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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 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
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MONTEREY PASTA COMPANY
DELAWARE 77-0227341
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1528 MOFFETT STREET
SALINAS, CALIFORNIA 93905
(Address of principal executive offices)
TELEPHONE: (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 April 28, 1999, 12,889,594 shares of common stock, $.001 par value, of
the registrant were outstanding.
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<PAGE>
MONTEREY PASTA COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 28, 1999 (unaudited)
and December 27, 1998
Condensed Consolidated Statements of Operations (unaudited) three
months ended March 28, 1999 and March 29, 1998
Condensed Consolidated Statements of Cash Flows (unaudited) three
months ended March 28, 1999 and March 29, 1998
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
Exhibit Index
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $422,047 $61,645
Accounts receivable, net........................ 2,612,124 2,062,565
Inventories .................................... 2,111,408 1,813,653
Prepaid expense and other ...................... 1,301,553 1,291,251
------------ ------------
Total current assets.......................... 6,447,132 5,229,114
Property and equipment, net ...................... 5,442,074 5,261,723
Intangible assets, net............................ 1,301,929 174,302
Deposits and other................................ 172,893 170,141
------------ ------------
Total assets.................................. $13,364,028 $10,835,280
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ 1,696,065 1,330,649
Accrued liabilities ............................ 665,860 518,420
Current portion of debt......................... 2,884,377 1,779,227
------------ ------------
Total current liabilities..................... 5,246,302 3,628,296
Long-term debt.................................... 557,231 497,761
Commitments and contingencies
Stockholders' equity:
Common stock.................................... 39,535,785 39,389,656
Accumulated deficit............................. (31,975,290) (32,680,433)
------------ ------------
Total stockholders' equity.................... 7,560,495 6,709,223
------------ ------------
Total liabilities and stockholders' equity.... $13,364,028 $10,835,280
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
First Quarter Ended
------------------------
March 28, March 29,
1999 1998
------------ -----------
<S> <C> <C>
Net revenues from continuing
operations.......................... $7,973,250 $5,982,859
Cost of sales......................... 4,895,914 3,598,576
------------ -----------
Gross profit.......................... 3,077,336 2,384,283
Selling, general and administrative... 2,271,773 2,032,899
------------ -----------
Operating income ..................... 805,563 351,384
Loss on disposition of assets......... (36,729) --
Other income, (expense), net.......... (1,961) 16,385
Interest expense, net................. (49,305) (43,052)
------------ -----------
Income from continuing operations
before provision for income
income taxes........................ 717,568 324,717
Provision for income taxes............ (12,426) --
------------ -----------
Net income from continuing
operations.......................... $705,142 $324,717
============ ===========
Basic and diluted income per share.... $0.06 $0.02
Weighted average common and common
equivalent shares outstanding....... 12,744,716 14,289,500
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 28, March 29,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income from operations............................ $705,142 $324,717
Adjustments to reconcile net income from
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization....................... 273,014 238,151
Provisions for allowances for bad debts,
returns, adjustments and spoils................... (146,382) 11,631
Loss on disposition of property and equipment....... 36,729 --
Expenses paid in common stock options............... -- 51,000
Changes in assets and liabilities:
Accounts receivable............................... (403,177) 730,643
Inventories....................................... (80,480) 36,485
Prepaid expenses and other........................ (13,054) 214,294
Accounts payable.................................. 365,416 (7,982)
Accrued expenses.................................. 147,440 (146,157)
------------ ------------
Net cash provided by operations................... 884,648 1,452,782
Cash flows from investing activities:
Acquisition of business operating assets............ (1,415,633) (109,599)
Repurchase of common stock.......................... -- (2,750,873)
Purchase of property and equipment.................. (274,363) (355,518)
------------ ------------
Net cash used in investing activities............. (1,689,996) (3,215,990)
Cash flows from financing activities:
Bank overdrafts..................................... -- (5,692)
Proceeds from revolving line of credit.............. 4,544,269 --
Repayments on revolving line of credit.............. (3,816,439) (250,000)
Proceeds from long term debt........................ 750,000 2,400,000
Repayment of long-term debt and capital
lease obligations.................................. (313,210) (655,164)
Proceeds from issuance of common stock.............. 1,130 740
------------ ------------
Net cash provided by financing activities......... 1,165,750 1,489,884
Net increase (decrease) in cash and cash equivalents.. 360,402 (273,324)
Cash and cash equivalents, beginning of period........ 61,645 410,228
------------ ------------
Cash and cash equivalents, end of period.............. $422,047 $136,904
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements have been prepared by
Monterey Pasta Company (the "Company") and are unaudited. Certain
amounts shown in the 1998 financial statements have been reclassified to
conform with the current presentation. The financial statements have
been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not necessarily include all information and footnotes
required by generally accepted accounting principles and should be read
in conjunction with the Company's 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 March 28, 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., a San Antonio, Texas based fresh
pasta and sauce producer with an emphasis on private label production.
The consideration to the seller consisted 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 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 $70,000, was allocated to identifiable fixed assets totaling $200,000
and inventories of $217,000. The balance of $1,143,000, which includes
trademarks and recipes not specifically quantifiable, was charged to
goodwill.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
------------ ------------
<S> <C> <C>
Production--Ingredients.................. $660,006 $865,693
Production--Finished goods............... 926,069 560,762
Paper goods and packaging materials...... 555,333 417,198
------------ ------------
2,141,408 1,843,653
Reserve for spoils and obsolescence...... (30,000) (30,000)
------------ ------------
$2,111,408 $1,813,653
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
------------ ------------
<S> <C> <C>
Machinery and equipment.................... $5,722,115 $5,024,208
Leasehold improvements..................... 1,852,956 1,852,958
Computers, office furniture and equipment.. 673,194 760,060
Vehicles................................... 310,942 310,942
------------ ------------
8,559,207 7,948,168
Less accumulated depreciation and
amortization............................. (3,394,764) (3,188,936)
------------ ------------
5,164,443 4,759,232
Construction in progress................... 277,631 502,491
------------ ------------
$5,442,074 $5,261,723
============ ============
</TABLE>
5. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt included
the following:
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
------------ ------------
<S> <C> <C>
Credit Facility:
Receivable and inventory revolver........ $1,251,086 $523,256
Equipment revolver....................... 233,332 274,999
Term loan................................ 750,000 --
Equipment term loan...................... 1,000,000 1,250,000
Capitalized leases payable................. 207,190 228,733
------------ ------------
3,441,608 2,276,988
Less current maturities.................. 2,884,377 1,779,227
------------ ------------
$557,231 $497,761
============ ============
</TABLE>
Credit Facility
The March 12, 1999 acquisition of Frescala Foods, Inc., with an
initial cash outlay of $1,345,000, necessitated the negotiation of a new
two-year term loan 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. At March 28, 1999
the following credit facility was in place with an expiration date of
7/22/99:
- - Accounts receivable and inventory revolver for up to $1,500,000
with interest at prime (7.75% at 3/28/99)
- - Equipment revolver for up to $500,000 with interest at prime
plus .25% (8.0% at 3/28/99), payable at $13,889 monthly, plus
interest
- - Term note for up to $2,000,000 plus interest at prime plus .25%
(8.00% at 3/28/99), payable at $83,333 monthly, plus interest
- - Term note for $750,000 plus interest at prime plus .25% (8.0%
at 3/28/99), payable at $31,250 monthly, plus interest
The equipment revolver and term notes 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.
6. Income Taxes
The Company's income tax expense for the three months ended March
28, 1999 consists of $12,426 for current State taxes. The remainder of
Federal and State of California income taxes were fully offset by net
operating loss carryforwards.
7. 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 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 March 28, 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 $7,973,000 for the
quarter ended March 28, 1999, as compared to $5,983,000 for the quarter
ended March 29, 1998, a 33% increase. The sales gain primarily resulted
from increased number of retail and club stores compared to first
quarter of 1998.
Gross profit was $3,077,000 or 39% of net revenues for the first
quarter 1999, compared to $2,384,000 or 40% for the first quarter of
1998. This compares to a 41% gross margin for the year ended December
27, 1998. The gross profit decline compared to year-end 1998 was
primarily caused by the write-off of obsolete packaging inventory.
Selling, general and administrative expenses for the
quarter ended March 28, 1999 were $2,272,000, an increase of $239,000 or
12% when compared to the same quarter last year when they were
$2,033,000. The increase is primarily attributable to variable selling
expenses associated with the 33% sales increase compared to first
quarter of 1998.
Depreciation and amortization expense, included in cost of sales and
selling, general and administrative expenses, was $273,000 or 3% of net
revenues for the quarter ended March 28, 1999, compared to $238,000 or
4% of net revenues for the first quarter of 1998. Amortization of
intangibles increased by $11,000 compared to first quarter of 1998
because of goodwill associated with the February 1998 acquisition of
certain assets of M.C. Rossi, Inc., and the March 1999 acquisition of
Frescala Foods, Inc.
There was a $37,000 loss on disposition of fixed assets for the
quarter ended March 28, 1999, compared to no gain or loss during the
first quarter of 1998. During the first quarter of 1999, the Company
disposed of obsolete computer equipment replaced as part of its process
of ensuring compliance with year 2000 issues.
Net interest expense was $49,000 for the first quarter of 1998,
compared to $43,000 for the same period in 1997. The net increase in
interest expense resulted from borrowings to repurchase common stock
from Clearwater Fund IV LLC in March 1998, and from a partial month's
interest associated with the borrowings to purchase the Frescala Foods,
Inc. assets on March 12, 1999.
Liquidity and Capital Resources
As discussed under "Credit Facility" in Note 6, the asset
acquisition of Frescala Foods, Inc. necessitated the addition of a new
term note in the amount of $750,000 payable over 24 months beginning in
April 1999, along with further borrowings on the Company's revolving
credit line. The Company owed the bank $3,234,000 at March 28, 1999
compared with $3,103,000 on March 29, 1998. The credit capacity is
now $4,750,000, of which $2,624,000 was outstanding on April 27, 1999.
Management believes that earnings before interest, taxes, depreciation,
and amortization (EBITDA) will be sufficient to service fixed monthly
payments plus interest (at present, approximately $1.9 million
annually), anticipated capital expenditures (approximately $1.1
million in 1999), and provide funds for reduction in working capital
borrowings. The Company's credit facility expires on July 22, 1999
and will have to be replaced or extended by that date.
During the three month period ended March 28, 1999, $885,000 of cash
was provided by the Company's operations, compared to $1,453,000 cash
provided in the first quarter, 1998. The 1998 decline, in spite of a
$472,000 improvement in EBITDA, was primarily related to a net increase
in other elements of working capital as a result of the rapid sales
expansion.
Sales and Marketing
The Company's sales and marketing strategy is twofold and targets
sustainable growth in distribution of its products and the introduction
of innovative new products to keep the Company positioned as the
category leader in the marketplace.
Expansion of the Company's club store business continued in the first
quarter of 1999 with the full rollout of its products to the 35
warehouses in Costco's Los Angeles division. In addition, the Company
introduced its products into Costco's San Diego division during the
quarter. Monterey Pasta products are now found in all operating
divisions of Costco. Distribution of the Company's products also
continues to grow with the national expansion of Sam's Club. The
Company's products are now found in over 390 Sam's Club Stores locations
nationwide.
During the first quarter of 1999 the Company's retail grocery
distribution increased significantly with the addition of more than 200
Ralph's stores in the Los Angeles market, and the addition of more than
150 Smart & Final locations in the western United States. The Company's
acquisition in March 1999 of Frescala Foods, Inc. added 750 retail
outlets to the Company's national distribution, including major regional
chains Fred Meyer, HEB, Randall's and King Soopers bringing the total
number of grocery and Club stores offering the Company's products to
approximately 4,400.
In keeping with its position as the category leader in product
innovation, late in the first quarter of 1999, the Company introduced a
new line of "Tortelloni Grandi" products, which feature the largest
tortelloni available in the marketplace. Initial offerings in the line
include Spinach and Cheese Tortelloni Grandi and Five Cheese Tortelloni
Grandi. In addition, the Company made several additions to its recently
introduced Restaurant Style line of pastas and sauces. These new
offerings included Chicken Rosemary Ravioli and Garden Fresh Marinara
Sauce.
Major Customers
Two of the Company's customers, Costco and Sam's Club Stores,
accounted for 45% and 37%, respectively, of the Company's sales for the
three months ended March 28, 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
eight consecutive quarters. At March 28, 1999, the Company had an
accumulated deficit of $31,975,000. 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 1999, assuming
that its existing bank loans can be extended when they expire in July
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. 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.
- - 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 37%,
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 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 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 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 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 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 $85,000. To date the Company has
incurred approximately $80,000 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, and an update of its personal computer network.
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
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. 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
None
Item 6. Exhibits and Reports on Form 8-K
The Company filed the following report on Form 8-K during the
quarter ended March 28, 1999.
- - Report on Form 8-K filed March 17, 1999 reported the
acquisition of the operating assets of Frescala Foods, Inc.
("Frescala Foods") effective March 12, 1999 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. The shareholders of Frescala Foods 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.
<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: April 28, 1999 By: /s/ R. LANCE HEWITT
---------------------------------
R. Lance Hewitt
President and Chief
Executive Officer
By: /s/ STEPHEN L. BRINKMAN
---------------------------------
Stephen L. Brinkman
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Number Exhibit title
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)
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 fled 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
(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
10.22
Defined Contribution Administrative Service Agreement between the
Company and First Mercantile Trust dated December 15, 1998
10.23
First Amendment to Security and Loan Agreement and Addendum thereto
between the Company and Imperial Bank dated July 23, 1998
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.
<PAGE>
FIRST AMENDMENT TO
SECURITY AND LOAN AGREEMENT
BETWEEN MONTEREY PASTA COMPANY
AND IMPERIAL BANK DATED JULY 23, 1998
This First Amendment ("Amendment") amends that certain Security and
Loan Agreement and the Addendum thereto (the "Addendum"), dated July
23, 1998, by and between Monterey Pasta Company ("Borrower") and
Imperial Bank ("Bank") (collectively, the Security and Loan Agreement
and the Addendum are referred to herein as the "Agreement") as
follows:
1. A new Paragraph 5.e is hereby added to the Agreement to read in its
entirety as follows:
"Year 2000 Compliance. Borrower and its subsidiaries, as
applicable, have reviewed the areas within their operations
and business which could be adversely affected by, and have
developed or are developing a program to address on a timely
basis, the Year 2000 Problem and have made related
appropriate inquiry of material suppliers and vendors, and
based on such review and program, the Year 2000 Problem will
not have a material adverse effect upon their financial
condition, operations or business as now conducted. "Year
2000 Problem" means the possibility that any computer
applications or equipment used by Borrower may be unable to
recognize and properly perform date sensitive functions
involving certain dates prior to and any dates on or after
December 31, 1999."
2. Paragraph 9.a of the Addendum is hereby amended to read in its
entirety as follows:
"At all times maintain a minimum tangible net worth (meaning
excess of all assets, excluding any value for goodwill,
trademarks, patents, copyrights, organization expense and other
similar intangible items, less its liabilities, plus subordinated
debt) of not less than $5,500,000. The minimum tangible net worth
shall increase by $200,000 each fiscal quarter end beginning March
31, 1999."
3. Paragraph 9.b of the Addendum is hereby amended to read in its
entirety as follows:
"At all times maintain a maximum ratio of total debt to tangible
net worth (total liabilities less subordinated debt divided by
tangible net worth), not to exceed 1.20:1."
4. Paragraph 9.d of the Addendum is hereby amended to read in its
entirety as follows:
"At all times maintain a current ratio (current assets divided by
current liabilities) of not less than 1.10:1."
4. 5. Paragraph 9.e of the Addendum is hereby amended to read in its
entirety as "Intentionally Omitted."
6. A new Paragraph 9.o is hereby added to the Agreement to read in its
entirety as follows:
"Year 2000 Compliance. Perform all acts reasonably
necessary to ensure that (a) Borrower and any business in
which Borrower holds a substantial interest, and (b) all
customers, suppliers and vendors whose compliance is likely
to be material to Borrower's business, become Year 2000
Compliant in a timely manner. Such acts shall include,
without limitation, performing a comprehensive review and
assessment of all Borrower's systems and adopting a detailed
plan, with itemized budget, for the remediation, monitoring
and testing of such systems. As used in this paragraph,
"Year 2000 Compliant" shall mean, in regard to any entity,
that all software, hardware, firmware, equipment, goods or
systems utilized by or material to the business operations
or financial condition of such entity, will properly perform
date sensitive functions before, during and after the year
2000. Borrower shall, immediately upon request, provide to
Bank such certifications or other evidence of Borrower's
compliance with the terms of this paragraph as Bank may from
time to time require."
7. Except as provided above, the Agreement remains unchanged.
8. This amendment is effective as of March 12, 1999, and the parties
hereby confirm that the Credit Agreement as amended is in full
force and effect.
Monterey Pasta Company Imperial Bank
"BORROWER" "BANK"
By: /s/ STEPHEN L. BRINKMAN By: /s/ BRIAN C. SANTOS
_______________________ ____________________________
Stephen L. Brinkman Brian C. Santos
Title: CFO and Secretary Title: Vice President
By: /s/ R. LANCE HEWITT
_______________________
R. Lance Hewitt
Title: CEO and President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED STATEMENT OF OPERATIONS, THE
CONDENSED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE
CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 422,047
<SECURITIES> 0
<RECEIVABLES> 2,612,124 <F1>
<ALLOWANCES> 0
<INVENTORY> 2,111,408
<CURRENT-ASSETS> 6,447,132
<PP&E> 8,836,838
<DEPRECIATION> 3,394,764
<TOTAL-ASSETS> 13,364,028
<CURRENT-LIABILITIES> 5,246,302
<BONDS> 0
0
0
<COMMON> 39,535,785
<OTHER-SE> (31,975,290)
<TOTAL-LIABILITY-AND-EQUITY> 13,364,028
<SALES> 7,973,250
<TOTAL-REVENUES> 7,973,250
<CGS> 4,895,914
<TOTAL-COSTS> 4,895,914
<OTHER-EXPENSES> 2,271,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,305
<INCOME-PRETAX> 717,568
<INCOME-TAX> 12,426
<INCOME-CONTINUING> 705,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,744,716
<EPS-PRIMARY> $0.06
<EPS-DILUTED> $0.06
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
