<PAGE>
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 September 24, 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
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 NOVEMBER 6, 2000, 13,300,688 shares of common stock, $.001 par value, of the
registrant were outstanding.
<PAGE>
MONTEREY PASTA COMPANY
FORM 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) September 24, 2000 and
December 26, 1999............................................................... 3
Condensed Consolidated Statements of Operations (unaudited) Third quarter
ended September 24, 2000 and September 26, 1999 and the nine months ended
September 24, 2000 and September 26, 1999....................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) Nine months
ended September 24, 2000 and September 26, 1999................................. 5
Notes to Unaudited Condensed 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>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONTEREY PASTA COMPANY
Condensed CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 24, 2000 December 26, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 87,738 $ 71,399
Accounts receivable, net............................... 5,821,464 3,813,611
Inventories............................................ 2,408,366 2,703,314
Deferred tax assets-short term......................... 2,740,000 1,036,000
Prepaid expenses ...................................... 435,093 487,433
------------------ -----------------
Total current assets........................... 11,492,661 8,111,757
Property and equipment, net............................ 9,135,584 6,789,265
Deferred tax assets-long term.......................... 962,000 2,394,000
Intangible assets, net................................. 1,156,578 1,281,277
Deposits .............................................. 98,316 89,716
------------------ -----------------
Total assets................................... $22.845,139 $18,666,015
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 2,235,077 $ 2,752,967
Accrued liabilities.................................... 1,309,867 542,709
Current portion of long-term debt...................... 33,831 688,186
------------------ -----------------
Total current liabilities...................... 3,578,775 3,983,862
------------------ -----------------
Long-term debt........................................... 46,999 72,577
------------------ -----------------
Commitments and contingencies............................
Stockholders' equity:
Common stock........................................... 40,640,959 40,262,579
Accumulated deficit.................................... (21,421,594) (25,653,003)
------------------ -----------------
Total stockholders' equity............................. 19,219,365 14,609,576
------------------ -----------------
Total liabilities and stockholders' equity..... $22,845,139 $18,666,015
================== =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------- -----------------
September 24, 2000 September 26, 1999 September 24, 1999 September 26, 2000
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues .............................. $ 12,160,813 $ 9,942,782 $ 34,362,194 $ 27,015,558
Cost of sales ............................. 7,364,434 6,163,056 21,181,504 16,526,987
------------------ ------------------ ------------------ ------------------
Gross profit .............................. 4,796,379 3,779,726 13,180,690 10,488,571
Selling, general and
administrative ......................... 3,184,707 2,634,732 8,932,064 7,551,077
------------------ ------------------ ------------------ ------------------
Operating income .......................... 1,611,672 1,144,994 4,248,626 2,937,494
Gain (loss) on disposition
of assets .............................. -- 3,225 -- (13,004)
Other income/(expense), net ............... (4,360) 5,494 (7,262) 389
Interest expense, net ..................... (6,901) (36,224) (59,956) (135,362)
------------------ ------------------ ------------------ ------------------
Income before provision for income
tax benefit/(expense) .................. 1,600,411 1,117,489 4,181,408 2,789,517
Provision for income
tax benefit/(expense) .................. 225,000 (92,340) 50,000 (126,415)
------------------ ------------------ ------------------ ------------------
Net income ................................ $ 1,825,411 $ 1,025,149 $ 4,231,408 $ 2,663,102
------------------ ------------------ ------------------ ------------------
Basic income per share .................... $ 0.14 $ 0.08 $ 0.32 $ 0.21
================== ================== ================== ==================
Diluted income per share .................. $ 0.13 $ 0.08 $ 0.31 $ 0.21
================== ================== ================== ==================
Primary shares outstanding ................ 13,278,210 12,791,078 13,193,992 12,638,036
Diluted shares outstanding ................ 13,939,510 13,255,983 13,801,901 12,972,284
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
MONTEREY PASTA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 24, 2000 September 26, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income from operations ............................................. $ 4,231,408 $ 2,663,102
Adjustments to reconcile net income from operations
to net cash provided by (used in) operating activities:
Deferred tax assets ............................................. (272,000) --
Depreciation and amortization ................................... 1,004,239 877,670
Provisions for allowances for bad debts,
returns, adjustments and spoils ............................... 280,556 (151,430)
Loss on disposition of property
and equipment ................................................. -- 13,004
Changes in assets and liabilities:
Accounts receivable ...................................... (2,288,409) (1,807,585)
Inventories .............................................. 294,948 (474,311)
Prepaid expenses and other ............................... 52,340 519,546
Accounts payable ......................................... (517,890) 1,356,889
Accrued expenses ......................................... 767,158 126,684
Deposits ................................................. (8,600) 78,825
------------------ ------------------
Net cash provided by operations ................................. 3,543,750 3,202,394
------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of assets .................................... -- 27,600
Acquisition of business operating accounts ...................... -- (1,418,158)
Purchase of property and equipment .............................. (3,225,860) (974,795)
------------------ ------------------
Net cash used in investing activities ........................ (3,225,860) (2,365,353)
------------------ ------------------
Cash flows from financing activities:
Proceeds from revolving line of credit .......................... 11,315,761 12,726,150
Repayments on revolving line of credit .......................... (11,920,646) (12,473,461)
Proceeds from long term debt .................................... -- 750,000
Repayment of long term debt and capital lease obligations........ (75,048) (2,342,859)
Proceeds from issuance of common stock .......................... 378,382 710,123
------------------ ------------------
Net cash used in financing activities ....................... (301,551) (630,047)
------------------ ------------------
Net increase in cash and cash equivalents .............................. 16,339 206,994
Cash and cash equivalents, beginning of period ......................... 71,399 61,645
------------------ ------------------
Cash and cash equivalents, end of period ............................... $ 87,738 $ 268,639
================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
MONTEREY PASTA COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
Monterey Pasta Company (the "Company") and are unaudited. Certain amounts shown
in the 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 September 24, 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:
<TABLE>
<CAPTION>
September 24, 2000 December 26, 1999
------------------ -----------------
<S> <C> <C>
Production - Ingredients.................. $ 1,014,964 $ 855,477
Production - Finished Goods............... 698,024 979,616
Paper goods and packaging materials....... 722,878 895,721
------------------ -----------------
2,435,866 2,730,814
Reserve for spoils and
obsolescence......................... (27,500) (27,500)
------------------ -----------------
Net inventory............................. $ 2,408,366 $ 2,703,314
================== =================
</TABLE>
6
<PAGE>
4. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
September 24, 2000 December 26, 1999
------------------ -----------------
<S> <C> <C>
Machinery and equipment..................... $ 8,307,296 $ 6,623,919
Leasehold improvements...................... 2,844,892 1,993,221
Computers, office furniture
and equipment............................ 855,066 568,117
Vehicles.................................... 380,575 335,401
------------------ -----------------
12,387,829 9,520,658
Less accumulated depreciation and
amortization............................. (5,059,849) (4,180,308)
------------------ -----------------
7,327,980 5,340,350
Construction in progress................. 1,807,604 1,448,915
------------------ -----------------
Property, plant and equipment, net.......... $ 9,135,584 $ 6,789,265
================== =================
</TABLE>
5. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Components of long-term debt included the following:
<TABLE>
<CAPTION>
September 24, 2000 December 26, 1999
------------------ -----------------
<S> <C> <C>
Credit Facility:
Receivable and inventory revolver....... $ - $ 604,885
Capitalized leases.......................... 80,830 155,878
------------------ -----------------
80,830 760,763
Less current maturities................ 33,831 688,186
------------------ -----------------
Long-term portion......................... $ 46,999 $ 72,577
================== =================
Credit Facility
</TABLE>
On August 10, 2000 the Company's credit facility with Imperial Bank was
renewed for another year. The existing accounts receivable and inventory
revolver was renewed to expire August 9, 2001 with a commitment of $1.5 million
and interest at LIBOR plus 185 basis points for a debt/tangible net worth ratio
of 0.50:1. LIBOR premiums increase 25 basis points for increased debt/tangible
net worth ratio increments of 0.25:1. In addition, the Company's lender approved
a $8.5 million non-revolving term facility in the event of a need for major
capital expenditures and acquisitions, with the same interest rate structure.
The total credit facility is $10.0 million.
6. INCOME TAXES
The provision for income tax benefits (expense) for the three and nine months
ended September 24, 2000 and September 26, 1999 include Federal and State
alternative minimum and certain other State taxes, offset by recognition of
California Manufacturer's tax credits in 2000. Except for alternative minimum
taxes, Federal and State of California income taxes for the 2000 and 1999 three
and nine month periods were fully offset by net operating loss (NOL)
carryforwards. As of September 24, 2000, additional Federal and State NOLs
totaling approximately $9.6 and $5.7 million, respectively, are available to
reduce future periods' taxable income.
The findings in a 2000 Federal Court case for an unrelated party involving some
similar issues and fact patterns indicated that certain losses arising from the
Company's previously-owned subsidiary Upscale Food Outlets, Inc. will probably
not be useable by the Company. Accordingly, beginning of year Federal NOLs were
reduced by approximately $17.6 million. The resulting $5.4 million reduction in
gross deferred tax assets had no effect since it had been fully reserved (please
refer to
7
<PAGE>
Management Discussion and Analysis page 10, paragraphs six and seven, for more
comments related to the Company's income tax position).
7. STOCKHOLDERS' EQUITY
During the first three 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 represented the
remainder of those 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. However, there are still outstanding warrants which expire in
April 2003 to purchase 400,750 shares of common stock at $6.50 per share that
were issued in connection with a 1996 private placement. In addition, employee
and director options representing 76,771 shares of common stock were exercised
during the first nine months of 2000, and 3,006 common shares were issued under
the Company's employee stock purchase plan.
8. 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 alleged 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 agreed to pay $700,000 to the Company in
settlement of the claim asserted by the plaintiff. Plaintiff's counsel applied
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 exchanged
mutual releases. The settlement was approved by the Board of Directors of the
Company.
The funds were placed in an interest-bearing escrow account pending
approval of Plaintiff's attonrey's fees. The court approved the fees
application and on October 27, 2000 the Company received a check in the amount
of $472,405.69 including the settlement amount of $470,000.00, and interest of
$2,405.69. The stockholders' equity account was increased to reflect the
settlement amount.
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 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.
8
<PAGE>
The Company sells its pasta and pasta sauces through leading grocery
store chains and club stores. As of September 24, 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.
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 $12,161,000 for the third
quarter ended September 24, 2000, as compared to $9,943,000 for the third
quarter ended September 26, 1999, an increase of 22%. For the nine months ended
September 24, 2000, net revenues increased $7,346,000 or 27% to $34,362,000 from
$27,016,000 for the nine months ended September 26, 1999. The year-to-date
increase resulted from an increase in club and retail distribution, an increase
in same-store sales, and a full nine months' sales from the Frescala Foods, Inc.
asset purchase that was acquired March 12, 1999. Retail chain sales increased
25% on a year to date basis, while club store sales grew 28%.
Gross profit was $4,796,000 or 39.4% of net revenues for the third
quarter of 2000, compared to $3,780,000 or 38.0% for the third quarter of 1999.
For the nine months ended September 24, 2000, gross profit was $13,181,000 or
38.4%
9
<PAGE>
compared to $10,489,000 or 38.8% for the nine months ended September 26, 1999.
Gross margins for the first nine months of 2000 were impacted by new product
development discussed in the "Sales and Marketing" section which follows, and
capacity and efficiency issues which management believes are being addressed by
its $3.5 million capital commitment and other management efficiency imperatives.
Selling, general and administrative expenses ("SG&A") for the third
quarter ended September 24, 2000, were $3,185,000, an increase of 21% or
$550,000 when compared to $2,635,000 in the third quarter of 1999. For the nine
months ended September 24, 2000, SG&A increased $1,381,000 or 18% to $8,932,000
from $7,551,000 for the same period in 1999. The increases compared to 1999 are
related to the 27% year-to-date sales increase, additional product
demonstrations associated with the added club store business, full year expense
for two marketing positions, as well as partial year expense for two additional
administrative positions. Freight expense also increased nearly $200,000 in
excess of the sales increase impact due to the general increase in fuel expense
currently being experienced nation-wide, and slightly more costly freight
logistics associated with new distribution. Management believes that the current
level of SG&A expenses is consistent with efficient operations, and increased
expenses in future months, mainly in the sales and marketing area, will be
directly associated with increased levels of profitable sales.
Depreciation and amortization expense, included in cost of sales and
SG&A, was $350,000 or 3% of net revenues for the quarter ended September 24,
2000, compared to $304,000 or 3% of net revenues for the quarter ended September
24, 2000. For the nine months ended September 24, 2000, depreciation and
amortization expense was $1,004,000 or 3% of net revenues, compared to $878,000
for the same period last year, also 3% of net revenues.
There was no gain or loss on disposition of fixed assets for the third
quarter ended September 24, 2000 compared with a gain of $3,000 for the third
quarter last year. For the nine months ended September 24, 2000, there was no
gain or loss on disposition of fixed assets, compared to a loss of $13,000 for
the nine months ended September 26, 1999.
Net interest expense was $7,000 for the quarter ended September 24,
2000, compared to net interest expense of $36,000 for the same quarter in 1999.
For the nine months ended September 24, 2000, net interest expense was $60,000
compared to $135,000 for the nine months ended September 26, 1999. The net
decrease in interest expense is a result of the additional cash generated from
the increased profit level, which reduced loan balances.
The third quarter 2000 income tax benefit of $225,000 consists primarily of
alternative minimum and certain state taxes offset by California Manufacturer's
tax credits, as compared to 1999 third quarter tax expense of $92,000, which
consisted primarily of alternative minimum and certain state taxes. The tax
credits also affected the nine month provision for 2000, resulting in a net tax
benefit of $50,000 compared to net tax expense of $126,000 for the same period
in 1999. Except for alternative minimum taxes, Federal and State of California
income taxes for the 2000 and 1999 three and nine month periods were fully
offset by net operating loss (NOL) carryforwards. As of September 24, 2000,
additional Federal and State NOLs totaling approximately $9.6 and $5.7 million,
respectively, are available to reduce future periods' taxable income.
The findings in a 2000 Federal Court case for an unrelated party involving some
similar issues and fact patterns indicated that certain losses arising from the
Company's previously-owned subsidiary Upscale Food Outlets, Inc. will probably
not be useable by the Company. Accordingly, beginning of year Federal NOLs were
reduced by approximately $17.6 million. The resulting $5.4 million reduction in
gross deferred tax assets had no effect since it had been fully reserved.
Management continues to explore possible alternatives and tax treatment theory;
however, there can be no assurance that the NOLs and resultant future tax
benefit will be restored.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 24, 2000, $3,544,000 of
cash was provided by the Company's continuing operations, compared to $3,202,000
in the first nine months of 1999, an increase of $342,000. The 2000 improvement
in income from operations of $1,568,000 was offset by the cash payment of
approximately $800,000 in capital expense included in accounts payable at
year-end 1999, and differences in prepaid expenses from year end 1999 vs. 1998
as they impacted year-to-date cash flow numbers for third quarter 2000 vs. third
quarter 1999 (refer to Statements of Cash Flows and Balance Sheets).
The Company believes that its existing credit facilities, together with
cash flow from operations, will be sufficient to meet its cash needs for normal
operations for the next twelve months.
10
<PAGE>
SALES AND MARKETING
The Company's sales and marketing strategy is twofold. It targets
sustainable growth in distribution of its products and the introduction of
innovative new products to keep the Company positioned as a gourmet category
leader in the marketplace.
Expansion of the Company's club store business continued in the third
quarter of 2000, with the rollout of the Company's new Potato and Cheese and
Potato and Onion Pierogies to selected divisions of Costco Wholesale and Sam's
Club which began early in the third quarter 2000. Both varieties of pierogies
were also introduced to additional retail chains in the third quarter.
In keeping with its strategy of bringing innovative, new products to
the marketplace, in the third quarter of 2000 the Company began selling a new
line of refrigerated, fresh stuffed pizzas and calzones. This represents a
significant new expansion in the Company's product offerings. This line was
introduced to selected retail and warehouse club store accounts late in the
third quarter of 2000.
In August of 2000 the Company announced the expansion of its major
private retail chain business with the addition of five refrigerated soups to
nearly 1,600 stores.
As of September 24, 2000 the Company distributed its products to a
total of approximately 5,000 retail and 700 club store outlets as compared to
3,800 retail and 600 club store outlets as of September 26, 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 fourteen consecutive quarters. At September 24, 2000, the Company had
an accumulated deficit of $21,422,000. There can be no assurance that the
Company will maintain its recent profitability in the long or short term.
- LIQUIDITY: NEED FOR ADDITIONAL CAPITAL. Management believes that its
operations and existing bank lines of credit will provide adequate
liquidity to meet the Company's planned capital and operating requirements
for normal operations through 2001. 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
11
<PAGE>
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. During the nine months of 2000, two
customers, Costco and Sam's Club Stores, accounted for 50% 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 450 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
12
<PAGE>
Court for the District of Delaware, Case No. 99-004-SLR. The lawsuit alleged 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 agreed to pay $700,000 to
the Company in settlement of the claim asserted by the plaintiff. Plaintiff's
counsel applied 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 exchanged mutual releases. The settlement was approved by the Board of
Directors of the Company.
The funds were placed in an interest-bearing escrow account pending
approval of Plaintiff's attonrey's fees. The court approved the fees
application and on October 27, 2000 the Company received a check in the amount
of $472,405.69 including the settlement amount of $470,000.00, and interest of
$2,405.69. The stockholders' equity account was increased to reflect the
settlement amount.
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
(a) The Company's annual Stockholders' meeting was held July 27,
2000.
(b) At the annual meeting the following matters were approved:
(i) the election of the following eight directors to hold
office for the ensuing year and until their successors
are elected and qualified. The following directors
received the identical vote total listed below
<TABLE>
<CAPTION>
Votes Against
Votes for or withheld
--------- -----------
<S> <C> <C>
R. Lance Hewitt 12,003,312 77,306
Charles B. Bonner 12,003,312 77,306
Floyd R. Hill 12,003,312 77,306
Thomas E. Kees 12,003,312 77,306
Van Tunstall 12,003,312 77,306
James Wong 12,003,312 77,306
Stephen L. Brinkman 12,003,312 77,306
Walter L. Henning 12,003,312 77,306
</TABLE>
(ii) the appointment of BDO Seidman, LLP as the independent
public accountants for the year ending December 31, 2000
was approved with 11,988,797 votes in favor, 61,454 votes
against or withheld, and 29,647 votes abstaining.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND S-8
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY PASTA COMPANY
Date: NOVEMBER 6, 2000 By: /S/ R. LANCE HEWITT
----------------------------
R. Lance Hewitt
Chief Executive Officer
By: /S/ STEPHEN L. BRINKMAN
----------------------------
Stephen L. Brinkman
Chief Financial Officer
14
<PAGE>
INDEX TO EXHIBITS
3.1 Certificate of Incorporation dated August 1, 1996 (incorporated by
reference from Exhibit B to the Company's 1996 Proxy)
3.2 Bylaws of the Company (incorporated by reference from Exhibit C to
the 1996 Proxy)
4.1 Form of Warrant for purchase of the Company's Common Stock, dated as
of July 1, 1996 (incorporated by reference from Exhibit 4.5 filed
with the Company's 1996 Form S-3)
4.2 Form of Registration Rights Agreement dated April 1996, among the
Company, Spelman & Co., Inc. and investor (incorporated by
reference from Exhibit 10.42 filed with the Company's Original
March 31, 1996 Quarterly Report on Form 10-Q on May 1, 1996 ("1996
Q1 10-Q"))
4.3 Stockholder Rights Agreement dated as of May 15, 1996 between the
Company and Corporate Stock Transfer, as rights agent
(incorporated by reference from Item 2 of Form 8-A filed with the
Securities and Exchange Commission on May 28, 1996)
4.4 Amendment to Registration Rights Agreement dated as of April 20,
1997 among the Company, Spelman & Co., Inc. and investor, amending
the Registration Rights Agreement entered into as of April, 1996
(incorporated by reference from Exhibit 4.9 filed with the
Company's 1996 Form 10-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)
15
<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 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)
16
<PAGE>
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 (incorporated by reference to Exhibit 10.32, in the
Company's June 25, 2000 Quarterly Report on Form 10-Q filed on
August 4, 2000)
10.33 Second Amendment to Credit Agreement between the Company and
Imperial Bank dated August 2, 199
10.34 Third Amendment to Credit Agreement between the Company and Imperial
Bank dated August 2, 1999
27.1 Financial Data schedule
*Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its former subsidiary,
Upscale Food Outlets, Inc.
17
