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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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 March 30, 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
MONTEREY PASTA COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 77-0227341
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1528 MOFFETT STREET
SALINAS, CALIFORNIA 93905
(Address of principal executive offices)
TELEPHONE: (408) 753-6262
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- -------
At May 12, 1997, 10,475,473 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
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
March 30, 1997 and December 29, 1996 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended March 30, 1997 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 30, 1997 and March 31, 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
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PART I. FINANCIAL INFORMATION
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . $ 1,898,416 $ 724,729
Accounts receivable, net . . . . . . . . 1,828,370 1,669,366
Inventories. . . . . . . . . . . . . . . 1,312,916 1,504,977
Prepaid expenses and other . . . . . . . 304,388 693,870
-------------- -----------------
Total current assets . . . . . . . . 5,344,090 4,592,942
Property and equipment, net. . . . . . . . 5,624,014 6,027,603
Intangible assets, net . . . . . . . . . . 116,909 141,105
Deposits and other . . . . . . . . . . . . 120,920 27,109
-------------- -----------------
Total assets . . . . . . . . . . . . $ 11,205,933 $ 10,788,759
-------------- -----------------
-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued against future deposits. . $ 258,591 $ 845,372
Accounts payable . . . . . . . . . 850,632 713,311
Accrued liabilities. . . . . . . . . . . 1,366,084 2,122,345
Current portion of long-term debt. . . . 485,212 901,166
Net liability from discontinued operations 286,406 387,584
-------------- -----------------
Total current liabilities. . . . . . 3,246,925 4,969,778
-------------- -----------------
Long-term debt . . . . . . . . . . . . . . 1,297,474 734,279
Commitments and contingencies. . . . . . . --- ---
Stockholders' equity:
Common stock . . . . . . . . . . . . . . 37,539,135 35,221,611
Preferred stock. . . . . . . . . . . . . 3,884,019 4,182,790
Accumulated deficit. . . . . . . . . . . (34,761,620) (34,319,699)
-------------- -----------------
Total stockholders' equity . . . . . . . 6,661,534 5,084,702
-------------- -----------------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . $ 11,205,933 $ 10,788,759
-------------- -----------------
-------------- -----------------
The accompanying notes are an integral part of these consolidated financial
statements.
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 30, 1997 MARCH 31, 1996
--------------- --------------
<S> <C> <C>
Net revenues from continuing operations $ 6,535,502 $ 6,133,087
Cost of sales. . . . . . . . . . . . 3,730,329 3,529,415
--------------- --------------
Gross profit . . . . . . . . . . . . 2,805,173 2,603,672
Selling, general and administrative. 2,937,771 3,043,456
Loss on disposition or impairment of assets 142,014 41,867
--------------- --------------
Operating income (loss). . . . . . . (274,612) (481,651)
--------------- --------------
Interest income (expense). . . . . . (60,437) (228,199)
Income (loss) from continuing operations
before provision for income taxes . (335,049) (709,850)
Provision for income taxes. . . . . 11,872 ---
--------------- --------------
Net income (loss) from continuing operations (346,921) (709,850)
--------------- --------------
Loss from discontinued operations. . --- ---
Net loss . . . . . . . . . . . . . . $ (346,921) $ (709,850)
--------------- --------------
--------------- --------------
Net income (loss) per share - Primary
and fully diluted:
Continuing operations . . . . . $ (0.05) $ (0.10)
Discontinued operations . . . . $ (0.00) $ (0.00)
--------------- --------------
Total net income (loss) per share. . $ (0.05) $ (0.10)
--------------- --------------
--------------- --------------
Weighted average common shares outstanding 8,746,683 7,313,925
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 30, 1997 MARCH 31, 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . $ (346,921) $ (709,850)
Adjustments to reconcile net loss to net cash from
(used by) operating activities:
Depreciation and amortization . . . . . 225,577 196,418
Loss on sale of assets. . . . . . . . . 142,014 41,867
Discount on convertible debt. . --- 172,907
Expenses paid in common stock options 22,357 ---
Changes in reserves against receivables (391,109) ---
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . 232,105 (688,388)
Inventories. . . . . . . . . . . . . 192,061 22,119
Prepaid expenses and other . . 413,678 (554,268)
Accounts payable . . . . . . . . . . (137,321) (195,338)
Accrued liabilities. . . . . . . . . (651,083) 445,131
--------------- ----------------
Net cash used in continuing operations. (298,642) (1,169,402)
Net cash used in discontinued operations... (101,178) (1,398,473)
--------------- ----------------
Net cash used in operating activities (399,820) (2,567,875)
--------------- ----------------
Cash flows from (used by) investing activities:
Proceeds from sale of assets. . . . . . 85,485 8,821
Purchase of intangibles and other assets --- (59,445)
Purchase of property and equipment. . . (43,364) (319,294)
--------------- ----------------
Net cash used in investing activities 42,121 (369,918)
--------------- ----------------
Cash flows from (used by) financing activities:
Checks drawn against future deposits (586,781) ---
Repayment of long-term debt and capital
lease obligations . . . . . . . . . . . (13,945) (684)
Stock options granted . . . . . 22,357 ---
Proceeds from issuance of common stock. 1,996,396 ---
Credit facilities borrowings. . 6,207,000 1,424,764
Credit facilities repayments. . . . . . (6,123,305) ---
--------------- ----------------
Net cash provided by financing activities 1,501,722 1,424,080
--------------- ----------------
Net increase (decrease) in cash. . . . . . 1,173,687 (1,513,713)
Cash and cash equivalents at beginning of period 724,729 1,937,884
--------------- ----------------
Cash and cash equivalents at end of period $ 1,898,416 $ 424,171
--------------- ----------------
--------------- ----------------
</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 and, therefore, do not
necessarily include all information and footnotes required by generally
accepted accounting principles and should be read in conjunction with the
Company's 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 March 30, 1997, and for all periods presented have been recorded.
A description of the Company's accounting policies and other financial
information is included in the audited consolidated financial statements as
filed with the Securities and Exchange Commission in the Company's Form 10-K
for the year ended December 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 three months ended March 30, 1997, $298,771 of Preferred Series B
Stock was converted into 160,256 shares of Common Stock (see Note 8). During
this 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). Finally, $95,000 in deemed dividends to Preferrred
Stockholders was accrued during the three months ended March 30, 1997 (see
Note 8).
3. NEW ACCOUNTING PRONOUNCEMENTS
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. Calculations under the
new standard, which will be adopted in 1997, are expected to have no
significant difference from those under the current method.
4. INVENTORIES
Inventories consist of the following:
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
Production - Ingredients $ 461,911 $ 591,853
Production - Finished Goods 575,318 654,640
Paper goods and packaging materials 330,687 313,484
-------------- -----------------
$ 1,367,916 $ 1,559,977
Reserve for spoils and obsolescence (55,000) (55,000)
-------------- -----------------
$ 1,312,916 $ 1,504,977
-------------- -----------------
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5. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
Machinery and equipment $ 4,093,393 $ 4,187,534
Leasehold improvements 1,748,780 1,748,780
Computer equipment 492,705 309,981
Office furniture and equipment 260,880 443,604
Vehicles 304,667 574,877
Assets held for sale 266,701 326,701
-------------- -----------------
$ 7,167,126 $ 7,591,477
Less accumulated depreciation and amortization (1,610,844) (1,588,242)
-------------- -----------------
5,556,282 6,003,235
Construction in progress 67,732 24,368
-------------- -----------------
$ 5,624,014 $ 6,027,603
-------------- -----------------
-------------- -----------------
6. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt include the following:
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
Credit Facility:
Receivable line. . . . . . . $ 354,840 $ 116,747
Inventory line . . . . . . . 328,297 303,369
Equipment revolver . . . . . 353,410 397,813
Equipment term loan. . . . . 520,833 583,332
Capitalized leases . . . . . . . 225,306 234,184
-------------- -----------------
1,782,686 1,635,445
Less current maturities. . . 485,212 901,166
-------------- -----------------
$ 1,297,474 $ 734,279
-------------- -----------------
-------------- -----------------
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 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. In April 1997, the Company was
informed that due to extensive remodeling at certain retail locations, 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
Income tax benefits resulting from the net operating loss carryforward
generated for the three months ended March 30, 1997, were fully offset with
a valuation allowance due to uncertainties about realization. Minimum state
income taxes and franchise fees for the first quarter, 1997 were $11,872.
7
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8. STOCKHOLDERS' EQUITY
COMMON STOCK
In March, 1997, the Company completed the sale of approximately
$1,995,000, net of expenses, of its common stock in a private offering to
accredited investors at a gross price of $1.35 per share. The shares of
common stock are restricted securities with registration rights. Purchaser
of the private placement receive from the date of issue until the date the
shares are registered interest at the rate of eight percent (8%) per annum,
payable in shares. Sentra Securities Corporation acted as placement agent.
The Placement Agent received $108,000 in execution and expense fees, and
warrants to 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. The Company has reflected the common
stock as outstanding on March 30, 1997; the actual share certificates were
issued in April.
On March 13, 1997, 250 shares of Series B Preferred Stock were converted
into 160,256 shares of Common Stock as discussed below.
PREFERRED 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. 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. Of the $270,000 of
such penalties accrued as of March 30, 1997, included in accrued liabilities
in the accompanying balance sheet, $95,000 was accounted for as a deemed
dividend for the three months ended March 30, 1997. An additional $13,755 in
penalties was incurred during the period April 30, 1997 to May 6, 1997, the
date of filing of the amended Registration Statement covering the related
conversion shares. The amended agreements for both series of Convertible
Preferred stock call for additional penalties if the Registration Statement is
not declared effective by July 31, 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 which constitutes an annualized dividend equal to 4%
of the purchase price of the Series A Convertible Preferred stock through
December, 1996. The payment will be in the form of Common Stock, valued at
80% of the market price of the Common Stock upon effectiveness of the pending
Registration Statement on Form S-3. No additional dividends will be payable
on the Series A-1 stock. Holders of the remaining unconverted Series B-1
stock will receive an 8% annual dividend from April 1, 1997 forward, payable
in each quarter.
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 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.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report.
The financial results reported herein do not indicate the financial results
that may be achieved by the Company in any future period.
Other than the historical facts contained herein, this Quarterly Report
contains forward-looking statements that involve substantial risks and
uncertainties. For a discussion of such risks and uncertainties, please see
the Company's Annual Report on Form 10-K for the year ended December 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 March 30, 1997, more than 3,600 grocery
and club stores offered the Company's products. The Company plans to
continue 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.
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.
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.
Net revenues from continuing operations were $6,536,000 for the quarter
ended March 30, 1997, as compared to $6,133,000 for the quarter ended March
31, 1996. The increase in sales primarily results from per-store sales gains
at new and existing locations offsetting those locations that were
discontinued due to low volumes, high returns, or lower than expected margins.
Gross profit was $2,805,000 or 43% of net revenues for the first quarter
1997, compared to $2,604,000 or 42% for the first quarter of 1996. This
compares to a 35% gross margin for the year ended December 29, 1996.
Selling, general and administrative expenses for the quarter ended March
30, 1997, decreased by $106,000 when compared to the same quarter last year.
The Company believes that ongoing and recently completed cost reduction
programs will result in substantial reductions of future corporate and
overhead costs, beginning in the second quarter of 1997. While the Company
reduced selling, general and administrative expenses during the first quarter
of 1997, non-recurring costs associated with corporate reorganization,
relocation and downsizing exceeded $294,000 in the first quarter, 1997.
9
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Depreciation and amortization expense, included in cost of sales and
selling, general and administrative expenses, was $226,000 or 3% of net
revenues for the quarter ended March 30, 1997, compared to $196,000 or 3% of
net revenues for the first quarter of 1996.
Loss on disposition of fixed assets was $142,000 for the quarter ended
March 30, 1997, compared to $42,000 for the first quarter of 1996. During
the first quarter of 1997, the Company sold off obsolete and unused plant
equipment and seven trucks that were formerly utilized to support direct
store sales (DSD). Further asset reductions are planned for 1997.
Net interest expense was $60,000 for the first quarter of 1997, compared
to $228,000 for the same period in 1996. The net decline in interest
expense is primarily attributable to a one time charge of $172,000 in 1996
relating to guaranteed conversion discount on the 7% note converted to common
stock in 1996.
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
In March 1997, the Company substantially completed a Private Placement
of 1,600,000 shares of Common stock at a gross price of $1.35 per share less
related expenses and fees. Management believes that the 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.
During the three month period ended March 30, 1997, $399,820 of cash was
used in the Company's operations, compared to $2,567,875 used in the first
quarter, 1996, related to the operating losses from continuing operations and
expenditures related to discontinued operations.
SALES AND MARKETING
In April, 1997, the Company, after conducting a review of the financial
results of its remaining direct store delivery ("DSD") program, elected to
retain a portion of the DSD program involving 70 stores, three drivers and
three delivery trucks.
SETTLEMENTS WITH FORMER EMPLOYEES
The Company has settled and concluded all known employment related
disputes with former employees. Settlement costs were deducted from
reserves for discontinued operations or continuing operations as appropriate.
MAJOR CUSTOMERS
Two of the Company's retail customers accounted for 49% and 11%
respectively of the Company's sales for the three months ended March 30,
1997. No other customer accounted for greater than 10% of net revenues for
the period.
10
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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
nine of eleven quarters since then. The Company's operating loss for the
quarter ended March 30, 1997 was $347,000. For the quarter ended December
1996 the loss was $1,345,000. At March 30, 1997, the Company had an
accumulated deficit of $34,762,000. There can be no assurance that the
Company will return to profitability in the short term or ever.
- - 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.
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 March 30, 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. 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.
11
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- - 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 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 increase 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.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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 are replaced in the case of the Series A-1 Preferred
with no dividends 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
has 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 pending Registration Statement on Form S-3 is
declared effective. 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 retains the right to redeem the
Series B-1 Preferred Stock; however, the Series A-1 Preferred Stock is not
subject to redemption.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has 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 was 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 May 1 to
May 6, 1997, the date of filing of the Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-3 covering the related conversion shares.
Additional penalties will accrue to the holder of Series B-1 Convertible
Preferred stock if the Registration Statement is not declared effective by
July 31, 1997. The Company cannot forecast the date the Registration
Statement will become effective.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY PASTA COMPANY
Date: May 13, 1997 By: /s/ KENNETH S. STEEL, JR.
---------------------------
Kenneth S. Steel, Jr..
Chief Executive Officer
By: /s/ JAMES S. SERBIN
---------------------------
James S. Serbin
Chief Financial Officer
14
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
2.1 Agreement and Plan of Merger dated August 7, 1996 by and between
Monterey Pasta Company, a California corporation and Monterey
Pasta Company, a Delaware corporation (incorporated by reference
from Exhibit A to the Company's Proxy Statement for the Special
Meeting of Shareholders held on August 1, 1996, filed with the
Securities and Exchange Commission on June 27, 1996)
3.1 Certificate of Incorporation dated August 1, 1996 (incorporated
by reference from Exhibit 5 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)
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
Company's Annual Report on Form 10-K on April 14, 1997 ("1996
Form 10-K"))
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
Company's Annual Report on Form 10-K on April 14, 1997 ("1996
Form 10-K"))
3.4 Bylaws of the Company (incorporated by reference from Exhibit C
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)
3.5 Certificate of Designations of Series A-1 Convertible Preferred
Stock (incorporated by reference from Exhibits with corresponding
numbers filed with the Company's Annual Report on Form 10-K/A on
April 29, 1997 ("1996 Form 10-K/A"))
3.6 Certificate of Designations of Series B-1 Convertible Preferred
Stock (incorporated by reference from Exhibits with corresponding
numbers filed with the Company's 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)
4.2 Registration Rights 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)
4.3 Subscription Agreement dated as of August 9, 1996 (incorporated
by reference from Exhibits with corresponding numbers filed with
the Company's Registration Statement on Form S-3 on August 23,
1996)
4.4 Registration Rights Agreement, dated as of August 9, 1996
(incorporated by reference from Exhibits with corresponding
numbers filed with the Company's Registration Statement on Form
S-3 on August 23, 1996)
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 Company's Registration
Statement on Form S-3 on August 23, 1996)
4.6 Form of Registration Rights Agreement dated April 1996, among the
Company, Spelman & Co., Inc. and investor (incorporated by
reference from Exhibits with corresponding numbers filed with the
Company's Quarterly Report on Form 10-Q on June 21, 1996).
4.7 Shareholder Rights Agreement dated as of May 15, 1996 between the
Company and Corporate Stock Transfer, as rights agent
(incorporated by reference from Item 2 of Form 8-A filed with the
Securities and Exchange Commission on May 28, 1996)
4.8 Form of Subscription Agreement dated April 1996, among the
Company, Spelman & Co., Inc. and investor (incorporated by
reference from Exhibits with corresponding numbers filed with the
Company's 1996 Form 10-K/A)
4.9 Form of Amendment to Registration Rights Agreement dated as of April
20, 1997 among the Company, Spelman & Co., Inc. and investor,
amending the Registration Rights Agreement entered into as of April
1996 (incorporated by reference from Exhibits with corresponding
numbers filed with the Company's 1996 Form 10 K/A)
<PAGE>
4.10 Series A Convertible Preferred Stock Exchange Agreement dated as of
March 10, 1997 by and between the Company and GFL Performance
Fund Limited (incorporated by reference from Exhibits with
corresponding numbers filed with the Company's 1996 Form 10-K/A)
4.11 Series B Convertible Preferred Stock Exchange Agreement dated as of
April 2, 1997 by and between the Company and Pangaea Fund Limited
(incorporated by reference from Exhibits with corresponding numbers
filed with the Company's 1996 Form 10-K/A)
4.12 Registration Rights Agreement dated as of December 31, 1996 among the
Company, Sentra Securities Corporation and investor (incorporated by
reference from Exhibits with corresponding numbers filed with the
Company's 1996 Form 10-K/A)
4.13 Form of Warrant ("Sentra Warrant") for purchase of Company's Common
Stock dated March 1997 issued in connection with the Company's March
1997 private placement (incorporated by reference from Exhibits with
corresponding numbers filed with the Company's Pre-Effective Amendment
No. 1 to the Registration Statement on Form S-3 on May 6, 1997)
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 Pre-Effective Amendment
No. 1 to the Registration Statement on Form S-3 on May 6, 1997)
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 Exhibits with
corresponding numbers 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 Exhibits with
corresponding numbers 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 Exhibits with corresponding numbers
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 Exhibits with corresponding numbers
filed with the 1995 Form 10-K)
10.12 Investment Agreement dated July 12, 1995 with The Seychelles Fund,
Ltd. (incorporated by reference from Exhibits with corresponding
numbers filed with the 1995 Form 10-K)
10.13 Master Lease dated August 1, 1995 with Sentry Financial Corporation
(incorporated by reference from Exhibits with corresponding numbers
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 ("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 Q3 10-Q)
<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
Exhibits with corresponding numbers 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 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 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 ("Q2
10-Q"))
10.21* Employment Agreement dated June 30, 1993 with Anthony W. Giannini
(incorporated by reference from Exhibits with corresponding numbers
filed with the 1994 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 Exhibits with
corresponding numbers 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
Exhibits with corresponding numbers 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
Exhibits with corresponding numbers filed with 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 Exhibits with
corresponding numbers 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
Company's 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
Company's 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
"S-3"))
10.30 Joint Escrow Instructions dated as of October 1995 (incorporated by
reference from Exhibit 10.5 to the Company's 1995 S-3)
11
<PAGE>
10.31 Note Purchase Agreement dated as of October 19, 1995 with GFL
Advantage Fund Limited (incorporated by reference from Exhibit 10.3 to
the Company's 1995 S-3)
10.32 Convertible Note dated as of October 25, 1995, executed by the Company
in favor of GFL Advantage Fund Limited (incorporated by reference from
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 August 23,
1996, among the Company, Upscale Food Outlets, Inc., Monterey
Pasta Development Company, California Pasta Company, and James G.
Schlicher (incorporated by reference from Exhibits with corresponding
numbers filed with the Company's Quarterly Report on Form 10-Q on June
21, 1996)
10.40 Stock Purchase Agreement dated April 1, 1996 between Upscale
Acquisitions, Inc. and the Company (incorporated by reference
from Exhibits with corresponding numbers filed with the Company's
Quarterly Report on Form 10-Q on August 23, 1996).
10.41 Placement Agent Agreement dated April 12, 1996 between the Company and
Spelman & Co., Inc. (incorporated by reference from Exhibits
with corresponding numbers filed with the Company's Quarterly Report
on Form 10-Q on August 23, 1996).
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 Company's
Quarterly Report on Form 10-Q filed August 23, 1996)
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 Company's Quarterly Report on Form 10-Q filed August 23, 1996)
10.46* Employment Agreement dated February 12, 1996 with Mr. Robert J. Otto
(incorporated by reference from Exhibit 10.24 to the Company's
Quarterly Report on Form 10-Q filed August 23, 1996).
16.1 Letter from Deloitte & Touche LLP dated October 31, 1996 (incorporated
by reference to the Company's Report on Form 8-K/A filed November 8,
1996)
21.1 Subsidiaries of the Company (incorporated by reference to the
Company's 1996 Form 10-K)
27.1 Financial Data Schedule
- ---------------------
* Management contract or compensatory plan or arrangement covering
executive officers or directors of Monterey Pasta Company.
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 1,898,416
<SECURITIES> 0
<RECEIVABLES> 2,361,545
<ALLOWANCES> 533,175
<INVENTORY> 1,312,916
<CURRENT-ASSETS> 5,344,090
<PP&E> 7,324,858
<DEPRECIATION> 1,610,844
<TOTAL-ASSETS> 11,205,933
<CURRENT-LIABILITIES> 3,246,925
<BONDS> 0
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3,884,019
<COMMON> 37,539,135
<OTHER-SE> (34,761,620)
<TOTAL-LIABILITY-AND-EQUITY> 11,205,933
<SALES> 6,535,502
<TOTAL-REVENUES> 6,535,502
<CGS> 3,730,329
<TOTAL-COSTS> 3,730,329
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<INTEREST-EXPENSE> 60,437
<INCOME-PRETAX> (335,049)
<INCOME-TAX> 11,872
<INCOME-CONTINUING> (346,921)
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