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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 0-22534-LA
MONTEREY PASTA COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 77-0227341
(State of incorporation) (IRS employer identification number)
1528 Moffett Street
Salinas, California 93905
(408) 753-6262
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ _____ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the issuer as of April 25, 1997 was $19,600,000. The number
of shares outstanding of the issuer's common stock as of April 25, 1997, was
10,474,908.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Monterey Pasta Company was incorporated in June 1989 as a producer of
refrigerated gourmet pasta and sauces to restaurants and grocery stores in the
Monterey, California area. The Company has since expanded its operations to
provide its products to grocery and club stores throughout the United States.
The Company's overall strategic plan is to enhance the value of the Monterey
Pasta Company brand name by distributing its gourmet pasta products through
multiple channels of distribution.
Monterey Pasta produces and markets premium quality refrigerated gourmet
pasta and pasta sauces, emphasizing superior flavors and innovative products.
Monterey Pasta seeks to build brand recognition and customer loyalty by
employing an aggressive marketing program that focuses on developing multiple
points of sale for the Company's products. The Company markets and sells its
products primarily through grocery and club stores.
Monterey Pasta currently offers 38 varieties of contemporary gourmet pasta
products that are produced using the Company's proprietary recipes, including
refrigerated cut pasta, ravioli, tortelloni, tortellini, and pasta sauces.
Examples of the Company's pasta and pasta sauces include: Snow Crab Ravioli,
Smoked Salmon Ravioli, Gorgonzola Roasted Walnut Ravioli, Sweet Red Pepper
Fettuccini, Sun Dried Tomato Pesto Sauce, Roasted Garlic Artichoke Sauce; and
the new Reduced Fat Herb Alfredo and Reduced Fat Sundried Tomato Cream sauces.
Other products introduced in 1996 include Five Cheese Tortelloni, Low Fat
Ravioli, Chicken Sausage Ravioli, Chicken Tarragon Ravioli, and Roasted Garlic
Chicken Ravioli, as well as the new dessert raviolis, Apple Cinnamon and
Chocolate Raspberry and dessert sauces, Vanilla Creme and Raspberry. Monterey
Pasta believes its pasta products appeal to health-conscious consumers who are
seeking excellent quality, convenience and value as well as innovative taste
combinations.
The Company sells its pasta and sauces through leading grocery store
chains, including Safeway, Albertsons, Giant Foods, Stop & Shop, Hannaford
Bros, Brunos, H.E. Butt, Kroger, Star Markets, Shaws, and Nob Hill; and club
store chains such as Price/Costco, Sams and BJ's. As of December 29, 1996, a
total of 3,585 grocery and club stores offered Monterey Pasta's products.
Effective December 31, 1995, the Company discontinued the business of its
restaurant and franchise subsidiaries, and wrote off its entire $7,693,000
investment. Accordingly, the restaurant and franchise businesses are accounted
for as discontinued operations in the accompanying consolidated financial
statements for all periods presented. In 1996, the Company sold its restaurant
subsidiary to an entity owned by Mr. Lance H. Mortensen, a former Chairman,
Chief Executive Officer, and Board member of the Company. In late 1996, the
Company discontinued its efforts to sell to national food service
distributors/contract feeders, and nontraditional venues such as sports
coliseums and universities.
The success of the Company's efforts will depend on two key factors: (1)
whether grocery and club store chains will continue to increase the number of
their stores offering the Company's products, and (2) whether the Company can
continue to increase the number of grocery and club store chains offering its
products. 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.
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In April 1996, the Company sold approximately $3,786,000, net of expenses,
of its common stock in a private offering to accredited investors at an average
net price of $4.13 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 were 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, which was approved on May 7, 1996.
In August 1996, the Company sold approximately $3,308,000, net of expenses
but before deemed dividend of $875,000 resulting from the guaranteed conversion
discount, 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.
In August 1996, Company was re-incorporated in the state of Delaware.
The Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities and Exchange Act of 1933, and Section 21E of the
Securities and Exchange Act of 1934, that involve substantial risks to the
Company, including statements about the Company's recent operating losses, the
possible need for additional capital, and the ability to attract and retain
qualified management. In connection therewith, please see the cautionary
statements contained herein in "Business Risks" which identify important
factors that could cause actual results to differ materially from those in
the forward-looking statements.
INDUSTRY OVERVIEW
The Company believes that the U.S. retail market for refrigerated pasta is
large, growing and highly fragmented. Although refrigerated pasta products are
not new, fresh pasta and pasta sauce were essentially created as a national
specialty food category in 1986 when Nestle Fresh Foods Co., a division of
Nestle S.A. ("Nestle"), introduced its Contadina-Registered Trademark- brand of
fresh pasta. In 1990, Kraft General Foods, Inc., a division of Philip Morris
("Kraft"), unveiled its DiGiorno-Registered Trademark- brand of fresh pasta
nationally.
The Company believes that the growth in the fresh pasta category has been
aided by several factors including both the intensive advertising by Nestle and
Kraft and the changing consumer taste preferences to favor distinctive, high
quality, freshly prepared healthy foods. The Company further believes that
consumers are demanding more healthful food products as they learn more about
the importance of one's diet in a healthy lifestyle. For example, the U.S.
Surgeon General has recommended that consumers lower the percentage of calories
from fat in their diets to no more than 30% (from the existing 37% average) and
the U.S. Department of Agriculture recommends that 60-70% of Americans' daily
caloric intake come from complex carbohydrates. Consequently, much of
consumers' demand for more healthful food products is focused on lowering the
fat content of their diets and increasing their intake of complex carbohydrates.
The Company believes that the sale of pasta, which is generally low in fat and
high in complex carbohydrates, is benefiting from the trend towards healthier
eating.
No assurance can be given that the refrigerated pasta and sauce industry
will continue to expand. Nor can there be any assurance that current levels of
public attention to personal health, fitness and diet or current perceptions of
healthfulness associated with fresh pasta and pasta sauces will continue in the
future. In particular, the public perception of the healthfulness associated
with pasta-based meals may decline due to a recent study by the Center for
Science in the Public Interest finding high fat content in cheese and
cream-based pastas and pasta sauces. The Company has recently introduced low-fat
sauces and low-fat ravioli in response to such concerns.
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Additionally, as the Company expands to different regions of the United States,
the Company may encounter differing public perceptions and concerns about health
and diet. This may adversely impact the Company's marketing and expansion
strategy and cause it to incur greater expenses in promoting its products.
STRATEGY
Monterey Pasta's objective is to become a leading regional supplier of
refrigerated gourmet pasta and pasta sauces through distribution of its products
to grocery and club stores. The key elements of the Company's strategy include
the following:
- - Create brand awareness by communicating to the consumer that Monterey Pasta
Company provides a healthful and nutritious line of products and to promote
repeat business by reinforcing positive experiences with the Company's
products.
- - Introduce new products on a timely basis to maintain customer interest and
to respond to changing consumer tastes. In order to maximize its margins,
the Company will focus most of its efforts to those new products that can
be manufactured and distributed out of its Salinas, California facility and
will supplement its existing line of cut pasta, ravioli, tortelloni,
tortellini, and sauces.
- - Reduce total operating costs through continual evaluation of administrative
and production staffing and procedures. The Company will consider
additional minor capital improvements at its manufacturing facility in
order to increase production efficiencies and capacities and to reduce the
Company's cost of goods.
- - Expand market share through same-store revenue growth, geographic
diversification, and product line expansions.
The Company will continue to redirect its advertising and promotional
activities from a national campaign to specific programs customized to suit its
retail grocery and club store accounts. This will include an increase of
in-store demonstrations, coupons, scan backs and other related activities.
PRODUCTS
The Company produces and markets the following gourmet refrigerated cut
pasta, ravioli, tortelloni, tortellini and pasta sauces under the Monterey
Pasta Company product name:
CUT PASTA: YEAR INTRODUCED
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Egg Fettuccini 1989
Egg Linguini 1989
Garlic Basil Fettuccini 1989
Sweet Red Pepper Fettuccini 1989
Angel Hair 1989
RAVIOLI:
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Garlic Basil/Cheese 1989
Spinach and Cheese 1989
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Gorgonzola Roasted Walnut 1989
Garden Vegetable 1990
Snow Crab 1993
Smoked Salmon 1992
Smoked Monterey Jack/Cilantro 1992
Mediterranean 1993
Roasted Turkey 1993
Vermont Cheddar/Roasted Garlic 1994
Chicken Tarragon 1996
Low Fat Cheese 1996
Chicken Sausage 1996
Roasted Garlic Chicken 1996
Apple Cinnamon 1996
Chocolate Raspberry 1996
TORTELLONI:
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Spinach Mushroom 1994
Sundried Tomato and Asiago Cheese 1994
Five Cheese 1996
TORTELLINI:
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Garlic Basil Cheese 1996
SAUCES:
-------
Sweet Tomato Basil 1989
Fresh Herb Alfredo 1993
Pesto 1989
Sundried Tomato Cream 1991
Sundried Tomato Pesto 1992
Roasted Garlic Artichoke 1995
Reduced Fat Herb Alfredo 1995
Reduced Fat Sundried Tomato Cream 1995
Lemon Peppercorn 1996
Thick and Chunky Tomato Basil 1996
Tomato 1996
French Vanilla Creme 1996
Raspberry Sauce 1996
The Company is committed to diversifying its product offerings with
innovative new pasta products and product lines. The Company's product
development team and product development consultants focus on creating new pasta
products that innovatively blend complementary tastes, food textures and
ingredients while strictly adhering to the Company's emphasis on freshness,
healthfulness and quality. As new products are introduced, selected items will
be discontinued to help ensure that the product line is focused on consumer
demand, to maximize the Company's return on its shelf space in grocery and club
stores, and to respond to changing trends and consumer preferences.
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The Company's refrigerated cut pasta, ravioli, tortelloni, tortellini and
pasta sauces are packaged in clear lightweight containers which reveal the fresh
appearance of its products. Monterey Pasta presents its product with a colorful
logo, distinctive packaging styles, ingredient information and cooking
instructions to communicate the gourmet, fresh and healthful qualities of its
pasta and pasta sauces.
The goal of the Company is to introduce new products on a timely and
regular basis to maintain customer interest and to respond to changing consumer
tastes. There can be no assurance that the Company's efforts to achieve such a
goal will result in successful new products or product lines or that new
products can be developed and introduced on a timely and regular basis. If the
Company's new products are not successful, the Company's grocery and club store
sales may be adversely affected as customers seek new products.
PRODUCTION
The Company produces its refrigerated pasta products in a Monterey
County, California facility which, in 1995, was expanded to 37,666 square
feet from its initial configuration of 10,000 square feet. It is
strategically located in one of the largest produce-growing regions in the
United States and is near several major vendors and food service
distributors. The expanded facility is certified by the United States Food
and Drug Administration (USDA) and utilizes state-of-the-art thermal
processing, chilling and packaging processes.
The current facility is staffed by approximately 178 employees, including
purchasing agents, quality control, accounting personnel, sales staff,
drivers, and production line workers. Refrigerated pasta is manufactured at
the facility using high quality ingredients such as Extra Fancy Durham wheat,
whole eggs or egg whites, fresh herbs and IQF herbs and spices, and local
cheeses and milk products. The ingredients are mixed in accordance with the
Company's proprietary recipes. After filling with fresh and unusual fillings
such as snow crab, smoked salmon, and Vermont cheddar cheese, the ravioli and
tortellini products receive a prescribed thermal process (pasteurization) to
insure product safety and to preserve flavor, quality and shelf life. The
product is then chilled immediately and packaged in controlled atmosphere
trays. Pasta sauces are mixed and processed in individual batches in
accordance with the Company's proprietary processes and recipes and then
directly packed and sealed in plastic containers. After preparation,
processing, chilling and packaging, all pasta and sauces are kept in cold
storage to preserve quality and shelf life.
The Company continuously reviews a variety of small capital projects for
the production department. The future addition of assets will be evaluated for
increased efficiency, flexibility and need. The Company maintains adequate
production capacity to accommodate the forecasted growth of its current product
line over the next two to three years.
DISTRIBUTION
The Company's success depends upon an effective system of distribution for
its products. Through March 1997, Monterey Pasta used its direct store
delivery system ("DSD") to deliver its products in Northern California. As part
of the plan to nationalize its operations, the Company will reduce or assign to
food distributors its direct store delivery system in April 1997. The Company
has converted its largest DSD account, Safeway Stores, to warehouse direct
delivery in March 1997. To distribute its products to other parts of the
country, the Company uses common carriers. The dependence on other companies
for delivery of its products poses a risk to the Company. While this method of
delivery has been reliable and available at acceptable rates thus far, there can
be no assurance that the Company will continue to be able to negotiate
acceptable freight rates in the future and that delivery will not be disrupted
for reasons including, but not limited to, adverse weather, natural disasters
or labor disputes in the trucking industry.
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The Company is in negotiations as of March 31, 1997 with a former employee
who wants to purchase DSD assets and obtain a supply contract with the Company.
GROCERY CHAIN AND CLUB STORE SALES
Monterey Pasta sells its refrigerated pasta and pasta sauces to chain
grocery and club stores.
NUMBER OF STORES CARRYING MONTEREY PASTA PRODUCTS
-------------------------------------------------
1994 1995 1996
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Retail Grocery Stores 1202 4241 3413
Club Stores 89 115 172
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TOTAL 1291 4356 3585
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For the years 1994, 1995 and 1996, Price/Costco and Safeway each accounted
for approximately 45% and 13%, 47% and 12%, and 41% and 9%, respectively, of
total revenues. No other customers accounted for greater than 10% of the
Company's net revenues during this period. The Company currently sells its
products to four separate Price/Costco regions which make purchasing decisions
independently of one another. These regions re-evaluate, on a regular basis,
the products carried in their stores. There can be no assurance that these
Price/Costco regions will continue to offer Monterey Pasta products in the
future or continue to allocate Monterey Pasta the same amount of shelf space.
As such, the loss of either of those customers would materially adversely
affect the Company's business operations.
In 1996, the average grocery store carried 11 individual Monterey Pasta
products, or Stock Keeping Units ("SKUs"), and the average club store carried
12 SKUs.
NONTRADITIONAL VENUES
As result of the deterioration of operating results in 1996, the Company
has redirected its operating focus to generating improved financial
performance in its existing retail grocery and club store business. In line
with this decision, the Company has discontinued its efforts to sell to
national food service distributors and nontraditional venues such as sports
coliseums, universities and the military.
MARKETING
The Company's marketing strategy is to create brand awareness by
communicating to the consumer that Monterey Pasta Company provides a gourmet
quality nutritious line of products and to promote repeat business by
reinforcing positive experiences with the Company's products. The Company's
approach includes the introduction of new products on a timely basis to maintain
customer interest and to respond to changing consumer tastes. Additionally,
the Company will continue to expand its sales into those geographic regions that
will best support the purchase of the Company's upscale, premium grade products.
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COMPETITION
The Company's business is subject to significant competition. The
fresh pasta and pasta sauce industry is highly competitive and is
dominated by a small number of very large national companies, such as Nestle,
with its Contadina-Registered Trademark- brand, and Kraft, with its
DiGiorno-Registered Trademark- brand, along with a number of regional
competitors, such as Mallards, Romance and Trios. Multinational competitors and
many of the regional competitors have significantly more brand name recognition,
marketing personnel, and cash resources than the Company. Moreover, competition
for shelf space in grocery stores is intense and poses great difficulty for
smaller food companies.
To date, the Company has benefited from the marketing efforts of Nestle and
Kraft and certain large regional companies. These companies have committed
significant financial resources towards advertisement, promotion and development
of the fresh pasta and pasta sauce industry, which have contributed to
the rapid expansion of this market and to the increased consumer attention to
the refrigerated pasta and sauce category. No assurance, however, can be given
that these large companies will continue to expend such resources in the future
or that the Company will continue to enjoy such benefits. In the future, the
Company may be required to incur significantly greater expenses for promotion,
advertisement and marketing, which could adversely affect profitability. There
can be no assurance that the Company will be able to commit funds to promotion,
advertisement and marketing while operating profitably.
Competitive factors in the refrigerated pasta and sauce industry include
brand awareness, product quality and taste, healthfulness, price and
availability of grocery and club store shelf space. The Company's suggested
retail prices are slightly higher than its competitors' prices to emphasize the
premium quality of its product line. The Company believes the excellent
quality, taste and healthfulness of its products are superior to that of its
competitors, although its brand name recognition and access to grocery shelf
space is significantly less than many of its competitors. The Company believes
that the variety of its product line, which focuses on contemporary California
cuisine, provides a competitive advantage over many companies who market
traditional Italian-style pasta and sauce products.
MANAGEMENT
As of March 31, 1997, the directors, executive officers and other
officers, and certain significant employees of the Company are as follows:
Directors and Executive Officers:
NAME AGE POSITION
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Charles B. Bonner 55 Director
Daniel J. Gallery 42 Director
Floyd R. Hill 53 Director
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Timothy J. Ryan 57 Director
Kenneth A. Steel, Jr. 39 Chief Executive Officer and
Director
Robert F. Steel 42 Director
Van Tunstall 50 Director
James Wong 50 Director
James S. Serbin 44 Chief Financial Officer
Other officers and certain significant employees:
George W. Hammond 46 Corporate Secretary and Plant
Controller
Roy G. Scotton 37 Plant Manager
Peter F. Klein 37 Plant Superintendent
Jody Cook 36 Senior Zone Manager
Joseph Stirlacci 37 Western Zone Manager
Normally each director is elected for a period of one year and serves until
his or her successor is duly elected by the shareholders. Directors can be
elected by the Board to serve between annual shareholder meeting elections.
The principal occupations of each director and executive officer of the
Company, for at least the past five years, are as follows:
CHARLES B. BONNER, DIRECTOR. Mr. Bonner served as a Director of the
Company from 1993 through January 1995, at which time he resigned as a Director
due to other business commitments. He was reappointed as a Director effective
September 1995. Mr. Bonner is president of Pacific Resources, Inc., a merger
and acquisition advisory firm, a position he has held since September 1989.
From 1979 to 1989, Mr. Bonner was president of Bonner Packing Company, a
privately-held Fresno, California based dried fruit producer. Mr. Bonner also
serves as a director for the following privately-owned corporations: O.K.
Produce Company, Spencer Fruit Company, Charles Tingey Associates, Organic
Food Products, and Murphy's Express.
DANIEL J. GALLERY, DIRECTOR. Mr. Gallery has been a Director of the
Company since January 1995. In 1984, Mr. Gallery co-founded Denver-based Carts
of Colorado, Inc., a designer and manufacturer of mobile and
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modular merchandising equipment. As executive vice president of sales and
marketing, Mr. Gallery is responsible for worldwide sales and marketing for
Carts of Colorado.
FLOYD R. HILL, DIRECTOR. Mr. Hill co-founded the Company in 1989, served
as its Secretary/Treasurer and Chief Executive Officer until 1993, and served as
a Director of the Company from 1989 until 1994. Mr. Hill became a Director
again in January 1995. Mr. Hill served as the Senior Vice President of
Production from August 1993 until November 1995. From 1969 until 1991, Mr. Hill
was employed by Eli Lilly & Co. in various marketing and product development
positions. Mr. Hill is currently the president and chief executive officer of
Organic Food Products.
TIMOTHY J. RYAN, DIRECTOR. Mr. Ryan has been a Director of the Company
since September 7, 1995. Mr. Ryan, a consultant with his own firm, Tim Ryan &
Associates, Inc., consulted with the Company during the first quarter of 1995
and was acting Chief Operating Officer of the Company from March 1995 until
October 1995. From 1988 to 1995, Mr. Ryan was employed by Taco Bell, Inc., a
division of PepsiCo, serving as senior vice president, Full Service Dining from
1993 to 1995 and senior vice president, Marketing and New Concepts from 1988 to
1993. Mr. Ryan served as president of Sizzler USA from 1994 to 1996.
KENNETH A. STEEL, JR., CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Steel
was elected CEO and Director of the Company in October of 1996. He is a
stockholder of and continues to serve as executive vice president with K.A.
Steel Chemicals, Inc., a position he has held since 1979. He serves on the
board of directors of Organic Food Products of Morgan Hill, California and
M.D. Labs, Inc. of Tempe, Arizona.
ROBERT F. STEEL, DIRECTOR, Mr. Steel, brother of the Chief Executive
Officer, was elected to the Board in March, 1997. He is president, CEO, and
a stockholder of K.A. Steel Chemicals, Inc., a Chicago based chemical
distribution and manufacturing company, and chairman and owner of Montana
Metal Products, a precision sheet metal fabrication and machining company.
Mr. Steel holds managing director positions with Platinum Venture Partners,
Inc., a venture capital partnership of investors who own and operate their
own businesses, D-Vision Systems, a video editing software company, and
Forest Financial Corporation, an information technology lease finance
company. Additionally, Mr. Steel serves as a director for Affiliated Chemical
Group, Ltd., Whittman-Hart, Flatlander's Brewing Company, and Blue Rhino
Corporation.
VAN TUNSTALL, DIRECTOR. Mr. Tunstall was elected to the Board of
Directors in February, 1997. He is currently consulting with a variety of
companies. Mr. Tunstall was a senior executive with Gilroy Foods, Inc., an
international manufacturer of various food product ingredients, from 1987 to
1995. He served as president and chairman of the Board from 1991 through 1995.
Previously, Mr. Tunstall held various positions with McCormick & Company. Inc.
JAMES WONG, DIRECTOR. Mr. Wong was elected to the Board of Directors in
March, 1997. He functions as chairman and chief executive officer of
Directions International, a U.S. based management consulting firm which he
founded. Mr. Wong serves as a director on a variety of boards for both
profit and not-for-profit, privately held organizations.
JAMES S. SERBIN, CHIEF FINANCIAL OFFICER. Mr. Serbin joined the Company
as Chief Financial Officer in March, 1997. From 1985 to January 1997, Mr.
Serbin was president and sole stockholder of his own CPA firm, a professional
corporation in Phoenix, Arizona, while employed as controller for two closely
held Arizona operations. Prior to 1985, Mr. Serbin held a senior financial
position with Carter Hawley Hale Stores, retail department stores, after
working in both tax and audit with Semple & Cooper and Coopers & Lybrand,
certified public accounting firms.
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The principal occupations of other certain significant employees of the
Company, for at least the past five years, are as follows:
GEORGE W. HAMMOND, PLANT CONTROLLER AND CORPORATE SECRETARY. Mr. Hammond
came to the Company as Plant Controller in February 1996 after 23 years with
Nestle Food Company, a major producer of food products. He served as plant
controller with their Contadina Foods division, their Carnation Evaporated
Milk operation and their Nestle Chocolate/Confections division. Mr. Hammond
was appointed Corporate Secretary in March 1997.
ROY G. SCOTTON, PLANT MANAGER. Mr. Scotton joined the Company in June
1996 as Production Manager and was subsequently promoted to Plant Manager.
Previously, Mr. Scotton had nine years in production supervision at Nestle Food
Company.
PETER F. KLEIN, PLANT SUPERINTENDENT. Mr. Klien became Plant
Superintendent at the Company in November 1994, responsible for warehouse
functions. He has over 15 years of experience in overseeing warehouse
operations, shipping and receiving, and maintenance services.
JODY COOK, SENIOR ZONE MANAGER. Mr. Cook joined the Company in March 1995
as Southern Zone Manager and was promoted in September 1996 to Senior Zone
Manager. Over nine years with Pepsi Cola Company, Mr. Cook rose through the
sales ranks from sales representative to business development manager. He has
responsibility for product sales including managing brokers and securing new
accounts.
JOSEPH STIRLACCI, WESTERN ZONE MANAGER. Mr. Stirlacci has served as
Western Zone Manager since December of 1995. His primary responsibility is to
manage, maintain and secure club store accounts. Having been in the food and
beverage industry since 1981, Mr. Stirlacci spent seven years with Young's
Market managing wholesale liquor and wine after six years as the account
executive for four large grocery chains.
MANAGEMENT INFORMATION SYSTEMS
The Company purchased a new integrated management information system in
1996 with the objective to implement an electronic link between the Company's
retail sales operations, production facilities and the corporate offices. The
Expandable MRP system ("Expandable") is central to the Company's efforts to
automate, centralize and streamline many of the Company's key functions
including accounting and finance, human resources, and production and inventory
control.
Expandable was used in 1996 for accounts receivable and accounts
payable processing, sales order management, and inventory control. The
manufacturing operations will expand their use to include bill of material
(recipe) management and MRP processes in 1997. The general ledger module was
tested in late 1996 and activated live in January 1997. Efforts to complete
the full integration of all systems will continue in 1997 toward the expected
enhancement of management and control.
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GOVERNMENT REGULATION
The Company is subject to the regulations of the U.S. Food and Drug
Administration (FDA), the U.S. Department of Agriculture (USDA), and state
and local regulations relating to cleanliness, maintenance of food production
equipment, food storage, cooking and cooling temperatures and food handling,
and is subject to unannounced on-site inspections of production facilities.
As a producer and distributor of foods, the Company is subject to the
Regulations of the U.S. Food and Drug Administration, state food and health
boards and local health boards for the production, handling, storage,
transportation, labeling and processing of food products. Regulations in new
markets, new regulations in existing markets, and future changes in existing
regulations may adversely impact the Company by raising the cost of
production and delivery of pasta and sauces and/or by affecting the perceived
healthfulness of the Company's products. A failure to comply with one or
more regulatory requirements could result in a variety of sanctions,
including fines and the withdrawal of the Company's products from store
shelves. The Company is not aware of any currently existing facts or
circumstances that would cause it to fail to comply with any of the
regulations to which it is currently subject.
EMPLOYEES
As of December 29, 1996, the Company employed a total of 178 persons,
including 30 administrative personnel, 8 sales personnel, 13 drivers, and 127
production personnel. None of the Company's employees are represented by a
labor union and the Company believes its relations with its employees are good.
TRADEMARKS AND SERVICE MARKS
The Company registered the "Monterey Pasta Company" name and logo design
with the United States Patent and Trademark Office. An "in use" application is
pending for the new revised "postage stamp" logo design that has been in
commerce as of July 1996. There can be no assurance that competitors will not
adopt similar names or logo designs outside the protection of the Company's
trademark registration.
ITEM 2. PROPERTIES
During February 1996, the Company leased 9,160 square feet of executive
office and training space facilities in downtown San Francisco. The Company
vacated this space in January 1997 following a staff reduction and consolidation
of all operations in the Company's factory in Monterey County. The Company
subleased the San Francisco property at a premium, as of April 1, 1997, to a
large publishing interest for the remaining term of the lease.
The Company leases 37,666 square feet of space in Monterey County,
California for its pasta and sauce production facility pursuant to a lease
which expires in 2004, with two ten-year options for renewal. This facility
produces all of the Company's products and now serves as the Company
manufacturing and administration headquarters. The Company believes its current
facilities provide adequate capacity for its manufacturing and related
administrative activity at present and for the immediate future.
The Company currently leases three outside warehouse facilities. Two of
these warehouses are located in Salinas, California and San Leandro, California
and are month-to-month leases. The remaining warehouse is in Emeryville,
California and is leased through May of 1997. The Company has formally
terminated this lease.
12
<PAGE>
As of December 31, 1995, the Company's restaurant subsidiary, Upscale Food
Outlets, Inc. ("UFO") held a number of leases associated with the restaurant
businesses. These were transferred with the sale of that business to Upscale
Acquisitions, Inc. in April of 1996.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary,
routine litigation incidental to the Company's business, to which the Company is
a party or to which any of its property is subject. The Company's former
subsidiary, UFO, is a defendant in several lawsuits alleging breach of payment
in vendor related matters. As noted above, the Company sold UFO in 1996, and the
new owner assumed all current and future liabilities associated with that
business. Although there can be no assurance given as the results of such legal
proceedings, based upon information currently available, management does not
believe these proceedings will have a material adverse effect on the financial
position, cash flows, or results of operations of the Company.
OTHER LAWSUITS
Ingalls Moranville Advertising LLC filed suit in the Superior Court of
the State of California in and for the County of San Francisco on or about
February 18, 1997, regarding claimed commissions and costs for print
advertising in four magazines. The principal sum claimed is $180,307.
The Company is presently communicating directly with the publishers of
the four magazines to determine whether this action can be resolved
informally. Given the recent commencement of this action, the Company has not
conducted any discovery or analyzed fully the relative merits of the
contentions of the parties in this action.
OTHER PROCEEDINGS
During 1996, the Company contracted with Outdoor Systems, Inc. for
billboard and transit shelter advertising totaling $222,400. The Company gave
notice late in 1996 to cancel advertising scheduled for February and March,
1997. The vendor contends that it is unable to re-sell the advertising space
which was reserved for the Company. Outdoor Systems acknowledges its
obligation to mitigate purported damages and advises that it will credit the
Company for all space which is re-sold. Because the Company's advertising was
scheduled for February and March of 1997, the Company has not been advised by
Outdoor Systems, Inc. of the sum alleged to be due for billboard and transit
shelter space not re-sold.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote during the fourth quarter of 1996.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on December 7, 1993 at a
price to the public of $6.00 per share. Since that date, the Company's
Common Stock has traded on the Nasdaq National Market System under the symbol
"PSTA." The following table sets forth for the period indicated, the high
and low sales prices of shares of the Common Stock on the Nasdaq National
Market System.
HIGH LOW
---- ---
Fiscal year 1995:
First quarter 9 1/4 5 3/4
Second quarter 7 3/8 4 7/8
Third quarter 8 3/8 4 3/8
Fourth quarter 8 1/8 4 1/2
Fiscal year 1996:
First quarter 6 1/4 4 7/8
Second quarter 7 1/4 5 7/8
Third quarter 6 5/8 3 3/8
Fourth quarter 4 1 49/64
As of February 28, 1997, there were approximately 233 stockholders of
record of the Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends to Common stockholders. The
Company intends to retain future earnings in its business and does not
anticipate paying cash dividends on the outstanding Common stock in the near
future.
However, the Company does have a commitment to pay $50,000 to its prior
Series A Preferred Stockholders in lieu of dividends that would have accrued
during the period from August 1, 1996 to December 31, 1996. This dividend is
payable in Common stock at 80% of the market price of Common shares on the
effective date of the pending S-3 Registration Statement. The maximum market
price to be used in the conversion is $5.50 per share ($4.40 per share net
price). The Company's currently outstanding 3000 shares of Series A-1 Preferred
Stock were issued in March 1997 in exchange for the outstanding 3,000 shares of
Series A Preferred Stock. The Series A-1 Preferred Stock does not receive
dividends.
In April 1997, the Company will pay $30,000 in lieu of accrued dividends
to its Series B Stockholder in connection with the exchange of the remaining
unconverted 250 shares of outstanding Series B Preferred Stock for 250 shares
of Series B-1 Preferred Stock. The newly issued shares of Series B-1
Preferred Stock accrue dividends at the rate of $80 per share per annum
payable in cash quarterly.
14
<PAGE>
In addition, guaranteed discounts to market price upon conversion of the
Series A and B Preferred Stock, representing additional yield to the investors,
are accounted for as non-cash deemed dividends in 1996. Such discounts will
continue to apply to the newly issued Series A-1 and B-1 Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company. This data should be read in conjunction with the consolidated
financial statements and related notes included else-where in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------------------
1992 1993 1994 1995 1996
---------------------------------------------------------------------
(dollar amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues from continuing operations $ 3,353 $ 4,738 $ 9,282 $ 18,716 $ 24,492
Income (loss) from continuing operations (1) $ 177 $ 329 $ (1,261) $ (764) $ (8,453)
Income (loss) from discontinued operations $ - $ (79) $ (1,772) $(21,279) $ 220
Net loss per share - total N/A N/A $ (0.57) $ (3.42) $ (1.13)
Net income after pro forma income tax provision (1) $ 115 $ 172 N/A N/A N/A
Pro forma income from continuing operations $ 0.05 $ 0.10 N/A N/A N/A
per share
Weighted average common and common 2,336,973 2,636,111 5,303,811 6,440,198 8,276,608
equivalent shares outstanding (2)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $ (82) $ 10,878 $ 4,719 $ 597 $ (377)
Total assets $ 1,571 $ 14,446 $ 22,117 $ 11,691 $ 10,789
Total debt and capital lease obligations $ 789 $ 445 $ 127 $ 4,131 $ 1,635
Stockholders' equity $ 458 $ 13,082 $ 20,397 $ 2,232 $ 5,085
</TABLE>
15
<PAGE>
(1) Net income has been adjusted pro forma for 1992 and 1993 as if the Company
had converted for tax purposes from Subchapter S to Subchapter C. Income from
continuing operations for 1992 and 1993 do not reflect a tax provision because
the Company reported under Subchapter S in those years. The pro forma tax
provisions for 1992 and 1993, assuming a conversion to Subchapter C, were
$62,000 and $77,000 respectively.
(2) Weighted average shares outstanding and income per share represent the
average number of shares outstanding for such periods adjusted to reflect the
approximately 175.38 for one stock split and a .9231-to-1 Preferred Stock
dividend (accounted for as a stock split) authorized on August 31, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein do not indicate the financial results that may
be achieved by the Company in any future period.
BACKGROUND
Monterey Pasta Company was incorporated in June 1989 as a producer of
refrigerated gourmet pasta and sauces to restaurants and grocery stores in the
Monterey, California area. The Company has since expanded its operations to
provide its products to grocery and club stores throughout the United States.
The Company's overall strategic plan is to enhance the value of the Monterey
Pasta Company brand name by distributing its gourmet pasta products through
multiple channels of distribution.
The Company's distribution of pasta and pasta sauces to grocery and club
stores increased from approximately 25 stores as of December 1989, to
approximately 4,300 in December 1995, and declined to approximately 3,600 as
of December 29, 1996. The Company plans to continue significant expansion of
its distribution to grocery and club stores in its current market area and
to further its penetration in other geographic regions of the U.S. During
1994, 1995 and 1996, significant costs were incurred to promote this
expansion including product demonstration, advertising, warehousing, and
distribution costs and the hiring of additional personnel.
As noted above in Item 1, effective December 31, 1995, the Company
discontinued the business of its restaurant and franchise subsidiaries, and
wrote off its entire $7,693,000 investment in 1995. Accordingly, the
restaurant and franchise businesses are accounted for as discontinued
operations in the accompanying consolidated financial statements for all periods
presented. The Company sold its restaurant subsidiary to an affiliate of Mr.
Lance Mortensen, a former Chief Executive Officer and Director of the Company.
The success of the Company depends on a number of factors including whether
grocery and club store chains will continue to expand the number of their 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. 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.
16
<PAGE>
The Company believes that access to substantially greater capital
resources, coupled with continued reduction of its administrative and
production costs, will be key requirements in the Company's efforts to
enhance its competitive position and increase its market penetration. In
order to support its expansion program, the Company has developed, and is
continuing to develop new products for the consumers and revised advertising
and promotional activities for its retail grocery and club store accounts.
There can be no assurance that the Company will be able to increase its net
revenues from grocery and club stores. Because the Company will continue to
make expenditures associated with the expansion of its business, the
Company's results of operations may be affected.
MATERIAL CHANGES IN FINANCIAL CONDITION
During 1996 the company achieved significant increases in net revenues
and market share at the expense of profitability and cash flow. Having
discontinued its restaurant and franchise subsidiaries effective December 31,
1995, the Company refocused its efforts into expanding its branded product
sales. During the first three quarters of 1996, management channeled much of
its manpower and financial resources to expand market share and brand
awareness through increased advertising and promotion, relocation of
corporate offices, and new product labels. This strategy proved unsuccessful,
since the Company's added expenses in many cases exceeded the gross
contribution margin associated with the incremental volume. While net revenues
increased by 31% to $24,492,000 in 1996, annual losses from continuing
operations increased to $8,233,000 from $764,000 in 1995. These significant
losses contributed to a decrease in working capital from $598,000 in 1995 to
a working capital deficit of $377,000 in 1996, as well as a decrease in cash
from $1,938,000 in 1995 to $725,000 in 1996. During the same period, current
liabilities other than the net liability from discontinued operations
increased from $2,364,000 to $4,583,000. In October, 1996 the company
experienced a complete turnover in its executive management team. The interim
management group acted quickly to reduce the Company's operating costs and
eliminate unprofitable business (see also Liquidity and Capital Resources and
Cost Reductions below).
CONTINUING OPERATIONS FOR 1994, 1995 AND 1996
Net revenues from continuing operations were $9,282,000, $18,716,000 and
$24,492,000 for 1994, 1995 and 1996, respectively, reflecting annual increases
in sales of 102% for 1995 when compared to 1994 and 31% for 1996 when compared
to 1995. These increases are the result of increased distribution on a
per-store basis to approximately 3,600 individual grocery and club stores by
year-end of 1996 compared to approximately 1,300 and 4,300 for 1994 and 1995,
respectively.
Gross margins decreased from 41% in 1995 to 35% in 1996, in large part due
to the attempted penetration of the East Coast and Southern California markets
during the first three quarters of 1996. Although the Company was successful in
increasing its overall sales figures by adding customers in these areas, the
terms given to the new customers were often at severely reduced margins.
Beginning in late 1996 and early 1997, the Company has since discontinued
relationships with or renegotiated terms with the bulk of those customers
accounting for the reduced margins, thereby beginning a reversal of the 1996
negative gross margin trend. Margins increased from 22% in 1994 to 41% in
1995, due to the positive impact created by significantly increased sales,
reducing previously under utilized capacity.
Selling, general and administrative expenses increased by $7,776,000, or
92%, to $16,238,000 in 1996. These expenses totaled $3,639,000 in 1994 and
$8,460,000 in 1995, reflecting a growth of $4,821,000 or 132% from 1994 to
1995. Included in 1996's increased spending is over $8 million specifically
for sales and marketing including incremental headcount and promotional
expenses deemed necessary to expand the business base. The 1995 increases
were also attributable to expansion of the Company's infrastructure,
including increased administrative and management salaries, recruiting and
training, and facilities costs. Additionally, selling costs were high as a
result of the Company's efforts to obtain new customers and enter new
geographic markets. This trend is expected to be reversed in 1997 as a
result of redefined marketing focus, reduced headcounts and related overhead
expenses implemented in late 1996 and early 1997.
Depreciation and amortization expense, included in cost of sales and
selling, general and administrative expenses, increased to $919,000, or 4% of
net revenues in 1996, compared to $686,000 or 4% of net revenues in 1995 and
$370,000 or 4% in 1994. These increases relate primarily to capital
expenditures in the Monterey County production facility. The Company
anticipates further increases in depreciation and amortization in future periods
as additional equipment is purchased and placed into service.
Net interest expense of $431,000 was recognized in 1996 compared to net
interest income of $40,000 recognized in 1995 and $123,000 in 1994. The net
increase in interest expense is attributable to costs of increased borrowings
during 1996.
RESULTS OF DISCONTINUED OPERATIONS FOR 1994, 1995 AND 1996
Net revenues from the discontinued operations were $6,069,000, $5,836,000
and $1,796,000 for 1994, 1995 and 1996 (prior to sale of UFO), respectively.
Operating losses from the discontinued operations were $1,772,000,
$13,586,000, and $839,000 for 1994, 1995, and 1996 (prior to sale of UFO),
respectively.
17
<PAGE>
The total 1995 losses from discontinued operations also included provisions
covering 1996 losses prior to sale of UFO, accruals related to discontinued
operations, and provisions to reduce the net assets from discontinued
operations to their net realizable value. The 1996 losses were charged
directly to the resulting reserves, as were actual expenditures related to
the restaurant and franchising operations. During 1996, the reserves were
also reduced by $220,000 to reflect adjustments of estimates to the actual
Company expenditures. Remaining reserves of $388,000 are expected to be
utilized during 1997 as the Company finalizes all arrangements winding up its
involvement in the discontinued operations.
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on its
operations to date. Substantial increases in labor, employee benefits, freight,
energy, ingredients and packaging, rents and other operating expenses could
adversely affect the operations of the Company's business in future periods.
Management cannot predict whether such increases will occur in the future.
LIQUIDITY AND CAPITAL RESOURCES
During the twelve month period ended December 29, 1996, $8,083,000 of cash
was used in the Company's operations, compared to $8,476,000 used in 1995,
related to the operating losses from continuing operations and expenditures
related to discontinued operations.
In October 1995, the Company entered into a Note Purchase Agreement with an
existing institutional shareholder. The Company received net proceeds of
approximately $3.9 million in exchange for a convertible subordinated note.
The 7% note plus accrued interest was converted into 933,711 shares of common
stock in 1996. The common shares include registration rights.
In December 1995, the Company obtained a $3,000,000 credit facility from a
commercial lending institution. The proceeds from such financing were used for
general corporate purposes.
In April 1996, the Company sold approximately $3,785,000, net of expenses,
of its common stock in a private offering to accredited investors at an average
net price of $4.13 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 were 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, which was approved on May 7, 1996.
In August 1996, the Company sold approximately $3,308,000, net of expenses
but before deemed dividend of $875,000 resulting from the guaranteed conversion
discount, 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.
On December 31, 1996, the Company offered 1600 Units, each unit consisting
of 1000 shares, at $1,350 per Unit in a private placement. This financing
closed in March 1997.
All accrued and future dividends on Series A Preferred Stock are replaced
by a payment of $50,000 in the form of stock of the Company valued at 80% of
the fair market value of the Company's common stock on the date of
effectiveness of a pending registration statement, but no higher than $4.40.
In lieu of prior and ongoing penalties for failing to obtain effectiveness,
the Company agreed to pay $240,000 from the proceeds of its 1997 Common Stock
offering. The transaction will be effected by the exchange of 3,000 shares
of newly issued Series A-1 Preferred Stock for the 3,000 shares of
outstanding Series A Preferred Stock being canceled.
18
<PAGE>
The Company reached agreement along similar lines with the holder of
its Series B Preferred Stock. The 500 shares of outstanding Series B Preferred
Stock at December 29, 1996 had an initial face value of $500,000. Half of the
Series B shares were converted into 160,256 shares of Common Stock as of March
13, 1997. The remaining shares are being exchanged for 250 shares of
Series B-1 Preferred Stock, and the Company has agreed to pay $30,000 in
settlement of all amounts previously owed.
As discussed above, during 1996, the Company used $6,115,000 in cash for
continuing operations. In addition, the Company had an operating loss of
$8,168,000 in 1996, and net working capital at December 29, 1996 was a
deficit of $377,000. As part of its plans to return to profitable operations,
the Company has:
- withdrawn from certain unprofitable markets and customers;
- renegotiated terms with certain other customers;
- realigned its marketing focus, reducing related slotting fees and
advertising expenditures;
- renegotiated agreements with preferred shareholders reducing certain
dividends and penalties;
- relocated and centralized its corporate headquarters from San
Francisco into its manufacturing plant location in Salinas, California;
and
- reduced its headcount and related overhead.
In addition, subsequent to December 29, 1996, the Company completed a
Private Placement of approximately 1,600,000 shares of Common stock at a
gross price of $1.35 per share, and entered into an agreement to sell 550,000
shares of restricted Common stock to the Company's Chief Executive Officer at
$1.88 per share. While there can be no assurance as to the outcome of the
Company's initiatives, management believes these changes in its business, as
discussed above, will allow the Company to enhance its financial position and
operating results.
Management believes that the recently concluded private placement funding
and cash generated from continuing operations will provide adequate funding
to meet its needs through mid-1998. However, as a result of the Company's
desire to significantly expand and develop its customer base and distribution
network, the Company is evaluating additional financing opportunities to
support such expansion.
SALES AND MARKETING
As part of the Company's efforts to build national brand recognition and
loyalty, the Company introduced new product labels and promotional materials
in 1996. However, allowances and accruals against receivables substantially
increased from a total of $153,000 at December 31, 1995 to $1,093,000
(including $169,000 carried in an accrual account) at December 29, 1996.
This significant increase was caused by a number of factors: during late
1995 and through summer of 1996, the Company began a concentrated effort to
increase its market presence in several geographic areas, particularly the
East Coast and Southern California markets. As part of the marketing effort,
sales people and outside agents were encouraged to negotiate aggressively
with new and potential customers regarding terms, discount from list, special
coupon and marketing allowances, slotting allowances, and the like. This
effort continued on more and more aggressive terms into the third quarter.
However, during the late summer of 1996, it became apparent that much of the
new business was being finalized at unsatisfactorily low net revenues, and
even negative margins in some isolated cases. In addition, since all
shipments are F.O.B. plant, there were increased freight costs. Finally,
much of the new business in these markets required the payment or crediting
of significant slotting fees which had been gaining in significance to the
Company's business since mid-1995.
As a result of analyzing higher-than-expected returns both from the new
customers (due in part to distance from the plant, and in part to liberal
terms) and the continuing customer base (due to a complete logo and label
change in late summer 1996), and higher-than-expected allowances from "coupon
specials", etc., the Company substantially increased its allowances beginning
in the 3rd quarter of 1996.
During late 1996 and continuing into 1997, the Company also began
evaluating some of the more marginal business, and began making plans to
curtail or drop certain customers and markets, as discussed below. As a
result, recovery of certain of the amounts on the books became less certain,
resulting in additional increases to the reserves as of December 29, 1996.
As a part of the Company's plans to return to profitability, the Company
has withdrawn from the food service, kiosk, and military markets. As a
result, the Company took a writedown of $307,000 in 1996 for manufacturing
equipment and vendor carts directly associated with these activities. In
addition, a $91,000 writedown to estimated fair value was taken in 1996 for
certain plant equipment replaced when the Company updated its production
lines, as well as certain excess or overvalued office equipment.
In 1996, the Company expended substantial resources on slotting
allowances and other incentives in order to attract new customers. The Company
re-evaluated the effectiveness of these expenditures and wrote off $523,000 for
slotting allowances which were determined to be non-recoverable and of no
future benefit (see below).
Further, as part of the Company's strategic refocusing, the Company has
re-evaluated its advertising and marketing strategy. As previously disclosed in
prior Company's forms 10-K and 10-Q, the Company's strategy contained risks
associated with expenditures related to attempts to increase market share and
attract new customers. Based on an evaluation of the potential benefits from
significant media advertising campaigns, the Company has decided to withdraw its
current media advertising efforts and forego additional media advertising
expenditures. As a result, during 1996 the Company wrote off related,
non-recoverable prepaid advertising and advertising production expenses
totaling $257,000. The Company has also accrued for future commitments for
which there are contractual obligations. As part of this change in strategy,
the Company significantly reduced the staffing of its marketing department
subsequent to the third quarter of 1996.
Since October 1996, the sales staff has reported directly to the CEO
and has consisted of regional sales personnel and support staff, focusing on
the retail and club store markets, together with the direct store delivery
("DSD") group, supporting current DSD customers. In addition, the Company
will continue to support its sales efforts to the club stores, through the
continued use of in-store demonstration programs. In March 1997, the Company
discontinued the bulk of the DSD program, converting the largest portion
(Safeway retail locations) to warehouse delivery. The Company continues to
service the remaining DSD customers.
The Company successfully began implementation of an overall price increase
to the retail grocery trade starting October 1996.
19
<PAGE>
COST REDUCTIONS
The Company significantly reduced its total corporate and plant
administrative headcount and costs on a going-forward basis as part of the plan
adopted in the fourth quarter of 1996 to return to profitable operations and
optimize financial performance. In January 1997, the Company relocated its
corporate headquarters from San Francisco, California to its manufacturing
facility in Salinas, California. This move is expected to result in a
substantial reduction of future corporate and overhead costs, beginning in the
second quarter of 1997.
In addition, the Company significantly reduced the scope of its
advertising and media campaigns. The Company will continue with those
promotional activities, such as in-store demonstrations, that it considers
effective and consistent with its ongoing sales objectives. In this light,
the Company's slotting fees from club stores and grocery chains for shelf
space allocations, for example, declined significantly starting in the
fourth quarter of 1996.
Consistent with these cost reduction initiatives, the Company has invested
$1.472 million in machinery and equipment and leasehold improvements in
retooling its Salinas production facilities to increase operating efficiencies
as well as shelf life of its products.
In a complementary move, the Company announced a uniform overall retail
grocery price increase and in some cases revised its trade allowance and product
return policies to those accounts with insufficient profit margins commencing in
the fourth quarter of 1996. Although the Company was generally successful in
revising its sales agreements with specific customers, it voluntarily
discontinued the supply of products to selected retail grocery accounts.
SETTLEMENTS WITH FORMER EMPLOYEES
The Company had outstanding employment related disputes with a number of
employees. Total settlement costs are included either in the reserves for
discontinued operations or in continuing operations as appropriate.
MAJOR CUSTOMERS
Two of the Company's retail customers, Price/Costco and Safeway, accounted
for 41% and 9% respectively of the Company's sales for the twelve months ended
December 29, 1996. No other customer accounted for greater than 10% of net
revenues for the period.
BUSINESS RISKS
Certain characteristics and dynamics of the Company's business and of
financial markets generally create risks to the Company's long-term success and
to predictable quarterly results. These risks include:
- - RECENT OPERATING LOSSES: NO ASSURANCE OF PROFITABILITY The Company's
profitability began to decline in 1994. In the second quarter of 1994, the
Company reported its first operating loss from continuing operations. The
Company reported additional operating losses from continuing operations in
eight of ten quarters since then. The Company's operating loss for the
quarter ended December 1996 was $1,345,000. At December 29, 1996, the
Company had an accumulated deficit of $34,320,000. There can be no
assurance that the Company will return to profitability in the short term
or ever.
20
<PAGE>
- - LIQUIDITY; NEED FOR ADDITIONAL CAPITAL. Management believes that it will
have sufficient resources to provide adequate liquidity to meet the
Company's planned capital and operating requirements through mid-1998.
Thereafter, the Company's operations will need to be funded either with
funds generated through operations or with additional debt or equity
financing. If the Company's operations do not provide funds sufficient to
fund its operations and the Company seeks outside financing, there can be
no assurance that the Company will be able to obtain such financing when
needed, on acceptable terms or at all. In addition, any future equity
financing or convertible debt financing would cause the Company's
shareholders to incur dilution in net tangible book value per share of
Common Stock.
- - HIRING AND RETENTION OF KEY PERSONNEL; MANAGEMENT TRANSITION. The success
of the Company depends on the efforts of key management personnel. In the
fourth quarter of 1996, a number of corporate officers left the Company.
These included its President and Chief Executive Officer, Executive Vice
President and Vice President-Legal Affairs, who resigned on October 4, 1996
together with three additional Board members, and its Chief Financial
Officer, who resigned on November 8, 1996. In addition, the interim
President appointed in December 1996 resigned in March 1997. The Company
currently has a Chief Executive Officer and a new Chief Financial
Officer, neither of whom has previously been a part of the Company's
management team, and both of whom may not continue in their current
positions on a long-term basis. The Board of Directors began a search
for a new Chief Executive Officer in the first quarter of 1997. The
Company's success will depend on its ability to operate under new
management, to attract qualified candidates, to effect a smooth
transition to new management with minimal disruption in operations, and
to motivate and retain key employees and officers. There can be no
assurance that the Company will be able to effect smooth transitions
from its management team to a new management team, that new officers
will be hired or if hired will be able to perform effectively, or that
significant management turnover will not continue in the future. At
December 29, 1996, there are no keyman insurance policies in place.
- - IMPACT OF INFLATION. The Company believes that inflation has not had a
material impact on its operations to date. Substantial increases in labor,
employee benefits, freight, energy, ingredients and packaging, rents and
other operating expenses could adversely affect the operations of the
Company's business in future periods. The Company cannot predict whether
such increases will occur in the future.
- - VOLATILITY OF STOCK PRICE. The market price of the Company's common stock
has fluctuated substantially since the initial public offering of the
common stock in December 1993. Such volatility may, in part, be
attributable to the Company's operating results or to changes in the
direction of the Company's expansion efforts. In addition, changes in
general conditions in the economy, the financial markets or the food
industry, natural disasters or other developments affecting the Company or
its competitors could cause the market price of the Company's common stock
to fluctuate substantially. In addition, in recent years, the stock
market has experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies, including the Company, for reasons sometimes
unrelated to the operating performance of these companies. Any shortfall
in the Company's net sales or earnings from levels expected by securities
analysts or the market could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given
period. Additionally, the Company may not learn of such shortfalls until
late in the fiscal quarter, which could result in an even more immediate
and significant adverse effect on the trading price of the Company's common
stock.
- - RISKS INHERENT IN FOOD PRODUCTION. The Company faces all of the risks
inherent in the production and distribution of refrigerated food products,
including contamination, adulteration and spoilage, and the associated
risks of product liability litigation and declines in the price of its
stock may be associated with even an isolated event. The Company has a
modern production facility, employs what it believes is state-of-the-art
21
<PAGE>
thermal processing, temperature-controlled storage, HAACP programs intended
to insure food safety, and has obtained USDA approval for its production
plant. However, there can be no assurance that the Company's procedures
will be adequate to prevent the occurrence of such events.
SEASONALITY AND QUARTERLY RESULTS
The Company's grocery and club store accounts are expected to experience
seasonal fluctuations to some extent. The Company's business in general may
also be affected by a variety of other factors, including but not limited to
general economic trends, competition, marketing programs, and special or unusual
events.
COMPETITION AND DEPENDENCE ON COMMON CARRIERS
The Company's business continues to be dominated by several very large
competitors which have significantly greater resources than the Company; such
competitors can outspend the Company and negatively affect the Company's market
share and results of operations. The Company also continues to be dependent on
common carriers to distribute its products. Any disruption in the Company's
distribution system or increase in the costs thereof could have a material
adverse impact on the Company's business.
MARKETING AND SALES RISKS
The future success of the Company's efforts will depend on a number of
factors, including whether grocery and club store chains will continue to expand
the number of their individual stores offering the Company's products and
whether allowances and other incentives will expand retail distribution.
Expansion into new markets increases the risk of significant product returns
resulting from the Company's supply of slower selling items to its customers.
In addition, grocery and club store chains continually re-evaluate the products
carried in their stores and no assurances can be given that the chains currently
offering the Company's products will continue to do so in the future. Should
these channels choose to reduce or eliminate products, the Company could
experience a significant reduction in its product sales. As indicated
previously, the Company remains dependent on the use of slotting allowances and
other incentives to expand retail distribution. In order to reduce risk, the
Company has significantly reduced expansion into new markets requiring such
major expenditures. Furthermore, the improvement in profitability resulting
from the Company's overall retail grocery price increase and revision of its
trade allowance and product return policies to previously low margin customers
is contingent on the degree of ongoing acceptance of these changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
22
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On October 18, 1996, Deloitte & Touche LLP ("Deloitte") resigned as
independent public accountants for the Company. Deloitte's report on the
Company's financial statements for 1995 (1) did not contain an adverse opinion
or a disclaimer of opinion and (2) was not qualified or modified as to
uncertainty, audit scope or accounting principles.
Deloitte advised the Company that its recent registration statement on
Form S-3 should be amended due to recent changes in management and
deterioration of operations. Additionally, in a letter dated October 31, 1996,
Deloitte indicated that Item 4.1 of a Form 8-K filed by the Company on October
25, 1996, should have included the following statement regarding auditing scope:
"Deloitte & Touche LLP ("D&T") advised the Company that allegations of
potential violations by Board members of Company policy on insider
trading would have caused D&T to expand the scope of their work if
they would have audited 1996. D&T recommended an independent
investigation of such allegations."
In response to notification about alleged potential violations of the
Company's policy, the Company's newly-elected Chief Executive Officer conducted
a preliminary investigation into the allegations. The investigation revealed,
that in connection with margin calls, a former Director incurred a Section 16(b)
violation of the Securities and Exchange Act of 1934, and another Director
incurred violations of internal Company policy as a result of margin calls.
The Company's outside attorneys, Gray Cary Ware & Freidenrich, a Professional
Corporation, are finalizing an independent investigation into the foregoing
charges.
There were no disagreements with Deloitte on any matter of accounting
principles and practices, financial statement disclosure, or auditing scope or
procedure.
On October 25, 1996, the Company engaged BDO Seidman, LLP ("BDO") to serve
as independent public accountants. The Company did not consult with BDO with
respect to the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit report that might be rendered
on the Company's financial statements, nor did the Company consult with BDO
regarding the subject of any disagreement with its former independent public
accountants or with respect to any events required to be reported pursuant to
paragraph (a)(1)(v) or Item 304 of Regulation S-K with respect to such former
independent public accountants.
On December 18, 1995, Arthur Andersen LLP ("Arthur Andersen") resigned
as independent public accountants for the Company. Arthur Andersen's report on
the Company's financial statements for 1994 and 1993 (1) did not contain an
adverse opinion or a disclaimer of opinion and (2) was not qualified or modified
as to uncertainty, audit scope or accounting principles.
Arthur Andersen and the Company had two disagreements during the 1994 and
1995 fiscal years, both of which were resolved to Arthur Andersen's
satisfaction. There were no disagreements related to financial statement
disclosures or auditing scope or procedure. The two disagreements are
described below:
- - As of January 1, 1995, the Company had an net operating loss carryforward
("NOL"). In accordance with the Statement of Financial Accounting
Standard ("SFAS") 109, the tax benefit of such NOL was recorded as a
deferred tax asset. SFAS 109 requires that a valuation allowance be
provided to the extent that management assesses that it is more likely than
not that some portion or all of the deferred tax asset will not be
realized. Management believed that no valuation allowance was required.
Arthur Andersen believed that a 100% valuation allowance should be
provided. The issue was discussed by representatives of Arthur Andersen
and a member of the Audit Committee of the Company's Board of Directors.
Upon resolution of the disagreement, a valuation allowance of 100% of the
deferred tax asset was provided for in the fourth quarter of fiscal year
1994.
23
<PAGE>
During the first quarter of 1995, Monterey Pasta Development Company
("MPDC"), a wholly-owned subsidiary of the Company, entered into an
Area Development Agreement with a franchisee, LBJ Restaurants LLC, a
Colorado limited liability company. The agreement provided for a
development fee of $375,000 and a franchise fee of $75,000, both
payable to MPDC. Revenue related to the $450,000 was deferred at the
end of the second quarter of 1995. At the end of the third quarter
1995, management believed that the $450,000 of revenue should be
recognized. Arthur Andersen believed that such revenue should not be
recognized until certain contingencies were resolved. The issue was
discussed by representatives of Arthur Andersen and certain members
of the Company's management, some of whom are members of the
Company's Board of Directors. Upon resolution of the disagreement,
recognition of the revenue of $450,000 was deferred at the end of the
third quarter of 1995.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the Company
is set forth in Part I of this Report under the caption "Management."
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% beneficial owners are required by
SEC regulations to furnish the Company with copies of all reports they file
under Section 16(a). To the Company's knowledge, based solely on its review
of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with during the fiscal year ended December
29, 1996, except that for Messrs. Chris Gilliam, a former Director, Marshall
Stevens, a former President, and Ken Steel, the current Chief Executive
Officer, initial reports on Form 3 following their appointments were filed
late. In addition, certain reports on Form 4 for John Abrams, a former
Officer and Director, were filed late.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Securities
Name and Underlying All
Principal Position Year Salary $ Bonus $ Other $ Options (#) Other $
- ------------------ ---- --------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
KENNETH A. STEEL, JR. 1996 $ - (1) $ - $ - $ - (1) $ -
Interim Chief 1995 N/A N/A N/A N/A N/A
Executive Officer 1994 N/A N/A N/A N/A N/A
NORMAN E . DEAN 1996 $ 167,599 (2) $ - $ 4,850 (3) $ - $ -
Former President and 1995 $ 57,692 (2) $ - $ 1,200 (3) $610,000 (4) $ -
Chief Executive 1994 N/A N/A N/A $ 10,000 (4) N/A
Officer
ANTHONY W. GIANNINI 1996 $ 85,064 $ - $ 4,150 (5) $ 60,000 (6) $ 31,125 (7)
Former Senior Vice 1995 $ 107,520 $ 36,950 $ 6,600 (5) $ 55,000 (6) $ -
President of Sales 1994 $ 101,124 $ 15,676 $ - $ - $ -
</TABLE>
Notes:
(1) Mr. Steel was appointed Chief Executive Officer on October 5, 1996. He
receives no salary compensation, but was granted rights to purchase 550,000
shares of Common stock on March 20, 1997 with a full recourse
25
<PAGE>
promissory note for the full amount at a per share price of $1.875, subject
to time served and performance restrictions.
(2) Mr. Dean resigned as Chief Executive Officer and President of the Company
on October 4, 1996. He was appointed to those positions effective October 2,
1995, upon the resignation of Mr. Mortensen.
(3) Mr. Dean received an auto allowance of $400 per month through April 1996
and $650 per month thereafter.
(4) As a Director, Mr. Dean received stock options totaling 10,000 on March 3,
1994 and 10,000 on January 6, 1995. Fifteen thousand of these shares are
exercisable as of December 29, 1996; the balance expired unvested upon his
resignation. Mr. Dean also received options, as an employee, on 600,000
shares on September 7, 1995, outside the 1993 Stock Option Plan, vesting on
various performance targets, all of which expired unvested upon his resignation.
(5) Mr. Giannini received an auto allowance of $550 per month through May 1996
and $650 per month thereafter.
(6) Mr. Giannini received stock options on 55,000 shares of common stock
which expired unvested upon his termination; however, he received an option for
60,000 shares of common stock on December 19, 1996 in connection with a
separation agreement.
(7) Subsequent to his termination in July 1996, Mr. Giannini was a consultant
to the Company until March 1997.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth for the fiscal year ended December 29, 1996,
the options granted to the executive officers named below. During the fiscal
year ended December 29, 1996, there were no exercises of stock options by the
executive officers named in the table below.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------
Number of % of Total Potential Realizable
Securities Options Value on 12/29/96
Underlying Granted to Exercise ------------------------------
Options Employees or Base Expiration Alternative Grant
Name Granted (2) in 1996 Price Date Date Value (1)
- --------------------- ------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
K.A.Steel, Jr. 0 0 0 0 0
N.E.Dean 0 0 0 0 0
A.W. Giannini 60,000 11.9% $1.875 12/18/2007 $60,796
</TABLE>
(1) The alternative grant date values are based on the modified Black-Scholes
option pricing model, assuming no dividend yield, expected volatility of
approximately 54%, risk free rate of return of 6%, and expected time of
exercise generally at half of the original contractual life. Actual values
realized on stock options are dependent on actual future performance of the
Company's stock, among other factors. Accordingly, the amounts may not
necessarily be realized.
(2) The 1993 Stock Option Plan provides that upon, among other things, the
dissolution, liquidation, reorganization, merger or consolidation of the Company
or the sale of all or substantially all of the assets of the Company, or
transfer of control (as such term is defined under Section 7.1 of the Plan), all
outstanding options under the 1993 Stock Option Plan shall become immediately
exercisable as of the date
26
<PAGE>
30 days prior to the date of transfer of control if such options would otherwise
terminate upon consummation of the transaction or if the surviving or successor
corporation as the case may be, does not assume the Company's obligations under
the 1993 Stock Option Plan or substitute for such outstanding options.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-The-Money
Unexercised Options at Options at
December 29, 1996 December 29, 1996
--------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
K.A. Steel, Jr. 0 0 0 0
N.E. Dean 10,000 0 0 0
5,000 0 0 0
A.W. Giannini 60,000 0 $ 3,750 0
</TABLE>
EMPLOYMENT CONTRACTS
James B. Serbin, Chief Financial Officer, has a 13-26 week employment
contract with the Company expiring September 26, 1997. Permanent placement
will be considered by both parties at that time.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 24, 1997 (except as noted in
the footnotes to the table), certain information with respect to the beneficial
ownership of the Company's Common Stock by (i) all persons known by the Company
to be the beneficial owners of more than 5% of the outstanding Common Stock of
the Company, (ii) each director and director-nominee of the Company, (iii) the
Chief Executive Officer as of April 24, 1997, and (iv) all executive officers
and directors of the Company for fiscal year 1996 through April 24, 1997,
as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP (2) PERCENT OF CLASS (2)
- --------------------------------------- ------------------------ --------------------
<S> <C> <C>
Wellington Management Company, LLP (3) 722,000 4.84%
75 State Street
Boston, MA 02109
Wellington Trust Company, N.A. (4) 361,000 2.42%
7575 State Street
Boston, MA 02109
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP (2) PERCENT OF CLASS (2)
- --------------------------------------- ------------------------ --------------------
<S> <C> <C>
GFL Performance Fund Limited (5) 2,000,000 13.40%
C/O Genesee Advisers
12007 Sunrise Valley Drive, Suite 460
Reston, VA 22091
Kenneth A. Steel, Jr. (6) 735,000 4.93%
Robert F. Steel (7) 200,000 1.34%
Daniel J. Gallery (8) 73,000 .49%
Timothy J. Ryan (9) 54,000 .36%
Van Tunstall 25,000 .17%
Floyd R. Hill (10) 210,000 1.41%
James Wong -- --
Charles B. Bonner (11) 28,727 .19%
All Officers and Directors as a group 1,330,727 8.92%
(9 persons)
</TABLE>
(1) Unless otherwise noted, the address of each named person is: Care of
Monterey Pasta Company, 1528 Moffett Street, Salinas, CA 93905
(2) Includes shares of Monterey Pasta Company Common Stock underlying the
options and convertible securities outstanding held by the beneficial owners
with respect to whom the calculation is made, but does not include shares of
Common Stock that may not be acquired until more than 60 days after April 25,
1997.
(3) According to a Schedule 13D filed with the Securities and Exchange
Commission on January 24, 1997, Wellington Management Company, LLP, in its
capacity as investment adviser, may be deemed to be the beneficial owner of all
722,000 shares owned by its investment counseling clients. Wellington
Management Company, LLP, has shared dispositive power over all 772,000 shares.
(4) According to a Schedule 13D filed with the Securities and Exchange
Commission on January 24, 1997, Wellington Trust Company, N.A., in its
capacity as an investment adviser, may be deemed to be the beneficial owner of
all 361,000 shares owned by its investment counseling clients. Wellington
Management Company, LLP, has shared dispositive voting power over all 361,000
shares.
(5) Includes 2,000,000 shares related to convertible preferred stock (based on
share price at April 24, 1997).
28
<PAGE>
(6) Includes 550,000 restricted shares to be purchased with a full recourse
note under rights granted on March 20, 1997.
(7) Includes 50,000 exercisable options granted under the 1993 Stock Option
Plan.
(8) Includes 60,000 exercisable options granted under the 1993 Stock Option
Plan.
(9) Includes 54,000 exercisable options granted under the 1993 Stock
Option Plan.
(10) Includes 10,000 exercisable options granted under the 1993 Stock
Option Plan.
(11) Includes 5,000 exercisable options granted under the 1993 Stock Option
Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased office space from a partnership in which Mr. Lance
Mortensen is a limited partner. Mr. Mortensen is a Shareholder, former
Director, former President and former Chairman of the Board of the Company.
Rent expense under this lease in 1996 was $150,108. The Company vacated this
space in February 1996, and paid $65,000 plus 5,323 shares of its common
stock in settlement of the lease obligation.
In April 1996, the Company's restaurant subsidiary Upscale Food Outlets,
Inc. (UFO), was sold to Upscale Acquisitions, Inc. (Upscale), which is
wholly-owned by Mr. Lance Mortensen. The purchase price for the shares of UFO
sold to Upscale was $1,000 cash plus a note executed by Upscale for
$2,500,000. In addition, under the agreement, the Company advanced $350,000
to UFO subsequent to the purchase. The purchase note is accounted for under
the cost recovery method which defers recognition of income (or reduction of
loss) until payments are received. The cash advances are not accounted for
under the cost recovery method, but have been fully reserved as possibly
uncollectible. During 1996, the Company sold $62,350 in food products to UFO.
Of this amount, $18,738 is uncollected and is fully reserved at December 29,
1996.
During 1996, the Company purchased certain office furniture and equipment
under a prior agreement from the Shareholder referred to above for $100,000.
Certain of the furniture purchased was reduced to its estimated fair value at
the end of 1996, resulting in a writedown of $55,000.
29
<PAGE>
Mr. Kenneth A. Steel, Jr., the Company's Chief Executive Officer, who is
also a Director and Shareholder, is a director and shareholder of Organic
Food Products, Inc., from whom the Company contracted certain co-packing
service and obtained raw materials. Mr. Floyd R. Hill, who is another
director, shareholder and chief executive officer of Organic Food Products,
Inc., is also a Co-founder, Director and Shareholder of the Company.
Payments to the related entity were $186,513 during 1996. These arrangements
are continuing in 1997.
On March 20, 1997, Mr. Steel, was granted rights to purchase 550,000 shares
of Common Stock with a full recourse promissory note for the full amount at a
per share price of $1.875 per share, subject to time served and performance
restrictions.
During 1996, the Company made payments of $137,252 in connection with
purchases of carts and kiosks from Carts of Colorado, Inc. A $222,000 loss
was recorded in the third quarter of 1996, reducing the related assets
(including prior purchases, upgrades and additions purchased from other
vendors) to their estimated fair values. Mr. Daniel Gallery, co-founder,
director and executive vice president of Carts of Colorado, Inc. is also a
Director of the Company.
The terms of these transactions were, when entered into, generally similar to
those that could have been entered into with unrelated parties.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a)(1) Consolidated Financial Statements of Monterey Pasta Company: PAGE NUMBER
-----------
Reports of Independent Certified Public Accountants 32
Consolidated Balance Sheets: Year-End 1995 and 1996 35
Consolidated Statements of Operations: Years Ended 1994, 1995 and 1996 36
Consolidated Statements of Stockholders' Equity: Years Ended 1994, 1995 and 1996 37
Consolidated Statements of Cash Flows: Years Ended 1994, 1995 and 1996 39
Summary of Significant Accounting Policies 40
Notes to Consolidated Financial Statements 43
Schedule II -- Valuation and Qualifying Accounts 58
</TABLE>
All other schedules have been omitted since the required information is
continued in the Consolidated Financial Statements or because such schedules
are not required.
(a)(2) Exhibits: See Index to Exhibits on page 59. The Exhibits listed in
the accompanying Index of Exhibits are filed or incorporated by
reference as part of this report. Exhibit Nos. 10.1, 10.2, 10.18,
10.19, 10.20, 10.21, 10.22, 10.44, 10.45, and 10.46 are management
contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the quarter
ended December 29, 1996:
- - Report on Form 8-K filed on October 17, 1996, reported that the Board of
Directors, at a special board meeting held on October 4, 1996, accepted
the resignation of Mr. Norman "Ned" Dean as President and Chief Executive
Officer. The Board also accepted the resignations of three Board members,
Christopher G. Gilliam, Paul Miller, and E. Michael Moone.
- - Report on Form 8-K filed on October 25, 1996, reported the resignation of
Deloitte & Touche LLP as the Company's independent public accountants and
announced the engagement of BDO Seidman, LLP as its independent public
accountants effective October 25, 1996.
- - Report on Form 8-KA filed on November 8, 1996, amended the October 25, 1996
8-K filing to include reference to Deloitte & Touche LLP's October 31 letter
which noted that the accountants first notified the Company's Board of
Directors of its concern about alleged potential violations of the
Company's policy on insider trading by three directors on October 18, the
day it resigned as the Company's independent public accountants. This
filing also included notice of the resignation of Stephen J. Kennedy, Vice
President and Chief Financial Officer, effective November 8, 1996.
This filing noted that the Company's Chief Executive Officer conducted a
preliminary investigation which revealed margin calls with respect to two
directors in violation of the Company's, trading policy, and that the
Company had retained new securities counsel, Gray Cary Ware and
Freidenrich on October 30, 1996 to confirm the results of this
investigation, and to expand the scope of review through prior periods.
31
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
Monterey Pasta Company
We have audited the accompanying consolidated balance sheet of Monterey
Pasta Company and subsidiary as of December 29, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended. We have also audited the Schedule listed in the
accompanying index at Item 14(a). These financial statements and the
Schedule are the responsibility of Monterey Pasta Company's management. Our
responsibility is to express an opinion on these financial statements and the
Schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedule are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and Schedule.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Monterey Pasta
Company and subsidiary at December 29, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
San Francisco, California
March 26, 1997
32
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
Monterey Pasta Company
We have audited the accompanying consolidated balance sheet of Monterey Pasta
Company and subsidiaries as of December 31,1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of Monterey Pasta
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Monterey Pasta
Company and subsidiaries at December 31, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
March 29, 1996
33
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
Monterey Pasta Company
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Monterey Pasta Company and subsidiaries
for the year ended January 1, 1995. These financial statements are the
responsibility of Monterey Pasta Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Monterey Pasta Company and subsidiaries for the
year then ended January 1, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Oakland, California
March 6, 1995
34
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (Note 4) 1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 1,937,884 $ 724,729
Accounts receivable, less allowances of 1,241,248 1,669,366
$153,267 and $924,285 (Notes 1 and 7)
Inventories (Notes 2 and 7) 1,094,976 1,504,977
Prepaid expense and other (Note 10) 1,652,381 693,870
------------ ------------
Total current assets 5,926,489 4,592,942
Property and equipment, net (Notes 3 and 7) 5,338,968 5,700,902
Assets held for sale (Note 3) - 326,701
Intangible and other assets, net 295,320 141,105
Deposits and other 130,240 27,109
------------ ------------
Total assets $ 11,691,017 $ 10,788,759
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ - $ 845,372
Accounts payable 1,511,592 713,311
Accrued payroll and related benefits 257,447 299,968
Accrued liabilities (Note 13) 595,368 1,822,377
Current portion of notes, loans, and
capitalized leases payable (Notes 1, 4 and 18) - 901,166
Net liability from discontinued operations (Note 15) 2,964,415 387,584
------------ ------------
Total current liabilities 5,328,822 4,969,778
------------ ------------
Notes, loans, and capitalized leases payable,
less current portion (Notes 1, 4, 6 and 18) 4,130,599 734,279
------------ ------------
Total liabilities 9,459,421 5,704,057
------------ ------------
Commitments and contingencies (Notes 5, 9, 15 and 18) - -
Stockholders' equity (Notes 1, 6, 14, 16 and 18):
Series A and B Convertible Preferred Stock,
no par value, 1,000,000 shares
authorized, 3,500 issued and outstanding
in 1996 - 4,182,790
Common stock, no par value, 70,000,000
shares authorized, 6,819,112 and
8,714,652 issued and outstanding 27,268,263 35,221,611
Accumulated deficit (25,036,667) (34,319,699)
------------ ------------
Total stockholders' equity 2,231,596 5,084,702
------------ ------------
Total liabilities and stockholders' equity $ 11,691,017 $ 10,788,759
------------ ------------
------------ ------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
35
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
------------------------------------------
1994 1995 1996
------------------------------------------
<S> <C> <C> <C>
Net revenues (Note 11) $ 9,281,740 $ 18,715,826 $ 24,492,403
Cost of sales 7,025,995 11,111,379 15,851,120
------------ ------------ ------------
Gross profit 2,255,745 7,604,447 8,641,283
Selling, general and administrative (Notes 10 and 13) 3,639,116 8,460,031 16,237,609
Loss on disposition or impairment of assets (Note 3) - - 571,544
------------ ------------ ------------
Operating loss (1,383,371) (855,584) (8,167,870)
-
Interest income (expense), net (Note 4) 122,831 40,319 (430,968)
Other income, net - 51,084 145,808
------------ ------------ ------------
Loss from continuing operations before provision
for income taxes (1,260,540) (764,181) (8,453,030)
Provision for income taxes (Note 8) - - -
------------ ------------ ------------
Loss from continuing operations (1,260,540) (764,181) (8,453,030)
Discontinued operations (Notes 8 and 15):
Loss from operations and disposition (1,771,874) (18,476,706) -
(Loss) recovery during phase-out period - (2,802,622) 219,998
------------ ------------ ------------
Net loss $ (3,032,414) $(22,043,509) $ (8,233,032)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per common share and common equivalent share (Note 14):
Net loss from continuing operations
attributable to common shareholders (Note 14) $ (1,260,540) $ (764,181) $ (9,561,363)
------------ ------------ ------------
------------ ------------ ------------
Primary and fully diluted loss per share:
Continuing operations $ (0.24) $ (0.12) $ (1.16)
Discontinued operations $ (0.33) $ (3.30) $ 0.03
------------ ------------ ------------
Net loss per common share $ (0.57) $ (3.42) $ (1.13)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common and common equivalent 5,303,811 6,440,198 8,276,608
shares outstanding
Dividends on common shares $ - $ - $ -
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
36
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1994, 1995, AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- ------------------------- Accumulated
See Note 6 Shares Amount Shares Amount Deficit Total
- ---------------------------- ------------------------- ------------------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of 1994 1,200,000 $ - 3,657,500 $ 13,042,807 $ 39,256 $ 13,082,063
Issuance of common stock in
acquisition of assets at an
average net price per share
of $17.59 - - 100,000 1,759,000 - 1,759,000
Conversion of Series A
convertible preferred stock
to common stock (1,200,000) - 1,200,000 - - -
Issuance of common stock in
public offering, less costs of
$901,979, at an average net
price per share of $8.30 - - 750,000 6,223,021 - 6,223,021
Repurchase of common stock
issued in acquisition of assets,
at an average net price per
share of $17.59 - - (100,000) (1,759,000) - (1,759,000)
Issuance of common stock, less
offering costs of $15,654, at
an average net price per share
of $9.17 - - 450,000 4,124,346 - 4,124,346
Net loss - - - - (3,032,414) (3,032,414)
------------------------- ------------------------- ----------- ------------
Balance, end of 1994 - $ - 6,057,500 $ 23,390,174 $(2,993,158) $ 20,397,016
Exercise of stock options, at
an average net price per share
of $6.12 - - 15,733 96,305 - 96,305
Issuance of common stock
through Employee Stock
Purchase Plan, at an average
net price per share of $5.63 - - 879 4,950 - 4,950
Issuance of common stock, less
offering costs of $123,424,
at an average net price per
share of $6.83 - - 300,000 2,047,573 - 2,047,573
Issuance of common stock, less
offering costs of $264,339,
at an average net price per
share of $3.89 - - 445,000 1,729,261 - 1,729,261
</TABLE>
37
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1994, 1995, AND 1996
(CONTINUED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- ------------------------- Accumulated
See Note 6 Shares Amount Shares Amount Deficit Total
- ---------------------------- ------------------------- ------------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss - - - - (22,043,509) (22,043,509)
------------------------- ------------------------- ------------- ------------
Balance, end of 1995 - $ - 6,819,112 $ 27,268,263 $(25,036,667) $ 2,231,596
Conversion of 7% note
payable plus accrued
interest, less costs of
$264,951, at an average
net price per share of $4.21 - - 933,711 3,928,412 - 3,928,412
Issuance of common stock in
payment of penalties related
to conversion of 7% note,
at an average net price per
share of $5.06 - - 39,506 200,000 - 200,000
Issuance of common stock in
private placement, net of
offering costs of $222,147,
at an average net price per
share of $4.13 - - 916,000 3,785,353 - 3,785,353
Issuance of common stock in
payment of lease settlement
to a related party, at an
average net price per share
of $6.58 - - 5,323 35,000 - 35,000
Issuance of Series A and B
convertible preferred stock,
net of offering costs of
$146,938 plus deemed
dividend, at an average net
value per share of $1,195.08 3,500 4,182,790 - - (875,000) 3,307,790
Deemed dividend of $50
per share on preferred stock - - - - (175,000) (175,000)
Issuance of common stock
under Employee Stock
Purchase Plan, at an average
price per share of $4.58 - - 1,000 4,583 - 4,583
Net loss for the year - - - - (8,233,032) (8,233,032)
------------------------- ------------------------- ------------ ------------
Balance, end of 1996 3,500 $ 4,182,790 8,714,652 $ 35,221,611 $(34,319,699) $ 5,084,702
------------------------- ------------------------- ------------ ------------
------------------------- ------------------------- ------------ ------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
38
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
------------------------------------------
See Note 12 - Supplemental Cash Flow Information 1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (1,260,540) $ (764,181) $ (8,453,030)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 369,645 685,742 918,585
Allowances for bad debts, returns, adjustments - - 771,018
and spoils
Unrealized interest income from held-to-
maturity securities (141,986) - -
Inventory reserves - - 15,000
Loss on disposition and writedown of
property and equipment - - 571,554
Expenses paid in common stock - - 228,363
Changes in assets and liabilities:
Accounts receivable (376,613) (379,103) (1,199,134)
Inventories (546,193) (199,950) (425,001)
Prepaid expenses, intangible
assets and other (829,523) (947,732) 1,160,918
Income taxes payable (37,400) - -
Accounts payable 538,563 738,745 (798,281)
Accrued expenses 501,311 59,018 1,094,530
------------ ------------ ------------
Net cash used in continuing operations (1,782,736) (807,461) (6,115,478)
Net cash used in discontinued operations (9,971,057) (7,668,088) (1,967,602)
------------ ------------ ------------
Net cash used in operating activities (11,753,793) (8,475,549) (8,083,080)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of held-to-maturity securities (4,381,223) - -
Redemption of held-to-maturity securities 3,500,000 1,023,209 -
Purchase of property and equipment (3,492,216) (1,566,895) (1,968,360)
Proceeds from sale of property and equipment - - 75,383
Proceeds from sale of subsidiary - - 1,000
Advances to related party - - (350,000)
------------ ------------ ------------
Net cash used in investing activities (4,373,439) (543,686) (2,241,977)
------------ ------------ ------------
Cash flows from financing activities:
Increase in bank overdraft - - 845,372
Proceeds from revolving line of credit - - 20,081,967
Repayments on revolving line of credit - - (19,194,071)
Proceeds from long-term debt - 4,010,549 457,474
Debt issuance costs - - (64,951)
Repurchase of common stock (1,259,000) - -
Repayment of long-term debt and capital
lease obligations (368,137) (126,914) (111,615)
Proceeds from issuance of preferred stock - - 3,307,790
Proceeds from issuance of common stock 10,347,367 3,878,089 3,789,936
------------ ------------ ------------
Net cash used in financing activities 8,720,230 7,761,724 9,111,902
------------ ------------ ------------
Net decrease in cash (7,407,002) (1,257,511) (1,213,155)
Cash and cash equivalents, beginning of period 10,602,397 3,195,395 1,937,884
------------ ------------ ------------
Cash and cash equivalents, end of period $ 3,195,395 $ 1,937,884 $ 724,729
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
39
<PAGE>
MONTEREY PASTA COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Monterey
Pasta Company (a producer and distributor of pasta and pasta sauces),
together with its wholly-owned subsidiaries, Upscale Food Outlets, Inc. (a
chain of fast food restaurants serving the Company's product - through April
1996) and Monterey Pasta Development Company (a franchiser of restaurants -
inactive). All significant intercompany accounts and transactions have been
eliminated in consolidation. Collectively, Monterey Pasta Company, Upscale
Food Outlets, Inc. and Monterey Pasta Development Company are referred to as
the "Company." As discussed in Note 15, the Company discontinued the
operations of Upscale Food Outlets, Inc. and Monterey Pasta Development
Company effective December 31, 1995. Accordingly, the restaurant and
franchise businesses are accounted for as discontinued operations in the
accompanying consolidated financial statements for all periods presented.
The Company's production facility is located in Monterey Country,
California. The principal markets for the Company's food products are the
Western and Northeastern United States. The principal customers are retail
groceries and club stores. The Company offers credit and payment terms to its
customers in line with industry practices, generally calling for unsecured trade
accounts receivable.
ACCOUNTING PERIODS
Effective June 1, 1994, the Company changed from a monthly reporting
period to a 4-week, 4-week and 5-week reporting period. The fiscal year ends on
the last Sunday of each calendar year (a 52/53 week year). The 1994, 1995 and
1996 fiscal years ended on January 1, 1995, December 31, 1995, and December 29,
1996, respectively.
RECLASSIFICATIONS
Certain of the 1994 and 1995 financial statement amounts have been
reclassified to conform to the 1996 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCES
The Company provides reserves for estimated credit losses, product returns,
spoilage, and adjustments at a level deemed appropriate to adequately provide
for known and inherent risks related to such amounts. The allowances are based
on reviews of loss, return, spoilage, adjustment history, current economic
conditions, and other factors that deserve recognition in estimating potential
losses. While management uses the best information available in making its
determination, the ultimate recovery of recorded accounts, notes, and other
receivables is also dependent on future economic and other conditions that may
be beyond management's control.
40
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist principally of component ingredients to the
Company's refrigerated pasta and sauces, finished goods, and packaging
materials.
ADVERTISING COSTS
The Company expenses advertising costs as incurred or when the related
campaign commences. Slotting fees paid or credited to club stores and grocery
chains for shelf space allocations are amortized over the shorter of expected
utility or one year.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided for
on the straight-line method over the estimated useful lives of the assets (or
lease term for leasehold improvements if shorter):
Leasehold improvements 7 to 20 years
Machinery and equipment 7 to 12 years
Office furniture and equipment 5 to 15 years
Vehicles 5 to 7 years
Long-lived assets are assessed for possible impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected
by such an impairment loss are depreciated or amortized at their new carrying
amount over the remaining estimated life; assets to be sold or otherwise
disposed of are not subject to further depreciation or amortization.
INTANGIBLE ASSETS
Intangible assets consist of tradenames and other intangibles recorded at
cost, net of accumulated amortization of $146,417 and $201,356 in 1995 and
1996, respectively.
INCOME TAXES
The Company accounts for corporate income taxes in accordance with SFAS No,
109, "Accounting for Income Taxes", which requires an asset and liability
approach. This approach results in the recognition of deferred tax assets
(future tax benefits) and liabilities for the expected future tax consequences
of temporary timing differences between the book carrying amounts and the tax
basis of assets and liabilities. Future tax benefits are subject to a valuation
allowance to the extent of the likelihood that the deferred tax assets may not
be realized.
REVENUE RECOGNITION
The Company recognizes revenues through sales of pasta and sauce products
primarily to grocery and club store chains. Sales are recorded when goods are
shipped for most customers and upon delivery to retail locations for the Direct
Store Delivery program. Consignment shipments to club store warehouses are
recognized upon shipment to individual club store locations. Potential returns,
adjustments and spoilage allowances are provided for in accounts receivable
allowances and accruals.
41
<PAGE>
NET LOSS PER SHARE (see Note 14)
Net loss per common share is computed by dividing net loss plus dividends
on preferred stock (including deemed dividends - see Note 6) by the weighted
average number of common shares and dilutive common share equivalents (stock
options and warrants) outstanding during each year. Computations on the fully
diluted basis, which considers the exercise of stock options, warrants and
other convertible issues, were antidilutive in 1994, 1995 and 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Under this
standard, the recoverability of the carrying amount of certain long-lived
tangible and intangible assets is assessed whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable under
certain circumstances. During 1996, certain such assets were identified and
written down to their fair values (see Note 3). There was no effect from the
adoption of SFAS 121 on earlier years; the Company had adjusted the carrying
value of assets used in discontinued operations to their net realizable value as
of December 31, 1995 (see Note 15), and the events and circumstances
precipitating the 1996 writedowns had not yet occurred.
Also effective January 1, 1996, the Company adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". Under this standard,
companies are encouraged, but not required, to adopt the fair value method of
accounting for employee stock-based transactions. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Companies are permitted to continue to account for employee stock-based
transaction under Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees," but are required to disclose pro forma net
income and earnings per share as if the fair value method had been adopted. The
Company has elected to continue to account for stock-based compensation under
APB No. 25 (see Note 6).
On March 3, 1997 the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with APB No.
15, "Earnings per Share" (see Note 14). SFAS No. 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. Because of losses in 1994, 1995 and 1996, other
potentially dilutive securities have an antidilutive effect in all periods.
Accordingly, calculations under the new standard, which will be adopted in 1997,
are expected to have no significant difference from those under the current
method.
42
<PAGE>
MONTEREY PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk include cash, accounts receivable, and notes and
advances receivable from related party (see Note 7).
The Company maintains its cash and liquid investment accounts primarily
with two commercial banks located in the San Francisco Bay area and Suisun City,
California. The total bank cash balances are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000 held in each bank. A summary of
total insured and uninsured balances as of December 29, 1996 is as follows:
<TABLE>
<CAPTION>
Cash and Cash Equivalents
----------------------------------------
Commercial
Banks Other Total
----- ----- -----
<S> <C> <C> <C>
Amounts per bank and financial institution records $ 669,584 $ 52,850 $ 722,434
Portion insured by FDIC 203,849 - 203,879
---------- ---------- ----------
Uninsured amounts $ 465,735 $ 52,850 $ 518,585
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 29, 1996, estimated fair values for the Company's financial
instruments and methods and assumptions used in estimating fair values were as
follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Cash and Cash Equivalents: the carrying amount in the
balance sheet approximates fair value $ 724,729 $ 724,729
Accounts Receivable, less allowances: the carrying amount
in the balance sheet approximates fair value due to the
relatively short-term maturity of the debt and the
reserves reducing the amounts to net realizable value 1,669,366 1,669,366
Notes and Loans Payable (credit facility): the carrying
amount approximates fair value since the interest
floats with the prime rate 1,401,261 1,401,261
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Capitalized Leases Payable: the fair value is estimated
based on current interest rates and comparable
current available terms 234,184 234,184
2. INVENTORIES
1995 1996
---------- ----------
Inventories consisted of the following:
Production - Ingredients $ 530,511 $ 591,853
Production - Finished goods 393,484 654,640
Paper goods and packaging materials 210,981 313,484
------------- -------------
$ 1,134,976 $ 1,559,977
Reserves for spoils and obsolescence (40,000) (55,000)
------------- -------------
$ 1,094,976 $ 1,504,977
------------- -------------
------------- -------------
3. PROPERTY AND EQUIPMENT
1995 1996
---------- ----------
Property and equipment consisted of the following:
Leasehold improvements $ 1,550,963 $ 1,748,780
Machinery and equipment 3,398,749 4,187,535
Computers, office furniture and equipment 522,902 753,584
Vehicles 732,424 574,877
------------- --------------
6,205,038 7,264,776
Less accumulated depreciation and amortization (1,049,380) (1,588,242)
------------- --------------
5,155,658 5,676,534
Construction in progress 183,310 24,368
------------- --------------
$ 5,338,968 $ 5,700,902
------------- --------------
------------- --------------
</TABLE>
During the third and fourth quarters of 1996, the Company identified
certain property and equipment assets which were overvalued, obsolete and/or no
longer being used in the Company's operations. These assets consist of
44
<PAGE>
equipment replaced in the renovation of the Company's production facilities,
equipment designed for sales to restaurant and food service operations which
the Company has discontinued, carts and kiosks for alternative venue
operations which have also been discontinued, and office furniture and
fixtures identified as excess or impaired in value. The bulk of these
assets, included in assets held for sale in the accompanying balance sheet,
have been reduced to their estimated fair value, resulting in losses of
$90,918 for the obsolete equipment and $315,152 on the restaurant and
alternative venue equipment, (included in loss on disposition and impairment
of assets in the accompanying statement of operations). During 1996, the
Company had $169,567 in net revenues and a gross margin loss of $20,132
attributable to the restaurant and alternative venue operations; the
restaurant equipment was also used to produce product for the Company's
restaurant subsidiary prior to its sale in April (see Note 15). The assets
held for sale are expected to be sold or otherwise disposed of during the
coming year. An additional writedown of $46,000 relates to office furniture
and fixtures identified as excess and/or impaired in value.
4. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
<TABLE>
<CAPTION>
Year-end debt consisted of the following: 1995 1996
------------ ------------
<S> <C> <C>
Credit Facility:
Receivable and inventory revolver $ 52,375 $ 420,116
Equipment revolver 63,178 397,813
Equipment term loan - 583,332
7% Convertible note payable due October 1997 4,000,000 -
Capitalized leases payable
15,046 234,184
------------- --------------
$ 4,130,599 $ 1,635,445
Less current maturities - 901,166
------------- --------------
$ 4,130,599 $ 734,279
------------- --------------
</TABLE>
CREDIT FACILITY
In December 1995, the Company obtained a $3,000,000 credit facility
from a financial institution maturing in December 1998, secured by substantially
all assets of the Company, and composed of the following:
- - Accounts receivable and inventory revolver for up to $1,750,000 with
interest at prime plus 3% (11.25% at December 29, 1996)
- - Equipment revolver for up to $500,000 with interest at prime plus 3.25%
(11.5% at December 29, 1996), payable at $14,800 monthly, plus interest
- - Equipment term loan up to $750,000 with interest at prime plus 3.25% (11.5%
at December 29, 1996) payable at $20,833 monthly, plus interest
The terms of the Credit Facility prohibit the payment of cash
dividends on the Company's capital stock and restrict payments for, among
other things, repurchasing shares of its capital stock. Other terms of the
Credit Facility limit the Company with respect to, among other things, (i)
incurring additional indebtedness, (ii) adversely changing the capital
structure, and (iii) acquiring assets other than in the normal course of
business.
The terms of the Credit Facility also provide for potential events
of default, including material adverse changes in the Borrower's business or
financial condition. Effective January 1, 1997, the lender temporarily
increased the above rates, citing recent material adverse changes. The rate
on the accounts receivable and inventory revolver increased to prime plus 5%,
and the rate on the equipment loans increased to prime plus 5.25%. These
rates will revert to the original levels upon attaining profitable operations
in two consecutive quarters.
45
<PAGE>
The lender has formally waived any violation in covenants as of
December 29, 1996, and has clarified the definition of material adverse changes
as it relates to operating results. Accordingly, the equipment revolver and
term loans of Credit Facility are classified as long term in the accompanying
balance sheet.
CAPITALIZED LEASES PAYABLE
The Company leases certain equipment under capitalized leases, including
refrigeration equipment located at retail sites of the Company's single largest
customer (see Note 11). The arrangements with the customer call for title of
the equipment to be transferred to the customer if it carries Company products
continuously through August of the year 2000. The Company's arrangements with
the lessor call for monthly payments of $5,905, including interest at 11.08%,
plus a final purchase payment at fair value not to exceed $40,664. The leases
are collateralized by the underlying equipment with original capitalized values
of $71,299 and $320,270 in 1995 and 1996, respectively. Future minimum lease
payments consisted of:
Total
-----
1997 $ 81,264
1998 81,264
1999 77,796
2000 53,145
------------
$ 293,469
Less amounts representing interest 59,285
-----------
Net capitalized leases $ 234,184
-----------
-----------
7% CONVERTIBLE NOTE
In October 1995, the Company issued a 7% convertible note payable to
an investment company originally due October 1997. During 1996, this note,
plus accrued interest, was converted into 933,711 shares of common stock at an
average price of $4.21 (net of offering costs) (see Note 6).
PRINCIPAL PAYMENT MATURITIES
Notes, loans and capitalized leases payable require principal payments
(including the principal portion of capitalized leases above) as follows:
Amount
------
1997 $ 901,166
1998 491,156
1999 192,349
2000 50,774
------------
$ 1,635,445
------------
------------
46
<PAGE>
5. OPERATING LEASES
The Company currently leases production, warehouse and corporate
office space as well as certain equipment at various locations in California,
Washington and Texas under both month-to-month and non-cancelable operating
lease agreements, expiring through November 2004. The terms of the leases
generally require the Company to pay common area maintenance, taxes, insurance,
and certain other costs.
Future lease payments due under non-cancelable operating leases with
terms of more than one year but before consideration of a sublease entered into
in 1997 (see Note 18) are as follows:
Year Amount
---- ------
1997 $ 366,000
1998 364,000
1999 371,000
2000 377,000
2001 and thereafter 725,000
------------
$ 2,203,000
------------
------------
Rent expense under the leases for 1994, 1995, and 1996 was $167,216,
$300,362, and $544,072 (see also Note 7).
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK (SEE ALSO NOTE 18)
In August 1993, the Board of Directors declared a dividend to
common stockholders which was accounted for as a stock split. On that date,
the stockholders of record were issued .9231 shares of no par, non-voting
Series A Convertible Preferred for each share of common stock. In July 1994,
the resulting 1,200,000 preferred shares were automatically converted
one-for-one to common stock as a result of the beneficial ownership of two
principal stockholders being reduced to less than 20% of the common stock
outstanding.
At the August 1996 Annual Shareholders Meeting, the shareholders
approved a decrease in the authorized number of preferred shares from
5,000,000 to 1,000,000. During August, 3,000 shares of Series A Convertible
Preferred and 500 shares of Series B Convertible Preferred stock were issued
at an average stated price of $1000 per share under separate agreements
amended in February and April 1997. The shares are convertible to common
stock at 80% of the market price, as defined in the agreements. For Series
A, this amount is not to exceed $5.50 per share (maximum conversion price
$4.40 per share). The $875,000 value of the guaranteed contractual discount
rate, which is additional yield to the investors, is accounted for as a
deemed dividend to the preferred shareholders.
The common conversion shares contain registration rights; the
agreements relating to the Preferred Stock specify that delays in the
effective registration date after November 1, 1996 result in certain
penalties. As of December 29, 1996, $175,000 of such penalties, accrued in
other liabilities in the accompanying balance sheets, are accounted for as
deemed dividends in the accompanying statements of stockholders' equity. The
penalties for Series A, plus an additional $90,000 relating to 1997, are
payable in cash upon completion of a forthcoming private placement (see Note
18) and were subsequently paid in March 1997. Additional penalties will
accrue if a pending amended Registration Statement covering the related
conversion shares is not filed with the SEC by April 30, 1997; penalties for
February, March and April 1997 are prospectively waived under the terms of
the 1997.
47
<PAGE>
The Series A Convertible Preferred shares carried 4% cumulative
dividends from issuance through December 1996. Under the amended agreements,
in lieu of such dividends, the Company agreed to issue Common Stock having a
value of $50,000 with the shares to be calculated at 80% of fair market value
of the Company's Common Stock upon effectiveness of the Registration
Statement. No dividends for Series A (or Series A-1 issued in exchange)
accrue after December 31, 1996. The Series B shares initially carried a 4%
cumulative dividend through date of conversion. Under the amendments, the
Series B-1 Preferred Stock will accrue an 8% dividend from January 1997
forward, payable in each quarter.
Two hundred fifty shares of Series B Preferred Stock were converted into
160,256 shares of Common Stock in March 1997. In connection with the April
1997 agreement pursuant to which the holder of the remaining 250 shares of
Series B Preferred Stock exchanged such shares for Series B-1 Preferred
Stock, the Company will pay $30,000 in lieu of prior accrued dividends
through December 29, 1996 on the Series B Preferred Stock and penalties for
failure to obtain Effectiveness of the Registration Statement. Future
penalties will be due to the holder of the Series B-1 Preferred Stock if an
amendment to the Registration Statement is not filed by April 30, 1997, or if
the Registration Statement is not declared effective by July 31, 1997. Such
penalties will total $5,000 per week, until any such default is cured.
COMMON STOCK (see also Note 18)
During 1994, the Company issued 450,000 shares of its common stock at
a gross price of $9.20 per share in a private placement, and 750,000 shares of
its common stock at a gross price of $10.00 per share in a public offering.
During 1995, the Company issued 445,000 shares of its common stock at
a gross price of $4.48 per share and 300,000 shares of its common stock at a
gross price of $7.23 per share in two private placements. In December 1995, the
shareholders approved an increase in the authorized number of common shares to
20,000,000 from 10,000,000. At the August 1996 Annual Shareholders Meeting, the
shareholders approved an additional increase in the number of common shares
from 20,000,000 to 70,000,000.
During 1996, the 7% convertible note payable plus accrued interest
(see Note 4) was converted into 933,711 shares of common stock at an average
gross price of $4.49 per share. Included in the accrued interest was
$172,907 relating to a guaranteed discount from market price upon conversion,
treated as interest expense and an increase in the amounts credited to common
stock. In addition, 39,506 shares 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 conversion shares with the Securities and Exchange Commission.
In April 1996, the Company issued 916,000 shares of its common stock
at a gross price of $4.38 per share iFn a private placement. In June 1996, the
Company issued 5,323 shares of its common stock at a gross price of $6.58 per
share to a related party in payment of a lease termination settlement (see Notes
5 and 7). These shares, as well as the conversion shares pertaining to the 1996
Series A and B Convertible Preferred Stock above, are subject to registration
rights.
The Company adopted a Shareholder Rights Agreement in May, 1996
which gives shareholders the right to purchase one additional share of common
stock at $28 for each share of common stock owned. The Rights are
exercisable upon announcement of pending attainment by a person or entity who
(together with all affiliates) will become the beneficial owner, through
purchase or by merger, of securities representing 20% or more of the voting
power of all common stock, except in certain circumstances of stock
acquisition or merger as permitted by a vote of a majority of the non-officer
members of the Board of Directors. The Rights, which expire upon the earlier
of consummation of a merger permitted by a vote of the Board as described
above or December 31, 2004, may be redeemed by the Company at $.001 each.
WARRANTS
In 1993, the Company issued warrants to purchase 205,000 shares of
common stock for $8.40 per share through December 1998.
In April 1996, the Company issued warrants to purchase 400,750
shares of its common stock at $6.50 per share in connection with a placement
of 916,000 shares of common stock. The warrants, with an estimated original
value of $137,400, are valid for seven years, and include registration rights
for the related shares.
48
<PAGE>
STOCK OPTION PLAN
Effective August 31, 1993, the Company's Board of Directors adopted
a stock option plan, subsequently amended and restated, which provides for
the granting of incentive stock options or non-qualified stock options to
eligible employees, consultants and outside directors. The Company has
reserved 1,740,000 shares of its common stock for issuance under the plan.
The plan provides that the option price shall not be less than the fair
market value of the shares on the date of grant; therefore, no compensation
expense is recorded for employees. Compensation, or other expense is
recorded for any non-employee grants at fair value of the option award.
Options vest over a period of one to three years and may be exercised for a
period of up to ten years. In addition, certain options were granted by the
Board outside the plan in 1995. The following table shows activity in
outstanding options during 1995 and 1996.
<TABLE>
<CAPTION>
1995 1996
------------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 628,933 $ 7.16 1,236,348 $ 6.70
Granted 905,364 6.92 505,000 4.72
Exercised (10,666) 6.03 - -
Canceled (287,283) 8.43 (1,151,667) 6.45
---------- ----------
Outstanding at end of year 1,236,348 $ 6.70 589,681 $ 5.26
---------- ----------
---------- ----------
Options exercisable at year end 334,824 $ 6.25 495,823 $ 4.97
---------- ----------
---------- ----------
Weighted average fair value of $ 3.31 $ 2.27
options granted during
the year
</TABLE>
The following table shows information for options outstanding or
exercisable as of December 29, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Range of Remaining Average Remaining Average
Exercise Number of Contractual Exercise Number of Contractual Exercise
Prices Shares Life Price Shares Life Price
- -------------- --------- ----------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
$1.88 - 4.99 170,000 9.5 years $1.99/share 170,000 9.5 years $1.99/share
$5.00 - 6.99 330,681 6.9 years $6.26/share 266,823 6.5 years $6.22/share
$7.00 - 8.88 89,000 8.8 years $7.77/share 59,000
--------- --------- 8.7 years $7.86/share
Total 589,681 8.0 years $5.26/share 495,823 7.8 years $4.97/share
--------- ---------
--------- ---------
</TABLE>
49
<PAGE>
If the Company had elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the estimated
fair value of stock option grants over the service period, regardless of
later changes in stock prices and price volatility. The fair value at date
of grant for options granted in 1995 and 1996 has been estimated based on a
modified Black-Scholes pricing model with the following assumptions: no
dividend yield for any year; expected volatility for 1995 and 1996 grants of
approximately 44% and 46%, based on historical results; risk-free interest
rates of 6.65% and 6.6% for 1995 and 1996 grants; and expected lives of
approximately five years for all grants. The following table shows pro forma
net loss and loss per share for 1995 and 1996 as if the Company had elected
the fair value method of accounting for stock options.
1995 1996
------------ ------------
Net loss as reported $(22,043,509) $(8,233,032)
Additional compensation expense (383,714) (291,232)
------------- ------------
Pro forma net loss, as adjusted $(22,427,223) $(8,524,264)
Deemed dividends on preferred stock
(see Note 6) - (1,108,333)
------------- ------------
Pro forma net loss attributable
to common shareholders $(22,427,223) $(9,622,597)
------------- ------------
------------- ------------
Net loss per share (primary and
fully diluted) $ (3.42) $ (1.13)
Additional compensation expense (0.06) (0.04)
------------- ------------
Pro forma net loss per share, as adjusted $ (3.48) $ (1.17)
------------- ------------
------------- ------------
The above calculations include only the effects of 1995 and 1996
grants. Because options generally vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net earnings or losses in future years.
POTENTIAL DILUTION
Common Stock outstanding and the effect of convertible preferred
stock, options and warrants at year-end 1996 are summarized as follows (see
also Note 18):
Potential
Proceeds
Shares from Exercise
------------ ---------------
Common stock outstanding 8,714,652
Convertible preferred stock 2,536,231 $ 3,500,000
(based on share price at
December 29, 1996)
50
<PAGE>
Stock options 589,681 3,099,597
Warrants 605,000 4,322,000
------------
12,445,564
------------
------------
EMPLOYEE STOCK PURCHASE PLAN
In October 1994, the Company's Board of Directors adopted a qualified
employee stock purchase plan. Under the purchase plan, eligible employees
(those who have completed one year of continuous employment with the Company)
may purchase shares of the Company's common stock through payroll deductions not
to exceed 10%. The Company has reserved 200,000 shares of its common stock
for issuance under the purchase plan, which remains in effect until terminated
by the Company's Board of Directors, or until all of the shares reserved for
under the purchase plan have been issued. Unless the Board has otherwise
provided a higher amount prior to the commencement of an offering period, the
offering exercise price for each purchase period is 85% of the lesser of (a) the
fair market value of the shares on the offering date of such offering period or
(b) the fair market value of the shares on the given purchase date. There were
879 and 1,000 shares of common stock issued under the plan in 1995 and 1996,
respectively.
7. RELATED PARTY TRANSACTIONS
The Company leased office space from a partnership in which a
limited partner is a Stockholder, former Director, former President and
former Chairman of the Board of the Company (see also Note 15). Rent expense
under this lease in 1994, 1995 and 1996 was $146,300, $175,308, and $150,108,
respectively. The Company vacated this space in February 1996, and paid
$65,000 plus 5,323 shares of its common stock (see Note 6) in settlement of
the lease obligation.
During 1996, the Company also purchased certain office furniture and
equipment under a prior agreement from the stockholder referred to above for
$100,000. Certain of the furniture purchased was reduced to its estimated fair
value at the end of 1996, resulting in a writedown of $55,000 (see Note 3).
Also during 1996, the Company repaid $112,500, previously received
from a potential franchisee, to a trust controlled by the stockholder referred
to above in connection with termination of franchising operations. During
1995, the trust sold land and loaned cash to the potential franchisee in
anticipation of operating restaurants under the Monterey Pasta name. When
the franchising operations were discontinued in early 1996 (see Note 15), the
land was returned to the trust and the amounts received as advance
franchising fees were paid at the franchisee's direction in satisfaction of
its obligation to the trust.
Upscale Food Outlets, Inc. (UFO) was purchased from the Company in
April 1996 by an entity owned by the stockholder referred to above. During
1996, the Company sold $62,350 in food products to UFO (see Notes 15 and 16).
Of this amount, $18,738 is uncollected and is fully reserved at December 29,
1996.
In addition, Other Income in 1996 includes $73,750 in short-swing
profits recovered from the stockholder referred to above pursuant to Section
16(b) of the Securities & Exchange Act of 1934.
The Company's Chief Executive Officer, who is also a Director and
Stockholder, is a director and stockholder of an entity from whom the Company
contracted certain co-packing service and obtained raw materials at terms and
prices similar to other third-party vendors. Another director, stockholder
and chief executive officer of the related entity is also a Co-founder,
Director and Stockholder of the Company. Payments to the related entity and
its predecessors were $16,706, $153,923, and $186,513 during 1994, 1995 and
1996.
51
<PAGE>
During 1995 and 1996, the Company paid $72,803 and $12,833,
respectively in operations consulting fees to an entity owned by a Director
of the Company. During 1995 and 1996, the Company made payments of $57,098
and $137,252, respectively in connection with purchases of carts and kiosks
from another entity. The co-founder, director and executive vice president
of this entity is also a Director of the Company. During the third quarter
of 1996, these carts and kiosks (including additions and purchases from other
vendors) were reduced to their estimated fair market value resulting in a
loss of $221,569 (see Note 3).
8. INCOME TAXES
A reconciliation between the Company's effective tax rate and U.S.
federal income tax rate on loss from continuing operations follows:
1994 1995 1996
---- ---- ----
Federal statutory rate (34.0%) (34.0%) (34.0%)
State income taxes, net (6.0%) (6.0%) (6.0%)
Losses for which tax benefits are
reduced by valuation allowances 40.0% 40.0% 40.0%
------- ------- -------
Effective income tax rate 0.0% 0.0% 0.0%
------- ------- -------
------- ------- -------
Income tax benefits (reduction of benefits) related to discontinued
operations, fully offset by valuation allowances, approximated $708,000,
$8,512,000, and ($88,000) in 1994, 1995, and 1996, respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
1995 1996
---- ----
Net operating loss carryforward $ 6,960,000 $ 13,360,000
Reserves for restructure and
discontinued operations 3,077,000 168,000
Depreciation and amortization 143,000 130,000
Other - 124,000
------------ -------------
10,180,000 13,782,000
Less valuation allowance (10,180,000) (13,782,000)
------------ -------------
Net deferred tax assets $ - $ -
------------ -------------
------------ -------------
Since the Company could not determine that it was more likely than not
that the deferred tax assets would be realized, a 100% valuation allowance was
provided in 1995 and 1996.
At December 29, 1996, the Company had a tax net operating loss
carryforward (NOL) of approximately $17 million which expires in varying amounts
through 2011. Should significant changes in the Company's ownership occur, the
annual amount of NOL carryforwards available for future use would be limited.
52
<PAGE>
9. LITIGATION AND CONTINGENCIES
There are no material pending legal proceedings, other than routine
litigation incidental to the Company's business, to which the Company is a party
or to which any of its property is subject. The Company's former restaurant
subsidiary, UFO, is a defendant in approximately four lawsuits alleging breach
of lease relating to restaurants closed in 1995 and 1996. As disclosed in Note
15, the Company sold UFO in 1996, and contractually UFO continues to have sole
responsibility for such litigation. Although there can be no assurance given as
to the results of such legal proceedings, based upon information currently
available, management does not believe these proceedings will have a material
adverse effect on the financial position or results of operations of the
Company.
10. ADVERTISING COSTS AND EXPENDITURES
Included in the balance sheet under Prepaid Expenses and Other are
advertising costs of $385,939 at December 29, 1996, relating primarily to
slotting fees and advertising production costs. Total advertising expenses and
slotting fees included in Selling, General and Administrative expenses in the
accompanying statements of operations for 1996 were $3,635,796, including
$780,106 in writedowns to net realizable value in the third and fourth quarters
of 1996. These writedowns included $523,000 in slotting fees determined to
be nonrecoverable or of no future benefit. Additionally, based on an
evaluation of the potential benefits from significant media advertising
campaigns associated with attempts to penetrate new markets, the Company
decided to withdraw its current media advertising efforts. As a result,
related non-recoverable prepaid advertising and advertising production
expense, totaling $257,106 were written off.
11. SIGNIFICANT CUSTOMERS
Price/Costco and Safeway each accounted for portions of total revenues
as follows:
1994 1995 1996
---- ---- ----
Price/Costco 45% 47% 41%
Safeway 13% 12% 9%
At year end 1995 and 1996, Safeway accounted for approximately $261,000
and $276,000, respectively, and Price/Costco accounted for approximately
$618,000 and $837,000, respectively, of trade accounts receivable.
The Company currently sells its products to four separate Price/Costco
regions which makes purchasing decisions independently of one another. On a
regular basis, these regions re-evaluate the products carried in their stores.
There can be no assurance that these Price/Costco regions will continue to offer
Monterey Pasta's products in the future or continue to allocate Monterey Pasta
the same amount of shelf space. Currently, the loss of either Price/Costco or
Safeway would materially adversely affect the Company's business operations.
No other single customer accounted for more than 10% of the revenues.
12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
CASH PAYMENTS: ---- ---- ----
<S> <C> <C> <C>
Interest $ 19,379 $ 18,308 $ 313,155
Debt issue costs - - 64,591
NON-CASH OPERATING ACTIVITIES:
Charges and adjustments to reserve for
discontinued operations - 2,964,415 260,229
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
NON-CASH FINANCING AND INVESTING ACTIVITIES: ---- ---- ----
<S> <C> <C> <C>
Conversion of long-term debt and accrued
interest to common stock $ - $ - $ 3,928,412
Capitalization of lease - purchase of
equipment - - 271,091
Deemed dividends on preferred stock - - 1,050,000
Transfer of fixed assets to assets held
for sale - - 326,701
Issuance of note receivable in
sale of subsidiary - - 2,500,000
Issuance of common stock in payment for
expenses or assets 1,759,000 - 235,000
Forgiveness of debt in connection with
repurchase of common stock 500,000 - -
</TABLE>
13. EMPLOYEE BENEFIT PLAN
In 1996, the Company instituted a 401(k) Plan covering substantially all
full-time employees with six months of service. Under the Plan, employees may
elect to defer up to 15% of compensation (subject to certain limitations).
One-half of employee contributions up to 6% of compensation are matched by the
Company. In addition, the Company may make an annual discretionary
profit-sharing contribution. Employee contributions, Company matching
contributions and related earnings are always 100% vested. Company
profit-sharing contributions and related earnings vest 20% a year, with 100%
vesting after five years of service. During 1996, the Company's expense for
matching contributions was $21,970; there was no profit-sharing contribution
for 1996.
14. EARNINGS PER SHARE
Primary earnings per share are based on the weighted-average number of
common shares actually outstanding during the period and dilutive common stock
equivalents assumed to be outstanding during the period (no includable
equivalents in any period presented). Fully diluted earnings per share in 1996
include the common shares converted from long-term debt during 1996 (see Notes 4
and 6) as if they had been converted at the beginning of 1996. The 1996 losses
are also increased by $1,108,333 in dividends on preferred stock,
representing amounts unavailable to actual or potential common shareholders, as
follows:
Net loss from continuing
operations $(8,453,030)
Deemed dividends on preferred stock for
guaranteed conversion discount (see Note 6) (875,000)
Deemed dividends on preferred stock for
penalty for late registration of
conversion shares (see Note 6) (175,000)
Contractual face rate dividends on preferred
stock (see Note 6) (58,333)
----------
Net loss from continuing operations
attributable to common shareholders (9,561,363)
Net recovery from discontinued operations
attributable to common shareholders 219,998
------------
Net loss attributable to common shareholders $(9,341,365)
------------
------------
The contractual face rate dividends have not yet been declared or accrued in
the accompanying balance sheets. These amounts will be excluded from
consideration as dividends in 1997 upon payment in cash for Series B or
issuance of common stock for Series A (see Note 6). Because of equivalent
shares includable in different periods or at different amounts, per-share
amounts for the four quarters do not necessarily equal per-share amounts for
the entire year.
15. DISCONTINUED OPERATIONS
In early 1996, the Company decided to discontinue the operations of its
restaurant and franchise subsidiaries, and wrote off the investment in those
subsidiaries effective as of December 31, 1995. In early 1996, all operations
of the franchising subsidiary, as well as agreements with two franchisees, were
terminated. In April 1996, the Company's restaurant subsidiary Update Food
Outlets, Inc. (UFO), was sold to Upscale Acquisitions, Inc. (Upscale), which is
wholly-owned by Mr. Lance Mortensen. Mr. Mortensen is the chief executive
officer, president, and a director of Upscale; he is also a Stockholder and
former Director, Chairman of the Board, President, and Chief Executive Officer
of the Company.
The purchase price for the shares of UFO sold to Upscale was $1,000 cash
plus a note executed by Upscale for $2,500,000 at prime, not to exceed 10%.
The original terms of the note called for 84 equal monthly payments to begin
on April 1, 1998. In addition, under the agreement, the Company advanced
$350,000 to UFO subsequent to the purchase. The purchase note is accounted
for under the cost recovery method which defers recognition of income (or
reduction of loss) until payments are received. The cash advances, bearing
interest at the same rate, are not accounted for under the cost recovery
method, but have been fully reserved as possibly uncollectible. At December
29, 1996, amounts owed by UFO and Upscale to the Company, fully offset by
reserves and deferred income, totaled $3,045,237, including unrecognized
interest income of $176,489 and accounts receivable of $18,738 (see Note 7).
54
<PAGE>
Net revenues from the discontinued operations were $6,068,879, $5,835,816
and $1,796,430 for 1994, 1995 and 1996 (prior to sale of UFO), respectively.
Operating losses from the discontinued operations were $1,771,874, $13,586,374,
and $839,314 for 1994, 1995, and 1996 (prior to sale of UFO), respectively.
The total 1995 losses from discontinued operations also included provisions
covering 1996 losses prior to sale of UFO, accruals related to discontinued
operations, and provisions to reduce the net assets from discontinued operations
to their net realizable value. The 1996 losses were charged directly to the
resulting reserves, as were actual expenditures related to the restaurant and
franchising operations. During 1996, the reserves were also reduced by $219,998
to reflect adjustments of estimates to the actual Company expenditures.
Remaining reserves of $387,584 are expected to be utilized during 1997 as the
Company finalizes all arrangements winding up its involvement in the
discontinued operations.
Net liabilities of the discontinued operations as of year end 1995 and 1996
were:
1995 1996
------------- -------------
Current assets $ 1,445,345 $ -
Current liabilities (10,283,650) (387,584)
Non-current assets 5,968,290 -
Non-current liabilities (94,400) -
------------- -------------
Net liabilities $ (2,964,415) $ (387,584)
------------- -------------
------------- -------------
16. QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflect all
adjustments which, in the opinion of management, are of a normal and
recurring nature necessary to present fairly the results of operations for
the periods presented. The 1996 results for first, second, and third quarter
have been retroactively restated to reflect various corrections as follows:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER
------------------------------------------ ------------------------------------------
As As
Originally As Originally As
Filed Adjustments Adjusted Filed Adjustments Adjusted
----- ----------- -------- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales 6,261,734 (128,647) a 6,133,087 6,716,498 - 6,716,498
Gross profit 2,679,762 (76,090) a 2,603,672 3,194,949 - 3,194,949
Operating loss (239,969) (241,665) b (481,651) (16,243) (367,543) d (383,786)
Loss from continuing
operations (239,996) (469,854) c (709,850) (82,939) (367,543) d (450,482)
Net loss (239,996) (469,854) c (709,850) (82,939) - (82,939)
Earnings per primary and
fully diluted common share:
Continuing operation (0.03) (0.07) (0.10) (0.01) (0.04) (0.05)
Discontinued operation - - - - 0.04 0.04
----------- ----------- ----------- ----------- ----------- ------------
Net loss (0.03) (0.07) (0.10) (0.01) - (0.01)
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
a. $128,647 in sales and $52,557 in related costs were previously
inadvertently recorded in advance of passage of title.
b. In addition to the $76,090 referred to in "a", the following corrections
were made:
Lease termination costs not accrued 103,000
Writeoff of leasehold improvements 41,867
Errors in capitalization of fixed assets
and prepaid expenses 56,000
Interest expense improperly included
in selling, general and administrative
expenses (55,292)
Increase in reserves against receivables 19,990
-----------
165,565
-----------
c. In addition to the $241,685 referred to in "a" and "b", interest expense
was increased by $228,199, including the $55,292 reclassification
described above and $172,907 in guaranteed conversion discount (see
Note 4).
d. Reductions to the reserve for discontinued operations were previously
netted against selling, general and administrative expenses in error.
In addition, consideration of deemed dividend discount on loss per share in
Third Quarter resulted in an additional $.07 loss per share.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter 1995
------- ------- ------- ------- ----
Year Ended 1995
<S> <C> <C> <C> <C> <C>
Net Sales $ 3,840,535 $ 3,948,334 $ 5,089,422 $ 5,837,535 $18,715,826
Gross profit 1,469,933 1,724,565 2,167,450 2,242,499 7,604,447
Operating profit (loss) 198,113 (267,282) 124,091 (910,506) (855,584)
Income (loss) from 198,113 (242,803) 132,204 (851,695) (764,181)
continuing operations
Net loss $ (1,788,804) $ (9,204,721) $ (960,499) $(10,089,485) $(22,043,509)
</TABLE>
55
<PAGE>
Earnings/(loss) per primary and
fully diluted common share (Note 14):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Continuing operations $0.03 ($0.04) $0.02 ($0.12) ($0.12)
Discontinued operations ($0.32) ($1.47) ($0.16) ($1.36) ($3.30)
------------ ----------- ----------- ----------- ------------
Net loss ($0.29) ($1.51) ($0.14) ($1.48) ($3.42)
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
First Second Third Fourth
Quarter Quarter Quarter Quarter 1996
------------ ----------- ----------- ----------- ------------
Year Ended 1996
Net Sales $ 6,133,087 $ 6,716,498 $ 5,670,820 $ 5,971,998 $ 24,492,403
Gross profit 2,603,672 3,194,949 752,085 2,090,577 8,641,283
Operating loss (481,651) (383,786) (5,957,038) (1,345,395) (8,167,870)
Loss from continuing (709,850) (450,482) (5,924,928) (1,367,770) (8,453,030)
operations
Net loss $ (709,850) $ (82,939) $(5,924,928) $(1,515,315) $ (8,233,032)
Earnings/(loss) per primary and
fully diluted common share (Note 14):
Continuing operations ($0.10) ($0.05) ($0.75) ($0.18) ($1.16)
Discontinued operations $0.00 $0.04 $0.00 ($0.01) ($0.03)
------------ ----------- ----------- ----------- ------------
Net loss ($0.10) ($0.01) ($0.75) ($0.19) ($1.13)
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
</TABLE>
17. LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company had an operating loss of $8,167,870 and used
$6,115,478 in cash for continuing operations. In addition, net working
capital at December 29, 1996 was a deficit of $376,836. As part of its plans
to return to profitable operations, the Company has:
- withdrawn from certain unprofitable markets and customers (see Note 3);
- renegotiated terms with certain other customers;
- realigned its marketing focus, reducing related slotting fees and
advertising expenditures (see Note 10);
- renegotiated agreements with preferred shareholders reducing certain
dividends and penalties (see Notes 6 and 18);
- relocated and centralized its corporate headquarters from San
Francisco into its manufacturing plant location in Salinas, California
(see Note 18);
and
- reduced its headcount and related overhead.
In addition, subsequent to December 29, 1996, the Company completed a
Private Placement of approximately 1,600,000 shares of Common stock at a
gross price of $1.35 per share, and entered into an agreement to sell
550,000 shares of restricted Common stock to the Company's Chief Executive
Officer at $1.88 per share (see Note 18). While there can be no assurance as
to the outcome of the Company's initiatives, management believes these
changes in its business, as discussed above, will allow the Company to
enhance its financial position and operating results.
18. SUBSEQUENT EVENTS
EQUITY TRANSACTIONS
In March 1997, the Company's Chief Executive Officer agreed to
purchase 550,000 shares of Common Stock containing various time-served and
performance restrictions with a non-recourse note due December 31, 1997. The
shares will be repurchasable by the Company at the original price of $1.88
per share (market price on the effective date of grant) if the restriction
conditions are not met, in varying amounts, through September 1997.
Effective December 31, 1996, a financing consultant for the Company was
granted options to buy 50,000 shares of Common Stock at $1.88 per share
(market price on the effective date of grant) in lieu of consulting fees.
On March 13, 1997, one half of the Series B Preferred stock was converted
into 160,256 shares of Common Stock. Also, as discussed in Note 6, certain
terms of the agreement for both Series A and Series B Preferred stock were
amended retroactively in February and April 1997. Accordingly, in March
1997, the Company's 3,000 shares of Series A Preferred Stock were exchanged
for Series A-1 incorporating the amendments. In April, 1977 the remaining
250 shares of Series B Preferred Stock will be exchanged for Series B-1,
incorporating the amendments.
56
<PAGE>
During the first quarter of 1997, the Company completed a private placement
of approximately 1,600,000 shares of Common stock at a gross price of $1.35 per
share, and provided registration rights relating to those shares.
In March 1997, the President of the Company was granted options to buy
30,000 shares of Common Stock at $2.00 per share (market price on the effective
date of grant) as part of a termination settlement.
FINANCING TRANSACTIONS
As discussed in Note 4, the interest rates on the Company's credit
facility were increased to prime plus 5.0% and prime plus 5.25% for the accounts
receivable/inventory and equipment portions of the line, respectively, effective
January 1, 1997.
OTHER
In January 1997, the Company relocated its corporate and administrative
headquarters from San Francisco to its plant location in Salinas, California.
Effective April 1, 1997, the Company subleased its San Francisco office space to
Harper Collins Publishing, Inc. on a four year sublease arrangement.
57
<PAGE>
SCHEDULE II
MONTEREY PASTA COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Additions - Deductions -
Balance, Charged to Writeoffs Balance,
Beginning Costs and Charged to End of
of 1996 Expense Reserves 1996
--------- ----------- ------------ --------
Allowances against Receivables --
Spoils, Returns, Adjustments
and Bad Debts 153,267 1,061,566 290,548 924,285
Receivable from Related Party - 350,000 - 350,000
Inventory Reserves --
Spoils and Obsolescence 40,000 55,000 40,000 55,000
58
<PAGE>
INDEX TO EXHIBITS
NUMBER
EXHIBIT TITLE
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 5 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 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 from 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 1993 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 from the 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 from the 1996 Form 10-K/A)
59
<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 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 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 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 filed 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 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 Exhibits with corresponding numbers
filed with 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 to 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 1995 Q3 10-Q)
60
<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 Company's 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 Company's
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 Company's 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)
61
<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 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
Exhibits with corresponding numbers filed with 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
Q1 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 filed with the 1996 Q1 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
filed with the 1996 Q1 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 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 1996 Q1 10-Q)
11 Computation of Net Loss per Share
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
27.1 Financial Data Schedule (Previously Filed)
62
<PAGE>
* Management contract or compensatory plan or arrangement covering
executive officers or directors of Monterey Pasta Company and its
subsidiary, Upscale Food Outlets, Inc.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the of San Francisco, State
of California, on the 25th day of August, 1997.
MONTEREY PASTA COMPANY
By: \s\ R. LANCE HEWITT
------------------------------
R. Lance Hewitt
Chief Executive Officer
By: \s\ JAMES S. SERBIN
-----------------------
James S. Serbin
Chief Financial Officer
As of August 25, 1997, no Proxy statements have yet been furnished to
securityholders. The Company made its Annual Report available to
securityholders in July, 1997, and provided copies of such report
to the Commission at that time.
64
<PAGE>
EXHIBIT 11
MONTEREY PASTA COMPANY
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
PRIMARY NET LOSS PER SHARE
<S> <C> <C> <C>
COMPUTATION FOR STATEMENT OF OPERATIONS
Loss from continuing operations before
dividends on preferred stock $ (1,260,540) $ (764,181) $ (8,453,030)
Deduct dividends on preferred shares - - (1,108,333)
------------------- ----------------- ----------------
Loss attributable to common shareholders
before discontinued operations (1,260,540) (764,181) (9,561,363)
Recovery (loss) from discontinued operations (1,771,674) (21,279,328) 219,998
------------------- ----------------- ----------------
Loss attributable to common stock $ (3,032,214) $ (22,043,509) $ (9,341,365)
------------------- ----------------- ----------------
------------------- ----------------- ----------------
Weighted average number of common
shares outstanding 5,303,811 6,440,198 8,276,608
------------------- ----------------- ----------------
------------------- ----------------- ----------------
Primary net loss per share:
Continuing operations $ (0.24) $ (0.12) $ (1.16)
Discontinued operations (0.33) (3.30) 0.03
------------------- ----------------- ----------------
Net loss $ (0.57) $ (3.42) $ (1.13)
------------------- ----------------- ----------------
------------------- ----------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FULLY DILUTED NET LOSS PER SHARE
COMPUTATION FOR STATEMENT OF OPERATIONS - SUBMITTED IN ACCORDANCE WITH REGULATION S-K ITEM 601(b)(11)
ALTHOUGH IT IS CONTRARY TO PARAGRAPH 40 OF APB OPINION NO. 15 BECAUSE IT PRODUCES AN ANTI-DILUTIVE RESULT,
OR NOT REQUIRED BY FOOTNOTE 2 TO PARAGRAPH 14 OF APB OPINION NO. 15 BECAUSE IT RESULTS IN DILUTION OF
LESS THAN 3%
<S> <C> <C> <C>
Loss from continuing operations before
dividends on preferred stock $ (1,260,540) $ (764,181) $ (8,453,030)
Add back interest on convertible debt ** 208,962
Deduct dividends on preferred shares * - - (1,108,333)
------------------- ----------------- ----------------
Loss attributable to common shareholders
before discontinued operations (1,260,540) (764,181) (9,352,401)
Recovery (loss) from discontinued operations (1,771,674) (21,279,328) 219,998
------------------- ----------------- ----------------
Loss attributable to common stock $ (3,032,214) $ (22,043,509) $ (9,132,403)
------------------- ----------------- ----------------
------------------- ----------------- ----------------
Weighted average number of common
shares outstanding 5,303,811 6,440,198 8,276,608
Assuming conversion of convertible debt ** - N/A-Anti-Dilutive 124,029
------------------- ----------------- ----------------
Weighted average number of common
shares outstanding as adjusted 5,303,811 6,440,198 8,400,637
------------------- ----------------- ----------------
------------------- ----------------- ----------------
Diluted net loss per share:
Continuing operations $ (0.24) $ (0.12) $ (1.11)
Discontinued operations (0.33) (3.30) 0.03
------------------- ----------------- ----------------
Net loss $ (0.57) $ (3.42) $ (1.08)
------------------- ----------------- ----------------
------------------- ----------------- ----------------
</TABLE>
* See Note 14 to the financial statements
** Convertible debt considered although anti-dilutive, since actually converted
during the period
<PAGE>
EXHIBIT 21.1
MONTEREY PASTA COMPANY
SUBSIDIARIES OF THE COMPANY
INACTIVE:
Monterey Pasta Development Corporation
(Incorporated in California May 16, 1994)
1528 Moffett St.
Salinas, California 93905
ACTIVE:
None
