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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 1999
OR
[ ] 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
(Exact name of registrant as specified in its charter)
DELAWARE 77-0227341
(State of incorporation) (IRS employer
identification number)
1528 Moffett Street
Salinas, California 93905
(831) 753-6262
(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether 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, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( )
--
The approximate aggregate market value of the voting stock held by
non-affiliates of the issuer as of February 17, 2000 was $40,467,599. The
number of shares outstanding of the issuer's common stock as of February 17,
2000 was 13,059,291.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Monterey Pasta Company ("the Company") was incorporated in June 1989
as a producer and distributor 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, selected regions in Canada, and part of
Latin America. The Company's overall strategic plan is to enhance the value
of the Monterey Pasta Company brand name by distributing its gourmet pasta
products through multiple channels of distribution.
The Company currently produces and markets premium quality
refrigerated gourmet pastas, soups, gnocchi, and pasta sauces, emphasizing
superior flavors and innovative products. It seeks to build brand recognition
and customer loyalty by employing a marketing program that focuses on
developing multiple points of sale for the Company's products. The Company
markets and sells its products primarily through grocery and club stores.
The Company offers over 100 varieties of contemporary gourmet pasta
and sauce products, as well as soups and gnocchi that are produced using the
Company's proprietary recipes, including refrigerated cut pasta, ravioli,
tortellini, tortelloni and pasta sauces. Examples of the Company's pasta and
pasta sauces include: Roasted Garlic Chicken Ravioli, Lobster Ravioli, Fire
Roasted Vegetable Ravioli, Five Cheese Tortelloni, Roasted Garlic Artichoke
Sauce, Pesto Sauce and Fresh Herb Alfredo sauces. In 1999 the Company
introduced three new product lines: Tortelloni Grandi large entree-sized
tortelloni, a line of "Homestyle-Fresh" soups with eight varieties, and a
refrigerated, fresh Potato Parmesan gnocchi.
The Company sells its products through leading grocery store chains
including Albertson's, King Soopers, Safeway, Ralph's, Jewel, Fred Meyer,
Kroger, HEB, and QFC; and warehouse club stores such as Costco Wholesale and
Sam's Club (a division of Wal-Mart). As of December 26, 1999, approximately
4,500 grocery and club stores offered Monterey Pasta's products.
In 1998 the Company added a web site, www.montereypasta.com, to
further support its brand by providing both consumer and investor
information, and opened an on-line store offering Monterey Pasta products to
the rapidly growing number of Internet shoppers. Shoppers can now order items
for delivery within two days. In 1999 the Company expanded the site to offer
other non-food items and other food items as well.
The success of the Company's efforts will depend in large part on
three key factors: (1) whether grocery and club store chains will continue to
increase the number of their stores offering the Company's products, (2)
whether the Company can continue to increase the number of grocery and club
store chains offering its products, and (3) whether the Company can continue
to introduce new products that meet consumer acceptance. Grocery and club
store chains continually re-evaluate the products carried in their stores,
and no assurances can be given that the chains currently offering the
Company's products will continue to do so in the future.
This Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, that involve substantial risks to the
Company, including statements about the Company's recent operating losses,
the possible need for additional capital, the ability to attract and retain
qualified management, the need to add points of distribution and the need to
develop new products. In connection therewith, please see the cautionary
statements contained herein in "Business Risks" which identify important
factors that could cause actual results to differ materially from those in
the forward-looking statements.
INDUSTRY OVERVIEW
The Company believes that the U.S. retail market for refrigerated
pasta is large and highly fragmented. Although refrigerated pasta products
are not new, fresh pasta and pasta sauce were essentially created as a
national specialty food category in 1986 when Nestle Fresh
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Foods Co., a division of Nestle S.A. ("Nestle"), introduced its
Contadina-Registered Trademark- brand of fresh pasta. In 1990, Kraft General
Foods, Inc., a division of Philip Morris ("Kraft"), unveiled its
DiGiorno-Registered Trademark- brand of fresh pasta nationally.
The Company believes that the interest in the fresh pasta category
has been aided by several factors including heavy advertising and promotion
by Nestle and Kraft, the changing consumer preference for freshly prepared
healthy foods, and increasing consumer demand for convenient, quick meal
solutions. The Company is further encouraged by industry research reports,
which show that spending on gourmet, specialty foods by consumers in the
Company's target market appears to be growing.
No assurance can be given that the refrigerated pasta and sauce
industry will expand further. Nor can there be any assurance that current
trends in healthy eating, perception of fresh pasta and pasta sauce as a
healthy eating alternative, consumer demand for meal solutions, or consumer
spending levels in the specialty food category will continue in the future.
Additionally, as the Company expands into different geographic regions, it
may encounter different consumer perceptions, attitudes and behavior. This
may adversely impact the Company's marketing and expansion strategy and cause
it to incur greater expenses in the promotion of its products.
STRATEGY
Monterey Pasta's objective is to become the leading national
supplier of refrigerated gourmet pasta, pasta sauces, and refrigerated soups
through distribution of its products to grocery and club stores. The key
elements of the Company's strategy include the following:
- 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.
- 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, sauces,
gnocchi, and soups.
- 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.
- 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.
- 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.
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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.
PRODUCTS
The Company produces and markets a variety of gourmet refrigerated
cut pasta, ravioli, tortelloni, tortellini, soups, gnocchi, and pasta sauces
under the Monterey Pasta Company and Arthur's labels. Arthur's is a
mid-priced label which was acquired as part of the March 1999 acquisition of
San Antonio Texas-based Frescala Foods, Inc. (see "Liquidity and Capital
Resources", page 13). Following is a representative list of the Company's
products with those sold under the Arthur's label so noted:
<TABLE>
<CAPTION>
YEAR INTRODUCED OR
CUT PASTA: ACQUIRED
---------- --------
<S> <C>
Garlic Basil Fettuccine 1989
Sweet Red Pepper Fettuccine 1989
Angel Hair 1989
Spinach Fettuccine (Arthur's) 1999
Lemon Pepper Linguine (Arthur's) 1999
RAVIOLI:
Lobster 1997
Fire Roasted Vegetable 1997
Restaurant-Style Artichoke & Cheese 1998
Restaurant-Style Chicken Piccata 1998
Restaurant-Style Gorgonzola Cheese 1998
Restaurant-Style Snow Crab 1998
Restaurant-Style Roasted Garlic 1998
Restaurant-Style Herb and Cheese 1998
Restaurant-Style Spinach Ricotta 1998
Restaurant-Style Shrimp Scampi 1998
Restaurant-Style Chicken Rosemary 1999
Four Cheese (Arthur's) 1999
Light Garden Vegetable (Arthur's) 1999
TORTELLONI:
Spinach Mushroom 1994
Sundried Tomato and Asiago Cheese 1994
Restaurant-Style Pesto Sausage 1998
Restaurant-Style Rainbow Five Cheese 1998
Italian Sausage (Arthur's) 1999
Proscuitto, Spinach & Cheese (Arthur's) 1999
TORTELLINI:
Garlic Basil Cheese 1996
Tri-Color (Arthur's) 1999
Cheese (Arthur's) 1999
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PRODUCTS (CONT.)
SAUCES:
Roasted Garlic Artichoke 1995
Thick and Chunky Tomato Basil 1996
Restaurant-Style Roasted Garlic
and Parmesan 1998
Restaurant-Style Basil Cream Sauce
with Artichokes 1998
Restaurant-Style Pesto Sauce with
Garlic and Basil 1998
Restaurant-Style Garden Fresh Marinara 1999
Restaurant-Style Fresh Alfredo with Herbs 1999
Sun Dried Tomato Pesto (Arthur's) 1999
Five Pepper Pesto (Arthur's) 1999
Alfredo (Arthur's) 1999
Roasted Garlic Pesto (Arthur's) 1999
SOUPS:
Tuscan Minestrone 1999
Monterey Clam Chowder 1999
Autumn Classic Butternut Squash 1999
Old Fashioned Chicken Noodle 1999
Southern Style Corn Chowder 1999
Red Ripe Tomato with Basil 1999
Savory Split Pea with Ham 1999
Potato with Black Forest Ham 1999
TORTELLONI GRANDI:
Spinach and Cheese 1999
Italian Sausage 1999
Five Cheese and Rainbow Five Cheese 1999
GNOCCHI:
Potato Parmesan 1999
</TABLE>
The Company is committed to diversifying its product offerings with
innovative new pasta products and other gourmet product lines. The Company's
product development team and product development consultants focus on
creating new products that innovatively blend complementary tastes, food
textures and ingredients while strictly adhering to the Company's emphasis on
freshness, healthfulness and quality. As new products are introduced,
selected items will be discontinued to help ensure that the product line is
focused on consumer demand, to maximize the Company's return on its shelf
space in grocery and club stores, and to respond to changing trends and
consumer preferences.
The Company's refrigerated cut pasta, ravioli, tortelloni,
tortellini, pasta sauces, gnocchi, and soups are packaged in clear
lightweight containers which reveal the fresh appearance of its products.
Monterey Pasta presents its products with a colorful logo, distinctive
packaging styles, ingredient information and cooking instructions to
communicate the gourmet, fresh and healthful qualities of its products. Its
new Restaurant-Style products, Tortelloni Grandi, gnocchi, and
Homestyle-Fresh soup product lines feature new packaging to maximize shelf
impact and generate increased consumer interest in the products.
The goal of the Company is to introduce new products on a timely and
regular basis to maintain customer interest and to respond to changing
consumer tastes. There can be no assurance that the Company's efforts to
achieve such a goal will result in successful new products
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or product lines or that new products can be developed and introduced on a
timely and regular basis. If the Company's new products are not successful,
the Company's grocery and club store sales may be adversely affected as
customers seek new products.
PRODUCTION
The Company produces its products in a 43,680 square foot Monterey
County, California facility. It is strategically located in one of the
largest produce-growing regions in the United States and is near several
major vendors and food service distributors. The facility is certified by the
United States Department of Agriculture (USDA) and utilizes state of the art
thermal processing, chilling and packaging processes. The Company also added
to a new 20,000 square foot refrigerated distribution center in December
1999, which is also located in Monterey County, approximately three miles
from its production facility.
The current production facility is staffed by approximately 180
employees, including plant management, a purchasing agent, quality control,
accounting personnel, sales staff, drivers, and production line workers.
Refrigerated pasta is manufactured at the facility using high quality
ingredients such as Extra Fancy Durham wheat, whole eggs or egg whites, fresh
herbs and IQF (Individually Quick Frozen) herbs and spices, and local cheeses
and milk products. The ingredients are mixed in accordance with the Company's
proprietary recipes. After filling with fresh and unusual fillings such as
snow crab, lobster, and Vermont cheddar cheese, the ravioli and tortellini
products receive a prescribed thermal process (pasteurization) to insure
product safety and to preserve flavor, quality and shelf life. The product is
then chilled immediately and packaged in controlled atmosphere trays. Pasta
sauces are mixed and processed in individual batches in accordance with the
Company's proprietary processes and recipes and then directly packed and
sealed in plastic containers. After preparation, processing, chilling and
packaging, all pasta and sauces are kept in cold storage to preserve quality
and shelf life. Approximately 19 people are employed at the new distribution
center, including shipping personnel, customer service and traffic personnel,
and the logistics manager.
The Company continuously reviews a variety of capital projects for
the production department and in the past two years has spent $3.6 million on
capital improvements including a new tortelloni line, a new packaging line, a
new 20,000 square foot refrigerated distribution center, a new pasteurizer,
as well as deposits on new equipment to be installed in the year 2000.
Approximately $1.3 million of the $2.6 million 1999 expenditures are part of
the $3.5 million capital commitment approved by the Company's Board of
Directors in October 1999 to expand capacity and improve efficiency while
maintaining product quality. Some of the main components of the program,
which is scheduled to be complete by December 31, 2000, in addition to the
distribution center, are a more efficient packline, filling and mixing
equipment, a new pasta making machine and pasteurizer, and additional
equipment and enhancements to improve sauce and soup making efficiency and
augment capacity. The new equipment is expected to create a 100% increase in
sauce capacity, a 200% increase in filling and mixing capacity, and a 25%
increase in packline capacity. Future additions of assets will be evaluated
for increased efficiency, flexibility and need.
DISTRIBUTION
The Company's success depends upon an effective system of
distribution for its products. In Northern California the Company maintains
three direct store delivery ("DSD") routes to deliver its products to
approximately 140 stores. The Company also delivers product directly to
warehouses for Safeway, its largest Northern California customer. To
distribute its products to other customers and parts of the country (over 90%
of its business), the Company uses common carriers. The dependence on other
companies for delivery of its products poses a risk to the Company. While the
common carrier method of delivery has been reliable and available at
acceptable rates thus far, there can be no assurance that the Company will
continue to be able to negotiate acceptable freight rates in the future and
that delivery will not be disrupted for reasons including, but not limited
to, adverse weather, natural disasters or labor disputes in the trucking
industry.
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GROCERY CHAIN AND CLUB STORE SALES
Monterey Pasta sells its products to chain grocery and club stores.
<TABLE>
<CAPTION>
NUMBER OF STORES CARRYING MONTEREY PASTA PRODUCTS
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Retail Grocery Stores 2,600 2,950 3,900
Club Stores 500 510 640
------------- ------------- -------------
TOTAL 3,100 3,460 4,540
============= ============= =============
</TABLE>
For the years 1997, 1998 and 1999, Costco accounted for 50%, 46% and
49% of total net revenues, while Sam's Club Stores accounted for 12%, 33%,
and 31% of revenues for the same years. 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 offer Monterey Pasta products in the future
or continue to allocate Monterey Pasta the same amount of shelf space. The
Company currently supplies its products to approximately 420 Sam's Club
Stores which feature expanded delis. Purchasing decisions are made at the
company headquarters with input from the store level. While the Company is in
the fourth year of its relationship with Sam's, there can be no assurance
that Sam's Club Stores will continue to carry its products or allocate
Monterey Pasta the same amount of shelf space. The loss of either of these
major customers could materially adversely affect the Company's business
operations.
In 1999, the average grocery store carried 12 individual Monterey
Pasta products, or Stock Keeping Units ("SKUs"), and the average club store
carried 11 SKUs.
MARKETING
The Company's marketing strategy is to create brand awareness by
communicating to the consumer that Monterey Pasta Company provides a gourmet
quality nutritious line of products and to promote repeat business by
reinforcing positive experiences with the Company's products. The Company's
approach includes the introduction of new products on a timely basis to
maintain customer interest and to respond to changing consumer tastes.
Additionally, the Company will continue to expand its sales into those
geographic regions that will best support the purchase of the Company's
upscale, premium grade products.
COMPETITION
The Company's business is subject to significant competition. The
fresh pasta and pasta sauce industry is highly competitive and is dominated
by a two very large multinational companies, Nestle, with its
Contadina-Registered Trademark- brand, and Kraft, with its
DiGiorno-Registered Trademark- brand. There are also a number of smaller
regional competitors, such as Mallards-Registered Trademark- (recently
acquired by Tyson), Romance, and Trios-Registered Trademark-, (now owned by
ConAgra). Multinational competitors have significantly more brand name
recognition, marketing personnel, and cash resources than the Company.
Moreover, competition for shelf space in grocery stores is intense and poses
great difficulty for smaller food companies.
To date, the Company has benefited from the marketing efforts of
Nestle and Kraft. These companies have committed significant financial
resources towards advertisement, promotion and development of the fresh pasta
and pasta sauce industry, which have contributed to the rapid expansion of
this market and to the increased consumer attention to the refrigerated pasta
and sauce category. No assurance, however, can be given that these large
companies will continue to expend such resources in the future or that the
Company will continue to enjoy such benefits. In the future, the Company may
be required to incur significantly greater expenses for promotion,
advertisement and marketing, which could adversely affect profitability.
There can be no assurance that the Company will be able to commit funds to
promotion, advertisement and marketing while operating profitably.
Competitive factors in the refrigerated pasta and sauce industry
include brand awareness, product quality and taste, healthfulness, price and
availability of grocery and club store shelf space. The Company's suggested
retail prices are slightly higher than its competitors'
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prices to emphasize the premium quality of its product line. The Company
believes the excellent quality, taste and healthfulness of its products are
superior to that of its competitors, although its brand name recognition and
access to grocery shelf space is significantly less than many of its
competitors. The Company also believes that the quality of its products and
the variety of its product line, which focuses on contemporary California
cuisine, provide a competitive advantage over many companies who market
traditional Italian-style pasta and sauce products.
MANAGEMENT
Information relating to directors and executive officers of the
Company is set forth in Part III of this report.
MANAGEMENT INFORMATION SYSTEMS
The Company purchased a new integrated management information system
in 1996 with the objective to implement an electronic link between the
Company's retail sales operations, production facilities and the corporate
offices. The Expandable MRP system ("Expandable") is central to the Company's
efforts to automate, centralize and streamline many of the Company's key
functions including accounting and finance, human resources, and production
and inventory control. During the fall of 1998 the Company successfully
installed a new version of Expandable to ensure compliance with year 2000
needs. All other systems were successfully updated to comply with year 2000
needs during 1999.
GOVERNMENT REGULATION
The Company is subject to the regulations of the U.S. Food and Drug
Administration (FDA), the U.S. Department of Agriculture (USDA), and state
and local regulations relating to cleanliness, maintenance of food production
equipment, food storage, cooking and cooling temperatures and food handling,
and is subject to unannounced on-site inspections of production facilities.
Regulations in new markets, new regulations in existing markets, and future
changes in existing regulations may adversely impact the Company by raising
the cost of production and delivery of pasta and sauces and/or by affecting
the perceived healthfulness of the Company's products. A failure to comply
with one or more regulatory requirements could result in a variety of
sanctions, including fines and the withdrawal of the Company's products from
store shelves. The Company is not aware of any currently existing facts or
circumstances that would cause it to fail to comply with any of the
regulations to which it is currently subject.
EMPLOYEES
As of December 26, 1999, the Company employed a total of 182
persons, including 31 administrative personnel, 5 sales personnel, 4 drivers,
and 142 and distribution production personnel. None of the Company's
employees are represented by a labor union and the Company believes its
relations with its employees are good.
TRADEMARKS AND SERVICE MARKS
The Company has registered the "Monterey Pasta Company" name and
"postage stamp" logo design with the United States Patent and Trademark
Office. There can be no assurance that competitors will not adopt similar
names or logo designs outside the protection of the Company's trademark
registration. In July of 1999 the Company applied for registration with the
United States Patent and Trademark Office for the "Homestyle-Fresh" trademark
currently used in its soup line. In March of 1999 the Company acquired the
right to use the "Arthur's" label with its acquisition of the Frescala Foods,
Inc. business (See "Liquidity and Capital Resources" and Note 16).
ITEM 2. PROPERTIES
During February 1996, the Company leased 9,160 square feet of
executive office and training space facilities in downtown San Francisco. The
Company vacated this space in January 1997 following a staff reduction and
consolidation of all operations in the Company's factory in Monterey County.
The Company subleased the San Francisco property at a small premium, as of
April 1, 1997, to a large publishing interest for the remaining term of the
lease through February 2001.
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Effective February 6, 1998, the Company leased an additional 4,649
sq. ft. in the same building it now occupies in Monterey County, California,
bringing the total square footage leased to 42,315 pursuant to a lease which
expires in 2004 with two ten year options for renewal. The additional space
was used to increase the efficiency of the production and storage areas. In
June of 1998, the Company leased an additional 1,365 sq. ft. in the same
building, pursuant to the same lease expiration. This area is used for office
space. The total square footage now leased by the Company is 43,680, or
approximately one acre of building space, and comprises the entire building.
Company management believes that the properties/facilities are suitable and
adequate for the Company's needs.
The Company currently leases two outside warehouse facilities in
Salinas, California within the same warehouse complex approximately
three-miles from its production facility. One, comprised of approximately
12,000 square feet, is used to store excess coolers and display racks,
packaging materials, idle equipment and company records, and is a
month-to-month lease. The second is for 20,000 square feet of refrigerated
storage. The term is for five years and expires January 2005.
ITEM 3. LEGAL PROCEEDINGS
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. On
February 2, 2000 the United States District Court for the District of
Delaware denied a motion to dismiss a lawsuit against Clearwater Fund IV,
Ltd. And Clearwater Fund IV, LLC, stockholders of the Company, (collectively,
"Clearwater") alleging a violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, in connection with an alleged purchase and
sale of the Company's stock within a six month period. The Company has been
named as a nominal defendant in this suit; however, to date it does not
expect to incur damages, if the plaintiff is ultimately successful. In fact,
is this lawsuit is ultimately successful, the Company may receive a portion
of the $987,000 profit deemed to have been received by Clearwater in
connection with the purchase and sale of the Company's stock. There can be no
assurance that the Company will receive any funds as a result of this suit,
or that one of the parties to the suit will not allege damages payable by the
Company, which, even if ultimately unsuccessful, could cause the Company to
expend time and money to resolve.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote during the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on December 7, 1993
at a price to the public of $6.00 per share. Since that date, the Company's
Common Stock has traded on the NASDAQ National Market System under the symbol
"PSTA." The table on the following page sets forth for the period indicated,
the high and low sales prices of shares of the Common Stock on the NASDAQ
National Market System.
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<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal year 1998:
First quarter $ 1 3/4 $ 1 1/8
Second quarter 1 1/2 1 1/16
Third quarter 1 9/16 1 1/16
Fourth quarter 1 13/16 1
Fiscal year 1999:
First quarter $ 3 7/32 $ 1 5/16
Second quarter 3 2 3/8
Third quarter 3 1/2 2 1/2
Fourth quarter 4 1/2 2 9/16
</TABLE>
As of February 14, 2000, there were 308 stockholders of record of
the Common Stock and approximately 3,500 investors with shares in street name.
DIVIDEND POLICY
The Company has not paid any cash dividends to Common stockholders,
except to certain holders of private placement common stock in 1997, which
represented guaranteed yield for the period from stock issuance in April,
1997 until the Registration Statement on Form S-3 was effective on October
24, 1997. The Company intends to retain future earnings in its business and
does not anticipate paying cash dividends on the outstanding Common stock in
the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company. These data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in Form 10-K.
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------------------
(dollar amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues from continuing operations $ 18,716 $ 24,492 $ 23,447 $ 26,217 $ 36,902
Income (loss) from continuing operations $ (1,297) $ (8,453) $ 474 $ 2,037 $ 7,027*
Income (loss) from discontinued operations $ (21,279) $ 220 $ 37 $ -- $ --
Basic net income (loss) per common share $ (3.50) $ (1.13) $ 0.02 $ 0.16 $ 0.55
Diluted income (loss) per common share $ (3.50) $ (1.13) $ 0.02 $ 0.16 $ 0.54
Weighted average primary shares outstanding 6,440,198 8,276,608 10,458,451 12,979,055 12,711,801
Weighted average diluted shares outstanding 6,440,198 8,276,608 10,458,451 12,979,055 13,074,776
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $ 597 $ (377) $ 2,444 $ 1,601 $ 4,128
Total assets $ 11,691 $ 10,789 $ 11,029 $ 10,835 $ 18,666
Total debt and capital lease obligations $ 3,958 $ 1,635 $ 1,797 $ 2,277 $ 761
Stockholders' equity $ 2,405 $ 5,085 $ 7,360 $ 6,709 $ 14,610
</TABLE>
*Includes one-time impact of $3.43 million reversal of deferred tax asset
valuation allowance.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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 a variety of products to grocery and club
stores throughout the United States, selected regions in Canada, and part of
Latin America. The Company's overall strategic plan is to enhance the value
of the Monterey Pasta Company brand name by distributing its gourmet products
through multiple channels of distribution.
The Company's product distribution to grocery and club stores
increased from approximately 25 stores as of December 1989, to approximately
4,300 by December 1995, declined to approximately 3,100 as of December 28,
1997 and increased, once again, to approximately 4,500 stores by December 26,
1999. During 1994, 1995 and 1996, significant costs were incurred to promote
the expansion that occurred, including product demonstration, advertising,
warehousing, and distribution costs and the hiring of additional personnel.
In 1997, the focus was changed to developing a profitable distribution base.
Hence, the reduction in store totals, and the return to profitability. During
1998 and 1999 the Company added profitable retail and club distribution
including approximately 110 additional club stores, 750 retail stores as part
of the March, 1999 Frescala Foods acquisition, and several new retail chains
comprising over 550 stores.
The success of the Company's efforts to increase revenue will depend
on three key factors: (1) whether grocery and club store chains will continue
to increase the number of their stores offering the Company's products, (2)
whether the Company can continue to increase the number of grocery and club
store chains offering its products, and (3) continued introduction of new
products that meet consumer acceptance. Grocery and club store chains
continually re-evaluate the products carried in their stores, and no
assurances can be given that the chains currently offering the Company's
products will continue to do so in the future or that such chains will not
reduce the number of stores carrying the Company's products.
The Company believes that access to substantially greater capital
resources, coupled with continued reduction of its administrative and
production costs as a percent of sales revenue, will be key requirements in
the Company's efforts to enhance its competitive position and increase its
market penetration. In order to support its expansion program, the Company
has developed, and is continuing to develop new products for consumers and
revised advertising and promotional activities for its retail grocery and
club store accounts. 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.
CONTINUING OPERATIONS FOR 1997, 1998 AND 1999
Net revenues from continuing operations were $23,447,000,
$26,217,000, and $36,902,000 for 1997, 1998, and 1999, respectively,
reflecting an annual increase in sales of 12% for 1998, when compared to
1997, and a 41% increase for 1999 when compared to 1998. The 1998 and 1999
increases resulted from increased store numbers from approximately 3,100 at
the end of 1997 to approximately 3,460 individual grocery and club stores by
year-end of 1998, and approximately 4,540 at year end 1999.
Gross margin decreased to 38% in 1999 from 41% in both 1997 and
1998. The decline was caused by excess distribution expenses arising from
outside warehouse arrangements which were replaced by a company-run
distribution complex in December 1999, slightly lower gross margin percent
caused by the conversion of most of the remaining customers to
Restaurant-Style product by the fourth quarter of 1999, and expenses
associated with intensive new product development efforts. In addition, lower
gross margin percent was experienced on the Frescala Foods sales over the
first six months of operation (after the March 1999 purchase) until the San
Antonio, Texas facility was closed and the business fully assimilated into
the Salinas, California plant.
11
<PAGE>
Selling, general and administrative expenses ("SG&A") increased to
$10,220,000, up $1,909,000 or 23% from $8,311,000 in 1998, which had declined
$413,000 or 5% from 1997. The 1999 expense level reflects the first year SG&A
expenses increased since 1996 when they were $16.2 million. The 1996 expense
level was materially reduced in 1997 to $8,724,000 as a result of redefined
marketing focus, and facilities consolidation from San Francisco to Salinas,
with reduced headcount and related overhead expenses implemented in late 1996
and early 1997. Further decreases in administrative costs continued during
1998 with a $1.1 million reduction in professional fees, public reporting
expense, insurance costs, and other administrative expenses, partially offset
by increased expenses in the sales and marketing area related to new
customers and stores. In 1999 variable costs associated with the 41% sales
increase, additional product demonstration expense related to the added club
store business, full year expense for two marketing positions, and normal
wage and salary inflation contributed to the increase over 1998. SG&A
expenses as a percent of sales were 37.2%, 31.7% and 27.6% for 1997, 1998,
and 1999, respectively. Management believes the current level of SG&A
expenses is consistent with efficient operations, and additional expenses in
future periods, mainly in the sales and marketing area, will be directly
associated with increased levels of sales.
Depreciation and amortization expense, included in cost of sales and
SG&A, increased to $1,046,000, or 3% of net revenues in 1999, compared to
$999,000 or 4% of net revenues in 1998, and $961,000 or 4% in 1997. The
increases over the past two years relate primarily to capital expenditures in
the Salinas, California production facility and the addition of the Frescala
Foods business that added $94,000 amortization expense during 1999. The
Company anticipates further increases in depreciation and amortization in
future periods as additional equipment is purchased and placed in service.
Net interest expense of $156,000 was recognized in 1999 compared to
net interest expense of $250,000 in 1998 and $211,000 in 1997. Cash raised by
the March, 1997 private placement helped reduce interest expense in 1997. The
1998 increase was the result of the funds borrowed to repurchase common stock
from Clearwater Fund IV LLC in March of that year. The 1999 decline was
associated with additional cash generated by the increased profit level,
which reduced loan balances, reduction in interest rate premium over prime by
the Company's lender, and reductions in prime rate.
Remaining reserves for discontinued operations of $388,000 at the
end of 1996 from the sale of a former subsidiary, Upscale Food Outlets, less
a recovery of $37,000, were utilized during 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the twelve months ended December 26, 1999, $4,701,000 of cash
was provided by the Company's operations, compared to $3,057,000 provided in
1998. The improvement in 1999 profitability of $1,560,000 was largely
responsible for the $1,644,000 increase in cash from operations. Working
capital changes on a net basis were relatively minor. The 1999 improvement
followed a $4.1 improvement of 1998 over 1997, of which $1.6 million was
contributed by an increased net cash income (net income plus depreciation and
amortization). The remainder of the 1998 increase over 1997 was a result of
an improvement in working capital accounts, specifically accounts receivable,
prepaid expenses, and accounts payable, partially offset by an increase in
inventory needed to support increased sales.
In December 1995, the Company obtained a $3,000,000 credit facility
from a commercial lending institution. The proceeds from such financing were
used for sales and marketing expenses, working capital, and capital
investment. This facility was renegotiated with another bank in July 1997 to
avail the Company of lower interest rates. It was increased to $4,000,000 in
March, 1998 to allow for a stock repurchase of 2,365,066 shares of Common
from Clearwater Fund IV LLC for a total purchase price of $2,690,000 or
$1.1375 per share, resulting in a 15.6% reduction in shares outstanding. In
July 1998 and July 1999 the credit facility was renewed for additional years
with lower interest rates on the term notes and the receivables and inventory
line, as well as no loan fees. A term note for $750,000 was negotiated in
March 1999 to assist with the funding of the Frescala Foods acquisition. This
note was repaid in full in September of 1999. Current credit facility is at
$4.75 million, of which $605,000 was outstanding at December 26, 1999, all
current (See Note 4 to the financial statements).
A total of $1,516,000 in cash was used in 1999 in connection with
the Frescala Foods acquisition, including costs associated with the
transaction (Refer to following paragraph). In addition, $2,415,000 in cash
was used to purchase equipment and leasehold improvements in 1999, compared
to $933,000 in 1998. Approximately $1.3 million of the 1999 capital
expenditures were part of a $3.5 million capital plan approved by the
Company's Board of directors in October 1999 for the period of October 1999
through December 2000. The Company plans to make additional capital
expenditures in 2000 of approximately $2.2 million to expand production
capability, improve packaging efficiency
12
<PAGE>
and maintain quality. All capital expenditures are expected to be funded with
a combination of cash flow from operations and use of the Company's credit
facility.
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 plus fully vested
options to purchase 300,000 shares of the Company's common stock. 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 received
an earn-out of $97,000 as of October 31, 1999 based upon Frescala sales above a
predetermined level. Funding for the transaction came from a new $750,000
two-year term loan, since repaid, use of existing accounts receivable and
inventory line, and cash flow from operations.
The total consideration of $1,587,000 plus related acquisition costs of
$73,000, was allocated to identifiable fixed assets totaling $200,000 and
inventories of $217,000. The balance of $1,243,000, which includes trademarks
and recipes not specifically quantifiable, was charged to goodwill.
Management believes that the Company's credit facility and cash
generated from continuing operations will provide adequate funding to meet its
needs for normal operations and capital purchases through 2000.
DEFERRED TAX ASSETS
Due to the prior history of losses, a 100% valuation allowance against
deferred tax assets was provided in 1998 and earlier years, as management could
not determine that it was more likely than not that they would be realized. As
of December 26, 1999, however, the Company has experienced three consecutive
years of increasingly profitable operations. Accordingly, a portion of the
valuation allowance totaling $3,430,000 has been reversed as of December 26,
1999, since the Company believes it is more likely than not that this portion of
deferred tax assets will be realized.
SALES AND MARKETING
The Company's sales and marketing strategy targets sustainable growth.
Its focus is on increasing sales through expansion of its club store and retail
grocery business, increasing its distribution through the rapidly growing number
of natural and organic food retailers, and the introduction of innovative new
products designed to meet consumer needs.
After gaining over 300 new club stores during 1997 and 1998, expansion
of the Company's club store business continued in 1999 with the rollout of the
Company's products in Costco's Los Angeles and San Diego divisions with 72 total
warehouses. Distribution of the Company's products continues to grow with the
national expansion of Sam's Club. Monterey Pasta's products are now found in
approximately 420 Sam's Club locations, an increase of approximately 90 stores
over 1998.
During 1999 the Company's retail grocery distribution increased
significantly with the addition of over 200 Ralph's stores in California, 79
stores of Denver-based King Soopers, 44 stores of Norfolk, VA-based Farm Fresh,
Inc., 150 Smart and Final Stores throughout the western United States, as well
as a third Direct Store Delivery route in Northern California. It also acquired
750 new stores with the March 1999 Frescala acquisition, of which it retained
550 at year-end 1999.
Monterey Pasta's products are made with no preservatives or artificial
ingredients. Capitalizing on this strength, the Company continues to pursue
increased distribution through natural and organic food retailers, whose growth
has exceeded 20% in recent years. The Company estimates there are 450 potential
natural and organic retail grocery stores available, as potential markets for
its products.
To fulfill its objective of introducing innovative new products, in
1999 the Company made several significant introductions including Gnocchi,
Homestyle-Fresh Refrigerated soups, and Tortelloni Grandi. It also expanded its
line of Restaurant-Style pastas and sauces, which feature the largest ravioli
currently available to the fresh grocery consumer. These new additions include
Chicken Rosemary Ravioli, Garden Fresh Marinara Sauce, and Fresh Alfredo Sauce
with Herbs.
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<PAGE>
The 1999 introduction of the Company's Potato Parmesan gnocchi was the
first refrigerated fresh gnocchi widely available in the marketplace. Additional
varieties are currently under development and will be introduced in the coming
year.
Tortelloni Grandi was another significant addition to the Company's
product offerings in 1999. These new entree-sized tortelloni are 80% larger by
weight than traditional tortelloni and contain twice the filling. This
introduction is designed to take advantage of the fast-growing tortelloni
segment of the refrigerated pasta market.
Also new for 1999 are Monterey Pasta's Homestyle Fresh soups. These
gourmet refrigerated, fresh soups are packaged in easy-to-open,
microwave-and-serve 20 ounce plastic cups. The initial release includes eight
varieties. This introduction expands the Company's already-successful pasta and
sauce business into another grocery category. New flavors will be introduced in
the coming year.
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:
- - 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 eleven consecutive quarters. At December 26, 1999, the Company had an
accumulated deficit of $25,653,000. 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 and capital expenditures through 2000, assuming that
its existing bank lines 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.
14
<PAGE>
- - 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 1999, two customers, Costco and Sam's
Club Stores, accounted for 49% and 31%, 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 offer Monterey Pasta products in the future or
continue to allocate Monterey Pasta the same amount of shelf space. The
Company also supplies its products to approximately 420 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 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. The Company used both internal
and external resources to reprogram, replace and test the systems for the
year 2000 modifications. No problems have been noted with year internal
2000 compliance as of the filing date of this Form 10-K.
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. This assessment is essentially complete and no matters
have come to the Company's attention, which
15
<PAGE>
could give rise to the need for remedial measures. The Company cannot
currently predict the future effect of third parties' "Year 2000"
issues on its business. As of the filing date of this Form 10-K there
have been no indications of material matters which have or could impact
the Company's business from third parties. Contingency measures such as
the stocking of additional inventory of key items were put in place at
year-end 1999 and no adverse consequences were observed.
The cost of becoming year 2000 compliant was approximately $85,000. No
further expenses of a material nature are anticipated.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to
the hedged risk or (ii) the earnings' effect of the hedged forecast
transaction. For a derivative NOT designated as a hedging instrument, the
gain or loss is recognized in income in the period of change. SFAS 133, as
amended, is effective for all fiscal quarters beginning after June 15, 2000.
Historically the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of this new standard to affect its financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated at ITEM 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of FEBRUARY 16, 2000, the directors, executive officers, and
other significant employees of the Company are as follows:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS:
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles B. Bonner 57 Director
Thomas E. Kees 49 Director
R. Lance Hewitt 60 Chief Executive Officer, President
and Director
Floyd R. Hill 56 Director
Van Tunstall 53 Director
James Wong 52 Director
Walter L. Henning 55 Director
16
<PAGE>
Stephen L. Brinkman 51 Chief Financial Officer,
Corporate Secretary, and Director
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
OTHER SIGNIFICANT EMPLOYEES:
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lynn Port 55 Plant Controller
Roy G. Scotton 40 Director - Logistics and Human Resources
Peter F. Klein 40 Plant Manager
Ron Hendershott 49 Director - Quality Assurance and Tech. Svcs.
Don Anspaugh 34 Sales Manager - Mid Central Region
Clifford Farmer 44 Natural Foods/DSD Sales Manager
Lisa Player 40 Sales Manager - East
Joseph Stirlacci 40 Senior Sales Manager - West
</TABLE>
Normally each director is elected for a period of one year and
serves until the stockholders duly elect his or her successor. Directors may
be elected by the Board to fill a vacancy between annual stockholder meeting
elections.
The principal occupations of each director and executive officer of
the Company, for at least the past five years, are as follows:
CHARLES B. BONNER, DIRECTOR. Mr. Bonner served as a Director of the
Company from 1993 through January 1995, and was reappointed as a Director
effective September 1995. Mr. Bonner is President of Pacific Resources, Inc.,
a mergers and acquisitions advisory firm, a position he has held since
September 1989. Mr. Bonner also serves as a director for the following
entities: Internet Plus, Inc., Everything Metal Imaginable, Inc., and Daystar
Venture Fund, LP.
R. LANCE HEWITT, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR.
Mr. Hewitt joined the Company in June 1997 as President and Director. He was
named Chief Executive Officer in August 1997. Mr. Hewitt was most recently
President of Carriage House Fruit Company from 1995 to 1997. He was Chief
Operating Officer of Ingro Mexican Foods from 1988 to 1995. Hewitt also
served as Vice President of Marketing and Sales for the Lawry's Foods
division of Thomas J. Lipton, Inc., a subsidiary of Unilever, and spent
fifteen years with McCormick Schilling, Inc. in various executive capacities.
FLOYD R. HILL, DIRECTOR. Mr. Hill co-founded the Company in 1989,
served as its Secretary/Treasurer and Chief Executive Officer until 1993, and
served as a Director of the Company from 1989 until 1994. Mr. Hill became a
Director again in January 1995. He also served as the Senior Vice President
of Production from August 1993 until November 1995. From 1969 until 1991, Eli
Lilly & Co. employed Mr. Hill in various marketing and product development
positions. Mr. Hill joined Organic Food Products in November 1995 as Chief
Operating Officer, and was promoted the Chief Executive Officer in December
1995, a position he held until April 1998. He is currently the owner and
operator of a motel in Tombstone, Arizona.
THOMAS E. KEES, DIRECTOR. Mr. Kees has served as President, Chief
Executive Officer, and Chairman of Legacy Brands, Inc. since September 1,
1995. Legacy is a licensing and marketing company for highly recognized food
products such as the Mrs. Field's brands. From 1994 to 1995 he was the Senior
Vice President of Retail Development at A.C. Nielsen where he founded and
chaired the Nielsen Retail Advisory Board. Mr. Kees served as Executive Vice
President of Raley's Supermarkets and Drug Centers, a regional sales operator
of 85 Stores in Northern California and Nevada, from 1992 to 1994. Mr. Kees
was elected to the Board in June of 1998.
VAN TUNSTALL, DIRECTOR. Mr. Tunstall was elected to the Board of
Directors in February 1997. Since 1997, he has served as President of the
Central Coast Group, a strategic consulting and business services firm. He
has been an independent consultant with a variety of companies since 1997.
Mr. Tunstall was a senior executive with Gilroy Foods, Inc., an international
manufacturer of various food product
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<PAGE>
ingredients, from 1977 to 1995. He served as President and Chairman of the
Board from 1991 through 1995. Previously, Mr. Tunstall held various positions
with McCormick & Company, Inc.
JAMES WONG, DIRECTOR. Mr. Wong was elected to the Board of Directors
in March 1997. He serves as Chairman and Chief Executive Officer of
Directions International, a U.S. based management consulting firm, which he
founded in 1988. He has worked on five continents facilitating strategic
alliances with suppliers and joint venture partners to improve global market
share and profitability. Mr. Wong serves as a director on a variety of boards
for both profit and not-for-profit, privately held organizations.
WALTER L. HENNING, DIRECTOR. Mr. Henning was elected to the Board of
Directors in December 1999. He is currently Plant Manager of the Salinas
Plant, McCormick & Company, Inc., a position he has held since early 1999.
Mr. Henning began his career with McCormick and Company in 1971 as Manager,
Technical Services. He subsequently was promoted several times to other
positions in technical and plant management before leaving the company in
1983 to accept the position of Vice President of Operations with Tone Spices.
Following the sale of Tone, Mr. Henning returned to a subsidiary of McCormick
and Company, Gilroy Foods, Inc. in 1995 as Vice President of Operations. Mr.
Henning remained with Gilroy Foods, Inc. in the same capacity after it was
purchased by ConAgra in 1996, before ultimately returning to McCormick &
Company.
STEPHEN L. BRINKMAN, CHIEF FINANCIAL OFFICER, CORPORATE SECRETARY,
AND DIRECTOR. Mr. Brinkman joined the Company in August, 1997 after a 17 year
career with Gilroy Foods, Inc., where he was Controller from 1984 through
1988 and Vice President, Finance and Administration from 1989 through 1996.
Previously, he was Controller for a large California-based farming company,
and worked for Security Pacific Bank in agricultural banking. Mr. Brinkman
was elected to the Board in October 1999.
The principal occupations of certain other significant employees of
the Company, for at least the past five years, are as follows:
LYNN PORT, PLANT CONTROLLER. Mr. Port came to the Company in January
1998. He has over 24 years experience as a controller in agribusiness,
retail, government and health care concerns, most recently with Country Home
Care from 1995 through 1997. From 1989 to 1995 Mr. Port was Director of
Finance for the Monterey County Housing Authority. Prior to 1989 Mr. Port
served for four years as Controller for Gilroy Canning, Inc., a large tomato
processing company.
ROY G. SCOTTON, DIRECTOR-LOGISTICS. Mr. Scotton joined the Company
in June 1996 as Production Manager and was subsequently promoted to Plant
Manager. Mr. Scotton served at Nestle Food Company from 1987 to 1996, most
recently as Organizational Development Manager. In March 1998, Mr. Scotton
was reassigned to the responsibilities formerly held by Mr. Klein, with the
exception of plant maintenance. He is now head of Logistics and responsible
for the Company's new distribution center.
PETER F. KLEIN, PLANT MANAGER. Mr. Klein became Production Manager
at the Company in November 1994, responsible for production and plant
maintenance. In 1996 he was promoted to Plant Superintendent responsible for
warehouse functions and plant maintenance. He has over 15 years of experience
in overseeing warehouse operations, shipping and receiving, and maintenance
services. In March of 1998 Mr. Klein assumed responsibility for plant
operations as well as plant maintenance and production planning,
relinquishing his warehouse functions to Mr. Scotton. Mr. Klein is also
responsible for Human Relations.
RON HENDERSHOTT, DIRECTOR OF QUALITY ASSURANCE AND TECHNICAL
SERVICES. Mr. Hendershott joined the Company in May 1995 as Quality Control
Manager. He was promoted to his current position in March 1998. Mr.
Hendershott has over 25 years of managerial experience in Quality
Control/Quality Assurance, technical services, and regulatory affairs. Prior
to joining Monterey Pasta he was with La Victoria Foods as Director of
Quality Control from 1993 through 1995 after spending two years with Weight
Watchers as Manager of Technical Support Services. He also served American
Home Foods for seven years as Regulatory Affairs Manager.
DON ANSPAUGH, SALES MANAGER-MID CENTRAL REGION. Mr. Anspaugh joined
the Company in March 1998 to replace Jody Cook, who assumed new
responsibilities as a Manufacturer's Agent in a consulting role and has since
left the Company. Mr. Anspaugh has nearly ten years of sales experience, most
recently with Willett America, where he served as Inside Sales Manager from
1995 through 1997. He was DSD Manager with the Company from 1994 to 1995. Mr.
Anspaugh also was an Area Sales Manager with Labeljet Company, a division of
Willett America, and was a District Sales Representative with Coca-Cola.
19
<PAGE>
JOSEPH STIRLACCI, SENIOR SALES MANAGER-WEST. Mr. Stirlacci has
served as Western Zone Manager since December 1995. In December 1999 he was
promoted to Senior Sales Manager-West. His primary responsibility is to
manage, maintain and secure club store accounts. Mr. Stirlacci has been in
the food and beverage industry since 1981, serving seven years with Young's
Market managing wholesale liquor and wine from 1988 to 1995, after six years
as the account executive for four large grocery chains.
LISA PLAYER, SALES MANAGER-EAST. Ms. Player joined the Company in
the capacity of Eastern Zone Sales Manager and Sam's Club Stores Account
Manager in March 1998 after spending a year as Corporate Sales Account
Executive with FTP Travel Management Group, a large regional corporate travel
management company. Prior to that she was employed for over five years by
Trio's Pasta Products of Chelsea, Massachusetts, a competitor of the Company,
ultimately as National Account Sales Manager. During her tenure with Trio's,
Ms. Player was responsible for the Sam's Club account (which, after her
tenure with Trio's, was acquired by the Company in September, 1997).
CLIFFORD M. (RICK) FARMER. Mr. Farmer joined Monterey Pasta Company
in April 1991 and was responsible for developing the Company's Direct Store
Delivery operation. After the successful startup of the DSD system, he was
promoted in 1992 to Plant Operations/Distribution Manager. Her moved back to
the DSD operation in June 1993 in the capacity of Northern California
Division Manager and was ultimately promoted to Western Regional Operations
Manager. He has been responsible for the Company's DSD operations since 1993
and recently added natural food and specialty stores to his responsibilities.
Mr. Farmer has over 15 years of food sales and distribution experience
including as four-year stint as Executive Vice President of Golden Yolk Egg
Company in San Francisco.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% beneficial owners are required by
SEC regulations to furnish the Company with copies of all reports they file
under Section 16(a). To the Company's knowledge, based solely on its review
of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with during the fiscal year ended December
26, 1999, with no exceptions.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
SECURITIES
NAME AND UNDERLYING ALL
PRINCIPAL POSITION YEAR SALARY $ BONUS $ OTHER $ OPTIONS (#) OTHER $
------------------ ---- -------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
R. LANCE HEWITT 1999 $179,846(1) $ -- $9,000(1) 112,000(1) $ --
President and Chief 1998 $175,000(1) $61,250 $9,000(1) --(1) $ --
Executive Officer 1997 $ 94,231(1) N/A $4,500(1) 100,000(1) N/A
STEPHEN L. BRINKMAN 1999 $124,038(2) $ 3,923 $ -- 60,000(2) $ --
Chief Financial Officer 1998 $115,293(2) $23,540 $ -- --(2) $ --
1997 $ 35,962(2) $ -- $ -- 60,000(2) $ --
</TABLE>
Notes: (1) Mr. Hewitt was appointed President in June 1997 and Chief
Executive Officer in August 1997. He was eligible for a 35% bonus upon
completing his first full year of employment, which was paid in June 1998.
For every year thereafter he is eligible for a bonus of up to a maximum of
35% of his salary annually for achieving agreed-upon income targets, as
approved by the Board of Directors, and an additional 25% of his salary for
achieving certain specific objectives for each fiscal period. He was eligible
to vest and vested 50,000 options each year, because he was still employed by
the Company on both the first and second anniversaries of his May 26, 1997
employment agreement. Mr. Hewitt was also eligible to receive, at the
discretion of the Board of Directors, an additional 200,000 options during
the first two years of employment split as follows: 120,000 for achieving
agreed-upon business goals in the first year and 80,000 for achieving
business goals in the second year. The cycle for measurement of Mr. Hewitt's
eligibility for bonus, and those options tied to performance, was converted
to a fiscal year basis during the fourth quarter of 1998 by resolution of the
board of Directors at its October 22, 1998 meeting. At its February 9, 1999
Board of Directors meeting, the directors awarded 32,000 options to Mr.
Hewitt for performance in his first full year of employment through fiscal
year-end 1998, based on the new measurement cycle. The determination for the
remainder of the options was made subsequent to 1999 fiscal year-end when Mr.
Hewitt was awarded an additional 80,000 options which vested as of February
13, 2000. In May 1999 Mr. Hewitt was granted an additional 80,000 options
based on milestones for the year 2000; 27,000 will vest if he is still
employed by the Company on December 30, 2000, and 53,000 will vest based on
achievement of performance objectives mutually agreed upon with the Board.
During its February 2000 Board of Directors meeting the Board awarded Mr.
Hewitt a 50% bonus for his 1999 performance. Mr. Hewitt also receives an auto
allowance of $750 per month.
(2) Mr. Brinkman was appointed Chief Financial Officer in September 1997. He
was eligible for, and received, a 20% bonus based upon performance upon
completion of his first full year of employment. For every year thereafter he
is eligible for a bonus of up to 20% based upon the achievement of
performance criteria agreed upon with the Chief Executive Officer. Mr.
Brinkman was granted 60,000 options in 1997. He vested 10,000 options upon
his initial employment date, 10,000 options on his first anniversary and
10,000 options for achieving certain performance criteria in his first full
year of employment. In addition, he was eligible to vest and vested 10,000
options on his second anniversary of employment, 10,000 options for achieving
certain performance criteria in his second full year of employment, 5,000
options on his third anniversary of employment and 5,000 options for
achieving certain performance criteria in his third full year of employment.
The cycle for measurement of Mr. Brinkman's eligibility for bonus, and those
options tied to performance, was converted to a fiscal year basis during the
fourth quarter of 1998 at the direction of the Chief Executive Officer. He
vested 3,000 options for performance through fiscal year-end 1998, based on
the new measurement cycle. The vesting determination for the remainder of the
options was made subsequent to 1999 fiscal year-end, at which time Mr.
Brinkman vested an additional 6,666 options, with 334 forfeited based on 1998
performance criteria. In February 2000 Mr. Brinkman was awarded an 18.8%
bonus for his 1999 performance. In May 1999 Mr. Brinkman was granted an
21
<PAGE>
additional 60,000 options based on milestones for the year 2000; 20,000 will
vest if he is still employed by the Company on December 30, 2000, and 40,000
will vest based on achievement of performance objectives mutually agreed upon
with the CEO.
OPTION GRANTS IN LAST FISCAL YEAR
The Board of Directors awarded Mr. Hewitt 32,000 options for his
1998 performance as mentioned in Note 1 to the "Summary Compensation" table
on the preceding page. In addition, the Board granted 80,000 options to Mr.
Hewitt and 60,000 options to Mr. Brinkman for the year 2000 which will vest
based on employment status and achievement of certain performance measures
(See Notes 1 and 2 under "Executive Compensation"). Neither Mr. Hewitt nor
Mr. Brinkman exercised any options during 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF % OF TOTAL
SECURITIES OPTIONS POTENTIAL REALIZABLE VALUE
UNDERLYING GRANTED TO EXERCISE ON 12/26/99:
OPTIONS EMPLOYEES OR BASE EXPIRATION ALTERNATIVE GRANT DATE
NAME GRANTED IN 1999 PRICE DATE VALUE
- ------------------------ ------------ -------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
R. Lance Hewitt 32,000 10.12 2.125 February 22, 2009 $ 45,760
80,000 25.32 2.625 May 16, 2009 114,400
Stephen L. Brinkman 60,000 18.99 2.625 May 16, 2009 $ 85,800
</TABLE>
The Alternative Grant-Date Value of Mr. Hewitt's and Mr. Brinkman's
options was calculated using a Black-Scholes option pricing model assuming no
dividends, a weighted average risk-free interest rate of 5.28% and a
weighted-average volatility of 53.14%.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 26, 1999 DECEMBER 26, 1999
----------------------------------- -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
R. Lance Hewitt 132,000 80,000 $ 239,250 $ 105,000
Stephen L. Brinkman* 43,000 76,666* $ 96,750 $ 116,248
</TABLE>
* Mr. Brinkman forfeited 334 options during 1999 related to performance
objectives for 1998.
EMPLOYMENT CONTRACTS
Mr. Hewitt and Mr. Brinkman have employment agreements, the terms of
which are outlined under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table on the following page sets forth as of February 11, 2000
(except as noted in the footnotes to the table), certain information with
respect to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to be the beneficial owners of more than 5% of
the outstanding Common Stock of the Company, (ii) each director and
director-nominee of the Company, (iii) the Chief Executive Officer as of
February 11, 2000, and (iv) all executive officers and directors of the
Company for fiscal year 1998 through February 11, 2000, as a group.
22
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER(1) AMOUNT AND NATURE OF PERCENT OF CLASS(2)
BENEFICIAL OWNERSHIP(2)
<S> <C> <C>
Gruber and McBaine Capital Management(3) 1,812,300 12.4%
50 Osgood Place, Penthouse
San Francisco, CA 94133
Thomas E. Kees(4) 10,000 *
Van Tunstall(5) 77,300 *
Floyd R. Hill(6) 159,000 1.1%
James Wong(7) 25,000 *
R. Lance Hewitt(8) 227,000 1.5%
Charles B. Bonner(9) 124,727 *
Stephen L. Brinkman(10) 57,666 *
Walter L. Henning(11) 28,700 *
All Officers and Directors as a group
(8 persons) (12) 709,393 4.9%
</TABLE>
- -------------------
* Represents less than 1%
(1) Unless otherwise noted, the address of each named person is: Care of
Monterey Pasta Company, 1528 Moffett Street, Salinas, CA 93905.
(2) Includes shares of Monterey Pasta Company Common Stock underlying the
options and convertible securities outstanding held by the beneficial
owners with respect to whom the calculation is made, but does not
include shares of Common Stock that may not be acquired until more than
60 days after February 14, 2000.
(3) John D. Gruber and J. Patterson McBaine are the only directors of, and
hold all executive offices of, Gruber and McBaine Capital Management
("GMCM"), an investment advisor. GMCM, together with Messrs. Gruber,
McBaine, and Thomas O. Lloyd-Butler, are the general partners of Lagunitas
Partners, L.P. ("Lag"), a California investment limited partnership. As of
2/14/99 GMCM had shared voting and investment power over 1,359,400 shares;
Mr. Gruber has sole voting and investment power over 230,800 shares and
shared voting and investment power over 1,359,400 shares; Mr. McBaine has
sole voting and investment power over 222,100 shares and shared voting and
investment power over 1,359,400 shares; Lag has sole voting and investment
power over 396,100 shares; and Mr. Butler has shared voting and investment
power over 1,359,400 shares.
(4) Includes 5,000 exercisable options granted under the 1993 Stock Option
Plan.
(5) Includes 25,000 exercisable options granted under the 1993 Stock Option
Plan.
(6) Includes 59,000 exercisable options granted under the 1993 Stock Option
Plan.
(7) Includes 25,000 exercisable options granted under the 1993 Stock Option
Plan.
(8) Includes 212,000 exercisable options granted under the 1993 Stock Option
Plan.
23
<PAGE>
(9) Includes 71,000 exercisable options granted under the 1993 Stock Option
Plan.
(10) Includes 39,666 exercisable options granted under the 1993 Stock Option
Plan.
(11) Includes 6,200 shares held in an IRA account in the name of Teresa A.
Henning to which Mr. Henning claims beneficial ownership.
(12) Includes 436,666 exercisable options granted under the 1993 Stock Option
Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)(1) Consolidated Financial Statements of Monterey Pasta Company: PAGE NUMBER(S)
<S> <C>
Report of Independent Certified Public Accountants 24
Consolidated Balance Sheets: Year-End 1998 and 1999 25
Consolidated Statements of Operations: Years Ended 1997, 1998 and 1999 26
Consolidated Statements of Stockholders' Equity: Years Ended 1997, 1998 and 1999 27-29
Consolidated Statements of Cash Flows: Years Ended 1997, 1998 and 1999 30
Summary of Significant Accounting Policies 31-33
Notes to Consolidated Financial Statements 33-45
Schedule II - Valuation and Qualifying Accounts 46
</TABLE>
All other schedules have been omitted since the required information is
contained in the Consolidated Financial Statements or because such
schedules are not required.
(a)(2) Exhibits: See Index to Exhibits on page 46. The Exhibits listed in
the accompanying Index of Exhibits are filed or incorporated by
reference as part of this report. Exhibit Nos. 4.7, 10.1, 10.2, 10.12,
10.13, 10.15, and 10.16 are management contracts or compensatory plans
or arrangements.
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
None
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Monterey Pasta Company
We have audited the accompanying consolidated balance sheets of Monterey
Pasta Company and subsidiary as of December 27, 1998 and December 26, 1999
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 26,
1999. We have also audited the Schedule listed in the accompanying index at
Item 14(a). These financial statements and the Schedule are the
responsibility of Monterey Pasta Company's management. Our responsibility is
to express an opinion on these financial statements and the Schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
Schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and Schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation of the financial
statements and Schedule. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Monterey Pasta
Company and subsidiary at December 27, 1998 and December 26, 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended December 26, 1999, in conformity with generally accepted
accounting principles.
Also, in our opinion, the Schedule presents fairly in all material respects,
the information set forth therein.
BDO Seidman, LLP
San Francisco, California
January 28, 2000
25
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 27, 1998 December 26, 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 61,645 $ 71,399
Accounts receivable, less allowances of --
$312,408 and $136,127 (Notes 1, 4 and 11) 2,062,565 3,813,611
Inventories (Notes 2 and 4) 1,813,653 2,703,314
Deferred tax assets - short term -- 1,036,000
Prepaid expense and other (Note 10) 1,291,251 487,433
-------------------- --------------------
Total current assets 5,229,114 8,111,757
Property and equipment, net (Notes 3 and 4) 5,261,723 6,789,265
Deferred tax assets - long term -- 2,394,000
Intangible assets, net (Note 16) 174,302 1,281,277
Deposits and other 170,141 89,716
-------------------- --------------------
Total assets $ 10,835,280 $ 18,666,015
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,330,649 $ 2,752,967
Accrued payroll and related benefits 225,438 239,703
Accrued liabilities (Note 13) 292,982 303,006
Current portion of notes, loans, and
Capitalized leases payable (Notes 1, 3 and 4) 1,779,227 688,186
-------------------- --------------------
Total current liabilities 3,628,296 3,983,862
Notes, loans, and capitalized leases payable,
less current portion (Notes 1, 3 and 4) 497,761 72,577
-------------------- --------------------
Total liabilities 4,126,057 4,056,439
-------------------- --------------------
Commitments and contingencies (Notes 5, 9, 11, 13, 14, and 16)
Stockholders' equity (Notes 6, 7, and 15):
Common stock, $.001 par value, 70,000,000
shares authorized, 12,542,613 and
12,938,922 issued and outstanding 39,389,656 40,262,579
Accumulated deficit (32,680,433) (25,653,003)
-------------------- --------------------
Total stockholders' equity 6,709,223 14,609,576
-------------------- --------------------
Total liabilities and stockholders' equity $ 10,835,280 $ 18,666,015
==================== ====================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
26
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------------
1997 1998 1999
--------------------------------------------------------------
<S> <C> <C> <C>
Net revenues (Note 11) $23,446,780 $26,217,297 $36,901,772
Cost of sales 13,761,013 15,579,059 22,748,471
---------------- ---------------- ----------------
Gross profit 9,685,767 10,638,238 14,153,301
Selling, general and administrative (Notes 5, 10 and 13) 8,723,887 8,310,908 10,219,615
---------------- ---------------- ----------------
Operating income 961,880 2,327,330 3,933,686
Loss on disposition of assets (Note 3) (259,480) (26,387) (13,004)
Other income, net (Note 5) 4,135 16,843 1,736
Interest expense, net (Note 4) (211,438) (249,693) (156,233)
---------------- ---------------- ----------------
Income from continuing operations before provision
for income taxes 495,097 2,068,093 3,766,185
Income tax benefit (provision) (Note 8) (20,691) (31,135) 3,261,245
---------------- ---------------- ----------------
Income from continuing operations 474,406 2,036,958 7,027,430
Discontinued operations (Note 14) 36,882 -- --
---------------- ---------------- ----------------
Net income $ 511,288 $ 2,036,958 $ 7,027,430
================ ================ ================
Net income per common share (Note 6):
Net income from continuing operations $ 474,406 $ 2,036,958 $ 7,027,430
Dividends to preferred and certain common stockholders (317,647) -- --
---------------- ---------------- ----------------
Net income from continuing operations
Attributable to common stockholders $ 156,759 $ 2,036,958 $ 7,027,430
================ ================ ================
Basic income per share:
Continuing operations $ 0.02 $ 0.16 $ 0.55
Discontinued operations $ 0.00 $ 0.00 $ 0.00
---------------- ---------------- ----------------
Basic net income per common share $ 0.02 $ 0.16 $ 0.55
================ ================ ================
Diluted Income per share:
Continuing operations $ 0.02 $ 0.16 $ 0.54
Discontinued operations $ 0.00 $ 0.00 $ 0.00
---------------- ---------------- ----------------
Diluted net income per common share $ 0.02 $ 0.16 $ 0.54
================ ================ ================
Primary shares outstanding 10,458,451 12,979,055 12,711,801
Diluted shares outstanding 10,458,451 12,979,055 13,074,776
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements
27
<PAGE>
<TABLE>
<CAPTION>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1997, 1998, AND 1999
Preferred Stock Common Stock Stockholder
----------------------- ------------------------- Note Accumulated
See Note 6 and 7 Shares Amount Shares Amount Receivable Deficit Total
----------------------- -------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, end of 1996 3,500 $4,182,790 8,714,652 $35,754,611 $ -- $(34,852,699) 5,084,702
Conversion of Series B-1 Shares to
Common Stock (500) (593,542) 345,490 582,372 -- -- (11,170)
Issuance of common stock in
private placement, net of offering
costs of $145,407, at an average
net price per share of $1.259 -- -- 1,600,000 1,960,448 -- -- 1,960,448
Conversion of A-1 shares to common (3,000) (3,589,248) 4,108,108 3,523,343 -- -- (65,905)
stock
Options granted in lieu of fees -- -- 27,095 -- -- 27,095
Issuance of common stock under
Employee Stock Purchase Plan at an
average price Per share of $2.05 -- -- 1,225 2,513 -- -- 2,513
Issuance of 550,000 shares of
common stock at $1.875 in exchange
for Promissory note -- -- 550,000 1,031,250 (1,031,250) -- --
Steel share forfeitures -- -- (250,000) (468,750) 468,750 -- --
Deemed dividends paid in shares -- -- 136,784 227,225 -- (227,225) --
Deemed and actual dividends paid in -- -- -- -- -- (148,755) (148,755)
cash
Net income for the year -- -- -- -- -- 511,288 511,288
----------------------- --------------------------- ------------- -------------- -------------
Balance, end of 1997 -- $ -- 15,206,259 $42,640,107 $ (562,500) $(34,717,391) $7,360,216
======================= =========================== ============= ============== =============
</TABLE>
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1997, 1998, AND 1999
Preferred Stock Common Stock Stockholder
------------------------- ----------------------------- Note Accumulated
See Notes 6 and 7 Shares Amount Shares Amount Receivable Deficit Total
- ------------------------- ------------------------- ----------------------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, end of 1997 -- -- 15,206,259 $42,640,107 $(562,500) $(34,717,391) $7,360,216
Issuance of common stock
under Employee Stock Purchase
Plan, at an average net price
per share of $1.14 -- -- 1,420 1,612 -- -- 1,612
Reversal of share subscription -- -- (300,000) (562,500) 562,500 -- --
Reclassification of above
share subscription as an option -- -- -- 51,000 -- -- 51,000
Repurchase and retirement of
Clearwater Fund IV, Ltd.
Common shares, at an average
total price per share of $1.16 -- -- (2,365,066) (2,740,563) -- -- (2,740,563)
Net income for the year -- -- -- -- -- 2,036,958 2,036,958
------------------------- ----------------------------- ------------ ------------- ----------
Balance, end of 1998 -- $ -- 12,542,613 $39,389,656 $ -- $(32,680,433) 6,709,223
------------------------- ----------------------------- ------------ ------------- ----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
29
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1997, 1998, AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Stockholder
---------------- ------------------------- Note Accumulated
See Notes 6, 7 and 16 Shares Amount Shares Amount Receivable Deficit Total
- --------------------- ---------------- ------------------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, end of 1998 - $ - 12,542,613 $39,389,656 $ - $(32,680,433) $ 6,709,223
Issuance of common stock under
Employee Stock Purchase Plan, at
an average net price per share
of $1.47 - - 1,534 2,257 - - 2,257
Issuance of common stock as
part of net warrant exercised
with an exercise price of
$2.25 per share - - 12,489 (5) - - (5)
Issuance of common stock as
part of cash warrant exercise
with an exercise price of
$2.25 per share - - 40,300 90,675 - - 90,675
Issuance of common stock as
part of cash stock option
exercises - - 41,986 72,496 - - 72,496
Issuance of common stock to
former CEO upon repayment of
non-recourse stock loan - - 300,000 562,500 - - 562,500
Fair market value of options to
purchase 300,000 shares of common
stock at an exercise price of $2.33
issued as part of acquisition of
business - - - 145,000 - - 145,000
Net income for the year - - - - - 7,027,430 7,027,430
---------------- ------------------------- ------ ------------ -----------
Balance, end of 1999 - $ - 12,938,922 $40,262,579 $ - $(25,653,003) $14,609,576
---------------- ------------------------- ------ ------------ -----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
30
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------
See Note 12 - Supplemental Cash Flow Information 1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (Loss) from continuing operations $ 474,406 $ 2,036,958 $ 7,027,430
Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities:
Deferred income taxes - - (3,430,000)
Depreciation and amortization 960,527 998,649 1,182,883
Provisions for allowances for bad debt, returns,
adjustments and spoils 109,608 477,674 693,727
Provision for inventory reserves 55,000 55,000 149,500
Loss on disposition and writedown of
property and equipment 259,480 26,387 13,004
Expenses paid in common stock and options 27,095 51,000 -
Changes in assets and liabilities:
Accounts receivable (880,987) (99,494) (2,444,773)
Inventories 231,431 (650,107) (821,886)
Prepaid expenses and other assets (917,957) 177,954 884,243
Accounts payable (594,149) 381,613 1,422,318
Accrued expenses (613,002) (398,712) 24,289
------------- ------------ -------------
Net cash provided by (used in) continuing operations (888,548) 3,056,922 4,700,735
Net cash used in discontinued operations (137,902) - -
------------- ------------ -------------
Net cash provided by (used in) operating activities (1,026,450) 3,056,922 4,700,735
------------- ------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (480,977) (932,596) (2,414,538)
Repurchase of common stock - (2,740,563) -
Proceeds from sale of property and equipment 159,095 5,293 27,600
Acquisition of business operating assets - (109,599) (1,515,741)
------------- ------------ -------------
Net cash used in investing activities (321,882) (3,777,465) (3,902,679)
------------- ------------ -------------
Cash flows from financing activities:
Bank overdrafts (839,680) (5,692) -
Proceeds from revolving line of credit 15,078,913 8,181,621 16,393,424
Repayments on revolving line of credit (14,714,032) (8,611,259) (16,311,796)
Proceeds from long-term debt - 2,399,234 750,000
Securities and debt issue costs (71,308) - -
Repayment of long-term debt and capital lease obligations (253,364) (1,593,556) (2,347,853)
Dividends on preferred stock (148,755) - -
Proceeds from issuance of common stock 1,982,057 1,612 727,923
------------- ------------ -------------
Net cash provided by (used in) financing activities 1,033,831 371,960 (788,302)
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents (314,501) (348,583) 9,754
Cash and cash equivalents, beginning of year 724,729 410,228 61,645
------------- ------------ -------------
Cash and cash equivalents, end of year $ 410,228 $ 61,645 $ 71,399
============= ============ =============
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
31
<PAGE>
MONTEREY PASTA COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Monterey
Pasta Company (a producer and distributor of pasta, pasta sauces, soups, and
related items), together with its wholly-owned subsidiary, Monterey Pasta
Development Company (a franchiser of restaurants - inactive). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Collectively, Monterey Pasta Company and Monterey Pasta Development Company are
referred to as the "Company." As discussed in Note 14, the Company discontinued
the operations of Upscale Food Outlets, Inc. (a chain of fast food restaurants
serving the Company's products) and Monterey Pasta Development Company,
effective December 31, 1995. Accordingly, the restaurant and franchise
businesses are accounted for as discontinued operations in the accompanying
consolidated financial statements for all periods presented.
The Company's production facility and distribution center are both
located in Monterey County, California. Its products are available throughout
the United States as well as selected distribution areas in Canada, the
Caribbean and Latin America. The principal customers are retail groceries and
club stores. The Company offers credit and payment terms to its customers in
line with industry practices, generally calling for unsecured trade accounts
receivable.
ACCOUNTING PERIODS
For quarterly reporting purposes the Company employs a 4-week, 4-week,
5-week reporting period. The fiscal year ends on the last Sunday of each
calendar year (52/53-week year). The 1997, 1998, and 1999 fiscal years all
contained 52 weeks and ended on December 28, 1997, December 27, 1998, and
December 26, 1999, respectively.
RECLASSIFICATIONS
Certain of the prior year financial statement amounts have been
reclassified to conform to the current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCES
The Company provides allowances for estimated credit losses, product
returns, spoilage, and adjustments at a level deemed appropriate to adequately
provide for known and inherent risks related to such amounts. The allowances are
based on reviews of loss, return, spoilage, adjustment history, contractual
relationships with customers, current economic conditions, and other factors
that deserve recognition in estimating potential losses. While management uses
the best information available in making its determination, the ultimate
recovery of recorded accounts, notes, and other receivables is also dependent on
future economic and other conditions that may be beyond management's control.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market and consist principally of component ingredients to
the Company's refrigerated pasta and sauces, finished goods, and packaging
materials.
SLOTTING AND ADVERTISING COSTS
The Company expenses advertising costs as incurred or when the related
campaign commences. Slotting fees paid or credited to club stores and grocery
chains for shelf space allocations are amortized between six and twelve months
depending on the nature of the chain program or agreement.
32
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the assets
(or lease term for leasehold improvements if shorter):
<TABLE>
<S> <C>
Leasehold improvements 7 to 12 years
Machinery and equipment 7 to 12 years
Office furniture and equipment 5 to 15 years
Vehicles 5 to 7 years
</TABLE>
Long-lived assets, including intangible assets, are assessed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amounts may not be recoverable, or whenever management has
committed to a plan to dispose of the assets. Assets to be held and used
affected by such an impairment loss are depreciated or amortized at their new
carrying amount over the remaining estimated life; assets to be sold or
otherwise disposed of are not subject to further depreciation or amortization.
INTANGIBLE ASSETS
Intangible assets consist of tradenames, goodwill, and other
intangibles and are recorded at cost, net of accumulated amortization. During
1998 intangible assets of $110,000 were recorded in connection with the purchase
of the operating equipment, recipes, and trademarks of a small pasta
manufacturer, representing the excess of purchase price over the fair value of
assets acquired. In 1999 intangible assets of $1,243,466 were acquired as part
of the Frescala Foods, Inc. acquisition and represented trademarks, recipes, and
customer lists (See Note 16). Intangibles are amortized over their respective
useful lives, ranging from 5 to 10 years.
INCOME TAXES
The Company accounts for corporate income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No, 109, "Accounting for
Income Taxes", which requires an asset and liability approach. This approach
results in the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary timing
differences between the book carrying amounts and the tax basis of assets and
liabilities. Future tax benefits are subject to a valuation allowance to the
extent of the likelihood that the deferred tax assets may not be realized.
REVENUE RECOGNITION
The Company recognizes revenues through sales of pasta and sauce
products primarily to grocery and club store chains. Sales are recorded when
goods are shipped for most customers and upon delivery to retail locations for
the Direct Store Delivery program. Consignment shipments to club store
warehouses are recognized upon shipment to individual club store locations.
Potential returns, adjustments and spoilage allowances are provided for in
accounts receivable allowances and accruals.
STOCK-BASED COMPENSATION
As permitted under the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company continues to account for employee
stock-based transactions under Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." However, SFAS No. 123 requires the
Company to disclose pro forma net income and earnings per share as if the fair
value method had been adopted. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. For
non-employees, cost is also measured at the grant date, but is actually
recognized in the financial statements over the vesting period, or immediately
if no further services are required.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the period.
Actual
33
<PAGE>
results could differ from those estimates. The most significant estimates made
by the Company are those related to accounts receivable and deferred tax
allowances.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings' effect of the hedged forecast transaction. For a derivative NOT
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133, as amended, is effective for all fiscal quarters
beginning after June 15, 2000. Historically the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of this new standard to affect
its financial statements.
MONTEREY PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, include cash and accounts receivable.
The Company maintains its cash accounts in Imperial Bank, Fresno,
California. The total bank cash balances are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. At times the cash balances exceed
such limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 27, 1998 and December 26, 1999, estimated fair values for the
Company's financial instruments and methods and assumptions used in estimating
fair values were as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents: the carrying amount in the
balance sheet approximates fair value $ 61,645 $ 61,645 $ 71,399 $ 71,399
Accounts Receivable, less allowances: the carrying amount in
the balance sheet approximates fair value due to the relatively
short-term maturity of the receivable and the allowances reducing
the amounts to estimated net realizable value 2,062,565 2,062,565 3,813,611 3,813,611
Notes and Loans Payable (credit facility): the carrying amount
Approximates fair value since the interest floats with prime rate 2,048,255 2,048,255 604,855 604,855
Capitalized Leases Payable: the fair value is estimated based on
Current interest rates and comparable current available terms 228,733 228,733 155,878 155,878
</TABLE>
34
<PAGE>
2. INVENTORIES
<TABLE>
<CAPTION>
1998 1999
--------------- -------------
<S> <C> <C>
Inventories consisted of the following:
Production - Ingredients $865,693 $855,477
Production - Finished goods 560,762 979,616
Paper goods and packaging materials 417,198 895,721
--------------- -------------
1,843,653 2,730,814
Allowances for spoils and obsolescence (30,000) (27,500)
--------------- -------------
$ 1,813,653 $ 2,703,314
=============== =============
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Property and equipment consisted of the following:
Leasehold improvements $ 1,852,958 1,993,221
Machinery and equipment 5,024,208 6,623,919
Computers, office furniture and equipment 760,060 568,117
Vehicles 310,942 335,401
-------------- --------------
7,948,168 9,520,658
Less accumulated depreciation and amortization (3,188,936) (4,180,308)
-------------- --------------
4,759,232 5,340,350
Construction in progress 502,491 1,448,915
-------------- --------------
$ 5,261,723 $ 6,789,265
============== ==============
</TABLE>
Construction in progress at December 26, 1999 includes deposits for
equipment on order, and the most of the cost of a new distribution center
project with an expected outlay of $835,000, which are part of a $3.5 million
capital plan approved by the Company's Board of Directors for the period from
October 1, 1999 through December 31, 2000.
4. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
<TABLE>
<CAPTION>
Year-end debt consisted of the following: 1998 1999
---------------- ----------------
<S> <C> <C>
Credit Facility:
Receivable and inventory revolver $ 523,256 $ 604,885
Equipment revolver 274,999 -
Equipment term loan 1,250,000 -
Capitalized leases payable 228,733 155,878
---------------- ----------------
2,276,988 760,763
Less current maturities 1,779,227 688,186
---------------- ----------------
Long term portion $ 497,761 $ 72,577
================ ================
</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.
35
<PAGE>
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 (8.50% at 12/26/99). 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,
which is available if the need arises.
The terms of the Credit Facility, which expires July 31, 2000, prohibit
the payment of cash dividends (except with written approval) on the Company's
capital stock and restricts payments for, among other things, repurchasing
shares of its capital stock. Other terms of the Credit Facility limit the
Company with respect to, among other things, (i) incurring additional
indebtedness, (ii) adversely changing the capital structure, and (iii) acquiring
assets other than in the normal course of business including specific limits on
annual capital expenditures (currently $2.75 million). As of December 26, 1999,
there were no violations of any loan covenants.
CAPITALIZED LEASES PAYABLE
The Company leases certain equipment under capitalized leases,
including office equipment, a van and truck, as well as refrigeration equipment,
most of which is located at retail sites of the Company's single largest
customer (see Note 12).
The leases are collateralized by the underlying equipment with book
values of $236,403, $249,996, and $197,842 in 1997, 1998 and 1999, respectively.
Future minimum lease payments consist of:
<TABLE>
<CAPTION>
Year Total
---- -----
<S> <C>
2000 $ 94,480
2001 37,885
2002 31,074
2003 14,646
2004 722
------------
178,807
Less amounts representing interest 22,929
------------
Capitalized leases payable $ 155,878
============
</TABLE>
PRINCIPAL PAYMENT MATURITIES
Notes, loans and capitalized leases payable require principal payments
(including the principal portion of capitalized leases above) as follows:
<TABLE>
<CAPTION>
Amount
------------
<S> <C>
2000 $688,186
2001 32,398
2002 28,478
2003 10,987
2004 714
------------
$ 760,763
============
</TABLE>
5. OPERATING LEASES
The Company currently leases production, warehouse and corporate office
space as well as certain equipment in Monterey County, California under both
month-to-month and non-cancelable operating lease agreements, expiring through
December 2004. The terms of the leases generally require the Company to pay
common area maintenance, taxes, insurance, and certain other costs.
Future minimum annual lease payments due under non-cancelable operating
leases with terms of more than one year and sublease income from the lease of
the Company's former headquarters are as follows:
36
<PAGE>
<TABLE>
<CAPTION>
Year Lease Amount Sublease Income Net
---- ------------ ---------------- ---
<S> <C> <C> <C>
2000 $ 721,593 $ 240,710 $ 480,883
2001 510,826 30,089 480,737
2002 491,864 - 491,864
2002 503,249 - 503,249
2004 483,888 - 483,888
------------- ----------------- ---------------
$ 2,711,420 $ 270,799 $ 2,440,621
============= ================= ===============
</TABLE>
Gross rent expense under the leases for 1997, 1998, and 1999 was
$509,225, $536,738, and $583,012, respectively. During 1997, the Company
subleased its former San Francisco premises at a slight premium to the rent for
which it has contractual liability. The sublease expires in 2001 on the same
date as the underlying lease. Sublease income for 1997, 1998 and 1999 was
$158,100, $210,680, and $230,700, respectively. The Company also subleased a
portion of its Salinas headquarters for part of 1998 with sublease income of
$48,132.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
During August 1996, 3,000 shares of Series A Convertible Preferred and
500 shares of Series B Convertible Preferred stock were issued at an average
stated price of $1,000 per share under separate agreements amended in February
and April 1997. The shares were convertible to common stock at 80% of the market
price, as defined in the agreements. The $875,000 value of the guaranteed
contractual discount rate, which is additional yield to the investors, was
accounted for as a deemed dividend to the preferred stockholders. The Company's
agreements for Series A and B Convertible Preferred stock provided for certain
dividends, as well as penalties if the related common conversion shares were not
registered by November 1, 1996.
Under the amended agreements, which called for the exchange of the
unconverted Series A and B shares for new Series A-1 and B-1 shares, $240,000
was paid to the holders of the Series A-1 stock on March 31, 1997, in lieu of
all prior penalties and dividends. Also, $30,000 was paid to the holder of
Series B-1 on April 4, 1997, in lieu of all prior penalties and dividends. An
additional $13,755 in penalties was incurred during the period from May 1, 1997
to May 6, 1997, the date of filing of the amended Registration Statement
covering the related conversion shares. The amended agreement for the Series B-1
Convertible Preferred stock called for additional penalties if the Registration
Statement was not declared effective by July 31, 1997. The Registration
Statement was not declared effective until October 24, 1997. Therefore, $30,000
was paid to the holder of the B-1 Convertible Preferred Stock on November 3,
1997.
In lieu of dividends for Series A-1 called for under the original
agreements, the Company agreed to pay a total amount of $50,000 to holders of
the new Series A-1 stock, constituting an annualized dividend equal to four
percent (4%) of the purchase price of the Series A Preferred Stock through
December 28, 1996. The dividend was paid in the form of 37,037 shares of the
Company's common stock, valued at $62,500 based on 80% of the $1.6875 per share
market price on the day the Registration Statement was effective.
During March 1997, one-half of the Series B Convertible Preferred
stock, with a face amount of $250,000 and a total book value of $298,771, was
converted into 160,256 shares of Common Stock having a market value of $312,500.
Holders of the remaining unconverted Series B-1 stock received an 8% annual
dividend from April 1, 1997 forward, payable in each quarter; with two dividends
of $5,000 paid during 1997. The remaining Series B-1 Preferred Stock was
converted to 207,894 shares of common stock in October, 1997. Of the 207,894
shares of common stock issued, 22,660 shares represented penalty shares awarded
due to late effectiveness of the Company's Registration Statement.
In December 1997 the $3,000,000 of Series A-1 Convertible Preferred
Stock was converted into 4,108,108 shares of common stock. On February 13, 1998,
the Company was notified by the NASDAQ Stock Market, Inc. ("NASDAQ") that the
Company's Series A convertible Preferred stock offering, as amended by the
Series A-1 Agreement in March of 1997 had violated Rule 4460(i)(l)(D)(ii) which
requires stockholder approval prior to the issuance of securities convertible
into common stock equal to, or in excess of, 20% of outstanding shares at the
time of issuance. The NASDAQ required the Company to repurchase 2,365,066
shares, held by Clearwater Fund IV, Ltd., or face delisting from the National
NASDAQ market.
37
<PAGE>
After reviewing its options, Company management, in concert with the
Company's Board of Directors and its legal advisors, decided to begin
negotiations with the Clearwater Fund IV, Ltd. to repurchase 2,365,066 shares.
Negotiations were completed March 5, 1998 and the Company repurchased the shares
for a total consideration of $2,690,263 or $1.1375/share. Outstanding shares
after the repurchase were 12,841,193, for a reduction of 15.6%.
COMMON STOCK
In April 1997, the Company issued 1,600,000 shares of its common stock
at a gross price of $1.35/share in a private placement. The shares were
registered as part of the Company Registration Statement on Form S-3 which was
effective October 24, 1997.
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.
During November of 1997 the Company issued 77,087 shares of common
stock in lieu of a guaranteed yield on the private placement common stock issued
in March, 1997. The yield was guaranteed at 8% from date of stock issuance until
effectiveness of the Company's Registration Statement on Form S-3. The
Registration Statement was declared effective on October 24, 1997 and $126,471
in penalties had accumulated.
During the second through fourth quarters of 1999, warrants representing
86,987 shares of Company common stock were exercised at $2.25 per share (See
Note 7). Certain of the warrants were converted into stock as a "net exercise."
In this case no actual cash exercise proceeds are received by the Company.
Instead, shares are issued for only the difference between the average of the
NASDAQ closing bid and ask on the day preceding exercise, and the exercise
price, multiplied by the number of shares represented by warrants. This
potential gain is then divided by the average of the closing bid and ask to
determine the number of shares to issue. As a result, while warrants potentially
representing 86,987 common shares were exercised, only 52,789 shares of common
stock were issued.
In addition, employee options representing 10,219 shares of common stock
were exercised during the second, third, and fourth 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. A consultant exercised options representing 7,767
shares of common stock during the fourth quarter of 1999 with an exercise price
of $2.06.
EMPLOYEE STOCK PURCHASE PLAN
In October 1994, the Company's Board of Directors adopted a qualified
employee stock purchase plan. Under the purchase plan, eligible employees (those
who have completed one year of continuous employment with the Company) may
purchase shares of the Company's common stock through payroll deductions not to
exceed 10% of gross wages. The Company has reserved 200,000 shares of its common
stock for issuance under the purchase plan, which remains in effect until
terminated by the Company's Board of Directors, or until all of the shares
reserved for under the purchase plan have been issued. Unless the Board has
otherwise provided a higher amount prior to the commencement of an offering
period, the offering exercise price for each purchase period is 85% of the
lesser of (a) the fair market value of the shares on the offering date of such
offering period or (b) the fair market value of the shares on the given purchase
date. There were 1,225, 1,420, and 1,534 shares of common stock issued under the
plan in 1997, 1998 and 1999, respectively. At December 26, 1999 there were
193,942 available shares remaining under the plan.
38
<PAGE>
EARNINGS PER SHARE
Basic earnings per share are based on earnings available to common
stockholders divided by the weighted-average number of common shares actually
outstanding during the period. Diluted earnings per share also include the
incremental effect of any dilutive common stock equivalents assumed to be
outstanding during the period. Because of equivalent shares includable in
different periods or at different amounts, per-share amounts for the four
quarters do not necessarily equal per-share amounts for the entire year.
Options to purchase 848,081, 1,002,581and 1,222,395 shares of common stock were
outstanding at year-end 1997, 1998, and 1999, respectively. Because the options'
exercise prices were greater than the average market price of the common shares
the options outstanding at the end of 1997 and 1998 were not included in the
computation of diluted earnings per share. A total of 1,152,395 options were
included in the 1999 computation of diluted earnings per share, with 70,000
excluded. Warrants to purchase 1,138,550, 933,550, and 846,563 were outstanding
at year-end 1997, 1998, and 1999, respectively. The 1997 and 1998 balances were
not included in the calculation of diluted earnings per share because their
exercise prices exceeded the average market price of the common shares. In 1999
warrants representing 445,813 shares of common stock were included in the
calculation of diluted earnings per share, leaving warrants representing 400,750
shares excluded.
7. WARRANTS AND STOCK OPTIONS
In April 1996, the Company issued warrants to purchase 400,750 shares
of its common stock at $6.50 per share in connection with a placement of 916,000
shares of common stock. The warrants, with an estimated original value of
$137,400, are valid for seven years, expire in April 2003, and include
registration rights for the related shares, which were registered effective
October 24, 1997.
In March 1997, the Company issued warrants for 532,800 shares of its
common stock at $2.25 per share in connection with a private placement of
1,600,000 shares of common stock. The warrants, with an estimated original value
of $271,700, are valid for three years, expire in March, 2000, and included
registration rights for the related shares which were part of the Company's S-3
which was effective October 24, 1997. Warrants representing a total of 86,987
potential shares were exercised in 1999 (See Note 6). As of December 26, 1999
warrants to purchase 445,813 shares of common stock remained outstanding.
STOCK OPTION PLAN
Effective August 31, 1993, the Company's Board of Directors adopted a
stock option plan, subsequently amended and restated, which provides for the
granting of incentive stock options or non-qualified stock options to eligible
employees, consultants and outside directors. The Company has reserved 1,740,000
shares of its common stock for issuance under the plan. The plan provides that
the option price shall not be less than the fair market value of the shares on
the date of grant; therefore, no compensation expense is recorded for employees.
Compensation or other expense is recorded for any non-employee grants at fair
value of the option award. Options generally vest over a period of one to three
years and may be exercised for a period of up to ten years. In January of 1998,
the Company filed a Form S-8 to register up to 540,000 additional shares of
common stock eligible to be issued pursuant to the Plan to increase the total
number of registered shares to 1,740,000. The Plan was amended in July 1998 to
allow two years from date of a transfer of control for the exercise of options
for those employees and directors not retained after the transfer of control. On
April 23, 1999, the Company filed an S-8 to register 300,000 shares of common
stock associated with options issued in conjunction with the March 12, 1999
purchase of the operating assets of Frescala Foods, Inc. (See Note 16).
In May of 1997 an executive search firm was granted options to purchase
7,767 shares of Company common stock with an exercise price of $2.06, immediate
vesting, and a 3 year expiration. The $4,738 fair value of the option grant was
charged to expense in 1997.
During 1997, a financing consultant for the Company was granted options
to buy 50,000 shares of common stock with an exercise price of $1.88, immediate
vesting and expiring March 12, 1998. The options expired unexercised. The
$22,357 fair value of the option grant was charged to expense in 1997.
39
<PAGE>
The following table shows activity in outstanding options during 1997, 1998 and
1999.
<TABLE>
<CAPTION>
1997 1998 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 589,681 $ 5.26 848,081 $ 3.24 1,002,581 $ 2.24
Granted (1) 491,913 2.24 540,314 1.72 616,000 2.44
Exercised - - - - (341,986) 1.86
Canceled or expired (1) (233,513) 6.13 (385,814) 3.53 (54,200) 5.86
---------- -------- ----------- -------- ----------- --------
Outstanding at end of year 848,081 $ 3.24 1,002,581 $ 2.24 1,222,395 $ 2.29
========== ======== =========== ======== =========== ========
Options exercisable at year end 554,257 $ 3.73 826,581 $ 2.38 880,645 $ 2.26
========== ======== =========== ======== =========== ========
Weighted average fair value of
Options granted during
the year $ 0.97 $ 0.38 $ 0.88
======== ======== ========
</TABLE>
(1) Including 43,146 and 50,314 non-officer employee options repriced in 1997
and 1998.
The following table shows information for options outstanding or
exercisable as of December 26, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Range of Remaining Average Remaining Average
Exercise Number of Contractual Exercise Number of Contractual Exercise
Prices Shares Life Price Shares Life Price
- --------------- ----------- ------------- -------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.00 - 2.99 1,151,895 6.6 years $2.08/share 820,645 5.6 years $1.99/share
$3.00 - 4.99 20,500 8.3 years $4.06/share 10,000 6.7 years $3.88/share
$5.00 - 6.99 40,000 2.0 years $6.19/share 40,000 2.0 years $6.19/share
$7.00 10,000 5.7 years $7.00/share 10,000 5.7 years $7.00/share
----------- ------------
Total 1,222,395 6.4 years $2.29/share 880,645 5.4 years $2.26/share
=========== ============
</TABLE>
If the Company had elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the estimated
fair value of stock option grants over the service period, regardless of later
changes in stock prices and price volatility. The fair value at date of grant
for options granted in 1997 1998 and 1999 has been estimated based on a modified
Black-Scholes pricing model with the following assumptions: no dividend yield
for any year; expected volatility for 1997, 1998 and 1999 grants of
approximately 46%, 49%, and 46% based on historical results; risk-free interest
rates of 6.60%, 7.37% and 5.38%; and expected lives of approximately five years
for all grants. The following table shows net income or loss and income or loss
per share for 1997, 1998 and 1999 as if the Company had elected the fair value
method of accounting for stock options.
40
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net income as reported $ 511,288 $ 2,036,958 $ 7,027,430
Additional compensation expense (478,988) (213,465) (164,211)
------------- ------------- -------------
Proforma income, as adjusted 32,300 1,823,493 6,863,219
Dividends to preferred and certain common stockholders (317,647) - -
------------- ------------- -------------
Proforma income (loss) attributable to common
stockholders $ (285,347) $ 1,823,493 $ 6,863,219
============= ============= =============
Basic net income per share $ 0.02 $ 0.16 $ 0.55
Additional compensation expense (0.05) (0.02) (0.01)
------------- ------------- -------------
Basic Proforma net income (loss) per share, as adjusted $ (0.03) $ 0.14 $ 0.54
============= ============= =============
Diluted net income per share $ 0.02 $ 0.16 $ 0.54
Additional compensation expense (.05) (.02) (0.01)
------------- ------------- -------------
Diluted Proforma net income (loss) per share, as adjusted $ (.03) $ 0.14 $ 0.53
============= ============= =============
</TABLE>
8. INCOME TAXES
The Company's income tax benefit (expense) consists of:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ (105,051)
State (20,961) (31,135) ( 63,704)
----------- ----------- -------------
Total (20,961) (31,135) (168,755)
----------- ----------- -------------
Deferred:
Federal - - 3,250,000
State - - 180,000
----------- ----------- -------------
Total - - 3,430,000
----------- ----------- -------------
Net tax benefit (expense) $ (20,961) $ (31,135) $ 3,261,245
=========== =========== =============
</TABLE>
41
<PAGE>
A reconciliation between the Company's effective tax rate and U.S.
federal income tax rate on loss from continuing operations follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of effect on
Federal income taxes 7.7% 1.5% 1.7%
Non-deductible expenses 3.8% 0.4% 1.3%
Utilization of net operating losses for
which deferred income tax assets had
been reduced by valuation allowances (22.5%) (36.4%) (37.8%)
Reversal of Federal and State valuation
allowances - - (91.1%)
Other (19.0%) 2.0% 5.3%
-------- -------- ---------
Effective income tax rate 4.0% 1.5% (86.6%)
======== ======== =========
</TABLE>
Due to the prior history of losses, a 100% valuation allowance against
the deferred tax assets was provided in 1998 and earlier years, as management
could not determine that it was more likely than not that they would be
realized. As of December 26, 1999, however, the Company has experienced three
years of increasingly profitable operations. Accordingly, a portion of the
valuation allowance totaling $3,430,000 has been reversed as of December 26,
1999, since the Company believes it is more likely than not that this portion of
deferred tax assets will be realized.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Federal loss carryforwards $ 11,507,000 $10,077,000
Depreciation, amortization and writedown
on fixed assets (153,000) 31,000
Alternative minimum tax credit carryovers - 105,000
State income and franchise taxes, net of
effect on Federal income taxes 495,000 519,000
Other 226,000 210,000
-------------- -------------
12,075,000 10,942,000
Less valuation allowance (12,075,000) (7,512,000)
-------------- -------------
Net deferred tax assets $ - $ 3,430,000
============== =============
</TABLE>
The valuation allowance decreased by $137,000, $1,058,000, and
$4,563,000 for 1997, 1998, and 1999, respectively.
At December 26, 1999, the Company had tax net operating loss (NOL) and
capital loss carryforwards of approximately $31 million and $13 million for
Federal and State tax purposes, respectively, which expire in varying amounts
through 2002 for capital losses and through 2017 for NOLs. Should significant
changes in the Company's ownership occur, the annual amount of NOL carryforwards
available for future use would be limited.
42
<PAGE>
9. LITIGATION AND CONTINGENCIES
On August 5, 1997, Lance Mortensen, former President, Chief Executive
Officer and director of the Company, filed a complaint against the Company for
breach of implied covenant of good faith and fair dealing relating to a written
employment contract. The lawsuit was settled during May of 1998 through binding
arbitration with no current profit or loss impact.
As of December 26, 1999, there are no material pending legal
proceedings, other than routine litigation incidental to the Company's
business, to which the Company is a party or to which any of its property is
subject. On February 2, 2000 the United States District Court for the
District of Delaware denied a motion to dismiss a lawsuit against Clearwater
Fund IV, Ltd. And Clearwater Fund IV, LLC, stockholders of the Company,
(collectively, "Clearwater") alleging a violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, in connection with an alleged
purchase and sale of the Company's stock within a six month period. The
Company has been named as a nominal defendant in this suit; however, to date
it does not expect to incur damages, if the plaintiff is ultimately
successful. In fact, is this lawsuit is ultimately successful, the Company
may receive a portion of the $987,000 profit deemed to have been received by
Clearwater in connection with the purchase and sale of the Company's stock.
There can be no assurance that the Company will receive any funds as a result
of this suit, or that one of the parties to the suit will not allege damages
payable by the Company, which, even if ultimately unsuccessful, could cause
the Company to expend time and money to resolve.
10. SLOTTING AND ADVERTISING COSTS
Included in the balance sheet under "Prepaid Expenses and Other" are
slotting and advertising costs of $1,074,997 at December 27, 1998, and $152,745
at December 26, 1999, relating primarily to slotting fees paid or credited to
club stores and grocery chains for shelf space allocations. Total advertising
expenses and slotting fees included in Selling, General and Administrative
expenses in the accompanying statements of operations for 1997, 1998 and 1999
were $1,143,922, $1,827,355, and $1,977,333, respectively.
11. SIGNIFICANT CUSTOMERS
Costco and Sam's Club Stores each accounted for portions of total
revenues as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Costco 50% 46% 49%
Sam's Club Stores 12% 33% 31%
</TABLE>
At December 27, 1998 and December 26, 1999, Costco and Sam's Club
Stores accounted for the following concentration of accounts receivable.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Costco 37% 38% 49%
Sam's Club Stores 8% 28% 27%
</TABLE>
The Company currently sells its products to six separate Costco regions
which make purchasing decisions independently of one another. On a regular
basis, these regions re-evaluate the products carried in their stores. There can
be no assurance that these Costco regions will continue to offer Monterey
Pasta's products in the future or continue to allocate Monterey Pasta the same
amount of shelf space. Purchasing decisions for Sam's Club Stores ("Sam's"), the
Company's second largest customer, are made at the head office level with input
from the stores. While the Company is in the fourth year of its relationship
with Sam's, there can be no assurance that Sam's will continue to carry the
Company's products. Currently, the loss of either Costco or Sam's would
materially adversely affect the Company's business operations.
No other single customer accounted for more than 10% of revenues or accounts
receivable
43
<PAGE>
12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
CASH PAYMENTS: 1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Interest $ 255,145 $ 241,243 $ 171,212
Income Taxes 20,691 31,135 168,755
NON-CASH OPERATING ACTIVITIES:
Charges and adjustments to reserve for
discontinued operations 36,882 - -
Fair value of options granted in return for
services 27,095 51,000 -
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Issuance of common stock in payment of
expenses or assets - - 145,000
Purchase of leased equipment 49,955 103,264 19,099
Reversal of restricted stock purchase - 562,500 -
Deemed dividends on preferred and private
placement common stock paid in shares 227,225 - -
Purchase of restricted shares for note
receivable 562,500 - -
</TABLE>
13. EMPLOYEE BENEFIT PLAN
In 1996, the Company instituted a 401(k) Plan covering substantially
all full-time employees with six months of service. Under the Plan, employees
may elect to defer up to 15% of compensation (subject to certain limitations).
The Company matches one-half of employee contributions up to 6% of compensation.
In addition, the Company may make an annual discretionary profit-sharing
contribution. Employee contributions, Company matching contributions and related
earnings are always 100% vested. Company profit-sharing contributions and
related earnings vest 20% a year, with 100% vesting after five years of service.
During 1997, 1998 and 1999, the Company's expense for matching contributions was
$31,362, $37,527, and $73,326 respectively; there were no profit-sharing
contributions for 1997, 1998 or 1999.
14. DISCONTINUED OPERATIONS
In early 1996, the Company decided to discontinue the operations of its
restaurant and franchise subsidiaries, and wrote off the investment in those
subsidiaries effective as of December 31, 1995. In early 1996, all operations of
the franchising subsidiary, as well as agreements with two franchisees, were
terminated. In April 1996, the Company's restaurant subsidiary, UFO, was sold to
Upscale Acquisitions, Inc. (Upscale), which is wholly-owned by Mr. Lance
Mortensen (see Note 8). He was also a stockholder and former director, Chairman
of the Board, President, and Chief Executive Officer of the Company.
The purchase price for the shares of UFO sold to Upscale was $1,000
cash plus a note executed by Upscale for $2,500,000. In addition, under the
agreement, the Company advanced $350,000 to UFO subsequent to the purchase. The
purchase note was accounted for under the cost recovery method, which defers
recognition of income (or reduction of loss) until payments are received. The
cash advances were not accounted for under the cost recovery method but were
fully reserved at year end 1996 as possibly uncollectible. The note and advances
were written off during 1997.
The 1996 losses from business disposition and phaseout were charged
directly to the reserves established during 1995, as were other expenditures
related to the restaurant and franchising operations. Remaining reserves of
$388,000 at the end of 1996, less a $37,000 recovery, were utilized during 1997.
44
<PAGE>
15. QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below and on the
following page reflect all adjustments which, in the opinion of management, are
of a normal and recurring nature necessary to present fairly the results of
operations for the periods presented.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter 1998
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
YEAR ENDED 1998
Net revenue $5,982,859 $6,307,531 $6,705,847 $7,221,060 $26,217,297
Gross profit 2,384,283 2,572,231 2,737,795 2,943,929 10,638,238
Operating income 351,384 653,554 660,185 662,207 2,327,330
Net income $ 324,717 $ 542,573 $ 569,477 $ 600,191 $ 2,036,958
Basic earnings per common share $ 0.02 $ 0.04 $ 0.05 $ 0.05 $ 0.16
---------- ---------- ---------- ---------- -----------
Diluted earnings per common share $ 0.02 $ 0.04 $ 0.05 $ 0.05 $ 0.16
---------- ---------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter 1998
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
YEAR ENDED 1999
Net revenue $7,973,250 $9,099,526 $9,942,782 $9,886,214 $36,901,772
Gross profit 3,077,336 3,631,509 3,779,726 3,664,730 14,153,301
Operating income 805,563 986,937 1,144,994 996,192 3,933,686
Net income $ 705,142 $ 932,811 $1,025,149 $4,364,328 $ 7,027,430
Primary earnings per common share $ 0.06 $0.07 $0.08 $ 0.34 $ 0.55
---------- ---------- ---------- ---------- -----------
Diluted earnings per common share $ 0.06 $ 0.07 $ 0.08 $ 0.32 $ 0.54
---------- ---------- ---------- ---------- -----------
</TABLE>
Significant 1999 fourth quarter adjustments included a reversal of portions of
the Company's reserve against deferred tax assets amounting to $3,430,000 (See
Note 8).
45
<PAGE>
16. INTANGIBLE ASSETS AND BUSINESS ACQUISITION
Intangible assets consist of:
<TABLE>
<CAPTION>
1998 1999
----------- ----------
<S> <C> <C>
Tradenames $ 204,376 $ 204,376
Other Intangibles 138,085 247,684
Goodwill and other intangibles not
Separately quantifiable 109,599 1,243,466
----------- ----------
$ 452,060 $1,695,526
Less accumulated amortization 277,758 414,249
----------- ----------
Net intangible Assets $ 174,302 $1,281,277
=========== ==========
</TABLE>
THE FRESCALA PURCHASE
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 plus fully vested
options to purchase 300,000 shares of the Company's common stock. 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 received
an earn-out of $97,000 as of October 31, 1999 (treated as additional purchase
price) based upon Frescala sales above a predetermined level. Funding for the
transaction came from a new $750,000 two-year term loan, since repaid, use of
existing accounts receivable and inventory line, and cash flow from operations.
The entire $1,660,000 cost of the acquisition (including acquisition
costs of $73,000) was recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Inventories $ 217,000
Fixed assets 200,000
Goodwill including trademarks,
customer list, and recipes, not
specifically quantifiable 1,243,000
----------
Total acquisition cost $1,660,000
==========
</TABLE>
Results of operations would not be materially different if Frescala would have
been acquired as of January 1997, the beginning of the first period presented.
46
<PAGE>
SCHEDULE II
MONTEREY PASTA COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions - Deductions -
Balance, Charged to Write-offs Balance,
Beginning Costs and Charged to End of
of 1997 Expense Reserves 1997
--------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Allowances against Receivables --
Spoils, Returns, Adjustments
And Bad Debts $ 924,285 $ 109,608 $ 701,016 $ 332,877
Receivable from Related Party 350,000 - 350,000 -
Inventory Reserves --
Spoils and Obsolescence 55,000 55,000 55,000 55,000
</TABLE>
<TABLE>
<CAPTION>
Additions - Deductions -
Balance, Charged to Write-offs Balance,
Beginning Costs and Charged to End of
of 1998 Expense Reserves 1998
--------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Allowances against Receivables --
Spoils, Returns, Adjustments
And Bad Debts $ 332,877 $ 477,674 $ 498,143 $ 312,408
Inventory Reserves --
Spoils and Obsolescence 55,000 55,000 80,000 30,000
</TABLE>
<TABLE>
<CAPTION>
Additions - Deductions -
Balance, Charged to Write-offs Balance,
Beginning Costs and Charged to End of
of 1999 Expense Reserves 1999
--------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Allowances against Receivables --
Spoils, Returns, Adjustments
and Bad Debts $ 312,408 $ 693,727 $ 870,008 $ 136,127
Inventory Reserves --
Spoils and Obsolescence 30,000 149,500 152,000 27,500
</TABLE>
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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, in the city of San
Francisco, State of California, on the 17TH DAY OF FEBRUARY, 2000
MONTEREY PASTA COMPANY
By: /s/ R. LANCE HEWITT
--------------------------------
R. Lance Hewitt
President and Chief
Executive Officer
By: /s/ STEPHEN L. BRINKMAN
--------------------------------
Stephen L. Brinkman
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
indicated and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/CHARLES B. BONNER Director February 10, 1999
----------------------------------------------
Charles B. Bonner
/s/FLOYD R. HILL Director February 10, 1999
----------------------------------------------
Floyd R. Hill
/s/THOMAS E. KEES Director February 10, 1999
----------------------------------------------
Thomas E. Kees
/s/VAN TUNSTALL Director February 10, 1999
----------------------------------------------
Van Tunstall
/s/JAMES WONG Director February 10, 1999
----------------------------------------------
James Wong
/s/WALTER L. HENNING Director February 10, 1999
----------------------------------------------
Walter L. Henning
/s/R. LANCE HEWITT President, Chief Executive February 10, 1999
---------------------------------------------- Officer and Director
R. Lance Hewitt
/s/STEPHEN L. BRINKMAN Chief Financial Officer, February 10, 1999
---------------------------------------------- Secretary, and Director
Stephen L. Brinkman
</TABLE>
48
<PAGE>
INDEX TO EXHIBITS
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-KA)
4.5 Registration Rights Agreement dated as of December 31, 1996 among the
Company, Sentra Securities Corporation and investor (incorporated by
reference from Exhibit 4.12 filed with the Company's 1996 Form 10-K/A)
4.6 Form of Warrant ("Sentra Warrant") for purchase of Company's Common
stock dated March 1997 issued in connection with the Company's March
1997 Private Placement (incorporated by reference from Exhibit 4.13
filed with the Company's Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-3 filed on May 6, 1997 ("1997
Amendment No. 1 to Form S-3))
4.7* Stock Purchase Agreement between the Company and Kenneth A. Steel,
Jr. dated April 29, 1997 (incorporated by reference from Exhibit 4.14
filed with the 1997 Amendment No. 1 to Form S-3)
10.1* Second Amended and Restated 1993 Stock Option Plan (as amended on
August 1, 1996) (incorporated by reference to Exhibit 10.1 filed with
the Company's 1996 Form 10-K)
10.2* 1995 Employee Stock Purchase Plan (incorporated by reference from
Exhibit 10.15 to the Company's 1994 Form 10-K)
10.3 Monterey County Production Facility Lease of the Company, as amended
(incorporated by reference from Exhibit 10.03 to the SB-2)
10.4 Amendment No. 1 dated February 1, 1995 and Amendment No. 2 dated
March 1, 1995 to Monterey County Production Facility Lease of the
Company (incorporated by reference from Exhibit 10.6 filed with
the 1995 Form 10-K)
10.5 Amendment No. 3 dated September 12, 1997, and Amendment No. 4 dated
February 6, 1998 to Monterey County Production Facility Lease of the
Company (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)
49
<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
10.30 Credit Agreement between the Company and Imperial Bank dated August 2,
1999
10.31 First Amendment to Credit Agreement between the Company and Imperial
Bank dated August 2, 1999
27.1 Financial Data schedule
*Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its former subsidiary,
Upscale Food Outlets, Inc.
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CREDIT AGREEMENT
This Credit Agreement ("Agreement") is made and entered into on August 2, 1999,
by and between Monterey Pasta Company, a Delaware corporation ("Borrower") and
Imperial Bank, a California banking corporation, ("Bank").
Subject to the terms and conditions of this Agreement, any security agreement(s)
executed by Borrower in favor of Bank, any note(s) executed by Borrower in favor
of Bank, or any other agreements executed in conjunction therewith
(collectively, the "Loan Documents"), Bank shall make the loans and or advances
(individually a "Loan" and collectively "Loans") referred to below to Borrower.
In consideration of mutual covenants and conditions hereof, the parties hereto
agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.01 REVOLVING CREDIT COMMITMENT.
(a) REVOLVING LINE OF CREDIT. Subject to the terms and conditions
of this Agreement, provided that no event of default then has occurred and is
continuing, Bank shall, upon Borrower's request make advances ("Revolving
Loans") to Borrower, for working capital requirements of Borrower, in an amount
not to exceed $1,500,000 (the "Revolving Line of Credit") until July 31, 2000
(the "Revolving Line of Credit Maturity Date"). Revolving Loans may be repaid
and reborrowed, provided that all outstanding principal and accrued interest on
the Revolving Loans shall be payable in full on the Revolving Credit Maturity
Date.
(b) REVOLVING NOTE. The interest rate, principal and interest
payments, maturity date and certain other terms of the Revolving Loan will be
contained in a promissory note dated the date of this agreement, as such may be
amended or replaced from time to time.
1.02
TERM LOAN COMMITMENT.
(a) TERM LOAN. Subject to the terms and conditions of this
Agreement, Bank shall make available to Borrower a term loan (the "Term Loan")
in the amount of $1,250,000, the proceeds of which shall be used only for the
payoff of Borrower's current obligations to Bank as represented by note #6 and
note #7.
(b) TERM LOAN NOTE. The interest rate, principal and interest
payments, maturity date and certain other terms of the Term Loan will be
contained in a promissory note dated the date of this agreement, as such may
be amended or replaced from time to time.
1.03 CONVERTING REVOLVING CREDIT.
(a) CONVERTING REVOLVING LINE OF CREDIT COMMITMENT. Subject to the
terms and conditions of this Agreement, between the date of this Agreement and
August 5, 2004, (the "Converting Revolving Line Termination Date"), provided
that no event of default has occurred and is continuing, Bank hereby agrees to
make advances ("Converting Revolving Loans") to Borrower from time to time not
to exceed at
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any one time the aggregate principal amount of Two Million Dollars ($2,000,000)
(the "Converting Revolving Line of Credit"), the proceeds of which shall be only
used by Borrower for major capital expenditures and approved acquisitions.
Borrower may from time to time through the Converting Revolving Termination Date
borrow, partially or wholly repay its outstanding borrowings, and reborrow any
amount of the Converting Revolving Loans repaid, subject to all of the
limitations, terms and conditions contained herein or in the promissory note
representing the Converting Revolving Line of Credit; provided however, that the
total outstanding borrowings under the Converting Revolving Line of Credit shall
not at any time exceed the maximum principal amount available thereunder, as set
forth above. After the Converting Revolving Line Termination Date any amounts
repaid may not be reborrowed. All advances outstanding on the Converting
Revolving Line Termination Date shall be repaid in forty-eight (48) equal
monthly principal payments plus interest.
(b) CONVERTING REVOLVING NOTE. The interest rate, principal and
interest payments, maturity date and certain other terms of the Converting
Revolving Loans will be contained in a promissory note dated the date of this
agreement, as such may be amended or replaced from time to time.
(c) LATE CHARGE. If any installment payment, interest payment,
principal payment or principal balance due under the Loans is delinquent twenty
(20) or more days, Borrower agrees to pay Bank a late charge in the amount of
five percent (5%) of the payment so due and unpaid, in addition to the payment;
but nothing in this paragraph is to be construed as any obligation on the part
of the Bank to accept payment of any payment past due or less than the total
unpaid principal balance after maturity. All payments, at Bank's sole
discretion, shall be applied first to any late charges owing, then to interest
and the remainder, if any, to principal.
(d) DEFAULT RATE. If an Event of Default occurs hereunder, then
during the continuance thereof at the Bank's option, the interest rate shall be
five percent (5%) per year in excess of the rate otherwise applicable.
(e) INTEREST CALCULATIONS. The term "Prime Rate" shall mean the
rate that the Bank has announced as its prime lending rate, which shall vary
concurrently with any change in the Prime Rate. Interest based on the Prime Rate
shall vary concurrently with any change in the Prime Rate. All interest shall be
computed at the rate specified in any note on the basis of the actual number of
days during which the principal balance of the corresponding Loans are
outstanding divided by 360, which shall for interest computation purposes be
considered one (1) year.
1.04 DOCUMENTATION FEE, COSTS AND EXPENSES. In addition to any
other amounts due, or to become due, concurrently with the execution hereof,
Borrower agrees to pay to Bank a documentation fee in the amount of $750.00,
and all other costs and expenses incurred by the Bank in the preparation of this
Agreement, the other Loan Documents and the perfection of any security interest
granted to Bank by Borrower.
1.05 COLLATERAL. Borrower shall grant or cause to be granted to
Bank a first priority lien on any and all personal property assets of Borrower
which is assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest or pursuant to the terms of
any security agreement, or otherwise as security for all of Borrower's
obligations to Bank, all as may be subject to Section 5.03 herein.
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1.06 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all interest, fees, costs, and/or expenses due under this Agreement by charging
Borrower's demand deposit account number 15-003-545 with Bank, or any other
demand deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by Borrower.
2. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
2.01 EXISTENCE AND RIGHTS. Borrower is a corporation, duly
organized and existing and in good standing under the laws of the state of
California, which shall survive at least five years beyond the maturity of any
Loans hereunder Borrower is authorized and in good standing to do business in
the state of its incorporation; Borrower has the appropriate powers and adequate
authority, rights and franchises to own its property and to carry on its
business as now conducted, and is duly qualified and in good standing in each
state in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has
the power and adequate authority to make and carry out this Agreement. Borrower
has no investment in any other business entity unless specified in writing to
Bank.
2.02 AGREEMENT AUTHORIZED. The execution, delivery and performance
of this Agreement and the Loan Documents are duly authorized and do not require
the consent or approval of any governmental body or other regulatory authority;
are not in contravention of or in conflict with any law or regulation or any
term or provision of Borrower 's charter/articles of incorporation, or similar
document as the case may be, and this Agreement is the valid, binding and
legally enforceable obligation of Borrower in accordance with its terms; subject
only to bankruptcy, insolvency or similar laws affecting creditors rights
generally.
2.03 NO CONFLICT. The execution, delivery and performance of this
Agreement and the Loan Documents are not in contravention of or in conflict with
any agreement, indenture or undertaking to which Borrower is a party or by which
it or any of its property may be bound or affected, and do not cause any lien,
charge or other encumbrance to be created or imposed upon any such property by
reason thereof.
2.04 LITIGATION. Except as disclosed in writing to Bank by
Borrower, there is no litigation or other proceeding pending or threatened
against or affecting Borrower which if determined adversely to Borrower or its
interest would have a material adverse effect on the financial condition of
Borrower, and Borrower is not in default with respect to any order, writ,
injunction, decree or demand of any court or other governmental or regulatory
authority.
2.05 FINANCIAL CONDITION. The balance sheet of Borrower as of May
23, 1999, and the related profit and loss statement for the same period ended as
of that date, a copy of which has heretofore been delivered to Bank by Borrower,
and all other statements and data submitted in writing by Borrower to Bank in
connection with this request for credit are true and correct, and said balance
sheet truly presents the financial condition of Borrower as of the date thereof,
and has been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date there have been
no material adverse changes in the financial condition or business of Borrower.
Borrower has no knowledge of any liabilities, contingent or otherwise, at such
date not reflected in said balance sheet,
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and Borrower has not entered into any special commitments or substantial
contracts which are not reflected in said balance sheet, other than in the
ordinary and normal course of its business, which may have a materially adverse
effect upon its financial condition, operations or business as now conducted.
2.06 TITLE TO ASSETS. Borrower has good title to its assets, and
the same are not subject to any liens or encumbrances other than those permitted
by Section 5.03 hereof.
2.07 TAX STATUS. Borrower has no liability for any delinquent
state, local or federal taxes, and, if Borrower has contracted with any
government agency, Borrower has no liability for renegotiation of profits.
2.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof,
possesses all necessary trademarks, trade names, copyrights, patents, patent
rights, and licenses to conduct its business as now operated, without any known
conflict with the valid trademarks, trade names, copyrights, patents and license
rights of others.
2.09 REGULATION U. None of the proceeds of any Loan shall be used
to purchase or carry margin stock (as defined within Regulation U of the Board
of Governors of the Federal Reserve system).
2.10 ERISA. All defined benefit pension plans as defined in the
Employees Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower meet, as of the date hereof, the minimum funding standards of Section
302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in
ERISA has occurred with respect to any such plan.
2.11 YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as
applicable, have reviewed the areas within their operations and business which
could be adversely affected by, and have developed or are developing a program
to address on a timely basis, the Year 2000 Problem and have made related
appropriate inquiry of material suppliers and vendors, and based on such review
and program, the Year 2000 Problem will not have a material adverse effect upon
its financial condition, operations or business as now conducted. "Year 2000
Problem" means the possibility that any computer applications or equipment used
by Borrower may be unable to recognize and properly perform date sensitive
functions involving certain dates prior to and any dates one or after December
31, 1999.
3. CONDITIONS PRECEDENT TO LOAN
Prior to Bank being obligated to make any Loan pursuant to
this Agreement, Bank must receive all of the following, each of which must be in
form and substance satisfactory to Bank:
3.01 PROMISSORY NOTE(S). Original, executed promissory note(s) as
applicable.
3.02 SECURITY AGREEMENT. Original, executed security agreement(s)
covering the personal property collateral securing the Loan(s).
3.03 FINANCING STATEMENT. Financing statement(s) executed by
Borrower and any grantor of a security interest.
3.04 INSURANCE. Borrower shall have delivered to Bank evidence
of insurance coverage required pursuant to that Agreement to Provide Insurance
executed by Borrower, in form, substance,
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amounts, covering risks and issued by companies satisfactory to Bank, and where
required by Bank, with loss payable endorsements in favor of Bank.
3.05 ORGANIZATIONAL DOCUMENTS. Copies of the articles of
incorporation or similar document as the case may be, of the any.
3.06 AUTHORIZATIONS. Certified copies of all action taken by any
Borrower to authorize the execution, delivery and performance of the Loan
Documents.
3.07 GOOD STANDING . Good standing certificates from the
appropriate secretary of state of the state in which any Borrower is organized
and in each state in which it is required to be qualified to do business.
3.08 LOAN PAY DOWN. Principal payment in the amount of $41,666.72
to be applied to note number 6, plus payment of all accrued but unpaid interest
on notes 6 and 7 to the date of disbursement hereunder.
3.09 ADDITIONAL DOCUMENTS. Such other documents as Bank may
reasonably deem necessary.
4. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under borrowings, or
other indebtedness, or so long as Bank has any obligation to extend credit to
Borrower it will, unless Bank shall otherwise consent in writing:
4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights,
franchises and other authority adequate for the conduct of its business;
maintain its properties, equipment and facilities in good order and repair;
conduct its business in an orderly manner without voluntary interruption and,
if a corporation or partnership, maintain and preserve its existence.
4.02 USE OF PROCEEDS. Use the proceeds of the Loans only for
purposes specified in Section 1 of this Agreement.
4.03 INSURANCE. Maintain public liability, property damage and
workers' compensation insurance and insurance on all its insurable property
against fire and other hazards with responsible insurance carriers to the
extent usually maintained by similar businesses and/or in the exercise of good
business judgment, and as required by that Agreement to Provide Insurance
executed by Borrower, with the Bank to be shown as Lenders Loss Payee on such
policies.
4.04 TAXES AND OTHER LIABILITIES. Pay and discharge, before the
same become delinquent and before penalties accrue thereon, all taxes,
assessments and governmental charges upon or against it or any of its
properties, and all its other liabilities at any time existing, except to the
extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse effect upon
its financial condition or the loss of any right of redemption from any sale
thereunder; and
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(b) It shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting practice) deemed by it to be adequate
with respect thereto.
4.05 RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at all reasonable times and
upon reasonable notice during normal business hours; and furnish Bank:
(a) MONTHLY FINANCIAL STATEMENT. As soon as available, and in any
event within Thirty (30) days after the close of each month, a balance sheet,
profit and loss statement and reconciliation of Borrower's capital balance
accounts as of the close of such period and covering operations for the portion
of Borrower's fiscal year ending on the last day of such period, all in
reasonable detail and reasonably acceptable to Bank, in accordance with
generally accepted accounting principles on a basis consistently maintained by
Borrower .
(b) QUARTERLY FINANCIAL STATEMENT. As soon as available, and in
any event within Forty-five (45) days after the close of each calendar quarter,
deliver to Bank a from 10Q containing a balance sheet, profit and loss statement
in form satisfactory and reasonably acceptable to Bank.
(c) ANNUAL FINANCIAL STATEMENT. As soon as available, and in any
event within Ninety (90) days after and as of the close of each fiscal year of
Borrower, a consolidated report of audit (10K) of Company, all in reasonable
detail, audited by an independent certified public accountant selected by
Borrower and reasonably acceptable to Bank, in accordance with generally
accepted accounting principles on a basis consistently maintained by Borrower.
(d) OFFICER'S CERTIFICATE. Within Thirty (30) days after the end
of each month of Borrower, a certificate of the chief financial officer of
Borrower, stating that Borrower has performed and observed each and every
covenant contained in this Agreement to be performed by it and that no event has
occurred and no condition then exists which constitutes an event of default
hereunder or would constitute such an event of default upon the lapse of time or
upon the giving of notice and the lapse of time specified herein; or, if any
such event has occurred or any such condition exists, specifying the nature
thereof in the form of exhibit 4.05 attached hereto.
(e) AUDIT REPORTS. Promptly after the receipt thereof by Borrower,
copies of any detailed audit reports submitted to Borrower by independent
accountants in connection with each annual or interim work on the accounts of
Borrower made by such accountants;
(f) STOCKHOLDER, SECURITY AND EXCHANGE COMMISSION STATEMENTS AND
REPORTS Promptly after the same are available, copies of all such proxy
statements, financial statements and reports as Borrower or any subsidiary shall
send to its members or stockholders as appropriate, if any, and copies of all
reports which Borrower or any subsidiary may file with the Securities and
Exchange Commission.
(g) OTHER INFORMATION. Such other information relating to the
affairs of Borrower as the Bank reasonably may request from time to time.
4.06 CURRENT RATIO. Maintain at all times a minimum ratio of total
current assets (excluding all amounts due from stockholders, officers and
affiliates) divided by total current liabilities (including all amounts due to
stockholders, officers and affiliates) of 1.25 to 1.00.
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4.07 WORKING CAPITAL. Maintain at all times working capital,
meaning current assets (excluding all amounts due from stockholders, officers
and affiliates) minus total current liabilities (including all amounts due to
stockholders, officers and affiliates) of not less than One Million Two Hundred
Fifty Thousand Dollars ($1,250,000).
4.08 TANGIBLE NET WORTH. Maintain at all times Tangible Net Worth
(defined as stockholder's equity less any value for goodwill, trademarks,
patents, copyrights, leaseholds, organization expense and other similar
intangible items, and any amounts due from stockholders, officers and
affiliates) plus Subordinated Debt, meaning debt subordinated to the obligations
of Borrower to Bank, in form and substance satisfactory to Bank, of not less
than Six million Two Hundred Fifty Thousand Dollars ($6,250,000). Increasing by
$300,000 as of the end of each fiscal quarter starting with the fiscal quarter
ending September 30, 1999.
4.09 DEBT TO TANGIBLE NET WORTH. Maintain at all times a ratio of
total liabilities less Subordinated Debt (as defined in 4.08) to Tangible Net
Worth (as defined in 4.08), of not greater than 1.00 to 1.00.
4.10 DEBT COVERAGE RATIO. Maintain on an annual basis a ratio EBIDA
divided by Current Portion of Long Term Debt, and capital leases plus interest
expense of not less than 1.75 to 1.00. EBIDA shall mean the sum of (a) net
income after taxes, plus (b) interest expense, plus (c) depreciation and
amortization expense (excludes slotting amortization).
4.11 ERISA. Cause all defined benefit pension plans, as defined in
ERISA, of Borrower to, at all times, meet the minimum funding standards of
Section 302 of ERISA, and ensure that no Reportable Event or Prohibited
Transaction, as defined in ERISA, will occur with respect to any such plan.
4.12 LAWS. At all times comply with, or cause to be complied with,
all laws, statues, rules, regulations, orders and directions of any governmental
authority having jurisdiction over Borrower or Borrower's business.
4.13 GAAP. Compliance with all financial covenants shall be
calculated based on generally accepted accounting principles applied on a
consistent basis as maintained by Borrower.
4.14 YEAR 2000 COMPLIANT. Borrower shall perform all acts
reasonably necessary to ensure that (a) Borrower and any business in which
Borrower holds a substantial interest, and (b) all customers, suppliers and
vendors whose compliance is likely to be material to Borrower's business, become
Year 2000 Compliant in a timely manner. Such acts shall include, without
limitation, performing a comprehensive review and assessment of all Borrower's
systems and adopting a detailed plan, with itemized budget, for the remediation,
monitoring and testing of such systems. As used in this paragraph, "Year 2000
Compliant" shall mean, in regard to any entity, that all software, hardware,
firmware, equipment, goods or systems utilized by or material to the business
operations or financial condition of such entity, will properly perform date
sensitive functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Agent such certifications or other evidence
of Borrower's compliance with the terms of this paragraph as Bank may from time
to time require.
4.15 OPERATING ACCOUNTS. Maintain all primary accounts and banking
relationship with the Bank. Maintain, or cause to be maintained, on deposit with
Bank, non-interest bearing demand deposit
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balances sufficient to compensate Bank for all services provided by Bank.
Balances shall be calculated after reduction for the reserve requirement of the
Federal Reserve Board and uncollected funds. Any deficiencies shall be charged
directly to the Borrower on a monthly basis.
4.16 NOTICES. Promptly notify Bank in writing of (i) the occurrence
of any Event of Default hereunder or any event which upon notice and lapse of
time would be an Event of Default; (ii) all litigation affecting Borrower where
the amount is $50,000 or more; any substantial dispute which may exist between
Borrower and any governmental regulatory body or law enforcement authority; any
change in Borrower's name or principal place of business; or any other matter
which has resulted or might result in a material adverse change in Borrower's
financial condition or operations.
4.17 AUDITS. Permit representatives of Bank to conduct audits of
Borrower's books and records relating to the Accounts, Inventory and other
Collateral and make extracts therefrom, with results satisfactory to Bank,
PROVIDED that Bank shall use its best efforts to not interfere with the conduct
of Borrower's business, and to the extent possible to arrange for verification
of the Accounts directly with the account debtors obligated thereon or
otherwise, all under reasonable procedures acceptable to Bank and at Borrower's
sole expense; PROVIDED FURTHER that, prior to an Event of Default, Borrower
shall not be responsible for the expense of any such audit.
5. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, or so long as Bank has
any obligation to extend credit to Borrower, it will not, without Bank's written
consent:
5.01 TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in
the character of its business; or make any change in its executive management.
5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness for borrowed moneys other than Loans from the Bank except
obligations now existing as shown in the financial statement dated May 31, 1999,
other than those Permitted Indebtedness listed on Schedule 5.02 attached hereto
or sell or transfer, either with or without recourse, any accounts or notes
receivable or any moneys due or to become due.
5.03 LIENS AND ENCUMBRANCES. Create, incur, permit to exist, or
assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any
asset now owned or hereafter acquired by it, other than liens for taxes not
delinquent and liens in Bank's favor and other than liens agreed to in writing
by Bank and other than those Permitted Liens listed in Schedule 5.03 attached
hereto.
5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or
advances to any person or other entity other than in the ordinary and normal
course of its business as now conducted or make any investment in the securities
of any person or other entity other than the United States Government; or
guarantee or otherwise become liable upon the obligation of any person or other
entity, except by endorsement of negotiable instruments for deposit or
collection in the ordinary and normal course of its business other than those
listed in Schedule 5.04 attached hereto.
5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION.
Purchase or otherwise acquire the assets or business of any person or other
entity; or liquidate, dissolve, merge or consolidate, or commence any
proceedings therefor; or sell any assets except in the ordinary and normal
course of its business as now conducted; or sell, lease, assign, or transfer
any substantial part of its business or fixed
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assets, or any property or other assets necessary for the continuance of its
business as now conducted, including without limitation the selling of any
property or other asset accompanied by the leasing back of the same.
5.06 CAPITAL EXPENDITURES. Make or incur obligations for fixed or
capital assets, which includes purchase money indebtedness or capital lease
obligations in excess of $1,500,000 in any one fiscal year.
5.07 DIVIDENDS Declare or pay any dividend or make any other
distribution on any of its capital stock now outstanding or hereafter issued or
purchase, redeem or retire any of such stock other than in dividends or
distributions payable in Borrower's capital stock, except for the repurchase of
Borrower's capital stock from officers, directors, employees or consultants of
Borrower upon termination of their employment with or rendering of service to
Borrower.
5.08 SUBORDINATED LIABILITIES. Make any payments on any Borrower's
obligation subordinated to the obligations to Bank, other than in accordance
with the provisions of any subordination agreement executed by the Bank and the
subordinated debt holder.
6. EVENTS OF DEFAULT
The occurrence of any of the following events of default ("Events of Default")
shall, at Bank's option, terminate Bank's commitment to lend and make all sums
of principal and interest then remaining unpaid on all Borrower's indebtedness
to Bank immediately due and payable, all without demand, presentment or notice,
all of which are hereby expressly waived:
6.01 FAILURE TO PAY. Failure to pay any installment of principal or
of interest on any indebtedness of Borrower to Bank within, five (5) days of its
due date.
6.02 BREACH OF COVENANT. Failure of Borrower to perform any other
term or condition of this Agreement or any Loan Document binding upon Borrower.
6.03 BREACH OF WARRANTY. Any of Borrower's representations or
warranties made herein or any statement or certificate at any time given in
writing pursuant hereto or in connection herewith shall be false or misleading
in any respect.
6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become
insolvent; or admit its inability to pay its debts as they mature; or make an
assignment for the benefit of creditors; or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business.
6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of
$50,000, writ or warrant of attachment, or similar process shall be entered or
filed against Borrower or any of its assets and shall remain unvacated, unbonded
or unstayed for a period of ten (10) days or in any event later than five (5)
days prior to the date of any proposed sale thereunder.
6.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against Borrower
and, if instituted against it, shall not be dismissed within thirty (30) days
thereafter.
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6.07 REVOCATION OF SUBORDINATION AGREEMENT. Any subordination
agreement required hereunder is breached or becomes ineffective; or any
Guarantor or subordination creditor disavows or attempts to revoke or terminate
such guarantee or subordination agreement.
6.08 CESSATION OF BUSINESS. Borrower shall voluntarily suspend its
business.
6.09 ADVERSE CHANGE. Any change which, in the opinion of Bank, is
materially adverse to the financial condition of Borrower or any Guarantor; or
should Bank, for any reason, believe that the prospect of Borrower's payment or
performance hereunder or under any other agreement or instrument with Bank be
impaired.
6.10 OTHER DEFAULTS. Borrower, or any Guarantor of Borrower's
obligations to Bank, shall commit or do or fail to commit or do any act or thing
which would constitute an event of default under any of the terms of any other
agreement, document or instrument executed or to be executed by it concerning
the obligation to pay money.
6.11 ADVANCES. Notwithstanding anything to the contrary contained
herein, Bank shall have no duty to make advances while any event of default
exists notwithstanding any cure period provided for herein.
7. MISCELLANEOUS PROVISIONS
7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of Bank or any holder of notes issued hereunder, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this Agreement or any note(s) issued in
connection with a Loan that Bank may make hereunder, are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
7.02 COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed
by the parties hereto in several counterparts, each of which shall be deemed to
be an original and all of which shall constitute together but one and the same
agreement. This Agreement, and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersedes any prior agreements, written or oral, with respect thereto.
7.03 ATTORNEY'S FEES. Borrower will pay promptly to Bank without
demand after notice, with interest thereon from the date of expenditure at the
rate applicable to the Loan, reasonable attorneys' fees and all costs and
expenses paid or incurred by Bank in collecting or compromising the Loan after
the occurrence of an Event of Default, whether or not suit is filed. If suit is
brought to enforce any provision of this Agreement, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
7.04 ADDITIONAL REMEDIES. The rights, powers and remedies given to
Bank hereunder shall be cumulative and not alternative and shall be in addition
to all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.05 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assigns of
Borrower.
10
<PAGE>
7.06 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the state of California, to the jurisdiction
of whose courts the parties hereby agree to submit.
7.07 OFFSET. In addition to and not in limitation of all rights of
offset that Bank or other holder of the Loan may have under applicable law, Bank
or other holder of any note issued hereunder shall, upon the occurrence of any
Event of Default or any event which with the passage of time or notice would
constitute such an Event of Default, have the right to appropriate and apply to
the payment of the Loan any and all balances, credits, deposits, accounts or
monies of Borrower then or thereafter with Bank or other holder, within ten (10)
days after the Event of Default, and notice of the occurrence of any Event of
Default by Bank to Borrower.
7.08 SEVERABILITY. Should any one or more provisions of the
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective.
7.09 TIME OF THE ESSENCE. Time is hereby declared to be of the
essence of this Agreement and of every part hereof.
7.10 ACCOUNTING. All accounting terms shall have the meanings
applied under generally accepted accounting principles unless otherwise
specified.
7.11 REFERENCE PROVISION.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Credit
Agreement, any security agreement executed by Borrower in favor of Bank or any
note executed by Borrower in favor of Bank or any other agreement or instrument
issued in favor of Bank by Borrower (collectively in this Section, the
"Agreement") which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "CLAIM DATE" (defined as the date on which a
party subject to this Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or Los Angeles County if none
(the "COURT"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP Section170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the date of selection of the
referee and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section644 in any court in the state
of
11
<PAGE>
California having jurisdiction. Any party may apply for a reference proceeding
at any time after thirty (30) days following notice to any other party of the
nature of the controversy, dispute or claim, by filing a petition for a hearing
and/or trial. All discovery permitted by this Agreement shall be completed no
later than fifteen (15) days before the first hearing date established by the
referee. The referee may extend such period in the event of a party's refusal to
provide requested discovery for any reason whatsoever, including, without
limitation, legal objections raised to such discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to "priority" in
conducting discovery. Depositions may be taken by either party upon seven (7)
days written notice, and request for production or inspection of documents shall
be responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties. Pending
appointment of the referee as provided herein, the Superior Court is empowered
to issue temporary and/or provisional remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the state of California. The
rules of evidence applicable to proceedings at law in the state of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section1280 through Section1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
7.12 This Agreement may be modified only by a writing signed by all parties
hereto.
12
<PAGE>
This Agreement is executed on behalf of the parties by duly authorized officers
as of the date first above written.
IMPERIAL BANK MONTEREY PASTA COMPANY, A
("BANK") DELAWARE CORPORATION
("BORROWER")
By: By:
------------------------------- ---------------------------------
Brian C. Santos R. Lance Hewitt
Senior Vice President Chief Executive Officer
Its: Its:
------------------------------ --------------------------------
By:
---------------------------------
Stephen L. Brinkman
Chief Financial Officer
Its:
--------------------------------
13
<PAGE>
Exhibit "4.05"
COMPLIANCE CERTIFICATE
The financial statement of MONTEREY PASTA COMPANY (Borrower) attached hereto
dated as of 6/27/99, and submitted to Imperial Bank pursuant to the
Credit Agreement between us dated 8/2/99, shows compliance with all
financial covenants (unless otherwise noted, below) as specified therein, as
follows:
<TABLE>
<CAPTION>
COVENANT: ACTUAL:
<S> <C> <C>
4.06 Minimum Current Ratio 1.25:1.00 1.50
----------
4.07 Minimum Working Capital $1,250,000 1,853,654
----------
4.08 Minimum Tangible Net Worth: $6,250,000 7,337,189
----------
4.09 Debt/TNW 1.00:1.00 53
----------
4.10 Minimum EBIDA Coverage Ratio (Annual): 1.75:1.0 Annual
----------
</TABLE>
Exceptions: (If none, so state) None
------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The undersigned authorized officer of MONTEREY PASTA COMPANY. hereby certifies
that Borrower is in complete compliance with the terms and conditions of the
Credit Agreement for the period ending 6/27/99, except as noted above. I know of
no pending conditions which may cause an Event of Default to exist in the next
thirty (30) days. The required support documents for this certification are
attached and prepared in accordance with generally accepted accounting
principles, consistently applied.
DATE: 8/5/99
- -------------------------------------------- ------------------------------
Signed Stephen L. Brinkman
Authorized Officer of MONTEREY PASTA COMPANY
Name: Stephen L. Brinkman
----------------------------------------
Title: Chief Financial Officer ( Please Print)
-----------------------------------------------------
<PAGE>
FIRST AMENDMENT TO
CREDIT AGREEMENT
BETWEEN MONTEREY PASTA COMPANY AND
IMPERIAL BANK DATED AUGUST 2, 1999
This First Amendment ("Amendment") amends that certain Credit Agreement (the
"Agreement") dated August 2, 1999, by and between Monterey Pasta Company
("Borrower") and Imperial Bank ("Bank") as follows:
1. Paragraph 5.06 is hereby amended to read in its entirety as follows:
"CAPITAL EXPENDITURES. Make or incur obligations for fixed or
capital assets, which includes purchase money indebtedness or capital
lease obligations in excess of $2,750,000 in any one fiscal year."
2. Except as provided above, the Agreement remains unchanged.
3. This amendment is effective as of January 5, 2000, and the parties
hereby confirm that the Credit Agreement as amended is in full force and effect.
MONTEREY PASTA COMPANY IMPERIAL BANK
"Borrower" "Bank"
By: By:
-------------------------------- -------------------------------
Stephen L. Brinkman Brian C. Santos
Chief Financial Officer Vice President
Title: Title:
----------------------------- ----------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 71,399
<SECURITIES> 0
<RECEIVABLES> 3,949,738
<ALLOWANCES> 136,127
<INVENTORY> 2,703,314
<CURRENT-ASSETS> 8,111,757
<PP&E> 10,969,573
<DEPRECIATION> 4,180,308
<TOTAL-ASSETS> 18,666,015
<CURRENT-LIABILITIES> 3,983,862
<BONDS> 0
0
0
<COMMON> 40,262,579
<OTHER-SE> (25,653,003)
<TOTAL-LIABILITY-AND-EQUITY> 18,666,015
<SALES> 36,901,772
<TOTAL-REVENUES> 36,901,772
<CGS> 22,748,471
<TOTAL-COSTS> 22,748,471
<OTHER-EXPENSES> 10,219,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,766,185
<INCOME-TAX> (3,261,245)
<INCOME-CONTINUING> 7,027,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,027,430
<EPS-BASIC> .55
<EPS-DILUTED> .54
</TABLE>
