<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q/A
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from: to: .
--------------- --------------
COMMISSION FILE NUMBER 0-22534-LA
MONTEREY PASTA COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 77-0227341
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1528 MOFFET STREET
SALINAS, CALIFORNIA 93905
(Address of principal executive offices)
TELEPHONE: (408) 753-6262
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ -------
At July 31, 1996, 8,713,911 shares of common stock, no par value, of the
registrant were outstanding.
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MONTEREY PASTA COMPANY
FORM 10-Q/A
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations (unaudited)
Second quarter ended June 30, 1996 and July 2, 1995
and the Six months ended June 30, 1996 and July 2, 1995 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1996 and July 2, 1995 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1.Legal Proceedings 13
Item 2.Changes in Securities 13
Item 3.Defaults Upon Senior Securities 13
Item 4.Submission of Matters to a Vote of Security Holders 13
Item 5.Other Information 13
Item 6.Exhibits and Reports on Form 8-K 13
Signature Page 14
Exhibit Index 15
2
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PART I. FINANCIAL INFORMATION
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 506,534 $ 1,937,884
Accounts receivable, net 2,934,622 1,241,248
Inventories 1,591,051 1,094,976
Prepaid expenses and other 2,203,306 1,652,381
------------ ------------
Total current assets 7,235,513 5,926,489
Note receivable 300,000 -
Property and equipment, net 6,181,851 5,338,968
Intangible assets, net 171,172 295,320
Deposits and other 215,451 130,240
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TOTAL ASSETS $ 14,103,987 $ 11,691,017
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,123,985 $ 1,511,592
Accrued liabilities 848,894 852,815
Current portion of long-term debt 361,200 -
Net liability from discontinued
operations 783,000 2,964,415
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Total current liabilities 3,117,079 5,328,822
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Long-term debt 1,508,821 4,130,599
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Commitments and contingencies - -
Stockholders' equity:
Preferred Stock - -
Common Stock 35,307,546 27,268,263
Accumulated deficit (25,829,459) (25,036,667)
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Total stockholders' equity 9,478,087 2,231,596
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 14,103,987 $ 11,691,017
------------ ------------
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- ----------------
JUNE 30, 1996 JULY 2, 1995 JUNE 30, 1996 JULY 2, 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues from continuing operations $ 6,716,498 $ 3,948,334 $ 12,849,585 $ 7,788,869
Cost of sales 3,521,549 2,223,769 7,050,964 4,594,371
------------- ------------ ------------- ------------
Gross profit 3,194,949 1,724,565 5,798,621 3,194,498
Selling, general and administration 3,565,310 1,991,847 6,608,766 3,263,667
Loss on disposition of assets 13,425 - 55,292 -
------------- ------------ ------------- ------------
Operating loss (383,786) (267,282) (865,437) (69,169)
Interest income (expense), net (66,696) 24,479 (294,895) 24,479
------------- ------------ ------------- ------------
Loss from continuing operations
before provision for income taxes (450,482) (242,803) (1,160,332) (44,690)
Provision for income taxes - - - -
------------- ------------ ------------- ------------
Net recovery (loss) from
continuing operations (450,482) (242,803) (1,160,332) (44,690)
Net loss from discontinued
operations 367,543 (8,961,918) 367,543 (10,948,835)
------------- ------------ ------------- ------------
Net loss $ (82,939) $ (9,204,721) $ (792,789) $(10,993,525)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Net income (loss) per share - Primary
and fully diluted:
Continuing operations $ (0.05) $ (0.04) $ (0.15) $ (0.01)
Discontinued operations $ 0.04 $ (1.47) $ 0.04 $ (1.79)
------------- ------------ ------------- ------------
Total net loss per share $ (0.01) $ (1.51) $ (0.11) $ (1.80)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Weighted average common shares
outstanding 8,342,752 6,112,127 8,199,498 6,091,468
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------
JUNE 30, 1996 JULY 2, 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,160,332) $ (44,690)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 440,958 284,175
Loss on sale of assets 55,292 -
Discount on convertible debt 172,907 -
Effect of changes in operating working capital:
Accounts receivable (1,693,374) (253,037)
Inventories (496,075) (124,634)
Prepaid expenses and other (550,589) (438,122)
Accounts payable (387,607) 850,265
Accrued liabilities 119,196 (299,355)
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Net cash used in continuing operations (3,499,624) (25,398)
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Net cash used in discontinued operations (1,881,872) (3,050,197)
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Cash flows from investing activities:
Proceeds from the sale of assets 31,383 -
Purchase of intangibles and other assets (105,986) (64,526)
Purchase of property and equipment (987,051) (880,458)
Note receivable advances (300,000) -
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Net cash used in investing activities (1,361,654) (944,984)
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Cash flows from financing activities:
Repayment of long-term debt and capital
lease obligations (5,690) (29,379)
Net proceeds from issuance of common stock 3,930,970 1,486,686
Credit facility borrowings 4,127,220 -
Credit facility repayments (2,740,700) -
------------- -------------
Net cash used in financing activities 5,311,800 1,457,307
------------- -------------
Net decrease in cash (1,431,350) (2,563,272)
Cash and cash equivalents at beginning of the period 1,937,884 3,195,395
------------- -------------
Cash and cash equivalents at end of the period $ 506,534 $ 632,123
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
Monterey Pasta Company (the "Company") and are unaudited. Certain amounts
shown in the 1995 financial statements have been reclassified to conform with
the current presentation. The financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not
necessarily include all information and footnotes required by generally
accepted accounting principles and should be read in conjunction with the
Company's 1995 Annual Report on Form 10-K, as amended by Form 10-K/A. In the
opinion of the Company, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows as of June 30, 1996, and for
all periods presented have been recorded. A description of the Company's
accounting policies and other financial information is included in the
audited consolidated financial statements as filed with the Securities and
Exchange Commission in the Company's Form 10-K for the year ended December
31, 1995, as amended by Form 10-K/A. The consolidated results of operations
for the interim quarterly periods are not necessarily indicative of the
results expected for the full year.
2. STATEMENT OF CASH FLOWS
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additions to property, plant and equipment during the six months ended June
30, 1996, included $141,722 financed by advances from the equipment
revolving line of credit and an additional $216,870 that was acquired through
a capital lease agreement. Also, during the six months ended June 30, 1996,
debt and accrued interest totaling $3,900,406, plus interest representing
guaranteed conversion discount of $172,907, net of expenses, were converted
into common stock (see Footnote 6), and early settlement of a lease
obligation was partially paid by the issuance of $35,000 of common stock. In
addition, 39,506 shares of Common Stock, valued at $5.0625 per share, were
issued to the noteholder in payment of a penalty due to a delay in the
registration of the shares with the Securities and Exchange Commission.
3. NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995. The new standard
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for
employee stock-based transactions under Accounting Principles Board Opinion
("APBO") No. 25, "Accounting for Stock Issued to Employees", but would be
required to disclose in a note to the financial statements pro forma net
income and, if presented, earnings per share as if the Company had applied
the new method of accounting.
The accounting requirements of the new standard are effective for all
employee awards granted after the beginning of the fiscal year of adoption.
The Company has elected to continue to account for stock-based compensation
under APBO No. 25 and will adopt the disclosure requirements of SFAS No. 123
in 1996.
6
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4. INVENTORIES
Inventories consist of the following:
June 30, 1996 December 31, 1995
-------------- ------------------
Product ingredients $ 532,398 $ 530,511
Finished goods 675,768 353,484
Paper and packaging materials 382,885 210,981
-------------- ------------------
$ 1,591,051 $ 1,094,976
-------------- ------------------
-------------- ------------------
5. PROPERTY AND EQUIPMENT
Investments in property, plant and equipment are comprised of the following;
June 30, 1996 December 31, 1995
--------------- -----------------
Machinery and equipment $ 3,985,874 $ 3,398,749
Leasehold imnprovements 1,566,383 1,550,963
Office furniture and equipment 769,564 522,902
Vehicles 695,950 732,424
--------------- -----------------
7,017,771 6,205,038
Less accumulated depreciation
and amortization (1,426,262) (1,049,380)
--------------- -----------------
5,591,509 5,155,658
Construction in progress 590,342 183,310
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$ 6,181,851 $ 5,338,968
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6. LONG-TERM DEBT
Components of long-term debt included the following:
June 30, 1996 December 31, 1995
--------------- -----------------
Credit facility:
Receivable and inventory
revolver $ 771,372 $ 52,375
Equipment revolver 141,722 63,178
Equipment term loan 708,333 -
7% Convertible note, due
October, 1997 - 4,000,000
Other 248,594 15,046
--------------- -----------------
1,870,021 4,130,599
Less current portion of long-term
debt (361,200) -
--------------- -----------------
$ 1,508,821 $ 4,130,599
--------------- -----------------
--------------- -----------------
During the first six months of 1996, the 7% convertible note payable plus
interest of $172,907 representing guaranteed conversion discount, as well as
face-rate accrued interest of $20,456, were converted into 973,476 shares of
common stock of the Company. The average conversion price, including accrued
interest and net of offering costs, was $4.21 per share.
7
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7. INCOME TAXES
The net operating loss carryforward generated for the six months ended June
30, 1996, was fully offset with a valuation allowance due to uncertainties
about its realization.
8. DISCONTINUED OPERATIONS
Subsequent to year-end 1995, the Company decided to discontinue the
operations of its restaurant and franchise subsidiaries. As a result of this
decision the Company wrote off its entire investment in its restaurant and
franchise subsidiaries.
Net revenues for the restaurant and franchise subsidiaries were $648,184 and
$1,893,494 for the first quarters of 1996 and 1995 respectively and $740,546
and $1,796,430 for the six months ended June 30, 1996, and July 2, 1995,
respectively.
On April 19, 1996, the Company closed a transaction pursuant to a Stock
Purchase Agreement between itself and Upscale Acquisitions, Inc., a
California corporation ("Upscale"), dated as of April 1, 1996 (the
"Agreement"). Pursuant to the Agreement, the Company sold its shares in a
wholly-owned subsidiary, Upscale Food Outlets, Inc., a California corporation,
which owns and operates restaurants in California, Colorado and
Washington that feature pasta products under the name of "Monterey Pasta
Company". The purchase price of the shares was $1,000 in cash and a note
executed by Upscale in the principal amount of $2,500,000 ("Note"). The
Company has elected to use the "cost recovery method" to account for the
transaction, which defers recognition of income until payments are received.
Mr. Lance H. Mortensen is the sole shareholder, Chief Executive Officer,
President and a director of Upscale. Mr. Mortensen is also a director of the
Company, and former Chairman of the Board, Chief Executive Officer and
President of the Company.
The Agreement also provided for advances by the Company to Upscale to be added
to the principal amount of the Note. Advances totaling $300,000 have been
added to the Note during the quarter ended June 30, 1996. These advances are
not accounted for using the "cost recovery method".
In connection with the discontinuance of the restaurant and franchising
operation, as of December 31, 1995, the Company established a net reserve of
approximately $2,964,000 to cover operating losses prior to sale as well as
other costs and expenses connected with the discontinued operations. The
Company continues to carry a reserve of approximately $783,000 to cover
remaining estimated liabilities.
9. STOCKHOLDERS' EQUITY
In April, 1996, the Company sold approximately $4,000,000 of its common stock
in a private offering to accredited investors at $4.375 per share. The
shares of common stock are restricted securities with registration rights.
Purchasers of the common stock agreed not to sell such shares for one year
from the date of purchase without the consent of the placement agent.
Spelman & Co. acted as placement agent (the "Placement Agent") on a "best
efforts", "any or all" basis. The Placement Agent received no cash
commissions in the offering but received warrants to purchase one share of
common stock for each $10 in shares sold, exercisable at a price of $6.50 per
share, for a term of seven years. The net proceeds from the offering are
being used by the Company for advertising, marketing, promotion, capital
equipment and working capital. In May, 1996, the Board of Directors of the
Company adopted a shareholders rights plan, a copy of which was mailed to
shareholders on May 31, 1996. In August, 1996, the Company sold 3,500 shares
of the Company's preferred stock for approximately $3,500,000 (See Footnote
12 - Subsequent Events).
8
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10. EMPLOYEE BENEFITS PLANS
The Company established a voluntary defined contribution 401(k) plan in 1996
that covers all employees that are not covered by a collective bargaining
agreement beginning on the first day of the calendar quarter after having
completed six months of service. The plan allows for employer matching
contributions. The Company is currently matching fifty percent of the first
6% contributed by employees. Employee and employer matching contributions
are always 100% vested. The plan also provides for a voluntary profit
sharing contribution by the Company at its election based on the eligible
employees salary as a percent of total eligible salaries. Profit sharing
contributions vest over five years at 20% per year.
11. CONTINGENCIES
See Footnote 10 of the Company's audited consolidated financial statements
which are included in the Company's Annual Report filed on Form 10-K for the
year ended December 31, 1995, as amended by Form 10-K/A, for a description of
such items.
12. SUBSEQUENT EVENTS
On August 1, 1996 at a Special Meeting of Shareholders of Monterey Pasta
Company, a California corporation, the shareholders approved the following
proposals:
1. To authorize the Company to change the Company's state of incorporation
from California to Delaware,
2. To amend the authorized shares of the Company's common stock from
20,000,000 to 70,000,000, an increase of 50,000,000 shares, and
3. To amend the Company's First Amended and Restated 1993 Stock Option Plan
to increase the number of shares of common stock reserved for
issuance thereunder from 1,200,000 to 1,740,000, an increase of 540,000
shares.
On August 7, 1996, the Company was reincorporated in Delaware.
In August, 1996, the Company sold approximately $3,500,000 of convertible
preferred stock. This preferred stock is convertible into common stock at
80% of the market value of the Company's common stock as defined in the
subscription agreement. The Company anticipates using the proceeds for
capital expenditures, working capital and other general corporate purposes.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
financial statements and related notes and other information included in this
report. The financial results reported herein do not indicate the financial
results that may be achieved by the Company in any future period.
Other than the historical facts contained herein, this Quarterly Report
contains forward-looking statements that involve substantial risks and
uncertainties. For a discussion of such risks and uncertainties, please see the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, as
amended by Form 10-K/A. In addition to the risks and uncertainties discussed in
the Annual Report, the following factors should be considered. As the Company
has continued to expand its retail distribution, it has expended substantial
resources on slotting allowances and other incentives in order to attract new
customers. There can be no assurance that such expenditures will generate
sufficient revenues to cover costs or that such new customers will be retained.
The Company's business continues to be dominated by several very large
competitors which have significantly greater resources than the Company; such
competitors can outspend the Company and negatively affect the Company's market
share and results of operations. The Company also continues to be dependent on
common carriers to distribute its products. Any disruption in the Company's
distribution system or increase in the costs thereof could have a material
adverse impact on the Company's business.
BACKGROUND
Monterey Pasta Company (the "Company") produces and markets premium
quality refrigerated and frozen gourmet pasta and pasta sauces. The
Company seeks to build national brand recognition and customer loyalty by
employing targeted marketing and advertising programs that focus on
developing complementary channels of distribution and multiple points of sale
for the Company's products. The Company markets and sells its products
through grocery and club stores, national food service distributors/contract
feeders and nontraditional venues such as sports coliseums and universities.
The Company sells its pasta and pasta sauces through leading grocery
store chains, including A & P, Kroger, Winn-Dixie, Safeway, Vons, Albertsons,
Giant Foods, Stop & Shop, Hannaford Bros., QFC, Harris-Teeter Super, Cala/Bell,
Pathmark, Smitty's, Nob Hill and Petrini's; and club store
chains such as Price/Costco and BJ's. As of June 30, 1996, more than
6,000 grocery and club stores offered the Company's products.
The Company currently offers over 30 unique and delicious varieties of
pasta and sauce products that are produced using the Company's proprietary
recipes, including refrigerated cut pasta, ravioli, tortelloni, tortellini
and pasta sauces. The Company believes its pasta products appeal to
value-conscious consumers who are seeking excellent quality and convenience.
As part of the Company's efforts to build national brand recognition and
loyalty, the Company introduced new product labels and promotional materials
during the quarter. The Company also continued its capital investment program
at its Monterey County manufacturing facility. The expenditures include the
completion of a new production line to increase manufacturing capacity.
Subsequent to the year ended December 31, 1995, the Company decided to
discontinue the business of its restaurant and franchise subsidiaries. In
1995, the Company wrote off its entire investment in its restaurant and
franchise subsidiaries and reclassified these subsidiaries as discontinued
operations. On April 19, 1996, the Company closed the sale of its subsidiary
pursuant to a Stock Purchase Agreement between itself and Upscale
Acquisitions, Inc., a California corporation ("Upscale"), dated as of April
1, 1996 (the "Agreement"). The purchase price of the shares was $1,000 in
cash and a note executed by Upscale in the principal amount of $2,500,000
("Note"). Mr. Lance H. Mortensen is the sole shareholder, Chief Executive
Officer, President and a director of Upscale. Mr. Mortensen is also a
director of the Company, and former Chairman of the Board, Chief Executive
Officer and President of the Company. The Company has elected to use the
"cost recovery method" to account for the transaction, which defers
recognition of income until payments are received.
10
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The Agreement also provided for advances by the Company to be added to
the principal amount of the Note. Advances totaling $300,000 have been added
to the Note during the quarter ended June 30, 1996. These advances are not
accounted for using the "cost recovery method".
While most discontinued operational issues have been resolved, some
issues are not expected to be fully settled until year-end, and therefore the
Company continues to carry a net liability of approximately $783,000 for
discontinued operations.
There can be no assurance that these changes and the sale to Upscale
will lead to improved operating results for the Company. The future success
of the Company's efforts will depend on a number of factors, including
whether grocery and club store chains will continue to expand the number of
their individual stores offering the Company's products and whether the
Company can continue to increase the number of grocery and club store chains
offering its products. During the second quarter of 1996, the Company added
seven major customers. The Company remains dependent on the use of slotting
allowances and other incentives to expand retail distribution. New markets
increase the risk of significant product returns resulting from slower
selling product than expected. In addition, grocery and club store chains
continually re-evaluate the products carried in their stores and no
assurances can be given that the chains currently offering the Company's
products will continue to do so in the future. Should these channels choose
to reduce or eliminate products, the Company could experience a significant
reduction in product sales.
RESULTS OF OPERATIONS
Net revenues increased 70% to $6,716,000 for the quarter ended June 30,
1996 as compared to $3,948,000 for the quarter ended July 2, 1995. For the
six months ended June 30, 1996, net revenues increased 65% to $12,850,000 from
$7,789,000 for the six months ended July 2, 1995. The increase in sales is
the result of distribution to approximately 6,000 individual grocery and club
stores at June 30, 1996, compared to approximately 1,700 in the same periods
during 1995.
Gross profit was $3,195,000, or 48% of net revenues for the second
quarter of 1996, compared to $1,725,000, or 43% for the second quarter of
1995. For the six months ending June 30, 1996, gross profit was $5,799,000 or
45% of net revenues, as compared to $3,195,000 or 41% for the equivalent
period in 1995. The improvement is in part due to increases in sales and
improved product manufacturing efficiency, partially offset by higher
allowances in entering new markets and changes in product mix.
Selling, general and administrative expenses increased 78%, to
$3,565,000 for the quarter ended June 30, 1996, compared to $1,992,000 for
the second quarter of 1995. For the six months ending June 30, selling,
general and administrative expenses increased 102% to $6,609,000 in 1996
compared to $3,264,000 for the six months of 1995. Selling costs,
particularly costs related to grocery store trade promotions and club store
demonstrations, were higher as a result of the Company's efforts to obtain
new customers and enter new geographic markets. Additionally, cost increases
are attributable to the expansion of the Company's infrastructure which has
required additional costs such as administrative and management salaries,
increased depreciation (as discussed below), recruiting and training of new
personnel, modifying computer systems and related indirect costs. Also, in
March 1996, the Company moved its corporate office from Danville, California
to San Francisco, California and incurred lease termination charges totalling
$103,000.
11
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Depreciation and amortization, included in cost of sales and selling,
general and administrative expenses, was $245,000, or 3% of net revenues for
the quarter ended June 30, 1996 compared to $88,000, or 2% of net revenues
for the first quarter of 1995. For the six months ending June 30, 1996,
depreciation and amortization was $441,000, or 3% of net revenues, compared
to $284,000, or 3% of net revenues for the first half of 1995. These
expenses relate primarily to capital expenditures in the Monterey County
production facility. The Company anticipates increases in depreciation and
amortization in future periods as additional equipment to expand production
capability is purchased and placed into service.
Loss on disposition of assets in the first six months of 1996 primarily
related to abandonment of leasehold improvements in Danville, California.
Net interest expense of $67,000 was recognized in the quarter ended June 30,
1996, compared to net interest income of $24,000 for the same period in 1995.
The increase in expense related primarily to the use of the credit facility
obtained in late 1995. Net interest expense of $295,000 in the first six
months of 1996, compared to net interest income of $24,000 for the same
period in 1995, was due in part to utilization of the credit facility and
also due to $173,000 in guaranteed conversion discount on convertible debt
reorganized in the first quarter.
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on its
operations to date. Substantial increases in labor, employee benefits,
ingredients and packaging, rents and other operating expenses could adversely
affect the operations of the Company's business in future periods. The
Company cannot predict whether such increases will occur.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ending June 30, 1996, the Company used $6,743,000 in
its operations. Cashflow used by continuing operations included $3,500,000
for working capital requirements and $987,000 for capital equipment
acquisitions. Cashflow used by discontinued operations totaling $1,882,000
was related to the funding of wind-down activities associated with the
Company's discontinued restaurant and franchise subsidiaries.
During the first six months of 1996, the Company raised approximately
$3,786,000, net of expenses, from a private placement of 916,000 shares at an
average net price of $4.13 per share.
In August, 1996, the Company sold approximately $3,500,000 of
convertible preferred stock. This preferred stock is convertible
into common stock at 80% of the market value of the Company's common stock as
defined in the subscription agreement. The Company anticipates using the
proceeds for capital expenditures, working capital and other general
corporate purposes.
There is no assurance that the additional capital raised by the Company
during 1996 will be sufficient to meet its future needs. As the Company
continues to grow it may require additional capital to fund expansion and
operating requirements, including but not limited to advertising and customer
promotional expenses and capital equipment.
12
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
See Note 12 to Unaudited Condensed Consolidated Financial Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See Note 12 to Unaudited Condensed Consolidated Financial Statements.
Pursuant to a Notice dated April 19, 1996, the Company held its
Annual Meeting of Shareholders on May 7, 1996, and the shareholders
voted on the following two proposals:
1. To elect eight directors to serve until the next Annual Meeting
of Shareholders or until their successors are elected and
qualified, and
2. To ratify the appointment of Deloitte & Touche LLP as the
Company's independent certified public accountants for the
fiscal year ending December 29, 1996.
(1) Election of directors:
Charles B. Bonner For 4,006,514 Against 0 Abstain 8,377
Norman E. Dean For 4,006,514 Against 0 Abstain 8,377
Daniel J. Gallery For 4,006,514 Against 0 Abstain 8,377
Christopher G. Gilliam For 4,006,514 Against 0 Abstain 8,377
Floyd R. Hill For 4,006,514 Against 0 Abstain 8,377
E. Michael Moone For 4,006,514 Against 0 Abstain 8,377
Lance H. Mortensen For 4,006,344 Against 0 Abstain 8,547
Timothy J. Ryan For 4,006,514 Against 0 Abstain 8,377
(2) Ratification of Independent Public Accountants - Deloitte & Touche
LLP
For 3,985,546 Against 4,395 Abstain 24,950
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The exhibits listed in the accompanying exhibit index on
page 15 are sequentially numbered and are filed or incorporated by
reference as part of this report.
(b) Reports on Form 8-K:
(1) Report on Form 8-K filed on May 28, 1996, reported the execution
and adoption by the Company of a Rights Agreement with Corporate Stock
Transfer, as the rights agent, dated as of May 15, 1996, including
Form of Rights Certificate.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MONTEREY PASTA COMPANY
Date: June 3, 1997 By: /s/ KENNETH A. STEEL, JR.
-----------------------------
Kenneth S. Steel, Jr.
Chief Executive Officer
By: /s/ JAMES S. SERBIN
----------------------------
James S. Serbin
Chief Financial Officer
14
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
2.1 Agreement and Plan of Merger dated August 7, 1996 by and between
Monterey Pasta Company, a California corporation and Monterey
Pasta Company, a Delaware corporation (incorporated by reference
from Exhibit A to the Company's Proxy Statement for the Special
Meeting of Shareholders held on August 1, 1996, filed with the
Securities and Exchange Commission on June 27, 1996 ("1996 Proxy"))
3.1 Certificate of Incorporation dated August 1, 1996 (incorporated
by reference from Exhibit B to the 1996 Proxy)
3.2 Certificate of Designations of Series A Convertible Preferred
Stock (incorporated by reference from Annex I to the Subscription
Agreement dated July 31, 1996, filed as Exhibit 4.1 to the 1996
Proxy)
3.3 Certificate of Designations of Series B Convertible Preferred
Stock (incorporated by reference from Annex I to the Subscription
Agreement dated August 9, 1996, filed as Exhibit 4.3 to the 1996
Proxy)
3.4 Bylaws of the Company (incorporated by reference from Exhibit C
to the Company's 1996 Proxy)
3.5 Certificate of Designations of Series A-1 Convertible Preferred
Stock (incorporated by reference from Exhibits with corresponding
numbers filed with the Company's Annual Report on Form 10-K/A on
April 29, 1997 ("1996 Form 10-K/A"))
3.6 Certificate of Designations of Series B-1 Convertible Preferred
Stock (incorporated by reference from Exhibits with corresponding
numbers filed with the 1996 Form 10-K/A)
4.1 Subscription Agreement, dated as of July 31, 1996 (incorporated
by reference from Exhibits with corresponding numbers filed with
the Company's Registration Statement on Form S-3 on August 23,
1996 ("1996 Form S-3"))
4.2 Registration Rights Agreement, dated as of July 31, 1996
(incorporated by reference from Exhibits with corresponding
numbers filed with the 1996 Form S-3)
4.3 Subscription Agreement dated as of August 9, 1996 (incorporated
by reference from Exhibits with corresponding numbers filed with
the 1996 Form S-3)
4.4 Registration Rights Agreement, dated as of August 9, 1996
(incorporated by reference from Exhibits with corresponding
numbers filed with the 1996 Form S-3)
4.5 Form of Warrant for purchase of the Company's Common Stock dated
as of July 1, 1996 (incorporated by reference from Exhibits with
corresponding numbers filed with the 1996 Form S-3)
4.6 Form of Registration Rights Agreement dated April 1996, among
the Company, Spelman & Co., Inc. and investor (incorporated by
reference from Exhibit 10.42 filed with the Company's
original March 31, 1996 Quarterly Report on Form 10-Q on
May 1, 1996 ("1996 Q-1 10-Q")).
4.7 Shareholder Rights Agreement dated as of May 15, 1996 between the
Company and Corporate Stock Transfer, as rights agent
(incorporated by reference from Item 2 of Form 8-A filed with the
Securities and Exchange Commission on May 28, 1996)
4.8 Form of Subscription Agreement dated April 1996, among the
Company, Spelman & Co., Inc. and investor (incorporated by
reference from Exhibits with corresponding numbers filed with the
Company's 1996 Form 10-K/A)
4.9 Form of Amendment to Registration Rights Agreement dated as of April
20, 1997 among the Company, Spelman & Co., Inc. and investor,
amending the Registration Rights Agreement entered into as of April
1996 (incorporated by reference from Exhibits with corresponding
numbers filed with the 1996 Form 10-K/A)
15
<PAGE>
4.10 Series A Convertible Preferred Stock Exchange Agreement dated as of
March 10, 1997 by and between the Company and GFL Performance
Fund Limited (incorporated by reference from Exhibits with
corresponding numbers filed with the Company's 1996 Form 10-K/A)
4.11 Series B Convertible Preferred Stock Exchange Agreement dated as of
April 2, 1997 by and between the Company and Pangaea Fund Limited
(incorporated by reference from Exhibits with corresponding numbers
filed with the Company's 1996 Form 10-K/A)
4.12 Registration Rights Agreement dated as of December 31, 1996 among the
Company, Sentra Securities Corporation and investor (incorporated by
reference from Exhibits with corresponding numbers filed with the
Company's 1996 Form 10-K/A)
4.13 Form of Warrant ("Sentra Warrant") for purchase of Company's Common
Stock dated March 1997 issued in connection with the Company's March
1997 private placement (incorporated by reference from Exhibits with
corresponding numbers filed with the Company's Pre-Effective Amendment
No. 1 to the Registration Statement on Form S-3 on May 6, 1997
("1997 Amendment No. 1 to Form S-3")
4.14* Stock Purchase Agreement between the Company and Kenneth A. Steel, Jr.
dated April 29, 1997 (incorporated by reference from Exhibits with
corresponding numbers filed with the Company's 1997 Amendment
No. 1 to Form S-3)
10.1* Second Amended and Restated 1993 Stock Option Plan (as amended on
August 1, 1996) (incorporated by reference to the Company's 1996 Form
10-K)
10.2* 1995 Employee Stock Purchase Plan (incorporated by reference from
Exhibit 10.15 to the Company's 1994 Form 10-K)
10.3 Blackhawk Plaza Lease of the Company (incorporated by reference from
Exhibit 10.02 to the Company's Registration Statement No. 33-69590-LA
on Form SB-2 (the "SB-2")
10.4 353 Sacramento Street Office Lease dated as of December 27, 1995 with
John Hancock Mutual Life Insurance Company, together with letter
agreement dated March 20, 1996 regarding basement storage
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K filed April 1, 1996 (the "1995 Form 10-K")
10.5 Monterey County Production Facility Lease of the Company, as amended
(incorporated by reference from Exhibit 10.03 to the SB-2)
10.6 Amendment No. 1 dated February 1, 1995 and Amendment No. 2 dated March
1, 1995 to Monterey County Production Facility Lease of the Company
(incorporated by reference from Exhibit 10.6 to the
1995 Form 10-K)
10.7 Christie Avenue Warehouse Lease of the Company (incorporated by
reference from Exhibit 10.04 to the SB-2)
10.8 Loan and Security Agreement dated December 8, 1995 with Coast Business
Credit, a Division of Southern Pacific Thrift and Loan Association,
and Schedule thereto (incorporated by reference from Exhibit 10.8 to
the 1995 Form 10-K)
10.9 Equipment Collateral Security Agreement dated December 8, 1995 with
Coast Business Credit (incorporated by reference from Exhibit 10.9
to the 1995 Form 10-K)
10.10 Secured Promissory Note dated December 8, 1995 in the original
principal amount of $500,000 in favor of Coast Business Credit
(incorporated by reference from Exhibit 10.10 to the
1995 Form 10-K)
10.11 Secured Promissory Note dated December 8, 1995 in the original
principal amount of $750,000 in favor of Coast Business Credit
(incorporated by reference from Exhibit 10.11 the 1995 Form 10-K)
10.12 Investment Agreement dated July 12, 1995 with The Seychelles Fund,
Ltd. (incorporated by reference from Exhibit 10.12 to the 1995
Form 10-K)
10.13 Master Lease dated August 1, 1995 with Sentry Financial Corporation
(incorporated by reference from Exhibit 10.13 to the 1995 Form 10-K)
10.14 Letter Agreement dated July 26, 1995 between Monterey Pasta
Development Company and California Pasta Company (incorporated by
reference from Exhibit 10.21 to the Company's Quarterly Report on Form
10-Q for the quarter ended October 2, 1995 ("1995 Q3 10-Q"))
10.15 Asset Purchase Agreement dated July 26, 1995 between Upscale Food
Outlets, Inc. and California Pasta Company (incorporated by
reference from Exhibit 10.22 to the Company's 1995 Q3 10-Q)
16
<PAGE>
10.16 Franchise Termination Agreement and Release dated March 8, 1996 among
the Company, Upscale Food Outlets, Inc., Monterey Pasta
Development Company, The Lance H. Mortensen Unitrust dated December 3,
1994, and LBJ Restaurants, LLC (incorporated by reference from
Exhibit 10.16 to the 1995 Form 10-K)
10.17 Acquisition Agreement between the Company and Upscale Food Outlets,
Inc. (incorporated by reference from Exhibit 10.05 to the SB-2)
10.18* Employment Agreement with Lance H. Mortensen (incorporated by
reference from Exhibit 10.06 to the SB-2)
10.19* Employment Agreement dated September 5, 1995 with Mr. Norman E. Dean
(incorporated by reference from Exhibit 10.20 to the 1995 Q3 10-Q)
10.20* Consulting Agreement dated May 25, 1995 with Daniel J. Gallery
(incorporated by reference from Exhibit 10.18 to the Quarterly
Report on Form 10-Q for the quarter ended July 2, 1995 ("1995
Q2 10-Q"))
10.21* Employment Agreement dated June 30, 1993 with Anthony W. Giannini
(incorporated by reference from Exhibit 10.21 to the 1995 Form 10-K)
10.22* Employment Agreement with Mr. David J. Massara (incorporated by
reference from Exhibit 10.18 to the 1994 Form 10-K)
10.23 Trademark Registration -- MONTEREY PASTA COMPANY, under Registration
No. 1,664,278, registered on November 12, 1991 with the U.S. Patent
and Trademark Office (incorporated by reference from Exhibit 10.09 to
the SB-2)
10.24 Trademark Registration -- MONTEREY PASTA COMPANY, under Registration
No. 1,943,602, registered on December 26, 1995 with the U.S. Patent
and Trademark Office (incorporated by reference from Exhibit 10.24
to the 1995 Form 10-K)
10.25 Trademark Registration -- MONTEREY PASTA COMPANY and Design, under
Registration No. 1,945,131, registered on January 2, 1996 with the
U.S. Patent and Trademark Office (incorporated by reference from
Exhibit 10.25 to the 1995 Form 10-K)
10.26 Trademark Registration -- MONTEREY PASTA COMPANY and Design, under
Registration No. 1,951,624, registered on January 23, 1996 with the
U.S. Patent and Trademark Office (incorporated by reference from
Exhibit 10.26 to the 1995 Form 10-K)
10.27 Trademark Registration -- MONTEREY PASTA COMPANY, under Registration
No. 1,953,489, registered on January 30, 1996 with the U.S. Patent and
Trademark Office (incorporated by reference from
Exhibit 10.27 to the 1995 Form 10-K)
10.28 Subscription Agreement dated as of June 21, 1995 with GFL Advantage
Fund Limited (incorporated by reference from Exhibit 10.19 to the
1995 Q2 10-Q)
10.29 Registration Rights Agreement dated as of June 15, 1995 with GFL
Advantage Fund Limited, as amended on October 13 and 19, 1995,
respectively (incorporated by reference from Exhibit
10.2 to the 1995 Q2 10-Q, and Exhibits 10.6 and 10.7 to the
Company's S-3 Registration Statement No. 33-96684, filed on
December 12, 1995 (the "1995 S-3"))
10.30 Joint Escrow Instructions dated as of October 1995 (incorporated by
reference from Exhibit 10.5 to the 1995 S-3)
17
<PAGE>
10.31 Note Purchase Agreement dated as of October 19, 1995 with GFL
Advantage Fund Limited (incorporated by reference from Exhibit 10.3 to
the Company's 1995 S-3)
10.32 Convertible Note dated as of October 25, 1995, executed by the Company
in favor of GFL Advantage Fund Limited (incorporated by reference from
Exhibit 10.32 to the 1995 Form 10-K)
10.33 Trademark Purchase (Burns) (incorporated by reference from Exhibit
10.12 of the SB-2)
10.34 Purchase of Stock and Exhibits (Burns- Mortensen-Hill) (incorporated
by reference from Exhibit 10.13 of the SB-2)
10.35 Non-Recourse Promissory Note (Hill-Mortensen) (incorporated by
reference from Exhibit 10.15 of the SB-2)
10.36 Asset Purchase Agreement dated March 1, 1994 between Upscale Food
Outlets, Inc., Lucca's Pasta Bar, Inc., Timothy John
Morris and Marian Kathryn Morris (incorporated by reference from
Exhibit 10.16 to the Company's 1993 Form 10-K)
10.39 Franchise Termination Agreement and Release dated as of March 27,
1996, among the Company, Upscale Food Outlets, Inc., Monterey
Pasta Development Company, California Pasta Company, and James G.
Schlicher (incorporated by reference from Exhibit 10.39 to the 1996
Q-1 10-Q)
10.40 Stock Purchase Agreement dated April 1, 1996 between Upscale
Acquisitions, Inc. and the Company (incorporated by reference
from Exhibit 10.40 to the 1996 Q-1 10-Q)
10.41 Placement Agent Agreement dated April 12, 1996 between the Company and
Spelman & Co., Inc. (incorporated by reference from Exhibit 10.41 to
the 1996 Q-1 10-Q)
10.44* The Company's 401(k) Plan, established to be effective as of January
1, 1996, adopted by the Board of Directors on June 7, 1996
(incorporated by reference from Exhibit 10.44 to the Company's
original June 30, 1996 Quarterly Report on Form 10-Q filed on
August 13, 1996 ("1996 Q2 10-Q"))
10.45* Directed Employee Benefit Trust Agreement dated June 17, 1996 between
the Company and The Charles Schwab Trust Company, as Trustee of the
Company's 401(k) Plan (incorporated by reference from Exhibit 10.45 to
the Company's 1996 Q2 10-Q)
10.46* Employment Agreement dated February 12, 1996 with Mr. Robert J. Otto
(incorporated by reference from Exhibit 10.24 to the Company's
1996 Q1 10-Q).
16.1 Letter from Deloitte & Touche LLP dated October 31, 1996 (incorporated
by reference to the Company's Report on Form 8-K/A filed November 8,
1996)
21.1 Subsidiaries of the Company (incorporated by reference to the
Company's 1996 Form 10-K)
27.1 Financial Data Schedule
- ---------------------
* Management contract or compensatory plan or arrangement covering
executive officers or directors of Monterey Pasta Company.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 506,534
<SECURITIES> 0
<RECEIVABLES> 2,934,622
<ALLOWANCES> 0
<INVENTORY> 1,591,651
<CURRENT-ASSETS> 7,235,513
<PP&E> 7,608,113
<DEPRECIATION> 1,426,262
<TOTAL-ASSETS> 14,013,987
<CURRENT-LIABILITIES> 3,117,079
<BONDS> 0
0
0
<COMMON> 35,307,546
<OTHER-SE> (25,829,459)
<TOTAL-LIABILITY-AND-EQUITY> 14,013,987
<SALES> 12,849,585
<TOTAL-REVENUES> 12,849,585
<CGS> 7,050,964
<TOTAL-COSTS> 7,050,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,895
<INCOME-PRETAX> (1,160,332)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,160,332)
<DISCONTINUED> 367,543
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (792,789)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
