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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 29, 1998.
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from: to: .
COMMISSION FILE NUMBER 0-22534-LA
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MONTEREY PASTA COMPANY
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 7, 1998, 12,841,812 shares of common stock, $.001 par value, of
the registrant were outstanding.
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<PAGE>
MONTEREY PASTA COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) March 29, 1998
and December 28, 1997
Condensed Consolidated Statements of Operations (unaudited) three
months ended March 29, 1998 and March 30, 1997
Condensed Consolidated Statements of Cash Flows (unaudited) three
months ended March 29, 1998 and March 30, 1997
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K and S-8
Signature Page
Exhibit Index
<PAGE>
PART I. FINANCIAL INFORMATION
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $136,904 $410,228
Accounts receivable, net........................ 1,698,471 2,440,745
Inventories .................................... 1,182,061 1,218,546
Prepaid expense and other ...................... 1,476,207 1,519,801
------------ ------------
Total current assets.......................... 4,493,643 5,589,320
Property and equipment, net ...................... 5,180,322 5,057,846
Intangible and other assets, net.................. 206,073 101,582
Deposits and other................................ 109,544 280,245
------------ ------------
Total assets.................................. $9,989,582 $11,028,993
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................................. $ -- $5,692
Accounts payable................................ 941,054 949,036
Accrued liabilities ............................ 770,975 917,132
Current portion of long-term debt.............. 1,938,158 1,273,216
------------ ------------
Total current liabilities..................... 3,650,187 3,145,076
Long-term debt.................................... 1,353,596 523,701
Commitments and contingencies
Stockholders' equity:
Common stock.................................... 39,378,473 42,640,107
Shareholder note receivable..................... -- (562,500)
Accumulated deficit............................. (34,392,674) (34,717,391)
------------ ------------
Total stockholders' equity.................... 4,985,799 7,360,216
------------ ------------
Total liabilities and stockholders' equity.... $9,989,582 $11,028,993
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
First Quarter Ended
------------------------
March 28, March 30,
1998 1997
------------ -----------
<S> <C> <C>
Net revenues from continuing
operations........................ $5,982,859 $6,535,502
Cost of sales....................... 3,598,576 3,730,329
------------ -----------
Gross profit........................ 2,384,283 2,805,173
Selling, general and administrative
expenses.......................... 2,032,899 2,937,771
Loss on disposition or impairment
of assets......................... -- 142,014
------------ -----------
Operating income (loss)............. 351,384 (274,612)
Interest expense.................... (43,052) (60,437)
Other income, (net)................. 16,385 --
------------ -----------
Income (loss) from continuing
operations before provision for
income taxes...................... 324,717 (335,049)
Provision for income taxes.......... -- (11,872)
------------ -----------
Net income (loss) from continuing
operations........................ 324,717 (346,921)
Dividends to preferred stockholders. -- (95,000)
------------ -----------
Net income (loss) from continuing
operations attributable to common
stockholders...................... $324,717 ($441,921)
============ ===========
Basic and diluted income
(loss) per share: $0.02 ($0.05)
============ ===========
Weighted average common and common
equivalent shares outstanding..... 14,289,500 8,746,683
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 28, March 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations........ $324,717 ($346,921)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 238,151 225,577
Loss on disposition and writedown of
property and equipment.......................... -- 142,014
Expenses paid in common stock options............. 51,000 22,357
Provisions for allowances for bad debts,
returns, adjustments and spoils................. 11,631 (391,109)
Changes in assets and liabilities:
Accounts receivable............................. 730,643 232,105
Inventories..................................... 36,485 192,061
Prepaid expenses and other...................... 214,294 319,867
Accounts payable................................ (7,982) 137,321
Accrued expenses................................ (146,157) (851,261)
------------ ------------
Net cash provided by (used in)
continuing operations........................ 1,452,782 (317,989)
Net cash used in discontinued operations.......... -- (101,178)
------------ ------------
Net cash provided by (used in)
operating activities.......................... 1,452,782 (419,167)
------------ ------------
Cash flows from (used by) investing activities:
Proceeds from sale of assets...................... -- 85,485
Purchase of intangibles and other assets.......... (109,599) --
Repurchase of common stock........................ (2,750,873) --
Purchase of property and equipment................ (355,518) (49,487)
------------ ------------
Net cash provided by (used in)
investing activities.......................... (3,215,990) 35,998
------------ ------------
Cash flows from (used by) financing activities:
Bank overdrafts................................... (5,692) (586,781)
Proceeds from revolving line of credit............ -- 6,207,000
Repayments on revolving line of credit............ (250,000) (6,045,814)
Proceeds from long-term debt....................... 2,400,000 --
Repayment of long-term debt and capital
lease obligations................................ (655,164) (13,945)
Proceeds from issuance of common stock........ 740 1,996,396
------------ ------------
Net cash provided by financing activities....... 1,489,884 1,556,856
------------ ------------
Net increase (decrease) in cash....................... (273,324) 1,173,687
Cash and cash equivalents at beginning of period.... 410,228 724,729
------------ ------------
Cash and cash equivalents at end of period.......... $136,904 $1,898,416
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<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 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 1997 Annual Report on
Form 10-K. 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 29, 1998, 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 28, 1997. 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:
In April 1997, the Company's then current Chief Executive Officer agreed to
purchase 550,000 shares of Common Stock based on an agreement containing
various time-served and performance conditions with a full recourse note due
December 31, 1997. A portion of the shares were repurchasable by the Company
at the original price of $1.88 if the conditions were not met and, therefore,
250,000 shares were forfeited during 1997. On December 31, 1997, the note in
the amount of $562,500 was converted to non-interest bearing and non-recourse,
and was extended for two years with an expiration of December 31, 1999. The
shares were reclassified as options and the $51,000 calculated as the fair
market value under the Black-Scholes method was recorded as an expense during
the first quarter of 1998.
3. New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 132, Employers' Disclosures about
Postretirement Benefits. SFAS No. 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when previous related accounting standards were issued.
SFAS 132 is effective for financial statements for years beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated unless the information is not readily available, in which case the
notes to the financial statements should include all available information and
a description of the information not available. Management has not yet
determined whether the Company's current financial statement disclosures will
need to be modified based upon current operations. Results of operations and
financial position will be unaffected by implementation of this standard.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Production--Ingredients.................. $460,839 $602,428
Production--Finished goods............... 456,592 382,736
Paper goods and packaging materials...... 319,630 288,382
------------ ------------
1,237,061 1,273,546
Allowances for spoils and obsolescence... (55,000) (55,000)
------------ ------------
$1,182,061 $1,218,546
============ ============
</TABLE>
5. PROPERTY AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Machinery and equipment.................... $4,703,928 $4,459,088
Leasehold improvements..................... 1,811,990 1,809,946
Computers, office furniture and equipment.. 743,747 743,747
Vehicles................................... 241,112 233,942
------------ ------------
7,500,777 7,246,723
Less accumulated depreciation and
amortization............................. (2,485,884) (2,252,842)
------------ ------------
5,014,893 4,993,881
Construction in progress................... 165,429 63,965
------------ ------------
$5,180,322 $5,057,846
============ ============
</TABLE>
6. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of debt include the following:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Credit Facility:
Receivable and inventory revolver........ $702,894 $952,894
Equipment revolver....................... 400,000 --
Equipment term loan...................... 2,000,000 636,371
Capitalized leases payable................. 188,860 207,652
------------ ------------
3,291,754 1,796,917
Less current maturities.................. 1,938,158 1,273,216
------------ ------------
$1,353,596 $523,701
============ ============
</TABLE>
Credit Facility
Because of the need to acquire a portion of the Company's Common shares
owned by Clearwater Fund IV, Ltd., its largest stockholder (See Note 8), with
a capital commitment of $2,690,263, the Company recently asked the bank to
increase its credit facility by $1 million. On February 25, 1998 the bank
approved the following new credit facility with an expiration date of 7/24/98,
and revised the existing loan covenants to reflect the impact of the
Clearwater transaction.
o Accounts receivable and inventory revolver for up to $1,500,000 with
interest at prime plus 1/2% (9.0% at 3/29/98)
o Equipment revolver for up to $500,000 with interest at prime plus .75%
(9.25% at 3/29/98), payable at $13,889 monthly, plus interest
o Term note for up to $2,000,000 plus interest at prime plus 1.50% (10.00%
at 3/29/98 payable at $83,333 monthly, plus interest
The equipment revolver is expected to be renewed and continues to be
amortized as a long-term loan and, accordingly, is classified as long term in
the accompanying balance sheets.
7. Income Taxes
Federal and State of California income tax for the months ended March 29,
1998, were fully offset by net operating loss carryforwards.
8. Stockholders' Equity
Preferred Stock
In December 1997, $3,000,000 of Series A-1 Convertible Preferred Stock was
converted into 4,108,108 shares of common stock. Refer to discussion below
relating to repurchase of 2,365,066 shares on March 5, 1998.
Common Stock
As disclosed in Company's Form 10-K, on March 5, 1998, the Company repurchased
2,365,066 shares of its common stock from its largest stockholder, Clearwater
Fund IV, Ltd. for a per share price of $1.1375 and a total consideration of
$2,690,000. The repurchase was in response to a notification on February 13,
1998 by the NASDAQ Stock Market, Inc. ("NASDAQ") that the Company's Series A
convertible Preferred stock offering, as amended by the Series A-1 Agreement
in March of 1997 had violated Rule 4460(i)(l)9D)(ii) which requires
shareholder approval prior to the issuance of securities convertible into
common stock equal to, or in excess of, 20% of outstanding shares at the time
of issuance. The NASDAQ required the Company to repurchase the shares, or
face delisting from the National NASDAQ market.
In April 1997, the Company's then current Chief Executive Officer agreed to
purchase 550,000 shares of common stock based on an agreement containing
various time-served and performance restrictions with a full recourse note
due December 31, 1997. Certain of the performance restrictions were not met
and 250,000 shares were forfeited during 1997, leaving 300,000 shares
outstanding at December 28, 1997. The note, with a remaining balance of
$562,500, was converted to a non-interest bearing non-recourse status
effective December 31, 1997 with an expiration date of December 31, 1999.
Because the new note is non-recourse, the shares and related note are treated
for accounting purposes as canceled and replaced with options. The $51,000
fair value of the resulting option grant was recorded as an expense
during the first quarter of 1998.
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, has been a defendant in several lawsuits alleging breach of
lease relating to restaurants closed in 1995 and 1996, and other vendor
related cases. The Company sold UFO in 1996 and contractually UFO continues
to have sole responsibility for such litigation. Although there can be no
assurance given as to the results of such legal proceedings, based upon
information currently available, management does not believe these proceedings
will have a material adverse effect on the financial position or results of
operations of the Company.
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 implied covenant of good faith and fair dealing. Mr. Mortensen
alleges that he is entitled to at least $310,919 plus attorney's fees,
pursuant to a written employment agreement. That agreement contained a
binding arbitration provision. The arbitration is scheduled for May 11 and
12, 1998. The Company intends to vigorously contest Mr. Mortensen's claim.
On November 25, 1997, Mr. Mortensen was awarded a writ of attachment in the
amount of $251,000 pending resolution of the suit. As a result, the Company
purchased a bond secured by a letter of credit with its bank for the amount of
the attachment. The writ will be released upon settlement of the arbitration.
The Company has insurance coverage for any amounts arising from the employee
benefits portion of the claim, $56,000, and the insurance company has
committed to pay legal costs emanating from the defense of the claim.
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 28, 1997.
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 29, 1998, more than 3,100 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.
Monterey Pasta's objective is to become a leading national supplier of
refrigerated gourmet pasta and pasta sauces through distribution of its
products to grocery and club stores. The key elements of the Company's
strategy include the following:
o Create brand awareness by communicating to the consumer that
Monterey Pasta Company provides a healthful and nutritious line of
products and to promote repeat business by reinforcing positive
experiences with the Company's products.
o Introduce new products on a timely basis to maintain customer interest
and to respond to changing consumer tastes. In order to maximize its
margins, the Company will focus its efforts on those new products that
can be manufactured and distributed out of its Salinas, California
facility and will supplement its existing line of cut pasta, ravioli,
tortelloni, tortellini, and sauces.
o Reduce total operating costs through continual evaluation of
administrative and production staffing and procedures. The Company
will consider additional minor capital improvements at its manufacturing
facility in order to increase production efficiencies and capacities,
and to reduce the Company's cost of goods.
o Expand market share through same-store revenue growth, addition of
new grocery and club store chains, geographic diversification, and
product line expansion, including creation of additional meal occasions
using Monterey Pasta products.
During the first quarter of 1998 the Company introduced three new home meal
replacement entrees, two Southwestern style raviolis and a complementary
salsa, and a completely new line of pastas and sauces.
The Company will continue to direct its advertising and promotional
activities to specific programs customized to suit its retail grocery and club
store accounts. These will include in-store demonstrations, coupons, scan
backs, cross-couponing and other related activities. 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.
The success of the Company's efforts will depend on three key factors:
(1) whether grocery and club store chains will continue to increase the number
of their stores offering the Company's products, (2) whether the Company can
continue to increase the number of grocery and club store chains offering its
products, and (3) continued introduction of new products that meet consumer
acceptance. 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 or that such chains will not reduce the number of stores carrying the
Company's products.
Net revenues from continuing operations were $5,983,000 for the
quarter ended March 29, 1998, as compared to $6,536,000 for the quarter ended
March 30, 1997. The decrease in sales primarily results from reduction in
retail locations which were discontinued in 1997 due to low volumes, high
returns, or lower than expected margins.
Gross profit was $2,384,000 or 40% of net revenues for the first
quarter 1998, compared to $2,805,000 or 43% for the first quarter of 1997.
This compares to a 41% gross margin for the year ended December 28, 1997. The
gross profit decline was caused by extra costs and plant inefficiencies
associated with the introduction of the home meal replacement and M.C. Rossi
product lines.
Selling, general and administrative expenses for the quarter ended
March 29, 1998 were $2,033,000, a decline of $905,000 when compared to the
same quarter last year when they were $2,938,000. The level of selling,
general, and administrative expenses currently experienced is indicative of a
level resulting from corporate reorganization, relocation, and downsizing
accomplished early in 1997.
Depreciation and amortization expense, included in cost of sales and
selling, general and administrative expenses, was $238,000 or 4% of net
revenues for the quarter ended March 29, 1998, compared to $226,000 or 4% of
net revenues for the first quarter of 1997.
There was no gain or loss on disposition of fixed assets for the
quarter ended March 29, 1998, compared to $142,000 for the first quarter of
1997. During the first quarter of 1997, the Company sold obsolete and unused
plant equipment and seven trucks that were formerly utilized to support direct
store delivery sales (DSD).
Net interest expense was $43,000 for the first quarter of 1998,
compared to $60,000 for the same period in 1997. The net decline in interest
expense is primarily attributable to lower average bank loan balances during
the first quarter of 1998 compared to 1997 due to positive operating results.
Liquidity and Capital Resources
As discussed in the "Stockholder's Equity" section, in March of 1997
the Company repurchased 2,365,066 shares of common stock from its largest
stockholder, Clearwater Fund IV, Ltd., for a total consideration of
$2,690,000. This necessitated an increase in the Company's credit facility by
$1,000,000 from $3,000,000 to $4,000,000. The Company owed $3,103,000 at
March 29, 1998.
During the three month period ended March 30, 1997, $1,453,000 of cash
was provided by the Company's operations, compared to $419,000 cash used in
the first quarter, 1997. The 1998 improvement was primarily related to a
continuing operations profit of $325,000 in first quarter 1998, compared with
a loss of $347,000 in first quarter 1997, and a reduction of accounts
receivable relative to year end 1997.
Sales and Marketing
The Company's sales and marketing strategy targets sustainable
growth. Its focus is on increasing sales through expansion of its club store
and retail grocery business, increasing its distribution through the rapidly
growing number of natural and organic food retailers, and the introduction of
innovative new products designed to meet consumer needs.
The Company continued its strong, ongoing relationship with Costco in
first quarter of 1998, adding the 38 store Seattle Division in March, with an
initial commitment for 10 SKUs in each store. It also added Bristol Farms, a
small upscale chain in the Los Angeles area, with six stores.
Monterey Pasta's products are made with no preservatives or artificial
ingredients. Capitalizing on this strength, the Company plans to pursue
increased distribution through natural and organic food retailers, whose
growth has exceeded 20% annually in recent years. The Company estimates there
are 450 potential natural and organic retail grocery locations available for
its products.
The Company has introduced new Southwest/Mexican products to help
fulfill its objective of providing added meal occasions to the consumer, and
to take advantage of the fast growing market for southwestern and Mexican food
products. Initial offerings in the new line include Blue Corn Ravioli with
Sonoma Jack Habanero Cheese filling, Chili Cilantro Ravioli with Southwestern
Chicken filling, and a new Ranchero Salsa.
The Company's new product offering has also included the introduction
of items into the growing home meal replacement ("HMR") category. The
Company introduced its first three products in the HMR line in early 1998 on
a limited basis in its DSD stores. Late in the first quarter it began
introducing the new items into some of its retail stores.
Major Customers
Two the Company's retail customers, Costco and Sam's Club Stores,
accounted for 46% and 33%, respectively, of the Company's sales for the three
months ended March 29, 1998. No other customer accounted for greater than 10%
of net revenues for the period.
Business Risks
Certain characteristics and dynamics of the Company's business and of
financial markets generally create risks to the Company's long-term success
and to predictable quarterly results. These risks include:
Recent Operating Losses: No Assurance of Continued 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. Since then, the Company has reported losses in nine of fifteen
quarters. The Company's net income from continuing operations for the quarter
ended March 29, 1998 was $325,000, a fourth consecutive profitable quarter.
At March 29, 1998, the Company had an accumulated deficit of $34,393,000.
There can be no assurance that the Company will maintain its recent
profitability in the long term.
Liquidity: Need for Additional Capital. Management believes that its
operations and existing bank lines of credit will provide adequate liquidity
to meet the Company's planned capital and operating requirements through 1998.
If the Company's operations do not provide cash sufficient to fund its
operations and the Company seeks outside financing, there can be no assurance
that the Company will be able to obtain such financing when needed, on
acceptable terms, or at all. In addition, any future equity financing or
convertible debt 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. On August
1, 1997, the interim Chief Executive Officer was replaced by a permanent Chief
Executive Officer, R. Lance Hewitt. On September 18, 1997 the Company
appointed a new Chief Financial Officer, Stephen L. Brinkman. Neither officer
had previously been a part of the Company's management team. The Company's
success will depend on its ability to operate under new management, and to
motivate and retain key employees and officers. There can be no assurance
that the Company's new management team will be able to perform effectively, or
that significant management turnover will not continue in the future. At May
7, 1998 there are no keyman insurance policies in place.
Impact of Inflation. The Company believes that inflation has not had a
material impact on its operations to date. Substantial increases in labor,
employee benefits, freight, energy, ingredients and packaging, rents and other
operating expenses could adversely affect the operations of the Company's
business in future periods. The Company cannot predict whether such increases
will occur in the future.
Volatility of Stock Price. The market price of the Company's common stock
has fluctuated substantially since the initial public offering of the common
stock in December 1993. Such volatility may, in part, be attributable to the
Company's operating results or to changes in the direction of the Company's
expansion efforts. In addition, changes in general conditions in the
economy, the financial markets or the food industry, natural disasters or
other developments affecting the Company or its competitors could cause the
market price of the Company's common stock to fluctuate substantially. In
addition, in recent years, the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies, including the Company,
for reasons sometimes unrelated to the operating performance of these
companies. Any shortfall in the Company's net sales or earnings from levels
expected by securities analysts or the market could have an immediate and
significant adverse effect on the trading price of the Company's common stock
in any given period. Additionally, the Company may not learn of such
shortfalls until late in the fiscal quarter, which could result in an even
more immediate and significant adverse effect on the trading price of the
Company's common stock.
Risks Inherent in Food Production. The Company faces all of the risks
inherent in the production and distribution of refrigerated food products,
including contamination, adulteration and spoilage, and the associated risks
of product liability litigation and declines in the price of its stock may be
associated with even an isolated event. The Company has a modern production
facility, employs what it believes is state-of-the-art 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.
Dependence on Major Customers. In first quarter of 1998, three customers
accounted for 46%, 33%, and 8%, respectively, of the Company's total net
revenues. Loss of any of these customers, Costco, Sam's Club Stores, and
Safeway, would have a material adverse effect on the Company.
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 its distribution
system or increase in the costs thereof could have a material adverse impact on
the Company's business.
Marketing and Sales Risks. The future success of the Company's efforts will
depend on a number of factors, including whether grocery and club store chains
will continue to expand the number of their individual stores offering the
Company's products and whether allowances and other incentives will expand
retail distribution. Expansion into new markets increases the risk of
significant product returns resulting from the Company's supply of slower
selling items to its customers. In addition, grocery and club store chains
continually re-evaluate the products carried in their stores and no assurances
can be given that the chains currently offering the Company's products will
continue to do so in the future. Should these channels choose to reduce or
eliminate products, the Company could experience a significant reduction in
its product sales. As indicated previously, the Company remains dependent on
the use of slotting allowances and other incentives to expand retail
distribution. In order to reduce risk, the Company has significantly reduced
expansion into new markets requiring such major expenditures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings, other than
ordinary, routine litigation incidental to the Company's business, to which
the Company is a party or to which any of its property is subject. The
Company's former subsidiary, UFO, has been a defendant in several lawsuits
alleging breach of payment in vendor related matters. As noted above, the
Company sold UFO in 1996, and the new owner assumed all current and future
liabilities associated with that business. Although there can be no assurance
given as the results of such legal proceedings, based upon information
currently available, management does not believe these proceedings will have a
material adverse effect on the financial position, cash flows, or results of
operations of the Company.
Other Lawsuits
On August 5, 1997, Lance H. Mortensen, former President, Chief
Executive Officer and Director of the Company, filed a complaint against the
Company alleging that he is entitled to at least $310,919 pursuant to a
written employment agreement. That agreement contained a binding arbitration
provision. In the arbitration, scheduled for May 11 and 12, 1998, the
Company intends to vigorously contest Mr. Mortensen's claim. The Company has
insurance coverage for the employee benefits portion of the claim and the
insurance company has committed to pay legal costs emanating from the defense
of the claim.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
In February 1998, the Company entered into an agreement to
sublease a portion of the Company's Salinas facility (4,649 sq. ft.) until
August 1998, when the Company expects to occupy the area. Also in February,
1998 the Company acquired the right to lease the remainder of the building's
1,365 square feet of office space.
Item 6. Exhibits and Reports on Form 8-K and S-8
The Company filed the following reports on Form 8-K during the
quarter ended March 29, 1998.
Report on Form 8-K filed on January 23, 1998, reported the resignation
of Timothy J. Ryan from the Board of Directors, effective December 31,
1997, the resignations of Directors Kenneth A. Steel and Robert F. Steel
effective January 29, 1998, and the appointment of Gerard P. Melia to
the Board of Directors on January 29, 1998.
Report on Form 8-K filed on March 6, 1998 reported the repurchase of
2,365,066 shares of Common Stock of the Company held by Clearwater
Fund IV. Ltd. for a purchase price of $1.1375 per share.
Filing on Form S-8 on January 26, 1998 was made to register 540,000
shares of company common stock which may be issued as part of the First
Amended and Restated 1993 Stock Option Plan.
<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 7, 1998 By: /s/ R. LANCE HEWITT
-----------------------------------------
R. Lance Hewitt
President and Chief Executive Officer
By: /s/ STEPHEN L. BRINKMAN
-----------------------------------------
Stephen L. Brinkman
Chief Financial Officer
<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 Company's 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 Company's
Registration Statement on Form S-3) on August 23, 1996 ("1996 S-3"))
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 4.1 to the Company's 1996 S-3)
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 10K/A"))
3.6 Certificate of Designations of Series B-1 Convertible Preferred
Stock (incorporated by reference from Exhibit 3.5 filed with the
Company's 1996 Form 10-K/A)
4.1 Subscription Agreement, dated as of July 31, 1996 (incorporated by
reference from Exhibit 4.1 filed with the Company's 1996 S-3)
4.2 Registration Rights Agreement, dated as of July 31, 1996
(incorporated by reference from Exhibit 4.2 filed the Company's 1996
S-3)
4.3 Subscription Agreement, dated August 9, 1996 (incorporated by
reference from Exhibit 4.3 filed with the Company's 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 Company's 1996 Form S-3)
4.6 Form of Registration Rights Agreement dated April 1996, among the
Company, Spelman & Co., Inc. and investor (incorporated by reference
from Exhibit 10.42 filed with the Company's Original March 31, 1996
Quarterly Report on Form 10- Q on May 1, 1996 ("1996 Q-1 10-Q"))
4.7 Shareholder Rights Agreement dated as of May 15, 1996 between the
Company and Corporate Stock Transfer, as rights agent (incorporated
by reference from Item 2 of Form 8-A filed with the Securities and
Exchange Commission on May 28, 1996)
4.8 Form of Subscription Agreement dated April 1996, among the Company,
Spelman & Co., Inc. and investor (incorporated by reference from
Exhibits with corresponding numbers filed with the Company's 1996
Form 10-K/A)
4.9 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)
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 for Exhibits with
corresponding numbers filed with the Company's Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-3 filed on
May 6, 1997 ("1997 Amendment No. 1 to Form S-3"))
4.14* Stock Purchase Agreement between the Company and Kenneth A. Steel,
Jr. dated April 29, 1997 (incorporated by reference from Exhibits
with corresponding numbers filed with the 1997 Amendment No. 1 to
Form S-3)
5.1 Opinion and Consent of Gray Cary Ware & Freidenrich, a
Professional Corporation (incorporated by reference from Exhibits
with corresponding numbers filed with the 1997 Amendment No. 1 to
Form S-3)
10.1* Second Amended and Restated 1993 Stock Option Plan (as amended on
August 1, 1996) (incorporated by reference to Exhibit 10.1 filed
with 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 10.2 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 Exhibits with corresponding
numbers filed with the 1995 Form 10-K)
10.7 Christie Avenue Warehouse Lease of the Company (incorporated by
reference from Exhibit 10.04 to the SB-2)
10.8 Loan and Security Agreement dated December 8, 1995 with Coast
Business Credit, a Division of Southern Pacific Thrift and Loan
Association, and Schedule thereto (incorporated by reference from
Exhibit 10.8 to the 1995 Form 10-K)
10.9 Equipment Collateral Security Agreement dated December 8, 1995 with
Coast Business Credit (incorporated by reference from Exhibit 10.9
to the 1995 Form 10-K)
10.10 Secured Promissory Note dated December 8, 1995 in the original
principal amount of $500,000 in favor of Coast Business Credit
(incorporated by reference from Exhibit 10.10 to the 1995 Form 10-K)
10.11 Secured Promissory Note dated December 8, 1995 in the original
principal amount of $750,000 in favor of Coast Business Credit
(incorporated by reference from Exhibit 10.11 to the 1995 Form 10-K)
10.12 Investment Agreement dated July 12, 1995 with the Seychelles Fund,
Ltd. (incorporated by reference from Exhibit 10.12 to the 1995 Form
10-K)
10.13 Master Lease dated August 1, 1995 with Sentry Financial Corporation
(incorporated by reference from Exhibit 10.13 to the 1995 Form 10-K)
10.14 Letter Agreement dated July 26, 1995 between Monterey Pasta
Development Company and California Pasta Company (incorporated by
reference from Exhibit 10.21 to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 2, 1995 ("1995 Q3 10-Q"))
10.15 Asset Purchase Agreement dated July 26, 1995 between Upscale Food
Outlets, Inc. and California Pasta Company (incorporated by
reference from Exhibit 10.22 to the 1995 Q3 10-Q)
10.16 Franchise Termination Agreement and Release dated March 8, 1996
among the Company, Upscale Food Outlets, Inc., Monterey Pasta
Development Company, The Lance H. Mortensen Unitrust dated December
3, 1994, and LBJ Restaurants, LLC (incorporated by reference from
Exhibit 10.16 to the 1995 Form 10-K)
10.17 Acquisition Agreement between the Company and Upscale Food Outlets,
Inc. (incorporated by reference from Exhibit 10.05 to the SB-2)
10.18* Employment Agreement with Lance H. Mortensen (incorporated by
reference from Exhibit 10.06 to the Company's Q3 10-Q)
10.19* Employment Agreement dated September 5, 1995 with Mr. Norman E.
Dean (incorporated by reference from Exhibit 10.20 to the 1995 Q-3
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 10-Q 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 to the 1995 Form 10-K)
10.22* Employment Agreement with Mr. David J. Massara (incorporated by
reference from Exhibit 10.18 to the Company's 1994 Form 10-K)
10.23 Trademark Registration -- MONTEREY PASTA COMPANY, under
Registration No. 1,664,278, registered on November 12, 1991 with the
U.S. Patent and trademark Office (incorporated by reference from
Exhibit 10.09 to the SB-2)
10.24 Trademark Registration -- MONTEREY PASTA COMPANY, under Registration
No. 1,943,602, registered on December 26, 1995 with the U.S. Patent
and trademark Office (incorporated by reference from Exhibit 10.24
to the 1995 Form 10-K)
10.25 Trademark Registration -- MONTEREY PASTA COMPANY and Design, under
Registration No. 1,945,131, registered on January 2, 1996 with the
U.S. Patent and trademark Office (incorporated by reference from
Exhibit 10.25 to the 1995 Form 10-K)
10.26 Trademark Registration-- MONTEREY PASTA COMPANY and Design, under
Registration No. 1,951,624, registered on January 23, 1996 with the
U.S. Patent and Trademark Office (incorporated by reference from
Exhibit 10.26 to the 1995 Form 10-K)
10.27 Trademark Registration-- MONTEREY PASTA COMPANY 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 to the 1995 Form 10-K)
10.28 Subscription Agreement dated as of June 21, 1995 with GFL
Advantage Fund Limited (incorporated by reference from Exhibit
10.19 to the 1995 Q2 10-Q)
10.29 Registration Rights Agreement dated as of June 15, 1995 with GFL
Advantage Fund Limited, as amended on October 13 and 19, 1995,
respectively (incorporated by reference from Exhibit 10.2 to the
1995 Q2 10-Q, and Exhibits 10.6 and 10.7 to the Company's S-3
Registration Statement No. 33-96684, filed on December 12, 1995
("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 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)
10.38 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 to the 1996
Q1 10-Q)
10.40 Stock Purchase Agreement dated April 1, 1996 between Upscale
Acquisitions, Inc. and the Company (incorporated by reference from
Exhibit 10.40 filed with the 1996 Q1 10-Q)
10.41 Placement Agent Agreement dated April 12, 1996 between Company and
Spelman & Co., Inc. (incorporated by reference from Exhibit 10.41
filed with the 1996 Q1 10-Q)
10.44* The Company's 401(k) Plan, established to be effective as of January
1, 1996, adopted by the Board of Directors on June 7, 1996
(incorporated by reference from Exhibit 10.44 to the Company's
Quarterly Report on Form 10-Q on August 13, 1996 ("1996 Q-2 10- Q"))
10.45* Directed Employee Benefit Trust Agreement dated June 17, 1996
between the Company and The Charles Schwab Trust Company, as Trustee
of the Company's 401(k) Plan (incorporated by reference from Exhibit
10.45 to the 1996 Q2 10-Q)
10.46* Employment Agreement dated February 12, 1996 with Mr. Robert J. Otto
(incorporated by reference from Exhibit 10.24 to the 1996 Q1 10-Q)
10.47 Security and Loan Agreement (Accounts Receivable and/or Inventory)
dated July 24, 1997 between the Company and Imperial Bank
(incorporated by reference from Exhibit 10.47 of the Company's
Pre-Effective Amendment No. 3 to From S-3 filed on October 14, 1997
("1997 Amendment No. 3 to Form S-3"))
10.48 Agreement Regarding Employment, Trade Secrets, Inventions, and
Competition dated May 26, 1997 with Mr. R. Lance Hewitt
(incorporated by reference from Exhibit 10.48 of the 1997 Amendment
No. 3 to Form S-3)
10.49 Employment Agreement dated August 25, 1997 with Mr. Stephen L.
Brinkman (incorporated by reference to Exhibit 10.49, in the
Company's September 28, 1997 Quarterly Report on Form 10-Q filed on
November 10, 1998)
10.50 First Amendment to Security and Loan Agreement dated July 24, 1997
between the Company and Imperial Bank (incorporated by reference to
Exhibit 10.50 in the Company's 1997 Form 10-K)
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 and its former subsidiary,
Upscale Food Outlets, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED STATEMENT OF OPERATIONS, THE
CONDENSED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE
CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 136,904
<SECURITIES> 0
<RECEIVABLES> 1,698,471 <F1>
<ALLOWANCES> 0
<INVENTORY> 1,182,061
<CURRENT-ASSETS> 4,493,643
<PP&E> 7,666,206
<DEPRECIATION> 2,485,884
<TOTAL-ASSETS> 9,989,582
<CURRENT-LIABILITIES> 3,650,187
<BONDS> 0
0
0
<COMMON> 39,378,473
<OTHER-SE> (34,392,674)
<TOTAL-LIABILITY-AND-EQUITY> 9,989,582
<SALES> 5,982,859
<TOTAL-REVENUES> 5,982,859
<CGS> 3,598,576
<TOTAL-COSTS> 3,598,576
<OTHER-EXPENSES> 2,032,899
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,052
<INCOME-PRETAX> 324,717
<INCOME-TAX> 0
<INCOME-CONTINUING> 324,717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324,717
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.02
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
