-----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, BNWIL//faYx9umKa7sjFLlI6rRBwtBOMNE/O4LwTsYc71F83pQ77SJqy3txE9+vx KMU2KPDS0bQWzcjOzH4R7A== 0000898430-97-000677.txt : 19970222 0000898430-97-000677.hdr.sgml : 19970222 ACCESSION NUMBER: 0000898430-97-000677 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970218 SROS: NASD GROUP MEMBERS: EDWARD AND NORMA PHILLIPS FAMILY TRUST GROUP MEMBERS: PHILLIPS EDWARD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: MATTHEWS STUDIO EQUIPMENT GROUP CENTRAL INDEX KEY: 0000855575 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 951447751 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-48119 FILM NUMBER: 97537610 BUSINESS ADDRESS: STREET 1: 2405 EMPIRE AVE CITY: BURBANK STATE: CA ZIP: 91504 BUSINESS PHONE: 8436715X32 MAIL ADDRESS: STREET 1: 2405 EMPIRE AVENUE CITY: BURBANK STATE: CA ZIP: 91504 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PHILLIPS EDWARD CENTRAL INDEX KEY: 0000898545 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 2405 EMPIRE AVE CITY: BURBANK STATE: CA ZIP: 91504 BUSINESS PHONE: 8188436715 MAIL ADDRESS: STREET 1: 2405 EMPIRE AVENUE CITY: BURBANK STATE: CA ZIP: 91504 SC 13D/A 1 AMENDMENT #5 TO SCHEDULE 13D UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 (Amendment No. 5) MATTHEWS STUDIO EQUIPMENT GROUP (Name of Issuer) Common Stock, no par value per share (Title of Class of Securities) 577 140 10 6 (CUSIP Number) Edward Phillips III Matthews Studio Equipment Group 2405 Empire Avenue Burbank, California 91504-3399 (818) 843-6715 with a copy to: Francis W. Costello, Esq. Whitman Breed Abbott & Morgan 633 West Fifth Street Los Angeles, California 90071 (213) 896-2400 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) January 10, 1997 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with the statement [ ]. Page 1 of 77 Pages SCHEDULE 13D - --------------------- ------------------- CUSIP NO. 577140 10 6 Page 2 of 77 Pages - --------------------- ------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Edward Phillips III - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] N/A - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS PF; 00 - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] N/A - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES BENEFICIALLY 209,667 (2%); See Item 5 OWNED BY ------------------------------------------------------------ EACH REPORTING 8 SHARED VOTING POWER PERSON WITH 1,847,450 (17.9%); See Item 5 ------------------------------------------------------------ 9 SOLE DISPOSITIVE POWER 209,667 (2%); See Item 5 ------------------------------------------------------------ 10 SHARED DISPOSITIVE POWER 1,847,450 (17.9%); See Item 5 - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 2,057,117; See Item 5 - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] N/A - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 19.9%; See Item 5 - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON IN - -------------------------------------------------------------------------------- Page 2 of 77 Pages SCHEDULE 13D - --------------------- ------------------- CUSIP NO. 577140 10 6 Page 3 of 77 Pages - --------------------- ------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Edward and Norma Phillips Family Trust - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] N/A - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS 00 - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] N/A - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION California - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES BENEFICIALLY 1,847,450 (17.9%); See Item 5 OWNED BY ------------------------------------------------------------ EACH REPORTING 8 SHARED VOTING POWER PERSON WITH 0 ------------------------------------------------------------ 9 SOLE DISPOSITIVE POWER 1,847,450 (17.9%); See Item 5 ------------------------------------------------------------ 10 SHARED DISPOSITIVE POWER 0 - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,847,450 - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] N/A - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 17.9% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON 00 - -------------------------------------------------------------------------------- Page 3 of 77 Pages SCHEDULE 13D INTRODUCTION. This statement relates to Edward Phillips III ("Phillips") and each other person who is the record owner or may be deemed the beneficial owner of shares of Common Stock (as hereinafter defined) of Matthews Studio Equipment Group by virtue of their affiliated status or other relationship with Phillips (collectively, the "reporting persons"). This statement amends and restates the statement on Schedule 13D and amendments thereto made with respect to the reporting persons as follows: 1. Statement on Schedule 13D dated September 10, 1993; 2. Amendment No. 1 to Schedule 13D dated March 2, 1992; 3. Amendment No. 2 to Schedule 13d dated October 6, 1992; 4. Amendment No. 3 to Schedule 13D dated December 28, 1993; and 5. Amendment No. 4 to Schedule 13D dated January 29, 1993. ITEM 1. SECURITY AND ISSUER. This statement relates to the common stock, no par value per share (the "Common Stock"), issued by Matthews Studio Equipment Group, a California corporation (the "Company"). The principal executive offices of the Company are located at 2405 Empire Avenue, Burbank, California 91504-3399. ITEM 2. IDENTITY AND BACKGROUND. (a) The reporting persons are (i) Edward and Norma Phillips Family Trust, a California trust (the "Phillips Family Trust"), and (ii) Phillips, a natural person in his individual capacity. Phillips and his wife, Norma Phillips, are the only trustees of the Phillips Family Trust. (b) The principal business address of each of the Phillips Family Trust, its trustees and Phillips is 2405 Empire Avenue, Burbank, California 91504-3399. (c) The principal business of the Phillips Family Trust is to hold investments as part of an estate plan for the Phillips family. The principal business of Phillips is serving as President of Matthews Studio Equipment, Inc., a subsidiary of the Company ("MSEI"), and a director of the Company. Page 4 of 77 Pages (d) During the last five years, none of the Phillips Family Trust, the or Phillips or his wife has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) During the last five years, none of the Phillips Family Trust, or Phillips or his wife has been a party to a civil proceeding or a judicial or administrative body of a competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. (f) The Phillips Family Trust is a California trust. Phillips and his wife each is a citizen of the United States. ITEM 3. SOURCE AND AMOUNT OF FUNDS. This statement relates to a total of 2,057,117 shares of Common Stock which may be deemed to be beneficially owned by Phillips and owned of record by the reporting persons as of the date hereof as more specifically described in Item 5 below. The number of shares of Common Stock owned of record and beneficially by the reporting persons as of the date hereof were acquired for cash or in consideration of the exchange of certain shares of stock as described in this Item 3 and in Item 5 below. In the case of each of the purchases of shares by Phillips upon the exercise of options, Phillips obtained the purchase price from his available personal cash resources. In the case of the acquisition of shares of Common Stock by Phillips, other than upon exercise of options, Phillips paid a purchase price consisting of shares of common stock of the acquired company. In the case of shares of Common Stock acquired by the Phillips Family Trust, the shares were obtained from Phillips for no consideration. ITEM 4. PURPOSE OF THE TRANSACTION. The shares of Common Stock beneficially owned by Phillips were acquired and are being held for investment purposes. As a result of the ownership of the shares and Phillips positions as President of MSEI and a director of the Company, Phillips may be deemed to control the Company. Phillips and the other reporting persons may, from time to time, depending on their evaluation of the market for the Common Stock, other opportunities available to them, their financial requirements and other possible future developments, decide to increase or decrease their holdings of the Common Stock of the Company, although they have no present intention to do so. None of the reporting persons has any current plans or proposals which relate to or would result in the occurrence of any of the actions or events specified in clauses (a) through (j) of Item 4 of Schedule 13D. Page 5 of 77 Pages ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. (a) The aggregate number of shares of Common Stock and percentage of the total outstanding shares represented thereby beneficially owned by (i) Phillips is 2,057,117 shares of Common Stock (including 140,667 shares issuable upon the exercise of currently exercisable options) or 19.9% of the total and (ii) the Phillips Family Trust is 1,847,450 shares of Common Stock or 17.9% of the total, calculated, in each case accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, based on a total of 10,331,591 shares of Common Stock outstanding as reported in the Company's annual report on Form 10-K for the year ended September 30, 1996. (b) Phillips may be deemed to have the sole power to vote and to dispose of the 69,000 shares owned by him directly and the 140,667 shares issuable upon exercise of the options owned by him, or 2%. Phillips may be deemed to share the power to vote and to dispose of the 1,847,450 shares or 17.9% owned by the Phillips Family Trust with his wife who also serves as a trustee of the Phillips Family Trust as described in Item 2 above. (c) The aggregate 2,057,117 shares of Common Stock owned of record and beneficially by the reporting persons as of the date hereof were acquired for cash or in consideration of the exchange of certain shares of stock (or sold for cash) as follows: 1. in connection with a reverse acquisition of Captech, Inc. by the Company in February 1989 Phillips acquired 2,115,000 shares of Common Stock in exchange for shares of MSEI; 2. by the grant of options to Phillips to purchase 60,000 shares of Common Stock in February 1989 exercisable at $1.10 per share; 3. in connection with the acquisition of Matthews Studio Electronics, Inc. by the Company in July 1989 Phillips acquired 150,000 shares of Common Stock in exchange for shares of such company; 4. by the transfer of 2,265,000 shares in February 1991 by Phillips, as trust settlor, to the Phillips Family Trust; 5. by the grant of options to Phillips to purchase 5,000 shares of Common Stock in September 1991 exercisable at $1.38 per share; 6. by the exercise of options by Phillips for the purchase of 41,000 shares in February 1992 at an aggregate exercise price of $46,500 and the payment of cash therefor, and by the transfer of these 41,000 shares by Phillips, as trust settlor, in February 1992, to the Phillips Family Trust; 7. by the sale of 25,000 shares of Common Stock by the Phillips Family Trust on the open market in October 1992 for aggregate gross proceeds of $81,250; Page 6 of 77 Pages 8. by the sale of 22,000 shares of Common Stock by the Phillips Family Trust on the open market in December 1992 for aggregate gross proceeds of $56,100; 9. by the sale of 40,000 shares of Common Stock by the Phillips Family Trust on the open market in January 1993 for aggregate gross proceeds of $150,000; 10. by the grant of options to Phillips to purchase 50,000 shares of Common Stock in May 1993 exercisable at $3.125 per share; 11. by the sale by the Phillips Family Trust of 2,500 shares of Common Stock on the open market in September 1994 for aggregate gross proceeds of $8,100; 12. by the sale by the Phillips Family Trust of 2,500 shares of Common Stock on the open market in October 1994 for aggregate gross proceeds of $7,500; 13. by the gift (for no consideration) by the Phillips Family Trust to a niece of Phillips, of 100 shares of Common Stock in June 1994; 14. by the sale by the Phillips Family Trust of 97,450 shares of Common Stock in June 1995 to the De Mattos Family Trust, a trustee of which is Carlos D. De Mattos, Chairman, President and Chief Executive Officer and a director of the Company, in a private transaction for a purchase price of $1.00 per share or an aggregate $97,450 in cash; 15. by the grant of options to Phillips to purchase 200,000 shares of Common Stock (currently exercisable as to 66,667 of such shares) in July 1995 exercisable at $3.00 per share; 16. by the transfer by the Phillips Family Trust of 69,000 shares of Common Stock to Phillips as settlor of this trust, for no consideration, in April 1996; and 17. by the sale of 200,000 shares of Common Stock in January 1997 by the Phillips Family Trust to ING Equity Partners, L.P. I, an affiliate of the Company ("ING"), in a private transaction for a purchase price of $1.80 per share or an aggregate $360,000 in cash. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. Pursuant to a certain Stockholders Agreement dated July 27, 1995, as amended, Phillips has agreed to vote or cause to be voted all shares of Common Stock beneficially owned by him for two representatives of ING to the Board of Directors of the Company and to set the number of members of the Board of Directors of the Company at nine. Except as disclosed herein and in the exhibits hereto, each of which are incorporated herein by reference and made Page 7 of 77 Pages a part hereof, none of the reporting persons is a party to any contract, arrangement, understanding or relationship (legal or otherwise) with any person with respect to any securities of the Company, including, but limited to, transfer or voting of any of the securities. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. 1. Declaration of Trust of the Edward and Norma Phillips Family Trust dated June 5, 1991. 2. Stockholders Agreement dated July 27, 1995 among the Company, ING, Phillips and Carlos D. De Mattos, and their affiliates. 3. Amendment No. 1 to Stockholders Agreement dated April 5, 1996 among the Company, ING, Phillips, Carlos D. De Mattos, and their affiliates. SIGNATURE After reasonable inquiry and to the best knowledge and belief of each of the undersigned, the undersigned certify that the information set forth in this Statement is true, complete and correct. Date: February 13, 1997 /s/ EDWARD PHILLIPS III -------------------------------------------- Edward Phillips III, individually EDWARD AND NORMA PHILLIPS FAMILY TRUST By: /s/ EDWARD PHILLIPS III --------------------------------------- Edward Phillips III, a trustee Page 8 of 77 Pages EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE 1. Declaration of Trust of the Edward and Norma 10 Phillips Family Trust dated June 5, 1991 2. Stockholders Agreement dated July 27, 1995 50 among the Company, ING, Phillips and Carlos D. De Mattos, and their affiliates 3. Amendment No. 1 to Stockholders Agreement 74 dated April 5, 1996 among the Company, ING, Phillips and Carlos D. De Mattos
Page 9 of 77 Pages EX-1 2 DECLARATION OF TRUST EXHIBIT 1 EDWARD AND NORMA PHILLIPS FAMILY TRUST ----------- June 5, 1991 Page 10 of 77 TABLE OF CONTENTS ARTICLE 1 --------- INTRODUCTORY PROVISIONS ----------------------- 1.1 TRUST ESTATE 1 1.2 NAMES OF TRUSTS 1 1.3 TRUSTEE 1 1.4 TRUSTORS 1 1.5 FAMILY DECLARATIONS 1 1.6 CHARACTER OF TRUST PROPERTY 2 1.7 NO CONTRACT FOR TRUST DISPOSITION 2 ARTICLE 2 --------- TRUST DURING TRUSTORS' JOINT LIVES ---------------------------------- 2.1 PAYMENTS IN TRUSTEE'S DISCRETION 2 2.2 TRUSTORS' POWER TO DIRECT PAYMENTS 3 2.3 TRUSTORS' USE OF RESIDENCE 3 2.4 LIMITATIONS IF TRUSTOR INCAPACITATED 3 2.5 TRUSTEE'S EXERCISE OF DISCRETION 4 ARTICLE 3 --------- DIVISION ON DEATH OF FIRST SPOUSE --------------------------------- 3.1 DIVISION OF COMMUNITY PROPERTY 4 3.2 DECEASED SPOUSE'S EXPENSES 5 3.3 DIVISION INTO SEPARATE TRUSTS-IF NORMA IS THE SURVIVING SPOUSE 5 3.4 DIVISION INTO SEPARATE TRUSTS-IF ED IS THE SURVIVING SPOUSE 6 3.5 MARITAL DEDUCTION AMOUNT 6 3.6 DISCLAIMERS BY SURVIVING SPOUSE 7 ARTICLE 4 --------- TRUSTS DURING SURVIVING SPOUSE'S LIFETIME ----------------------------------------- A. SURVIVOR'S TRUST ---------------- 4.1 DISCRETIONARY PAYMENTS BY TRUSTEE 8 4.2 SURVIVING SPOUSE'S POWER TO DIRECT PAYMENTS 8 4.3 INCAPACITY OF SURVIVING SPOUSE 8 4.4 GENERAL POWER OF APPOINTMENT 9 B. MARITAL TRUST ------------- 4.5 QTIP ELECTION 9 4.6 QUALIFIED AND NONQUALIFIED MARITAL TRUST 10 4.7 EXEMPT AND NONEXEMPT MARITAL TRUST 10 4.8 ADMINISTRATION OF MARITAL TRUSTS 10
Page 11 of 77 4.9 INCOME PAYMENTS FROM MARITAL TRUSTS 10 4.10 PRINCIPAL PAYMENTS FROM MARITAL TRUSTS 10 4.11 LIMITED POWER OF WITHDRAWAL 11 4.12 LIMITED POWER OF APPOINTMENT 11 4.13 MARITAL DEDUCTION LIMITATIONS 11 C. EXEMPTION TRUST --------------- 4.14 PAYMENTS FROM EXEMPTION TRUST 12 4.15 LIMITED POWER OF APPOINTMENT 12 4.16 SURVIVING SPOUSE'S RESIDENCE 13 4.17 EXERCISE OF DISCRETION 13 ARTICLE 5 --------- DISTRIBUTION AFTER DEATH OF SURVIVING SPOUSE -------------------------------------------- 5.1 COLLECTION OF TRUST ASSETS 13 5.2 SURVIVING SPOUSE'S EXPENSES 14 5.3 DISTRIBUTION OF PERSONAL ARTICLES 14 5.4 DIVISION INTO SEPARATE SHARES 14 5.5 TRUSTS FOR TRUSTORS' CHILDREN 15 5.6 JAMIE AND JULIE'S TRUST 16 5.7 TRUSTS FOR TRUSTORS' DESCENDANTS 18 5.8 DISTRIBUTION OF ANY REMAINDER 19 5.9 TERMINATION OF ALL TRUSTS 20 ARTICLE 6 --------- REVOCATION AND AMENDMENT ------------------------ 6.1 REVOCATION DURING TRUSTORS' JOINT LIVES 20 6.2 AMENDMENT DURING TRUSTORS' JOINT LIVES 20 6.3 REVOCATION AND AMENDMENT BY SURVIVING SPOUSE 21 6.4 REVOCATION AND AMENDMENT PERSONAL TO TRUSTORS 21 6.5 TRUSTS IRREVOCABLE AFTER FIRST SPOUSE'S DEATH 21 ARTICLE 7 --------- TRUSTEE PROVISIONS ------------------ 7.1 SUCCESSOR TRUSTEES 21 7.2 DESIGNATION OF SUCCESSORS 22 7.3 RESIGNATION OF TRUSTEE 22 7.4 TRUSTEE'S COMPENSATION 22 7.5 EMPLOYMENT OF AGENTS AND ADVISORS 22 7.6 DISCLAIMER OF ADMINISTRATIVE POWERS 23 7.7 EXERCISE OF POWERS IN FIDUCIARY CAPACITY 23 7.8 WAIVER OF BOND 23 7.9 TRUSTEE'S LIABILITY 23 7.10 CO-TRUSTEE'S LIABILITY 23 7.11 SUCCESSOR TRUSTEE'S LIABILITY 23 7.12 NOTICE OF EVENTS AFFECTING INTERESTS 24 7.13 AUTHORITY OF COTRUSTEES 24
Page 12 of 77 ARTICLE 8 --------- ADMINISTRATIVE POWERS OF TRUSTEE -------------------------------- 8.1 GENERAL AUTHORITY OF TRUSTEE 24 8.2 TRUSTEE'S STANDARD OF CARE 24 8.3 TRUSTEE'S INVESTMENT AUTHORITY 24 8.4 AUTHORITY TO RETAIN PROPERTY 24 8.5 MANAGEMENT OF SECURITIES 25 8.6 EXERCISE OF VOTING RIGHTS 25 8.7 NOMINEE HOLDING AUTHORIZED 25 8.8 BORROWING AND ENCUMBERING 26 8.9 INSURING TRUST PROPERTY 26 8.10 LITIGATION AND COMPROMISE OF CLAIMS 26 8.11 TRUSTEE'S POWERS ON DISTRIBUTION 26 8.12 TRUSTEE'S POWERS SURVIVE TRUST TERMINATION 26 ARTICLE 9 --------- ACCOUNTING AND TAX PROVISIONS ----------------------------- 9.1 ACCOUNTING BY TRUSTEE 27 9.2 DETERMINATION OF PRINCIPAL AND INCOME 27 9.3 ALLOCATION OF INCOME AND EXPENSES 27 9.4 ADJUSTMENT FOR TAX CONSEQUENCES 27 9.5 PURCHASE AND REDEMPTION OF FLOWER BONDS 27 ARTICLE 10 ---------- TRUST ADMINISTRATION PROVISIONS ------------------------------- 10.1 ADDITIONS TO TRUST 28 10.2 NO PHYSICAL DIVISION REQUIRED 28 10.3 TRANSACTIONS WITH TRUSTOR'S PROBATE ESTATE 28 10.4 RESTRICTION ON ASSIGNMENT 29 10.5 DISCLAIMER BY BENEFICIARIES 29 10.6 PAYMENTS FOR EDUCATION 29 10.7 LOANS TO BENEFICIARY 29 10.8 BENEFICIARY UNDER LEGAL DISABILITY 29 10.9 DISTRIBUTION TO CUSTODIAN 29 1O.10 DEFERRAL OF DIVISION OR DISTRIBUTION 30 10.11 WITHHOLDING DISTRIBUTION SUBJECT TO CLAIMS 30 10.12 EXERCISE OF POWERS OF APPOINTMENT 30 10.13 NO-CONTEST CLAUSE 31 10.14 CHOICE OF LAW 31 10.15 CERTIFICATION OF TRUST 31 10.16 OCCUPANCY OF RESIDENCE BY CHILDREN AND GUARDIANS 31 ARTICLE 11 ---------- DEFINITIONS ----------- 11.1 TRUSTEE 32 11.2 CURRENT BENEFICIARY 32 11.3 DEATH TAXES 32
Page 13 of 77 11.4 DECEASED SPOUSE 32 11.5 DESCENDANTS 32 11.6 EDUCATION 32 11.7 INTERNAL REVENUE CODE 33 11.8 BY RIGHT OF REPRESENTATION 33 11.9 SURVIVING SPOUSE 33 11.10 SURVIVOR'S TRUST 33 11.11 MARITAL TRUST 33 11.12 MARITAL TRUSTS 33 11.13 QTIP ELECTION 33 11.14 EXEMPTION TRUST 33 11.15 JAMIE AND JULIE'S TRUST 33 ARTICLE 12 ---------- RULES OF CONSTRUCTION --------------------- 12.1 SHALL AND MAY 34 12.2 STATUTES, CODES AND REGULATIONS 34 12.3 GENDER AND NUMBER 34 12.4 SEVERABILITY CLAUSE 34 12.5 USE OF HEADINGS 34 12.6 ARTICLE AND PARAGRAPH REFERENCES 34
CERTIFICATION BY TRUSTORS ACCEPTANCE BY TRUSTEE Page 14 of 77 DECLARATION OF TRUST EDWARD PHILLIPS III and NORMA J. PHILLIPS, the trustee, declare that EDWARD PHILLIPS III and NORMA J. PHILLIPS, the trustors, hereby create the EDWARD AND NORMA PHILLIPS FAMILY TRUST. All property subject to this instrument, including any additional property transferred to the trustee from time to time, shall be held, administered, and distributed in accordance with the terms of this instrument. ARTICLE 1 --------- INTRODUCTORY PROVISIONS ----------------------- 1.1 TRUST ESTATE. All property subject to this instrument is referred to as the "trust estate." Additional property acceptable to the trustee may be added to the trust estate at any time by the trustors or by any other person. 1.2 NAMES OF TRUSTS. The initial trust created by this instrument and continuing during the trustors' joint lives is called the "EDWARD AND NORMA PHILLIPS FAMILY TRUST." Each additional trust created in this instrument may be referred to by the name given to it in Article 3 or by any other convenient name designated by the trustee in a written instrument filed with the trust records. 1.3 TRUSTEE. EDWARD PHILLIPS III and NORMA J. PHILLIPS are collectively the initial trustee. The successor trustees are named in Article 7 of this instrument. All references to the trustee in this instrument shall include any trustee or co-trustees acting under this instrument at any time. 1.4 TRUSTORS. The term "trustors" as used in this instrument refers only to EDWARD PHILLIPS III and NORMA J. PHILLIPS, the initial trustors of this trust. The terms "trustor" and "spouse" may refer to either trustor depending on the context. 1.5 FAMILY DECLARATIONS. The trustors have two (2) children living on the date of this instrument, whose names and dates of birth are: EMILY SUZANNE PHILLIPS APRIL 5, 1978 EDWARD TYLER PHILLIPS IV JULY 1, 1985 Page 15 of 77 All references in this instrument to a "child of the trustors" and any similar terms shall refer only to the trustors' children named above. EDWARD PHILLIPS III ("Ed") has two (2) children from a prior marriage living on the date of this instrument, whose names and dates of birth are: JULIE DANIELLE PHILLIPS MARCH 24, 1965 JAIME DENISE PHILLIPS FEBRUARY 27, 1968 All references in this instrument to a "Ed's child" and any similar terms shall refer only to Ed's children named above. 1.6 CHARACTER OF TRUST PROPERTY. Any community property or separate property transferred to this trust shall remain community property or separate property, as the case may be. Any community property or separate property distributed or withdrawn from this trust, including any income or appreciation of that property, shall remain community property or separate property, as the case may be, unless there has been a valid transmutation of the property at the time the distribution or withdrawal is made. Notwithstanding the foregoing, the trustee shall have full power to convey and otherwise manage and control the trust property in accordance with the provisions of this instrument without the joinder or consent of either trustor. 1.7 NO CONTRACT FOR TRUST DISPOSITION. Except for this instrument, neither trustor has made any agreement controlling the disposition of the trust property and this instrument shall not be construed as evidence of any such agreement. ARTICLE 2 --------- TRUST DURING TRUSTORS' JOINT LIVES ---------------------------------- During the joint lifetimes of the trustors, the trustee shall hold, administer, and distribute the trust estate for the benefit of the trustors as provided in this Article 2. 2.1 PAYMENTS IN TRUSTEE'S DISCRETION. In the absence of written instructions from the trustors, the trustee shall pay to or apply for the benefit of the trustors as much of the net income and principal of the trust estate as the trustee, in the trustee's discretion, considers appropriate for the trustors' support, care, comfort, and general welfare, in accordance with their accustomed manner of living. In making these payments, the trustee may take into account, to the extent the trustee considers advisable, the trustors' other Page 16 of 77 income and financial resources outside this trust. Any net income not distributed shall be accumulated and added to principal. Consistent with the trustee's fiduciary duties, the trustee may pay more to or apply more for the benefit of one trustor than the other. The trustee may make payments to either trustor for the account of the community, provided that the trustor receiving the payments shall have the same duty to use the payments for the trustors' benefit as he or she has with respect to any other community property. The trustee's powers under this paragraph shall be subject to the limitations of paragraph 2.4. 2.2 TRUSTORS' POWER TO DIRECT PAYMENTS. Subject to the limitations of paragraph 2.4 below, the trustee shall pay to or apply for the benefit of the trustors as much of the net income and principal of the trust estate as either or both trustors may request in writing from time to time. In addition, the trustors, acting jointly, may at any time direct the trustee in writing to make single or periodic payments from the trust estate to any other person or organization. The trustee shall promptly comply with the trustors' written directions concerning payments and shall have no responsibility to inquire into or determine the purposes for which the payments are made. 2.3 TRUSTORS' USE OF RESIDENCE. The trustors may continue to occupy, without the payment of rent, any residential property included in the trust estate. The trustors, acting jointly, may direct the trustee in writing to sell any such residence and to purchase, rent, or lease a replacement residence selected by the trustors. The trustee shall pay from the trust estate any rent or lease payments, mortgage or trust deed payments, property taxes, assessments, insurance premiums, maintenance expenses and ordinary repairs on any residential property included in the trust estate. 2.4 LIMITATIONS IF TRUSTOR INCAPACITATED. If the trustee, in the trustee's discretion, determines that either trustor has become physically or mentally incapacitated and unable to manage his or her financial affairs, the trustee's discretion concerning payments under paragraph 2.1 shall be limited by the provisions of this paragraph and the trustors' powers to direct payments under paragraph 2.2 shall cease to be effective. As long as one trustor is incapacitated, the trustee shall pay to the other trustor for the account of the community, or shall apply for the benefit of either or both trustors, as much of the net income and principal of the trust estate as the trustee, in the trustee's discretion, considers necessary for the trustors' proper support, health, and maintenance in accordance with their accustomed manner of living. In deciding on these payments, the trustee shall take into account the trustors' other income and financial resources outside this trust, so far as Page 17 of 77 known to the trustee and reasonably available for the trustors' use. Any net income not distributed shall be accumulated and added to principal. During the incapacity of one trustor, the non-incapacitated trustor may withdraw as much of the accumulated income and principal of the trust estate as he or she may request from the trustee in writing. Any trust income or principal paid to or withdrawn by the non-incapacitated trustor shall be held and administered as community property. This paragraph shall cease to apply if the trustee determines that the incapacitated trustor has regained the ability to manage his or her financial affairs. In determining the incapacity of a trustor, the trustee may rely on a written certificate from two licensed physicians who have examined the trustor. If the trustee determines that both trustors are incapacitated and unable to manage their financial affairs, the trustee shall apply all payments from the trust estate directly for the trustors' benefit. 2.5 TRUSTEE'S EXERCISE OF DISCRETION. The trustee shall exercise the power to invade principal of the trust estate for the benefit of the trustors in a liberal manner and the rights of other beneficiaries in the trust shall be of secondary importance. ARTICLE 3 --------- DIVISION ON DEATH OF FIRST SPOUSE --------------------------------- On the death of the first spouse, the trustee shall divide and distribute the trust estate as provided in this Article 3. 3.1 DIVISION OF COMMUNITY PROPERTY. In this instrument, the first spouse to die is called the "deceased spouse" and the survivor is called the "surviving spouse." On the death of the deceased spouse, the trustee shall promptly collect any property added to the trust estate as a result of the deceased spouse's death, such as property distributed to the trustee under the deceased spouse's will and any life insurance or retirement plan benefits payable to the trustee. The trustee shall then divide the trust estate into two shares, called the "decedent's share" and the "survivor's share." The decedent's share shall consist of the deceased spouse's one-half interest in the trustors' community property, together with any of the deceased spouse's separate property, held or received by the trustee. The survivor's share shall consist of the remaining trust assets. In making this division, the trustee may allocate the trustors' community property in divided or undivided interests, pro rata or non-pro rata, using reasonable values determined by the trustee as of the date of division. Subject to Page 18 of 77 any contrary provisions in the deceased spouse's will or in any beneficiary designations, all property added to the trust estate at the deceased spouse's death shall be divided and allocated as provided in this Article 3. 3.2 DECEASED SPOUSE'S EXPENSES. After the death of the deceased spouse, the trustee shall pay the following items from the trust estate: (1) the deceased spouse's last illness and funeral expenses; (2) the deceased spouse's debts, to the extent they are valid and enforceable immediately before the deceased spouse's death; (3) attorney's fees and other expenses incurred in administering this trust and the deceased spouse's probate estate; and (4) any death taxes payable by reason of the deceased spouse's death, including any death taxes attributable to property passing outside the trust estate. The trustee shall allocate these payments between the decedent's share and the survivor's share as follows: (1) payments of the deceased spouse's last illness and funeral expenses shall be charged only against the decedent's share; (2) payments of the deceased spouse's debts shall be charged proportionately against the decedent's share and the survivor's share in accordance with California law in effect at the death of the deceased spouse; (3) payments of attorney's fees and other expenses of administration shall be charged against the decedent's share, except for administration expenses properly attributable to the surviving spouse, which shall be charged against the survivor's share; and (4) payments of the deceased spouse's death taxes shall be charged against the decedent's share, without apportionment or charge against any beneficiary of the trust estate or any transferee of property passing outside the trust estate, except that any increase in the deceased spouse's death taxes resulting from disclaimers made by the surviving spouse shall be charged only against the disclaimed property. 3.3 DIVISION INTO SEPARATE TRUSTS-IF NORMA IS THE SURVIVING SPOUSE. After paying or adequately providing for payment of the deceased spouse's debts and expenses, the trustee shall divide the remaining balance of the trust estate into three separate trusts, called the "Survivor's Trust," the "Marital Trust" and "Jamie and Julie's Trust," as follows: 3.3.1 SURVIVOR'S TRUST. The Survivor's Trust shall consist of the remaining assets of the survivor's share of the trust estate, consisting of the balance of the surviving spouse's interest in the trustors' community property (and any of the surviving spouse's separate property) included in or added to the trust estate, together with any undistributed income of the assets included in the survivor's share. Page 19 of 77 3.3.2 MARITAL TRUST. The Marital Trust shall consist of that portion of the decedent's share, called the "marital deduction amount," determined in accordance with the provisions of paragraph 3.5 below. 3.3.3 JAMIE AND JULIE'S TRUST. Jamie and Julie's Trust shall consist of the remaining balance of the decedent's share. 3.4 DIVISION INTO SEPARATE TRUSTS-IF ED IS THE SURVIVING SPOUSE. If ED is the surviving spouse, than after paying or adequately providing for payment of the deceased spouse's debts and expenses, the trustee shall divide the remaining balance of the trust estate into three separate trusts, called the "Survivor's Trust," the "Marital Trust" and the "Exemption Trust," as follows: 3.4.1 SURVIVOR'S TRUST. The Survivor's Trust shall consist of the remaining assets of the survivor's share of the trust estate, consisting of the balance of the surviving spouse's interest in the trustors' community property (and any of the surviving spouse's separate property) included in or added to the trust estate, together with any undistributed income of the assets included in the survivor's share. 3.4.2 MARITAL TRUST. The Marital Trust shall consist of that portion of the decedent's share, called the "marital deduction amount," determined in accordance with the provisions of paragraph 3.5 below. 3.4.3 EXEMPTION TRUST. The Exemption Trust shall consist of the remaining balance of the decedent's share. 3.5 MARITAL DEDUCTION AMOUNT. The marital deduction amount to be allocated to the Marital Trust shall consist of the minimum pecuniary amount necessary as a marital deduction to entirely eliminate (or reduce to the maximum extent possible) any federal estate tax payable by reason of the death of the deceased spouse, after taking into account the following: (1) The net value of all other property included in the deceased spouse's gross estate that qualifies for the federal estate tax marital deduction and that passes or has passed to or in trust for the surviving spouse, whether under this instrument, under the deceased spouse's will, by right of survivorship, or otherwise; (2) All other deductions taken in determining the deceased spouse's federal estate tax; and Page 20 of 77 (3) All credits allowed for federal estate tax purposes in the deceased spouse's estate, other than a credit for death taxes paid in the estate of a person whose death occurs after the death of the deceased spouse, or the credit allowed for state death taxes, unless at least some such state death tax would be payable to a state regardless of the federal credit. No credit shall be taken into account in determining the marital deduction amount if the credit will result in disallowance of the estate tax marital deduction. In determining the marital deduction amount, final federal estate tax values shall control, except that any disclaimer by the surviving spouse of assets otherwise qualifying for the federal estate tax marital deduction in the deceased spouse's estate shall be disregarded for the purposes of this computation. The trustee may satisfy the marital deduction amount in cash or in kind, including undivided interests in kind, or partly in each, but only with assets included in the deceased spouse's gross estate that qualify for the federal estate tax marital deduction. Assets allocated in kind shall be valued at their net fair market values as finally determined for federal estate tax purposes, provided that the trustee shall select the assets used to satisfy the marital deduction amount so that any appreciation or depreciation in values occurring between the applicable valuation date and the date of allocation is fairly representative of the appreciation or depreciation in the value of all assets available for allocation. Assets eligible for a foreign death tax credit in the deceased spouse's estate shall be used only if all other assets of the deceased spouse's estate are insufficient to fully fund the marital deduction amount. The terms "gross estate" and "marital deduction" as used in this instrument shall have the same meanings as under the estate tax provisions of the Internal Revenue Code. 3.6 DISCLAIMERS BY SURVIVING SPOUSE. If the surviving spouse effectively disclaims an interest in all or any part of the property allocated to the Marital Trust, then the Marital Trust or portion, as the case may be, shall be administered and distributed as if the disclaimed interest had been omitted from the terms of the Marital Trust; but if the surviving spouse disclaims all beneficial interests in property allocated to the Marital Trust, then the disclaimed property shall be added to and become part of the Exemption Trust. If the surviving spouse effectively disclaims an interest in all or any part of the property allocated to the Exemption Trust, then the Exemption Trust or portion, as the case may be, shall be administered and distributed as if the disclaimed interest had been omitted from the terms of the Exemption Trust; but if the surviving spouse disclaims all beneficial interests in property allocated to the Exemption Trust, then the disclaimed property shall be distributed Page 21 of 77 as provided in Article 5 of this instrument as if the surviving spouse had died immediately after the deceased spouse. ARTICLE 4 --------- TRUSTS DURING SURVIVING SPOUSE'S LIFETIME ----------------------------------------- During the lifetime of the surviving spouse, the trustee shall hold, administer, and distribute the trust estate for the benefit of the surviving spouse as provided in this Article 4. A. SURVIVOR'S TRUST ---------------- 4.1 DISCRETIONARY PAYMENTS BY TRUSTEE. In the absence of written directions from the surviving spouse, the trustee shall pay to or apply for the benefit of the surviving spouse as much of the net income and principal of the Survivor's Trust as the trustee, in the trustee's discretion, considers appropriate for the surviving spouse's support, care, comfort, and general welfare, in accordance with the surviving spouse's accustomed manner of living. Any net income not distributed shall be accumulated and added to principal. The trustee shall exercise the power to invade principal of the Survivor's Trust for the surviving spouse in a liberal manner and the rights of other beneficiaries in the trust shall be of secondary importance. 4.2 SURVIVING SPOUSE'S POWER TO DIRECT PAYMENTS. The trustee shall pay to or apply for the benefit of the surviving spouse, or to any other person or organization designated by the surviving spouse, as much of the net income or principal of the Survivor's Trust as the surviving spouse may direct in writing from time to time. Subject to the provisions of paragraph 4.3 (dealing with the surviving spouse's incapacity), the trustee shall promptly comply with the surviving spouse's written directions and shall have no responsibility to inquire into or determine the purposes for which the payments are made. 4.3 INCAPACITY OF SURVIVING SPOUSE. If the trustee, in the trustee's discretion, determines that the surviving spouse has become physically or mentally incapacitated and unable to manage his or her financial affairs, the trustee's discretion concerning payments under paragraph 4.1 shall be limited by the provisions of this paragraph and the surviving spouse's power to direct payments under paragraph 4.2 shall cease to be effective. During such period of incapacity, the trustee shall pay to or apply for the benefit of the surviving spouse as much of the net income and principal of the Survivor's Trust as the trustee, in the trustee's discretion, considers necessary for the surviving spouse's proper support, health, and maintenance in accordance with his or Page 22 of 77 her accustomed manner of living. In deciding on these payments, the trustee shall take into account, to the extent the trustee considers advisable, all other income and financial resources of the surviving spouse outside the Survivor's Trust, known to the trustee and reasonably available for the surviving spouse's use. In determining the incapacity of the surviving spouse, the trustee may rely on a written certificate from two licensed physicians who have examined the surviving spouse. This paragraph shall cease to apply if the trustee determines that the surviving spouse has regained the ability to manage his or her financial affairs. 4.4 GENERAL POWER OF APPOINTMENT. On the death of the surviving spouse, the trustee shall distribute all or any part of the assets then remaining in or added to the Survivor's Trust, including undistributed income, to such one or more persons and entities, including the surviving spouse's own estate, in such proportions and on such terms and conditions, either outright or in trust, as the surviving spouse may appoint in an acknowledged written instrument delivered to the trustee which specifically refers to and exercises this power of appointment. Any of the Survivor's Trust not effectively appointed by the surviving spouse in this manner shall be distributed as provided in Article 5. B. MARITAL TRUST ------------- 4.5 QTIP ELECTION. The trustee is authorized, in the trustee's sole discretion, to make or not make a "QTIP election" (as defined in Section 1.1.1.3 below) to treat all or any portion of the Marital Trust as qualified terminable interest property for the purpose of qualifying the trust, or a specific portion of it, for the federal estate tax marital deduction in the deceased spouse's estate. In deciding on the election, the trustee shall consider all relevant factors, including, but not limited to: (1) the potential benefits and detriments of reducing the estate tax on the deceased spouse's estate and increasing the tax on the surviving spouse's estate; and (2) the potential benefits of eliminating from the surviving spouse's estate any appreciation in the value of the Marital Trust assets that may occur between the death of the deceased spouse and the death of the surviving spouse. The discretion of the trustee with regard to this election shall be absolute, notwithstanding any beneficial or adverse effect that making or not making the election may have on the deceased spouse's estate, on the surviving spouse's estate, or on the beneficiaries or their respective estates. The trustee shall not be liable to any beneficiary of the trust estate for decisions made in good faith with regard to making or not making this election. 4.6 QUALIFIED AND NONQUALIFIED MARITAL TRUST. If the trustee does not make a QTIP election with respect to all of the assets allocated to the Marital Trust, then the trustee shall divide the Page 23 of 77 Marital Trust into separate trusts to reflect this partial election according to the values of assets allocated to each trust at the time the division is made. The trust with respect to which the QTIP election is made is referred to as the "Qualified Marital Trust" and the trust with respect to which the QTIP election is not made is referred to as the "Nonqualified Marital Trust." 4.7 EXEMPT AND NONEXEMPT MARITAL TRUST. If the trustee makes a QTIP election with respect to the entire Marital Trust, then the trustee shall divide the Marital Trust into two additional trusts, called the "Exempt Marital Trust" and the "Nonexempt Marital Trust." The Exempt Marital Trust shall consist of an amount equal to the deceased spouse's generation-skipping transfer tax ("GST") exemption, reduced by the aggregate amount of the deceased spouse's GST exemption that has been allocated by the trustee or the executor of the deceased spouse's will to other transfers of property by the deceased spouse during his or her lifetime or as a result of the deceased spouse's death. The Nonexempt Marital Trust shall consist of any remaining assets of the Marital Trust. If the trustee makes a QTIP election with respect to only a portion of the Marital Trust, then the trustee shall divide only the Qualified Marital Trust into Exempt and Nonexempt trusts in the manner provided in this paragraph. 4.8 ADMINISTRATION OF MARITAL TRUSTS. Each additional trust into which the Marital Trust is divided in accordance with the foregoing provisions shall be held and administered by the trustee as a separate trust, but each trust shall be distributed according to the same terms, except as otherwise provided below. Such trusts are collectively referred to herein as the "Marital Trusts." 4.9 INCOME PAYMENTS FROM MARITAL TRUSTS. During the surviving spouse's lifetime, the trustee shall pay to or apply for the benefit of the surviving spouse the entire net income of the Marital Trusts, in quarter-annual or more frequent installments. On the death of the surviving spouse, the trustee shall distribute any accrued or undistributed income of the Marital Trusts to the personal representative of the surviving spouse's estate. 4.10 PRINCIPAL PAYMENTS FROM MARITAL TRUSTS. If the trustee considers the net income of the Marital Trusts to be insufficient, the trustee shall also pay to or apply for the benefit of the surviving spouse as much of the principal of the Marital Trusts as the trustee, in the trustee's discretion, considers reasonably necessary for the surviving spouse's proper support, health and maintenance, in accordance with the surviving spouse's accustomed manner of living. In deciding on these payments, the trustee shall take into Page 24 of 77 consideration, to the extent the trustee considers advisable, all other income and financial resources of the surviving spouse outside the Marital Trusts. To the extent practicable, the trustee shall make all such discretionary invasions of principal from the Nonexempt Marital Trust. 4.11 LIMITED POWER OF WITHDRAWAL. In addition to any other payments that the surviving spouse is entitled to receive from the Marital Trusts, the trustee shall also pay to the surviving spouse from the principal of the Nonexempt Marital Trust such amounts as the surviving spouse may request in writing from time to time, provided that such payments shall not exceed in the aggregate the greater of the following amounts in any calendar year: (1) five thousand dollars ($5,000.00) or (2) five percent (5%) of the value of the principal of the Nonexempt Marital Trust determined at the end of the calendar year. This right of withdrawal shall be noncumulative, so that if during a calendar year the surviving spouse does not withdraw the full amount to which he or she is entitled under this paragraph, the right to withdraw any amount no so withdrawn shall lapse at the end of that calendar year. 4.12 LIMITED POWER OF APPOINTMENT. The surviving spouse shall have a limited power of appointment over the principal of the Marital Trusts remaining undistributed at his or her death. On the death of the surviving spouse, the trustee shall distribute all or any part of the remaining principal of the Marital Trusts to such one or more of the group composed of the trustors' descendants and the spouses of such descendants, in such proportions and on such terms and conditions, either outright or in trust, as the surviving spouse may appoint in an acknowledged written instrument delivered to the trustee which specifically refers to and exercises this power of appointment. Any principal of the Marital Trusts not effectively appointed by the surviving spouse in this manner shall be held, administered and distributed as provided in Article 5 of this instrument. 4.13 MARITAL DEDUCTION LIMITATIONS. The trustors intend that the Marital Trust qualify for the marital deduction allowed under the estate tax provisions of the Internal Revenue Code. If and to the extent that the trustee elects to qualify the Marital Trust or any portion of the trust for the federal estate tax marital deduction, the trustee shall not take any action or have any powers that will impair the marital deduction and all provisions of this instrument shall be interpreted to conform to this objective. If any provision cannot be so construed it shall be deemed void. Notwithstanding any contrary provisions in this instrument, the following provisions and limitations shall apply to the Marital Trusts: (1) During the surviving spouse's lifetime, the surviving spouse shall have the power to direct the trustee in writing to make all or any part of the principal of Page 25 of 77 the Marital Trusts productive or to convert promptly any unproductive part into productive property; (2) The trustee shall invest and reinvest the assets of the Marital Trusts so that the aggregate return on all investments of the Marital Trusts are reasonable in light of then existing circumstances; (3) The trustee shall establish reasonable reserves for depreciation and depletion; (4) For bonds purchased at a discount, the trustee shall, at least annually, accumulate and pay the discount as interest from trust principal or from the proceeds on the sale or redemption of the bonds; and (5) If the trustee redeems treasury bonds at par in payment of the deceased spouse's federal estate taxes, the trustee shall consider any accrued interest on such bonds in calculating the income payable to the surviving spouse from the Marital Trusts. C. EXEMPTION TRUST --------------- 4.14 PAYMENTS FROM EXEMPTION TRUST. All net income of the Exemption Trust shall be accumulated and added to principal. Subject to the limitations stated below, the trustee shall have the power to pay to or apply for the benefit of the surviving spouse as much of the accumulated income and principal of the Exemption Trust as the trustee, in the trustee's discretion, considers necessary for the surviving spouse's proper support, health, and maintenance, after taking into account the surviving spouse's other sources of income and financial resources outside the Exemption Trust. To the extent practicable, the trustee shall make no payments to the surviving spouse from the Exemption Trust unless both the Survivor's Trust and the Marital Trust have first been exhausted. Notwithstanding the foregoing, as long as the surviving spouse is acting as trustee of the Exemption Trust, no payments shall be made to the surviving spouse from the Exemption Trust, unless the surviving spouse has irrevocably appointed a co-trustee to act with respect to the Exemption Trust, in which case the co-trustee may exercise the power to invade principal of the Exemption Trust as provided in this paragraph. 4.15 LIMITED POWER OF APPOINTMENT. On the death of the surviving spouse, the trustee shall distribute all or any part of the assets then remaining in or added to the Exemption Trust, including all accumulated income, to such one or more of the trustors' descendants or the spouses of such descendants, in such proportions and on such terms and conditions, either outright or in trust, as the surviving spouse may appoint in an acknowledged written instrument delivered to the trustee which specifically refers to and exercises this power of appointment. Any of the Exemption Trust not effectively appointed by the surviving spouse in this manner shall be distributed as provided in Article 5. Page 26 of 77 4.16 SURVIVING SPOUSE'S RESIDENCE. After the death of the deceased spouse, the surviving spouse shall have the right to continue to occupy, without payment of rent, all real property in the trust estate that the trustors were using for residential purposes at the time of the deceased spouse's death, whether on a full or part time basis. The trustee is expressly authorized to continue to hold any residential property that the trustee receives or acquires as part of the trust estate for as long as the surviving spouse continues to occupy it. The surviving spouse may direct the trustee in writing to sell any such residential property and to purchase, rent, or lease a replacement residence selected by the surviving spouse. However, to the extent that an interest in the residential property is allocated to the Exemption Trust, the value of the interest in any replacement residence included in that trust shall be of comparable or lower value. The trustee shall pay out of the income or principal of each trust to which an interest in the property has been allocated a pro rata share of the trust deed payments, property taxes, assessments, insurance premiums, maintenance expenses, and ordinary repairs on the property, or any rent or lease payments, based on the proportionate interest in the property included in each trust. 4.17 EXERCISE OF DISCRETION. In exercising the discretion to invade principal of the trusts created during the surviving spouse's lifetime, the trustee shall be mindful of the fact that the trustors' primary concern in establishing these trusts is the welfare of the surviving spouse and that the rights of other beneficiaries in the trusts shall be of secondary importance. ARTICLE 5 --------- DISTRIBUTION AFTER DEATH OF SURVIVING SPOUSE -------------------------------------------- After the death of the surviving spouse, any of the trust estate that has not been effectively disposed of by the surviving spouse's exercise of a power of appointment shall be held, administered, and distributed as provided in this Article 5. 5.1 COLLECTION OF TRUST ASSETS. On the death of the surviving spouse, the trustee shall promptly collect any property added to the trust estate as a result of the surviving spouse's death, such as property distributed to the trustee under the surviving spouse's will and any life insurance or retirement plan benefits payable to the trustee. Subject to any contrary provisions in the surviving spouse's will or in any beneficiary designations, all assets added to the trust estate on the death of the surviving spouse shall be allocated to the Survivor's Trust. Page 27 of 77 5.2 SURVIVING SPOUSE'S EXPENSES. On the death of the surviving spouse, the trustee, in the trustee's reasonable discretion, may pay any of the following out of the trust estate: (1) the surviving spouse's last illness and funeral expenses; (2) debts of the surviving spouse, to the extent they are valid and enforceable immediately before the surviving spouse's death; (3) attorney's fees and other costs incurred in administering this trust and the surviving spouse's probate estate; and (4) any death taxes payable by reason of the surviving spouse's death, including death taxes attributable to property passing outside the trust estate. Payments of the surviving spouse's debts and last illness and funeral expenses shall be charged first to the Survivor's Trust, to the extent it is sufficient, and then to the Marital Trust. Payments of attorney's fees and other expenses of administration shall be charged to the Survivor's Trust, except for expenses properly attributable to the Marital Trust or to the Exemption Trust, which shall be charged against the property included in those trusts. Unless the surviving spouse provides contrary directions regarding apportionment of death taxes in his or her will, payments of the surviving spouse's death taxes shall be charged and recovered by the trustee in accordance with applicable federal and state tax laws and proration statutes. 5.3 DISTRIBUTION OF PERSONAL ARTICLES. As soon as practicable after the death of the surviving spouse, the trustee shall distribute all tangible articles of a household or personal nature that have been included in or added to the trust estate in any manner, such as personal automobiles, household furniture, furnishings, appliances, books, objects of art, family heirlooms, photographs, jewelry, clothing and personal effects, together with any insurance on those assets, to each then living child of the trustors, to be divided between them in shares of substantially equal net value as they shall agree, or as the trustee, in the trustee's discretion, shall determine if they are unable to agree on a division. If no child of the trustors is living at the time for distribution, the assets described in this paragraph shall be disposed as part of the remaining trust assets. 5.4 DIVISION INTO SEPARATE SHARES. After paying or adequately providing for payment of any of the surviving spouse's debts, expenses and death taxes that the trustee elects to pay and on making the distribution of personal articles directed above, the trustee shall divide the remaining assets of the trust estate into as many equal shares as there are children of the trustors then living and children of the trustors then deceased leaving descendants then living. The trustee shall allocate one equal share to each living child of the trustors and one equal share to each group composed of the living descendants of a deceased child of the trustors. Each such share shall be retained in trust and administered and distributed as further provided below. Page 28 of 77 5.5 TRUSTS FOR TRUSTORS' CHILDREN. Each share set aside for a living child of the trustors shall be divided into a separate trust ("the Child's Trust") to be held and administered for the benefit of the child during the child's lifetime, as follows: 5.5.1 As long as the child is under age 30, the trustee shall pay to or apply for the benefit of the child as much of the net income and principal of the child's trust as the trustee, in the trustee's discretion, considers necessary for the child's proper support, health and education. Any income not distributed shall be accumulated and added to principal. 5.5.2 After the child reaches age 30, the trustee shall pay to or apply for the benefit of the child the entire net income of the child's trust, in quarter-annual or more frequent installments. If the trustee considers the income of the child's trust to be insufficient, the trustee shall also pay to or apply for the benefit of the child as much of the principal of the child's trust as the trustee, in the trustee's discretion, considers necessary for the child's proper support, health, and education. In deciding on these payments, the trustee shall take into consideration, to the extent the trustee considers advisable, the child's other income, financial resources and sources of support outside the child's trust, so far as known to the trustee and reasonably available for the child's use. 5.5.3 At any time after the child reaches age 30, the trustee shall distribute to the child as much of the trust as the child may request in any acknowledged written instrument delivered to the trustee, but, in no event, in excess of one-third (1/3) of the value of the child's trust, determined as of that date. 5.5.4 At any time after the child reaches age 35, the trustee shall distribute to the child as much of the child's trust as the child may request in any acknowledged written instrument delivered to the trustee, but, in no event, in excess of one-half (1/2) of the value of the child's trust, determined as of that date. 5.5.5 When the child reaches age 40, the trustee shall terminate the child's trust and distribute the remaining assets of the child's trust, including any accrued or undistributed income of that trust, outright to the child, free of trust. 5.5.6 If the child dies before receiving full distribution of the child's trust share, the trustee shall then distribute the remaining balance of the child's share to such one or more persons and entities, Page 29 of 77 including the child's own estate, on such terms and conditions, either outright or in trust, as the child may appoint in a will or codicil which specifically refers to and exercises this general testamentary power of appointment. 5.5.7 Any assets of the deceased child's trust that are not effectively appointed by the child in the manner provided above shall be distributed as follows: (a) If the deceased child leaves descendants who are then living, the unappointed balance of the child's trust shall be divided into separate shares and administered and distributed for the benefit of the descendants of the deceased child according to the provisions of paragraph 5.7 below, provided that the trust for each descendant shall terminate no later than the time provided by paragraph ? below. (b) If the deceased child leaves no living descendants, the balance of the child's trust shall be distributed to the trustors' then-living descendants, by right of representation. However, if any part of that balance would otherwise be distributed to a person for whose benefit a trust is then being administered under this instrument, then that portion shall not be distributed outright but shall instead be added to that trust and administered according to its term. 5.6 JAMIE AND JULIE'S TRUST. Each share set aside for Ed's daughters JAMIE and JULIE (the "daughters" or "daughter") shall be divided into a separate trust ("the daughter's Trust") to be held and administered for the benefit of the daughter during the daughter's lifetime, as follows: 5.6.1 The trustee shall pay to or apply for the benefit of the daughter the entire net income of the daughter's trust, in quarter-annual or more frequent installments. If the trustee considers the income of the daughter's trust to be insufficient, the trustee shall also pay to or apply for the benefit of the daughter as much of the principal of the daughter's trust as the trustee, in the trustee's discretion, considers necessary for the daughter's proper support, health, and education. In deciding on these payments, the trustee shall take into consideration, to the extent the trustee considers advisable, the daughter's other income, financial resources and sources of support outside the daughter's trust, so far as known to the trustee and reasonably available for the daughter's use. Page 30 of 77 5.6.2 At any time after the expiration of five (5) years after Ed's death, the trustee shall distribute to the daughter as much of the trust as the daughter may request in any acknowledged written instrument delivered to the trustee, but, in no event, in excess of one-third (1/3) of the value of the daughter's trust, determined as of that date. 5.6.3 At any time after the expiration of ten (10) years after Ed's death, the trustee shall distribute to the daughter as much of the daughter's trust as the daughter may request in any acknowledged written instrument delivered to the trustee, but, in no event, in excess of one- half (1/2) of the value of the daughter's trust, determined as of that date. 5.6.4 After the expiration of fifteen (15) years after Ed's death, the trustee shall terminate the daughter's trust and distribute the remaining assets of the daughter's trust, including any accrued or undistributed income of that trust, outright to the daughter, free of trust. 5.6.5 If the daughter dies before receiving full distribution of the daughter's trust share, the trustee shall then distribute the remaining balance of the daughter's share to such one or more persons and entities, including the daughter's own estate, on such terms and conditions, either outright or in trust, as the daughter may appoint in a will or codicil which specifically refers to and exercises this general testamentary power of appointment. 5.6.6 Any assets of the deceased daughter's trust that are not effectively appointed by the daughter in the manner provided above shall be distributed as follows: (a) If the deceased daughter leaves descendants who are then living, the unappointed balance of the daughter's trust shall be divided into separate shares and administered and distributed for the benefit of the descendants of the deceased daughter according to the provisions of paragraph 5.7 below, provided that the trust for each descendant shall terminate no later than the time provided by paragraph ? below. (b) If the deceased daughter leaves no living descendants, the balance of the daughter's trust shall be distributed to the trustors' then-living descendants, by right of representation. However, if any part of that balance would otherwise be distributed to a person for whose benefit a trust is then being administered under this instrument, then that Page 31 of 77 portion shall not be distributed outright but shall instead be added to that trust and administered according to its term. 5.7 TRUSTS FOR TRUSTORS' DESCENDANTS. Each share of descendants of a deceased child of the trustors shall be further divided into separate shares for those descendants, by right of representation. Each share set aside for a descendant who is then age 35 or older shall be distributed outright to that descendant, free of trust. Each share set aside for a descendant who has not then reached age 35 shall be held, administered and distributed in a separate trust for the benefit of that descendant as follows: 5.7.1 As long as the descendant is under age 21, the trustee shall pay to or apply for the benefit of the descendant as much of the net income and principal of the descendant's trust as the trustee, in the trustee's discretion, considers necessary for the descendant's proper support, health and education. Any income not distributed shall be accumulated and added to principal. 5.7.2 After the descendant reaches age 21, the trustee shall pay to or apply for the benefit of the descendant the entire net income of the descendant's trust, in quarter-annual or more frequent installments. If the trustee considers the net income of the descendant's trust to be insufficient, the trustee shall also pay to or apply for the benefit of the descendant as much of the principal of the descendant's trust as the trustee, in the trustee's discretion, considers necessary for the descendant's proper support, health and education. When deciding on payments to be made from the descendant's trust, the trustee may take into account, to the extent the trustee considers advisable, any of the descendant's other income, financial resources, and sources of support outside the descendant's trust, so far as known to the trustee and reasonably available for the descendant's use, including the descendant's capacity for gainful employment after completion of his or her education. 5.7.3 At any time after the descendant reaches age 25, the trustee shall distribute to the descendant as much or all of the descendant's trust as the descendant may request in any acknowledged written instrument delivered to the trustee but, in no event, in excess of one-half (1/2) of the value of the descendant's trust, determined as of that date. 5.7.4 When the descendant reaches age 35, the trustee shall terminate the descendant's trust and distribute the remaining balance of the trust to the descendant. Page 32 of 77 5.7.5 If the descendant dies before receiving full distribution of his or her trust share, the trustee shall then distribute the remaining balance of the descendant's share to such one or more persons and entities, including the descendant's own estate, on such terms and conditions, either outright or in trust, as the descendant may appoint in a will or codicil which specifically refers to and exercises this general testamentary power of appointment. 5.7.6 Any assets of the deceased descendant's trust that are not effectively appointed by the descendant in the manner provided above shall be distributed as follows: (a) If the deceased descendant leaves descendants then living, the balance of the descendant's trust shall be distributed to his or her then living descendants, by right of representation. However, if a person entitled to receive distribution is then under age 25, the trustee shall not distribute that person's share outright, but shall instead distribute the share to a custodian serving on behalf of the beneficiary until age 25 under the California Uniform Transfers to Minors Act. If no such custodian is then acting, the trustee shall name a custodian from among those persons qualified to serve, which may include the trustee. The trustee shall be free of liability and discharged from any further accountability for distributions made in accordance with the provisions of this paragraph. (b) If the deceased descendant leaves no descendants then- living, the balance of the descendant's trust shall be distributed to the trustors' then-living descendants, by right of representation. However, if any part of that trust balance would otherwise be distributed to a person for whose benefit a trust is then being administered under this instrument, that portion shall not be distributed outright but shall instead be added to that trust and administered according to its terms. 5.8 DISTRIBUTION OF ANY REMAINDER. If at any time before full distribution of the trust estate the trustors and all of the trustors' descendants are deceased and no other disposition of the trust property is directed by this instrument, the remaining trust assets shall then be divided and distributed one-half to the heirs of EDWARD PHILLIPS III and one-half to the heirs of NORMA J. PHILLIPS. The identities and respective shares of those heirs shall be determined in all respects as though the death of each trustor had occurred Page 33 of 77 immediately after the event requiring distribution under this paragraph and according to the laws of the State of California then in effect relating to intestate succession. 5.9 TERMINATION OF ALL TRUSTS. Unless terminated earlier in accordance with other provisions of this instrument, all trusts created under this instrument, or by the exercise of any power of appointment granted by this instrument, shall terminate twenty-one (21) years after the death of the last survivor of the trustors and the trustors' descendants who are living at the death of the deceased spouse. The trustee shall distribute the principal and undistributed income of each trust so terminated to the income beneficiary of that trust. If at the time of termination the right to income is not fixed by the term of the trust, distribution shall be made to the person who is then entitled or authorized, in the trustee's discretion, to receive trust income. ARTICLE 6 --------- REVOCATION AND AMENDMENT ------------------------ 6.1 REVOCATION DURING TRUSTORS' JOINT LIVES. As long as both trustors are living, either trustor acting alone, or both trustors acting together, may revoke this trust or withdraw all or any portion of the trust assets by signing and delivering written instructions to the trustee designating the assets to be revoked. On receipt of such instructions, the trustee shall promptly deliver the designated trust assets to the trustors. Any community property revoked or withdrawn from this trust shall remain the trustors' community property. If this trust is revoked with respect to all or a major portion of the assets subject to it, the trustee shall be entitled to retain sufficient assets reasonably necessary to secure payment of liabilities lawfully incurred in administering the trust, unless the trustors agree to indemnify the trustee against any loss or expense. 6.2 AMENDMENT DURING TRUSTORS' JOINT LIVES. The trustors may amend the terms of this instrument at any time during their joint lifetimes by a written instrument signed and acknowledged by both trustors and delivered to the trustee. No amendment shall substantially increase the duties or liabilities of the trustee or change the trustee's compensation without the trustee's consent and the trustee shall have no obligation to act under an amendment unless the trustee accepts it. If a trustee is removed because of a refusal to accept an amendment, the trustors shall pay any amounts due to the trustee and shall indemnify the trustee against any liability lawfully incurred in administering the trust. Page 34 of 77 6.3 REVOCATION AND AMENDMENT BY SURVIVING SPOUSE. The surviving spouse may revoke the Survivor's Trust in whole or in part by signing and delivering written instructions to the trustee designating the assets to be revoked. On revocation, the trustee shall promptly comply with the surviving spouse's instructions. In addition, the surviving spouse may amend the terms of the Survivor's Trust by a signed and acknowledged written instrument delivered to the trustee. The surviving spouse's powers of revocation and amendment shall be subject to the qualifications applicable to the trustors in paragraphs 6.1 and 6.2 above. 6.4 REVOCATION AND AMENDMENT PERSONAL TO TRUSTORS. The trustors' powers to revoke and amend this trust are personal to them and may not be exercised on their behalf by any other person, except that if a conservator has been appointed for either trustor, such conservator may exercise a trustor's powers after obtaining approval from the court that appointed the conservator. 6.5 TRUSTS IRREVOCABLE AFTER FIRST SPOUSE'S DEATH. Except for the Survivor's Trust, all trusts created in this instrument after the death of the deceased spouse shall be irrevocable and unamendable and no person, including the surviving spouse, shall have any power to revoke, amend, or terminate those trusts. ARTICLE 7 --------- TRUSTEE PROVISIONS ------------------ 7.1 SUCCESSOR TRUSTEES. EDWARD PHILLIPS III and NORMA J. PHILLIPS shall serve as the initial trustee of all trusts created under this instrument as long as they are collectively able and willing to act. On the death of EDWARD PHILLIPS III, or on his resignation or inability to serve for any reason, then the successor trustee named in paragraph 7.1.1 below shall serve as trustee of JAMIE and JULIE'S TRUST and NORMA J. PHILLIPS shall serve as sole trustee of all other trusts created under this instrument. On the death of NORMA J. PHILLIPS, or on her resignation or inability to serve for any reason, EDWARD PHILLIPS III shall serve as sole trustee of all trusts created under this instrument. 7.1.1 If EDWARD PHILLIPS III is the surviving trustee, then upon his death, resignation or inability to serve for any reason, the following named individuals shall serve as successor trustees hereunder, in the order named: First Successor Appointee: CARLOS DE MATTOS Page 35 of 77 Second Successor Appointee: GREG MOISEEF Third Successor Appointee: GERALD STONE 7.1.2 If NORMA J. PHILLIPS is the surviving trustee, then upon her death, resignation or inability to serve for any reason, the following named individuals shall serve as successor trustees hereunder, in the order named: First Successor Appointee: CYNTHIA PERRY Second Successor Appointee: CHRISTOPHER SKINNER Third Successor Appointee: NORMAN SKINNER 7.2 DESIGNATION OF SUCCESSORS. If at any time there is no trustee able or willing to act under this instrument, any person interested in the trust may petition the appropriate court for appointment of a successor. 7.3 RESIGNATION OF TRUSTEE. Any trustee acting under this instrument may resign as trustee at any time by giving written notice of resignation to the current beneficiary of each affected trust, to the acting co-trustee of that trust, if any, and to the designated successor trustee of that trust. Resignation shall be effective on acceptance of office by the successor trustee. 7.4 TRUSTEE'S COMPENSATION. Each individual trustee acting under this instrument shall be entitled to reasonable compensation from the trust estate for services rendered as trustee; and each trustee shall be entitled to repayment out of the trust estate for expenses properly incurred in the administration of the trust. 7.5 EMPLOYMENT OF AGENTS AND ADVISORS. The trustee may employ accountants, attorneys, corporate fiduciaries, custodians, investment or tax advisors, and any other agents or advisors, even if they are associated or affiliated with the trustee, to advise and assist the trustee in the administration of the trust and in the management of any trust assets, and the trustee may rely on the advice given by these agents. The trustee may pay reasonable compensation from the trust estate for all services performed by these agents and such payments shall not decrease the compensation to which an individual trustee would otherwise be entitled. 7.6 DISCLAIMER OF ADMINISTRATIVE POWERS. Any trustee acting under this instrument may disclaim, release or restrict the scope of any power held in connection with any trust, including any administrative power, whether that power is expressly granted in this instrument or implied by law, by a Page 36 of 77 written instrument specifying the power to be disclaimed, released or restricted and the nature of any such restriction. Any disclaimed or released power may be exercised by the then acting co-trustee. 7.7 EXERCISE OF POWERS IN FIDUCIARY CAPACITY. Each trustee acting under this instrument shall exercise the powers vested in the trustee in good faith and in accordance with the trustee's fiduciary duties. No trustee shall have the power by reason of any administrative powers granted in this instrument to enlarge or shift the beneficial interests of a trust except as an incidental consequence of the discharge of the trustee's fiduciary duties. 7.8 WAIVER OF BOND. No bond shall be required of any person named as trustee in this instrument or of any person designated as trustee in the manner specified in this instrument. 7.9 TRUSTEE'S LIABILITY. No individual trustee acting under this instrument shall be liable to any person interested in the trust estate for any act or failure to act, except for the trustee's own willful misconduct, bad faith, or gross negligence. No trustee shall be liable or responsible for any act, omission or default of any other trustee, unless the trustee has knowledge of facts that might reasonably be expected to put the trustee on notice. 7.10 CO-TRUSTEE'S LIABILITY. No trustee shall be liable or responsible for any act, omission or default of any other trustee, unless such trustee has knowledge of facts that might reasonably be expected to put the trustee on notice. 7.11 SUCCESSOR TRUSTEE'S LIABILITY. No successor trustee acting under this instrument shall be liable for any act, omission or default of a predecessor trustee. Unless requested in writing within 60 days of appointment by a current beneficiary of the trust, a successor trustee shall have no duty to investigate or review any action of a predecessor trustee. A successor trustee may accept as correct the accounting records of the predecessor trustee without further investigation and without liability to any person claiming or having an interest in the trust. 7.12 NOTICE OF EVENTS AFFECTING INTERESTS. Unless the trustee receives notice of the occurrence of an event affecting the beneficial interests of a trust, the trustee shall not be liable to any beneficiary for distributions made or other actions taken in good faith as though the event had not occurred. The trustee shall not be liable to any creditor for making distributions authorized by this instrument unless the trustee has received actual written notice of the creditor's claim. Page 37 of 77 7.13 AUTHORITY OF COTRUSTEES. As long as EDWARD PHILLIPS III and NORMA J. PHILLIPS are acting as cotrustees under this instrument, the signature of, or any action taken by, either EDWARD PHILLIPS III or NORMA J. PHILLIPS, acting alone, shall be binding upon the trust and may be relied on by third parties dealing with the trustees. ARTICLE 8 --------- ADMINISTRATIVE POWERS OF TRUSTEE -------------------------------- 8.1 GENERAL AUTHORITY OF TRUSTEE. To carry out the purposes of each trust held under this instrument and subject to any additions or limitations stated elsewhere herein, the trustee shall have all powers now or hereafter conferred on trustees by law, including all powers granted by the California Trust Law. The powers confirmed by this paragraph shall be in addition to all powers expressly conferred on the trustee in this instrument. 8.2 TRUSTEE'S STANDARD OF CARE. In administering the trust held under this instrument, the trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing, including but not limited to the general economic conditions at the time and the anticipated needs of the trust and its beneficiaries, that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from this instrument. 8.3 TRUSTEE'S INVESTMENT AUTHORITY. Within the limitations of the foregoing standard of care, the trustee is authorized to invest and reinvest trust funds in any kind of real or personal property and in any kind of investment. The trustee shall have full authority to invest and reinvest trust funds without being restricted as to the form of investments that the trustee may otherwise be permitted to make by law and the trustee may consider individual investments as part of an overall investment strategy. 8.4 AUTHORITY TO RETAIN PROPERTY. The trustee may continue to hold in the form in which received any securities or other property received as part of this trust, including unproductive or underproductive property, as long as the trustee deems advisable. 8.5 MANAGEMENT OF SECURITIES. The trustee is authorized to buy, sell, and trade in stocks, bonds, and securities of every nature, including short sales, and for such purposes the trustee may Page 38 of 77 establish and maintain margin accounts with securities dealers or brokers and may pledge any securities held or purchased by the trustee with such dealers and brokers as security for loans and advances made to the trustee. The trustee shall have all the rights, powers, and privileges of an owner of the securities held in this trust, including, but not limited to, the power to vote and give proxies; to enter into shareholders' agreements; to pay calls, assessments, and other sums chargeable or accruing against or on account of such securities; to sell or exercise stock subscription of conversion rights; to consent, directly or through a committee or other agent, to the reorganization, consolidation, merger, liquidation, sale, or dissolution of a corporation or other business enterprise; and to participate in voting trusts and pooling arrangements (whether or not extending beyond the term of the trust), and incident thereto, to deposit securities with and transfer title and delegate discretion to any protective or other committee as the trustee deems advisable. 8.6 EXERCISE OF VOTING RIGHTS. The trustee may exercise voting rights with respect to any shares of stock of a domestic or foreign corporation, any membership in a nonprofit corporation, or any other trust property, either in person or by proxy, and the trustee may waive notice of a meeting or consent to the holding of a meeting and authorize, ratify, approve, or confirm any action that may be taken by shareholders, members, or property owners. 8.7 NOMINEE HOLDING AUTHORIZED. The trustee is expressly authorized to hold securities or any other trust property registered or recorded in the trustee's name as trustee under this instrument, or in the trustee's individual name, as nominee, without disclosing this trust, or in the individual name of any other person, firm, or corporation, including any bank, trust company, or securities brokerage house, as nominee, without disclosing this trust, or the trustee may hold securities unregistered in such condition that title will pass by delivery. 8.8 BORROWING AND ENCUMBERING. The trustee shall have the power to borrow money for any trust purpose and to encumber trust property to secure the indebtedness of the trust or the joint indebtedness of the trust and a co-owner of trust property. 8.9 INSURING TRUST PROPERTY. The trustee shall have the power to carry, at the expense of the trust, insurance of such kinds and in such amounts as the trustee considers advisable to protect the trust property against damage or loss and to protect the trustee against liability with respect to third parties. Page 39 of 77 8.10 LITIGATION AND COMPROMISE OF CLAIMS. The trustee shall have the power to commence or defend, at the expense of the trust, any actions, claims, or proceedings for the protection of the trust property or for the protection of the trustee in the performance of the trustee's duties. The trustee may pay or contest any claim by or against the trust, adjust or settle any claim or litigation by compromise, arbitration, or otherwise, and release, in whole or in part, any claim belonging to the trust. The trustee's powers under this paragraph shall apply during the term of the trust and after distribution of trust assets. However, the trustee shall have no obligations or duties with respect to any claims or litigation occurring after distribution of trust property unless the trustee is adequately indemnified by the distributee for any loss in connection with such matters. 8.11 TRUSTEE'S POWERS ON DISTRIBUTION. In any case in which the trustee is required to divide trust property into parts or shares for the purpose of distribution or otherwise, the trustee shall have the discretion to make the division or distribution in undivided interests or in kind, or partly in cash and partly in kind, using reasonable values determined by the trustee. For this purpose, the trustee may make such sales of the trust property as the trustee deems necessary on such terms and conditions as the trustee considers advisable. The trustee shall have no obligation to make a pro rata division or distribution among beneficiaries similarly situated; and the trustee may make a non-pro rata division between shares and non-pro rata distributions to beneficiaries, as long as the assets allocated to the separate shares or distributed to the beneficiaries have equivalent or proportionate fair market values. 8.12 TRUSTEE'S POWERS SURVIVE TRUST TERMINATION. All of the trustee's powers, duties, and immunities shall continue after the time for termination of each trust and until the trustee has made final distribution of the trust property. ARTICLE 9 --------- ACCOUNTING AND TAX PROVISIONS ----------------------------- 9.1 ACCOUNTING BY TRUSTEE. While both trustors are living, the trustee shall not be required to account to the trustors, unless an accounting is requested in writing by either trustor. After the death of one spouse, the trustee shall not be required to account to the surviving spouse, unless an accounting is requested in writing by the surviving spouse. Written approval of the trustee's account by the trustors, or by the surviving spouse, as the case may be, shall be final and conclusive with respect to all transactions disclosed in it Page 40 of 77 as to all trust beneficiaries. After the death of the surviving spouse, the trustee shall account in the manner provided by the California Trust Law. 9.2 DETERMINATION OF PRINCIPAL AND INCOME. The trustee shall determine all matters with respect to what is principal and income of the trust estate and the apportionment and allocation of receipts and expenses between those accounts in accordance with the California Revised Uniform Principal and Income Act. Any such matters not provided for either in this instrument or in the California Revised Uniform Principal and Income Act shall be determined by the trustee, in the trustee's reasonable discretion. 9.3 ALLOCATION OF INCOME AND EXPENSES. Income accrued or unpaid on trust property when received into the trust shall be treated as any other income. Except as otherwise expressly provided in this instrument, income accrued or held undistributed by the trustee at the termination of a trust shall be distributed to the next succeeding beneficiaries of the trust in proportion to their interest in that income. Among successive beneficiaries of a trust, all taxes and current expenses shall be prorated on a daily basis and charged to the period to which they relate. 9.4 ADJUSTMENT FOR TAX CONSEQUENCES. The trustee is authorized, in the trustee's reasonable discretion, to take any action and to make any election to minimize the tax liabilities of each trust and its beneficiaries, to allocate the benefits among the various beneficiaries, and to make adjustments in the rights of any beneficiaries, or between the income and principal accounts, to compensate for the consequences of any tax election or any investment or other administrative decision that the trustee believes has had the effect of directly or indirectly preferring one beneficiary or group of beneficiaries over others. 9.5 PURCHASE AND REDEMPTION OF FLOWER BONDS. The trustee is authorized to purchase, at less than par, United States government bonds that are redeemable at par in payment of federal estate taxes ("flower bonds"). The trustee may purchase these bonds in such amounts as the trustee, in the trustee's discretion, considers advisable, if the trustee believes that either trustor is in substantial danger of death. For this purpose, the trustee may partition a part of the trustors' community property and make the purchase from either or both portions. The trustee may purchase the bonds on margin and may borrow funds and give security for that purpose. The trustee shall resolve any doubt concerning the desirability of making the purchase and its amount in favor of making the purchase and in purchasing a larger, even if somewhat excessive, amount. The trustee shall not be liable to either trustor, to any heir of either trustor, or to any beneficiary of this trust for losses resulting Page 41 of 77 from purchases made in good faith. Notwithstanding anything to the contrary in this instrument, the trustee shall redeem all such flower bonds to the fullest extent possible in payment of a deceased trustor's federal estate tax liability, without apportionment or charge against any beneficiary of the trust estate or any transferee of property passing outside the trust estate. The executor or administrator of the deceased trustor's estate, or if none is appointed, the trustee acting under this instrument, shall select the redemption date of the bonds. In determining the income payable to the surviving spouse from the Marital Trust, the trustee shall take into account all accrued interest on bonds redeemed in payment of a deceased trustor's federal estate tax. ARTICLE 10 ---------- TRUST ADMINISTRATION PROVISIONS ------------------------------- 10.1 ADDITIONS TO TRUST. With the consent of the trustee, additional property from any source may be added to the trust estate at any time. The trustee is expressly authorized to accept property transferred to this trust by the will of either trustor, by either trustor's conservator, or by an agent acting on behalf of either trustor under a durable power of attorney. 10.2 NO PHYSICAL DIVISION REQUIRED. There need be no physical segregation or division of the various trusts created in this instrument except as segregation or division may be required by termination of any of the trusts, but the trustee shall keep separate accounts for the different undivided interests. 10.3 TRANSACTIONS WITH TRUSTOR'S PROBATE ESTATE. The trustee is expressly authorized to lend money to the probate estate of either trustor, or to any trust created by either trustor, and to purchase property from the probate estate of either trustor, or from any trust created by either trustor, on such terms and conditions as the trustee considers advisable. 10.4 RESTRICTION ON ASSIGNMENT. The interest of a beneficiary in the principal or interest of this trust shall be free from the claims of creditors and from attachment, execution, bankruptcy, or other legal process to the fullest extent of the law, and the interest of a beneficiary shall not be transferable by voluntary or involuntary assignment or by operation of law, except that a beneficiary may assign all or any part of his or her interest in a trust to any one or more of his or her descendants. 10.5 DISCLAIMER BY BENEFICIARIES. Any beneficiary of this trust may disclaim all or any part of any interest in property to which the beneficiary is entitled under this instrument. Except as otherwise Page 42 of 77 provided herein, any disclaimed interest shall be distributed as if the beneficiary had predeceased both trustors. No other interest of the beneficiary shall be affected by the disclaimer unless that interest has also been disclaimed. 10.6 PAYMENTS FOR EDUCATION. Whenever provision is made in this instrument to pay for the education of a beneficiary, the term "education" shall include college, graduate, postgraduate, professional, and vocational studies as long as such studies are pursued to advantage by the beneficiary at an institution of the beneficiary's choice. In determining payments to be made to a beneficiary for education, the trustee shall take into account the beneficiary's reasonably related living and traveling expenses. 10.7 LOANS TO BENEFICIARY. The trustee is authorized to make loans out of the trust estate to any beneficiary of the trust estate on such terms and conditions as the trustee determines to be fair and reasonable under the circumstances and to guarantee loans to a beneficiary by encumbrances on trust property. 10.8 BENEFICIARY UNDER LEGAL DISABILITY. The trustee may pay any amount distributable to a beneficiary, without regard to whether the beneficiary is under a legal disability, by paying the amount directly to the beneficiary or by paying the sum to another person for the use or benefit of the beneficiary. 10.9 DISTRIBUTION TO CUSTODIAN. If a beneficiary otherwise entitled to receive distribution from the trust estate is under age 25 at the time for distribution, the trustee shall not distribute that beneficiary's share outright, but shall instead distribute that share to a custodian serving on behalf of the beneficiary until age 25 under the California Uniform Transfers to Minors Act. If no such custodian is then acting, the trustee may name a custodian from among those persons qualified to serve, which may include the trustee. The trustee shall be free of liability and shall be discharged from any further accountability for distributions made in accordance with this paragraph. 10.10 DEFERRAL OF DIVISION OR DISTRIBUTION. Whenever the trustee is directed by the provisions of this instrument to make a division or distribution of trust assets on the death of either trustor, the trustee may, in the trustee's discretion, defer that division or distribution until the deceased trustor's federal estate tax has been finally determined. If the trustee defers the distribution or division of trust assets, the deferred division or distribution shall be made as if it had taken place at the time prescribed in this instrument in the Page 43 of 77 absence of this paragraph, and the rights of the beneficiaries of those assets under other provisions of this instrument shall be deemed to have accrued and vested as of that prescribed time. 10.11 WITHHOLDING DISTRIBUTION SUBJECT TO CLAIMS. At the time for distribution of any property held in this trust, the trustee shall have the authority to withhold from distribution, without payment of interest, all or any part of the trust property, as long as the trustee, in the trustee's discretion, determines that the property may be subject to conflicting claims, to tax deficiencies, or to liabilities, contingent or otherwise, properly incurred in the administration of the trust, provided, however, that the foregoing shall not affect the vesting of any interest in any trust created under this instrument or the accrual and payment of trust income to any beneficiary. 10.12 EXERCISE OF POWERS OF APPOINTMENT. Except as otherwise specifically provided in this instrument, the provisions regarding distribution of each trust shall be subject to the exercise of any power of appointment over that trust conferred in this instrument. Any property subject to a power of appointment conferred in this instrument shall be deemed not to have been effectively appointed by the holder of the power if the holder has failed to exercise the power, has effectively revoked an exercise of the power, has irrevocably released, disclaimed or renounced the power, or if the holder's attempted exercise of the power is invalid or ineffective for any reason. If no document purporting to exercise the power of appointment has been brought to the attention of the trustee within six months after the death of the holder, the trustee may distribute the trust property subject to the power in accordance with the terms of this instrument as if the power had not been exercised. If a document purporting to exercise the power is subsequently located, the trustee shall not be liable to the appointees under that exercise and the rights of the appointees and the persons receiving property from the trustee shall be governed by applicable law. 10.13 NO-CONTEST CLAUSE. If a beneficiary under this instrument, alone or in conjunction with any other person or persons, contests or attacks the validity of this instrument in any court or seeks to obtain an adjudication in any proceeding in any court that this trust or any of its provisions are void, or otherwise seeks to void, nullify, or set aside this trust or any of its provisions, or if a beneficiary contests or attacks either trustor's last will or any provisions of those wills in any proceeding designed to thwart their wishes as expressed in those wills, then that beneficiary's right to take any interest given to that beneficiary in this instrument shall be determined as it would have been determined had the beneficiary predeceased the execution of this trust Page 44 of 77 instrument without surviving descendants. The trustee is authorized to defend, at the expense of the trust, any contest or attack on this trust or any of its provisions. 10.14 CHOICE OF LAW. All questions concerning the validity, construction, interpretation and administration of the trusts created in this instrument shall be governed by the laws of the State of California in force from time to time, regardless of whether the place of administration is changed to another state. 10.15 CERTIFICATION OF TRUST. Any bank, stock broker, transfer agent, or other third party dealing with the trustee may rely on a written certificate of the trustee or the trustee's attorney as to the existence of this trust and the trustee's authority under this instrument. The trustee may omit the dispositive provisions of this instrument in any copy submitted to a third party and no third party shall have any duty to inquire into or be concerned with the dispositive provisions of the trust. 10.16 OCCUPANCY OF RESIDENCE BY CHILDREN AND GUARDIANS. After the death of the surviving spouse, trustors' minor children, the guardian of trustors' minor children, and the children of any such guardian, shall have the right to continue to occupy, without payment of rent, all real property in the trust estate that the trustors were using for residential purposes at the time of the surviving spouse's death, whether on a full or part time basis. The trustee is expressly authorized to continue to hold any residential property that the trustee receives or acquires as part of the trust estate for as long as the trustors' minor children continue to occupy it. The trustee is authorized, in the trustee's discretion to sell any such residential property and to purchase, rent, or lease a replacement residence selected by trustee after consultation with the trustors' minor children and the guardian of trustors' minor children. The trustee shall pay out of the income or principal of each trust to which an interest in the property has been allocated a pro rata share of the trust deed payments, property taxes, assessments, insurance premiums, maintenance expenses, and ordinary repairs on the property, or any rent or lease payments, based on the proportionate interest in the property included in each trust. ARTICLE 11 ---------- DEFINITIONS ----------- Except as otherwise provided in this instrument, the following definitions shall apply in interpreting this instrument, unless the context clearly requires otherwise. Page 45 of 77 11.1 TRUSTEE. All references to "the trustee" shall include any trustee or co-trustees under this instrument at any time, except that a reference to the trustee of a particular trust shall include only the acting trustee of that trust. All references to the trustee in the singular shall include all acting co-trustees. 11.2 CURRENT BENEFICIARY. The "current beneficiary" of a trust means the beneficiary or group of beneficiaries who are then entitled or authorized in the trustee's discretion to receive current distributions out of income or principal of the trust. 11.3 DEATH TAXES. As used in this instrument, the term "death taxes" means all estate, inheritance, and other death taxes, including interest and penalties, except for special use valuation recapture taxes and any federal or state tax imposed on a generation-skipping transfer other than a "direct skip" as that term is defined in the federal tax laws. 11.4 DECEASED SPOUSE. The term "deceased spouse" as used in this instrument shall have the meaning set forth in paragraph 3.1 above. 11.5 DESCENDANTS. The term "descendants" means children, grandchildren, and their lineal descendants of all generations. A class designation of descendants, children or grandchildren includes persons legally adopted into the class during minority and persons naturally born into the class in or out of wedlock. A reference to "descendants" in the plural includes a single descendant whenever the context so requires. 11.6 EDUCATION. The term "education" as used in this instrument shall have the meaning set forth in paragraph ? above. 11.7 INTERNAL REVENUE CODE. The term "Internal Revenue Code" as used in this instrument shall mean the Internal Revenue Code of 1986, as amended from time to time. 11.8 BY RIGHT OF REPRESENTATION. Whenever distribution under this instrument is to be made "by right of representation," the property to be distributed shall be divided into as many equal shares as there are living children of the designated ancestor, if any, and deceased children who leave descendants then living. Each living child of the designated ancestor shall receive one share and the share of each deceased child who leaves descendants then living shall be divided in the same manner. 11.9 SURVIVING SPOUSE. The term "surviving spouse" as used in this instrument shall have the meaning set forth in paragraph 3.1 above. Page 46 of 77 11.10 SURVIVOR'S TRUST. The term "Survivor's Trust" as used in this instrument shall have the meaning set forth in paragraph 3.3.1,3.4.1 above. 11.11 MARITAL TRUST. The term "Marital Trust" as used in this instrument shall have the meaning set forth in paragraph 3.3.2,3.4.2 above. 11.12 MARITAL TRUSTS. The term "Marital Trusts" as used in this instrument shall have the meaning set forth in paragraph 4.8 above. 11.13 QTIP ELECTION. The term "QTIP election" as used in this instrument shall mean the election under Section 2056(b)(7) of the Internal Revenue Code. 11.14 EXEMPTION TRUST. The term "Exemption Trust" as used in this instrument shall have the meaning set forth in paragraph 3.4.3 above. 11.15 JAMIE AND JULIE'S TRUST. The term "Jamie and Julie's Trust" as used in this instrument shall have the meaning set forth in paragraph 3.3.3 above. ARTICLE 12 ---------- RULES OF CONSTRUCTION --------------------- Except as otherwise provided in this instrument, the following rules of construction shall apply in interpreting this instrument, unless the context clearly requires otherwise. 12.1 SHALL AND MAY. When this instrument states that the trustee shall perform an act, the trustee is required to perform the act. When this instrument states that the trustee may do an act, the trustee's decision to do or not do the act shall be made in the exercise of the trustee's fiduciary discretion. 12.2 STATUTES, CODES AND REGULATIONS. All references to specific acts, statutes and codes shall include any amended or successor laws. 12.3 GENDER AND NUMBER. Masculine, feminine and neuter pronouns, and singular and plural words, each include the others whenever the context so indicates. 12.4 SEVERABILITY CLAUSE. If any provision of this instrument is unenforceable, the remaining provisions shall nevertheless remain in effect. Page 47 of 77 12.5 USE OF HEADINGS. The Article and paragraph headings in this instrument are for convenient reference only and are not intended to be fully descriptive of the contents. In no event shall the headings be relied upon in interpreting this instrument. 12.6 ARTICLE AND PARAGRAPH REFERENCES. Whenever reference is made in this instrument to a specific Article or paragraph, the reference is to the Article or paragraph of this instrument. Page 48 of 77 CERTIFICATION BY TRUSTORS We, the undersigned trustors, certify that we have read this Declaration of Trust and that it correctly states the terms under which the trust property is to be held, administered, and distributed by the trustee. We hereby approve the Declaration of Trust in all respects and request that the trustee execute it. Executed on June 5, 1991, at Los Angeles, California. TRUSTORS /s/ Edward Phillips III ----------------------------- EDWARD PHILLIPS III /s/ Norma J. Phillips ----------------------------- NORMA J. PHILLIPS ACCEPTANCE BY TRUSTEE Accepted on June 5, 1991, at Los Angeles, California. TRUSTEES /s/ Edward Phillips III ------------------------------ EDWARD PHILLIPS III /s/ Norma J. Phillips ------------------------------ NORMA J. PHILLIPS Page 49 of 77 EX-2 3 STOCKHOLDERS AGREEMENT Exhibit 2 - -------------------------------------------------------------------------------- MATTHEWS STUDIO EQUIPMENT GROUP ------------------------------- STOCKHOLDERS AGREEMENT ------------------------------ Dated as of July 27, 1995 - -------------------------------------------------------------------------------- Page 50 of 77 STOCKHOLDERS AGREEMENT ---------------------- STOCKHOLDERS AGREEMENT, dated as of July 27, 1995, among MATTHEWS STUDIO EQUIPMENT GROUP, a California corporation (the "Company"), ING Equity Partners, L.P. I, a Delaware limited partnership ("ING") and the Management Stockholders. W I T N E S S E T H: ------------------- WHEREAS, ING pursuant to a Purchase Agreement (the "Purchase Agreement") dated July 27, 1995, between the Company and ING is purchasing from the Company (i) $5,000,000 in principal amount of the Company's senior subordinated notes (the "Notes"), (ii) warrants (the "Warrants") to purchase seventeen percent (17%) of the outstanding common stock, no par value (the "Common Stock"), of the Company on a fully diluted basis, and (iii) one million shares of special voting preferred stock, no par value (the "Special Voting Preferred Stock"), of the Company; and WHEREAS, ING pursuant to an Option Agreement, dated June 5, 1995, between ING and Edward Carlin, is purchasing 1,400,000 shares of Common Stock (the "Option Shares"); and WHEREAS, the Management Stockholders are the beneficial owners of approximately forty-two percent (42%) of the Common Stock; and WHEREAS, the Company, ING and the Management Stockholders desire to enter into this Agreement for the purposes, among others, of (i) establishing the composition of the Company's Board of Directors, (ii) assuring continuity in the management of the Company and (iii) limiting the manner and terms by which the Stockholder Shares may be transferred. NOW, THEREFORE, in consideration of the mutual agreements and understandings set forth herein, the parties hereto hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS As used in this Agreement, the following terms shall have the following respective meanings: Affiliate shall mean with respect to any Person, (a) any Person which --------- directly, or indirectly through one or more Page 51 of 77 intermediaries, controls, or is controlled by, or is under common control with, such Person, or (b) any Person who is a director or executive officer (i) of such Person, (ii) of any Subsidiary of such Person, or (iii) of any Person described in clause (a) above, or with respect to any Stockholder, the Company; provided, that any Affiliate of a corporation shall be deemed an Affiliate of such corporation's stockholders. For purposes of this definition, "control" of a Person shall mean the power, direct or indirect, (i) to vote or direct the voting of more than 5% of the outstanding shares of Voting Stock of such Person, or (ii) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. Agreement shall mean this Agreement as in effect on the date hereof and as --------- hereafter from time to time amended, modified or supplemented in accordance with the terms hereof. Board of Directors shall mean the Board of Directors of the Company, as ------------------ duly constituted in accordance with this Agreement, or any committee thereof duly constituted in accordance with this Agreement, the By-laws and applicable law and duly authorized to make the relevant determination or take the relevant action. To the extent that the Board of Directors is required under this Agreement to authorize or approve, or make a determination in respect of a transaction between the Company, on the one hand, and a Stockholder, and/or a Stockholder's Affiliates, on the other hand, the Board of Directors shall be deemed to exclude such Stockholder, any of its Affiliates, and any of the directors, officers, employees, agents or representatives of such Stockholder and/or its Affiliates, who are members of the Board of Directors. By-Laws shall mean the By-Laws of the Company as amended and in effect on ------- the date hereof, and as hereafter further amended or restated in accordance with the terms hereof and pursuant to applicable law. Charter shall mean the Articles of Incorporation of the Company as in ------- effect on the date hereof, including all certificates of determination of the Company, and as hereafter from time to time amended, restated, modified or supplemented in accordance with the terms hereof and pursuant to applicable law. Closing Date shall mean the date on which the transactions contemplated by ------------ the Purchase Agreement shall be consummated. Commission shall mean the Securities and Exchange Commission and any ---------- successor commission or agency having similar powers. Page 52 of 77 Common Stock shall mean the Common Stock, no par value per share, of the ------------ Company. Eligible Offering shall mean an offer by the Company to sell to investors ----------------- (including any Stockholder) for cash shares of Common Stock, or any security convertible into or exchangeable for, or carrying rights or options to purchase, shares of Common Stock, as the case may be, other than an offering of securities by the Company: (i) in connection with any merger of, or acquisition by, the Company; or (ii) registered under the Securities Act; or (iii) in connection with the exercise of the Warrants or other warrants or options outstanding on the date hereof; or (iv) pursuant to (A) the Company's Amended and Restated 1989 Stock Option Plan; (B) the Company's 1994 Stock Option Plan; (C) the Company's 1994 Stock Option Plan for Directors; (D) any other employee benefit plan and (E) options granted pursuant to the Employment Agreements dated July 1, 1995, between the Company and each of Carlos D. De Mattos, Edward Phillips and John Murray pursuant to any acquisition permitted under the Purchase Agreement and the Credit Agreement of even date herewith by and among the Company, certain of the Company's Subsidiaries and Chemical Bank. Exchange Act shall mean the Securities Exchange Act of 1934, as amended, or ------------ any similar Federal statute then in effect, and a reference to a particular section thereof shall include a reference to the comparable section, if any, of such similar Federal statute. Financial Investor shall mean a purchaser of any Securities that is a (i) ------------------ bank, an investment bank, an investment partnership or investment company or other Person whose primary business is the financial services or investment business or (ii) an Affiliate of such a Person identified in clause (i). First Offer Price and Terms shall have the meaning specified in Section --------------------------- 5.1(a). GAAP shall mean the generally accepted accounting principles in the United ---- States of America in effect from time to time, applied on a consistent basis both as to classification of items and amounts. Page 53 of 77 ING shall mean ING Equity Partners, L.P. I. --- ING Transferee shall mean any Person to whom ING has transferred Stock -------------- other than in a transaction described in Section 4.2(b) or Section 4.2(c) -------------- -------------- Management Stockholders shall mean Carlos D. De Mattos and Edward Phillips. ----------------------- NASDAQ shall mean the NASDAQ National Market or the NASDAQ Small Cap ------ Market. Notice of Exercise shall have the meaning specified in Section 5.1(b). ------------------ Notice of Intention shall have the meaning specified in Section 5.1(a). ------------------- Offered Shares shall have the meaning specified in Section 5.1. -------------- Offerees shall have the meaning specified in Section 5.6(b) -------- Option Shares is defined in the Second Recital. ------------- Permitted Transferees shall mean, those Persons to whom transfers of Common --------------------- Stock and Preferred Stock are permitted to be made pursuant to Section 4.2 and Article V hereof. Person shall mean an individual or a corporation, association, partnership, ------ joint venture, organization, business, trust, or any other entity or organization, including a government or any subdivision or agency thereof. Preferred Stock shall mean the Special Voting Preferred Stock of the --------------- Company. Public Offering shall mean a public offering and sale of equity securities --------------- of the Company pursuant to an effective registration statement under the Securities Act. Purchase Agreement shall mean the Purchase Agreement, dated July 27, 1995, ------------------ between the Company and ING. Qualifying Offering shall mean an underwritten initial public offering of ------------------- the Common Stock registered under the Securities Act, which offering results in net proceeds to the Company of at least $10,000,000 and a price per share of Common Stock of not less than $2.50 per share (appropriately adjusted to reflect all recapitalization events). Page 54 of 77 Registration Rights Agreement shall have the meaning specified in Section ----------------------------- 5.1(a). Securities shall mean any Common Stock, Preferred Stock or other capital ---------- stock of the Company. Securities Act shall mean, as of any date, the Securities Act of 1933, as -------------- amended, or any similar federal statute then in effect, and in reference to a particular section thereof shall include a reference to the comparable section, if any, of any such similar federal statute and the rules and regulations thereunder. Selling Stockholders shall have the meaning specified in Section 5.7. -------------------- Stock shall mean the Common Stock and the Preferred Stock. ----- Stockholders shall mean ING and the Management Stockholders, and any ------------ Permitted Transferee of any such Person who becomes a party to or bound by the provisions of this Agreement in accordance with the terms hereof. Subsidiary shall mean as to any Person a corporation of which outstanding ---------- shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the Board of Directors of such corporation are at the time owned, directly or indirectly through one or more intermediaries, or both, by such Person. Transaction Documents shall mean this Agreement, the Purchase Agreement, --------------------- the Registration Rights Agreement, each of the agreements that are exhibits hereto and thereto, and all agreements, instruments and documents contemplated thereby. Voting Stock shall mean capital stock of the Company of any class or ------------ classes, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of corporate directors (or Persons performing similar functions), including without limitation, the Common Stock and the Preferred Stock. Voting Stockholder shall mean a Stockholder who holds Voting Stock or ------------------ retains, by proxy or otherwise, the power to vote Voting Stock. Warrants shall mean the Warrants issued by the Company to ING pursuant to -------- the Purchase Agreement. Page 55 of 77 ARTICLE II BOARD OF DIRECTORS MANAGEMENT Section 2.1. Board of Directors. (a) From and after the Closing (as ------------------ defined in the Purchase Agreement) and until the provisions of this Section 2.1 cease to be effective, each Stockholder shall vote all of such Stockholder's Voting Stock and shall take all other necessary or desirable actions within the Stockholder's control (whether in his capacity as a stockholder, director, member of a committee of the Board of Directors or officer of the Company or otherwise, and including, without limitation, attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), and the Company shall take all necessary and desirable actions within its control (including, without limitation, calling special board and stockholder meetings), so that: (i) the number of directors on the Board of Directors shall be nine; and (ii) two representatives designated by ING (the "ING Directors") or, if ING and its Affiliates cease to be Stockholders, designated by ING Transferees holding a majority of the Stock (other than Preferred Stock) held by such ING Transferees (with Warrants counted on an as if exercised basis), shall be elected to the Board of Directors; and (iii) the removal from the Board of Directors (with or without cause) of any representative designated by ING or the ING Transferees shall be only at the written request of ING or the ING Transferees (if ING and its Affiliates are no longer Stockholders), and under no other circumstances; and (iv) in the event that any representative designated hereunder by ING or the ING Transferees (if ING and its Affiliates are no longer Stockholders) for any reason ceases to serve as a member of the Board of Directors during his term of office, the resulting vacancy on the Board of Directors shall be filled by a representative designated by ING or the ING Transferees as provided hereunder; and (v) ING or the ING Transferees (if ING and its Affiliates are no longer Stockholders) shall use all reasonable efforts to insure that none of the designees is engaged as an officer, director or control person of a company or other business enterprise that is in competition with the Company and that none of the designees possesses a Page 56 of 77 pecuniary or similar interest in any of the Company's business or assets (other than ownership of Common Stock) of such a pervasive nature as to hamper materially such designee's ability to impartially take part in the general deliberations of the Board of Directors concerning the Company's business and prospects; provided, however, that if ING and Affiliates of ING or, if ING and its - -------- ------- Affiliates cease to be Stockholders, ING Transferees cease to hold Warrants to purchase at least eight and five-tenths percent (8.5%) of the outstanding Common Stock on a fully diluted basis, the number of ING Directors required by clause (a)(ii) shall be automatically reduced to one. (b) The Stockholders shall take all necessary and appropriate actions to provide that the ING Directors are members of any and all committees of the Board; provided, that, nothing in this Section 2.1(b) shall imply that the ING -------- Directors shall constitute a majority of such committees. (c) The Company shall pay the reasonable out-of-pocket expenses incurred by each director in connection with attending the meetings of the Board and any committee thereof. So long as any ING Director serves on the Board and for three years thereafter, the Company shall maintain directors indemnity insurance coverage reasonably satisfactory to the ING Directors. The ING Directors shall be provided the same compensation, stock incentive and reimbursement benefits as other independent directors of the Company. (d) The Company and the Stockholders shall use their best efforts to provide, as soon as practicable, in the Company's Charter and Bylaws for indemnification and reimbursement of directors and officers to the fullest extent permitted by the General Corporation Law of California. (e) If any party fails to designate a representative to fill a directorship pursuant to the terms of this paragraph 1, the election of a Person to such directorship shall be accomplished in accordance with the Company's bylaws and applicable law. Section 2.2. Conflicting Agreements. Each Stockholder represents that ---------------------- such Stockholder has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement, and no holder of Stock shall grant any proxy or become party to any voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement. No Stockholder shall act, for any reason, as a member Page 57 of 77 of a group or in concert or enter into any agreement or arrangement with any other Person in connection with the acquisition, disposition or voting of Stock in any manner which is inconsistent with the provisions of this Agreement. Section 2.3. Actions Consistent with Agreement. The Company shall not --------------------------------- circumvent this Agreement by taking any action through a Subsidiary or Affiliate that would be prohibited under this Agreement. ARTICLE III PURCHASES OF COMMON STOCK Section 3.1. ING Purchases. Until three years from the date hereof, ING ------------- agrees to refrain from acquiring either directly or indirectly through its Affiliates greater than 50% of the Common Stock then outstanding; provided, that -------- nothing in this Section 3.1 shall prevent or restrict acquisition of Common Stock by ING as long as any event of default under any debt financing arrangement or agreement between the Company and ING exists or is continuing and entitles ING to acceleration of payments of interest, penalties or principal owed to ING under such debt financing arrangement or agreement; provided, -------- further, that nothing in this Section 3.1 shall prevent or restrict ING from - ------- exercising in part or full any and all rights, including but not limited to preemptive rights, rights of first offer and anti-dilution adjustment rights, of ING under the Transaction Documents. ARTICLE IV TRANSFERS OF STOCK Section 4.1. Restrictions on Transfer. Each Stockholder agrees that such ------------------------ Stockholder will not, directly or indirectly, offer, sell, transfer, assign or otherwise dispose of (or make any exchange, gift, assignment or pledge of) (collectively, for purposes of Articles IV and V hereof only, a "transfer") any Stock or Warrants except (a) as provided in Section 4.2; (b) in accordance with Article V; or (c) an exercise of Warrants into Common Stock pursuant to the terms of the Warrants and the Purchase Agreement. In addition to the other restrictions noted in this Article IV, each Stockholder agrees that it will not, directly or indirectly, transfer any of its Stock except as permitted under the Securities Act and other applicable securities laws. Page 58 of 77 Section 4.2. Exceptions to Restrictions. The provisions of Section 4.1 -------------------------- and Article V shall not apply to any of the following transfers: (a) From any Stockholder that is a natural person to (i) such Stockholder's spouse or children or (ii) to any trust solely for such Stockholder's benefit or the benefit of such Stockholder's spouse or children; provided, that, in each case referred to above, such Stockholder -------- acts as trustee and retains the sole power to direct the voting and disposition of such Securities; and provided, further that each such Person -------- ------- including any such trust (each a "Permitted Transferee") shall execute a counterpart of and become a party to this Agreement and shall agree in a writing in form and substance satisfactory to the Company to be bound and becomes bound by the terms of this Agreement as a Stockholder. (b) From any Stockholder to any Affiliate of the Company, or pursuant to a merger or consolidation involving the Company or a sale of all or substantially all of the outstanding shares of Common Stock. (c) Pursuant to a Public Offering occurring after the date hereof or an open market sale following a Public Offering after the date hereof in accordance with Rule 144 of the Commission. (d) From any Stockholder to an Affiliate of such Stockholder. (e) From any Stockholder to another Stockholder. (f) From ING or ING's Affiliates pursuant to Section 5.6. (g) The transfer of Option Shares. Section 4.3. Endorsement of Certificates. (a) Upon the execution of this --------------------------- Agreement, in addition to any other legend which the Company may deem advisable under the Securities Act and certain state securities laws, all certificates representing shares of issued and outstanding Common Stock and Preferred Stock shall be endorsed at all times prior to a Qualifying Offering as follows: THIS CERTIFICATE IS SUBJECT TO, AND IS TRANSFERABLE ONLY UPON COMPLIANCE WITH, THE PROVISIONS OF A STOCKHOLDERS AGREEMENT, DATED JULY 27, 1995, AMONG THE COMPANY AND Page 59 of 77 CERTAIN OF ITS STOCKHOLDERS. A COPY OF THE ABOVE REFERENCED AGREEMENTS ARE ON FILE AT THE OFFICE OF THE COMPANY. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION FROM REGISTRATION, UNDER SAID ACT. (b) Except as otherwise expressly provided in this Agreement, all certificates representing shares of Stock hereafter issued to or acquired by any of the Stockholders or their successors hereto (including, without limitation, all certificates representing shares of Common Stock hereafter issued upon the exercise of Warrants) shall bear the legends set forth above, and the shares of Stock represented by such certificates shall be subject to the applicable provisions of this Agreement. The obligations of each party hereto shall be binding upon each transferee to whom Stock is transferred by any party hereto, whether or not such transfer is permitted under the terms of this Agreement, except for transfers described in Section 4.2(c). Prior to consummation of any transfer, except for transfers described in Section 4.2(c) or Section 4.4, such party shall cause the transferee to execute an agreement in form and substance reasonably satisfactory to the other parties hereto, providing that such transferee shall fully comply with the terms of this Agreement. Prompt notice shall be given to the Company and each Stockholder by the transferor of any transfer (whether or not to a Permitted Transferee) of any Stock. Section 4.4. Sale of Common Stock by the Management Stockholders. (a) --------------------------------------------------- Prior to the first anniversary of the date of the consummation of a Qualifying Offering subsequent to the date hereof, each Management Stockholder (including its Affiliates), individually, in any twelve-month period shall not sell, transfer, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, encumbrance, assignment or other disposition of any shares of Common Stock held by such Management Stockholder and its Affiliates except as follows: (i) Each Management Stockholder, during any twelve-month period prior to the first anniversary of the date of the consummation of a Qualifying Offering subsequent to the date hereof, may sell, transfer or assign the number of shares of Common Stock equal to or less than the number of shares of Common Stock equal to or less than 10% of the holdings of such Management Stockholder as of the date Page 60 of 77 hereof, less fifty percent (50%) that number of shares pledged or encumbered pursuant to clause (ii). ----------- (ii) Each Management Stockholder, during any twelve-month period prior to the first anniversary of the date of the consummation of a Qualifying Offering subsequent to the date hereof, may pledge or encumber the number of shares of Common Stock equal to or less than the number of shares of Common Stock equal to or less than 20% of the holdings of such Management Investor as of the date hereof, less that number of shares sold, transferred or assigned pursuant to clause (i). ---------- (b) After the first anniversary of the date of the consummation of a Qualifying Offering, each Management Stockholder and its Affiliates, individually, in any twelve month period shall not sell, transfer, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, encumbrance, assignment or other disposition of any shares of Common Stock held by such Management Stockholder and its Affiliates except as follows: (i) Each Management Stockholder, during any twelve-month period prior to the first anniversary of the date of the consummation of a Qualifying Offering subsequent to the date hereof, may sell, transfer or assign the number of shares of Common Stock equal to or less than the number of shares of Common Stock equal to or less than 20% of the holdings of such Management Stockholder as of the date hereof, less fifty percent (50%) that number of shares pledged or encumbered pursuant to clause (ii). ----------- (ii) Each Management Stockholder, during any twelve-month period prior to the first anniversary of the date of the consummation of a Qualifying Offering subsequent to the date hereof, may pledge or encumber the number of shares of Common Stock equal to or less than the number of shares of Common Stock equal to or less than 40% of the holdings of such Management Investor as of the date hereof, less that number of shares sold, transferred or assigned pursuant to clause (i). ---------- Section 4.5. Improper Transfer. Any attempt to transfer or encumber any ----------------- shares of Stock not in accordance with this Agreement shall be null and void and neither the Company nor any transfer agent of such securities shall give any effect to such attempted transfer or encumbrance in its stock records. Page 61 of 77 ARTICLE V RIGHTS OF FIRST OFFER; TAG ALONG SALES Section 5.1. Transfers by a Stockholder. (a) Except for sales of -------------------------- securities contemplated by the Registration Rights Agreement, dated the date hereof, among the Company and the parties named therein (the "Registration Rights Agreement") and transfers permitted by Sections 4.1 and 4.2, if at any time any Stockholder shall desire to sell any Stock or Warrants owned by him or it (such Stockholder desiring to sell shares of such Stock being referred to herein as a "Selling Stockholder"), then such Selling Stockholder shall deliver at least 5 days prior to consummating such transaction written notice of its desire to sell such Stock (a "Notice of Intention"), accompanied by a copy of a proposal relating to such sale (the "Sale Proposal"), to each of the other Stockholders and to the Company, setting forth such Selling Stockholder's desire to make such sale, the number and class of shares of Stock or Warrants proposed to be transferred (the "Offered Securities") and the price at which and terms on which such Selling Stockholder proposes to sell the Offered Securities (the "First Offer Price and Terms") and other terms applicable thereto. (b) Upon receipt of the Notice of Intention, the Company and the other Stockholders shall then have the right (other than with respect to sales, pledges or encumbrances of Common Stock, pursuant to Section 4.4) to purchase at the First Offer Price and Terms and on the other terms specified in the Sale Proposal all or, subject to Section 5.1(d), any portion of the Offered Securities in the following order of priority: if the Selling Stockholder is a Management Stockholder, the other Management Stockholders shall have the first right to purchase the Offered Securities pro rata among those Management Stockholders so electing on the basis of the respective number of shares of Common Stock owned or held whether as trustee or through other Permitted Transferees by such Management Stockholders (or in such other proportions as such Management Stockholders may agree), and thereafter,the remaining Stockholders shall have the right to purchase the Offered Securities pro rata among such Stockholders so electing to purchase on the basis of the respective numbers of shares of Common Stock (with Warrants considered on an as if converted basis) owned by such Stockholders (or in such other proportion as they may agree), and thereafter, the Company shall have the right to purchase the Offered Securities. The rights of the Stockholders and the Company pursuant to this Section 5.1(b) shall be exercisable by the delivery of notice to the Selling Stockholder (the "Notice of Exercise"), within 4 business days from the date of delivery of the Notice of Intention. The Notice of Exercise shall state the total number of shares of the Offered Page 62 of 77 Securities such Stockholder (or the Company) is willing to purchase without regard to whether or not other Stockholders purchase any shares of the Offered Securities. A copy of such Notice of Exercise shall also be delivered by each Stockholder to the Company and each other Stockholder. The rights of the Stockholders and the Company pursuant to this Section 5.1(b) shall terminate if unexercised 5 business days after the date of delivery of the Notice of Intention. (c) In the event that the Stockholders or the Company exercise their rights to purchase any or all of the Offered Securities in accordance with Section 5.1(b), then the Selling Stockholder must sell the Offered Securities to such Stockholders (or, as the case may be, the Company) within 30 calendar days from the date of delivery of the Notice of Exercise received by the Selling Stockholder. (d) Notwithstanding the foregoing provisions of this Section 5.1, unless the Selling Stockholder shall have consented to the purchase of less than all of the Offered Securities, no Stockholder or Stockholders nor the Company may purchase any Offered Securities hereunder unless all of the Offered Securities are to be so purchased. (e) For purposes of this Article V, any Person who has failed to give notice of the election of an option hereunder within the specified time period will be deemed to have waived its rights on the day after the last day of such period. (f) Each Stockholder in its capacity only as a stockholder agrees and acknowledges that the Company may purchase or acquire Common Stock pursuant to Section 5.1(b) hereof, and approves such purchases and acquisitions, and waives any objection or claim relating thereto, whether against the Company, the Board of Directors or otherwise. Section 5.2. Transfer of Offered Shares to Third Parties. If all ------------------------------------------- notices required to be given pursuant to Section 5.1 have been duly given and the Stockholders and the Company do not exercise their respective options to purchase all of the Offered Securities at the First Offer Price and Terms and the Selling Stockholder does not desire to sell less than all the Offered Securities or if with the consent of the Selling Stockholder, the other Stockholders and the Company purchase less than all of the Offered Securities pursuant to the provisions hereof, then in either such event the Selling Stockholder shall have the right, subject to compliance by the Selling Stockholder (if such Selling Shareholder is ING) with the provisions of Section 4.3(b) hereof, for a period of 120 calendar days from the earlier of (i) the expiration of the option period pursuant to Section 5.1 with Page 63 of 77 respect to such Sale Proposal or (ii) the date on which such Selling Stockholder receives notice from the other Stockholders and the Company that they will not exercise in whole or in part the options granted pursuant to Section 5.1, to enter into an agreement to sell, or to sell, to any third party which is not an Affiliate of, or related to, the Selling Stockholder the Offered Securities remaining unsold at a price of not less than 90% of the First Offer Price and Terms, and on the other terms no less favorable (taken as a whole) to the purchaser than those specified in the Sale Proposal. Section 5.3. Purchase of Offered Shares. The consummation of any -------------------------- purchase and sale pursuant to Section 5.1 shall take place on such date, not later than 30 calendar days after the expiration of the option period pursuant to Section 5.1 with respect to such option, as the Selling Stockholder shall select. Prior to the consummation of any sale pursuant to Section 5.1, the Selling Stockholder (if such Selling Stockholder is ING or an ING Affiliate or an ING Transferee) shall comply with Section 4.3(b) hereof. Upon the consummation of any such purchase and sale, the Selling Stockholder shall deliver certificates evidencing the Offered Securities sold duly endorsed, or accompanied by written instruments of transfer in form satisfactory to the purchaser duly executed by the Selling Stockholder free and clear of any liens, against delivery of the First Offer Price and Terms, payable in the manner specified in Section 5.1(a). Section 5.4. Waiting Period with Respect to Subsequent Transfers. In --------------------------------------------------- the event that the Stockholders and the Company do not exercise their options to purchase all of the Offered Securities, and the Selling Stockholder shall not have sold the remaining Offered Securities to a third party for any reason before the expiration, as applicable, of the 120-day period described in Section 5.2, then such Selling Stockholder shall not give another Notice of Intention pursuant to Section 5.1 for a period of 90 calendar days after the last day of such 120-day period. Section 5.5. Legally Binding Obligation. Subject to Section 5.1(a), -------------------------- making a written offer, giving or failing to give written notice within the stated period, accepting an offer or making a decision or election, in each case as provided in Section 5.1 or 5.2, shall create a legally binding obligation to buy or sell, or a legally binding obligation to refrain from buying or selling, or a legally binding waiver of the right to buy or sell, as the case may be, the subject Stock as provided in such Section 5.1 or 5.2. Page 64 of 77 Section 5.6. Right to Join in Sale. (a) Anything in this Agreement --------------------- to the contrary notwithstanding, if any Stockholder or group of Stockholders proposes, other than (i) transfers to a Permitted Transferee pursuant to Section 4.2 and (ii) transactions by ING or ING's Affiliates or Permitted Transferees to a Financial Investor, to sell, dispose of or otherwise transfer any Stock or Warrants (each a "Disposing Stockholder"), such person or group shall refrain from effecting such transaction unless, prior to the consummation thereof, each other Stockholder shall have been afforded the opportunity to join in such sale of Common Stock on a pro rata basis, as hereinafter provided. (b) Prior to consummation of any proposed sale, disposition or transfer of shares of Stock described in Section 5.6(a), the Disposing Stockholder shall cause the person or group that proposes to acquire such shares (the "Proposed Purchaser") to offer (the "Purchase Offer") in writing to each other Stockholder (collectively, the "Offerees") to purchase shares of Stock owned by such Stockholder (regardless of whether the shares of Stock proposed to be sold by the Disposing Stockholders are the same class as the shares of Stock owned by such Stockholders), such that the number of shares of such Stock so offered to be purchased from such Stockholder shall be equal to the product obtained by multiplying the total number of shares of such Stock then owned by such Stockholder by a fraction, the numerator of which is the aggregate number of shares of Stock proposed to be purchased by the Proposed Purchaser from all Stockholders (including the Disposing Stockholder or Stockholders) and the denominator of which is the aggregate number of shares of Stock then owned by all of the Offerees and the Disposing Stockholder, in all cases considering Warrants (but not Preferred Stock) on an as if converted basis. Such purchase shall be made at the highest price per share and on such other terms and conditions as the Proposed Purchaser has offered to purchase shares of Stock to be sold by the Disposing Stockholder or Stockholders, in all cases considering Warrants (but not Preferred Stock) on an as if converted basis. Each Stockholder shall have 20 calendar days from the date of receipt of the Purchase Offer in which to accept such Purchase Offer, and the closing of such purchase shall occur within 30 calendar days after such acceptance or at such other time as such Stockholder and the Proposed Purchaser may agree. The number of shares of Stock to be sold to the Proposed Purchaser by the Disposing Stockholder or Stockholders shall be reduced by the aggregate number of shares of Stock purchased by the Proposed Purchaser from the other Stockholders pursuant to the acceptance by them of Purchase Offers in accordance with the provisions of this Section 5.6(b), considering Warrants (but not Preferred Stock) on an as if converted basis. In the event that a sale or other transfer subject to this Section 5.6 is to be Page 65 of 77 made to a Proposed Purchaser who is not a Stockholder, the Disposing Stockholder shall notify the Proposed Purchaser that the sale or other transfer is subject to this Section 5.6 and shall ensure that no sale or other transfer is consummated without the Proposed Purchaser first complying with this Section 5.6. It shall be the responsibility of each Disposing Stockholder to determine whether any transaction to which it is a party is subject to this Section 5.6. Section 5.7. Participation Rights. (a) The Company hereby grants to -------------------- ING the right to purchase ING's proportionate percentage of any future Eligible Offering. The Company shall, before issuing any securities pursuant to an Eligible Offering, give written notice thereof to ING. Such notice shall specify the security or securities the Company proposes to issue and the consideration that the Company intends to receive therefor. For a period of thirty (30) days following the date of such notice, ING shall be entitled, by written notice to the Company, to elect to purchase all or any part of such proportionate percentage of ING of the securities being sold in the Eligible Offering; provided, however, that if two or more securities shall be proposed to -------- ------- be sold as a "unit" in an Eligible Offering, any such election must relate to such unit of securities. If elections pursuant to this Section 5.7 shall not be made with respect to any securities included in an Eligible Offering within such thirty (30) day period, then the Company may issue such securities to investors, but only for a consideration payable in cash not less than, and otherwise on terms no more favorable to the investors than, that set forth in the Company's notice and only within ninety (90) days after the end of such thirty (30) day period. In the event that any such offer is accepted by ING, the Company shall sell to ING, and ING shall purchase from the Company, for the consideration and on the terms set forth in the notice as aforesaid, the securities that ING shall have elected to purchase. For the purposes of this Section 5.7, "proportionate percentage" shall mean with respect to ING as of any date, the result (expressed as a percentage) obtained by dividing (i) the number of shares of Common Stock (considering warrants on an as if converted basis) held by ING and its Permitted Transferees, by (ii) the number of shares of Common Stock then outstanding. ARTICLE VI TERMINATION Section 6.1. Certain Terminations. (a) The provisions of Articles -------------------- II, III, IV (other than in Section 4.4) and V shall terminate on the date on which any of the following events first Page 66 of 77 occurs: (i) a Qualifying Offering, (ii) a merger or consolidation of the Company with or into another Person that is not an Affiliate of the Company, as a result of which the Stockholders own less than 51% of the outstanding shares of Voting Stock of the surviving or resulting corporation, or (iii) ten years from the date of this Agreement. (b) Notwithstanding the foregoing, this Agreement shall in any event terminate with respect to ING, Affiliates of ING or ING Transferee when (i) such Person and its Affiliates (other than the Company) cease to be Affiliates of the Company and (ii) such Person and its Affiliates (other than the Company) cease to hold Common Stock (including shares to be received upon the exercise of the Warrants) representing three percent (3%) of the outstanding Common Stock on a fully diluted basis and cease to hold any Notes, and with respect to any other Stockholder when such Stockholder no longer owns any Stock or warrants or options to acquire Stock and no longer is due dividends with respect to Preferred Stock. In addition, this Agreement shall terminate with respect to all Stockholders upon the written consent of ING. ARTICLE VII MISCELLANEOUS Section 7.1. Successors and Assigns. Except as otherwise provided ---------------------- herein, all of the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective successors and assigns of the parties hereto. No Stockholder may assign any of its rights hereunder to any Person other than a transferee that has complied with the requirements of Sections 4.2 and 5.3 (if applicable) as provided therein in all respects. The Company may not assign any of its rights hereunder to any Person other than an Affiliate of the Company. If any transferee of any Stockholder (other than a Management Stockholder) shall acquire any Stock, in any manner, whether by operation of law or otherwise, such shares shall be held subject to all of the terms of this Agreement, and by taking and holding such shares such Person shall be entitled to receive the benefits of and be conclusively deemed to have agreed to be bound by and to comply with all of the terms and provisions of this Agreement. Section 7.2. Amendment and Modification; Waiver of Compliance; ------------------------------------------------- Conflicts. (a) This Agreement may be amended only by a written instrument duly - --------- executed by ING, or if ING and its Affiliates cease to be Stockholders, a representative designated by the ING Transferees holding a majority of the Stock (other than Preferred Stock) held by the ING Transferees (with Warrants converted on an as if exercised basis) and the Management Page 67 of 77 Stockholders. In the event of the amendment or modification of this Agreement in accordance with its terms, the Stockholders shall cause the Board of Directors of the Company to meet within 30 calendar days following such amendment or modification or as soon thereafter as is practicable for the purpose of adopting any amendment to the Charter and By-Laws of the Company that may be required as a result of such amendment or modification to this Agreement, and, if required, proposing such amendments to the Stockholders entitled to vote thereon, and the Stockholders agree to vote in favor of such amendments. (b) Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. (c) In addition to the provisions of Section 7.2(b), any failure of the Company to comply with any obligation, covenant, agreement or condition herein may be waived by a written instrument duly executed by ING, or if ING and its Affiliates cease to be Stockholders, a representative designated by the ING Transferees holding a majority of the Stock (other than Preferred Stock) held by the ING Transferees (with Warrants counted on an as if exercised basis) and the Management Stockholders, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Section 7.3. Notices. Any notice, request, claim, demand, document ------- and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by telex or telecopy (with such telex or telecopy confirmed promptly in writing sent by first class mail), or first class mail, or other similar means of communication, as follows: (i) If to ING, addressed to ING Equity Partners, L.P., 135 East 57th Street, 9th Floor, New York, New York 10022, Attention: Benjamin P. Giess; (ii) If to the Company, addressed to Matthews Studio Equipment Group, 2405 Empire Avenue, Burbank, California 91504, Attention: Carlos D. De Mattos; or Page 68 of 77 (iii) If to a Stockholder other than ING, to the address of such Stockholder set forth in the stock records of the Company; or, in each case, to such other address or telex or telecopy number as such party may designate in writing to each Stockholder and the Company by written notice given in the manner specified herein. All such communications shall be deemed to have been given, delivered or made when so delivered by hand or sent by telex (answer back received) or telecopy, or five business days after being so mailed. Section 7.4. Entire Agreement. This Agreement contains the entire ---------------- agreement among the parties hereto with respect to its subject matter and supersedes all prior oral and written agreements and memoranda and undertakings among the parties hereto with regard to such subject matter. The Company represents to the Stockholders that the rights granted to the holders hereunder do not in any way conflict with and are not inconsistent with the rights granted or obligations accepted under any other agreement (including the Charter) to which the Company is a party. Section 7.5. Injunctive Relief. The Stockholders acknowledge and agree ----------------- that a violation of any of the terms of this Agreement will cause the Stockholders irreparable injury for which an adequate remedy at law is not available. Therefore, the Stockholders agree that each Stockholder shall be entitled to an injunction, restraining order or other equitable relief from any court of competent jurisdiction, restraining any Stockholder from committing any violations of the provisions of this Agreement. Section 7.6. Inspection. For so long as this Agreement shall be in ---------- effect, this Agreement shall be made available for inspection by any Stockholder at the principal executive offices of the Company. Section 7.7. Headings. The section and paragraph headings contained in -------- this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 7.8. Recapitalizations, Exchanges, Etc., Affecting the Common -------------------------------------------------------- Stock; New Issuances. The provisions of this Agreement shall apply, to the full - -------------------- extent set forth herein with respect to the Common Stock and the Preferred Stock and to any and all equity or debt securities of the Company or any successor or assign of the Company (whether by merger, consolidation, sale Page 69 of 77 of assets, or otherwise) which may be issued in respect of, in exchange for, or in substitution of, such equity or debt securities and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, reclassifications, recapitalizations, reorganizations and the like occurring after the date hereof. Section 7.9. Purchase Agreement Covenants. The Company covenants that ---------------------------- until ING or its Affiliates no longer hold any Notes, Warrants or Special Voting Preferred Stock, the Company will perform the covenants contained in Sections 6.1.1, 6.1.5, 6.1.7, 6.1.8, 6.1.9, 6.1.11, 6.1.13 (subject to the provisions of Section 2.1(a) hereof), 6.1.14, 6.1.15, 6.2.4, 6.2.6, 6.2.8 and 6.2.19 of the Purchase Agreement. Section 7.10. Cancellation of Employment Agreements and Consulting ---------------------------------------------------- Arrangements. The Company and the Management Stockholders represent and warrant - ------------ that all Employment Agreements between the Management Stockholders and the Company, including the Employment Agreements dated December 29, 1988 (but, excluding those dated July 1, 1995), including the provisions therein regarding consulting services and payments for such services have been cancelled and are of no further force and effect. Section 7.11. Ratification of Prior Acts of Board of Directors of Company; ------------------------------------------------------------ Right to Negotiate. Each of the Stockholders hereby adopts, ratifies and - ------------------ confirms all of the actions heretofore taken by the Board of Directors in all respects, including, without limitation, in respect of the Purchase Agreement and the transactions contemplated thereby. Nothing in this Agreement (apart from Article V hereof) shall be deemed to restrict or prohibit the Company from purchasing Stock from any Stockholder at any time upon such terms and conditions and at such price as may be mutually agreed upon between the Company and such Stockholder, whether or not at the time of such purchase, circumstances exist which specifically grant the Company the right to purchase, or such Stockholder the right to sell, Stock pursuant to the terms of this Agreement. Section 7.12. Litigation. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED, ---------- APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO ACKNOWLEDGES AND AGREES THAT IN THE EVENT OF ANY BREACH OF THIS AGREEMENT, THE NON-BREACHING PARTY WOULD BE IRREPARABLY HARMED AND COULD NOT BE MADE WHOLE BY MONETARY DAMAGES, AND THAT, IN ADDITION TO ANY OTHER REMEDY TO WHICH THEY MAY BE ENTITLED AT LAW OR IN EQUITY, THE PARTIES SHALL BE ENTITLED TO SUCH EQUITABLE OR INJUNCTIVE RELIEF AS MAY BE APPROPRIATE. EACH PARTY AGREES THAT JURISDICTION AND VENUE WILL BE PROPER IN THE SOUTHERN DISTRICT OF NEW YORK AND WAIVES ANY OBJECTIONS BASED UPON FORUM NON Page 70 of 77 CONVENIENS. EACH PARTY WAIVES PERSONAL SERVICE OF PROCESS AND AGREES THAT A SUMMONS AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING SHALL BE PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED BY REGISTERED OR CERTIFIED MAIL TO THE PARTY AT THE ADDRESS SET FORTH IN THIS AGREEMENT, OR AS OTHERWISE PROVIDED BY THE LAWS OF THE STATE OF NEW YORK OR THE UNITED STATES. THE CHOICE OF FORUM SET FORTH IN THIS SECTION 7.11 SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE JURISDICTION. EACH OF THE PARTIES HERETO, OTHER THAN ING, HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT AND INVOLVING ACTIONS OR CLAIMS AGAINST ING. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO ENTERING INTO THIS AGREEMENT. Section 7.13. No Strict Construction. The language used in this Agreement ---------------------- will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. Section 7.14. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 7.15. Termination of Previous Stockholder Agreement. Each of the --------------------------------------------- Management Stockholders and the Company represents, acknowledges and accepts that this Agreement supersedes and replaces and renders null and void any previous stockholders agreement executed by such parties which may conflict with this Agreement. Section 7.16. Acknowledgements. EACH PARTY HERETO ACKNOWLEDGES THAT IT ---------------- HAS HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS AGREEMENT, INCLUDING THE LAST TWO SENTENCES OF SECTION 7.11 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED TO PARTY BY SUCH COUNSEL. Page 71 of 77 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the date first above written. MATTHEWS STUDIO EQUIPMENT GROUP By: /s/ Carlos D. De Mattos --------------------------------- Carlos D. De Mattos Chairman & Chief Executive Officer STOCKHOLDERS: ING EQUITY PARTNERS, L.P. I By: LEXINGTON PARTNERS, L.P. its general partner By: LEXINGTON PARTNERS, INC. its general partner By: /s/ Benjamin P. Giess -------------------------- Name: Benjamin P. Giess ------------------------ Title: Vice President ----------------------- /s/ Carlos D. De Mattos --------------------------------- Carlos D. De Mattos /s/ Edward Phillips --------------------------------- Edward Phillips Page 72 of 77 C&E DM Limited Partnership By: /s/ Carlos D. De Mattos ----------------------------- its general partner C&E DM, LLC By: /s/ Carlos D. De Mattos ----------------------------- Name: Carlos D. De Mattos --------------------------- Title: Manager -------------------------- The Carlos and Elena De Mattos Family Trust dated February 12, 1991 /s/ Carlos D. De Mattos ------------------------------- Carlos D. De Mattos, as trustee The Edward and Norma Phillips Family Trust dated June 5, 1991 /s/ Edward Phillips ------------------------------- Edward Phillips, as trustee Page 73 of 77 EX-3 4 AMENDMENT #1 TO STOCKHOLDERS AGREEMENT EXHIBIT 3 AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT, dated as of April 5, 1996 (this "Amendment") to that certain Stockholders Agreement dated as of July 27, 1995 --------- (the "Stockholders Agreement"), among MATTHEWS STUDIO EQUIPMENT GROUP (the ---------------------- "Company"), ING EQUITY PARTNERS, L.P.I ("ING"), and the Management Stockholders ------- --- is made by and among the Company, ING and the Management Stockholders. Capitalized terms used herein, except as otherwise defined herein, shall have the meanings given to such terms in the Stockholders Agreement. WHEREAS, the Common Stock of the Company is listed on the National Association of Securities Dealer, Inc. ("NASD") inter-dealer quotation system and is designated as a National Market System security; and WHEREAS, the NASD has required that the Company amend the terms of the Warrant to modify the anti-dilution rights of the holders of the Warrant and amend the terms of the Preferred Stock, to modify the powers, rights, privileges and preferences of the Preferred Stock; and WHEREAS, the Company, the Management Stockholders and ING mutually desire to maintain the listing of the Company's Common Stock with the NASD and the designation of the same as a National Market System security and in connection with the amendment of the Warrant, the terms of the Preferred Stock and related documents in order for the Company to accommodate the actions required by the NASD, and ING wishes to amend the Stockholders Agreement and the Company and the Management Stockholders are willing to enter into this Amendment to provide such accommodation; NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, and other good and valuable consideration, the value and sufficiency of which is hereby acknowledged the parties hereto agree as follows: 1. Amendments to Stockholders Agreement. The Stockholders Agreement is ------------------------------------ hereby amended as of date hereof to amend and revise Section 6.1(a) to read in its entirety as follows: Section 6.1. Certain Terminations. (a) The provisions of -------------------- Articles III, IV (other than in Section 4.4) and V shall terminate on the date on which any of the following events first occurs: (i) a Qualifying Offering, (ii) a merger or consolidation of the Company with or into another Page 74 of 77 Person that is not an Affiliate of the Company, as a result of which the Stockholders own less than 51% of the outstanding shares of Voting Stock of the surviving or resulting corporation, or (iii) ten years from the date of this Agreement. 2. No Implied Amendments. Except as herein amended, the Stockholders --------------------- Agreement shall remain in full force and effect and is ratified in all respects. On and after the effectiveness of this Amendment, each reference in the Stockholders Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference to the Stockholders Agreement in any other agreements, documents or instruments executed and delivered in connection with the Stockholders Agreement, shall mean and be a reference to the Stockholders Agreement, as amended by this Amendment. 3. Effective Time. This Amendment shall become effective upon compliance -------------- with each of the conditions set forth in Section 4 of Amendment No.1 to Purchase Agreement of even date herewith between the Company and ING. 4. Counterparts. This Amendment may be executed by the parties hereto in ------------ several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Page 75 of 77 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. MATTHEWS STUDIO EQUIPMENT GROUP By: /s/ Carlos D. De Mattos -------------------------------- Carlos D. De Mattos Chairman & Chief Executive Officer STOCKHOLDERS: ING EQUITY PARTNERS, L.P. I By: LEXINGTON PARTNERS, L.P. its general partner By: LEXINGTON PARTNERS, INC. its general partner By:/s/ Benjamin P. Giess --------------------------------- Benjamin P. Giess Vice President /s/ Carlos D. De Mattos ---------------------------------------- Carlos D. De Mattos /s/ Edward Phillips ---------------------------------------- Edward Phillips Page 76 of 77 C&E DM Limited Partnership By: /s/ Carlos De Mattos ------------------------------------- Carlos De Mattos, Its General Partner C&E DM, LLC By: /s/ Carlos De Mattos ------------------------------------- Carlos De Mattos, Its Manager The Carlos and Elena De Mattos Family Trust dated February 12, 1991 /s/ Carlos De Mattos ---------------------------------------- Carlos De Mattos, Trustee The Edward and Norma Phillips Family Trust dated June 5, 1991 /s/ Edward Phillips ----------------------------------------- Edward Phillips, as trustee Page 77 of 77 -----END PRIVACY-ENHANCED MESSAGE-----