<PAGE>
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 JUNE 29, 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 August 13, 1997, 11,025,473 shares of common stock, $.001 par value, of
the registrant were outstanding.
<PAGE>
MONTEREY PASTA COMPANY
FORM 10-Q
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 29, 1997 (unaudited) and December 29, 1996 3
Condensed Consolidated Statements of Operations
(unaudited) Second quarter ended June 29, 1997
and June 30, 1996 and the Six months ended
June 29, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows
(unaudited) Six months ended June 29, 1997
and June 30, 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 Securities 13
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
Exhibit Index 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 29, 1997 DECEMBER 29, 1996
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 1,348,304 $ 724,729
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 1,674,398 1,669,366
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 1,136,521 1,504,977
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 200,572 693,870
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . 4,359,795 4,592,942
Property and equipment, net. . . . . . . . . . . . . . . . . . . 5,327,597 6,027,603
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . 111,800 141,105
Deposits and other . . . . . . . . . . . . . . . . . . . . . . . 107,255 27,109
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 9,906,447 $ 10,788,759
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . $ 387,343 $ 845,372
Accounts payable.. . . . . . . . . . . . . . . . . . . . . . . 482,484 713,311
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . 1,014,178 2,122,345
Current portion of long-term debt. . . . . . . . . . . . . . . 173,132 901,166
Net liability from discontinued operations.. . . . . . . . . . 226,000 387,584
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . 2,283,137 4,969,778
------------ ------------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 759,011 734,279
------------ ------------
Commitments and contingencies. . . . . . . . . . . . . . . . . . --- ---
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 38,560,166 35,221,611
Subscription note receivable.. . . . . . . . . . . . . . . . . (1,031,250) ---
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . 3,884,019 4,182,790
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (34,548,636) (34,319,699)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 6,864,299 5,084,702
------------ ------------
Total liabilities and stockholders' equity. . . . . . . $ 9,906,447 $ 10,788,759
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 29, 1997 JUNE 30, 1996 JUNE 29, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues from continuing operations. . . . . . . . $ 5,552,631 $ 6,716,498 $ 12,088,133 $ 12,849,585
Cost of sales. . . . . . . . . . . . . . . . . . . . . 3,098,124 3,521,549 6,828,453 7,050,964
------------ ------------ ------------- -------------
Gross profit . . . . . . . . . . . . . . . . . . . . . 2,454,507 3,194,949 5,259,680 5,798,621
Selling, general and administrative expenses . . . . . 2,099,555 3,565,310 5,037,327 6,608,766
Loss on sale of assets . . . . . . . . . . . . . . . . 117,666 13,425 259,680 55,292
------------ ------------ ------------- -------------
Operating income (loss). . . . . . . . . . . . . . . . 237,286 (383,786) (37,327) (865,437)
Interest income (expense), net . . . . . . . . . . . . (50,932) (66,696) (111,369) (294,895)
------------ ------------ ------------- -------------
Income (loss) from continuing operations
before provision for income taxes. . . . . . . . . 186,354 (450,482) (148,696) (1,160,332)
Provision for income taxes . . . . . . . . . . . . . . (3,110) --- (14,982) ---
------------ ------------ ------------- -------------
Net income (loss) from continuing operations . . . . . 183,244 (450,482) (163,678) (1,160,332)
------------ ------------ ------------- -------------
Net recovery from discontinued
operations. . . . . . . . . . . . . . . . . . . . 36,882 367,543 36,882 367,543
------------ ------------ ------------- -------------
Net income (loss). . . . . . . . . . . . . . . . . . . $ 220,126 $ (82,939) $ (126,796) $ (792,789)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net income (loss) per common share and common equivalent share:
Net income (loss) from continuing operations
attributable to common shareholders. . . . . . . . $ 119,146 $ (450,482) $ (322,775) $ (1,160,332)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Primary and fully diluted income (loss) per share:
Continuing operations. . . . . . . . . . . . . . . $ 0.01 $ (0.05) $ (0.03) $ (0.15)
Discontinued operations. . . . . . . . . . . . . . $ - $ .04 $ - $ .04
------------ ------------ ------------- -------------
Net income (loss) per share. . . . . . . . . . . . . . $ 0.01 $ (0.01) $ (0.03) $ (0.11)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Weighted average common and common
equivalent shares outstanding. . . . . . . . . . . 10,838,110 8,342,752 9,792,397 8,199,498
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
JUNE 29, 1997 JUNE 30,1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . $ (163,678) $ (1,160,332)
Adjustments to reconcile net loss to net cash from
(used by) operating activities:
Depreciation and amortization. . . . . . . . . . . 485,518 440,958
Loss on sale of assets . . . . . . . . . . . . . . 259,680 55,292
Discount on convertible debt.. . . . . . . . . . --- 172,907
Expenses paid in common stock options. . . . . . 27,669 ---
Changes in reserves against receivables. . . . . (512,245) ---
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . 507,213 (1,693,374)
Inventories. . . . . . . . . . . . . . . . . . 368,456 (496,075)
Prepaid expenses and other . . . . . . . . . . 493,298 (550,589)
Accounts payable . . . . . . . . . . . . . . . (230,827) (387,607)
Accrued liabilities. . . . . . . . . . . . . . (1,203,167) 119,196
-------------- --------------
Net cash used in continuing operations.. . . . . . 31,917 (3,499,624)
Net cash used in discontinued operations . . . . . (124,701) (1,882,872)
-------------- --------------
Net cash used in operating activities . . . . . . (92,784) (5,382,496)
-------------- --------------
Cash flows from (used by) investing activities:
Proceeds from sale of assets . . . . . . . . . . . 158,896 31,383
Purchase of intangibles and other assets . . . . . (94,402) (105,986)
Purchase of property and equipment . . . . . . . . (160,527) (987,051)
Advances to related party. . . . . . . . . . . . . --- (300,000)
Proceeds from sale of subsidiary . . . . . . . . . --- 1,000
-------------- --------------
Net cash from (used by) investing activities . . (96,033) (1,360,654)
-------------- --------------
Cash flows from (used by) financing activities:
Bank overdrafts. . . . . . . . . . . . . . . . . (458,029) ---
Repayment of long-term debt and capital
lease obligations. . . . . . . . . . . . . . . (563,781) (5,690)
Dividends on preferred stock . . . . . . . . . . (7,142) ---
Proceeds from issuance of common stock . . . . . 1,980,865 3,930,970
Credit facilities borrowings.. . . . . . . . . . 11,133,844 4,127,220
Credit facilities repayments . . . . . . . . . . (11,273,365) (2,740,700)
-------------- --------------
Net cash provided by financing activities. . . 812,392 5,311,800
-------------- --------------
Net increase (decrease) in cash. . . . . . . . . . . . 623,575 (1,431,350)
Cash and cash equivalents at beginning of period . . . 724,729 1,937,884
-------------- --------------
Cash and cash equivalents at end of period . . . . . . $ 1,348,304 $ 506,534
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
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, except for the December 29, 1996
balance sheet, are unaudited. Certain amounts shown in the 1997 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
June 29, 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 in interest expense (credited to common stock) representing
guaranteed contractural discount on debt converted to common stock during the
quarter ended March 31, 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
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 Preferred
Stockholders was accrued during the three months ended March 30, 1997 (see
Note 8).
During the second quarter ended June 29, 1997, options to purchase 6,400
shares of the Company's Common stock at $2.50 per share, valued at $5,312,
were granted in lieu of recruiting fees. Additionally, 550,000 shares of
Common Stock were sold at $1.875 per share to the Company's interim Chief
Executive Officer for a full recourse note totaling $1,031,250 (see Note 8).
3. NEW ACCOUNTING PRONOUNCEMENTS
In March 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". 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Acounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 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.
6
<PAGE>
4. INVENTORIES
Inventories consist of the following:
JUNE 29, 1997 DECEMBER 29, 1996
------------- -----------------
Production - Ingredients $ 467,021 $ 591,853
Production - Finished Goods 437,820 654,640
Paper goods and packaging materials 286,680 313,484
------------ ------------
$ 1,191,521 $ 1,559,977
Reserve for spoils and obsolescence (55,000) (55,000)
------------ ------------
$ 1,136,521 $ 1,504,977
------------ ------------
------------ ------------
5. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 29, 1997 DECEMBER 29, 1996
------------- -----------------
<S> <C> <C>
Machinery and equipment. . . . . . . . . . . . . . $ 4,085,709 $ 4,187,534
Leasehold improvements . . . . . . . . . . . . . . 1,748,780 1,748,780
Computer equipment . . . . . . . . . . . . . . . . 492,705 309,981
Office furniture and equipment . . . . . . . . . . 194,252 443,604
Vehicles . . . . . . . . . . . . . . . . . . . . . 233,942 574,877
Assets held for sale . . . . . . . . . . . . . . . 160,700 326,701
------------ ------------
$ 6,916,088 $ 7,591,477
Less accumulated depreciation and amortization . . (1,773,386) (1,588,242)
------------ ------------
5,142,702 6,003,235
Construction in progress.. . . . . . . . . . . . . 184,895 24,368
------------ ------------
$ 5,327,597 $ 6,027,603
------------ ------------
------------ ------------
</TABLE>
6. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt include the following:
<TABLE>
<CAPTION>
JUNE 29, 1997 DECEMBER 29, 1996
------------- -----------------
<S> <C> <C>
Credit Facility: . . . . . . . . . . . . . . .
Receivable line. . . . . . . . . . . . . . . $ 137,264 $ 116,747
Inventory line.. . . . . . . . . . . . . . . 143,331 303,369
Equipment revolver . . . . . . . . . . . . . -- 397,813
Equipment term loan. . . . . . . . . . . . . 440,519 583,332
Capitalized leases . . . . . . . . . . . . . . 211,029 234,184
--------- -----------
932,143 1,635,445
Less current maturities. . . . . . . . . . . 173,132 901,166
--------- -----------
Long term portion . . . . . . . . . . . . . . $ 759,011 $ 734,279
--------- -----------
</TABLE>
CAPITALIZED LEASES PAYABLE
7
<PAGE>
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 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 six months ended June 29, 1997, were fully offset with a
valuation allowance due to uncertainties about realization. Minimum state
income taxes and franchise fees for the second quarter, 1997 were $3,110.
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. The shares of common stock
are restricted securities with registration rights. Purchaser 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, payable in shares, is accounted for as a deemed dividend
attributable to these shares of common stock. 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.
On April 30, 1997, the Company's interim Chief Executive Officer purchased
550,000 shares of restricted Common Stock at $1.875 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 100,000 have not
yet vested. The remaining 150,000 were forfeited due to a performance
condition expiring on June 30, 1997, and will be treated as canceled
effective July 1, 1997.
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 agreement for the Series B-1 Convertible
Preferred stock calls for additional penalties if the Registration Statement
is not declared effective by July 31, 1997. The Registration Statement has
not been declared effective; therefore, beginning August 1, 1997, and
continuing until the Registration Statement is declared effective, additional
penalties of $2,500 per week will accrue to the holder of the B-1
Convertible Preferred Stock.
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. The dividend
will be paid 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.
8
<PAGE>
9. LITIGATION AND CONTINGENCIES
The Company's former President, Chairman of the Board, and Chief
Executive Officer, Lance Mortensen (who is also a shareholder), has filed
suit agains the Company seeking approximately $312,000 for alleged breach of
contract in an employment-related dispute. Although discovery has not yet
commenced and there can be no assurances as to the outcome of this matter,
management does not believe there will be a material adverse affect upon the
financial position, results of operations, or cash flows of the Company.
There are no other 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, 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 June 29, 1997, more than 65 grocery and
club store chains with over 2,800 locations 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.
As part of its expansion program, the Company has developed, and is
continuing to develop new products for the consumers, in addition to revising
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.
RESULTS OF OPERATIONS
Net revenues from continuing operations were $5,553,000 for the second
quarter ended June 29, 1997, as compared to $6,716,000 for the second quarter
ended June 30, 1996. For the six months ended June 29, 1997, net revenues
decreased $762,000 to $12,088,000 from $12,850,000 for the six months ended
June 30, 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 returns, or
lower than expected margins.
9
<PAGE>
Gross profit was $2,455,000 or 44% of net revenues for the second quarter
1997, compared to $3,195,000 or 48% for the second quarter of 1996. For the
six months ended June 29, 1997, gross profit was $5,260,000 or 44% compared
to $5,799,000 or 45% for the six months ended June 30, 1996. This compares
to a 35% gross margin for the year ended December 29, 1996.
Selling, general and administrative expenses for the second quarter ended
June 29, 1997, were $2,100,000, a decrease of 41% when compared to the same
quarter last year which was $3,565,000. For the six months ended June 29,
1997, selling, general and administrative expenses decreased $1,571,000 to
$5,037,000 from $6,609,000 when compared to the same period last year. The
Company believes that ongoing and recently completed cost reduction programs
will result in additional reductions of future corporate and overhead costs.
Depreciation and amortization expense, included in cost of sales and
selling, general and administrative expenses, was $231,000 or 4% of net
revenues for the quarter ended June 29, 1997, compared to $245,000 or 4% of
net revenues for the quarter ended June 30, 1996. For the six months ended
June 29, 1997, depreciation and amortization expense was $486,000, compared
to $441,000 for the same period last year.
Loss on disposition of fixed assets was $118,000 for the second quarter
ended June 29, 1997, compared to $13,000 for the second quarter last year.
For the six months ended June 29, 1997, loss on disposition of fixed assets
was $260,000 compared to $55,000 for the six months ended June 30, 1996.
During the second quarter of 1997, the Company continued to dispose of
obsolete and unused plant equipment.
Net interest expense was $51,000 for the quarter ended June 29, 1997,
compared to $67,000 for the same quarter in 1996. For the six months ended
June 29, 1997, net interest expense was $111,000 compared to $295,000 for
the six months ended June 30, 1996. The net decline in interest expense is
primarily attributable to a one time first quarter charge of $173,000 in 1996
relating to guaranteed conversion discount on a 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
During the six months ended June 29, 1997, the Company completed a
Private Placement of 1,600,000 shares of Common stock, and received
approximately $1,980,000, net of expenses. Management believes that the
Company's existing credit facilities and cash generated from continuing
operations and the private placement will provide adequate funding to meet
its needs through mid-1998. On July 31, 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.
During the six month period ended June 29, 1997, $93,000 of cash was
used in the Company's operations, compared to $5,382,000 used in the same
period last year, related to the operating losses from continuing operations
and expenditures related to discontinued operations.
SALES AND MARKETING
During March 1997, the Company converted 209 direct store delivery
("DSD") Safeway locations to bulk warehouse delivery, and either terminated
relationships with or transferred to brokers an additional 69 independent
customer DSD locations. As a result, the Company eliminated six driver
positions, and sold eight of its delivery vans during the six months ended
June 30, 1997. After conducting a review of the financial results of its
remaining DSD customers, the Company elected to retain a portion of the
program involving 70 stores, three drivers and three delivery trucks.
The Company continues to increase its focus on building sales volume
while reducing returns and maintaining margins. Recent addition to
distribution agreements with Sam's Club, a division of WalMart, are the
result of management's efforts to add profitable growth to the Company's
sales volume.
MAJOR CUSTOMERS
10
<PAGE>
One of the Company's retail customers, Price-Costco accounted for 49% of
the Company's sales for the six months ended June 29, 1997. No other
customer accounted for greater than 10% of net revenues for the period.
During the same period last year, two customers, Price-Costco and Safeway
Stores, accounted for 36% 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 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 twelve quarters since then. The
Company's net income from continuing operations for the second quarter
ended June 29, 1997, was $183,000, however, net loss from continuing
operations for the six months ended June 29, 1997 was $164,000. The
Company's loss from contining operations for the first quarter ended
March 30, 1997 was $347,000. For the quarter ended December 1996 the
loss was $1,345,000. At June 29, 1997, the Company had an accumulated
deficit of $34,566,000. There can be no assurance that the Company will
maintain profitability in the short term or ever.
- - 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 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.
- - 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. The Company's Chief Financial Officer was appointed in March of
this year. 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 effectivly, or that significant management turnover will not
continue in the future. At June 29, 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
11
<PAGE>
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
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 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 are
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 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; 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 Registration
Statement on Form S-3 covering the related conversion shares.
Additional penalties of $2,500 per week will accrue to the
holder of Series B-1 Preferred Stock from August 1, 1997, to
the date the registration Statement is declared effective.
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: August 12, 1997 By: /s/ R. LANCE HEWITT
----------------------------
R. Lance Hewitt
Chief Executive Officer
By: /s/ JAMES S. SERBIN
----------------------------
James S. Serbin
Chief Financial Officer
14
<PAGE>
INDEX TO EXHIBITS
NUMBER EXHIBIT TITLE
- ------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated August 7, 1996 by and between
Monterey Pasta Company, a California corporation and Monterey
Pasta Company, a Delaware corporation (incorporated by reference
from Exhibit A to the Company's Proxy Statement for the Special
Meeting of Shareholders held on August 1, 1996, filed with the
Securities and Exchange Commission on June 27, 1996 ("1996
Proxy"))
3.1 Certificate of Incorporation dated August 1, 1996 (incorporated by
reference from Exhibit 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 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
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 ("1996 Form S-3"))
4.2 Registration Rights Agreement, dated as of July 31, 1996
(incorporated by reference from Exhibit 4.2 filed with the
1996 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 the 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)
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 Warrent ("Sentra Warrent") 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 Exhibit 4.13 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
15
<PAGE>
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)
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
16
<PAGE>
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
1995 Q2 10-Q)
10.29 Registration Rights Agreement dated as of June 15, 1995 with GFL
Advantage Fund Limited, as amended on October 13 and 19, 1995,
respectively (incorporated by reference from Exhibit 10.2 to the
1995 Q2 10-Q, and Exhibits 10.6 and 10.7 to the Company's S-3
Registration Statement NO. 33-96684, filed on December 12, 1995
("1995 S-3"))
10.30 Joint Escrow Instructions dated as of October 1995 (incorporated by
reference from Exhibit 10.5 to the 1995 S-3)
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
Q2 10-Q)
10.45* Directed Employee Benefit Trust Agreement dated June 17, 1996
between the Company and The Charles Schwab Trust Company, as
Trustee of the Company's 401(k) Plan (incorporated by reference
from Exhibit 10.24 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 Q1
10-Q)
11 Exhibit 11 - Computation of net earnings (loss) per share
16.1 Letter from Deloitte & Touche LLP dated October 31, 1996
(incorporated by reference to the Company's Report on Form 8-K/A
filed November 8, 1996)
27.1 Financial data schedule
* Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its subsidiary, Upscale
Food Outlets, Inc.
17
<PAGE>
EXHIBIT 11
MONTEREY PASTA COMPANY
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 29, 1997 JUNE 30, 1996 JUNE 29, 1997 JUNE 30, 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 $ 183,243 $(450,482) $(163,678) $(1,160,332)
Deduct dividends on certain common shares* (43,200) - (43,200) -
Deduct dividends on preferred shares* (20,897) - (115,897) -
---------- --------- --------- ----------
Income (Loss) attributable to common shareholders
before discontinued operations 119,146 (450,482) (322,775) (1,160,332)
Recovery (Loss) from discontinued operations 36,882 367,543 36,882 367,543
---------- --------- --------- ----------
Income (Loss) attributable to common stock $ 156,028 $ (82,939) $(285,893) $ (792,789)
---------- --------- --------- ----------
---------- --------- --------- ----------
Weighted average number of common
shares outstanding 10,838,110 8,342,752 9,792,397 8,199,498
---------- --------- --------- ----------
---------- --------- --------- ----------
Primary net income (loss) per share:
Continuing operations $ 0.01 $ (0.05) $ (0.03) $ (0.15)
Discontinued operations - 0.04 - 0.04
---------- --------- --------- ----------
Net Income (Loss) $ 0.01 $ (0.01) $ (0.03) $ (0.11)
---------- --------- --------- ----------
---------- --------- --------- ----------
</TABLE>
FULLY DILUTED NET LOSS PER SHARE
COMPUTATION FOR STATEMENT OF OPERATIONS - SUBMITTED IN ACCORDANCE WITH
REGULATION S-K ITEM 601(b)(11) ALTHOUGH 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%
<TABLE>
<S> <C> <C> <C> <C>
Income (Loss) from continuing operations before
dividends on preferred stock $ 183,243 $(450,482) $(163,678) $(1,160,332)
Add back interest on convertible debt** - 2,301 - 208,962
Deduct dividends on certain common shares* (43,200) - (43,200) -
Deduct dividends on preferred shares* (20,897) - (115,897) -
---------- --------- --------- ----------
Income (Loss) attributable to common shareholders
before discontinued operations 119,146 (448,181) (322,775) (951,370)
Recovery (Loss) from discontinued operations 36,882 367,543 36,882 367,543
---------- --------- --------- ----------
Income (Loss) attributable to common stock $ 156,028 $ (80,638) $(285,893) $ (583,827)
---------- --------- --------- ----------
---------- --------- --------- ----------
Weighted average number of common
shares outstanding 10,838,110 8,342,752 9,792,397 8,199,498
Assuming conversion of convertible debt** - 8,840 - 124,029
---------- --------- --------- ----------
Weighted average number of common
shares outstanding as adjusted 10,838,110 8,351,592 9,792,397 8,323,527
---------- --------- --------- ----------
---------- --------- --------- ----------
Diluted net income (loss) per share:
Continuing operations $ 0.01 $ (0.05) $ (0.03) $ (0.11)
Discontinued operations - 0.04 - 0.04
---------- --------- --------- ----------
Net Income (Loss) $ 0.01 $ (0.01) $ (0.03) $ (0.07)
---------- --------- --------- ----------
---------- --------- --------- ----------
</TABLE>
* See Note 8 to the financial statements
** Convertible debt considered although anti-dilutive, since actually
converted during the period
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<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 1,348,304
<SECURITIES> 0
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<ALLOWANCES> 412,040
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0
3,884,019
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