UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

(Mark One)
ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
		For the quarterly period ended September 28, 2003.
o		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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý                           No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o                           No ý

 

At November 6, 2003, 14,213,682 shares of common stock, $.001 par value, of the registrant were outstanding.

 

 

MONTEREY PASTA COMPANY

 

FORM 10-Q

 

Table of Contents

 

PART 1.  FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 28, 2003 (unaudited) and December 29, 2002
		Condensed Consolidated Statements of Operations (unaudited) for the Third quarter ended September 28, 2003 and September 29, 2002 and for the Nine months ended September 28, 2003 and September 29, 2002
		Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine months ended September 28, 2003 and September 29, 2002
		Notes to the Unaudited Condensed Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Disclosure Controls and Procedures
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Changes in Securities
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K
	Signature Page
	Exhibit Index
	302 Certification of Chief Executive Officer – Exhibit 31.1
	302 Certification of Chief Financial Officer – Exhibit 31.2
	906 Certification of Chief Executive Officer – Exhibit 32.1
	906 Certification of Chief Financial Officer – Exhibit 32.2

 

2

 

PART I.  FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

MONTEREY PASTA COMPANY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 28, 2003			December 29, 2002
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	5,475,682		$	6,838,244
Accounts receivable, net		6,915,873			6,058,710
Inventories		4,061,443			3,723,072
Deferred tax assets-short term		3,475,615			4,068,400
Prepaid expenses and other		1,616,389			1,048,120
Total current assets		21,545,002			21,736,546
Property and equipment, net		15,465,499			14,254,574
Deferred tax assets-long term		937,760			765,300
Goodwill, net		4,748,390			4,669,254
Intangible assets, net		2,050,469			2,239,113
Deposits and other		167,308			134,694
Total assets		$	44,914,428		$	43,799,481
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,459,102		$	3,201,470
Accrued liabilities		1,309,119			1,639,918
Current portion of Long-term debt		3,988			14,964
Total current liabilities		4,772,209			4,856,352
Long-term debt		—			1,785
Commitments and contingencies
Stockholders’ equity:
Common stock		14,214			14,196
Additional paid-in capital		44,576,477			44,518,855
Accumulated deficit		(4,448,472		)	(5,591,707		)
Total stockholders’ equity		40,142,219			38,941,344
Total liabilities and stockholders’ equity		$	44,914,428		$	43,799,481

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MONTEREY PASTA COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Third quarter ended						Nine months ended
		September 28, 2003			September 29, 2002			September 28, 2003			September 29, 2002
Net revenues		$	14,875,852		$	16,568,577		$	46,263,692		$	46,424,933
Cost of sales		10,890,204			10,385,662			31,742,998			29,236,073
Gross profit		3,985,648			6,182,915			14,520,694			17,188,860
Selling, general and administrative		4,392,853			4,194,117			12,899,500			11,712,906
Loss on disposition of assets		—			—			—			67,880
Operating income (loss)		(407,205		)	1,988,798			1,621,194			5,408,074
Other income (expense), net		479			(223		)	978			2,467
Interest income, net		14,302			5,598			58,950			91,452
Income (loss) before provision for income tax benefit (expense)		(392,424		)	1,994,173			1,681,122			5,501,993
Provision for income tax benefit (expense)		132,869			3,549,238			(537,887		)	3,128,300
Net income (loss)		$	(259,555	)	$	5,543,411		$	1,143,235		$	8,630,293
Basic income (loss) per share		$	(0.02	)	$	0.39		$	0.08		$	0.62
Diluted income (loss) per share		$	(0.02	)	$	0.38		$	0.08		$	0.59
Weighted average basic shares outstanding		14,209,371			14,106,434			14,204,275			14,002,273
Weighted average diluted shares outstanding		14,474,957			14,641,970			14,418,961			14,687,571

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MONTEREY PASTA COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine Months Ended
		September 28, 2003			September 29, 2002
Cash flows from operating activities:
Net income		$	1,143,235		$	8,630,293
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		420,325			(3,480,835		)
Depreciation and amortization		1,572,683			1,231,480
Provisions for allowances for bad debts, returns, adjustments and spoils		198,959			108,702
Tax benefit of disqualifying dispositions		—			379,400
Loss on disposition of assets		—			67,880
Changes in assets and liabilities:
Accounts receivable		(1,056,122		)	(2,094,931		)
Inventories		(338,371		)	(689,577		)
Prepaid expenses and other		(600,883		)	(347,672		)
Accounts payable		257,632			2,145,015
Accrued liabilities		(330,800		)	(352,555		)
Net cash provided by operating Activities		1,266,658			5,597,200
Cash flows from investing activities:
Purchase of property and equipment		(2,594,965		)	(3,465,125		)
Purchase of trademark, recipes, and rights		—			(149,292		)
Acquisition of business operating assets		(79,135		)	(5,930,974		)
Net cash used in investing activities		(2,674,100		)	(9,545,391		)
Cash flows from financing activities:
Repayment of Long-Term		(12,761		)	(23,716		)
Proceeds from issuance of common stock		57,641			827,031
Net cash provided by financing activities		44,880			803,315
Net decrease in cash and cash equivalents		(1,362,562		)	(3,144,876		)
Cash and cash equivalents, beginning of period		6,838,244			7,232,128
Cash and cash equivalents, end of period		$	5,475,682		$	4,087,252
		September 28, 2003			September 29, 2002
Cash payments:
Interest		$	0		$	4,285
Income Taxes		155,501			(12,924		)

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

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MONTEREY PASTA COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.     Basis of Presentation

 

The condensed consolidated financial statements have been prepared by Monterey Pasta Company (the “Company”) and are unaudited.  Certain amounts shown in the 2002 financial statements have been reclassified to conform to the current presentation.  The financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not necessarily include all information and footnotes required by generally accepted accounting principles, and should be read in conjunction with the Company’s 2002 Annual Report on Form 10-K.   In the opinion of the Company, all adjustments necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of September 28, 2003, and for the nine months then ended, have been recorded.  A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the Securities and Exchange Commission in the Company’s Form 10-K for the year ended December 29, 2002.  The consolidated results of operations for the interim quarterly periods are not necessarily indicative of the results expected for the full year.

 

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 2002 fiscal year contained 52 weeks and ended on December 29.  The current fiscal year contains 52 weeks and will end on December 28, 2003.

 

2.     Business Acquisition and Statement of Cash Flows

 

On August 23, 2002, the Company purchased the operating assets and inventory of Emerald Valley Kitchen, Inc. a Eugene, Oregon based producer of organic salsas, dips, hummus, and sauces with over 90% of its sales to retail chains. The Company considered this purchase an opportunity to enter the rapidly growing organic food market.  The consideration to the sellers consisted of $5,744,000 in cash.  Additionally, the Emerald Valley owners are eligible to receive an earn-out based upon Emerald Valley Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) above predetermined levels, starting at $979,000, for the first five years after the acquisition date.  It was agreed to calculate the earnout annually at the end of successive twelve-month periods following acquisition.  The calculation of the earn-out for the first year ended August 23, 2003 resulted in an additional payment to the former owners of $76,635.  Funding for the transaction and the first annual payment came from existing cash balances.

 

3.     New Accounting Pronouncements

 

In July 2002 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability.  Severance pay under SFAS 146, in many cases, would be recognized over time rather than up front. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002.  The adoption of this Statement did not have a material impact on the Company’s financial condition or results of operations.

 

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which provides alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based employee compensation as prescribed in SFAS 123, “Accounting for Stock-Based Compensation.” Additionally, SFAS 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of this Statement are effective for fiscal years ending after December 15, 2002.  The Company has not elected to change to the fair-value method of accounting for stock-based compensation and, therefore, the transition portions of this statement have not had a material impact on the Company’s financial condition or results of operations.

 

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a qualified guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 is effective on a prospective basis for qualified guarantees issued or modified after December 31, 2002.  The adoption of this Interpretation did not have a material impact on the Company’s financial condition or results of operations.

 

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Pursuant to its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. To date, the Company has not incurred any costs as there have been no lawsuits or claims that would invoke these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of September 28, 2003.

 

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors and customers, its sublandlord and (ii) its agreements with investors. Under these provisions the Company has agreed to generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. To date, the Company has not incurred any costs as there have been no lawsuits or claims related to these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of September 28, 2003.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which requires the consolidation of certain special purpose or variable interest entities. FIN No. 46 is applicable to financial statements issued after 2002, however, disclosures are required currently if the Company expects to consolidate any variable interest entities. The Company has no variable interest entities and therefore, there are no entities that will be consolidated with the Company’s financial statements as a result of FIN No. 46.

 

In May 2003, the FASB issued SFAS 150, “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity” which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a material impact on the Company’s financial position or results of operations.

 

4.     Inventories

 

Inventories consisted of the following:

 

		September 28, 2003			December 29, 2002
Production – Ingredients		$	1,690,421		$	1,280,970
Production – Finished Goods		1,343,686			1,538,465
Paper goods and packaging materials		1,152,878			940,960
Operating supplies		36,958			32,177
		4,223,943			3,792,572
Reserve for spoils and obsolescence		(162,500		)	(69,500		)
Net Inventories		$	4,061,443		$	3,723,072

 

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5.     Property and Equipment

 

Property, plant and equipment consisted of the following:

 

		September 28, 2003			December 29, 2002
Machinery and equipment		$	17,337,675		$	15,965,795
Leasehold improvements		5,024,606			4,970,075
Computers, office furniture and equipment		729,781			724,198
Vehicles		364,433			363,748
		23,456,495			22,023,816
Less accumulated depreciation and amortization		(9,373,379		)	(7,989,339		)
		14,083,116			14,034,477
Construction in progress		1,382,383			220,097
Net property and equipment		$	15,465,499		$	14,254,574

 

The majority of construction in progress is related to the plant expansion program completed during the second quarter of 2003 with some minor projects remaining.  Other construction in progress is associated with typical annual projects involving replacement, regulatory, food safety and efficiency projects.

 

6.     Credit Facility

 

On August 1, 2001, Imperial Bank, now Comerica Bank provided a new multi-year credit facility to the Company.  The existing accounts receivable and inventory revolver was amended to expire October 31, 2003 with a commitment of $1.5 million and interest at either prime rate or LIBOR plus 185 basis points for a debt/tangible net worth ratio of less than 1.0:1.  LIBOR premium increases 25 basis points for debt/tangible net worth ratios from 1.0 to 1.25:1, with another 25 basis point increase for debt/tangible net worth ratios above 1.25:1.  In addition, the Company’s lender approved an $8.5 million non-revolving term facility in the event of a need for major capital expenditures and acquisitions, which expires October 31, 2009.  The term loan facility is subject to annual review if unused.  If used, it converts to an 84-month term loan.  Pricing is at either prime rate or LIBOR plus premiums for the same debt/tangible net worth ratios beginning at 200 basis points over LIBOR and increasing 25 basis points for successive debt/tangible net worth increments.  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 September 28, 2003, there were no violations of any loan covenants and no loans outstanding.

 

The Company has a written commitment from Comerica Bank to renew its credit facility as of its expiration date on terms at least as favorable as the prior year.

 

7.     Income Taxes

 

Deferred tax assets, principally related to the expected benefit from utilization of net operating loss carryforwards (“NOLs”), offset most of the estimated book tax expense, with actual cash tax payments of $156,000 year-to-date made during the first nine months of 2003.  Deferred tax assets remaining on the Balance Sheet at the end of the third quarter to offset future income tax liabilities, are $3,476,000 short term and $938,000 long term.

 

8.     Litigation

 

The Company and two of its officers and directors have been named as defendants in two consolidated purported securities class action cases filed in the Northern District of California:  Wietschner v. Monterey Pasta Company et al., No. C 03-00632 MJJ (filed Feb. 13, 2003); Moore-Warner v. Monterey Pasta Company et al., No. C 03-1072 MJJ (filed Mar. 12, 2003).  The cases purport to be brought on behalf of a class of all persons who purchased the common stock of the Company from July 11, 2002 through December 16, 2002.  The complaints allege that defendants issued false statements regarding expected earnings and revenues, in violation of Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934.  No specific amount of damages is claimed.  On July 11, 2003, lead plaintiffs filed a consolidated complaint.  The Company moved

 

8

 

to dismiss, and that motion was heard on October 21, 2003.  Management believes that plaintiffs’ allegations are without merit and intends to contest the cases vigorously.

 

On February 20, 2003, a purported shareholder derivative complaint was filed in the Superior Court, County of Monterey, Imperial County Employees’ Retirement System v. Hewitt et al., No. M63679.  The complaint alleges claims for breach of fiduciary duty, gross negligence, waste, and abuse of control against the directors of the Company, based in substantial part on the same allegations as the securities class action complaints.  On June 13, 2003, the Court granted the Company’s and the individual defendants’ demurrers (motions to dismiss) to the case without leave to amend. After judgment was entered, plaintiff filed a notice of appeal. The parties subsequently agreed that the appeal would be dismissed, with each side to bear its own costs.  The stipulation to this effect has been filed with the Superior Court.  Accordingly, the lawsuit has concluded.

 

The Company will incur legal fees in defending the securities lawsuit.  At this time, the Company cannot estimate the amount of fees that will be incurred.  There are no other material legal procedings pending to which the Company is a party or to which any of its property is subject.  The Company is a party to ordinary routine litigation incidental to the Company’s business.

 

9.     Stockholders’ Equity

 

During the first nine months of 2003, 15,695 employee stock purchase plan shares were issued with proceeds to the Company of $54,000.  Additionally, 1,596 shares of common stock were issued during the same period as part of employee option exercises with proceeds to the Company of $4,000.

 

The Company accounts for employee stock options using the intrinsic value method, and has no current plans to change this accounting.  If the fair value method of accounting had been applied results would have been:

 

		3 mos. ended						9 mos. Ended
		9/28/2003			9/29/2002			9/28/2003			9/29/2002
Pro forma impact of fair value method:
Reported net income (loss)		$	(260	)	$	5,543		$	1,143		$	8,630
Less: fair value impact of employee stock compensation		(341		)	(298		)	(978		)	(816		)
Pro forma net income (loss)		$	(601	)	$	5,245		$	165		$	7,814
Earnings (loss) per common share:
Basic—as reported		$	(0.02	)	$	0.39		$	0.08		$	0.62
Diluted—as reported		$	(0.02	)	$	0.38		$	0.08		$	0.59
Basic—pro forma		$	(0.04	)	$	0.37		$	0.01		$	0.56
Diluted—pro forma		$	(0.04	)	$	0.36		$	0.01		$	0.53

 

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

The following discussion should be read in conjunction with the financial statements and related notes and other information included in this report.  The financial results reported herein do not indicate the financial results that may be achieved by the Company in any future period.

 

Other than the historical facts contained herein, this Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties.  For a discussion of such risks and uncertainties, please see the Company’s Annual Report on Form 10-K for the year ended December 29, 2002.  In addition to the risks and uncertainties discussed in the Annual Report, the risks set forth herein, including the risks associated with any reduction of sales to two major customers currently comprising a majority of total revenues, the Company’s ability to expand distribution of food products to new and existing customers, attract and retain qualified management, and compete in the competitive wholesale food products industry, should be considered.

 

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Background

 

Monterey Pasta Company (“Monterey Pasta” or the “Company”) was incorporated in June 1989 as a producer and wholesaler of refrigerated gourmet pasta and sauces to restaurants and grocery stores in the Monterey, California area.  The Company has since expanded its operations to provide its products to grocery and club stores throughout the United States.  The Company’s overall strategic plan is to enhance the value of the Monterey Pasta Company brand name by distributing its gourmet food products through multiple channels of distribution.

 

The Company is committed to diversifying its offerings with innovative new product line extensions, complementary 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 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.

 

The Company sells its pasta and sauces through leading grocery store chains and club stores.  As of September 28, 2003, approximately 8,700 grocery and club stores offered the Company’s products.  The Company plans to continue expansion of its distribution to grocery and club stores in its current market area and to further its penetration in other geographic regions of the U.S. and other parts of the world.

 

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 solutions using Monterey Pasta products.

 

•                  Introduce new products on a timely basis to maintain customer interest and to respond to changing consumer tastes.  In order to maximize its margins, the Company will focus its efforts on those new products that can be manufactured and distributed out of its Salinas, California or Eugene, Oregon facilities, and will supplement its existing line of cut pasta, ravioli, tortelloni, tortellini, prepared foods, sauces, gnocchi, pizzas and calzones, baked stuffed sandwiches, borsellini, salsas, dips, hummus, polenta, and soups.

 

•                  Reduce operating costs as a percentage of sales through continual evaluation of administrative and production staffing and procedures.  The Company will consider additional capital improvements at its manufacturing facilities in order to increase production efficiencies and capacities, and to reduce the Company’s cost of goods on a per unit basis.

 

•                  Create brand awareness by communicating to the consumer that Monterey Pasta provides a healthful and nutritious line of products, and promote repeat business by reinforcing positive experiences with the Company’s products.

 

•                  Establish a presence with specific targeted accounts in the food service distribution channel.

 

•                  Consider the acquisition of other compatible companies or product lines to expand retail distribution, or the range of product offerings, or to accomplish other synergies where the acquisition will create long-term stockholder value, and be accretive to earnings in the first year.

 

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, coupon programs, temporary price reduction promotions, and other related activities. There can be no assurance that the Company will be able to increase its net revenues

 

10

 

from grocery and club stores.  Because the Company will continue to make expenditures associated with the expansion of its business, the Company’s results of operations may be affected.

 

The success of the Company’s acquisition strategy is dependent upon its ability to generate cash from current operations, attract new capital, find suitable acquisition candidates, and successfully integrate new businesses and operations.  There is no assurance that acquisitions can be financed from current cash flow, and, if not, that outside sources of capital will be available to supplement internally-generated funds.  There is no assurance that management can successfully select suitable acquisition candidates and that these new businesses can be successfully integrated to create long term stockholder value.

 

Results of Operations

 

Net revenues from operations were $14,876,000 for the third quarter ended September 28, 2003, as compared to $16,569,000 for the third quarter ended September 29, 2002, a 10% decrease.  For the nine months ended September 28, 2003, net revenues decreased $161,000 to $46,264,000 from $46,425,000 for the nine months ended September 29, 2002.  The quarterly decrease was mainly related to lower sales to the Company’s two major customers, Costco Wholesale (“Costco”) and Sam’s Club Stores, by 31% and 3%, respectively.  The Costco decline was caused largely by a reduction of items in the refrigerated section storewide and some loss of items to competition.  The Sam’s decline was less significant and was related to some shelf space restrictions despite a greater number of items offered.  The year-to-date decrease was a result of a 14% reduction in club sales, which was only partially offset by an increase of 39% in retail sales.   EVK represented 26% of the 39% increase in retail sales and most of the remainder of the overall retail increase was contributed by increased number of stores gained in the last half of 2002.

 

Gross profit was $3,986,000, or 26.8% of net revenues for the third quarter 2003, compared to $6,183,000 or 37.3% for the third quarter of 2002. Year-to-date 2003 gross profit was 31.4%, compared with 37.0% for the first nine months of 2002.  This compares to a 36.1% gross profit for the year ended December 29, 2002.  The gross profit decline compared with third quarter 2002 and the year-ended December 29, 2002 was a function of increased fixed costs in anticipation of increased sales which have not grown at the level expected, and increased costs associated with a new packaging concept.  The year-to-date decline in gross profit was also caused by these factors.  In addition, one-time expenses associated with the rapid rollout of the new package to the Company’s second largest club store customer also contributed to the decline.

 

Selling, general and administrative expenses (“SG&A”) for the third quarter ended September 28, 2003, were $4,393,000, an increase of 5% as compared to $4,194,000 for the same quarter last year.   For the nine months ended September 28, 2003, SG&A totaled $12,899,000 or 27.9% of sales , an increase of 10% as compared to $11,713,000 or 25.2% of sales for the same period last year. For fiscal year-end 2002, SG&A expenses were 25.3% of sales.  The quarterly and year-to-date increases compared to 2002 are related to additional staffing in the sales and marketing area, extra legal expenses associated with the securities lawsuits, increased freight cost due to fuel surcharges and less efficient loads related to increased retail sales, and other staffing increases in the administrative area.  The increased percent of SG&A expenses as a percent of sales is attributable to spending levels geared to a higher sales growth expectation than was achieved in the first nine months.  Management believes that the current level of SG&A expenses is needed to support future sales growth.

 

Depreciation and amortization expense, included in cost of sales and SG&A, was $514,000 or 3.4% of net revenues for the quarter ended September 28, 2003, compared to $412,000 or 2.5% of net revenues for the quarter ended September 29, 2002.  For the nine months ended September 28, 2003, depreciation and amortization expense was $1,573,000 or 3.4% of net revenues, compared to $1,231,000 for the same period last year, which was 2.6% of net revenues.  Depreciation increased by $205,000 during the first nine months of 2003, to $1,384,000 from $1,179,000, as a result of depreciation related to the 2002 asset additions of $4.8 million, as well as those projects completed in the first three quarters of 2003.  The amortization increase of $137,000 during the first nine months, from $52,000 in 2002 to $189,000 in 2003 was related mainly to the Emerald Valley Kitchen acquisition.

 

There was no gain or loss on disposition of fixed assets in either of the third quarters ended September 28, 2003 or September 29, 2002. For the nine months ended September 28, 2003, there was no gain or loss compared to a loss of $68,000 for the nine months ended September 29, 2002.  The loss in 2002 resulted from write-off of over $250,000 of obsolete and abandoned computer hardware, software and furniture and fixtures.

 

Net interest income was $14,000 for the quarter ended September 28, 2003, compared to net interest income of $6,000 for the same quarter in 2002.   For the nine months ended September 28, 2003, net interest income was $59,000 compared to a net interest income of $91,000 for the nine months ended September 29, 2002. The interest income decrease is the result of lower interest rates and less profit from operations than the prior year.

 

11

 

Income taxes for the third quarter of 2003 were a tax credit of $133,000 or approximately 33.9% of pretax loss, as compared to a tax credit of $3,549,000 for the same period in 2002.   For the first nine months of 2003, income taxes were $538,000 or 32.0% of pretax income as compared to a tax credit of $3,128,000 for the same period in 2002.  The 2003 taxes were accrued for book purposes at the full taxation rates less certain credits, which were mostly offset by deferred tax assets, while the 2002 taxes were impacted in the third quarter by the reversal of deferred tax asset reerves related to NOLs from its former subsidiary Upscale Food Outlets (“UFO”).

 

During 2002, the Company completed a comprehensive study of the nature of certain NOLs arising in connection with its previously owned subsidiary UFO and the likelihood of their being utilized.   Management concluded that it was more likely than not that they would be utilized.  As a result, reserves against these specific deferred tax assets totaling $5,404,000 were released during 2002 and offset against income tax expense.  Because of this evaluation and resulting release of reserves, the Company expects that future income tax expense will be accrued at a more normalized combined Federal and State rate approaching statutory rates less certain tax credits and timing differences.  The future disallowance of any previous UFO NOL usage, if it occurs, would increase both income tax expense and amounts actually payable.

 

Liquidity and Capital Resources

 

During the nine month period ended September 28, 2003, $1.3 million of cash was provided by the Company’s operations, compared to $5.6 million cash provided in the first nine months of 2002.  The $4.3 million decrease is primarily attributable to decline in cash flow from operations of $3.2 million, with a significant change in accounts payable balance between comparable periods accounting for most of the remainder.  Capital expenditures were approximately $2.6 million in the first nine months of 2003 with major projects including an automated filling machine, a chunky ravioli line, a new telephone system, a prepared foods line, an upgrade of a chiller, and the final expenditures on the plant expansion at the distribution center.

 

During the first nine months of 2003, proceeds from the Employee Stock Purchase Plan share purchase of 15,695 shares were $54,000, and proceeds from employee option expercises were $4,000 (1,596 equivalent shares). This compares to the first nine months of 2002 in which $827,000 was generated from the exercise of stock options resulting in 610,650 shares of common stock ($791,000), and 7,670 Employee Stock Purchase Plan shares ($36,000).

 

The Company finances its operations and growth primarily with cash flows generated from operations. The Company has available a $10,000,000 credit facility consisting of a $1.5 million accounts receivable and inventory revolver and an $8.5 million non-revolving term facility for major capital expenditures and acquisitions (discussed in further detail on Note 6 to the financial statements on page 8).  This access to capital provides us with flexible working capital, which occasionally may be needed in the normal course of business, and the opportunity to grow our business through acquisitions or develop our existing infrastructure through capital investment.

 

The Company believes that its existing credit facilities, for which the Company has a written commitment to renew, together with cash flow from operations, are sufficient to meet its cash needs for normal operations including all capital expenditures for the next twelve months.

 

We believe that cash on hand of $5.5 million at September 28, 2003, as well as projected remaining fiscal 2003 and 2004 cash flows from operations, and availability under our Credit Facility are sufficient to fund our working capital needs, and anticipated capital expenditures, and any acquisitions the Company may enter into for the remainder of fiscal 2003 and 2004. We currently invest our cash on hand in highly liquid short-term investments yielding approximately 1% interest.

 

Critical Accounting Policies and Management Judgements

 

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.  These allowances against sales 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.

 

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Sales Incentives and Advertising Costs

 

The Company expenses advertising costs as incurred or when the related campaign commences.  Sales incentives paid or credited to club stores and grocery chains for shelf space allocations are offset against sales are amortized between six and twelve months depending on the nature of the chain program or agreement.  Loss of a major account could create the need to expense the remaining prepaid asset relating to that account in a specific quarter, thereby potentially affecting the results of that quarter.  In addition, sales incentives could increase, thereby adversely affecting gross margins.

 

Goodwill/Intangible Assets

 

Intangible assets, other than goodwill, consist of tradenames and other intangibles and are recorded at cost, net of accumulated amortization.  These intangibles are amortized over their respective useful lives, if determinate, ranging from three to ten years.  Goodwill and intangibles with indeterminate useful lives are assessed for impairment at least annually. The valuation of these intangibles is generally determined based upon valuations performed by third party specialists and management’s best estimates of fair value.  As a result, the ultimate value and recoverability of these assets is subject to the validity of the assumptions used.  The Company cannot predict the occurrence of events that might adversely affect the reported value of goodwill that totaled $4.7 million at September 28, 2003.  However, the current fair market value of acquired assets is in excess of carrying values and, accordingly, management believes that only significant changes in cash flow assumptions would result in impairment.

 

Deferred Tax Asset Valuation Allowance

 

The Company accounts for corporate income taxes in accordance with 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.

 

The Company has significant deferred tax assets, which include significant amounts of NOLs from the Company’s former restaurant operating subsidiary UFO. These NOLs were previously fully reserved based upon management’s best estimate of ultimate realizeability.  During 2002, based upon new evidence and management’s judgments these reserves were substantially reduced.  The amount of the reserve is significantly dependent on management’s assumptions regarding future taxable income and the availability of these NOLs to offset future taxable income. The effect on the Company’s net income is significant whenever the estimate of realizability changes, as it did in 2002 (See “Deferred Tax Assets” below). The Company expects to utilize most of the remaining NOLs in fiscal 2003 and 2004.

 

Workers Compensation Deductible Program

 

The Company’s entered into a deductible worker’s compensation program for 2003 which is self funded up to $250,000 per claim.  As a result, management is required to make estimates of incurred but not yet reported claims (“IBNR”) as there is frequently a lag time between the occurrence of the event or series of events that ultimately result in a claim under the program.  Therefore management accrues a liability for IBNR based primarily upon its claims experience under the program combined with management’s estimation of the impact of safety programs designed to minimize the occurrence of claims.  However, the occurrence of significant claims could result in unexpectedly large charges.

 

As of September 28, 2003 the Company has only nine months worth of claims experience upon which to base their estimate of IBNR.  During that nine-month period the Company’s claims experience has been extremely low.

 

Sales and Marketing

 

The Company’s sales and marketing strategy is twofold and emphasizes sustainable growth in distribution of its products and introduction of innovative new products to keep the Company positioned as the category leader in the marketplace.

 

In keeping with its strategy of bringing innovative, new products to the marketplace, in the third quarter of 2003 the Company worked aggressively to develop a new line of reduced carbohydrate products.  This effort will leverage the current, and rapidly increasing popularity of reduced carbohydrate diet programs and lifestyles.  The Company plans to introduce this

 

13

 

new line to both warehouse club and retail grocery accounts early in the fourth quarter and will incur costs associated with a new product line introduction.

 

In addition, the Company continued to work on its line of heat-and-serve entrees by presenting new varieties to its key accounts, and by developing an exciting new line of pasta and sauce “kits”.  These products will be entering the marketplace during the fourth quarter.

 

Following the introduction of its new pasta and sauce packaging to warehouse club accounts during the second and third quarters, the Company finalized its new package designs for its retail product lines during the third quarter.  The Company will be “restaging” its entire retail product line during the fourth quarter.

 

Major Customers

 

Two of the Company’s customers, Costco and Wal-Mart, Inc including its subsidiary, Sam’s Club, accounted for 35% and 32%, respectively, of the Company’s sales for the nine months ended September 28, 2003.  No other customer accounted for greater than 10% of net revenues for the period.

 

Deferred Tax Assets

 

During 2002, the Company completed its evaluation of the likelihood of realizing certain deferred tax assets arising from net operating losses (NOLs) originated in connection with its former restaurant operating subsidiary UFO.  As a result, reserves against these deferred tax assets totaling $5,404,000 were released and offset against income tax expense.  This credit, together with permanent differences and other current tax effects, resulted in a net income tax benefit of $3,128,000.  Of these amounts, $4,674,000 in reserves released along with permanent differences and other current tax effects, resulted in a net income tax benefit $3,549,000 during 2002. Utilization of these remaining NOLS and other deferred tax assets is expected to offset substantially all of the federal income taxes otherwise payable for 2003.  As of September 28, 2003, remaining net deferred tax assets available to offset future cash taxes are $3,476,000 short term and $938,000 long term.

 

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 continued for twenty-five consecutive quarters through the second quarter of 2003.  At September 28, 2003, the Company had an accumulated deficit of $4,448,000.  There can be no assurance that the Company will generate profits in the short or long term.

 

•                  Liquidity:  Need for Additional Capital.   Management believes that its current cash balances, 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 the next twelve months.  See Note 6 to the financial statements for a description of the credit facility.  The disallowance of a significant portion of previously-utilized UFO NOLs might require an unexpected cash outlay.   The use of the UFO NOLs through third quarter 2003 is approximately $14 million.  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.  On September 3, 2002 the Company announced the hiring of James M. Williams as its new President, effective October 1, 2002, to replace R. Lance Hewitt, who stayed on as Chief Executive Officer through 2002.  Mr. Hewitt retired from day-to-day operations effective December 28, 2002 and Mr. Williams was named Chief Executive Officer on the same date.  On October 6, 2003, Mr. Stephen L. Brinkman announced his resignation as the Company’s Chief Financial Officer.  Scott Wheeler, the current Corporate Controller was named as Chief Financial Officer effective October 27, 2003. The Company currently has a key man insurance policy with a face amount of $500,000  for Mr. Williams.  There can be no assurance that significant management turnover will not occur in the future, which could disrupt the Company’s operations, and business may suffer as a result.

 

14

 

•                  Impact of Inflation.  Dairy ingredients and energy prices had a material inflationary impact on the Company’s operations during 2001, but did not have an impact during 2002 and so far have not had a material impact in 2003.  Freight rate increases related to fuel surcharges impacted the first three quarters of 2003 by approximately $120,000 when compared with the same period in 2002.  Substantial increases in labor, employee benefits, freight, ingredients and packaging, rents and other operating expenses, as well as increases in dairy ingredients and energy prices 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.

 

•                  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, which may be associated with even an isolated event.  Although the Company has modern production facilities, employs what it believes are the necessary processes and equipment in order to insure food safety, and has obtained USDA approval for its California production facilities, there can be no assurance that the Company’s procedures will be adequate to prevent the occurrence of such events.  The quality assurance programs and food safety programs similar to those employed in the Salinas, California facilities are in the process of being established for the Eugene, Oregon facility.

 

•                  Dependence on Major Customers.  During the first nine months of 2003, two of the Company’s customers, Costco and Wal-Mart, Inc including its subsidiary, Sam’s Club, accounted for 35% and 32%, respectively, of the Company’s total revenues.  The Company currently sells its products to eight separate Costco regions (approximately 330 stores) which currently make purchasing decisions independently of one another.  These regions re-evaluate, on a regular basis, the products carried in their stores. There can be no assurance that these Costco regions will continue to offer Monterey Pasta products in the future or continue to allocate Monterey Pasta the same amount of shelf space.  The Company also supplies its products to approximately 450 Sam’s Club stores, and 1,100 Wal-Mart Supercenters and Neighborhood Markets.  Purchasing decisions are made at the respective company’s headquarters with input from the store level.  The Company is in the sixth year of its relationship with Sam’s Club.  However, there can be no assurance that Sam’s Club will continue to carry its products.   The Company obtained the Wal-Mart Supercenter business during 2002, so the relationship is relatively new and there is no guarantee of its success. Loss of either of these customers, Costco or Sam’s Club, or a significant reduction in sales to either, would have a material adverse effect on the Company.  Additionally, liberalized pricing or allowance terms would create downward pressure on gross margins.

 

•                  Seasonality and Quarterly Results.  The Company’s grocery and club store accounts are expected to experience seasonal fluctuations.  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 such as prolonged periods of hot weather.

 

•                  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.  These competitors can outspend the Company and negatively affect the Company’s market share and results of operations.  The Company also continues to be dependent on common carriers to distribute its products.  Any disruption in its distribution system or increase in the costs thereof could have a material adverse impact on the Company’s business.

 

•                  California Energy Supply and Pricing. During 2001, California experienced an energy crisis that increased the Company’s energy expenses and could have disrupted the Company’s operations.  In the event of an acute power shortage, when power reserves for California fall below 1.5%, electricity providers have on some occasions implemented, and may in the future implement, rolling blackouts.  If blackouts interrupt the power supply to the Company’s production facilities, such facilities would temporarily be unable to continue production.  Any such interruption could result in a loss of revenue as a result of reduced production and spoilage of food products.  In addition, related to the energy crisis, many of the electricity and natural gas suppliers raised their rates substantially during the first six months of 2001. Because the Company has most of its operations in California, its operating costs are affected by an increase in electricity and natural gas prices. As a result, the Company’s operating results could be affected in some measure in the future by fluctuations in the price or supply of energy.  Electricity prices are similar to the same three-month period a year ago.  Natural gas prices in the first nine months of 2003 have increased over 80% from the same period a year ago.  This impacted operating cost by approximately $225,000 during the first nine months of 2003.  Management cannot predict the level of future energy prices or supply with certainty.

 

15

 

•                  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.

 

•                  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, either in the same measure or at all.  Should these channels choose to reduce or eliminate products, the Company could experience a significant reduction in its product sales.  The Company remains dependent on the use of slotting allowances and other incentives to expand retail distribution.

 

•                  Dairy Ingredients Prices.  During the first ten months of 2001 average price of certain dairy ingredients increased over 40% compared with the average of the prior twelve months, as measured by butterfat prices published by the State of California Department of Food and Agriculture.  Because the Company utilizes various dairy ingredients in many of its products, its operating costs will be affected by an increase in the price of those ingredients. The Company’s operating results were affected in the first eleven months of 2001. Although dairy ingredient prices have declined significantly since November 2001, they have started to increase in the third quarter 2003, but have not as yet materially impacted operating margins.  Continued increases in dairy prices, if they occur, will have a negative impact on operating results in the future.  Dairy ingredients historically tend to be cyclical in nature and subject to declines in price as well as increases.  Management cannot predict with certainty the duration or magnitude of the current price cycle.

 

•                  Deductible Worker’s Compensation Program.  The Company entered into a deductible worker’s compensation program for fiscal year 2003.  This program features a fixed annual payment, a deductible of $250,000 per occurrence, and a $500,000 letter of credit in favor of the insurance company. This new program creates a maximum exposure of approximately $2.1 million for claims occurring in 2003.  A competitive “guaranteed cost” program would have cost the Company approximately $1.5 million.  Therefore, the Company’s maximum incremental exposure in the event of adverse experience is approximately $600,000.  The maximum potential cost reduction is as much as $1.1 million.

 

 

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

 

Market Risk Disclosure

 

The Company does not hold market risk sensitive trading instruments, nor does it use financial instruments for trading purposes.  All sales, operating items and balance sheet data are denominated in U.S. dollars, therefore, the Company currently has no foreign currency exchange rate risk (see “Foreign Currency Risks” section below for further discussion).

 

In the ordinary course of its business the Company enters into commitments to purchase raw materials over a period of time, generally six months to one year, at contracted prices.  At September 28, 2003 these future commitments were not at prices in excess of current market, or in quantities in excess of normal requirements.  The Company does not utilize derivative contracts either to hedge existing risks or for speculative purposes.

 

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Interest Rate Risk

 

The Company has fixed and variable income investments consisting of cash equivalents.  The magnitude of the interest income generated by these cash equivalents is affected by market interest rates.  We do not use marketable securities nor derivative financial instruments in our investment portfolio.

 

The interest payable on our bank line of credit is based on variable interest rates and therefore affected by changes in market interest rates.  The Company had no bank debt at the end of the third quarter and has not had bank debt since the third quarter of 2000.

 

Foreign Currency Risk

 

The Company’s sales to-date have been made to primarily U.S. customers and, as a result, has not had any significant exposure to factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. However, the Company is now selling and, in future periods, expects to sell more in foreign markets. If sales are made in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets.

 

Item 4.    Disclosure Controls and Procedures

 

Under the supervision of and with the participation of our management, including the our chief executive officer and chief financial officer, the Company evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended.  Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 28, 2003. There have been no significant changes during the quarter ended September 28, 2003 (including corrective actions with regard to significant deficiencies or material weaknesses) in the Company’s internal controls or in other factors that could significantly affect these controls.

 

PART II.  OTHER INFORMATION

Item 1.       Legal Proceedings

 

The Company and two of its officers and directors have been named as defendants in two consolidated purported securities class action cases filed in the Northern District of California:  Wietschner v. Monterey Pasta Company et al., No. C 03-00632 MJJ (filed Feb. 13, 2003); Moore-Warner v. Monterey Pasta Company et al., No. C 03-1072 MJJ (filed Mar. 12, 2003).  The cases purport to be brought on behalf of a class of all persons who purchased the common stock of the Company from July 11, 2002 through December 16, 2003.  The complaints allege that defendants issued false statements regarding expected earnings and revenues, in violation of Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934.  No specific amount of damages is claimed.  On July 11, 2003, lead plaintiffs filed a consolidated complaint.  The Company moved to dismiss, and that motion was heard on October 21, 2003.  Management believes that plaintiffs’ allegations are without merit and intends to contest the cases vigorously.

 

On February 20, 2003, a purported shareholder derivative complaint was filed in the Superior Court, County of Monterey, Imperial County Employees’ Retirement System v. Hewitt et al., No. M63679.  The complaint alleges claims for breach of fiduciary duty, gross negligence, waste, and abuse of control against the directors of the Company, based in substantial part on the same allegations as the securities class action complaints.  On June 13, 2003, the Court granted the Company’s and the individual defendants’ demurrers (motions to dismiss) to the case without leave to amend. After judgment was entered, plaintiff filed a notice of appeal. The parties subsequently agreed that the appeal would be dismissed, with each side to bear its costs.  The stipulation to this effect has been filed with the Superior Court.  Accordingly, the lawsuit has concluded.

 

The Company will incur legal fees in defending the securities lawsuit. There are no other material legal procedings pending to which the Company is a party or to which any of its property is subject.  The Company is a party to ordinary routine litigation incidental to the Company’s business.

 

Item 2.       Changes in Securities

 

None

 

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Item 3.       Defaults upon Senior Securities

 

None

 

Item 4.       Submission of Matters to a Vote of Security Holders

 

(a) The Company’s annual stockholders’ meeting was held July 30, 2003.

 

(b) At the annual meeting the following matters were approved:

 

(i) the election of the following nine directors to hold office for the ensuing year and until their successors are elected and qualified.  The following directors received vote total listed below:

 

		Votes For *		Votes Against *
R. Lance Hewitt		13,090,175		8,259
Charles B. Bonner		13,092,184		6,250
Michael P. Schall		13,090,634		7,800
Van Tunstall		13,063,740		36,494
James Wong		13,060,827		37,607
Stephen L. Brinkman		13,095,134		3,300
Walter L. Henning		13,096,334		2,100
F. Christopher Cruger		13,062,431		36,003
James M. Williams		13,077,234		21,200

 

*Abstentions for all directors were 290,139 shares

 

(ii) the appointment of BDO Seidman, LLP as the independent public accountants for the year ending December  29, 2002 was approved with 13,312,884 votes in favor, 33,054 votes against, and 42,635 votes abstaining.

 

Item 5.       Other Information

 

During the first quarter of 2003, the Company leased an additional 1,190 square feet of office space adjacent to its headquarters building in Salinas, California with a three-year lease.  During the second quarter of 2003, the Company leased an additional 10,904 square feet adjacent to its distribution center.  This brings the total square feet leased at the Salinas, California site of its distribution center to over 98,000.  Total square feet leased is now approximately 162,000 including 19,000 square feet in Eugene, Oregon, the site of its Emerald Valley Kitchen facility, and 44,000 square feet at its headquarters facility in Salinas, California.

 

Item 6.       Exhibits and Reports on Form 8-K

 

(a)          Reports on Form 8-K

 

Date of Report		Items		Description
July 29, 2003		7, 9		Report of earnings for second quarter of 2003

 

(b)         Exhibits

 

31.1                 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2                 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1                 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2                 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	MONTEREY PASTA COMPANY
Date: November 6, 2003
	By:	/s/ JAMES M. WILLIAMS
		James M. Williams
		Chief Executive Officer
	By:	/s/ SCOTT WHEELER
		Scott Wheeler
		Chief Financial Officer

 

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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)
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”))

 

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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 April 1, 2001 Quarterly Report on Form 10-Q filed on April 28, 1999)
10.24		Agreement for Purchase and Sale of Assets dated as of March 12, 1999, by and among the Company and the shareholders of Frescala Foods, Inc. (incorporated by reference from Exhibit 2.1 filed with the Company’s 8-K on March 17, 1999)
10.25		Royalty agreement dated July 12, 1999 between Company and Chet’s Gourmet Foods, Inc. for soups (incorporated by reference to Exhibit 10.25, in the Company’s September 26, 1999 Quarterly Report on Form 10-Q filed on November 9, 1999 (“1999 Q3 10-Q”))
10.26		Storage Agreement Manufactured Products dated August 3, 1999 between the Company and Salinas Valley Public Warehouse for storage and handling of Company’s product in Monterey County, California storage facility (incorporated by reference to Exhibit 10.26, filed with the Company’s 1999 Q3 10-Q)
10.27		Commercial Lease dated August 10, 1999 between Company and Salinas Valley Public Warehouse for storage space in Monterey County, California (incorporated by reference to Exhibit 10.27, filed with the Company’s 1999 Q3 10-Q)
10.28		Rental Agreement dated September 6, 1999 between Company and Porter Family Trust for storage space in Monterey County, California (incorporated by reference to Exhibit 10.28 filed with the Company’s 1999 Q3 10-Q)
10.29		Royalty agreement dated September 15, 1999 between Company and Chet’s Gourmet Foods, Inc. for meatball and sauce item (incorporated by reference to Exhibit 10.29, filed with the Company’s 1999 Q3 10-Q)
10.30		Credit Agreement between the Company and Imperial Bank dated August 2, 1999 (incorporated by reference to Exhibit 10.30 filed with the Company’s 1999 Form 10-K on February 18, 2000 (“1999 Form 10-K”))
10.31		First Amendment to Credit Agreement between the Company and Imperial Bank dated August 2, 1999 (incorporated by reference to Exhibit 10.21 filed with the Company’s 1999 Form 10-K)
10.32		Commercial lease dated January 1, 2000 between the Company and PTF for Operating Engineers, LLC for

 

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		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 (incorporated by reference to Exhibit 10.35 filed with the Company’s 2000 Form 10-K on February 7, 2001 (“2000 Form 10-K”))
10.36		Fourth Amendment to Credit Agreement between the Company and Imperial Bank dated August 2, 1999 (incorporated by reference to Exhibit 10.36 filed with the Company’s 2000 Form 10-K)
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. (incorporated by reference to Exhibit 10.37 filed with the Company’s 2000 Form 10-K)
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. (incorporated by reference to Exhibit 10.38 filed with the Company’s 2000 Form 10-K on February 7, 2000)
10.39		Fifth Amendment to Credit Agreement between the Company and Imperial Bank dated August 2, 1999 (incorporated by reference to Exhibit 10.39 in the Company’s April 1, 2001 Quarterly Report on Form 10-Q filed on May 7, 2001)
10.40		Lease Extension and Modification Agreement between the Company and Marco Warehouse d.b.a. Salinas Valley Public Warehouse dated September 1, 2001 (incorporated by reference to Exhibit 10.40 in the Company’s September 30, 2001 Quarterly Report on Form 10-Q filed on November 7, 2001)
10.41		Royalty Agreement dated January 18, 2002 between Company and Toscana Foods, LLC for ravioli with unique rough chopped filling (incorporated by reference to Exhibit 10.41 in the Company’s June 30, 2002 Quarterly Report on Form 10-Q filed on August 9, 2002)
10.42		Asset Purchase Agreement dated August 23, 2002 by and among the Company and the shareholders of Emerald Valley Kitchen, Inc. (incorporated by reference from Exhibit 10.42 filed with the Company’s 8-K on August 30, 2002)
10.43		Commercial lease dated August 23, 2002 between the Company and Mel Bankoff for plant, warehouse and office space in Eugene, Oregon (incorporated by reference from Exhibit 10.43 filed with the Company’s 8-K on August 30, 2002)
10.44		Commercial lease dated January 3, 2003 between the Company and Conrad Family Trust for office space in Salinas, Monterey County, California (incorporated by reference from Exhibit 10.44 filed with the Company’s 2002 Form 10-K filed on February 14, 2003)
10.45		Second Lease modification to 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 from Exhibit 10.45 filed with the Company’s June 29, 2003 Quarterly Report of Form 10-Q filed on August 7, 2003)
31.1**		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2**		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

*Management contract or compensatory plan or arrangement covering executive officers or directors of the Company and its former subsidiary, Upscale Food Outlets, Inc.

 

** filed herewith

 

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