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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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 26, 2000.
/ / 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 APRIL 20, 2000, 13,243,693 shares of common stock, $.001 par value, of the
registrant were outstanding.
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MONTEREY PASTA COMPANY
FORM 10-Q
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets March 26, 2000
(unaudited) and December 26, 1999 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended March 26, 2000 and March 28, 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 26, 2000 and March 28, 1999 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 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
Index to Exhibits 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONTEREY PASTA COMPANY
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CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 26, 2000 DECEMBER 26, 1999
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ASSETS
Current assets:
Cash and cash equivalents.............................. $ 66,979 $ 71,399
Accounts receivable, net............................... 3,637,418 3,813,611
Inventories............................................ 2,926,755 2,703,314
Deferred tax assets - short term....................... 1,036,000 1,036,000
Prepaid expenses and other............................. 423,977 487,433
------------ ------------
Total current assets........................... 8,091,129 8,111,757
Property and equipment, net............................ 7,876,451 6,789,265
Deferred tax assets - long term........................ 2,394,000 2,394,000
Intangible assets, net................................. 1,239,710 1,281,277
Deposits and other..................................... 96,317 89,716
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Total assets................................... $ 19,697,607 $ 18,666,015
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 2,472,608 $ 2,752,967
Accrued liabilities.................................... 470,512 542,709
Current portion of debt ............................... 663,794 688,186
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Total current liabilities...................... 3,606,914 3,983,862
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Long-term debt........................................... 64,072 72,577
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Commitments and contingencies............................
Stockholders' equity:
Common stock .......................................... 40,585,189 40,262,579
Accumulated deficit.................................... (24,558,568) (25,653,003)
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Total stockholders' equity............................. 16,026,621 14,609,576
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Total liabilities and stockholders' equity..... $ 19,697,607 $ 18,666,015
============ ============
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The accompanying notes are an integral part of these consolidated financial
statements.
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
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MARCH 26, 2000 MARCH 28, 1999
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Net revenues from continuing operations .................................. $ 11,155,539 $ 7,973,250
Cost of sales ............................................................ 7,031,458 4,895,914
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Gross profit ............................................................. 4,124,081 3,077,336
Selling, general and administrative ...................................... 2,931,555 2,271,773
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Operating income ......................................................... 1,192,526 805,563
Loss on disposition of assets............................................. - (36,729)
Other income (expense), net............................................... 3,926 ( 1,961)
Interest expense, net..................................................... (27,018) (49,305)
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Income from continuing operations before provision for
income taxes ............................................................. 1,169,434 717,568
Provision for income taxes................................................ (75,000) (12,426)
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Net income from continuing operations.......................... .......... $ 1,094,434 $ 705,142
============ ============
Basic and diluted income per share: ...................................... $ 0.08 $ 0.06
============ ============
Primary shares outstanding ............................................... 13,048,111 12,543,261
Diluted shares outstanding ............................................... 13,619,031 12,744,716
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MONTEREY PASTA COMPANY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
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MARCH 26, 2000 MARCH 28, 1999
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Cash flows from operating activities:
Net income from operations.................................... $ 1,094,434 $ 705,142
Adjustments to reconcile net income from operations to
net cash provided by (used in) operating activities:
Depreciation and amortization.......................... 324,529 273,014
Provisions for allowances for bad debts, returns,
adjustments and spoils ......................... 183,790 (146,382)
Loss on disposition of property and equipment.......... - 36,729
Changes in assets and liabilities:
Accounts receivable............................. ( 7,597) (403,177)
Inventories..................................... ( 223,441) ( 80,480)
Prepaid expenses and other...................... 56,856 ( 13,054)
Accounts payable................................ ( 280,359) 365,416
Accrued expenses................................ ( 72,197) 147,440
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Net cash provided by operations................... 1,076,015 884,648
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Cash flows from investing activities:
Acquisition of business operating assets............... - (1,415,633)
Purchase of property and equipment .................... (1,370,149) (274,363)
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Net cash used in investing activities............ (1,370,149) (1,689,996)
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Cash flows from financing activities:
Proceeds from revolving line of credit ............ 4,171,378 4,544,269
Repayments on revolving line of credit ............ (4,179,591) (3,816,439)
Proceeds from long term debt ...................... - 750,000
Repayment of long-term debt and capital
lease obligations............................... ( 24,684) ( 313,210)
Proceeds from issuance of common stock............. 322,611 1,130
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Net cash provided by financing activities....... 289,714 1,165,750
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Net increase (decrease) in cash and cash equivalents.......... ( 4,420) 360,402
Cash and cash equivalents, beginning of period................ 71,399 61,645
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Cash and cash equivalents, end of period...................... $ 66,979 $ 422,047
============= =============
</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 1999 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 1999 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 26, 2000, 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 26, 1999. 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 plus fully vested options to purchase
300,000 shares of the Company's common stock. The options had an approximate
fair market value of $145,000, an exercise price of $2.33 per share, and a
three-year expiration. Additionally, Frescala owners were eligible to receive an
earn-out based upon Frescala sales above a predetermined level. The earn-out was
calculated during the fourth quarter of 1999 and an additional $98,000 was paid
and charged to goodwill. 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.
During the first quarter of 1999 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. The $98,000 earn-out and an additional $2,000 in acquisition costs
were charged to goodwill over the balance of 1999.
3. INVENTORIES
Inventories consisted of the following:
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MARCH 26, 2000 DECEMBER 26, 1999
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Production - Ingredients ............................... $ 1,161,278 $ 855,477
Production - Finished Goods ............................. 888,324 979,616
Paper goods and packaging materials ..................... 904,653 895,721
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$ 2,954,255 $ 2,730,814
Reserve for spoils and obsolescence ..................... (27,500) (27,500)
--------------- -------------
$ 2,926,755 $ 2,703,314
=============== =============
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4. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
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MARCH 26, 2000 DECEMBER 26, 1999
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Machinery and equipment................................... $ 7,048,564 $ 6,623,919
Leasehold improvements.................................... 1,995,909 1,993,221
Computers and software.................................... 577,501 568,117
Vehicles 380,575 335,401
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10,002,549 9,520,658
Less accumulated depreciation and amortization............ (4,463,271) (4,180,308)
--------------- --------------
5,539,278 5,340,350
Construction in progress.................................. 2,337,173 1,448,915
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$ 7,876,451 $ 6,789,265
=============== ==============
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5. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt included the following:
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MARCH 26, 2000 DECEMBER 26, 1999
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Credit Facility:
Receivable and inventory revolver...................... $ 596,672 $ 604,885
Capitalized leases......................................... 131,194 155,878
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727,866 760,763
Less current maturities................................ 663,794 688,186
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$ 64,072 $ 72,577
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CREDIT FACILITY
At March 26, 2000 the following credit facility was in place with an
expiration date of 7/31/00:
- Accounts receivable and inventory revolver for up to $1,500,000
with interest at prime (9.00% at 3/26/00)
- Equipment revolver commitment for up to $500,000 with interest at
prime
- Term note facility for up to $2,750,000 with rate and terms to be
negotiated
The equipment revolver and term note commitments are expected to be renewed
and, if utilized, will continue to be amortized as long term notes.
6. INCOME TAXES
The Company's income tax expense for the three months ended March 26, 2000
consists of estimated State and Federal taxes and Delaware corporation tax. The
remainder of Federal and State of California income taxes was fully offset by
net operating loss carryforwards.
7. LITIGATION, CONTINGENCIES, AND SUBSEQUENT EVENT
On February 2, 2000 the United States District Court for the District of
Delaware denied a motion to dismiss a lawsuit against Clearwater Fund IV, Ltd.
and Clearwater Fund IV, LLC, stockholders of the Company, (collectively,
"Clearwater"), Mark Levy v. Clearwater Fund IV, Ltd. and Clearwater Fund IV, LLC
and Monterey Pasta Company, United States District Court for the District of
Delaware, Case No. 99-004-SLR. The lawsuit alleges a violation of Section 16(b)
of the Securities Exchange Act of 1934, as amended, in connection with an
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alleged purchase and sale of the Company's stock within a six-month period. The
Company has been named as a nominal defendant in the lawsuit. Plaintiff seeks
the return of approximately $1,064,000 in alleged profit and Clearwater contests
the claim. During the week of April 10, 2000, the parties reached an agreement
in principal whereby Clearwater will pay $700,000 to the Company in settlement
of the claim asserted by the plaintiff. Plaintiff's counsel is expected to apply
to the court for attorney's fees of approximately $226,000 from the settlement.
As part of the settlement, Clearwater and the Company expect to exchange mutual
releases. Settlement agreements have not yet been finalized. The proposed
settlement is subject to approval by the Board of Directors of the Company.
Plaintiff's attorneys' fees application is subject to approval by the court.
Accordingly, there can be no assurance at this time that the Company will
receive funds as part of the lawsuit, and if the settlement is not finalized,
one or more of the parties to the lawsuit may make a claim for damages against
the Company, which, even if not successful, would cause the Company to expend
money to resolve. There are no other 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.
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 26, 1999. 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 26, 2000, approximately 4,900 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:
- 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.
- 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, sauces,
gnocchi, and soups.
- 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.
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- 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.
- 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.
- 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 $11,156,000 for the quarter
ended March 26, 2000, as compared to $7,973,000 for the quarter ended March 28,
1999, a 40% increase. The sales gain primarily resulted from increased number of
retail and club stores as well as certain "same store growth" compared to first
quarter of 1999.
Gross profit was $4,124,000 or 37% of net revenues for the first quarter
2000, compared to $3,077,000 or 39% for the first quarter of 1999. This compares
to a 38% gross margin for the year ended December 26, 1999. The gross margin
decline was associated with extra costs in the fourth quarter of 1999 which
resulted in high cost beginning inventory, and some additional costs associated
with the production of two new SKUs until proper machinery could be deployed.
Selling, general and administrative expenses for the quarter ended March
26, 2000 were $2,932,000, an increase of $660,000 or 29% when compared to the
same quarter last year when they were $2,272,000. The increase is primarily
attributable to variable selling expenses associated with the 40% sales increase
compared to first quarter of 1999 and additional club store demo expenses
associated with new stores and new SKUs.
Depreciation and amortization expense, included in cost of sales and
selling, general and administrative expenses, was $325,000 or 3% of net revenues
for the quarter ended March 26, 2000, compared to $273,000 or 3% of net revenues
for the first quarter of 1999. Amortization of intangibles increased by $26,000
compared to first quarter of 1999 because of goodwill associated with the March
1999 acquisition of Frescala Foods, Inc.
There was no gain or loss on disposition of fixed assets for the quarter
ended March 26, 2000, compared to a $37,000 loss during the first quarter of
1999 that was associated with the disposal of outdated computer equipment.
Net interest expense was $27,000 for the first quarter of 1999, compared to
$49,000 for the same period in 1997. The net decrease in interest expense
resulted from reduction in borrowings because of increased profitability.
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LIQUIDITY AND CAPITAL RESOURCES
The Company repaid all of its term loan obligations by the end of third
quarter 1999, and currently has no term loan obligations. The $597,000
outstanding on the operating line as of 3/26/00 was used to finance a portion of
the Company's $3.5 million capital expansion program announced in October 1999.
Management feels that a combination of the operating line and cash flow from
operations will be sufficient to finance the estimated $1.7 million in capital
expense remaining in 2000 with no need to use the $3.25 million term loan
facility. The Company's credit facility expires on July 31, 2000 and will have
to be replaced or extended by that date.
During the three month period ended March 26, 2000, $1,076,000 of cash was
provided by the Company's operations, compared to $885,000 cash provided in the
first quarter, 1999. The 2000 increase was associated with the $440,000 increase
in net income plus depreciation and amortization, partially offset by an
increase in working capital elements as part of the 40% sales growth.
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 2000, with the introduction of additional items including the
Company's new Potato Parmesan Gnocchi into national distribution with Sam's Club
locations throughout the U.S. The company also expanded the distribution of its
gnocchi into various divisions of Costco, as well as select retail chains.
During the first quarter of 2000 the company entered into a private label
supply relationship with a major retail chain with an initial placement of four
SKUs in 400 stores. In addition, the Company was successful in placing its new
Homestyle-Fresh soups into retail distribution with Vons stores in the Southern
California market.
In keeping with its strategy of bringing innovative, new products to the
marketplace, in the first quarter of 2000 the Company worked aggressively to
develop a new line of refrigerated fresh pierogies, several additions to its
already successful line of fresh gnocchi, and additions to its line of
Homestyle-Fresh soups. These products will be introduced to both retail and
warehouse club store accounts in the second quarter of 2000.
MAJOR CUSTOMERS
Two of the Company's customers, Costco and Sam's Club Stores, accounted for
51% and 31%, respectively, of the Company's sales for the three months ended
March 26, 2000. No other customer accounted for greater than 10% of net revenues
for the period. The Costco sales growth vs. first quarter 1999, when it
represented 45% of sales, is related to the addition of 3 new divisions picked
up during the last 10 months of 1999.
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:
- - 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 twelve consecutive quarters. At March 26, 2000, the Company had an
accumulated deficit of $24,559,000. 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 and capital expenditures through 2000, assuming that
its existing bank lines can be extended when they expire in July of 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
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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 impact 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 the first quarter of 2000, two customers,
Costco and Sam's Club Stores, accounted for 51% and 31%, respectively, of
the Company's total revenues. The Company currently sells its products to
seven 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 also supplies its products to approximately 420 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, and this relationship is expected to continue, 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
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Company also continues to be dependent on common carriers to distribute its
products. Any disruption in its distribution system or increase in the
costs thereof could have a material adverse impact on the Company's
business.
- - MARKETING AND SALES RISKS. The future success of the Company's efforts will
depend on a number of factors, including whether grocery and club store
chains will continue to expand the number of their individual stores
offering the Company's products and whether allowances and other incentives
will expand retail distribution. Expansion into new markets increases the
risk of significant product returns resulting from the Company's supply of
slower selling items to its customers. In addition, grocery and club store
chains continually re-evaluate the products carried in their stores and no
assurances can be given that the chains currently offering the Company's
products will continue to do so in the future. Should these channels choose
to reduce or eliminate products, the Company could experience a significant
reduction in its product sales. As indicated previously, the Company
remains dependent on the use of slotting allowances and other incentives to
expand retail distribution. In order to reduce risk, the Company has
significantly reduced expansion into new markets requiring such major
expenditures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 2, 2000 the United States District Court for the District of
Delaware denied a motion to dismiss a lawsuit against Clearwater Fund IV, Ltd.
and Clearwater Fund IV, LLC, stockholders of the Company, (collectively,
"Clearwater"), Mark Levy v. Clearwater Fund IV, Ltd. and Clearwater Fund IV, LLC
and Monterey Pasta Company, United States District Court for the District of
Delaware, Case No. 99-004-SLR. The lawsuit alleges a violation of Section 16(b)
of the Securities Exchange Act of 1934, as amended, in connection with an
alleged purchase and sale of the Company's stock within a six-month period. The
Company has been named as a nominal defendant in the lawsuit. Plaintiff seeks
the return of approximately $1,064,000 in alleged profit and Clearwater contests
the claim. During the week of April 10, 2000, the parties reached an agreement
in principal whereby Clearwater will pay $700,000 to the Company in settlement
of the claim asserted by the plaintiff. Plaintiff's counsel is expected to apply
to the court for attorney's fees of approximately $226,000 from the settlement.
As part of the settlement, Clearwater and the Company expect to exchange mutual
releases. Settlement agreements have not yet been finalized. The proposed
settlement is subject to approval by the Board of Directors of the Company.
Plaintiff's attorneys' fees application is subject to approval by the court.
Accordingly, there can be no assurance at this time that the Company will
receive funds as part of the lawsuit, and if the settlement is not finalized,
one or more of the parties to the lawsuit may make a claim for damages against
the Company, which, even if not successful, would cause the Company to expend
money to resolve. There are no other 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.
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
None
12
<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 20, 2000 By: /s/ R. LANCE HEWITT
---------------------------
R. Lance Hewitt
President and Chief Executive Officer
By: /s/ STEPHEN L. BRINKMAN
---------------------------
Stephen L. Brinkman
Chief Financial Officer
13
<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-KA)
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, 1999 to Monterey County Production Facility Lease of the
Company (incorporated by reference from Exhibit 10.5 filed with the
Company's September 27, 1999 Quarterly Report on Form 10-Q dated November
4, 1999 ("1999 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)
14
<PAGE>
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. 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 1999 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, 1999 (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, 1999 (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)
10.25 Royalty agreement dated July 12, 1999 between Company and Chet's Gourmet
Foods, Inc. for soups (incorporated by reference to Exhibit 10.25, in
the Company's September 26, 1999 Quarterly Report on Form 10-Q filed
on November 9, 1999 ("1999 Q3 10-Q"))
10.26 Storage Agreement Manufactured Products dated August 3, 1999 between the
Company and Salinas Valley Public Warehouse for storage and handling of
Company's product in Monterey County, California storage facility
(incorporated by reference to Exhibit 10.26, filed with the Company's
1999 Q3 10-Q)
10.27 Commercial Lease dated August 10, 1999 between Company and Salinas Valley
Public Warehouse for storage space in Monterey County, California
(incorporated by reference to Exhibit 10.27, filed with the Company's
1999 Q3 10-Q)
10.28 Rental Agreement dated September 6, 1999 between Company and Porter
Family Trust for storage space in Monterey County, California
(incorporated by reference to Exhibit 10.28 filed with the Company's
1999 Q3 10-Q)
10.29 Royalty agreement dated September 15, 1999 between Company and Chet's
Gourmet Foods, Inc. for meatball and sauce item (incorporated by
reference to Exhibit 10.29, filed with the Company's 1999 Q3 10-Q)
10.30 Credit Agreement between the Company and Imperial Bank dated August 2,
1999 (incorporated by reference to Exhibit 10.30 filed with the
Company's 1999 Form 10-K on February 18, 2000 ("1999 Form 10-K"))
10.31 First Amendment to Credit Agreement between the Company and Imperial Bank
dated August 2, 1999 (incorporated by reference to Exhibit 10.21 filed
with the Company's 1999 Form 10-K)
27.1 Financial Data schedule
*Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its former subsidiary,
Upscale Food Outlets, Inc.
15
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