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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997.
( ) 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
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MONTEREY PASTA COMPANY
<TABLE>
<S> <C>
DELAWARE 77-0227341
(State or other (IRS Employer
jurisdiction of Identification
incorporation or No.)
organization)
</TABLE>
1528 MOFFETT STREET
SALINAS, CALIFORNIA 93905
(Address of principal executive offices)
TELEPHONE: (408) 753-6262
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
At November 10, 1997, 11,098,151 shares of common stock, $.001 par value, of
the registrant were outstanding.
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MONTEREY PASTA COMPANY
FORM 10-Q
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) September 28, 1997 and December 29,
1996................................................................................ 3
Condensed Consolidated Statements of Operations (unaudited) Third quarter ended
September 28, 1997 and September 29, 1996 and the nine months ended September 28,
1997 and September 29, 1996......................................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) Nine months ended
September 28, 1997 and September 29, 1996........................................... 5
Notes to Unaudited Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 15
Item 2. Changes in Securities.................................................................... 15
Item 3. Defaults Upon Senior Securities.......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders...................................... 16
Item 5. Other Information........................................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
Signature Page................................................................................... 17
Exhibit Index.................................................................................... 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 29, 1996
SEPTEMBER 28, 1997 -----------------
------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 595,132 $ 724,729
Accounts receivable, net................................................. 1,643,072 1,669,366
Inventories.............................................................. 1,129,387 1,504,977
Prepaid expenses and other............................................... 1,783,343 579,223
------------------ -----------------
Total current assets................................................... 5,150,934 4,478,295
Property and equipment, net................................................ 5,258,541 6,027,603
Intangible assets, net..................................................... 106,691 141,105
Deposits and other......................................................... 124,544 141,756
------------------ -----------------
Total assets........................................................... $ 10,640,710 $ 10,788,759
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft........................................................... $ 176,369 $ 845,372
Accounts payable......................................................... 630,273 1,543,184
Accrued liabilities...................................................... 740,957 1,292,472
Current portion of long-term debt........................................ 1,649,433 901,166
Net liability from discontinued operations............................... 224,854 387,584
------------------ -----------------
Total current liabilities.............................................. 3,421,886 4,969,778
------------------ -----------------
Long-term debt............................................................. 344,345 734,279
------------------ -----------------
Commitments and contingencies.............................................. -- --
Stockholders' equity:
Common stock............................................................. 38,763,190 35,754,611
Subscription note receivable............................................. (750,000) --
Preferred stock.......................................................... 3,884,019 4,182,790
Accumulated deficit...................................................... (35,022,730) (34,852,699)
------------------ -----------------
Total stockholders' equity............................................... 6,874,479 5,084,702
------------------ -----------------
Total liabilities and stockholders' equity............................. $ 10,640,710 $ 10,788,759
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------------------- --------------------------------------
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues from continuing
operations........................ $ 5,199,556 $ 5,670,820 $ 17,287,689 $ 18,520,405
Cost of sales....................... 3,247,171 4,918,735 10,075,625 11,969,699
------------------ ------------------ ------------------ ------------------
Gross profit........................ 1,952,385 752,085 7,212,064 6,550,706
Selling, general and administrative
expenses.......................... 1,603,049 6,284,509 6,640,576 12,893,275
Loss on disposition or impairment of
assets............................ -- 424,614 259,480 479,906
------------------ ------------------ ------------------ ------------------
Operating income (loss)............. 349,336 (5,957,038) 312,008 (6,822,475)
Other income (expense).............. 106 (3,512) 106 (3,512)
Interest income (expense), net...... (65,855) 35,622 (177,224) (259,273)
------------------ ------------------ ------------------ ------------------
Income (loss) from continuing
operations before provision for
income taxes...................... 283,587 (5,924,928) 134,890 (7,085,260)
Provision for income taxes.......... (8,924) -- (23,906) --
------------------ ------------------ ------------------ ------------------
Net income (loss) from continuing
operations........................ 274,663 (5,924,928) 110,984 (7,085,260)
Net recovery (loss) from
discontinued operations........... -- -- 36,882 367,543
Net income (loss)................... $ 274,663 $ (5,924,928) $ 147,866 $ (6,717,717)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Net income (loss) per common share
and common equivalent share:
Net income (loss) from continuing
operations attributable to common
shareholders...................... $ 174,196 $ (6,541,317) $ (148,580) $ (7,701,649)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Primary and fully diluted income
(loss) per share:
Continuing operations............. $ 0.02 $ (.75) $ (0.01) $ (0.94)
Discontinued operations........... $ -- $ $ -- $ .04
------------------ ------------------ ------------------ ------------------
Net income (loss) per share......... $ 0.02 $ (0.75) $ (0.01) $ (0.90)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Weighted average common and common
equivalent shares outstanding..... 10,879,140 8,713,916 10,154,644 8,130,471
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------ ------------------
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Cash flows from operating activities:
Net income (loss) from continuing operations.............................. $ 110,983 $ (7,085,260)
Adjustments to reconcile net loss to net cash used in operating
activities:
Restructuring Charge.................................................... 104,230
Depreciation and amortization........................................... 706,720 664,983
Decrease in tax benefit valuation allowance............................. 13,057
Loss on sale or impairment of assets.................................... 259,480 413,294
Discount on convertible debt............................................ -- 172,907
Reserve for inventory spoils, returns, allowances and bad debts......... 528,782
Expenses paid in common stock options................................... 28,243 --
Changes in reserves against receivables................................. (439,507) --
Changes in assets and liabilities:
Accounts receivable................................................... 465,801 (1,405,295)
Inventories........................................................... 375,590 (155,535)
Prepaid expenses and other............................................ (1,186,908) 463,627
Accounts payable...................................................... (912,912) 287,620
Accrued liabilities................................................... (767,269) 662,782
------------------ ------------------
Net cash used in continuing operations.................................. (1,359,779) (5,344,808)
Net cash used in discontinued operations................................ (125,847) (1,940,019)
------------------ ------------------
Net cash used in operating activities................................. (1,485,626) (7,274,827)
------------------ ------------------
Cash flows from (used by) investing activities:
Proceeds from sale of assets............................................ 159,504 70,383
Purchase of intangibles and other assets................................ -- (93,987)
Purchase of property and equipment...................................... (272,273) (1,529,474)
------------------ ------------------
Net cash used by investing activities................................. (112,769) (1,553,078)
------------------ ------------------
Cash flows from (used by) financing activities:
Decrease in bank overdrafts............................................. (669,002) --
Repayment of long-term debt and capital lease obligations............... (443,659) --
Securities issue costs.................................................. (50,492) --
Net proceeds from issuance of common stock.............................. 1,982,057 3,816,206
Net proceeds from issuance of preferred stock........................... -- 3,380,000
Deemed dividends on preferred stock..................................... (102,142) --
Credit facilities borrowings............................................ 14,628,913 7,984,303
Credit facilities repayments............................................ (13,876,877) (6,970,701)
------------------ ------------------
Net cash provided by financing activities............................. 1,468,798 8,209,808
------------------ ------------------
Net decrease in cash...................................................... (129,597) (618,097)
Cash and cash equivalents at beginning of period.......................... 724,729 1,937,884
------------------ ------------------
Cash and cash equivalents at end of period................................ $ 595,132 $ 1,319,787
------------------ ------------------
------------------ ------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
Monterey Pasta Company (the "Company") and are unaudited. Certain amounts shown
in the 1996 financial statements have been reclassified to conform with the
current presentation. The financial statements have been prepared in accordance
with the instructions for Form 10-Q; therefore, they do not necessarily include
all information and footnotes required by generally accepted accounting
principles and should be read in conjunction with the Company's 1996 Annual
Report on Form 10-K, as amended by Form 10-K/A. In the opinion of the Company,
all adjustments necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows as of September 28, 1997, and for
all periods presented have been recorded. All such adjustments are of a normal
and recurring nature, with the exception of $172,907 and $533,000 in interest
expense for the quarters ended March 31, 1996, and December 31, 1995,
respectively, representing guaranteed contractual discount on debt converted to
common stock in 1996. A description of the Company's accounting policies and
other financial information is included in the audited consolidated financial
statements as filed with the Securities and Exchange Commission in the Company's
Form 10-K for the year ended December 29, 1996, as amended by Form 10-K/A. The
consolidated results of operations for the interim quarterly periods are not
necessarily indicative of the results expected for the full year.
2. STATEMENT OF CASH FLOWS
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter ended March 30, 1997, $298,771 of Preferred Series
B Stock was converted into 160,256 shares of Common Stock (see Note 8). During
that period, options to purchase 50,000 shares of the Company's Common stock at
$1.88 per share, valued at $22,357, were granted in lieu of fees to a consultant
who later became a Director of the Company. In connection with the March 1997
Private Placement of 1,600,000 shares of Common Stock, $108,000 of offering
costs were retained by the Placement Agent out of the net proceeds (see Note 8).
Deemed dividends to Series A Preferred Stockholders of $95,000 were accrued
during the three months ended March 30, 1997. During the second quarter ended
June 29, 1997, 500,000 shares of Common Stock were sold at $1.88 per share to
the Company's interim Chief Executive Officer in return for a full recourse note
totalling $1,031,250 (see Note 8). During the third quarter ended September 28,
1997, 150,000 of these shares were forfeited, resulting in a reversal of
$281,250 of the note. In the third quarter, equipment leases with an original
principal value of $49,955 were capitalized. Also, during the third quarter, the
Company accrued $62,500 payable in shares of common stock to reflect a 1996
dividend to Series A Preferred Stockholders (dividend of $50,000 payable in
shares at 80% of market price to be paid upon effective date of a related S-3
Registration Statement -- See Note 8). Finally, $115,571, payable in shares of
Common Stock and due upon effectiveness of Registration Statement, has been
accrued through third quarter and accounted for as a deemed dividend to Private
Placement Stockholders (see Note 8).
3. NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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." 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
6
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MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
Calculations under the new standard, which will be adopted as of the year ended
December 28, 1997, are expected to reflect no significant difference from those
under the current method.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS No.
129 establishes disclosure requirements regarding pertinent rights and
privileges of outstanding securities. Examples of disclosure items regarding
securities include, though are not limited to, items such as dividend and
liquidation preferences, participation rights, call prices and dates, conversion
or exercise prices or rates. The number of shares issued upon conversion,
excercise or satisfaction of required conditions during at least the most recent
annual fiscal period and any subsequent interim period must also be disclosed.
Disclosure of liquidation preferences of preferred stock in the equity section
of the statement of financial condition is also required. This standard will
also be adopted as of the year ended December 28, 1997.
4. INVENTORIES
Inventories consist of the following:
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<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
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Production - Ingredients............................... $ 441,664 $ 591,853
Production - Finished Goods............................ 424,762 654,640
Paper goods and packaging materials.................... 317,961 313,484
------------------ -----------------
$ 1,184,387 $ 1,559,977
Reserve for spoils and obsolescence.................... (55,000) (55,000)
------------------ -----------------
$ 1,129,387 $ 1,504,977
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------------------ -----------------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
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Machinery and equipment................................ $ 4,197,987 $ 4,187,534
Leasehold improvements................................. 1,781,331 1,748,780
Computer equipment..................................... 510,301 309,981
Office furniture and equipment......................... 224,023 443,604
Vehicles............................................... 233,942 574,877
Assets held for sale................................... 160,700 326,701
------------------ -----------------
$ 7,108,284 $ 7,591,477
Less accumulated depreciation and amortization......... (2,004,144) (1,588,242)
------------------ -----------------
5,104,140 6,003,235
Construction in progress............................... 154,401 24,368
------------------ -----------------
$ 5,258,541 $ 6,027,603
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</TABLE>
7
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MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of debt include the following:
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<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
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<S> <C> <C>
Credit Facility:
Receivable line...................................... $ 785,474 $ 116,747
Inventory line....................................... 157,095 303,369
Installment note..................................... 400,000
Equipment revolver................................... -- 397,813
Equipment term loan.................................. 414,149 583,332
Capitalized leases..................................... 237,060 234,184
------------------ -----------------
1,993,778 1,635,445
Less current maturities.............................. 1,649,433 901,166
------------------ -----------------
Long term portion...................................... $ 344,345 $ 734,279
------------------ -----------------
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</TABLE>
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. The original arrangements with the customer (since now changed) called
for title of the equipment to be transferred to the customer if it carries
Company products continuously through August of the year 2000. In April 1997,
the Company was informed that due to extensive remodeling at certain retail
locations, a portion of the equipment was no longer needed and has since been
returned to the Company. The returned equipment is expected to be placed at
other retail customer sites during 1997.
7. INCOME TAXES
Federal and California State income taxes for the quarter and nine months
ended September 28, 1997 were fully offset by net operating losses generated in
prior periods. The provision for income taxes in the accompanying statement of
operations for the quarter and nine months ended September 28, 1997, consists of
minimum State income taxes and franchise fees for jurisdictions other than
California.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
In March, 1997, the Company completed the sale of approximately $1,980,000,
net of expenses, of its common stock in a private offering to accredited
investors at a gross price of $1.35 per share for 1,600,000 shares. The shares
of common stock are restricted securities with registration rights. Purchasers
of the private placement receive, from the date of issuance until the date the
shares are registered, additional guaranteed yield at the rate of eight percent
(8%) per annum. This yield, totalling $115,571 for the nine months ended
September 28, 1997, was payable in shares, and has been accounted for as a
deemed dividend attributable to these shares of common stock. An additional
$10,900 was accrued through October 23, 1997, the day before the Company's
Registration Statement on form S-3 was declared effective, for a total of
$126,471. Accordingly, in November 1997, 77,087 shares were issued to the
holders of private placement shares based on the October 24, 1997 price of $1.64
per share. Sentra Securities Corporation, acting as placement agent, received
$108,000 in execution and expense fees, and warrants to
8
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MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
purchase 532,800 shares of common stock exercisable at a price of $2.25 per
share, for a term of three years. The net proceeds from the offering are being
used by the Company for advertising, marketing, promotion, capital equipment and
working capital.
On April 30, 1997, the Company's interim Chief Executive Officer purchased
550,000 shares of restricted Common Stock at $1.88 per share with a full
recourse 7% note due December 31, 1997. The shares, subject to certain
time-served and performance requirements, are repurchaseable by the Company at
the issuance price (with cancellation of any related interest income) if they do
not vest under the restictions. Of the total, 300,000 shares have fully vested
and are no longer subject to repurchase, and 150,000 were forfeited due to a
performance condition expiring on June 30, 1997, and were treated as canceled
effective July 1, 1997. The remaining 100,000 were forfeited due to a
performance condition expiring September 30, 1997, and will be treated as
canceled effective October 1, 1997.
PREFERRED STOCK
The Company's agreements for Series A and B Convertible Preferred stock,
originally issued in August 1996, were amended in February and early April,
1997. The original agreements provided for certain dividends, as well as
penalties if the related Common conversion shares were not registered by
November 1, 1996.
Under the amended agreements, which called for the exchange of the
unconverted Series A and B shares for new Series A-1 and B-1 shares, $240,000
was paid to the holders of the Series A-1 stock on March 31, 1997, in lieu of
all prior penalties. $30,000 was paid to the holders of Series B-1 on April 4,
1997, in lieu of all prior penalties and dividends. An additional $13,755 in
penalties was incurred during the period from May 1, 1997 to May 6, 1997, the
date of filing of the amended Registration Statement covering the related
conversion shares. Of this amount, $11,613 remains in accrued liabilities at
September 28, 1997. The amended agreement for the Series B-1 Convertible
Preferred stock called for additional penalties if the Registration Statement
was not declared effective by July 31, 1997. The Registration Statement was not
declared effective until October 24, 1997. Therefore, beginning August 1, 1997,
additional penalties of $2,500 per week have accrued to the holder of the B-1
Convertible Preferred Stock with a total of $21,071 recorded as an accrued
liability at the end of the third quarter. An additional $8,929 was incurred
through October 23 with the sum of $30,000 paid to the holder of the B-1
Convertible Preferred Stock on November 3, 1997.
In lieu of dividends for Series A-1 called for under the original
agreements, the Company agreed to pay a total amount of $50,000 to holders of
the new Series A-1 stock, constituting an annualized dividend equal to four
percent (4%) of the purchase price of the Series A Preferred Stock through
December 28, 1996. The dividend was paid in the form of 37,037 shares of the
Company's common stock based on 80% of the $1.6875 per share market price on the
day the Registration Statement was effective. The market value of the stock
distributed, $62,500, is recorded as a liability as of September 28, 1997. No
additional dividends will be payable on the Series A-1 stock.
During March, 1997, one-half of the Series B Convertible Preferred stock,
with a face amount of $250,000 and a total book value of $298,771, was converted
into 160,256 shares of Common Stock having a market value of $312,500. Holders
of the remaining unconverted Series B-1 stock received an 8% annual dividend
from April 1, 1997 forward, payable in each quarter; with $5,000 recorded as a
liability at September 28, 1997. This remaining Series B-1 Preferred Stock was
converted to 207,894 shares of common stock in October, 1997.
9
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9. LITIGATION AND CONTINGENCIES
A former CEO and Director of the Company has filed a lawsuit against the
Company alleging breach of an employment contract. The Company believes this
suit is without merit and will vigorously defend its position. There are no
additional proceedings at this time to which the Company is a party or to which
any of its property is subject. The Company's former restaurant subsidiary,
Upscale Food Outlets, Inc. is a defendant in approximately four lawsuits
alleging breach of lease relating to restaurants closed in 1995 and 1996 and
other vendor related cases. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein do not indicate the financial results that may
be achieved by the Company in any future period.
Other than the historical facts contained herein, this Quarterly Report
contains forward-looking statements that involve substantial risks and
uncertainties. For a discussion of such risks and uncertainties, please see the
Company's Annual Report on Form 10-K for the year ended December 29, 1996, as
amended by Form 10-K/A. In addition to the risks and uncertainties discussed in
the Annual Report, the risks set forth herein, including the Company's recent
operating losses and ability to attract and retain qualified management, should
be considered.
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 points of distribution.
The Company sells its pasta and pasta sauces through leading grocery store
chains and club stores. As of September 28, 1997 more than 65 grocery and club
store chains with over 2,850 locations offered the Company's products. In
addition, on September 26, 1997, the Company entered into an agreement with
Sam's Club Stores (a division of Walmart) to supply product to every Sam's store
which can stock refrigerated pasta products. This twelve month agreement
effectively triples the Company's current Sam's Club distribution from
approximately 95 stores to approximately 300 stores. As a result, the Company
believes it is now the first refrigerated upscale gourmet pasta company to be
truly national in scope. Future plans include the expansion of its distribution
to grocery and club stores in its current market area, entry into health food
stores equipped for refrigerated products, and further penetration in other
geographic regions of the U.S with existing and new products.
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.
As part of its expansion program, the Company has developed, and is
continuing to develop new products for the consumer, in addition to revising
advertising and promotional activities for its retail
10
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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.
RESULTS OF OPERATIONS
Net revenues from continuing operations were $5,200,000 for the third
quarter ended September 28, 1997, as compared to $5,671,000 for the third
quarter ended September 29, 1996. For the nine months ended September 28, 1997,
net revenues decreased $1,232,000 to $17,288,000 from $18,520,000 for the nine
months ended September 29, 1996. The decrease in sales over last year results
primarily from the Company's discontinuance of aggressive market expansion
programs that, while increasing net revenues significantly, also increased sales
and administrative costs resulting in operating losses. Additionally, as part of
management's new marketing strategy, the Company discontinued doing business
with selected retail chains that demonstrated low volumes, high product returns,
or lower than expected margins.
Gross profit was $1,952,000 or 38% of net revenues for the third quarter of
1997, compared to $752,000 or 13% for the third quarter of 1996. For the nine
months ended September 28, 1997, gross profit was $7,212,000 or 42% compared to
$6,551,000 or 35% for the nine months ended September 29, 1996. This compares to
a 35% gross margin for the year ended December 29, 1996. Gross profit
improvement was due to an emphasis on improving margins through elimination of
marginal accounts and better management of pricing and allowances.
Selling, general and administrative expenses for the third quarter ended
September 28, 1997, were $1,603,000, a decrease of 74% when compared to
$6,285,000 in the third quarter of 1996. For the nine months ended September 28,
1997, selling, general and administrative expenses decreased $6,252,000 to
$6,641,000 from $12,893,000 when compared to the same period in 1996. The most
significant expense declines are in the Sales and Marketing area with reduced
slotting, promotion, advertising , and Direct Store Delivery expenses, salaries
with an overall reduction of over 35% in staffing, and corporate overhead
expense reduction achieved through consolidation of operations into one location
at Salinas, California. The 1996 results also included the writeoff of
nonrecoverable advertising and slotting fees totaling $800,000 in the third
quarter ended September 29, 1996. The Company believes that ongoing and recently
completed cost reduction programs will result in additional reductions of future
overhead costs.
Depreciation and amortization expense, included in cost of sales and
selling, general and administrative expenses, was $260,000 or 5% of net revenues
for the quarter ended September 28, 1997, compared to $222,000 or 4% of net
revenues for the quarter ended September 29, 1996. For the nine months ended
September 28, 1997, depreciation and amortization expense was $746,000 or 4% of
net revenues, compared to $663,000 for the same period last year (4% of net
revenues).
There was no gain or loss on disposition or impairment of fixed assets for
the third quarter ended Sepember 28, 1997, compared to a loss of $425,000 for
the third quarter last year. For the nine months ended September 28, 1997, loss
on disposition of fixed assets was $259,000 compared to $480,000 for the nine
months ended September 29, 1996. The 1996 loss included $383,000 in impairment
charges reducing certain obsolete and/or excess assets to their estimated fair
value. The Company still holds $161,000 in assets for sale as of the end of the
third quarter ended September 28, 1997.
Net interest expense was $66,000 for the quarter ended September 28, 1997,
compared to net interest income of $36,000 for the same quarter in 1996. In
1996, private placement funds received in April had not been completely
expended. For the nine months ended September 28, 1997, net interest expense was
$177,000 compared to $259,000 for the nine months ended September 29, 1996. The
net decline in year-to-date interest expense is attributable to a one time first
quarter charge of $172,000 in 1996 relating to guaranteed conversion discount on
a 7% note converted to common stock in 1996, offset partially by higher bank
borrowings in 1997.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 1997 the Company had existing cash and cash equivalents
of $595,000. Management believes that the Company's existing credit facilities
and cash generated from continuing operations will provide adequate funding to
meet its needs through 1998. On July 24, 1997, the Company negotiated favorable
credit terms with a new lender, and changed its primary banking relationship to
the lender as a condition of the reduced interest credit facility. The new
credit facility also offers a potential interest rate reduction of 1.5% from
current levels based on the achievement of certain profitability as of fiscal
1997 year-end.
During the nine month period ended September 28, 1997, $1,486,000 of cash
was used in the Company's operations, compared to $7,275,000 used in the same
period last year, which related to the operating losses from continuing
operations and expenditures related to discontinued operations.
SALES AND MARKETING
The Company continues to increase its focus on building sales volume while
reducing product returns and maintaining margins. Recent additions to
distribution with national acceptance at Sam's Club, a division of WalMart, and
Cub Foods Colorado are the result of management's efforts to add profitable
growth to the Company's sales base.
Monterey Pasta's products are made with no preservatives or artificial
ingredients. Using this point of difference, the Company plans to expand
distribution channels by selling through natural and organic food retailers,
whose growth has exceeded 20% annually over the last four years. Monterey Pasta
has also developed a line of Mexican-style pastas and sauces aimed at the
rapidly growing Mexican food market.
MAJOR CUSTOMERS
One of the Company's retail customers, Price-Costco, accounted for 47% of
the Company's sales for the nine months ended September 29, 1997. Another
customer , Safeway, accounted for 10% of revenues for the period. No other
customer accounted for greater than 10% of revenues for the period. During the
same period last year, Price-Costco and Safeway Stores, accounted for 44% and
10% respectively of the Company's sales.
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 CONTINUING PROFITABILITY. The
Company's profitability began to decline in 1994 when, in the second
quarter, the Company reported its first operating loss from continuing
operations. The Company reported additional operating losses from
continuing operations in nine of thirteen quarters since then. The
Company's net income from continuing operations for the third quarter
ended September 28, 1997, was $275,000, a second straight profitable
quarter. The second quarter of 1997 showed a net income from continuing
operations of $183,000. As of September 28, 1997, the Company had an
accumulated deficit of $35,023,000. There can be no assurance that the
Company will maintain profitability in the long term.
- LIQUIDITY; NEED FOR ADDITIONAL CAPITAL. Management believes that it has
sufficient resources to provide adequate liquidity to meet the Company's
planned capital and operating requirements through 1998. Thereafter, the
Company's operations may 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 cash sufficient to fund its operations
and the Company seeks outside financing, there can be no assurance that
the Company will be able to obtain such financing when needed, on
acceptable terms, or at all. In addition, any future equity financing or
convertible debt
12
<PAGE>
financing would cause the Company's shareholders to incur dilution in net
tangible book value per share of Common Stock.
- KEY PERSONNEL; MANAGEMENT TRANSITION. The success of the Company depends
on the efforts of key management personnel. On August 1, 1997, the interim
Chief Executive Officer was replaced by a permanent Chief Executive
Officer. On September 18, 1997 the Company appointed a new Chief Financial
Officer. Neither officer has previously been a part of the Company's
management team. The Company's success will depend on its ability to
operate under new management, 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 a smooth transition from its prior
management team to a new management team, that new officers will be able
to perform effectively, or that significant management turnover will not
continue in the future. At September 28, 1997, 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. Also, 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
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
13
<PAGE>
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.
- EFFECTIVENESS OF REGISTRATION STATEMENT. The SEC declared the Company's
Registration Statement on Form S-3 effective as of October 24, 1997. As a
result, holders of an aggregate of up to 5,782,869 shares of the Company's
common stock may now sell their shares in the public market. Substantial
sales by such stockholders could have a negative effect on the price of
the Company's common stock.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 1997, Lance H. Mortensen, former President, Chief Executive
Officer and Director of the Company, filed a complaint against the Company for
breach of contract and breach of the implied covenant of good faith and and fair
dealing. Mr. Mortensen alleges that he is entitled to at least $310,919 pursuant
to a written employment agreement. That agreement contained a binding
arbitration provision. The Company intends to vigorously contest Mr. Mortensen's
claim through binding arbitration.
ITEM 2. CHANGES IN SECURITIES
In March and April 1997 the Company issued Series A-1 and Series B-1
Preferred Stock in exchange for its outstanding Series A and Series B Preferred
Stock, respectively. The 4% annual dividends on the Series A and Series B
Preferred Stock were replaced in the case of the Series A-1 Preferred with no
dividend and, in the case of the Series B-1 Preferred, with an 8% dividend. In
lieu of dividends on the Series A-1 Preferred Stock, the Company agreed to issue
the holder of the Series A-1 Preferred Stock $50,000 of Common Stock priced at
80% of the fair market value of the Company's Common Stock as of the date its
Registration Statement on Form S-3 was declared effective. On October 24, 1997,
the date the Registration Statement was declared effective, the closing price of
the Company's common stock was $1.6875, resulting in the issuance of 37,037
shares of Common Stock. The Series A-1 and B-1 Preferred Stock are convertible
into Common Stock at 80% of the average Closing Price of the Common Stock on the
five days prior to conversion, as were the Series A and Series B Preferred
Stock; however, the highest conversion price has been reduced for both series
from $9.00 to $4.40. The Company's series B-1 Preferred Stock was converted into
207,894 shares of common stock in October, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 28, 1997, the Company had 3,250 shares of Series A-1 and B-1
Convertible Preferred stock outstanding, convertible into shares of Common Stock
at 80% of the market price of the Common shares, not to exceed $4.40 per share.
Under the agreements with the Preferred stockholders, amended in 1997, $240,000
and $30,000 were paid on March 31, 1997 and April 4, 1997, respectively, in lieu
of certain dividends and penalties for non-registration of the Common shares.
Additional penalties totaling $13,755 were incurred for the period from May 1 to
May 6, 1997, the date of filing of the Pre-effective Amendment No. 1 to
Registration Statement on Form S-3 covering the related conversion shares.
Further penalties of $2,500 per week have accrued to the holder of Series B-1
Preferred Stock from August 1, 1997, to the date the Registration Statement was
declared effective, and an additional $21,071 was accrued at the end of the
third quarter. The Registration Statement was declared effective October 24,
1997 and, as of that date, the outstanding shares of Series B-1 Preferred Stock
have been converted into 190,111 shares of common stock. Additional penalties
from September 29 through October 23 were $8,929, for a total of $30,000 since
paid.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the September 18, 1997 annual Stockholders' meeting the following
matters were submitted to a vote of the Stockholders and were approved as
submitted:
The election of the following nine directors to hold office for the ensuing
year and until their successors are elected and qualified with 6,571,481 votes
of a total of 11,026,133 shares entitled to vote:
R. Lance Hewitt
Kenneth A. Steel, Jr.
Charles B. Bonner
Daniel J. Gallery
Floyd R. Hill
Timothy J. Ryan
Robert F. Steel
Van Tunstall
James Wong
The appointment of BDO Seidman, LLP as the independent public accountants
for the year ending December 28, 1997 with 6,645,552 votes of a total of
11,026,133 shares entitled to vote.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
MONTEREY PASTA COMPANY
Date: November 12, 1997 By: /s/ R. LANCE HEWITT
-----------------------------------------
R. Lance Hewitt
CHIEF EXECUTIVE OFFICER
By: /s/ STEPHEN L. BRINKMAN
-----------------------------------------
Stephen L. Brinkman
CHIEF FINANCIAL OFFICER
</TABLE>
17
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated August 7, 1996 by and between Monterey Pasta Company, a California
corporation and Monterey Pasta Company, a Delaware corporation (incorporated by reference from Exhibit
A to the Company's Proxy Statement for the Special Meeting of Shareholders held on August 1, 1996,
filed with the Securities and Exchange Commission on June 27, 1996 ("1996 Proxy"))
3.1 Certificate of Incorporation dated August 1, 1996 (incorporated by reference from Exhibit B to the 1996
Proxy)
3.2 Certificate of Designations of Series A Convertible Preferred Stock (incorporated by reference from
Annex I to the Subscription Agreement dated July 31, 1996, filed as Exhibit 4.1 to the 1996 Proxy)
3.3 Certificate of Designations of Series B Convertible Preferred Stock (incorporated by reference from
Annex I to the Subscription Agreement dated August 9, 1996, filed as Exhibit 4.3 to the 1996 Proxy)
3.4 Bylaws of the Company (incorporated by reference from Exhibit C to the Company's 1996 Proxy)
3.5 Certificate of Designations of Series A-1 Convertible Preferred Stock (incorporated by reference from
Exhibit 3.5 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
Exhibit 3.6 filed with the Company's 1996 Form 10-K/A)
4.1 Subscription Agreement, dated as of July 31, 1996 (incorporated by reference from Exhibit 4.1 filed with
the Company's Registration Statement on Form S-3 on August 23, 1996)
4.2 Registration Rights Agreement, dated as of July 31, 1996 (incorporated by reference from Exhibit 4.2
filed with the Company's Registration Statement on Form S-3)
4.3 Subscription Agreement, dated August 9, 1996 (incorporated by reference from Exhibit 4.3 filed with the
1996 Form S-3)
4.4 Registration Rights Agreement, dated as of August 9, 1996 (incorporated by reference from Exhibit 4.4
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 Exhibit 4.5 filed with the 1996 Form S-3)
4.6 Form of Registration Rights Agreement dated April 1996, among the Company, Spelman & Co., Inc. and
investor (incorporated by reference from Exhibit 4.6 with the Company's original March 31, 1996,
Quarterly Report on Form 10-Q on August 13, 1996 (the "1996 Q1 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 Exhibit 4.8 filed with 1996 Form 10-K/A)
4.9 Amendment to Registration Rights Agreement dated as of April 20, 1997 among the Company, Spelman & Co.,
Inc. and investor, amending the Registration Rights Agreement entered into as of April 1996
(incorporated by reference from Exhibit 4.9 filed with the 1996 Form 10-K/A)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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 Exhibit 4.10 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 Exhibit 4.11 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 Exhibit 4.12 filed with the 1996 Form 10-K/A)
4.13 Form of Warrant ("Sentra Warrant") for purchase of Company's Commons Stock dated March 1997 issued in
connection with the Company's March 1997 Private Placement (incorporated by reference from Exhibit
4.134 filed with the Company's Pre-Effective Amendment No. 1 to the Registration Statement on Form S-3
on May 6, 1997 ("1997 Amendment #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 Exhibit 4.14 filed with the 1997 Amendment #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 Annual Report on Form 10-K filed April 14, 1997 (the "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 10.2 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 Exhibit 10.6 filed with the
1995 Form 10-K)
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
filed with 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 filed with 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 filed with 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 filed with 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 filed with the 1995 Form 10-K)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.13 Master Lease dated August 1, 1995 with Sentry Financial Corporation (incorporated by reference from
Exhibit 10.13 filed with the 1995 Form 10-K)
10.14 Letter Agreement dated July 26, 1995 between Monterey Pasta Development Company and California Pasta
Company (incorporated by reference from Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 2, 1995 ("1995 Q3 10-Q"))
10.15 Asset Purchase Agreement dated July 26, 1995 between Upscale Food Outlets, Inc. and California Pasta
Company (incorporated by reference from Exhibit 10.22 to the Company's 1995 Q3 10-Q)
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 filed with 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 1995
Q3 10-Q)
10.19* Employment Agreement with Mr. Norman E. Dean (incorporated by reference from Exhibit 10.20 to the SB-2)
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 10-O for the quarter ended July 2, 1995 ("1995 Q2 10-Q"))
10.21* Consulting Agreement dated May 25, 1995 with Anthony W. Giannini (incorporated by reference from Exhibit
10.21 filed with 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 filed with 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 filed with 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 filed with the 1995 Form 10-K)
10.27 Trademark Registration -- MONTEREY PASTA COMPANY and Design, under Registration No. 1,953,489,
registered on January 30, 1996 with the U.S. Patent and Trademark Office (incorporated by reference
from Exhibit 10.27 filed with 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 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 Q2 10-Q, and
Exhibits 10.6 and 10.7 to the Company's S-3 Registration Statement No. 33-96684, filed on December 12,
1995 ("1995 S-3"))
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.30 Joint Escrow Instructions dated as of October 1995 (incorporated by reference from Exhibit 10.5 to the
1995 S-3)
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 Exhibit 10.32 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)
10.38 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 filed with 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 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 10.24 to the 1996 Q1 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 10.24
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 Q2 10-Q)
11 Exhibit 11 -- Computation of net earnings (loss) per share
10.47 Security and Loan Agreement (Accounts Receivable and/or Inventory) dated July 24, 1997 between the
Company and Imperial Bank (incorporated by reference from Exhibit 10.47 of 1997 S-3)
10.48 Agreement Regarding Employment, Trade Secrets, Inventions, and Competition dated May 26, 1997 with Mr.
R. Lance Hewitt (incorporated by reference from Exhibit 10.48 of 1997 S-3)
10.49 Employment agreement dated August 25, 1997 with Mr. Stephen L. Brinkman
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)
27.1 Financial data schedule
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its subsidiary, Upscale
Food Outlets, Inc.
21
<PAGE>
Exhibit 10.49
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of August 25, 1997
(the "Effective Date") is by and between MONTEREY PASTA COMPANY, a Delaware
corporation ("Employer") and STEPHEN L. BRINKMAN ("Employee").
AGREEMENT
1. EMPLOYMENT. Employer hereby employs Employee and Employee accepts
employment with Employer beginning on the Effective Date. The employment
created by this Agreement is "at will," with no promise of permanent
employment.
2. DUTIES OF EMPLOYEE.
A. DUTIES. Employee shall act as the Chief Financial Officer of
Employer and/or in such other official capacities as may from time to time be
designated by Employer. Employee shall perform such services as are
reasonably related to said office(s), subject to policies set by Employer.
B. DEVOTION OF TIME TO EMPLOYER'S BUSINESS. Employee agrees to
devote sufficient time and attention to the business of Employer to carry out
his assigned duties.
3. EMPLOYEE COMPENSATION.
A. ANNUAL SALARY. Employer agrees to initially pay Employee an
annual salary of One Hundred and Ten Thousand Dollars ($110,000), payable
bi-weekly. The annual salary will be subject to periodic review.
B. BONUSES. Employer may from time to time authorize bonuses
payable to Employee, up to a maximum of twenty percent (20%) of his then
annual base salary per year, based upon performance criteria to be agreed
upon between Employee and Employer.
C. EMPLOYMENT TAXES. All compensation and bonuses paid by Employer
to Employee shall be subject to withholding taxes and other employment taxes
as required by law.
4. EMPLOYEE BENEFITS.
A. BENEFIT PLANS. Employer agrees to include Employee in benefit
plans, including a 401K plan, as shall from time to time be approved and
adopted by Employer, and for which Employee is eligible.
B. MEDICAL AND DENTAL INSURANCE PLAN. Employer shall include
Employee in all medical and dental insurance plans as shall be offered by
Employer to its employees generally, when enrollment is first available.
C. LIFE INSURANCE. Employer agrees to provide Employee with life
insurance, as shall from time to time be approved and adopted by Employer.
D. REIMBURSED BUSINESS EXPENSES. Employee shall be reimbursed for
reasonable business expenses in accordance with the general policy of
Employer.
E. VACATION AND SICK LEAVE. Employee shall be entitled to an
annual noncumulative vacation and sick leave without loss of compensation in
accordance with the policies established by the Employer. Employer's current
policy is two (2) weeks vacation after one (1) year of employment.
5. STOCK PURCHASE OPTIONS. Employee shall be entitled to options to
purchase sixty thousand (60,000) shares of the common stock of Employer (the
"Shares"), at the market price as of the Effective Date of this Agreement, in
accordance with the following schedule and terms. Attached hereto as Exhibit
A is the Employee Stock Option Plan which is incorporated herein by reference.
A. An option to purchase Ten Thousand (10,000) of the Shares shall
vest in Employee upon the Effective Date.
B. An option to purchase Ten Thousand (10,000) of the Shares shall
vest in Employee on the date which is one (1) year following the Effective
Date, provided this Agreement has not been terminated before such date.
C. An option to purchase an additional Ten Thousand (10,000) of
the Shares shall vest in Employee on the date which is one (1) year following
the Effective Date, to the extent that the performance criteria agreed to
between Employee and the Employer have been met, and provided this Agreement
has not been terminated before such date.
D. An option to purchase Ten Thousand (10,000) of the shares shall
vest in Employee on the date which is two (2) years following the effective
date, provided this Agreement has not been terminated before stock date.
E. An option to purchase up to Ten Thousand (10,000) of the Shares
shall vest in Employee on the date which is two (2) years following the
Effective Date, to the extent that the performance criteria agreed to between
Employee and the Chief Executive Officer of Employer have been met, and
provided this Agreement has not been terminated before such date.
F. An option to purchase Five Thousand (5,000) of the Shares shall
vest in Employee on the date which is three (3) years following the Effective
Date, provided this Agreement has not been terminated before such date.
G. An option to purchase an additional Five Thousand (5,000) of
the Shares shall vest in Employee on the date which is three (3) years
following the Effective Date, to the extent that the
1
<PAGE>
performance criteria agreed to between Employee and the Employer have been
met, and provided this Agreement has not been terminated before such date.
H. Once an option to purchase has vested in Employee, provided
that this Agreement has not yet been terminated, Employee shall have 10 years
to exercise such option, by giving written notice of the exercise to
Employer, and paying the consideration (in cash) for such shares to Employer
within thirty (30) of the date of such notice. Notwithstanding the foregoing
sentence, if Employee has himself elected to terminate this Agreement,
Employee shall have six (6) months from the date of his election to so
terminate this Agreement to give notice to Employer of his exercise of any
vested and unexpired option(s) to purchase. In any event, the parties agree
that these provisions shall not conflict with the provisions of the Monterey
Pasta Employee Stock Option Plan.
I. Notwithstanding the vesting periods provided in paragraphs A
through F above, and provided that this Agreement has not been terminated,
upon the sale of Employer (whether a sale of substantially all of its assets
or a sale of a majority interest in its stock), all Employee's options to
purchase the Shares which have not vested at such time shall then vest.
6. TERMINATION; SEVERANCE.
A. TERMINATION WITHOUT CAUSE. This Agreement may be terminated by
either party upon thirty (30) days written notice by the terminating party to
the other party.
B. TERMINATION WITH CAUSE. This Agreement may be immediately
terminated by Employer by written notice to Employee upon the happening of
any of the following events: (i) In the event Employee shall fail, or refuse
to comply with the reasonable policies, standards and directives of Employer
from time to time established; (ii) in the event Employee shall fail, or
refuse, to perform Employee's obligations pursuant to this Agreement; (iii)
upon the death of Employee; or (iv) at Employer's option, if Employee shall
suffer a permanent disability. For the purposes of this Agreement,
"permanent disability" shall be defined as Employee's inability, from
physical or mental illness or other cause, to perform the majority of
Employee's usual required duties for a period of three (3) months or more.
Employer's option shall be exercised in writing, delivered to Employee, and
shall be effective on delivery.
C. COMPENSATION UPON TERMINATION. Except as provided in paragraph
D below, upon expiration or termination of this Agreement as provided herein,
Employee shall be entitled to receive only the compensation accrued but
unpaid as of the date Employee actually stopped working and shall not be
entitled to additional compensation or stock options except as expressly
provided in this Agreement.
D. SEVERANCE UPON TERMINATION WITHOUT CAUSE. Notwithstanding
paragraph C above, in the event that this Agreement is terminated by Employer
or Employer's successor without cause as provided under paragraph A above,
Employee shall continue to receive his salary (payable on the same terms as
paragraph 3 A above) up to a maximum of one (1) year following the
termination date as severance pay. Such severance pay shall cease upon
Employee's obtaining full-time employment as an executive with another
employer; provided, however, Employee shall receive such severance pay for
the first six (6) months following such termination regardless of whether or
not Employee obtains other employment during that six (6) month period. For
example, if Employee obtains a full-time position in five (5) months, he
would still receive six (6) months severance.
7. GENERAL PROVISIONS.
A. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the Employer and Employee relating to the subject
matter hereof and neither this Agreement nor any provisions hereof can be
modified, changed, discharged, or terminated except by an instrument in
writing signed by the party against whom any waiver, change, discharge or
termination is sought.
B. ASSIGNMENT. Neither this Agreement nor any of the rights
hereunder shall be assignable by Employee or by Employer.
C. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
COMPANY: EMPLOYEE:
MONTEREY PASTA COMPANY
/s/ R. Lance Hewitt /s/ Stephen L. Brinkman
- --------------------------- ------------------------------
By: R. Lance Hewitt STEPHEN L. BRINKMAN
Its: President and CEO
2
<PAGE>
EXHIBIT 11
MONTEREY PASTA COMPANY
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
PRIMARY NET LOSS PER SHARE
COMPUTATION FOR STATEMENT OF OPERATIONS
Income (Loss) from continuing operations
before dividends on preferred stock....... $ 274,663 $ (5,924,928) $ 110,984 $ (7,085,260)
Deduct dividends on certain common
shares*................................... (72,371) -- (115,571) --
Deduct dividends on preferred shares*....... (28,096) (616,389) (143,993) (616,389)
---------------- ---------------- ---------------- ----------------
Income (Loss) attributable to common
shareholders before discontinued
operations................................ 174,196 (6,541,317) (148,580) (7,701,649)
Recovery (Loss) from discontinued
operations................................ -- -- 36,882 367,543
---------------- ---------------- ---------------- ----------------
Income (Loss) attributable to common
stock..................................... $ 174,196 $ (6,541,317) $ (111,698) $ (7,334,106)
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Weighted average number of common shares
outstanding............................... 10,879,140 8,713,916 10,154,644 8,130,471
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Primary net income (loss) per share:
Continuing operations..................... $ 0.02 $ (0.75) $ (0.01) $ (0.94)
Discontinued operations................... -- -- -- 0.04
---------------- ---------------- ---------------- ----------------
Net Income (Loss)......................... $ 0.02 $ (0.75) $ (0.01) $ (0.90)
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
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%.
Income (Loss) from continuing operations
before dividends on preferred stock....... $ 274,663 $ (5,924,928) $ 110,984 $ (7,085,260)
Deduct dividends on certain common
shares*................................... (72,371) -- (115,571) --
Deduct dividends on preferred shares*....... (28,096) (616,389) (143,993) (616,389)
---------------- ---------------- ---------------- ----------------
Income (Loss) attributable to common
shareholders before discontinued
operations................................ 174,196 (6,541,317) (148,580) (7,701,649)
Recovery (Loss) from discontinued
operations................................ -- -- 36,882 367,543
---------------- ---------------- ---------------- ----------------
Income (Loss) attributable to common
stock..................................... $ 174,196 $ (6,541,317) $ (111,698) $ (7,334,106)
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Weighted average number of common shares
outstanding............................... 10,879,140 8,713,916 10,154,644 8,130,471
Assuming conversion of convertible debt..... -- N/A-AntiDilutive -- N/A-AntiDilutive
Assuming conversion of convertible
preferred................................. N/A-AntiDilutive -- N/A-AntiDilutive --
---------------- ---------------- ---------------- ----------------
Weighted average number of common shares
outstanding as adjusted................... 10,879,140 8,713,916 10,154,644 8,130,471
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Diluted net income (loss) per share:
Continuing operations..................... 0.02 (0.75) (0.01) (0.94)
Discontinued operations................... -- -- -- 0.04
---------------- ---------------- ---------------- ----------------
Net Income (Loss)......................... 0.02 (0.75) (0.01) (0.90)
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
- ------------------------------
* See Note 8 to the financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 545,132
<SECURITIES> 0
<RECEIVABLES> 2,127,850
<ALLOWANCES> 484,778
<INVENTORY> 1,129,387
<CURRENT-ASSETS> 5,150,434
<PP&E> 7,101,985
<DEPRECIATION> 2,004,143
<TOTAL-ASSETS> 10,640,710
<CURRENT-LIABILITIES> 3,421,886
<BONDS> 0
0
3,884,019
<COMMON> 38,763,190
<OTHER-SE> (35,772,730)
<TOTAL-LIABILITY-AND-EQUITY> 10,640,710
<SALES> 17,287,689
<TOTAL-REVENUES> 17,287,689
<CGS> 10,075,625
<TOTAL-COSTS> 10,075,625
<OTHER-EXPENSES> (106)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177,224
<INCOME-PRETAX> 134,840
<INCOME-TAX> 23,906
<INCOME-CONTINUING> 110,984
<DISCONTINUED> 36,882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 147,866
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
