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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998.
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from: to: .
COMMISSION FILE NUMBER 0-22534-LA
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MONTEREY PASTA COMPANY
DELAWARE 77-0227341
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1528 MOFFETT STREET
SALINAS, CALIFORNIA 93905
(Address of principal executive offices)
TELEPHONE: (831) 753-6262
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
At November 4, 1998, 12,842,613 shares of common stock, $.001 par value, of
the registrant were outstanding.
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<PAGE>
MONTEREY PASTA COMPANY
FORM 10-Q
Table of Contents
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) September 27, 1998
and December 28, 1997
Condensed Consolidated Statements of Operations (unaudited)
Third quarter ended September 27, 1998 and September 28, 1997
and the nine months ended September 27, 1998 and
September 28, 1997
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 27, 1998 and September 28, 1997
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
Exhibit Index
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $248,264 $410,228
Accounts receivable, net........................ 2,438,569 2,440,745
Inventories .................................... 1,293,589 1,218,546
Prepaid expense and other ...................... 1,233,096 1,519,801
------------ ------------
Total current assets.......................... 5,213,518 5,589,320
Property and equipment, net ...................... 5,354,700 5,057,846
Intangible and other assets, net.................. 184,892 101,582
Deposits and other................................ 107,893 280,245
------------ ------------
Total assets.................................. $10,861,003 $11,028,993
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................................. $ -- $5,692
Accounts payable................................ 1,676,398 949,036
Accrued liabilities ............................ 570,584 917,132
Current portion of long-term debt.............. 1,687,448 1,273,216
------------ ------------
Total current liabilities..................... 3,934,430 3,145,076
Long-term debt.................................... 817,541 523,701
Commitments and contingencies
Stockholders' equity:
Common stock.................................... 39,389,655 42,640,107
Stockholder note receivable..................... -- (562,500)
Accumulated deficit............................. (33,280,623) (34,717,391)
------------ ------------
Total stockholders' equity.................... 6,109,032 7,360,216
------------ ------------
Total liabilities and stockholders' equity.... $10,861,003 $11,028,993
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
-------------------------- --------------------------
Sept 27, September 28, Sept 27, September 28,
1998 1997 1998 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net revenues from continuing
operations.......................... $6,705,847 $5,199,556 $18,996,237 $17,287,689
Cost of sales......................... 3,968,052 3,247,171 11,301,928 10,075,625
------------ ------------- ------------ -------------
Gross profit.......................... 2,737,795 1,952,385 7,694,309 7,212,064
Selling, general and administrative
expenses............................ 2,077,610 1,603,049 6,029,186 6,640,576
------------ ------------- ------------ -------------
Operating income ..................... 660,185 349,336 1,665,123 571,488
Loss on disposition of property and
equipment........................... (18,868) -- (26,387) (259,480)
Other income, (net)................... 2,055 106 13,977 106
Interest expense, (net)............... (69,934) (65,855) (194,217) (177,224)
------------ ------------- ------------ -------------
Income from continuing
operations before provision for
income taxes........................ 573,438 283,587 1,458,496 134,890
Provision for income taxes............ (3,961) (8,924) (21,729) (23,906)
------------ ------------- ------------ -------------
Net income from continuing
operations.......................... 569,477 274,663 1,436,767 110,984
Net recovery from
discontinued operations -- -- -- 36,882
------------ ------------- ------------ -------------
Net income $569,477 $274,663 $1,436,767 $147,866
Net income (loss) per common share
and common equivalent share:
Net income from continuing
operations.......................... $569,477 $274,663 $1,436,767 $110,984
Dividends to preferred and certain
common stockholders................. -- (100,467) -- (259,564)
------------ ------------- ------------ -------------
Net income (loss) from continuing
operations attributable to common
stockholders........................ $569,477 $174,196 $1,436,767 ($148,580)
============ ============= ============ =============
Basic and diluted income
(loss) per share:
Continuing operations............... $0.05 $0.02 $0.11 ($0.01)
Discontinued operations............. -- 0.00 -- 0.00
------------ ------------- ------------ -------------
Net income(loss)per common share.... $0.05 $0.02 $0.11 ($0.01)
============ ============= ============ =============
Weighted average common and common
equivalent shares outstanding....... 12,542,296 10,879,140 13,124,536 10,154,644
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sept. 27, Sept. 28,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations............... $1,436,767 $110,983
Adjustments to reconcile net income from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization..................... 741,567 706,720
Provisions for allowances for bad debts,
returns, adjustments and spoils................. (40,102) (439,507)
Loss on disposition and writedown of
property and equipment.......................... 26,387 259,480
Expenses paid in common stock options............. 51,000 28,243
Changes in assets and liabilities:
Accounts receivable............................. 42,278 465,801
Inventories..................................... (75,043) 375,590
Prepaid expenses and other...................... 298,357 (1,186,908)
Accounts payable................................ 727,362 (912,912)
Accrued expenses................................ (346,548) (767,269)
------------ ------------
Net cash provided by (used in)
continuing operations........................ 2,862,025 (1,359,779)
Net cash used in discontinued operations.......... -- (125,847)
------------ ------------
Net cash provided by (used in)
operating activities.......................... 2,862,025 (1,485,626)
------------ ------------
Cash flows from (used in) investing activities:
Proceeds from sale of assets...................... 5,293 159,504
Purchase of intangibles and other assets.......... (109,599) --
Repurchase of common stock........................ (2,740,563) --
Purchase of property and equipment................ (883,112) (272,273)
------------ ------------
Net cash (used in)
investing activities.......................... (3,727,981) (112,769)
------------ ------------
Cash flows from (used in) financing activities:
Bank overdrafts................................... (5,692) (669,002)
Proceeds from revolving line of credit............ 4,496,707 14,628,913
Repayments on revolving line of credit............ (5,015,951) (13,876,877)
Proceeds from long-term debt and capital
lease obligations................................ 2,503,265 --
Repayment of long-term debt and capital
lease obligations................................ (1,275,949) (443,659)
Proceeds from issuance of common stock........ 1,612 1,931,565
Dividends to preferred and certain
common stockholders.............................. -- (102,142)
------------ ------------
Net cash provided by financing activities....... 703,992 1,468,798
------------ ------------
Net (decrease) in cash.............................. (161,964) (129,597)
Cash and cash equivalents at beginning of period.... 410,228 724,729
------------ ------------
Cash and cash equivalents at end of period.......... $248,264 $595,132
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements have been
prepared by Monterey Pasta Company (the "Company") and are
unaudited. Certain amounts shown in the 1997 financial statements
have been reclassified to conform with the current presentation. The
financial statements have been prepared in accordance with the
instructions for Form 10-Q and, therefore, do not necessarily include all
information and footnotes required by generally accepted accounting
principles and should be read in conjunction with the Company's 1997
Annual Report on Form 10-K. In the opinion of the Company, all
adjustments necessary to present fairly the Company's consolidated
financial position, results of operations and cash flows as of September
27, 1998, and for all periods presented, have been recorded. A
description of the Company's accounting policies and other financial
information is included in the audited consolidated financial statements
as filed with the Securities and Exchange Commission in the Company's
Form 10-K for the year ended December 28, 1997. The consolidated
results of operations for the interim quarterly periods are not necessarily
indicative of the results expected for the full year.
2. Statement of Cash Flows
Non-Cash Investing and Financing Activities:
In April 1997, the Company's then current Chief Executive
Officer agreed to purchase 550,000 shares of Common Stock based on
an agreement containing various time-served and performance
conditions with a full recourse note due December 31, 1997. A
portion of the shares were repurchasable by the Company at the
original price of $1.88 if the conditions were not met and, therefore,
250,000 shares were forfeited during 1997. On December 31, 1997,
the note in the amount of $562,500 was converted to non-interest
bearing and non-recourse, and was extended for two years with an
expiration of December 31, 1999. The shares were reclassified as
options and the $51,000 calculated as the fair market value under the
Black-Scholes method was recorded as an expense during the first
quarter of 1998 (see Note 8).
3. New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 132,
Employers' Disclosures about Postretirement Benefits. SFAS No. 132
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when previous
related accounting standards were issued.
SFAS 132 is effective for financial statements for years beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated unless the information is not readily
available, in which case the notes to the financial statements should
include all available information and a description of the information not
available. Management has not yet determined whether the Company's
current financial statement disclosures will need to be modified based
upon current operations. Results of operations and financial position
will be unaffected by implementation of this standard.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Production--Ingredients.................. $491,905 $602,428
Production--Finished goods............... 571,635 382,736
Paper goods and packaging materials...... 285,049 288,382
------------ ------------
1,348,589 1,273,546
Allowances for spoils and obsolescence... (55,000) (55,000)
------------ ------------
$1,293,589 $1,218,546
============ ============
</TABLE>
5. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Machinery and equipment.................... $4,931,042 $4,459,088
Leasehold improvements..................... 1,851,544 1,809,946
Computers, office furniture and equipment.. 757,864 743,747
Vehicles................................... 310,942 233,942
------------ ------------
7,851,392 7,246,723
Less accumulated depreciation and
amortization............................. (2,942,444) (2,252,842)
------------ ------------
4,908,948 4,993,881
Construction in progress................... 445,752 63,965
------------ ------------
$5,354,700 $5,057,846
============ ============
</TABLE>
6. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of debt included the following:
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Credit Facility:
Receivable and inventory revolver........ $433,650 $952,894
Equipment revolver....................... 316,666 --
Equipment term loan...................... 1,500,000 636,371
Capitalized leases ........................ 254,673 207,652
------------ ------------
2,504,989 1,796,917
Less current maturities.................. 1,687,448 1,273,216
------------ ------------
$817,541 $523,701
============ ============
</TABLE>
Credit Facility
The Company has in place the following credit facility through
7/22/99:
o Accounts receivable and inventory revolver for up to $1,500,000 with
interest at prime (8.50% at 9/27/98)
o Equipment revolver for up to $500,000 with interest at prime plus .75%
(9.25% at 9/27/98), payable at $13,889 monthly, plus interest
o Term note for up to $2,000,000 plus interest at prime plus .75% (9.25%
at 9/27/98) payable at $83,333 monthly, plus interest
The equipment revolver is amortized as a long term loan in the
accompanying balance sheets.
As of November 3, 1998 the total amount utilized under the
facility was $2,466,432 and the total available for future borrowing
was $1,533,568.
7. Income Taxes
Federal and State of California income taxes for the nine
months ended September 27, 1998, were fully offset by net operating
loss carryforwards. The tax expense listed on the Statements of
Operations for 1997 and 1998 comparable periods is for certain other
State taxes.
8. Stockholders' Equity
Common Stock
As disclosed in Company's 1997 Form 10-K, on March 5,
1998, the Company repurchased 2,365,066 shares of its common
stock from its largest stockholder, Clearwater Fund IV LLC
(formerly Clearwater Fund IV, Ltd.) for a per share price of $1.1375
and a total consideration of $2,690,000. The repurchase was in
response to a notification on February 13, 1998 by the NASDAQ
Stock Market, Inc. ("NASDAQ") that the Company's Series A
convertible Preferred stock offering, as amended by the Series A-1
Agreement in March of 1997 had violated Rule 4460(i)(l)9D)(ii)
which requires shareholder approval prior to the issuance of securities
convertible into common stock equal to, or in excess of, 20% of
outstanding shares at the time of issuance. The NASDAQ required
the Company to repurchase the shares, or face delisting from the
National NASDAQ market.
In April 1997, the Company's then current Chief Executive
Officer agreed to purchase 550,000 shares of common stock based on an
agreement containing various time-served and performance restrictions
with a full recourse note due December 31, 1997. Certain of the
performance restrictions were not met and 250,000 shares were
forfeited during 1997, leaving 300,000 shares outstanding at December
28, 1997. The note, with a remaining balance of $562,500, was
converted to a non-interest bearing non-recourse status effective
December 31, 1997 with an expiration date of December 31, 1999.
Because the new note is non-recourse, the shares and related note are
treated for accounting purposes as canceled and replaced with options.
The $51,000 fair value of the resulting option grant was recorded as an
expense during the first quarter of 1998.
9. Litigation and Contingencies
There are no material pending legal proceedings, other than routine
litigation incidental to the Company's business, to which the Company
is a party or to which any of its property is subject. The Company's
former restaurant subsidiary, UFO, has been a defendant in several
lawsuits alleging breach of lease relating to restaurants closed in 1995
and 1996, and other vendor related cases. The Company sold UFO in
1996 and contractually UFO continues to have sole responsibility for
such litigation. Although there can be no assurance given as to the
results of such legal proceedings, based upon information currently
available, management does not believe these proceedings will have a
material adverse effect on the financial position or results of operations
of the Company.
On August 5, 1997, Lance Mortensen, former President, Chief
Executive Officer and director of the Company, filed a complaint
against the Company for breach of implied covenant of good faith and
fair dealing relating to a written employment contract. The lawsuit was
settled during May of 1998 through binding arbitration with no current
profit or loss impact.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The following discussion should be read in conjunction with
the financial statements and related notes and other information
included in this report. The financial results reported herein do not
indicate the financial results that may be achieved by the Company in
any future period.
Other than the historical facts contained herein, this
Quarterly Report contains forward-looking statements that involve
substantial risks and uncertainties. For a discussion of such risks and
uncertainties, please see the Company's Annual Report on Form 10-K
for the year ended December 28, 1997. In addition to the risks and
uncertainties discussed in the Annual Report, the risks set forth
herein, including the Company's past operating losses and ability to
retain qualified management, should be considered.
Background
Monterey Pasta Company was incorporated in June 1989 as a
producer of refrigerated gourmet pasta and sauces to restaurants and
grocery stores in the Monterey, California area. The Company has
since expanded its operations to provide its products to grocery and
club stores throughout the United States. The Company's overall
strategic plan is to enhance the value of the Monterey Pasta Company
brand name by distributing its gourmet pasta products through
multiple points of distribution.
The Company sells its pasta and pasta sauces through leading
grocery store chains and club stores. As of September 27, 1998,
more than 3,400 grocery and club stores offered the Company's
products. The Company plans to continue expansion of its
distribution to grocery and club stores in its current market area and
to further its penetration in other geographic regions of the U.S.
Monterey Pasta's objective is to become the leading national
supplier of refrigerated gourmet pasta and pasta sauces through
distribution of its products to grocery and club stores. The key
elements of the Company's strategy include the following:
Create brand awareness by communicating to the
consumer that Monterey Pasta Company provides a
healthful and nutritious line of products and to promote
repeat business by reinforcing positive experiences with
the Company's products.
Introduce new products on a timely basis to maintain
customer interest and to respond to changing consumer
tastes. In order to maximize its margins, the Company
will focus its efforts on those new products that can be
manufactured and distributed out of its Salinas,
California facility and will supplement its existing line of
cut pasta, ravioli, tortelloni, tortellini, and sauces.
Reduce operating costs through continual evaluation of
administrative and production staffing and procedures.
The Company will consider additional capital
improvements at its manufacturing facility in order to
increase production efficiencies and capacities, and to
reduce the Company's cost of goods.
Expand market share through same-store revenue
growth, addition of new grocery and club store chains,
geographic diversification, and product line expansion,
including creation of additional meal occasions using
Monterey Pasta products.
Consider the acquisition of other compatible companies
to expand retail distribution, or the range of product
offerings, or to accomplish other synergies where the
acquisition will create long term stockholder value.
The Company will continue to direct its advertising and
promotional activities to specific programs customized to suit its retail
grocery and club store accounts. These will include in-store
demonstrations, coupons, scan backs, cross-couponing and other
related activities. There can be no assurance that the Company will be
able to increase its net revenues from grocery and club stores.
Because the Company will continue to make expenditures associated
with the expansion of its business, the Company's results of
operations may be affected.
The success of the Company's efforts will depend on three
key factors: (1) whether grocery and club store chains will continue to
increase the number of their stores offering the Company's products,
(2) whether the Company can continue to increase the number of
grocery and club store chains offering its products, and (3) continued
introduction of new products that meet consumer acceptance.
Grocery and club store chains continually re-evaluate the products
carried in their stores, and no assurances can be given that the chains
currently offering the Company's products will continue to do so in
the future or that such chains will not reduce the number of stores
carrying the Company's products.
Results of Operations
Net revenues from continuing operations were
$6,706,000 for the third quarter ended September 27, 1998, as
compared to $5,200,000 for the third quarter ended September 28,
1997, an increase of 29%. For the nine months ended September 27,
1998, net revenues increased $1,708,000 or 10% to $18,996,000 from
$17,288,000 for the nine months ended September 28, 1997. The
increase in sales over last year results primarily from the Company's
increased distribution with the Sam's Club Stores and Costco chains,
offsetting a decline in some retail chain sales which were discontinued
because of low profitability.
Gross profit was $2,738,000 or 41% of net revenues for the
third quarter of 1998, compared to $1,952,000 or 38% for the third
quarter of 1997. For the nine months ended September 27, 1998,
gross profit was $7,694,000 or 41% compared to $7,212,000 or 42%
for the nine months ended September 28, 1997. The 1998 year-to-
date gross profit compares to a 41% gross profit for the year ended
December 28, 1997. Gross margins for the first nine months of 1998
were impacted by the intense new product development discussed in
the "Sales and Marketing" section which follows.
Selling, general and administrative expenses ("SG&A") for
the third quarter ended September 27, 1998, were $2,078,000, an
increase of 30% or $475,000 when compared to $1,603,000 in the
third quarter of 1997. For the nine months ended September 27,
1998, SG&A decreased $612,000 or 9% to $6,029,000 from
$6,641,000 for the same period in 1997. The most significant
expense increases in the third quarter of 1998 compared to the third
quarter of 1997 were in the Sales and Marketing area which showed
an increase of $556,000 overall and were associated with the 29%
increase in sales, and costs related to the acquisition of new customers
and stores compared to 1997. The third quarter sales and marketing
expense increase was partially offset by reductions in legal and
accounting expenses. The most significant year-to-date reductions
from 1997 are in the professional fee and insurance expense areas
($759,000), partially offset by increased expenses in the sales and
marketing area related to new customers and stores. Management
believes the current level of SG&A expenses is consistent with
efficient operations, and additional expenses in future months, mainly
in the sales and marketing area, will be directly associated with
increased levels of sales.
Depreciation and amortization expense, included in cost of
sales and SG&A, was $254,000 or 4% of net revenues for the quarter
ended September 27, 1998, compared to $221,000 or 4% of net
revenues for the quarter ended September 28, 1997. For the nine
months ended September 27, 1998, depreciation and amortization
expense was $742,000 or 4% of net revenues, compared to $707,000
for the same period last year (4% of net revenues).
There was a loss on disposition of fixed assets for the third
quarter ended September 28, 1997 of $19,000 compared with no gain
or loss for the third quarter last year. For the nine months ended
September 27, 1998, loss on disposition of fixed assets was $26,000
compared to $259,000 for the nine months ended September 28,
1997.
Net interest expense was $70,000 for the quarter ended
September 28, 1997, compared to net interest expense of $66,000 for
the same quarter in 1997. For the nine months ended September 27,
1998, net interest expense was $194,000 compared to $177,000 for
the nine months ended September 28, 1997. The net increase in year-
to-date interest expense is a result of increased borrowing related to
the repurchase of 2.36 million shares of common stock from the
Company's largest stockholder, Clearwater Fund IV LLC, at a cost of
$2.7 million, most of which was borrowed from Imperial Bank, the
Company's lender.
Liquidity and Capital Resources
During the nine month period ended September 27, 1998,
$2,862,000 of cash was provided by the Company's continuing
operations, compared to a usage of $1,360,000 in the first nine
months of 1997. The 1998 improvement was primarily related to a
continuing operations profit of $1,437,000 in first nine months of
1998, compared with a profit of $111,000 in first nine months 1997,
and a reduction of prepaid expenses, combined with an increase in
accounts payable relative to year end 1997.
The Company believes that its existing credit facilities, together with
cash flow from operations, will be sufficient to meet its cash needs for
normal operations for the next twelve months.
Sales and Marketing
The Company's sales and marketing strategy targets
sustainable growth. Its focus is on increasing sales through expansion
of its club store and retail grocery business, increasing its distribution
through the rapidly growing number of natural and organic food
retailers, and the introduction of innovative new products designed to
meet consumer needs.
As of September 27, 1998 the Company distributed its
products to a total of 2,900 retail and 508 club store outlets as
compared to 2,620 retail and 230 club store outlets as of September
28, 1997. The Company enhanced its strong, ongoing relationship
with Costco in the third quarter of 1998, adding its products to
Costco's new Midwestern Division warehouses in the Detroit market.
In the retail sector, the Company expanded its operations significantly
with the addition of over 200 stores of Safeway's Seattle and Portland
divisions, as well as by adding 20 stores of Chicago-based Jewel Food
Stores.
Monterey Pasta's products are made with no preservatives or
artificial ingredients. Capitalizing on this strength, the Company is
pursuing increased distribution through natural and organic food
retailers, whose growth has exceeded 20% annually in recent years.
The Company estimates there are 450 potential natural and organic
retail grocery locations in this market that could be potential
customers for the Company's products.
In the third quarter of 1998 the Company began rollout of its
new "Restaurant Style" line of pastas and sauces which feature the
largest ravioli available to the grocery consumer. The uniqueness of
these new, larger products has generated a significant amount of
interest from both retail and club store accounts, and early acceptance
of the product by key accounts has been encouraging.
The Company also began rollout of its new line of Gourmet
Meat Sauces late in the third quarter to capitalize on a trend which
shows meat sauces to be one of the highest growth areas of the
prepared sauce category. The product line is the first refrigerated,
fresh line of meat sauces available to the consumer. As is the case
with the Company's Restaurant Style pastas and sauces, initial
response to the Gourmet Meat Sauce line has been positive.
Business Risks
Certain characteristics and dynamics of the Company's
business and of financial markets generally create risks to the
Company's long-term success and to predictable quarterly results.
These risks include:
Recent Operating Losses: No Assurance of Continued
Profitability. In the second quarter of 1994, the Company
reported its first operating loss from continuing operations.
Subsequent to that quarter the Company incurred losses through
the first quarter of 1997, after which it regained profitability,
which has continued for six consecutive quarters. At September
27, 1998, the Company had an accumulated deficit of
$33,281,000. There can be no assurance that the Company will
maintain its recent profitability in the long term.
Dependence on Major Customers-Need to Diversify Distribution.
During the first nine months of 1998, two customers accounted
for 45%, and 33%, respectively, of the Company's total
revenues. Loss of either of these customers, Costco or Sam's
Club Stores, would have a material adverse effect on the
Company. The Company is seeking to diversify its distribution
channels by adding additional grocery and club store chains as
customers. Failure to diversify its customer base could have a
material adverse effect on the Company's future growth and
profitability.
Liquidity: Need for Additional Capital. Management believes
that its operations and existing bank lines of credit will provide
adequate liquidity to meet the Company's planned capital and
operating requirements through the third quarter of 1999. If the
Company's operations do not provide cash sufficient to fund its
operations, and the Company seeks outside financing, there can
be no assurance that the Company will be able to obtain such
financing when needed, on acceptable terms, or at all. In
addition, any future equity financing or convertible debt financing
would cause the Company's stockholders to incur dilution in net
tangible book value per share of Common Stock.
Hiring and Retention of Key Personnel: Management Transition.
The success of the Company depends on its ability to operate
under new management that was retained in mid-1997, and to
motivate and retain key employees and officers. There can be no
assurance that the Company's new management team will be able
to perform effectively, or that significant management turnover
will not continue in the future. The Company has key man
insurance policies in place in the face amount of $500,000 for
both its Chief Executive Officer, R. Lance Hewitt, and its Chief
Financial Officer, Stephen L. Brinkman.
Impact of Inflation. The Company believes that inflation has not
had a material impact on its operations to date. Substantial
increases in labor, employee benefits, freight, energy, ingredients
and packaging, rents and other operating expenses could
adversely affect the operations of the Company's business in
future periods. The Company cannot predict whether such
increases will occur in the future.
Volatility of Stock Price. The market price of the Company's
common stock has fluctuated substantially since the initial public
offering of the common stock in December 1993. Such volatility
may, in part, be attributable to the Company's operating results
or to changes in the direction of the Company's expansion efforts.
Changes in general conditions in the economy, the financial
markets or the food industry, natural disasters or other
developments affecting the Company or its competitors could also
cause the market price of the Company's common stock to
fluctuate substantially. In addition, in recent years, the stock
market has experienced extreme price and volume fluctuations.
This volatility has had a significant effect on the market prices of
securities issued by many companies, including the Company, for
reasons sometimes unrelated to the operating performance of
these companies. Any shortfall in the Company's net sales or
earnings from levels expected by securities analysts or the market
could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given
period. Additionally, the Company may not learn of such
shortfalls until late in the fiscal quarter, which could result in an
even more immediate and significant adverse effect on the trading
price of the Company's common stock.
Risks Inherent in Food Production. The Company faces all of the
risks inherent in the production and distribution of refrigerated
food products, including contamination, adulteration and spoilage,
and the associated risks of product liability litigation and declines
in the price of its stock which may be associated with even an
isolated event. The Company has a modern production facility,
employs what it believes is state-of-the-art thermal processing,
temperature-controlled storage, HAACP programs intended to
insure food safety, and has obtained USDA approval for its
production plant. However, there can be no assurance that the
Company's procedures will be adequate to prevent the occurrence
of such events.
Seasonality and Quarterly Results. The Company's grocery and
club store accounts are expected to experience seasonal
fluctuations to some extent. The Company's business in general
may also be affected by a variety of other factors, including but
not limited to general economic trends, competition, marketing
programs, and special or unusual events.
Competition. The Company's business continues to be dominated
by several very large competitors which have significantly greater
resources than the Company; such competitors can outspend the
Company and negatively affect the Company's market share and
results of operations.
Dependence on Common Carriers. The Company continues to be
dependent on common carriers to distribute its products. Any
disruption in its distribution system or increase in the costs
thereof could have a material adverse impact on the Company's
business.
Marketing and Sales Risks. The future success of the Company's
efforts will depend on a number of factors, including whether
grocery and club store chains will continue to expand the number
of their individual stores offering the Company's products and
whether allowances and other incentives will expand retail
distribution. Expansion into new markets increases the risk of
significant product returns resulting from the Company's supply
of slower selling items to its customers. In addition, grocery and
club store chains continually re-evaluate the products carried in
their stores and no assurance can be given that the chains
currently offering the Company's products will continue to do so
in the future. Should these channels choose to reduce or
eliminate products, the Company could experience a significant
reduction in its product sales. As indicated previously, the
Company remains dependent on the use of slotting allowances and
other incentives to expand retail distribution. In order to reduce
risk and maintain profitability, the Company has avoided
expansion into new chains requiring such major expenditures.
Year 2000. Many computer systems were written using two
digits rather than four to define the applicable year. As a result,
those computer programs have time sensitive software that
recognizes a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company utilizes software vendors for its major computer
program applications. The installation of a year 2000 compliant
version of the Company's financial, inventory, and production
software is scheduled to be complete before fiscal year end 1998.
The Company has also completed an assessment of its internal
personal computer network, which is expected to be year 2000
compliant by the end of January 1999. Updating telephones,
facsimile machines and labeling equipment for year 2000 is
scheduled to be complete by mid-1999.
The Company does not believe that the cost of becoming year
2000 compliant will be in excess of $60,000. To date the
Company has incurred minor expenses, primarily for assessment
of the year 2000 issue, development of a modification plan, and
preparation for the installation of a year 2000 compliant version if
its financial, inventory, and production software.
The cost of the project and the dates on which the Company
believes it will complete the year 2000 modifications are based on
management's best estimates. However, there can be no
guarantee that these estimates will be achieved. Failure to be
year 2000 compliant in a timely fashion could have a material
adverse effect on the Company's operations and financial
condition.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual Stockholders' meeting was
held July 21, 1998.
(b) At the annual meeting the following matters were
approved:
(i) the election of the following seven directors to
hold office for the ensuing year and until their
successors are elected and qualified.
Votes For Votes Against Abstaining and
or withheld Broker non-votes
R. Lance Hewitt 9,202,524 -0- 100,835
Charles B. Bonner 9,202,294 -0- 101,065
Daniel J. Gallery 9,202,294 -0- 101,065
Floyd R. Hill 9,129,881 -0- 173,478
Thomas E. Kees 9,202,524 -0- 100,835
Van Tunstall 9,202,524 -0- 100,835
James Wong 9,202,524 -0- 100,835
(ii) the appointment of BDO Seidman, LLP as the independent
public accountants for the year ending December 27, 1998
was approved with 9,246,072 votes in favor, 38,425 votes
against or withheld, and 18,862 votes abstaining or
broker non-votes.
Item 5. Other Information
In February 1998, the Company entered into an agreement to
sublease a portion of the Company's Salinas facility (4,649 sq. ft.)
until August 1998. This sublease was extended to October 5, 1998 at
which time the existing tenant vacated its space. Also in February
1998 the Company acquired the right to lease the remainder of the
building's 1,365 square feet of office space occupied by another
tenant. In June 1998 the Company entered into a sublease with that
tenant which expired in August 1998. That tenant has also vacated the
premises. By the end of 1998 the Company plans to occupy the
entire building, encompassing 43,680 square feet, as part of its plant
capacity expansion.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits listed in the accompanying index to
Form 10-Q Exhibits are filed or incorporated by reference as
part of this report.
(b) Reports on Form 8-K. No reports on Form 8-K were
filed during the quarter ended September 27, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY PASTA COMPANY
Date: November 4, 1998 By: /s/ R. LANCE HEWITT
-----------------------------------------
R. Lance Hewitt
President and Chief Executive Officer
By: /s/ STEPHEN L. BRINKMAN
-----------------------------------------
Stephen L. Brinkman
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Number Exhibit Title
3.1
Certificate of Incorporation dated August 1, 1996
(incorporated by reference from Exhibit B to the
Company's 1996 Proxy)
3.2
Bylaws of the Company (incorporated by reference from
Exhibit C to the 1996 Proxy)
4.1
Form of Warrant for purchase of the Company's Common
Stock, dated as of July 1, 1996 (incorporated by
reference from Exhibit 4.5 filed with the Company's
1996 Form S-3)
4.2
Form of Registration Rights Agreement dated April 1996,
among the Company, Spelman & Co., Inc. and
investor (incorporated by reference from Exhibit 10.42
filed with the Company's Original March 31, 1996
Quarterly Report on Form 10-Q on May 1, 1996
("1996 Q-1 10-Q"))
4.3
Stockholder Rights Agreement dated as of May 15, 1996
between the Company and Corporate Stock Transfer,
as rights agent (incorporated by reference from Item 2
of Form 8-A filed with the Securities and Exchange
Commission on May 28, 1996)
4.4
Amendment to Registration Rights Agreement dated as of
April 20, 1997 among the Company, Spelman & Co.,
Inc. and investor, amending the Registration Rights
Agreement entered into as of April 1996 (incorporated
by reference from Exhibit 4.9 filed with the
Company's 1996 Form 10-K/A)
4.5
Registration Rights Agreement dated as of December 31,
1996 among the Company, Sentra Securities
Corporation and Investor (incorporated by reference
from Exhibit 4.12 filed with the Company's 1996
Form 10-K/A)
4.6
Form of Warrant ("Sentra Warrant") for purchase of
Company's Common Stock dated March 1997 issued
in connection with the Company's March 1997 Private
Placement (incorporated by reference from Exhibit
4.13 filed with the Company's Pre-Effective
Amendment No. 1 to the Registration Statement on
Form S-3 filed on May 6, 1997 ("1997 Amendment
No. 1 to Form S-3))
4.7*
Stock Purchase Agreement between the Company and
Kenneth A. Steel, Jr. dated April 29, 1997
(incorporated by reference from Exhibit 4.14 filed
with the 1997 Amendment No.1 to Form S-3)
10.1*
Second Amended and Restated 1993 Stock Option Plan (as
amended on August 1, 1996) (incorporated by
reference to Exhibit 10.1 filed with the Company's
1996 Form 10-K)
10.2*
1995 Employee Stock Purchase Plan (incorporated by
reference from Exhibit 10.15 to the Company's 1994
Form 10-K)
10.3
Monterey County Production Facility Lease of the
Company, as amended (incorporated by reference
from Exhibit 10.03 to the SB-2)
10.4
Amendment No. 1 dated February 1, 1995 and Amendment
No. 2 dated March 1, 1995 to Monterey County
Production Facility Lease of the Company
(incorporated by reference from Exhibit 10.6 filed
with the 1995 Form 10-K)
10.5
Amendment No. 3 dated September 12, 1997, and
Amendment No. 4 dated February 6, 1998 to
Monterey County Production Facility Lease of the
Company
10.6
Trademark Registration -- MONTEREY PASTA
COMPANY, under Registration No. 1,664,278,
registered on November 12, 1991 with the U.S. Patent
and trademark Office (incorporated by reference from
Exhibit 10.09 to the SB-2)
10.7
Trademark Registration -- MONTEREY PASTA
COMPANY, under Registration No. 1,943,602,
registered on December 26, 1995 with the U.S. Patent
and trademark Office (incorporated by reference from
Exhibit 10.24 to the 1995 Form 10-K)
10.8
Trademark Registration -- MONTEREY PASTA
COMPANY and Design, under Registration No.
1,945,131, registered on January 2, 1996 with the
U.S. Patent and trademark Office (incorporated by
reference from Exhibit 10.25 to the 1995 Form 10-K)
10.9
Trademark Registration-- MONTEREY PASTA
COMPANY and Design, under Registration No.
1,951,624, registered on January 23, 1996 with the
U.S. Patent and Trademark Office (incorporated by
reference from Exhibit 10.26 to the 1995 Form 10-K)
10.10
Trademark Registration-- MONTEREY PASTA
COMPANY and Design, under Registration No.
1,953,489, registered on January 30, 1996 with the
U.S. Patent and Trademark Office (incorporated by
reference from Exhibit 10.27 to the 1995 Form 10-K)
10.11
Registration Rights Agreement dated as of June 15, 1995
with GFL Advantage Fund Limited, as amended on
October 13 and 19, 1995, respectively (incorporated
by reference from Exhibit 10.2 to the 1995 Q2 10-Q,
and Exhibits 10.6 and 10.7 to the Company's S-3
Registration Statement No. 33-96684, filed on
December 12, 1995 ("1995 S-3"))
10.12*
The Company's 401(k) Plan, established to be effective as
of January 1, 1996, adopted by the Board of
Directors on June 7, 1996 (incorporated by reference
from Exhibit 10.44 to the Company's Quarterly
Report on Form 10-Q on August 13, 1996 ("1996 Q-2
10-Q"))
10.13*
Directed Employee Benefit Trust Agreement dated June
17, 1996 between the Company and The Charles
Schwab Trust Company, as Trustee of the Company's
401(k) Plan (incorporated by reference from Exhibit
10.45 to the 1996 Q2 10-Q)
10.14
Security and Loan Agreement (Accounts Receivable
and/or Inventory) dated July 24, 1997 between the
Company and Imperial Bank (incorporated by
reference from Exhibit 10.47 of the Company's Pre-
Effective Amendment No. 3 to From S-3 filed on
October 14, 1997 ("1997 Amendment No. 3 to Form
S-3"))
10.15
Agreement Regarding Employment, Trade Secrets,
Inventions, and Competition dated May 26, 1997 with
Mr. R. Lance Hewitt (incorporated by reference from
Exhibit 10.48 of the 1997 Amendment No. 3 to Form S-3)
10.16
Employment Agreement dated August 25, 1997 with Mr.
Stephen L. Brinkman (incorporated by reference to
Exhibit 10.49, in the Company's September 28, 1997
Quarterly Report on Form 10-Q filed on November
10, 1998)
10.17
First Amendment to Security and Loan Agreement dated
July 24, 1997 between the Company and Imperial
Bank (incorporated by reference to Exhibit 10.50 in
the Company's 1997 Form 10-K)
10.18
Second Amendment to Security and Loan Agreement
dated July 24, 1997 between the Company and
Imperial Bank
10.19
Security and Loan Agreement dated July 23, 1998
between the Company and Imperial Bank
10.20
Addendum to Security and Loan Agreement dated July 23,
1998 between the Company and Imperial Bank
27.1
Financial Data schedule
* Management contract or compensatory plan or arrangement
covering executive officers or directors of Monterey Pasta Company
and its former subsidiary, Upscale Food Outlets, Inc.
<PAGE>
THIRD AMENDMENT TO LEASE
This THIRD AMENDMENT TO LEASE is made and
entered into this 12th day of September, 1997, by and between
KENNETH and PATTIE SLAMA, husband and wife, hereinafter
called "Lessor," and MONTEREY PASTA COMPANY, a Delaware
corporation, hereinafter called "Lessee."
WITNESSETH:
WHEREAS, Lessor and Lessee have entered into a written
lease dated October 3, 1994, regarding the property known as 1528
Moffett Street, Salinas, California, as amended by Amendment to
Lease date February 1, 1995 and Second Amendment to Lease dated
February 28, 1995, a copy of the Lease and Amendments (hereinafter
referred to as the "Lease") being attached hereto as Exhibit "A"; and
WHEREAS the parties desire to further amend the Lease in
certain other respects.
NOW, THEREFORE, for good and valuable consideration,
the receipt whereof is hereby acknowledged, the parties hereby amend
the Lease as follows.
1. The following shall be added to the end of
Paragraph 2.1 of the Lease:
"Effective February 6, 1998, Lessor shall lease to
Lessee an additional Four Thousand Six Hundred Forty-Nine
(4,649) square feet (which includes a lobby to be
maintained by Lessee) of space, all as more fully shown on
Exhibit 1 attached hereto and made a part hereof. After said
date, the term "Premises" shall hereinafter
refer to the premises currently leased by Lessee (being
37,666 square feet) along with the additional space
described herein (being 4,649 square feet) or a total of forty-
two thousand three hundred fifteen (42,315) square
feet. Regarding the square footage figure above, it is
understood that these figures are approximate only and there
will be no changes in this Lease if it is determined that the
actual square footage leased herein is more or less than
said figures. It is also understood that Lessor will provide
Lessee with twelve (12) parking spaces
for the additional space being leased hereunder."
2. The following shall be added to the end of
Paragraph 4.1 of the Lease:
"Effective February 6, 1998, the base rent shall
increase by the sum of Three Thousand Nine Hundred Fifty-One
Dollars and Sixty-Five Cents ($3,951.65) per month
for a total base rent of Nineteen Thousand Five Hundred Fifty
Dollars and Sixty-Four Cents ($19,550.64); provided,
however, that it is understood that the current rent paid by
Lessee shall be adjusted prior to February 6, 1998 and the
above rental amount will therefore be adjusted
accordingly."
3. The following shall be added to the end of
Paragraph 4.2 of the Lease:
"Notwithstanding anything to the contrary herein, it
is understood that effective February 6, 1998, Lessee shall
lease from Lessor the additional space referred to in
Paragraph 2.1 and this additional space is ten and nineteen
hundredths percent (10.19%) of the total space in
the Industrial Center (being 43,680 square feet). Thus, effective
February 6, 1998, Lessee's share as defined herein will be
ninety-six and eighty-eight hundredths percent
(96.88%).
It is understood that Lessee is currently paying
Lessor the sum of Two Thousand Three Hundred Dollars
($2,300.00) as the monthly operating expenses and
this monthly amount will now increase to Two Thousand Five
Hundred Fifty Dollars ($2,550.00) per month."
4. The following shall be added to the end of
Paragraph 5 of the Lease:
"Notwithstanding anything to the contrary herein, it
is understood that upon execution of this Third Amendment to
Lease, Lessee shall increase the deposit by an additional
Three Thousand Nine Hundred Fifty-One Dollars and
Sixty-Five Cents ($3951.65)."
5. The following shall be added as a new paragraph 55
of the Lease:
"55. Further Consideration For Additional Space.
As further consideration for Lessor leasing to Lessee the
additional space described in the amendment to Paragraph
2.1 of the Lease, Lessee shall pay to Lessor the sum
of Ten Thousand Dollars ($10,000.00) on execution of this
Third Amendment To Lease."
6. The following shall be added as a new paragraph 56
of the Lease:
"56. Conditions Regarding Additional Space.
A. Notwithstanding anything to the contrary herein,
it is understood that the additional space described in the
amendment to Paragraph 2.1 of the Lease is presently being
leased to Bob and Kelly Bradford ("Bradford") who
operate a public gymnasium on the premises and the lease for
Bradford expires on February 5, 1998. Lessor
cannot warrant that Bradford will vacate the premises on or
before said date but Lessor will use all due diligence
to have the additional space available to Lessee by February
6, 1998. In the event said space is not available until
a later date, it is understood that the amendments herein will
be modified so that the effective date is the date that
the additional space becomes available to the lessee.
B. In the event that Bradford desires to remain a
tenant of said premises after February 5, 1998, it is understood
that Lessee will permit Bradford an opportunity to
remain on the premises for a period not exceeding six (6)
months (or until August 5, 1998) on terms comparable to the
terms in the Lease for the additional space. In the
event that the above leasehold arrangement occurs, the
parties agree and understand that this Lease and the
amendments herein will apply and Lessee will be the lessee
and Bradford will be a sublessee of Lessee during the
period Bradford remains on the premises after February 5,
1998.
C. In the event Bradford (i) does not vacate the
premises on or before February 5, 1998; and (ii) does not finalize
a sublease arrangement with Lessee pursuant to B. above, it
is understood that Lessor, at Lessor's expense, shall
have the responsibility to evict Bradford from the premises."
7. The following shall be added as a new paragraph 57
of the Lease:
"57. Management Fee. Notwithstanding anything
to the contrary herein, it is understood that Lessee shall pay to
Lessor a management fee of three percent (3%) of
the rental paid by Lessee hereunder, payable and due at the
same time as the rent is due hereunder.
Except for the changes described herein, the Lease
remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have signed
this Third Amendment to Lease on the date first above written.
MONTEREY PASTA COMPANY,
a Delaware Corporation
By: /s/ GEORGE W. HAMMOND
Corporate Secretary
/s/ KENNETH SLAMA
"Lessee"
"Lessor"
/s/ PATTIE SLAMA
"Lessor"
FOURTH AMENDMENT TO LEASE
THIS FOURTH AMENDMENT TO LEASE is made and
entered into this 6th day of February, 1998, by and between
KENNETH and PATTIE SLAMA, husband and wife, hereinafter
called "Lessor," and MONTEREY PASTA COMPANY, a Delaware
corporation, hereinafter called "Lessee."
WITNESSETH:
WHEREAS, Lessor and lessee have entered into a written
lease date October 3, 1994, regarding the property known as 1528
Moffett Street, Salinas, California, as amended by Amendment to
Lease dated February 1, 1995 and Second Amendment to Lease dated
February 28, 1995 and Third Amendment to Lease dated September
12, 1997, a copy of the Lease and Amendments (hereinafter referred
to as the "Lease") being attached hereto as Exhibit "A", and
WHEREAS the parties desire to further amend the Lease in
certain other respects.
NOW, THEREFORE, for good and valuable consideration,
the receipt whereof is hereby acknowledged, the parties hereby amend
the Lease as follows:
1. The following shall be added to the end of
Paragraph 2.1 of the Lease:
"Effective June 1, 1998, Lessor shall lease to Lessee
and additional one thousand three hundred and sixty-five (1,365)
square feet of space, all as more fully shown on Exhibit 1 attached
hereto and made a part hereof. After said date, the term "Premises"
shall hereinafter refer to the premises currently leased by Lessee
(being 42,315 square feet) along with the additional space described
herein (being 1,365 square feet) or a total of forty-three thousand six
hundred eighty (43,680) square feet."
2. The following shall be added to the end of
Paragraph 4.1 of the Lease:
"Effective June 1, 1998. the base rent shall increase
by the sum of One Thousand Nine Hundred Forty-Five Dollars
($1,945.00) per month for a total base rent of Twenty-Two Thousand
One Hundred Twelve Dollars and Twenty Cents ($20,112.20)."
3. The following shall be added to the end of
Paragraph 4.2 of the Lease:
"Notwithstanding anything to the contrary herein, it
is understood that effective June 1, 1998, Lessee shall lease from
Lessor the additional space referred to in Paragraph 2.1 and this
additional space is three and twenty-two hundredths percent (3.22%)
of the total space in the Industrial Center (being 43,680 square feet).
Thus, effective June 1, 1998, Lessee's share as defined herein will be
one hundred percent (100%).
It is understood that Lessee is currently paying
lessor the sum of Two Thousand Five Hundred Fifty Dollars
($2,550.00) as the monthly estimated operating expenses and this
monthly amount will now increase to Two Thousand Seven Hundred
Dollars ($2,700.00) per month."
4. The following shall be added to the end of
Paragraph 4.1 of the Lease:
"Notwithstanding anything to the contrary herein, it
is understood that upon execution of this Fourth Amendment to Lease,
Lessee shall increase the deposit by an additional One Thousand Nine
Hundred Forty-Five Dollars ($1,945.00)."
5. The following shall be added to the end of
Paragraph 55 of the Lease:
"Notwithstanding anything to the contrary herein, it
is understood that Lessee shall pay to lessor the sum of Five Thousand
Dollars ($5,000.00) on execution of this Fourth Amendment to lease."
6. The following shall be added to the end of
Paragraph 57 of the Lease:
"Effective June 1, 1998 Lessee shall pay to Lessor a
management fee of three percent (3%) of the rent paid by Lessee
under this Fourth Amendment, payable and due at the same time as
the rent is due hereunder."
Except for the changes described herein, the Lease remains
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have signed
this Fourth Amendment to Lease on the date first above written.
MONTEREY PASTA COMPANY, a
Delaware corporation,
By: /s/ S.L. BRINKMAN
/s/ KENNETH SLAMA
"Lessee"
"Lessor"
/s/ PATTIE SLAMA
"Lessor"
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between MONTEREY PASTA
COMPANY, a DELAWARE CORPORATION
(herein called "Borrower") and IMPERIAL BANK (herein called
"Bank").
1. Bank hereby commits, subject to all the terms and conditions
of this Agreement and prior to the termination of its commitment as
hereinafter provided to make loans to Borrower from time to time in
such amounts as may be determined by Bank up to, but not exceeding
in the aggregate unpaid principal balance, the following Borrowing
Base:
70 % of Eligible Accounts
30 % of the Value of Inventory NOT TO
EXCEED $250,000.00 and in no event more than $ 1,500,000.00
2. The amount of each loan made by Bank to Borrower
hereunder shall be debited to the loan ledger account of Borrower
maintained by Bank (herein called "Loan Account") and Bank shall
credit the Loan Account with all loan repayments made by Borrower.
Borrower promises to pay Bank (a) the unpaid balance of Borrower's
Loan Account on demand and (b) on or before the tenth day of each
month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the rate of
ZERO percent ( 0.00 %) per annum in excess of the rate of
interest which Bank has announced as its prime lending rate ("Prime
Rate") which shall vary concurrently with any change in such Prime
Rate. Interest shall be computed at the above rate on the basis of the
actual number of days during which the principal balance of the loan
account is outstanding divided by 360, which shall for interest
computation purposes be considered one year. Bank at its option may
demand payment of any or all of the amount due under the Loan
Account including accrued but unpaid interest at any time. Such
notice may be given verbally or in writing and should be effective
upon receipt by Borrower. The amount of interest payable each
month by Borrower shall not be less than a minimum monthly
charge of $ 250.00 . Bank is hereby authorized to
charge Borrower's deposit account(s) with Bank for all sums due
Bank under this Agreement.
3. Request for loans hereunder shall be in writing duly executed
by Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in Section 1, which
shall disclose that Borrower is entitled to the amount of loan being
requested.
4. As used in this Agreement, the following terms shall have the
following meanings:
A. "Accounts" means any right to payment for goods
sold or leased, or to be sold or to be leased, or for services rendered
or to be rendered no matter how evidenced, including accounts
receivable, contract rights, chattel paper, instruments, purchase
orders, notes, drafts, acceptances, general intangibles and other forms
of obligations and receivables.
B. "Inventory" means all of the borrower's goods,
merchandise and other personal property which are held for sale or
lease. including those held for display or demonstration or out on
lease or consignment or to be furnished under a contract of service or
are raw materials, work in process or materials used or consumed, or
to be used or consumed in Borrower's business, and shall include all
property rights, patents, plans, drawings, diagrams, schematics,
assembly and display materials relating thereto.
C. "Collateral" means any and all personal property of
Borrower which is assigned to hereafter is assigned to Bank as
security or in which Bank now has or hereafter acquires a security
interest.
D. "Eligible Accounts" means all of Borrower's
Accounts excluding, however, (1) all Accounts under which payment
is not received within 90 days from any invoice date, (2) all
Accounts against which the account debtor or any other person
obligated to make payment thereon asserts any defense, offset,
counterclaim or other right to avoid or reduce the liability represented
by the Account and (3) any Accounts if the account debtor or any
other person liable in connection therewith is insolvent, subject to
bankruptcy or receivership proceedings or has made an assignment for
the benefit of creditors or whose credit standing is unacceptable to
Bank and Bank has so notified Borrower. Eligible Accounts shall
only include such accounts as Bank in its sole discretion shall
determine are eligible from time to time.
E. "Value of Inventory" means the value of Borrower's
Inventory determined in accordance with generally accepted
accounting principles consistently applied excluding, however, the
amount of progress payments, pre-delivery payments, deposits and
any other sums received by Borrower in anticipation of the sale and
delivery of Inventory, all Inventory on consignment or lease to others,
and all property on consignment or lease from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and
future Accounts, including all proceeds due thereunder, all guaranties
and security therefor and all merchandise giving rise thereto, and
hereby grants to Bank a continuing security interest in all Borrower's
Inventory and in all proceeds and products thereof, whether now
owned or hereafter existing or acquired, including all moneys in the
Collateral Account referred to in Section 6 hereof, as security for any
and all obligations of Borrower to Bank, whether now owing or
hereafter incurred and whether direct, indirect, absolute or contingent.
So long as Borrower is indebted to Bank or Bank is committed to
extend credit to Borrower, Borrower will execute and deliver to Bank
such assignments, including Bank's standard forms of Specific or
General Assignment covering individual Accounts, notices, financing,
statements, and other documents and papers as Bank may require in
order to affirm, effectuate or further assure the assignment to Bank of
the Collateral or to give any third party, including the account debtors
obligated on the Accounts, notice of Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts and
Inventory proceeds pursuant to paragraph 10, Borrower will collect
with diligence all Borrower's Accounts and Inventory proceeds,
provided that no legal action shall be maintained thereon or in
connection therewith without Bank's prior written consent. Any
collection of Accounts or Inventory proceeds by Borrower, whether in
the form of cash, checks, notes, or other instruments for the payment
of money (properly endorsed or assigned where required to enable
Bank to collect same), shall be in trust for Bank, and Borrower shall
keep all such collection separate and apart from all other funds and
property so as to be capable of identification as the property of Bank
and deliver said collections, together with the proceeds of all cash
sales, daily to Bank in the identical form received. The proceeds of
such collections when received by Bank may be applied by Bank
directly to the payment of Borrower's Loan Account or any other
obligation secured hereby. Any credit given by Bank upon receipt of
said proceeds shall be conditional credit subject to collection.
Returned items at Bank's option may be charged to Borrower's
general account. All collections of the Accounts and Inventory
proceeds shall be set forth on an itemized schedule, showing the name
of the account debtor, the amount of each payment and such other
information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts or
Inventory proceeds pursuant to paragraph 10, Borrower may continue
its present policies with respect to returned merchandise and
adjustments. However, Borrower shall immediately notify Bank of all
cases involving returns, repossessions, and loss or damage of or to
merchandise represented by the Accounts or constituting Inventory
and of any credits, adjustments or disputes arising in connection with
the goods or services represented by the Accounts or constituting
Inventory and, in any of such events, Borrower will immediately pay
to Bank from its own funds (and not from the proceeds of Accounts of
Inventory) for application to Borrower's Loan Account or any other
obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the
Accounts. Until payment is made as provided herein or until release
by Bank from its security interest, all merchandise returned to or
repossessed by Borrower shall be set aside and identified as the
property of Bank and Bank shall be entitled to enter upon any
premises where such merchandise is located and take immediate
possession thereof and remove same.
8. Borrower represents and warrants to Bank: (i) If Borrower
is a corporation, that Borrower is duly organized and existing in
the State of its incorporation and the execution, delivery and
performance hereof and within Borrower's corporate powers, have
been duly authorized and are not in conflict with law or the terms of
any charter, by-law or other incorporation papers, or of any
indenture, agreement or undertaking to which Borrower is a party or
by which Borrower is found or affected; (ii) Borrower is, or at the
time the collateral becomes subject to Bank's security interest will be,
the true and lawful owner of and has, or at the time the Collateral
becomes subject to Bank's security interest will have, good and clear
title to the Collateral, subject only to Bank's rights therein; (iii) Each
Account is, or at the time the Account comes into existence will be, a
true and correct statement of a bona fide indebtedness incurred by the
debtor named therein in the amount of the Account for ether
merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and
accepted by, the account debtor; (iv) That there are or will be no
defenses, counterclaims, or setoffs which may be asserted against the
Accounts; and (v) any and all financial information, including
information relating to the Collateral, submitted by Borrower to Bank,
whether previously or in the future, is or will be true and correct.
9. Borrower will (i) Furnish Bank from time to time such
financial statements and information as Bank may reasonably request
and inform Bank immediately upon the occurrence of a material
adverse change therein; (ii) Furnish Bank periodically, in such form
and detail and at such times as Bank may require, statements showing
aging and reconciliation of the Accounts and collections thereon, and
reports as to the Inventory and sales thereof; (iii) Permit
representatives of Bank to inspect the Inventory and Borrower's books
and records relating to the Collateral and make extracts therefrom at
any reasonable time and to arrange for verification of the Accounts,
under reasonable procedures, acceptable to Bank, directly with the
account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against
any of the Collateral and any information received by Borrower
relative to the Collateral, including the Accounts, the account debtors
or other persons obligated in connection therewith, which may in any
way affect the value of the Collateral or the rights and remedies of
Bank in respect thereto; (v) Reimburse Bank upon demand for any
and all legal costs, including reasonable attorney's fees, and other
expense incurred in collecting any sums payable by Borrower under
Borrower's Loan Account or any other obligation secured hereby,
enforcing any term or provision of this Security Agreement or
otherwise or in the checking, handling and collection of the Collateral
and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location at which the Inventory is or
will be kept, other than for temporary processing, storage or similar
purposes, and of any removal thereof to a new location and of each
office of Borrower at which records of Borrower relating to the
Accounts are kept; (vii) Provide, maintain and deliver to Bank
policies insuring the Collateral against loss or damage by such risks
and in such amounts, forms and companies as Bank may require and
with loss payable solely to Bank, and, in the event Bank takes
possession of the Collateral, the insurance policy or policies and any
unearned or returned premium thereon shall at the option of the Bank
become the sole property of Bank, such policies and the proceeds of
any other insurance covering or in any way relating to the Collateral,
whether now in existence or hereafter obtained, being hereby assigned
to Bank; (viii) Do all acts necessary to maintain, preserve and protect
all Inventory, keep all Inventory in good condition and repair and not
to cause any waste or unusual or unreasonable depreciation thereof,
and (ix) In the event the unpaid balance of Borrower's Loan Account
shall exceed the maximum amount of outstanding loans to which
Borrower is entitled under Section 1 hereof, Borrower shall
immediately pay to Bank from its own funds and not from the
proceeds of Collateral, for credit to Borrower's Loan
Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower,
collect the Accounts and Inventory proceeds and may give notice of
assignment to any and all account debtors, and Borrower does hereby
make, constitute and appoint Bank its irrevocable, true and lawful
attorney with power to receive, open and dispose of all mail addressed
to Borrower, to endorse the name of Borrower upon any checks or
other evidences of payment that may come into the possession of Bank
upon the Accounts or as proceeds of Inventory; to endorse the name
of the undersigned upon any document or instrument relating to the
Collateral; in its name or otherwise, to demand, sue for, collect and
give acquittances for any and all moneys due or to become due upon
the Accounts; to compromise, prosecute or defend any action, claim
or proceeding with respect thereto; and to do any and all things
necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations
secured hereby shall have been repaid in full, Borrower shall not sell,
dispose of or grant a security interest in any of the Collateral other
than to Bank, or execute any financing statements covering the
Collateral in favor of any secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any
obligation, or breach be made in any warranty, statement, promise,
term or condition, contained herein or hereby secured; (ii) Any
statement or representation made for the purpose of obtaining credit
hereunder prove false; (iii) Bank deem the Collateral inadequate or
unsafe or in danger of misuse; (iv) Borrower become insolvent or
make an assignment for the benefit of creditors; or (v) Any
proceeding be commenced by or against Borrower under any
bankruptcy, reorganization, arrangement, readjustment of debt or
moratorium law or statute; then in any such event, Bank may, at its
option and without demand first made and without notice to Borrower,
do any one or more of the following: (a) Terminate its obligation to
make loans to Borrower as provided in Section 1 hereof; (b) Declare
all sums secured hereby immediately due and payable; (c)
Immediately take possession of the Collateral wherever it may be
found, using all necessary force so to do, or require Borrower to
assemble the Collateral and make it available to Bank at a place
designated by Bank which is reasonably convenient to Borrower and
Bank, and Borrower waives all claims for damages due to or arising
from or connected with any such taking; (d) Proceed in the
foreclosure of Bank's security interest and sale of the Collateral in any
manner permitted by law, or provided for herein; (e) Sell, lease or
otherwise dispose of the Collateral at public or private sale, with or
without having the Collateral at the place of sale, and upon terms and
in such manner as Bank may determine, and Bank may purchase same
at any such sale; (f) Retain the Collateral in full satisfaction of the
obligations secured thereby; (g) Exercise any remedies of a secured
party under the Uniform Commercial Code. Prior to any such
disposition, Bank may, at as option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor
by bank shall be repaid by Borrower and secured hereby. Bank shall
have the right to enforce one or more remedies hereunder successively
or concurrently, and any such action shall not estop or prevent Bank
from pursuing any further remedy which it may have hereunder or by
law. If a sufficient sum is not realized from any such disposition of
Collateral to pay all obligations secured by this Security Agreement,
Borrower hereby promises and agrees to pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other
legal process be issued against any property of Borrower, or if any
assessment for taxes against Borrower, other than real property, is
made by the Federal or State government or any department thereof,
the obligation of Bank to make loans to Borrower as provided in
Section 1 hereof shall immediately terminate and the unpaid
balance of the Loan Account, all other obligations secured hereby and
all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery
receipts, reports and other types of documents and records submitted
to Bank in connection with the transactions contemplated herein at any
time subsequent to four months from the time such items are delivered
to Bank.
15. Nothing herein shall in any way limit the effect of the
conditions set forth in any other security or other agreement executed
by Borrower, but each and every condition hereof shall be in addition
thereto.
16. Should default be made in the payment of principal or
interest when due, or in the performance or observance, when due, of
any item, covenant or condition of this Agreement, any deed
of trust, security agreement or other agreement (including
amendments or extensions thereof) securing or pertaining to this
Agreement, at the option of the holder hereof and without notice or
demand, the entire balance of principal and accrued interest then
remaining unpaid shall (a) become immediately due and payable, and
(b) thereafter bear interest, until paid in full, at the increased rate of
5% per year in excess of the rate provided for above, as it may vary
from time to time.
17. If any installment payment, interest payment, principal
payment or principal balance payment due hereunder is delinquent
twenty (20) or more days, Borrower agrees to pay Bank a late charge
in the amount of 5% of the payment so due and unpaid, in
addition to the payment; but nothing is this paragraph is to be
construed as any obligation on the part of the Bank to accept payment
of any payment past due or less than the total unpaid principal balance
after maturity.
All payments shall be applied first to any late charges owing,
then to interest and the remainder, if any, to principal.
18. Reference Provision.
A. Other than (i) non-judicial foreclosure and all
matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or
the exercise of other provisional remedies (any and all of which may
be initiated pursuant to applicable law), each controversy, dispute or
claim between the parties arising out of or relating to this document
("Agreement"), which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "Claim Date" (defined as the
date on which a party subject to the Agreement gives written notice to
all other parties that a controversy, dispute or claim exists), will be
settled by a reference proceeding in California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute
the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such
controversy, dispute or claim is subject to the reference proceeding
and except as set forth above, the parties waive their rights to initiate
any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property,
if any, is located or Los Angeles County if none (the "Court"). The
referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected
by the Presiding Judge of the Court (or his representative). The
referee shall be appointed to sit as a temporary judge, with all of the
powers of a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided
for in Rule 244 of the California Rules of Court (or any subsequently
enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP 170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the Claim Date and (b)
try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date.
Any decision rendered by the referee will be final, binding and
conclusive and judgment shall be entered pursuant to CCP 644 in any
court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy,
dispute or claim, by filing a petition for hearing and/or trial. All
discovery permitted by this Agreement shall be completed no later
than fifteen (15) days before the first hearing date established by the
referee. The referee may extend such period in the event of a party's
refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery
or unavailability of a witness due to absence or illness. No party shall
be entitled to "priority" in conducting discovery. Depositions may be
taken by either party upon seven (7) days written notice, and request
for production or inspection of documents shall be responded to within
ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee
whose decision shall be final and binding upon the parties. Pending
appointment of the referee as provided herein, the Superior Court is
empowered to issue temporary and/or provisional remedies,
as appropriate.
B. Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding
is conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings
and hearings conducted before the referee, except for trial, shall be
conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of
the court reporter at the trial shall be borne equally by the parties.
C. The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of
the State of California. The rules of evidence applicable to
proceedings at law in the State of California will be applicable to the
reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding
upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the
claims of the parties that are the subject of the reference. The parties
hereto expressly reserve the right to contest or appeal from the final
judgment or any appealable order or appealable judgment entered by
the referee. The parties hereto expressly reserve the right to findings
of fact, conclusions of law, a written statement of decision, and the
right to move for a new trial or a different judgment, which new trial,
if granted, is also to be a reference proceeding under this provision.
D. In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor
statute is enacted), any dispute between the parties that would
otherwise be determined by the reference procedure herein described
will be resolved and determined by arbitration. The arbitration will
be conducted by a retired judge of the Court, in accordance with the
California Arbitration Act, 1280 through 1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery
as set forth hereinabove shall apply to any such arbitration
proceeding.
19. Additional Provisions:
X If checked, the Addendum or Exhibit "A" attached (and all
amendments thereto and replacements therefor) is incorporated herein
by this reference.
Executed this 23RD day of JULY , 1998
IMPERIAL BANK
BY: /s/ Brian C. Santos
BRIAN C. SANTOS, VICE PRESIDENT
MONTEREY PASTA COMPANY
(Name of Borrower)
BY: /s/ R. Lance Hewitt
(Authorized Signature and Title)
R. LANCE HEWITT, CEO
BY: /s/ Stephen L. Brinkman
(Authorized Signature and Title)
STEPHEN BRINKMAN, CFO/SECRETARY
ADDENDUM TO SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
("SECURITY AND LOAN AGREEMENT") BETWEEN
MONTEREY PASTA COMPANY AND IMPERIAL BANK DATED
July 23, 1998
This Addendum is made and entered into July 23, 1998, between
Monterey Pasta Company ("Borrower") and Imperial Bank ("Bank").
This Addendum amends and supplements the Security and Loan
Agreement. In the event of any inconsistency between the terms
herein and the terms of the Security and Loan Agreement, the terms
herein shall in all cases govern and control. All capitalized terms
herein, unless otherwise defined herein, shall have the meaning set
forth in the Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security
and Loan Agreement, to make advances against Eligible Accounts and
Inventory shall expire on July 22, 1999, subject to Bank's right to
renew said commitment in its sole discretion. Any such renewal of
the commitment shall not be binding upon Bank unless it is in writing
and signed by an officer of the Bank.
2. As a condition precedent to Bank's obligation to make any
advances to Borrower, Borrower shall, among other things, (i)
provide to Bank a perfected security interest in all it owned patents
and trademarks in form and substance satisfactory to Bank and (ii)
cause any material copyright registerable works including software to
be promptly registered in the U.S. Copyright Office and execute and
deliver a mortgage of copyrights and amendments appropriate and
acceptable to Bank to perfect Bank's security interest in all proceeds
of such works.
3. In addition to the provisions in the Security and Loan Agreement,
Eligible Accounts shall only include such accounts as Bank in its sole
discretion shall from time to time determine are eligible. Eligible
Accounts shall also not include any of the following:
a. Accounts with respect to which the account debtor is an
officer, director, shareholder, employee, subsidiary or affiliate of
Borrower.
b. Accounts due from a customer if more than twenty five
percent (25%) or more of the aggregate amount of accounts of such
customer have at that time remained unpaid for more than ninety (90)
days from the invoice date.
c. Accounts representing billings for service or maintenance
contracts or for inventory or equipment on rent to the account debtor.
d. Accounts with respect to international transactions unless
insured or covered by a letter of credit in a manner and form
acceptable to the Bank.
e. Salesman's accounts for promotional purposes.
f. The amount by which any one account exceeds ten percent
(10%) (thirty five percent [35%] in the case of Price/Costco and
Walmart/Sam's Club, and fifteen percent [15%] in the case of
Safeway Stores, Kroger, Stop & Shop, American Stores/Lucky and
Albertson's) of the total accounts receivable balance. Bank may allow
higher concentration limits from time to time, as evidenced in writing
and signed by an officer of Bank.
g. Accounts where the account debtor is a seller to
borrower, to the extent that a potential offset exists.
h. Consignment or Guaranteed Sales,
i. US Government Accounts.
j. Credits over 90 days.
k. Bankrupt Accounts.
l. Accounts over 90 days past invoice date.
4. Pursuant to the provisions in the Security and Loan Agreement,
Bank will advance up to thirty percent (30%) of the Value of
Inventory at the request of Borrower made from time to time, up to a
maximum amount outstanding of $250,000.00 ("Inventory Sublimit").
Value of Inventory shall only include such inventory as Bank in its
sole discretion shall from time to time determine is eligible. Value of
Inventory shall include Inventory consisting of raw materials in the
original manufacturer's packaging, bulk raw materials, all properly
stored, and readily salable and shall not include Inventory consisting
of unused packaging, work in process, ingredients which have been
mixed with others or finished goods.
5. Borrower represents and warrants that:
a. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in
default with respect to any order, writ, injunction, decree or demand
of any court or other governmental or regulatory authority.
b. The balance sheet of Borrower dated as of May 28, 1998,
and the related profit and loss statement for the five fiscal months then
ended, a copy of which has heretofore been delivered to Bank by
Borrower, and all other statements and data submitted in writing by
Borrower to Bank in connection with its request for credit are true and
correct, and said balance sheet and profit and loss statement truly
present the financial condition of Borrower as of the date thereof and
the results of the operations of Borrower for the period covered
thereby, and have been prepared in accordance with generally
accepted accounting principles on a basis consistently maintained.
Since such date, there have been no material adverse changes in the
financial condition or business of Borrower. Borrower has no
knowledge of any liabilities, contingent or otherwise, at such date not
reflected in said balance sheet, and Borrower has not entered into any
special commitments or substantial contracts which are not reflected
in said balance sheet, other than in the ordinary and normal course of
its business, which may have a materially adverse effect upon its
financial condition, operations or business as now conducted.
c. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any government
agency, Borrower has no liability for renegotiation of profits.
d. Borrower, as of the date hereof, possesses all necessary
trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated (collectively, these
rights are sometimes hereinafter referred to as "Intellectual
Property"), without any known conflict with valid trademarks, trade
names, copyrights, patents and license rights of others. Further,
Borrower agrees to do all things necessary for Bank to file its security
interest in any such Intellectual Property with the appropriate
recording office, and shall notify Bank when any such Intellectual
Property is acquired or otherwise becomes owned by Borrower.
6. Borrower agrees that so long as it is indebted to Bank, or so long
as Bank has any obligation to extend credit to Borrower, it will not,
without the prior written consent of Bank:
a. Make any substantial change in the character of its
business; or make any change in its executive management.
b. Create, incur, assume or permit to exist any indebtedness
for borrowed monies other than loans from Bank except obligations
now existing as shown in financial statement dated May 28, 1998,
excluding those being refinanced by Bank; or sell or transfer, either
with or without recourse, any accounts or notes receivable or any
monies due or to become due.
c. Create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon
property at any time purchased or acquired under conditional sale or
other title retention agreement) upon any asset now owned or
hereafter acquired by it, other than liens for taxes not delinquent and
liens in Bank's favor.
d. Make any loans or advances to any person or other entity
other than in the ordinary and normal course of its business as now
conducted or make any investment in the securities of any person or
other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other
entity, except by endorsement of negotiable instruments for deposit or
collection in the ordinary and normal course of its business.
e. Purchase or otherwise acquire the assets or business of
any person or other entity; or liquidate, dissolve, merge or
consolidate, or commence any proceedings therefore; or except in the
ordinary and normal course of its business, sell (including without
limitation the selling of any property or other asset accompanied by
the leasing back of the same) any assets including any fixed assets,
any property, or other assets necessary for the continuance of its
business as now conducted.
Declare or pay any dividend or make any other distribution on any of
its capital stock now outstanding or hereafter issued or purchase,
redeem or retire any of such stock.
g. Make, or incur obligations for, capital expenditures in
excess of $1,000,000 in any one fiscal year. Bank will not consider
any request to exceed this limitation unless said request is
accompanied by written evidence of the unanimous approval of such
request by the Board of Directors of Borrower.
h. Make, or incur liability for, payments of rent under leases
of real property in excess of $100,000, and personal property in
excess of $100,000, in any one fiscal year. Bank will not consider
any request to exceed this limitation unless said request is
accompanied by written evidence of the unanimous approval of such
request by the Board of Directors of Borrower.
8. All financial covenants and financial information referenced herein
shall be interpreted and prepared in accordance with generally
accepted accounting principles applied on a basis consistent with
previous years. Compliance with financial covenants shall be
calculated and monitored on a fiscal monthly, quarterly or annual
basis.
9. Borrower affirmatively covenants that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank, or so
long as Bank has any obligation to extend credit to Borrower, it will:
a. At all times maintain a minimum tangible net worth
(meaning the excess of all assets, excluding any value for goodwill,
trademarks, patents, copyrights, organization expense and other
similar intangible items, less its liabilities, plus subordinated debt) of
not less than $4,450,000. The minimum tangible net worth shall
increase by $200,000 each fiscal quarter end beginning September 30,
1998.
b. At all times maintain a maximum ratio of total debt to
tangible net worth (total liabilities less subordinated debt divided by
tangible net worth), not to exceed 1.50 to 1.00.
c. At all times maintain a minimum working capital
(Borrower's current assets minus current liabilities) of not less than
$750,000.
d. At all times maintain a current ratio (current assets
divided by current liabilities) of not less than 1.25 to 1.00.
e. Maintain profitable operations on a fiscal year end basis
in the minimum amount of $250,000.00.
f. As of each fiscal year end, achieve a Debt Service
Coverage Ratio (net profit after tax plus depreciation and amortization
expense for the period divided by the current portion of long term
debt and capital leases) of not less than 2.5 to 1.0.
g. As soon as it is available, but not later than fifteen (15)
days after and as of the end of each fiscal month, deliver to Bank an
accounts receivable aging, accounts payable aging, inventory
summary, and transaction report together with supporting schedules in
form satisfactory to Bank, and certified by an officer of Borrower.
h. As soon as it is available, but not later than thirty (30)
days after and as of the end of each fiscal month, deliver to Bank a
financial statement consisting of a balance sheet and profit and loss
statement in form satisfactory to Bank, and a Compliance Certificate
certified by an officer of Borrower.
I. As soon as it is available, but not later than forty five (45)
days after the end of Borrower's fiscal quarter, deliver to Bank a form
10-Q containing a financial statement consisting of a balance sheet and
profit and loss statement in form satisfactory to Bank, together with a
Compliance Certificate certified by an officer of Borrower.
j. As soon as it is available, but not later than ninety (90)
days after the end of Borrower's fiscal year, deliver to Bank a 10-K
report containing a report of audit of Borrower's financial statements
together with changes in financial position certified without negative
qualification by an independent certified public accountant selected by
Borrower but acceptable to Bank together with a Compliance
Certificate certified by an officer of Borrower.
k. Maintain and preserve all rights, franchises and other
authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct
its business or partnership, maintain and preserve its existence.
l. Maintain public liability, property damage and workers
compensation insurance and insurance on all its insurable property
against fire and other hazards with responsible insurance carriers to
the extent usually maintained by similar businesses. Borrower shall
provide evidence of property insurance in amounts and types
acceptable to Bank, and certificates naming Bank loss payee.
m. Pay and discharge, before the same become delinquent
and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and
any of its other liabilities at any time existing, except to the extent and
so long as:
(i) The same are being contested in good faith and by
appropriate proceedings in such manner as not to cause any materially
adverse effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(ii) It shall have set aside on its books reserves (segregated to
the extent required by generally accepted accounting practice) deemed
by it adequate with respect thereto.
n. Maintain a standard and modern system of accounting in
accordance with generally accepted accounting principles on a basis
consistently maintained; permit Bank's representatives to have access
to, and to examine its properties, books and records at all reasonable
times.
10. At such times as Borrower chooses (or Bank requires) reporting
of collateral and loan activity on a daily basis with submission of
"payment in kind" for credit to Loan Account ("Streamline
Reporting"), all sums received by Bank, whether from Borrower or
from Borrower's account debtors shall be applied to the outstanding
loan balance on the second (2nd) day following receipt thereof by the
Bank. Interest shall continue to accrue on all loans outstanding
pursuant to the Security and Loan Agreement until sums received are
applied as herein provided. While Borrower reports on a basis other
than daily ("Formula Reporting"), Borrower may retain its collections
for its own account, in trust for Bank.
11. In addition to any other amounts due, or to become due,
Borrower agrees to pay to Bank:
a. Audit fees in the amount of $2,500.00 for periodic
examinations of Borrower's books and records by Bank conducted at
intervals, absent default, of once each six months during the initial
term of this agreement.
12. Borrower will maintain substantially all its banking relationship
with Bank. It is acceptable that Borrower maintains a payroll
disbursement account for the accommodation of its employees at
another financial institution of its choosing.
13. No failure or delay on the part of Bank or any holder of Notes
issued hereunder, in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof. All rights and remedies existing under this
agreement or any not issued in connection with a loan that Bank may
make hereunder, are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
14. This Security and Loan Agreement and Addendum extends to all
obligations of Borrower to Bank.
MONTEREY PASTA COMPANY
IMPERIAL BANK
"BORROWER"
"BANK"
BY: ________________________________
/s/ Brian C. Santos Vice President
BY: ________________________________
/s/ R. Lance Hewitt
'TITLE: CEO
BY: _______________________________
/s/ Stephen Brinkman
TITLE: CFO/Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED STATEMENT OF OPERATIONS, THE
CONDENSED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE
CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 248,264
<SECURITIES> 0
<RECEIVABLES> 2,438,569 <F1>
<ALLOWANCES> 0
<INVENTORY> 1,293,589
<CURRENT-ASSETS> 5,213,518
<PP&E> 8,297,144
<DEPRECIATION> 2,942,444
<TOTAL-ASSETS> 10,861,003
<CURRENT-LIABILITIES> 3,934,430
<BONDS> 0
0
0
<COMMON> 39,389,655
<OTHER-SE> (33,280,623)
<TOTAL-LIABILITY-AND-EQUITY> 10,861,003
<SALES> 6,705,847
<TOTAL-REVENUES> 6,705,847
<CGS> 3,968,052
<TOTAL-COSTS> 3,968,052
<OTHER-EXPENSES> 2,077,610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,934
<INCOME-PRETAX> 573,438
<INCOME-TAX> 3,961
<INCOME-CONTINUING> 569,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 569,477
<EPS-PRIMARY> $0.05
<EPS-DILUTED> $0.05
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
