) if any event relating to or affecting the Authority or the Borrower or its present or proposed facilities shall occur as a result of which it is necessary, in the opinion of counsel for the Underwriter or the Authority, to amend or supplement the Official Statement in order to make the Official Statement not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, forthwith prepare and furnish to the Underwriter and the Authority (at the expense of the Borrower) a reasonable number of copies of an amendment of or supplement to the Official Statement (in form and substance satisfactory to counsel for the Underwriter and counsel to the Authority) which will amend or supplement the Official Statement so that it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time the Official Statement is delivered to purchaser, not misleading. For the purposes of this subsection, the Authority A-4 and the Borrower will furnish such information as the Underwriter may from time to time reasonably request. (m) The Borrower agrees to indemnify and hold harmless the Authority and the Underwriter and each person, if any, who controls (as such term is defined in Section 15 of the Securities Act of 1933, as amended) the Authority and the Underwriter and their officers, agents, employees, advisors and attorneys against any and all judgments, losses, claims, damages, liabilities and expenses (i) arising out of any statement or information in the Official Statement, relating to the Borrower and the Project, that is or is alleged to be untrue or incorrect in any material respect or the omission or alleged omission therefrom of any statement or information that should be stated therein or that is necessary to make the statements therein relating to the Borrower and the Project not misleading in any material respect, and (ii) to the extent of the aggregate amount paid in settlement of any litigation commenced or threatened arising from a claim based upon any such untrue statement or omission if such settlement is effected with the written consent of the Borrower. In case any claim shall be made or action brought against the Authority or the Underwriter or any controlling person based upon the Official Statement for which indemnity may be sought against the Borrower, as provided above, such party shall promptly notify the Borrower in writing setting forth the particulars of such claim or action and the Borrower shall assume the defense thereof, including the retaining of counsel acceptable to such party and the payment of all expenses. The Authority and the Underwriter or any such controlling person shall have the right to retain separate counsel in any such action and to participate in the defense thereof but shall bear the fees and expenses of such counsel unless (A) the Borrower shall have specifically authorized the retaining of such counsel or (B) the parties to such suit include such Underwriter or controlling person or persons, and the Borrower and such Underwriter or controlling person or persons have been advised by such counsel that one or more legal defenses may be available to it or them which may not be available to the Borrower, in which case the Borrower shall not be entitled to assume the defense of such suit notwithstanding its obligation to bear the fees and expenses of such counsel. (n) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Paragraph (m) hereof is applicable but for any reason is held to be unavailable from the Borrower, the Borrower and the Underwriter shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Borrower from persons who control the Borrower within the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933, as amended (collectively, the "Securities Acts"), to which the Borrower and the Underwriter may be subject in such proportions that the Underwriter are responsible for that portion represented by the percentage that the underwriting discount or fee received by the Underwriter bears to the offering price of the Bonds and the Borrower is responsible for the balance; provided, however, that (i) in no case shall the Underwriter be responsible for any amount in excess of the underwriting fee or discount applicable to the Bonds purchased by such Underwriter pursuant to the Purchase A-5 Contract and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act of 1933, as amended) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Paragraph (n), each person, if any, who controls the Underwriter within the meaning of the Securities Acts, shall have the same rights to contribution as the Underwriter, and each person, if any, who controls the Borrower within the meaning of the Securities Acts shall have the same rights to contribution as the Borrower, subject in each case to clauses (i) and (ii) of this Paragraph (n). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Paragraph (n), notify such party or parties from whom contribution may be sought, but the omission to so notify such party from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Paragraph (n). No party shall be liable for contribution with respect to any action or claims settled without its consent. The representations, warranties, agreements and indemnities herein shall survive the Closing under the Purchase Contract and any investigation made by or on behalf of the Authority and the Underwriter or any person who controls the Authority or the Underwriter of any matters described in or related to the transactions contemplated hereby and by the Purchase Contract, the Official Statement, the Loan Agreement, the Remarketing Agreement and the Indenture. A-6 This Letter of Representation shall be binding upon the Borrower and shall inure solely to the benefit of the Authority, the Underwriter and, to the extent set forth herein, persons controlling the Authority and the Underwriter, and their respective officers, employees, agents, advisors, attorneys and personal representatives, successors and assigns, and no other person or firm shall acquire or have any right under or by virtue of this Letter of Representation. Very truly yours, PROVENA FOODS INC. By /s/ Thomas J. Mulaney ------------------------- Authorized Signatory A-7 EX-10.44 10 TAX REGULATORY AGREEMENT Exhibit 10.44 =============================================================================== TAX REGULATORY AGREEMENT by and among CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee, and PROVENA FOODS INC. Dated as of October 1, 1998 Executed as Part of the Proceedings for the Authorization and Issuance of: $4,000,000 California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) ================================================================================ TABLE OF CONTENTS (This Table of Contents is for convenience of reference only and is not part of the Tax Regulatory Agreement.)
Page ---- ARTICLE I DEFINITIONS Section 1.01. Definitions....................................................................................... 1 Section 1.02. Reliance on Borrower's Information................................................................ 11 ARTICLE II CERTAIN REPRESENTATIONS BY THE BORROWER Section 2.01. Description of the Project and Description of the Facilities...................................... 11 Section 2.02. Capital Expenditures.............................................................................. 12 Section 2.03. Prior Issues and $40 Million Limit................................................................ 13 Section 2.04. Federal Tax Return Information.................................................................... 13 Section 2.05. Composite Issues.................................................................................. 13 Section 2.06. Prohibited Uses................................................................................... 14 Section 2.07. No Composite Project.............................................................................. 14 Section 2.08. Acquisition of Existing Property.................................................................. 14 Section 2.09. Land Acquisition Limit and No Acquisition of Farmland............................................. 14 Section 2.10. Representations by the Borrower for Purposes of IRS Form 8038..................................... 15 ARTICLE III USE OF BOND PROCEEDS Section 3.01. Anticipated Use of Proceeds....................................................................... 16 Section 3.02. Certification as to Costs of the Project.......................................................... 16 ARTICLE IV ARBITRAGE Section 4.01. Arbitrage Representations and Elections........................................................... 16 Section 4.02. Arbitrage Compliance.............................................................................. 18 Section 4.03. Calculation of Rebate Amount...................................................................... 19 Section 4.04. Payment to United States.......................................................................... 21
Section 4.05. Recordkeeping..................................................................................... 22 Section 4.06. Rebate Analyst.................................................................................... 22 ARTICLE V COMPLIANCE WITH CODE............................................................................................. 23 ARTICLE VI TERM OF TAX REGULATORY AGREEMENT................................................................................. 24 ARTICLE VII AMENDMENTS....................................................................................................... 25 ARTICLE VIII EVENTS OF DEFAULT, REMEDIES Section 8.01. Events of Default................................................................................. 25 Section 8.02. Remedies for an Event of Default.................................................................. 25
EXHIBIT A-1 SOURCES AND USES OF FUNDS EXHIBIT A-2 PROPERTY FINANCED OR REFINANCED BY THE BONDS EXHIBIT B-1 FORM OF PROVIDER CERTIFICATION FOR A CERTIFICATE OF DEPOSIT EXHIBIT B-2 FORM OF PROVIDER CERTIFICATION FOR AN INVESTMENT CONTRACT EXHIBIT B-3 FORM OF BORROWER'S CERTIFICATION FOR A CERTIFICATE OF DEPOSIT INVOLVING THREE BIDS EXHIBIT C USEFUL LIFE CALCULATION EXHIBIT D DECLARATION OF OFFICIAL INTENT ii TAX REGULATORY AGREEMENT THIS TAX REGULATORY AGREEMENT (this "Tax Regulatory Agreement") is made and dated as of October 1, 1998, by and among CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY and its successors or assigns (the "Authority"), PROVENA FOODS INC., a corporation duly organized and existing under the laws of the State of California and its successors or assigns (the "Borrower"), and U.S. BANK TRUST NATIONAL ASSOCIATION, solely in its capacity as trustee under the Indenture, as defined below (the "Trustee"); W I T N E S S E T H: WHEREAS, the Authority has authorized the issuance of $4,000,000 aggregate principal amount of its Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) (the "Bonds"), the proceeds of which are being loaned to the Borrower pursuant to a Loan Agreement, dated as of October 1, 1998, between the Authority and the Borrower (the "Agreement"), to finance the construction and installation of a manufacturing facility and the acquisition of certain manufacturing equipment, as more fully set forth in the Agreement (the "Project") and to pay a portion of the costs of issuance of the Bonds; WHEREAS, the Borrower will use the Project in the manufacture of meat products or for the manufacture of other tangible personal property; and WHEREAS, the Authority has determined that the issuance, sale and delivery of the Bonds is needed to finance the Project; and WHEREAS, this Tax Regulatory Agreement has been entered into by the Authority, the Borrower and the Trustee to ensure compliance with the provisions of the Internal Revenue Code of 1986, as amended, and the Regulations thereunder (the "Code"); and WHEREAS, to ensure that interest on the Bonds will be and remain excludable from gross income under the Code, the restrictions listed in this Tax Regulatory Agreement must be satisfied. NOW THEREFORE, the Authority, the Borrower and the Trustee hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. The following words and phrases shall have the following meanings. Any capitalized word or term used herein but not defined herein shall have the same meaning given in the hereinafter defined Indenture. "Abusive Arbitrage Device" means any action which has the effect of (a) enabling the Authority or the Borrower to exploit the difference between taxable and tax-exempt interest rates 1 to obtain a material financial advantage; and (b) overburdening the tax-exempt bond market as defined in (S) 1.148-10 of the Regulations. "Accounting Method" means both the overall method used to account for the Gross Proceeds of the Bonds (e.g., the cash method or a modified accrual method) and the method used to account for or allocate any particular item within that overall accounting method (e.g., accounting for Investments, Expenditures, allocations to and from different sources and particular items of the foregoing). "Agreement" means the Loan Agreement, dated as of October 1, 1998, between the Authority and the Borrower, and any amendments and supplements thereto. "Average Economic Life" means the average reasonably expected economic life of the Facilities as defined in (S) 147(b) of the Code. "Average Maturity" means the average maturity of the Bonds as defined in (S) 147(b) of the Code. "Bond Counsel" means a law firm of nationally recognized bond counsel who is requested to deliver its approving opinion with respect to the issuance of and the exclusion from federal income taxation of interest on the Bonds. "Bond Year" means the period commencing October 1 of each calendar year and terminating on September 30 of the immediately succeeding calendar year during the term of the Bonds, except that the first Bond Year shall commence on the Date of Issuance and end on September 30, 1999 (unless a different period is required by the Regulations or selected by the Borrower pursuant to the Regulations). "Bond Yield" means the Yield of the Bonds calculated in accordance with Section 1.148-4 of the Regulations. "Borrower" means Provena Foods Inc., a corporation duly organized and existing under the laws of the State of California or any entity which is the surviving, resulting or transferee entity in any merger, consolidation or transfer permitted under the Agreement. "Capital Expenditure" means any cost of a type that is for the acquisition, construction, reconstruction or improvement of land or property of a character subject to the allowance for depreciation. For example, costs incurred to acquire, construct, reconstruct or improve land, buildings and equipment generally are Capital Expenditures. Whether an expenditure is a capital expenditure is determined at the time the expenditure is paid with respect to the property. Future changes in law do not affect whether an expenditure is a capital expenditure. "Capital Project" means all Capital Expenditures that carry out the governmental purpose of the Bonds. For example, a Capital Project may include Capital Expenditures for one or more building improvements or equipment, plus related capitalized interest paid or accrued prior to the in-service date for the Capital Project. "Class of Investments" means one of the following, each of which represents a different 2 Class of Investments: (a) Each category of yield restricted Purpose Investment and Program Investment, as defined in (S) 1.148-1(b), that is subject to a different definition of materially higher Yield under (S) 1.148-2(d)(2); (b) Yield restricted Nonpurpose Investments; and (c) All other Nonpurpose Investments. "Code" means the Internal Revenue Code of 1986, as amended. "Computation Date" means the Initial Computation Date, an Installment Computation Date or the Final Computation Date. "Computation Date Credit" means on the last day of each Bond Year during which there are Gross Proceeds subject to the rebate requirement of Article IV hereof, and on the Final Computation Date, the amount of $1,000. "Consistently Applied" means applied uniformly within a fiscal period and between fiscal periods to account for Gross Proceeds of an issue and any amounts that are in a commingled fund. "Costs of Issuance" means all costs incurred in connection with the issuance of the Bonds, other than fees paid to or on behalf of credit enhancers as fees for "qualified guarantees" as defined in (S) 1.148-4(f) of the Regulations or to the Authority as a portion of its higher Yield permitted on the Agreement under (S) 1.148-2(d)(2) of the Regulations. Examples of Costs of Issuance include (but are not limited to): (a) underwriter's spread (whether realized directly or derived through purchase of the Bonds at a discount below the price at which a substantial number of the Bonds are sold to the public) or placement agent's fee; (b) counsel fees (including bond counsel, underwriter's counsel, placement agent's counsel, issuer's counsel, borrower's counsel, trustee's counsel, and any other specialized counsel fees incurred in connection with the issuance of the Bonds); (c) financial advisor fees incurred in connection with the issuance of the Bonds; (d) rating agency fees (except for any such fee that is paid in connection with or as a part of the fee for credit enhancement of the Bonds); (e) trustee fees incurred in connection with the issuance of the Bonds; (f) accountant fees incurred in connection with the issuance of the Bonds; 3 (g) printing costs (for the Bonds and of the preliminary and final offering circulars or official statements); (h) costs incurred in connection with the required public approval process (e.g., publication costs for public notices generally and costs of the public hearing); and (i) Authority fees to cover administrative costs and expenses incurred in connection with the issuance of the Bonds. "Costs of Issuance Fund" means the Costs of Issuance Fund established pursuant to the Indenture. "Current Outlay of Cash" means an outlay reasonably expected to occur not later than 5 banking days after the date as of which the allocation of Gross Proceeds to the Expenditure is made. "Date of Issuance" means October 7, 1998. "Discharged" means, with respect to any Bond, the date on which all amounts due with respect to such Bond are actually and unconditionally due, if cash is available at the place of payment, and no interest accrues with respect to such Bond after such date. "Economic Accrual Method" (also known as the constant interest method or actuarial method) means the method of computing Yield that is based on the compounding of interest at the end of each compounding period. "Expenditure" means a book or record entry which allocates Proceeds of the Bonds in connection with a Current Outlay of Cash. "Facilities" means the Manufacturing Facility financed or refinanced with the Proceeds of the Bonds and described in Exhibit A-2 hereto. "Fair Market Value" means the price at which a willing buyer would purchase an Investment from a willing seller in a bona fide, arm's-length transaction. Fair Market Value generally is determined on the date on which a contract to purchase or sell the Nonpurpose Investment becomes binding (i.e., the trade date rather than the settlement date). Except as otherwise provided in this definition, an Investment that is not of a type traded on an established securities market (within the meaning of (S) 1273 of the Code), is rebuttably presumed to be acquired or disposed of for a price that is not equal to its Fair Market Value. The Fair Market Value of a United States Treasury obligation that is purchased directly from the United States Treasury is its purchase price. The following guidelines shall apply for purposes of determining the Fair Market Value of the obligations described below: (a) Certificates of Deposit. The purchase of certificates of deposit with fixed interest rates, fixed payment schedules and substantial penalties for early withdrawal will be deemed to be an Investment purchased at its Fair Market Value on the purchase date if the Yield on the certificate of deposit is not less than: 4 (i) The Yield on reasonably comparable direct obligations of the United States; and (ii) The highest Yield that is published or posted by the provider to be currently available from the provider on reasonably comparable certificates of deposit offered to the public. (b) Guaranteed Investment Contracts. A Guaranteed Investment Contract is a Nonpurpose Investment that has specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate, and also includes any agreement to supply Investments on two or more future dates (e.g., a forward supply contract). The purchase price of a Guaranteed Investment Contract is treated as its Fair Market Value on the purchase date if: (i) The Borrower makes a bona fide solicitation for a specified Guaranteed Investment Contract and receives at least three bona fide bids from providers that have no material financial interest in the issue (e.g., as underwriters or brokers); (ii) The Borrower purchases the highest-Yielding Guaranteed Investment Contract for which a qualifying bid is made (determined net of broker's fees); (iii) The Yield on the Guaranteed Investment Contract (determined net of broker's fees) is not less than the Yield then available from the provider on reasonably comparable Guaranteed Investment Contracts, if any, offered to other persons from a source of funds other than gross proceeds of tax-exempt bonds; (iv) The determination of the terms of the Guaranteed Investment Contract takes into account as a significant factor the Borrower's reasonably expected drawdown schedule for the amounts to be invested, exclusive of amounts deposited in debt service funds and reasonably required reserve or replacement funds; (v) The terms of the Guaranteed Investment Contract, including collateral security requirements, are reasonable; and (vi) The obligor on the Guaranteed Investment Contract certifies the administrative costs that it is paying (or expects to pay) to third parties in connection with the Guaranteed Investment Contract. "Final Computation Date" means the date the last Bond is Discharged. "Future Value" means the Value of a Receipt or Payment at the end of any interval as determined by using the Economic Accrual Method and equals the Value of that Payment or Receipt when it is paid or received (or treated as paid or received), plus interest assumed to be 5 earned and compounded over the period at a rate equal to the Yield on the Bonds, using the same compounding interval and financial conventions used to compute the Yield on the Bonds. "Gross Proceeds" means any Proceeds or Replacement Proceeds of the Bonds. "Indenture" means, the Indenture of Trust, dated as of October 1, 1998, between the Authority and the Trustee, and any amendments and supplements thereto. "Initial Computation Date" means the date a rebate calculation is required, if any, pursuant to Section 3.03(c) of the Indenture. "Installment Computation Date" means the last day of the fifth Bond Year and each succeeding fifth Bond Year as stated in Section 4.01 hereof or the last day of any Bond Year prior to the fifth Bond Year selected by the Borrower. "Interest Collateral Account" means the interest bearing deposit account established by the Borrower with the Bank pursuant to Section 2.09 of the Reimbursement Agreement to reimburse the Bank for draws made by the Trustee under the letter of credit to the pay the interest on the Bonds and the principal of the Bonds in connection with the optional redemption of Bonds as required by the Reimbursement Agreement. "Investment" means any Purpose Investment or Nonpurpose Investment, including any other tax-exempt bond. "Investment Instructions" means the letter of instructions set forth as an exhibit to the No Arbitrage Certificate of the Authority dated the Date of Issuance. "Investment Proceeds" means any amounts actually or constructively received from investing Proceeds of the Bonds. "Investment-Type Property" means any property, other than property described in (S) 148(b)(2)(A), (B), (C) or (E) of the Code that is held principally as a passive vehicle for the production of income. Except as otherwise provided, a prepayment for property or services is Investment-Type Property if a principal purpose for prepaying is to receive an Investment return from the time the prepayment is made until the time payment otherwise would be made. A prepayment is not Investment-Type Property if-- (a) The prepayment is made for a substantial business purpose other than Investment return and the issuer has no commercially reasonable alternative to the prepayment, or (b) Prepayments on substantially the same terms are made by a substantial percentage of persons who are similarly situated to the issuer but who are not beneficiaries of tax-exempt financing. "Issue Price" means, except as otherwise provided, issue price as defined in (S)(S) 1273 and 1274 of the Code. Generally, the Issue Price of bonds that are publicly offered is the first price at which a substantial amount of the bonds is sold to the public. Ten percent is a substantial 6 amount. The public does not include bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers. The Issue Price does not change if part of the issue is later sold at a different price. The Issue Price of bonds that are not substantially identical is determined separately. The Issue Price of bonds for which a bona fide public offering is made is determined as of the sale date based upon reasonable expectations regarding the initial public offering price. If a bond is issued for property, the applicable Federal tax-exempt rate is used in lieu of the Federal rate in determining the Issue Price under (S) 1274 of the Code. The issue price of bonds may not exceed their Fair Market Value as of the sale date. With respect to the Bonds, the Issue Price is $4,000,000. "Manufacturing Facility" means a Capital Project that is used in the manufacturing or production of tangible personal property (including the processing resulting in a change in the condition of such property) including facilities that are directly related and ancillary to a Manufacturing Facility if such directly related and ancillary facilities are located on the same site as the Manufacturing Facility and not more than 25% of the proceeds of an issue that finances the Manufacturing Facility are used to provide such directly related and ancillary facilities. "Net Sale Proceeds" means Sale Proceeds, less the portion of those Sale Proceeds invested in a reasonably required reserve or replacement fund under (S) 148(d) of the Code and as part of a minor portion under (S) 148(e) of the Code. "Nonpurpose Investment" means any security, obligation, annuity contract or Investment type property as defined in (S) 148(b) of the Code, including "specified private activity bonds" as defined in (S) 57(a)(5)(c) of the Code, but excluding all other obligations the interest on which is excludable from federal gross income. The term "Nonpurpose Investment" does not include the Borrower's obligations to make payments to the Authority pursuant to the provisions of the Agreement. "Payments" means, for purposes of computing the Rebate Amount, (a) amounts actually or constructively paid to acquire a Nonpurpose Investment (or treated as paid to a commingled fund); (b) for a Nonpurpose Investment that is allocated to an issue on a date after it is actually acquired (e.g., an Investment that becomes allocable to Transferred Proceeds or to Replacement Proceeds) or that becomes subject to the rebate requirement of the Code on a date after it is actually acquired (e.g., an Investment allocated to a reasonably required reserve or replacement fund for a construction issue at the end of the two-year spending period), the Value of that Investment on that date; (c) for a Nonpurpose Investment that was allocated to an issue at the end of the preceding computation period, the Value of that Investment at the beginning of the computation period; (d) on the last day of each Bond Year during which there are amounts allocated to Gross Proceeds of an issue that are subject to the rebate requirement of the Code, and on the final maturity date, a Computation Date Credit; and (e) Yield Reduction Payments on Nonpurpose Investments made pursuant to (S) 1.148-5(c) of the Regulations. For purposes of computing the Yield on an Investment (including the Value of the Investment), Payment means amounts to be actually or constructively paid to acquire the Investment; provided, however, that payments made by a conduit borrower, such as the Borrower, are not treated as paid until the conduit borrower ceases to receive the benefit of earnings on those amounts. Payments on Investments, including Guaranteed Investment Contracts, are adjusted for Qualified Administrative Costs of acquiring a Nonpurpose Investment. 7 "Pre-Issuance Accrued Interest" means amounts representing interest that accrued on an obligation for a period not greater than one year before the Date of Issuance but only if those amounts are paid within one year after the Date of Issuance. "Principal User" means a person who is a principal owner, principal lessee, a principal output purchaser or "other" principal user and any Related Person to a Principal User. A principal owner is a person who at any time holds more than a 10% ownership interest (by value) in a facility or, if no person holds more than a 10% ownership interest, then the person (or persons in the case of multiple equal owners) who holds the largest ownership interest in the facility. A person is treated as holding an ownership interest if such person is an owner for federal income tax purposes generally. A principal lessee is a person who at any time leases more than 10% of the facility (disregarding portions used by the lessee under a short-term lease). The portion of a facility leased to a lessee is generally determined by reference to its fair rental value. A short- term lease is one which has a term of one year or less, taking into account all options to renew and reasonably anticipated renewals. A principal output purchaser is any person who purchases output of a facility, unless the total output purchased by such person during each one-year period beginning with the date such facility is placed in service is 10% or less of such facility's output during each such period. An "other" principal user is a person who enjoys a use of a facility (other than a short-term use) in a degree comparable to the enjoyment of a principal owner or a principal lessee, taking into account all the relevant facts and circumstances, such as the person's participation in control over use of such facility or its remote or proximate geographic location. "Prior Issues" means any issue of tax-exempt obligations (whether or not the issuer of each issue is the same) to which Section 103(b)(6) of the 1954 Code or Section 144(a) of the Code applies. "Proceeds" means any Sale Proceeds, Investment Proceeds and Transferred Proceeds of an issue. Proceeds do not include, however, amounts actually or constructively received with respect to a Purpose Investment that are properly allocable to the immaterially higher Yield under (S) 1.148-2(d) of the Regulations or section 143(g) of the Code or to Qualified Administrative Costs recoverable under (S) 1.148-5(e) of the Regulations. "Project" has the meaning given to such term in the preambles hereto. "Project Fund" means the Project Fund established pursuant to the Indenture. "Purchase Fund" means the Purchase Fund established pursuant to the Indenture. "Purpose Investment" means an Investment that is acquired to carry out the governmental purpose of an issue. The Agreement constitutes a Purpose Investment. "Qualified Administrative Costs" means reasonable, direct administrative costs, other than carrying costs, such as separately stated brokerage or selling commissions, but not legal and accounting fees, recordkeeping, custody and similar costs. General overhead costs and similar indirect costs of the issuer such as employee salaries and office expenses and costs associated with computing the Rebate Amount are not Qualified Administrative Costs. In general, 8 administrative costs are not reasonable unless they are comparable to administrative costs that would be charged for the same Investment or a reasonably comparable Investment if acquired with a source of funds other than Gross Proceeds of tax-exempt bonds. "Qualified Hedging Transaction" means a contract which meets the requirements of (S) 1.148-4(h)(2) of the Regulations. "Rebate Amount" means the excess of the Future Value of all Receipts on Nonpurpose Investments over the Future Value of all the Payments on Nonpurpose Investments. Future Value is computed as of the Computation Date. Rebate Amount additionally includes any penalties and interest on underpayments reduced for recoveries of overpayments. "Rebate Analyst" shall mean the entity chosen by the Borrower and the Authority in accordance with Section 4.06 hereof to determine the amount of required deposits to the Rebate Fund, if any. "Rebate Fund" means the Rebate Fund established pursuant to the Indenture. "Receipts" means, for purposes of computing the Rebate Amount, (a) amounts actually or constructively received from a Nonpurpose Investment (including amounts treated as received from a commingled fund), such as earnings and return of principal; (b) for a Nonpurpose Investment that ceases to be allocated to an issue before its disposition or redemption date (e.g., an Investment that becomes allocable to Transferred Proceeds of another issue or that ceases to be allocable to the issue pursuant to the universal cap under (S) 1.148-6 of the Regulations) or that ceases to be subject to the rebate requirement of the Code on a date earlier than its disposition or redemption date (e.g., an Investment allocated to a fund initially subject to the rebate requirement of the Code but that subsequently qualifies as a bona fide debt service fund), the Value of that Nonpurpose Investment on that date; and (c) for a Nonpurpose Investment that is held at the end of a computation period, the Value of that Investment at the end of that period. For purposes of computing Yield on an Investment, Receipts means amounts to be actually or constructively received from the Investment, such as earnings and return of principal (including the Value of an Investment). Receipts on Investments, including Guaranteed Investment Contracts, are adjusted (reduced) for Qualified Administrative Costs. "Recomputation Event" means a transfer, waiver, modification or similar transaction of any right that is part of the terms of the Bonds or a Qualified Hedging Transaction is entered into, or terminated, in connection with the Bonds. "Regulation" or "Regulations" means the temporary, proposed or final Income Tax Regulations promulgated by the Department of the Treasury and applicable to the Bonds, including (S)(S) 1.148-0 through 1.148-11, (S) 1.149 and (S)(S) 1.150-1 and 1.150-2 as issued by the Internal Revenue Service on October 18, 1993 for bonds issued after March 1, 1993, including any amendments made thereto. "Related Person" means any person if (a) the relationship to such person would result in a disallowance of loss under Sections 267 or 707(b) of the Code or (b) such person is a member of the same controlled group of corporations (as defined in Section 1563(a) of the Code, except 9 that "more than 50 percent" shall be substituted for "at least 80 percent" each place it appears therein). "Replacement Proceeds" means amounts which have a sufficiently direct nexus to the Bonds or to the governmental purpose of the Bonds to conclude that the amounts would have been used for that governmental purpose if the Proceeds of the Bonds were not used or to be used for that governmental purpose, as more fully defined in (S) 1.148-1(c) of the Regulations. "Revenue Fund" means the Revenue Fund established pursuant to the Indenture. "Sale Proceeds" means any amounts actually or constructively received from the sale of the Bonds, including amounts used to pay underwriters' discount or compensation or placement agent's fee and accrued interest other than Pre- Issuance Accrued Interest. "SLGS" means United States Treasury Certificates of Indebtedness, Notes and Bonds State and Local Government Series. "Tax Regulatory Agreement" means this Tax Regulatory Agreement. "Test-Period Beneficiary" means any person who is an owner or a Principal User of facilities financed by an issue or issues of tax-exempt obligations issued under the 1954 Code or the Code during the three-year period beginning on the later of the date such facilities were placed in service or the date of issuance for such issue or issues of tax-exempt obligations. For purposes of determining whether a person is a Test-Period Beneficiary, all persons who are Related Persons shall be treated as one person. "Transferred Proceeds" means Proceeds of a refunding issue which become transferred proceeds of a refunding issue and cease to be Proceeds of a prior issue when Proceeds of the refunding issue discharge any of the outstanding principal amount of the prior issue. The amount of Proceeds of the prior issue that become transferred proceeds of the refunding issue is an amount equal to the Proceeds of the prior issue on the date of that discharge multiplied by a fraction: (a) The numerator of which is the principal amount of the prior issue discharged with Proceeds of the refunding issue on the date of that discharge; and (b) The denominator of which is the total outstanding principal amount of the prior issue on the date immediately before the date of that discharge. "Universal Cap" means the Value of all outstanding Bonds. "Value" means Value as determined under (S) 1.148-4(e) of the Regulations for a Bond and Value determined under (S) 1.148-5(d) of the Regulations for an Investment. "Yield" means, for purposes of determining the Yield on the Bonds, the Yield computed under the Economic Accrual Method using consistently applied compounding intervals of not more than one year. A short first compounding interval and a short last compounding interval may be used. Yield is expressed as an annual percentage rate that is calculated to at least four 10 decimal places (e.g., 5.2525%). Other reasonable, standard financial conventions, such as the 30 days per month/360 days per year convention, may be used in computing Yield but must be consistently applied. The Yield on an issue that would be a Purpose Investment (absent (S) 148(b)(3)(A) of the Code) is equal to the Yield on the conduit financing issue that financed that Purpose Investment. The Yield on a fixed yield issue is the discount rate that, when used in computing the present Value as of the issue date of all unconditionally payable payments of principal, interest and fees for qualified guarantees on the issue and amounts reasonably expected to be paid as fees for qualified guarantees on the issue, produces an amount equal to the present Value, using the same discount rate, of the aggregate issue price of bonds of the issue as of the issue date. In the case of obligations purchased or sold at a substantial discount or premium, the Regulations prescribe certain special Yield calculation rules. For purposes of determining the Yield on an Investment, the Yield computed under the Economic Accrual Method, using the same compounding interval and financial conventions, shall be used to compute the Yield on the Bonds. The Yield on an Investment allocated to the Bonds is the discount rate that, when used in computing the present Value as of the date the Investment is first allocated to the issue of all unconditionally payable receipts from the Investment, produces an amount equal to the present Value of all unconditionally payable payments for the Investment. The Yield on an Investment shall not be adjusted by any hedging transaction entered into in connection with such Investment unless the Authority, the Trustee and the Borrower have received an opinion of Bond Counsel that such an adjustment is permitted by the Regulations. Yield shall be calculated separately for each Class of Investments. "Yield Reduction Payment" means a payment to the United States with respect to an Investment which is treated as a Payment for that Investment that reduces the Yield on that Investment in accordance with (S) 1.148-5(c) of the Regulations. Yield Reduction Payments include Rebate Amounts paid to the United States. "1954 Code" means the Internal Revenue Code of 1954, as amended, as in effect on the effective date of the Code. Section 1.02. Reliance on Borrower's Information. Bond Counsel and the Authority shall be permitted to rely upon the contents of any certification, document or instructions provided pursuant to this Tax Regulatory Agreement and shall not be responsible or liable in any way for the accuracy of their contents or the failure of the Borrower to deliver any required information. ARTICLE II CERTAIN REPRESENTATIONS BY THE BORROWER Section 2.01. Description of the Project and Description of the Facilities. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that: 11 (a) The description of the Project set forth in the preambles hereto and the description of the Facilities set forth in Exhibit A-2 hereto are true and accurate. (b) The Facilities constitute a Manufacturing Facility of pepperoni, sausage and other meat products or facilities directly related and ancillary to such Manufacturing Facility. (c) The portion of the Facilities which constitutes directly related and ancillary facilities serves solely the manufacturing portion of the Facilities, is on the same site as the manufacturing portion of the Facilities and is financed with not more than 25% of the net Proceeds of the Bonds. In addition, with respect to the portion of the Facilities to be used for offices, not more than a de minimis amount of the functions to be performed at such offices is not directly related to day-to-day operations of the Facilities (e.g., a salesman's office is not related to day-to-day operations of the Facilities). Section 2.02. Capital Expenditures. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that: (a) During the period beginning three years before the Date of Issuance and ending on the Date of Issuance, the aggregate amount of Capital Expenditures (including any expenditure that was or could have been treated as a Capital Expenditure under any rule or election under the Code) paid or incurred, excluding those to be paid or reimbursed with Proceeds of the Bonds, with respect to (i) facilities located in the incorporated municipality (or unincorporated county) in which the Facilities are located and (ii) the Principal User of which was or is the Borrower, any other Principal User of the Facilities or any Related Person thereto, was $262,000. (b) During the period beginning on the Date of Issuance and ending on the date three years after the Date of Issuance, the aggregate amount of Capital Expenditures (including any expenditure that was or could have been treated as a Capital Expenditure under any rule or election under the Code) expected to be incurred, excluding those to be paid or reimbursed with Proceeds of the Bonds, with respect to (i) facilities located in the incorporated municipality (or unincorporated county) in which the Facilities are located and (ii) the Principal User of which was or is the Borrower, any other Principal User of the Facilities or any Related Person thereto, is anticipated to be $4,630,000. (c) The amount of capitalized interest to be paid on all financings for the Facilities excluding that paid from Proceeds of the Bonds is $200,000. The amount of capitalized interest to be paid in connection with the Facilities paid from Proceeds of the Bonds is $30,000. (d) The sum of (i) the Capital Expenditures described in paragraph (a) above plus (ii) the actual Capital Expenditures to be incurred as described in paragraphs (b) and (c) plus (iii) the aggregate outstanding amount of all $1 million or $10 million exempt small issues set forth in Section 2.03(a) below plus (iv) the greater of the Issue Price or the par amount of the Bonds shall not exceed $10 million. 12 (e) The information contained in subsections (a), (b), (c) and (d) above, which has been provided to the Authority to enable the Authority to elect to qualify the Bonds for the $10,000,000 exemption afforded by Section 144(a)(4) of the Code, is true, accurate and complete. The Authority hereby elects to issue the Bonds pursuant to the exemption afforded by Section 144(a)(4) of the Code. (f) The Facilities will not be sold, leased or the use otherwise transferred to a person other than the Borrower, any other Principal User of the Facilities or any Related Person thereto identified as of the Date of Issuance during the three-year period ending three years after the Date of Issuance, unless the Borrower has received an approving opinion of Bond Counsel to the effect that such sale, lease or transfer will not adversely affect the tax-exempt status of the Bonds. Section 2.03. Prior Issues and $40 Million Limit. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that: (a) The aggregate face amount of all Prior Issues outstanding as of the Date of Issuance, the proceeds of which were or will be used to any extent with respect to facilities located in the incorporated municipality (or unincorporated county) in which the Facilities are located and the Principal Users of such facilities are the Borrower, any other Principal User of the Facilities or any Related Person thereto, is $-0-. (b) The aggregate face amount of all Prior Issues and all exempt facility bonds, qualified redevelopment bonds and industrial development bonds as defined in the 1954 Code or the Code outstanding as of the Date of Issuance, the proceeds of which were used by or were allocated to the Borrower, any other Principal User of the Facilities or any Related Person thereto as a Test-Period Beneficiary is $-0-. Section 2.04. Federal Tax Return Information. The Facilities have a SIC Code Number of 2013. The Borrower files its federal income tax return at the Internal Revenue Service Center in Fresno, California. The federal employer identification number of the Borrower is 95-2782215. Section 2.05. Composite Issues. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that: (a) During the period beginning 15 days prior to the sale date of the Bonds and ending 15 days thereafter none of the Borrower, any other Principal User of the Facilities or any Related Person thereto sold, guaranteed, arranged, participated in, assisted with, borrowed the proceeds of, or leased facilities financed by obligations issued under Section 103 of the 1954 Code or Section 103 of the Code by any state or local governmental unit or any constituted authority empowered to issue obligations by or on behalf of any state or local governmental unit. (b) During the period commencing on the Date of Issuance and ending 15 days thereafter, there will be no obligations sold or issued under Section 103 of the 1954 Code or the Code that are guaranteed by the Borrower, any other Principal User of the 13 Facilities or any Related Person or which are issued with the assistance or participation of, or by arrangement with, the Borrower, any other Principal User of the Facilities or any Related Person without the written opinion of Bond Counsel to the effect that the issuance of such obligations will not adversely affect their opinion as to the exclusion from gross income for federal income tax purposes of interest with respect to the Bonds. (c) Other than the Borrower, any other Principal User of the Facilities or any Related Person, no person (or Related Person to such other person) has (i) guaranteed, arranged, participated in, assisted with the issuance of, or paid any portion of the Costs of Issuance of the Bonds or (ii) provided any property or any franchise, trademark or trade name (within the meaning of Section 1253 of the Code) which is to be used in connection with the Facilities. Section 2.06. Prohibited Uses. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that no portion of the Proceeds of the Bonds is being used to provide a facility, a purpose of which is retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment. No portion of the proceeds of the Bonds is being used to provide any private or commercial golf course, country club, health club, massage parlor, tennis club, skating facility (including roller skating, skateboarding and ice skating), racquet sports facility (including any handball, squash or racquetball court), hot tub facility, suntan facility, racetrack, skybox or other luxury box, airplane, store the principal business of which is the sale of alcoholic beverages for consumption off premises, or facility used primarily for gambling. No portion of the Proceeds of the Bonds is being used directly or indirectly to provide residential real property for single- or multi-family units. Section 2.07. No Composite Project. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that the Facilities are a stand-alone Manufacturing Facility unconnected to any other facility and do not share any portion of substantial common facilities with any other building (other than the Facilities), (b) an enclosed shopping mall or (c) a strip of offices, stores or warehouses. Section 2.08. Acquisition of Existing Property. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that no portion of the Proceeds of the Bonds will be used to pay the cost of acquisition of real property (other than land or any interest therein) the first use of which will not be pursuant to the acquisition with the Proceeds of the Bonds. Section 2.09. Land Acquisition Limit and No Acquisition of Farmland. The Borrower hereby represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that: (a) The amount of Proceeds of the Bonds expended for land will not exceed $484,000, which is not greater than 25% of the Proceeds of the Bonds. (b) No portion of the Proceeds of the Bonds will be used directly or indirectly for the acquisition of land or any interest therein to be used for the purpose of farming. 14 Section 2.10. Representations by the Borrower for Purposes of IRS Form 8038. Section 149(e) of the Code requires as a condition to qualification for tax-exemption that the Authority provide to the Secretary of the Treasury certain information with respect to the Bonds and the application of the proceeds derived therefrom. The following representations of the Borrower will be relied upon by the Authority and Bond Counsel in satisfying this information reporting requirement. Accordingly, the Borrower hereby represents, covenants and warrants to the best of its knowledge, for the benefit of the Authority, Bond Counsel and the registered owners of the Bonds, the truth and accuracy of (c) through (t) below:
(a) Authority's employer identification number....................................... 68-0304653 (b) Number of 8038 reports previously filed by the Authority this calendar year.............. 17 (c) Issue price of the Bonds......................................................... $4,000,000 (d) Proceeds used for Accrued Interest....................................................... $0 (e) Costs of Issuance (including Underwriter's Discount)................................ $80,000 (f) Reasonably required Reserve Fund Deposits................................................ $0 (g) Proceeds used for Credit Enhancement..................................................... $0 (h) Proceeds used to refund prior issue...................................................... $0 (i) Nonrefunding Proceeds............................................................ $3,920,000 (j) Date of final maturity of the Bonds......................................... October 1, 2023 (k) Interest Rate on the final maturity of the Bonds......................................... VR (l) Issue price of the final maturity of the Bonds................................... $4,000,000 (m) Issue price on the entire issue of the Bonds..................................... $4,000,000 (n) Stated redemption price at maturity of the final maturity of the Bonds........... $4,000,000 (o) Stated redemption price at maturity of the entire issue of the Bonds............. $4,000,000 (p) Weighted average maturity of the entire issue of the Bonds.................... 24.9836 years (q) Yield on the entire issue of the Bonds................................................... VR (r) Net interest cost for the entire issue of the Bonds...................................... VR (s) The Standard Industrial Classification Code(s) for the Facilities is................... 2013 (t) Type of Property financed by Nonrefunding Proceeds of the Bonds:
15
Land............................................................................... $484,000 Buildings........................................................................ $3,436,000 Equipment with recovery period of more than 5 years...................................... $0 Equipment with recovery period of 5 years or less........................................ $0 Other.................................................................................... $0 Total....................................................................... $3,920,000 ==========
ARTICLE III USE OF BOND PROCEEDS Section 3.01. Anticipated Use of Proceeds. The Borrower covenants, represents and warrants for the benefit of the Authority, the Trustee and the registered owners of the Bonds that the Proceeds of the Bonds will be used in the manner set forth in Exhibit A-2 hereto and that the Proceeds of the Bonds will be invested in accordance with the Investment Instructions. Section 3.02. Certification as to Costs of the Project. The Borrower hereby certifies, with respect to the amounts shown in Exhibit A-1, that such amounts consist only of costs which are directly related to and necessary for the financing of the Project. ARTICLE IV ARBITRAGE Section 4.01. Arbitrage Representations and Elections. In connection with the issuance of the Bonds, the Borrower hereby represents, certifies and warrants as follows: (a) The Borrower has entered into contracts with third parties for the acquisition, construction and equipping of the Facilities obligating an expenditure in excess of 5% of the Net Sale Proceeds of the Bonds and the Borrower will proceed with due diligence in completing the Facilities and in allocating the Net Sale Proceeds of the Bonds to such Expenditures. (b) The Borrower will use a reasonable, Consistently Applied Accounting Method to account for Gross Proceeds, Investments and Expenditures for the Bonds. The Borrower shall additionally use a Consistently Applied Accounting Method for allocating Proceeds of the Bonds to Expenditures, subject to the Current Outlay of Cash rule. (c) The Borrower shall not commingle Proceeds of the Bonds with any other funds. 16 (d) In connection with the Bonds, there has not been created or established and the Borrower does not expect that there will be created or established, any sinking fund, pledged fund or similar fund (other than as specifically identified in the Indenture), including without limitation any arrangement under which money, securities or obligations are pledged directly or indirectly to secure the Bonds or any contract securing the Bonds or any arrangement providing for compensating or minimum balances to be maintained by the Borrower with any registered owner or credit enhancer of the Bonds, except the Interest Collateral Account. (e) The allocation of Net Proceeds of the Bonds to the reimbursement portion of the costs of the Facilities will be made as of and completed on the Date of Issuance. The declaration of official intent required by (S) 1.150-2 of the Regulations with respect to Net Proceeds of the Bonds used to reimburse the Borrower for certain Capital Expenditures made in connection with the Facilities is attached hereto as Exhibit D. (f) The Borrower reasonably expects that 85% of the Net Sale Proceeds of the Bonds will be used to complete the Facilities within three years of the Date of Issuance and not more than 50% of the Proceeds of the Bonds will be invested in Nonpurpose Investments having a substantially guaranteed Yield for four years or more. The Borrower reasonably expects that the Net Sale Proceeds of the Bonds deposited to the Project Fund will be expended in accordance with the schedule contained in the No Arbitrage Certificate executed and delivered by the Authority in connection with the issuance and delivery of the Bonds. (g) All funds and accounts established pursuant to the Indenture will be invested pursuant to the No Arbitrage Certificate executed by the Authority on the Date of Issuance and the Investment Instructions delivered to the Authority and the Borrower on the Date of Issuance. (h) The Borrower will not enter into and will not direct the Trustee to engage in any Abusive Arbitrage Devises. If the Borrower directs the Trustee to invest any of the Gross Proceeds in certificates of deposit or pursuant to an investment contract or a certificate of deposit, the Borrower will obtain and provide to the Trustee certifications in the form attached hereto as Exhibit B. (i) The Borrower hereby makes, and the Authority hereby accepts, the following elections and other choices pursuant to the Regulations with respect to the Bonds: (i) The Borrower elects the bond year stated in the definition of the Bond Year. (ii) The Borrower elects to avail itself of all unrestricted yield investments granted in the Regulations for temporary period, reasonably required reserve fund and minor portion investments. 17 (iii) The Borrower elects to treat the last day of the fifth Bond Year (September 30, 2003) as the initial Installment Computation Date and the initial rebate payment date. The Borrower elects to treat the last day of each subsequent fifth Bond Year as subsequent Installment Computation Dates and subsequent rebate payment dates. The Borrower may change or adjust such dates as permitted by the Regulations. (iv) With respect to the Universal Cap, the Borrower as of the Date of Issuance does not expect that the operation of the Universal Cap will result in a reduction or reallocation of Gross Proceeds of the Bonds and that the Borrower (A) does not expect to pledge funds (other than those described in the Indenture) to the payment of the Bonds; (B) expects to expend Sale Proceeds of the Bonds within the expected temporary periods; and (C) does not expect to retire any of the Bonds earlier than shown in the Yield computations for the Bonds pursuant to this Article IV. Section 4.02. Arbitrage Compliance. (a) The Borrower and the Authority acknowledge that the continued exclusion of interest on the Bonds from gross income of the recipients thereof for purposes of federal income taxation depends, in part, upon compliance with the arbitrage limitations imposed by (S) 148 of the Code, including the rebate requirement described in Section 4.03 below. The Borrower and the Authority hereby agree and covenant that they shall not permit at any time or times any of the Proceeds of the Bonds or other funds of the Borrower to be used, directly or indirectly, to acquire any asset or obligation, the acquisition of which would cause the Bonds to be "arbitrage bonds" for purposes of (S) 148 of the Code. The Borrower further agrees and covenants that it shall, to the extent that any Proceeds of the Bonds are invested in any Investment which is not Investment Securities, do and perform all acts and things necessary in order to ensure that the requirements of (S) 148 of the Code and the Regulations are met. To the extent that Proceeds of the Bonds are invested in any Investment which is not an Investment Security, the Borrower shall retain, at its own expense, a Rebate Analyst to make such determinations and calculations as may be necessary in order to ensure that the Borrower takes the actions described in Sections 4.02 through 4.06 hereof with respect to the Investment of Gross Proceeds on deposit in the funds and accounts established under the Indenture. If the Borrower fails to retain such a Rebate Analyst, the Authority shall, upon being notified in writing of such failure, at the Borrower's expense, retain such a Rebate Analyst. The Borrower shall direct the Trustee to make the required transfers and dispositions described in Sections 4.02, 4.03 and 4.04 hereof, and the Trustee may rely upon information provided by the Borrower. (b) The Revenue Fund and the Purchase Fund will be used primarily to achieve a proper matching of revenues and debt service on the Bonds within each Bond Year. With respect to the Revenue Fund and the Purchase Fund: (i) to the extent amounts are deposited therein, the Revenue Fund and the Purchase Fund will be depleted at least once a year except for a carryover amount not to exceed in the aggregate the greater of one-twelfth of the principal and interest payments on the Bonds for the 18 immediately preceding Bond Year or the earnings on the Revenue Fund and the Purchase Fund for the immediately preceding Bond Year; (ii) any amounts contributed to the Revenue Fund and the Purchase Fund will be spent within thirteen (13) months of the date of such contribution to pay debt service on the Bonds; and (iii) any amount received from the investment or reinvestment of moneys held in the Revenue Fund and the Purchase Fund will be spent within one year of receipt thereof, all in accordance with the Indenture. To the extent the provisions of this Section 4.2(b) are satisfied, amounts in the Revenue Fund and the Purchase Fund will be invested without regard to yield and no rebate calculations will need to be made with respect to any moneys in the Revenue Fund or the Purchase Fund during any Bond Year; provided, however, that the total earnings on Nonpurpose Investments held in the Revenue Fund and the Purchase Fund do not exceed $100,000. (c) In general, no rebate calculations will be required with respect to Sale Proceeds or Investment Proceeds if at least 15% of expected Gross Proceeds actually are spent within six (6) months after the Date of Issuance, at least 60% of expected Gross Proceeds actually are spent within twelve (12) months after the Date of Issuance, and 100% of actual Gross Proceeds actually are spent within eighteen (18) months after the Date of Issuance. The requirement that 100% of actual Gross Proceeds be spent within eighteen (18) months after the Date of Issuance will be met if at least 95% of Gross Proceeds is spent within eighteen (18) months and the remainder is held as a reasonable retainage and such remainder is spent within thirty months after the Date of Issuance. Section 4.03. Calculation of Rebate Amount. (a) (S) 148(f) of the Code requires the payment to the United States of the Rebate Amount. Except as provided below, the Revenue Fund, the Project Fund, the Costs of Issuance Fund, the Rebate Fund, the Interest Collateral Account and all other funds or accounts treated as containing Gross Proceeds, are subject to this rebate requirement. (b) In accordance with the requirements set out in the Code and pursuant to the Indenture, the Authority has created the Rebate Fund, to be held by the Trustee, in its capacity as Trustee under the Indenture, and used as provided in this Section. (i) On or before 25 days following each Computation Date, upon the Borrower's written direction, an amount shall be deposited to the Rebate Fund by the Trustee from source or sources stated in such direction so that the balance of the Rebate Fund shall equal the aggregate Rebate Amount as of such determination date. (ii) Amounts deposited in the Rebate Fund shall be invested in accordance with the Investment Instructions by the Trustee at the written direction of the Borrower. (iii) All money at any time deposited in the Rebate Fund shall be held by the Trustee, to the extent required by this Tax Regulatory Agreement and the 19 Indenture, for payment to the United States of America of the Rebate Amount. All amounts deposited into or on deposit in the Rebate Fund shall be governed by this Tax Regulatory Agreement. (iv) For purposes of crediting amounts to the Rebate Fund or withdrawing amounts from the Rebate Fund, Nonpurpose Investments shall be valued in the manner provided in this Article. (c) In order to meet the rebate requirement of (S) 148(f) of the Code, the Borrower agrees and covenants to take, or cause to be taken by the Trustee or the Rebate Analyst described in Section 4.06 hereof, as appropriate, the following actions: (i) For each Investment of amounts held with respect to the Bonds in (A) the Revenue Fund, (B) the Purchase Fund, (C) the Project Fund, (D) the Costs of Issuance Fund and (E) the Rebate Fund, the Trustee shall record the purchase date of such Investment, its purchase price, accrued interest due on its purchase date, its face amount, its coupon rate, its Yield, the frequency of its interest payment, its disposition price, accrued interest due on its disposition date and its disposition date. The Rebate Analyst retained by the Borrower shall determine the Fair Market Value for such Investments and the Yield thereon as may be required by the Regulations. The Yield for an Investment shall be calculated by using the method set forth in the Regulations. (ii) For each Computation Date specified in paragraph (iii) below, the Rebate Analyst shall compute the Yield on the Bonds as required by the Regulations based on the definition of issue price contained in Section 148(h) of the Code and the Regulations. The Bonds are a variable rate issue and accordingly the yield on the Bonds cannot be determined at this time. The Yield on the Bonds shall be calculated by the Rebate Analyst at such time in order to comply with this Tax Regulatory Agreement and the Regulations based on the definitions of issue price contained in Section 148(h) of the Code using payments or prepayments of the principal of, premium, if any, and interest on the Bonds required by the Regulations. For purposes of this Tax Regulatory Agreement the initial offering price to the public (not including bond houses and brokers, or similar persons or organizations acting in the capacity of underwriters or wholesalers) at which a substantial amount of the Bonds were sold is the Issue Price. Any reasonable amounts paid for credit enhancement have been and may generally be treated as interest on the Bonds for purposes of Yield computation to the extent permitted by the Regulations. (iii) Subject to the special rules set forth in paragraphs (iv) and (v) below, the Rebate Analyst shall determine the amount of earnings received on all Nonpurpose Investments described in paragraph (i) above, for each Computation Date. In addition, where Nonpurpose Investments are retained by the Trustee after retirement of the Bonds, any unrealized gains or losses as of the date of retirement of the Bonds must be taken into account in calculating the earnings on such Nonpurpose Investments to the extent required by the Regulations. 20 (iv) In determining the Rebate Amount computed pursuant to this Section, (A) all earnings on any bona fide debt service fund (including the Revenue Fund, the Purchase Fund and the Interest Collateral Account) shall not be taken into account for any Bond Year during which the gross earnings of such funds total less than $100,000, (B) the Universal Cap applicable to the Bonds pursuant to (S) 1.148-6(b)(2) of the Regulations shall be taken into account, (C) all of the Borrower's elections and other choices set forth in Section 4.01 hereof shall be taken into account and (D) all spending exceptions to rebate met by the Borrower shall be taken into account. (v) For each Computation Date specified in paragraph (iii) above, the Rebate Analyst shall calculate for each Investment described in paragraphs (i) and (iii) above, an amount equal to the earnings which would have been received on such Investment at an interest rate equal to the Yield on the Bonds as described in paragraph (ii) above. The method of calculation shall follow that set forth in the Regulations. (vi) For each Computation Date, the Rebate Analyst shall determine the amount of earnings received on all Investments held in the Rebate Fund for the Computation Date. The method of calculation shall follow that set forth in the Regulations. (vii) For each Computation Date, the Rebate Analyst shall calculate the Rebate Amount, by any appropriate method to be described in the Code and Regulations applicable or which becomes applicable to the Bonds. The determination of the Rebate Amount shall account for the amount (to be rounded down to the nearest multiple of $100) equal to the sum of all amounts determined in paragraph (iii), all amounts determined in paragraphs (v) and (vi), and less any amount which has previously been paid to the United States pursuant to Section 4.04 below. The Rebate Analyst shall notify the Trustee of the Rebate Amount. (viii) If the Rebate Amount exceeds the amount on deposit in the Rebate Fund, the Borrower shall immediately pay such amount to the Trustee for deposit into the Rebate Fund. Section 4.04. Payment to United States. (a) Not later than sixty (60) days after each Installment Computation Date (or such longer period as may be permitted by the Regulations), the Trustee shall pay to the United States an amount that, when added to the Future Value as of such Computation Date of previous rebate payments made for the Bonds, equals at least ninety percent (90%) of the Rebate Amount required to be on deposit in the Rebate Fund as of such 21 payment date. No later than sixty (60) days after the Final Computation Date the Trustee shall pay to the United States an amount that, when added to the Future Value as of such Computation Date of previous rebate payments made for the Bonds, equals at least one hundred percent (100%) of the balance remaining in the Rebate Fund. (b) The Trustee shall mail each payment of an installment to the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255. Each payment shall be accompanied by Internal Revenue Form 8038-T, and, if necessary, a statement summarizing the determination of the Rebate Amount. (c) If on any Computation Date, the aggregate amount earned on Nonpurpose Investments in which the Gross Proceeds of the Bonds are invested is less the amount that would have been earned if the obligations had been invested at a rate equal to the Yield on the Bonds as determined in Section 4.03 hereof, such deficit may at the written request of the Borrower be withdrawn from the Rebate Fund and paid to the Borrower or as the Borrower shall direct. The Borrower may direct that any overpayment of rebate may be recovered from any Rebate Amount previously paid to the United States pursuant to (S) 1.148-3(i) of the Regulations. (d) The Borrower shall also pay any penalty or interest on underpayments of Rebate Amount not paid in a timely manner pursuant to this Tax Regulatory Agreement, the Code and the Regulations. Section 4.05. Recordkeeping. In connection with the rebate requirement, the Borrower and the Trustee shall maintain the following records: (a) The Borrower and the Trustee shall record all amounts paid to the United States pursuant to Section 4.04 hereof. The Trustee shall furnish to the Authority and the Borrower copies of any materials filed with the Internal Revenue Service pertaining thereto and shall provide the Authority and the Borrower with all records in its possession that the Authority, the Borrower or the Rebate Analyst may request relating to the calculation of any Rebate Amount. (b) The Borrower and the Trustee shall retain records of the rebate calculations until six years after the retirement of the last obligation of the Bonds. Section 4.06. Rebate Analyst. (a) To the extent required to comply with the provisions of Section 4.02 hereof, the Borrower shall appoint a Rebate Analyst and any successor Rebate Analyst for the Bonds reasonably acceptable to the Authority, subject to the conditions set forth in this Section. The Rebate Analyst and each successor Rebate Analyst shall signify its acceptance of the duties imposed upon it hereunder by a written instrument of acceptance 22 delivered to the Trustee, the Authority and the Borrower under which such Rebate Analyst will agree to discharge its duties pursuant to this Tax Regulatory Agreement in a manner consistent with prudent industry practice. (b) The Rebate Analyst may at any time resign and be discharged of the duties and obligations created by this Tax Regulatory Agreement by giving notice to the Trustee, the Authority and the Borrower. The Rebate Analyst may be removed at any time by an instrument signed by the Authority and the Borrower and filed with the Authority, the Borrower and the Trustee. The Borrower and the Authority shall, upon the resignation or removal of the Rebate Analyst, appoint a successor Rebate Analyst. (c) Each successor Rebate Analyst appointed pursuant to this Section shall be either a firm of independent accountants or Bond Counsel or another entity experienced in calculating rebate payments required by (S) 148(f) of the Code. (d) In order to provide for the administration of the matters pertaining to arbitrage rebate calculations set forth herein, and in the Investment Instructions and No Arbitrage Certificate, the Trustee, the Borrower and the Authority may provide for the employment of the Rebate Analyst on or prior to September 30, 2003. The Trustee and the Authority may rely conclusively upon and shall be fully protected from all liability in relying upon the opinions, calculations, determinations, directions and advice of the Rebate Analyst. The charges and fees for such Rebate Analyst shall be paid by the Borrower upon presentation of an invoice for services rendered in connection therewith. ARTICLE V COMPLIANCE WITH CODE In order to ensure that interest on the Bonds is excludable from the gross income of the recipients thereof for purposes of federal income taxation, the Borrower hereby represents and covenants as follows: (a) The Average Maturity of the Bonds does not exceed 120% of the Average Economic Life of the Facilities within the meaning of (S) 147(b) of the Code as set forth in Exhibit C hereto. (b) The Bonds are not and shall not become directly or indirectly "federally guaranteed." Unless otherwise excepted under (S) 149(b) of the Code, the Bonds will be considered "federally guaranteed" if (i) the payment of principal and interest with respect to the Bonds is guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof), (ii) 5% or more of the Proceeds of the Bonds is (A) to be used in making loans, the payment of principal or interest with respect to which are to be guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof) or (B) to be invested (directly or indirectly) in federally insured deposits or accounts or (iii) the payment of principal or interest on the Bonds is otherwise indirectly guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof). 23 (c) The Borrower will provide to the Authority all information necessary to enable the Authority to complete and file Internal Revenue Forms 8038 and 8038-T pursuant to (S) 149(e) of the Code. (d) As required by (S) 147(f) of the Code, the Bonds and the Project were the subject of a public hearing held on March 20, 1998, which was preceded by reasonable public notice. (e) The Borrower will comply with, and make all filings required by, all effective rules, rulings or regulations promulgated by the Department of the Treasury or IRS with respect to obligations described in (S)(S) 103 and 144 of the Code, such as the Bonds. (f) The Borrower agrees to rebate all amounts required to be rebated to the United States of America pursuant to (S) 148(f) of the Code. The Borrower agrees to provide any instructions to the Trustee that are necessary to satisfy the requirements of (S) 148(f) of the Code. The Borrower will not deposit or instruct the Trustee to deposit amounts in the Rebate Fund in excess of the amounts reasonably expected to be needed to make the payments to the United States as required by (S) 148(f) of the Code. (g) The Sale Proceeds of the Bonds and any Investment Proceeds will be expended for the purposes set forth in the Agreement and in the Indenture and no amount of such Proceeds of the Bonds in excess of 2% of the Sale Proceeds of the Bonds will be expended to pay the costs of issuing the Bonds within the meaning of (S) 147(g) of the Code. (h) The Authority shall not sell any other tax-exempt obligations within 15 days of the sale date of the Bonds pursuant to the same plan of financing with the Bonds and payable from substantially the same source of funds, determined without regard to qualified guaranties from unrelated parties and used to pay the Bonds. (i) The Bonds were approved by the Governor of the State of California following the public hearing referred to in (d) above. ARTICLE VI TERM OF TAX REGULATORY AGREEMENT This Tax Regulatory Agreement shall be effective from the Date of Issuance through the date that the last Bond is redeemed, paid or deemed paid pursuant to the terms of the Indenture, except that the requirements of Section 4.05 hereof shall survive until six years after the retirement of the last obligations of the Bonds. 24 ARTICLE VII AMENDMENTS Notwithstanding any other provision hereof, any provision of this Tax Regulatory Agreement may be deleted or modified at any time at the option of the Borrower, with the consent of the Authority, if the Borrower has provided to the Trustee and the Authority an opinion, in form and substance satisfactory to the Trustee and the Authority, of Bond Counsel that such deletion or modification will not adversely affect the exclusion of interest on the Bonds from the gross income of the recipients thereof for purposes of federal income taxation. ARTICLE VIII EVENTS OF DEFAULT, REMEDIES Section 8.01. Events of Default. The failure of any party to this Tax Regulatory Agreement to perform any of its required duties under any provision hereof shall constitute an Event of Default under this Tax Regulatory Agreement and under the Indenture. Section 8.02. Remedies for an Event of Default. Upon an occurrence of an Event of Default under Section 8.01 hereof, the Authority or the Trustee may in their discretion, proceed to protect and enforce their rights and the rights of the registered owners of the Bonds by pursuing any available remedy under the Indenture or by pursuing any other available remedy, including, but not limited to, a suit at law or in equity. 25 IN WITNESS WHEREOF, the Authority, the Borrower and the Trustee have caused this Tax Regulatory Agreement to be executed in their respective names and by their proper officers thereunto duly authorized, all as of the day and year first written above. CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY Attest: By /s/ Illegible Signature ____________________________ Chair By Blake Fowler _____________________ Secretary PROVENA FOODS INC. By Thomas J. Mulroney ____________________________ Name Thomas J. Mulroney __________________________ Title CFO _________________________ U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee By Celia Crom ____________________________ Name Celia Crom __________________________ Title Trust Officer _________________________ [Signature Page to Tax Regulatory Agreement] EXHIBIT A-1 SOURCES AND USES OF FUNDS 1. Amount received from the sale of the Bonds (exclusive of accrued interest) is as follows:
Face amount of the Bonds........................... $4,000,000 Less: Underwriters' discount...................... $ 0 Total amount received from the sale of the Bonds... $4,000,000
2. Proceeds of the Bonds totaling $3,920,000, representing 100% of the Net Sale Proceeds of the Bonds after deduction of the amounts described in 3 below will be deposited to the Project Fund 3. $80,000 of the Bond proceeds will be deposited in the Costs of Issuance Fund to pay a portion of the Costs of Issuance of the Bonds. Estimated Use of Substantially all of the Proceeds of the Bonds
(1) Issue price of Bonds................................. $4,000,000 (2) Substantially All Factor.................................. .95% (3) Total................................................ $3,800,000 ========== (4) Amount paid for qualified Project Costs* (including interest during construction, if any) $3,920,000 Note: All investment earnings, if any, on the Bond proceeds will be used for qualified Project Costs (including interest during construction, if any).
*Qualified Project Costs: Land $484,000 Building $3,920,000 A-1 EXHIBIT A-2 PROPERTY FINANCED OR REFINANCED BY THE BONDS 1. Acquisition of the real property located in the Crossroads Commercial Industrial Park, Lathrop, California $484,000. 2. Construction of meat processing facility $3,436,000. A-2 EXHIBIT B-1 FORM OF PROVIDER CERTIFICATION FOR A CERTIFICATE OF DEPOSIT I, [Name], [Position], of [Entity Providing the Certificate of Deposit] (the "Provider") HEREBY CERTIFY that the yield on the Certificate of Deposit entered into on [DATE] is not less than the highest yield that the Provider publishes or posts for comparable certificates of deposit offered to the public and that the yield on the Certificate of Deposit is not less than the yield available on reasonably comparable direct obligations offered by the United States Treasury. IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of ____________ 19___. By_____________________________ Name___________________________ Title__________________________ B-1 EXHIBIT B-2 FORM OF PROVIDER CERTIFICATION FOR AN INVESTMENT CONTRACT I, [Name], [Position], of [Entity Providing Investment Contract] (the "Provider") HEREBY CERTIFY in connection with the Investment Contract between [NAME] and the Provider dated as of [DATE] (the "Investment Contract") that the yield on the Investment Contract is at least equal to the yield offered on reasonably comparable Investment contracts offered to other persons, if any, from a source of funds other than gross proceeds of an issue of tax-exempt bonds and that the amount of administrative costs that are reasonably expected to be paid by the Provider to third parties in connection with the Investment Contract is $____________. For purposes of this certification, administrative costs include all brokerage or selling commissions paid by the Provider to third parties in connection with the Investment Contract, legal or accounting fees, investment advisory fees, recordkeeping, safekeeping, custody and other similar costs or expenses. IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of ____________ 19___. By__________________________________ Name________________________________ Title_______________________________ B-2 EXHIBIT B-3 FORM OF BORROWER'S CERTIFICATION FOR AN INVESTMENT CONTRACT INVOLVING THREE BIDS I, [[Name], [Position], of Provena Foods Inc., a California corporation (the "Borrower"), HEREBY CERTIFY in connection with the Investment contract between the Borrower and [Entity Providing Investment Contract] (the "Provider") dated as of __________ ___, ______ the "Investment Contract") that (i) at least three bids on the Investment Contract were received from persons other than those with a material financial advantage in the California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project), (ii) the yield on the Investment Contract purchased is at least equal to the yield offered under the highest bid received from an uninterested party, (iii) the price of the Investment Contract takes into account as a significant factor the Borrower's expected drawdown for the funds to be invested (other than float funds or reasonably required reserve or replacement funds) and (iv) any collateral security requirements for the Investment Contract are reasonable. IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of ____________ 19___ . PROVENA FOODS INC. By________________________________ Name______________________________ Title_____________________________ B-3 EXHIBIT C USEFUL LIFE OF THE PROPERTY FINANCED OR REFINANCED BY THE BONDS
Cost Useful Life* Land $ 484,000 X n/a Building 3,436,000 X 40.5 $139,158,000 ---------- ---- ------------ $3,920,000 $139,158,000 ========== ============ Less: cost of land 484,000 ---------- $3,436,000 ==========
Average life of Project = $139,158,000 divided by $3,436,000 = 40.5 years. Useful life of Project for purposes of Section 147(b) of the Code = 40.5 years x 1.20 = 48.6 years Average life of Bonds = 24.9836 years ============= The information contained in this schedule, attached as an exhibit hereto, setting forth the respective cost, economic life, ADR midpoint life, if any, under Revenue Procedure 87-56, 1987-42 I.R.B. 4, and Revenue Procedure 83-35, 1983-2 C.B. 745, as supplemented and amended from time to time, and guideline life, if any, under Revenue Procedure 62-21, 1962-2 C.B. 118, as supplemented and amended from time to time, of each asset of the Facilities financed with the Proceeds of the Bonds, is true, accurate and complete. *Includes time from date of issuance until property is placed in service. C-1 EXHIBIT D DECLARATION OF OFFICIAL INTENT [See Attached] [LETTERHEAD OF COMERICA] Letter of Credit Division IRREVOCABLE DIRECT PAY LETTER OF CREDIT COMERICA BANK CALIFORNIA INTERNATIONAL BANKING DEPARTMENT 333 W. SANTA CLARA STREET SAN JOSE, CALIFORNIA 95113 October 6, 1998 U.S. Bank Trust National Association 150 E. Fifth Street St Paul, MN 55101 Dear Sirs: We hereby issue in your favor, as trustee ("Trustee") under the Indenture of Trust ("Indenture") dated as of October 1, 1998, by and between you and the California Economic Development Financing Authority ("Issuer") this Irrevocable Direct Pay Letter of Credit (this "Credit") No. 548144 for the account of Provena Foods Inc., a California corporation ("Account Party"), in an amount not exceeding Four Million Sixty Thousand Dollars ($4,060,000) (the "Stated Amount") of which amount not exceeding $4,000,000 ("Principal Amount") may be drawn upon with respect to the payment of principal and $60,000 ("Interest Amount") may be drawn upon with respect to the payment of interest of California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds. Series 1998 (Provena Foods Inc. Project) (the "Bonds"). Funds under this Credit are available to you against drawing certificate(s) ("Drawing Certificate(s)"), duly signed and presented to us at 333 W. Santa Clara Street, 5th Floor, San Jose, California 95113 as follows: 1) If a drawing is being made with respect to the payment of interest on the Bonds, or with respect to the payment of principal on the Bonds, your request for payment shall be presented in the form of a certificate, with the blanks appropriately filled in, as attached to this Credit as Annex A ("Annex A Drawing Certificate"). 2) If a drawing is made with respect to the payment of interest and principal in connection with the purchase of tendered Bonds or Bonds deemed tendered, your request shall be presented in the form of a certificate, with the appropriate blanks filled in, as attached to this Credit as Annex B ("Annex B Drawing Certificate). Any Drawing Certificate may be presented in person or by telecopier at 408-556-5216 to the attention of Manager, Operations, provided the drawing by telecopy is confirmed by telephone at 408-556-5109 and the original certificates have been sent by overnight mail to us as herein provided. In the event that any telecopied certificate shall differ from the corresponding original certificate received, and we shall have acted upon or in reliance upon such telecopied certificate, Comerica such telecopied certificate shall govern and control. The certificate shall have all blanks appropriately filled in and shall be duly executed by your authorized officer. An Annex A Drawing Certificate complying with the terms of this Credit and presented prior to 10:00 a.m. Pacific time, on any Business Day (as defined herein) shall be honored and the amount shall be paid in immediately available funds by 4:30 p.m. Pacific time on the same Business Day or such later Business Day as specified in the Annex A Drawing Certificate. An Annex A Drawing Certificate complying with the terms of this Credit and presented at or after 10:00 a.m., Pacific time on any Business Day shall be honored and the amount of the draft paid in immediately available funds on the following Business Day by 10:00 a.m. Pacific time or such later Business Day as specified in the Annex A Drawing Certificate. An Annex B Drawing Certificate presented hereunder, and complying with the terms of this Credit will be duly honored and the amount shall be paid in immediately available funds (i) not later than 11:30 a.m., Pacific time, on the Business Day on which such Annex B Drawing Certificate is presented to us as aforesaid if such presentation is made to us at or before 8:30 a.m., Pacific time, and (ii) not later than 11:30 a.m., Pacific time, on the Business Day following the business day on which such demand is presented to us as aforesaid if such presentation is made to us after 8:30 a.m., Pacific time. Payment under this Credit shall be made in accordance with the payment instructions set forth in the completed Drawing Certificate accompanying each draft. Business Day for purposes hereof means any day other than (i) a day on which the banking institutions in (a) New York, New York, (b) the City of San Jose, California or (c) the cities in which the Trustee or the Paying Agent (as defined in the Indenture) have their respective principal offices are authorized to close or (ii) a day on which the New York Stock Exchange is closed. This Credit is transferable in its entirety, but not in part, to any transferee who has succeeded you as Trustee under the Indenture and may be successively so transferred. Transfer of this Credit to such transferee shall be affected by the presentation to us of this Credit accompanied by a Certificate substantially in the form of Annex C ("Transfer Certificate"). Each payment of a Drawing with respect to the payment of interest on or principal of the Bonds honored by us shall reduce the portion of the Principal Amount and the Interest Amount available under this Credit, subject to reinstatement as provided below. The Stated Amount of this Credit shall also be reduced by the amount stated in a written notice of reduction executed by the Trustee. A reduction of the Stated Amount through the use of such a written notice of reduction shall be effective as of the actual date of receipt by us of such notice at our above stated address. Following the honoring of a Drawing hereunder to pay interest on the Bonds (other than interest in connection with redemption, maturity, acceleration or purchase upon tender of the Bonds in whole or in part), the available Interest Amount shall be automatically and immediately reinstated following such drawing to the original amount. Page 2 of 7 all of which constitute an integral part of this Letter of Credit [LOGO APPEARS HERE] Letter of Credit Division Following the honoring of a Drawing hereunder to pay principal and interest of the Bonds in order to purchase the Bonds on behalf of the Account Party, the available Principal and Interest Amount shall not be reinstated to the original amount, unless you shall have received our notice to you by hand delivery or telecopier transmission at (415) 273-4591 receipt of which has been confirmed by you to us in writing via return telecopy at (408) 556-5216, followed by the delivery of the original notice by overnight delivery, that there has been reinstatement of the Principal Amount and Interest Amount. This Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce, Publication No. 500 (the "Uniform Customs"): provided, however, that Article 48(g) shall not apply to this Credit. As to matters not covered by the Uniform Customs, this Credit shall be governed by the internal laws of the State of California. Notwithstanding anything to the contrary contained in Article 17 of the Uniform Customs, if this Credit expires during an interruption of business as described in Article 17, we will honor otherwise complying draws under this Credit that are made within ten (10) days after the resumption of business by us. Notwithstanding anything to the contrary contained in Article 41 of the Uniform Customs, this Credit will not terminate because of any failure to make any permitted drawing under this Credit. This Credit, unless extended, shall expire on the earliest of (i) 5:00 p.m. Pacific Time October 15, 2003, (ii) the date of receipt by us of notice from the Trustee and the Account Party that the issuance of an alternate credit facility in substitution for this Credit has occurred, (iii) the date following the payment under this Credit as a result of the acceleration of the Bonds under the Indenture, (iv) five (5) days following the Fixed Rate Date as stipulated in the notice delivered to us pursuant to the terms of the Indenture, or (v) the date that we receive notice from the Trustee that none of the Bonds are outstanding under the Indenture. All payments hereunder will be made with our own funds and not with any funds received directly or indirectly from the Account Party, Issuer or any party related to the Account Party, Issuer or any party related to the Account Party or Issuer. We undertake that your Drawing Certificate(s), drawn and presented on or before the expiration of this Credit in conformity with the terms of this Credit, will be duly honored. Very truly yours, COMERICA BANK - CALIFORNIA By: /s/ Illegible Signature ---------------------------- Page 3 of 7 all of which constitute an integral part of this Letter of Credit [LETTERHEAD OF COMERICA] Letter of Credit Division ANNEX A Regular Drawing Certificate Comerica Bank-California International Department 333 W. Santa Clara Street, 5th Floor San Jose, California 95113 Attention: Manager, Operations We refer to your Letter of Credit No. 548144 issued in support of the California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) (the "Credit"). Terms defined in the Credit not otherwise defined herein shall have the same meaning herein as therein. 1. As Trustee pursuant to the Indenture, we hereby make demand for payment under the Credit to pay or provide for the payment of interest on such Bonds in the amount of $____________ and principal in the amount of $__________. This Drawing is made as [a regularly scheduled interest payment] [an extraordinary redemption] [an optional redemption] [a mandatory redemption] [maturity of the Bonds] [in connection with acceleration], under the provisions of Section ___ of the Indenture. (Delete inappropriate clauses) 2. The amount demanded for the payment of principal and/or interest does not exceed the amount available on the date hereof to be drawn under the Credit in respect to the payment of principal and interest on the Bonds and the stated amount of the Credit will be permanently reduced by the amount demanded herein in respect to the payment of principal. 3. Upon receipt of the amount demanded under this Credit, we will apply the same directly to payment when due in respect to interest and/or principal on account of such Bonds. 4. Please remit your payments on [insert date] as follows: _________________, 199__ U.S. Bank Trust National Association, as Trustee By:______________________________ Its: Authorized Officer Page 4 of 7 all of which constitute an integral part of this Letter of Credit [LETTERHEAD OF COMERICA] ANNEX B Purchase Drawing Comerica Bank-California International Department 333 W. Santa Clara Street, 5th Floor San Jose, California 95113 Attention: Manager, Operations We refer to your Letter of Credit No. 548144 issued in support of the California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) (the "Credit"). Terms defined in the Credit not otherwise defined herein shall have the same meaning herein as therein. 1. As Trustee pursuant to the Indenture, we hereby make demand for payment under the Credit to pay or provide for the payment of interest in the amount of $________ and for payment of principal in the amount of $_____ for the purchase of tendered Bonds under the provisions of Section(s) ____ of the Indenture. If the Bonds are book-entry bonds deposited with The Depository Trust Company or any successor thereto ("Depository"), we certify to you that we have directed the Depository to reflect beneficial ownership in Bonds for your benefit as a secured party, and the aggregate amount of such Bonds is equal to the amount of the drawing for principal under this paragraph. 2. The amount demanded for the payment of principal and/or interest does not exceed the amount available on the date hereof to be drawn under the Credit with respect to the payment of principal and interest on the Bonds. 3. The stated amount of the Credit will be permanently reduced by the amount demanded herein in respect to the payment of principal and interest, unless you otherwise advise us as provided in the Credit. 4. Upon receipt of the amount demanded under this Credit, we will apply the same directly to payment when due with respect to interest and/or principal on account of such Bonds. 5. Please remit your payment on [insert date] as follows: ______________________________ ______________________________ ___________, 199__ U.S. Bank Trust National Association as Trustee By:_______________ Its: Authorized Officer Page 5 of 7 all of which constitute an integral part of this Letter of Credit [LETTERHEAD OF COMERICA] Letter of Credit Division ANNEX C Instructions for Transfer Comerica Bank-California International Department 333 W. Santa Clara Street, 5th Floor San Jose, California 95113 Attention: Manager, Operations We refer to your Letter of Credit No. 548144 issued in support of the California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) (the "Credit"). The undersigned, as Trustee, is named as beneficiary of the Credit. The Transferee named below has succeeded the undersigned as Trustee under the Indenture defined in the Credit: Name of Transferee Address Therefore, for value received, the undersigned hereby irrevocably instructs you to transfer to such Transferee all rights of the undersigned to draw under the Credit. By this transfer, all rights of the undersigned in the Credit are transferred to Transferee and Transferee shall have the sole rights as beneficiary thereof, including sole rights relating to any amendments, whether increases or extensions or other amendments and whether now existing or hereafter made. All amendments are to be advised directly to Transferee without necessity of any consent of or notice to the undersigned. U.S. Bank Trust National Association, as Trustee By: Its: Authorized Officer Page 6 of 7 all of which constitute an integral part of this Letter of Credit [LETTERHEAD OF COMERICA] The undersigned (Name of Transferee) hereby accepts the foregoing transfer of rights under the Credit and has accepted the obligations of the Trustee under the Indenture. (Name of Transferee) By: Title Address of Principal Corporate Trust Office Telephone Fax Page 7 of 7 all of which constitute an integral part of this Letter of Credit EX-10.45 11 BUILDING LOAN AGREEMENT Exhibit 10.45 BUILDING LOAN AGREEMENT THIS BUILDING LOAN AGREEMENT ("Agreement") is made as of October 1, 1998, by and between PROVENA FOODS INC., a California corporation ("Borrower"), and COMERICA BANK-CALIFORNIA, a California banking corporation ("Lender"). 1. DEFINITIONS OF TERMS USED IN THIS AGREEMENT ------------------------------------------ 1.1 Bonds: California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project). 1.2 Borrower's Funds: The funds to be deposited by Borrower into the Borrower's Funds, Building Loan Account for the purposes herein described. 1.3 Borrower's Funds, Building Loan Account: A special non-interest bearing account into which any Borrower's Funds shall be deposited pending disbursement in the manner and for purposes herein described. Borrowers Funds shall be disbursed in the manner provided in this Agreement for disbursement of the Loan proceeds. 1.4 Chino Property: That certain real property legally described in the Chino Trust Deed given as additional collateral for the Reimbursement Agreement. 1.5 Chino Trust Deed: The Deed of Trust in favor of lender of even date herewith encumbering the Chino Property and given to secure the Reimbursement Agreement. 1.6 Completion Date: The date of required completion of construction of the Improvements in accordance with the Plans and the requirements of this Agreement and issuance of all licenses and permits necessary for the occupancy, use or lease thereof, which is April 1, 2000. 1.7 Cost Breakdown: An itemized schedule on a component, unit and trade breakdown basis covering all costs of renovation and completing the Improvements, to be submitted to and approved by Lender prior to any disbursement. 1.8 Disbursement Schedule: The schedule of disbursement of the proceeds of the Loan and of any Borrower's Funds, Building Loan Account as set forth on the Disbursement Schedule attached hereto as Exhibit A and the --------- Disbursement Plan attached hereto as Exhibit B. --------- 1 1.9 Draw Request: The form, substantially in the form of Exhibit C attached hereto and made a part hereof, which is submitted to Lender - --------- by Borrower when a disbursement of Loan proceeds is requested. 1.10 Environmental Indemnity: The unsecured environmental indemnity agreement executed in favor of Lender of even date herewith. 1.11 Governmental Authority: The authority of the United States, the State in which the Property is located, any political subdivision thereof, any city and any governmental or quasi-governmental agency, department, commission, board, bureau or instrumentality of any of them, or any court, administrative tribunal, or public utility. 1.12 Governmental Requirements: Any present or future law, ordinance, order, rule or regulation of a Governmental Authority applicable to Borrower or the construction, maintenance, use, operation or leasing of the Property. 1.13 Improvements: The manufacturing project to be constructed on the Property. 1.14 Indenture: The Indenture of Trust, by and between Issuer and the Trustee, relating to the Bonds. 1.15 Initial Disbursement: The payment upon Recordation of costs, charges, expenses and items associated with the issuance of the Bonds and the Loan as set forth in Paragraph 6.2. 1.16 Issuer: California Economic Development Financing Authority, a body public and corporate, and a public instrumentality of the State of California, as issuer of the Bonds. 1.17 Letter of Credit: The direct pay letter credit issued by Lender in connection with the issuance of the Bonds. 1.18 Letter of Credit Documents: This Agreement, the Security Agreement, the Trust Deed, the Chino Trust Deed and all documents given to Lender from time to time to secure the reimbursement obligations of Borrower under the Reimbursement Agreement, provided, however, that the Environmental Indemnity is not one of the Letter of Credit Documents. Notwithstanding any provision of any Letter of Credit Document, Borrower's obligations under the Environmental Indemnity are not secured by the Trust Deed, the Chino Trust Deed or the Security Agreement. 1.19 Litigation Amount: Fifty Thousand Dollars ($50,000). 2 1.20 Loan: The amount evidenced by the Loan Agreement. 1.21 Loan Agreement: The Loan Agreement by and between the Issuer and Borrower. 1.22 Plans: The final plans and specifications for the Improvements. 1.23 Personal Property: That personal property described in the Trust Deed and Chino Trust Deed and Security Agreement and which is collateral for the Reimbursement Agreement. 1.24 Project: The Property, the Improvements and the Personal Property. 1.25 Property: That certain real property legally described in the Trust Deed where the manufacturing facility financed by the Bonds is to be constructed and the Improvements to be constructed on a portion thereof. 1.26 Recordation: The act of recording the Trust Deed in the official records of the County in which the Property is situated. 1.27 Reimbursement Agreement: The reimbursement agreement by and between Borrower and Lender related to the Letter of Credit. 1.28 Security Agreement: The Security Agreement from the Borrower to Lender, securing the Reimbursement Agreement. 1.29 Title Insurer: Collectivel, the issuers of the title insurance policies required by Paragraph 8.3, i.e., Benefit Land Title Insurance Company and Chicago Title Company. 1.30 Trust Deeds: The two deeds of trust in favor of Lender of even date herewith encumbering the Property and the Chino Property respectively and given to secure the Reimbursement Agreement. 1.31. Trustee: The trustee for the holders of the Bonds under the Indenture. 2. LOAN. ---- 2.1 Borrower has applied to the Issuer for the issuance of the Bonds to fund the Loan to finance acquisition of the Property and renovation of the Improvements and for other costs related thereto. 2.2 Borrower has requested that Lender issue in favor of the Trustee for the account of the Borrower, the Letter of Credit, which Letter of Credit is to be available to be 3 drawn upon to provide funds for the payment of principal and interest on the Bonds when due and payable. 2.3 Borrower agrees that Lender shall have approval rights over the disbursement of the Loan to the Borrower pursuant to this Agreement. 3. LOAN PROCEEDS. Upon Recordation, Lender is authorized to: ------------- 3.1 Approve the initial Disbursement in the manner and for the purpose provided by Paragraph 6.2 directly to the parties to whom the respective payment is to be made. 4. CONDITIONS PRECEDENT TO RECORDATION. Prior to Recordation the ----------------------------------- following conditions shall have been satisfied: 4.1 Lender shall have received: 4.1.1 original insurance policies or certificates thereof for the insurance required by Paragraph 8.9 hereof; 4.1.2 preliminary title reports issued by Title Insurer showing the condition of title to the Property and the Chino Property with the Property's and Chino Property's legal descriptions and a copy of all documents listed as exceptions to said reports; 4.1.3 a "phase one" environmental assessment, in form and substance satisfactory to Lender ("Environmental Assessment") prepared by a qualified licensed environmental consultant acceptable to Lender confirming the absence of hazardous or toxic materials in, on, under or around the Property and the Chino Property. The Environmental Assessment shall, at a minimum, include a description of current and former uses of the Property and the Chino Property and the results of an inspection of the Property and the Chino Property and adjacent and neighboring property sufficient to form a basis for a reasoned opinion concerning the existence of, or potential for, hazardous material contamination on or in the vicinity of the Property and the Chino Property. In the event the Environmental Assessment indicates that the Property or the Chino Property may be affected by hazardous or toxic materials, or is otherwise unsatisfactory to Lender, in Lender's sole discretion, Lender may require additional or further environmental testing, 4 inspection and/or assessment of the Property and/or the Chino Property; 4.1.4 any development agreement related to the Property with any governmental agency together with each applicable governmental entities approved for the Project, with evidence of subordination of any such development agreement to the lien of Lender; and 4.1.5 an ALTA survey for each of the Property and the Chino Property certified to Lender and satisfactory to Lender. 4.1.6 evidence satisfactory to Lender that the Project complies with the applicable zoning ordinances; 4. CONDITIONS PRECEDENT TO DISBURSEMENT. ----------------------------------- 5.1 Prior to the Initial Disbursement, the following conditions shall have been satisfied: 5.1.1 Title Insurer shall have issued or agreed to issue the title policies described in Paragraph 8.3 hereof, naming Lender as insured in the aggregate amount of $4,060,000. 5.1.2 Lender shall have received a Draw Request, and all the requirements set forth in Part I of the Disbursement Schedule shall have been satisfied. 5.1.3 UCC-1 Financing Statements shall have been filed with the Secretary of State for the state where the Property and Chino Property is situated describing the Personal Property. 5.1.4 Recordation shall have occurred. 5.2 Prior to Lender approving disbursements after the Initial Disbursement, except for the last disbursement, the following conditions shall have been satisfied: 5.2.1 The Initial Disbursement shall have occurred. 5.2.2 No default shall exist under this Agreement, the Reimbursement Agreement or any other Letter of Credit Document. 5 5.2.3 Lender shall have received an appraisal showing an indicated prospective market value of the Project (the "Appraisal"). 5.2.4 Lender shall have received within 30 days of Recordation a list of the names and addresses of all material dealers, laborers and subcontractors with whom agreements have been made by the Borrower to deliver materials to and/or perform work on the Improvements; 5.2.5 Lender shall have received within 30 days of Recordation the Cost Breakdown; 5.2.6 Lender shall have received within 30 days of Recordation a Project Construction Cost Schedule which shall include a 10% contingency reserve and a Construction Disbursement Schedule, each satisfactory to Lender; 5.2.7 Lender shall have received within 30 days of Recordation the Plans in form and substance satisfactory to Lender and assigned to Lender; and 5.2.8 Lender shall have received within 30 days of Recordation the construction contract and architect's agreement for the Improvements, each in form and substance satisfactory to Lender and each assigned to Lender with the contractor's and architect's consent. 5.2.9 Lender shall have received a Draw Request, and all the requirements set forth in the paragraph(s) indicated under Part II of the Disbursement Schedule shall have been satisfied. 5.2.10 Concurrently with the Draw Request, Borrower shall furnish to Lender (i) copies of all "soft-cost" invoices, and (ii) unconditional partial releases of lien (on forms approved by Lender) from all subcontractors for the construction of the portion of the Improvements covered by the immediately preceding Draw Request. 5.2.11 With respect to every Draw Request, the Title Insurer shall have agreed to issue its continuation endorsement to Lender indicating that since the last preceding disbursement to Borrower, there has been no change in the state of title, that there are no intervening liens which may now or hereafter take priority over the disbursement to be made and that there are no survey exceptions not theretofore approved by Lender. 5.2.12 The representations and warranties of Borrower made in Paragraph 7 hereof shall be true and correct on and as of the date of the disbursement with the same effect as if made on such date. 5.2.13 The Improvements shall not have been materially injured or damaged by fire or other casualty unless Lender shall have received insurance proceeds sufficient 6 in its judgment to effect the satisfactory restoration of the Improvements and to permit the completion thereof prior to the Completion Date. 5.2.14 Borrower shall have deposited with Lender cash in the amount, estimated by Lender, necessary to pay for the costs of completion of construction of the Improvements to the extent that the aggregate amount remaining in the construction fund held by the Trustee (the "Program Fund") under the Indenture (and available pursuant to the limitations of Section 6.5 hereof) and Borrower's Funds, Building Loan Account, designated for the payment of the remaining costs to be incurred in the completion of renovation of the Improvements is, in the opinion of Lender, insufficient therefor. 5.2.15 Advice from Lender's inspection department or inspector designated by Lender to the effect that, to date, the Improvements have been constructed in accordance with the Plans and that the present state of construction of the Improvements will, barring then unforeseen and unknown delays, permit completion of construction of the Improvements on or before the Completion Date. 5.2.16 Copies of all inspection reports from the United States Department of Agriculture shall be delivered to Lender and such reports shall be in form and substance reasonably satisfactory to Lender. 5.3 Prior to Lender's approval of the last disbursement, the conditions set forth in subparagraph 5.2 of this paragraph shall be satisfied and in addition the following conditions shall have been satisfied by Lender's receipt of: 5.3.1 Advice from Lender's inspection department or inspector designated by Lender to the effect that the Improvements have been completed in accordance with the Plans. 5.3.2 A final Draw Request, and all the requirements set forth in the paragraph(s) indicated under Part II of the Disbursement Schedule shall have been satisfied. 5.3.3 Evidence that Borrower has filed the notice of completion of the Improvements necessary to establish commencement of the shortest statutory period for the filing of mechanics' and materialmen's liens. 5.3.4 Conditional partial releases of lien (on forms approved by Lender, and conditioned only upon receipt of the funds allocated in the last disbursement) from each material dealer, laborer and/or subcontractor who has done work or furnished materials for the construction of the Improvements. 5.3.5 A CLTA Endorsement Series 101, as Lender may determine, issued by Title Insurer subsequent to the expiration of the period during which any lien for labor, 7 services or materials may be validly recorded against the Property or the Improvements or such other endorsements to Lender's title insurance policy as Lender may require which shall insure that the Improvements have been completed free of all mechanics' and materialmen's liens or claims thereof. 5.3.6 Evidence satisfactory to Lender that the Improvements have received approval for operation by the United States Department of Agriculture. 6. LOAN DISBURSEMENT. The proceeds of the Loan and Borrower's ----------------- Funds deposited in the Borrower's Funds, Building Loan Account shall be used only for the payment of costs of construction of the Improvements in accordance with the Plans and other costs related thereto, as set forth on the Disbursement Schedule, and shall be disbursed to or for the account of Borrower as follows: 6.1 Method of Disbursement: Subject to fulfillment of all applicable conditions and the terms and procedures set forth in this Agreement and the Disbursement Schedule, (a) each disbursement shall be made on the basis of a Draw Request submitted by Borrower to Lender and to the Trustee (as required by the Loan Agreement), and (b) upon Lender's approval of the Draw Request, the proceeds of the disbursement shall be deposited into the commercial account identified in the Disbursement Schedule, except that at Lender's option, disbursements may otherwise be made by Trustee directly to Borrower, to subcontractors, laborers or material providers, or jointly to one or more of the foregoing, or to other persons designated by Borrower, or in such other manner as the Lender may approve or require. 6.2 Initial Disbursement: Immediately before Recordation, and upon satisfaction of the conditions of Paragraph 5.1 hereof, Lender shall approve the disbursement by Trustee to the persons indicated in the Disbursement Schedule (including Lender), in accordance with the Disbursement Schedule the amounts necessary to pay all costs, charges and expenses incurred or to be incurred (as estimated by Lender) in connection with the Loan or payable pursuant to this Agreement and the other Letter of Credit Documents, excluding direct costs of labor and materials related to the Improvements, and including but not limited to letter of credit fees (which are deemed earned at Recordation and are not refundable in whole or part), service charges, title charges, tax and lien service charges, recording fees, escrow fees, appraisal fees, legal fees, real property taxes and assessments, insurance premiums, any amount required to pay existing encumbrances affecting the Property or Chino Property. 6.3 Subsequent Disbursements: Upon satisfaction of the conditions of Paragraph 5.2 hereof, Lender shall approve the disbursement by Trustee directly to Borrower or, at Lender's option, directly to subcontractor or to such persons as have actually supplied labor, material or services in connection with or incidental to the construction of the Improvements (or for payment of the cost of any of Borrower's undertakings hereunder, in the Reimbursement Agreement, the Trust Deed or the Security Agreement), such sums as are required for the payment of interest on the Loan, costs and expenses of construction of the Improvements and costs incidental thereto as set forth on the Disbursement Schedule. Such disbursements shall be made in accordance with the applicable 8 provisions of the Disbursement Schedule. All funds approved by Lender to be disbursed hereunder to Borrower shall be received by Borrower in trust and Borrower agrees that the same shall be used only for the payment of those items contemplated by the particular disbursement. If at any time Lender is holding Borrower's Funds in the Borrower's Funds, Building Loan Account, Lender shall make all disbursements first from the Borrower's Funds, Building Loan Account until such funds are exhausted. 6.4 Final Disbursement: The final disbursement shall be the payment of any monies retained from progress payments or draws as set forth in the Disbursement Schedule. Subject to the provisions of this Agreement, the final disbursement shall be made only after Borrower has satisfied the conditions of Paragraph 5.3 hereof and delivered or caused to be delivered to Lender in addition to those required under Paragraph 8.3 hereof, such additional endorsements or such additional policies of title insurance with endorsements thereto as Lender may require, with a liability limit of not less than $4,060,000 issued by Title Insurer, with coverage and in form satisfactory to Lender, insuring Lender's interest under the Trust Deed as a first lien on the Property excepting only such items as shall have been approved in writing by Lender. 6.5 Disbursement Limits: Lender shall not be required to approve any disbursement of an aggregate amount of the Loan proceeds for materials incorporated into the Improvements during any stage of construction which exceeds the lesser of the value of such labor or materials or the amount allocated to that stage of construction as set forth in the Disbursement Schedule, and in any event, Lender shall not be required to approve the disbursement of any amount which, in Lender's opinion, will reduce that portion of the Program Fund designated for the cost of completion of construction of the Improvements below that needed to pay for the labor materials necessary to complete the Improvements. If Borrower consists of more than one person or is a partnership or joint venture, Lender is authorized to make disbursements to any one of such persons or to any partner or joint venturer. 7. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents ------------------------------------------ and warrants, which representations and warranties shall survive any investigations, inspections or inquiries made by Lender or any of its representatives or approval of any disbursements made by Lender hereunder; that: 7.1 Draw Request: Each Draw Request shall be true and accurate and the submission of same or the receipt of the funds so requested shall constitute a reaffirmation of the representations, warranties and covenants contained herein. 7.2 Other Liens: Borrower has made no contract or arrangement of any kind, the performance which by the other party thereto would give rise to a lien on the Property, except for its arrangements with major subcontractors if there is no general contractor. 9 7.3 CC&R's, Zoning: It has examined, is familiar with, and the Improvements will in all respects conform to and comply with, all covenants, conditions, restrictions, reservations and zoning ordinances affecting the Property. 7.4 Other Financing: It has not received other financing for either the acquisition of the Property or the construction and installation of the Improvements except as has been specifically disclosed to and approved by Lender prior to Recordation. 7.5 Accuracy: All documents, reports, instruments, papers, information and forms of evidence delivered to Lender by Borrower with respect to the Loan are accurate and correct, are complete insofar as completeness may be necessary to give Lender true and accurate knowledge of the subject matter thereof, and do not contain any misrepresentations or omissions. Lender may rely on such documents, reports, instruments, papers, information and forms of evidence without investigation or inquiry, and any payment made by Lender in reliance thereon shall be a complete release in its favor of all sums so paid. 7.6 Adequacy of Loan: The amount of available Loan proceeds (as limited by Section 6.5 above) and Borrower's Funds available for construction purposes is sufficient to (a) pay all costs to be incurred in connection with completing the acquisition of the Property and the renovation, marketing and leasing of the Improvements as contemplated by the Loan Agreement, (b) pay all sums that may accrue under the Loan Agreement prior to repayment of the Loan, and (c) enable Borrower to perform and satisfy all the covenants of Borrower contained in the Loan Agreement and the Letter of Credit Documents. 8. BORROWER'S COVENANTS. Borrower covenants and agrees until -------------------- the full and final payment of the reimbursement obligations of Borrower under the Reimbursement Agreement, unless Lender waives compliance in writing, that it will: 8.1 Borrower's Funds: At the time and in amounts required by Lender, deposit Borrower's Funds in the Borrower's Funds, Building Loan Account. Borrower's Funds shall be disbursed from such account in the manner provided in Paragraph 6 above. Should it appear at any time that the total available funds then held by the Trustee in the Program Fund (as limited by Section 6.5 above) in Lender's reasonable judgment, to provide the financing for the completion of the Improvements, Borrower, within fifteen (15) days following receipt of written demand by Lender for additional funds, shall pay to Lender an amount equal to such deficiency as expressed in said demand for deposit in the Borrower's Funds, Building Loan Account, which funds shall first be exhausted before any further disbursement of the proceeds of the Loan shall be made. 8.2 Improvements Inspection: Permit Lender, or its representatives (and Lender shall have the right) to enter upon the Property, inspect the Improvements and all materials to be used in the construction thereof and to examine all detailed plans and shop drawings which are or may be kept at the construction site and will cooperate, and cause the general contractor or, if none, the major subcontractors, to cooperate with Lender. If Lender in its reasonable judgment 10 determines that any work or materials fail to materially conform to any Governmental Requirement, or sound building practices, or that they otherwise depart from any of the requirements of this Agreement, Lender may require the work to be stopped and withhold its approval of disbursements until the matter is corrected. In the event Lender determines that work must be stopped and disbursements withheld, Lender shall give Borrower prior telephone notice of its decision to so act (which telephonic notice shall be confirmed by a written notice); however, if Lender in good faith determines that an emergency is occurring or has occurred such that an immediate cessation of work is required, then Lender need only give notice to Borrower of such action as soon as reasonably possible under the circumstances. If this occurs, Borrower shall promptly correct the work to Lender's reasonable satisfaction, and pending completion of such corrective work shall not allow any other work to proceed. No such action by Lender shall be deemed to extend the Completion Date and shall not otherwise affect Borrower's obligation to complete the Improvements within the time and in the manner required by this Amendment. Inspection by lender of construction shall be for the purpose of protecting the security of Lender and preserving Lender's rights under the Letter of Credit Documents. No site inspection shall be deemed to constitute a waiver of any default of Borrower, and such inspection is in no way to be construed as a representation that there is a compliance with the Plans or Governmental Requirements or that the construction is free from faulty material or workmanship. 8.3 Title Insurance: Deliver or cause to be delivered to Lender at Recordation or within a reasonable time thereafter two 1970 ALTA Lender's Policies of Title Insurance or their equivalent with an aggregate liability limit of not less than the face amount of the Reimbursement Agreement, issued by Title Insurer, insuring Lender's interest under the Trust Deed as a valid first lien on the Property and Lender's interest under the Chino Trust Deed is a valid second lien on the Chino Property, together with such reinsurance or coinsurance agreements or endorsements to said policy as Lender may require. Said policies shall contain only such exceptions from their coverage as shall have been approved in writing by Lender. After Recordation, Borrower shall, at its own cost and expense, maintain the Trust Deed as a first lien on the property and the Chino Trust Deed as a second lien on the Chino Property and deliver or cause to be delivered to Lender from time to time such endorsements to said policies as Lender deems necessary to insure such priority of the Trust Deed and Chino Trust Deed. Borrower has requested and Bank has agreed to waive Bank's standard requirement that Borrower deliver or cause to be delivered to Lender at Recordation 1970 ALTA LP-10 Policies of Title Insurance, on the condition that Borrower shall deliver or cause to be delivered to Lender, upon completion of the Improvements and filing of a valid notice of completion, an ALTA Lender's Policy of Title Insurance with a liability limit of not less than the face amount of the Reimbursement Agreement, insuring Lender's interest under the Trust Deed as a valid first lien on that portion of the Property which remains subject to the Trust Deed. Borrower shall furnish to Title Insurer surveys and any other information required to enable it to issue such endorsements and policies. 8.4 Construction Start: Cause construction of the Improvements to be commenced not more than 60 days after Recordation and thereafter diligently prosecute such renovation so that the same will be completed, in any event, on or before the Completion Date; 11 provided, however, that if construction shall have commenced prior to Recordation, the policy of title insurance shall be issued without exception for the claims of mechanics or material suppliers or other deletion or exception based upon the commencement of renovation. 8.5 Personal Property Installation: Not install materials, personal property, equipment, or fixtures subject to any security agreement or other agreement or contract wherein the right is reserved to any person, firm or corporation to remove or repossess any such material, equipment or fixtures, or whereby title to any of the same is not completely vested in Borrower at time of installation, without Lender's written consent. 8.6 Insurance: Prior to Recordation, procure and deliver to Lender and thereafter maintain a policy or policies of insurance in form and content and by an insurer or insurers satisfactory to Lender, including a clause giving Lender a minimum of thirty (30) days' notice if such insurance is canceled, as follows: (i) owner's "all risk" insurance in nonreporting form, in an amount not less than the face amount of the Reimbursement Agreement or the full insurable completed value of the Improvements on a replacement cost basis, whichever amount is lesser, with the normal conditions including fire, extended coverage, vandalism, malicious mischief, and a lender's loss payable endorsement naming Lender as loss payee; (ii) comprehensive liability insurance on an "occurrence" basis, indicating coverage satisfactory to Lender, and naming Lender as an additional insured; (iii) workers' compensation insurance, issued to Borrower, as may be required by applicable workers' compensation insurance laws; (iv) any additional or different coverage as may be specified in Lender's insurance letter; and (v) any and all additional insurance that Lender in its reasonable judgment may from time to time require, against insurable hazards which at the time are commonly insured against in the case of property similarly situated. At Lender's request, Borrower shall supply Lender with a counterpart original of any policy. 8.7 Notification of Default: Promptly notify Lender in writing of the occurrence of any event of default under this Agreement, the Reimbursement Agreement, the Trust Deed, the Chino Trust Deed, the Security Agreement or the Environmental Indemnity or of any facts then in existence which would become an event of default hereunder or thereunder upon the giving of notice or the lapse of time or both. 8.8 Payment of Costs: Pay all costs and expenses required to satisfy the conditions of this Agreement. Without limitation of the generality for the foregoing, Borrower will pay: 8.8.l all taxes and recording expenses, including stamp taxes if any; 8.8.2 the fees and commissions lawfully due to brokers in connection with this transaction and hold Lender harmless from all such claims; 8.8.3 the fees of Lender's inspectors in connection with the construction of the Improvements; and 12 8.8.4 The fees of Lender's attorneys in connection with the issuance of the Letter of Credit upon the issuance of the Letter of Credit. 8.9 No Conveyance or Encumbrance: Not to sell, convey, transfer, dispose of or further encumber the Property or the Improvements or any part thereof or any interest therein or enter into a lease covering all or any portion thereof (other than residential leases entered into in the ordinary course of business) or an undivided interest therein, either voluntarily, involuntarily or otherwise, or enter into an agreement so to do without the prior written consent of Lender being first had and obtained. All easements, declarations of covenants, conditions and restrictions, and private or public dedications affecting the Property shall be submitted to Lender for its approval and such approval shall be obtained prior to the execution or granting of any thereof by Borrower, accompanied by a drawing or survey showing the precise location of each thereof. 8.10 Compliance with Governmental Requirements: Comply promptly with all Governmental Requirements. Within ten (10) days after Borrower's receipt of any governmental permits, approvals or disapprovals, Borrower shall deliver copies of all such matters to Lender. 8.11 Diligent Construction: Cause the construction of the Improvements to be prosecuted with diligence and continuity and completed in accordance with the Plans on or before the Completion Date, free and clear of liens or claims for liens. 8.12 Satisfy Conditions: Cause all conditions hereof to be satisfied at the time and in the manner herein provided. 8.13 Application of Disbursements: Receive the disbursements to be made hereunder as a trust fund for the purpose of paying the costs of construction of the Improvements and apply the same first to such payment before using any part thereof for any other purpose. 8.14 Paid Vouchers: Deliver to Lender, on demand, any contracts, bills of sale, statements, receipted vouchers or agreements, under which Borrower claims title to any materials, fixtures or articles incorporated in the Improvements. 8.15 Defect Corrections: Upon demand of Lender, correct any defect in the Improvements or any departure from the Plans not approved by Lender. The advance of any Loan proceeds shall not constitute a waiver of Lender's right to require compliance with this covenant with respect to any such defects or departures from the Plans not theretofore discovered by or called to the attention of Lender. 8.16 Contract or Plans Changes: Not, without the prior written consent of Lender, permit any change in the construction plans for the Project which would (i) change the square foot area of the Improvements, or (ii) adversely affect the value of the Improvements. 13 8.17 Furnishing Notices: Borrower shall promptly furnish Lender with copies, or notify Lender in writing, of the following: 8.17.1 any litigation affecting Borrower, or if Borrower is a partnership, any general partner of Borrower, where the amount claimed is uninsured and is in excess of the Litigation Amount; 8.17.2 any communication, whether written or oral, that Borrower may receive from any governmental, judicial or legal authority, giving notice of any claim or assertion that the Improvements fail in any respect to comply with any Governmental Requirements, or of any dispute which may exist between Borrower and any governmental, judicial or legal authority that may adversely affect Borrower, the Property or the Project; 8.17.3 any material adverse change in Borrower's or any Guarantor's financial condition or operations or in the physical condition of the Property; 8.17.4 any strike or labor controversy threatening to result in a strike affecting, or that may affect, the Project; 8.17.5 any cessation of labor on the Project which continues for more than ten (10) consecutive Business Days; 8.17.6 any filings (with true copies thereof) with any Governmental Authority regarding or pursuant to any law related to Hazardous Materials (as defined in the Trust Deed) or the environment; 8.17.7 any proceeding or inquiry by any Governmental Authority (including, without limitation, the California State Department of Health Services) with respect to the presence of any Hazardous Materials on the Property or the migration thereof from or to other property; 8.17.8 all claims made or threatened by any third party against Borrower or the Property relating to any loss or injury resulting from any Hazardous Materials; 8.17.9 Borrower's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Property or any part thereof to be subject to any restriction on the ownership, occupancy, transferability or use of the Property under any Hazardous Materials Laws; or 8.17.10 any proposed or contemplated change in the organization or management of Borrower or in the nature of its business. 14 8.18 Organization and Management: Without the prior written consent of Lender, Borrower shall not permit or suffer any management, organizational or other material changes in its structure or operations and if Borrower is a limited liability company, in the structure or operations of its managers, the replacement of any of its members, or the designation of any other person to manage and operate the Project in place of its managers. 9. DEFAULT. At the option of Lender, the following shall constitute events of default hereunder (including, if Borrower consists of more than one person, the occurrence of any of such events with respect to any one or more of said persons): 9.1 Any default in the performance of any covenant, condition or agreement set forth herein, in the Trust Deed, Reimbursement Agreement, the Security Agreement or any other of the Letter of Credit Documents after any applicable cure period. 9.2 Borrower voluntarily suspends the transaction of business or there is an attachment, execution or other judicial seizure of any material portion of Borrower's assets and such seizure is not discharged or bonded against within thirty (30) days. 9.3 Any representation by Borrower to Lender concerning Borrower's financial condition or credit standing or any representation or warranty contained herein proves to be materially false or misleading. 9.4 Default by Borrower on any other debt at Lender or default by Borrower or Operator of any debt secured by the Property. 9.5 Any person obtains an order or decree in any court of competent jurisdiction enjoining the construction of the Improvements or enjoining or prohibiting Borrower or Lender or either of them from performing this Agreement, and such proceedings are not discontinued and such decree is not vacated within thirty (30) days after the granting thereof. 9.6 Borrower neglects, fails or refuses to keep in full force and effect any permit or approval with respect to the construction of the Improvements. 9.7 If any Notice to Withhold or Bonded Notice to Withhold (Stop Notice) in connection with the Loan is served on Lender in accordance with the provisions of the California Civil Code and within five (5) days of the receipt of such notice the claim set forth therein is not discharged or, if the amount claimed is disputed in good faith by Borrower or the general contractor for the Improvements and the Notice to Withhold is bonded, an appropriate counter bond or equivalent acceptable to Lender is filed with Lender. 9.8 The imposition, voluntary or involuntary, of any lien or encumbrance upon the Property or the Chino Property without Lender's written consent or unless an adequate counter bond is provided and such lien is accordingly released within thirty (30) days of the imposition of such lien. 10. REMEDIES. If any of the events of default set forth in Paragraph -------- 9 occur, then Lender, in addition to its other rights hereunder, may at its option, without prior demand or notice: 10.1 Terminate the obligation of Lender to approve disbursements hereunder, or Lender may waive the event of default or, without waiving, determine, upon terms and conditions satisfactory to Lender, to approve further disbursements. 10.2 Notwithstanding the exercise of the remedy described in Paragraph 10.1 hereof, Lender may approve any disbursements after the happening of any one or more of said events of default without thereby waiving its right to demand payment of the amounts due to Lender under the Reimbursement Agreement and without liability to approve any other or further disbursements. 10.3 Proceed as authorized by law to satisfy the indebtedness of Borrower to Lender and in that regard, Lender shall be entitled to all of the rights, privileges and benefits contained in the Trust Deed, the Security Agreement or other Letter of Credit Documents. 10.4 Either directly or through an agent or court-appointed receiver, take possession of the Property and enter into such contracts and perform any and all work and labor necessary to complete the Improvements substantially in accordance with the Plans, subject to such modifications and changes as Lender may deem appropriate, in which event expenditures therefor shall be deemed an additional advance to Borrower, payable on demand, bearing interest at the Credit Provider Rate (as defined in the Reimbursement Agreement) and secured by the Letter of Credit Documents. 11. POWER OF ATTORNEY. In the event of default as defined in ----------------- Paragraph 9 hereof, Borrower hereby constitutes and appoints Lender its true and lawful attorney in fact with the power and authority, including full power of substitution, to act, in Lender's sole discretion, but without the obligation to act, as follows: 11.1 To take possession of the Property and complete the Improvements. 11.2 To use any of Borrower's Funds and any funds which may remain undisbursed under the Loan for the purpose of completing the Improvements and for other costs related thereto. 11.3 To make such additions and changes and corrections in the Plans as may be necessary or desirable as Lender in its sole discretion deems proper to complete the Improvements. 16 11.4 To employ such contractors, subcontractors and agents, architects and inspectors as are required to complete the Improvements. 11.5 To employ watchmen to protect the Property and Improvements from injury. 11.6 To pay, settle or compromise all existing bills and claims against Borrower's Funds or any funds which may remain undisbursed under the Loan or as may be necessary or desirable, as Lender in its sole discretion deems proper, for the completion of the Improvements or for protection or clearance of title to the Property and Personal Property or for the protection of Lender's interest with respect thereto. 11.7 To prosecute and defend all actions and proceedings in connection with the construction of the Improvements. 11.8 As Lender in its sole discretion deems proper, to execute, acknowledge, and deliver all instruments and documents in the name of Borrower which may be necessary or desirable to do and to do any and every act with respect to the construction of the Improvements which Borrower might do on his own behalf. This Power of Attorney is a power coupled with an interest and cannot be revoked and any costs or expenses incurred by Lender in connection with any acts by Lender under or pursuant to this Paragraph 11 shall be at the cost and expense of Borrower, repayable on demand by Borrower to Lender with interest thereon at the Credit Provider Rate, with any such advances made or costs or expenses incurred by Lender to be secured by the Trust Deed and the Security Agreement. 12. DISCLAIMER. WHETHER OR NOT LENDER ELECTS TO EMPLOY ANY OR ALL OF ---------- THE REMEDIES AVAILABLE TO IT IN THE EVENT OF DEFAULT, LENDER SHALL NOT BE LIABLE FOR THE CONSTRUCTION OF OR FAILURE TO CONSTRUCT OR COMPLETE OR PROTECT THE IMPROVEMENTS OR FOR PAYMENT OF ANY EXPENSE INCURRED IN CONNECTION WITH THE EXERCISE OF ANY REMEDY AVAILABLE TO LENDER OR FOR THE CONSTRUCTION OR COMPLETION OF THE IMPROVEMENTS OR FOR THE PERFORMANCE OR NON-PERFORMANCE OF ANY OTHER OBLIGATION OR BORROWER. 13. RELEASE AND INDEMNITY. Borrower agrees to release and indemnify, --------------------- defend and hold Lender harmless from and against all liabilities, claims, actions, damages, costs and expenses (including all reasonable legal fees and expenses of Lender's counsel) arising out of or resulting from construction of the Improvements, including any defective workmanship or materials; any failure to satisfy any of the Governmental Requirements; Lender's performance of any act permitted under the Letter of Credit Documents (excluding Lender's gross negligence or willful misconduct); breach of any representation or warranty made or given by Borrower to Lender; breach of any obligation of Borrower contained in any of the Letter of Credit Documents; or any claim or 17 cause of action of any kind by any party that Lender is liable for any act or omission committed or made by Borrower or any other person or entity in connection with the ownership, sale, operation or development of the Property, the Chino Property or the construction of the Improvements, whether on account of any theory of derivative liability, comparative negligence or otherwise. Upon demand by Lender, Borrower shall defend any action or proceeding brought against Lender arising out of or alleging any claim of action covered by this indemnity, all at Borrower's own cost alternative, Lender may elect to conduct its own defense at the expense of Borrower. Notwithstanding the provisions of the two preceding sentences, Borrower shall have the right to provide the defense of Lender (which this paragraph requires) by counsel of Borrower's choosing, whom Lender shall have the right to approve in its reasonable judgment. Borrower's right to so provide Lender's defense shall apply so long as there is no conflict or divergence of interest between the interest of Lender and the interest of Borrower in the provision of the defense. Lender shall have the right, in its sole discretion, to determine whether a conflict or divergence of interest exists; if Lender determines that a conflict or divergence of interest exists, Borrower shall retain separate counsel to conduct the defense of Lender, which separate counsel shall be acceptable to Lender in its reasonable judgment. The provisions of this paragraph shall survive the termination of this Agreement, the repayment of the amounts due to Lender under the Reimbursement Agreement, and the release of the Property or any portion of it from the Trust Deed and the release of the Chino Property or any portion of it from the Chino Trust Deed. 14. SIGNS. Borrower hereby grants Lender the right to erect or cause ----- to be erected Lender's sign or signs in size and loaction desired by Lender on the Property so long as such sign or signs do not interfere with the reasonable construction of the Improvements. 15. GENERAL CONDITIONS. ------------------ 15.1 No Waiver: No delay or omission of Lender in exercising any right or power arising from any default by Borrower shall be construed as a waiver of such default or as an acquiescence therein, nor shall any single or partial exercise thereof preclude any further exercise thereof. Lender may, at its option, waive any of the conditions herein and any such waiver shall not be deemed a waiver of Lender's rights hereunder but shall be deemed to have been made in pursuance of this Agreement and not in modification thereof. No waiver of any event of default shall be construed to be a waiver of or acquiescence in or consent to any preceding or subsequent event of default. 15.2 No Third Party Benefits: This Agreement is made for the sole benefit of Borrower and Lender, their successors and assigns and no other person or persons shall have any rights or remedies under or by reason of this Agreement nor shall Lender owe any duty whatsoever to any claimant for labor performed or material furnished in connection with the construction of the Improvements, to approve the disbursement of any undisbursed portion of the Loan to the payment of any such claim or to exercise any right or power of Lender hereunder or arising from any default by Borrower. 18 15.3 Notice: All notices or demands of any kind which either party may be required or desire to serve upon the other under the terms of this Agreement shall be in writing and shall be given by personal delivery, national overnight courier, or by certified or registered United States mail, postage prepaid, to the address for the party to be served set forth below its signature. Notices shall be effective upon receipt or when proper delivery is refused. In case of service by mail, notices shall be deemed complete at the expiration of the second day after the date of mailing. If Borrower consists of more than one person, service of any notice or demand of any kind by Lender upon any one of said persons in the manner hereinabove provided shall be complete service upon all. Either party may change its address for purposes of notice by giving notice of such change of address to the other party in accordance with the provisions of this paragraph. 15.4 Entire Agreement: This Agreement, the other Letter of Credit Documents and the Environmental Indemnity constitute the entire understanding between the parties regarding the matters mentioned in or incidental to this Agreement. The Letter of Credit Documents and the Environmental Indemnity supersede all oral negotiations and prior writings concerning the subject matter of the Letter of Credit Documents and the Environmental Indemnity. If there is any conflict between the terms, conditions and provisions of this Agreement and those of any other agreement or instrument, including any of the Letter of Credit Documents or the Environmental Indemnity, the terms, conditions and provisions of this Agreement shall prevail. This Agreement may not be modified, amended or terminated except by a written agreement signed by each of the parties hereto. 15.5 Documentation: In addition to the instruments and documents mentioned or referred to herein, Borrower will, at its own cost and expense, supply Lender with such other instruments, documents, information and data as may, in Lender's opinion, be reasonably necessary for the purposes hereof, all of which shall be in form and content acceptable to Lender. 15.6 Borrower Information: Borrower agrees that Lender may provide any financial or other information, data or material in Lender's possession relating to Borrower, the Loan, this Agreement, the Property or the Improvements, to Lender's parent, affiliate, subsidiaries, participants or service providers, without further notice to Borrower. 15.7 Not Assignable: Neither this Agreement nor any right of Borrower to receive any sums, proceeds or disbursements hereunder, may be assigned, pledged, hypothecated, anticipated or otherwise encumbered by Borrower without the prior written consent of Lender. Subject to the foregoing restrictions, this Agreement shall inure to the benefit of Lender, its successors and assigns and bind Borrower, its heirs, executors, administrators, successors and assigns. 15.8 Time is of the Essence: Time is hereby declared to be of the essence of this Agreement and of every part hereof. 15.9 Supplement to Security Agreements: The provisions of this Agreement are not intended to supersede the provisions of the Trust Deed or any other Letter of Credit Document or the Environmental Indemnity but shall be construed as supplemental thereto. 15.10 Joint and Several Obligations: If Borrower consists of more than one person, the obligations of Borrower shall be the joint and several obligations of all such persons, and any married person who executes this Agreement agrees that recourse may be had against his or her separate property for satisfaction of his or her obligations hereunder. When the context and construction so require, all words used in the singular herein shall be deemed to have been used in the plural and the masculine shall include the feminine and neuter and vice versa. 15.11 Governing Law: This Agreement (and any and all disputes between the parties arising directly or indirectly from the transaction or from the lending relationship contemplated hereunder) shall be governed by and construed in accordance with the laws of the State of California. 15.12 Agency: In the event of a default in Paragraph 9 hereof, Borrower hereby appoints and authorizes Lender, as its agent, to record any notices of completion, cessation of labor and other notices that Lender deems necessary to record to protect any interest of Lender under the provisions of this Agreement, the Reimbursement Agreement, the Trust Deed, the Chino Trust Deed or the Security Agreement. This agency is a power coupled with an interest an is not revocable. 15.13 Governmental Regulations: If payment of the indebtedness secured by the Trust Deed and the Chino Trust Deed is to be insured or guaranteed by any governmental agency, Borrower shall comply with all rules, regulations, requirements and statutes relating thereto or provided in any commitment issued by any such agency to insure or guarantee payment of such indebtedness. 15.14 Collection Costs: Borrower shall pay promptly to Lender without demand, with interest thereon from date of expenditure at the Default Interest rate, reasonable attorneys' fees and all costs and other expenses paid or incurred by Lender in enforcing or exercising its rights or remedies created by, connected with or provided in this Agreement, and payment thereof shall be secured by the Trust Deed, the Chino Trust Deed and the Security Agreement. 15.15 Survival: The representations, warranties and covenants herein shall survive the disbursement of the Loan and shall remain in force and effect until the obligations of Borrower under the Reimbursement Agreement are paid in full. 15.16 Waiver of Jury Trial: LENDER AND BORROWER EACH ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE LENDING RELATIONSHIP ESTABLISHED HEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES, AND THEREFORE, BORROWER 20 AND LENDER EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING ACTIONS SOUNDING IN TORT) TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT RELATING HERETO OR ARISING FROM THE TRANSACTION CONTEMPLATED HEREUNDER OR THE LENDING RELATIONSHIP ESTABLISHED HEREBY AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE AND NOT BY A JURY. 16. SEVERABILITY. Invalidation of any one or more of the provisions of ------------ this Agreement, the Trust Deed, the other Letter of Credit Documents or the Environmental Indemnity by judgment or court order shall in no way affect any of the other provisions thereof which shall remain in force and effect. 17. SPECIAL CONDITIONS. The special conditions, if any, are set forth ------------------ in Exhibit E attached hereto and made a part hereof and are, by this reference, --------- incorporated herein. 18. COUNTERPARTS. This Agreement may be executed simultaneously in two ------------ or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. COMERICA BANK-CALIFORNIA, a California banking corporation By: /s/ Illegible Signature ----------------------------------- Its: ---------------------------------- Address: 333 W. Santa Clara Street San Jose, California 95113 BORROWER: PROVENA FOODS INC., a California corporation By: /s/ Illegible Signature ----------------------------------- Its: CFO ---------------------------------- 21 DISBURSEMENT SCHEDULE (Exhibit A) THE LOAN PROCEEDS IN THE AMOUNT OF $4,000,000 SHALL BE DISBURSED AS FOLLOWS: I. INITIAL DISBURSEMENT. Lender is hereby authorized and directed to make Initial Disbursements for the purposes, in the amounts, and to the persons indicated in the attached Exhibit 1: II. SUBSEQUENT DISBURSEMENTS. The remainder of the Loan available for disbursement under the Building Loan Agreement and Borrower's Funds in the sum aggregate of $ [TO BE DETERMINED AFTER BORROWER DELIVERS ITS PROJECT CONSTRUCTION COST SCHEDULE PRIOR TO ANY DISBURSEMENTS SUBSEQUENT TO INITIAL DISBURSEMENT] shall be disbursed in conformity with (i) the Building Loan Agreement, and in particular the requirements of Articles 5 and 6 thereof, and (ii) the Disbursement Plan, attached hereto as Exhibit B. III. AUTHORIZED SIGNERS. Borrower authorizes either _______________ or _________________ to sign all Draw Request and other documents in connection with the administration of the Loan. Borrower represents and warrants to Lender that the following signatures are specimen signatures of the persons named in the preceding sentence: ____________________________________ ____________________________________ THIS DISBURSEMENT SCHEDULE IS EXECUTED BY BORROWER AS OF THIS _____ DAY OF OCTOBER 1998. BORROWER: - -------- Provena Foods Inc., a California corporation By: Timothy Mulroney ------------------------- Its: CEO ------------------------- FOR ACCOUNTING PURPOSES ONLY: [_] MAKE DISBURSEMENTS UNDER II HEREOF TO ________________________________ By: [_] CREDITING COMMERCIAL ACCOUNT #_____________ AT OFFICE SAN JOSE HEADQUARTERS [_] CASHIER'S CHECK INITIAL DISBURSEMENTS (Exhibit 1) --------- [Land Purchase] $_____________________ ____________________ [Costs of Issuance] $_____________________ ____________________ ____________________ ____________________ ____________________ DISBURSEMENT PLAN (Exhibit B) --------- [TO BE DETERMINED WITH LENDER'S APPROVAL PRIOR TO ANY DISBURSEMENTS SUBSEQUENT TO THE INITIAL DISBURSEMENT] DRAW REQUEST (Exhibit C) --------- APPLICATION AND CERTIFICATE FOR PAYMENT DATE: APPLICATION NO.: ----------------------------- --------------------------- BORROWER: Provena Foods Inc., a California corporation PROJECT: Provena Foods Inc., a California corporation Lathrop, California ================================================================================
Total Work Completed to Date.................................................... $ ______________________ Less Payments to Date........................................................... $ ______________________ Total Deductions................................................................ $ ______________________ AMOUNT NOW DUE.................................................................. $ ______________________
This is to certify that work reported herein has been completed in accordance with the contract documents and also that there are no change orders to date which have not been checked and approved by Comerica Bank-California. Also, this is to certify that all amounts have been paid by Borrower for work for which previous Certificates for Payment were issued and payment received from Borrower and the current payment shown herein is now due. ___________________________________ Owner Date EX-10.46 12 REIMBURSEMENT AGREEMENT Exhibit 10.46 ____________________________________________________________ ____________________________________________________________ $4,060,000 REIMBURSEMENT AGREEMENT By and Between PROVENA FOODS INC. and COMERICA BANK-CALIFORNIA Dated as of October 1, 1998 ____________________________________________________________ ____________________________________________________________ Relating to: California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) REIMBURSEMENT AGREEMENT dated as of October 1, 1998 (this "Agreement"), by and between PROVENA FOODS INC., a California corporation ("Borrower") and COMERICA BANK-CALIFORNIA, a California banking corporation (the "Credit Bank"). W I T N E S S E T H ------------------- WHEREAS, Borrower proposes to finance the purchase and construction of a manufacturing project in Lathrop, California, and the acquisition and installation of equipment and other personal property to be used in connection therewith, (collectively, the "Project"); WHEREAS, in order to finance the Project, Borrower has requested the assistance of the California Economic Development Financing Authority, a body public and corporate and a public instrumentality of the State of California (the "Issuer"), to issue its Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project) (the "Bonds"), in the principal amount of $4,000,000. WHEREAS, in order to provide for the authentication and delivery of the Bonds, to establish and declare the terms and conditions upon which the Bonds are to be issued and secured and to secure the payment of the principal thereof and of the interest and premium, if any, thereon, the Issuer has entered into an Indenture of Trust (the "Indenture"), dated as of October 1, 1998, by and between the Issuer and U.S. Bank Trust National Association, as trustee (the "Trustee"); WHEREAS, pursuant to the Indenture, Trustee will make certain disbursements for the acquisition, construction and equipping of the Project according to the terms more specifically set forth in the Indenture and the Loan Agreement (the "Loan Agreement"), dated as of October 1, 1998 by and between the Issuer and Borrower; WHEREAS, Borrower has requested that the Credit Bank issue in favor of the Trustee, for the account of Borrower, a direct-pay letter of credit ("Letter of Credit") in an initial stated amount of $4,060,000, which Letter of Credit is to be available to be drawn upon to provide funds for the payment of principal and interest on the Bonds when due and payable; and WHEREAS, any Bonds purchased by the Credit Bank by application of amounts drawn under the Letter of Credit pursuant to a Purchase Drawing (as defined herein) shall be reflected on the records of the Depository as being held for the account of the Credit Bank until the Credit Bank shall have been reimbursed for the amount so drawn and interest accrued thereon in accordance with this Agreement, which reimbursement may be satisfied by the payment of the principal and interest represented by the Bonds so held by or for the account of the Credit Bank, as provided herein and in such Bonds, or the payment to the Credit Bank pursuant to the terms of that certain Remarketing Agreement dated as of October 1, 1998 (the "Remarketing Agreement"), between Borrower and Dain Rauscher, as remarketing agent, following the remarketing of the Bonds; 2 NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS. ----------- For purposes of this Agreement, capitalized terms used herein which are not defined herein shall have the meanings set forth in the Indenture. In addition, the following terms shall have the following meanings: "Agreement" shall mean this Reimbursement Agreement, including any Exhibits hereto, as the same may be supplemented and amended in accordance with its terms. "Base Rate" shall mean the rate of interest publicly announced from time to time by the Credit Bank as its "reference rate" or "prime rate." "Bond Documents" shall mean, at any time, each of the following as in effect or as outstanding, as the case may be, at such time: (i) the Bonds; (ii) the Indenture; (iii) the Loan Agreement; (iv) the Remarketing Agreement; (v) the Security Agreement; (vi) the Environmental Indemnity; (vii) the Deed of Trust; (viii) this Agreement; (ix) the Building Loan Agreement and (x) any other agreements, instruments, certificates or other documents executed in connection with the foregoing. "Bonds" shall mean the California Economic Development Financing Authority Variable Rate Demand Industrial Development Revenue Bonds, Series 1998 (Provena Foods Inc. Project). "Borrower" shall mean Provena Foods Inc., a California corporation. "Building Loan Agreement" shall mean the building loan agreement by and between Borrower and Credit Bank as required by Section 3.1(c) hereof. "Business Day" shall mean a day other than (i) a day on which the banking institutions in (a) New York, New York or (b) the City of San Jose, California or (c) the cities in which the Trustee or the Paying Agent (as defined in the Indenture) have their respective principal offices are authorized to close or (ii) a day on which the New York Stock Exchange is closed. "Chino Property" that certain real property legally described in the Chino Trust Deed given as additional collateral for the Reimbursement Agreement. "Chino Trust Deed" shall mean the Deed of Trust in favor of lender of even date herewith encumbering the Chino Property and given to secure the Reimbursement Agreement. 3 "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations, rulings and proclamations promulgated or issued thereunder. "Credit Bank" shall mean Comerica Bank-California, a California banking corporation and its successors and assigns, as issuer of the Letter of Credit, or any issuer of a substitute Letter of Credit. "Credit Provider Rate" shall mean two (2%) in excess of the rate of interest established by the Credit Bank from time to time as its Base Rate during any period that interest shall accrue at such rate pursuant to the terms of this Agreement, each change in such Base Rate to become effective on the date such change is announced by the Credit Bank, such rate to be calculated on the basis of actual number of days elapsed and a 360-day year; provided, however, the Credit Provider Rate shall in no event exceed the lesser of 12.00% per annum or the maximum interest rate applicable to the Bonds permitted by the laws of the State of California. In each case, the Credit Provider Rate shall change when and as the Base Rate changes. "Date of Issuance" has the meaning set forth in Section 2.1 hereof. "Deeds of Trust" shall mean the two Deed of Trusts, security agreement and fixture filings (with assignment of rents and leases) in favor of the Credit Bank as required by Section 3.1(c) hereof encumbering the Property and the Chino Property. "Drawing" shall mean a drawing under the Letter of Credit in accordance with its terms, and shall include a "Purchase Drawing," "Principal Drawing," and "Interest Drawing." "Drawing Fee" shall mean the fee described in Section 2.3 hereof. "Environmental Indemnity" shall mean the unsecured environmental indemnity agreement executed in favor of the Credit Bank as required by Section 3.1(d) hereof. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" shall have the meaning set forth in Article 10 hereof. "Expiration Date" shall have the meaning assigned to that term in the Letter of Credit. "Indenture" shall have the meaning set forth in the third WHEREAS clause hereof, as the same may be supplemented and amended in accordance with its terms. 4 "Interest Drawing" shall mean a Drawing under the Letter of Credit to pay interest on the Bonds (other than Bonds registered in the name of the Credit Bank) when due and payable by Issuer pursuant to the Indenture. "Issuer" shall mean the California Economic Development Financing Authority, a public body, corporate and politic, duly organized and existing under the laws of the State of California. "Letter of Credit" shall mean the Letter of Credit issued by the Credit Bank pursuant to this Agreement, and shall include any amended Letter of Credit or any substitute therefor. "Letter of Credit Fee" shall mean the fee described in Section 2.2 hereof. "Loan Agreement" shall mean that certain Loan Agreement, dated as of October 1, 1998, by and between the Issuer and Borrower and relating to the Bonds, as the same may be supplemented and amended in accordance with its terms. "Official Statement" shall mean the Official Statement dated October 6, 1998, relating to the delivery and sale of the Bonds, including any supplement to such Official Statement. "PBGC" shall mean Pension Benefit Guaranty Corporation. "Person" shall mean an individual, association, unincorporated organization, corporation, partnership, joint venture, trust, government or any governmental agency or political subdivision or any other entity or organization. "Permitted Encumbrances" shall mean those matters of record against the Property as approved in writing by Credit Bank. "Plan" shall mean an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by Borrower for employees of Borrower or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which Borrower is then making or accruing an obligation to make contributions or has within the preceding five years of such plan made contributions. "Principal Drawing" shall mean a Drawing under the Letter of Credit to pay the principal of the Bonds (other than Bonds registered in name of the Credit Bank) required to be made by Issuer upon the maturity thereof, upon acceleration or upon the optional or mandatory redemption thereof, all pursuant to the Bonds and the Indenture. 5 "Project" shall mean the Property and the facilities, structures, buildings, additions, extensions, alterations and improvements to the Property to be financed with the proceeds of the Bonds, including the construction of a manufacturing facility in Lathrop, California, and the acquisition and installation of equipment and other personal property to be used in connection therewith. "Property" means the real property, and any buildings, structures and fixtures thereon, described in Exhibit A hereto. --------- "Purchase Drawing" shall mean a Drawing under the Letter of Credit to pay the purchase price of the Bonds following the failure to remarket any Bonds as set forth in Section 8.09(c) of the Indenture. "Remarketing Agent" shall mean Dain Rauscher Incorporated, as remarketing agent under the Remarketing Agreement, or any successor to it as remarketing agent. "Remarketing Agreement" shall mean that certain Remarketing Agreement dated as of October 1, 1998 by and between Borrower and the Remarketing Agent, and any successor remarketing agreement entered into by the Borrower and a successor remarketing agent in accordance with the provisions of the Indenture. "Restrictions" shall have the meaning set forth in Section 7.4 hereof. "Security Agreement" shall mean that certain Security Agreement dated as of October 1, 1998 by Borrower in favor of the Credit Bank. "Special Counsel" shall mean Manatt, Phelps & Phillips, LLP. "Stated Amount" shall mean the amount set forth in the Letter of Credit as the "Stated Amount", as such amount is reduced and reinstated from time to time in accordance with the Letter of Credit. "Stated Expiration Date" shall have the meaning assigned to that term in the Letter of Credit. "Transfer Certificate" shall have the meaning assigned to that term in the Letter of Credit. "Transfer Fee" shall mean the fee described in Section 2.4 hereof. "Trustee" shall mean U.S. Bank Trust National Association, in its capacity as trustee under the Indenture, and any other bank or trust Borrower at any time substituted in its place pursuant to and in accordance with the Indenture. 6 "Uniform Customs and Practice" means the Uniform Customs and Practice for Documentary Credits approved by the International Chamber of Commerce and in effect as of the date of issuance of the Letter of Credit. ARTICLE 2. LETTER OF CREDIT; FEES; REIMBURSEMENT. ------------------------------------- SECTION 2.1 Amount and Terms of Letter of Credit. The Credit Bank ------------------------------------ agrees, upon at least 24 hours' prior notice from Borrower to the Credit Bank and on the terms and subject to the conditions hereinafter set forth, including, without limitation, the conditions set forth in Article 3 hereof, to issue the Letter of Credit on the date of delivery specified herein (the "Date of Issuance"), provided such date of delivery is not later than October 31, 1998, effective upon such delivery date and expiring on the Expiration Date. The Letter of Credit will be issued in an initial Stated Amount of $4,060,000, representing the aggregate principal amount represented by the Bonds as of the Date of Issuance, plus interest on such principal amount for a period of 45 days at a rate not to exceed twelve percent (12%) per annum. The Letter of Credit shall be issued to the Trustee for the account of Borrower, and shall be substantially in the form of Exhibit B hereto, with such changes to the form set forth in Exhibit B as Borrower and the Credit Bank shall agree in writing are necessary or advisable. SECTION 2.2 Letter of Credit Fee. Borrower shall pay to the Credit -------------------- Bank a nonrefundable letter of credit fee (the "Letter of Credit Fee") in an amount equal to 1.5% of the Stated Amount for each 12-month period from and including the Date of Issuance until but excluding the Expiration Date, payable in advance quarterly commencing on the Date of Issuance. SECTION 2.3 Drawing Fee. Borrower shall pay to the Credit Bank for ----------- each drawing on the date thereof a nonrefundable drawing fee (the "Drawing Fee") in an amount equal to the commercially reasonable and customary fee charged by the Credit Bank to its customers for a draw under a letter of credit. SECTION 2.4 Letter of Credit Transfer Fee. Any transfer of the ----------------------------- Letter of Credit by the Trustee or issuance of a substitute Letter of Credit shall be made by, and be only effective upon, (a) in the case of such a transfer, the Trustee providing the Credit Bank with a Transfer Certificate (as defined in the Letter of Credit) in accordance with the Letter of Credit and (b) in the case of such a transfer or such an issuance, payment to the Credit Bank by Borrower of a transfer fee (the "Transfer Fee") of $500 for each transfer or issuance and of the costs payable to the Credit Bank in respect of each such transfer or issuance. No Transfer Fee shall be due in the event of a transfer or substitution due to: (a) non-renewal of the Letter of Credit; (b) a downgrading of the Letter of Credit; or (c) an increase in costs associated with the Letter of Credit. 7 SECTION 2.5 Reduction and Reinstatement of Stated Amount. The Stated -------------------------------------------- Amount shall be automatically reduced and reinstated as specified in the Letter of Credit; provided that the Letter of Credit shall be reinstated to the extent the Credit Bank is paid the full sale price with respect to Bonds (or portions thereof) purchased on its behalf which have been resold pursuant to the terms of the Remarketing Agreement. SECTION 2.6 Interest. Borrower hereby agrees to pay interest at the -------- Credit Provider Rate on any and all amounts required to be paid by Borrower under this Agreement from and after the due date thereof until paid in full, whether before or after the expiration of the Letter of Credit and this Agreement, at the Stated Expiration Date or otherwise, such interest to be payable on demand. Notwithstanding anything herein to the contrary, to the extent permitted by law, if at any time the Credit Provider Rate exceeds any statutory or constitutional interest rate limitation or restriction and the Credit Bank shall not receive payment at the Credit Provider Rate, any subsequent reduction in the Credit Provider Rate shall not reduce the rate of interest utilized for the calculation of amounts payable to the Credit Bank hereunder until the total amount due if the Credit Provider Rate had at all times been utilized, has been paid to the Credit Bank. SECTION 2.7 Increased Costs. If any change in any law or regulation --------------- or in the interpretation thereof by any court or administrative or governmental entity charged with the administration thereof shall either (i) impose, modify or deem applicable any reserve, special deposit, capitalization or similar requirement against letters of credit issued by the Credit Bank or (ii) impose on the Credit Bank any other condition relating, directly or indirectly, to this Agreement or the Letter of Credit or the holding or owning of any Bonds by the Credit Bank or the purchasing thereof, and the result of any event referred to in (i) or (ii) above shall be to increase the cost to the Credit Bank of issuing or maintaining the Letter of Credit, or of purchasing the Bonds, then, upon demand by the Credit Bank, Borrower shall, upon not less than 30 days' prior notice from the Credit Bank (which notice shall specify in reasonable detail the circumstances giving rise to the increase and the method of calculating the increase), pay to the Credit Bank, from time to time as specified by the Credit Bank, such additional amounts as shall be demanded by the Credit Bank as sufficient to compensate the Credit Bank for such increased cost, together with interest at the Credit Provider Rate on amounts required to be paid under this Section 2.7 from the due date of such payment following not less than 30 days' prior notice until payment in full thereof. SECTION 2.8 Net Payments. All payments under this Agreement shall be ------------ made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments (after deduction or withholding for or on account of a proportionate share attributable to the transactions contemplated by this Agreement of any future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government, any political subdivision or any taxing authority other than any tax on or measured by the overall net income of the Credit Bank pursuant to the income tax laws of the United States or the jurisdiction where the Credit Bank's principal office is located (collectively, the "Taxes")) shall not be less than the amounts 8 otherwise specified to be paid under this Agreement. A certificate as to any additional amounts payable to the Credit Bank under this Section 2.8 submitted to Borrower by the Credit Bank shall show in reasonable detail the amount payable and the calculations used to determine in good faith such amount and shall be presumptive absent manifest error. Any amounts payable by Borrower under this Section 2.8 with respect to past payments shall be due within thirty days following receipt by Borrower of such certificate from the Credit Bank; any such amounts payable with respect to future payments shall be due concurrently with such future payments. With respect to each deduction or withholding for or on account of any Taxes, Borrower shall promptly furnish to the Credit Bank such certificates, receipts and other documents as may be required (in the reasonable judgment of the Credit Bank) to establish any tax credit to which the Credit Bank may be entitled. Without in any way affecting any of its rights under this Section 2.8, the Credit Bank agrees that, upon its becoming aware that any of the present or future payments due it under this Agreement would be subject to deduction for Taxes, it will notify Borrower in writing and the Credit Bank further agrees that it will use reasonable efforts not disadvantageous to it (in its sole determination) in order to avoid or minimize, as the case may be, the payment by Borrower of any additional amounts for Taxes pursuant to this Section 2.8. SECTION 2.9 Reimbursement of Principal Drawings and Interest ------------------------------------------------ Drawings. (a) If a Principal Drawing or Interest Drawing is repaid at or prior to 5:00 p.m. (California time) on the same day on which it is made, no interest shall be payable on such Drawing. Unless otherwise waived by the Credit Bank, Borrower shall be obligated, without notice of a Principal Drawing or Interest Drawing or demand for reimbursement from the Credit Bank (which notice is hereby waived by Borrower), to reimburse the Credit Bank for all Principal Drawings and Interest Drawings on the same Business Day of payment by the Credit Bank of such Drawings; provided that, in the event such reimbursement is not made on the Same Business Day, such reimbursement amount shall be the amount of the Principal Drawing and Interest Drawing plus interest at the Credit Provider Rate, but in no event higher than the maximum rate permitted by applicable law, on such amounts from and including the date such Drawings are paid by the Credit Bank until payment in full by Borrower (as determined by the Credit Bank). If a Principal Drawing or Interest Drawing is repaid after 5:00 p.m. (California time) on any Business Day, it shall be treated as having been repaid on the following Business Day. Likewise, if a Principal Drawing or an Interest Drawing is paid by Credit Bank after 5:00 pm (California time) on any Business Day, it shall be treated as having been paid on the following Business Day. Borrower shall maintain an account (the "Interest Collateral Account") at Credit Bank in the name of Borrower and Credit Bank at Credit Bank for the purpose of reimbursing the Credit Bank for drawings under the Letter of Credit, on the day of each drawing Credit Bank shall debit such Interest Collateral Account for the amount of any Principal Drawing and Interest Drawing and, in the event of any shortfall, shall notify Borrower who shall reimburse Credit Bank for any such shortfall no later than the next Business Day. If there are funds in Borrower's account at Credit Bank sufficient to reimburse Credit Bank for the amount of any Principal Drawing and Interest Drawing on the date of any such draws, Borrower shall not be liable to Credit Bank for interest in the event that Credit Bank fails to debit Borrower's account on the same day that such Principal Drawing or Interest Drawing is made. 9 (a) The Credit Bank shall maintain in accordance with sound banking practices an account or accounts evidencing the indebtedness of Borrower resulting from each Principal Drawing and each Interest Drawing and the interest accruing thereon, and in any legal action or proceeding in respect of this Agreement, the entries made in such account or accounts shall, in the absence of manifest error, be conclusive evidence of the existence and amounts of the obligations of Borrower therein recorded. SECTION 2.10 Redemption Payments. (a) Commencing May 1, 2000 and ------------------- continuing on the first (1st) day of each month, those amounts contained on Exhibit C attached hereto shall be deposited into an interest bearing account (the "Principal Collateral Account") in the name of Borrower and Credit Bank at Credit Bank and used to reimburse the Credit Bank on and as of the date of drawing for drawings under the Letter of Credit used to pay the annual redemption of Bonds required under Subparagraph (b) below, including the redemption price thereof and accrued interest. Provided that all sums due or to become due to Credit Bank have been paid, upon the Stated Expiration Date, any amounts remaining in the Bank Account, including accrued interest, shall be returned by the Credit Bank to the Borrower. (a) The Borrower agrees that on the Interest Payment Date of May of each year commencing May 1, 2001 and continuing on such May 1 Interest Payment Date thereafter until the Stated Expiration Date, Bonds in that amount equal to the amount on deposit in the Bank Account or such lesser amount comprising Authorized Denominations (as defined in the Indenture) shall be redeemed by the Borrower pursuant to the provisions of the Indenture and the Loan Agreement. The Borrower agrees to take any and all actions and provide any and all notices as may be required by it under the Indenture, the Loan Agreement and hereunder to cause such redemption. SECTION 2.11 Reimbursement of Purchase Drawings. (a) Borrower's ---------------------------------- obligation to reimburse the Credit Bank for any unreimbursed amounts drawn under the Letter of Credit in respect of any Purchase Drawing shall be secured in part by the purchased Bonds. The obligation of Borrower under this Agreement and under the Indenture in respect of such Bonds purchased with the proceeds of a Purchase Drawing shall be satisfied by the payment of such Bonds in accordance with their terms and the terms of the Indenture and the subsequent payment to the Credit Bank of all such payments, or the reimbursement of the Credit Bank pursuant to the terms of the Remarketing Agreement following the remarketing of the Bonds. (a) In the event that any Bonds are registered in the name of Borrower or the Credit Bank, on the date on which the Letter of Credit expires for any reason, the principal amount of such Bonds and the interest accrued thereon shall thereupon be paid by Borrower immediately to the Credit Bank; provided that nothing herein contained shall affect any right which the Credit Bank may have hereunder or under the Indenture or the Bonds upon the occurrence of an Event of Default hereunder or thereunder. SECTION 2.12 Security. Borrower, in order to secure its obligation to -------- make payments to the Credit Bank pursuant to the terms of this Agreement and to perform all of its 10 other covenants and agreements under this Agreement, has pledged, assigned and granted to the Credit Bank, a lien on and security interest in the Project subject to the Permitted Encumbrances and has executed the Security Agreement. SECTION 2.13. Place and Manner of Payment; Computation of Interest. ---------------------------------------------------- All payments by Borrower to the Credit Bank hereunder, except reimbursement of Principal Drawings and Interest Drawings pursuant to Section 2.9 hereof and reimbursement of Purchase Drawings pursuant to Section 2.11 hereof, shall be made to the Credit Bank at 333 West Santa Clara Street, International Department, 5th Floor, San Jose, California 95113 in lawful currency of the United States in immediately available funds not later than 5:00 p.m. (California time) on the date due, without set-off, counterclaim or deduction of any kind. In the event that the date specified for any such payment hereunder is not a Business Day, such payment shall be made not later than the next following Business Day. Borrower shall pay interest on any such payment not made on the due date, at the Credit Provider Rate, to the Business Day on which such payment is made. Computations of interest hereunder shall be made by the Credit Bank and Borrower on the basis of actual days elapsed and a 360-day year. ARTICLE 3. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT. -------------------------------------------------------- SECTION 3.1. Documents to be Received. The Credit Bank's obligation ------------------------ to issue the Letter of Credit as set forth in Section 2.1 hereof is subject to the conditions precedent that, on or prior to the Date of Issuance, the Credit Bank shall receive the following documents, all in form and substance satisfactory to the Credit Bank and its Special Counsel: (a) a copy of the articles of incorporation and by-laws of the Borrower, certified as of the date of the delivery of the Bonds by the authorized officers of the Borrower showing authorization for, among other things, the execution, delivery and performance by the Borrower of this Agreement and the Bond Documents to which Borrower is a party and authorizing Borrower to obtain the issuance of the Letter of Credit and certified copies of all other documents evidencing any other action of Borrower taken with respect thereto; (b) a certificate, signed by the authorized officers of the Borrower, dated the date of the delivery of the Bonds, to the effect that: (i) The representations and agreements of Borrower contained in this Agreement and each of the Bond Documents to which it is a party are true, complete and correct in all material respects as of the Date of Issuance; (ii) Borrower has complied with all agreements, covenants and conditions to be complied with by Borrower at or prior to the Date of Issuance under this Agreement and each of the Bond Documents to which it is a party; (iii) No event affecting Borrower has occurred since the date of the Official Statement which either makes untrue or incorrect in any material respect, as of the Date of Issuance, the statements or information contained in the Official Statement concerning 11 Borrower or is not reflected in the Official Statement but should be reflected therein in order to make the statements and information therein concerning Borrower not misleading in any material respect; (iv) The information concerning Borrower and the Project contained in the Official Statement and the appendices thereto does not contain any untrue statement of a material fact or omit to state any fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading in any material respect; and (v) No Event of Default has occurred and is continuing, or would result from the issuance of the Letter of Credit, the making of this Agreement or any of the other Bond Documents to which Borrower is a party, and no event has occurred and is continuing which would constitute an Event of Default but for the requirement that notice be given or time elapse or both; (c) this Agreement, the Security Agreement, the Environmental Indemnity, the Building Loan Agreement and the Deeds of Trust duly executed by Borrower; (d) all Bond Documents and other documents, certificates, opinions, approvals or filings with respect to the Bond Documents, this Agreement or the transactions contemplated thereby or hereby as the Credit Bank or its Special Counsel shall reasonably request, in form and substance satisfactory to the Credit Bank; (e) a phase I environmental assessment in form and substance satisfactory to Credit Bank ("Environmental Assessment") prepared by a qualified licensed environmental consultant acceptable to Credit Bank confirming the absence of hazardous or toxic material in, on, under or around the Property and the Chino Property; in the event the Environmental Assessment indicates that the Property may be affected by hazardous or toxic materials, or is otherwise unsatisfactory to Credit Bank, in Credit Bank's sole discretion, Credit Bank may require additional or further environmental testing, inspection and/or assessment of the Property and/or the Chino Property; SECTION 3.2 Other Conditions Precedent to Issuance of the Letter of ------------------------------------------------------- Credit. The Credit Bank's obligation to issue the Letter of Credit as set forth - ------ in Section 2.1 hereof shall be subject to the additional conditions precedent that on or before the Date of Issuance: (a) Borrower shall pay to the Credit Bank the Letter of Credit Fee, for the first three months in immediately available funds; (b) no change shall have occurred in any law, regulation, ruling or other action of the United States or the State of California or any political subdivision therein or thereof which, in the opinion of Special Counsel for the Credit Bank would make it illegal or inadvisable for the Credit Bank to issue the Letter of Credit as provided therein; and 12 (c) all legal requirements provided herein incident to such issuance shall be met to the reasonable satisfaction of the Credit Bank and its Special Counsel; ARTICLE 4. CONDITIONS PRECEDENT TO DISBURSEMENT OF BOND PROCEEDS. ----------------------------------------------------- SECTION 4.1 Prior Conditions Precedent. The Credit Bank's approval -------------------------- of the disbursement of any money under the Loan Agreement and the Indenture is subject to the conditions precedents contained in the Building Loan Agreement including but not limited to Section 4 and 5.1 thereof and Section 3.1 hereof. ARTICLE 5. INDEMNIFICATION. --------------- In addition to any other amounts payable by Borrower under this Agreement, Borrower hereby agrees to release, protect, indemnify, pay and save the Credit Bank and its officers, directors, employees, attorneys and agents (each, an "indemnified person") harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including attorneys' fees) which any indemnified person may, other than as a result of its gross negligence or willful misconduct or default by Credit Bank or such indemnified person, incur or be subject to as a consequence, direct or indirect, of (i) the execution and delivery or transfer of, or payment or failure to pay, under the Letter of Credit, (ii) any breach by the Borrower of any representation or warranty, covenant, term or condition in, or the occurrence of any default under, this Agreement or any of the Bond Documents, including all fees or expenses resulting from the settlement or defense of any claims or liabilities arising as a result of any such breach or default, (iii) the holding or owning by the Credit Bank or its nominee of any Bond, (iv) the issuance, sale or delivery of the Bonds, (v) the use of the proceeds of the Bonds or any Drawing, or (vi) involvement of any indemnified person in any legal suit, investigation, proceeding, inquiry or action as a consequence, direct or indirect, of the Credit Bank's issuance of the Letter of Credit, the Credit Bank's holding or owning of any Bond, the holding or owning of any Bond by the Credit Bank's nominee, the Credit Bank's execution of this Agreement, or any other event or transaction contemplated by any of the foregoing. Promptly after receipt by an indemnified person of notice of the commencement of any action in respect of which indemnity may be sought against Borrower under this Article 5, such indemnified person will notify Borrower in writing of the commencement thereof, and, subject to the provisions hereinafter stated, Borrower may assume the defense of such action (including the employment of counsel, who shall be satisfactory to the indemnified person, but at Borrower's expense) insofar as such action shall relate to any alleged liability in respect of which indemnification may be sought from Borrower. An indemnified person shall have the right to employ separate counsel in any such action and to participate in the defense thereof, and the reasonable fees and expenses of such counsel shall be at the expense of Borrower; provided that Borrower shall not be responsible for the fees and expenses of such separate counsel if Borrower shall have agreed to assume the defense of an indemnified party with counsel reasonably satisfactory to such indemnified party and no conflict of interest necessitates the employment of separate counsel. 13 ARTICLE 6. OBLIGATIONS ABSOLUTE. -------------------- To the fullest extent permitted by applicable law, the obligations of Borrower under this Agreement shall be unconditional and irrevocable, and shall be paid or performed strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of the Letter of Credit, this Agreement or any of the other Bond Documents other than in the case of the gross negligence or willful misconduct of the Credit Bank; (b) any amendment or waiver of or any consent to depart from the terms of this Agreement (other than the provisions of this Agreement specifically amended or waived) or any of the other Bond Documents other than in the case of the gross negligence or willful misconduct of the Credit Bank; (c) the existence of any claim, set-off, defense or other right which Borrower may have at any time against the Trustee, any beneficiary or any transferee of the Letter of Credit (or any persons or entities for whom the Trustee, any such beneficiary or any such transferee may be acting), the Credit Bank or any other person or entity, whether in connection with this Agreement, any of the other Bond Documents or the transactions contemplated hereby or thereby or any unrelated transaction other than in the case of the gross negligence or willful misconduct of the Credit Bank or Credit Bank's default under this Agreement; (d) any statement or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (e) any nonapplication or misapplication by the Trustee or otherwise of the proceeds of any Drawing; (f) payment by the Credit Bank under the Letter of Credit against presentation of a draft or certificate which does not comply with the terms of the Letter of Credit other than in the case of the gross negligence or willful misconduct of the Credit Bank; (g) the failure by the Credit Bank to honor any Drawing under the Letter of Credit or to make any payment demanded under the Letter of Credit on the grounds that the demand for such payment does not conform to the terms and conditions of the Letter of Credit other than in the case of the gross negligence or willful misconduct of Credit Bank; or (h) any other circumstances or happening similar to any of the foregoing. 14 ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF BORROWER. ------------------------------------------ To induce the Credit Bank to enter into this Agreement and issue the Letter of Credit, Borrower makes the representations and warranties to the Credit Bank set forth in this Article 7 on and as of the date hereof. SECTION 7.1. Organization; Powers. Company is a corporation duly -------------------- organized, validly existing and in good standing under the laws of the State of California and has the power and authority to carry on its business as presently conducted including, without limitation, the operation of the Project, to own its assets and to enter into and perform its obligations under this Agreement and the other Bond Documents to which it is a party. SECTION 7.2. Authorization. The execution, delivery and performance ------------- by Borrower of this Agreement and the other Bond Documents to which Borrower is a party have been duly authorized by all necessary action of Borrower and this Agreement and such other Bond Documents constitute legal, valid and binding obligations of Borrower enforceable in accordance with their terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors'rights generally, by general equitable principles which may limit the right to obtain equitable remedies and by provisions of applicable California and Federal law. SECTION 7.3. Compliance with Laws and Contracts. The execution, ---------------------------------- delivery and performance by Borrower of this Agreement and the other Bond Documents to which Borrower is a party do not and will not (a) violate any provision of any order, writ, judgment, injunction, decree, determination or award as currently in effect to which Borrower is subject or the Articles of Incorporation or By-Laws of Borrower or, to the best of Borrower's knowledge, any law, rule or regulation to which Borrower is subject; (b) result in a breach of or constitute a default under the provisions of any material indenture, loan or credit agreement or any other agreement, lease or instrument to which Borrower may be or is subject or by which it, or its property, is bound; or (c) result in, or require, the creation or imposition of any mortgage, Deeds of Trust, assignment, pledge, lien, security interest or other charge or encumbrance of any nature or with respect to any of the Property other than as provided therein; and Borrower is not in default under any such order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument or any law, rule or regulation to which Borrower is subject. SECTION 7.4. Approvals. Borrower has obtained all authorizations, --------- consents, approvals, licenses, exemptions of or filings or registrations with all commissions, boards, bureaus, agencies, instrumentalities, trustees, holders of any indebtedness of Borrower or any other Person, domestic or foreign, necessary to the valid execution, delivery and performance by Borrower of this Agreement and the other Bond Documents to which Borrower is a party which are capable of being obtained on or prior to the Date of Issuance, other than the site plan review and building permits and plan check for the Project and except as such may be required under the state securities or Blue Sky laws in connection with the distribution of the Bonds by the Remarketing Agent. Borrower is familiar with all conditions, restrictions, reservations, statutes, 15 regulations and ordinances affecting the Property, including, without limitation, all pollution control, environmental protection, zoning and land use regulations, building codes and all restrictions and requirements imposed by the City of Lathrop or San Joaquin County, California and all other governmental entities (collectively, the "Restrictions"), with respect to the Property, the Project and the construction of the Project and the existing and contemplated use of the Property. Borrower has obtained or will timely obtain all permits, approvals, consents and other authorizations necessary under the Restrictions for such construction and use. As of the date hereof, Borrower is not aware of any violation or asserted violation of any Restrictions concerning the Property or the existing or contemplated use thereof, and further, Borrower is not aware of any action or proceeding pending before any court or governmental agency with respect to the validity of any such Restrictions or any of such authorizations or permits. SECTION 7.5. Financial Statements. The financial statements of -------------------- Borrower, copies of which have heretofore been delivered to the Credit Bank, were prepared in accordance with generally accepted accounting principles consistently applied, fairly represent the financial position of Borrower as of dates referred to therein, and there has been no material adverse change in the financial position or operations of such parties since such financial statements were prepared. SECTION 7.6. Litigation. To the best knowledge of Borrower, there is ---------- no action, suit, proceeding, inquiry or investigation at law or in equity or before or by any court, public board or body pending against or affecting Borrower or the properties, assets or operations of Borrower (a) wherein an unfavorable decision, ruling or finding could have a materially adverse affect upon: (i) the transactions contemplated by, or the validity of, this Agreement, the other Bond Documents, or any agreement or instrument to which Borrower is a party and which is used or contemplated for use in the consummation of the transactions contemplated by this Agreement and the other Bond Documents, (ii) the tax-exempt status of the interest on the Bonds, or (iii) Borrower's property, assets, operations or condition, financial or otherwise, or its ability to perform its obligations in respect of the Indenture or this Agreement; or (b) which in any way contests the existence, organization or powers of Borrower or the titles of the officers of Borrower to their respective offices. SECTION 7.7. Employee Benefit Plans. Borrower is in compliance in ---------------------- all material respects with ERISA to the extent applicable to it and has received no notice to the contrary from the PBGC or any other governmental entity or agency and no reportable event (as defined in ERISA) which could result in a material accumulated deficiency under ERISA or a material liability to the PBGC has occurred and is continuing. SECTION 7.8. Defaults. No Event of Default or event which with the -------- passage of time, the giving of notice or both could become an Event of Default has occurred and is continuing. SECTION 7.9. Disclosure. The information contained in the Official ---------- Statement under the caption "The Borrower and The Project" is true and correct, and such information does 16 not contain any untrue statement of a material fact nor does such information omit any material facts necessary in order to make such information not misleading. SECTION 7.10. Reports. All reports and forms required to be filed with ------- the Internal Revenue Service by Borrower have been so filed. SECTION 7.11. Utilities. All utility services necessary for the --------- operation of the Project are either available within or at the boundaries of the Property or all necessary steps have been or shall be taken by Borrower to assure the complete construction thereof, including, without limitation, all electrical and telephone facilities, water supply, gas, and storm and sanitary sewer facilities. SECTION 7.12. Condemnation. No taking of the Property and/or the Chino ------------ Property or any part thereof through eminent domain, conveyance in lieu thereof, condemnation or similar proceeding is pending or, to Borrower's knowledge, threatened by any governmental agency. SECTION 7.13. Roads. All public roads necessary for the full ----- utilization of the Project for their intended purpose have been completed. SECTION 7.14. Brokers. Borrower has not dealt with any person, firm ------- or corporation who is or may be entitled to any finder's fee, brokerage commission, loan commission or other sum in connection with the issuance of the Letter of Credit pursuant to this Agreement nor the entering into of this Agreement. Borrower hereby agrees to indemnify and defend the Credit Bank and hold the Credit Bank harmless against any and all loss, liability, cost or expense, including reasonable attorneys' fees, which the Credit Bank may suffer or sustain should such warranty or representation prove inaccurate in whole or in part. SECTION 7.15. Hazardous Materials. Borrower is not in violation of any ------------------- federal, state or local law, ordinance or regulation relating to environmental conditions on, under or about the Property and/or the Chino Property including, but not limited to, soil and groundwater conditions. Neither Borrower, nor to Borrower's knowledge, any third party, has used, generated, manufactured, refined, produced, processed, stored or disposed of on, under or about the Property and/or the Chino Property or transported to or from the Property any "Hazardous Materials" except in compliance with applicable law and except as may be set forth on the Phase I Environmental Assessment to be delivered to Credit Bank hereunder, nor does Borrower intend to use the Property and/or the Chino Property in the future for the purpose of generating, manufacturing, refining, producing, storing, handling, transferring, processing or transporting of Hazardous Materials other than those materials customarily used in the construction and operation of a manufacturing facility. For the purposes hereof, "Hazardous Materials" shall mean any flammable explosives, radioactive materials, asbestos, organic compounds known as polychlorinated biphenyls, chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, including, without limitation, any substances defined as or included in the definition of "hazardous substances," "hazardous materials," or "toxic substances" in the Comprehensive 17 Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; or the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.; or any applicable law relating to radioactive and/or nuclear materials or substances or any applicable California law; and in the regulations adopted, published and/or promulgated pursuant to said laws. ARTICLE 8. AFFIRMATIVE COVENANTS OF BORROWER. --------------------------------- Until the termination of this Agreement and the payment in full to the Credit Bank of all amounts payable to the Credit Bank hereunder, Borrower hereby covenants and agrees that it will: SECTION 8.1. Reporting Requirements. Furnish to the Credit Bank on ---------------------- request, notices of filing of all reports material to the Project that Borrower may be required to file with any governmental commission, department, board, bureau or agency of the Federal, State or local government relating to the transactions contemplated by the Indenture. In addition, Borrower shall cause to be delivered to Credit Bank (i) the annual financial statements audited by a certified public accountant of Borrower within 90 days after the end of its fiscal year and quarterly financial statements of the Borrower certified as true and correct by Borrower within forty-five (45) days after the end of each of its fiscal quarter. SECTION 8.2. Building Permits. Cause all building permits for the ---------------- improvements to be constructed as part of the Project to be issued within 180 days of the Date of Issuance. SECTION 8.3. Delivery of Appraisal. Deliver to Credit Bank within 30 --------------------- days of the Date of Issuance the appraisal for the Project called for in Section 5.24(e) of the Building Loan Agreement. SECTION 8.4. Notices. ------- (a) Give prompt notice in writing to the Credit Bank of a known occurrence of an Event of Default or event which with the passage of time, the giving of notice or both could become an Event of Default, and of any known development, financial or otherwise, which may be reasonably expected to materially adversely affect the ability of Borrower to perform its obligations as set forth hereunder or under any of the other Bond Documents, setting forth the details of and the action Borrower proposes to take with respect to such event or development; and (b) Give prompt notice in writing to the Credit Bank of any known pending action, suit or proceeding, relating to the operations or the condition (financial or otherwise) of the Project in an uninsured amount in excess of $50,000 or the ability of Borrower to repay any debt incurred under this Agreement or the Indenture or which questions the validity of the Bond Documents. 18 SECTION 8.5. Payment of Taxes and Other Obligations. From time to -------------------------------------- time pay and discharge, or cause to be paid and discharged, all payments in lieu of taxes, service charges, assessments or other governmental charges which may lawfully be imposed upon the revenues and income from the Project and will pay all lawful claims for labor, material and supplies which if unpaid might become a lien or charge upon the Project, revenues or income or which might impair the security of the Deeds of Trust or the use of the Project revenues or other funds to pay the principal of and interest thereon, all to the end that the priority and security of the Deeds of Trust and of the Credit Bank shall be preserved; provided that nothing in this Section 8.5 shall require Borrower to make any such payment so long as it in good faith shall contest the validity thereof and shall have established adequate reserves with respect thereto. SECTION 8.6. Compliance with Laws, etc. Comply with the requirements -------------------------- of all applicable laws, rules, regulations and orders of any governmental entity, noncompliance with which would, singly or in the aggregate, materially and adversely affect its ability to complete or operate the Project or perform under this Agreement or any other Bond Documents to which Borrower is a party, unless the same shall be contested by it in good faith and by appropriate proceedings which shall operate to stay the enforcement thereof. SECTION 8.7. Inspection Rights. At any reasonable time and from time ----------------- to time upon three (3) days' prior written notice, permit the Credit Bank or any agents or representatives thereof to examine and make copies of the records and books of account related to the transactions contemplated by this Agreement, and at any reasonable time to visit the Project and to discuss its affairs, finances and accounts with Borrower and its independent accountants. SECTION 8.8. Keeping of Records and Books of Account. Keep or cause --------------------------------------- to be kept proper and current books and accounts (separate from all other records and accounts) in which complete and accurate entries shall be made of all transactions relating to the Project and the Revenues and other funds provided for in the Loan Agreement, and will prepare and furnish to the Credit Bank the financial statements required under Section 8.1. SECTION 8.9. Maintenance of Approvals, Filings and Registrations. At --------------------------------------------------- all times maintain in effect, renew and comply with all the terms and conditions of all consents, licenses, approvals and authorizations as may be necessary or appropriate under any applicable law or regulation for the execution, delivery and performance of this Agreement and the other Bond Documents to which Borrower is a party, and to make this Agreement and such other Bond Documents its legal, valid, binding and enforceable obligations, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally, to general equitable principles which may limit the right to obtain equitable remedies and to provisions of applicable California law. 19 SECTION 8.10. Maintenance and Operation of the Project. ---------------------------------------- (a) Subject to applicable requirements and restrictions imposed, and to the extent permitted, by law, operate or cause to operate the Project in the manner described in the Official Statement. (b) To the extent material to the transactions contemplated herein or in the Bond Documents, operate and maintain, or cause to be operated and maintained, the Project in accordance with all applicable governmental laws, ordinances, approvals, rules, regulations and requirements including, without limitation, such zoning, sanitary, pollution and safety ordinances and laws and such rules and regulations thereunder as may be binding upon Borrower. Borrower further covenants and agrees that it will cause to be maintained and operated all engines, boilers, pumps, machinery, apparatus, fixtures, fittings and equipment of any kind in, or that shall be placed in any building or structure now or hereafter at any time constituting part of the Project in good repair, working order and condition, except such property or equipment as is no longer being utilized by Borrower, and that it will from time to time make or cause to be made all necessary and proper replacements, repairs, renewals and improvements so that the efficiency and value of the Project shall not be impaired. SECTION 8.11. Insurance Required. Maintain, in accordance with the ------------------ provisions of the Deeds of Trust, insurance on the Project and the Chino Property with responsible and reputable insurance companies and associations which are acceptable to the Credit Bank, including, without limitation, public liability, property damage, hurricane, fire and extended coverage insurance, title insurance, provided that such property damage, fire and extended coverage and title insurance shall each be maintained in an amount not less than the greater of the aggregate principal amount of the Bonds or the full insurable replacement value of the Project and the Chino Property, as applicable (the term "full insurable replacement value" as used herein shall mean the cost to repair or replace the Project and the Chino Property, as applicable and any portion thereof with property of like kind and quality, without deduction for depreciation). All such policies shall name Borrower and the Credit Bank as insured parties, beneficiaries or loss payees as their interest may appear. Each policy shall contain a provision to the effect that the insurer shall not cancel or substantially modify the policy provisions without first giving 30 days' advance written notice thereof to Borrower and the Credit Bank. At least once during each 12-month period, commencing on the Date of Issuance, Borrower shall file with the Credit Bank a certificate setting forth the policies of insurance maintained pursuant to this Agreement, the names of the insurers and insured parties, the amounts of such insurance and applicable deductibles, the risks covered thereby and the expiration dates thereof. SECTION 8.12. ERISA. Promptly pay and discharge all obligations and ----- liabilities, applicable to Borrower, arising under ERISA of a character which if unpaid or unperformed might result in the imposition of a lien against any of its properties or assets and promptly notify the Credit Bank of the occurrence of any reportable event (as defined in ERISA) which might result in the termination by the PBGC of any Plan or of receipt of any notice from PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor. Borrower will notify the Credit Bank of its intention to terminate or withdraw from any Plan and 20 will not terminate any such Plan or withdraw therefrom unless it shall be in compliance with all of the terms and conditions of this Agreement after giving effect to any liability to PBGC resulting from such termination or withdrawal. SECTION 8.13. Bond Proceeds; Additional Funds. Cause the proceeds of ------------------------------- the Bonds to be used for the purposes set forth in the Indenture and the Loan Agreement and make any necessary deposit into the funds and accounts established under and referred to in the Indenture and the Loan Agreement. SECTION 8.14. Further Assurances. Execute and deliver to the Credit ------------------ Bank all such documents and instruments and do all such other acts and things as may be necessary or required by the Credit Bank to enable the Credit Bank to exercise and enforce its rights under this Agreement and to realize thereon, and record and file and re-record and re-file all such documents and instruments, at such time or times, in such manner and at such place or places, all as may be necessary or required by the Credit Bank to validate, preserve and protect the position of the Credit Bank under this Agreement. SECTION 8.15. Financial Covenants. Borrower shall maintain the ------------------- following financial ratios and covenants on a consolidated basis: (a) Minimum Quick Ratio to exceed 0.90:1.00. Quick Ratio is defined as cash plus accounts receivable, less restricted cash to current liabilities; (b) Cash Flow Coverage to exceed 1.30 times. Cash Flow Coverage Ratio is defined as net income plus depreciation, depletion and amortization to current maturities of long term debt; (c) Minimum Effective Tangible Net Worth to exceed $7,500,000. Effective Tangible Net Worth is stated net worth plus subordinated debt less any intangible assets. Intangible assets can include, but are not limited to Bonds costs, investments in joint ventures, overseas assets, loans to employees and owners, goodwill, research and development expenses and project costs, and any other assets deemed intangible in accordance with generally accepted accounting principles; and (d) Maximum Debt (total liabilities less subordinated debt) to Tangible Net Worth (stated net worth plus subordinated debt less intangible assets) less than 2.00:1.00. ARTICLE 9. NEGATIVE COVENANTS OF BORROWER. ------------------------------ Until the termination of this Agreement and the payment in full to the Credit Bank of all amounts payable to the Credit Bank hereunder, Borrower hereby covenants and agrees that, without the prior written consent of the Credit Bank, Borrower will not directly or indirectly: SECTION 9.1. Additional Indebtedness. Issue any other obligations ----------------------- payable, with respect to principal or interest, from the revenues of the Project which have, or purport to 21 have, any lien upon the revenues of the Project superior to or on a parity with the lien of the Credit Bank and the Trustee for the Bonds; provided, however, that nothing in this covenant shall prevent Borrower from issuing and selling pursuant to law refunding bonds or other refunding obligations payable from and having a first lien upon the revenues of the Project if such refunding certificates or other refunding obligations are issued for the purpose of, and are sufficient for the purpose of, prepaying all of the Bonds authorized by the Indenture and then outstanding. SECTION 9.2. Limitation on Encumbrances on the Project. Create, ----------------------------------------- assume or suffer to exist any security interest, encumbrance, lien or charge of any kind (including the charge upon property purchased under conditional sales or other title retention agreements) (a "security interest") upon the Project other than real property or special taxes or liens not yet due and payable or Permitted Encumbrances or liens in favor of Credit Bank, unless the obligations of Borrower under this Agreement shall be secured prior to any indebtedness or other obligation secured by such security interest and Borrower further covenants and agrees that if such a security interest is created or assumed by Borrower, it will make or cause to be made effective a provision whereby the obligation of Borrower under this Agreement will be secured prior to such indebtedness or other obligation secured by such security interest. SECTION 9.3. Amendments. Amend, modify, terminate, grant or waive, ---------- or permit the amendment, modification, termination or grant of, or any waiver under (or consent to, or permit or suffer to occur any action or omission which results in, or is equivalent to, an amendment, modification, or grant of a waiver under) the Bond Documents except as agreed to by Credit Bank. SECTION 9.4. Official Statement. Make any changes in reference to ------------------ the Credit Bank in any revision or amendment of the Official Statement. SECTION 9.5. Arbitrage. Use, or permit the use of, the proceeds of --------- any Bond in any manner that would have caused the Bonds, at the time of issuance thereof, to be "arbitrage bonds" within the meaning of Section 148 of the Code. SECTION 9.6. Prohibited Uses. Use any of the properties financed or --------------- refinanced out of any proceeds of the Bonds or suffer or permit such properties, to be used in any manner or take any action or omit to take any action which would adversely affect the tax exempt status of interest on the Bonds. SECTION 9.7. Prohibition on Sale of Assets. Sell, lease, assign, ----------------------------- transfer or otherwise dispose of any of the Project whether now owned or acquired in the future, except (a) obsolete or worn out property or equipment no longer necessary in the ordinary course of the Project's business, or (b) property disposed of in the ordinary course of the Project's business for adequate consideration. 22 ARTICLE 10. DEFAULT AND REMEDIES. -------------------- SECTION 10.1. Events of Default. Each of the following events shall, ----------------- at the option of the Credit Bank, constitute an "Event of Default" under this Agreement: (a) the occurrence of any event which constitutes an "Event of Default" under the Indenture, the Loan Agreement, the Security Agreement, the Building Loan Agreement or the Environmental Indemnity; or (b) the failure by Borrower to pay any amount payable hereunder within three (3) Business Days following the due date of such amount; or (c) the failure by Borrower to perform or observe any other term, covenant or agreement contained in this Agreement, provided that the failure of Borrower to perform such covenants (other than as provided in subsections (a) and (b) of this Section 10.1 and other than the covenants set forth in Article 9 hereof) shall not be deemed an Event of Default if Borrower is diligently proceeding to cure such nonperformance; provided, however, that such cure shall have been achieved, in any event, no later than sixty (60) days after written notice given to Borrower by the Credit Bank; or (d) any warranty, representation or other written statement made by or on behalf of Borrower contained in this Agreement, or in any Bond Document or in any instrument furnished in compliance with or in reference to any of the foregoing, is false or misleading in any material respect on any date as of which made, and such falsity or misleading statement materially and adversely affects the Project, the Property or Borrower, or its ability to perform under this Agreement, the Environmental Indemnity, the Security Agreement or any other Bond Documents to which Borrower is a party; or (e) Borrower makes an assignment for the benefit of creditors, files a petition in bankruptcy, is unable generally to pay its debts as they come due, is adjudicated insolvent or bankrupt or there is entered any order or decree granting relief in any involuntary case commenced against Borrower under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or if Borrower petitions or applies to any tribunal for any receiver, trustee, liquidator, assignee, custodian, sequestrator or other similar official of Borrower or of any substantial part of its properties, or commences any proceeding in a court of law for a reorganization, readjustment of debt, dissolution, liquidation or other similar procedure under the law or statutes of any jurisdiction, whether now or hereafter in effect, or if there is commenced against Borrower any such proceeding in a court of law which remains undismissed or shall not be discharged, vacated or stayed, or such jurisdiction shall not be relinquished, within sixty (60) days after commencement; or (f) Borrower by any act, indicates its consent to, approval of, or acquiescence in any such proceeding in a court of law, or to an order for relief in an involuntary case commenced against Borrower under any such law, or to the appointment of any receiver, trustee, liquidator, assignee, custodian, sequestrator or other similar official for Borrower, or if Borrower 23 suffers any such receivership, trusteeship, liquidation, assignment, custodianship, sequestration or other similar procedure to continue undischarged for a period of sixty (60) days after commencement or if Borrower takes any action for the purposes of effecting the foregoing; or (g) any material provision of this Agreement, the Security Agreement, the Environmental Indemnity, the Deeds of Trust or of any of the Bond Documents shall cease to be valid and binding, or Borrower or any governmental entity shall contest any such provision, or Borrower, or any agent or trustee on behalf of Borrower, shall deny that it has any or further liability under this Agreement, the Environmental Indemnity, the Security Agreement, the Deeds of Trust or any of the Bond Documents; (h) final judgment for the payment of money in excess of an aggregate of $100,000 related to the Project and not fully covered by insurance shall be rendered against Borrower and the same shall remain undischarged for a period of thirty (30) consecutive days during which execution shall not be effectively stayed or for the payment of which a surety bond or other adequate security has not been obtained in the judgment of the Credit Bank; or (i) any reportable event (as defined in ERISA) which the Credit Bank determines in good faith constitutes grounds for the termination of any Plan of Borrower or for the appointment by the appropriate United States District Court of a trustee to administer or liquidate any such Plan, shall have occurred and be continuing thirty (30) days after written notice to such effect shall have been given to Borrower by the Credit Bank; or any such Plan shall be terminated; or a trustee shall be appointed by the appropriate United States District Court to administer any such Plan; or the PBGC shall institute proceedings to administer or terminate any such Plan; and in the case of any such event the aggregate amount of vested unfunded liabilities under such Plan shall exceed (either singly or in the aggregate in the case of any such liability arising under more than one such Plan) 5% of the total assets of Borrower; or (j) the failure of any Bonds to be remarketed within 90 days of the date of a Purchase Drawing (except if such failure to remarket is a result of a change in Credit Bank's rating or a material adverse change in the financial condition of the Credit Bank). SECTION 10.2. Remedies. Upon the occurrence of an Event of Default -------- pursuant to Section 10.1(f) or (g), all amounts payable by Borrower under this Agreement shall become due and payable, in each case automatically and immediately without any presentment, demand, protest or other notice or formality of any kind (all of which are expressly waived). Upon the occurrence of an Event of Default (other than pursuant to Section 10.1(f) or (g)) the Credit Bank may, by notice to Borrower, declare all amounts payable by Borrower under this Agreement to be immediately due and payable (and the same shall upon such notice become immediately due and payable), in each case without any presentment, demand, protest or other notice or formality of any kind. Upon any such occurrence, the Credit Bank may, in addition, (a) exercise all of its rights and remedies under any other Bond Document or applicable law or (b) exercise all or any combination of the remedies provided for in this Section 10.2. 24 ARTICLE 11. CONTINUING OBLIGATION. --------------------- This Agreement is a continuing obligation of Borrower and shall, until the later of the Expiration Date or the date upon which all amounts due and owing to the Credit Bank hereunder shall have been fully and finally paid, be binding upon Borrower, its successors and assigns, and inure to the benefit of and be enforceable by the Credit Bank and its successors, transferees and assigns; provided, that Borrower may not assign all or any part of this Agreement without the prior written consent of the Credit Bank. ARTICLE 12. LIMITED LIABILITY OF THE CREDIT BANK. ------------------------------------ Borrower hereby assumes all risks of the acts, omissions or misuse of the Letter of Credit by the Trustee or any successor thereto. Neither the Credit Bank nor any of its officers, directors or agents shall be liable or responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of, or the making of a Drawing under, the Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign the Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the Trustee to comply fully with the conditions required in order to effect a Drawing; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; (v) for any loss or delay in the transmission or otherwise of any Bond, document or draft required in order to make a Drawing; or (vi) for any consequences arising from causes beyond the control of the Credit Bank; provided, however, that Borrower shall have a claim against the Credit Bank, and the Credit Bank shall be liable to Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by Borrower which Borrower proves were proximately caused by (x) the Credit Bank's willful misconduct or gross negligence in determining whether documents presented under the Letter of Credit comply with the terms of the Letter of Credit or (y) the Credit Bank's willful or grossly negligent failure to pay under the Letter of Credit after the presentation to it by the Trustee of a draft and certificate strictly complying with the terms and conditions of the Letter of Credit. None of the above shall affect, impair, or prevent the vesting of any of the Credit Bank's rights or powers hereunder. In furtherance and extension, and not in limitation, of the specific provisions hereinabove set forth, any action taken or omitted by the Credit Bank under or in connection with the Letter of Credit or any related Bond Documents or other documents, if taken or omitted in good faith, shall be binding upon Borrower and shall not put the Credit Bank under any resulting liability to Borrower (except in the case of the gross negligence or breach of this Agreement by Credit Bank). 25 ARTICLE 13. MISCELLANEOUS. ------------- SECTION 13.1. Amendments, Nonwaiver and Remedies. This Agreement ---------------------------------- may be amended only upon the written agreement of Borrower and the Credit Bank, and Borrower may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if Borrower shall first obtain the written consent of the Credit Bank. No course of dealing between Borrower and the Credit Bank, nor any delay in exercising any rights hereunder, shall operate as a waiver of any rights of the Credit Bank hereunder. No single or partial exercise of any right under this Agreement shall preclude any other further exercise of such right or the exercise of any other right. The Credit Bank may remedy any default by Borrower hereunder or with respect to any other person, firm or corporation in a reasonable manner without waiving the default remedied and without waiving any other prior or subsequent default by Borrower. The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. SECTION 13.2. Survival of Representations and Warranties. All ------------------------------------------ agreements, representations and warranties of Borrower contained in this Agreement and in any Bond Documents delivered pursuant hereto shall survive the execution and delivery of this Agreement and the issuance of the Letter of Credit hereunder, and the agreements contained in Article 5 and Section 13.3 hereof shall survive payment of the Bonds, the reimbursement to the Credit Bank of any payments or disbursements under the Letter of Credit and the termination of this Agreement. SECTION 13.3. Expenses. Whether or not the transactions -------- contemplated by this Agreement are consummated or the Letter of Credit is issued, Borrower agrees to pay on demand, all reasonable costs and expenses of the Credit Bank including, without limitation, the reasonable fees and expenses of Special Counsel in connection with the preparation, issuance or delivery, as the case may be, of the Letter of Credit, this Agreement, the other Bond Documents and any other documents which may be delivered in connection with any of the foregoing. In addition, Borrower agrees to pay on demand all costs and expenses of the Credit Bank (including reasonable counsel fees and expenses) in connection with (i) the filing, recording, administration, transfer, amendment, maintenance, renewal or cancellation of the Letter of Credit, this Agreement or the other Bond Documents, (ii) any payment by the Credit Bank under the Letter of Credit, or (iii) any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of the Letter of Credit, this Agreement or the other Bond Documents, and any other documents which may be delivered in connection with this Agreement. In addition, Borrower agrees to pay promptly all costs and expenses of the Credit Bank for (i) any and all amounts which the Credit Bank has paid relating to the Credit Bank's curing of any Event of Default under this Agreement or any of the other Bond Documents, (ii) the enforcement of this Agreement or any of the other Bond Documents, or (iii) any action or proceeding relating to a court order, injunction, or other process or decree restraining or seeking to restrain the Credit Bank from paying any amount under the Letter of Credit on the presentation of drafts and other documents in connection with the same. Borrower agrees to save the Credit Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omitting to pay any taxes and fees to the extent Borrower is obligated to pay the same under this Section 13.3. 26 SECTION 13.4. Waiver of Right of Set-off and Limitation on the Credit ------------------------------------------------------- Bank Collateral. - --------------- (a) Upon the occurrence and during the continuance of any Event of Default, the Credit Bank is hereby authorized at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower) and to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Credit Bank to or for the credit of the account of Borrower against any and all of the obligations of Borrower now or hereafter existing under this Agreement, irrespective of whether or not the Credit Bank shall have made any demand hereunder. (b) The Credit Bank agrees promptly to notify Borrower after any such set-off and application; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Credit Bank under this Section 13.4 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Credit Bank may have. SECTION 13.5 Notices. All notices, requests and other communications ------- hereunder shall be in written form (including bank wire, telegram, facsimile, telex or similar writing) and shall be given to the party to whom addressed, at its address, facsimile or telex number set forth below, or such other address, facsimile or telex number as such party may hereafter specify for the purpose by notice to the other parties listed below. Each such notice, request or communication shall be effective (i) if given by telex, facsimile or other electronic means, when such communication is transmitted to the address specified below and the appropriate answer back is received, (ii) if given by mail, three days after such communication is deposited in the United States mail with postage prepaid by registered or certified mail, return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified below. All notices given by telex, facsimile or other electronic means shall be confirmed in writing as promptly as practicable. If to Borrower: Provena Foods Inc. 5010 Eucalyptus Avenue Chino, California 91710 Attention: Thomas J. Mulroney Telephone: (909) 627-1082 Facsimile: (909) 677-7315 27 with a copy to counsel: Procopio, Cory, Hargreaves & Savitch 530 "B" Street San Diego, California 92101 Attention: Gary Wright, Esq. Telephone: (619) 515-3248 Facsimile: (619) 235-0398 If to the Credit Bank: Comerica Bank-California 333 West Santa Clara Street, 5th Floor San Jose, California 95113 Attention: Michael J. Archer Telephone: (408) 556-5361 Facsimile: (408) 556-5395 with a copy to counsel: Manatt, Phelps & Phillips, LLP 11355 West Olympic Boulevard Los Angeles, California 90064-1614 Attention: Chris A. Carlson, Esq. Telephone: (310) 312-4000 Facsimile: (310) 312-4224 SECTION 13.6. Participation. The Credit Bank may at any time arrange ------------- for other banking institutions of the Credit Bank's choosing ("Participants") to participate in all or any portion of the Credit Bank's obligations under the Letter of Credit, of the obligations of Borrower evidenced hereby and by the Bonds which may be held by the Credit Bank or its nominee ("Participations"). Without in any way limiting the right of the Participants hereunder, Borrower agrees that the Participants shall be entitled to (i) receive copies of all documents furnished to the Credit Bank pursuant to Section 8.1 hereof (at such addresses as the Credit Bank shall designate from time to time to Borrower in writing) and (ii) receive the benefits of Sections 2.7 and 2.8 hereof to the extent of their respective Participations. Notwithstanding the Credit Bank's granting of any Participations, Borrower shall have the right to continue dealing solely with the Credit Bank and agents of the Credit Bank which have been appointed in writing (as to the appointment of which Borrower has received written notice). No Participant shall enter into any reimbursement security or other similar agreement with Borrower with respect to the Letter of Credit, this Agreement or the Bonds. Notwithstanding the foregoing, in the event of any Participations, Borrower shall not be liable for any Taxes or other expenses in excess of that amount which would be otherwise due without such Participations and no Participation shall be 28 allowed if such Participations would result in a lower credit rating for the Bank or the Bonds or increase the cost to the Borrower or result in any default under the Bond Documents. SECTION 13.7. Satisfaction Requirement. If any agreement, certificate ------------------------ or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to the Credit Bank, the determination of such satisfaction shall be made by the Credit Bank in its sole and exclusive judgment exercised in good faith. SECTION 13.8. Uniform Customs and Practices. This Agreement and the ----------------------------- Letter of Credit shall be subject to the Uniform Customs and Practice (a copy of which is available upon request), and, in the event any provision of the Uniform Customs and Practice is or is construed to vary from or be in conflict with any provision of the California Uniform Commercial Code, as from time to time amended and in force (the "Commercial Code"), the Uniform Customs and Practice shall prevail. In addition to other rights of the Credit Bank hereunder or under application for the Letter of Credit, any action, inaction or omission taken or suffered by the Credit Bank, or by any of its correspondents, under or in connection with the Letter of Credit or the relative instruments, documents, or property, if in good faith and in conformity with such foreign or domestic laws, regulation, or customs as the Credit Bank or any of its correspondents may deem to be applicable thereto, shall be binding upon Borrower and shall not place the Credit Bank or any of its correspondents under any liability to Borrower. SECTION 13.9. Governing Law. This Agreement and the Letter of Credit ------------- shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of California, without giving effect to conflicts of law principles. The parties hereby waive, to the fullest extent permitted by law, any rights they may have to a jury trial. SECTION 13.10. Counterparts. This Agreement may be executed ------------ simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. SECTION 13.11. Severability. Any provision of this Agreement ------------ which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. 29 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the day and year first above written. BORROWER: PROVENA FOODS INC., a California corporation By: /s/ [ILLEGIBLE] ____________________________________ Its: CFO ___________________________________ Credit Bank: - ----------- COMERICA BANK-CALIFORNIA By: /s/ [ILLEGIBLE] ____________________________________ Its: VP ___________________________________ 30 Exhibit A Legal Description All that certain real property now or hereafter acquired, in the City of Lathrop and County of San Joaquin, State of California (the "Land"), more particularly described as follows: Lot 3 of Tract No. 2208 CROSSROADS COMMERCIAL/INDUSTRIAL PARK UNIT NO. 1, in the County of San Joaquin, State of California, as per Map thereof recorded in Book 31 of Maps, Page 70, San Joaquin County Records. 31 Exhibit B Form of Letter of Credit 32 Exhibit C Redemption Payments
Monthly Annual Date Payments Payments ---- ---------- -------- May 1, 2000 - April 1, 2001 $ 6,391.67 $ 76,700 May 1, 2001 - April 1, 2002 $ 6,750.00 $ 81,000 May 1, 2002 - April 1, 2003 $ 7,125.00 $ 85,500 May 1, 2003 - April 1, 2004 $ 7,533.33 $ 90,400 May 1, 2004 - April 1, 2005 $ 7,958.33 $ 95,500 May 1, 2005 - April 1, 2006 $ 8,408.33 $100,900 May 1, 2006 - April 1, 2007 $ 8,883.33 $106,600 May 1, 2007 - April 1, 2008 $ 9,383.33 $112,600 May 1, 2008 - April 1, 2009 $ 9,916.67 $119,000 May 1, 2009 - April 1, 2010 $10,475.00 $125,700 May 1, 2010 - April 1, 2011 $11,058.33 $132,700 May 1, 2011 - April 1, 2012 $11,683.33 $140,200 May 1, 2012 - April 1, 2013 $12,341.67 $148,100 May 1, 2013 - April 1, 2014 $13,041.67 $156,500 May 1, 2014 - April 1, 2015 $13,766.67 $165,200 May 1, 2015 - April 1, 2016 $14,558.33 $174,700 May 1, 2016 - April 1, 2017 $15,366.67 $184,400 May 1, 2017 - April 1, 2018 $16,241.67 $194,900 May 1, 2018 - April 1, 2019 $17,158.33 $205,900 May 1, 2019 - April 1, 2020 $18,125.00 $217,500 May 1, 2020 - April 1, 2021 $19,150.00 $229,800 May 1, 2021 - April 1, 2022 $20,225.00 $242,700 May 1, 2022 - October 1, 2023 $45,194.44 $813,500
33 EX-23.1 13 CONSENT OF KPMG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Provena Foods Inc.: We consent to the incorporation by reference in the registration statement (No. 33-23852) on Form S-8 of Provena Foods Inc. of our report dated February 1, 1999, relating to the balance sheets of Provena Foods Inc. as of December 31, 1998 and 1997, and the related statements of earnings, shareholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Provena Foods Inc. KPMG LLP Orange County, California March 10, 1999 EX-27 14 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 4,057,059 19,471 3,842,760 0 1,458,369 9,436,777 11,344,150 3,742,110 17,279,663 2,215,697 4,000,000 4,572,482 0 0 5,906,965 17,279,663 24,502,571 27,958,619 21,794,110 2,252,774 18,919 0 87,348 3,799,962 1,558,183 2,241,779 0 0 0 2,241,779 .78 .77
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