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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 26, 1999.
( ) 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
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 9, 1999, 12,934,435 shares of common stock, $.001 par value, of
the registrant were outstanding.
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MONTEREY PASTA COMPANY
FORM 10-Q
Table of Contents
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
September 26, 1999 and December 27, 1998 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations (unaudited)
Third quarter ended September 26, 1999 and September 27, 1998
and the nine months ended September 26, 1999 and September 27, 1998 . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 26, 1999 and September 27, 1998 . . . . . . . . . . . . . . . 5
Notes to Unaudited Condensed Consolidated Financial Statements . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K and S-8 . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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SEPTEMBER 26, 1999 DECEMBER 27, 1998
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ASSETS
Current assets:
Cash and cash equivalents.............................. $ 268,639 $ 61,645
Accounts receivable, net............................... 4,021,580 2,062,565
Inventories............................................ 2,505,239 1,813,653
Prepaid expenses ...................................... 771,705 1,291,251
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Total current assets........................... 7,567,163 5,229,114
Property and equipment, net.............................. 5,633,363 5,261,723
Intangible assets, net................................... 1,224,165 174,302
Deposits ................................................ 91,316 170,141
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Total assets................................... $14,516,007 $10,835,280
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,687,538 $ 1,330,649
Accrued liabilities.................................... 645,104 518,420
Current portion of long-term debt...................... 874,966 1,779,227
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Total current liabilities...................... 4,207,608 3,628,296
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Long-term debt........................................... 80,951 497,761
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Commitments and contingencies............................
Stockholders' equity:
Common stock........................................... 40,244,778 39,389,656
Accumulated deficit.................................... (30,017,330) (32,680,433)
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Total stockholders' equity..................... 10,227,448 6,709,223
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Total liabilities and stockholders' equity..... $14,516,007 $10,835,280
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THIRD QUARTER ENDED NINE MONTHS ENDED
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SEPTEMBER 26, 1999 SEPTEMBER 27, 1998 SEPTEMBER 26, 1999 SEPTEMBER 27,1998
------------------ ------------------ ------------------ -----------------
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Net revenues from continuing operations....... $ 9,942,782 $ 6,705,847 $ 27,015,558 $ 18,996,237
Cost of sales................................. 6,163,056 3,968,052 16,526,987 11,301,928
--------------- --------------- --------------- ----------------
Gross profit.................................. 3,779,726 2,737,795 10,488,571 7,694,309
Selling, general and administrative .......... 2,634,732 2,077,610 7,551,077 6,029,186
--------------- --------------- --------------- ----------------
Operating income 1,144,994 660,185 2,937,494 1,665,123
Gain (loss) on disposition of assets.......... 3,225 (18,868) (13,004) (26,387)
Other income, net............................. 5,494 2,055 389 13,977
Interest expense, net......................... (36,224) (69,934) (135,362) (194,217)
--------------- --------------- --------------- ----------------
Income from continuing operations before
provision for income taxes............... 1,117,489 573,438 2,789,517 1,458,496
Provision for income taxes.................... (92,340) (3,961) (126,415) (21,729)
--------------- --------------- --------------- ----------------
Net income from continuing operations......... 1,025,149 569,477 2,663,102 1,436,767
--------------- --------------- --------------- ----------------
Basic and diluted income per share............ $ 0.08 $ 0.05 $ 0.21 $ 0.11
=============== =============== =============== ================
Primary shares outstanding.................... 12,791,078 12,542,296 12,638,036 13,124,536
Diluted shares outstanding.................... 13,255,983 12,542,296 12,972,284 13,124,536
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
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SEPTEMBER 26, 1999 SEPTEMBER 27, 1998
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Cash flows from operating activities:
Net income from operations................................................. $ 2,663,102 $ 1,436,767
Adjustments to reconcile net income from operations
to net cash provided by (used in) operating activities:
Depreciation and amortization....................................... 877,670 741,567
Provisions for allowances for bad debts, returns,
adjustments and spoils.......................................... (151,430) (40,102)
Loss on disposition of property and equipment....................... 13,004 26,387
Expenses paid in common stock and options....................... - 51,000
Changes in assets and liabilities:
Accounts receivable.......................................... (1,807,585) 42,278
Inventories.................................................. (474,311) (75,043)
Prepaid expenses and other................................... 519,546 298,357
Accounts payable............................................. 1,356,889 721,670
Accrued expenses............................................. 126,684 (346,548)
Deposits..................................................... 78,825 -
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Net cash provided by operations..................................... 3,202,394 2,856,333
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Cash flows from investing activities:
Proceeds from sale of assets........................................ 27,600 5,293
Acquisition of business operating assets............................ (1,418,158) (109,599)
Purchase of property and equipment.............................. (974,795) (883,112)
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Net cash used in investing activities......................... (2,365,353) (987,418)
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Cash flows from financing activities:
Proceeds from revolving line of credit.......................... 12,726,150 4,496,707
Repayments on revolving line of credit.......................... (12,473,461) (5,015,951)
Proceeds from long term debt ................................... 750,000 2,503,265
Repayment of long term debt and capital lease obligations....... (2,342,859) (1,275,949)
Repurchase of common stock...................................... - (2,740,563)
Proceeds from issuance of common stock.......................... 710,123 1,612
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Net cash used in financing activities......................... (630,047) (2,030,879)
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Net increase (decrease) in cash and cash equivalents....................... 206,994 (161,964)
Cash and cash equivalents, beginning of period............................. 61,645 410,228
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Cash and cash equivalents, end of period................................... $ 268,639 $ 248,264
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</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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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 1998 financial statements have been reclassified to conform to
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 1998 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 26, 1999, 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
27, 1998. The consolidated results of operations for the interim quarterly
periods are not necessarily indicative of the results expected for the full
year.
2. BUSINESS ACQUISITION AND STATEMENT OF CASH FLOWS
On March 12, 1999 the Company purchased the operating assets and
inventory of Frescala Foods, Inc. ("Frescala"), a San Antonio, Texas based
fresh pasta and sauce producer with an emphasis on private label production.
The consideration to Frescala consisted of $1,345,000 in cash and fully
vested options to purchase 300,000 shares of the Company's common stock (see
Item 6). The options have an approximate fair market value of $145,000, an
exercise price of $2.33 per share, and a three-year expiration. Additionally,
Frescala owners could receive an earn-out based upon Frescala sales above a
predetermined level. The earn-out will be calculated during the first year of
combined operations. Funding for the transaction came from a new $750,000
two-year term loan, use of existing accounts receivable and inventory line,
and cash flow from operations.
The total consideration of $1,490,000 plus related acquisition costs
of $73,000, was allocated to identifiable fixed assets totaling $200,000 and
inventories of $217,000. The balance of $1,146,000, which includes trademarks
and recipes not specifically quantifiable, was charged to goodwill.
NON CASH ITEM
The Company acquired a copy machine with a fair market value of $19,099
through a financing lease which was booked in the third quarter of 1999.
3. INVENTORIES
Inventories consisted of the following:
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SEPTEMBER 26, 1999 DECEMBER 27, 1998
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Production - Ingredients...................................... $ 928,658 $ 865,693
Production - Finished Goods.................................... 1,069,707 560,762
Paper goods and packaging materials............................ 604,374 417,198
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$ 2,602,739 $ 1,843,653
Reserve for spoils and obsolescence....................... (97,500) (30,000)
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Net inventory.................................................. $ 2,505,239 $ 1,813,653
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</TABLE>
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4. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
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SEPTEMBER 26, 1999 DECEMBER 27, 1998
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Machinery and equipment.................................... $ 5,928,174 $ 5,024,208
Leasehold improvements..................................... 1,923,492 1,852,958
Computers, office furniture and equipment ................. 694,457 760,060
Vehicles................................................... 335,401 310,942
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8,881,524 7,948,168
Less accumulated depreciation and amortization............. (3,915,566) (3,188,936)
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4,965,958 4,759,232
Construction in progress.............................. 667,405 502,491
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Property, plant and equipment, net......................... $ 5,633,363 $ 5,261,723
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5. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt included the following:
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SEPTEMBER 26, 1999 DECEMBER 27, 1998
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Credit Facility:
Receivable and inventory revolver................. $ 775,945 $ 523,256
Equipment revolver................................ - 274,999
Equipment term loan............................... - 1,250,000
Capitalized leases................................... 179,972 228,733
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955,917 2,276,988
Less current maturities.......................... 874,966 1,779,227
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Long-term portion.................................... $ 80,951 $ 497,761
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</TABLE>
CREDIT FACILITY
On August 2, 1999 the Company's credit facility was renewed for
another year. Upon renewal, the two remaining term notes were consolidated
into a new note for $1,250,000 to mature on August 7, 2000, with payments of
$104,167 per month and interest at prime (8.25% at 9/26/99). This note was
repaid in full during September 1999.
The existing accounts receivable and inventory revolver was renewed
for another year to expire July 31, 2000 with a commitment of $1.5 million
and interest at prime (8.25% at 9/26/99). In addition, the Company's lender
approved a $2 million revolving term facility in the event of a need for
major capital expenditures and acquisitions, with interest rate to be
determined, and an expiration of August 5, 2004. The total credit facility is
$4.75 million.
6. INCOME TAXES
Federal and State of California income taxes for the nine months
ended September 26, 1999 include Federal and State alternative minimum tax
for 1998 and 1999 and certain other State taxes. The tax expense listed on
the Statements of Operations for 1998 is for certain other State taxes.
Except for alternative minimum tax, Federal and State of California income
taxes for the nine months ended September 26, 1999 were fully offset by net
operating loss carryforwards.
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7. STOCKHOLDERS' EQUITY
COMMON STOCK
During the second and third quarters of 1999, warrants, with an
exercise price of $2.25, and an expiration date of March 27, 2000,
representing 58,869 shares of Company common stock were exercised. These
warrants were originally issued in connection with a March 1997 private
placement in which the Company issued warrants to purchase 532,800 shares of
common stock. There are warrants remaining from the March 1997 private
placement to purchase 473,931 shares of common stock at $2.25 per share, as
well as warrants expiring in April 2003 to purchase 400,750 shares of common
stock at $6.50 per share issued in connection with a 1996 private placement.
In addition, employee options representing 8,619 shares of common stock were
exercised during the second and third quarters of 1999 with an average
exercise price of $1.125. A former employee also exercised options during the
third quarter of 1999 representing 24,000 shares of common stock with an
exercise price of $1.875.
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 non-interest bearing, non-recourse status
effective December 31, 1997 with an expiration date of December 31, 1999.
Because the new note was non-recourse, the shares and related note were
treated for accounting purposes as canceled and replaced with an option to
purchase such shares. The $51,000 fair value of the resulting option grant
was recorded as an expense during the first quarter of 1998.
During the second quarter of 1999, the former Chief Executive
Officer of the Company sold 5,705 shares and reduced the loan balance by
$10,697. The remainder of the 300,000 shares was sold by July 21, 1999, and
the sum of $551,803 was paid to the Company to retire the note.
8. LITIGATION AND CONTINGENCIES
There are no material pending legal proceedings, other than
ordinary, 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 subsidiary, Upscale Food Outlets ("UFO"), has been a
defendant in several lawsuits alleging breach of payment in vendor related
matters. The Company sold UFO in 1996, and the new owner assumed all current
and future liabilities associated with that business. 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,
cash flows, or results of operations of the Company.
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 27,
1998. 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
and wholesaler 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 food products through multiple channels of distribution.
8
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The Company sells its pasta and pasta sauces through leading grocery
store chains and club stores. As of September 26, 1999, approximately 4,400
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 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.
- Use the Company's Internet presence to create awareness of, and
make available, Monterey Pasta products in areas in which they are
not currently available, and to support the Company's existing
retail and club store accounts.
- 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 acquisition strategy is dependent upon
its ability to generate cash from current operations, attract new capital,
find suitable acquisition candidates, and successfully integrate new
businesses and operations. There is no assurance that acquisitions can be
financed from current cash flow, and, if not, that outside sources of capital
will be available to supplement internally-generated funds. There is no
assurance that management can successfully select suitable acquisition
candidates and that these new businesses can be successfully integrated to
create long term stockholder value.
RESULTS OF OPERATIONS
Net revenues from continuing operations were $9,943,000 for the
third quarter ended September 26, 1999, as compared to $6,706,000 for the
third quarter ended September 27, 1998, an increase of 48%. For the nine
months ended September 26, 1999, net revenues increased $8,020,000 or 42% to
$27,016,000 from $18,996,000 for the nine months ended September 27, 1998.
The increase in sales over last year results primarily from the Company's
increased distribution with both retail and club store chains. Retail chain
sales increased 36% on a year to date basis, while club store sales grew 43%.
Gross profit was $3,780,000 or 38% of net revenues for the third
quarter of 1999, compared to $2,738,000 or 41% for the third quarter of 1998.
For the nine months ended September 26, 1999, gross profit was $10,489,000 or
39% compared to $7,694,000 or 41% for the nine months ended September 27,
1998. The 1999 year-to-date gross profit compares to a 41% gross profit for
the year ended December 27, 1998. Gross margins for the first nine months of
1999 were impacted by the
9
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intense new product development discussed in the "Sales and Marketing"
section which follows, the writeoff of labels as more customers switched from
older recipes to the new Restaurant-style product, and the lower gross
margins on the Frescala product during the transition from the San Antonio,
Texas facility to the Salinas, California headquarters (See Part II Item 5
"Other Information").
Selling, general and administrative expenses ("SG&A") for the third
quarter ended September 26, 1999, were $2,635,000, an increase of 27% or
$557,000 when compared to $2,078,000 in the third quarter of 1998. For the
nine months ended September 26, 1999, SG&A increased $1,522,000 or 25% to
$7,551,000 from $6,029,000 for the same period in 1998. The increases
compared to 1998 are related to the 42% sales increase, additional product
demonstrations associated with the added club store business, and full year
expense for two marketing positions. Management believes that 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 profitable sales.
Depreciation and amortization expense, included in cost of sales and
SG&A, was $304,000 or 3% of net revenues for the quarter ended September 26,
1999, compared to $254,000 or 4% of net revenues for the quarter ended
September 27, 1998. For the nine months ended September 26, 1999,
depreciation and amortization expense was $878,000 or 3% of net revenues,
compared to $742,000 for the same period last year (4% of net revenues).
There was a gain of $3,000 on disposition of fixed assets for the
third quarter ended September 26, 1999 compared with a loss of $19,000 for
the third quarter last year. For the nine months ended September 26, 1999,
loss on disposition of fixed assets was $13,000 compared to a loss of $26,000
for the nine months ended September 27, 1998.
Net interest expense was $36,000 for the quarter ended September 26,
1999, compared to net interest expense of $70,000 for the same quarter in
1998. For the nine months ended September 26, 1999, net interest expense was
$135,000 compared to $194,000 for the nine months ended September 27, 1998.
The net decrease in interest expense is a result of the additional cash
generated from the increased profit level, which reduced loan balances,
reductions in interest rate by the Company's lender, and reductions in prime
rate.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 26, 1999, $3,202,000 of
cash was provided by the Company's continuing operations, compared to
$2,856,000 in the first nine months of 1998, an increase of $346,000. The
1998 improvement in income from operations of $1,226,0000 was offset by
increases in working capital associated with the 42% year to date sales
increase.
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 is twofold. It targets
sustainable growth in distribution of its products and the introduction of
innovative new products to keep the Company positioned as the gourmet
category leader in the marketplace.
In the third quarter of 1999, the Company further expanded its club
store business with the completion of a full rollout of its products to
Costco Wholesale's San Diego Division. Monterey Pasta products are now found
in all Costco Wholesale locations in the United States. The Company's
products are also found in over 400 Sam's Clubs nationwide.
During the quarter, the Company continued to expand its retail
grocery business with the introduction of its "Restaurant Style" pasta and
sauce line to all Southern California Lucky Stores. The Company also added
its products to the 44 stores of Norfolk, Virginia-based Farm Fresh
Supermarkets during the quarter.
Continuing its emphasis on new product development and innovation,
in the third quarter of 1999, the Company introduced its new line of
Homestyle-Fresh Soups to both retail and warehouse club store accounts. These
new ready-to-eat soups are packed in 20-ounce microwaveable serving cups.
There are eight initial offerings in the line, including Monterey Clam
Chowder, Old Fashioned Chicken Noodle, Ripe Red Tomato and Autumn Classic
Butternut Squash. It also increased distribution for its Potato Parmesan
Gnocchi to both retail and club accounts.
10
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As of September 26, 1999 the Company distributed its products to a
total of approximately 3,800 retail and 600 club store outlets as compared to
2,900 retail and 508 club store outlets as of September 27, 1998.
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 ten consecutive quarters. At
September 26, 1999, the Company had an accumulated deficit of $30,017,000.
There can be no assurance that the Company will maintain its recent
profitability in the long term.
- - 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
for normal operations through 2000, assuming that its existing bank loans
can be extended when they expire in July and August of 2000. 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. The success of the Company depends
on its ability to retain key executives, and to motivate and retain other
key employees and officers. The Company has key man insurance policies in
place in the face amount of $500,000 for its Chief Executive Officer, R.
Lance Hewitt, and its Chief Financial Officer, Stephen L. Brinkman. There
can be no assurance that significant management turnover will not occur in
the future.
- - 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
Company's 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. In addition, 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 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. This could result in an even more immediate and
significant adverse impact on the trading price of the Company's common
stock upon announcement of the shortfall or quarterly operating results.
- - 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.
- - DEPENDENCE ON MAJOR CUSTOMERS. During the first nine months of 1999, two
customers, Costco and Sam's Club Stores accounted for 47% and 32%,
respectively, of the Company's total revenues. The Company currently sells
its products to six separate Costco regions which make purchasing decisions
independently of one another. These regions re-evaluate, on a regular
basis, the products carried in their stores. There can be no assurance that
these Costco regions will continue to
11
<PAGE>
offer Monterey Pasta products in the future or continue to allocate
Monterey Pasta the same amount of shelf space. The Company currently has
a one-year agreement, which expires 12/31/2000, to supply its products to
approximately 390 Sam's Club Stores. Purchasing decisions are made at
the company headquarters with input from the store level. While the
Company is in the third year of its relationship with Sam's, and this
relationship is expected to continue, there can be no assurance that
Sam's Club Stores will continue to carry its products. Loss of either of
these customers, Costco or Sam's Club Stores, would have a material
adverse effect on the Company.
- - 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 AND DEPENDENCE ON COMMON CARRIERS. 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. The Company also 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
assurances 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, the Company has
significantly reduced expansion into new markets 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 Company has a task force in place to address "Year 2000"
issues. Installation of a year 2000 compliant version of the Company's
financial, inventory, and production software was completed in November
1998. The Company has also completed the work necessary to make its
internal personal computer network year 2000 compliant during March 1999.
Updating telephones, facsimile machines and labeling equipment for year
2000 was completed during the second quarter of 1999.
In addition, the Company has been in contact with its suppliers and other
third parties to determine the extent to which they may be vulnerable to
year 2000 issues. As this assessment continues, matters may come to the
Company's attention, which could give rise to the need for remedial
measures, which have not yet been identified. The Company cannot currently
predict the potential effect of third parties "year 2000" issues on its
business. It is expected that assessment, remediation and contingency
planning activities will be on going throughout the remainder of 1999, with
the goal of appropriately resolving all material internal systems and third
party issues. The Company has used both internal and external resources to
reprogram, replace and test the systems for the year 2000 modifications.
The Company does not believe that the cost of becoming year 2000 compliant
will be in excess of $85,000. To date the Company has incurred
approximately $84,500 of that expense for assessment of the year 2000
issue, development of a modification plan, the installation of a year 2000
compliant version of its financial, inventory, and production software, an
update of its personal computer network, telephone and voice mail system
and packaging and labeling software. The conversion is nearly complete and
very little additional cost is anticipated. The project is scheduled to be
complete by the end of the fourth quarter of 1999.
The final 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
12
<PAGE>
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 22,
1999.
(b) At the annual meeting the following matters were approved:
(i) the election of the following six directors to hold office
for the ensuing year and until their successors are elected
and qualified.
<TABLE>
<CAPTION>
Votes Against
Votes For or withheld
--------- -------------
<S> <C> <C>
R. Lance Hewitt 10,177,402 34,270
Charles B. Bonner 10,177,572 35,100
Floyd R. Hill 10,155,922 56,750
Thomas E. Kees 10,177,602 35,070
Van Tunstall 10,175,402 37,270
James Wong 10,175,302 37,370
</TABLE>
(ii) the appointment of BDO Seidman, LLP as the independent
public accountants for the year ending December 26, 1999
was approved with 10,178,192 votes in favor, 24,675 votes
against or withheld, and 9,805 votes abstaining or broker
non-votes.
ITEM 5. OTHER INFORMATION
During June of 1999 the Company closed its San Antonio, Texas facility and
incorporated the production into its Salinas, California facility. Certain
equipment was moved to the Salinas facility and a small amount of equipment
was sold with a gain of $20,000. Non-recurring expenses associated with the
plant closure such as severance, plant cleanup, and freight were included in
second quarter expenses. The one-time expenses were offset from sales of
Frescala product so there was no material impact on second quarter operating
results. Third quarter results were affected by normal transition costs
associated with initial production of new items in a new environment. Impact
on operating results was not material when gross margin from associated sales
is considered. However, overall Company gross margin percent was affected
because of the lower percent gross margin on Frescala product during
transition.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND S-8
The Company filed the following report on Form 8-K during the first
nine months ended September 26, 1999.
- Report on Form 8-K filed March 17, 1999 reported the acquisition
of the operating assets of Frescala Foods, Inc. effective March
12, 1999 for a consideration of $1,345,000 in cash and fully
vested options to purchase 300,000 shares of the Company's common
stock. The shareholders of Frescala may receive additional cash
consideration pursuant to earnout provisions in the Asset Purchase
Agreement if the Company achieves enumerated sales milestones
relating to existing and new business.
Filing on Form S-8 on April 23, 1999 was made to register 300,000
shares of Company common stock associated with options issued in conjunction
with the March 12, 1999 purchase of the operating assets of Frescala Foods, Inc.
14
<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 9, 1999 By: /s/ R. LANCE HEWITT
----------------------------
R. Lance Hewitt
Chief Executive Officer
By: /s/ STEPHEN L. BRINKMAN
----------------------------
Stephen L. Brinkman
Chief Financial Officer
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
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 Q1 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) 1995 Employee Stock Purchase Plan
(incorporated by reference from Exhibit 10.15 to the Company's 1994
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 (incorporated by reference from Exhibit 10.5 filed with the
Company's September 27, 1998 Quarterly Report on Form 10-Q dated
November 4, 1998 ("1998 Q3 10-Q"))
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)
16
<PAGE>
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 Q2 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 Form 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,
1997)
10.17 First Amendment to Security and Loan Agreement dated July 24, 1997
between the Company and Imperial Bank (incorporated by reference
from 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 (incorporated by reference
from Exhibit 10.18 filed with the Company's 1998 Q3 10-Q)
10.19 Security and Loan Agreement dated July 23, 1998 between the Company
and Imperial Bank (incorporated by reference from Exhibit 10.19
filed with the Company's 1998 Q3 10-Q)
10.20 Addendum to Security and Loan Agreement dated July 23, 1998 between
the Company and Imperial Bank (incorporated by reference from
Exhibit 10.20 filed with the Company's 1998 Q3 10-Q)
10.21 Agreement for Handling and Storage Services between the Company and
CS Integrated LLC dated February 5, 1999 (incorporated by reference
to Exhibit 10.21 filed with the Company's 1998 Form 10-K on March
17, 1999 ("1998 Form 10-K"))
10.22 Defined Contribution Administrative Service Agreement between the
Company and First Mercantile Trust dated December 15, 1998
(incorporated by reference to Exhibit 10.22 filed with the Company's
1998 Form 10-K)
10.23 First Amendment to Security and Loan Agreement and Addendum thereto
between the Company and Imperial Bank dated July 23, 1998
(incorporated by reference to Exhibit 10.23 filed with the Company's
March 28, 1999 Quarterly Report on Form 10-Q filed on April 28,
1999)
10.24 Agreement for Purchase and Sale of Assets dated as of March 12,
1999, by and among the Company and the shareholders of Frescala
Foods, Inc. (incorporated by reference from Exhibit 2.1 filed with
the Company's 8-K on March 17, 1999)
10.25 Royalty agreement dated July 12, 1999 between Company and Chet's
Gourmet Foods, Inc. for soups
10.26 Storage Agreement Manufactured Products dated August 3, 1999 between
the Company and Salinas Valley Public Warehouse for storage and
handling of Company's product in Monterey County, California storage
facility.
10.27 Commercial Lease dated August 10, 1999 between Company and Salinas
Valley Public Warehouse for storage space in Monterey County,
California
10.28 Rental Agreement dated September 6, 1999 between Company and Porter
Family Trust for storage space in Monterey County, California
10.29 Royalty agreement dated September 15, 1999 between Company and Chet's
Gourmet Foods, Inc. for meatball and sauce item
27.1 Financial Data schedule
</TABLE>
* Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its former subsidiary,
Upscale Food Outlets, Inc.
17
<PAGE>
Exhibit 10.25
ROYALTY AGREEMENT
The Royalty Agreement the "Agreement") is made and is effective July 12, 1999
between Chet's Gourmet Foods, Inc. ("Chet's"), a Nevada corporation located, at
28469 Wisteria Street, Highland, California 92346, and Monterey Pasta Company
(the "Company"), a Delaware corporation, located at 1528 Moffett Street,
Salinas, California 93905.
1. SERVICES PROVIDED
Chet's shall provide the Company input on the development and marketing of a
soup line. Services shall include, but not be limited to, input on recipe
development, flavors to market, marketing strategy, information on the market
conditions and competitive environment, packaging design, and developing
relationships with buyers for major chains. Chet's input to be more specifically
defined at a later date according to each parties written agreement.
2. TERM
Chet's shall provide services to Company pursuant to the Agreement commencing on
July 12, 1999 and continuing for two years from the effective date of this
Agreement, provided that the gross sales on the soup products listed on Exhibit
A ("Gross Sales") annually exceed two million dollars. If Gross Sales do not
exceed two million dollars per year commencing with the first year running from
the Effective Date, then this contract shall terminate or the parties shall
renegotiate its provisions. Should the contract terminate, Article six shall
remain in effect on all sales prior to the end of the contract. Chet's reserves
the right, upon discontinuance of the Agreement, to market any of these products
under his own name.
3. CONFIDENTIALITY
During the term of this agreement, the confidentiality provisions of this
agreement shall remain in full force and effect. Chet's, Company, their agents
or representatives shall not, without prior permission of the Company, disclose
any confidential information including any proprietary information such as
formulas, specifications, manufacturing methods, documentation produced,
business affairs, future plans, process information, customer lists, or any
other information which is a unique asset of the Company, and will include any
other information Chet's or Company is told is confidential.
Confidential information shall not include information that is disclosed by
Company without restriction, becomes publicly available through no act of the
other party, is received rightfully from a third party without a duty of
confidentiality, was in Chet's possession before receipt from Company, is
disclosed under operation of law, or is disclosed with the prior written
approval of Company.
<PAGE>
Chet's agrees that it will not at any time or in any manner, either directly or
indirectly, use any such information for Chet's own benefit. Chet's will protect
such information and treat it as strictly confidential. A violation of this
paragraph shall be a material violation of this Agreement.
If it appears that Chet's has disclosed (or has threatened to disclose)
information in violation of this Agreement, the Company shall be entitled to an
injunction to restrain Chet's from disclosing, in whole or in part, such
information, or from providing any services to any party to whom such
information has been disclosed or may be disclosed. The Company shall not be
prohibited by this provision from pursuing other remedies, including a claim for
loss and damages.
4. NON-COMPETITION
Chet's and Chet Taylor agree that they will not directly engage in own, manage,
operate, finance, or participate in as an employee, officer, director, agent,
consultant or seller of refrigerated soups for two years commencing on the
effective date of this agreement without the written permission of Company.
5. REFERRALS
During the term of this agreement Consultant agrees to promptly refer to Company
all orders and inquiries he may receive for Company's refrigerated soups.
6. PAYMENT TERM
Company shall pay Chet's the following royalty rates based on Gross Sales for
those items listed on Schedule A and attached.
<TABLE>
<CAPTION>
MARKETED PRIMARILY MARKETED PRIMARILY
MARKET SEGMENT BY COMPANY BY CHET'S
- -------------- ---------- ---------
<S> <C> <C>
-------------- % Royalty ----------------
Retail stores 2.8% 5%
Club stores 2.8% 5%
Convenience stores 2.8% 5%
Food Service establishments 5.0% 5%
</TABLE>
The Payment term will continue from the effective date of the Agreement for a
term of two years or as long as this contract is in effect. At the termination
of this contract payment to Chet's on existing accounts will continue. Payment
shall be made to Chet's 30 days after the end of the first accounting period of
the Company, which is a thirteen-week period, and every thirty days after each
successive accounting period. Company's soups sales records will be open for
reasonable inspection for Chet's accountants to review with two weeks notice any
time after the Company's first quarter accounting period.
<PAGE>
7. DEFINITION OF MARKETING EFFORT
A five percent royalty shall be paid by Company based on gross sales for those
customers or chains acquired by the Company primarily thorough the efforts of
Chet's or Chet Taylor, after receiving written order(s) from the CEO or other
authorized personnel. For all other customers and chains for which Company
personnel have expended the primary marketing effort, Chet's will be paid a 2.8%
royalty. Any contract rejected by Company based on Chet's marketing efforts
subsequently entered into within a 12 month period pays 5%.
8. MARKETING ALLOWANCES
All marketing allowances will be approved by the Company in writing in advance
and will be paid by the Company.
9. NO AUTHORITY TO BIND COMPANY
Chet's has no authority to enter into contracts or agreements on behalf of
Company without Company's written permission.
10. EXPENSES
Company shall not be liable for any expenses incurred by Chet's without prior
written approval.
11. BROKERAGE
Company's existing brokerage network will be utilized and compensated by
Company, except by mutual agreement between Company and Chet's to use another
broker. In the event another broker is used, Company will still have liability
for broker compensation, subject to Company's prior written consent.
12. TERMINATION
Either party shall have the right to terminate this Agreement, prior to the
expiration of the term hereof, upon the occurrence of the following event:
Breach or default of the other of any of the terms, obligations, convenants, or
representations under this Agreement which is not waived in writing by the
non-defaulting party. In such case, the non-defaulting party shall notify the
other of such alleged breach or default and the other party shall have a period
of thirty (30) days to cure the same. Chet's shall return to Company within
thirty days of termination of this agreement any records, reports, documents or
other materials disclosed by Company. Royalties shall continue on existing
accounts as long as items in attachment A are sold subject to the provisions of
Section 2 of this Agreement.
<PAGE>
13. ASSIGNMENT
This Agreement will bind and inure to the benefit of each party's permitted
successors and assigns. Neither party may assign this Agreement, in whole or in
part, without the other party's written consent; PROVIDED, HOWEVER, that Company
may assign this Agreement without such consent to a successor in interest or in
connection with any merger, consolidation, any sale of all or substantially all
of such party's assets or any other transaction in which more than fifty percent
(50%) of such party's voting securities are transferred. Any of the above
transactions do not affect Chet's royalty rights and Chet's royalty rights as
set forth in this agreement which continue with the above named new parties.
14. NOTICES
All notices required or permitted under this Agreement shall be in writing. All
notices of a significant nature affecting either parties rights and
responsibilities shall be certified mail, return receipt requested and receipt
must be in sender's possession
To Company:
Monterey Pasta Company
1528 Moffett Street
Salinas, CA 93905
Attention : R. Lance Hewitt
Chief Executive Officer
Phone: (408) 753-6262
Fax: (408) 753-6255
To Chet's:
Chet's Gourmet Foods, Inc.
7124 Seville Avenue
Highland, CA 93246
Phone: (909) 314-5069
Fax: (909) 425-0128
15. AMENDMENT
This Agreement may be modified or amended if the amendment is made in writing
and is signed by both parties.
<PAGE>
16. SEVERABILITY
If any provision of this Agreement shall be held to be invalid or unenforceable
for any reason, the remaining provisions shall continue to be valid and
enforceable. If a court finds that any provision of this Agreement is invalid or
unenforceable, but that by limiting such provision it would become valid and
enforceable, then the court prevails.
17. WAIVER OF CONTRACTUAL RIGHT
The failure of either party to enforce any provision of this Agreement shall not
be construed as a waiver or limitation of that party's right to subsequently
enforce and compel strict compliance with every provision of this Agreement.
18. APPLICABLE LAW
This Agreement shall be governed by the laws of the State of California.
19. AUTHORITY
Each individual executing this Agreement on behalf of a corporation hereto
represents and warrants that he or she is duly authorized to execute and deliver
this Agreement on behalf of such corporation in accordance with the Bylaws of
the corporation, and this Agreement is binding upon said corporation.
20. NO PARTNERSHIP OR JOINT VENTURE
This Agreement does not constitute and shall not be construed as constituting a
partnership or joint venture between Company and Chet's. Neither party shall
have any right to obligate or bind the other party in any manner whatsoever, and
nothing contained in this agreement shall give or is intended to give, any
rights of any kind to any third parties.
21. INTERPRETATION
Chet's, as well as Company, have been given the opportunity to retain counsel of
their own choosing for purposes of this transaction and has either done so or
has elected not to do so, as each sees fit. This Agreement shall be construed in
accordance to the fair meaning of its language. The rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be employed in interpreting this Agreement.
22. ACKNOWLEDGEMENT
Contribution and Development by Chet's Gourmet Foods or a like phrase to be
located anywhere Company chooses on the sleeve surrounding the container or
label. Company shall have 90 days from the date of signing this Agreement to
locate said phrase on its new labels.
<PAGE>
In witness whereof, the parties have executed this Agreement effective as of the
date set forth above.
Monterey Pasta Company
By: /s/ R. Lance Hewitt Date: 8/21/99
-------------------------------------- -----------------------
Name: R. Lance Hewitt
Title: Chief Executive Officer
Chet's Gourmet Foods, Inc.
By: /s/ Chet Taylor Date:
-------------------------------------- -----------------------
Name: Chet Taylor
Title: President
<PAGE>
Schedule A
List of Soups
Tuscan Minestrone
Monterey Clam Chowder
Autumn Classic Butternut Squash
Old Fashioned Chicken Noodle
Southern Style Corn Chowder
Ripe Red Tomato with Basil
Savory Split Pea with Ham
Potato with Black Forest Ham
<PAGE>
EXHIBIT 10.26
STORAGE AGREEMENT
MANUFACTURERS PRODUCTS
Agreement made August 3, 1999, between Salinas Valley Public Warehouse, a
corporation organized and existing under the laws of California, with its
principal office at 340 El Camino Real South, #16, Salinas, Monterey County,
California, here referred to as warehouseman and Monterey Pasta Company, a
corporation organized and existing under the laws of Delaware, with its
principal office at 1528 Moffett Street, Salinas, Monterey County,
California, here referred to as depositor.
The parties recite and declare that:
1. Depositor desires to ship Pasta Products in trucks or other vehicles to
340 El Camino Real South #16, Salinas, CA 93901, for the account of
depositor, and will require certain services, described below, to be
performed with respect to these products.
All receiving, picking and shipping of goods and pallet exchange;
All perpetual and physical inventory, warehouse receipts, and bills of
lading
Overseeing of day to day operations at CSI until cold storage unit at
340 El Camino Real South #16, Salinas, CA 93901 has been constructed.
2. Depositor desires to make arrangements with warehouseman to perform, and
warehouseman desires to perform for depositor, such of the above-described
services as may be required by depositor during the time this agreement is in
effect.
For the reasons set forth above and in consideration of the mutual covenants
and promises provided in this agreement, the parties agree as follows:
SECTION ONE
WAREHOUSING SERVICES AND RATES
Depositor hereby engages warehouseman to perform, and warehouseman shall
perform, during the term of this agreement and at the following rates, all of
the following services required by depositor in the course of its business
with respect to depositors products shipped in trucks or other vehicles to
340 El Camino Real South #16, Salinas, CA 93901, for the account of depositor:
<PAGE>
(a) Handling. Rate: $.275 per case. Handling, for purposes of this agreement,
includes keeping records of the contents of each truck; unloading and moving
depositors goods from the truck to warehouseman's warehouse; and delivering
the goods at the warehouse door on depositors order.
(b) Storage. Rate: $.275 per case. Storage, for purposes of this agreement,
includes storage and usual handling in warehouseman's warehouse.
(c) Making shipments. Making shipments, for purpose of this agreement,
includes filling orders for out-of-town and local shipments; marking the
destination on containers in the manner and from specified by depositor; and
procuring bills of lading or shipping receipts from the carrier and
forwarding them to the address specified by depositor.
(f) Transportation charges. Depositor shall pay lawful transportation charges
on prepaid shipments.
(g) Warehouse receipts. Warehouseman shall issue nonnegotiable warehouse
receipts as requested by depositor for the goods stored under this agreement.
(h) Cross-docking for retail and club shipments.
SECTION TWO
TERM OF AGREEMENT
If warehouseman defaults in the performance of any of the provisions of this
agreement, depositor may terminate the agreement by written notice to
warehouseman. Unless so terminated, or terminated by depositor upon 30 day
written notice, this agreement will continue in effect for a period of 5
(five) years from date of execution of this agreement and thereafter until
terminated by depositor on at least 30 (thirty) days written notice.
If warehouseman does not perform to the specifications of the depositor, the
depositor has the right, upon 30 days notice, to assume all activities
formerly performed by warehouseman on warehouseman's premises under one of
the three potential arrangements:
1) A lease of premises, equipment and refrigerated leasehold
improvements at an
<PAGE>
all inclusive lease rate for the remaining term of warehouseman's
lease along with any options for renewal included in the current
building lease held by warehouseman.
2) A purchase of equipment and leasehold improvements in conjunction
with an assumption of warehouseman's current building lease.
3) An assumption of warehouseman's remaining obligations with a lender
or lenders for equipment and leasehold improvements in conjunction
with an assumption of warehouseman's existing building lease.
With all three potential arrangements the warehouseman agrees to no markup
and profit margin added to the cost to the depositor of assuming any
obligations or purchasing any fixed assets. All transactions shall be
purchased or assumed at warehouseman's then existing cost or, in the case of
fixed assets, at a maximum of the warehouseman's book cost or a negotiated
price, whichever is lower.
SECTION THREE
LABOR AND EQUIPMENT
Warehouseman shall furnish all labor and equipment necessary to perform the
services specified above at the rates specified.
SECTION FOUR
CONDITION OF SHIPMENTS
Shipment will be reconciled by warehouseman with bills of lading, and any
damage or shortage will be noted on the original freight bill or carriers
receipt and the original freight bill or receipt forwarded promptly to
depositor. No goods will be delivered in torn, broken or damaged sacks or
other containers, or with respect to which there is any evidence of
infestation or contamination. In the event of a damaged case the
warehouseman will rebox product at the direction of depositor.
<PAGE>
SECTION FIVE
UNLOADING, LOADING, AND HAULING
Unloading, loading, and hauling will be done so as to protect the goods from
rain, snow, and other injurious weather conditions, from theft, and from
contract or proximity to anything that might be damaging or injurious.
Warehouseman shall leave no truck unguarded or unlocked until it is fully
unloaded or loaded. As to any truck that is not unloaded and unloaded within
the required time, warehouseman will promptly notify depositor, specifying
the consignee or consignees and the goods not unloaded or loaded. Hours of
operation shall be 6:00 a.m. to 11:00 p.m. with receiving available during
all hours. Warehouseman will compensate depositor at depositor's cost for
any damage to depositor's product resulting from mechanical or handling
damage, weather damage, insect or rodent damage, or contamination or loss due
to temperature abuse caused by improper handling or storage.
SECTION SIX
MANNER OF STORAGE
Warehouseman shall store all goods so that they will be protected at all
times against theft and against injury or damage from moisture, excess heat,
insects, rodents, improper or unusual location, or injurious contact. All
goods stored will be piled so as to permit inspection by depositor at anytime,
and delivery will always be made from the oldest goods on hand unless
otherwise specified by depositor. All goods shall be stored in a cooler
environment at a temperature of 34-36 degrees unless otherwise specified by
depositor.
SECTION SEVEN
DAILY AND STOCK REPORTS
Daily reports will be forwarded to depositor of all deliveries during the
preceding business day. Warehouseman will furnish depositor stock reports
and exception reports in writing at anytime requested by depositor, showing
deliveries and balance of stock on hand.
<PAGE>
SECTION EIGHT
COLLECTIONS
No collections shall be made except as depositor authorizes in writing, and
no C.O.D. deliveries shall be made without obtaining payment as directed by
depositor.
SECTION NINE
TITLE TO GOODS; DELIVERY
Title to all goods remains with depositor. All goods stored shall be
delivered to depositor or to its order on demand and on surrender of any
outstanding warehouse receipt or receipts. No deliveries will be made by
warehouseman without a written order.
SECTION TEN
PAYMENT OF CHARGES AND COLLECTIONS
All amounts due warehouseman will be paid by depositor on monthly invoices
within 30 days of invoice date.
SECTION ELEVEN
ADDRESSES OF PARTIES
All funds, notices, and documents required by this agreement to be sent or
delivered will be sent or delivered to depositor and to warehouseman at their
respective addresses above stated.
SECTION TWELVE
INSURANCE
Depositor on its property will carry insurance. Warehouseman on its property
will carry insurance.
SECTION THIRTEEN
STATUS OF WAREHOUSEMAN
<PAGE>
Warehouseman is an independent contractor and not an agent or employee of
depositor.
ASSIGNMENT
This Agreement will bind and insure to the benefit of each party's permitted
successors and assigns. Neither party may assign this Agreement, in whole or
in part, without the other party's written consent; PROVIDED, HOWEVER, that
Depositor may assign this Agreement without such consent to a successor in
interest or in connection with any merger, consolidation, any sale of all or
substantially all of such party's assets or any other transaction in which
more than fifty percent (50%) of such party's voting securities are
transferred. Any attempt to assign this Agreement other than in accordance
with this provision shall be null and void.
MEDIATION AND ARBITRATION
Any controversy arising out of the performance of this Agreement or
regarding the interpretation of this Agreement is subject to a good faith
effort at resolution through nonbinding mediation before any complaint
(whether a civil complaint in court or a implant in arbitration) may be
filed. Mediation is a process in which parties attempt to resolve a dispute
by submitting it to any impartial neutral mediator who is authorized to
facilitate the resolution of the dispute, but who is not empowered to impose
a settlement on the parties. The mediation fees, if any, shall be divided
equally amoung the parties involved. The parties agree to limit the
admissibility in any subsequent litigation or proceeding of anything said,
any admissions made, and any documents prepared, in the course of mediation,
consistent with California Evidence code section 1152.5.
IF ANY PARTY COMMENCES A COURT ACTION OR AN ARBITRATION PROCEEDINGS
BASED ON A DISPUTE OR CLAIM TO WHICH THIS SECTION APPLIES WITHOUT
FIRST ATTEMPTING TO RESOLVE THE MATTER IN GOOD FAITH THROUGH
MEDIATION, THEN THAT PARTY SHALL NOT BE ENTITLED TO RECOVER
ATTORNEY'S FEES EVEN IF THEY WOULD OTHERWISE BE AVAILABLE TO THAT
PARTY IN A SUBSEQUENT COURT ACTION OR ARBITRATION PROCEEDING:
Any controversy or claim arising out of or relating to this Agreement, or the
making, performance, or interpretation thereof, which is not resolved through
the mediation process required by the preceding Section shall be resolved by
arbitration in accordance
<PAGE>
with the Rules of the American Arbitration Association then existing, and
judgement on the arbitration award may be entered in any court having
jurisdiction over the subject matter of the controversy. Such award may be
appealed to any appellate court having jurisdiction over the matter to the
same extent that an appeal would be permissible from a civil judgement. The
Arbitrators selected shall be persons experienced in general corporate
matters or general business agreements, and shall make their awards based
upon the principles of California law. The parties shall have the right to
discovery and the Arbitration proceeding shall be reported by a certified
court order.
BY THEIR EXECUTION OF THIS AGREEMENT, THE PARTIES ARE AGREEING TO
HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THIS
"ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION.
ADDITIONALLY, THE PARTIES ARE HEREBY GIVING UP ANY RIGHTS THEY
MIGHT OTHERWISE HAVE POSSESSED TO HAVE THE DISPUTE LITIGATED IN A
COURT OR JURY TRIAL; PROVIDED, HOWEVER, THE PARTIES ARE NOT GIVING
UP THEIR JUDICIAL RIGHTS TO APPEAL OF THE DECISION OF THE
ARBITRATION(S). IF ANY PARTY REFUSES TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, SUCH PARTY MAY BE COMPELLED TO
ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE. THE PARTIES' AGREEMENT TO THIS ARBITRATION PROVISION IS
VOLUNTARY. THE PARTIES HAVE READ AND UNDERSTAND THE FOREGOING AND
AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.
<PAGE>
In witness whereof, the parties have executed this agreement as signed and
executed below.
Salinas Valley Public Warehouse
/s/ Richard Anello, President 8/9/99
- ---------------------------------------------------- ------------
Richard Anello, President Date
Salinas Valley Public Warehouse
/s/ Brenda J. Kibbee 8/9/99
- ---------------------------------------------------- ------------
Brenda Kibbee, General Manager Date
Monterey Pasta Company
/s/ R. Lance Hewitt 8/9/99
- ---------------------------------------------------- ------------
R. Lance Hewitt, President & Chief Executive Officer Date
Monterey Pasta Company
/s/ S. L. Brinkman 8/9/99
- --------------------------------------------------- ------------
Stephen L. Brinkman, Chief Financial Officer Date
<PAGE>
Exhibit 10.27
COMMERCIAL LEASE
This lease is made between Salinas Valley Public Warehouse, herein
called Lessor, and Monterey Pasta Company, herein called Lessee.
Lessee hereby offers to lease from Lessor the premises situated in the
City of Salinas, County of Monterey, State of California, described as 340 El
Camino Real South, #16, Salinas, CA 93901, approximately 8,000 sf upon the
following TERMS and CONDITIONS:
TERM and RENT
Lessor demises the above premises for a Month to Month term, commencing on
September 1, 1999 and terminating with 30 day written notice. Herein at the
annual rental of $.37/sf payable on the first day of each month and no later
than the last day of said month, for that months rental, during the term on
this lease. All rental payments shall be made to Lessor at the address
specified above.
UTILITIES and PROPERTY TAX
Utilities and Property Tax to be paid by Lessor.
USE
Lessee shall use and occupy the premises for the express purpose of storage.
CARE and MAINTENANCE of PREMISES
Lessee acknowledges that the premises are in good order and repair, unless
otherwise indicated herein. Lessee shall, at his own expense and at all
times, maintain the premises in good and safe condition.
ALTERATIONS
Lessee shall not, without first obtaining the written consent of Lessor, make
any alterations, additions, or improvements, in, to or about the premises.
<PAGE>
ORDINANCES and STATUTES
Lessee shall comply with all statutes, ordinances and requirements of all
municipal, state and federal authorities now in force, or which may hereafter
be in force, pertaining to the premises, occasioned by or affecting the use
thereof by Lessee.
ASSIGNMENT and SUBLETTING
Lessee shall not assign this lease or sublet any portion of the premises
without prior written consent of the Lessor, which shall not be unreasonably
withheld. Any such assignment or subletting without consent shall be void
and, at the option of the Lessor, may terminate this lease.
INDEMNIFICATION of LESSOR
Lessor Shall not be liable for any damage of injury to Lessee, or any other
person, or of any property, occurring on the demised premises or any part
thereof, and Lessee agrees to hold Lessor harmless form any claims for
damages, no matter how caused.
ENTIRE AGREEMENT
The foregoing constitutes the entire agreement between the parties and may be
modified only in writing, signed by both parties. The following Exhibits, if
any, have been made a part of this lease before the parties execution hereof:
Signed on this 10th day of August, 1999.
Salinas Valley Public Warehouse
By: /s/ Brenda J. Kibbee
-------------------------------------
Brenda J. Kibbee, General Manager
Monterey Past Company Monterey Past Company
By: /s/ R. Lance Hewitt, President By: /s/ Stephen L. Brinkman
------------------------------------- -------------------------------
R. Lance Hewitt, President/CEO Stephen L. Brinkman, CFO
<PAGE>
Exhibit 10.28
RENTAL AGREEMENT
THIS RENTAL AGREEMENT ("Agreement") is dated as of September 6, 1999 by
and between the Porter Family Trust ("Landlord"), and MONTEREY PASTA COMPANY, a
Delaware corporation ("Tenant").
WITNESSETH
THAT IN CONSIDERATION of the covenants, promises and agreements herein
contained, said parties do hereby covenant, promise and agree to, and with each
other, as follows:
1. PREMISES. Said Landlord does hereby let unto the Tenant, and said
Tenant does hereby hire and take of, the said Landlord for the term herein
specified, that certain real property and building, situated in the City of
Gonzales, County of Monterey, State of California, designated as a portion of a
building particularly described as an approximately 27,650 square foot unit
located at 33155 Gloria Road Gonzales, CA 93926-9401 ("Premises"). The property
included as part of the Agreement consists of approximately 17,100 square feet
of refrigerated storage space, 10,300 square feet of open dock space, and an
office of approximately 250 square feet referred to as the "scale office space."
2. TERM. The period of the Agreement shall be from September 13, 1999
until November 30, 1999 ("Term").
3. EXTENSION. The Landlord reserves the right to extend this Agreement
for additional 30-day periods at its sole option if the Tenant wishes to
continue to occupy the premises subsequent to November 30, 1999. Said extension
will be at the rate of $8,000 per 30-day period.
4. RENTAL. Tenant agree to pay Landlord, as rental for said premises
the following sums in lawful money of the United States:
A. The sum of Sixteen Thousand Dollars ($16,000.00) upon execution of
this Agreement by both parties, which shall represent rent for the first sixty
(60) days of the Agreement term.
B. The remainder of the Agreement term and any extensions shall be paid
at the rate of Two Hundred Sixty-six and 67/100 Dollars ($266.67) per day
effective and due on November 12, 1999, and calculated based on anticipated date
for surrender of premises.
5. UTILITIES. Tenant shall pay for all services and utilities.
6. PROPERTY TAXES. Landlord shall pay all property taxes.
1
<PAGE>
7. CONDITION OF PREMISES.
A. "AS-IS" CONDITION. Tenant accepts the Premises in their "AS-IS"
condition existing as of the date of this Agreement and without provision by
Landlord of any tenant improvement allowance to Tenant; provided, however, that
Landlord represents and warrants to Tenant that (i) to the best of Landlord's
actual knowledge, as of the date hereof, all building systems, refrigeration
systems, HVAC systems, wiring and plumbing serving the Premises are in good
order and repair, and (ii) as of the date hereof, Landlord has no actual
knowledge of any non-compliance of the Premises with ADA Requirements or other
applicable laws. Except to the limited extent otherwise provided in this
Agreement, Tenant acknowledges that no representations have been made to Tenant
by Landlord nor by any agent thereof respecting the condition of the Premises
and the acceptance of possession by Tenant shall evidence Tenant's agreement
that the Premises are in good and tenantable condition.
B. ALTERATIONS. Any alterations or modifications to the Premises shall
be at the sole cost and expense of Tenant and shall be subject to the approval
of Landlord. The Tenant has specific approval to install rollup doors, in "space
1" and "space 3" upon occupation of Premises, and a motion detection security
system in all refrigeration space.
8. ASSIGNMENT OR SUBLETTING. Tenant shall not assign or sublet this
Agreement or any part thereof without the written consent of Landlord.
9. REPAIRS AND MAINTENANCE. Landlord shall maintain outside of building
premises, all roofs and external walls. Tenant shall maintain interior of
building.
10. ENTRY BY OWNER. Tenant shall permit Landlord and its agents to
enter into and upon said Premises at all reasonable times for the purpose of
inspection or for the purpose of posting legal notices.
11. SECURITY. Those parties and representatives of parties described on
Exhibit A shall have access to the Premises for purposes related to the ongoing
operations of Tenant. This access shall be limited only to the space described
as Premises in Article 1.
12. LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord represents and
warrants that (i) there are no other understandings or agreements with respect
to the subject matter of the Agreement; (ii) Landlord is the owner and holder of
the entire Agreement estate under the Agreement, free and clear of any interest
of any third parties other than Landlord and the rights of other subtenants.
2
<PAGE>
13. NOTICES.
(a) A copy of notices to the Landlord shall be addressed to:
Shirley Porter
C/o Porter Family Trust
Post Office Box 93910
Pasadena, CA 91109
Phone: (626) 795-4411
Fax: (626) 568-3702
(b) A copy of notices to the Tenant shall be addressed to:
Monterey Pasta Company
1528 Moffett Street
Salinas, CA 93905
Attn: Pete Klein
Phone: (831) 753-6262 Ext. 129
Fax: (408) 753-6260
In order to be effective, any notice which is delivered via telecopier
must be sent on a business day, between the hours of 8:00 a.m. and 5:00 p.m. in
the time zone in which the addressee is located.
14. BINDING ON SUCCESSORS AND ASSIGNS. The covenants and conditions
herein contained shall, subject to the provision as to assignment, apply to and
bind heirs, successor, executors, administrators, and assigns.
15. LIABILITY INSURANCE. Tenant agrees to take out and keep in force
during the life of the Agreement at Tenant's expense, public liability insurance
at not less than $1,000,000.00 for any one person injured of $1,000,000.00 for
any one accident, or $500,000.00 for property damage. Said policies of insurance
shall name Landlord as additional insured therein, and Tenant shall obtain a
written obligation on the part of the insurance carriers to notify Landlord in
writing thirty (30) days prior to any cancellation thereof. Tenant shall furnish
Landlord a certificate of such insurance.
16. QUIET ENJOYMENT. Landlord covenants and agrees that upon Tenant's
payment of the Monthly Rent and performance of its other obligations hereunder,
Tenant shall and may peaceably and quietly have, hold, and enjoy the Premises
throughout the Term without any manner of hindrance or molestation from Landlord
or any one claiming by, through or under Landlord subject to the Agreement.
3
<PAGE>
17. TIME. Time is of the essence of this Agreement.
18. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties to this Agreement, and supersedes all prior agreements by
the parties, both written and verbal.
19. ATTORNEY'S FEES. If either party to this Agreement commences an
action against the other party arising out of or in connection with this
Agreement, the prevailing party shall be entitled to recover from the losing
party the costs and expenses of such action, including attorneys' fees.
20. AUTHORITY TO EXECUTE AGREEMENT. Each party to this Agreement, and
the persons executing this Agreement on behalf of each such party, warrant to
the other party that such party is in good standing and duly qualified to do
business in the State of California, and that the execution of this Agreement
has been duly authorized by such party's Board of Directors, if applicable. In
addition, the persons executing this Agreement warrant that they are duly
authorized to execute same on behalf of party for whom such persons have
executed this Agreement.
21. KEYS. Landlord shall make available, at Landlord's expense, to
Tenant all door keys for the Premises which Landlord has in its possession or
under its control. The possession of keys is limited only to employees of
Tenant, Salinas Valley Public Warehouse, and Polar Refrigeration.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
"Landlord"
Porter Family Trust,
a California trust
By: /s/ Shirley Porter
----------------------------
Shirley Porter
Its:
---------------------------
"Tenant"
Monterey Pasta Company,
A Delaware corporation
By: /s/ Stephen L. Brinkman
----------------------------
Stephen L. Brinkman
Its: Chief Financial Officer
4
<PAGE>
ROYALTY AGREEMENT
The Royalty Agreement the "Agreement") is made and is effective September 15,
1999 between Chet's Gourmet Foods, Inc. ("Chet's"), a Nevada corporation
located, at 28469 Wisteria Street, Highland, California 92346, and Monterey
Pasta Company (the "Company"), a Delaware corporation, located at 1528
Moffett Street, Salinas, California 93905.
1. SERVICES PROVIDED
Chet's shall provide the Company input on the development and marketing of a
chunky marinara sauce with meatballs item. Services shall include, but not be
limited to, input on recipe development, flavors to market, marketing
strategy, information on the market conditions and competitive environment,
packaging design, and developing relationships with buyers for major chains.
Chet's input to be more specifically defined at a later date according to
each parties written agreement.
2. TERM
Chet's shall provide services to Company pursuant to the Agreement commencing
on July 12, 1999 and continuing for two years from the effective date of this
Agreement, provided that the gross sales on the chunky marinara sauce with
meatballs item ("Gross Sales") annually exceed five hundred thousand dollars
($500,000.00). If Gross Sales do not exceed five hundred thousand dollars
($500,000.00) per year commencing with the first year running from the
Effective Date, then this contract shall terminate or the parties shall
renegotiate its provisions. Should the contract terminate, Article six shall
remain in effect on all sales prior to the end of the contract. Chet's
reserves the right, upon discontinuance of the Agreement, to market any of
these products under his own name.
3. CONFIDENTIALITY
During the term of this agreement, the confidentiality provisions of this
agreement shall remain in full force and effect. Chet's, its agents or
representatives shall not, without prior permission of the Company, disclose
any confidential information including any proprietary information such as
formulas, specifications, manufacturing methods, documentation produced,
business affairs, future plans, process information, customer lists, or any
other information which is a unique asset of the Company, and will include
any other information Chet's is told is confidential.
Confidential information shall not include information that is disclosed by
Company without restriction, becomes publicly available through no act of the
other party, is received rightfully from a third party without a duty of
confidentiality, was in Chet's possession before receipt from Company, is
disclosed under operation of law, or is disclosed with the prior written
approval of Company.
Chet's agrees that it will not at any time or in any manner, either directly
or indirectly, use any such information
1
<PAGE>
for Chet's own benefit. Chet's will protect such information and treat it as
strictly confidential. A violation of this paragraph shall be a material
violation of this Agreement.
If it appears that Chet's has disclosed (or has threatened to disclose)
information in violation of this Agreement, the Company shall be entitled to
an injunction to restrain Chet's from disclosing, in whole or in part, such
information, or from providing any services to any party to whom such
information has been disclosed or may be disclosed. The Company shall not be
prohibited by this provision from pursuing other remedies, including a claim
for loss and damages.
4. NON-COMPETITION
Chet's and Chet Taylor agree that they will not directly engage in own,
manage, operate, finance, or participate in as an employee, officer,
director, agent, consultant or seller of chunky marinara sauce with meatballs
for two years commencing on the effective date of this agreement without the
written permission of Company.
5. REFERRALS
During the term of this agreement Consultant agrees to promptly refer to
Company all orders and inquiries he may receive for Company's meatball and
sauce.
6. PAYMENT TERM
Company shall pay Chet's the following royalty rates based on Gross Sales for
those items listed on Schedule A and attached.
<TABLE>
<CAPTION>
Marketed Primarily Marketed Primarily
------------------ ------------------
Market Segment By Company By Chet's
- -------------- ---------- ---------
---------- % Royalty ----------
<S> <C> <C>
Retail stores 2.8% 5%
Club stores 2.8% 5%
Convenience stores 2.8% 5%
Food Service establishments 5.0% 5%
</TABLE>
The Payment term will continue from the effective date of the Agreement for a
term of two years or as long as this contract is in effect. At the
termination of this contract payment to Chet's on existing accounts will
continue. Payment shall be made to Chet's 30 days after the end of the first
accounting period of the Company, which is a thirteen-week period, and every
thirty days after each successive accounting period. Company's chunky
marinara sauce with meatballs sales records will be open for reasonable
inspection for Chet's accountants to review with two weeks notice any time
after the Company's first quarter accounting period.
2
<PAGE>
7. DEFINITION OF MARKETING EFFORT
A five percent royalty shall be paid by Company based on gross sales for
those customers or chains acquired by the Company primarily thorough the
efforts of Chet's or Chet Taylor, after receiving written order(s) from the
CEO or other authorized personnel. For all other customers and chains for
which Company personnel have expended the primary marketing effort, Chet's
will be paid a 2.8% royalty. Any contract rejected by Company based on Chet's
marketing efforts subsequently entered into within a 12 month period pays 5%.
8. MARKETING ALLOWANCES
All marketing allowances will be approved by the Company in writing in
advance and will be paid by the Company.
9. NO AUTHORITY TO BIND COMPANY
Chet's has no authority to enter into contracts or agreements on behalf of
Company without Company's written permission.
10. EXPENSES
Company shall not be liable for any expenses incurred by Chet's without prior
written approval.
11. BROKERAGE
Company's existing brokerage network will be utilized and compensated by
Company, except by mutual agreement between Company and Chet's to use another
broker. In the event another broker is used, Company will still have
liability for broker compensation, subject to Company's prior written consent.
12. TERMINATION
Either party shall have the right to terminate this Agreement, prior to the
expiration of the term hereof, upon the occurrence of the following event:
Breach or default of the other of any of the terms, obligations, convenants,
or representations under this Agreement which is not waived in writing by the
non-defaulting party. In such case, the non-defaulting party shall notify the
other of such alleged breach or default and the other party shall have a
period of thirty (30) days to cure the same. Chet's shall return to Company
within thirty days of termination of this agreement any records, reports,
documents or other materials disclosed by Company. Royalties shall continue
on existing accounts as long as items in attachment A are sold subject to the
provisions of Section 2 of this Agreement.
3
<PAGE>
13. ASSIGNMENT
This Agreement will bind and inure to the benefit of each party's permitted
successors and assigns. Neither party may assign this Agreement, in whole or
in part, without the other party's written consent; PROVIDED, HOWEVER, that
Company may assign this Agreement without such consent to a successor in
interest or in connection with any merger, consolidation, any sale of all or
substantially all of such party's assets or any other transaction in which
more than fifty percent (50%) of such party's voting securities are
transferred. Any of the above transactions do not affect Chet's royalty
rights and Chet's royalty rights as set forth in this agreement which
continue with the above named new parties.
14. NOTICES
All notices required or permitted under this Agreement shall be in writing.
All notices of a significant nature affecting either parties rights and
responsibilities shall be certified mail, return receipt requested and
receipt must be in sender's possession
To Company:
Monterey Pasta Company
1528 Moffett Street
Salinas, CA 93905
Attention : R. Lance Hewitt
Chief Executive Officer
Phone: (408) 753-6262
Fax: (408) 753-6255
To Chet's:
Chet's Gourmet Foods, Inc.
7124 Seville Avenue
Highland, CA 93246
Phone: (909) 314-5069
Fax: (909) 425-0128
15. AMENDMENT
This Agreement may be modified or amended if the amendment is made in writing
and is signed by both parties.
4
<PAGE>
16. SEVERABILITY
If any provision of this Agreement shall be held to be invalid or
unenforceable for any reason, the remaining provisions shall continue to be
valid and enforceable. If a court finds that any provision of this Agreement
is invalid or unenforceable, but that by limiting such provision it would
become valid and enforceable, then the court prevails.
17. WAIVER OF CONTRACTUAL RIGHT
The failure of either party to enforce any provision of this Agreement shall
not be construed as a waiver or limitation of that party's right to
subsequently enforce and compel strict compliance with every provision of
this Agreement.
18. APPLICABLE LAW
This Agreement shall be governed by the laws of the State of California.
19. AUTHORITY
Each individual executing this Agreement on behalf of a corporation hereto
represents and warrants that he or she is duly authorized to execute and
deliver this Agreement on behalf of such corporation in accordance with the
Bylaws of the corporation, and this Agreement is binding upon said
corporation.
20. NO PARTNERSHIP OR JOINT VENTURE
This Agreement does not constitute and shall not be construed as constituting
a partnership or joint venture between Company and Chet's. Neither party
shall have any right to obligate or bind the other party in any manner
whatsoever, and nothing contained in this agreement shall give or is intended
to give, any rights of any kind to any third parties.
21. INTERPRETATION
Chet's, as well as Company, have been given the opportunity to retain counsel
of their own choosing for purposes of this transaction and has either done so
or has elected not to do so, as each sees fit. This Agreement shall be
construed in accordance to the fair meaning of its language. The rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not be employed in interpreting this Agreement.
5
<PAGE>
In witness whereof, the parties have executed this Agreement effective as of
the date set forth above.
Monterey Pasta Company
By: /s/ R. Lance Hewitt Date:
--------------------------------------- ------------------------
Name: R. Lance Hewitt
Title: Chief Executive Officer
Chet's Gourmet Foods, Inc.
By: /s/ Chet Taylor Date:
--------------------------------------- ------------------------
Name: Chet Taylor
Title: President
6
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<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1999
<PERIOD-END> SEP-26-1999
<CASH> 268,639
<SECURITIES> 0
<RECEIVABLES> 4,021,580
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<INVENTORY> 2,505,239
<CURRENT-ASSETS> 7,567,163
<PP&E> 9,548,929
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0
0
<COMMON> 40,244,778
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<TOTAL-LIABILITY-AND-EQUITY> 14,516,007
<SALES> 9,942,782
<TOTAL-REVENUES> 9,942,782
<CGS> 6,163,056
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<INTEREST-EXPENSE> 36,224
<INCOME-PRETAX> 1,117,489
<INCOME-TAX> 92,340
<INCOME-CONTINUING> 1,025,149
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