Monterey Gourmet Foods, Inc. | About Us

Founded in 1989, Monterey Gourmet Foods now produces more than 250 different fresh gourmet food products for the premium food consumer that are distributed in more than 10,200 retail and club stores throughout the United States, selected regions of Canada, the Caribbean, Latin America and Asia Pacific. Monterey Gourmet Foods' fresh refrigerated gourmet food products are produced at facilities in Salinas, (Monterey County) California; Eugene, Oregon; and Seattle, Washington. Monterey Gourmet Foods continually introduces new product lines outside of its traditionally strong base of pasta and sauces. With a recent plant consolidation project completed; the realignment of resources and responsibilities of key individuals from the five subsidiaries; and the appointment of a new Chief Executive Officer, Monterey Gourmet Foods has emerged as one company, with one sales force, and a unified vision for marketing its multiple brands.

Price: (11/06/2007)	$3.79
52-week Range:	$3.54 - 4.83
Shares Outstanding:	17.4 million
Market Capitalization:	65.9 million
Revenues (ttm) (9/30/2007):	$100.4 million
EBITDA:	$5.8 million
Net income (ttm):	$1,550,000
P/E (ttm):	42.1
Fiscal Year Ends:	December 31
Book Value/Share:	$3.00
Revenue/Share (ttm):	$5.77
Total Assets:	$61.1 million
Working Capital:	$14.7 million

2007 HIGHLIGHTS

First Quarter 2007 results continued the trend with net revenue improving 10%, or $2.2 million over the first quarter of 2006 and net income improving by $198,000, or 198% over the prior year quarter. EPS was $0.02 per share compared to $0.01 per share in the first quarter of 2006.

For the Second Quarter 2007, PSTA reported its best operating profit in 17 quarters. Net Income for the quarter was $464,000, or $0.03 per share, compared to $146,000, or $0.01 per share in the prior year - a 218 percent increase.

PSTA showed continued improvement in the third quarter 2007, reporting net income of $279,000 or $.02 per share compared to a net loss of ($3,872,000) or ($.22) per share in the third quarter 2006-a net improvement of $4,151,000. The Company also reported nine months net revenues of $24.5 million compared to $22.1 million for the third quarter 2006 -- an 11% improvement.

Key brands contributing to revenue growth in 2007 Q3 were Monterey Pasta's refrigerated pasta, up 45%; and Casual Gourmet branded products, up 49%. SG&A as a percent of net revenues for Q3 were 25.3% compared to 32.5% in the prior year, down 22%. No longer selling SKU's at less than new minimum margins, or that fall below minimum production runs has impacted current revenues, but will improve as more profitable items come on line.

Gross profit for 2007 Q3 improved slightly, up 3.83% quarter over quarter and up 8.95% for the nine months on a year over year basis, despite continuing challenges and setbacks for the Sonoma Cheese branded products that are taking added time to correct: Costco has displaced several cheese SKUs with international flavors and the Company's cheese manufacturing costs are based on the Chicago Mercantile Exchange price for block cheese which has risen from $1.30 per pound last year to $2.00 today.

Key Considerations
After a restructuring begun in mid-2006 under the new CEO, Eric Eddings, Monterey Gourmet Foods has emerged as a markedly different organization. No longer five different fiefdoms cobbled together as a result of four acquisitions that took place between 2001 and 2005; Monterey Gourmet Foods has been re-organized by operational functions rather than brands, and is now one company, with one sales force, and a unified vision for marketing its multiple brands.

A broad-based profit improvement program has resulted in nearly $2 million in annualized operating margin improvement since its inception, beginning mid-year 2006 savings on an annualized basis.

Real improvements began in the fourth quarter of 2006 as new CEO, Eric Eddings (formerly CEO of subsidiary CIBO Naturals), who took the reins in September 2006, instituted a restructuring of compensation within the management and sales / marketing ranks that focused everyone on key profitability criteria. This has already led to several practices being revamped or eliminated and the number of SKUs reduced by 25%.

Overview
Monterey Gourmet Foods has overcome multiple reversals -any one of which might have doomed a less resilient company. In 2001/2002, the Company invested more than $9 million to expand its manufacturing capacity in order to meet the then high demand for its core pasta products. Almost immediately, it was affected by the Atkins' and other low-Carb diets that negatively impacted sales across the entire food industry. In 2003, Costco implemented a company-wide reduction in the number of SKUs across all food departments. In late 2004, Sam's Club followed suit with a similar program. Concurrent to all of this, the Company was experiencing one-time write-offs and much higher raw materials cost.

Monterey Gourmet Foods responded with innovation and a realistic game plan for the future. Beginning in 2002, the Company acquired Emerald Valley Organics and began developing a program of identifying other small regional companies whose products had national appeal. The reasoning was simple; take highly successful regional products and introduce them to a national audience by distributing them through an already existing network of relationships with the major Club stores and some 10,200 grocery outlets.

A PORTFOLIO OF BRANDS
Monterey Pasta/Monterey Gourmet Foods. Includes the company's traditional pasta/sauces and new gourmet refrigerated entrees such as Seafood Lasagna and Pasta Primavera; Grilled Wrap Sandwiches and Burritos; Whole Wheat pastas that feature "good" carbohydrates and 0 grams of Trans Fats, and Isabella's Kitchen Tamales. Monterey Pasta products can be found in club stores, retail grocery stores and specialty food stores nationwide.

Casual Gourmet Foods. Known for its complete line of low-fat poultry-based sausages, Casual Gourmet's easy-to-prepare products can be found in stores nationwide.

CIBO Naturals. An innovative, all-natural, specialty food company that creates fresh, ready-to-eat pestos, soft-flavored cheese spreads, dips, toppings and refrigerated pastas for the retail, foodservice and club store channels. CIBO products are available nationally and are "made to order" each week to ensure freshness and quality.

Emerald Valley Kitchen. Based in Eugene, Oregon, Emerald Valley Kitchen produces certified organic, all-natural fresh salsa, dips and hummus. EVK products are widely distributed throughout the Northwest and in natural / specialty food stores in most regions of the country.

Sonoma Foods. Founded in 1931, and acquired by Monterey Gourmet Foods in April, 2005, Sonoma has earned numerous awards over the years for its traditional and flavored jack cheeses. Formerly limited to the western states, sales of Sonoma Foods products are now being expanded to other regions of the country as well.

The core fresh pasta and sauce business of the Monterey Pasta brand has resumed its growth curve with new product introductions over the past year and now provide a strong engine for renewed growth. Whole wheat pastas, and entrees, part of the prepared food category, have gained strong market acceptance and continue to expand as new products within those groups are introduced. Fresh burritos and tamales, introduced in late 2005 through the Isabella's Kitchen label, were an immediate success, particularly during the holiday season, and are now generating strong sales throughout the year. Other winners include a new Tuscan Bean Spread, and sandwich ingredients that we supply to Starbucks and Pinaro Breads through our CIBO Naturals brand.

THE EXECUTIVE COMMITTEE
An Executive Committee was formed by CEO, Eric Eddings, immediately after he took over as CEO. The primary focus at the beginning was to define exactly where the company and its subsidiaries currently stood in the marketplace; determine where they wanted to be in three years; identify what the company would look like in the future and how it would operate; and, finally, work out the game plan for how to get there. One key element of all the discussions was that going forward, Monterey Gourmet Foods had to operate as one company, not five independent entities, each marching to the beat of its own drum. With that in mind, the Executive Committee was originally formed around eight key team members: Eric Eddings, CEO; Scott Wheeler, CFO; Bob Donaldson, who was VP/Sales at CIBO Naturals, but who now oversees sales for the entire company; John Davies from Monterey Pasta, now in charge of all Retail Field Sales; Joe Stirlacci from Monterey Pasta, now in charge of all Club Store Sales; Dan Brown of Monterey Pasta, now in charge of all Operations of all three processing plants; and Marty Adams, CEO of Sonoma Foods, who now is working on strategic solutions for Sonoma Foods.

Out of the initial sessions, conducted by an outside facilitator, 10 key projects were developed that would become the building blocks for the future. Some projects were shifts in long-term strategy and others were more tactical and immediate in nature. Teams were created for each project, usually consisting of five team members, and timelines were established for each goal. Teams were to meet as often as required and the Executive Committee adopted a schedule of meeting together, or by video conferencing, once per week to discuss progress and next steps required to fulfill each project's 90 and 100 day timelines.

Projects included: Reduction of headcount to eliminate redundancy. When operating as five separate companies, there were many instances of job duplication. With a transition to a more centralized operating model, one person could now perform for the company as a whole, leading to substantial savings. Internal Communication was redesigned so that each team member could help educate the others, challenge the others, and ensure that everyone understood the entire business, not just their individual role. Everyone reports through the Executive Committee. Compensation was redesigned so that everyone was rewarded by the same metrics; that bonuses would reflect profitability at both the corporate and division level. This ensures that everyone is part of the same team. New Product Development recognized that new ideas were vital to the company's success, whether for entirely new recipes or for re-energizing existing recipes.

FAST RESPONSE TO CHANGING TRENDS
The Executive Committee has proven itself to be very adept at problem solving and re-thinking the status quo to generate significant improvements both to the Company's products and the bottom line. In just more than 90 days, the team re-examined the packaging of the Monterey Pasta offerings, implemented changes that included moving from a cardboard sleeve to an informative sticker type label whose underside contains recipes, and getting the product onto the shelves. Not only do the products display better on the retail shelves, they also weigh less saving on shipping costs, and they no longer use costly cardboard which generates a savings of about $0.11 per unit, or $250,000 in 2007 Q3.

FORMING RELATIONSHIPS WITH CELEBRITY CHEFS
Monterey Gourmet Foods has formed new relationships with two well-know chefs in order to re-energize many of the product offerings of the Monterey Pasta line. In time, the company will also begin offering separate Signature product lines based on the recipes of each of its outside chefs. Marco Rossi, based in Salt Lake City, is known for being a premier pasta chef. He has strong ties to Italy and is developing new pasta items. One current recipe is a Cheese Ravioli, using imported Italian chesses, that be more affordable and cook in the microwave in record time. Kathy Casey is a well-known Seattle-based chef who has authored three cookbooks and hosts a cooking show seen throughout the Pacific Northwest.

ORGANIC GROWTH OF THE CORE BUSINESS
Through the nine months ended September 30, 2007, new products introduced within the year have contributed more than 10% of revenue. The goal is to reach a 15% to 17% contribution to revenue in the near future. A key driver in reaching this goal is a product development team that is constantly designing new products that can feed the pipeline into the Company's distribution system. While building a portfolio of stable product offerings is one element of success, another is providing a constant stream of new offerings that reduce the likelihood of falling victim to changing tastes that can affect demand for more mature products. Overall, 50 new products, across all brands, have been introduced within the past 10 months.

THE ROLE OF ACQUISITIONS
Monterey Gourmet Foods has a very successful formula for its acquisition strategy. Recent acquisitions - CIBO, Casual Gourmet, Emerald Valley Kitchen and Sonoma Cheese have all had strong products within the refrigerated food category that complement and enhance MGF's existing brands and product lines. Each had strong sales on a regional basis that could be expanded nationally through Monterey Gourmet Foods' existing distribution channels. Acquisitions made since 2003 account for about 40 percent of revenues, bringing diversification in both revenue mix and an expansion of the customer base.

Monterey Gourmet Food's acquisitions are not a consolidation story, but instead, allow the Company to expand its product offerings and subsequently its footprint inside the more than 9,600 locations it serves. Although most of the acquisitions originally operated individually from their own facilities in other states, many operational functions have been brought under one roof allowing Monterey Gourmet Foods to achieve economies of scale by centralizing areas such as accounting, sales, and distribution. This contributes to margin improvement for each brand as it is brought on board and incorporated into the Monterey Gourmet Foods family.

GROWTH STRATEGY
Monterey Gourmet Foods plans to continue building on its successful track record of buying high quality food companies with $10 to $20 million in annual sales and then introducing the newly acquired brands and products to a national market through its superior distribution network. Another substantial market, in addition to the nearly 10,000 retail and club stores, is the food service industry. Monterey Gourmet Foods is currently evaluating its options for a seamless entry into this additional market.

The overall strategy serves several purposes. First, it allows Monterey Gourmet Foods to expand its product offerings into complementary refrigerated gourmet food categories that gives the company greater access to shelf space in the stores it currently serves. It currently has a penetration rate of about 50 percent into the higher end retail grocery market it has defined as its target market, with added growth within reach - the goal is 70 percent penetration. Introducing additional products into stores where it already has relationships is the most cost effective means of achieving greater growth. Second, acquisitions have allowed Monterey Gourmet Foods to expand the number of food categories it can offer - it now has a product pipeline into 12 categories, compared with just three before its acquisitions. Third, new products from future acquisitions will, as they are rolled out to a national audience, provide faster growth rates within existing sales channels than could have been hoped for by trying to expand the older core business into new sales channels.

STRATEGIC COMMITTEE
A new committee focused on new acquisitions has been formed, comprised of Chief Executive Officer, Eric Eddings; Chief Financial Officer, Scott Wheeler; and three directors of the Company with extensive M&A experience in the food industry: Walter Henning, Vice Chairman of the Board, and recently retired as Vice President of Operations for McCormick & Co.; John H McGarvey, a founder of Cybus Capital Markets, a private investment bank active in the food industry; and Michael P Schall, President of Strategic Marketing Methods, a consultant to the food industry, who has extensive experience with large food companies such as Manischewitz and Carnation. The role of the committee is to review and evaluate new acquisition candidates that fit the core strengths and competencies of the current team at Monterey Gourmet Foods and that can be seamlessly integrated into the current manufacturing capabilities.

INVESTMENT HIGHLIGHTS
PSTA showed continued improvement in the third quarter 2007, reporting net income of $279,000 or $.02 per share compared to a net loss of ($3,872,000) or ($.22) per share in the third quarter 2006-a net improvement of $4,151,000. The Company also reported nine months net revenues of $24.5 million compared to $22.1 million for the third quarter 2006 — an 11% improvement.

Key brands contributing to revenue growth in 2007 Q3 were Monterey Pasta's refrigerated pasta, up 45%; and Casual Gourmet branded products, up 49%. SG&A as a percent of net revenues for Q3 were 25.3% compared to 32.5% in the prior year, down 22%. SG&A expenses were reduced $990,000 or 13.8% on an absolute basis, in the third quarter of 2007 compared to the same quarter in the prior year. This reflects the elimination of severance costs associated with the restructuring begun almost two years ago and greater savings in freight costs.

No longer selling SKU's at less than new minimum margins, or that fall below minimum production runs has impacted current revenues, but will improve as more profitable items come on line.

Monterey Gourmet Foods is comfortably on track to reach $100 million is sales for fiscal year 2007 and to reach profitability for the full year after three years of losses. Management and the Executive Committee have demonstrated their ability to innovate, to make hard choices and to implement needed changes to build a sustainable and scalable infrastructure. In the process of the restructuring, they have re-balanced the organization, created new systems and processes, adopted a new compensation system based on profits, created a culture of responsibility and discipline, and reduced SG&A by means that are sustainable. As a result, Monterey Gourmet Foods in now ready to leverage the significant accomplishments of the past year.

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