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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1999.
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from: _____ to: _____.
COMMISSION FILE NUMBER 0-22534-LA
MONTEREY PASTA COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 77-0227341
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1528 MOFFETT STREET
SALINAS, CALIFORNIA 93905
(Address of principal executive offices)
TELEPHONE : (831) 753-6262
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
At August 6, 1999, 12,916,316 shares of common stock, $.001 par value, of the
registrant were outstanding.
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MONTEREY PASTA COMPANY
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
June 27, 1999 and December 27, 1998 3
Condensed Consolidated Statements of Operations
(unaudited) Second Quarter Ended June 27, 1999 and June
28, 1998 and the
Six Months Ended June 27, 1999 and June 28, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 27, 1999 and June 28, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K and S-8 13
Signature Page 14
Exhibit Index 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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JUNE 27, 1999 DECEMBER 27, 1998
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ASSETS
Current assets:
Cash and cash equivalents.............................. $ 32,320 $ 61,645
Accounts receivable, net............................... 2,490,298 2,062,565
Inventories............................................ 2,151,282 1,813,653
Prepaid expenses and other............................. 1,037,552 1,291,251
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Total current assets........................... 5,711,452 5,229,114
Property and equipment, net.............................. 5,496,013 5,261,723
Intangible assets, net................................... 1,265,217 174,302
Deposits and other....................................... 152,816 170,141
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Total assets................................... $12,625,498 $10,835,280
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... 1,431,395 1,330,649
Accrued liabilities.................................... 482,580 518,420
Current portion of long-term debt...................... 1,961,389 1,779,227
------------ ----------
Total current liabilities...................... 3,875,364 3,628,296
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Long-term debt........................................... 147,728 497,761
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Commitments and contingencies............................
Stockholders' equity:
Common stock........................................... 39,644,885 39,389,656
Accumulated deficit.................................... (31,042,479) (32,680,433)
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Total stockholders' equity............................. 8,602,406 6,709,223
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Total liabilities and stockholders' equity..... $12,625,498 $10,835,280
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</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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SECOND QUARTER ENDED SIX MONTHS ENDED
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JUNE 27, 1999 JUNE 28, 1998 JUNE 27, 1999 JUNE 28, 1998
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Net revenues from continuing operations....... $ 9,099,526 $ 6,307,531 $ 17,072,776 $ 12,290,390
Cost of sales................................. 5,468,017 3,735,300 10,363,931 7,333,876
---------------- --------------- --------------- ----------------
Gross profit.................................. 3,631,509 2,572,231 6,708,845 4,956,514
Selling, general and administrative .......... 2,644,572 1,918,677 4,916,345 3,951,576
---------------- --------------- --------------- ----------------
Operating income (loss)....................... 986,937 653,554 1,792,500 1,004,938
Gain (loss) on disposition of assets.......... 20,500 ( 7,519) (16,229) ( 7,519)
Other income (expense), net................... ( 3,144) ( 3,933) (5,105) 11,922
Interest expense, net......................... ( 49,833) ( 81,761) (99,138) (124,283)
---------------- --------------- --------------- ----------------
Income from continuing operations before
provision for income taxes............... 954,460 560,341 1,672,028 885,058
Provision for income taxes.................... (21,649) (17,768) (34,075) (17,768)
---------------- --------------- --------------- ----------------
Net income from continuing operations......... 932,811 542,573 1,637,953 867,290
---------------- --------------- --------------- ----------------
Basic and diluted income per share............ $ 0.07 $ 0.04 $ 0.13 $ 0.06
---------------- --------------- --------------- ----------------
---------------- --------------- --------------- ----------------
Primary shares outstanding..................,, 12,579,768 12,541,812 12,561,515 13,415,656
Diluted shares outstanding.................... 12,969,956 12,541,812 12,857,336 13,415,656
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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SIX MONTHS ENDED
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JUNE 27, 1999 JUNE 28, 1998
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Cash flows from operating activities:
Net income from operations....................................... $ 1,637,953 $ 867,290
Adjustments to reconcile net income from continuing
to net cash provided by (used in) operating activities:
Depreciation and amortization............................. 573,362 487,853
Provisions for allowances for bad debts, returns,
adjustments and spoils................................ (141,404) 42,493
Loss on disposition of property and equipment......... 16,229 7,519
Expenses paid in common stock and options............. - 51,000
Changes in assets and liabilities:
Accounts receivable................................ (286,329) 207,745
Inventories........................................ (120,354) 107,536
Prepaid expenses and other......................... 253,699 551,823
Accounts payable................................... 100,746 220,556
Accrued expenses................................... (35,840) (352,472)
Deposits........................................... 17,325 -
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Net cash provided by operations....................... 2,015,387 2,191,343
Cash flows from investing activities:
Proceeds from sale of assets.............................. 20,500 5,293
Acquisition of business operating assets.................. (1,418,158) (109,599)
Purchase of property and equipment........................ (589,413) (589,929)
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Net cash used in investing activities............... (1,987,071) (694,235)
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Cash flows from financing activities:
Proceeds from revolving line of credit................ 8,292,804 1,475,468
Repayments on revolving line of credit................ (8,490,070) (1,918,084)
Proceeds from long term debt.......................... 750,000 2,400,000
Repayment of long term debt and capital lease
obligations......................................... (720,605) (967,693)
Repurchase of common stock............................ - (2,735,873)
Proceeds from issuance of common stock................ 110,230 740
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Net cash provided by financing activities.......... (57,641) (1,745,442)
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Net (decrease) in cash and cash equivalents...................... (29,325) (248,334)
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Cash and cash equivalents, beginning of period................... 61,645 410,228
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Cash and cash equivalents, end of period......................... $ 32,320 $ 161,894
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</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared
by Monterey Pasta Company (the "Company") and are unaudited. Certain amounts
shown in the 1998 financial statements have been reclassified to conform to
the current presentation. The financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not
necessarily include all information and footnotes required by generally
accepted accounting principles and should be read in conjunction with the
Company's 1998 Annual Report on Form 10-K. In the opinion of the Company, all
adjustments necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows as of June 27, 1999, and for
all periods presented, have been recorded. A description of the Company's
accounting policies and other financial information is included in the
audited consolidated financial statements as filed with the Securities and
Exchange Commission in the Company's Form 10-K for the year ended December
27, 1998. The consolidated results of operations for the interim quarterly
periods are not necessarily indicative of the results expected for the full
year.
2. BUSINESS ACQUISITION AND STATEMENT OF CASH FLOWS
On March 12, 1999 the Company purchased the operating assets and
inventory of Frescala Foods, Inc. ("Frescala"), a San Antonio, Texas based
fresh pasta and sauce producer with an emphasis on private label production.
The consideration to Frescala consisted of $1,345,000 in cash and fully
vested options to purchase 300,000 shares of the Company's common stock (see
Item 6). 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 came from a new $750,000
two-year term loan, use of existing accounts receivable and inventory line,
and cash flow from operations.
The total consideration of $1,490,000 plus related acquisition
costs of $73,000, was allocated to identifiable fixed assets totaling
$200,000 and inventories of $217,000. The balance of $1,146,000, which
includes trademarks and recipes not specifically quantifiable, was charged to
goodwill.
3. INVENTORIES
Inventories consisted of the following:
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JUNE 27, 1999 DECEMBER 27, 1998
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Production - Ingredients...................... $ 721,441 $ 865,693
Production - Finished Goods................... 878,805 560,762
Paper goods and packaging materials.......... 643,536 417,198
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2,243,782 1,843,653
Reserve for spoils and obsolescence..... (92,500) (30,000)
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Net inventory................................. $ 2,151,282 $ 1,813,653
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4. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
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JUNE 27 1999 DECEMBER 27, 1998
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Machinery and equipment........................ $ 5,856,862 $ 5,024,208
Leasehold improvements.......................... 1,905,477 1,852,958
Computers, office furniture and equipment....... 675,358 760,060
Vehicles........................................ 335,401 310,942
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8,773,098 7,948,168
Less accumulated depreciation and amortization.. (3,655,875) (3,188,936)
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5,117,223 4,759,232
Construction in progress.................... 378,790 502,491
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Property and equipment, net...................... $ 5,496,013 $ 5,261,723
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5. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt included the following:
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JUNE 27, 1999 DECEMBER 27, 1998
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Credit Facility:
Receivable and inventory revolver..... $ 325,990 $ 523,256
Equipment revolver.................... 191,665 274,999
Term Loan............................. 656,250 -
Equipment term loan................... 750,000 1,250,000
Capitalized leases...................... 185,212 228,733
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2,109,117 2,276,988
Less current maturities............... 1,961,389 1,779,227
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Long-term portion......................... $ 147,728 $ 497,761
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</TABLE>
CREDIT FACILITY
On August 2, 1999 the Company's credit facility was renewed for
another year. Upon renewal, the two remaining term notes were consolidated
into a new note for $1,250,000 to mature on August 7, 2000, with payments of
$104,167 per month and interest at prime (8.00% at 8/2/99).
The existing accounts receivable and inventory revolver was renewed
for another year to expire July 31, 2000 with a commitment of $1.5 million
and interest at prime (8.00% at 8/02/99). In addition, the Company's lender
approved a $2 million revolving term facility in the event of a need for
major capital expenditures and acquisitions, with interest rate to be
determined, and an expiration of August 5, 2004. The total credit facility is
$4.75 million.
The equipment revolver is amortized as a long-term loan in the
accompanying balance sheets as of June 27, 1999. It has since been repaid in
full.
6. INCOME TAXES
Except for $10,000 accrued for Federal and State alternative minimum
tax, Federal and State of California income taxes for the six months ended
June 27, 1999, were offset by net operating loss carryforwards. The tax
expense listed on the Statement of Operations for 1998 and 1999 comparable
periods is for the aforementioned alternative minimum tax (1999 only), and
certain State taxes.
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7. STOCKHOLDERS' EQUITY
COMMON STOCK
During the second quarter of 1999, warrants, with an exercise price
of $2.25, and an expiration date of March 27, 2000, representing 40,300
shares of company common stock, were exercised. These warrants were
originally issued in connection with a March 1997 private placement in which
the Company issued warrants to purchase 532,800 shares of common stock. There
are warrants remaining from the March 1997 private placement to purchase
492,500 shares of common stock, as well as warrants expiring in April 2003 to
purchase 400,750 shares of common stock at $6.50 per share issued in
connection with a 1996 private placement. In addition, employee options
representing 6,869 shares of common stock were exercised during the second
quarter of 1999.
In April 1997, the Company's then current Chief Executive Officer
agreed to purchase 550,000 shares of common stock based on an agreement
containing various time-served and performance restrictions with a full
recourse note due December 31, 1997. Certain of the performance restrictions
were not met and 250,000 shares were forfeited during 1997, leaving 300,000
shares outstanding at December 28, 1997. The note, with a remaining balance
of $562,500, was converted to 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 an option to purchase
such shares. The $51,000 fair value of the resulting option grant was
recorded as an expense during the first quarter of 1998.
During the second quarter of 1999, the former Chief Executive Officer of
the Company sold 5,705 shares and reduced the loan balance by $10,697. The
remainder of the 300,000 shares were sold by July 21, 1999, and the sum of
$551,803 was paid to the Company to retire the note.
8. LITIGATION AND CONTINGENCIES
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. 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 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,
cash flows, or results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
financial statements and related notes and other information included in this
report. The financial results reported herein do not indicate the financial
results that may be achieved by the Company in any future period.
Other than the historical facts contained herein, this Quarterly
Report contains forward-looking statements that involve substantial risks and
uncertainties. For a discussion of such risks and uncertainties, please see
the Company's Annual Report on Form 10-K for the year ended December 27,
1998. In addition to the risks and uncertainties discussed in the Annual
Report, the risks set forth herein, including the Company's recent operating
losses and ability to attract and retain qualified management, should be
considered.
BACKGROUND
Monterey Pasta Company was incorporated in June 1989 as a producer 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
8
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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 sells its pasta and pasta sauces through leading grocery
store chains and club stores. As of June 27, 1999, approximately 4,400
grocery and club stores offered the Company's products. The Company plans to
continue expansion of its distribution to grocery and club stores in its
current market area and to further its penetration in other geographic
regions of the U.S.
Monterey Pasta's objective is to become 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 the 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.
RESULTS OF OPERATIONS
Net revenues from continuing operations were $9,100,000 for the
second quarter ended June 27, 1999, as compared to $6,307,000 for the second
quarter ended June 28, 1998, a 44% increase. For the six months ended June
27, 1999, net revenues increased $4,783,000 to $17,073,000 from $12,290,000
for the six months ended June 28, 1998, a 39% increase. The increase in sales
over last year resulted primarily from the Company's additional club and
retail store distribution, and the Frescala acquisition, which comprised 7%
of second quarter sales.
9
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Gross profit was $3,632,000 or 40% of net revenues for the second
quarter 1999, compared to $2,572,000 or 41% for the second quarter of 1998.
For the six months ended June 27, 1999, gross profit was $6,709,000 or 39%
compared to $4,957,000 or 41% for the six months ended June 28, 1998. This
compares to a 41% gross margin for the year ended December 27, 1998. Gross
margins for the first six months were impacted by the writeoff of obsolete
packaging material, and the lower gross margins on Frescala sales. Gross
margins on Frescala sales are expected to increase in the third quarter,
since the San Antonio facility was closed June 30 with the production
absorbed into the Company's Salinas, California facility. The company expects
that the full impact of the improved Frescala gross margins will be felt in
the fourth quarter of 1999.
Selling, general and administrative expenses ("SG&A") for the second
quarter ended June 27, 1999, were $2,645,000, an increase of 38% as compared
to $1,919,000 in the same quarter last year. For the six months ended June
27, 1999, SG&A totaled $4,916,000, an increase of 24% as compared to
$3,952,000 in the same period last year. The increases compared to 1998 are
related to the sales increase, additional product demonstrations associated
with the added club store business, and full year expense for two marketing
positions. Management believes that the current level of SG&A expenses is
consistent with efficient operations, and additional expenses in future
months, mainly in the sales and marketing area, will be directly associated
with increased levels of profitable sales.
Depreciation and amortization expense, included in cost of sales and
SG&A, was $300,000 or 3% of net revenues for the quarter ended June 27, 1999,
compared to $250,000 or 4% of net revenues for the quarter ended June 28,
1998. For the six months ended June 27, 1999, depreciation and amortization
expense was $573,000, compared to $488,000 for the same period a year ago.
Gain on disposition of fixed assets was $21,000 for the second
quarter ended June 27, 1999, compared to an $8,000 loss for the second
quarter last year. For the six months ended June 27, 1999, loss on
disposition of fixed assets was $16,000, compared to a loss of $8,000 for the
six months ended June 28, 1998. The second quarter gain was related to
disposal of assets associated with the Frescala acquisition, while the first
quarter loss was a result of computer equipment disposed of as a part of the
Year 2000 compliance process.
Net interest expense was $50,000 for the quarter ended June 27,
1999, compared to $82,000 for the same quarter in 1998. For the six months
ended June 27, 1999, net interest expense was $99,000, compared to $124,000
for the six months ended June 28, 1998. The net decrease in interest expense
is a result of the additional cash generated from the increased profit level,
which reduced loan balances, reductions in interest rate by the Company's
lender, and reductions in prime rate.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended June 27, 1999, $2,015,000 of cash
was provided by the Company's operations, compared to $2,191,000 cash
provided in the first six months of 1998. The 1999 reduction is primarily
attributable to the substantial sales growth, and the resultant increase in
working capital.
The Company believes that its existing credit facilities, together
with cash flow from operations, is sufficient to meet its cash needs for
normal operations for the next twelve months.
SALES AND MARKETING
The Company's sales and marketing strategy is twofold. It targets
sustainable growth in distribution of its products, and the introduction of
innovative new products to keep the Company positioned as the gourmet
category leader in the marketplace.
In the second quarter of 1999, the Company continued to expand its
club store business with the introduction of its new Restaurant-Style pastas
and sauces into all Sam's Club locations. The Company's products are now
found in over 390 Sam's Clubs nationwide. In addition, Monterey Pasta
products have now been expanded to all operating divisions of Costco.
During the second quarter of 1999, the Company successfully
introduced its Restaurant-Style pastas and sauces and its new Tortelloni
Grandi line to the Northern California divisions of both Safeway and Lucky
Stores. This places the Company's premier product line in over 400 stores in
the affluent Northern California market.
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Maintaining its leadership position in product innovation, in the
second quarter of 1999, the Company introduced a new Gnocchi (potato
dumpling) into test markets. The initial flavor in the line is Potato
Parmesan, with additional flavors under development. The Company also
extended its "Tortelloni Grandi" line with the addition of new Italian
Sausage Tortelloni Grandi.
MAJOR CUSTOMERS
Two of the Company's customers, Costco and Sam's Club Stores,
accounted for 45% and 30%, respectively, of the Company's sales for the six
months ended June 27, 1999. 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 nine consecutive quarters. At June
27, 1999, the Company had an accumulated deficit of $31,042,000. There can
be no assurance that the Company will maintain its recent profitability in
the long term.
- - LIQUIDITY: NEED FOR ADDITIONAL CAPITAL. Management believes that its
operations and existing bank lines of credit will provide adequate
liquidity to meet the Company's planned capital and operating requirements
for normal operations through 2000, assuming that its existing bank loans
can be extended when they expire in July 2000. 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. The success of the Company depends
on its ability to retain key executives, and to motivate and retain other
key employees and officers. 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. There
can be no assurance that significant management turnover will not occur in
the future.
- - 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. This could result in an even more immediate and
significant adverse effect on the trading price of the Company's common
stock upon announcement of the shortfall or quarterly operating results.
11
<PAGE>
- - 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 which may be associated with even an isolated event. The Company has
a modern production facility, employs what it believes is state-of-the-art
thermal processing, temperature-controlled storage, HAACP programs intended
to insure food safety, and has obtained USDA approval for its production
plant. However, there can be no assurance that the Company's procedures
will be adequate to prevent the occurrence of such events.
- - DEPENDENCE ON MAJOR CUSTOMERS. In first quarter of 1999, two customers,
Costco and Sam's Club Stores accounted for 45% and 30%, respectively, of
the Company's total 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 390 Sam's Club Stores.
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. Loss of either of these customers, Costco or Sam's
Club Stores, would have a material adverse effect on the Company.
- - SEASONALITY AND QUARTERLY RESULTS. The Company's grocery and club store
accounts are expected to experience seasonal fluctuations to some extent.
The Company's business in general may also be affected by a variety of
other factors, including but not limited to general economic trends,
competition, marketing programs, and special or unusual events.
- - COMPETITION AND DEPENDENCE ON COMMON CARRIERS. The Company's business
continues to be dominated by several very large competitors which have
significantly greater resources than the Company; such competitors can
outspend the Company and negatively affect the Company's market share and
results of operations. The Company also continues to be dependent on common
carriers to distribute its products. Any disruption in its distribution
system or increase in the costs thereof could have a material adverse
impact on the Company's business.
- - MARKETING AND SALES RISKS. The future success of the Company's efforts will
depend on a number of factors, including whether grocery and club store
chains will continue to expand the number of their individual stores
offering the Company's products and whether allowances and other incentives
will expand retail distribution. Expansion into new markets increases the
risk of significant product returns resulting from the Company's supply of
slower selling items to its customers. In addition, grocery and club store
chains continually re-evaluate the products carried in their stores and no
assurances can be given that the chains currently offering the Company's
products will continue to do so in the future. Should these channels choose
to reduce or eliminate products, the Company could experience a significant
reduction in its product sales. As indicated previously, the Company
remains dependent on the use of slotting allowances and other incentives to
expand retail distribution. In order to reduce risk, the Company has
significantly reduced expansion into new markets requiring such major
expenditures.
- - 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. 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 the work necessary to make its
internal personal computer network year 2000 compliant during March 1999.
Updating telephones, facsimile machines and labeling equipment for year
2000 was completed during the second quarter of 1999.
In addition, the Company has been in contact with its suppliers and other
third parties to determine the extent to 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
12
<PAGE>
appropriately resolving all material internal systems and third party
issues. The Company has used 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 $85,000. To date the Company has incurred
approximately $84,000 of that expense for assessment of the year 2000
issue, development of a modification plan, the installation of a year 2000
compliant version of its financial, inventory, and production software, an
update of its personal computer network, telephone and voice mail system
and packaging software.
The final 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
During June of 1999 the Company closed its San Antonio, Texas facility
and incorporated the production into its Salinas, California facility. Certain
equipment was moved to the Salinas facility and a small amount of equipment was
sold with a gain of $20,000. Non-recurring expenses associated with the plant
closure such as severance, plant cleanup, and freight were included in second
quarter expenses. The one-time expenses were offset from sales of Frescala
product so there was no material impact on second quarter operating results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND S-8
The Company filed the following report on Form 8-K during the first
six months ended June 27, 1999.
- Report on Form 8-K filed March 17, 1999 reported the acquisition
of the operating assets of Frescala Foods, Inc. effective March
12, 1999 for a consideration of $1,345,000 in cash and fully
vested options to purchase 300,000 shares of the Company's common
stock. The shareholders of Frescala may receive additional cash
consideration pursuant to earnout provisions in the Asset Purchase
Agreement if the Company achieves enumerated sales milestones
relating to existing and new business.
Filing on Form S-8 on April 23, 1999 was made to register 300,000
shares of Company common stock issued in conjunction with the March 12, 1999
purchase of the operating assets of Frescala Foods, Inc.
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MONTEREY PASTA COMPANY
Date: August 6, 1999 By: /s/ R. LANCE HEWITT
----------------------------
R. Lance Hewitt
Chief Executive Officer
By: /s/ STEPHEN L. BRINKMAN
----------------------------
Stephen L. Brinkman
Chief Financial Officer
14
<PAGE>
INDEX TO EXHIBITS
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
Q1 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 & Co., Inc. and investor, amending the
Registration Rights Agreement entered into as of April, 1996
(incorporated by reference from Exhibit 4.9 filed with the
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 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 and Design, under
Registration No. 1,945,131, registered on January 2, 1996 with the
U.S. Patent and trademark Office (incorporated by reference from
Exhibit 10.25 to the 1995 Form 10-K)
15
<PAGE>
10.9 Trademark Registration--MONTEREY PASTA COMPANY and Design, under
Registration No. 1,951,624, registered on January 23, 1996 with the
U.S. Patent and Trademark Office (incorporated by reference from
Exhibit 10.26 to the 1995 Form 10-K)
10.10 Trademark Registration--MONTEREY PASTA COMPANY and Design, under
Registration No. 1,953,489, registered on January 30, 1996 with the
U.S. Patent and Trademark Office (incorporated by reference from
Exhibit 10.27 to the 1995 Form 10-K)
10.11 Registration Rights Agreement dated as of June 15, 1995 with GFL
Advantage Fund Limited, as amended on October 13 and 19, 1995,
respectively (incorporated by reference from Exhibit 10.2 to the
1995 Q2 10-Q, and Exhibits 10.6 and 10.7 to the Company's S-3
Registration Statement No. 33-96684, filed on December 12, 1995
("1995 S-3"))
10.12* 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 Mr. R. Mr. 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 to Exhibit 10.49, in 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 5, 1999 (incorporated by
reference to Exhibit 10.21 filed with the Company's 1998 Form 10-K
on March 17, 1999 ("1998 Form 10-K"))
10.22 Defined Contribution Administrative Service Agreement between the
Company and First Mercantile Trust dated December 15, 1998
(incorporated by reference to Exhibit 10.22 filed with the
Company's 1998 Form 10-K)
10.23 First Amendment to Security and Loan Agreement and Addendum thereto
between the Company and Imperial Bank dated July 23, 1998
(incorporated by reference to Exhibit 10.23 filed with the
Company's March 28, 1999 Quarterly Report on Form 10-Q filed on
April 28, 1999)
10.24 Agreement for Purchase and Sale of Assets dated as of March 12,
1999, by and among the Company and the shareholders of Frescala
Foods, Inc. (incorporated by reference from Exhibit 2.1 filed with
the Company's 8-K on March 17, 1999)
27.1 Financial Data schedule
* Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its former subsidiary,
Upscale Food Outlets, Inc.
16
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