SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 27, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-22534-LA
------------------------
MONTEREY PASTA COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 77-0227341
(State of incorporation) (IRS employer identification number)
1528 MOFFETT STREET
SALINAS, CALIFORNIA 93905
(831) 753-6262
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The approximate aggregate market value of the voting stock held by
non-affiliates of the issuer as of March 16, 1999 was $23,005,407. The number of
shares outstanding of the issuer's common stock as of March 16, 1999, was
12,843,648.
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<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
Monterey Pasta Company ("the Company") was incorporated in June
1989 as a producer and distributor of refrigerated gourmet pasta and
sauces to restaurants and grocery stores in the Monterey, California
area. The Company has since expanded its operations to provide its
products to grocery and club stores throughout the United States. The
Company's overall strategic plan is to enhance the value of the Monterey
Pasta Company brand name by distributing its gourmet pasta products
through multiple channels of distribution.
The Company produces and markets premium quality refrigerated
gourmet pasta and pasta sauces, emphasizing superior flavors and
innovative products. It seeks to build brand recognition and customer
loyalty by employing a marketing program that focuses on developing
multiple points of sale for the Company's products. The Company markets
and sells its products primarily through grocery and club stores.
The Company currently offers 57 varieties of contemporary gourmet
pasta and sauce products that are produced using the Company's
proprietary recipes, including refrigerated cut pasta, ravioli,
tortellini, tortelloni and pasta sauces. Examples of the Company's
pasta and pasta sauces include: Roasted Garlic Chicken Ravioli, Lobster
Ravioli, Fire Roasted Vegetable Ravioli, Five Cheese Tortelloni, Roasted
Garlic Artichoke Sauce, Pesto Sauce and Fresh Herb Alfredo sauces. In
1998 the Company introduced two new product lines: Restaurant Style
(large) pastas and sauces, with nine pastas and three sauces; and
Gourmet Meat Sauces with three sauces.
The Company sells its pasta and sauces through leading grocery
store chains including Albertson's, Safeway, Lucky Stores, Jewel, Giant
Foods, Kroger and QFC; and warehouse club stores such as Costco
Wholesale and Sam's Club (a division of Wal-Mart). As of December 27,
1998, approximately 3,460 grocery and club stores offered Monterey
Pasta's products.
In 1998 the Company added a web site www.montereypasta.com to
further support its brand by providing both consumer and investor
information, and opened an on-line store offering Monterey Pasta
products to the rapidly growing number of Internet shoppers. Shoppers
can now order pastas and sauces for delivery within two days. In the
future the Company plans to offer other non-food items as well as other
food items for Internet purchase through its on-line store.
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.
This Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of
the Securities Exchange Act of 1934, that involve substantial risks to
the Company, including statements about the Company's recent operating
losses, the possible need for additional capital, the ability to attract
and retain qualified management, the need to add points of distribution
and the need to develop new products. In connection therewith, please
see the cautionary statements contained herein in "Business Risks"
which identify important factors that could cause actual results to
differ materially from those in the forward-looking statements.
Industry Overview
The Company believes that the U.S. retail market for refrigerated
pasta is large and highly fragmented. Although refrigerated pasta
products are not new, fresh pasta and pasta sauce were essentially
created as a national specialty food category in 1986 when Nestle Fresh
Foods Co., a division of Nestle S.A. ("Nestle"), introduced its
Contadina? brand of fresh pasta. In 1990, Kraft General Foods, Inc., a
division of Philip Morris ("Kraft"), unveiled its DiGiorno? brand of
fresh pasta nationally.
The Company believes that the growth in the fresh pasta category
has been aided by several factors including heavy advertising and
promotion by Nestle and Kraft, the changing consumer preference for
freshly prepared healthy foods, and increasing consumer demand for
convenient, quick meal solutions. The Company is further encouraged by
industry research reports, which show that spending on gourmet,
specialty foods by consumers in the Company's target market appears to
be growing.
No assurance can be given that the refrigerated pasta and sauce
industry will expand further. Nor can there be any assurance that
current trends in healthy eating, perception of fresh pasta and pasta
sauce as a healthy eating alternative, consumer demand for meal
solutions, or consumer spending levels in the specialty food category
will continue in the future. Additionally, as the Company expands into
different geographic regions, it may encounter different consumer
perceptions, attitudes and behavior. This may adversely impact the
Company's marketing and expansion strategy and cause it to incur greater
expenses in the promotion of its products.
Strategy
Monterey Pasta's objective is to become the 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:
- - Create brand awareness by communicating to the consumer that
Monterey Pasta Company provides a healthful and nutritious line
of products and promote repeat business by reinforcing positive
experiences with the Company's products.
- - Introduce new products on a timely basis to maintain customer
interest and to respond to changing consumer tastes. In order
to maximize its margins, the Company will focus 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.
- - Use the Company's Internet presence to create awareness of, and
make available, Monterey Pasta products in areas in which they
are not currently available, and to support Company's existing
retail and club store accounts.
- - Reduce operating costs through continual evaluation of
administrative and production staffing and procedures. The
Company will consider additional capital improvements at its
manufacturing facility in order to increase production
efficiencies and capacities, and to reduce the Company's cost
of goods.
- - Expand market share through same-store revenue growth, addition
of new grocery and club store chains, geographic
diversification, and product line expansion, including creation
of additional meal occasions using Monterey Pasta products.
- - Consider the acquisition of other compatible companies to
expand retail distribution, or the range of product offerings,
or to accomplish other synergies where the acquisition will
create long-term stockholder value.
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 acquisition strategy is dependent
upon its ability to generate cash from current operations, attract new
capital, find suitable acquisition candidates, and successfully
integrate new businesses and operations. There is no assurance that
acquisitions can be financed from current cash flow, and, if not, that
outside sources of capital will be available to supplement internally-
generated funds. There is no assurance that management can successfully
select suitable acquisition candidates and that these new businesses can
be successfully integrated to create long term stockholder value.
Products
The Company produces and markets the following gourmet refrigerated cut
pasta, ravioli, tortelloni, tortellini and pasta sauces under the Monterey Pasta
Company product name:
<TABLE>
<CAPTION>
Year
Introduced
-----------
<S> <C>
Cut Pasta:
- -------------------------------------------------------
Egg Fettuccine....................................... 1989
Egg Linguine......................................... 1989
Garlic Basil Fettuccine.............................. 1989
Sweet Red Pepper Fettuccine.......................... 1989
Angel Hair........................................... 1989
Ravioli:
- -------------------------------------------------------
Garlic Basil/Cheese.................................. 1989
Spinach and Cheese................................... 1989
Gorgonzola Roasted Walnut............................ 1989
Smoked Monterey Jack/Cilantro........................ 1992
Smoked Salmon........................................ 1992
Snow Crab............................................ 1993
Vermont Cheddar/Roasted Garlic....................... 1994
Chicken Tarragon..................................... 1996
Low Fat Cheese....................................... 1996
Roasted Garlic Chicken............................... 1996
Lobster.............................................. 1997
Fire Roasted Vegetable............................... 1997
Restaurant Style Artichoke and Cheese................ 1998
Restaurant Style Chicken Piccata..................... 1998
Restaurant Style Gorgonzola Cheese................... 1998
Restaurant Style Snow Crab........................... 1998
Restaurant Style Roasted Garlic...................... 1998
Restaurant Style Herb and Cheese..................... 1998
Restaurant Style Spinach Ricotta..................... 1998
Restaurant Style Shrimp Scampi....................... 1998
Tortelloni:
- -------------------------------------------------------
Spinach Mushroom..................................... 1994
Sundried Tomato and Asiago Cheese.................... 1994
Five Cheese.......................................... 1996
Restaurant Style Pesto Sausage....................... 1998
Restaurant Style Rainbow Five Cheese................. 1998
Tortellini:
- -------------------------------------------------------
Garlic Basil Cheese.................................. 1996
Sauces:
- -------------------------------------------------------
Sweet Tomato Basil................................... 1989
Pesto................................................ 1989
Sundried Tomato Cream................................ 1991
Fresh Herb Alfredo................................... 1993
Roasted Garlic Artichoke............................. 1995
Thick and Chunky Tomato Basil........................ 1996
Restaurant Style Roasted Garlic and Parmesan......... 1998
Restaurant Style Basil Cream Sauce with Artichokes... 1998
Restaurant Style Pesto Sauce with Garlic and Basil... 1998
Gourmet Meat Sauces:
- -------------------------------------------------------
Sun Dried Tomato Sausage............................. 1998
Italian Sausage ..................................... 1998
Homestyle Pasta Sauce with 100% Ground Beef.......... 1998
</TABLE>
- ------------------
The Company is committed to diversifying its product offerings
with innovative new pasta products and product lines. The Company's
product development team and product development consultants focus on
creating new pasta products that innovatively blend complementary
tastes, food textures and ingredients while strictly adhering to the
Company's emphasis on freshness, healthfulness and quality. As new
products are introduced, selected items will be discontinued to help
ensure that the product line is focused on consumer demand, to maximize
the Company's return on its shelf space in grocery and club stores, and
to respond to changing trends and consumer preferences.
The Company's refrigerated cut pasta, ravioli, tortelloni,
tortellini and pasta sauces are packaged in clear lightweight containers
which reveal the fresh appearance of its products. Monterey Pasta
presents its products with a colorful logo, distinctive packaging
styles, ingredient information and cooking instructions to communicate
the gourmet, fresh and healthful qualities of its pasta and pasta
sauces. Its new Restaurant Style and Gourmet Meat Sauce product lines
feature new packaging designed to maximize shelf impact and generate
increased consumer interest in the products.
The goal of the Company is to introduce new products on a timely
and regular basis to maintain customer interest and to respond to
changing consumer tastes. There can be no assurance that the Company's
efforts to achieve such a goal will result in successful new products or
product lines or that new products can be developed and introduced on a
timely and regular basis. If the Company's new products are not
successful, the Company's grocery and club store sales may be adversely
affected as customers seek new products.
Production
The Company produces its refrigerated pasta products in a Monterey
County, California facility which, in 1995, was expanded to 37,666
square feet from its initial configuration of 10,000 square feet. It is
strategically located in one of the largest produce-growing regions in
the United States and is near several major vendors and food service
distributors. The expanded facility is certified by the United States
Department of Agriculture (USDA) and utilizes state of the art thermal
processing, chilling and packaging processes. As part of an addition to
the existing lease, the Company added 6,014 square feet during 1998 (See
"Properties" on page 9). The space will materially improve the
efficiency, flexibility, and capacity of the existing layout.
The current facility is staffed by approximately 165 employees,
including plant management, a purchasing agent, quality control,
accounting personnel, sales staff, drivers, and production line workers.
Refrigerated pasta is manufactured at the facility using high quality
ingredients such as Extra Fancy Durham wheat, whole eggs or egg whites,
fresh herbs and IQF (Individually Quick Frozen) herbs and spices, and
local cheeses and milk products. The ingredients are mixed in
accordance with the Company's proprietary recipes. After filling with
fresh and unusual fillings such as snow crab, lobster, and Vermont
cheddar cheese, the ravioli and tortellini products receive a prescribed
thermal process (pasteurization) to insure product safety and to
preserve flavor, quality and shelf life. The product is then chilled
immediately and packaged in controlled atmosphere trays. Pasta sauces
are mixed and processed in individual batches in accordance with the
Company's proprietary processes and recipes and then directly packed and
sealed in plastic containers. After preparation, processing, chilling
and packaging, all pasta and sauces are kept in cold storage to preserve
quality and shelf life.
The Company continuously reviews a variety of capital projects for
the production department and in the past two years has spent $1.5
million on capital improvements. With the addition of a third tortelloni
line in the summer of 1998, the Company maintains adequate production
capacity to accommodate the forecasted growth of its current product
line over the next two to three years. The Company currently has plans
to increase its refrigeration space by over 100 percent because of
capacity and efficiency needs by leasing space at a nearby facility. A
new pack line will also be added during 1999 to provide for expansion
capability and improve packaging efficiency. The future addition of
assets will be evaluated for increased efficiency, flexibility and need.
Distribution
The Company's success depends upon an effective system of
distribution for its products. In Northern California the Company
maintains three direct store delivery ("DSD") routes to deliver its
products to approximately 140 stores. The Company also delivers product
direct to warehouses for Safeway, its largest Northern California
customer. To distribute its products to other customers and parts of the
country (over 90% of its business), the Company uses common carriers.
The dependence on other companies for delivery of its products poses a
risk to the Company. While this method of delivery has been reliable
and available at acceptable rates thus far, there can be no assurance
that the Company will continue to be able to negotiate acceptable
freight rates in the future and that delivery will not be disrupted for
reasons including, but not limited to, adverse weather, natural
disasters or labor disputes in the trucking industry.
Grocery Chain and Club Store Sales
Monterey Pasta sells its refrigerated pasta and pasta sauces to chain
grocery and club stores.
<TABLE>
<CAPTION>
Number of Stores Carrying
Monterey Pasta Products
--------------------------------
1996 1997 1998
<S> <C>
Retail Grocery Stores... 3,400 2,600 2,950
Club Stores............. 200 500 510
---------- ---------- ----------
Total................. 3,600 3,100 3,460
========== ========== ==========
</TABLE>
- ------------------
For the years 1996, 1997 and 1998, Costco accounted for 41%, 50%
and 46% of total net revenues, while Sam's Club stores accounted for 12%
of 1997 net revenues and 33% of 1998 net revenues. The Company
currently sells its products to six separate Costco regions which make
purchasing decisions independently of one another. These regions re-
evaluate, on a regular basis, the products carried in their stores.
There can be no assurance that these Costco regions will continue to
offer Monterey Pasta products in the future or continue to allocate
Monterey Pasta the same amount of shelf space. The Company currently
has a one-year agreement, which expires 12/31/99, to supply its products
to approximately 330 Sam's Club Stores which feature expanded delis.
Purchasing decisions are made at the company headquarters with input
from the store level. While the Company is in the third year of its
relationship with Sam's, there can be no assurance that Sam's Club
Stores will continue to carry its products. The loss of either of these
major customers could materially adversely affect the Company's business
operations.
In 1998, the average grocery store carried 10 individual Monterey
Pasta products, or Stock Keeping Units ("SKUs"), and the average club
store carried 11 SKUs.
operations.
Marketing
The Company's marketing strategy is to create brand awareness by
communicating to the consumer that Monterey Pasta Company provides a
gourmet quality nutritious line of products and to promote repeat
business by reinforcing positive experiences with the Company's
products. The Company's approach includes the introduction of new
products on a timely basis to maintain customer interest and to respond
to changing consumer tastes. Additionally, the Company will continue to
expand its sales into those geographic regions that will best support
the purchase of the Company's upscale, premium grade products.
Competition
The Company's business is subject to significant competition. The
fresh pasta and pasta sauce industry is highly competitive and is
dominated by a two very large multinational companies, Nestle, with its
Contadina? brand, and Kraft, with its DiGiorno? brand. There are also
a number of smaller regional competitors, such as Mallards (recently
acquired by Tyson), Romance, and Trios, (now owned by ConAgra).
Multinational competitors have significantly more brand name
recognition, marketing personnel, and cash resources than the Company.
Moreover, competition for shelf space in grocery stores is intense and
poses great difficulty for smaller food companies.
To date, the Company has benefited from the marketing efforts of
Nestle and Kraft. These companies have committed significant financial
resources towards advertisement, promotion and development of the fresh
pasta and pasta sauce industry, which have contributed to the rapid
expansion of this market and to the increased consumer attention to the
refrigerated pasta and sauce category. No assurance, however, can be
given that these large companies will continue to expend such resources
in the future or that the Company will continue to enjoy such benefits.
In the future, the Company may be required to incur significantly
greater expenses for promotion, advertisement and marketing, which could
adversely affect profitability. There can be no assurance that the
Company will be able to commit funds to promotion, advertisement and
marketing while operating profitably.
Competitive factors in the refrigerated pasta and sauce industry
include brand awareness, product quality and taste, healthfulness, price
and availability of grocery and club store shelf space. The Company's
suggested retail prices are slightly higher than its competitors' prices
to emphasize the premium quality of its product line. The Company
believes the excellent quality, taste and healthfulness of its products
are superior to that of its competitors, although its brand name
recognition and access to grocery shelf space is significantly less than
many of its competitors. The Company also believes that the quality of
its products and the variety of its product line, which focuses on
contemporary California cuisine, provide a competitive advantage over
many companies who market traditional Italian-style pasta and sauce
products.
Management
Information relating to directors and executive officers of the
Company is set forth in Part III of this report.
Management Information Systems
The Company purchased a new integrated management information
system in 1996 with the objective to implement an electronic link
between the Company's retail sales operations, production facilities and
the corporate offices. The Expandable MRP system ("Expandable") is
central to the Company's efforts to automate, centralize and streamline
many of the Company's key functions including accounting and finance,
human resources, and production and inventory control. During the
fall of 1998 the Company successfully installed a new version of
Expandable to ensure compliance with year 2000 needs.
Government Regulation
The Company is subject to the regulations of the U.S. Food and
Drug Administration (FDA), the U.S. Department of Agriculture (USDA),
and state and local regulations relating to cleanliness, maintenance of
food production equipment, food storage, cooking and cooling
temperatures and food handling, and is subject to unannounced on-site
inspections of production facilities. Regulations in new markets, new
regulations in existing markets, and future changes in existing
regulations may adversely impact the Company by raising the cost of
production and delivery of pasta and sauces and/or by affecting the
perceived healthfulness of the Company's products. A failure to comply
with one or more regulatory requirements could result in a variety of
sanctions, including fines and the withdrawal of the Company's products
from store shelves. The Company is not aware of any currently existing
facts or circumstances that would cause it to fail to comply with any of
the regulations to which it is currently subject.
Employees
As of December 27, 1998, the Company employed a total of 165
persons, including 27 administrative personnel, 6 sales personnel, 4
drivers, and 128 production personnel. None of the Company's employees
are represented by a labor union and the Company believes its relations
with its employees are good.
Trademarks and Service Marks
The Company has registered the "Monterey Pasta Company" name and
"postage stamp" logo design with the United States Patent and
Trademark Office. There can be no assurance that competitors will not
adopt similar names or logo designs outside the protection of the
Company's trademark registration.
ITEM 2. PROPERTIES
During February 1996, the Company leased 9,160 square feet of
executive office and training space facilities in downtown San
Francisco. The Company vacated this space in January 1997 following a
staff reduction and consolidation of all operations in the Company's
factory in Monterey County. The Company subleased the San Francisco
property at a premium, as of April 1, 1997, to a large publishing
interest for the remaining term of the lease.
Effective February 6, 1998, the Company leased an additional 4,649
sq. ft. in the same building it now occupies in Monterey County,
California, bringing the total square footage leased to 42,315 pursuant
to a lease which expires in 2004 with two ten year options for renewal.
The additional space was used to increase the efficiency of the
production and storage areas. In June of 1998, the Company leased an
additional 1,365 sq. ft. in the same building, pursuant to the same
lease expiration. The new area will be used for office space. The
total square footage now leased by the Company is 43,680, or
approximately one acre of building space, and comprises the entire
building. Company management believes that the properties/facilities
are suitable and adequate for the Company's needs.
The Company currently leases two outside warehouse facilities in
Salinas, California within a one-mile radius of its production facility.
One, comprised of 4,800 square feet, is used to store excess coolers and
display racks, packaging materials and company records, and is a month-
to-month lease. The second, entered into with a public warehouse
concern, is for refrigerated storage and varies in usage based on volume
of finished product stored. The annual term is for three years
beginning March 1, 1999. Cancellation is based on a 60 day notice
provision in the event of a transfer of control involving the Company
with no buyout clause, a 900,000 case annual minimum, and annual price
reviews.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
ordinary, routine litigation incidental to the Company's business, to
which the Company is a party or to which any of its property is subject.
(The Company's former subsidiary, Upscale Food Outlets ("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.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to vote during the fourth quarter of
1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
The Company effected its initial public offering on December 7, 1993 at a
price to the public of $6.00 per share. Since that date, the Company's Common
Stock has traded on the NASDAQ National Market System under the symbol "PSTA."
The following table sets forth for the period indicated, the high and low sales
prices of shares of the Common Stock on the NASDAQ National Market System.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Fiscal year 1997:
First quarter...... $ 2 7/8 $ 1 5/8
Second quarter..... 2 3/4 1 5/8
Third quarter...... 2 3/8 1 7/16
Fourth quarter..... 2 3/16 3/4
Fiscal year 1998:
First quarter...... $ 1 3/4 $ 1 1/8
Second quarter..... 1 1/2 1 1/16
Third quarter...... 1 9/16 1 1/16
Fourth quarter..... 1 13/16 1
</TABLE>
- ------------------
As of March 1, 1999, there were 316 stockholders of record of the Common
Stock and approximately 4,000 investors with shares in street name.
Dividend Policy
The Company has not paid any cash dividends to Common
stockholders. The Company intends to retain future earnings in its
business and does not anticipate paying cash dividends on the
outstanding Common stock in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company. These data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
(dollar amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
- --------------------------------------------
Net revenues from continuing operations...... $9,738 $18,716 $24,492 $23,447 $26,217
Income (loss) from continuing operations .... ($1,261) ($1,297) ($8,453) $474 $2,037
Income (loss) from discontinued operations... ($1,772) ($21,279) $220 $37 --
Net income (loss) per common share........... ($0.57) ($3.50) ($1.13) $0.02 $0.16
Weighted average common and common
equivalent shares outstanding ............. 5,303,811 6,440,198 8,276,608 10,458,451 12,979,055
CONSOLIDATED BALANCE SHEET DATA:
- --------------------------------------------
Working capital (deficit).................... $4,719 $597 ($377) $2,444 $1,601
Total assets................................. $22,117 $11,691 $10,789 $11,029 $10,835
Total debt and capital lease obligations..... $127 $3,958 $1,635 $1,797 $2,277
Stockholders' equity......................... $20,397 $2,405 $5,085 $7,360 $6,709
</TABLE>
- ------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and related notes and other information included in
this report. The financial results reported herein do not indicate the
financial results that may be achieved by the Company in any future
period.
Background
Monterey Pasta Company was incorporated in June 1989 as a producer
and wholesaler of refrigerated gourmet pasta and sauces to restaurants
and grocery stores in the Monterey, California area. The Company has
since expanded its operations to provide its products to grocery and
club stores throughout the United States. The Company's overall
strategic plan is to enhance the value of the Monterey Pasta Company
brand name by distributing its gourmet pasta products through multiple
channels of distribution.
The Company's distribution of pasta and pasta sauces to grocery
and club stores increased from approximately 25 stores as of December
1989, to approximately 4,300 by December 1995, declined to approximately
3,100 as of December 28, 1997 and increased, once again, to
approximately 3,460 stores by December 27, 1988. During 1994, 1995 and
1996, significant costs were incurred to promote the expansion that
occurred, including product demonstration, advertising, warehousing, and
distribution costs and the hiring of additional personnel. In 1997, the
focus was changed to developing a profitable distribution base. Hence,
the reduction in store totals, and the return to profitability. During
1998 the Company added profitable retail and club distribution and
expects to continue that trend in 1999.
The success of the Company's efforts to increase revenue 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.
The Company believes that access to substantially greater capital
resources, coupled with continued reduction of its administrative and
production costs as a percent of sales revenue, will be key requirements
in the Company's efforts to enhance its competitive position and
increase its market penetration. In order to support its expansion
program, the Company has developed, and is continuing to develop new
products for consumers and revised advertising and promotional
activities for its retail grocery and club store accounts. There can be
no assurance that the Company will be able to increase its net revenues
from grocery and club stores. Because the Company will continue to make
expenditures associated with the expansion of its business, the
Company's results of operations may be affected.
Continuing Operations for 1996, 1997 and 1998
Net revenues from continuing operations were $24,492,000,
$23,447,000, and $26,217,000 for 1996, 1997 and 1998, respectively,
reflecting an annual decrease in sales of 4% for 1997, when compared to
1996, and a 12% increase for 1998 when compared to 1997. The decline in
sales in 1997 reflected the elimination of unprofitable chains and
Direct Store Delivery accounts. The 1998 increase resulted from an
increased number of stores to approximately 3,460 individual grocery and
club stores by year-end of 1998, compared to approximately 3,100 at year
end 1997.
The 6% gross margin increase from 35% in 1996 to 41% in 1997 was
due mainly to reduced sales discounts and allowances through better
controls and elimination of unprofitable accounts. Gross margin
stabilized at 41% in 1998.
Selling, general and administrative expenses decreased to
$8,311,000, down $413,000 or 5% in 1998 from $8,724,000 in 1997. The
1998 expense level reflects a two-year decline of $7,927,000 from the
1996 level, or a 49% decrease. Included in 1996's spending was over $8
million specifically for sales and marketing, including incremental
headcount and promotional expenses deemed necessary, at that time, to
expand the business base. Additionally, selling costs were high as a
result of the Company's efforts to obtain new customers and enter new
geographic markets. The 1996 increases were also attributable to
expansion of the Company's infrastructure, including increased
administrative and management salaries, recruiting and training, and
facilities costs. This trend was reversed in 1997 as a result of
redefined marketing focus, and facilities consolidation from San
Francisco to Salinas, with reduced headcount and related overhead
expenses implemented in late 1996 and early 1997. Further decreases in
administrative costs continued during 1998 with a $1.1 million reduction
in professional fees, public reporting expense, insurance costs, and
other administrative expenses, partially offset by increased expenses in
the sales and marketing area related to new customers and stores.
Management believes the current level of SG&A expenses is consistent
with efficient operations, and additional expenses in future periods,
mainly in the sales and marketing area, will be directly associated with
increased levels of sales.
Depreciation and amortization expense increased to $999,000, or 4%
of net revenues in 1998, compared to $961,000 or 4% of net revenues in
1997, and $919,000 or 4% in 1996. These increases over the past two
years relate primarily to capital expenditures in the Salinas,
California production facility. The Company anticipates further
increases in depreciation and amortization in future periods as
additional equipment is purchased and placed in service.
Net interest expense of $250,000 was recognized in 1998 compared
to net interest expense of $211,000 in 1997 and $431,000 in 1996
(which included $173,000 for guaranteed discount on convertible debt).
Cash raised by the March, 1997 private placement helped reduce interest
expense in 1997. The 1998 increase was the result of the funds
borrowed to repurchase common stock from Clearwater Fund IV LLC in
March.
Results of Discontinued Operations for 1996
Net revenues from discontinued operations for 1996 were $1,796,000
prior to the sale of former subsidiary Upscale Food Outlets, ("UFO").
Operating losses from discontinued operations were $839,999 for 1996
(prior to sale of UFO). The 1996 losses from business disposition and
phaseout were charged directly to the reserves established during 1995,
as were other expenditures related to the restaurant and franchising
operations. During 1996, the reserves were also reduced by $220,000 to
reflect adjustments of estimates to the actual Company expenditures.
Remaining reserves of $388,000 at the end of 1996, less a recovery of
$37,000, were utilized during 1997.
Liquidity and Capital Resources
During the twelve months ended December 27, 1998, $3,057,000 of
cash was provided by the Company's operations, compared to $1,026,000
used in 1997. The improvement in 1998 related to an increase in net
cash income (net income plus depreciation and amortization) from
continuing operations of $1,601,000 and an improvement in working
capital accounts, specifically accounts receivable, prepaid expenses and
accounts payable, partially offset by an increase in inventory.
In December 1995, the Company obtained a $3,000,000 credit
facility from a commercial lending institution. The proceeds from such
financing were used for sales and marketing expenses, working capital,
and capital investment. This facility was renegotiated with another
bank in July 1997 to avail the Company of lower interest rates. It was
increased to $4,000,000 in March, 1998 to allow for a stock repurchase
of 2,365,066 shares of Common from Clearwater Fund IV LLC for a total
purchase price of $2,690,000 or $1.1375 per share, resulting in a 15.6%
reduction in shares outstanding. In July 1998 the credit facility was
renewed for another year with lower interest rates on the term note and
the receivables and inventory line, as well as no loan fees (See Note 4
to the financial statements).
A total of $2,741,000 in cash was used in 1998 in connection with
the stock repurchase referred to above, including costs associated with
the transaction. In addition, $1,042,000 in cash was used to purchase
property, equipment, and intangible assets in 1998, compared to $481,000
in 1997. The Company plans to make additional capital expenditures in
1999 to expand production capability and improve packaging efficiency by
adding a new pack line. The Company expects the new line will cost
approximately $310,000. Additional projects are planned with a total
expected outlay of approximately $700,000. All capital expenditures are
expected to be funded with cash flow from operations.
In addition, in March of 1999 the Company purchased the operating assets and
inventory of Frescala Foods, Inc. ("Frescala") for a consideration of $1,345,000
in cash and 300,000 options with immediate vesting to purchase shares of
the company's common stock (see Notes 4 and 17). The options have an
approximate fair market value of $145,000, an exercise price of $2.33
per share, and a three-year expiration. Additionally, Frescala owners
could receive an earn-out based upon Frescala sales above a
predetermined level. The earn-out will be calculated during the first
year of combined operations. Funding for the transaction will come from
a new $750,000 two-year term note, use of existing accounts receivable
and inventory line, and cash flow from operations.
Management believes that the Company's credit facility and cash
generated from continuing operations will provide adequate funding to
meet its needs for normal operations through 1999.
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.
Expansion of the Company's club store business continued in 1998
with the addition of Costco Wholesale's Northwest and Midwest Divisions
with 44 total warehouses, and introduction of the Company's products
into Costco's Los Angeles Division. Distribution of the Company's
products continues to grow with the national expansion of Sam's Club.
Monterey Pasta's products are now found in over 380 Sam's Club
locations.
During 1998 the Company's retail grocery distribution increased
significantly with the addition of over 300 stores in the Seattle and
Portland divisions of Safeway, the addition of 40 stores in Kroger's
Louisville division, and the introduction of the Company's products into
the Chicago market in over 20 Jewel locations.
Monterey Pasta's products are made with no preservatives or
artificial ingredients. Capitalizing on this strength, the Company
continues to pursue increased distribution through natural and organic
food retailers, whose growth has exceeded 20% in recent years. The
Company estimates there are 450 potential natural and organic retail
grocery stores available, which are potential markets for its products.
To fulfill its objective of introducing innovative new products,
in 1998 the Company introduced its new line of Restaurant Style pastas
and sauces, which feature the largest ravioli currently available to the
fresh grocery consumer. Offerings in the line include Artichoke and
Cheese Ravioli, Chicken Piccata Ravioli, Gorgonzola Cheese Ravioli, Snow
Crab Ravioli, Roasted Garlic, Herb and Cheese Ravioli, Shrimp Scampi
Ravioli, Spinach Ricotta Ravioli, Pesto Sausage Tortelloni, Rainbow Five
Cheese Tortelloni, Roasted Garlic & Parmesan Sauce, Basil Cream Sauce
with Artichokes and Pesto Sauce with Garlic and Basil.
Also in 1998, the Company introduced a new line of Gourmet Meat
Sauces, which are the first refrigerated, fresh meat sauces widely
available in the marketplace. Varieties in the line are Italian Sausage
Sauce, Sun Dried Tomato Sausage Sauce, and Homestyle Pasta Sauce made
with 100% Ground Beef.
Cost Reductions
The Company significantly reduced its total corporate and plant
administrative headcount and costs on a going-forward basis as part of
the plan adopted in the fourth quarter of 1996 in order to return to
profitable operations and optimize financial performance. In January
1997, the Company relocated its corporate headquarters from San
Francisco, California to its manufacturing facility in Salinas,
California. This move resulted in a substantial reduction of future
corporate and overhead costs, beginning in the second quarter of 1997.
Also in 1997, the Company significantly reduced the scope of its
advertising and media campaigns. The Company will continue with those
promotional activities, such as in-store demonstrations, that it
considers effective and consistent with its ongoing sales objectives.
In this light, the Company's slotting fees from club stores and grocery
chains for shelf space allocations, for example, declined significantly
starting in the fourth quarter of 1996. Total 1997 selling, general and
administrative expenses declined to $8,723,000, a $7.5 million decrease
compared to 1996. In 1998 the Company increased its sales and marketing
expenditures by $683,000 to $6,718,000, a level more consistent with
sustained growth. This increase was offset by an $821,000 decrease in
professional fees and insurance expense, and overall SG&A expenses were
reduced once again, by $412,000, to $8,311,000. Management believes the
current level of SG&A expenses is consistent with efficient operations,
and additional expenses in future periods, mainly in the sales and
marketing area, will be directly associated with increased levels of
sales.
In an effort to sustain its commitment to reduce cost of
production, the Company will continue to invest in a variety of
machinery and equipment and leasehold improvements in retooling its
Salinas production facilities. The Company has spent approximately $1.4
million over the past two years in equipment and facilities
improvements.
Major Customers
Two of the Company's retail customers, Costco and Sam's, accounted
for 46% and 33%, respectively of the Company's sales for the twelve
months ended December 27, 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.
In the second quarter of 1994, the Company reported its first
operating loss from continuing operations. Subsequent to that
quarter the Company incurred losses through the first quarter of
1997, after which it regained profitability, which has continued for
seven consecutive quarters. At December 27, 1998, the Company had
an accumulated deficit of $32,680,000. There can be no assurance
that the Company will maintain its recent profitability in the long
term.
- - Dependence on Major Customers-Need to Diversify Distribution. During
1998, two customers accounted for 46%, and 33%, respectively, of the
Company's total revenues. Loss of either of these customers, Costco
or Sam's Club Stores, would have a material adverse effect on the
Company. The Company is seeking to diversify its distribution
channels by adding additional grocery and club store chains as
customers. Failure to diversify its customer base could have a
material adverse effect on the Company's future growth and
profitability.
- - 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 for normal operations through 1999. 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 stockholders 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 its ability to operate under new
management that was retained in mid-1997, 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.
The Company has key man insurance policies in place in the face
amount of $500,000 for its Chief Executive Officer, R. Lance Hewitt,
and its Chief Financial Officer, Stephen L. Brinkman.
- - 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 Company's 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.
- - 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.
- - Dependence on Common Carriers. The Company 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.
- - Year 2000. Many computer systems were written using two digits
rather than four to define the applicable year. As a result, those
computer programs have time sensitive software that recognizes a date
using "00" as the year 1900 rather than the year 2000. This could
cause a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar normal
business activities.
The Company utilizes software vendors for its major computer program
applications. The Company has a task force in place to address
"Year 2000" issues and installation of a year 2000 compliant
version of the Company's financial, inventory, and production
software was completed in November, 1998. The Company has also
completed an assessment of its internal personal computer network,
which is expected to be year 2000 compliant by the end of March 1999.
Updating telephones, facsimile machines and labeling equipment for
year 2000 is scheduled to be complete by mid-1999.
In addition, the Company has been in contact with its suppliers and
other third parties to determine the extent, which they may be
vulnerable to year 2000 issues. As this assessment continues,
matters may come to the Company's attention, which could give rise to
the need for remedial measures, which have not yet been identified.
The Company cannot currently predict the potential effect of third
parties "year 2000" issues on its business. It is expected that
assessment, remediation and contingency planning activities will be
on-going throughout 1999, with the goal of appropriately resolving
all material internal systems and third party issues. The Company
intends to utilize both internal and external resources to reprogram,
replace and test the systems for the year 2000 modifications.
The Company does not believe that the cost of becoming year 2000
compliant will be in excess of $70,000. To date the Company has
incurred minor expenses, primarily for assessment of the year 2000
issue, development of a modification plan, and for the installation
of a year 2000 compliant version of its financial, inventory, and
production software.
The cost of the project and the dates on which the Company believes
it will complete the year 2000 modifications are based on
management's best estimates. However, there can be no guarantee that
these estimates will be achieved. Failure to be year 2000 compliant
in a timely fashion could have a material adverse effect on the
Company's operations and financial condition.
Recently Issued Accounting Standards
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.
In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. SFAS
133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or (ii) the earnings' effect
of the hedged forecast transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the
period of change. SFAS 133 is effective for all fiscal quarters
beginning after June 15, 1999. Historically the Company has not entered
into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption
of this new standard to affect its financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated at Item
14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 16, 1999, the directors, executive officers, and other
significant employees of the Company are as follows:
<TABLE>
<CAPTION>
Directors and Executive Officers:
Name Age
- ------------------------------ ----- ------------------------------------------
<S> <C> <C>
Charles B. Bonner........... 57 Director
Thomas E. Kees.............. 48 Director
R. Lance Hewitt............. 59 Chief Executive Officer, President and
Director
Floyd R. Hill............... 55 Director
Van Tunstall................ 52 Director
James Wong.................. 52 Director
Stephen L. Brinkman......... 51 Chief Financial Officer and Corporate
Secretary
<CAPTION>
Other Significant Employees:
Name Age Position
- ------------------------------ ----- ------------------------------------------
Lynn Port................... 54 Plant Controller
Roy G. Scotton.............. 39 Director-Logistics and Human
Resources
Peter F. Klein.............. 39 Plant Manager
Ron Hendershott............. 48 Director-Quality Assurance and Tech.
Svcs.
Don Anspaugh................ 33 Sales Manager-Mid Central Region
Clifford Farmer............. 43 Natural Foods/DSD Sales Manager
Lisa Player................. 39 Sales Manager-East
Joseph Stirlacci............ 39 Sales Manager-West
</TABLE>
Normally each director is elected for a period of one year and
serves until his or her successor is duly elected by the stockholders.
Directors may be elected by the Board to fill a vacancy between annual
stockholder meeting elections.
The principal occupations of each director and executive officer
of the Company, for at least the past five years, are as follows:
Charles B. Bonner, Director. Mr. Bonner served as a Director of
the Company from 1993 through January 1995, and was reappointed as a
Director effective September, 1995. Mr. Bonner is President of Pacific
Resources, Inc., a mergers and acquisitions advisory firm, a position he
has held since September 1989. Mr. Bonner also serves as a director for
the following entities: Organic Food Products, Everything Metal
Imaginable, Inc., and Daystar Funds, L.P.
R. Lance Hewitt, President, Chief Executive Officer and Director.
Mr. Hewitt joined the Company in June, 1997 as President and Director.
He was named Chief Executive Officer in August, 1997. Mr. Hewitt was
most recently President of Carriage House Fruit Company from 1995 to
1997. He was Chief Operating Officer of Ingro Mexican Foods from 1988
to 1995. Hewitt also served as Vice President of Marketing and Sales
for the Lawry's Foods division of Thomas J. Lipton, Inc., a subsidiary
of Unilever, and spent fifteen years with McCormick Schilling, Inc. in
various executive capacities.
Floyd R. Hill, Director. Mr. Hill co-founded the Company in 1989,
served as its Secretary/Treasurer and Chief Executive Officer until
1993, and served as a Director of the Company from 1989 until 1994. Mr.
Hill became a Director again in January, 1995. He also served as the
Senior Vice President of Production from August 1993 until November
1995. From 1969 until 1991, Mr. Hill was employed by Eli Lilly & Co. in
various marketing and product development positions. Mr. Hill joined
Organic Food Products in November 1995 as Chief Operating Officer, and
was promoted the Chief Executive Officer in December, 1995, a position
he held until April, 1998. He is currently serving as an independent
consultant to Organic Food Products and is the owner and operator of a
motel in Tombstone, Arizona.
Thomas E. Kees, Director. Mr. Kees has served as President,
Chief Executive Officer, and Chairman of Legacy Brands, Inc. since
September 1, 1995. Legacy is a licensing and marketing company for
highly recognized food products such as Mrs. Field's frozen desserts,
Gumby food and beverage items and Mattel's Extreme Dinosaurs. From 1994
to 1995 he was the Senior Vice President of Retail Development at A.C.
Nielsen where he founded and chaired the Nielsen Retail Advisory Board.
Mr. Kees served as Executive Vice President of Raley's Supermarkets and
Drug Centers, a regional sales operator of 85 Stores in Northern
California and Nevada, from 1992 to 1994.
Van Tunstall, Director. Mr. Tunstall was elected to the Board of
Directors in February 1997. He has been an independent consultant with
a variety of companies since 1997. Mr. Tunstall was a senior executive
with Gilroy Foods, Inc., an international manufacturer of various food
product ingredients, from 1977 to 1995. He served as President and
Chairman of the Board from 1991 through 1995. Previously, Mr. Tunstall
held various positions with McCormick & Company, Inc.
James Wong, Director. Mr. Wong was elected to the Board of
Directors in March 1997. He serves as Chairman and Chief Executive
Officer of Directions International, a U.S. based management consulting
firm which he founded in 1988. He has worked on five continents
facilitating strategic alliances with suppliers and joint venture
partners to improve global market share and profitability. Mr. Wong
serves as a director on a variety of boards for both profit and not-
for-profit, privately held organizations.
Stephen L. Brinkman, Chief Financial Officer and Corporate
Secretary. Mr. Brinkman joined the Company in August, 1997 after a 17
year career with Gilroy Foods, Inc., where he was Controller from 1984
through 1988 and Vice President, Finance and Administration from 1989
through 1996. Previously, he was Controller for a large California-
based farming company, and worked for Security Pacific Bank in
agricultural banking.
The principal occupations of certain other significant employees
of the Company, for at least the past five years, are as follows:
Lynn Port, Plant Controller. Mr. Port came to the Company in
January 1998. He has over 24 years experience as a controller in
agribusiness, retail, government and health care concerns, most recently
with Country Home Care from 1995 through 1997. From 1989 to 1995 Mr.
Port was Director of Finance for the Monterey County Housing Authority.
Prior to 1989 Mr. Port served for four years as Controller for Gilroy
Canning, Inc., a large tomato processing company.
Roy G. Scotton, Director-Logistics and Human Resources. Mr.
Scotton joined the Company in June 1996 as Production Manager and was
subsequently promoted to Plant Manager. Mr. Scotton served at Nestle
Food Company from 1987 to 1996, most recently as Organizational
Development Manager. In March 1998, Mr. Scotton was reassigned to the
responsibilities formerly held by Mr. Klein, with the exception of plant
maintenance.
Peter F. Klein, Plant Manager. Mr. Klein became Production
Manager at the Company in November 1994, responsible for production and
plant maintenance. In 1996 he was promoted to Plant Superintendent
responsible for warehouse functions and plant maintenance. He has over
15 years of experience in overseeing warehouse operations, shipping and
receiving, and maintenance services. In March of 1998 Mr. Klein assumed
responsibility for plant operations as well as plant maintenance and
production planning, relinquishing his warehouse functions to Mr.
Scotton.
Ron Hendershott, Director of Quality Assurance and Technical
Services. Mr. Hendershott joined the Company in May 1995 as Quality
Control Manager. He was promoted to his current position in March 1998.
Mr. Hendershott has over 25 years of managerial experience in Quality
Control/Quality Assurance, technical services, and regulatory affairs.
Prior to joining Monterey Pasta he was with La Victoria Foods as
Director of Quality Control from 1993 through 1995 after spending two
years with Weight Watchers as Manager of Technical Support Services.
He also served American Home Foods for seven years as Regulatory Affairs
Manager.
Don Anspaugh, Sales Manager-Mid Central Region. Mr. Anspaugh
joined the Company in March, 1998 to replace Jody Cook, who assumed new
responsibilities as a Manufacturer's Agent in a consulting role and has
since left the Company. Mr. Anspaugh has nearly ten years of sales
experience, most recently with Willett America, where he served as
Inside Sales Manager from 1995 through 1997. He was DSD Manager with
the Company from 1994 to 1995. Mr. Anspaugh also was an Area Sales
Manager with Labeljet Company, a division of Willett America, and was a
District Sales Representative with Coca-Cola.
Joseph Stirlacci, Sales Manager-West. Mr. Stirlacci has served as
Western Zone Manager since December, 1995. His primary responsibility
is to manage, maintain and secure club store accounts. Mr. Stirlacci
has been in the food and beverage industry since 1981, serving seven
years with Young's Market managing wholesale liquor and wine from 1988
to 1995, after six years as the account executive for four large grocery
chains.
Lisa Player, Sales Manager-East. Ms. Player joined the Company
in the capacity of Eastern Zone Sales Manager and Sam's Club Stores
Account Manager in March, 1998 after spending a year as Corporate Sales
Account Executive with FTP Travel Management Group, a large regional
corporate travel management company. Prior to that she was employed for
over five years by Trio's Pasta Products of Chelsea, Massachusetts, a
competitor of the Company, ultimately as National Account Sales Manager.
During her tenure with Trio's, Ms. Player was responsible for the Sam's
Club account (which, after her tenure with Trio's, was acquired by the
Company in September, 1997).
Clifford M. (Rick) Farmer. Mr. Farmer joined Monterey Pasta
Company in April 1991 and was responsible for developing the Company's
Direct Store Delivery operation. After the successful startup of the
DSD system, he was promoted in 1992 to Plant Operations/Distribution
Manager. Her moved back to the DSD operation in June 1993 in the
capacity of Northern California Division Manager and was ultimately
promoted to Western Regional Operations Manager. He has been
responsible for the Company's DSD operations since 1993 and recently
added natural food and specialty stores to his responsibilities. Mr.
Farmer has over 15 years of food sales and distribution experience
including as four-year stint as Executive Vice President of Golden Yolk
Egg Company in San Francisco.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who
own more than 10% of a registered class of the Company's equity
securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of
the Company. Officers, directors and greater than 10% beneficial owners
are required by SEC regulations to furnish the Company with copies of all
reports they file under Section 16(a). To the Company's knowledge, based
solely on its review of the copies of such reports furnished to the
Company and written representations that no other reports were required,
all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with
during the fiscal year ended December 27, 1998, with three exceptions:
Mr. Tom Kees' Form 4 report for August 1998 was filed one day late, the
Form 5 for 1997 for Mr. Ken Steel, a former CEO and Director was filed
late, and Mr. Dan Gallery's Form 4 for May 1998 was returned for
corrections and subsequently refiled after the original due date.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------
All
Annual Compensation Securities Other
------------------------------------------- Underlying Compen-
Name and Principal Position Year Salary $ Bonus $ Other $ Options# sation
- ---------------------------- ------- ------------ --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
R. Lance Hewitt............ 1998 $175,000 (1) $61,250 $9,000 (1) -- (1) $ --
President and Chief 1997 $94,231 (1) $ -- $4,500 (1) 100,000 (1) $ --
Executive Officer 1996 N/A N/A N/A N/A N/A
Stephen L. Brinkman 1998 $115,293 (2) $23,540 $ -- (2) -- (2) $ --
Chief Financial Officer 1997 $ -- $ -- $ -- 60,000 (2) $ --
1996 N/A N/A N/A N/A N/A
</TABLE>
- ----------------
(1) Mr. Hewitt was appointed President in June of 1997 and Chief
Executive Officer in August 1997. He was eligible for a 35% bonus upon
completing his first full year of employment, which was paid in June
1998. For every year thereafter he is eligible for a bonus of up to a
maximum of 35% of his salary annually for achieving agreed-upon income
targets, as approved by the Board of Directors, and an additional 25% of
his salary for achieving certain specific objectives for each fiscal
period. He was also eligible to vest and vested 50,000 options because
he was still employed on the first anniversary of his May 26, 1997
employment agreement, and is eligible to vest 50,000 options if still
employed on the second anniversary of the agreement. Mr. Hewitt may
also receive, at the discretion of the Board of Directors, an additional
200,000 options during the first two years of employment split as
follows: 120,000 for achieving agreed-upon business goals in the first
year and 80,000 for achieving business goals in the second year. The
cycle for measurement of Mr. Hewitt's eligibility for bonus and those
options tied to performance was converted to a fiscal year basis during
the fourth quarter of 1998 by resolution of the board of Directors at
its October 22, 1998 meeting. As of December 27, 1998 the Board of
Directors had not authorized additional options. Mr. Hewitt also
receives an auto allowance of $750 per month.
(2) Mr. Brinkman was appointed Chief Financial Officer in September
1997. He was eligible for and received a 20% bonus based upon
performance upon completion of his first full year of employment. For
every year thereafter he is eligible for a bonus of up to 20% based upon
the achievement of performance criteria agreed upon with the Chief
Executive Officer. Mr. Brinkman was granted 60,000 options in 1997. He
vested 10,000 options upon his initial employment date, 10,000 options
on his first anniversary and 10,000 options for achieving certain
performance criteria in his first full year of employment. In addition,
he is eligible to vest 10,000 options on his second anniversary of
employment, 10,000 options for achieving certain performance criteria in
his second full year of employment, 5,000 options on his third
anniversary of employment and 5,000 options for achieving certain
performance criteria in his third full year of employment. The cycle
for measurement of Mr. Brinkman's eligibility for bonus and those
options tied to performance was converted to a fiscal year basis during
the fourth quarter of 1998 at the direction of the Chief Executive
Officer.
Option Grants in Last fiscal Year
There were no option grants to executive officers during 1998. In
addition, there were no options exercised during 1998 by any holder.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 27, 199 at December 27, 1998
--------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
R. Lance Hewitt................ 50,000 50,000 -- --
Stephen L. Brinkman............ 30,000 30,000 -- --
</TABLE>
Employment Contracts
Mr. Hewitt and Mr. Brinkman have employment agreements, the terms
of which were outlined under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The table on the following page sets forth as of March 3, 1999
(except as noted in the footnotes to the table), certain information
with respect to the beneficial ownership of the Company's Common Stock
by (i) all persons known by the Company to be the beneficial owners of
more than 5% of the outstanding Common Stock of the Company, (ii) each
director and director-nominee of the Company, (iii) the Chief Executive
Officer as of March 15, 1999, and (iv) all executive officers and
directors of the Company for fiscal year 1998 through March 15, 1999,
as a group.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Beneficial of
Name and Address of Beneficial Owner(1) Ownership(2) Class (2)
- ----------------------------------------------- ------------ --------
<S> <C> <C>
Clearwater Fund IV, Ltd. ....................... 1,483,934 10.35
611 Druid Road East, Suite 200
Clearwater, Florida 34616
Gruber and McBaine Capital Management (3)....... 1,416,200 9.88
50 Osgood Place, Penthouse
San Francisco, CA 94133
Van Tunstall (4)................................ 77,300 0.54
Floyd R. Hill (5)............................... 159,000 1.11
James Wong (6).................................. 15,000 0.11
R. Lance Hewitt (7)............................. 65,000 0.45
Charles B. Bonner (8)........................... 124,727 0.87
Thomas E. Kees.... ............................. 8,000 0.06
Stephen L. Brinkman (9)........................ 48,000 0.33
All Officers and Directors as a group
(7 persons).................................... 497,027 3.47
</TABLE>
- ----------------
(1) Unless otherwise noted, the address of each named person is:
Care of Monterey Pasta Company, 1528 Moffett Street, Salinas, CA
93905.
(2) Includes shares of Monterey Pasta Company Common Stock underlying
the options and convertible securities outstanding held by the
beneficial owners with respect to whom the calculation is made, but does
not include shares of Common Stock that may not be acquired until more
than 60 days after March 3, 1999.
(3) John D. Gruber and J. Patterson McBaine are the only directors of,
and hold all executive offices of, Gruber and McBaine Capital
Management ("GMCM"), an investment advisor. GMCM, together with
Messrs. Gruber, McBaine, and Thomas O. Lloyd-Butler, are the general
partners of Lagunitas Partners, L.P. ("Lag"), a California
investment limited partnership. As of 3/01/99 GMCM had shared
voting and investment power over 1,078,800 shares; Mr. Gruber has
sole voting and investment power over 166,200 shares and shared
voting and investment power over 1,078,800 shares; Mr. McBaine has
sole voting and investment power over 171,200 shares and shared
voting and investment power over 1,078,800 shares; Lag has sole
voting and investment power over 216,700 shares; and Mr. Butler has
shared voting and investment power over 1,078,800 shares.
(4) Includes 15,000 exercisable options granted under the 1993 Stock
Option Plan.
(5) Includes 59,000 exercisable options granted under the 1993 Stock
Option Plan.
(6) Includes 15,000 exercisable options granted under the 1993 Stock
Option Plan.
(7) Includes 50,000 exercisable options granted under the 1993 Stock
Option Plan.
(8) Includes 71,000 exercisable options granted under the 1993 Stock
Option Plan.
(9) Includes 30,000 exercisable options granted under the 1993 Stock
Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 30, 1997, Mr. Kenneth Steel, former Chief Executive
Officer, Director, and stockholder was granted rights to purchase
550,000 shares of Common Stock with a full recourse promissory note for
the full amount at a per share price of $1.875 per share, subject to
time served and performance restrictions. The note was converted to a
two-year non-interest bearing non-recourse status on December 31, 1997,
and was renewed for $562,500, the balance after the forfeiture of
250,000 shares due to performance restrictions. The shares have now been
classified as options and the $51,000 calculated as the fair market
value in the Black-Scholes model was recorded as an expense during the
first quarter of 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Consolidated Financial Statements of Monterey Pasta Company:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets: Year-End 1997 and 1998
Consolidated Statements of Operations: Years Ended 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity: Years Ended 1996,
1997 and 1998
Consolidated Statements of Cash Flows: Years Ended 1996, 1997 and 1998
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required
information is contained in the Consolidated Financial Statements
or because such schedules are not required.
(a)(2) Exhibits: See Index to Exhibits on page 52. The Exhibits
listed in the accompanying Index of Exhibits are filed or incorporated
by reference as part of this report. Exhibit Nos. 10.1, 10.2, 10.18,
10.19, 10.20, 10.21, 10.22, 10.44, 10.45, 10.46, 10.48, and 10.49 are
management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
None
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Monterey Pasta Company
We have audited the accompanying consolidated balance sheets of Monterey
Pasta Company and subsidiary as of December 28, 1997 and December 27,
1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended December 27, 1998. We have also audited the Schedule listed
in the accompanying index at Item 14(a). These financial statements and
the Schedule are the responsibility of Monterey Pasta Company's
management. Our responsibility is to express an opinion on these
financial statements and the Schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
and Schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and Schedule. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and
Schedule. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of
Monterey Pasta Company and subsidiary at December 28, 1997 and December
27, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 27, 1998, in
conformity with generally accepted accounting principles.
Also, in our opinion, the Schedule presents fairly in all material
respects, the information set forth therein.
/s/ BDO Seidman LLP
- -------------------
BDO Seidman, LLP
San Francisco, California
January 29, 1999, except for Notes 4 and 17, which are as of March 12, 1999
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, December 27,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS (Note 4)
Current assets:
Cash and cash equivalents (Note 1)................. $410,228 $61,645
Accounts receivable, less allowances of $332,877
and $312,408 (Notes 1, 8, and 12)................ 2,440,745 2,062,565
Inventories (Note 2)............................... 1,218,546 1,813,653
Prepaid expense and other (Note 11)................ 1,519,801 1,291,251
------------ ------------
Total current assets............................. 5,589,320 5,229,114
Property and equipment, net (Notes 3, 4 and 8)....... 5,057,846 5,261,723
Intangible and other assets, net..................... 101,582 174,302
Deposits and other................................... 280,245 170,141
------------ ------------
Total assets..................................... $11,028,993 $10,835,280
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... 954,728 1,330,649
Accrued payroll and related benefits............... 192,787 225,438
Accrued liabilities (Note 14)...................... 724,345 292,982
Current portion of notes, loans, and capitalized
leases payable (Notes 1, 3 and 4)................ 1,273,216 1,779,227
------------ ------------
Total current liabilities........................ 3,145,076 3,628,296
Notes, loans, and capitalized leases payable,
less current portion (Notes 1, 3 and 4)............ 523,701 497,761
------------ ------------
Total liabilities................................ 3,668,777 4,126,057
------------ ------------
Commitments and contingencies
(Notes 5, 10, 12, 14, 15, and 17)
Stockholders' equity (Notes 6, 7 and 16):
Series A and B Convertible Preferred Stock, no
par value, 1,000,000 shares authorized, none
issued and outstanding........................... -- --
Common stock, $.001 par value, 70,000,000 shares
authorized, 15,206,259 and 12,842,613
issued and outstanding........................... 42,640,107 39,389,656
Shareholder note receivable........................ (562,500) --
Accumulated deficit................................ (34,717,391) (32,680,433)
------------ ------------
Total stockholders' equity....................... 7,360,216 6,709,223
------------ ------------
Total liabilities and stockholders' equity....... $11,028,993 $10,835,280
============ ============
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues (Note 12)................... $24,492,403 $23,446,780 $26,217,297
Cost of sales............................ 15,851,120 13,761,013 15,579,059
------------ ------------ ------------
Gross profit............................. 8,641,283 9,685,767 10,638,238
Selling, general and administrative
(Notes 5, 11 and 14)................... 16,237,609 8,723,887 8,310,908
------------ ------------ ------------
Operating income (loss).................. (7,596,326) 961,880 2,327,330
Loss on disposition or impairment of
assets (Note 3)........................ (571,544) (259,480) (26,387)
Other income, net (Notes 5 and 8)........ 145,808 4,135 16,843
Interest expense, net (Note 4)........... (430,968) (211,438) (249,693)
------------ ------------ ------------
Income (loss) from continuing operations
before provision for income taxes...... (8,453,030) 495,097 2,068,093
Provision for income taxes (Note 9)...... -- 20,691 31,135
------------ ------------ ------------
Income (loss) from continuing operations. (8,453,030) 474,406 2,036,958
Discontinued operations (Note 15)........ 219,998 36,882 --
---------------------------------------
Net income (loss)........................ ($8,233,032) $511,288 $2,036,958
============ ============ ============
Net income (loss) per common share (Note 6):
Net income (loss) from continuing
operations............................. ($8,453,030) $474,406 $2,036,958
Dividends to preferred and certain
common stockholders ................... (1,108,343) (317,647) --
------------ ------------ ------------
Net income (loss) from continuing
operations attributable to common
stockholders........................... ($9,561,373) $156,759 $2,036,958
============ ============ ============
Basic and diluted income (loss) per share:
Continuing operations.................. ($1.16) $0.02 $0.16
Discontinued operations................ $0.03 $0.00 $0.00
---------------------------------------
Net income (loss) per common share....... ($1.13) $0.02 $0.16
============ ============ ============
Weighted average common and common
equivalent shares outstanding.......... 8,276,608 10,458,451 12,979,055
============ ============ ============
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1996, 1997, AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Shareholder Total
-------------------- ------------------------- Note Accumulated Shareholders'
SEE NOTES 6 AND 7 Shares Amount Shares Amount Receivable Deficit Equity
- --------------------------------------- ------- ----------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, end of 1995................... -- $ -- 6,819,112 $27,974,170 $ -- ($25,569,667) $2,404,503
Conversion of 7% note payable plus
accrued interest, less costs of
$264,951, at an average net price
per share of $4.78 (including
$705,907 discount recorded in 1995).. -- -- 933,711 3,755,505 -- -- 3,755,505
Issuance of common stock in payment of
penalties related to conversion of
7 % note, at an average net price
per share of $5.06................... -- -- 39,506 200,000 -- -- 200,000
Issuance of common stock in private
placement, net of offering costs of
$222,147, at an average net price
per share of $4.13.................... -- -- 916,000 3,785,353 -- -- 3,785,353
Issuance of common stock in payment
of lease settlement to a related
party, at an average net price
per share of $6.58.................... -- -- 5,323 35,000 -- -- 35,000
Issuance of Series A and B convertible
preferred stock, net of offering
costs of $146,938 plus deemed
dividend, at an average net value
per share of $1,195.08................ 3,500 4,182,790 -- -- -- (875,000) 3,307,790
Deemed dividend of $50 per share on
preferred stock....................... -- -- -- -- -- (175,000) (175,000)
Issuance of common stock under
Employee Stock Purchase Plan, at an
average price per share of $4.58...... -- -- 1,000 4,583 -- -- 4,583
Net loss for the year................... -- -- -- -- -- (8,233,032) (8,233,032)
------- ----------- ----------- ------------ ------------ ------------- -------------
Balance, end of 1996.................... 3,500 4,182,790 8,714,652 35,754,611 -- (34,852,699) 5,084,702
Conversion of Series B-1 Shares to
Common Stock.......................... (500) (593,542) 345,490 582,372 -- -- (11,170)
Issuance of common stock in private
placement, net of offering costs of
$145,407, at an average net price
per share of $1.259................... -- -- 1,600,000 1,960,448 -- -- 1,960,448
Conversion of A-1 shares to common
stock.................................(3,000) (3,589,248) 4,108,108 3,523,343 -- -- (65,905)
Options granted in lieu of fees......... -- -- -- 27,095 -- 27,095
Issuance of common stock under
Employee Stock Purchase Plan, at an
average price per share of $2.05...... -- -- 1,225 2,513 -- -- 2,513
Issuance of 550,000 shares of common
stock at $1.875 in exchange for
promissory note....................... -- -- 550,000 1,031,250 (1,031,250) -- --
Steel share forfeitures................. -- -- (250,000) (468,750) 468,750 -- --
Deemed dividends paid in shares......... -- -- 136,784 227,225 -- (227,225) --
Deemed and actual dividends paid in
cash.................................. -- -- -- -- -- (148,755) (148,755)
Net income for the year................. -- -- -- -- -- 511,288 511,288
------- ----------- ----------- ------------ ------------ ------------- -------------
Balance, end of 1997.................... -- -- 15,206,259 42,640,107 (562,500) (34,717,391) 7,360,216
Issuance of common stock under
Employee Stock Purchase Plan, at an
average price per share of $1.14...... -- -- 1,420 1,612 -- -- 1,612
Reversal of share subscription.......... -- -- -- (562,500) 562,500 -- --
Reclassification of above share
subscription as an option............. -- -- -- 51,000 -- -- 51,000
Repurchase and retirement of
Clearwater Fund IV, Ltd. Common
shares at an average total price
price per share of $1.16.............. -- -- (2,365,066) (2,740,563) -- -- (2,740,563)
Net income for the year................. -- -- -- -- -- 2,036,958 2,036,958
------- ----------- ----------- ------------ ------------ ------------- -------------
Balance, end of 1998.................... -- $ -- 12,842,613 $39,389,656 $ -- ($32,680,433) $6,709,223
======= =========== =========== ============ ============ ============= =============
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
SEE NOTE 13--SUPPLEMENTAL CASH FLOW INFORMATION 1996 1997 1998
- -------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (Loss) from continuing operations........... ($8,453,030) $474,406 $2,036,958
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization........................ 918,585 960,527 998,649
Provisions for allowances for bad debt, returns,
adjustments and spoils............................. 771,018 (591,408) (20,469)
Inventory reserves................................... 15,000 -- (25,000)
Loss on disposition and writedown of property and
equipment.......................................... 571,554 259,480 26,387
Expenses paid in common stock and options............ 228,363 27,095 51,000
Changes in assets and liabilities:
Accounts receivable.............................. (1,199,134) (179,971) 398,649
Inventories...................................... (425,001) 286,431 (570,107)
Prepaid expenses and other assets................ 1,160,918 (917,957) 177,954
Accounts payable................................. (798,281) (594,149) 381,613
Accrued expenses................................. 1,094,530 (613,002) (398,712)
------------ ------------ ------------
Net cash provided by (used in)
continuing operations............................ (6,115,478) (888,548) 3,056,922
Net cash used in discontinued operations........... (1,967,602) (137,902) --
------------ ------------ ------------
Net cash provided by (used in)
operating activities............................. (8,083,080) (1,026,450) 3,056,922
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................... (1,968,360) (480,977) (932,596)
Repurchase of common stock........................... -- -- (2,740,563)
Proceeds from sale of property and equipment......... 75,383 159,095 5,293
Purchase of intangible assets........................ -- -- (109,599)
Proceeds from sale of subsidiary..................... 1,000 -- --
Advances to related party............................ (350,000) -- --
------------ ------------ ------------
Net cash used in investing activities............ (2,241,977) (321,882) (3,777,465)
------------- ------------- -------------
Cash flows from financing activities:
Bank overdrafts...................................... 845,372 (839,680) (5,692)
Proceeds from revolving line of credit............... 20,081,967 15,078,913 8,181,621
Repayments on revolving line of credit............... (19,194,071) (14,714,032) (8,611,259)
Proceeds from long-term debt......................... 457,474 -- 2,399,234
Securities and debt issue costs........................ (64,951) (71,308) --
Repayment of long-term debt and capital lease
obligations........................................ (111,615) (253,364) (1,593,556)
Dividends on preferred stock......................... -- (148,755) --
Proceeds from issuance of preferred stock............ 3,307,790 -- --
Proceeds from issuance of common stock............... 3,789,936 1,982,057 1,612
------------ ------------ ------------
Net cash provided by financing activities........ 9,111,902 1,033,831 371,960
------------ ------------ ------------
Net decrease in cash and cash equivalents.............. (1,213,155) (314,501) (348,583)
Cash and cash equivalents, beginning of year........... 1,937,884 724,729 410,228
------------ ------------ ------------
Cash and cash equivalents, end of year................. $724,729 $410,228 $61,645
============ ============ ============
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
<PAGE>
MONTEREY PASTA COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations
The consolidated financial statements include the accounts of
Monterey Pasta Company (a producer and distributor of pasta and pasta
sauces), together with its wholly-owned subsidiaries, Upscale Food
Outlets, Inc. (a chain of fast food restaurants serving the Company's
product - through April 1996) and Monterey Pasta Development Company (a
franchiser of restaurants - inactive). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Collectively, Monterey Pasta Company, Upscale Food Outlets, Inc. and
Monterey Pasta Development Company are referred to as the "Company."
As discussed in Note 15, the Company discontinued the operations of
Upscale Food Outlets, Inc. and Monterey Pasta Development Company
effective December 31, 1995. Accordingly, the restaurant and franchise
businesses are accounted for as discontinued operations in the
accompanying consolidated financial statements for all periods
presented.
The Company's production facility is located in Monterey County,
California. Its products are available throughout the United States as
well as selected distribution areas in Canada. The principal customers
are retail groceries and club stores. The Company offers credit and
payment terms to its customers in line with industry practices,
generally calling for unsecured trade accounts receivable.
Accounting Periods
For quarterly reporting purposes the Company employs a 4-week, 4-
week, 5-week reporting period. The fiscal year ends on the last Sunday
of each calendar year (52/53-week year). The 1996, 1997, and 1998
fiscal years all contained 52 weeks and ended on December 29, 1996,
December 28, 1997, and December 27, 1998, respectively.
Reclassifications
Certain of the prior year financial statement amounts have been
reclassified to conform to the current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowances
The Company provides reserves for estimated credit losses, product
returns, spoilage, and adjustments at a level deemed appropriate to
adequately provide for known and inherent risks related to such amounts.
The allowances are based on reviews of loss, return, spoilage,
adjustment history, contractual relationships with customers, current
economic conditions, and other factors that deserve recognition in
estimating potential losses. While management uses the best information
available in making its determination, the ultimate recovery of recorded
accounts, notes, and other receivables is also dependent on future
economic and other conditions that may be beyond management's control.
Inventories
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market and consist principally of component
ingredients to the Company's refrigerated pasta and sauces, finished
goods, and packaging materials.
Slotting and Advertising Costs
The Company expenses advertising costs as incurred or when the
related campaign commences. Slotting fees paid or credited to club
stores and grocery chains for shelf space allocations are amortized over
the life of the agreement, generally one year.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is
provided for on the straight-line method over the estimated useful
lives of the assets (or lease term for leasehold improvements if
shorter):
<TABLE>
<S> <C>
Leasehold improvements................... 7 to 12 years
Machinery and equipment.................. 7 to 12 years
Office furniture and equipment........... 5 to 15 years
Vehicles................................. 5 to 7 years
</TABLE>
Long-lived assets, including intangible assets, are assessed for
possible impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable, or whenever management
has committed to a plan to dispose of the assets. Assets to be held and
used affected by such an impairment loss are depreciated or amortized at
their new carrying amount over the remaining estimated life; assets to
be sold or otherwise disposed of are not subject to further depreciation
or amortization.
Intangible Assets
Intangible assets consist of tradenames and other intangibles and
are recorded at cost, net of accumulated amortization of $240,470 and
$277,349 in 1997 and 1998, respectively. During 1998 intangible assets
of $110,000 were recorded in connection with the purchase of the
operating equipment, recipes, and trademarks of a small pasta
manufacturer, representing the excess of purchase price over the fair
value of assets acquired. Intangibles are amortized over their
respective useful lives, ranging from 5 to 10 years.
Income Taxes
The Company accounts for corporate income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No, 109, "Accounting
for Income Taxes", which requires an asset and liability approach.
This approach results in the recognition of deferred tax assets (future
tax benefits) and liabilities for the expected future tax consequences
of temporary timing differences between the book carrying amounts and
the tax basis of assets and liabilities. Future tax benefits are
subject to a valuation allowance to the extent of the likelihood that
the deferred tax assets may not be realized.
Revenue Recognition
The Company recognizes revenues through sales of pasta and sauce
products primarily to grocery and club store chains. Sales are recorded
when goods are shipped for most customers and upon delivery to retail
locations for the Direct Store Delivery program. Consignment shipments
to club store warehouses are recognized upon shipment to individual club
store locations. Potential returns, adjustments and spoilage allowances
are provided for in accounts receivable allowances and accruals.
Stock-based Compensation
As permitted under the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company continues to account for employee
stock-based transactions under Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees." However, SFAS No.
123 requires the Company to disclose pro forma net income and earnings
per share as if the fair value method had been adopted. Under the fair
value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period,
which is usually the vesting period. For non-employees, cost is also
measured at the grant date, but is actually recognized over the vesting
period, or immediately if no further services are required.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the period. Actual results could differ from those
estimates.
New Accounting Pronouncements
Effective January 1, 1998, the Company adopted the provisions of 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. Results of operations and
financial position were unaffected by implementation of this standard.
In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. SFAS
133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or (ii) the earnings' effect
of the hedged forecast transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the
period of change. SFAS 133 is effective for all fiscal quarters
beginning after June 15, 1999. Historically the Company has not entered
into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption
of this new standard to affect its financial statements.
<PAGE>
MONTEREY PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Concentration of Credit Risk and Fair Value of Financial
Instruments
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, include cash and accounts receivable.
The Company maintains its cash accounts in Imperial Bank, Fresno,
California. The total bank cash balances are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000. At times the cash
balances exceed such limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 28, 1997 and December 27, 1998, estimated fair values for the
Company's financial instruments and methods and assumptions used in estimating
fair values were as follows:
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents: the
carrying amount in the
balance sheet approximates
fair value................... $410,228 $410,228 $61,645 $61,645
Accounts Receivable, less
allowances: the carrying
amount in the balance sheet
approximates fair value due
to the relatively short-term
maturity of the debt and the
reserves reducing the
amounts to estimated net
realizable value............. 2,440,745 2,440,745 2,062,565 2,062,565
Notes and Loans Payable
(credit facility): the
carrying amount
approximates fair value
since the interest floats
with the prime rate.......... 1,589,265 1,589,265 2,048,255 2,048,255
Capitalized Leases Payable:
the fair value is estimated
based on current interest
rates and comparable current
available terms.............. 207,652 207,652 228,733 228,733
</TABLE>
2. INVENTORIES
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Inventories consisted of the following:
Production--Ingredients.................. $602,428 $865,693
Production--Finished goods............... 382,736 560,762
Paper goods and packaging materials...... 288,382 417,198
----------- -----------
1,273,546 1,843,653
Allowances for spoils and obsolescence... (55,000) (30,000)
----------- -----------
$1,218,546 $1,813,653
=========== ===========
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Property and equipment consisted of the following:
Leasehold improvements.............................. $1,809,946 $1,852,958
Machinery and equipment............................. 4,459,088 5,024,208
Computers, office furniture and equipment........... 743,747 760,060
Vehicles............................................ 233,942 310,942
----------- -----------
7,246,723 7,948,168
Less accumulated depreciation and amortization...... (2,252,842) (3,188,936)
----------- -----------
4,993,881 4,759,232
Construction in progress............................ 63,965 502,491
----------- -----------
$5,057,846 $5,261,723
=========== ===========
</TABLE>
During 1996, the Company identified certain property and equipment
assets which were overvalued, obsolete, and/or no longer being used in
the Company's operations, including office furniture and equipment
purchased from a stockholder. These assets were reduced to their
estimated fair value of $326,701 at December 29, 1996, resulting in a
loss on writedown of $452,000 in 1996 (included in loss on disposition
and impairment of assets in the accompanying statements of operations),
and were disposed of in 1997 and 1998.
4. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
<TABLE>
<CAPTION>
Year-end debt consisted of the following:
1997 1998
----------- -----------
<S> <C> <C>
Credit Facility:
Receivable and inventory revolver................... $952,894 $523,256
Equipment revolver.................................. -- $274,999
Equipment term loan................................. 636,371 1,250,000
Capitalized leases payable............................ 207,652 228,733
----------- -----------
1,796,917 2,276,988
Less current maturities............................. 1,273,216 1,779,227
----------- -----------
$523,701 $497,761
=========== ===========
</TABLE>
Credit Facility
At December 27, 1998 had in place a $4,000,000 credit facility
secured by substantially all assets of the Company, and comprised of the
following:
- - Accounts receivable and inventory revolver for up to $1,500,000
with interest at prime (7.75% at December 27, 1998).
- - Equipment revolver for up to $500,000 with interest at prime
plus .75% (8.50% at December 27, 1998), payable at $13,889
monthly, plus interest.
- - Term note for up to $2,000,000 plus interest at prime plus .75%
(8.50% at December 27, 1998) payable at $83,333 monthly, plus
interest.
The terms of the Credit Facility, which expires July 22, 1999,
prohibit the payment of cash dividends (except with written approval) on
the Company's capital stock and restricts payments for, among other
things, repurchasing shares of its capital stock. Other terms of the
Credit Facility limit the Company with respect to, among other things,
(i) incurring additional indebtedness, (ii) adversely changing the
capital structure, and (iii) acquiring assets other than in the normal
course of business including specific limits on annual capital
expenditures. As of December 27, 1998, there were no violations of any
loan covenants. The equipment revolver and term note are expected to be
renewed and continue to be amortized as long term notes and, accordingly,
are classified as long term in the accompanying balance sheets.
The March 12, 1999 acquisition of Frescala Foods, Inc. (see Note
17), with an initial cash outlay of $1,345,000, necessitated the
negotiation of a new two-year term note in the amount of $750,000 with an
interest rate of prime plus .25%, a maturity date of March 5, 2001, and
principal payments of $31,250 per month. At the same time the rates on the
two existing term notes were adjusted from .75% over prime to .25 over prime.
Certain loan covenants were also adjusted to reflect balance sheet ratios
expected from the assimilation of the new business.
Capitalized Leases Payable
The Company leases certain equipment under capitalized leases,
including office equipment, a van and truck, as well as refrigeration
equipment, most of which is located at retail sites of the Company's
single largest customer (see Note 12).
The leases are collateralized by the underlying equipment with book
values of $246,352, $236,403 and $249,996 in 1996, 1997 and 1998,
respectively. Future minimum lease payments consist of:
<TABLE>
<CAPTION>
Year Total
- -------------------------------- -----------
<S> <C>
1999............................... $108,793
2000............................... 89,663
2001............................... 33,082
2002............................... 26,273
2003............................... 6,586
-----------
264,397
Less amounts representing interest... 35,664
-----------
Net capitalized leases............... $228,733
===========
</TABLE>
Principal Payment Maturities
Notes, loans and capitalized leases payable require principal
payments (including the principal portion of capitalized leases above) as
follows:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
1999............................... $1,779,227
2000............................... 438,234
2001............................... 28,663
2002............................... 24,378
2003............................... 6,486
-----------
$2,276,988
===========
</TABLE>
5. Operating Leases
The Company currently leases production, warehouse and corporate
office space as well as certain equipment in Monterey County, California
under both month-to-month and non-cancelable operating lease agreements,
expiring through November 2004. The terms of the leases generally
require the Company to pay common area maintenance, taxes, insurance, and
certain other costs.
Future minimum annual lease payments due under non-cancelable
operating leases with terms of more than one year and sublease income
from the lease of the Company's former headquarters are as follows:
<TABLE>
<CAPTION>
Lease Sublease
Year Amount Income Net
- -------------------------------------------- ----------- -----------
<S> <C> <C> <C>
1999........................... $541,000 $211,000 $330,000
2000........................... 555,000 211,000 344,000
2001........................... 366,000 26,000 340,000
2002........................... 344,000 -- 344,000
2003........................... 351,000 -- 351,000
2004 and thereafter............ 298,000 -- 298,000
----------- ----------- -----------
$2,455,000 $448,000 $2,007,000
=========== =========== ===========
</TABLE>
Gross rent expense under the leases for 1996, 1997, and 1998
was $544,072, $509,225 and $536,738, respectively. During 1997, the
Company subleased its former San Francisco premises at a slight premium
to the rent for which it has contractual liability. The sublease expires
on the same date as the underlying lease. Sublease income for 1997 and
1998 was $158,100 and $210,680 respectively. The Company also subleased
a portion of its Salinas headquarters for part of 1998 with sublease
income of $48,132.
6. Stockholders' Equity
Preferred Stock
During August 1996, 3,000 shares of Series A Convertible
Preferred and 500 shares of Series B Convertible Preferred stock were
issued at an average stated price of $1,000 per share under separate
agreements amended in February and April 1997. The shares were
convertible to common stock at 80% of the market price, as defined in the
agreements. The $875,000 value of the guaranteed contractual discount
rate, which is additional yield to the investors, was accounted for as a
deemed dividend to the preferred stockholders. The Company's agreements
for Series A and B Convertible Preferred stock 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 and dividends. Also, $30,000 was
paid to the holder of Series B-1 on April 4, 1997, in lieu of all prior
penalties and dividends. An additional $13,755 in penalties was incurred
during the period from May 1, 1997 to May 6, 1997, the date of filing of
the amended Registration Statement covering the related conversion
shares. The amended agreement for the Series B-1 Convertible Preferred
stock called for additional penalties if the Registration Statement was
not declared effective by July 31, 1997. The Registration Statement was
not declared effective until October 24, 1997. Therefore, $30,000 was
paid to the holder of the B-1 Convertible Preferred Stock on November 3,
1997.
In lieu of dividends for Series A-1 called for under the original
agreements, the Company agreed to pay a total amount of $50,000 to
holders of the new Series A-1 stock, constituting an annualized dividend
equal to four percent (4%) of the purchase price of the Series A
Preferred Stock through December 28, 1996. The dividend was paid in the
form of 37,037 shares of the Company's common stock, valued at $62,500
based on 80% of the $1.6875 per share market price on the day the
Registration Statement was effective. No additional dividends will be
payable on the Series A-1 stock.
During March 1997, one-half of the Series B Convertible Preferred
stock, with a face amount of $250,000 and a total book value of $298,771,
was converted into 160,256 shares of Common Stock having a market value
of $312,500. Holders of the remaining unconverted Series B-1 stock
received an 8% annual dividend from April 1, 1997 forward, payable in
each quarter; with two dividends of $5,000 paid during 1997. The
remaining Series B-1 Preferred Stock was converted to 207,894 shares of
common stock in October, 1997. Of the 207,894 shares of common stock
issued, 22,660 shares represented penalty shares awarded due to late
effectiveness of the Company's Registration Statement.
In December 1997 the $3,000,000 of Series A-1 Convertible Preferred
Stock was converted into 4,108,108 shares of common stock. On February
13, 1998, the Company was notified 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)(D)(ii) which requires stockholder 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 2,365,066 shares, held by
Clearwater Fund IV, Ltd., or face delisting from the National NASDAQ
market.
After reviewing its options, Company management, in concert with
the Company's Board of Directors and its legal advisors, decided to
begin negotiations with the Clearwater Fund IV, Ltd. to repurchase
2,365,066 shares. Negotiations were completed March 5, 1998 and the
Company repurchased the shares for a total consideration of $2,690,263
or $1.1375/share. Outstanding shares after the repurchase were
12,841,193, for a reduction of 15.6%.
Common Stock (see also Preferred Stock above)
During 1996, a $4,000,000 convertible note payable
originally issued in 1995 plus accrued interest at 7% was converted into
933,711 shares of common stock at an average gross price of $4.31 per
share (before consideration of conversion discount and costs). Included
in the interest was $705,907 relating to a guaranteed discount from
market price upon conversion treated as interest expense and an increase
in the amounts credited to common stock. In addition, 39,506 shares
valued at $5.06 per share were issued to the noteholder in payment of a
penalty due to a delay in the registration of the conversion shares with
the Securities and Exchange Commission.
In April 1996, the Company issued 916,000 shares of its common
stock at a gross price of $4.38 per share in a private placement. In
June 1996, the Company issued 5,323 shares of its common stock at a gross
price of $6.58 per share to a related party in payment of a lease
termination settlement (see Note 8).
The Company adopted a Stockholder Rights Agreement in May 1996,
which gives the stockholders the right to purchase one additional share
of common stock at $28 for each share of common stock owned. The Rights
are exercisable upon announcement of pending attainment by a person or
entity who (together with all affiliates) will become the beneficial
owner, through purchase or by merger, of securities representing 20% or
more of the voting power of all common stock, except in certain
circumstances of stock acquisition or merger as permitted by a vote of
the majority of the non-officer members of the Board of Directors. The
Rights, which expire upon the earlier of consummation of a merger
permitted by vote of the Board as described above or December 31, 2004
may be redeemed by the Company at $.001 each.
During 1997, a financing consultant for the Company was granted
options to buy 50,000 shares of common stock with an exercise price of
$1.88, immediate vesting and expiring March 12, 1998. The options
expired unexercised. The $22,357 fair value of the option grant was
charged to expense in 1997.
In April 1997, the Company issued 1,600,000 shares of its common
stock at a gross price of $1.35/share in a private placement. The shares
were registered as part of the Company Registration Statement on Form S-3
which was effective October 24, 1997.
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 in exchange
for 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 deemed option grant was charged to income on its December 31
grant date, during the first quarter of 1998.
In May of 1997 an executive search firm was granted options to
purchase 7,767 shares of Company common stock with an exercise price of
$2.06, immediate vesting, and a 3 year expiration. The $4,738 fair value
of the option grant was charged to expense in 1997.
During November of 1997 the Company issued 77,087 shares of common
stock in lieu of a guaranteed yield on the private placement common stock
issued in March, 1997. The yield was guaranteed at 8% from date of stock
issuance until effectiveness of the Company's Registration Statement on
Form S-3. The Registration Statement was declared effective on October
24, 1997 and $126,471 in penalties had accumulated.
Employee Stock Purchase Plan
In October 1994, the Company's Board of Directors adopted a
qualified employee stock purchase plan. Under the purchase plan,
eligible employees (those who have completed one year of continuous
employment with the Company) may purchase shares of the Company's common
stock through payroll deductions not to exceed 10% of gross wages. The
Company has reserved 200,000 shares of its common stock for issuance
under the purchase plan, which remains in effect until terminated by the
Company's Board of Directors, or until all of the shares reserved for
under the purchase plan have been issued. Unless the Board has otherwise
provided a higher amount prior to the commencement of an offering period,
the offering exercise price for each purchase period is 85% of the lesser
of (a) the fair market value of the shares on the offering date of such
offering period or (b) the fair market value of the shares on the given
purchase date. There were 1,000, 1,225 and 1,420 shares of common stock
issued under the plan in 1996, 1997 and 1998, respectively.
Earnings per Share
Basic earnings per share are based on earnings available to common
stockholders divided by the weighted-average number of common shares
actually outstanding during the period. Diluted earnings per share also
include any dilutive common stock equivalents assumed to be outstanding
during the period (no includable equivalents in any period presented).
Because of equivalent shares includable in different periods or at
different amounts, per-share amounts for the four quarters do not
necessarily equal per-share amounts for the entire year.
Options to purchase 589,681, 848,081, and 1,002,581 shares of common
stock were outstanding at year end 1996, 1997, and 1998, respectively
but were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average
market price of the common shares. Warrants to purchase 605,750,
1,138,550 and 933,550 shares at year-end 1996, 1997 and 1998,
respectively, were not included for the same reason.
7. Warrants and Stock Option Plan
In April 1996, the Company issued warrants to purchase 400,750
shares of its common stock at $6.50 per share in connection with a
placement of 916,000 shares of common stock. The warrants, with an
estimated original value of $137,400, are valid for seven years, and
include registration rights for the related shares which were registered
effective October 24, 1997.
In March 1997, the Company issued warrants for 532,800 shares of
its common stock at $2.25 per share in connection with a private
placement of 1,600,000 shares of common stock. The warrants, with an
estimated original value of $271,700, are valid for three years, and
included registration rights for the related shares which were part of
the Company's S-3 which was effective October 24, 1997.
Stock Option Plan
Effective August 31, 1993, the Company's Board of Directors adopted
a stock option plan, subsequently amended and restated, which provides
for the granting of incentive stock options or non-qualified stock
options to eligible employees, consultants and outside directors. The
Company has reserved 1,740,000 shares of its common stock for issuance
under the plan. The plan provides that the option price shall not be
less than the fair market value of the shares on the date of grant;
therefore, no compensation expense is recorded for employees.
Compensation or other expense is recorded for any non-employee grants at
fair value of the option award. Options generally vest over a period of
one to three years and may be exercised for a period of up to ten years.
In January of 1998, the Company filed a Form S-8 to register up to
540,000 additional shares of common stock eligible to be issued pursuant
to the Plan to increase the total number of registered shares to
1,740,000. The Plan was amended in July 1998 to allow two years from
date of a transfer of control for the exercise of options for those
employees and directors not retained after the transfer of control.
The following table shows activity in outstanding options during 1996,
1997 and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.. 1,236,348 $6.70 589,681 $5.26 848,081 $3.24
Granted (1) .................. 505,000 4.72 491,913 2.24 540,314 1.72
Exercised..................... -- -- -- -- -- --
Canceled or expired (1)....... (1,151,667) 6.45 (233,513) 6.13 (385,814) 3.53
----------- --------- ---------- --------- ---------- ----------
Outstanding at end of year........ 589,681 $5.26 848,081 $3.24 1,002,581 $2.24
=========== ========== ==========
Options exercisable at year
end............................. 495,823 $4.97 572,379 $3.73 826,581 $2.38
=========== ========== ==========
Weighted average fair value of
options granted during the
year............................ $2.27 $0.97 $0.38
(1) Including 43,146 and 50,314 shares repriced in 1997 and 1998.
</TABLE>
The following table shows information for options outstanding or
exercisable as of December 27, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Remaining Exercise Remaining Exercise
Range of Number Contractual Price Number Contractual Price
Exercise Prices of Shares Life (years)(per share) of Shares Life (years)(per share)
- ------------------ ----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 0.00 - $ 2.99.. 890,081 5.9 $1.77 714,081 5.1 $1.81
3.00 - 4.99.. 10,000 7.7 3.88 10,000 7.7 3.88
5.00 - 6.99.. 92,500 2.1 6.08 92,500 2.1 6.08
$7.00...... 10,000 6.7 $7.00 10,000 6.7 $7.00
----------- -----------
1,002,581 5.5 $2.24 826,581 4.8 $2.38
=========== ===========
</TABLE>
If the Company had elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the
estimated fair value of stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The
fair value at date of grant for options granted in 1996, 1997, and 1998
has been estimated based on a modified Black-Scholes pricing model with
the following assumptions: no dividend yield for any year; expected
volatility for 1996, 1997 and 1998 grants of approximately 44%, 46%, and
49% based on historical results; risk-free interest rates of 6.65%,
6.6% and 7.37%; and expected lives of approximately five years for all
grants. The following table shows net income or loss and income or loss
per share for 1996, 1997 and 1998 as if the Company had elected the fair
value method of accounting for stock options.
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) as reported......... ($8,233,032) $511,288 $2,036,958
Additional compensation expense....... (291,232) (478,988) (213,465)
------------ ------------ ------------
Proforma income (loss), as adjusted... (8,524,264) 32,300 1,823,493
Dividends to preferred and certain
common shareholders................. (1,108,343) (317,647) --
------------ ------------ ------------
Proforma income (loss) attributable
to common shareholders.............. ($9,632,607) ($285,347) $1,823,493
============ ============ ============
Net income (loss) per share
(basic and diluted)................. ($1.13) $0.02 $0.16
Additional compensation expense....... (0.04) (0.05) (0.02)
------------ ------------ ------------
Proforma net income (loss) per share,
as adjusted......................... ($1.17) ($0.03) $0.14
============ ============ ============
</TABLE>
8. Related Party Transactions
The Company previously leased office space from a partnership in
which a limited partner was a Stockholder, former Director, former
President and former Chairman of the Board of the Company (see also Notes
10 and 15). Rent expense under this lease in 1996 was $150,108. The
Company vacated this space in February 1996, and paid $65,000 plus 5,323
shares of its common stock (see Note 6) in settlement of the lease
obligation.
During 1996, the Company also purchased certain office furniture
and equipment under a prior agreement from the stockholder referred to
above for $100,000. Certain of the furniture purchased was reduced to
its estimated fair value in 1996, resulting in a writedown of $55,000
(see Note 3). Also during 1996, the Company repaid $112,500, previously
received from a potential franchisee, to a trust controlled by this
stockholder in connection with termination of franchising operations.
Upscale Food Outlets, Inc. (UFO) was purchased from the Company in
April, 1996 by an entity owned by the stockholder referred to above.
During 1996, the Company sold $62,350 in food products to UFO (see Note
15). Of this amount, $18,738 was not collected, and was and written off
during 1997. In addition, Other Income in 1996 includes $73,750 in
short-swing profits recovered from this stockholder pursuant to Section
16(b) of the Securities & Exchange Act of 1934.
The Company's former Chief Executive Officer, who is also a
Director and Stockholder, is a director and stockholder of an entity from
whom the Company contracted certain co-packing service and obtained raw
materials at terms and prices similar to other third-party vendors.
Another director, stockholder and former Chief Executive Officer of the
related entity is also a co-founder, Director and Stockholder of the
Company. Payments to the related entity were $186,513 during 1996. In
1997, payments of $1,132 and billings of $18,703 for raw materials
purchases were made to this entity.
During 1996, the Company made payments of $137,252, in connection
with purchases of carts and kiosks from another entity. The co-founder,
director and executive vice president of this entity is also a former
Director of the Company. During 1996, these carts and kiosks were
reduced to their estimated fair market value resulting in a loss of
$221,569 (see Note 3).
9. Income Taxes
The Company's income tax expense in 1998 consists of $31,135 for
current State taxes; there was no tax expense in 1996, and 1997 tax expense
was $20,961. A reconciliation between the Company's effective tax rate and
and U.S. federal income tax rate on loss from continuing operations follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory rate.................. -34.0% 34.0% 34.0%
State income taxes, net of effect on
Federal income taxes.................. -6.0% 7.7% 1.5%
Non-deductible meals and entertainment.. 0.1% 3.8% 0.4%
Net operating losses for which tax
benefits are reduced by valuation
allowances............................ 40.6% -- 2.0%
Utilization of net operating losses for
which deferred income tax assets had
been reduced by valuation allowances.. -- -22.5% -36.4%
Other................................... -0.7% -19.0% --
------------ ------------ ------------
Effective income tax rate............... 0.0% 4.0% 1.5%
============ ============ ============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<C> <C>
Federal net operating loss carryforward.............. $12,247,000 $11,507,000
Reserves for discontinued operations................. 72,000 --
Depreciation, amortization and writedown on
fixed assets....................................... (241,000) (153,000)
State income and franchise taxes, net of effect
on Federal income taxes............................ 873,000 495,000
Other................................................ 182,000 226,000
------------ ------------
13,133,000 12,075,000
Less valuation allowance............................. (13,133,000) (12,075,000)
------------ ------------
Net deferred tax assets.............................. $ -- $ --
============ ============
</TABLE>
Since the Company could not determine that it was more likely than
not that the deferred tax assets would be realized, a 100% valuation
allowance was provided in 1996, 1997, and 1998. Both deferred tax assets
and the valuation allowance decreased in 1998 by $272,000 as a result of
changes in expectations regarding multi-state apportionment allocations
as well as changes in expected state tax rates.
At December 27, 1998, the Company had tax net operating loss (NOL)
carryforwards of approximately $35 million and $12 million for Federal
and State tax purposes, which expire in varying amounts through 2012.
Should significant changes in the Company's ownership occur, the annual
amount of NOL carryforwards available for future use would be limited.
10. 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 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
relating to a written employment contract. The lawsuit was settled
during May of 1998 through binding arbitration with no current profit or
loss impact.
11. Slotting and Advertising Costs
Included in the balance sheet under "Prepaid Expenses and Other"
are slotting and advertising costs of $1,326,925 at December 28, 1997,
and $1,074,997 at December 27, 1998, relating primarily to slotting fees
paid or credited to club stores and grocery chains for shelf space
allocations. Total advertising expenses and slotting fees included in
Selling, General and Administrative expenses in the accompanying
statements of operations for 1996, 1997 and 1998 were $3,635,796,
$1,143,922 and $1,827,355, respectively. The 1996 amounts included
$780,106 in writedowns to net realizable value.
12. Significant Customers
Costco, Sam's Club Stores and Safeway each accounted for portions
of total revenues as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Costco............................... 41% 50% 46%
Sam's Club Stores.................... 0% 12% 33%
Safeway.............................. 9% 8% 5%
</TABLE>
At December 28, 1997, one customer, Costco, accounted for 37% of
trade accounts receivable. At December 27, 1998, Costco accounted for
38%, and Sam's Club Stores accounted for 28% of trade receivables.
The Company currently sells its products to six separate Costco
regions which make purchasing decisions independently of one another.
On a regular basis, these regions re-evaluate the products carried in
their stores. There can be no assurance that these Costco regions will
continue to offer Monterey Pasta's products in the future or continue to
allocate Monterey Pasta the same amount of shelf space. Purchasing
decisions for Sam's Club Stores ("Sam's"), the Company's second
largest customer, are made at the head office level with input from the
stores. While the Company is in the third year of its relationship with
Sam's, there can be no assurance that Sam's will continue to carry the
Company's products. Currently, the loss of either Costco or Sam's would
materially adversely affect the Company's business operations.
No other single customer accounted for more than 10% of revenues or
accounts receivable.
13. SUPPLEMENTAL CASH FLOW INFORMATION FOR 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH PAYMENTS:
Interest........................... $313,155 $255,145 $249,693
Debt issue costs................... 64,951 -- --
NON-CASH OPERATING ACTIVITIES:
Charges and adjustments to reserve
for discontinued operations....... 260,229 36,882 --
Reversal of restricted stock
purchase (Note 6) ................ -- -- 562,500
Fair value of options granted in
return for services (Note 6)...... -- 27,095 51,000
Expense paid in common stock....... 228,363 -- --
NON-CASH FINANCING AND INVESTING
ACTIVITIES:
Conversion of long term debt to
common stock...................... 4,461,412 -- --
Transfer of fixed assets to assets
held for sale..................... 326,701 -- --
Issuance of note receivable in
sale of subsidiary................ 2,500,000 -- --
Issuance of common stock in
payment of expenses or assets..... 235,000 -- --
Capitalization of leased equipment. 271,091 49,955 103,264
Deemed dividends on preferred and
private placement common stock
paid in shares.................... 1,050,000 227,225 --
Purchase of restricted shares for
note receivable (Note 6).......... -- 562,500 --
</TABLE>
14. Employee Benefit Plan
In 1996, the Company instituted a 401(k) Plan covering
substantially all full-time employees with six months of service. Under
the Plan, employees may elect to defer up to 15% of compensation
(subject to certain limitations). The Company matches one-half of
employee contributions up to 6% of compensation. In addition, the
Company may make an annual discretionary profit-sharing contribution.
Employee contributions, Company matching contributions and related
earnings are always 100% vested. Company profit-sharing contributions
and related earnings vest 20% a year, with 100% vesting after five years
of service. During 1996, 1997 and 1998, the Company's expense for
matching contributions was $21,970, $31,362 and $37,527, respectively;
there were no profit-sharing contributions for 1996, 1997 or 1998.
15. Discontinued Operations
In early 1996, the Company decided to discontinue the operations
of its restaurant and franchise subsidiaries, and wrote off the
investment in those subsidiaries effective as of December 31, 1995. In
early 1996, all operations of the franchising subsidiary, as well as
agreements with two franchisees, were terminated. In April 1996, the
Company's restaurant subsidiary, UFO, was sold to Upscale Acquisitions,
Inc. (Upscale), which is wholly-owned by Mr. Lance Mortensen (see Note
8). Mr. Mortensen is the Chief Executive Officer, president, and a
director of Upscale. He is also a stockholder and former director,
Chairman of the Board, President, and Chief Executive Officer of the
Company.
The purchase price for the shares of UFO sold to Upscale was
$1,000 cash plus a note executed by Upscale for $2,500,000. In
addition, under the agreement, the Company advanced $350,000 to UFO
subsequent to the purchase. The purchase note was accounted for under
the cost recovery method, which defers recognition of income (or
reduction of loss) until payments are received. The cash advances were
not accounted for under the cost recovery method but were fully reserved
at year end 1996 as possibly uncollectible. The note and advances were
written off during 1997.
Net revenues from discontinued operations for 1996 were $1,796,000
(prior to sale of UFO). Operating losses from discontinued operations
were $839,999 for 1996 (prior to sale of UFO). The 1996 losses from
business disposition and phaseout were charged directly to the reserves
established during 1995, as were other expenditures related to the
restaurant and franchising operations. During 1996, the reserves were
also reduced by $220,000 to reflect adjustments of estimates to the
actual Company expenditures. Remaining reserves of $388,000 at the end
of 1996, less a $37,000 recovery, were utilized during 1997.
16. Quarterly Information (unaudited)
The summarized quarterly financial data presented below and on the
following page reflect all adjustments which, in the opinion of
management, are of a normal and recurring nature necessary to present
fairly the results of operations for the periods presented.
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended 1997 Quarter Quarter Quarter Quarter 1997
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue....................... $6,535,502 $5,552,631 $5,199,556 $6,159,091 $23,446,780
Gross profit...................... 2,805,173 2,454,507 1,952,385 2,473,702 9,685,767
Operating Income (loss)........... (274,612) 237,286 349,336 390,390 702,400
Income (loss) from continuing
operations...................... (346,921) 183,244 274,663 363,420 474,406
Net Income (loss)................. ($346,921) $220,126 $274,663 $363,420 $511,288
Basic and diluted earnings/(loss)
per common share (Note 6): ($0.05) $0.01 $0.02 $0.03 $0.02
=========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended 1998 Quarter Quarter Quarter Quarter 1998
- ---------------------------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue....................... $5,982,859 $6,307,531 $6,705,847 $7,221,060 $26,217,297
Gross profit...................... 2,384,283 2,572,231 2,737,795 2,943,929 10,638,238
Operating Income ................. 351,384 653,554 660,185 662,207 2,327,330
Income from continuing
operations...................... 324,717 542,573 569,477 600,191 2,036,958
Net Income (loss)................. $324,717 $542,573 $569,477 $600,191 $2,036,958
Basic and diluted earnings per
common share (Note 6):.......... $0.02 $0.04 $0.05 $0.05 $0.16
=========== =========== =========== =========== ============
</TABLE>
17. Subsequent Events
On March 12, 1999 the Company purchased the operating assets and
inventory of Frescala Foods, Inc., a San Antonio, Texas based fresh pasta
and sauce producer with an emphasis on private label production, for a
consideration of $1,345,000 in cash and 300,000 options with immediate vesting
to purchase shares of the Company's common stock (see Note 4). The options
have an approximate fair market value of $145,000, an exercise price of
$2.33 per share, and a three-year expiration. Additionally, Frescala
owners could receive an earn-out based upon Frescala sales above a
predetermined level. The earn-out will be calculated during the first
year of combined operations. Funding for the transaction will come from
a new $750,000 two-year term note, use of existing accounts receivable
and inventory line, and cash flow from operations.
<PAGE>
Schedule II
MONTEREY PASTA COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Balance to Write-Offs Balance
Beginning Cost and Charged to End
of 1996 Expense Reserves of 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowances against Receivables--
Spoils, Returns, Adjustments and
Bad Debts....................... $153,267 $1,061,566 $701,016 $924,285
Receivable from Related Party..... -- 350,000 -- 350,000
Inventory Reserves--
Spoils and Obsolescence........... 40,000 55,000 40,000 55,000
<CAPTION>
Charged
Balance to Write-Offs Balance
Beginning Cost and Charged to End
of 1997 Expense Reserves of 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowances against Receivables--
Spoils, Returns, Adjustments and
Bad Debts....................... $924,285 $109,608 $701,016 $332,877
Receivable from Related Party..... 350,000 -- 350,000 --
Inventory Reserves--
Spoils and Obsolescence........... 55,000 55,000 55,000 55,000
<CAPTION>
Charged
Balance to Write-Offs Balance
Beginning Cost and Charged to End
of 1998 Expense Reserves of 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowances against Receivables--
Spoils, Returns, Adjustments and
Bad Debts....................... $332,877 $477,674 $498,143 $312,408
Inventory Reserves--
Spoils and Obsolescence........... 55,000 55,000 80,000 30,000
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the city of San Francisco, State of California, on the 17th day of
March, 1999.
MONTEREY PASTA COMPANY
By: /s/ R. LANCE HEWITT
R. Lance Hewitt
President and Chief
Executive Officer
By: /s/STEPHEN L. BRINKMAN
Stephen L. Brinkman
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
- -------------------------- ---------------------------------- -------------
<S> <C> <C>
/s/ CHARLES B. BONNER Director March 3, 1999
- -------------------------
Charles B. Bonner
/s/ FLOYD R. HILL Director March 5, 1999
- -------------------------
Floyd R. Hill
/s/ THOMAS E. KEES Director March 5, 1999
- -------------------------
Thomas E. Kees
/s/ R. LANCE HEWITT President, Chief Executive Officer March 10, 1999
- ------------------------- and Director
R. Lance Hewitt
/s/ VAN TUNSTALL Director March 4, 1999
- -------------------------
Van Tunstall
/s/ JAMES WONG Director March 5, 1999
- -------------------------
James Wong
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit Title
- -------- ------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation dated August 1, 1996 (incorporated by
reference from Exhibit B to the Company's 1996 Proxy)
3.2 Bylaws of the Company (incorporated by reference from Exhibit C
to the 1996 Proxy)
4.1 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)
4.2 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"))
4.3 Stockholder 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)
4.4 Amendment to Registration Rights Agreement, dated as of April 20, 1997
among the Company, Spelman and company, inc., and investor, amending the
Registration Rights Agreement entered into as of April 1996 (incorporated
by reference from Exhibit 4.9 filed with the Company's 1996 Form 10-K/A)
4.5 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 Company's 1996 Form 10-K/A)
4.6 Form of Warrant ("Sentra Warrant") for purchase of the 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 filed on May 6, 1997 ("1997 Amendment No. 1
to Form S-3"))
4.7* 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 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 Monterey County Production Facility Lease of the Company, as amended
(incorporated by reference from Exhibit 10.03 to the SB-2)
10.4 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)
10.5 Amendment No. 3 dated September 12, 1997 and Amendment No. 4 dated
February 6, 1998 to Monterey County Production Facility Lease of the
Company (incorporated by reference from Exhibit 10.5 filed with the
Company's September 27, 1998 Quarterly Report on Form 10-Q dated
November 4, 1998 ("1998 Q3 10-Q"))
10.6 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)
10.7 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)
10.8 Trademark Registration -- MONTEREY PASTA COMPANY, 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)
10.9 Trademark Registration -- MONTEREY PASTA COMPANY, 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)
10.10 Trademark Registration -- MONTEREY PASTA COMPANY, under Registration No.
1,953,489 registered on January 30, 1996 with the U.S. Patent and
Trademark Office (incorporated by reference from Exhibit 10.27 to the
1995 Form 10-K)
10.11 Registration Rights Agreement dated as of June 15, 1995 with the GFL
Advantage Fund Limited, as amended on October 13 and 19, 1995,
respectively, (incorporated by reference from Exhibit 10.02 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"))
10.12* 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 Q2 10-Q"))
10.13* 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)
10.14 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 Form S-3 filed on October 14, 1997 ("1997 Amendment No. 3 to Form S-3"))
10.15 Agreement regarding Employment, Trade Secrets, Inventions, and Competition
dated May 26, 1997 with Lance Hewitt (incorporated by reference from
Exhibit 10.48 of the 1997 Amendment No. 3 to Form S-3)
10.16 Employment Agreement dated August 25, 1997 with Mr. Stephen L. Brinkman
incorporated by reference from Exhibit 10.49 to the Company's September
28, 1997 Quarterly Report on form 10-Q filed on November 10, 1997)
10.17 First Amendment to Security and Loan Agreement dated July 24, 1997
between the Company and Imperial Bank (incorporated by reference from
Exhibit 10.50 in the Company's 1997 Form 10-K)
10.18 Second Amendment to Security and Loan Agreement dated July 24, 1997
between the Company and Imperial Bank (incorporated by reference from
Exhibit 10.18 filed with the Company's 1998 Q3 10-Q)
10.19 Security and Loan Agreement dated July 23, 1998 between the Company and
Imperial Bank (incorporated by reference from Exhibit 10.19 filed
with the Company's 1998 Q3 10-Q)
10.20 Addendum to Security and Loan Agreement dated July 23, 1998 between the
Company and Imperial Bank (incorporated by reference from Exhibit 10.20
filed with the Company's 1998 Q3 10-Q)
10.21 Agreement for Handling and Storage Services between the Company and
CS Integrated LLC dated February 8, 1999
10.22 Defined Benefit Administrative Service Agreement between the Company and
First Mercantile Trust dated December 15, 1998
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its subsidiary, Upscale
Food Outlets, Inc.
AGREEMENT FOR HANDLING AND STORAGE SERVICES
This is an agreement for handling & storage services between CS
Integrated LLC (CSI) and Monterey Pasta Co. (MPC)
The term of this agreement shall be for three (3) years commencing on
March 1, 1999 and expiring at midnight on February 28, 2002. This
agreement may be extended for additional one-year periods unless either
party to the agreement provides written notice to the other at least 90
days prior to their intention of terminating the agreement.
For the term of the agreement and any extensions thereof, CSI shall
provide handling service for food products placed in storage facilities
on the CSI premises. CSI shall provide sufficient skilled warehouse
labor and necessary equipment to receive food products to be placed in
storage by MPC, and deliver to trucks, rails cars or other carriers
designed by MPC. As consideration for such services, MPC agrees to pay
CSI $.30 per case received.
Additionally, CSI shall provide sufficient refrigerated storage space
for the product provided by MPC. Temperature in said storage space shall
be maintained at an average temperature of 29 degrees F. As
consideration for such services, MPC agrees to pay CSI $.12 per case
received and $.12 per case per month for each successive month product
remains in storage.
MPC agrees that receipts and deliveries of its product shall be
scheduled within the normal operating hours of CSI - 8:00 AM to 5:00
PM, Monday through Friday. MPC further agrees that invoices for
services will be paid within 30 days from the date of invoice, and
services outside the scope of the services described shall be billed at
a rate mutually agreed upon by CSI and MPC. Due to expected changes in
parameters of the required services and conditions, CSI and MPC agree to
examine at the anniversary date of each year of the agreement, the costs
and rates charged and adjust rates according to mutual agreement.
Due to the space and capital expenditure commitments made by CSI to
accommodate the requirements of MPC, MPC agrees to a minimum annual
throughput of 400,000 cases. If in any year of the agreement or
subsequent extension, annual cases received by CSI amounts to less than
400,000, CSI will bill MPC for the difference between 400,000 and actual
cases received at $.42 per case. In the event of sale of either MPC or
CSI, either party may terminate the agreement upon 90 day advance notice
to the other without penalty or responsibility for minimum volumes.
Additionally, MPC may terminate the agreement at any time, without
penalty, if there is a serious breach of services by, and communicated
to CSI and not remedied.
/s/ PAT ZIMMERMAN
Signed: __________________________________ Date:
02/05/99
Pat Zimmerman
CS Integrated, LLC
/s/ STEPHEN L. BRINKMAN
Signed: __________________________________ Date:
02/18/99
Monterey Pasta Company
FIRST Defined Contribution
MERCANTILE Administrative Service
TRUST Agreement
Schedule B
This Agreement is between Monterey Pasta Company (the "Employer") and
Central Trust Company, Inc. d/b/a First Mercantile Trust Administrative
Services, a wholly owner subsidiary of FMT Holding Co., (hereinafter
referred to as "FMT") and will become effective on 1/4/99 and shall
remain in effect from plan year to plan year unless changed or
terminated in writing by FMT or the Employer.
It is understood and agreed by the Employer that it is the
responsibility of the Employer to provide FMT with accurate and timely
information on all matters relating to the operation of the Plan.
I. Plan Administrator
The Employer agrees to assume the duties and responsibilities as Plan
Administrator or to appoint a Plan Administrator other than FMT and
agrees to indemnify and hold FMT (and it affiliates) harmless from any
claims arising out of the Plan Administrator's failure to perform its
duties.
II. Administration and Reporting
FMT agrees to function as the Contract Administrator for the Plan. FMT
does not render investment advice and is not the Plan Administrator, or
acts as legal adviser with regard to the Plan. The Employer agrees to
seek the advice of counsel, as the Employer deems necessary, as to
matters that might arise regarding the adoption and/or operation of the
plan.
While FMT performs numerous edit checks on the data provided by the
employer, it is agreed and understood that the Employers is ultimately
responsible for the accuracy of the data supplied.
As Contract Administrator, FMT agrees to provide the following:
A. Installation
1. A Document Questionnaire with current options available for the Plan
for completion by the Employer.
2. A Prototype or Volume Submitter Plan Options Document with Adoption
Agreement, completed in accordance with the Employer's instructions.
3. One Summary Plan Description
4. Personalized Enrollment Materials.
5. A Services Guide including forms for the administration of the Plan.
B. Administration
1. Annually performed the Actual Deferral Percentage Test (the "ADP
TEST") to determine whether the average rate for the highly
compensated employees is within the prescribed proportions to the
average deferral rate for the non-highly-compensated employees. The
Employer will be notified in the event that the Plan fails the ADP
Test.
2. Annually perform the Actual Contributed Percentage Test (the "ACP
Test") to determine whether the average contribution rare for the
highly compensated employees is within the prescribed proportions to
the average contribution rate for the non-highly compensated
employees. The Employer will be notified in the event that the Plan
fails the ACP Test.
3. Annually calculate the vested percentage of each participant's
account.
4. Maintain records for each participant's account of the amount
eligible for hardship withdrawals
5. Annually test to verify compliance with any and all of the following
sections of the Internal Revenue Code: 401(a) (26), 410(b), 402(g)
415, 404.
6. Prepare annual financial statements for the Employer that reflect all
financial transactions of the Plan and its participants.
7. Prepare Form 5500 Series (i.e., 5500, 5500-C/R, Schedule A and
Schedule P) and all schedules.
8. Annually allocate contributions, earnings, forfeitures and any other
activity which alters the value of plan assets.
9. Annually determine eligibility for participation, benefits or
contributions, forfeitures and allocation of earnings.
10.Calculate benefit payment processing (Termination, Age 70 1/2,
Hardship, Loans, etc.)
11.Prepare Trustee Letter
12.Prepare Summary Annual Report
13.Prepare Form 1099-R for distributions made during the year, as
processed by FMT. It is the Employer's responsibility to distribute
these forms to the participant.
III. Fees
The Schedules of Fees, attached, reflects the charges for the services
specified in this Agreement. Any changes in the Schedule of Fees will
be communicated to the Employer in writing at least 90 days prior to the
effective date of such change.
If FMT receives inaccurate information from the Employer which requires
reprocessing or correction of any allocations, valuations, distributions,
participant statement or their reports, FMT reserves the right to charge
the Employer its prevailing rates (as contained in the attached Schedule
of Fees) on a time-and-charge basis for the additional administrative
services necessary to correct such errors. FMT will not be responsible
for any such added costs incurred as a result of inaccurate or untimely
information provided by the employer. The Schedule of Fees does not
include investment-related commissions or direct express associated with
the services provided by FMT, e.g., travel expenses, special printing,
shipping, Federal Express or similar special delivery charges (if
requested). All such additional expenses and services must have prior
written approval of the Employer or the Plan Administrator.
In the event that the Employer fails to pay administrative fees in
accordance with the invoice payment provisions, it will hold FMT
harmless in the event that such failure results in the suspension or
cessation of administrative services by FMT. The Employer and/or Plan
Administrator is/are responsible for the prudent and timely activities
associated or connected with the ongoing administration of the Plan.
IV. MISCELLANEOUS
1. Assignability. This Agreement is not assignable by either party
hereto without the prior written consent of the other party, such
consent no to be unreasonably withheld.
2. Effect. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, successors,
survivors, administrators and assigns.
3. Modification. This Agreement may be amended or modified only by the
written consent of the parties.
4. Severability. If any one or more of the provision of this Agreement
shall for any reason, be illegal or invalid, such illegality or
invalidity shall not affect any other provisions of this Agreement
shall be enforced as if such illegal or invalid provision had not
been contained herein.
5. Notices. Any notice required to be given hereunder shall be in
writing and shall be sent by certified United States mail, postage
prepaid, return receipt requested, and such notice shall be effective
when mailed. Notices shall be given to the respective parties at the
addresses listed below or at any other address, as may from time to
time be designated by the party in writing delivered to the other
party hereto.
6. Headings. All headings used herein are for the ease of reference
only and in no way shall be construed as interpreting, decreasing or
enlarging the provisions of this Agreement.
7. Entire Understanding. This Agreement constitutes and contains the
entire understanding between the parties and supersedes all prior
oral or written statements dealing with the subject matter herein.
8. Applicable Law: Forum. The law of the State of Tennessee shall govern
this Agreement in all respects, including but not limited to the
construction and enforcement thereof. All disputes, actions, or
controversies arising out of or related to this Agreement or any
relationship created hereby between the parties shall be brought in
court of competent jurisdiction in Shelby County, Tennessee. Plan
Sponsor further agrees to pay all expenses, legal or otherwise,
including court costs and attorney fees incurred by FMT in collecting
any fee or other money due FMT under this Agreement.
9. Transition. Upon termination of the Agreement, FMT shall as soon
as administratively feasible following receipt of Plan Sponsor's
written request, provide at Plan Sponsor's actual cost such
information as may be required by the Plan Sponsor to assure a
continuation of the services being performed under the Agreement
either by the Plan Sponsor or a successor to FMT.
V. Termination of Services
Either party may terminate this Agreement by giving the other party
written notice at least 90 days in advance if the effective date of such
termination, except that any termination by FMT shall be based upon
breach of contract by the Employer. Such notice from the Employer must
also include the name and address of the new administrator and, if
appropriate the name(s) of the Successor Trustee(s). In the event this
Agreement is terminated prior to the end of a plan year, then the
administrative and trust accounting fees due for such partial year shall
be equal to the fee for the full plan year divided by 12 and then
multiplied by the number of months, including any partial month, during
which this Agreement was in effect for such partial year.
VI. Acknowledgment
The Employer acknowledges that it has consulted, to the extent the
employer deems necessary, with legal and tax advisers. Solely the
provisions of this Agreement will govern the actions of FMT. FMT shall
not be required to review any actions taken by the Employer or the Plan
Administrator and shall be fully protected in taking, permitting or
omitting any actions on the basis of the Employer's action. FMT shall
incur no liability or responsibility for acting at the direction of the
Plan Administrator.
Employer Name: Monterey Pasta Company
Address: 1528 Moffett Street
City, State, Zip: Salinas, CA 93905
By: /s/ STEPHEN L. BRINKMAN
_________________________________
(Authorized Individual)
Title: Chief Financial Officer
Date: 12/15/98
First Mercantile Trust
P.O. Box 1330
Cordova, TN 38088-1330
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the year ended December 27, 1998 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> Dec-27-1998
<PERIOD-START> Dec-28-1997
<PERIOD-END> Dec-27-1998
<PERIOD-TYPE> 12-MOS
<CASH> 61,645
<SECURITIES> 0
<RECEIVABLES> 2,374,973
<ALLOWANCES> 312,408
<INVENTORY> 1,813,653
<CURRENT-ASSETS> 5,229,114
<PP&E> 7,948,168
<DEPRECIATION> 3,188,936
<TOTAL-ASSETS> 10,835,280
<CURRENT-LIABILITIES> 3,628,296
<BONDS> 0
0
0
<COMMON> 39,389,656
<OTHER-SE> (32,680,433)
<TOTAL-LIABILITY-AND-EQUITY> 10,835,280
<SALES> 26,217,297
<TOTAL-REVENUES> 26,217,297
<CGS> 15,579,059
<TOTAL-COSTS> 15,579,059
<OTHER-EXPENSES> 8,310,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,068,093
<INCOME-TAX> 31,135
<INCOME-CONTINUING> 2,036,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,036,958
<EPS-PRIMARY> $0.16
<EPS-DILUTED> $0.16
</TABLE>
