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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] 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 of incorporation) (IRS employer identification number)
1528 Moffett Street
Salinas, California 93905
(831) 753-6262
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
Indicate by check mark whether 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, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (__)
The approximate aggregate market value of the voting stock held by
non-affiliates of the issuer as of February 07, 2001 was $64,586,753. The
number of shares outstanding of the issuer's common stock as of February 07,
2001 was 13,317,343.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Monterey Pasta Company ("the Company") was incorporated in June 1989 as a
producer and distributor of refrigerated gourmet pasta and sauces to restaurants
and grocery stores in the Monterey, California area. The Company has since
expanded its operations to include a more diversified range of gourmet
refrigerated food products, which it provides to grocery and club stores
throughout the United States, selected regions in Canada, and part of Latin
America. The Company's overall strategic plan is to enhance the value of the
Monterey Pasta Company brand name by distributing its gourmet food products
through multiple channels of distribution, while selectively participating in
private label partnerships.
The Company currently produces and markets premium quality refrigerated
gourmet pastas, soups, gnocchi, pasta sauces, stuffed pizzas and calzones,
pierogies, and polenta emphasizing superior flavors and innovative products. It
seeks to build brand recognition and customer loyalty by employing a marketing
program that focuses on developing multiple points of sale for the Company's
products. The Company markets and sells its products primarily through grocery
and club stores.
The Company offers over 185 varieties of contemporary gourmet food
products that are produced using the Company's proprietary recipes. Examples
of the Company's products are listed under "Products" on pages four, five,
and six. In 2000 the Company introduced three new product lines: stuffed
pizzas and calzones, pierogies, and polenta, which it acquired through an
asset purchase of the Nate's polenta business from Elena's Food Specialties
of South San Francisco, California (See "Liquidity, Capital Resources, and
Business Acquisitions", page 13).
The Company sells its products through leading grocery store chains
including Albertson's, King Soopers, Safeway and Von's, Ralph's, Jewel, Fred
Meyer, Kroger, Raley's, HEB, and QFC; and warehouse club stores such as Costco
Wholesale and Sam's Club (a division of Wal-Mart). As of December 31, 2000,
approximately 6,000 grocery and club stores offered Monterey Pasta's products.
In 1998, the Company added a web site, www.montereypasta.com, to
further support its brand by providing both consumer and investor
information, and opened an on-line store offering Monterey Pasta products to
the rapidly growing number of Internet shoppers. Shoppers can now order items
for delivery within two days. In 1999, the Company expanded the site to offer
other non-food items and other food items as well. In 2000, the website was
updated to improve its speed of access, ease of navigation and technical
sophistication related to multi-media, and links to other websites.
The success of the Company's sales efforts will depend in large part on
three key factors: (1) whether grocery and club store chains will continue to
increase the number of their stores offering the Company's products, (2) whether
the Company can continue to increase the number of grocery and club store chains
offering its products, and 3) whether the Company can continue to introduce new
products that meet consumer acceptance. 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.
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934, that involve substantial risks to the Company, including
statements about the Company's recent operating losses, the possible need for
additional capital, the ability to attract and retain qualified management, the
need to add points of distribution and the need to develop new products. In
connection therewith, please see the cautionary statements contained herein in
"Business Risks" which identify important factors that could cause actual
results to differ materially from those in the forward-looking statements.
INDUSTRY OVERVIEW
The Company believes that the U.S. retail market for refrigerated pasta
is large and highly fragmented. Although refrigerated pasta products are not
new, fresh pasta and pasta sauce were essentially created as a national
specialty food category in 1986 when Nestle Fresh Foods Co., a division of
Nestle S.A. ("Nestle"), introduced its Contadina-Registered Trademark- (now
Buitoni-Registered Trademark-) brand of fresh pasta. In 1990, Kraft General
Foods, Inc., a division of Philip Morris ("Kraft"), unveiled its
DiGiorno-Registered Trademark- brand of fresh pasta nationally.
The Company believes that the interest in the fresh pasta category has
been aided by several factors including heavy advertising and promotion by
Nestle and Kraft, the changing consumer preference for freshly prepared healthy
foods, and increasing consumer
2
demand for convenient, quick meal solutions. The Company is further encouraged
by industry research reports, which show that spending on gourmet, specialty
foods by consumers in the Company's target market appears to be growing.
No assurance can be given that the refrigerated pasta and sauce industry
will expand further. Nor can there be any assurance that current trends in
healthy eating, perception of fresh pasta and pasta sauce as a healthy eating
alternative, consumer demand for meal solutions, or consumer spending levels in
the specialty food category will continue in the future. Additionally, as the
Company expands into different geographic regions, it may encounter different
consumer perceptions, attitudes and behavior. This may adversely impact the
Company's marketing and expansion strategy and cause it to incur greater
expenses in the promotion of its products.
The market for refrigerated stuffed pizzas and calzones is made up of many
small local producers, none of whom, to the Company's knowledge, offer extended
shelf life. The Company also has one larger competitor (San Francisco Foods of
San Leandro, CA) claiming a relatively short shelf life compared to the
Company's guarantee of 30 days, and offering competition with some of the
Company's current accounts.
The refrigerated soup market is comprised of many small local producers
and three other more substantial competitors, Stock Pot (owned by Campbell Soup
Company), Glencoe Foods, Inc. doing business as Covent Garden (owned by an
English Company) and Harry's, an independent headquartered in Portland, Oregon.
The Company believes it is benefiting by the promotion of Stock Pot and Covent
Garden, which are increasing consumer awareness of the refrigerated soup
category.
While the frozen pierogy market is dominated by one large producer with
over 80% of sales revenue, the refrigerated pierogy market is comprised of very
small local producers who sell through delis and cannot claim extended shelf
life. To its knowledge, the Company possesses the only refrigerated extended
shelf life pierogy with national distribution.
The polenta business is also highly fragmented and comprised of several
regional competitors in retail chains with no club store presence. The Company
will initially market under the Nate's label, with the potential of also selling
under its own brand sometime in the future.
No assurance can be given that the market for refrigerated gourmet food
products will expand further and that space will be made available at the store
level to house refrigerated products. Nor can there be any assurance that
current trends in healthy gourmet eating, perception of many of the Company's
products as healthy gourmet eating alternatives, consumer demand for quick meal
solutions, or consumer spending levels in the specialty food category will
continue in the future. Additionally, as the Company expands into different
geographic regions, it may encounter different consumer perceptions, attitudes
and behavior. This may adversely impact the Company's marketing and expansion
strategy and cause it to incur greater expenses in the promotion of its
products.
STRATEGY
Monterey Pasta's objective is to become a leading national supplier of
refrigerated gourmet food products 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 primarily
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,
soups, pizzas, and calzones.
- 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.
3
- 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.
PRODUCTS
The Company produces and markets a variety of gourmet refrigerated cut
pasta, ravioli, tortelloni, tortellini, soups, gnocchi, pasta sauces, stuffed
pizzas, calzones, pierogies, and polenta under the Monterey Pasta Company,
Arthur's and Nate's labels, as well as private labels. Arthur's is a
mid-priced pasta and sauce label which was acquired as part of the March 1999
acquisition of San Antonio Texas-based Frescala Foods, Inc. and the Nate's
label was acquired in December 2000 (see "Liquidity, Capital Resources, and
Business Acquisitions", page 13). Following is a representative list of the
Company's products with those sold under the Arthur's label so noted:
Year Introduced or
Acquired
------------------
CUT PASTA:
---------
Garlic Basil Fettuccine 1989
Sweet Red Pepper Fettuccine 1989
Angel Hair 1989
Spinach Fettuccine (Arthur's) 1999
Lemon Pepper Linguine (Arthur's) 1999
RAVIOLI:
-------
Lobster 1997
Fire Roasted Vegetable 1997
Restaurant-Style Artichoke & Cheese 1998
Restaurant-Style Chicken Piccata 1998
Restaurant-Style Gorgonzola Cheese 1998
Restaurant-Style Snow Crab 1998
Restaurant-Style Roasted Garlic 1998
Restaurant-Style Herb and Cheese 1998
Restaurant-Style Spinach Ricotta 1998
Restaurant-Style Shrimp Scampi 1998
Restaurant-Style Chicken Rosemary 1999
Four Cheese (Arthur's) 1999
Light Garden Vegetable (Arthur's) 1999
4
Year Introduced or
Acquired
------------------
TORTELLONI:
----------
Spinach Mushroom 1994
Sundried Tomato and Asiago Cheese 1994
Restaurant-Style Pesto Sausage 1998
Restaurant-Style Rainbow Five Cheese 1998
Italian Sausage (Arthur's) 1999
Proscuitto, Spinach & Cheese (Arthur's) 1999
TORTELLINI:
----------
Rainbow Five Cheese 1995
Garlic Basil Cheese 1996
Tri-Color (Arthur's) 1999
Cheese (Arthur's) 1999
SAUCES:
------
Roasted Garlic Artichoke 1995
Thick and Chunky Tomato Basil 1996
Restaurant-Style Roasted Garlic
and Parmesan 1998
Restaurant-Style Basil Cream Sauce
with Artichokes 1998
Restaurant-Style Pesto Sauce with
Garlic and Basil 1998
Restaurant-Style Garden Fresh Marinara 1999
Restaurant-Style Fresh Alfredo with Herbs 1999
Sun Dried Tomato Pesto (Arthur's) 1999
Five Pepper Pesto (Arthur's) 1999
Alfredo (Arthur's) 1999
Roasted Garlic Pesto (Arthur's) 1999
Vodka 2000
SOUPS:
-----
Tuscan Minestrone 1999
Monterey Clam Chowder 1999
Autumn Classic Butternut Squash 1999
Old Fashioned Chicken Noodle 1999
Southern Style Corn Chowder 1999
Red Ripe Tomato with Basil 1999
Savory Split Pea with Ham 1999
Potato with Black Forest Ham 1999
Southwest Style Tortilla 2000
TORTELLONI GRANDI:
-----------------
Spinach and Cheese 1999
Italian Sausage 1999
Five Cheese and Rainbow Five Cheese 1999
GNOCCHI:
-------
Potato Parmesan 1999
STUFFED PIZZAS:
--------------
Spicy Chicken with Sun-dried Tomatoes 2000
6 Italian Cheeses 2000
Italian Sausage and Pepperoni 2000
Pepperoni 2000
5
Year Introduced or
Acquired
------------------
CALZONES:
--------
Spinach, Feta Cheese and Pesto with Red
onions 2000
Black Forest Ham and Swiss Cheese 2000
Scrambled Eggs with Country Sausage
and Two Cheeses 2000
Meatball 2000
Italian Sausage, Pepper, and Onion 2000
PIEROGIES:
---------
Potato and Cheese 2000
Potato and Onion 2000
POLENTA (NATE'S):
----------------
Original 2000
Sun Dried Tomato 2000
Mexican Pepper 2000
Italian Herb 2000
Wild Mushroom 2000
Cinnamon Raisin 2000
The Company is committed to diversifying its product offerings with
innovative new pasta products and other gourmet product lines. The Company's
product development team and product development consultants focus on creating
new products that innovatively blend complementary tastes, food textures and
ingredients while strictly adhering to the Company's emphasis on freshness,
healthfulness and quality. As new products are introduced, selected items will
be discontinued to help ensure that the product line is focused on consumer
demand, to maximize the Company's return on its shelf space in grocery and club
stores, and to respond to changing trends and consumer preferences.
The Company's refrigerated products are packaged in clear lightweight
containers, which reveal the fresh appearance of its products. Monterey Pasta
presents its products with a colorful logo, distinctive packaging styles,
ingredient information and cooking instructions to communicate the gourmet,
fresh and healthful qualities of its products. Its new pizza, calzone, and
pierogy products feature new packaging to maximize shelf impact and generate
increased consumer interest in the products with increased emphasis on food
photography.
The goal of the Company is to introduce new products on a timely and
regular basis to maintain customer interest and to respond to changing consumer
tastes. There can be no assurance that the Company's efforts to achieve such a
goal will result in successful new products or product lines or that new
products can be developed and introduced on a timely and regular basis. If the
Company's new products are not successful, the Company's grocery and club store
sales may be adversely affected as customers seek new products.
PRODUCTION
The Company produces its products in a 43,680 square foot Monterey County,
California facility. It is strategically located in one of the largest
produce-growing regions in the United States and is near several major vendors
and food service distributors. The facility is certified by the United States
Department of Agriculture (USDA) and utilizes state of the art thermal
processing, chilling and packaging processes. The Company also added to a new
20,000 square foot refrigerated distribution center in December 1999, which is
also located in Monterey County, approximately three miles from its production
facility.
The current production facility is staffed by approximately 270 employees,
including plant management, a purchasing agent, quality control, accounting
personnel, sales staff, drivers, and production line workers. Refrigerated pasta
is manufactured at the facility using high quality ingredients such as Extra
Fancy Durham wheat, whole eggs or egg whites, fresh herbs and IQF (Individually
Quick Frozen) herbs and spices, and local cheeses and milk products. The
ingredients are mixed in accordance with the Company's proprietary recipes.
After filling with fresh and unusual fillings such as snow crab, lobster, and
Vermont cheddar cheese, the ravioli and tortellini products receive a prescribed
thermal process (pasteurization) to insure product safety and to preserve
flavor, quality and shelf life. The
6
product is then chilled immediately and packaged in controlled atmosphere trays.
Pasta sauces are mixed and processed in individual batches in accordance with
the Company's proprietary processes and recipes and then directly packed and
sealed in plastic containers. After preparation, processing, chilling and
packaging, all pasta and sauces are kept in cold storage to preserve quality and
shelf life. Approximately 19 people are employed at the new distribution center,
including shipping personnel, customer service and traffic personnel, and the
logistics manager.
The Company continuously reviews a variety of capital projects for the
production department and in the past two years has spent approximately $6.7
million on capital improvements. These included a new tortelloni line, a new
packaging line and clean room, increased sauce capacity and efficiency, a new
pasteurizer, a pizza/calzone line, and boiler and utility upgrades to
accommodate capacity increases. Approximately $900,000 was invested in a new
state-of-the-art 20,000 square foot refrigerated distribution center, which
materially improved efficiencies and customer service in 2000 when compared with
1999. The 2000 additions are expected to create a 100% increase in sauce
capacity, a 200% increase in filling and mixing capacity, and a 25% increase in
packline capacity compared with 1999 levels. Future additions of assets will be
evaluated for increased efficiency, flexibility and need.
DISTRIBUTION
The Company's success depends upon an effective system of distribution for
its products. In Northern California the Company maintains three direct store
delivery ("DSD") routes to deliver its products to approximately 140 stores. The
Company also delivers product directly to warehouses for Safeway, its largest
Northern California customer. To distribute its products to other customers and
parts of the country (over 90% of its business), the Company uses common
carriers. The dependence on other companies for delivery of its products poses a
risk to the Company. While the common carrier method of delivery has been
reliable and available at acceptable rates thus far, there can be no assurance
that the Company will continue to be able to negotiate acceptable freight rates
in the future and that delivery will not be disrupted for reasons including, but
not limited to, adverse weather, natural disasters or labor disputes in the
trucking industry.
GROCERY CHAIN AND CLUB STORE SALES
Monterey Pasta sells its products to chain grocery and club stores.
Number of Stores Carrying Monterey Pasta Products
-------------------------------------------------
1998 1999 2000
---- ---- ----
Retail Grocery Stores 2,950 3,900 5,330
Club Stores 510 640 670
------------ ------------ ------------
TOTAL 3,460 4,540 6,000
============ ============ ============
For the years 1998, 1999 and 2000, Costco accounted for 46%, 49% and 50%
of total net revenues, while Sam's Club stores accounted for 33%, 31%, and 30%
of revenues for the same years. The Company currently sells its products to
seven separate Costco regions which make purchasing decisions independently of
one another. These regions re-evaluate, on a regular basis, the products carried
in their stores. There can be no assurance that these Costco regions will
continue to offer Monterey Pasta products in the future or continue to allocate
Monterey Pasta the same amount of shelf space. The Company currently supplies
its products to approximately 430 Sam's Club stores which feature expanded
delis. 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, there can be no assurance that Sam's Club stores will continue to
carry its products or allocate Monterey Pasta the same amount of shelf space.
The loss of either of these major customers could materially adversely affect
the Company's business operations.
In 2000, the average grocery store carried 12 individual Monterey Pasta
products, or Stock Keeping Units ("SKUs"), and the average club store carried 11
SKUs.
MARKETING
The Company's marketing strategy is to create brand awareness by
communicating to the consumer that Monterey Pasta Company provides a gourmet
quality nutritious line of products and to promote repeat business by
reinforcing positive experiences with the Company's products. The Company's
approach includes the introduction of new products on a timely basis to maintain
customer
7
interest and to respond to changing consumer tastes. Additionally, the
Company will continue to expand its sales into those geographic regions that
will best support the purchase of the Company's upscale, premium grade products.
COMPETITION
The Company's business is subject to significant competition. The fresh
pasta and pasta sauce industry is highly competitive and is dominated by a
two very large multinational companies, Nestle, with its Contadina-Registered
Trademark- and Buitoni-Registered Trademark- brands, and Kraft, with its
DiGiorno-Registered Trademark- brand. There are also a number of smaller
regional competitors, such as Mallards-Registered Trademark- (owned by
Tyson), Romance, and Trios-Registered Trademark-, (owned by ConAgra) which
focuses mostly on the food service trade. Multinational competitors have
significantly more brand name recognition, marketing personnel, and cash
resources than the Company. Moreover, competition for shelf space in grocery
stores is intense and poses great difficulty for smaller food companies.
To date, the Company has benefited from the marketing efforts of Nestle and
Kraft in the pasta and sauce business, and Covent Garden and Stockpot in the
soup business. These companies have committed significant financial resources
towards advertisement, promotion and development of the fresh pasta, sauce and
soup industries, which have contributed to the rapid expansion of these markets
and to the increased consumer attention to the categories. No assurance,
however, can be given that these companies will continue to expend such
resources in the future or that the Company will continue to enjoy such
benefits. In the future, the Company may be required to incur significantly
greater expenses for promotion, advertisement and marketing, which could
adversely affect profitability. There can be no assurance that the Company will
be able to commit funds to promotion, advertisement and marketing while
operating profitably.
Competitive factors in the refrigerated food market include brand
awareness, product quality and taste, healthfulness, price and availability of
grocery and club store shelf space. The Company's suggested retail prices are
slightly higher than its competitors' prices for many of its items to emphasize
the premium quality of its product line. The Company believes the excellent
quality, taste and healthfulness of its products are superior to that of its
competitors, although its brand name recognition and access to grocery shelf
space is significantly less than some of its competitors. The Company also
believes that the quality of its products and the variety of its product lines
provide a competitive advantage over many companies which market more
traditional products.
MANAGEMENT
Information relating to directors and executive officers of the Company is
set forth in Part III of this report.
MANAGEMENT INFORMATION SYSTEMS
The Company purchased a new integrated management information system in
1996 with the objective to implement an electronic link between the Company's
retail sales operations, production facilities and the corporate offices. The
Expandable MRP system ("Expandable") is central to the Company's efforts to
automate, centralize and streamline many of the Company's key functions
including accounting and finance, human resources, and production and inventory
control. During the fall of 1998 the Company successfully installed a new
version of Expandable to ensure compliance with year 2000 needs. All other
systems were successfully updated to comply with year 2000 needs during 1999.
GOVERNMENT REGULATION
The Company is subject to the regulations of the U.S. Food and Drug
Administration (FDA), the U.S. Department of Agriculture (USDA), and state and
local regulations relating to cleanliness, maintenance of food production
equipment, food storage, cooking and cooling temperatures and food handling, and
is subject to unannounced on-site inspections of production facilities.
Regulations in new markets, new regulations in existing markets, and future
changes in existing regulations may adversely impact the Company by raising the
cost of production and delivery of pasta and sauces and/or by affecting the
perceived healthfulness of the Company's products. A failure to comply with one
or more regulatory requirements could result in a variety of sanctions,
including fines and the withdrawal of the Company's products from store shelves.
The Company is not aware of any currently existing facts or circumstances that
it is not addressing which would cause it to fail to comply with any of the
regulations to which it is currently subject.
8
EMPLOYEES
As of December 31, 2000, the Company employed a total of approximately
270 persons, including 34 administrative personnel, 5 sales personnel, 5
drivers, and 226 distribution and production personnel. None of the Company's
employees are represented by a labor union and the Company believes its
relations with its employees are good.
TRADEMARKS AND SERVICE MARKS
The Company has registered the "Monterey Pasta Company" name and
"postage stamp" logo design with the United States Patent and Trademark
Office. There can be no assurance that competitors will not adopt similar
names or logo designs outside the protection of the Company's trademark
registration. In July of 1999 the Company applied for registration with the
United States Patent and Trademark Office for the "Homestyle-Fresh" trademark
currently used in its soup line. In March of 1999, the Company acquired the
right to use the "Arthur's" label with its acquisition of the Frescala Foods,
Inc. business. In December 2000, it acquired the right to use the "Nate's"
label through its acquisition of the Nate's polenta business (See "Liquidity,
Capital Resources, and Business Acquisitions", page 13).
ITEM 2. PROPERTIES
Effective February 6, 1998, the Company leased an additional 4,649 sq. ft.
in the same building it now occupies in Monterey County, California, bringing
the total square footage leased to 42,315 pursuant to a lease which expires in
2004 with two ten year options for renewal. The additional space was used to
increase the efficiency of the production and storage areas. In June of 1998,
the Company leased an additional 1,365 sq. ft. in the same building, pursuant to
the same lease expiration. This area is used for office space. The total square
footage now leased by the Company is 43,680, or approximately one acre of
building space, and comprises the entire building. Company management believes
that the properties/facilities are suitable and adequate for the Company's
current needs, although it is investigating the leasing of additional space to
provide for future growth.
The Company currently leases two outside warehouse facilities in Salinas,
California within the same warehouse complex approximately three-miles from its
production facility. One, comprised of approximately 15,000 square feet, is used
to store excess coolers and display racks, packaging materials, idle equipment
and company records, and is a month-to-month lease. The second is for 20,000
square feet of refrigerated storage. The term is for five years and expires
January 2005.
During February 1996, the Company leased 9,160 square feet of executive
office and training space facilities in downtown San Francisco. The Company
vacated this space in January 1997 following a staff reduction and
consolidation of all operations in the Company's factory in Monterey County.
The Company subleased the San Francisco property at a small premium, as of
April 1, 1997, to a large publishing interest for the remaining term of the
lease, which expires February 14, 2001.
ITEM 3. 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 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 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 Plaintiffs' attorney's fees. The court approved the fee application
and on October 27, 2000 the Company received a check in the amount of $472,406
including the settlement amount of $470,000, and interest of $2,406. The
stockholders' equity account was increased to reflect the settlement amount,
net of the related $180,000 tax effect.
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.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote during the fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on December 7, 1993 at a
price to the public of $6.00 per share. Since that date, the Company's Common
Stock has traded on the NASDAQ National Market System under the symbol "PSTA."
The table on the following page sets forth for the period indicated, the high
and low sales prices of shares of the Common Stock on the NASDAQ National Market
System.
HIGH LOW
---- ---
Fiscal year 1999:
First quarter $ 3 7/32 $1 5/16
Second quarter 3 2 3/8
Third quarter 3 1/2 2 1/2
Fourth quarter 4 1/2 2 9/16
Fiscal year 2000:
First quarter $4 13/16 $ 3 3/8
Second quarter 4 5/16 3 1/4
Third quarter 5 1/4 3 5/8
Fourth quarter 5 7/8 4 5/16
As of February 04, 2001, there were 254 stockholders of record of the
Common Stock and approximately 4,600 investors with shares in street name.
DIVIDEND POLICY
The Company has not paid any cash dividends to Common stockholders, except
to certain holders of private placement common stock in 1997, which represented
guaranteed yield for the period from stock issuance in April, 1997 until the
Registration Statement on Form S-3 was effective on October 24, 1997. The
Company intends to retain future earnings in its business and does not
anticipate paying cash dividends on the outstanding Common stock in the near
future.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company. These data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in Form 10-K.
Years Ended
-------------------------------------------------------------------
1996 1997 1998 1999 2000
-------------------------------------------------------------------
(dollar amounts in thousands except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues from continuing operations $ 24,492 $ 23,447 $ 26,217 $ 36,902 $ 47,962
Income (loss) from continuing operations $ (8,453) $ 474 $ 2,037 $ 7,027 $ 6,141
Income from discontinued operations $ 220 $ 37 $ - $ - $ -
Basic net income (loss) per common share $ (1.13) $ 0.02 $ 0.16 $ 0.55 $ 0.46
Diluted income (loss) per common share $ (1.13) $ 0.02 $ 0.16 $ 0.54 $ 0.44
Weighted average primary shares outstanding 8,276,608 10,458,451 12,979,055 12,711,801 13,222,062
Weighted average diluted shares outstanding 8,276,608 10,458,451 12,979,055 13,074,776 13,835,384
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $ (377) $ 2,444 $ 1,601 $ 4,128 $ 9,979
Total assets $ 10,789 $ 11,029 $ 10,835 $ 18,666 $ 25,369
Total debt and capital lease obligations $ 1,635 $ 1,797 $ 2,277 $ 761 $ 73
Stockholders' equity $ 5,085 $ 7,360 $ 6,709 $ 14,610 $ 21,843
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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 a variety of products to grocery and club stores
throughout the United States, selected regions in Canada, and part of Latin
America. The Company's overall strategic plan is to enhance the value of the
Monterey Pasta Company brand name by distributing its gourmet products through
multiple channels of distribution.
The Company's product distribution to grocery and club stores increased
from approximately 25 stores as of December 1989, to approximately 4,300 by
December 1995, declined to approximately 3,100 as of December 28, 1997 and
increased, once again, to approximately 6,000 stores by December 31, 2000.
During 1994, 1995 and 1996, significant costs were incurred to promote the
expansion that occurred, including product demonstration, advertising,
warehousing, and distribution costs and the hiring of additional personnel. In
1997, the focus was changed to developing a profitable distribution base. Hence,
the reduction in store totals, and the return to profitability. During 1998
through 2000 the Company added profitable retail and club distribution including
approximately 170 additional club stores, 550 retail stores as part of the
March, 1999 Frescala Foods acquisition, and several new retail chains comprising
approximately 2,200 stores.
The success of the Company's efforts to increase revenue will depend on
three key factors: (1) whether grocery and club store chains will continue to
increase the number of their stores offering the Company's products, (2) whether
the Company can continue to increase the number of grocery and club store chains
offering its products, and (3) continued introduction of new products that meet
consumer acceptance. Grocery and club store chains continually re-evaluate the
products carried in their stores, and no assurances can
11
be given that the chains currently offering the Company's products will continue
to do so in the future or that such chains will not reduce the number of stores
carrying the Company's products.
The Company believes that access to substantially greater capital
resources, coupled with continued reduction of its administrative and production
costs as a percent of sales revenue, will be key requirements in the Company's
efforts to enhance its competitive position and increase its market penetration.
In order to support its expansion program, the Company has developed, and is
continuing to develop new products for consumers and revised advertising and
promotional activities for its retail grocery and club store accounts. 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.
OPERATIONS FOR 1998, 1999 AND 2000
Net revenues from continuing operations were $26,217,000, $36,902,000
and $47,962,000 for 1998, 1999, and 2000, respectively, reflecting an annual
increase in sales of 41% for 1999, when compared to 1998, and a 30% increase for
2000 when compared to 1999. The 1999 and 2000 increases resulted from increased
store numbers from approximately 3,460 at the end of 1998 to approximately 4,540
individual grocery and club stores by year-end of 1999, and approximately 6,000
at year end 2000.
Gross margin remained close to the 1999 level at 38.5% compared with
38.3%, although the last two quarters of 2000 evidenced an upward trend in gross
margin at 39.4% and 39.0% respectively. The increase came after the Company
experienced a decline in 1999 to 38.3% from 40.6% the prior year. The 1999
decline was caused by excess distribution expenses arising from outside
warehouse arrangements which were replaced by a company-run distribution complex
in December 1999, slightly lower gross margin percent caused by the conversion
of most of the remaining customers to Restaurant-Style product by the fourth
quarter of 1999, and expenses associated with intensive new product development
efforts. In addition, lower gross margin percent was experienced in 1999 on the
Frescala Foods sales over the first six months of operation (after the March
1999 purchase) until the San Antonio, Texas facility was closed and the business
fully assimilated into the Salinas, California plant. Significant packaging and
label write-offs, extensive new product development and introduction, and a
higher ratio of lower gross margin private label business influenced the 2000
gross profit percent. Although the private label gross margins are lower than
those of other customers, operating margins are comparable, as there are few
related deductions below the gross profit line.
Selling, general and administrative expenses ("SG&A") increased to
$12,366,000 up $2,146,000 or 21% from $10,220,000 in 1999, which had increased
$1,909,000 or 23% from 1998. The 1999 expense level reflected the first year
SG&A expenses increased since 1996 when they were $16.2 million. The 1996
expense level was materially reduced in 1997 to $8.7 million as a result of
redefined marketing focus, and facilities consolidation from San Francisco to
Salinas, with reduced headcount and related overhead expenses implemented in
late 1996 and early 1997. Further decreases in administrative costs continued
during 1998 with a $1.1 million reduction in professional fees, public reporting
expense, insurance costs, and other administrative expenses, partially offset by
increased expenses in the sales and marketing area related to new customers and
stores. In 1999, variable costs associated with the 41% sales increase,
additional product demonstration expense related to the added club store
business, full year expense for two marketing positions, and normal wage and
salary inflation contributed to the increase over 1998. The 21% increase in 2000
over 1999 resulted primarily from variable costs associated with the 30% sales
increase. SG&A expenses as a percent of sales were 31.7%, 27.7% and 25.8% for
1998, 1999, and 2000, respectively. Management believes the current level of
SG&A expenses is consistent with efficient operations, and additional expenses
in future periods, mainly in the sales and marketing area, will be directly
associated with increased levels of sales.
Depreciation and amortization expense, included in cost of sales and
SG&A, increased to $1,395,000, or 3% of net revenues in 2000, compared to
$1,183,000 or 3% of net revenues in 1999, and $999,000 or 4% in 1998. The
increases over the past two years relate primarily to capital expenditures in
the Salinas, California production facility and the addition of the Frescala
Foods business that added $94,000 amortization expense during 1999, and
$126,000 in 2000. The Company anticipates further increases in depreciation
and amortization in future periods as additional equipment is purchased and
placed in service, and goodwill expense increases with the acquisition of the
Nate's polenta business in December 2000 (See "Liquidity, Capital Resources,
and Business Acquisitions", page 13).
Net interest expense of $40,000 was recognized in 2000 compared to net
interest expense of $156,000 in 1999 and $250,000 in 1998. The 1999 decrease
compared with 1998 was associated with additional cash generated by the
increased profit level, which reduced loan balances, reduction in interest rate
premium over prime by the Company's lender, and reductions in prime rate. The
2000 decline, in spite of higher overall interest rates, resulted from the
reduction of debt associated with increased profitability. At year-end 2000 the
Company had no bank debt and the net interest expense for the year included
$27,000 of interest income.
12
LIQUIDITY, CAPITAL RESOURCES, AND BUSINESS ACQUISITIONS
During the twelve months ended December 31, 2000, $6,000,000 of cash
was provided by the Company's operations, compared to $4,701,000 provided in
1999. The decline in 2000 net income of $886,000 was offset by a $2,921,000
change in deferred tax assets leaving a net increase of $2,035,000 attributable
to profit performance associated with operations, excluding the change in
deferred tax assets. A decrease in Accounts Payable was primarily responsible
for reducing the $2,035,000 adjusted net income performance number to the
$1,299,000 net increase in cash provided by operations. The 1999 accounts
payable balance included nearly $800,000 in accrued fixed asset expenditures
associated with the significant plant expansion project completed in 2000. The
2000 accounts payable balance was $613,000 lower because of a much lower level
of capital commitments at year-end. The 2000 improvement followed a $1.6
improvement of 1999 over 1998, most of which was contributed by an increased net
cash income (net income plus depreciation and amortization).
In December 1995, the Company obtained a $3,000,000 credit facility
from a commercial lending institution. This facility was renegotiated with
another bank in July 1997 to avail the Company of lower interest rates. It
was increased to $4,000,000 in March, 1998 to allow for a stock repurchase of
2,365,066 shares of Common from Clearwater Fund IV LLC for a total purchase
price of $2,690,000 or $1.1375 per share, resulting in a 15.6% reduction in
shares outstanding. In July 1998, the facility was renewed for additional
years with lower interest rates on the term notes and the receivables and
inventory line, as well as no loan fees. A term note for $750,000 was
negotiated in March 1999 to assist with the funding of the Frescala Foods
acquisition. This note was repaid in full in September of 1999. The current
credit facility, renegotiated in August, 2000 is at $10.0 million, of which
zero was outstanding at December 31, 2000 (See Note 4 to the financial
statements). The new facility is priced at LIBOR, plus 185 basis points for a
debt/tangible net worth ratio of .50:1, with LIBOR premiums increasing in 25
basis point increments based on increased debt/tangible net worth increments
of .25:1.
A total of $500,000 in cash was used in 2000 in connection with the
Nate's polenta acquisition, including costs associated with the transaction
compared with $1,516,000 in 1999 associated with the March 1999 acquisition of
Frescala Foods, Inc. (Refer to following paragraph). In addition, $4,308,000 in
cash was used to purchase equipment and leasehold improvements in 2000, compared
to $2,415,000 in 1999. Approximately $1.3 million of the 1999 capital
expenditures were part of a $3.5 million capital plan approved by the Company's
Board of Directors in October 1999 for the period of October 1999 through
December 2000. The Company made additional capital expenditures in 2000 of
approximately $1.7 million to expand production capability, improve packaging
efficiency and maintain quality and upgrade utilities including boiler capacity
and waste water treatment, as well as another $.6 million for a stuffed
pizza/calzone line. All future capital expenditures are expected to be funded
with a combination of cash flow from operations and use of the Company's credit
facility.
On March 12, 1999, the Company purchased the operating assets and
inventory of Frescala Foods, Inc. ("Frescala"), a San Antonio, Texas based
fresh pasta and sauce producer with an emphasis on private label production.
The consideration to Frescala consisted of $1,345,000 in cash plus fully
vested options to purchase 300,000 shares of the Company's common stock. The
options have an approximate fair market value of $145,000, an exercise price
of $2.33 per share, and a three-year expiration. Additionally, Frescala
owners received an earn-out of $97,000 as of October 31, 1999 based upon
Frescala sales above a predetermined level. Funding for the transaction came
from a new $750,000 two-year term loan, since repaid, use of existing
accounts receivable and inventory line, and cash flow from operations.
The total consideration of $1,587,000 plus related acquisition costs of
$73,000, was allocated to identifiable fixed assets totaling $200,000 and
inventories of $217,000. The balance of $1,243,000, which includes trademarks
and recipes not specifically quantifiable, was charged to goodwill.
On December 8, 2000, the Company purchased the Nate's polenta
business of South San Francisco, California for a total consideration of
$469,000, plus related acquisition costs of $31,000. Approximately $19,000
was allocated to inventory. The remaining $481,000, which included recipes, a
licensing agreement, and customer list was charged to goodwill. Additionally,
Nate's former owners could receive an earn-out of a maximum of $100,000 to be
paid as of August 8, 2001 based upon Nate's sales above a predetermined level.
Management believes that the Company's $10 million credit facility and
cash generated from operations will provide adequate funding to meet its needs
for normal operations and capital purchases through 2001.
13
DEFERRED TAX ASSETS
Due to the prior history of losses, a 100% valuation allowance against
deferred tax assets was provided in 1998 and earlier years, as management could
not determine that it was more likely than not that they would be realized. As
of December 26, 1999, however, the Company had experienced three consecutive
years of increasingly profitable operations. Accordingly, a portion of the
valuation allowance totaling $3,430,000 has been reversed as of December 26,
1999, since the Company believes it is more likely than not that this portion of
deferred tax assets will be realized. The remaining reserves were released in
2000. At year-end 2000 the Company had $3,939,000 in deferred tax assets on its
books. Assuming the company remains profitable, it will relieve a substantial
portion of the deferred tax asset during 2001, as it expects to record book
taxes close to the Federal and State corporate rates. Expectations are to pay a
much lesser amount of cash taxes (See note 8 to the financial statements).
SALES AND MARKETING
The Company's sales and marketing strategy targets sustainable growth.
Its focus is on increasing sales through expansion of its club store and retail
grocery business, increasing its distribution through the rapidly growing number
of natural and organic food retailers, and the introduction of innovative new
products designed to meet consumer needs.
After gaining over 300 new club stores during 1997 and 1998, expansion
of the Company's club store business continued in 1999 with the rollout of the
Company's products in Costco's Los Angeles and San Diego divisions with 72 total
warehouses. The Company's presence in Costco was approximately 230 stores at
year-end 2000. Distribution of the Company's products also continues to grow
with the national expansion of Sam's Club. Monterey Pasta's products are now
found in approximately 430 Sam's Club locations, an increase of approximately
100 stores over 1998.
During 1999 the Company's retail grocery distribution increased
significantly with the addition of over 200 Ralph's stores in California, 79
stores of Denver-based King Soopers, 44 stores of Norfolk, VA-based Farm Fresh,
Inc., 150 Smart and Final Stores throughout the western United States, as well
as a third Direct Store Delivery route in Northern California. It also acquired
750 new stores with the March 1999 Frescala acquisition, of which it retained
550 at year-end 1999. During 2000 the net retail store increase was
approximately 1,430 with the addition of 24 Whole Foods and Wild Oats stores,
147 Raley's, 30 Super Targets, 77 Vons, 35 Furr's, and the balance, over 1,100
stores from an increased presence with a large private label customer, to whom
the Company formerly sold its branded product.
Monterey Pasta's products typically are made with no preservatives or
artificial ingredients. Capitalizing on this strength, the Company continues to
pursue increased distribution through natural and organic food retailers, whose
growth has exceeded 20% in recent years. The Company estimates there are 450
potential natural and organic retail grocery stores available, as potential
markets for its products.
During 2000 the Company continued its emphasis on bringing innovative
new products to the market place with the introduction of refrigerated stuffed
pizzas, calzones, pierogies, a tortilla soup, and a vodka sauce. The
refrigerated pizzas and calzones were introduced late in the third quarter with
a guaranteed shelf life of 30 days, and, to the company's knowledge, are the
only extended shelf life refrigerated pizzas and calzones. The pierogies,
introduced in the first quarter of 2000, are also the only extended shelf life
refrigerated pierogy the Company is aware of, have been accepted nationally at
Sam's Club stores, and have regional distribution elsewhere. These introductions
are part of an ongoing effort to rapidly introduce new products in the
refrigerated section which further the Company's gourmet image.
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 fifteen consecutive quarters. At December 31, 2000, the Company had an
accumulated deficit of $19,512,000. There can be no assurance that the
Company will maintain its recent profitability in the long or short term.
14
- - 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 2001, assuming that
its existing bank lines can be extended when they expire in August of 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, each 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 through 2000. 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, or their magnitude.
- - VOLATILITY OF STOCK PRICE. The market price of the Company's common stock
has fluctuated substantially since the initial public offering of the
Company's common stock in December 1993. Such volatility may, in part, be
attributable to the Company's operating results or to changes in the
direction of the Company's expansion efforts. In addition, changes in
general conditions in the economy, the financial markets or the food
industry, natural disasters or other developments affecting the Company or
its competitors could cause the market price of the Company's common stock
to fluctuate substantially. In addition, in recent years, the stock market
has experienced extreme price and volume fluctuations. This volatility has
had a significant effect on the market prices of securities issued by many
companies, including the Company, for reasons sometimes unrelated to the
operating performance of these companies. Any shortfall in the Company's
net sales or earnings from levels expected by securities analysts or the
market could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.
Additionally, the Company may not learn of such shortfalls until late in
the fiscal quarter. This could result in an even more immediate and
significant adverse impact on the trading price of the Company's common
stock upon announcement of the shortfall or quarterly operating results.
- - RISKS INHERENT IN FOOD PRODUCTION. The Company faces all of the risks
inherent in the production and distribution of refrigerated food products,
including contamination, adulteration and spoilage, and the associated
risks of product liability litigation and declines in the price of its
stock which may be associated with even an isolated event. The Company has
a modern production facility, employs what it believes is state-of-the-art
thermal processing, temperature-controlled storage, HAACP programs intended
to insure food safety, and has obtained USDA approval for its production
plant. However, there can be no assurance that the Company's procedures
will be adequate to prevent the occurrence of such events.
- - DEPENDENCE ON MAJOR CUSTOMERS. During 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 230 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 430 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, 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
15
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings' effect of the hedged forecast transaction. For a derivative NOT
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133, as amended, is effective for all fiscal quarters
beginning after June 15, 2000. Historically the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of this new standard to affect
its financial statements. There was no material impact from the application of
SFAS 133 upon adoption.
In December 1999, the SEC staff released Staff Accounting Bulletin
(SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides
interpretive guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 must be applied to financial statements
no later than the quarter ended September 30, 2000. There was no material impact
from the application of SAB 101 on the Company's financial position, results of
operations, or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 2, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. FIN 44 did not
have a material impact on the Company's financial position, results of
operations, or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required
by this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 6, 2001, the directors, executive officers, and other
significant employees of the Company are as follows:
DIRECTORS AND EXECUTIVE OFFICERS:
Name Age Position
---- --- --------
Charles B. Bonner 58 Director
Thomas E. Kees 50 Director
R. Lance Hewitt 61 Chief Executive Officer, President
and Director
Floyd R. Hill 57 Director
Van Tunstall 54 Director
James Wong 53 Director
Walter L Henning 56 Director
Stephen L. Brinkman 52 Chief Financial Officer,
Corporate Secretary
and Director
OTHER SIGNIFICANT EMPLOYEES:
Name Age Position
---- --- --------
Lynn Port 56 Plant Controller
Roy G. Scotton 41 Director-Logistics
Peter F. Klein 41 Plant Manager
Ron Hendershott 50 Director-Technical Services
Dan Engle 49 Sales Manager-Central/Southeast
Rick Falkenberg 48 Director-Quality Assurance
Clifford Farmer 44 Natural Foods/DSD Sales Manager
Lisa Player 40 Sales Manager-East
Joseph Stirlacci 40 National Sales Manager
Normally each director is elected for a period of one year and serves
until the stockholders duly elect his or her successor. Directors may be elected
by the Board to fill a vacancy between annual stockholder meeting elections.
The principal occupations of each director and executive officer of the
Company, for at least the past five years, are as follows:
CHARLES B. BONNER, DIRECTOR. Mr. Bonner served as a Director of the
Company from 1993 through January 1995, and was reappointed as a Director
effective September 1995. Mr. Bonner is President of Pacific Resources, Inc., a
mergers and acquisitions advisory firm, a position he has held since September
1989. Mr. Bonner also serves as a director for the following entities: Internet
Plus, Inc., Everything Metal Imaginable, Inc., and Daystar Venture Fund, LP.
17
THOMAS E. KEES, DIRECTOR. Mr. Kees is Chief Marketing Officer for Goods
Market Exchange, a business to business online alternate source buying service.
He previously served as President, Chief Executive Officer, and Chairman of
Legacy Brands, Inc. from September 1995 to December 2000. Legacy was a licensing
and marketing company for highly recognized food products such as the Mrs.
Field's brands. From 1994 to 1995 he was the Senior Vice President of Retail
Development at A.C. Nielsen where he founded and chaired the Nielsen Retail
Advisory Board. Mr. Kees served as Executive Vice President of Raley's
Supermarkets and Drug Centers, a regional sales operator of 85 stores in
Northern California and Nevada, from 1992 to 1994. Mr. Kees was elected to the
Board in June of 1998.
R. LANCE HEWITT, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr.
Hewitt joined the Company in June 1997 as President and Director. He was named
Chief Executive Officer in August 1997. Mr. Hewitt was most recently President
of Carriage House Fruit Company from 1995 to 1997. He was Chief Operating
Officer of Ingro Mexican Foods from 1988 to 1995. Hewitt also served as Vice
President of Marketing and Sales for the Lawry's Foods division of Thomas J.
Lipton, Inc., a subsidiary of Unilever, and spent fifteen years with McCormick
Schilling, Inc. in various executive capacities.
FLOYD R. HILL, DIRECTOR. Mr. Hill co-founded the Company in 1989,
served as its Secretary/Treasurer and Chief Executive Officer until 1993, and
served as a Director of the Company from 1989 until 1994. Mr. Hill became a
Director again in January 1995. He also served as the Senior Vice President of
Production from August 1993 until November 1995. From 1969 until 1991, Eli Lilly
& Co. employed Mr. Hill in various marketing and product development positions.
Mr. Hill joined Organic Food Products in November 1995 as Chief Operating
Officer, and was promoted to Chief Executive Officer in December 1995, a
position he held until April 1998. He is currently the owner and operator of a
motel in Tombstone, Arizona.
VAN TUNSTALL, DIRECTOR. Mr. Tunstall was elected to the Board of
Directors in February 1997. Since 1997, he has served as President of the
Central Coast Group, a strategic consulting and business services firm. He has
been an independent consultant with a variety of companies since 1997. Mr.
Tunstall was a senior executive with Gilroy Foods, Inc., an international
manufacturer of various food product ingredients, from 1977 to 1995. He served
as President and Chairman of the Board from 1991 through 1995. Previously, Mr.
Tunstall held various positions with McCormick & Company, Inc.
JAMES WONG, DIRECTOR. Mr. Wong was elected to the Board of Directors in
March 1997. He serves as Chairman and Chief Executive Officer of Directions
International, a U.S. based management consulting firm, which he founded in
1988. He has worked on five continents facilitating strategic alliances with
suppliers and joint venture partners to improve global market share and
profitability. Mr. Wong serves as a director on a variety of boards for both
profit and not-for-profit, privately held organizations.
WALTER L. HENNING, DIRECTOR. Mr. Henning was elected to the Board of
Directors in December 1999. He is currently Plant Manager of the Salinas Plant,
McCormick & Company, Inc., a position he has held since early 1999. Mr. Henning
began his career with McCormick and Company in 1971 as Manager, Technical
Services. He subsequently was promoted several times to other positions in
technical and plant management before leaving the company in 1983 to accept the
position of Vice President of Operations with Tone Spices. Following the sale of
Tone, Mr. Henning returned to a subsidiary of McCormick and Company, Gilroy
Foods, Inc. in 1995 as Vice President of Operations. Mr. Henning remained with
Gilroy Foods, Inc. in the same capacity after it was purchased by ConAgra in
1996, before ultimately returning to McCormick & Company.
STEPHEN L. BRINKMAN, CHIEF FINANCIAL OFFICER, CORPORATE SECRETARY, AND
DIRECTOR. Mr. Brinkman joined the Company in August, 1997 after a 17 year career
with Gilroy Foods, Inc., where he was Controller from 1984 through 1988 and Vice
President, Finance and Administration from 1989 through 1996. Previously, he was
Controller for a large California-based farming company, and worked for Security
Pacific Bank in agricultural banking. Mr. Brinkman was elected to the Board in
October 1999.
The principal occupations of certain other significant employees of the
Company, for at least the past five years, are as follows:
LYNN PORT, PLANT CONTROLLER. Mr. Port came to the Company in January
1998. He has over 24 years experience as a controller in agribusiness,
retail, government and health care concerns, most recently with Country Home
Care from 1995 through 1997. From 1989 to 1995 Mr. Port was Director of
Finance for the Monterey County Housing Authority. Prior to 1989, Mr. Port
served for four years as Controller for Gilroy Canning, Inc., a large tomato
processing company.
ROY G. SCOTTON, DIRECTOR-LOGISTICS. Mr. Scotton joined the Company in
June 1996 as Production Manager and was subsequently promoted to Plant Manager.
Mr. Scotton served at Nestle Food Company from 1987 to 1996, most recently as
Organizational Development Manager. In March 1998, Mr. Scotton was reassigned to
the responsibilities formerly held by Mr. Klein, with the exception of plant
maintenance. He is now head of Logistics and responsible for the Company's new
distribution center.
18
PETER F. KLEIN, PLANT MANAGER. Mr. Klein became Production Manager at
the Company in November 1994, responsible for production and plant maintenance.
In 1996 he was promoted to Plant Superintendent responsible for warehouse
functions and plant maintenance. He has over 15 years of experience in
overseeing warehouse operations, shipping and receiving, and maintenance
services. In March of 1998 Mr. Klein assumed responsibility for plant operations
as well as plant maintenance and production planning, relinquishing his
warehouse functions to Mr. Scotton. Mr. Klein is also responsible for Human
Relations.
RON HENDERSHOTT, DIRECTOR-TECHNICAL SERVICES. Mr. Hendershott joined
the Company in May 1995 as Quality Control Manager. He was promoted to his
current position in March 1998. Mr. Hendershott has over 25 years of managerial
experience in Quality Control/Quality Assurance, technical services, and
regulatory affairs. Prior to joining Monterey Pasta he was with La Victoria
Foods as Director of Quality Control from 1993 through 1995 after spending two
years with Weight Watchers as Manager of Technical Support Services. He also
served American Home Foods for seven years as Regulatory Affairs Manager.
DAN ENGLE, SALES MANAGER-CENTRAL/SOUTHEAST. Mr. Engle joined the
Company in June 2000 to replace Don Anspaugh who left the Company. Mr. Engle has
over 25 years food related sales and management experience, most recently with
Benzel's Bretzels, where he served as Private Label Manager from 1998 to 2000.
He was National Sales Manager with Nutritional Medical from 1997 to 1998, and
Vice President of Sales and Marketing for Freedom Foods from 1996 to 1998. Prior
to that he worked in private label development and sales over a period of 13
years with several companies, after concluding a seven-year stint as Account
Manager with Oscar Mayer.
RICK FALKENBERG, DIRECTOR-QUALITY ASSURANCE. Dr. Falkenberg joined the
Company in December 2000 to further strengthen the Quality Assurance efforts of
the Company with 25 years of food processing background. During his career, he
worked his way up the chain of responsibilities from plant sanitarian, QA lab
manager, QA divisional manager and then Director of Quality and Technical
Services. From 1998 to 2000 Dr. Falkenberg was the Director of Quality and
Technical Services for Basic Vegetable Products, a large industrial ingredient
supplier. Prior to that he ran his own International Business Development
Company for three years. From 1993-1996 he was the Corporate Manager of
Regulatory Affairs for Cadbury Beverages, following a three-year stay with
Gilroy Foods as Quality Assurance Manager.
CLIFFORD M. (RICK) FARMER, NATURAL FOODS/DSD SALES MANAGER. Mr. Farmer
joined Monterey Pasta Company in April 1991 and was responsible for developing
the Company's Direct Store Delivery operation. After the successful startup of
the DSD system, he was promoted in 1992 to Plant Operations/Distribution
Manager. Her moved back to the DSD operation in June 1993 in the capacity of
Northern California Division Manager and was ultimately promoted to Western
Regional Operations Manager. He has been responsible for the Company's DSD
operations since 1993 and in 1999 added natural food and specialty stores to his
responsibilities. Mr. Farmer has over 15 years of food sales and distribution
experience including as four-year stint as Executive Vice President of Golden
Yolk Egg Company in San Francisco.
LISA PLAYER, SALES MANAGER-EAST. Ms. Player joined the Company in the
capacity of Eastern Zone Sales Manager and Sam's Club stores Account Manager in
March 1998 after spending a year as Corporate Sales Account Executive with FTP
Travel Management Group, a large regional corporate travel management company.
Prior to that she was employed for over five years by Trio's Pasta Products of
Chelsea, Massachusetts, a competitor of the Company, ultimately as National
Account Sales Manager. During her tenure with Trio's, Ms. Player was responsible
for the Sam's Club account (which, after her tenure with Trio's, was acquired by
the Company in September, 1997).
JOSEPH STIRLACCI, NATIONAL SALES MANAGER. Mr. Stirlacci served as
Western Zone Manager since December 1995 until December 1999 when he was
promoted to Senior Sales Manager-West. In January 2001 he was promoted to
National Sales Manger. His primary responsibility is to manage, maintain and
secure club store and retail accounts. Mr. Stirlacci has been in the food and
beverage industry since 1981, serving seven years with Young's Market managing
wholesale liquor and wine from 1988 to 1995, after six years as the account
executive for four large grocery chains.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities, to file
with the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than 10% beneficial owners are required by SEC regulations to furnish
the Company with copies of all reports they file under Section 16(a). To the
Company's knowledge, based solely on its review of the copies of such reports
furnished to the Company and written representations that no
19
other reports were required, all Section 16(a) filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were
complied with during the fiscal year ended December 31, 2000, with the
exception that there was one instance of a late filing involving one
transaction each for Messrs. Bonner, Brinkman, Hewitt, Tunstall, Wong, and
Hill, and Kees, respectively during 2000.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
Securities
Name and Underlying All
Principal Position(3) Year Salary $ Bonus $ Other $ Options (#) Other $
--------------------- ---- ---------- ---------- --------- -------------- ---------
R. LANCE HEWITT 2000 $189,899 (1) $89,923 $9,000 (1) 160,000 (1) $ -
President and Chief 1999 $179,846 (1) $ - $9,000 (1) 112,000 (1) $ -
Executive Officer 1998 $175,000 (1) $61,250 $9,000 (1) - (1) $ -
STEPHEN L. BRINKMAN 2000 $132,333 (2) $23,319 $ - 60,000 (2) $ -
Chief Financial Officer 1999 $124,038 (2) $ 3,923 $ - 60,000 (2) $ -
1998 $115,293 (2) $23,540 $ - - (2) $ -
Notes:
(1) Mr. Hewitt was appointed President in June 1997 and Chief Executive
Officer in August 1997. He was eligible for a 35% bonus upon completing his
first full year of employment in 1998. For every year thereafter he is
eligible for a bonus of up to a maximum of 35% of his salary annually for
achieving agreed-upon income targets, as approved by the Board of Directors,
and an additional 25% of his salary for achieving certain specific objectives
for each fiscal period. He was eligible to vest and vested 50,000 options in
1998 and 1999, because he was still employed by the Company on both the first
and second anniversaries of his May 26, 1997 employment agreement. Mr. Hewitt
was also eligible to receive, at the discretion of the Board of Directors, an
additional 200,000 options during the first two years of employment split as
follows: 120,000 for achieving agreed-upon business goals in the first year
and 80,000 for achieving business goals in the second year. The cycle for
measurement of Mr. Hewitt's eligibility for bonus, and those options tied to
performance, was converted to a fiscal year basis during the fourth quarter
of 1998 by resolution of the board of Directors at its October 22, 1998
meeting. At its February 9, 1999 Board of Directors meeting, the directors
awarded 32,000 options to Mr. Hewitt for performance in his first full year
of employment through fiscal year-end 1998, based on the new measurement
cycle. The determination for the remainder of the options was made subsequent
to 1999 fiscal year-end when Mr. Hewitt was awarded an additional 80,000
options which vested as of February 10, 2000. In May 1999 Mr. Hewitt was
granted an additional 80,000 options based on milestones for the year 2000;
27,000 vested since he was still employed by the Company on December 30,
2000, and 53,000 will vest in 2001 based on achievement of performance
objectives mutually agreed upon with the Board. During its February 2000
Board of Directors meeting the Board awarded Mr. Hewitt a 50% bonus for his
1999 performance. On February 29, 2000 Mr. Hewitt was granted an additional
80,000 options based on milestones for the year 2001; 27,000 will vest if he
is still employed by the Company on December 30, 2001, and 53,000 will vest
in 2002 based on achievement of performance objectives for 2001, mutually
agreed upon with the Board. Mr. Hewitt also receives an auto allowance of
$750 per month.
(2) Mr. Brinkman was appointed Chief Financial Officer in September 1997. He
was eligible for, and received, a 20% bonus based upon performance upon
completion of his first full year of employment in 1998. For every year
thereafter he is eligible for a bonus of up to 20% based upon the achievement of
performance criteria agreed upon with the Chief Executive Officer. Mr. Brinkman
was granted 60,000 options in 1997. He vested 10,000 options upon his initial
employment date, 10,000 options on his first anniversary and 10,000 options for
achieving certain performance criteria in his first full year of employment. In
addition, he was eligible to vest and vested 10,000 options on his second
anniversary of employment, 10,000 options for achieving certain performance
criteria in his second full year of employment, 5,000 options on his third
anniversary of employment and 5,000 options for achieving certain performance
criteria in his third full year of employment. The cycle for measurement of Mr.
Brinkman's eligibility for bonus, and those options tied to performance, was
converted to a fiscal year basis during the fourth quarter of 1998 at the
direction of the Chief Executive Officer. He vested 3,000 options for
performance through fiscal year-end 1998, based on the new measurement cycle.
The vesting determination for the remainder of the options was made subsequent
to 1999 fiscal year-end, at which time Mr. Brinkman vested an additional 6,666
options, with 334 forfeited based on 1998 performance criteria. In February 2000
Mr. Brinkman was awarded an 18.8% bonus for his 1999 performance. In May 1999
Mr. Brinkman was granted an additional 60,000 options based on milestones for
the year 2000; 20,000
(3) No other officer received more than $100,000 compensation in any year
20
vested since he was still employed by the Company on August 25, 2000, and 40,000
will vest in 2001 based on achievement of performance objectives mutually agreed
upon with the CEO. On February 29, 2000 Mr. Brinkman was granted an additional
60,000 options based on milestones for the year 2001; 20,000 will vest if he is
still employed by the Company on August 25, 2001, and 40,000 will vest in 2002
based on achievement of 2001 performance objectives mutually agreed upon with
the CEO.
OPTION GRANTS IN LAST FISCAL YEAR
The Board of Directors awarded Mr. Hewitt 80,000 options for his 1998
performance as mentioned in Note 1 to the "Summary Compensation" table on the
preceding page. In addition, the Board granted 80,000 options to Mr. Hewitt and
60,000 options to Mr. Brinkman for the year 2001 which will vest based on
employment status and achievement of certain performance measures (See Notes 1
and 2 under "Executive Compensation"). Neither Mr. Hewitt nor Mr. Brinkman
exercised any options during 2000.
INDIVIDUAL GRANTS
Number of % of Total
Securities Options Potential Realizable Value
Underlying Granted to Exercise On 12/31/00:
Options Employees Or Base Expiration Alternative Grant Date
Name Granted in 2000 Price Date Value
- ------------------------ ------------ ---------- --------- ---------- --------------------------
R. Lance Hewitt 40,000 9.14 $ 2.125 October 20, 2009 $ 58,082
R. Lance Hewitt 40,000 9.14 $ 1.313 October 20, 2009 $ 93,918
R. Lance Hewitt 80,000 18.28 $ 3.344 February 28, 2010 $ 145,602
Stephen L. Brinkman 60,000 13.71 $ 3.344 February 28, 2010 $ 109,202
The Alternative Grant-Date Value of Mr. Hewitt's and Mr. Brinkman's
options was calculated using a Black-Scholes option pricing model assuming no
dividends, a weighted average risk-free interest rate of 6.37% and a
weighted-average volatility of 55.08%.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 2000 December 31, 2000
----------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ---------------- ----------------- ---------------- -----------------
R. Lance Hewitt 239,000 133,000 $646,355 $225,125
Stephen L. Brinkman* 79,666* 100,000 $225,227 $169,375
*Mr. Brinkman forfeited 334 options during 1999 related to performance
objectives for 1998.
EMPLOYMENT CONTRACTS
Mr. Hewitt and Mr. Brinkman have employment agreements, the terms of
which are outlined under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table on page 22 sets forth as of February 6, 2000 (except as
noted in the footnotes to the table), certain information with respect to the
beneficial ownership of the Company's Common Stock by (i) all persons known
by the Company to be the beneficial owners of more than 5% of the outstanding
Common Stock of the Company, (ii) each director and director-nominee of the
Company, (iii) the Chief Executive Officer as of February 6, 2001, and (iv)
all executive officers and directors of the Company for fiscal year 2000
through February 6, 2001, as a group.
21
SHARES OWNED
---------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER OF SHARES PERCENTAGE OF CLASS
- -------------------------------------------------------------- ------------------------ ------------------------
Gruber and McBaine Capital Management (2) 2,526,900 17.4%
50 Osgood Place, Penthouse
San Francisco, CA 94133
Thomas E. Kees (3) 5,000 *
Van Tunstall (4) 67,740 *
Floyd R. Hill (5) 169,000 1.2%
James Wong (6) 12,500 *
R. Lance Hewitt (7) 307,000 2.1%
Charles B. Bonner (8) 134,727 *
Stephen L. Brinkman (9) 137,666 *
Walter L. Henning (10) 33,700 *
All Officers and Directors as a group (8 persons) (11) 867,333 6.0%
- ---------------------
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within
sixty (60) days after February 6, 2001 are deemed outstanding, while such
shares are not deemed outstanding for purposes of computing percentage
ownership of any other person. Options granted under the Company's First
Amended and Restated 1993 Stock Option Plan (the "1993 Stock Option Plan")
generally become exercisable as the underlying shares vest. Unless
otherwise indicated in the footnotes below, the persons and entities named
in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Unless otherwise indicated, the address of each of the
individuals listed in the table is: c/o Monterey Pasta Company, 1528
Moffett Street, Salinas, CA 93905.
(2) Jon D. Gruber and J. Patterson McBaine are the only directors of, and
hold all executive offices of, Gruber and McBaine Capital Management
("GMCM"), an investment advisor. GMCM, together with Messrs. Gruber,
McBaine, Thomas O. Lloyd-Butler, and Eric B. Swergold are the general
partners of Lagunitas Partners, L.P. ("Lag"), a California investment
limited partnership. As of February 06, 2001, GMCM had shared voting and
investment power over 1,930,800 shares; Mr. Gruber has sole voting and
investment power over 293,500 shares and shared voting and investment
power over 1,930,800 shares; Mr. McBaine has sole voting and investment
power over 302,600 shares and shared voting and investment power over
1,930,800 shares; Lag has sole voting and investment power over 780,000
shares; and Mr. Butler and Mr. Swergold have shared voting and investment
power over 1,930,800 shares.
(3) Includes 5,000 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
(4) Includes 37,500 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
(5) Includes 69,000 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
(6) Includes 12,500 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
22
(7) Includes 292,000 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
(8) Includes 81,000 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
(9) Includes 119,666 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
(10) Includes 6,200 shares held in an IRA account in the name of Teresa A.
Henning to which Mr. Henning claims beneficial ownership, and 5,000 shares
subject to options granted under the 1993 Stock Option Plan which are
exercisable within sixty (60) days of February 6, 2001.
(11) Includes 621,666 shares subject to options granted under the 1993 Stock
Option Plan which are exercisable within sixty (60) days of February 6,
2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements of Monterey Pasta Company: Page Number(s)
---------------
Report of Independent Certified Public Accountants 24
Consolidated Balance Sheets: Year-End 1999 and 2000 25
Consolidated Statements of Operations: Years Ended 1998, 1999 and 2000 26
Consolidated Statements of Stockholders' Equity: Years Ended 1998, 1999 and 2000 27-28
Consolidated Statements of Cash Flows: Years Ended 1998, 1999 and 2000 29
Summary of Significant Accounting Policies 30-32
Notes to Consolidated Financial Statements 32-43
Schedule II - Valuation and Qualifying Accounts 44
All other schedules have been omitted since the required information is
contained in the Consolidated Financial Statements or because such
schedules are not required.
(a)(2) Exhibits: See Index to Exhibits on page 46. The Exhibits listed in the
accompanying Index of Exhibits are filed or incorporated by reference as part of
this report. Exhibit Nos. 4.7, 10.1, 10.2, 10.12, 10.13, 10.15, and 10.16 are
management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K filed in the fourth quarter of 2000:
None
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Monterey Pasta Company
We have audited the accompanying consolidated balance sheets of Monterey Pasta
Company and subsidiary as of December 26, 1999 and December 31, 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. We have
also audited the Schedule listed in the accompanying index at Item 14(a). These
financial statements and the Schedule are the responsibility of Monterey Pasta
Company's management. Our responsibility is to express an opinion on these
financial statements and the Schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and Schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
Schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and Schedule. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Monterey Pasta Company
and subsidiary at December 26, 1999 and December 31, 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with generally accepted accounting
principles.
Also, in our opinion, the Schedule presents fairly in all material respects, the
information set forth therein.
BDO Seidman, LLP
San Francisco, California
January 29, 2001
24
MONTEREY PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
December 26, 1999 December 31, 2000
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents (Note 1) $ 71,399 $ 1,457,499
Accounts receivable, less allowances of
$136,127 and $242,301 (Notes 1, 4 and 11) 3,813,611 4,944,009
Inventories (Notes 2 and 4) 2,703,314 3,088,097
Deferred tax assets - short term (Note 8) 1,036,000 3,379,200
Prepaid expenses and other (Note 10) 487,433 415,438
------------ ------------
Total current assets 8,111,757 13,284,243
Property and equipment, net (Notes 3 and 4) 6,789,265 9,838,097
Deferred tax assets - long term (Note 8) 2,394,000 379,800
Intangible assets, net (Note 15) 1,281,277 1,590,555
Deposits and other 89,716 96,316
------------ ------------
Total assets $ 18,666,015 $ 25,189,011
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,752,967 $ 2,139,767
Accrued payroll and related benefits 239,703 440,155
Accrued liabilities (Note 13) 303,006 873,070
Current portion of notes, loans, and
capitalized leases payable (Notes 1, 3 and 4) 688,186 32,398
------------ ------------
Total current liabilities 3,983,862 3,485,390
Notes, loans, and capitalized leases payable,
less current portion (Notes 1, 3 and 4) 72,577 40,179
------------ ------------
Total liabilities 4,056,439 3,525,569
------------ ------------
Commitments and contingencies (Notes 5, 9, 11, 13, and 15)
Stockholders' equity (Notes 6, 7, and 15):
Common stock, $.001 par value, 70,000,000
shares authorized, 12,938,922 and
13,313,021 issued and outstanding 40,262,579 41,175,344
Accumulated deficit (25,653,003) (19,511,902)
------------ ------------
Total stockholders' equity 14,609,576 21,663,442
------------ ------------
Total liabilities and stockholders' equity $ 18,666,015 $ 25,189,011
============ ============
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
25
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
--------------------------------------------
1998 1999 2000
--------------------------------------------
Net revenues (Note 11) $ 26,217,297 $ 36,901,772 $ 47,961,799
Cost of sales 15,579,059 22,748,471 29,474,723
------------ ------------ ------------
Gross profit 10,638,238 14,153,301 18,487,076
Selling, general and administrative (Notes 5, 10 and 13) 8,310,908 10,219,615 12,366,056
------------ ------------ ------------
Operating income 2,327,330 3,933,686 6,121,020
Loss on disposition of assets (26,387) (13,004) (37,421)
Other income (expense), net 16,843 1,736 (11,260)
Interest expense, net (Note 4) (249,693) (156,233) (40,338)
------------ ------------ ------------
Income before provision for income taxes 2,068,093 3,766,185 6,032,001
Income tax benefit (provision) (Note 8) (31,135) 3,261,245 109,100
------------ ------------ ------------
Net income $ 2,036,958 $ 7,027,430 $ 6,141,101
============ ============ ============
Net income per common share (Note 6):
Basic income per common share $ 0.16 $ 0.55 $ 0.46
Diluted income per common share $ 0.16 $ 0.54 $ 0.44
Basic shares outstanding 12,979,055 12,711,801 13,222,062
Diluted shares outstanding 12,979,055 13,074,776 13,835,384
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
26
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1997, 1998, AND 1999
Preferred Stock Common Stock Stockholder
------------------ --------------------------- Note Accumulated
See Notes 6 and 7 Shares Amount Shares Amount Receivable Deficit Total
- ---------------------- ------- -------- ----------- ------------ ---------- ------------ ------------
Balance, end of 1997 -- -- 15,206,259 $ 42,640,107 $(562,500) $(34,717,391) $ 7,360,216
Issuance of common stock under
Employee Stock Purchase Plan, at
an average net price per share
of $1.14 -- -- 1,420 1,612 -- -- 1,612
Reversal of share subscription -- -- (300,000) (562,500) 562,500 -- --
Reclassification of above
share subscription as an option -- -- -- 51,000 -- -- 51,000
Repurchase and retirement of
Clearwater Fund IV, Ltd.
Common shares, at an average
total price per share of $1.16 -- -- (2,365,066) (2,740,563) -- -- (2,740,563)
Net income for the year -- -- -- -- -- 2,036,958 2,036,958
------- -------- ----------- ------------ --------- ------------ ------------
Balance, end of 1998 -- -- 12,542,613 39,389,656 -- (32,680,433) 6,709,223
Issuance of common stock under
Employee Stock Purchase Plan, at
an average net price per share
of $1.47 -- -- 1,534 2,257 -- -- 2,257
Issuance of common stock as
part of net warrant exercised
with an exercise price of
$2.25 per share -- -- 12,489 (5) -- -- (5)
Issuance of common stock as
part of cash warrant exercise
with an exercise price of
$2.25 per share -- -- 40,300 90,675 -- -- 90,675
Issuance of common stock as
part of cash stock option
exercises -- -- 41,986 72,496 -- -- 72,496
Issuance of common stock to
former CEO upon repayment of
non-recourse stock loan -- -- 300,000 562,500 -- -- 562,500
Fair market value of options
issued as part of acquisition
of business 145,000 145,000
Net income for the year -- -- -- -- -- 7,027,430 7,027,430
------- -------- ----------- ------------ --------- ------------ ------------
Balance, end of 1999 -- $ -- 12,938,922 $ 40,262,579 $ -- $(25,653,003) $ 14,609,576
======= ======== =========== ============ ========= ============ ============
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
27
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 1998, 1999, AND 2000
Preferred Stock Common Stock
------------------- ------------------------ Accumulated
See Notes 6 and 7 Shares Amount Shares Amount Deficit Total
- ------------------------ ------- --------- ---------- ----------- ------------ -----------
Balance, end of 1999 -- $ -- 12,938,922 $40,262,579 $(25,653,003) $14,609,576
Issuance of common stock under
Employee Stock Purchase Plan, at
an average net price per share
of $1.47 -- -- 3,006 4,141 -- 4,141
Issuance of common stock as
part of net warrant exercised
with an exercise price of
$2.25 per share -- -- 152,839 -- -- --
Issuance of common stock as
part of cash warrant exercise
with an exercise price of
$2.25 per share -- -- 115,950 260,888 -- 260,888
Issuance of common stock as part
of cash stock option exercises -- -- 102,304 163,403 -- 163,402
Net settlement less legal
expenses and tax effect from
Clearwater Fund IV LLC (Note 6) -- -- -- 274,453 -- 274,453
Tax benefit of disqualifying
dispositions (Note 8) -- -- -- 117,400 -- 117,400
Stock based compensation -- -- -- 92,480 -- 92,480
Net income for the year -- -- -- -- 6,141,101 6,141,101
------- --------- ---------- ----------- ------------ -----------
Balance, end of 2000 -- $ -- 13,313,021 $41,175,344 $(19,511,902) $21,663,442
======= ========= ========== =========== ============ ===========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
28
MONTEREY PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
-------------------------------------------
See Note 12 - Supplemental Cash Flow Information 1998 1999 2000
----------- ------------ ------------
Cash flows from operating activities:
Net Income $ 2,036,958 $ 7,027,430 $ 6,141,101
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes -- (3,430,000) (509,000)
Depreciation and amortization 998,649 1,182,883 1,394,204
Provisions for allowances for bad debt, returns,
adjustments and spoils 477,674 693,727 476,341
Tax benefit for disqualifying dispositions -- -- 117,400
Provision for inventory reserves 55,000 149,500 --
Loss on disposition and writedown of
property and equipment 26,387 13,004 37,421
Expenses paid in common stock and options 51,000 -- 92,480
Changes in assets and liabilities:
Accounts receivable (99,494) (2,444,773) (1,606,739)
Inventories (650,107) (821,886) (365,713)
Prepaid expenses and other assets 177,954 884,243 65,395
Accounts payable 381,613 1,422,318 (613,200)
Accrued expenses (398,712) 24,289 770,516
----------- ------------ ------------
Net cash provided by operations 3,056,922 4,700,735 6,000,206
Cash flows from investing activities:
Purchase of property and equipment (932,596) (2,414,538) (4,308,418)
Repurchase of common stock (2,740,563) -- --
Proceeds from sale of property and equipment 5,293 27,600 --
Acquisition of business operating assets (109,599) (1,515,741) (500,388)
----------- ------------ ------------
Net cash used in investing activities (3,777,465) (3,902,679) (4,808,806)
----------- ------------ ------------
Cash flows from financing activities:
Bank overdrafts (5,692) -- --
Proceeds from revolving line of credit 8,181,621 16,393,424 11,682,598
Repayments on revolving line of credit (8,611,259) (16,311,796) (12,287,483)
Proceeds from long-term debt 2,399,234 750,000 --
Securities and debt issue costs -- -- --
Repayment of long-term debt and capital lease obligations (1,593,556) (2,347,853) (83,301)
Section 16(b) settlement -- -- 454,453
Proceeds from issuance of common stock 1,612 727,923 428,433
----------- ------------ ------------
Net cash provided by (used in) financing activities 371,960 (788,302) 194,700
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (348,583) 9,754 1,386,100
Cash and cash equivalents, beginning of year 410,228 61,645 71,399
----------- ------------ ------------
Cash and cash equivalents, end of year $ 61,645 $ 71,399 $ 1,457,499
=========== ============ ============
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
29
MONTEREY PASTA COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Monterey
Pasta Company (a producer and distributor of pasta, pasta sauces, soups, and
related items), together with its wholly-owned subsidiary, Monterey Pasta
Development Company (a franchiser of restaurants - inactive). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Collectively, Monterey Pasta Company and Monterey Pasta Development Company are
referred to as the "Company."
The Company's production facility and distribution center are both
located in Monterey County, California. Its products are available throughout
the United States as well as selected distribution areas in Canada, the
Caribbean and Latin America. The principal customers are retail groceries and
club stores. The Company offers credit and payment terms to its customers in
line with industry practices, generally calling for unsecured trade accounts
receivable.
ACCOUNTING PERIODS
For quarterly reporting purposes the Company employs a 4-week, 4-week,
5-week reporting period. The fiscal year ends on the last Sunday of each
calendar year (52/53-week year). The 1998 and 1999 fiscal years contained 52
weeks and ended on December 27, 1998, December 26, 1999, respectively. The 2000
fiscal year contained 53 weeks and ended on December 31.
RECLASSIFICATIONS
Certain of the prior year financial statement amounts have been
reclassified to conform to the current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCES
The Company provides allowances for estimated credit losses, product
returns, spoilage, and adjustments at a level deemed appropriate to adequately
provide for known and inherent risks related to such amounts. The allowances are
based on reviews of loss, return, spoilage, adjustment history, contractual
relationships with customers, current economic conditions, and other factors
that deserve recognition in estimating potential losses. While management uses
the best information available in making its determination, the ultimate
recovery of recorded accounts, notes, and other receivables is also dependent on
future economic and other conditions that may be beyond management's control.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market and consist principally of component ingredients to
the Company's refrigerated pasta and sauces, finished goods, and packaging
materials.
SLOTTING AND ADVERTISING COSTS
The Company expenses advertising costs as incurred or when the related
campaign commences. Slotting fees paid or credited to club stores and grocery
chains for shelf space allocations are amortized between six and twelve months
depending on the nature of the chain program or agreement.
30
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the assets
(or lease term for leasehold improvements if shorter):
Leasehold improvements 7 to 12 years
Machinery and equipment 7 to 12 years
Office furniture and equipment 5 to 15 years
Vehicles 5 to 7 years
Long-lived assets, including intangible assets, are assessed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amounts may not be recoverable, or whenever management has
committed to a plan to dispose of the assets. Assets to be held and used
affected by such an impairment loss are depreciated or amortized at their new
carrying amount over the remaining estimated life; assets to be sold or
otherwise disposed of are not subject to further depreciation or amortization.
INTANGIBLE ASSETS
Intangible assets consist of tradenames, goodwill, and other
intangibles and are recorded at cost, net of accumulated amortization.
Intangibles are amortized over their respective useful lives, ranging from 3 to
10 years.
INCOME TAXES
The Company accounts for corporate income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) 109, ACCOUNTING FOR INCOME
TAXES, which requires an asset and liability approach. This approach results in
the recognition of deferred tax assets (future tax benefits) and liabilities for
the expected future tax consequences of temporary timing differences between the
book carrying amounts and the tax basis of assets and liabilities. Future tax
benefits are subject to a valuation allowance to the extent of the likelihood
that the deferred tax assets may not be realized.
REVENUE RECOGNITION
The Company recognizes revenues through sales of pasta and sauce
products primarily to grocery and club store chains. Sales are recorded when
goods are shipped for most customers and upon delivery to retail locations for
the Direct Store Delivery program. Consignment shipments to club store
warehouses are recognized upon shipment to individual club store locations.
Potential returns, adjustments and spoilage allowances are provided for in
accounts receivable allowances and accruals.
STOCK-BASED COMPENSATION
As permitted under the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company continues to account for employee
stock-based transactions under Accounting Principles Board Opinion (APB) No. 25,
ACCOUNTING FOR STOCK ISSUED TO Employees. However, SFAS No. 123 requires the
Company to disclose pro forma net income and earnings per share as if the fair
value method had been adopted. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. For
non-employees, cost is also measured at the grant date, but is actually
recognized in the financial statements over the vesting period, or immediately
if no further services are required.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates. The most significant estimates
made by the Company are those related to accounts receivable and deferred tax
allowances.
31
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to
the hedged risk or (ii) the earnings' effect of the hedged forecast
transaction. For a derivative NOT designated as a hedging instrument, the
gain or loss is recognized in income in the period of change. SFAS 133, as
amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Historically the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company expects no material impact on the Company's
financial position upon the adoption of SFAS 133.
In December 1999, the SEC staff released Staff Accounting Bulletin
(SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides
interpretive guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 must be applied to financial statements
no later than the quarter ended September 30, 2000. There was no material impact
from the application of SAB 101 on the Company's financial position, results of
operations, or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 2, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. FIN 44 did not
have a material impact on the Company's financial position, results of
operations, or cash flows.
MONTEREY PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, include cash and accounts receivable.
The Company maintains its cash accounts in Imperial Bank, Fresno,
California. The total bank cash balances are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. At times the cash balances exceed
such limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 26, 1999 and December 31, 2000, estimated fair values for the
Company's financial instruments and methods and assumptions used in estimating
fair values are expressed in the table on the following page.
32
1999 2000
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Cash and Cash Equivalents: the carrying amount in the
balance sheet approximates fair value $ 71,399 $ 71,399 $1,457,499 $1,457,499
Accounts Receivable, less allowances: the carrying amount in
the balance sheet approximates fair value due to the relatively
short-term maturity of the receivables and the allowances
reducing the amounts to estimated net realizable value 3,813,611 3,813,611 4,944,009 4,944,009
Notes and Loans Payable (credit facility): the carrying amount
approximates fair value since the interest floats with prime rate 604,855 604,855 - -
Capitalized Leases Payable: the fair value is estimated based on
current interest rates and comparable current available terms $ 155,878 155,878 72,577 $ 72,577
2. INVENTORIES
1999 2000
----------------- ---------------
Inventories consisted of the following:
Production - Ingredients $ 855,477 $ 1,168,907
Production - Finished goods 979,616 1,089,653
Paper goods and packaging materials 895,721 857,037
----------------- ---------------
2,730,814 3,115,597
Allowances for spoils and obsolescence (27,500) (27,500)
----------------- ---------------
$ 2,703,314 $ 3,088,097
================= ===============
3. PROPERTY AND EQUIPMENT
1999 2000
---------------- ----------------
Property and equipment consisted of the following:
Leasehold improvements $ 1,993,221 $ 3,592,696
Machinery and equipment 6,623,919 8,269,797
Computers, office furniture and equipment 568,117 879,575
Vehicles 335,401 391,302
---------------- ----------------
9,520,658 13,133,370
Less accumulated depreciation and amortization (4,180,308) (5,297,906)
---------------- ----------------
5,340,350 7,835,464
Construction in progress 1,448,915 2,002,633
---------------- ----------------
$ 6,789,265 $ 9,838,097
================ ================
Construction in progress at December 31, 2000 includes deposits for equipment
on order or yet to be installed.
33
4. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE
Year-end debt consisted of the following: 1999 2000
---------------- ----------------
Credit Facility:
Receivable and inventory revolver $ 604,885 $ -
Capitalized leases payable 155,878 72,577
---------------- ----------------
760,763 72,577
Less current maturities 688,186 32,398
---------------- ----------------
Long term portion $ 72,577 $ 40,179
================ ================
CREDIT FACILITY
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.
The terms of the Credit Facility prohibit the payment of cash dividends
(except with written approval) on the Company's capital stock and restricts
payments for, among other things, repurchasing shares of its capital stock.
Other terms of the Credit Facility limit the Company with respect to, among
other things, (i) incurring additional indebtedness, (ii) adversely changing the
capital structure, and (iii) acquiring assets other than in the normal course of
business including specific limits on annual capital expenditures (currently
$4.25 million). As of December 31, 2000, there were no violations of any loan
covenants and no loans outstanding.
CAPITALIZED LEASES PAYABLE
The Company leases certain equipment under capitalized leases,
including office equipment, a van and truck, as well as refrigeration equipment,
most of which is located at retail sites of the Company's single largest
customer (see Note 11).
The leases are collateralized by the underlying equipment with
original cost of $436,061 and $159,693 in 1999 and 2000, respectively. Future
minimum lease payments consist of:
Year Total
---- -----
2001 $ 37,885
2002 31,074
2003 14,646
2004 722
---------
84,327
Less amounts representing interest 11,750
---------
Capitalized leases payable $ 72,577
=========
34
PRINCIPAL PAYMENT MATURITIES
Capitalized leases payable require principal payments (including the
principal portion of capitalized leases above) as follows:
Amount
------
2001 $32,398
2002 28,478
2003 10,987
2004 714
------------
$ 72,577
============
5. OPERATING LEASES
The Company currently leases production, warehouse and corporate office
space as well as certain equipment in Monterey County, California under both
month-to-month and non-cancelable operating lease agreements, expiring through
December 2004. The terms of the leases generally require the Company to pay
common area maintenance, taxes, insurance, and certain other costs.
Future minimum annual lease payments due under non-cancelable operating
leases with terms of more than one year and sublease income from the lease of
the Company's former headquarters are as follows:
Year Lease Amount Sublease Income Net
---- ------------ ---------------- ---
2001 $ 528,202 $ 31,108 $ 497,094
2002 503,344 - 503,344
2003 511,845 - 511,845
2004 492,770 - 492,770
---------------- -------------- -------------
$ 2,036,161 $ 31,108 $ 2,005,053
================ ============== =============
Gross rent expense under the leases for 1998, 1999, and 2000 was
$536,738, $578,179 and $714,809 respectively. During 1997, the Company subleased
its former San Francisco premises at a slight premium to the rent for which it
has contractual liability. The sublease expires in 2001 on the same date as the
underlying lease. Sublease income for the San Francisco property for 1998, 1999
and 2000 was $210,680, $230,700, and $247,865 respectively. The Company also
subleased a portion of its Salinas headquarters for part of 1998 with sublease
income of $48,132.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In December 1997, $3,000,000 of Series A-1 Convertible Preferred Stock,
originally issued in August 1996, was converted into 4,108,108 shares of common
stock. On February 13, 1998, the Company was notified by the NASDAQ Stock
Market, Inc. ("NASDAQ") that the Company's Series A Convertible Preferred stock
offering, as amended by the Series A-1 Agreement in March of 1997, had violated
Rule 4460(i)(l)(D)(ii) which requires stockholder approval prior to the issuance
of securities convertible into common stock equal to, or in excess of, 20% of
outstanding shares at the time of issuance. The NASDAQ required the Company to
repurchase 2,365,066 shares, held by Clearwater Fund IV, Ltd., or face delisting
from the National NASDAQ market.
After reviewing its options, Company management, in concert with the
Company's Board of Directors and its legal advisors, began negotiations with
Clearwater Fund IV, Ltd. to repurchase 2,365,066 shares. Negotiations were
completed March 5, 1998 and the Company repurchased the shares for a total
consideration of $2,690,263 or $1.1375/share.
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 following
the conversion of Clearwater's convertible preferred stock to the Company's
common stock. 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. In July 2000, the
35
parties signed a settlement agreement whereby Clearwater 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 attorney's fees. The court approved the fee
application and on October 27, 2000 the Company received a check in the
amount of $472,406 including the settlement amount of $470,000, and interest
of $2,406. The stockholders' equity account was increased to reflect the
disgorged profit settlement amount, net of the related $180,000 tax effect.
COMMON STOCK
In April 1997, the Company's then current Chief Executive Officer
agreed to purchase 550,000 shares of common stock based on an agreement
containing various time-served and performance restrictions with a full recourse
note due December 31, 1997. Certain of the performance restrictions were not met
and 250,000 shares were forfeited during 1997, leaving 300,000 shares
outstanding at December 28, 1997. The note, with a remaining balance of
$562,500, was converted to non-interest bearing, non-recourse status effective
December 31, 1997 with an expiration date of December 31, 1999. Because the new
note was non-recourse, the shares and related note were treated for accounting
purposes as canceled and replaced with an option to purchase such shares. The
$51,000 fair value of the resulting option grant was recorded as an expense
during the first quarter of 1998. During 1999, the former Chief Executive
Officer of the Company sold the shares and repaid the note entirely.
During 1999, warrants representing 86,987 shares of Company common
stock were exercised at $2.25 per share (See Note 7). Certain of the warrants
were converted into stock as a "net exercise." In this case no actual cash
exercise proceeds were received by the Company. Instead, shares were issued for
only the difference between the average of the NASDAQ closing bid and ask on the
day preceding exercise, and the exercise price, multiplied by the number of
shares represented by warrants. This potential gain was then divided by the
average of the closing bid and ask to determine the number of shares to issue.
As a result, while warrants potentially representing 86,987 common shares were
exercised, only 52,789 shares of common stock were issued.
In addition, employee options representing 10,219 shares of common
stock were exercised in 1999 with an average exercise price of $1.125. A
former employee also exercised options during the third quarter of 1999
representing 24,000 shares of common stock with an exercise price of $1.875.
A consultant exercised options representing 7,767 shares of common stock
during the fourth quarter of 1999 with an exercise price of $2.06.
During the first three months of 2000, warrants, with an exercise price
of $2.25 and an expiration date of March 27, 2000, representing a potential of
445,813 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. Since certain of the warrants were converted
into stock as a net exercise, only 268,789 shares of common stock were issued.
At fiscal year-end 2000 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.
During 2000 employee and director options representing 102,304
shares of common stock were exercised.
EMPLOYEE STOCK PURCHASE PLAN
In October 1994, the Company's Board of Directors adopted a qualified
employee stock purchase plan. Under the purchase plan, eligible employees (those
who have completed one year of continuous employment with the Company) may
purchase shares of the Company's common stock through payroll deductions not to
exceed 10% of gross wages. The Company has reserved 200,000 shares of its common
stock for issuance under the purchase plan, which remains in effect until
terminated by the Company's Board of Directors, or until all of the shares
reserved for under the purchase plan have been issued. Unless the Board has
otherwise provided a higher amount prior to the commencement of an offering
period, the offering exercise price for each purchase period is 85% of the
lesser of (a) the fair market value of the shares on the offering date of such
offering period or (b) the fair market value of the shares on the given purchase
date. There were 1,420, 1,534, and 3,006 shares of common stock issued under the
plan in 1998, 1999 and 2000, respectively. At December 31, 2000 there were
190,936 available shares remaining under the plan.
36
EARNINGS PER SHARE
Basic earnings per share are based on earnings available to common
stockholders divided by the weighted-average number of common shares actually
outstanding during the period. Diluted earnings per share also include the
incremental effect of any dilutive common stock equivalents assumed to be
outstanding during the period. Because of equivalent shares includable in
different periods or at different amounts, per-share amounts for the four
quarters do not necessarily equal per-share amounts for the entire year.
Options to purchase 1,002,581, 1,222,395, and 1,501,390 shares of
common stock were outstanding at year-end 1998, 1999, and 2000, respectively
(see Note 7). Because the options' exercise prices were greater than the average
market price of the common shares, the options outstanding at the end of 1998
were not included in the computation of diluted earnings per share. A total of
1,152,395 options were included in the 1999 computation of diluted earnings per
share, with 70,000 excluded, because of exercise prices. During 2000 a total of
1,465,590 options were included in the computation of diluted earnings per
share, with 35,300 excluded, because of exercise prices. Warrants to purchase
933,550, 846,563, and 400,750 were outstanding at year-end 1998, 1999, and 2000,
respectively (see Note 7). The 1998 warrant balances were not included in the
calculation of diluted earnings per share because their exercise prices exceeded
the average market price of the common shares. In 1999 warrants representing
445,813 shares of common stock were included in the calculation of diluted
earnings per share, leaving warrants representing 400,750 shares excluded,
because of exercise prices. During 2000 no warrants representing shares on
common stock were included, with warrants representing 400,750 shares of common
stock excluded, because of exercise prices.
7. WARRANTS AND STOCK OPTIONS
In April 1996, the Company issued warrants to purchase 400,750 shares
of its common stock at $6.50 per share in connection with a placement of 916,000
shares of common stock. The warrants, with an estimated original value of
$137,400, are valid for seven years, expire in April 2003, and include
registration rights for the related shares, which were registered effective
October 24, 1997.
In March 1997, the Company issued warrants for 532,800 shares of its
common stock at $2.25 per share in connection with a private placement of
1,600,000 shares of common stock. The warrants, with an estimated original value
of $271,700, are valid for three years, expire in March, 2000, and included
registration rights for the related shares which were part of the Company's S-3
which was effective October 24, 1997. Warrants representing a total of 86,987
and 445,813 potential shares were exercised in 1999 and 2000, respectively (See
Note 6). As of December 31, 2000 warrants to purchase 400,750 shares of common
stock remained outstanding.
STOCK OPTION PLAN
Effective August 31, 1993, the Company's Board of Directors adopted a
stock option plan, subsequently amended and restated, which provides for the
granting of incentive stock options or non-qualified stock options to eligible
employees, consultants and outside directors. The Company initially reserved
1,200,000 shares of its common stock for issuance under the plan. The plan
provides that the option price shall not be less than the fair market value of
the shares on the date of grant; therefore, no compensation expense is recorded
for employees, unless the market price exceeds the strike price on the day of
grant. Compensation or other expense is recorded for any non-employee grants at
fair value of the option award. Options generally vest over a period of one to
three years and may be exercised for a period of up to ten years. In January of
1998, the Company filed a Form S-8 to register up to 540,000 additional shares
of common stock eligible to be issued pursuant to the Plan to increase the total
number of registered shares to 1,740,000. The Plan was amended in July 1998 to
allow two years from date of a transfer of control for the exercise of options
for those employees and directors not retained after the transfer of control. On
April 23, 1999, the Company filed an S-8 to register 300,000 shares of common
stock associated with options issued outside of the plan, in conjunction with
the March 12, 1999 purchase of the operating assets of Frescala Foods, Inc.
37
The following table shows activity in outstanding options during 1998, 1999
and 2000.
1998 1999 2000
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 848,081 $ 3.24 1,002,581 $ 2.24 1,222,395 $ 2.29
Granted (1) 540,314 1.72 616,000 2.44 437,300 3.30
Exercised - - (341,986) 1.86 (102,304) 1.60
Canceled or expired (385,814) 3.53 (54,200) 5.86 (56,501) 4.81
------------- -------------- ------------- ------------ ------------- -------------
Outstanding at end of year 1,002,581 $ 2.24 1,222,395 $ 2.29 1,500,890 $ 2.54
============= ============== ============= ============ ============= =============
Options exercisable at year end 826,581 $ 2.38 880,645 $ 2.26 1,008,589 $ 2.15
============= ============== ============= ============ ============= =============
Weighted average fair value of
options granted during
the year $ 0.38 $ 0.88 $ 1.98
============== ============ ==============
(1) Including non-officer employee options repriced in 1998.
The following table shows information for options outstanding or
exercisable as of December 31, 2000.
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Range of Remaining Average Remaining Average
Exercise Number of Contractual Exercise Number of Contractual Exercise
Prices Shares Life Price Shares Life Price
- ----------------- ----------- ---------------- ---------------- ----------- ---------------- ----------------
$0.00 - 2.99 1,119,090 5.7 years $2.10/share 967,589 5.3 years $2.03/share
$3.00 - 4.99 346,500 9.1 years $3.62/share 21,000 7.4 years $3.94/share
$5.00 - 6.99 25,300 8.0 years $5.35/share 10,000 4.9 years $5.50/share
$7.00 10,000 4.7 years $7.00/share 10,000 4.7 years $7.00/share
----------- ------------
Total 1,500,890 6.5 years $2.54/share 1,008,589 5.3 years $2.15/share
=========== ============
If the Company had elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the estimated
fair value of stock option grants over the service period, regardless of later
changes in stock prices and price volatility. The fair value at date of grant
for options granted in 1998, 1999, and 2000 has been estimated based on a
modified Black-Scholes pricing model with the following assumptions: no dividend
yield for any year; expected volatility for 1998, 1999 and 2000 grants of
approximately 46%, 49%, and 55% based on historical results; risk-free interest
rates of 6.60%, 7.37% and 6.37%; and expected lives of approximately five years
for all grants. The table on the following page shows net income or loss and
income or loss per share for 1998 1999, and 2000 as if the Company had elected
the fair value method of accounting for stock options.
38
1998 1999 2000
------------- ---------------- ----------------
Net income as reported $ 2,036,958 $7,027,430 $6,141,101
Additional compensation expense, net of tax effect (213,465) (164,211) (257,108)
------------- ---------------- ----------------
Proforma net income, as adjusted $ 1,823,493 $6,863,219 $5,883,993
============= ================ ================
Basic net income per share $ 0.16 $ 0.55 $ 0.46
Additional compensation expense (0.02) (0.01) (0.02)
------------- ---------------- ----------------
Basic Proforma net income per share, as adjusted $ 0.14 $ 0.54 $ 0.44
============= ================ ================
Diluted net income per share $ 0.16 $ 0.54 $ 0.44
Additional compensation expense (.02) (.01) (0.01)
------------- ---------------- ----------------
Diluted Proforma net income (loss) per share, as adjusted $ 0.14 $ 0.53 $ 0.43
============= ================ ================
8. INCOME TAXES
The Company's income tax benefit (provision) consists of:
1998 1999 2000
---- ---- ----
Current:
Federal $ - $ (105,051) $(244,500)
State (31,135) (63,704) (155,400)
-------------- ---------------- ----------------
Total (31,135) (168,755) (399,900)
-------------- ---------------- ----------------
Deferred:
Federal - 3,250,000 (221,100)
State - 180,000 730,100
-------------- ---------------- ---------------
Total - 3,430,000 509,000
-------------- ---------------- ---------------
Net tax benefit (expense) $(31,135) $ 3,261,245 $ 109,100
============== ================ ===============
A reconciliation between the Company's effective tax rate and U.S.
federal income tax rate on loss from continuing operations follows:
1998 1999 2000
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of effect on
Federal income taxes 1.5 1.7 4.3
Utilization of net operating losses for
which deferred income tax assets had
been reduced by valuation allowances (36.4) (37.8) -
Reversal of Federal and State valuation
allowances - (91.1) (40.3)
Other 2.4 7.0 .2
-------------- ---------------- ----------------
Effective income tax rate 1.5% (86.2%) (1.8)%
============== ================ ================
39
Due to the prior history of losses, a 100% valuation allowance
against deferred tax assets was provided in 1998 and earlier years, as
management could not determine that it was more likely than not that they
would be realized. As of December 26, 1999, however, the Company had
experienced three consecutive years of increasingly profitable operations.
Accordingly, a portion of the valuation allowance totaling $3,430,000 was
reversed in 1999, since the Company believed it was more likely than not that
this portion of deferred tax assets will be realized. Remaining reserves were
reversed in 2000.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
1999 2000
---- ----
Federal loss carryforwards $ 10,077,000 $2,356,000
Accumulated depreciation and amortization 31,000 305,800
Alternative minimum tax credit carryovers 105,000 248,000
State income and franchise taxes, net of
effect on Federal income taxes 519,000 613,100
Other 210,000 236,100
---------------- ----------------
10,942,000 3,939,000
Less valuation allowance (7,512,000) -
---------------- ----------------
Net deferred tax assets $ 3,430,000 $3,759,000
================ ================
The valuation allowance for 1998, 1999 and 2000 was reduced by
$1,058,000, $4,563,000 and $7,512,000, respectively. Included in the year
2000 reduction was approximately $5.4 million covering a corresponding
reduction in gross deferred tax assets related to net operating loss
carryforwards ("NOLs") arising from the Company's previously-owned subsidiary
Upscale Food Outlets, Inc. (UFO). The findings in a 2000 Federal Court case
for an unrelated party involving some similar issues and fact patterns
indicated that the UFO losses would 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 in prior years.
As of December 31, 2000, the Company has NOLs totaling approximately
$7.0 and $3.5 million for Federal and State tax purposes, which expire in
varying amounts through 2012 and 2002, respectively. Should more than a 50%
change in Company ownership occur within a three-year period, utilization of
these losses to reduce future years' taxable income. State income and
franchise deferred tax assets include approximately $440,000 in California
Manufacturer's Tax Credits available to offset future California income taxes
which expire in varying amounts through 2008.
The Company realizes tax benefits as a result of the exercise of
non-qualified stock options and the exercise and subsequent sale of certain
incentive stock options (disqualifying dispositions). For financial reporting
purposes, any reduction in income tax obligations as a result of these tax
benefits is credited to additional paid-in capital. In the year 2000, tax
benefits of disqualifying dispositions totaling $117,400 has been credited to
stockholders' equity. Also in 2000, the $180,000 tax effect of the Clearwater
settlement (see Note 6) was debited directly to stockholders' equity.
9. LITIGATION AND CONTINGENCIES
On August 5, 1997, Lance Mortensen, former President, Chief Executive
Officer and director of the Company, filed a complaint against the Company for
breach of implied covenant of good faith and fair dealing relating to a written
employment contract. The lawsuit was settled during May of 1998 through binding
arbitration with no current profit or loss impact.
In November 2000 the Company received $472,406 in settlement of a
Section 16(b) lawsuit against a former significant stockholder (see Note 6).
As of December 31, 2000 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.
40
10. SLOTTING AND ADVERTISING COSTS
Included in the balance sheet under "Prepaid Expenses and Other" are
slotting and advertising costs of $152,745 at December 26, 1999, and $37,177 at
December 31, 2000, relating primarily to slotting fees paid or credited to club
stores and grocery chains for shelf space allocations. Total advertising
expenses and slotting fees included in Selling, General and Administrative
expenses in the accompanying statements of operations for 1998, 1999 and 2000
were $1,827,355, $1,977,333, and $1,847,292 respectively.
11. SIGNIFICANT CUSTOMERS
Costco and Sam's Club stores each accounted for portions of total
revenues as follows:
1998 1999 2000
---- ---- ----
Costco 46% 49% 50%
Sam's Club stores 33% 31% 30%
At December 27, 1998, December 26, 1999, and December 31, 2000 Costco
and Sam's Club stores accounted for the following concentration of accounts
receivable.
1997 1998 1999
---- ---- ----
Costco 38% 49% 42%
Sam's Club stores 28% 27% 32%
The Company currently sells its products to six separate Costco regions
which make purchasing decisions independently of one another. On a regular
basis, these regions re-evaluate the products carried in their stores. There can
be no assurance that these Costco regions will continue to offer Monterey
Pasta's products in the future or continue to allocate Monterey Pasta the same
amount of shelf space. Purchasing decisions for Sam's Club stores ("Sam's"), the
Company's second largest customer, are made at the head office level with input
from the stores. While the Company is in the fourth year of its relationship
with Sam's, there can be no assurance that Sam's will continue to carry the
Company's products. Currently, the loss of either Costco or Sam's would
materially adversely affect the Company's business operations.
No other single customer accounted for more than 10% of revenues or accounts
receivable.
12. SUPPLEMENTAL CASH FLOW INFORMATION
1998 1999 2000
---------------- ---------------- ----------------
CASH PAYMENTS:
Interest $ 241,243 $ 171,212 $ 43,954
Income Taxes 31,135 177,958 265,786
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Issuance of common stock in payment of
Assets - 145,000 -
Purchase of leased equipment 103,264 19,099 -
Reversal of restricted stock purchase $ 562,500 $ - $ -
13. EMPLOYEE BENEFIT PLAN
In 1996, the Company instituted a 401(k) Plan covering substantially
all full-time employees with six months of service. Under the Plan, employees
may elect to defer up to 15% of compensation (subject to certain limitations).
The Company matches one-half of employee contributions up to 6% of compensation.
In addition, the Company may make an annual discretionary profit-sharing
contribution. Employee contributions, Company matching contributions and related
earnings are always 100% vested. Company profit-sharing contributions and
related earnings vest 20% a year, with 100% vesting after five years of service.
During 1998, 1999 and
41
2000, the Company's expense for matching contributions was $37,527, $73,326, and
$91,806, respectively; there were no profit-sharing contributions for 1998, 1999
or 2000.
14. QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below and on the
following page reflect all adjustments which, in the opinion of management, are
of a normal and recurring nature necessary to present fairly the results of
operations for the periods presented.
First Second Third Fourth
Quarter Quarter Quarter Quarter 1999
------- ------- ------- ------- ----
YEAR ENDED 1999
Net revenue $7,973,250 $9,099,526 $9,942,782 $9,886,214 $36,901,772
Gross profit 3,077,336 3,631,509 3,779,726 3,664,730 14,153,301
Operating income 805,563 986,937 1,444,994 996,192 3,933,686
Net income $ 705,142 $ 932,811 $1,025,149 $4,364,328 $ 7,027,430
Basic earnings per common share $0.06 $0.07 $0.08 $0.34 $0.55
===== ===== ===== ===== =====
Diluted earnings per common share $0.06 $0.07 $0.08 $0.32 $0.54
===== ===== ===== ===== =====
Significant 1999 fourth quarter adjustments included a reversal of portions of
the Company's reserve against deferred tax assets amounting to $3,430,000 (See
Note 8).
First Second Third Fourth
Quarter Quarter Quarter Quarter 2000
------- ------- ------- ------- ----
YEAR ENDED 2000
Net revenue $ 11,155,539 $ 11,045,842 $ 12,160,813 $ 13,599,605 $47,961,799
Gross profit 4,124,081 4,260,230 4,796,379 5,306,386 18,487,076
Operating income 1,192,526 1,444,428 1,611,672 1,872,394 6,121,020
Net income $1,094,434 $1,311,563 $1,825,411 $ 1,909,693 $ 6,141,101
Primary earnings per common share $0.08 $0.10 $0.14 $0.14 $0.46
===== ===== ===== ===== =====
Diluted earnings per common share $0.08 $0.09 $0.13 $0.14 $0.44
===== ===== ===== ===== =====
42
15. INTANGIBLE ASSETS AND BUSINESS ACQUISITION
Intangible assets consist of:
1998 1999 2000
---- ---- ----
Tradenames $ 204,376 $ 204,376 $ 204,376
Other intangibles 247,684 247,684 262,684
Goodwill and other intangibles not
separately quantifiable - 1,243,466 1,709,784
---------- ---------- ----------
$ 452,060 $1,695,526 $2,176,844
Less accumulated amortization 277,758 414,249 586,289
---------- ---------- ----------
Net intangible assets $ 174,302 $1,281,277 $1,590,556
========== ========== ==========
THE FRESCALA PURCHASE
On March 12, 1999 the Company purchased the operating assets and
inventory of Frescala Foods, Inc. ("Frescala"), a San Antonio, Texas based fresh
pasta and sauce producer with an emphasis on private label production. The
consideration to Frescala consisted of $1,345,000 in cash plus fully vested
options to purchase 300,000 shares of the Company's common stock. The options
have an approximate fair market value of $145,000, an exercise price of $2.33
per share, and a three-year expiration. Additionally, Frescala owners received
an earn-out of $97,000 as of October 31, 1999 (treated as additional purchase
price) based upon Frescala sales above a predetermined level. Funding for the
transaction came from a new $750,000 two-year term loan, since repaid, use of
existing accounts receivable and inventory line, and cash flow from operations.
The entire $1,660,000 cost of the acquisition (including acquisition
costs of $73,000) was recorded as follows:
Inventories $ 217,000
Fixed assets 200,000
Goodwill including trademarks,
customer list, and recipes, not
specifically quantifiable 1,243,000
-----------
Total acquisition cost $1,660,000
===========
Results of operations would not be materially different if Frescala
would have been acquired as of January 1999.
THE NATE'S PURCHASE
On December 8, 2000 the Company purchased the Nate's polenta
business of South San Francisco, California for a total consideration of
$469,000, of which $19,000 was allocated to inventory, plus related
acquisition costs of $31,000. The remaining $481,000, which included recipes,
a licensing agreement, and customer list not specifically quantifiable was
charged to goodwill. Additionally, Nate's former owners could receive an
earn-out of a maximum of $100,000 to be paid as of August 8, 2001 based upon
Nate's sales above a predetermined level.
Results of operations would not be materially different if Nate's would
have been acquired as of January 1999.
43
SCHEDULE II
MONTEREY PASTA COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Additions - Deductions -
Balance, Charged to Write-offs Balance,
Beginning Costs and Charged to End of
of 1998 Expense Reserves 1998
------------- --------------- ---------------- ------------
Allowances against Receivables --
Spoils, Returns, Adjustments
And Bad Debts $ 332,877 $ 477,674 $ 498,143 $ 312,408
Inventory Reserves --
Spoils and Obsolescence 55,000 55,000 80,000 30,000
Additions - Deductions -
Balance, Charged to Write-offs Balance,
Beginning Costs and Charged to End of
of 1999 Expense Reserves 1999
------------- --------------- ---------------- ------------
Allowances against Receivables --
Spoils, Returns, Adjustments
And Bad Debts $ 312,408 $ 693,727 $ 870,008 $ 136,127
Inventory Reserves --
Spoils and Obsolescence 30,000 149,500 152,000 27,500
Additions - Deductions -
Balance, Charged to Write-offs Balance,
Beginning Costs and Charged to End of
of 2000 Expense Reserves 2000
------------- --------------- ---------------- ------------
Allowances against Receivables --
Spoils, Returns, Adjustments
and Bad Debts $ 136,127 $ 476,341 $ 370,167 $ 242,301
Inventory Reserves --
Spoils and Obsolescence 27,500 - - 27,500
44
SIGNATURES
Pursuant to the requirements of Section 13 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, in the city of San
Francisco, State of California, on the 7th day of February, 2001
MONTEREY PASTA COMPANY
By: /s/ R. LANCE HEWITT
-------------------
R. Lance Hewitt
President and Chief Executive Officer
By: /s/ STEPHEN L. BRINKMAN
-----------------------
Stephen L. Brinkman
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
indicated and on the dates indicated.
NAME TITLE DATE
/s/ CHARLES B. BONNER Director February 06, 2001
----------------------------------------------
Charles B. Bonner
/s/ FLOYD R. HILL Director February 06, 2001
----------------------------------------------
Floyd R. Hill
/s/ THOMAS E. KEES Director February 06, 2001
----------------------------------------------
Thomas E. Kees
/s/ VAN TUNSTALL Director February 06, 2001
----------------------------------------------
Van Tunstall
/s/ JAMES WONG Director February 06, 2001
----------------------------------------------
James Wong
/s/ WALTER L. HENNING Director February 06, 2001
----------------------------------------------
Walter L. Henning
/s/ R. LANCE HEWITT President, Chief Executive February 06, 2001
---------------------------------------------- Officer and Director
R. Lance Hewitt
/s/ STEPHEN L. BRINKMAN Chief Financial Officer, February 06, 2001
---------------------------------------------- Secretary, and Director
Stephen L. Brinkman
45
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)
46
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)
47
10.29 Royalty agreement dated September 15, 1999 between Company and Chet's
Gourmet Foods, Inc. for meatball and sauce item (incorporated by reference
to Exhibit 10.29, filed with the Company's 1999 Q3 10-Q)
10.30 Credit Agreement between the Company and Imperial Bank dated August 2,
1999 (incorporated by reference to Exhibit 10.30 filed with the Company's
1999 Form 10-K on February 18, 2000 ("1999 Form 10-K"))
10.31 First Amendment to Credit Agreement between the Company and Imperial Bank
dated August 2, 1999 (incorporated by reference to Exhibit 10.21 filed with
the Company's 1999 Form 10-K)
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, 1999 (incorporated by reference to Exhibit 10.33 in the
Company's September 25, 2000 Quarterly Report on Form 10-Q filed on
November 6, 2000 ("2000 Q3 10-Q"))
10.34 Third Amendment to Credit Agreement between the Company and Imperial Bank
dated August 2, 1999 (incorporated by reference to Exhibit 10.34 in the
Company's 2000 Q3 10-Q")
10.35 Royalty agreement dated February 11, 2000 between Company and William Naim
for development of pizza and calzone recipes and process
10.36 Fourth Amendment to Credit Agreement between the Company and Imperial Bank
dated August 2, 1999
10.37 Asset Purchase Agreement dated as of December 8, 2000, by and among the
Company and the shareholders of Elena's Food Specialties, Inc.
10.38 Limited License for use of Nate's brand dated as of December 8, 2000, by
and among the Company and the shareholders of Elena's Food Specialties,
Inc.
* Management contract or compensatory plan or arrangement covering executive
officers or directors of Monterey Pasta Company and its former subsidiary,
Upscale Food Outlets, Inc.
48