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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 25, 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 AUGUST 4, 2000, 13,273,693 shares of common stock, $.001 par value, of the
registrant were outstanding.
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MONTEREY PASTA COMPANY
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
June 25, 2000 and December 26, 1999 3
Condensed Consolidated Statements of Operations
(unaudited) Second Quarter Ended June 25, 2000 and June
27, 1999 and the Six Months Ended June 25, 2000 and June 27, 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 25, 2000 and June 27, 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 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K and S-8 13
Signature Page 14
Exhibit Index 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 25, 2000 DECEMBER 26, 1999
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ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 521,185 $ 71,399
Accounts receivable, net .............................................................. 4,054,922 3,813,611
Inventories ........................................................................... 2,447,467 2,703,314
Deferred tax assets -- short term ..................................................... 1,036,000 1,036,000
Prepaid expenses and other ............................................................ 411,019 487,433
------------ ------------
Total current assets .......................................................... 8,470,593 8,111,757
Property and equipment, net ............................................................. 8,732,430 6,789,265
Deferred tax assets -- long term ........................................................ 2,394,000 2,394,000
Intangible assets, net .................................................................. 1,198,144 1,281,277
Deposits and other ...................................................................... 96,316 89,716
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Total assets .................................................................. $ 20,891,483 $ 18,666,015
------------ ------------
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 2,082,492 $ 2,752,967
Accrued liabilities ................................................................... 680,563 542,709
Current portion of long-term debt ..................................................... 680,098 688,186
------------ ------------
Total current liabilities ..................................................... 3,443,153 3,983,862
------------ ------------
Long-term debt .......................................................................... 55,302 72,577
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Commitments and contingencies............................................................
Stockholders' equity:
Common stock........................................................................... 40,640,033 40,262,579
Accumulated deficit ................................................................... (23,247,005) (25,653,003)
------------ ------------
Total stockholders' equity ............................................................ 17,393,028 14,609,576
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Total liabilities and stockholders' equity .................................... $ 20,891,483 $ 18,666,015
------------ ------------
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</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
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JUNE 25, 2000 JUNE 27, 1999 JUNE 25, 2000 JUNE 27, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues ............................................... $ 11,045,842 $ 9,099,526 $ 22,201,381 $ 17,072,776
Cost of sales .............................................. 6,785,612 5,468,017 13,817,070 10,363,931
------------ ------------ ------------ ------------
Gross profit ............................................... 4,260,230 3,631,509 8,384,311 6,708,845
Selling, general and administrative ........................ 2,815,802 2,644,572 5,747,357 4,916,345
------------ ------------ ------------ ------------
Operating income ........................................... 1,444,428 986,937 2,636,954 1,792,500
Gain (loss) on disposition of assets ....................... -- 20,500 -- (16,229)
Other expense, net ......................................... (6,828) (3,144) (2,902) (5,105)
Interest expense, net ...................................... (26,037) (49,833) (53,055) (99,138)
------------ ------------ ------------ ------------
Income before provision for income taxes ................... 1,411,563 954,460 2,580,997 1,672,028
Provision for income taxes ................................. (100,000) (21,649) (175,000) (34,075)
------------ ------------ ------------ ------------
Net income ................................................. $ 1,311,563 $ 932,811 $ 2,405,997 $ 1,637,953
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic income per share ..................................... $ 0.10 $ 0.07 $ 0.18 $ 0.13
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted income per share ................................... $ 0.09 $ 0.07 $ 0.18 $ 0.13
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Wtd. average primary shares outstanding .................... 13,255,655 12,579,768 13,151,883 12,561,515
Wtd. average diluted shares outstanding .................... 13,846,620 12,969,956 13,733,096 12,857,336
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
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SIX MONTHS ENDED
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JUNE 25, 2000 JUNE 27, 1999
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Cash flows from operating activities:
Net income from operations ............................. $ 2,405,997 $ 1,637,953
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................... 654,361 573,362
Provisions for allowances for bad debts, returns,
adjustments and spoils .......................... 310,996 (141,404)
Loss on disposition of property and equipment ... -- 16,229
Changes in assets and liabilities:
Accounts receivable ...................... (552,307) (286,329)
Inventories .............................. 255,847 (120,354)
Prepaid expenses and other ............... 76,414 253,699
Accounts payable ......................... (670,475) 100,746
Accrued expenses ......................... 137,853 (35,840)
Deposits ................................. (6,600) 17,325
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Net cash provided by operations ................. 2,612,086 2,015,387
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Cash flows from investing activities:
Proceeds from sale of assets .................... -- 20,500
Acquisition of business operating assets ........ -- (1,418,158)
Purchase of property and equipment .............. (2,514,394) (589,413)
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Net cash used in investing activities ..... (2,514,394) (1,987,071)
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Cash flows from financing activities:
Proceeds from revolving line of credit .......... 8,661,761 8,292,804
Repayments on revolving line of credit .......... (8,637,416) (8,490,070)
Proceeds from long term debt .................... -- 750,000
Repayment of long term debt and capital lease
obligations ................................... (49,708) (720,605)
Proceeds from issuance of common stock .......... 377,457 110,230
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Net cash provided by (used in) financing
activities ............................. 352,094 (57,641)
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Net increase (decrease) in cash and cash equivalents ... 449,786 (29,325)
Cash and cash equivalents, beginning of period ......... 71,399 61,645
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Cash and cash equivalents, end of period ............... $ 521,185 $ 32,320
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</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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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 to the
current presentation. The financial statements have been prepared in accordance
with the instructions for Form 10-Q and, therefore, do not necessarily include
all information and footnotes required by generally accepted accounting
principles and should be read in conjunction with the Company's 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 June 25, 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. An earn-out of
$98,000 was paid during the fourth quarter of 1999, and, along with an
additional $2,000 in acquisition costs, was 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 initial 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:
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JUNE 25, 2000 DECEMBER 26, 1999
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Production -- ingredients .................................. $ 992,865 $ 855,477
Production -- finished Goods ............................... 672,949 979,616
Paper goods, parts and packaging materials ................ 809,153 895,721
----------- -----------
2,474,967 2,730,814
Reserve for spoils and obsolescence ................... (27,500) (27,500)
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Net inventory .............................................. $ 2,447,467 $ 2,703,314
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</TABLE>
6
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4. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 25, 2000 DECEMBER 26, 1999
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Machinery and equipment .................................... $ 7,309,053 $ 6,623,919
Leasehold improvements ..................................... 2,069,546 1,993,221
Computers equipment ........................................ 578,611 568,117
Vehicles ................................................... 380,575 335,401
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10,337,785 9,520,658
Less accumulated depreciation and amortization ............. (4,751,537) (4,180,308)
------------ ------------
5,586,248 5,340,350
Construction in progress .............................. 3,146,182* 1,448,915
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Property and equipment, net ................................ $ 8,732,430 $ 6,789,265
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</TABLE>
*Mostly consists of expenditures associated with the Company's $3.5 million
capital program including new pasta production lines, sauce line expansion,
clean room, utilities to support, and new distribution center.
5. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt included the following:
<TABLE>
<CAPTION>
JUNE 25, 2000 DECEMBER 26, 1999
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<S> <C> <C>
Receivable and inventory revolver ............ $629,230 $604,885
Capitalized leases ........................... 106,170 155,878
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735,400 760,763
Less current maturities ...................... 680,098 688,186
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Long-term portion ............................... $ 55,302 $ 72,577
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</TABLE>
CREDIT FACILITY
At June 25, 2000 the following credit facility was in place, collateralized
by substantially all assets of the Company, with an expiration date of 7/31/00:
- Accounts receivable and inventory revolver for up to $1,500,000 with
interest at prime (9.50% at 6/25/00)
- 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 with Imperial Bank are
expected to be renewed and, if utilized, will continue to be amortized as
long-term notes. Imperial Bank has made a commitment effective July 31 for
renewal loan pricing tied to LIBOR (below prime rate) for most future borrowings
with the remainder tied to prime rate. The Company's borrowing capacity will
also be increased from $4.75 million to $10 million, with a total term note
facility of up to $8 million.
6. INCOME TAXES
The Company's income tax expense for the six months ended June 25, 2000
consists of estimated State and Federal alternative minimum tax and Delaware
corporation tax. The remainder of Federal and State of California income taxes
was fully offset by net operating loss carryforwards.
7
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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 alleged
purchases and sales of the Company's stock within a six-month period. The
Company was named as a nominal defendant in the lawsuit. Plaintiff sought the
return of approximately $1,064,000 in alleged profit and Clearwater contested
the claim. During the week of July 10, 2000, the parties signed a settlement
agreement whereby Clearwater will pay $700,000 to the Company in settlement of
the claim asserted by the plaintiff. Plaintiff's counsel will apply to the court
for attorney's fees and expenses of approximately $230,000 from the settlement.
As part of the settlement, Clearwater and the Company are exchanging mutual
releases. The proposed settlement was approved 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, or that another party or parties will not
contest the settlement and 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.
8. STOCKHOLDERS' EQUITY
During the first six months of 2000, warrants, with an exercise price of
$2.25 and an expiration date of March 27, 2000, representing 268,789 shares of
company common stock, were exercised. These warrants were originally issued in
connection with a March 1997 private placement in which the Company issued
warrants to purchase up to 532,800 shares of common stock. There are no warrants
remaining from the March 1997 private placement. However, there are warrants
expiring in April 2003 to purchase 400,750 shares of common stock at $6.50 per
share issued in connection with a 1996 private placement. In addition, employee
options representing 65,732 shares of common stock were exercised during the
first six months of 2000.
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 past 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 June 25, 2000, approximately 5,700 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.
8
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Monterey Pasta's objective is to become the leading national supplier of
refrigerated gourmet pasta, pasta sauces, and refrigerated soups 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.
- 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 $11,046,000 for the second
quarter ended June 25, 2000, as compared to $9,100,000 for the second quarter
ended June 27, 1999, a 21% increase. For the six months ended June 25, 2000, net
revenues increased $5,128,000 to $22,201,000 from $17,073,000 for the six months
ended June 27, 1999, a 30% increase. The quarterly increase in sales over last
year resulted primarily from the Company's additional club and retail store
distribution and an increase in same-store sales. The year-to-date increase
resulted from an increase in club and retail distribution, an increase in
same-store sales, and a full six months' sales from the Frescala Foods, Inc.
asset purchase that was acquired March 12, 1999.
Gross profit was $4,260,000 or 39% of net revenues for the second quarter
2000, compared to $3,632,000 or 40% for the second quarter of 1999. For the six
months ended June 25, 2000, gross profit was $8,384,000 or 38% compared to
$6,709,000 or 39% for the six months ended June 27, 1999. This compares to a 38%
gross margin for the year ended December 26, 1999. Gross margins in the second
quarter improved by two points compared to the first quarter of 2000 as planned
capital and process improvements began to take effect. These improvements are
expected to gain more prominence
9
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in the last two quarters of 2000 as capital projects are completed, and process
improvements and programs are in more advanced stages of implementation.
Selling, general and administrative expenses ("SG&A") for the second
quarter ended June 25, 2000, were $2,816,000, an increase of 6% as compared to
$2,645,000 in the same quarter last year. For the six months ended June 25,
2000, SG&A totaled $5,747,000, an increase of 17% as compared to $4,916,000 for
the same period last year. The year-to-date increases compared to 1999 are
related to the 30% sales increase and additional product demonstrations
associated with the added club store business. Management believes that the
current level of SG&A expenses is consistent with efficient operations, and
additional expenses in future months, mainly in the sales and marketing area,
will be directly associated with increased levels of profitable sales. For the
second quarter of 2000 SG&A expenses were 26% of sales compared with 29% for the
same period a year ago. On a year-to-date basis SG&A expenses are 26% of sales
compared with 29% for the first six months of fiscal 1999. For fiscal year 1999
SG&A expenses were 28% of sales.
Depreciation and amortization expense, included in cost of sales and SG&A,
was $330,000 or 3% of net revenues for the quarter ended June 25, 2000, compared
to $300,000 or 3% of net revenues for the quarter ended June 27, 1999. For the
six months ended June 25, 2000, depreciation and amortization expense was
$654,000, compared to $573,000 for the same period a year ago. The additional
expense was a result of a full six months' amortization of the Frescala Foods'
goodwill, as well as the significant capital program approved in October of
1999.
There was no gain or loss on disposition of fixed assets for the second
quarter ended June 25, 2000, compared to a $21,000 gain for the second quarter
last year. For the six months ended June 25, 2000, there was no gain or loss on
disposition of fixed assets, compared to a loss of $16,000 for the six months
ended June 27, 1999. The second quarter gain in 1999 was related to disposal of
assets associated with the Frescala acquisition, while the first quarter 1999
loss was a result of computer equipment disposed of as a part of the Year 2000
compliance process.
Net interest expense was $26,000 for the quarter ended June 25, 2000,
compared to $50,000 for the same quarter in 1998. For the six months ended June
25, 2000, net interest expense was $53,000, compared to $99,000 for the six
months ended June 27, 1999. The net decrease in interest expense is a result of
the additional cash generated from the increased profit level, which reduced
loan balances, and reductions in interest rate by the Company's lender.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended June 25, 2000, $2,612,000 of cash was
provided by the Company's operations, compared to $2,015,000 cash provided in
the first six months of 1999. The 2000 increase is primarily attributable to the
substantial sales growth, and the resultant increase in net income, partially
offset by an increase in working capital. There were also proceeds of $377,000
from the exercise of warrants and options which partially funded the $2.5
million spent in the acquisition of fixed assets during the first six months,
along with the increase in working capital.
The Company believes that its existing credit facilities, for which the
Company has a verbal commitment to renew, together with cash flow from
operations, is sufficient to meet its cash needs for normal operations for the
next twelve months.
SALES AND MARKETING
The Company's sales and marketing strategy is twofold 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 second
quarter of 2000, with the introduction of the Company's new Potato and Cheese
and Potato and Onion Pierogies to selected divisions of Costco Wholesale.
Introduction to Sam's Club began early in the third quarter 2000. Both varieties
of pierogies were also introduced to selected retail chains in the second
quarter.
During the second quarter of 2000 the Company expanded its private label
supply relationship with a major retail chain with the placement of its products
in over 1,400 additional stores, as well as the introduction of five new SKUs to
the program.
10
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In keeping with its strategy of bringing innovative, new products to the
marketplace, in the second quarter of 2000 the Company worked aggressively to
develop a new line of refrigerated, fresh stuffed pizzas and calzones. This
represents a significant new expansion in the Company's product offerings. This
line will be introduced to both retail and warehouse club store accounts in the
third quarter of 2000.
MAJOR CUSTOMERS
Two of the Company's customers, Costco and Sam's Club Stores, accounted for
49% and 31%, respectively, of the Company's sales for the six months ended June
25, 2000. 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:
- NO ASSURANCE OF CONTINUED PROFITABILITY. In the second quarter of
1994, the Company reported its first operating loss. Subsequent to
that quarter the Company incurred losses through the first quarter of
1997, after which it regained profitability, which has continued for
thirteen consecutive quarters. At June 25, 2000, the Company had an
accumulated deficit of $23,247,000. 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. 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 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
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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 49% and 31%,
respectively, of the Company's total revenues. The Company currently
sells its products to seven separate Costco regions (approximately 220
stores) 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 fourth 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 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 alleged
purchases and sales of the Company's stock within a six-month period. The
Company was named as a nominal defendant in the lawsuit. Plaintiff sought the
return of approximately $1,064,000 in alleged profit and Clearwater contested
the claim. During the week of July 10, 2000, the parties signed a settlement
agreement whereby Clearwater will pay $700,000 to the Company in settlement of
the claim asserted by the plaintiff. Plaintiff's counsel will apply to the court
for attorney's fees and expenses of approximately $230,000 from the settlement.
As part of the settlement, Clearwater and the Company are exchanging mutual
releases. The proposed settlement was approved 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, or that another party or parties will not
contest the settlement and make a claim for damages against the Company, which,
even if not successful, would cause the Company to
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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 AND S-8
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY PASTA COMPANY
Date: August 4, 2000 By: /s/ R. Lance Hewitt
----------------------------
R. Lance Hewitt
Chief Executive Officer
By: /s/ Stephen L. Brinkman
----------------------------
Stephen L. Brinkman
Chief Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<S> <C>
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)
</TABLE>
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<TABLE>
<S> <C>
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 1998 Form
10-K on March 17, 1999 ("1998 Form 10-K"))
10.22 Defined Contribution Administrative Service Agreement between
the Company and First Mercantile Trust dated December 15, 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)
</TABLE>
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<TABLE>
<S> <C>
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)
10.32 Commercial lease dated January 1, 2000 between the Company and
PTF for Operating Engineers, LLC for storage space in Monterey
County, California
27.1 Financial Data schedule
</TABLE>
*Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its former subsidiary,
Upscale Food Outlets, Inc.
17
