-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EPfw/jOd6GnuG1Dp1gHzlbzcv6qcdtGecAOsDZ2DyaZXluFEQvtyQcfS8mPrS0qj 9mjPyJ7oKGc8QK6HrLz2kg== 0000912057-96-022699.txt : 19961016 0000912057-96-022699.hdr.sgml : 19961016 ACCESSION NUMBER: 0000912057-96-022699 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19961015 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL FOOD & BEVERAGE INC /DE/ CENTRAL INDEX KEY: 0000880584 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 330307734 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-43621 FILM NUMBER: 96642863 BUSINESS ADDRESS: STREET 1: 30152 AVENTURA STREET 2: PO BOX 80609 CITY: RANCHO SANTA MARGARI STATE: CA ZIP: 92668 BUSINESS PHONE: 7148588800 MAIL ADDRESS: STREET 1: 30152 AVENTURA STREET 2: PO BOX 80609 CITY: RANCHO SANTA MARGARI STATE: CA ZIP: 92688 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 29, 1996 ------------------------------------------------- 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 33-43621 INTERNATIONAL FOOD AND BEVERAGE, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 33-0307734 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30152 Aventura, Rancho Santa Margarita, California 92688 - ---------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) (714) 858-8800 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [x]. Not Applicable because the Registrant does not have securities registered under 12(b) or 12(g). The aggregate market value of Common Stock held by non-affiliates of the Registrant on September 1, 1996 was approximately $490,000. On September 1, 1996, Registrant had 156,589,351 shares of Common Stock outstanding. TABLE OF CONTENTS PAGE PART I Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 3 Introduction . . . . . . . . . . . . . . . . . 3 Market . . . . . . . . . . . . . . . . . . . . 3 Products . . . . . . . . . . . . . . . . . . . 3 Sales and Marketing. . . . . . . . . . . . . . 4 Seasonality. . . . . . . . . . . . . . . . . . 5 Customers. . . . . . . . . . . . . . . . . . . 5 Suppliers. . . . . . . . . . . . . . . . . . . 5 Competition. . . . . . . . . . . . . . . . . . 6 Regulation . . . . . . . . . . . . . . . . . . 6 Employees. . . . . . . . . . . . . . . . . . . 6 Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 6 Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . 6 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . 6 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS . . . . . . . . . 7 Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . 8 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . 9 Results of Operations. . . . . . . . . . . . . 9 Inflation. . . . . . . . . . . . . . . . . . . 10 Liquidity and Capital Resources. . . . . . . . 11 Capital Expenditures . . . . . . . . . . . . . 11 Net Operating Loss Carryforwards . . . . . . . 11 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . 11 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . 11 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . 12 Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 13 Employment Agreements. . . . . . . . . . . . . 14 Bonus Plan . . . . . . . . . . . . . . . . . . 14 Stock Option Plan. . . . . . . . . . . . . . . 14 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . 15 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 16 PART IV Item 14. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 18 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2 PART I ITEM 1. BUSINESS INTRODUCTION International Food and Beverage, Inc. (the "Company") manufactures a complete line of pizzas, pizza components, and specialty baked products and markets them nationally through foodservice customers which include retail supermarket service delicatessens as well as restaurants, hotels, sport and theme parks, and other catering locations. The Company utilizes its proprietary manufacturing process to produce premium quality HAND-TOSSED crusts that deliver the unique taste, texture and appearance of fresh pizzeria pizzas. Since 1986 the Company has continued to develop its distinctive product line and strong industry relationships. From 1986 through early 1990 the Company relied solely on a number of outside contract manufacturers for production but in 1990 opened the bakery section of its state-of-the-art 50,000 sq. ft. facility. The Company's manufacturing plant was completed in mid-1993 with the addition of a USDA certified pizza topping section, providing the capacity to produce a much improved line of premium quality pizzas at a significantly reduced cost. In July 1995 the Company entered into an agreement with a marketing and sales organization under which the Company provides manufacturing and distribution services. Pizzas are produced for shipment to domestic customers and for export to Pacific Rim countries. The President of this organization is also a member of the Company's Board of Directors. Management believes that this type of contract production will continue to enable a greater utilization of the Company's manufacturing facility and deliver incremental margin contribution. MARKET Pizza is "America's favorite food" according to the trade press with estimated annual sales at $30 billion within the United States. Over the past decade, pizza has become the nation's leading take-home and home-delivered food while category growth continues. American-style pizza has also become popular around the world as various cultures accept the value, convenience, nutrition and, most of all, fun of eating pizza! The Company primarily sells to customers within the retail supermarket and the foodservice/catering segments of this market. SUPERMARKET BUSINESS MAGAZINE and Chicago-based Information Resources, Inc. estimate that 1995 annual sales of pizza at retail supermarkets reached nearly $3 billion and that over the past five years pizza has been one of the supermarkets' fastest growing categories. The Company believes the sales of pizza at foodservice locations (other than pizzeria restaurants or institutional feeding locations) exceeds $5 billion annually and that pizza sales continue to grow in these locations. PRODUCTS The Company's product line consists of fully prepared pizzas (cheese pizzas or pizzas complete with assorted meat and/or vegetable toppings) available on a variety of crusts; various sizes, shapes and styles of hand-made pizza crusts; and a variety of cheeses, topping ingredients, and packaging supplies which are purchased for resale to customers. Additionally, the Company manufactures Gourmet Italian Cheese Crusts (similar to the Boboli-Registered Trademark- product from CPC International) and other specialty flavored bread products. The Company manufactures and distributes nationally a line of HAND-TOSSED pizzas. Unlike competitive products which are either stamped into a mold or die cut from a sheet of dough, the Company's crusts are hand-formed and then hearth baked to provide the taste, texture and appearance of "fresh pizzeria" quality. Utilizing a variety of dough recipes, the Company produces its crusts and baked products in a highly automated manufacturing process that nearly replicates the steps performed in a pizzeria restaurant. A number of products involve hand-stretching and hand-tossing of dough pieces to form desired shapes while preserving the naturally fermented gases that contribute to product taste and texture. While costing slightly more than competitive pizza 3 crusts, the Company's products are viewed by executive chefs and service deli merchandisers as superior in quality to either stamped or die cut crusts available from competitive suppliers. The Company's proprietary baking process has evolved over the years with an important breakthrough achieved late in 1994 that ensures a significantly crispier crust with more yeasty flavor and "fresh made" texture. Many of the Company's products have been developed after collaborative efforts with executive chefs and research and development personnel of the Company's major customers. The Company offers a custom development service to these large customers whereby premium quality products can be designed to meet specific operator requirements for serving application, taste and distinctiveness, and to satisfy preparation constraints. These "signature" products satisfy the customers' need for unique offerings while adding to the Company's capability and technical expertise. The Company's products and programs are generally designed to replace or be alternatives to traditional component programs which are more labor, ingredient and space intensive. In addition, these other programs result in products which are inconsistent in appearance and sometimes lacking in availability due to peaks and valleys in consumption demand. Increasingly, customers are searching for "labor friendly" alternatives that offer ready-to-top or fully prepared pizzas that are "hand-made" in appearance and deliver "pizzeria quality" in taste and texture. The following table sets forth the Company's major product classes for fiscal 1994 through 1996. Working with major targeted customers, the Company has successfully shifted sales volume over the years towards Prepared Pizzas which offer higher margins based on added value to our customers. Percentage of Revenues ---------------------------------- Product Classes 1994 1995 1996 - --------------- ---- ---- ---- Prepared Pizzas: Retail, Service Deli and Frozen 46% 53% 65% Foodservice Operators 10 8 13 -- -- -- 56 61 78 -- -- -- Pizza Crusts and Components: Retail Service Deli 20 10 2 Foodservice Operators 24 29 20 -- -- -- 44 39 22 -- -- -- TOTAL 100% 100% 100% ---- ---- ---- ---- ---- ---- SALES AND MARKETING The Company markets products under its own brand names (JUKEBOX-Registered Trademark-, MAMA MIA ITALIANO-TM-, MAMA MIA HOMESTYLE-TM- and MAMMA GINA'S); sells its products under foodservice distributor private labels, including Sysco Corporation's IMPERIAL and ARREZZIO labels and S.E. Rykoff/John Sexton and Company's BELLAGIO-Registered Trademark- label; and is the primary supplier to Safeway, Inc. under a controlled PIZZERIA FRESCA label and SAFEWAY Brand private label. The Company's sales efforts are conducted by an in-house sales management team together with field merchandisers assigned to specific accounts. The Company's sales organization directs its primary efforts at identifying large regional or national accounts and distributor organizations, presenting product and program offerings tailored to each user and managing the resulting implementation and customer relationships. Additionally, the sales organization manages independent food brokers in various regions throughout the United States and also works in concert with sales organizations provided by full-line foodservice distributors who service individual end user customers. The majority of the Company's foodservice business is conducted through traditional foodservice distribution channels. Sales to retail customers are made direct or with the assistance of specialized brokers, with shipments generally made directly to the customers' warehouses. 4 The Company generally sells its products pursuant to customer purchase orders and fills orders within ten days of receipt. Because purchase orders are filled shortly after receipt, backlog is not material to the Company's retail or foodservice businesses. Substantially all of the Company's domestic products are delivered to customers by independent trucking companies or picked up by customers at one of the Company's warehouses. With regard to the Company's export sales (currently to Korea only), backlog of orders are normal and the Company receives payment in full at time of shipment. SEASONALITY The Company's retail pizza business experiences moderate seasonality with the highest sales periods occurring between fall and early spring. Foodservice sales are comparatively stable throughout the calendar year. CUSTOMERS The Company sells its products to full line foodservice distributors, direct to major foodservice customer's warehouses, and to retail grocery warehouses and distributors throughout the United States. During fiscal 1996, approximately 70% of the Company's sales were to customers located in the western United States while approximately 30% of sales were to customers in the eastern half of the United States. Products sold to foodservice distributors are resold to end user customers ranging in size from national accounts to multi- unit regional organizations to single location accounts. Given the fact that the Company focuses its own selling efforts on national and multi-unit regional accounts, the majority of its foodservice sales are to these types of organizations. During fiscal 1996, approximately 85% of sales were made to the Company's five largest customers with the aggregate of the various divisions of one of these customers accounting for approximately 44% of sales. The Company's retail customers include, among others, Safeway Inc., Von's Grocery Company and Albertson's. Its principal foodservice distributor customers are Sysco Corporation, U.S. Foodservice (recently acquired S.E. Rykoff/John Sexton and Company), Martin-Brower, MBM Foodservice and Alliant Foodservice (formerly Kraft Foodservice). These distributor organizations in turn sell to end user customers of the Company including restaurant chains such as Friendly's Ice Cream, Golden Corral Restaurants, Marie Callender's Restaurants, Old Country Buffet Restaurants, and Tony Roma's; hotel chains such as Marriott, Radisson and Doubletree; theme and event centers such as Knott's Berry Farm, Anaheim Stadium and the Great Western Forum; transportation terminals such as Host Airport locations; and military locations such as Camp Pendleton. SUPPLIERS The Company believes that the raw materials utilized in manufacturing its products, which principally include flour, cheese, tomatoes, spices, meat products, and packaging materials, are readily available from a number of potential suppliers. The Company utilizes at least two sources of supply for each of its key raw material categories although pricing and current production volumes dictate that the majority of purchases for an item be made from a single principal supplier. Although the Company does not maintain contracts with most of its suppliers, the Company believes that there are numerous alternative sources of supply available to meet production requirements. Many of the Company's raw materials are agricultural commodities; consequently, the prices the Company pays for its materials vary over time due to commodity market conditions including demand, crop yield and weather. The Company believes that normal historical commodity price variations would not have a material effect on gross profit margins beyond the extent to which raw material cost increases could be passed on to the Company's customers. Throughout all of calendar 1996 the commodity price for cheese, the Company's single most impactful ingredient cost, has experienced unprecedented increases. The current year average price of cheese has been approximately twenty cents per pound or over 15% higher than the average price experienced in the previous three calendar years. This dramatic increase resulted in the Company raising prices to its customers, but before doing so the Company experienced a period of reduced profit margins. 5 COMPETITION The Company faces significant competition in the marketing and sale of its products. The Company competes with a number of national organizations and numerous regional companies, which have significantly greater financial, manufacturing, marketing and distribution resources than the Company. The Company believes that the principal competitive factors in the marketing of pizza and specialty baked products are quality, price, ease of preparation, and variety of product offerings. While the company believes that its products compete favorably with respect to these factors, and believes that its willingness and ability to develop custom products to meet specific customer requirements represents a substantial benefit to potential customers, there can be no assurance that the Company will be able to compete successfully. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". REGULATION The Company's manufacturing facility and its products are subject to extensive regulation by the United States Food and Drug Administration, the United States Department of Agriculture, and by other state and local authorities in jurisdictions in which the Company's products are processed or sold. The manufacturing facility is subject to periodic inspection by federal, state and local authorities. The Company believes that its manufacturing facility is currently in substantial compliance with all material governmental laws and regulations and that all material permits and licenses relating to their operations have been maintained. EMPLOYEES The Company currently employs approximately 50 people. No employee of the Company is a member of a collective bargaining unit and the Company is unaware of any attempt by its employees to organize such units. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES The Company's principal executive offices and 50,000 square feet manufacturing facility is located at 30152 Aventura, Rancho Santa Margarita, California 92688. The Company leases that facility pursuant to a ten year lease, with two 5-year renewal options, at a monthly rent of $25,000 exclusive of insurance and taxes. The Company also utilizes public warehouses for finished goods storage. Utilization of these warehouses is the result of arrangements with large distributor organizations to facilitate mixed load shipments of private label products, accommodation to certain customers to ensure convenient small lot shipments to local operating units or temporary storage for finished goods inventory when levels exceed the storage capacity of the Company's own on-site freezer. The Company's manufacturing facility is equipped with a single baking and topping line, which is currently operating at approximately 35% of full capacity. The facility contains sufficient space for future installation of a second baking and topping line. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year covered by this report. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is not quoted on NASDAQ but has been traded in the over-the-counter market since approximately October 1987. There has been relatively little trading in the Company's Common Stock and there can be no assurance that a more active market will develop or be sustained. Throughout the two years ended June 30, 1996 the high and low bid quotations for the Company's Common Stock has been less than or equal to $.01 per share. The high and low bid quotations represent prices between dealers and do not include retail markups, markdowns or commissions, and may not represent actual transactions. Throughout the two years ended June 30, 1996 there has been considerable disparity between the quoted bid and ask prices, regularly approaching as much as a $.10 per share spread. Accordingly, the market price for shares of the Company's Common Stock may be highly volatile, with a limited public float. The approximate number of holder of records of the Company's Common Stock on September 1, 1996 was 500. The Company has not and does not expect to pay cash dividends on its Common Stock in the foreseeable future. 7 ITEM 6. SELECTED FINANCIAL DATA The selected financial data as of June 30, 1995, and 1996, for the year ended June 30, 1994, the six months ended December 31, 1994 and June 30, 1995 and for the year ended June 30, 1996 are derived from the audited financial statements of the Company and should be read in conjunction with the audited financial statements included herein. The selected financial data as of June 30, 1992, 1993, and 1994 and for the years ended June 30, 1992 and 1993 are derived from the audited financial statements of the Company which are not included herein.
Six Months Six Months Year Years Ended June 30, Ended Ended Ended ------------------------------------ December 31, June 30, June 30, 1992 1993 1994 1994 1995 1996 ---- ---- ---- ---- ---- ---- Statement of Operations Data: (1) (1) (In thousands, except per share data) Revenues $ 6,007 $ 8,446 $ 10,703 $ 3,580 $ 2,718 $ 6,572 Cost of sales 5,913 8,257 8,385 3,279 2,212 5,374 Gross profit 94 189 2,318 301 506 1,198 Selling and distribution expense 1,937 2,534 2,927 1,412 702 1,135 General and administrative expense 1,209 1,180 1,841 361 298 524 Interest expense, net 111 139 113 111 3 54 Net income (loss) (3,163) (3,331) (2,563) (1,583) (497) (515) Net income (loss) applicable to common shareholders (4,064) (3,657) (2,563) (1,583) (497) (515) Net income (loss) per common share (0.27) (0.04) (0.02) (0.01) (0.00) (0.00) Weighted average shares outstanding 15,046 88,169 153,924 153,924 153,924 154,145 June 30, ---------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Balance Sheet Data: (In thousands) Current assets $ 1,925 $ 1,691 $ 2,019 $ 922 $ 1,175 Fixed assets 860 2,001 1,760 1,053 905 Total assets 3,677 4,591 4,547 1,975 2,080 Current liabilities 4,325 1,617 2,396 1,711 1,941 Long-term debt 0 504 2,316 373 756 Shareholders' equity (deficiency) (648) 2,398 (165) (109) (617)
(1) A change in control transaction occurred December 31, 1994 and was recorded in conformity with Accounting Principles Board Opinion No. 16. Accordingly, assets and liabilities as of January 1, 1995, and the results of operations for the six months ended June 30, 1995, reflect the "push-down" of the new controlling shareholder's basis, minority interest at its historical basis, and the consideration received from BT Capital Corporation. See accompanying footnotes to the audited financial statements for a description of the transaction. The company has not paid dividends in any of the periods presented. 8 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 of the Company and notes thereto contained elsewhere in this report. RESULTS OF OPERATIONS FISCAL 1996 COMPARED TO FISCAL 1995 The change in control and utilization of purchase accounting as of January 1, 1995 has resulted in the accompanying statements for the twelve months ended June 30, 1996 being non comparable versus the prior year twelve month corresponding period. Accordingly, the following discussion addresses historical results in periods since January 1, 1995. Revenues for the twelve month period ended June 30, 1996 of $6,572,000 increased approximately 20% when compared with revenues of $5,436,000 in the prior year (utilizing the revenues for the six month period ended June 30, 1995 of $2,718,000, annualized). This revenue increase is due to a full year of contract manufacturing for a marketing company that sells to both domestic retail chains and export customers. The Company continues to market its pizzas and crusts nationally to retail supermarket service delicatessen customers and major foodservice accounts. Beginning in May 1996, the Company began a private label program producing a line of pizzas being sold in the frozen food section of a major national grocery retailer. The gross profit margin of 18.2% for the twelve months ended June 30, 1996 was roughly comparable to the gross margin of 18.6% reported for the six month period ended June 30, 1995. Current year margins in the past twelve months reflect cost reduction improvements combined with gains in operating efficiencies, offset by higher material costs (principally in cheese) that have occurred over the past six months. To combat the higher material costs the Company raised prices. These price increases however were primarily made beginning late in fiscal 1996 and in certain cases not until September 1996. Fixed overhead per unit sold remains high at the Company's low level of production. The Company anticipates an increase in its gross profit contribution rate given recent price increases and assuming the Company is able to achieve increased production volume. Additionally, gross profit would be further benefited if cheese prices return to historical price levels. Selling, general and administrative expenses for the Company's first, second and third fiscal quarters ended March 30, 1996 were substantially constant in dollars and as a percent of sales and decreased slightly as a percent of sales for the fourth quarter of fiscal 1996 with the increase in revenues. The improvement as a percent of sales in fiscal 1996 versus the six month period ended June 1995 reflects the impact of a full year of operations following restructuring and cost containment efforts that were initiated early in calendar 1995. The Company does not anticipate having to add substantially to fixed overhead costs to support revenue growth of fifty to one hundred percent of its current revenue level assuming a similar mix of products and customers. The resulting loss for the twelve month period ended June 30, 1996 was $515,000 versus a reported loss for six months ended June 30, 1995 of $497,000. 9 SIX MONTHS ENDED JUNE 30, 1995 The change in control and utilization of purchase accounting as of January 1, 1995 has resulted in the accompanying financial statements being largely non comparable with prior periods except as to revenue trends. Accordingly, the following discussion addresses the results of operations for the six months ended June 30, 1995 while the six month period ended December 31, 1994 is discussed in the following section. Revenues for the six month period ended June 30, 1995 declined $862,000 to $2,718,000 versus the first six months of fiscal 1995. Nearly one half of the decline was attributable to the loss during the period of a single division of the Company's largest retail customer. This division has reversed its pizza buying decision twice in the past six months. Revenues to the Company's biggest foodservice customer declined by approximately $135,000 in this period versus the fist six months of fiscal 1995 as certain larger restaurant locations of the chain converted from premade products to "scratch" on-premises preparation. The gross profit margin during the six month period ended June 30, 1995 was 18.6%. This margin was achieved even though throughout the period the plant ran at approximately 35% of its current operating capacity. Fixed overhead per unit sold remained high at the Company's low level of production. During the first calendar quarter of 1995 the Company completed restructuring and cost containment programs which have reduced fixed plant, selling, and general and administrative overhead by approximately $75,000 per month. SIX MONTHS ENDED DECEMBER 31, 1994 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 1993 Revenues for the six months ended December 31, 1994 were $3,580,000 versus $5,815,000 in the comparable prior year period. The most significant factor in the revenue decline was the impact of program changes during the first quarter of fiscal 1995 by operating divisions of the Company's largest customer. Within these divisions, the customer replaced existing programs and products made by the Company with alternative products from the Company. The new products benefit the customer with less in-store labor and waste, result in higher margins for the Company but have had the effect of lowering sales. Gross profit in the first half of fiscal 1995 decreased from 24.0% to 8.4%. This decline was primarily attributable to reduced sales offset only in part by higher margins in the current year period on certain of the Company's new products. The increase in selling and distribution expenses for comparable periods resulted primarily from the impact of transaction costs associated with the change in control, the introduction of the JUKEBOX-Registered Trademark- line, and transition costs associated with the program changes within the Company's major customer described above. INFLATION The moderate rate of inflation over the past few years has had an insignificant impact on the Company's sales and results of operations during the period. 10 LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities was $727,000 for the twelve month period ended June 30, 1996. This cash use consists of (i) cash used to finance sales growth of approximately $160,000, representing the excess growth in accounts receivables and inventories over the increase in accounts payable and accrued expenses (excluding marketing), (ii) approximately $200,000 used to satisfy marketing obligations associated with the discontinuation late in fiscal 1995 of the Jukebox retail program and a change in the methodology for funding on-going promotional expenses for the Company's largest retail customer, leaving (iii) $367,000 of cash used by operations throughout fiscal 1996. Management believes that the Company becomes cash positive from operations when it achieves a sustained average monthly revenue rate between $750,000 and $800,000 at current sales prices, product mix and assuming continuation of the recent high costs of materials. In the period since July 1, 1995 the Company's principal shareholder provided the Company debt financing totaling $355,000, the proceeds of which have been used for working capital. Also, in March 1996 the Company entered into a one year $500,000 revolving line of credit agreement collateralized by eligible accounts receivables and inventories. Throughout most of September 1996 the outstanding borrowings under this credit facility averaged approximately $330,000. The Company believes that this credit facility will be adequate to fund the Company's short term working capital requirements. The Company's primary emphasis remains revenue generation through increased sales to existing and new customers. It is also aggressively evaluating opportunities ranging from contract manufacturing for others to the acquisition of a synergistic product line or company. The foregoing Management's Discussion and Analysis contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, regarding management's expectations concerning gross profit contribution, cheese prices, volume, the adequacy of funds from the existing credit facility and the level of which the Company's operations become cash positive. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, including, among others, the following: reduced or lack of increase in demand for the Company's products, competitive pricing pressures, changes in the market price of ingredients used in the Company's products and the level of expenses incurred in the Company's operations. CAPITAL EXPENDITURES The Company is currently operating at approximately 35% of plant capacity. The Company has however committed to a capital improvement which will result in the replacement of its current CO(2) tunnel freezer with a higher capacity CO(2) spiral freezer. This undertaking affords the Company the opportunity to significantly improve (i) line efficiencies with resulting expected lower per unit production costs and (ii) overall product quality. The improvement is being financed by the holder of the note for the equipment being replaced, with the down payment to be satisfied with the underlying equity in the current equipment. The resulting eighty four month equipment contract increases the Company's present monthly payment by approximately $3,500 before giving effect to expected production cost savings. NET OPERATING LOSS CARRYFORWARDS As of June 30, 1996, the Company, had net operating loss carryforwards for federal and state purposes of approximately $968,000 and $484,000, respectively. These carryforwards begin to expire in 2011 and 2001, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this Item is set forth in "Index to Financial Statements" ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company and their ages as of September 1, 1996 are as follows: NAME AGE POSITION ---- --- -------- Michael W. Hogarty 53 President, Chief Executive Officer and Director Daniel E. Ferrari 47 Vice President of Sales Patrick A. Cusack 48 Vice President of Operations Ann M. Gooch 39 Vice President of Finance, Secretary and Treasurer Norman N. Habermann(1) 63 Chairman of the Board Eber E. Jaques(1) 57 Director David R. Newstadt(1) 66 Director James R. Tolliver 50 Director - -------------------- (1) Member of the audit and compensation committees. Each member of the Board of Directors of the Company is elected for a one- year term and until his successor is elected and qualified. MICHAEL W. HOGARTY has been President and Chief Executive Officer and a director of the Company since March 1988. From December 1984 to December 1987, Mr. Hogarty was the President and Chief Executive Officer of Edy's Grand Ice Cream, Dreyer's Grand Ice Cream's midwest and eastern subsidiary, a manufacturer and marketer of ice cream and related products. From July 1978 to December 1984, Mr. Hogarty was President and Chief Executive Officer of S.B. Thomas, Inc., the specialty baking subsidiary of CPC International, a food processing corporation and Executive Vice President of S.B. Thomas, Inc., from 1974 to 1978. Mr. Hogarty previously served as a Vice President of Johnson and Johnson. DANIEL E. FERRARI joined the Company in January 1995 as Vice President of Sales. From January 1994 to December 1994, Mr. Ferrari served as District Manager for Kraft USA products in the Southern California market area. From 1989 through 1993 while at Kraft USA he held the positions of Director of Sales for Kraft's Western Dairy Group and was District Manager at Kraft's Knudsen Division of Los Angeles. From 1984 to 1988, Mr. Ferrari was Western Regional Sales Manager for No Nonsense Fashions and from 1976 to 1984 he held various sales positions with Proctor & Gamble. PATRICK A. CUSACK joined the Company in July 1994 as Vice President of Operations. From April 1989 to July 1994, Mr. Cusack held positions as Plant Manager and Division Service/Quality Manager of Operations for International Multifoods, Frozen Specialty Division in Riverside, California. Prior to that time, Mr. Cusack held various operational management positions with Pillsbury, Van De Kamps Division and North Consumer Products, a division of Siebe North, Inc., a manufacturer of personal safety products. ANN M. GOOCH joined the Company in June 1988 as Director of Finance. She was appointed Treasurer of the Company in May 1991 and Vice President of Finance and Secretary in March 1992. From 1986 until 1988, Ms. Gooch served as Corporate Controller for Rusty Pelican Restaurants, Inc. from 1978 to 1986 she was employed by Deloitte & Touche, an international public accounting firm. Ms. Gooch is a certified public accountant. 12 NORMAN N. HABERMANN has served as Chairman of the Board of the Company since May 1991. From 1986 until February 1994, Mr. Habermann was President and Chief Executive Officer of the Restaurant Enterprises Group (formerly the restaurant division of W.R. Grace & Co.) an owner and operator of over 600 restaurants including Coco's, Carrows, El Torito, Reubens and others. He is now President of Scobrett Associates, Inc. which is involved in consulting and venture capital activities. EBER E. JAQUES has been a director of the Company since 1989. From 1981 to 1988, Mr. Jaques served as Executive Vice President of Del Taco, Inc., which operated and franchised fast service Mexican-American restaurants. Mr. Jaques is currently Executive Vice President of Empire Entertainment, an entertainment company. DAVID R. NEWSTADT has been a director of the Company since 1989. Mr. Newstadt is currently retired. From May 1986 through July 1987, Mr. Newstadt served as President and Chief Executive Officer of Sun-Diamond Growers of California, a cooperative of growers. From 1981 to 1985, he was President of the Best Foods Division of CPC International, a food processing corporation. JAMES R. TOLLIVER has been a Director of the Company since July 1996. Since December 1987, Mr. Tolliver has been the President and sole owner of Sunset Specialty Foods, Inc., a Company that markets and distributes frozen pizza products to retail supermarket and export customers. Subject to modification by the Board of Directors, Mssrs. Habermann, Jaques and Newstadt receive an annual retainer of $2,500. In addition, each of these directors have been granted an option to purchase up to 800,000 shares of the Company's Common Stock at the fair market value of the Common Stock on the date of individual grants. Options granted to these directors become exercisable ratably over the period during the continuing service as a director and expire seven years from the date of grant. All directors are reimbursed for expenses incurred on behalf of the Company. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid by the Company during its fiscal year ended June 30, 1996 to (i) the four most highly compensated current executive officers of the Company and (ii) all executive officers of the Company as a group. NAME OF INDIVIDUAL OR NUMBER OF CAPACITIES IN CASH PERSONS IN GROUP WHICH SERVED COMPENSATION(1) - ---------------- ------------- ------------ Michael W. Hogarty President and Chief Executive Officer $147,000 Daniel E. Ferrari Vice President of Sales $ 52,000(2) Patrick A. Cusack Vice President of Operations $ 70,000 Ann M. Gooch Vice President of Finance, Treasurer and Secretary $ 68,000 All executive officers as a group (4 persons) All capacities $337,000 - -------------------- (1) The Company provides executive officers with certain personal benefits which do not exceed in value 10% of the officer's cash compensation or, as to all executive officers as a group, 10% of the aggregate cash compensation for the group. (2) Mr. Ferrari began his employment with the Company in January 1995 and resigned in December 1995. He subsequently rejoined the Company in late June 1996. His current annual salary is $95,000. 13 EMPLOYMENT AGREEMENTS Mr. Hogarty has an employment agreement with the Company that provides for a minimum base salary of $150,000 per year. The employment agreement continues until Mr. Hogarty's death or voluntary resignation, until he is removed for cause or until all the members of the Board of Directors (except for Mr. Hogarty) determine that the Company is failing to make reasonable progress toward its business plan goals. BONUS PLAN The Board of Directors has approved a bonus plan that provides for management bonuses. The bonus pool shall be allocated to key members of the management in accordance with a plan approved by the Board of Directors. As of this date, the Company has made no payments of bonuses. STOCK OPTION PLAN The Company has adopted the 1988 Stock Option Plan for Key Employees (the "Plan"). All employees of the Company are eligible to receive options under the Plan. The maximum aggregate amount of stock to be issued upon exercise of all options granted under the Plan may not exceed 1,800,000 shares, subject to adjustment upon the occurrence of certain events such as a stock split, stock dividend, reorganization, merger or similar corporate change. Unless earlier terminated by the Board of Directors, the Plan will terminate in November 1998. The Plan provides for administration by the Board of Directors or if the Board of Directors authorizes, by a committee appointed by the Board (the "Committee"). The Board of Directors has a Compensation Committee of disinterested directors who, among their duties, will make recommendations to the Board of Directors regarding grants of options under the Plan. The Board of Directors has the authority, subject to the express provisions of the Plan, to determine the persons to be granted options, to determine whether options granted under the Plan are intended to be nonstatutory stock options or incentive stock options, to determine the terms and provisions of options, including the times at which such options shall be granted, the number of shares subject to each option, the option price and the duration of each option, to interpret and construe the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations necessary or advisable for the administration of the Plan. 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of shares of the Company's Common Stock as of September 1, 1996 by (i) all stockholders known to the Company to be benefical owners of more than 5% of the outstanding Common Stock; (ii) each director; and (iii) all officers and directors of the Company as a group. Except as may be otherwise indicated in the footnotes to the table, each person has sole voting power and sole dispositive power as to all of the shares shown as beneficially owned by them. SHARES OF THE COMPANY'S COMMON STOCK PERCENT NAME OF BENEFICIALLY BENEFICIALLY BENEFICIAL OWNER(1)(2) OWNED OWNED - ---------------------- ----- ----- Michael W. Hogarty(4) 123,252,220 78.7% BT Capital Corporation(3) 18,000,000 11.5 Ann M. Gooch(5) 6,297,193 4.0 Daniel E. Ferrari(6) 6,156,943 3.9 Patrick A. Cusack(7) 6,156,943 3.9 James R. Tolliver(8) 2,555,782 1.6 Eber E. Jaques(9) 729,500 * Norman N. Habermann(10) 650,000 * David R. Newstadt(11) 650,000 * All directors and executive officers as a group (8 persons)(12) 146,448,581 92.3 - --------------- * Less than 1% (1) Unless otherwise indicated in these footnotes, the address of each person listed is c/o International Food and Beverage, Inc., 30152 Aventura, Rancho Santa Margarita, CA 92688. (2) Does not give effect to the potential issuance of shares upon the exercise of (i) 316,666 shares granted to other members of management under the Company's Stock Option Plan (exercise prices between $.00177 and $.40 per share) and (ii) other options and warrants to acquire up to 122,000 shares (exercise price $.35 per share). (3) The address of BT Capital Corporation is 280 Park Avenue, 32 West, New York, New York 10017. Represents shares owned by Mr. Hogarty over which BT Capital Corporation has an option. The exercise price is $.00177 and the option expires in December 1999. (4) Included in Mr. Hogarty's beneficially owned shares are 18,000,000 shares of Common Stock which BT Capital Corporation has the right to purchase under an option agreement received in connection with the change in control transaction in December 1994 (exercise price of $.00177) expiring December 1999. (5) Includes 3,078,471 shares which under a Stock Purchase Agreement with Mr. Hogarty are subject to certain purchase rights by him which expire in December 1998. Includes 140,000 shares which Ms. Gooch has the right to acquire upon exercise of outstanding options. (6) Includes 4,309,860 shares which under a Stock Purchase Agreement with Mr. Hogarty are subject to certain purchase rights by him which expire in December 1998. 15 (7) Includes 4,309,860 shares which under a Stock Purchase Agreement with Mr. Hogarty are subject to certain purchase rights by him which expire in December 1998. (8) James R. Tolliver a Director of the Company is the President and sole owner of Sunset Specialty Foods, Inc., the shareholder. (9) Includes 650,000 shares which Mr. Jaques has the right to acquire upon exercise of outstanding options. (10) Includes 650,000 shares which Mr. Habermann has the right to acquire upon exercise of outstanding options. (11) Includes 650,000 shares which Mr. Newstadt has the right to acquire upon exercise of outstanding options. (12) Includes currently vested options held by directors and officers of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On various dates during the first six months of fiscal 1995 BT Capital Corporation ("BTCC") loaned a total of $700,000 to the Company pursuant to notes and a Security Agreement collateralized by the Company's accounts receivable and inventories. The proceeds were used primarily for working capital. On December 31, 1994 BTCC, MH Investments, Inc., a California corporation wholly-owned by Michael W. Hogarty, the Chief Executive Officer and President of the Company, and Michael W. Hogarty entered into agreements which provided for the sale by BTCC of 91.8% of the outstanding shares of Common Stock of the company to MH Investments, Inc. for $250,000. Concurrent with the foregoing transaction, the Company entered into a Tax Allocation Agreement with BTCC. The parties elected under Section 338(h)(10) of the Internal Revenue Code to treat the transaction as an asset acquisition for tax purposes. Under the terms of the Tax Allocation Agreement, BTCC agreed to pay to the Company $3,475,000 as full consideration for the potential tax benefits which have or may in the future inure to the benefit of BTCC and its affiliates with such amount paid by (i) elimination of $2,675,000 of debt and interest owed to BTCC by the Company, and (ii) payment of $800,000 in cash and short term notes receivable. As a result of the Section 338(h)(10) election, BTCC and its affiliates will be entitled to use, subject to applicable limitations and restrictions, any net operating losses of the Company existing as of December 31, 1994. In connection with the foregoing transaction, MH Investments, Inc. has given BTCC a five year option to purchase up to 18,000,000 shares of Common Stock of the Company from MH Investments, Inc. at the same price per share paid by MH Investments, Inc. On various dates from June 1995 through January 1996 Mr. Hogarty loaned a total of $455,000 to the Company pursuant to notes and a Security Agreement collateralized by the Company's accounts receivable and inventories, subordinated in March 1996 to the Revolving Credit Agreement Lender. See accompanying footnotes to the audited financial statements for a description of the Agreement. The proceeds were used primarily for working capital. In February 1996, the Company entered into a "Manufacturing Services and Marketing Agreement" as amended, (the "Agreement") with Sunset Specialty Foods, Inc. ("Sunset") and James R. Tolliver, the sole owner of Sunset. The Agreement provides the terms by which the Company will contract manufacture product for Sunset, who heretofore has purchased product for sale to both domestic retail chains and export customers. Pursuant to the Agreement the Company is obligated to issue as a commission to Sunset at the completion of each quarter Common Stock of the Company equal to four shares of Common Stock for each $1.00 of pizza finished product produced and purchased during the period from February 1, 1996 through June 30, 1996, and three shares of 16 Common Stock for each $1.00 of pizza finished product produced and purchased during the two quarters ending December 31, 1996. Effective July 1, 1996 the Agreement was amended to exclude the stock commission on purchases by Sunset for export. Through the quarter ended June 30, 1996 the Company issued or was obligated to issue 2,555,782 shares. With respect to each of the major transactions described above, the transactions were approved by a majority of the disinterested directors of the Company. 17 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements PAGE ---- Report of Independent Accountants. . . . . . . . . . . . . . . F-1 Balance Sheets of the Company as of June 30, 1996, June 30, 1995 and December 31, 1994. . . . . F-2 Statements of Operations for the year ended June 30, 1996, the six months ended June 30, 1995 and December 31, 1994 and the year ended June 30, 1994 . . . . . . . . . . . . . . . F-3 Statement of Shareholders' Equity (Deficiency) for the year ended June 30, 1996, the six months ended June 30, 1995 and December 31, 1994 and the year ended June 30, 1994 . . . . F-4 Statements of Cash Flows for the year ended June 30, 1996, the six months ended June 30, 1995 and December 31, 1994 and the year ended June 30, 1994 . . . . . . . . . . . . . . . F-5 Notes to Financial Statements. . . . . . . . . . . . . . . . . F-6 (b) Reports on Form 8-K. There are no reports on Form 8-K filed during the last quarter of the fiscal year covered by this report. (c) Exhibits included or incorporated by reference herein: See Exhibit Index 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. INTERNATIONAL FOOD AND BEVERAGE, INC. By: /s/ Michael W. Hogarty -------------------------------- Michael W. Hogarty Chief Executive Officer and President Date: October 7, 1996 19 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Michael W. Hogarty Chief Executive October 7, 1996 - -------------------------- Officer and President Michael W. Hogarty (Principal Executive Officer) and Director /s/ Ann M. Gooch Vice President of October 7, 1996 - ------------------------- Finance and Treasurer Ann M. Gooch (Principal Financial and Accounting Officer) /s/ Norman H. Habermann Chairman of the Board October 7, 1996 - ------------------------- Norman N. Habermann /s/ Eber E. Jaques Director October 7, 1996 - ------------------------- Eber E. Jaques /s/ David R. Newstadt Director October 7, 1996 - ------------------------- David R. Newstadt /s/ James R. Tolliver Director October 7, 1996 - ------------------------- James R. Tolliver 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of International Food and Beverage, Inc. Rancho Santa Margarita, California We have audited the accompanying balance sheets of International Food and Beverage, Inc. as of June 30, 1996 and 1995, and December 31, 1994, and the related statements of operations, shareholders' equity (deficiency) and cash flows for the year ended June 30, 1996, the six months ended June 30, 1995 and December 31, 1994 and the year ended June 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International Food and Beverage, Inc. as of June 30, 1996 and 1995, and December 31, 1994, and the results of its operations and its cash flows for the year ended June 30, 1996, the six months ended June 30, 1995 and December 31, 1994 and the year ended June 30, 1994, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Newport Beach, California October 1, 1996 F-1 INTERNATIONAL FOOD AND BEVERAGE, INC. BALANCE SHEETS
JUNE 30, JUNE 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ -------------------- (PREDECESSOR-NOTE 2) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 20,000 $ 192,000 $ - Accounts receivable, net of allowance for doubtful accounts of $70,000 at June 30, 1996 and 1995, $100,000 at December 31, 1994 505,000 186,000 379,000 Inventories 643,000 504,000 858,000 Prepaid expenses 7,000 40,000 53,000 ------------ ------------ ------------ Total current assets 1,175,000 922,000 1,290,000 FIXED ASSETS 905,000 1,053,000 1,562,000 OTHER ASSETS, less accumulated amortization of $44,000 at December 31, 1994 51,000 GOODWILL, less accumulated amortization of $281,000 at December 31, 1994 694,000 ------------ ------------ ------------ $ 2,080,000 $ 1,975,000 $ 3,597,000 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 429,000 $ 240,000 $ 2,825,000 Accounts payable 840,000 502,000 791,000 Accrued wages and benefits 373,000 413,000 440,000 Accrued commissions and marketing 181,000 446,000 661,000 Other accrued expenses 118,000 110,000 215,000 ------------ ------------ ------------ Total current liabilities 1,941,000 1,711,000 4,932,000 LONG-TERM DEBT 756,000 373,000 413,000 COMMITMENTS SHAREHOLDERS' EQUITY (DEFICIENCY): Preferred Stock, par value $0.01 per share; 1,000,000 shares authorized Common Stock, par value $0.01 per share; 199,000,000 shares authorized, 154,763,438, 154,023,569 and 153,923,529 shares issued and outstanding at June 30, 1996, 1995 and December 31, 1994 respectively 394,000 387,000 1,539,000 Additional paid-in capital 1,000 1,000 20,126,000 Retained earnings (deficit) (1,012,000) (497,000) (23,413,000) ------------ ------------ ------------ (617,000) (109,000) (1,748,000) ------------ ------------ ------------ $ 2,080,000 $ 1,975,000 $ 3,597,000 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. F-2 INTERNATIONAL FOOD AND BEVERAGE, INC. STATEMENTS OF OPERATIONS
YEAR SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, DECEMBER 31, JUNE 30, 1996 1995 1994 1994 ------------ ------------ ------------ ------------ (PREDECESSOR - NOTE 2) REVENUES $ 6,572,000 $ 2,718,000 $ 3,580,000 $ 10,703,000 COST OF SALES 5,374,000 2,212,000 3,279,000 8,385,000 ------------ ------------ ------------ ------------ GROSS PROFIT 1,198,000 506,000 301,000 2,318,000 OPERATING EXPENSES: Selling and distribution 1,135,000 702,000 1,412,000 2,927,000 General and administration 524,000 298,000 361,000 1,841,000 Interest expense, net 54,000 3,000 111,000 113,000 ------------ ------------ ------------ ------------ 1,713,000 1,003,000 1,884,000 4,881,000 ------------ ------------ ------------ ------------ NET LOSS $ (515,000) $ (497,000) $ (1,583,000) $ (2,563,000) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET LOSS PER COMMON SHARE $ (.00) $ (.00) $ (.01) $ (.02) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 154,144,914 153,923,569 153,923,569 153,923,569 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. F-3 INTERNATIONAL FOOD AND BEVERAGE, INC. STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY) FOR THE YEAR ENDED JUNE 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1995 AND DECEMBER 31, 1994 AND THE YEAR ENDED JUNE 30, 1994
ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL -------- -------- ----------- ----------- ------------ ------------- ----------- BALANCE at June 30, 1993 - $ - 153,923,569 $ 1,539,000 $ 20,126,000 $(19,267,000) $ 2,398,000 Net loss (2,563,000) (2,563,000) ---------- ---------- ----------- ----------- ------------ ------------ ----------- BALANCE at June 30, 1994 153,923,569 1,539,000 20,126,000 (21,830,000) (165,000) Net loss (1,583,000) (1,583,000) ---------- ---------- ----------- ----------- ------------ ------------ ----------- BALANCE at December 31, 1994 153,923,569 1,539,000 20,126,000 (23,413,000) (1,748,000) Effect of "push-down" accounting in connection with change in control (Note 2) (1,153,000) (20,126,000) 23,413,000 2,134,000 ---------- ---------- ----------- ----------- ------------ ------------ ----------- BALANCE at January 1, 1995 153,923,569 386,000 386,000 Issuance of shares for services 100,000 1,000 1,000 2,000 Net loss (497,000) (497,000) ---------- ---------- ----------- ----------- ------------ ------------ ----------- BALANCE at June 30, 1995 154,023,569 387,000 1,000 (497,000) (109,000) Issuance of shares for services 739,869 7,000 7,000 Net loss (515,000) (515,000) ---------- ---------- ----------- ----------- ------------ ------------ ----------- BALANCE at June 30, 1996 - $ - 154,763,438 $ 394,000 $ 1,000 $ (1,012,000) $ (617,000) ---------- ---------- ----------- ----------- ------------ ------------ ----------- ---------- ---------- ----------- ----------- ------------ ------------ -----------
See accompanying notes. F-4 INTERNATIONAL FOOD AND BEVERAGE, INC. STATEMENTS OF CASH FLOWS
YEAR SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, DECEMBER 31, JUNE 30, 1996 1995 1994 1994 ---------- ---------- ------------ ------------ (PREDECESSOR - NOTE 2) CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(515,000) $(497,000) $(1,583,000) $(2,563,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 165,000 84,000 304,000 604,000 Deferred interest on short and long-term debt 2,000 111,000 110,000 Deferred payments on litigation settlement 550,000 Issuance of Common Stock under distribution agreement 7,000 Changes in assets and liabilities: Accounts receivable (319,000) (186,000) 297,000 (16,000) Inventories (139,000) (504,000) (72,000) (89,000) Prepaid expenses 33,000 23,000 (38,000) Accounts payable 338,000 422,000 19,000 205,000 Accrued wages and benefits (40,000) 137,000 31,000 18,000 Accrued commissions and marketing (265,000) 408,000 125,000 346,000 Other accrued expenses 8,000 43,000 (305,000) 134,000 --------- --------- ----------- ----------- Net cash used by operating activities (727,000) (91,000) (1,050,000) (739,000) --------- --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets (17,000) (11,000) (83,000) (304,000) Cash used to satisfy net acquired liabilities of predecessor company (557,000) --------- --------- ----------- ----------- Net cash used by investing activities (17,000) (568,000) (83,000) (304,000) --------- --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable 684,000 100,000 700,000 1,290,000 Principal payments on notes payable (112,000) (49,000) (48,000) (62,000) --------- --------- ----------- ----------- Net cash provided by financing activities 572,000 51,000 652,000 1,228,000 --------- --------- ----------- ----------- NET INCREASE (DECREASE) IN CASH (172,000) (608,000) (481,000) 185,000 CASH AND CASH EQUIVALENTS, beginning of period 192,000 800,000 481,000 296,000 --------- --------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 20,000 $ 192,000 $ 0 $ 481,000 --------- --------- ----------- ----------- --------- --------- ----------- -----------
See accompanying notes. F-5 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF THE BUSINESS International Food and Beverage, Inc. (the "Company"), manufactures and markets fully prepared pizzas, pizza components and specialty baked products to customers within the foodservice industry including retail supermarket service delicatessens, restaurants, hotels, sports and theme parks, and catering locations. NOTE 2 - CHANGE IN CONTROL On December 31, 1994, BT Capital Corporation ("BTCC"), MH Investments, Inc., a California corporation wholly-owned by Michael W. Hogarty, the Chief Executive Officer and President of the Company, and Michael W. Hogarty entered into agreements which provided for the sale of 91.8% by BTCC of the outstanding shares of Common Stock of the company to MH Investments, Inc. for $250,000. Concurrent with the foregoing transaction, the Company entered into a Tax Allocation Agreement with BTCC. The parties elected under Section 338(h)(10) of the Internal Revenue Code to treat the transaction as an asset acquisition for tax purposes. Under the terms of the Tax Allocation Agreement, BTCC agreed to pay to the Company $3,475,000 as full consideration for the potential tax benefits which have or may in the future inure to the benefit of BTCC and its affiliates with such amount paid by (i) elimination of $2,675,000 of debt and interest owed to BTCC by the Company, and (ii) payment of $800,000 in cash and short term notes receivable. As a result of the Section 338(h)(10) election, BTCC and its affiliates will be entitled to use, subject to applicable limitations and restrictions, any net operating losses of the Company existing as of December 31, 1994. In connection with the foregoing transaction, MH Investments, Inc. has given BTCC a five year option to purchase up to 18,000,000 shares of Common Stock of the Company from MH Investments, Inc. at the same price per share paid by MH Investments, Inc. For financial reporting purposes this transaction was recorded in conformity with Accounting Principles Board Opinion No. 16. Accordingly, the assets and liabilities as of January 1, 1995, and the results of operations for the six months ended June 30, 1995, reflect the "push-down" of the new controlling shareholder's basis, minority interest at its historical basis, and the consideration received from BTCC. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company's fiscal year is the 52-53 week period ending on the Saturday closest to June 30. The fiscal year end and period end dates for the periods being reported on herein are June 29, 1996, July 1, 1995, December 31, 1994 and July 2, 1994. For clarity of presentation, fiscal year end and period end dates in the accompanying financial statements and notes are referred to as June 30 and December 31 for the applicable period presented. Accounts Receivable and Revenues Substantially all of the Company's sales are made to full-line foodservice distributors, national foodservice chains, major regional supermarket chains or a related party who sells to such organizations. Concentrations of credit risk exist because of the concentration of the Company's customers within these industries and its dependence on a limited number of customers for a large portion of annual revenues. Such risk, however, is mitigated by the longevity of the Company's customer relationships and is considered a normal part of the foodservice, institutional and retail grocery industries. At June 30, 1996 and 1995, and December 31, 1994 approximately 80%, 50% and 80%, respectively, of trade accounts receivable were from five large distributor organizations, national foodservice chains, regional supermarket chain accounts, or a related party who sells to such organizations. For the years ending June 30, 1996, 1995 and 1994, approximately 85%, 85% and 75%, respectively, of revenues were generated from the Company's five largest customers with the aggregate of the various divisions of one of these customers accounting for approximately 44%, 47% and 50%, respectively, of revenues. During fiscal 1996 sales to a related party F-6 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) were approximately $1,200,000 with an accounts receivable balance as of June 29, 1996 of $70,000 paid subsequent to year end within normal terms. The Company grants credit to its customers that is uncollateralized. Accordingly, the accounts receivale balance is subject to credit risk. Inventories Inventories consist of finished goods and raw materials and are stated at the lower of cost (first-in, first-out method) or market. Fixed Assets Substantially all of the Company's fixed assets were acquired within the past six years. The historical acquisition cost of these assets was approximately $4,000,000, however, as a result of the application of "push-down" accounting in connection with the change in control these assets are reported currently on the Company's financial statements with a cost before accumulated depreciation and amortization of $1,154,000. Asset additions subsequent to December 31, 1994 are stated at cost. Depreciation is provided using the straight-line method over the shorter of the estimated useful life of an asset or the remaining lease term for leasehold improvements (three to seven years). Significant improvements are capitalized. All maintenance and repair costs are charged to operations as incurred. When assets are sold or otherwise disposed of, the costs and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in operations. Other Assets Other assets consisted primarily of costs capitalized in connection with a June 1990 debt restructuring. These costs were being amortized using the interest method over seven years, and were reduced to zero, effective January 1, 1995, in connection with the change in control of the Company (Note 2). Goodwill The excess of cost over the fair value of net assets acquired by the predecessor company was recorded as goodwill and amortized using the straight-line method over twenty-five years. The goodwill was reduced to zero effective January 1, 1995, in connection with the change in control of the Company (Note 2). Income Taxes The Company follows Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities, and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Under this standard the provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. Net Loss Per Common Share Net loss per common share is based on the reported net loss divided by the weighted average number of common shares outstanding. Shares issuable under options have been excluded from the calculation in each period presented because of their antidilutive effect. Cash and Cash Equivalents The Company considers highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. F-7 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximates fair value. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management's Plans Management's plans for achieving profitable future operations are focused on continued revenue enhancement through sales to new service deli and foodservice customers, the ongoing development of new products, and further penetration of the existing customer base. Management believes that existing cash balances, available financing capacity and anticipated cash flows, augmented only if neccessary by additional working capital, the availability of which, subject to an agreed upon limit, has been confirmed to the Company, would be sufficient to fund the Company's operations for fiscal 1997. NOTE 4 - INVENTORIES Inventories consisted of the following: June 30, June 30, December 31, 1996 1995 1994 --------- --------- ------------ Raw materials $483,000 $303,000 $502,000 Finished goods 160,000 201,000 356,000 --------- --------- ------------ $643,000 $504,000 $858,000 --------- --------- ------------ --------- --------- ------------ NOTE 5 - FIXED ASSETS Fixed Assets consisted of the following: June 30, June 30, December 31, 1996 1995 1994 ----------- ---------- ------------ Machinery and equipment $1,154,000 $1,137,000 $ 2,556,000 Leasehold improvements 715,000 Office furniture and equipment 122,000 Automobile 45,000 ----------- ---------- ------------ 1,154,000 1,137,000 3,438,000 Accumulated depreciation and amortization (249,000) (84,000) (1,876,000) ----------- ---------- ------------ $ 905,000 $1,053,000 $ 1,562,000 ----------- ---------- ------------ ----------- ---------- ------------ F-8 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 5 - FIXED ASSETS (CONTINUED) Substantially all of the Company's fixed assets were acquired within the past six years. The historical acquisition cost of these assets was approximately $4,000,000, however, as a result of the application of "push-down" accounting in connection with the change in control these assets are reported currently on the Company's financial statements with a cost before accumulated depreciation and amortization of $1,154,000. Depreciation expense related to fixed assets totaled $165,000, $84,000, $281,000 and $545,000 for the periods ended June 30, 1996 and 1995, December 31, 1994 and June 30, 1994, respectively. NOTE 6 - NOTES PAYABLE AND CURRENT MATURITIES OF LONG-TERM DEBT Notes payable consisted of the following: June 30, June 30, December 31, 1996 1995 1994 ----------- ---------- ------------ Revolving Credit Agreement with a financial services corporation $329,000 $ - $ - Notes payable to bank and principal shareholder with interest at 10%, due October 31, 1995 collateralized by the Company's accounts receivable and inventories; canceled by the noteholder on December 31, 1994 (Note 2) 1,950,000 Note payable to bank and principal shareholder with interest at 10%, due October 31, 1995 uncollateralized; canceled by the noteholder on December 31, 1994 (Note 2) 500,000 Related accrued interest due on the bank and principal shareholder obligations; canceled by the noteholder on December 31, 1994 (Note 2) 225,000 Notes payable to vendors for equipment purchases, collateralized by equipment 21,000 33,000 40,000 Note payable to bank, interest at 10.85%, collateralized by auto, payable monthly through August, 1998; repaid May, 1996 upon disposal of the auto 29,000 31,000 Note payable to an individual and principal shareholder with interest at 10.25%, due October 31, 1997 collateralized by the Company's accounts receivable and inventories subordinated in March 1996 to the revolving credit agreement lender and reclassified as long term debt 100,000 Current portion of long-term debt (Note 7) 79,000 79,000 79,000 ----------- ---------- ------------ $429,000 $240,000 $2,825,000 ----------- ---------- ------------ ----------- ---------- ------------ F-9 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 6 - NOTES PAYABLE AND CURRENT MATURITIES OF LONG-TERM DEBT (CONTINUED) On March 15, 1996, the Company entered into a Revolving Credit Agreement with a financial services corporation for an initial renewable term expiring on October 15, 1997. Advances under the Agreement are limited to 75% of eligible accounts receivable and 50% of eligible raw material inventory to a maximum of $100,000, as defined in the Agreement. The aggregate amount of the outstanding revolving advances shall not be greater than $500,000. The outstanding balances are collateralized by substantially all of the Company's assets. In addition, there is a continuing guaranty by the principal shareholder. The Agreement contains various restrictive covenants including restrictions on the issuance of stock, payment of dividends, sale of assets, and limitations on debt issuances, capital expenditures and liens without prior approval. Interest is at prime plus 6.0% (14.25% at June 29, 1996), with minimum interest charges of $2,500 per month. Interest expense on notes payable for the periods ended June 30, 1996 and 1995, December 31, 1994 and June 30, 1994 was $21,000, $4,000, $114,000 and $7,000, respectively. NOTE 7 - LONG-TERM DEBT Long-term debt consisted of the following:
June 30, June 30, December 31, 1996 1995 1994 ------------ ------------ ------------ Notes payable to an individual and principal shareholder with interest at 10.25%, due October 31, 1997 collateralized by the Company's accounts receivable and inventories, subordinated in March 1996 to the Revolving Credit Agreement lender (Note 6) $455,000 $ - $ - Licensing agreement settlement obligation, payable monthly through April 2001, collateralized by the Company's equipment existing as of June 30, 1993 380,000 452,000 492,000 -------- -------- -------- 835,000 452,000 492,000 Less current maturities (79,000) (79,000) (79,000) -------- -------- -------- $756,000 $373,000 $413,000 -------- -------- -------- -------- -------- --------
Interest expense on long-term debt for the periods ended June 30, 1996 and 1995, December 31, 1994 and June 30, 1994 was $32,000, $0, $0 and $110,000, respectively. Interest costs paid in cash on all debt for the periods ended June 30, 1996 and 1995, December 31, 1994 and June 30, 1994 was $43,000, $4,000, $4,000 and $7,000, respectively. Maturities of notes payable and long-term debt for each of the next five years ending June 30 are as follows: 1997 $ 429,000 1998 534,000 1999 79,000 2000 79,000 2001 64,000 ---------- $1,185,000 ========== F-10 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - INCOME TAXES Effective July 1, 1993, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes". This change did not have a significant effect on the results of operations for the year ended June 30, 1994. Prior years' financial statements were not restated. Through December 31, 1994 the Company was a member of its principal shareholder's affiliated group and was included in the group's consolidated federal income tax return and combined California franchise tax return. However, the Company computed the provision for income taxes in these financial statements by applying SFAS No. 109 as if the Company filed a separate income tax return. The reconciliation of the effective tax rates and the U.S. statutory tax rates are as follows for the periods indicated:
Year Six Months Six Months Year Ended Ended Ended Ended June 30, June 30, December 31, June 30, 1996 1995 1994 1994 -------- ---------- ------------ -------- Tax benefit at statutory rate (34.0)% (34.0)% (34.0)% (34.0)% State taxes, net of federal liability .1 (5.4) Other 1.1 .8 .8 0.7 Change in valuation allowance 32.8 33.2 33.2 38.7 ----- ----- ----- ----- 0.0% 0.0% 0.0% 0.0% ----- ----- ----- ----- ----- ----- ----- -----
The significant components of the deferred income tax asset and (liability) are as follows: June 30, June 30, December 31, 1996 1995 1994 ---------- ---------- ------------ Property and equipment $ 3,000 $ 10,000 $ 584,000 Amortization (7,000) Accrued liabilities 176,000 Bad debts 43,000 Inventory reserve 34,000 Contributions carryforward 16,000 4,000 64,000 Tax credit carryforward 3,000 Net operating loss carryforward 374,000 254,000 7,608,000 Uniform capitalization of inventory costs 2,000 Other 1,000 1,000 1,000 --------- -------- ----------- 396,000 269,000 8,506,000 Valuation Allowance (396,000) (269,000) (8,506,000) --------- -------- ----------- Net deferred income taxes $ 0 $ 0 $ 0 --------- -------- ----------- --------- -------- ----------- As of June 30, 1996, the Company had net operating loss carryforwards for federal and state purposes of approximately $968,000 and $484,000, respectively. The net operating loss carryforwards begin expiring in 2011 and 2001, respectively. During the year ended June 30, 1996 the Company paid income taxes of $800. F-11 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIENCY): Stock Options Under the Company's 1988 Stock Option Plan for Key Employees (the "Plan") officers and employees are eligible to receive Incentive and Nonstatutory options to purchase shares of the Company's Common Stock. A maximum of 1,800,000 shares are authorized for grant at an exercise price equal to the fair market value of the stock on the date of grant. Options are exercisable over a period of time designated by the Board of Directors and generally expire 10 years from the date of grant. The Plan terminates in November 1998. During 1996, 1995 and 1994 the Company granted Nonstatutory stock options to Non-employee Directors and other individuals and entities. All options are exercisable over a defined vesting period as set forth in each agreement and expire at various dates through January 2005. At June 30, 1996 options outstanding and exercisable are as follows:
Options Options Price Range Outstanding Exercisable Per Share ----------- ----------- --------------- Incentive employee options $ 590,000 457,000 $ .00177 to .40 Nonemployee director nonstatutory options 2,400,000 1,950,000 .00177 to .40 Nonstatutory options 122,000 122,000 .35 ---------- ---------- --------------- $3,112,000 2,529,000 $ .00177 to .40 ---------- ---------- --------------- ---------- ---------- ---------------
In the three years ended June 30, 1996 no options were exercised. Warrants In connection with a private placement offering completed in August 1991, the Company issued as partial consideration for services rendered a warrant that entitles the placement agent to purchase up to 694,125 shares of the Company's Common Stock at an exercise price of $.40 per share. The warrant expired unexercised on August 7, 1996. NOTE 10 - COMMITMENTS Leases The Company has an operating lease for its manufacturing and corporate office facility. The lease, which expires in June 2000, requires monthly payments of approximately $25,000 through October 31, 1996 and thereafter is subject to annual adjustments of at least 4%, but not more than 7% based on the Consumer Price Index. Building and equipment rent expense for the periods ended June 30, 1996 and 1995, December 1, 1994, and June 30, 1994 was $298,000, $156,000, $150,000 and $249,000, respectively. Future minimum lease commitments on noncancellable operating leases are as follows: For The Years Ended June 30, Amount ---------------------------- ------------ 1997 $ 310,000 1998 322,000 1999 333,000 2000 346,000 ------------ $ 1,311,000 ------------ ------------ F-12 INTERNATIONAL FOOD AND BEVERAGE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 10 - COMMITMENTS (CONTINUED) Stock Issuance In February 1996, the Company entered into a "Manufacturing Services and Marketing Agreement" as amended, (the "Agreement") with Sunset Specialty Foods, Inc. ("Sunset") and James R. Tolliver, the sole owner of Sunset. The Agreement provides the terms by which the Company will contract manufacture product for Sunset, who heretofore has purchased product for sale to both domestic retail chains and export customers. Pursuant to the Agreement the Company is obligated to issue as a commission to Sunset at the completion of each quarter Common Stock of the Company equal to four shares of Common Stock for each $1.00 of pizza finished product produced and purchased during the period from February 1, 1996 through June 30, 1996, and three shares of Common Stock for each $1.00 of pizza finished product produced and purchased during the two quarters ending December 31, 1996. Effective July 1, 1996 the Agreement was amended to exclude the stock commission on purchases by Sunset for export. Through the quarter ended June 30, 1996 the Company had issued 729,869 shares of Common Stock and is accounted for as a noncash transaction on the Statement of Cash Flows. In August 1996 the Company issued an additional 1,825,913 shares of Common Stock in satisfaction of the commission earned as of June 29, 1996. F-13 INTERNATIONAL FOOD AND BEVERAGE, INC. EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - --- ----------- 3.01 Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.01 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 26, 1993). 3.02 Bylaws (incorporated by reference to Exhibit 3.02 to the Company's registration statement on Form S-1 filed with the Securities and Exchange Commission on October 29, 1991, the "Registration Statement"). 4.01 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Registration Statement). 10.1 Employment Agreement, dated March 15, 1988, as amended January 5, 1989, and November 9, 1990 between Michael W. Hogarty and the Company (incorporated by reference to Exhibit 10.11 to the Registration Statement). 10.2 Standard Form Industrial Lease, dated August 31, 1989, between Tijeras Partnership, as landlord, and the Company (incorporated by reference to Exhibit 10.13 to the Registration Statement). 10.3 1988 Stock Option Plan for Key Employees of International Food and Beverage, Inc. (incorporated by reference to Exhibit 10.19 to the Registration Statement). 10.4 Lease Amendment, dated December 8, 1992 to the Standard Form Industrial Lease, dated August 31, 1989, between Tijeras Partnership, as landlord, and the Company (incorporated by reference to Exhibit 10.8 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 26, 1993). 10.5 Promissory Note of the Company dated June 29, 1995, in the principal amount of $100,000 in favor of Michael W. Hogarty. Promissory Notes of the Company in substantially the same form as in Exhibit 10.5 herein were issued at various times between October 16, 1995 and January 31, 1996 in the total principal amount of $355,000 in favor of Michael W. Hogarty (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the fiscal year ended July 1, 1995). 10.6 Loan and Security Agreement, dated June 29, 1995 between the Company and Michael W. Hogarty (incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the fiscal year ended July 1, 1995). 10.7 Loan and Security Agreement, dated March 15, 1996 between Fremont Business Credit and the Company and related documents and agreements executed in connection therewith. 10.8 Building lease Estoppel Certificate dated December 11, 1995 to Ms. Nancee Ehlers Boldman and Ms. Sally Ehlers Stillion as Purchasers of the real property subject to the building lease included in this Exhibit Index as Exhibit 10.2 and Exhibit 10.4. 22.1 Subsidiaries (incorporated by reference to Exhibit 22.1 to the Registration Statement). 27 Financial Data Schedule. EX-10.7 2 EXHIBIT 10.7 LOAN AND SECURITY AGREEMENT LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT is entered into as of March 15, 1996 between FREMONT BUSINESS CREDIT, A DIVISION OF FREMONT FINANCIAL CORPORATION, a California corporation (FREMONT), with a place of business located at 2020 Santa Monica Boulevard, Suite 500, Santa Monica, California 90404-2023 and International Food and Beverage, Inc. a Delaware corporation (BORROWER), with its chief executive office located at 30152 Aventura, Rancho Santa Margarita, CA 92688 The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 TERMS. In addition to the terms that are defined within this Agreement, the following terms shall have the following definitions when used in this Agreement: ACCOUNT DEBTOR means any Person who is or who may become obligated under, with respect to, or on account of an Account. ACCOUNTS means all presently existing and hereafter arising accounts receivable, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, whether or not earned by performance, all credit insurance, guaranties, and other security therefor, as well as all goods returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. AGREEMENT means this Loan and Security Agreement and any riders, addenda, extensions, supplements, amendments or modifications to or in connection with this Loan and Security Agreement. AUTHORIZED OFFICER means any officer of Borrower authorized in writing to transact business with Fremont. BANKRUPTCY CODE means the United States Bankruptcy Code (11 U.S.C. Sections 101 ET SEC.), as amended, and any success or statute. BORROWER'S BOOKS means all of Borrower's books and records including all of the following: ledgers; records indicating, summarizing or evidencing Borrower's assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs or other computer prepared information, and the equipment containing such information. BUSINESS DAY means any day which is not a Saturday, Sunday or other day on which banks in the State of California are authorized or required to close. CODE means the California Uniform Commercial Code, as amended from time to time. COLLATERAL means all of the following: the Accounts; the Equipment; the General Intangibles; the Inventory; the Negotiate Collateral; any money or other assets of Borrower which hereafter come into the possession. custody or control of Fremont; and all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Equipment, General Intangibles, Inventory, Negotiable Collateral, money, deposit accounts or other tangible or intangible property resulting from the sale or other disposition of the Collateral, or any portion thereof or interest therein, and the proceeds thereof. ELIGIBLE ACCOUNTS means those Accounts created by Borrower in the ordinary course of business that arise out of Borrower's sale of goods or rendition of services, are owing from Account Debtors that are acceptable to Fremont, strictly comply with all of Borrower's representations and warranties to Fremont and are, and at all times continue to be, acceptable to Fremont in all respects; provided, however, that standards of eligibility may be fixed and revised from time to time by Fremont in Fremont's exclusive judgment. In determining such eligibility, Fremont may, but is not obligated to, rely on agings, reports and schedules of Accounts furnished by Borrower, but reliance by Fremont thereon from time to time shall not be deemed to limit Fremont's right to revise standards of eligibility at any time as to both Borrower's present and future Accounts. Eligible Accounts shall not include any of the following: (a) Accounts which the Account Debtor has failed to pay within forty-five (45) days after the original invoice date; (b) all Accounts owed by any Account Debtor that has failed to pay twenty-five percent (25.0%)(1) or more of its Accounts owed to Borrower within forty-five( 45 ) days after the original invoice date; (c) Accounts with respect to which the Account Debtor is an officer, director, employee or agent of Borrower;(2)(d) Accounts with respect to which the Account Debtor is a subsidiary of, related to, affiliated with or has common shareholders, officers or directors with Borrower; (e) Accounts with respect to which goods are placed on (1.) (fifty percent (50%) with respect to which the Account Debtor is Safeway, Inc.) (2.) , with the exception of Accounts with respect to which the Account Debtor is Sunset Specialty Foods (Processors Trading Company). 1 consignment, guaranteed sale, sale on return, sale on approval, bill and hold, or which contain other terms by reason of which payment by the Account Debtor may be conditional; (f) Accounts with respect to which the Account Debtor is not a resident of the United States; (g) Accounts with respect to which the Account Debtor is the United States or any department, agency or instrumentality of the United States (h) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower or, for any other reason, are subject to any right of offset in favor of the Account Debtor; (i) Accounts with respect to an Account Debtor whose total obligations to Borrower exceed fifteen percent (15%) of all Accounts, to the extent such obligations exceed such percentage; (1) (j) Accounts with respect to which the Account Debtor disputes liability or makes any claim with respect thereto, or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (k) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services; or (l) Accounts are payable in currency other than United States dollars. With respect to Accounts that exceed the concentration limits set forth in clause (i) above, Fremont from time to time in its sole discretion may designate such Accounts as Eligible Accounts if Borrower is able to establish Fremont's satisfaction the creditworthiness of the Account Debtor and the collectability of the Accounts. ELIGIBLE INVENTORY means Inventory consisting of first quality raw materials for finished goods (2) that are located at Borrower's premises, that strictly comply with all of Borrower's representations and warranties to Fremont and that are, and at all times continue to be, acceptable to Fremont in all respects; PROVIDED, HOWEVER that general criteria for Eligible Inventory may be established and revised from time to time by Fremont in Fremont's exclusive judgment. In determining such eligibility, Fremont may, but is not obligated to, rely on reports and schedules of Inventory furnished to Fremont by Borrower, but reliance thereon by Fremont from time to time shall not be deemed to limit Fremont's right to revise standards of eligibility at any time. Eligible Inventory shall not include slow moving or obsolete items, custom items, work in process, components which are not part of finished goods, spare parts, packaging and shipping materials, materials used or consumed in Borrower's business, goods returned to, repossessed or stopped in transit by Borrower. Inventory in the possession of Persons other than Borrower or subject to a security interest or lien in favor of any Person other than Fremont, bill and hold goods. Inventory which is not subject to Fremont's first priority, perfected security interest returned or defective goods, "seconds" and Inventory acquired on consignment. Eligible Inventory shall be valued at the lower of cost or wholesale market value. ENVIRONMENTAL LAW means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, the Resource Conservation and Recovery Act of 1976, the Hazardous Materials Transportation Act, the Toxic Substances Control Act the regulations pertaining to such statutes, and any other safety. health or-environmental statutes, laws, regulations or ordinances of the United States or of any state, county or municipality in which Borrower conducts its business or the Collateral is located. EQUIPMENT means all of Borrower's present and hereafter acquired equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, motor vehicles, rolling stock, processors, tools, parts, dies, jigs, goods (other than consumer goods, farm products or Inventory), wherever located, and any interest of Borrower in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions and improvements to any of the foregoing, wherever located. ERISA means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. ERISA AFFILIATE means each trade or business (whether or not incorporated and whether or not foreign) which is or may hereafter become a member of a group of which Borrower is a member and which is treated as a single employer under ERISA Section 4001(b)(1), or IRC Section 414. EVENT OF DEFAULT means the events specified in SECTION 8. FREMONT EXPENSES means all of the following: costs and expenses (including taxes, assessments and insurance premiums) required to be paid by Borrower under any of the Loan Documents which are paid or advanced by Fremont; filing, recording, publication, appraisal (including periodic Collateral appraisals), real estate survey, environmental audit and search fees assessed, paid or incurred by Fremont in connection with Fremont's transactions with Borrower; costs and expenses incurred by Fremont in the disbursement or collection of funds to or from Borrower; charges resulting from the dishonor of checks; costs and expenses paid or incurred by Fremont to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; costs and expenses paid or incurred by Fremont that result from third party claims against Fremont covered by Borrower's indemnification of Fremont in SECTION 11.4; costs and expenses paid or incurred by Fremont in enforcing or defending the Loan Documents; and Fremont's reasonable attorneys fees and expenses incurred (including the allocated costs of Fremont's in-house counsel) in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing, defending or otherwise representing Fremont in connection with the Loan Documents or the Obligations (including attorneys fees and expenses incurred in connection with a workout, a restructuring, an action to lift the automatic stay of Section 362 of the Bankruptcy Code, any other action or participation by Fremont in an Insolvency Proceeding concerning Borrower or any guarantor of the Obligations or any defense or participation by Fremont in any lender liability, preference or fraudulent conveyance actions). 1. except for Accounts with respect to which Safeway, Inc., Sysco Corporation, and Rykoff-Sexton, Inc. are the Account Debtors, each of which shall be ineligible to the extent they exceed thirty-five percent (35%) of all Accounts, and except for Accounts with respect to which Burris Foods, Inc. is the Account Debtor, which shall be ineligible to the extent they exceed twenty percent (20%) of all Accounts; 2. held for sale in the ordinary course of Borrower's business 2 GENERAL INTANGIBLES means all of Borrower's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes or regulations, choses or things in action, goodwill, patents, trade names, trademarks, service marks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, monies due under any royalty or licensing agreements, route lists, infringement claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds and tax refund claims) other than goods and Accounts, and Borrower's Books relating to any of the foregoing. HAZARDOUS MATERIAL means any substance, material, emission or waste which is or hereafter becomes regulated or classified as a hazardous substance, hazardous material, toxic substance or solid waste under any Environmental Law, asbestos, petroleum products, urea formaldehyde, polychlorinated biphenyls (PCBs), radon and any other hazardous or toxic substance, material, emission or waste. INSOLVENCY PROCEEDING means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with its creditors or proceedings seeking reorganization, liquidation, arrangement or other similar relief. INVENTORY means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service. Borrower's present and future raw materials, work in process, finished goods and materials used in or consumed in Borrower's business, goods which have been returned to, repossessed by or stopped in transit by Borrower, packing and shipping materials, wherever located, any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. IRC means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. LOAN DOCUMENTS means, collectively, this Agreement, any Notes, any security agreements, pledge agreements, deeds of trust, mortgages or other encumbrances or agreements which secure the Obligations, any guaranties of the Obligations, any lock box or blocked account agreements and any other agreement entered into between Borrower or any guarantor of the Obligations and Fremont relating to or in connection with this Agreement. MULTIEMPLOYER PLAN means a MULTIEMPLOYER PLAN as defined in ERISA Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of Borrower or any ERISA Affiliate. NEGOTIABLE COLLATERAL means all of Borrower's present and future letters of credit, notes, drafts, instruments, certificated and uncertificated securities, documents, leases and chattel paper, and Borrower's Books relating to any of the foregoing. NOTE means any promissory note made by Borrower to the order of Fremont concurrently herewith or at any time hereafter. OBLIGATIONS means all loans, advances, debts, liabilities (including all amounts charged to Borrower's loan account pursuant to any agreement authorizing Fremont to charge Borrower's loan account), obligations, fees, lease payments, guaranties, covenants and duties owing by Borrower to Fremont of any kind and description (whether pursuant to or evidenced by the Loan Documents, by any note or other instrument or by any other agreement between Fremont and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including any debt, liability or obligation owing from Borrower to others which Fremont may obtain by assignment or otherwise, and all interest thereon, including any interest that, but for the provisions of the Bankruptcy Code, would have accrued, and all Fremont Expenses which Borrower is required to pay or reimburse pursuant to the Loan Documents, by law or otherwise. PERSON means and includes natural persons, corporations, limited partnerships, general partnerships, joint ventures, trusts, land trusts, business trusts or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. PLAN means any plan described in ERISA Section 3(2) maintained for employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan. REFERENCE RATE means the variable rate of interest, per annum, published by The Wall Street Journal as the "Prime Rate" and based on "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks". The Reference Rate is nothing more nor less than an index for determining the interest rate payable under the terms of this Agreement. The Reference Rate is not necessarily the best rate, or any other definition of rates, offered by the banks that establish the rate or by Fremont. In the event The Wall Street Journal ceases to publish the "Prime Rate", Fremont may substitute any similar index for the Reference Rate. TERM LOAN means any term loan made by Fremont to Borrower, evidenced by and repayable in accordance with the terms and conditions of a Note. 3 1.2 CONSTRUCTION. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting and the term "or" has the inclusive meaning generally represented by the phrase "and/or". The words HEREOF, HEREIN, HEREBY, HEREUNDER, and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, exhibit and schedule references are to this Agreement unless otherwise specified. Any reference in this Agreement or in any of the other Loan Documents to this Agreement or any of the other Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions and supplements thereto and thereof. 1.3 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles (GAAP) as in effect from time to time. When used herein, the term FINANCIAL STATEMENTS SHALL include the notes and schedules thereto. 1.4 RIDERS, EXHIBITS, ETC. The Conditions Precedent Rider to this Agreement and all of the other riders, exhibits, addenda and schedules to this Agreement shall be deemed incorporated herein by reference. 1.5 CODE. Any terms used in this Agreement which are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 2. ADVANCES AND TERMS OF PAYMENT 2.1 LOANS. A. REVOLVING ADVANCES; REVOLVING ADVANCE LIMIT. Upon the request of Borrower, made at any time or from time to time during the term hereof, and so long as no Event of Default has occurred and is continuing, Fremont shall, in its sole discretion, make advances (the REVOLVING ADVANCES) to Borrower in an amount up to (a)seventy-five percent (75%) of the aggregate outstanding amount of Eligible Accounts, PLUS (b) the lesser of (1) fifty percent (50 %) of the aggregate value of the Eligible Inventory or (2) One Hundred Thousand Dollars ($ 100,000.00): PROVIDED, HOWEVER, that in no event shall the aggregate amount of the outstanding Revolving Advances be greater than, at any time, the sum of Five Hundred Thousand Dollars ($500,000.00) (the REVOLVING ADVANCE LIMIT). Fremont may reduce its advance rates on Eligible Accounts or Eligible Inventory or establish reserves with respect to borrowing availability if Fremont determines, in its sole discretion, that there has occurred, or is likely to occur, an impairment of the prospect of repayment of all or any portion of the Obligations, the value of the Collateral or the validity or priority of Fremont's security interests in the Collateral. B. Section is deleted. C. ADVANCE LIMIT. The sum of the Revolving Advance Limit PLUS the principal amount of all Term Loans outstanding from time to time, if any, is referred to herein as the ADVANCE LIMIT. 2.2 OVERADVANCES. All Revolving Advances made hereunder shall be added to and deemed part of the Obligations when made. If, at any time and for any reason, the aggregate amount of the outstanding Revolving Advances exceeds the dollar or percentage limitations contained in SECTION 2.1A (an OVERADVANCE), then Borrower shall, upon demand by Fremont, immediately pay to Fremont, in cash, the amount of such excess. 2.3 OVERADVANCE FEE. Without affecting Borrower's obligation to immediately repay to Fremont the amount of each Overadvance in accordance with the provisions of SECTION 2.2, in the event Fremont agrees to permit any Overadvance to exist and continue and in consideration for permitting such Overadvance to exist and continue, Borrower shall pay to Fremont a fee in an amount equal to two percent (2.0%) per month on the amount of the Overadvance for each day any Overadvance exists. All such fees shall be computed on the basis of a thirty (30) day month for the actual number of days elapsed. 2.4 AUTHORIZATION TO MAKE REVOLVING ADVANCES. Borrower hereby authorizes Fremont to make the Revolving Advances based upon telephonic or other instructions received from any one purporting to be an Authorized Officer, or, at the discretion of Fremont without instructions from or notice to Borrower, if such Revolving Advances are necessary to satisfy any Obligations. All requests for Revolving Advances hereunder shall specify the date on which the requested Revolving Advance is to be made (which day shall be a Business Day) and the amount of the requested Revolving Advance. Requests received after 11:00 a.m. Pacific time on any day shall be deemed to have been made as of the opening of business on the immediately following Business Day. All Revolving Advances made under this 4 Agreement shall be conclusively presumed to have been made to, at the request of, and for the benefit of Borrower when deposited to the credit of Borrower or otherwise disbursed in accordance with the instructions of Borrower or in accordance with the terms and conditions of this Agreement. 2.5 INTEREST. A. BASIC RATE; DEFAULT RATE. Except where specified to the contrary in any Loan Document, the aggregate outstanding amount of all Obligations shall bear interest at the rate of six percent (6.0%) per annum above the Reference Rate. The aggregate outstanding amount of all Obligations shall bear interest, from and after written notice by Fremont to Borrower of the occurrence of an Event of Default and without constituting a waiver of any such Event of Default, at the rate of nine percent (9.0%) per annum above the Reference Rate; PROVIDED, HOWEVER, that in the event an Insolvency Proceeding is commenced by or against Borrower, Fremont may charge such default rate of interest without providing written notice thereof to Borrower. All interest payable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed, based on the aggregate amount of the Obligations that are outstanding on each day. Interest shall continue to accrue until all of the Obligations are paid in full. B. INITIAL RATE. The Reference Rate as of the date of this Agreement is eight and one-quarter percent (8.25%) per annum, and, therefore, the effective rate of interest hereunder as of the date of this Agreement is fourteen and one-quarter percent (14.25%) per annum. The interest rate payable by Borrower under the terms of this Agreement shall be adjusted in accordance with any change in the Reference Rate from time to time on the date of any such change. All interest payable by Borrower shall be due and payable on the first day of each calendar month during the term of this Agreement. C. MINIMUM INTEREST PAYMENT. Not withstanding anything to the contrary contained in the Loan Documents, Borrower shall pay Fremont a minimum monthly interest charge in respect of the Obligations equal to Two Thousand Five Hundred Dollars ($2,500.00) per month. 2.6 VERIFICATION AND COLLECTION OF ACCOUNTS. Fremont or Fremont's designee may, at any time, with or without notice to Borrower, (a) notify Account Debtors of Borrower that the Accounts have been assigned to Fremont and that Fremont has a security interest in the Accounts; (b) contact Account Debtors of Borrower, either in writing or by telephone, for the purpose of verifying the validity, amount or any other matter relating to any Accounts; and (c) collect the Accounts directly and charge the collection costs and expenses to Borrower's loan account. Unless and until Fremont begins direct collection of the Accounts or gives Borrower other written instructions, Borrower shall collect all Accounts and the proceeds of other Collateral for the benefit of Fremont, receive in trust all payments thereon as Fremont's trustee and immediately deliver said payments to Fremont in their original form as received by Borrower (subject to the terms of any lockbox, blocked account or similar agreement entered into for the purpose of collection of the Accounts). 2.7 CREDITING PAYMENTS. For the purpose of calculating the availability of Revolving Advances under SECTION 2.1A, the receipt by Fremont of any wire transfer of funds, check or other item of payment shall be applied immediately to provisionally reduce the Obligations, but such receipt shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Fremont or unless and until such check or other item of payment is honored when presented for payment. For the purpose of calculating interest under SECTION 2.5A, the receipt by Fremont of any wire transfer of funds, check or other item of payment shall be deemed to have occurred four (4) Business Days after the date Fremont actually receives such item of payment. In the event any check or other item of payment is not honored when presented for payment, Borrower shall be deemed not to have made such payment and interest shall be recalculated accordingly. Not withstanding anything to the contrary contained herein, any wire transfer, check or other item of payment received by Fremont after 11:00 a.m. Pacific time shall be deemed to have been received by Fremont as of the opening of business on the immediately following Business Day. 2.8 (Intentionally has been deleted.) 2.9 LOAN ORIGINATION FEE. Borrower shall pay Fremont a fee (the LOAN ORIGINATION FEE)in the amount of Five Thousand Dollars ($5,000.00). The Loan Origination Fee shall be fully earned and is due and payable on the date that the initial REVOLVING ADVANCE is made hereunder. 5 2.10 SERVICING FEE. Borrower shall pay Fremont a monthly fee (the SERVICING FEE) in an amount equal to Two Hundred Fifty Dollars ($250.00). The Servicing Fee shall be payable on the first day of each calendar month in respect of Fremont's services for the preceding calendar month. The Servicing Fee shall be payable for the entire term of this Agreement, including all renewal terms, or so long as any of the Obligations are outstanding. 2.11 DOCUMENTATION FEE. Borrower shall pay Fremont a fee (the DOCUMENTATION FEE)in the amount of One Thousand Dollars ($1,000). The Documentation Fee shall be fully earned and is due and payable on the date that the initial Revolving Advance is made hereunder. 2.12 AUDIT FEE. Borrower shall pay Fremont an audit fee in an amount equal to Five Hundred Dollars ($500) for each audit of Borrower performed by Fremont subsequent to the making of the initial Revolving Advance hereunder. 2.13 LATE REPORTING FEE. Borrower shall pay Fremont a fee in an amount equal to Fifty Dollars ($50) per document per day for each Business Day any report, financial statement or schedule required to be delivered to Fremont by this Agreement is past due. 2.14 MISCELLANEOUS FEES. Borrower shall pay Fremont its customary fees for wire transfers (including a premium for early and late transfers), returned checks, letter of credit guarantees and any other services provided by Fremont to Borrower that are incidental to this Agreement. Upon Borrower's request, Fremont shall provide Borrower with a written schedule of the amounts of all such miscellaneous fees. 2.15 MAXIMUM CHARGES. In no event shall interest on the Obligations exceed the highest lawful rate in effect from time to time. It is not the intention of the parties hereto to make an agreement which violates any applicable state or federal usury laws. In no event shall Borrower pay or Fremont accept or charge any interest which, together with any other charges upon the principal or any portion thereof, exceeds the maximum lawful rate of interest allowable under any applicable state or federal usury laws. Should any provision of this Agreement or any existing or future Notes or Loan Documents between the parties be construed to require the payment of interest which, together with any other charges upon the principal or any portion thereof, exceeds the maximum lawful rate of interest, then any such excess shall be applied to the remaining principal balance, if any, and the remainder refunded to Borrower. 2.16 MONTHLY STATEMENTS. Fremont shall render monthly statements to Borrower of all Obligations, including statements of all principal, interest, fees and Fremont Expenses charged, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Fremont unless, within thirty (30) days after receipt thereof by Borrower, Borrower shall deliver to Fremont, by registered or certified mail or overnight courier service, at Fremont's address stated in SECTION 12, written objection to Fremont's statement specifying the error or errors, if any, contained in such statements. 2.17 PAYMENT MECHANICS. As an administrative convenience to Borrower to ensure the timely payment of amounts owing by Borrower to Fremont under this Agreement, Borrower hereby requests Fremont to advance for the account of Borrower an amount each month sufficient to pay interest accrued on the principal amount of the Obligations during the immediately preceding month and all monthly principal installments or other payments due under a Note or other Loan Document and amounts from time to time sufficient to pay all fees and Fremont Expenses owing by Borrower under this Agreement. Borrower authorizes Fremont, in Fremont's sole discretion, to make a Revolving Advance for Borrower's account of a sum sufficient each month to pay, on the due date thereof, all interest accrued on the principal amount of the Obligations during the immediately preceding month and all monthly principal installments or other payments due under a Note or other Loan Document and sums from time to time sufficient to pay, on the due date thereof, all fees and Fremont Expenses owing by Borrower under this Agreement, and Fremont may apply the proceeds of each such Revolving Advance to the payment of such interest, installments, fees and Fremont Expenses. Each such Revolving Advance shall thereafter accrue interest at the rate then applicable under this Agreement. Fremont, however, shall not be obligated to make any such Revolving Advance and Borrower acknowledges that Fremont will be particularly disinclined to do so if an Event of Default or an Overadvance exists at the time of, or would result from the making of, such Revolving Advance. 3. TERM OF AGREEMENT AND EARLY TERMINATION 3.1 TERM. This Agreement shall become effective in accordance with SECTION 14.1 and shall continue in full force and effect for a term ending one (1) year after the date hereof and shall be deemed automatically renewed for successive terms of one (1) year thereafter until terminated as of the end of the initial term or any renewal term (each a TERM) by either party giving the other written notice at least sixty (60) days prior to the end of the then current Term. 3.2 EARLY TERMINATION. Borrower, subject to the payment of the fee described below, may terminate this Agreement other than at the end of the then current Term by giving Fremont prior written notice of its intention to effect an early termination of this Agreement. Fremont may terminate this Agreement at any time upon or after the occurrence of an Event of Default. In view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Fremont's lost profits as a result of an early termination of this Agreement, in either of the instances described in the preceding two sentences, Borrower shall pay to Fremont, upon the effective date of such early termination and in addition to all other Obligations, an early termination fee (the EARLY TERMINATION FEE) in an amount equal to five percent (5.0%) of the Advance Limit. The Early Termination Fee shall be presumed to be the amount of damages sustained by Fremont as the result of the early termination and Borrower agrees that it is reasonable under the 6 circumstances currently existing. The Early Termination Fee shall be deemed included in the Obligations. Notwithstanding anything herein to the contrary, if and to the extent the Early Termination Fee constitutes interest under applicable law, the Early Termination Fee, when added to all other interest contracted for, charged or received under this Agreement or any other Loan Documents, shall not exceed, and shall be limited to an amount which constitutes, interest at the maximum lawful rate of interest allowable under applicable law. 3.3 EFFECT OF TERMINATION. Upon termination of this Agreement, all of the Obligations shall be immediately due and payable in full. No termination of this Agreement shall relieve or discharge Borrower of Borrower's duties, obligations and covenants hereunder until all of the Obligations have been fully and indefeasibly paid and satisfied, and Fremont's continuing security interest in the Collateral shall remain in effect until all of the Obligations have been fully and indefeasibly paid and satisfied. 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Fremont a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each and all of its covenants and duties under the Loan Documents. Fremont's security interest in the Collateral shall attach to all Collateral without further act on the part of Fremont or Borrower. Other than sales of Inventory to buyers in the ordinary course of business, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower shall, upon the request of Fremont, immediately endorse and assign such Negotiable Collateral to Fremont and deliver physical possession of such Negotiable Collateral to Fremont. 4.3 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall execute and deliver to Fremont, concurrently with Borrower's execution and delivery of this Agreement and at any time thereafter at the request of Fremont, all financing statements, continuation financing statements, fixture filings, security agreements, chattel mortgages, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Fremont may reasonably request, in form satisfactory to Fremont, to perfect and continue perfected Fremont's security interest in the Collateral and in order to fully consummate all of the transactions contemplated hereunder and under the other Loan Documents. 4.4 POWER OF ATTORNEY. Borrower hereby irrevocably designates, makes, constitutes and appoints Fremont (and any of Fremont's officers, employees or agents designated by Fremont) as Borrower's true and lawful attorney-in-fact, and Fremont, or Fremont's agent, may, without notice to Borrower and in either Borrower's or Fremont's name, but at the cost and expense of Borrower, at such time or times as Fremont in its sole discretion may determine: (a) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of the Accounts; (b) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (c) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (d) sign Borrower's name on any of documents described in SECTION 4.3 or on any other similar documents to be executed, recorded or filed in order to perfect or continue perfected Fremont's security interest in the Collateral; (e) sign Borrower's name on any invoices, bills of lading, freight bills, chattel paper, documents, instruments or similar documents or agreements relating to the Accounts, Inventory or other Collateral, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts and notices to Account Debtors; (f) send requests for verification of Accounts; (g) endorse Borrower's name on any checks, notes, acceptances, money orders, drafts or other items of payment or proceeds relating to any Collateral that may come into Fremont's possession and deposit the same to the account of Fremont for application to the Obligations; (h) do all other acts and things necessary, in Fremont's determination, to fulfill Borrower's obligations under this Agreement or any of the other Loan Documents; (i) at any time that an Event of Default has occurred and is continuing, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Fremont, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower; (j) at any time that an Event of Default has occurred and is continuing, use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, Equipment and any other Collateral and to which Borrower has access; (k) at any time that an Event of Default has occurred and is continuing, make, settle and adjust all claims under Borrower's policies of insurance, make all determinations and decisions with respect to such policies of insurance and endorse the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance; (l) at any time that an Event of Default has occurred and is continuing, sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Fremont deems advisable; and (m) at any time that an Event of Default has occurred and is continuing, settle, adjust or compromise disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Fremont determines to be reasonable, and, in furtherance thereof, execute and deliver any documents and releases that Fremont determines to be necessary. The appointment of Fremont as Borrower's attorney-in-fact and each and every one of Fremont's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and this Agreement has been terminated. 4.5 RIGHT TO INSPECT. Fremont, through any of its officers, employees or agents, shall have the right at any time or times during Borrower's usual business hours, or during the usual business hours of any third party having control over any of Borrower's Books, to inspect Borrower's Books in order to verify the amount or condition of, or any other matter relating to, the Collateral or Borrower's financial condition. Fremont also shall have the right at any time or times during Borrower's usual business hours to inspect and examine the Inventory and the Equipment and to check and test the same as to quality, quantity, value and condition. If an Event of Default has occurred or if Fremont reasonably believes that an Event of Default has occurred, Fremont may conduct any of the inspections referenced in this SECTION 4.5 at any time without regard to Borrower's or any third party's usual business hours. 7 5. REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Fremont and each such representation and warranty shall be deemed to be repeated with each Revolving Advance made by Fremont and shall be conclusively presumed to have been relied on by Fremont regardless of any investigation made or information possessed by Fremont. The following representations and warranties shall be cumulative and in addition to any and all other representations and warranties which Borrower shall now or hereafter give, or cause to be given, to Fremont. 5.1 NO PRIOR ENCUMBRANCES: SECURITY INTERESTS. Borrower has good and indefeasible title to the Collateral, free and clear of liens, claims, security interests or encumbrances, except for those permitted under SECTION 7.2. 5.2 ACCOUNTS. All of Borrower's Accounts constitute bona fide existing obligations created by the sale and Delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of Borrower's business, and, in the case of Accounts created by the sale and delivery of Inventory, the Inventory giving rise to such Accounts has been delivered to the Account Debtor. At the time of the creation of each Eligible Account or the assignment thereof to Fremont, each such Eligible Account is unconditionally owed to Borrower without defense, dispute, offset, counterclaim or right of return or cancellation and Borrower has not received notice of actual or imminent bankruptcy, insolvency or material impairment of the financial condition of the Account Debtor regarding such Eligible Account. 5.3 ELIGIBLE INVENTORY. All Eligible Inventory is of good and merchantable quality, free from defects. 5.4 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment are not stored with a bailee, warehouseman, processor or similar party unless Fremont has consented thereto in writing and are located only at the following locations: 30152 Aventura, Rancho Santa Margarita; finished goods inventory may, from time to time, be located at public warehouses for distribution to Account Debtors. 5.5 INVENTORY RECORDS. Borrower keeps correct and accurate records itemizing and describing the kind, type, quality and quantity of the Inventory and Borrower's cost therefor. 5.6 LOCATION OF CHIEF EXECUTIVE OFFICE. The chief executive office of Borrower is located at the address stated in the first paragraph of this Agreement. 5.7 DUE INCORPORATION AND QUALIFICATION. Borrower is a corporation duly organized and existing and in good standing under the laws of the state of its incorporation and is qualified or licensed to do business in, and is in good standing in, any state in which the failure to be qualified or licensed and in good standing could have a material adverse effect on Borrower's business or the Collateral. 5.8 FICTITIOUS NAME(S). Borrower is conducting its business at the present time under the following trade or fictitious name(s): Jukebox, Mama Mia. Borrower has complied with the fictitious name laws of all jurisdictions in which compliance is required in connection with its use of such name(s). During the five (5) years prior to the date of this Agreement, Borrower conducted business under the following trade or fictitious name(s) in addition to those stated above: ------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5.9 PERMITS AND LICENSES. Borrower holds all licenses, permits, franchises, approvals and consents as are required in the conduct of its business and the ownership and operation of its properties. 5.10 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery and performance of the Loan Documents to which Borrower is a party are within Borrower's corporate powers, have been duly authorized and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles or Certificate of Incorporation or Bylaws, nor will they create a default under any material agreement to which Borrower is a party. 5.11 LITIGATION. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower has no knowledge or notice of any pending, threatened or imminent litigation, governmental investigations, or claims, complaints, actions or prosecutions involving Borrower or any guarantor of the Obligations, except for ongoing collection matters in which Borrower is the plaintiff and such matters as have been disclosed to Fremont in writing. 5.12 TAXES. All assessments and taxes, whether real, personal or otherwise, due or payable by, or imposed, levied or assessed against Borrower or any of its property or in connection with Borrower's business have been paid in full prior to delinquency or the expiration of any extension period. 5.13 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. All financial statements relating to Borrower which have been or may hereafter be delivered by Borrower to Fremont have been prepared in accordance with GAAP and fairly present Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has been no material adverse change in the financial condition of Borrower since the date of the most recent of such financial statements submitted to Fremont. 5.14 SOLVENCY. Borrower is able to pay its debts (including trade debts) as they mature. No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this 8 Agreement or the other Loan Documents with the intent to hinder, delay or defraud either present or future creditors of Borrower. 5.15 ERISA. Neither Borrower, nor any ERISA Affiliate nor any Plan is or has been in violation of any of the provisions of ERISA, any of the qualification requirements of IRC Section 401(a), or any of the published interpretations thereof. No lien upon the assets of Borrower has arisen with respect to any Plan. No PROHIBITED TRANSACTION within the meaning of ERISA Section 406 or IRC Section 4975(c) has occurred with respect to any Plan. Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have made all contributions required to be made by them to any Plan or Multiemployer Plan when due. There is no accumulated funding deficiency in any Plan, whether or not waived. 5.16 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower has complied with all Environmental Laws. Except as previously disclosed to Fremont in writing, Borrower has not caused or permitted any Hazardous Materials to be located, incorporated, generated, stored, manufactured, transported to or from, released, disposed of or used at, upon, under or within any premises at which Borrower conducts its business, or in connection with Borrower's business. To the best of Borrower's knowledge, no prior owner or operator of any premises at which Borrower conducts its business has caused or permitted any of the above to occur at, upon, under or within any of such premises. 5.17 INTELLECTUAL PROPERTY. Borrower does not own or have rights as licensee in or to any trademarks or patents or have any trademark or patent applications pending, except as has been disclosed in writing to Fremont. 5.18 LABOR AND EMPLOYMENT DISPUTES. There are no pending grievances, disputes or controversies with any union or other organization of Borrower's employees, or pending threats of strikes or work stoppages, or demands for collective bargaining by any union or other organization of Borrower's employees. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that during the term of this Agreement and until payment in full of the Obligations, and unless Fremont shall otherwise consent in writing, Borrower shall do all of the following: 6.1 ACCOUNTING SYSTEM. Borrower at all times shall maintain a standard and modern system of accounting in accordance with GAAP with ledger and account cards or computer tapes, disks, printouts and records pertaining to the Collateral which contain information as may from time to time be requested by Fremont. Borrower also shall keep proper books of account showing all sales, claims and allowances on its Inventory. 6.2 COLLATERAL REPORTS. Borrower shall deliver to Fremont, no later than the fifteenth day of each month during the term of this Agreement, a detailed aging of the Accounts, a reconciliation statement and a summary aging, by vendor, of all accounts payable and any book overdraft. Borrower shall deliver to Fremont, as Fremont may from time to time require, collection reports, sales journals, invoices, original delivery receipts, customers' purchase orders, shipping instructions, bills of lading and other documentation respecting shipment arrangements. Absent such a request by Fremont, copies of all such documentation shall be held by Borrower as custodian for Fremont. 6.3 RETURNS. Returns and allowances, if any, as between Borrower and its Account Debtors, shall be permitted by Borrower on the same basis and in accordance with the usual and customary practices of Borrower as they exist at the time of the execution and delivery of this Agreement. If any Account Debtor returns any Inventory to Borrower, Borrower shall promptly determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Fremont) in the appropriate amount to such Account Debtor. Borrower shall promptly notify Fremont of all returns and recoveries and of all disputes and claims. 6.4 DESIGNATION OF INVENTORY. Borrower shall now and from time to time hereafter, but not less frequently than bi-weekly, execute and deliver to Fremont a designation of Eligible Inventory specifying Borrower's cost and the wholesale market value of such Eligible Inventory, and further specifying such other information as Fremont may reasonably request. 6.5 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver to Fremont: (a) as soon as available, but in any event within thirty (30) days after the end of each of Borrower's fiscal quarters during each of Borrower's fiscal years, a company prepared balance sheet and profit and loss statement covering Borrower's operations during such period; and (b) as soon as available, but in any event within ninety (90) days after the end of each of Borrower's fiscal years, financial statements of Borrower for each such fiscal year. Reviewed by independent certified public accountants acceptable to Fremont. Notwithstanding the foregoing, Fremont reserves the right to require Borrower to provide Fremont with company prepared financial statements on a monthly (rather than quarterly) basis. All such annual financial statements shall include a balance sheet and profit and loss statement, together with the accountants' letter to management. Borrower shall also deliver Borrower's Form 10-Qs, 10-Ks or 8-Ks, and any other filings made by Borrower with the Securities and Exchange Commission, if any, as soon as the same become available, and any other report reasonably requested by Fremont relating to the Collateral or the financial condition of Borrower, including financial projections, and a certificate signed by the chief financial officer or chief executive officer of Borrower to the effect that all reports, statements or computer prepared information of any kind or nature delivered or caused to be delivered to Fremont under this SECTION 6.5 fairly present the financial condition of Borrower and that there exists on the date of delivery of such certificate to Fremont no condition or event which constitutes an Event of Default. 9 6.6 LITIGATION. Borrower shall promptly notify Fremont in writing of any litigation, governmental investigations or criminal prosecutions involving Borrower, other than collection matters in which Borrower is the plaintiff. 6.7 TAX RETURNS, RECEIPTS. Borrower shall deliver to Fremont copies of each of Borrower's federal income tax returns, and any amendments thereto, within thirty (30) days after the filing thereof with the Internal Revenue Service. Furthermore, Borrower shall deliver to Fremont, promptly upon request by Fremont, satisfactory evidence of Borrower's payment of all federal withholding taxes required to be paid by Borrower. 6.8 GUARANTOR TAX RETURNS. Borrower shall cause each guarantor of the Obligations to deliver to Fremont copies of such guarantor's federal income tax returns within thirty (30) days after the filing thereof with the Internal Revenue Service. 6.9 TITLE TO EQUIPMENT. Upon Fremont's request, Borrower shall immediately deliver to Fremont, properly endorsed, any and all evidences of ownership of, or certificates of title or applications for title to, any items of Equipment. 6.10 MAINTENANCE OF EQUIPMENT. Borrower shall keep and maintain the Equipment in good operating condition and repair and shall make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and the Equipment is now and shall at all times remain personal property. 6.11 TAXES. All assessments and taxes, whether real, personal or otherwise, due or payable by, or imposed, levied or assessed against Borrower or any of its property or in connection with Borrower's business shall be paid in full prior to delinquency or the expiration of any extension period. Borrower shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of it by law and will execute and deliver to Fremont, on demand, appropriate certificates attesting to the payment or deposit thereof. Borrower shall make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability and local, state and federal income taxes, and shall, upon request, furnish Fremont with proof satisfactory to Fremont indicating that Borrower has made such payments or deposits. 6.12 INSURANCE. Borrower, at its expense, shall keep and maintain the Collateral insured against all risk of loss or damage from fire, theft, vandalism, malicious mischief, explosion, sprinklers and all other hazards and risks of physical damage included within the meaning of the term "extended coverage" in such amounts as are ordinarily insured against by other similar businesses. Borrower shall also keep and maintain comprehensive general public liability insurance and property damage insurance, and insurance against loss from business interruption, insuring against all risks relating to or arising from Borrower's ownership and use of the Collateral and Borrower's other assets and the operation of Borrower's business. All such policies of insurance shall be in such form, with such companies and in such amounts as may be satisfactory to Fremont, Borrower shall deliver to Fremont certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All such policies of insurance (except those of public liability and property damage) shall contain a Lender's Loss Payable endorsement in a form satisfactory to Fremont, naming Fremont as sole loss payee thereof, and shall contain a waiver of warranties. All proceeds payable under any such policy shall be payable to Fremont to be applied to the Obligations. 6.13 NO OFFSETS OR COUNTERCLAIMS. All payments hereunder and under the other Loan Documents made by or on behalf of Borrower shall be made without offset or counterclaim, and Borrower hereby waives any right to offset, against the repayment of the Obligations, any claims it may have against Fremont. 6.14 FREMONT EXPENSES. Borrower shall immediately and without demand reimburse Fremont for all sums expended by Fremont which constitute Fremont Expenses and Borrower hereby authorizes and approves all Revolving Advances and payments by Fremont for items constituting Fremont Expenses. Borrower acknowledges that Fremont Expenses include, among other things, (a) Fremont's reasonable attorneys fees and expenses incurred in defending or otherwise representing Fremont concerning the Loan Documents or the Obligations and (b) charges resulting from the dishonor of checks. Since Fremont Expenses are a part of the Obligations which are secured by the Collateral, Fremont shall not be required to discharge any lien or terminate any security interest in the Collateral unless and until (y) Borrower and Fremont execute a mutual general release of liability and indemnification in favor of and acceptable to Fremont and (z) to the extent another financial institution refinances the Obligations,such financial institution delivers an agreement, acceptable to Fremont, to indemnify Fremont for loss arising from checks delivered to Fremont for collection and payment of the Obligations which are returned for non-payment or for any other reason. 6.15 COMPLIANCE WITH LAW. Borrower shall comply with the requirements of all applicable laws, rules, regulations and orders of governmental authorities relating to Borrower and the conduct of Borrower's business, including the Fair Labor Standards Act and the Americans with Disabilities Act. 6.16 LOCATION OF INVENTORY AND EQUIPMENT. Borrower shall keep the Inventory and Equipment only at the locations identified in SECTION 5.5. 10 6.17 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower shall not permit any lien under any Environmental Law to be filed against any of the Collateral or any of Borrower's real property in which Fremont holds a lien, and will promptly notify Fremont of any proceeding, inquiry or claim relating to any alleged violation of any Environmental Law, or any alleged loss, damage or injury resulting from any Hazardous Material. Fremont shall have the right to join and participate in, as a party if it so elects, any legal or administrative proceeding initiated against Borrower or any guarantor of the Obligations with respect to any Hazardous Material or in connection with any Environmental Law. 7. NEGATIVE COVENANTS Borrower covenants and agrees that during the term of this Agreement and until payment in full of the Obligations, Borrower will not do any of the following without Fremont's prior written consent: 7.1 INDEBTEDNESS. Create, incur, assume, permit or otherwise become liable with respect to any indebtedness outside of the ordinary and usual course of Borrower's business, except (a) indebtedness set forth in Borrower's latest financial statements submitted to Fremont prior to the date of this Agreement and renewals or extensions of such indebtedness and (b) the Obligations. 7.2 LIENS. Create, incur, assume or permit to exist any security interest, lien, pledge, mortgage or encumbrance on any Collateral or on any of Borrower's real property in which Fremont holds a lien, except (a) the security interests granted to Fremont by Borrower, (b) the security interests disclosed in the UCC searches obtained by Fremont prior to the funding of the initial Revolving Advance hereunder and (c) any security interest which Borrower has disclosed in writing to Fremont and to which Fremont has given its prior written consent. 7.3 EXTRAORDINARY TRANSACTIONS. Enter into any transaction not in the ordinary and usual course of Borrower's business, including the sale, lease or other disposition of, whether by sale or otherwise, any of Borrower's assets other than sales of Inventory in the ordinary and usual course of Borrower's business; or make any advance, loan or capital contribution to any Person except in the ordinary and usual course of Borrower's business. 7.4 CHANGE NAME. Change Borrower's name, business structure or identity, or add any new fictitious name. 7.5 FUNDAMENTAL CHANGES. Enter into any acquisition, merger, consolidation, reorganization or recapitalization, or reclassify its capital stock, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or acquire by purchase or otherwise all or substantially all of the assets, stock or other beneficial ownership interest of any other Person. 7.6 GUARANTY. Guaranty or otherwise become in any way liable with respect to the obligations of any third party except by endorsement of instruments or items of payment for deposit to the account of Borrower for negotiation and delivery to Fremont. 7.7 RESTRUCTURE. Make any change in Borrower's capital structure or in the principal nature of Borrower's business operations. 7.8 PREPAYMENTS. Prepay any indebtedness owing to any third party. 7.9 CHANGE OF OWNERSHIP. Cause, permit or suffer any transfer, whether direct or indirect, of the ownership of ten percent (10%) or more of Borrower's outstanding capital stock or other beneficial ownership interest in any single transaction or series of transactions. 7.10 COMPENSATION. Pay total compensation, including salaries, withdrawals, fees, bonuses, commissions, drawing accounts, management fees or other payments, whether directly or indirectly, in money or otherwise, during any fiscal year to all of Borrower's executives, officers, shareholders, affiliates, and directors (or any relatives thereof) in an aggregate amount in excess of one hundred twenty percent (120%) of those earned in the prior fiscal year or to the extent positive cash flow exists, so long as debts are generally being paid when due, Borrower is not in default and positive availability exists under the credit facility. 7.11 LOANS TO INSIDERS. Make any loans, advances or extensions of credit to any officer, director, executive, employee or shareholder of Borrower, or any relative of any of the foregoing, or to any entity which is a subsidiary of, related to, affiliated with or has common shareholders, officers or directors with Borrower, which when aggregated with all other loans, advances or extensions of credit to any or all of the above Persons at any time outstanding during the term of this Agreement, exceeds Twenty-Five Thousand Dollars ($25,000.00). 7.12 CAPITAL EXPENDITURES. Make any capital expenditure, or any commitment therefor, in excess of One Hundred Thousand Dollars ($100,000.00 ) for any individual transaction or where the aggregate amount of such capital expenditures, made or committed for in any fiscal year, is in excess of Three Hundred Thousand Dollars ($300,000.00). 7.13 CONSIGNMENTS. Consign any Inventory; or sell any Inventory on bill and hold, sale on approval or other conditional terms of sale. 11 7.14 DISTRIBUTIONS. Make any distribution or declare or pay any dividends (in cash or in stock) on, or purchase, acquire, redeem or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding. 7.15 ACCOUNTING METHODS. Modify or change its method of accounting or enter into, modify or terminate any agreement currently existing or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Fremont information regarding the Collateral or Borrower's financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Fremont pursuant to or in accordance with this Agreement, and agrees that Fremont may contact directly any such accounting firm or service bureau in order to obtain such information. 7.16 SUSPENSION. Suspend or go out of business. 7.17 LOCATION OF CHIEF EXECUTIVE OFFICE. Relocate its chief executive office to a new location unless Fremont is given thirty (30) days prior written notice thereof. 8. EVENTS OF DEFAULT The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Agreement: 8.1 FAILURE TO PAY. Borrower fails to pay when due and payable, or when declared due and payable, any portion of the Obligations (whether principal, interest, fees and charges due Fremont, reimbursement of Fremont Expenses, or other amounts constituting Obligations); 8.2 FAILURE TO PERFORM. Borrower fails or neglects to perform, keep or observe any term, provision, condition, representation, warranty, covenant or agreement contained in this Agreement, in any of the other Loan Documents or in any other present or future agreement between Borrower and Fremont; 8.3 MISREPRESENTATION. Any misstatement or misrepresentation now or hereafter exists in any warrant, representation, statement or report made to Fremont by Borrower or any officer, employee, agent or director of Borrower, or if any such warranty or representation is withdrawn by any of them; 8.4 MISREPRESENTATION OF COLLATERAL. Any writing, document, aging, certificate or other evidence of the Eligible Accounts or Eligible Inventory shall be incomplete, incorrect or misleading at the time the same is furnished to Fremont; or Borrower shall fail to immediately remit to Fremont proceeds of Accounts and other Collateral, pursuant to the terms of SECTION 2.6; 8.5 MATERIAL ADVERSE CHANGE. There is a material adverse change in Borrower's business or financial condition; 8.6 MATERIAL IMPAIRMENT. There is a material impairment of the prospect of repayment of any portion of the Obligations owing to Fremont or a material impairment of the value or priority of Fremont's security interests in the Collateral; 8.7 LEVY OR ATTACHMENT. Any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any judicial officer; 8.8 INSOLVENCY BY BORROWER. An Insolvency Proceeding is commenced by Borrower; 8.9 INSOLVENCY AGAINST BORROWER. An Insolvency Proceeding is commenced against Borrower; 8.10 INJUNCTION AGAINST BORROWER. Borrower is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.11 GOVERNMENT LIEN. A notice of lien, levy or assessment is filed of record with respect to any of Borrower's assets by the United States government, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, or any taxes or debts owing at any time hereafter to any one or more of such entities becomes a lien, whether choate or otherwise, upon any of Borrower's assets and the same is not paid on the payment date thereof; 8.12 JUDGMENT. A judgment is entered against Borrower; 8.13 CROSS DEFAULT TO MATERIAL AGREEMENTS. There is a default in any material agreement to which Borrower is a party with one or more third parties or by which Borrower or Borrower's property or assets are bound; 8.14 SUBORDINATED DEBT PAYMENTS. Borrower makes any payment on account of indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination agreement applicable to such indebtedness; 12 8.15 LOSS OF GUARANTOR. Any guarantor of the Obligations dies, terminates his/her/its guaranty, becomes the subject of an Insolvency Proceeding, or contests his/her/its obligations under such a guaranty; or if any such guaranty of the Obligations ceases to be valid or enforceable for any reason; 8.16 ERISA VIOLATION. A PROHIBITED TRANSACTION within the meaning of ERISA Section 406 or IRC Section 4975(c) shall occur with respect to a Plan which could have a material adverse effect on the financial condition of Borrower; any lien upon the assets of Borrower in connection with any Plan shall arise; Borrower or any ERISA Affiliate shall completely or partially withdraw from a Multiemployer Plan and such withdrawal could, in the opinion of Fremont, have a material adverse effect on the financial condition of Borrower; Borrower or any of its ERISA Affiliates shall fail to make full payment when due of all amounts which Borrower or any of its ERISA Affiliates may be required to pay to any Plan or any Multiemployer Plan as one or more contributions thereto; Borrower or any of its ERISA Affiliates creates or permits the creation of any accumulated funding deficiency, whether or not waived; the voluntary or involuntary termination of any Plan which termination could, in the opinion of Fremont, have a material adverse effect on the financial condition of Borrower; or Borrower shall fail to notify Fremont promptly and in any event within ten (10) days of the occurrence of any event which constitutes an Event of Default under this clause or would constitute such an Event of Default upon the exercise of Fremont's judgment; or 8.17 CRIMINAL PROCEEDINGS. Criminal proceedings are instituted against Borrower, any member of Borrower's senior management or any guarantor of the Obligations that could result in the forfeiture or loss of Collateral or a material impairment of the financial condition of Borrower or any guarantor of the Obligations. Notwithstanding anything contained in this SECTION 8 to the contrary, Fremont shall refrain from exercising its rights and remedies and an Event of Default shall not be deemed to have occurred by reason of the occurrence of any of the events set forth in SECTIONS 8.7, 8.9, 8.11 or 8.12 of this Agreement if, within ten (10) days from the date thereof, the same is released, discharged, dismissed, bonded against or satisfied; PROVIDED, HOWEVER, Fremont shall not be obligated to make Revolving Advances to Borrower during such period. 9. FREMONT'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event of Default. Fremont may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, any of the other Loan Documents or otherwise, immediately due and payable in full; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, any of the other Loan Documents or any other agreement between Borrower and Fremont; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Fremont, but without affecting Fremont's rights and security interest in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Fremont considers advisable and, in such cases. Fremont will credit Borrower's loan account with only the net amounts received by Fremont in payment of such disputed Accounts, after deducting all Fremont Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all returned Inventory in trust for Fremont, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of Fremont; (f) Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Fremont considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Fremont so requires and to deliver or make the Collateral available to Fremont at a place designated by Fremont. Borrower authorizes Fremont to enter any premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest or compromise any encumbrance, charge or lien that in Fremont's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Fremont a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Fremont's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived) and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Fremont (including any amounts received in a lockbox or blocked account), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Fremont; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by Fremont (including any amounts received in a lockbox or blocked account) to secure the Obligations; 13 (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale and sell (in the manner provided for herein) the Collateral, Fremont is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral. Borrower's rights under all licenses and all franchise agreements shall inure to Fremont's benefit; (j) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Fremont determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (k) Fremont shall give notice of the disposition of the Collateral as follows: (1) Fremont shall give the Borrower and each holder of a security interest in the Collateral who has filed with Fremont a written request for notice, a notice in writing of the time and place of public sale or, if the sale is a private sale or some other disposition other than a public sale is to be made, then the time on or after which the private sale or other disposition is to be made; (2) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in SECTION 12, at least five (5) calendar days before the date fixed for the sale, or at least five (5) calendar days before the date on or after which the private sale or other disposition is to be made, unless the Collateral is perishable or threatens to decline speedily in value. Notice to Persons other than Borrower claiming an interest in the Collateral shall be sent to such addresses as they have furnished to Fremont; (3) If the sale is to be a public sale, Fremont shall also give notice of the time and place by publishing a notice one time at least five (5) calendar days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) Fremont may credit bid and purchase at any public sale; (m) Any deficiency that exists after disposition of the Collateral as provided above shall be paid immediately by Borrower. Any excess will be remitted without interest by Fremont to the party or parties legally entitled to such excess; and (n) In addition to the foregoing, Fremont shall have all rights and remedies provided by law and any rights and remedies contained in any other Loan Documents. All such rights and remedies shall be cumulative. 9.2 NO WAIVER. No delay on the part of Fremont in exercising any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right, power or privilege under this Agreement or otherwise, preclude other or further exercise of the right, power or privilege or the exercise of any other right, power or privilege. 10. TAXES AND EXPENSES REGARDING THE COLLATERAL If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums or otherwise) due to third parties regarding the Collateral, or fails to make any deposits or furnish any required proof of payment or deposit, or fails to perform any of Borrower's other covenants under the terms of this Agreement, then in its discretion and without prior notice to Borrower, Fremont may do any or all of the following: (a) make any payment which Borrower has failed to pay or any part thereof: (b) set up such reserves in Borrower's loan account as Fremont deems necessary to protect Fremont from the exposure created by such failure: (c) obtain and maintain insurance policies of the type described in SECTION 6.12 and take any action with respect to such policies as Fremont deems prudent; or (d) take any other action deemed necessary by Fremont to preserve and protect its interests and rights under this Agreement. Any payments made by Fremont shall not constitute an agreement by Fremont to make similar payments in the future or a waiver by Fremont of any Event of Default under this Agreement. Fremont need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or lien and the receipt of notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS AND INDEMNIFICATIONS 11.1 WAIVERS. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, notice of nonpayment at maturity, notice of intention to accelerate and notice of acceleration, so that Fremont may exercise any and all rights and remedies under the Loan Agreement or any other Loan Documents, or as otherwise provided at law or in equity, immediately upon the occurrence of any Event of Default, without any further notice, grace or opportunity to cure whatsoever. Borrower further waives notice prior to Fremont's taking possession or control of the Collateral, any bond or security which might be required by any court prior to allowing Fremont to exercise any of Fremont's remedies, and the benefit of all valuation, appraisement and exemption laws. Borrower agrees that Fremont may compromise, settle or release without notice to Borrower any accounts, documents, instruments, chattel paper or guaranties at any time held by Fremont on which Borrower may in any way be liable. 11.2 NO MARSHALING. Borrower, on its own behalf and on behalf of its successors and assigns, hereby expressly waives all rights, if any, to require a marshaling of assets by Fremont or to require that Fremont first resort to some or any portion of the Collateral before foreclosing upon, selling or otherwise realizing on any other portion thereof. 14 11.3 FREMONT LIABILITY FOR COLLATERAL. So long as Fremont complies with its obligations, if any, under Section 9207 of the Code. Fremont shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damages thereto occurring or arising in any manner or fashion from any cause: (c) any diminution in the value thereof; or (d) any act or default any carrier, warehouseman, bailee, forwarding agency or other Person. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 11.4 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless Fremont, its directors, officers, agents, employees, participants and assigns, from and against any and all claims, suits, actions, causes of action, liabilities, damages, losses, obligations, judgments and expenses, including attorneys fees and costs, of any nature whatsoever, in any way relating to or arising from the transactions contemplated by this Agreement or any other Loan Document (including those relating to or arising from any alleged or actual violation of any Environmental Law, or any loss, damage or injury resulting from any Hazardous Material; PROVIDED that the foregoing indemnification shall not extend to liabilities, damages, losses, obligations, judgments and expenses arising from the gross negligence or willful misconduct of Fremont. This indemnification provision shall survive the termination of this Agreement. 12. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement, the Loan Documents or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by receipted overnight delivery service to Borrower or to Fremont, as the case may be, at their addresses set forth below: If to Borrower: International Food and Beverage, Inc. ------------------------------------------------------ 30152 Aventura ------------------------------------------------------ Rancho Santa Margarita, CA 92688 ------------------------------------------------------ Attn: Michael W. Hogarty ------------------------------------------------- If to Fremont: FREMONT BUSINESS CREDIT A DIVISION OF FREMONT FINANCIAL CORPORATION 2020 Santa Monica Boulevard, Suite 500 Santa Monica, California 90404-2023 Attn: Division Credit Manager The parties hereto may change the address at which they are to receive notices hereunder by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this SECTION 12, other than notices by Fremont in connection with Sections 9504 and 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) calendar days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by Fremont in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or otherwise sent by Fremont in accordance with the delivery methods set forth above. 13. DESTRUCTION OF BORROWER'S DOCUMENTS All documents, schedules, invoices, agings or other papers delivered to Fremont may be destroyed or otherwise disposed of by Fremont four (4) months after they are delivered to or received by Fremont unless Borrower requests, in writing, the return of said documents, schedules, invoices, agings or other papers and makes arrangements, at Borrower's expense, for their return. 14. GENERAL PROVISIONS 14.1 EFFECTIVENESS. This Agreement and the other Loan Documents shall be binding and deemed effective when executed by Borrower and Fremont. 14.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; PROVIDED, HOWEVER, that Borrower may not assign this Agreement or any rights hereunder without Fremont's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Fremont shall release Borrower from its Obligations. Fremont may assign this Agreement and its rights and duties hereunder. Fremont reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in Fremont's rights and benefits hereunder. In connection therewith, Fremont may disclose all documents and information which Fremont now or hereafter may have relating to Borrower or Borrower's business. Borrower expressly consents to the assignment by Fremont to its wholly owned subsidiary, Fremont Funding Inc., of certain of Fremont's rights hereunder and under the other Loan Documents, including the beneficial interest in loans made by Fremont, and the subsequent assignment by Fremont Funding Inc. to the Fremont Small Business Loan Master Trust of such rights. 15 14.3 SECTION HEADINGS. Headings and numbers have been set forth, herein for convenience only. Unless the contrary is compelled by the context, everything contained in each paragraph applies equally to this entire Agreement. 14.4 INTERPRETATION. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Fremont or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 14.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 14.6 AMENDMENTS IN WRITING. Neither this Agreement nor any provision hereof shall be amended, modified waived, or terminated orally or by course of conduct or pattern of dealing, but only by a written agreement signed by an authorized officer of Fremont. Any purported amendment, modification, waiver or termination of this Agreement or any provision hereof that is not in writing and signed by an authorized officer of Fremont shall be void and of no effect. 14.7 INTEGRATION. This Agreement, together with the other Loan Documents, reflects the entire agreement between the parties with respect to the subject matter hereof. This Agreement, together with the other Loan Documents, supersedes all prior agreements, understandings and negotiations, if any, which, are merged into this Agreement and the other Loan Documents. 14.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts each of which, when executed and delivered, shall be deemed to be an original and all of which, when taken together, shall constitute but one and the same Agreement. 14.9 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to Fremont of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences and other voidable or recoverable payments of money or transfers of property (a VOIDABLE TRANSFER), and if Fremont is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer. or the amount thereof that Fremont is required or elects to repay or restore, and as to all reasonable costs, expenses and attorneys fees of Fremont related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated and restored and shall exist as though such Voidable Transfer had never been made. 14.10 CONSULTATION WITH COUNSEL. Borrower and Fremont acknowledge that they have been given the opportunity to consult with counsel and other advisors of their choice prior to entering into this Agreement. 14.11 LIMITATION OF LIABILITY. No claim may be made by Borrower or any other Person against Fremont or the officers directors, employees or agents of Fremont for any special, indirect, punitive or consequential damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith, and Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages. 14.12 TELEFACSIMILE EXECUTION. Delivery of an executed counterpart of this Agreement or any other Loan Document by telefacsimile transmission shall be equally as effective as delivery of an executed hard copy of the same. Any party delivering an executed counterpart of this Agreement or any other Loan Document by telefacsimile transmission shall also deliver an executed hard copy of the same, but the failure by such party to deliver an executed hard copy shall not affect the validity, enforceability and binding effect of this Agreement or such other Loan Document. 14.13 FINANCE LENDER LICENSE. Fremont is licensed as a Finance Lender by the California Department of Corporations file number 603 2362. [Remainder of Page Left Blank Intentionally] 16 15. CHOICE OF LAW AND VENUE THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED SHALL GOVERN WITH RESPECT TO (A) THE CREATION OF LIENS ON COLLATERAL LOCATED IN SUCH STATE AND (B) THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF FREMONT'S LIENS UPON ANY PORTION OF THE COLLATERAL LOCATED IN SUCH STATE AND THE ENFORCEMENT IN SUCH STATE OF FREMONT'S OTHER REMEDIES WITH RESPECT TO THE COLLATERAL LOCATED IN SUCH STATE. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF LOS ANGELES STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF FREMONT, IN ANY OTHER COURT IN WHICH FREMONT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY THE PARTIES EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND THE PARTIES HEREBY WAIVE ANY OBJECTION WHICH EITHER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION AVID HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE, BORROWER AVID FREMONT EACH WAIVES TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 15. 16. WAIVER OF JURY TRIAL BORROWER AND FREMONT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARlSING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND FREMONT REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed at Fremont's place of business Santa Monica, California. BORROWER: INTERNATIONAL FOOD AND BEVERAGE, INC. ------------------------------------------- a Delaware corporation ----------------- Signed By: /s/ Michael W. Hogarty ---------------------------------- Print Name: Michael W. Hogarty ---------------------------------- Title/Capacity: President ------------------------------ FREMONT BUSINESS CREDIT, A DIVISION OF FREMONT FINANCIAL CORPORATION, a California corporation Signed By: /s/ Jeffrey Lizar ---------------------------------- Print Name: Jeffrey Lizar ---------------------------------- Title/Capacity: Vice President ------------------------------ 17 CONDITIONS PRECEDENT RIDER TO LOAN AND SECURITY AGREEMENT BETWEEN FREMONT BUSINESS CREDIT A DIVISION OF FREMONT FINANCIAL CORPORATION AND INTERNATIONAL FOOD AND BEVERAGE, INC. This CONDITIONS PRECEDENT RIDER TO LOAN AND SECURITY AGREEMENT (hereinafter referred to as this "Rider") dated this 15th day of March, 1996, is hereby made a part of and incorporated into that certain Loan and Security Agreement (hereinafter referred to, together with all supplements and riders thereto and amendments thereof, as the "Loan Agreement") dated the date hereof between FREMONT BUSINESS CREDIT, A DIVISION OF FREMONT FINANCIAL CORPORATION, a California-corporation (hereinafter referred to as "Fremont"), and International Food and Beverage. Inc., a Delaware corporation (hereinafter referred to as "Borrower"). 1. All capitalized terms contained in this Rider, unless otherwise defined herein, shall have the meanings ascribed to such terms in the Loan Agreement. 2. As used herein, the term "Guarantor" shall refer to Michael W. Hogarty. 3. As conditions precedent to the making of any of the loans described in the Loan Documents, each of the following conditions shall be satisfied to the satisfaction of Fremont and its counsel unless waived by Fremont in writing: a. No Event of Default shall exist; b. Borrower shall have executed and delivered, or caused to be executed and delivered, each of the Loan Documents and all other instruments, documents, agreements, waivers, financing statements, assignments, and subordination agreements as in the opinion of Fremont may be necessary to give effect to the Loan Agreement, the transactions contemplated thereby or the perfection of Fremont's security interest in the Collateral; c. Guarantor shall have executed and delivered, or caused to be executed and delivered, a Continuing Guaranty, in form and substance acceptable to Fremont, and all other instruments, documents, agreements, waivers, financing statements, deeds of trust and subordination agreements as in the opinion of Fremont may be necessary to give effect to such Continuing Guaranty, the transactions contemplated thereby; d. Borrower shall have executed, and Fremont shall have filed, all financing statements deemed necessary or desirable to Fremont to perfect Fremont's security 1 interest in the Collateral, and Fremont shall have received assurances satisfactory to it that such security interests are duly perfected, first priority security interests; e. Borrower shall have delivered to Fremont evidence satisfactory to Fremont that the Collateral has been insured in such amounts as may be acceptable to Fremont, in its sole discretion, and in compliance with the provisions of the Loan Agreement and that Fremont has been named as lender loss payee on endorsements, in form and substance satisfactory to Fremont, issued in conjunction with all such policies of insurance; f. Borrower shall have caused to be delivered to Fremont a copy of its Articles of Incorporation certified by the Secretary of State of California together with a Good Standing Certificate for Borrower issued by the Secretary of State of California, each of which to be issued within sixty (60) days prior to the date of the Loan Agreement; g. Since January 1, 1996, there shall not have occurred any material adverse change in the business, financial condition or results of operations of Borrower or the existence or value of any of the Collateral; h. Fremont and Michael W. Hogarty shall have entered into a Subordination and Standby Agreement, in form and substance satisfactory to Fremont; and i. Fremont shall have received from Borrower's landlord(s) a duly executed Subordination and Consent of Real Property Owner, in form and substance satisfactory to Fremont, with respect to each leased property where Borrower stores Inventory or Equipment. j. At the time of initial funding under the Loan Documents, there shall be borrowing availability under Section 2.1 of the Loan Agreement to provide sufficient funding to pay (a) the amount of Borrower's indebtedness to the Existing Secured Lenders PLUS (b) the Loan Origination Fee of $5,000.00 described in Section 2.9 of the Loan Agreement, PLUS (c) the Documentation Fee of $1,000 described in Section 2.11 of the Loan Agreement. 4. Borrower's failure to fulfill, or cause to be fulfilled, each of the foregoing conditions precedent to the satisfaction of Fremont on or before March 31, 1996 shall relieve Fremont of any obligation to consummate the transactions contemplated by the Loan Documents. 5. The terms and conditions of this Rider are incorporated in and made a part of the Loan Agreement. 2 IN WITNESS WHEREOF, this Rider has been executed by the parties hereto as of the date first written above. INTERNATIONAL FOOD AND BEVERAGE, INC. a Delaware corporation Signed By: /s/ Michael W. Hogarty ----------------------------- Print Name: Michael W. Hogarty Title/Capacity: President FREMONT BUSINESS CREDIT, A DIVISION OF FREMONT FINANCIAL CORPORATION, a California corporation Signed By: /s/ Jeffrey Lizar ----------------------------- Print Name: Jeffrey Lizar Title/Capacity: Vice President 3 SUBORDINATION AND STANDBY AGREEMENT BY AND BETWEEN FREMONT BUSINESS CREDIT A DIVISION OF FREMONT FINANCIAL CORPORATION AND MICHAEL W. HOGARTY RELATING TO INTERNATIONAL FOOD AND BEVERAGE, INC. This Agreement, dated as of March 15, 1996, is by and between FREMONT BUSINESS CREDIT, A DIVISION OF FREMONT FINANCIAL CORPORATION, a California corporation ("Fremont"), and Michael W. Hogarty, an Individual ("Creditor"). 1. BACKGROUND. (a) International Food and Beverage, Inc. a Delaware corporation ("Borrower"), is currently or is about to become indebted to Creditor in the principal amount of Four hundred fifty-five thousand Dollars ($455,000.00). The indebtedness evidenced thereby is secured by a security interest in Borrower's "Collateral" (defined below). (b) Borrower has asked Fremont to make loans to Borrower, part of which shall be on a revolving basis. Borrower's obligations and indebtedness to Fremont are or are to be secured in part by a security interest in the "Collateral." Fremont is unwilling to make or continue to make such loans unless Creditor executes this Agreement. (c) Therefore, in consideration of the foregoing and the covenants set forth below, the parties hereto have signed this Agreement to establish the relative priorities of their respective security interests in the Collateral and to memorialize certain other agreements with respect to the enforcement of their respective rights and remedies against the Borrower. 2. DEFINITIONS. For purposes of this Agreement: (a) "Fremont's Debt" means all obligations, liabilities and indebtedness from time to time owing by Borrower to Fremont under Fremont's Documents or otherwise. (b) "Fremont's Documents" means any and all agreements, instruments and documents, together with any amendments thereto or replacements thereof, evidencing or securing a financing arrangement or arrangements between Fremont and the Borrower, including without limitation the Loan and Security Agreement between Borrower and Fremont. (c) "Collateral" means any existing or hereafter acquired personal property of the Borrower, whether tangible or intangible, including without limitation accounts, inventory, general intangibles and equipment, together with all proceeds of the foregoing. Collateral also includes the personal guaranties executed on behalf of Borrower and delivered by Guarantor(s) to Creditor and Fremont, respectively. (d) "Creditor's Debt" means all obligations, liabilities and indebtedness from time to time owing by Borrower to Creditor under Creditor's Documents or otherwise. 1 (e) "Creditor's Documents" means any and all agreements, instruments and documents, together with any amendments thereto or replacements thereof, now or hereafter evidencing or securing a financing arrangement or arrangements between Creditor and Borrower. (f) "Debt" means either Creditor's Debt or Fremont's Debt, as appropriate. (g) "Documents" means either Creditor's Documents or Fremont's Documents, as appropriate. Except as defined in this Agreement, all terms used in this Agreement shall have the meanings provided in the Uniform Commercial Code. 3. SUBORDINATION; STANDBY. (a) Creditor agrees to subordinate, and does hereby subordinate, any security interests or liens it now or hereafter has in or upon the Collateral under Creditor's Documents or otherwise to any security interests in or liens upon the Collateral which Fremont now or hereafter has under Fremont's Documents or otherwise. Such subordination shall be effective regardless of whether the security interests and liens of Fremont are valid, enforceable and/or perfected. Creditor further agrees to subordinate and does hereby subordinate payment by the Borrower of all or any part of Creditor's Debt to Fremont on Fremont's Debt. (b) Regardless of whether a default exists under Creditor's Documents, Creditor shall not, without the prior written consent of Fremont, (i) demand payment of, sue for or receive all or any part of Creditor's Debt, by setoff or otherwise, or (ii) take any action to enforce its security interests in or liens on, or exercise any other rights with respect to, the Collateral or Creditor's Documents until all of the financing arrangements between Fremont and Borrower have been terminated and all of Fremont's Debt has been fully paid and satisfied; PROVIDED, that so long as Fremont has not notified Creditor of the existence of any Event of Default, Creditor may receive regularly scheduled payments of accrued interest from Borrower (but no prepayments) at a Rate not to exceed ten and one-quarter percent (10.25%) per annum. (c) Upon a distribution of the assets or readjustment of the indebtedness of Borrower by reason of liquidation, composition, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action or proceeding involving the readjustment of all or any of the debts of Borrower, or the application of the assets of Borrower to the payment or liquidation thereof, Creditor acknowledges that the payment and satisfaction of Fremont's Debt shall have priority over the payment and satisfaction of Creditor's Debt. Fremont is irrevocably authorized and empowered to receive and collect any and all dividends, payments and distributions made on account of any proof of claim relating to Creditor's Debt in whatever form the same may be paid or issued until Fremont's Debt is paid or satisfied. Creditor agrees that if Creditor does not file a proof of claim, Fremont may do so on behalf of Creditor. If Creditor does file a proof of claim in respect of Creditor's Debt, Creditor shall execute and deliver to Fremont such assignments or other instruments as Fremont may require to enable Fremont to collect all dividends, payments and distributions which may be made at any time on account of Creditor's Debt until Fremont's Debt is fully paid and satisfied. (d) Except with respect to Permitted Payments, should any payment, distribution, security or instrument, or any proceeds thereof, be received by Creditor upon or with respect to Creditor's Debt prior to the satisfaction of all of Fremont's Debt and termination of all financing arrangements between Borrower and Fremont, Creditor shall receive and hold the same in trust, as trustee, for the benefit of Fremont and shall forthwith deliver the same to Fremont in precisely the form received (except for the endorsement or assignment by Creditor where necessary), for application on any of Fremont's Debt, due or not due, and, until so delivered, the same shall be held in trust by Creditor as the property of Fremont. In the event of the failure of Creditor to make any such 2 endorsement or assignment to Fremont, Fremont, or any of its officers or employees, is hereby irrevocably authorized to make the same. 4. NO ASSIGNMENT. Each of Fremont and Creditor represents, warrants and covenants to the other that it has not subordinated, assigned or transferred, and agrees that it will not subordinate, assign or transfer at any time this Agreement remains in effect, any right, claim or interest of any kind in or to its Debt unless such subordination, assignment or transfer is made subject to this Agreement. 5. LIMITATION ON CREDITOR'S COLLATERAL. Creditor agrees that until Fremont's debt has been fully paid and satisfied and the financing agreements between Borrower and Fremont have been terminated, Creditor will not obtain any liens or security interests in any Collateral other than the Collateral in which Creditor currently has an interest, whether to secure Creditor's debt now or hereafter owing. 6. INSTRUMENT LEGEND: AMENDMENTS. Any of Creditor's Documents now or hereafter evidencing any of the Creditor Debt, or any portion thereof, will be inscribed with a legend conspicuously indicating that payment thereof is subordinated to the claims of Lender pursuant to the terms of this Agreement, and copies thereof will be promptly delivered to Lender. 7. AMENDMENTS TO DOCUMENTS; WAIVERS. Creditor agrees that Fremont may at any time or times, in its discretion, (i) renew or extend the time of payment of Fremont's Debt, (ii) waive or release any Collateral or guaranties which may be held therefor, or (iii) modify or amend Fremont's Documents or Debt without further consent from Creditor or any other party, and without impairing or affecting this Agreement or any of Fremont's rights hereunder. Creditor further agrees that Creditor's Documents may not be modified or amended without Fremont's prior written consent. Creditor further agrees that Fremont shall be entitled to manage and supervise its financial arrangements with Borrower in accordance with its usual practices, modified from time to time as it deems appropriate under the circumstances, without affecting the validity or enforceability of this Agreement and without regard to the existence of any rights that Creditor may now or hereafter have in or to any of the assets of Borrower, and Fremont shall have no liability to Creditor for, and Creditor waives any claim which it may now or hereafter have against Fremont arising out of any and all actions which Fremont, in good faith, takes or omits to take (including, without limitation, actions with respect to the creation, perfection or continuation of liens or security interests in any existing or future Collateral, actions with respect to the occurrence of an Event of Default, actions with respect to the foreclosure upon, sale, release or depreciation of, or failure to realize upon any of the Collateral and actions with respect to the collection of any claim for all or any part of Fremont's Debt from any account debtor, guarantor or any other party) with respect to Fremont's Documents or to the collection of Fremont's Debt or the valuation, use, protection or release of Fremont's Collateral. 8. MARSHALING; APPLICATION OF PAYMENTS. Creditor hereby waives any rights Creditor has or may have in the future to require Fremont to marshal its Collateral, and agrees that Fremont may proceed against its Collateral in any order that it deems appropriate in the exercise of its absolute discretion. 9. BANKRUPTCY FINANCING ISSUES. If Borrower shall become subject to a proceeding under the Bankruptcy Code and if Fremont shall desire to permit the use of Collateral or to provide financing to Borrower under either Section 363 or Section 364 of the Bankruptcy Code, Creditor agrees as follows: (i) adequate notice to Creditor shall have been provided for such financing if Creditor receives notice one (1) business day prior to the entry of the order approving such financing; and (ii) no objection will be raised by Creditor to any such financing on the ground of a failure to provide adequate protection for Creditor's lien position in the Collateral. For purposes of this paragraph, notice of a proposed financing or use of cash Collateral shall be deemed given upon the giving of notice by telegram, telecopy or hand-delivery to Creditor, at the address and location indicated in Paragraph 11. This Subordination Agreement shall be applicable both before and after the filing of any petition by or against Borrower under the Bankruptcy Code and all references herein to Borrower shall be deemed to 3 apply to a trustee for Borrower and to Borrower as debtor-in-possession. 10. REPRESENTATIONS CONCERNING THE BORROWER. Neither Fremont, nor any of its directors, officers, agents or employees, shall be responsible to Creditor for (i) Borrower's solvency, financial condition, or ability to repay Creditor's Debt, (ii) any oral or written statements of Borrower, or (iii) the validity, sufficiency or enforceability of such Debt, any Documents or the security interests and liens granted by Borrower to Fremont. Creditor has entered into its Documents and financing arrangements with Borrower based upon its own independent investigation, and has not relied on any warranty or representation of Fremont with respect to the matters referred to in this paragraph. 11. MISCELLANEOUS. (a) This Agreement shall be irrevocable and shall continue effective until Fremont's Debt has been paid in full and the financing agreements between Borrower and Fremont have been terminated. (b) Either party's failure to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any other time and from time to time thereafter, and such rights shall be cumulative and not exclusive. (c) The knowledge by either party of any breach or other non- observance by the other party of the terms of this Agreement shall not constitute a waiver thereof or of any obligations to be performed by the other party hereunder. (d) Paragraph headings used herein are for convenience only, and shall not affect the meaning of any provision of this Agreement. (e) All notices or consents required under the terms and provisions of this Agreement shall be in writing and sent to the following addresses: If to Creditor: Michael W. Hogarty 47 Coronado Pointe Laguna Niguel, CA 92677 If to Fremont: FREMONT BUSINESS CREDIT 2020 Santa Monica Boulevard, Suite 500 Santa Monica, California 90404 Attention: Division Credit Officer Notices shall be deemed to have been duly given (i) if delivered personally or otherwise actually received, or (ii) if sent by overnight delivery service. Notice given in any manner described in this paragraph shall be effective upon receipt by the addressee thereof; provided, however, that if any notice is tendered to an addressee and delivery thereof is refused by such addressee, such notice shall be effective upon such tender. (f) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. (g) The prevailing party in any litigation arising out of or relating to this Agreement shall be entitled to its attorneys' fees and costs. 4 (h) THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF FREMONT, IN ANY OTHER COURT IN WHICH FREMONT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. CREDITOR AND FREMONT EACH WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE RIGHT TO A TRIAL BY JURY AND ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first written above. CREDITOR: Michael W. Hogarty FREMONT BUSINESS CREDIT, - ----------------------------------- A DIVISION OF FREMONT FINANCIAL CORPORATION Signed By: /s/ Michael W. Hogarty Signed By: /s/ Jeffrey Lizar ------------------------- ------------------------- Print Name: Michael W. Hogarty Print Name: Jeffrey Lizar Title/Capacity: Individual Title/Capacity: Vice President ACKNOWLEDGMENT BY BORROWER The undersigned, the Borrower in the foregoing Subordination and Standby Agreement (the "Agreement"), hereby acknowledges that it has received a copy of the Agreement and consents thereto, and agrees to recognize all priorities and other rights granted therein to the parties thereto, and Borrower will not do any act or perform any obligation which is not in accordance with the priorities and agreements set forth in the Agreement. BORROWER: International Food and Beverage, Inc. - -------------------------------------- Signed By: /s/ Michael W. Hogarty ---------------------------- Print Name: Michael W. Hogarty Title/Capacity: President Dated: March 15,1996 5 CONTINUING GUARANTY (Individual) To induce Fremont Business Credit, a division of Fremont Financial Corporation, a California corporation (FREMONT), to grant credit to International Food and Beverage, Inc. a Delaware corporation (BORROWER), and in consideration thereof and of any loans, advances, or other financial accommodations heretofore or hereafter granted by Fremont to or for the account of Borrower, the undersigned Michael W, Hogarty (hereinafter called GUARANTOR) unconditionally Guaranties the full and prompt payment and performance by Borrower of all of Borrower's Indebtedness (as hereinafter defined) and obligations to Freemont whether now existing or hereafter arising from time to time, and promise to pay to Fremont, or order, on demand, in lawful money of the United States, all of Borrower's Indebtedness to Fremont, and all costs and expenses, including attorneys fees and legal expenses, paid or incurred by Fremont in endeavoring to collect the Indebtedness, or any part thereof, and in enforcing this Continuing Guaranty. 1. DEFINITIONS. The word INDEBTEDNESS is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrower (including any interest which, but for the application of the provisions of the U,S, Bankruptcy Code, would have accrued on such amounts), heretofore, now or hereafter made, incurred, created, or arising, whether direct or indirect, absolute or contingent voluntary or involuntary, due or to become due, liquidated or unliquidated, determined or undetermined, secured or unsecured, however created, arising, or evidenced, whether Borrower may be liable thereon individually or jointly with others, and whether Borrower or any other party or person has any right or power to assert any claim or defense to the validity or enforceability of the Indebtedness. 2. TERMINATION. This Continuing Guaranty; is continuing, unlimited. absolute, and unconditional. This Continuing Guaranty may be terminated by Guarantor only by an express, written notice to Fremont of termination, and no notice as termination shall be effective until it is actually received by Fremont. No notice of termination shall affect or impair the obligations of Guarantor with respect to any Indebtedness existing on the date Fremont receives such notice, any interest thereon, or any expenses paid or incurred by Fremont in endeavoring to collect the Indebtedness or any part thereof, or in enforcing this Continuing Guaranty. No notice of termination by Guarantor shall affect or impair the obligations of any other guarantor of the Indebtedness. No payment by Guarantor shall reduce the Guarantor's obligations hereunder unless written notice to that effect is received by Fremont at or prior to Fremont's receipt of such payment. 3. OBLIGATIONS. Guarantor's obligations hereunder are independent of the obligations of Borrower. Guarantor waives the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement hereof. See attached page 1(a) incorporated herein by this reference. 4. INDEMNITY. Guarantor agrees to indemnify and hold Fremont harmless from and against all claims, actions, causes of action demands, obligations, liabilities, losses, costs, and expenses in connection with, on account of, or in any way relating to or arising from Fremont's transactions with Borrower; PROVIDED that the foregoing indemnification shall not extend to liabilities, damages, losses, obligations judgments and expenses arising from the gross negligence or willful misconduct of Fremont. 5. CONTINUATION OF TERMS. This Continuing Guaranty shall not be affected or impaired by any modifications, supplements, extensions or amendments of any contract or agreement to which the parties thereto may hereafter agree, nor by any modifications, releases or other alterations of any of the Indebtedness hereby guarantied or of any security therefor, nor by any agreements or arrangements whatever with Borrower or anyone else. 6. AUTHORIZATION. Guarantor authorizes Fremont, without notice or demand and without affecting Guarantor's liability hereunder, from time to time and any number of times, to take any or all of the following actions: (a) renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Continuing Guaranty or the Indebtedness, and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as Fremont in its discretion may determine; (d) release or substitute any other guarantors, sureties, or endorsers of the Indebtedness; and (e) assign, without notice, this Continuing Guaranty in whole or in part, or Fremont's rights hereunder, to anyone at any time. 1 3. OBLIGATIONS (CONTINUED). In the event an Insolvency Proceeding has been filed by or against Borrower and such proceeding is continuing or if Fremont determines, in its sole discretion, that an Event of Default has occurred under Section 8.4 of the Loan and Security Agreement between Borrower and Fremont, a separate action or actions may be brought and prosecuted against Guarantor, irrespective of whether Borrower is joined in any such action or actions. In any circumstance in which none of the facts described in the previous sentence have occurred, Fremont agrees that any action or actions against Guarantor under this Continuing Guaranty shall be brought and prosecuted concurrently with or subsequent to any action or actions against Borrower. 1(a) 7. WAIVERS. Guarantor waives all rights and defenses arising out of an election of remedies by Fremont, even though that election of remedies, such as nonjudicial foreclosure with respect to security for the Indebtedness guarantied hereunder, has destroyed Guarantor's rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the California Code of Civil Procedure or otherwise. Guarantor waives any right of subrogation, contribution, indemnity or reimbursement that Guarantor has or may have against Borrower with respect to the Indebtedness guarantied hereunder until such time as the Indebtedness guarantied hereunder has been indefeasibly paid in full. Guarantor waives any right to require Fremont to (a) proceed against Borrower; (b) proceed against or exhaust any security held from Borrower; or (C) pursue any other remedy in Fremont's power whatsoever. Guarantor waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower. Guarantor agrees that nothing shall discharge or satisfy the liability of Guarantor hereunder except the full and indefeasible payment and performance of all of Borrower's Indebtedness and obligations to Fremont with interest. Borrower's Indebtedness and obligations shall not be considered indefeasibly paid until all payments to Fremont are no longer subject to any right, by any person, to invalidate or set aside such payments or to seek to recoup the amount of such payments or to declare such payments to be fraudulent or preferential. In the event any portion of any such payments shall be set aside or restored, then Guarantor shall be liable for the full amount Fremont is required to repay, plus any costs and expenses (including attorneys fees) paid by Fremont in connection therewith. Any and all present and future debts and obligations of Borrower to Guarantor are hereby postponed in favor of and subordinated to the full payment and performance of all Indebtedness of Borrower to Fremont.(1) All monies or other property of Guarantor at any time in Fremont's possession may be held by Fremont as security for any and all obligations of Guarantor to Fremont however and whenever arising, whether absolute or contingent, whether due or to become due and whether under this Continuing Guaranty or otherwise. Guarantor also agrees that Fremont's books and records showing the account between Fremont and Borrower shall be admissible in any action or proceeding and shall be binding upon Guarantor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. Guarantor waives all presentments, demands for performance, notices of non-performance, protests, notices of protest, notices of dishonor, notices of default, notices of acceptance of this Continuing Guaranty and of the existence, creation or incurrence of new or additional indebtedness, notice of any and all favorable and unfavorable information, financial or other, about Borrower, heretofore, now or hereafter learned or acquired by Fremont and all other notices to which Guarantor might otherwise be entitled. 8. MAINTENANCE OF INFORMATION. Guarantor hereby represents to Fremont that Guarantor is and will remain informed of the financial condition of Borrower and of all other circumstances which bear upon the risk of non-payment of Borrower's Indebtedness and any other obligations of Borrower guarantied hereby. Guarantor agrees that Fremont is not obligated to inform Guarantor of any such circumstances, whether now existing or hereafter arising, and that Fremont is not required to inquire into the powers of Borrower or the officers, directors, partners or agents acting or purporting to act on its behalf, and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guarantied hereunder. 9. ATTORNEYS FEES. Guarantor agrees to pay reasonable attorneys fees (including the allocated costs of Fremont's in-house counsel) and all other costs and expenses which may be incurred by Fremont in the enforcement of this Continuing Guaranty or any claim hereunder or under any other instrument or guaranty. 10. AMENDMENTS IN WRITING. No termination or modification of this Continuing Guaranty shall be effective for any purpose unless it is in writing and executed by an officer of Fremont authorized to do so. 11. DEMAND PAYMENT. Guarantor agrees that upon the occurrence of an EVENT OF DEFAULT (as defined in the Loan and Security Agreement between Borrower and Fremont), Guarantor, immediately following a demand for payment from Fremont, shall pay Fremont the full amount of the Indebtedness guarantied hereunder. 12. SUCCESSORS AND ASSIGNS. The death of Guarantor shall not terminate this Continuing Guaranty. This Continuing Guaranty shall be binding upon the heirs, executors, administrators, trustees, beneficiaries, successors and assigns of Guarantor and shall inure to the benefit of Fremont, its successors and assigns, including without limitation Fremont Funding Inc. and LaSalle National Bank (or any successor thereto), as trustee of the Fremont Small Business Loan Master Trust. 13. SECURITY. This Continuing Guaranty is secured by: N/A (1) , with the exception of interest payable as permitted in the Subordination and Standby Agreement by and between Fremont and Guarantor along with reasonable expenses and salary generated in the ordinary course of Borrower's business. 2 14. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS CONTINUING GUARANTY, ITS CONSTRUCTION INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS CONTINUING GUARANTY SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA. THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FREMONT, IN ANY OTHER COURT IN WHICH FREMONT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. THE PARTIES EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND THE PARTIES HEREBY WAIVE ANY OBJECTION WHICH EITHER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION AND HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE, BORROWER AND FREMONT EACH WAIVES TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 14. 15. WAIVER OF JURY TRIAL. GUARANTOR HEREBY WAIVES GUARANTOR'S RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS CONTINUING GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. GUARANTOR REPRESENTS THAT GUARANTOR HAS REVIEWED THIS WAIVER AND KNOWINGLY AND VOLUNTARILY WAIVES GUARANTOR'S JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL IN THE EVENT OF LITIGATION, A COPY OF THIS CONTINUING GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Continuing Guaranty this 15th day of March, 1996. WITNESS: GUARANTOR: Signed By: /s/ Jeffrey Lizar Signed By: /s/ Michael W. Hogarty ------------------------- ------------------------------ Print Name: Jeffrey Lizar Print Name: Michael W. Hogarty 47 Coronado Pointe ---------------------------------------- Home Address Laguna Niguel, CA 92677 ---------------------------------------- City/State/Zip 3 [ COMPLETE THE APPROPRIATE NOTARIAL CERTIFICATES IF SIGNER(S) CANNOT APPEAR BEFORE FREMONT] CONTINUING GUARANTY DATED ---------------------- ACKNOWLEDGMENT BY GUARANTOR(S) BEFORE NOTARY PUBLIC STATE OF CALIFORNIA ) ) ss. COUNTY OF_______________________ ) On _____________________, 19____, before me, ______________________________ personally appeared _________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature: ------------------------------------ My Commission Expires: (Seal) ------------------------- Address: --------------------------------------- City/State/Zip: -------------------------------- 4 SECRETARY'S CERTIFICATE I, Ann M. Gooch do hereby certify that I am the duly elected an Secretary of International Food and Beverage,Inc., a Delaware corporation (the CORPORATION), that the following is a true and correct copy of the resolutions duly adopted by the Board of Directors of the Corporationon the 15th day of March, 1996, that the same have not in any way been modified or rescinded and are in full force and effect and that the resolutions have been adopted in accordance with the laws of the state of incorporation, the Certificate or Articles of Incorporation and the Bylaws of the Corporation, and that either no shareholder consent is required or any necessary shareholder consent has been obtained: "RESOLVED, that any one or more of the officers of the Corporation referred to below be and hereby are authorized and empowered on behalf of the Corporation to transact any and all business with Fremont Business Credit, a division of Fremont Financial Corporation (FREMONT) which the Corporation could in any way transact and are further authorized to execute, acknowledge and deliver on behalf of the Corporation and in its name to Fremont the following (the AGREEMENTS): 1. A Loan and Security Agreement, together with riders, attachments and addenda thereto, and Secured Promissory Note(s) in favor of Fremont, each in form and content as such officer deems necessary and appropriate; 2. All security agreements, pledge agreements, financing statements, deeds of trust, mortgages, assignments and other instruments of conveyance in favor of Fremont to effect a grant of a security interest or lien in all or a portion of the Corporation's assets, including without limitation accounts, inventory, equipment, general intangibles and real property; and 3. All documents, instruments, agreements or certificates ancillary to the aforementioned loan and security documentation to the benefit of Fremont deemed necessary or appropriate to consummate the transactions with Fremont contemplated by the Corporation: "RESOLVED FURTHER, that the following are the true and correct names, signatures, and titles of the officers of the Corporation referred to above:
NAMES SIGNATURES TITLES Michael W. Hogarty /s/ Michael W. Hogarty President -------------------------------------------------------------------------------- Ann M. Gooch /s/ Ann M. Gooch Chief Financial Officer -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
"RESOLVED FURTHER, that each of the foregoing officers is hereby authorized to execute and deliver, for and on behalf of the Corporation, all such other documents, instruments and agreements and to do all such other acts and things as, in the opinion of such officer, may be necessary or appropriate in order to effectuate the intent and purpose of the foregoing resolutions and to consummate the transactions contemplated by and to be performed by the Corporation in connection with the Agreements; "RESOLVED FURTHER, that the acts of said officers, or any of them, shall at all times receive full faith and credit without the necessity of inquiry by Fremont as to any of the circumstances attending the same or to the application of any money loaned pursuant hereto, and that the acts and doings of said authorized officers or any of them, in respect to the subject matter hereof, are hereby fully ratified, approved, adopted and confirmed; and "RESOLVED FURTHER, that the authorizations herein set forth shall remain in full force and effect and shall apply to all amendments and modifications of the Agreements until written notice of the modification or revocation of such authorizations shall be delivered to and actually received by Fremont at its office." IN WITNESS WHEREOF, I have executed this Certificate as Secretary of the Corporation this 15th day March, of 1996. Signed By: /s/ Ann M. Gooch ------------------------------ Print Name: Ann M. Gooch Title/Capacity: Secretary [LETTERHEAD] March 15, 1996 Mr. Michael Hogarty, President International Food and Beverage, Inc. 30152 Aventura Rancho Santa Margarita, CA 92688 Re: Letter of Understanding Dear Mr. Hogarty: This letter of understanding is with respect to the proposed loan by and between Fremont Business Credit a division of Fremont Financial Corporation ("Fremont") and International Food and Beverage, Inc. ("IFB"). Fremont hereby acknowledges the existence of secured debt owed to various parties. A listing of such secured debt is listed below: SECURED PARTY COLLATERAL UCC FINANCING STATEMENT #/DATE - ------------- ---------- ------------------------------ Avco Leasing Equipment 92-193578 September 4, 1992 Liquid Carbonic Ind. Equipment 92-267254 December 16, 1992 Gene Beck Equipment 94-059084 April 4, 1994 AT&T Capital Equipment 94-119639 June 13, 1994 Michael Hogarty Blanket 9526860247 September 20, 1995 Secured debt listed above owed to Michael Hogarty shall be fully subordinated to Fremont through the proposed Subordination and Standby Agreement. Said agreement includes language restricting enforcement actions available to Mr. Hogarty in the event of default including a full and absolute standstill on actions to be taken against the collateral. Sincerely, /s/ Jeffrey Lizar - ---------------------------- Jeffrey Lizar Vice President IMPORTANT - READ INSTRUCTIONS ON BACK BEFORE FILLING OUT FORM This FINANCING STATEMENT is presented for filing pursuant to the California Uniform Commercial Code. - ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR (LAST NAME FIRST - IF AN INDIVIDUAL) 1A. SOCIAL SECURITY OR FEDERAL TAX NO. International Food and Beverage, Inc. 33-0307734 - ------------------------------------------------------------------------------------------------------------------------------------ 1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE 30152 Aventura Rancho Santa Margarita, CA 92688 - ------------------------------------------------------------------------------------------------------------------------------------ 2. ADDITIONAL DEBTOR (IF ANY) (LAST NAME FIRST - IF AN INDIVIDUAL) 2A. SOCIAL SECURITY OR FEDERAL TAX NO. - ------------------------------------------------------------------------------------------------------------------------------------ 2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE - ------------------------------------------------------------------------------------------------------------------------------------ 3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY) 3A. FEDERAL TAX NO Jukebox, Mama Mia Italiano, and Mama Mia Homestyle - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ 4. SECURED PARTY 4A. SOCIAL SECURITY NO. FEDERAL Fremont Business Credit TAX NO. OR BANK TRANSIT AND A.B.A. NO. NAME a division of Fremont Financial Corporation MAILING ADDRESS 2020 Santa Monica Blvd., Suite 500 94-1701707 CITY Santa Monica STATE CA ZIP 90404 - ------------------------------------------------------------------------------------------------------------------------------------ 5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO., FEDERAL TAX NO. OR BANK TRANSIT AND A.B.A. NO. NAME MAILING ADDRESS CITY STATE ZIP - ------------------------------------------------------------------------------------------------------------------------------------ 6. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which located owner of record when required by instruction 4). All now owned and hereafter acquired equipment, goods machinery, trade fixtures, furnishings, furniture, tools, machine tools, office equipment, appliances, parts, dies, yigs, and chattels of every kind, including without limitation any or all of the foregoing which are or are to become fixtures on the real property described in the attached Exhibit "A". The name of the record owner of said real property is: The Boldman Family 1990 Trust and the Branson G. and Sally Stillion Trust. This fixture filing is filed as a precaution and is not intended to imply that any of the items herein described is or is to become a fixture on said real property. This Financing Statement is filed as a fixture filing and is to be filed in the real estate records. - ------------------------------------------------------------------------------------------------------------------------------------ 7. CHECK /X/ 7A /X/ PRODUCTS OF COLLATERAL 7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN IF APPLICABLE ARE ALSO COVERED ACCORDANCE WITH INSTRUCTION 5(a) ITEM: / /(1) / /(2) / /(3) / /(4) - ------------------------------------------------------------------------------------------------------------------------------------ 8. CHECK /X/ / / DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH UCC Section 9105 (1) (n) IF APPLICABLE - ------------------------------------------------------------------------------------------------------------------------------------ 9. /s/ Michael W. Hogarty DATE: 3/15/96 C 10. THIS SPACE FOR USE OF SIGNATURE(S) OF DEBTOR(S) O FILING OFFICER (DATE, TIME, D FILE NUMBER AND FILING E OFFICER) - --------------------------------------------------------------------------------------------------- Michael W. Hogarty, President 1 International Food and Beverage, Inc. TYPE OR PRINT NAME(S) OF DEBTOR(S) 2 - ------------------------------------------------------------------------------------------ /s/ Jeffrey Lizar 3 SIGNATURE(S) OF SECURED PARTIES 4 - ------------------------------------------------------------------------------------------ Jeffrey Lizar, Vice President 5 Fremont Business Credit, a division of Fremont Financial Corporation 6 TYPE OR PRINT NAME(S) OF SECURED PARTIES - ------------------------------------------------------------------------------------------ 7 - ------------------------------------------------------------------------------------------ 11. RETURN COPY TO: 8 NAME Fremont Business Credit, 9 ADDRESS a division of Fremont Financial Corp CITY 2020 Santa Monica Blvd., Ste 500 0 STATE Santa Monica, CA 90404 ZIP Attn: Jeffrey Lizar - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ (1) FILING OFFICER COPY FORM UCC-1 -- FILING FEE $3.00 APPROVED BY THE SECRETARY OF STATE - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
EXHIBIT "A" The real property referred to herein is situated in the county of Orange, state of California, and is described as follows: Lot 1 of Tract 11324, in the city of Rancho Santa Margarita, state of California, in the office of the county recorder of said county. Assessors Parcel Number: 805-043-26 COMMONLY KNOWN AS: 30152 AVENTURA, RANCHO SANTA MARGARITA, CALIFORNIA INSTRUCTIONS (REV.1/76) 1. PLEASE TYPE THIS FORM USING BLACK TYPEWRITER RIBBON 2. If the space provided for any item is inadequate: a. Note "Cont'd." in the appropriate space(s). b. Continue the Item(s) preceded by the Item. No. on an additional 8 1/2"x 11" sheet. c. Head each additional sheet with the Debtor's name (last name first for individuals) appearing in Item No. 1 of this form. Be sure to attach a copy of the additional sheet to each copy of the form. 3. NUMERICAL IDENTIFICATION: a. If the Debtor, Secured Party or Assignee is an individual, include Social Security number in the appropriate space. Disclosure of Social Security number is optional for the filing of this statement, It will be used to assist in correctly identifying individuals with similar names. (UCC SECTION #9403 [5]). b. If the Debtor, Secured Party or Assignee is other than an individual or a bank, show Federal Taxpayer Number in the appropriate space. c. If the Secured Party or Assignee is a bank, show Transit and ABA number in the appropriate space. This must be the complete 10 digit number. 4. COLLATERAL Description-Item 6 a. If the financing statement covers crops growing or to be grown, the statement must also contain a description of the real estate concerned in accordance with UCC Section #9402 (1). b. If the financing statement covers timber to be cut or covers minerals or the like, oil or gas or accounts subject to UCC Section #9103 (5), the statement must show that it covers this type of collateral and the statement must also show it is to be recorded in the real estate records, and the financing statement must contain a description of the real estate sufficient if it were contained in a mortgage of the real estate to give constructive notice of the mortgage under the law of this State. If the debtor does not have an interest of record in the real estate, the financing statement must show the name of a record owner in Item No 6. 5. SIGNATURES: Before mailing, be sure that the financing statement has been properly signed. A financing statement requires the signature of the debtor only EXCEPT under the following circumstances. If any of these circumstances apply, check the appropriate box in Item 7B and enter required information in Item 6. a. Under the provisions of UCC Section #9402 (2) a financing statement is sufficient when it is signed by the SECURED PARTY alone if it is filed to perfect a security interest in: (1) collateral already subject to a security interest in another jurisdiction when it is brought into this State or where the debtor's location is changed to this State. Such a financing statement must state that the collateral was brought into this State or that the debtor's location was changed to this State. (2) proceeds under UCC Section #9306, if the security interest in the original collateral was perfected. Such a financing statement must describe the original collateral and give the date of filing and the file number of the prior financing statement. (3) collateral as to which the filing has lapsed. Such a financing statement must include a statement to the effect that the prior financing statement has lapsed and give the date of filing and the file number of the prior financing statement. (4) collateral acquired after a change of name, identity or corporate structure of the debtor. Such a financing statement must include a statement that the name, identity or corporate structure of the debtor has been changed and give the date of filing and the file number of the prior financing statement and the name of the debtor as shown in the prior financing statement. 6. FILING FEE-PROPER PLACE TO FILE: Enclose filing fee of three dollars ($3.00) payable to the appropriate Filing Officer. Financing statements and related papers pertaining to consumer goods should be filed with the County Recorder in the county of the debtor's residence, or if the debtor is not a resident of this State, then in the office of the County Recorder of the county in which the goods are kept. When the collateral is crops growing or to be grown, timber to be cut, or minerals or the like (including oil and gas), or accounts subject to Section UCC #9103 (5), then filing is with the County Recorder where the property is located. In all other cases, filing is with the Secretary of State. 7. REMOVE SECURED PARTY AND DEBTOR COPIES. Send the ORIGINAL AND FIRST COPY with interleaved carbon paper to the Filing Officer with the correct filing fee. The original will be retained by the Filing Officer. The copy will be returned with the filing date and time stamped thereon. INDICATE THE NAME AND MAILING ADDRESS OF THE PERSON OR FIRM TO WHOM THE COPY IS TO BE RETURNED IN ITEM NO. 11. [LETTERHEAD] MICHAEL W. HOGARTY President and Chief Executive Officer March 15, 1996 Fremont Business Credit a division of Fremont Financial Corporation 2020 Santa Monica Blvd., Suite 500 Santa Monica, CA 90404 RE: Direction to Disburse Ladies and Gentlemen: The undersigned has delivered to you a Loan and Security Agreement ("Agreement") and related agreements, instruments and documents evidencing a financing arrangement between you and the undersigned, all of even date herewith. The undersigned hereby authorizes you to charge our loan $5,000.00 for the loan fee as described in the Loan and Security Agreement. Very truly yours, INTERNATIONAL FOOD AND BEVERAGE, INC. /s/ Michael W. Hogarty ----------------------------- By: Michael W. Hogarty Title: President February 2, 1996 Michael W. Hogarty, President International Food & Beverage, Inc. 30152 Aventura Rancho Santa Margarita, CA 92688 Dear Mr. Hogarty: In response to your request for financing, Fremont Business Credit ("FBC") is pleased to propose establishing a lending relationship with International Food K Beverage, Inc. ("Borrower") as outlined below. PLEASE UNDERSTAND THAT THIS IS A PROPOSAL AND NOT A COMMITMENT TO LEND. Funding under this proposal is subject to a satisfactory audit of the Borrower's books, records and operations, legal approval by FBC counsel and credit approval by FBC's senior management. CREDIT FACILITIES FBC will provide total Credit Facilities of $500,000 as outlined below: 1. A $500,000 revolving line of credit based upon advances of up to 75% of eligible accounts receivable and up to 50% of eligible raw material inventory. A) Eligible receivables shall exclude accounts over 45 days from invoice date, contra accounts, foreign, government, employee or affiliate accounts, poor credit accounts, excessive concentration accounts, service or finance charges or other accounts which, in the sole discretion of FBC, do not constitute acceptable collateral. B) Eligible inventory, as determined in the sole discretion of FBC, shall consist of raw material inventory valued on a FIFO basis at the lower of cost or market. Advances against inventory shall be limited to a maximum cash advance of $100,000. INTERNATIONAL FOOD & BEVERAGE, INC. JANUARY 22, 1996 PAGE 2 INTEREST RATES 1. Interest rates on the loans shall be six percent (6.0%) over the rate announced from time to time by the Bank of America as its "Reference Rate" and shall move on a daily basis with any changes in that rate. All interest will be computed on the basis of a 360 day year. Collections shall be credited to the loan on a daily basis, allowing Four (4) business days for collection of funds. 2. A minimum monthly charge will be in effect in the amount of $2,500 per month. If the actual monthly interest charge is less than the minimum monthly charge, $2,500 will be billed and collected in lieu of the computed interest amount. 3. FBC shall receive a facility fee of one percent (1.0%) of the credit facilities for providing the credit facilities outlined herein. This fee shall be in addition to the interest charges provided above and shall be payable at closing. 4. FBC shall receive a servicing fee of $250.00 per month. This fee shall be in addition to the interest charges provided above and shall be payable monthly. EXPENSES Borrower will reimburse all of FBC's costs and out-of-pocket expenses incurred in connection with the contemplated transaction including, but not limited to, audit fees ($1,500 per initial survey audit and $500.00 per audit thereafter) and expenses, search fees, appraisal fees, legal fees, etc., whether or not the transaction between us closes. Such expenses shall be paid to us upon demand, together with such advance funds on account of such as we may, from time to time, reasonably request. Expenses will not exceed $3,500 without prior written notice by FBC. TERM OF CONTRACT The credit facility shall be for one year. If the loans are paid off prior to the due date, the Early Termination Fee will be five percent (5.0%) of the credit facilities. The Early Termination Fee would not apply if Borrower gives proper written notice at least sixty (60) days prior to the contract termination date or any anniversary thereof, and the Credit Facility is paid off on the termination or anniversary date as notified. INTERNATIONAL FOOD & BEVERAGE, INC. JANUARY 22, 1996 PAGE 3 OTHER TERMS AND CONDITIONS 1. FBC loans will be fully secured by valid first and only liens (subject to secured amounts owed to Michael W. Hogarty) on all accounts receivable, inventory, general intangibles, patents, trademarks, machinery and equipment (except for a first lien on equipment by Gene Beck) and other related collateral. 2. Notes payable to Michael W. Hogarty in an amount not less than $390,000 shall be subordinated to FFC allowing for payments of interest accruing at a rate not to exceed 10.25%. An Intercreditor Agreement in form and content acceptable to FBC will be executed between Michael W. Hogarty and FBC. Said Intercreditor Agreement will include language restricting enforcement actions available to the Creditor in the event of default including a full and absolute standstill on actions to be taken against the collateral. 3. The Credit Facilities shall be personally guaranteed by Mr. Michael W. Hogarty. 4. Landlord Waivers and/or Mortgagee Waivers acceptable to FBC will be obtained for any premises where Borrower's collateral is located. 5. A lockbox/collateral proceeds account will be required in a form, and with a bank, acceptable to FBC. 6. At the time of closing, after considering anticipated advances for the repayment of prior secured lenders, closing fees, past due trade payables and other past due obligations, Borrower shall have a minimum unused borrowing availability from FBC of $10,000. 7. Borrower will continue to furnish FBC with all financial statements, projections, cash flows and other financial and collateral information as FBC reasonably requests. 8. Borrower shall execute, or cause to be executed, loan agreements, subordination agreements and such other legal agreements as are appropriate in the circumstances, including security agreements and loss payee endorsements on insurance policies acceptable to FBC covering the subject assets, all of which shall contain provisions, representations, covenants and events of default as are satisfactory to FBC and its counsel. INTERNATIONAL FOOD & BEVERAGE, INC. JANUARY 22, 1996 PAGE 4 DEPOSIT As evidence of our mutual good faith, and in consideration of FBC incurring certain expenses in the expectation of establishing a lender/borrower arrangement between us, FBC requests that you pay to us a deposit in the amount of $3,500 which will be: a. RETURNED TO YOU, less the cost of the audit, legal fees and any other out-of-pocket expenses directly related to the loan application and credit review, if our senior management does not approve the proposed financing. b. CREDITED TO YOUR ACCOUNT, less the aforementioned expenses if your credit is approved and funded; c. RETAINED BY US, if our senior management approves the proposed financing and you elect not to do business with us or if you withdraw your financing request during the credit approval process. d. RETAINED BY US, if, during the loan and credit review, FBC determines, in its sole discretion, that material disclosures were not made evident which would adversely affect the loan approval. e. RETAINED BY US, if, terms and conditions herein are not met. THIS PROPOSAL DOES NOT REPRESENT A COMMITMENT since it is subject to the satisfactory completion of our field audit, credit investigation and analysis and final approval by our counsel and senior management. This proposal letter cannot be relied upon by, nor is it intended to benefit, any party other than the proposed Borrower. To protect both Borrower and FBC from misunderstanding or disappointment, any agreements we have reached are contained in this writing, which is the complete and exclusive statement of the proposal from FBC, except as we may later agree in writing to modify it. If this proposal is acceptable to you, please sign where provided below and return a copy of this letter, together with your deposit of $3,500 to FBC by February 5, 1996. This proposal will expire on that date unless accepted in accordance with the terms herein. This transaction and the events contemplated herein must close by March 31, 1996, at which time the proposal provided herein will expire except for your obligation to pay expenses. FBC is pleased to be able to make this proposal and looks forward to providing you with working capital to meet your financing needs. We hope this will be the start of a long and mutually beneficial relationship. INTERNATIONAL FOOD & BEVERAGE, INC. JANUARY 22, 1996 PAGE 5 Very truly yours, Fremont Business Credit /s/ Jeffrey B. Lizar Agreed to and Accepted: - ----------------------------------- Jeffrey B. Lizar International Food & Beverage, Inc. Vice President /s/ Michael W. Hogarty ---------------------------------------- Michael W. Hogarty President EX-10.8 3 EXHIBIT 10.8 ESTOPPEL CERTIFICATE [LETTERHEAD] ESTOPPEL CERTIFICATE To: Ms. Nancee Ehlers Boldman Ms. Sally Ehlers Stillion C/0 Mr. Jeff Demorest Power Brokers 13700 Alton Pkwy Ste #154 Irvine, CA 92718 Dear Ms. Boldman and Ms. Stillion: You are hereby advised that the undersigned is the Lessee under the Lease dated August 31, 1989, together with any modifications thereof or supplements thereto, all of which are attached hereto and made a part hereof as Exhibit "A" (the "Lease"), with Tijeras Partnership, as Lessor, of those certain premises (the "Premises") more particularly described in the Lease, consisting of approximately 47,410 square feet located at 30152 Aventura, Rancho Santa Margarita, California (the "Property"). The undersigned certified and agrees, as follows: 1. Lessee has accepted possession and is in occupancy of the Premises pursuant to the terms of the Lease which is now in full force and effect and there exists no uncured monetary default by Lessee under the terms of the Lease, except as set forth below: none 2. The Lease commenced November 1, 1989, and ends June 15, 2000 , 3. The annual minimum basic rent under the Lease is $ 23,084.15, subject to any escalations and/or percentage rent and/or common maintenance charges, in accordance with the terms and provisions of the lease. Lessee also pays $2,161 of additional monthly rent pursuant to the lease addendum, dated December 8, 1992. 4. As of the date hereof, no rent has been paid by Lessee more than one month in advance under the Lease except for $23,084.15, which amount represents basic rent for the period beginning December 1, 1995 and ending December 31, 1995 and Lessee has no charge or claim of offset under said Lease or otherwise against rents or other amounts due or to become due thereunder. No "discounts," "free rent" or "discounted rent" have been agreed to and are in effect or shall take effect in the future except for: none 5. The sum of $26,823.00 was paid under the Lease as a security deposit and this is the only deposit made by Lessee in connection with the Lease. 6. Lessee has no right or option whatsoever to purchase or otherwise acquire the Premises, the Property or any portions thereof except as set forth in the Lease Rider. 7. There are no extension or renewal options under the Lease except as set forth in the Lease Rider. 8. Lessor is not in default under the Lease. 9. This Certificate shall inure to the benefit of you and your heirs, legal representatives, successors and assigns and shall be binding upon Lessee and Lessee's heirs, legal representatives, successors and permitted assigns. Lessee understands, acknowledges and agrees that you are purchasing the Property in reliance upon the truth, correctness and completeness of the items provided in this Certificate. 10. The document(s) attached hereto is a true and correct copy of the Lease; the Lease has not been modified or further amended; the Lease contains all of the understandings and agreements between the undersigned and Lessor with respect to the Premises. 11. The entity, person and/or officer executing this certificate is fully empowered to do so on behalf of the undersigned. Dated as of December 11, 1995 ----------- -- LESSEE: INTERNATIONAL FOOD & BEVERAGE, INC. By: /s/ Ann M. Gooch ------------------------------------ Its: Vice President of Finance ------------------------------ 2 EX-27 4 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FINANCIAL STATEMENTS. 1,000 YEAR JUN-29-1996 JUL-02-1995 JUN-29-1996 20 0 575 70 643 1,175 1,154 249 2,080 1,941 0 0 0 394 (1,011) 2,080 6,572 6,572 5,374 1,659 0 0 54 (515) 0 (515) 0 0 0 (515) (.00) (.00)
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