10-Q 1 monterey_2q09.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended June 30, 2009

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 001-11777

MONTEREY GOURMET FOODS, INC.
(Exact name of registrant as specified in its charter)


Delaware		77-0227341
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

1528 Moffett Street
Salinas, California 93905
(Address of principal executive offices)

Telephone: (831) 753-6262
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated Filer o	Non-accelerated filer o	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

At August 4, 2009, 16,781,700 shares of common stock, $.001 par value, of the registrant were outstanding.

MONTEREY GOURMET FOODS, INC.

FORM 10-Q

Table of Contents


			Page
PART 1. FINANCIAL INFORMATION

Item 1.		Financial Statements

		Consolidated Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008	3

		Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008	4

		Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	5

		Notes to the Unaudited Consolidated Financial Statements	6

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.		Controls and Procedures	23

Item 4T.		Controls and Procedures	23

PART II. OTHER INFORMATION

Item 1A.		Risk Factors	23

Item 4.		Submission of matters to a Vote of Security Holders	24

Item 6.		Exhibits	24

SIGNATURE PAGE			25

	Exhibit 31.1	Section 302 Certification of Chief Executive Officer

	Exhibit 31.2	Section 302 Certification of Chief Financial Officer

	Exhibit 32.1	Section 906 Certification of Chief Executive Officer

	Exhibit 32.2	Section 906 Certification of Chief Financial Officer

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

MONTEREY GOURMET FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)


	June 30, 2009			December 31, 2008

	(unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	3,802		$	2,151
Accounts receivable less allowances of $880 and $862		5,584			5,725
Inventories		6,532			6,642
Prepaid expenses and other		826			808


Total current assets		16,744			15,326

Property and equipment, net		14,582			15,420
Deposits and other		183			249
Intangible assets, net		4,251			4,560


Total assets	$	35,760		$	35,555


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable	$	4,288		$	4,316
Accrued payroll and related benefits		929			1,057
Accrued and other current liabilities		466			1,279


Total current liabilities		5,683			6,652


Other long-term liabilities		251			217


Stockholders’ equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none outstanding		—			—
Common stock, $.001 par value, 50,000,000 shares authorized, 17,406,571 and 17,391,342 issued and 16,781,700 and 16,766,471 outstanding		17			17
Additional paid-in capital		61,064			60,875
Treasury stock 624,871 and 624,871 shares, respectively, at cost		(1,789	)		(1,789	)
Accumulated deficit		(29,466	)		(30,417	)

Total stockholders’ equity		29,826			28,686


Total liabilities and stockholders’ equity	$	35,760		$	35,555

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

MONTEREY GOURMET FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except earnings per share numbers and share totals)


	Three Months Ended						Six Months Ended

	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008


Net revenues	$	19,280		$	21,643		$	40,255		$	45,599
Cost of sales		14,241			15,493			29,366			33,749


Gross profit		5,039			6,150			10,889			11,850

Selling, general and administrative expenses		4,865			5,702			9,922			12,007

Impairment and restructuring		—			—			—			1,606

Gain (loss) on disposition of assets		10			(8	)		10			(8	)


Operating income (loss)		184			440			977			(1,771	)

Other income, net		43			107			54			115

Interest income, net		1			22			2			48


Income (loss) before income taxes		228			569			1,033			(1,608	)
Income tax benefit (provision)		(9	)		(757	)		(41	)		(3	)


Net income (loss) from continuing operations		219			(188	)		992			(1,611	)

Income (loss) from discontinued operations, net of tax		(15	)		15			(41	)		(93	)


Net income (loss)	$	204		$	(173	)	$	951		$	(1,704	)


Basic income (loss) per share
Income (loss) from continuing operations	$	0.01		$	(0.01	)	$	0.06		$	(0.10	)
Net income (loss)	$	0.01		$	(0.01	)	$	0.06		$	(0.10	)

Diluted income (loss) per share
Income (loss) from continuing operations	$	0.01		$	(0.01	)	$	0.06		$	(0.10	)
Net income (loss)	$	0.01		$	(0.01	)	$	0.06		$	(0.10	)

Weighted average primary shares outstanding		16,781,700			16,838,981			16,778,993			16,934,987
Weighted average diluted shares outstanding		16,805,042			16,838,981			16,779,429			16,934,987

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

MONTEREY GOURMET FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of dollars)


	Six Months Ended

	June 30, 2009			June 30, 2008

Cash flows from operating activities:
Net income (loss)	$	951		$	(1,704	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,556			1,498
Impairment and restructuring		—			1,606
Provisions for inventory		—			543
Stock-based compensation		179			192
(Gain) loss on disposition of assets		(10	)		16
Gain on acquisition of minority interest		—			(109	)
Changes in assets and liabilities:
Accounts receivable		141			2,127
Inventories		110			612
Prepaid expenses		(18	)		126
Deposits and other		66			(50	)
Accounts payable		(28	)		(917	)
Accrued liabilities		(907	)		(343	)

Net cash provided by operating activities		2,040			3,597


Cash flows from investing activities:
Purchase of property and equipment, net		(409	)		(1,734	)
Proceeds from sale of property and equipment		10			15
Acquisition of businesses net of cash and minority interest		—			(50	)

Net cash used in investing activities		(399	)		(1,769	)


Repayment of debt		—			(44	)
Repayment of capital lease obligations		—			(35	)
Purchase of treasury stock		—			(1,132	)
Proceeds from issuance of common stock		10			26

Net cash provided by (used in) financing activities		10			(1,185	)


Net increase in cash and cash equivalents		1,651			643

Cash and cash equivalents, beginning of period		2,151			5,541

Cash and cash equivalents, end of period	$	3,802		$	6,184


	June 30, 2009		June 30, 2008

*Cash payments:*
Interest	$	—	$	2
Income Taxes	$	7	$	103

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

MONTEREY GOURMET FOODS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.	Basis of Presentation

The consolidated financial statements have been prepared by us (“Monterey Gourmet Foods, Inc.”, or the “Company”) and are unaudited. 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 our 2008 Annual Report on Form 10-K. In our opinion, the financial information includes all normal and recurring adjustments that we considers necessary to present fairly our consolidated financial position, results of operations and cash flows as of June 30, 2009. A description of our accounting policies and other financial information is included in our audited consolidated financial statements as filed with the Securities and Exchange Commission (“SEC”) in our Form 10-K for the year ended December 31, 2008. The consolidated results of operations for the interim quarterly periods are not necessarily indicative of the results expected for the full year.

Certain reclassifications have been made to 2008 balances to conform to 2009 presentation.

We have evaluated subsequent events through August 4, 2009, which is the date these financial statements were issued.


2.	Impairment, Restructuring, Goodwill and Intangible Assets

No impairment or restructuring occurred during the first six months of 2009.

As a result of a significant reduction in sales at Sonoma Foods, particularly in March 2008, the Company determined that indicators of impairment existed for the Sonoma Foods intangible assets. As a result of this testing and in accordance with SFAS No. 142, the Company recorded a pre-tax, non-cash charge of approximately $1.1 million in the first quarter of 2008 related to the impairment of intangible assets and goodwill associated with the acquisition of Sonoma Foods. In connection with management’s evaluation of the Sonoma Foods reporting unit, the Company agreed to terminate the employment agreements with the minority shareholders of Sonoma Foods and enter into separate severance agreements. The Company recorded severance charges of $466,000 related to the severance agreements during the first quarter of 2008.

Goodwill and other intangible assets at December 31, 2008 and June 30, 2009 consist of (in thousands):


	Gross goodwill and intangible assets

	December 31, 2007		Impairments 2008			December 31, 2008		Accumulated Amortization		Carrying Amount

Trademarks and tradenames	$	220	$	—		$	220	$	220	$	—
Customer lists		5,982		(495	)		5,487		3,055		2,432
Other intangibles		2,112		(118	)		1,994		1,141		853

Total amortized intangible assets		8,314		(613	)		7,701		4,416		3,285

Intangible assets with indefinite lives (1)		1,776		(501	)		1,275		—		1,275


Total intangible assets		10,090		(1,114	)		8,976		4,416		4,560

Goodwill		13,211		(13,211	)		—		—		—


Total goodwill and intangible assets	$	23,301	$	(14,325	)	$	8,976	$	4,416	$	4,560

(1) Effective January 1, 2009, these intangible assets (mostly tradenames and trademarks) are amortized over 20 years.


	June 30, 2009

	Gross		Accumulated Amortization		Carrying Amount


Trademarks and tradenames	$	1,495	$	252	$	1,243

Customer lists		5,487		3,267		2,220

Other intangibles		1,994		1,206		788


Total amortized intangible assets	$	8,976	$	4,725	$	4,251

Amortization expense of intangible assets for the six months ended June 30, 2009 and June 30, 2008 was $309,000 and $337,000 respectfully.

The following table estimates our amortization expense for the next five years (in thousands):


Year	Estimated Amortization Expense (In thousands)


July through December 2009	$	308
2010		617
2011		617
2012		537
2013		437
2014 and thereafter		1,735


Total	$	4,251


3.	Discontinued Operations

At the December 4, 2008, meeting of the Board of Directors, the Board agreed with management to look for a buyer for the further processed protein products sold under the Casual Gourmet brand. In addition, management presented to the Board discrete financial information for the further processed protein products currently being sold under the Casual Gourmet brand. The Board agreed with management to separate out these products for future Board meetings as these products were not a “core competency”. The Board further determined that, if we could not sell this segment, then we would by year end proceed to wind down and close all operations associated with this segment.

We announced on December 30, 2008 to all the employees of the Further Processed Protein Segment that we would completely close this segment. We also notified all the customers of these products that we would stop shipping these products. Our last shipment was on February 14, 2009 and all excess inventory and assets was liquidated by April 30, 2009. The results of operations of our former Further Processed Protein Products are presented as discontinued operations. The following summarizes the results of the discontinued operations for the three and six months ended June 30, 2009 and June 30, 2008 in thousands of dollars except the per share data.

MONTEREY GOURMET FOODS, INC.
STATEMENT OF OPERATIONS FROM DISCONTINUED OPERATIONS
(Unaudited)
(in thousands except earnings per share numbers and share totals)


	Three Months Ended					Six Months Ended

	June 30, 2009			June 30, 2008		June 30, 2009			June 30, 2008


Net revenues	$	4		$	2,266	$	265		$	3,932
Cost of sales		14			1,496		275			2,675


Gross profit		(10	)		770		(10	)		1,257

Selling, general and administrative expenses		5			696		32			1,342

Loss on disposition of assets		—			—		—			(8	)


Operating income (loss)		(15	)		74		(42	)		(93	)

Other income, net		—			—		—			—


Income (loss) before provision for income tax expense		(15	)		74		(42	)		(93	)
Income tax (benefit) provision		—			59		(1	)		—


Net income (loss) from discontinued operations	$	(15	)	$	15	$	(41	)	$	(93	)


Basic loss per share from discontinued operations	$	(0.00	)	$	0.00	$	(0.00	)	$	(0.01	)

Diluted loss per share from discontinued operations	$	(0.00	)	$	0.00	$	(0.00	)	$	(0.01	)

Weighted average primary shares outstanding		16,781,700			16,838,981		16,778,993			16,934,987
Weighted average diluted shares outstanding		16,805,042			16,838,981		16,779,429			16,934,987


4.	Inventory

Inventories consist of the following:


	June 30, 2009			December 31, 2008


Production – Ingredients	$	4,030		$	3,989
Production – Finished goods		2,163			2,628
Paper goods and packaging materials		750			1,072
Operating supplies		70			65

		7,013			7,754
Allowances for spoils and obsolescence		(481	)		(1,112	)

	$	6,532		$	6,642


5.	Notes, Loans, and Capital Leases Payable

We paid in-full all notes and capital leases during the first quarter of 2008 in advance of their maturity dates and we had no notes, loans or capital leases on our books through June 30, 2009.


6.	Credit Facility

We have a $5.0 million working capital line of credit from Comerica Bank that is currently unused. Our working capital line of credit commitment expires June 30, 2010.

The terms of our line of credit prohibit the payment of cash dividends (except with written approval) on our capital stock and restrict payments for, among other things, repurchasing shares of our capital stock. We implemented a stock repurchase program and received permission from the bank to proceed with this program. Other terms limit among other things, (i) incurring additional indebtedness, (ii) adversely changing the capital structure, (iii) acquiring assets other than in the normal course of business including specific limits on annual capital expenditures and (iv) maintaining certain financial covenants. We were in compliance with all of our bank covenants as of June 30, 2009.


7.	Income Taxes and Deferred Tax Asset Valuation Allowance

We account for corporate income taxes in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 109, “Accounting for Income Taxes” which requires an asset and liability approach. This approach results in the recognition of deferred tax assets (future tax benefits) and liabilities for the expected future tax consequences of temporary timing differences between the book carrying amounts and the tax basis of assets and liabilities. During 2008 we established a valuation allowance equal to 100% of our deferred tax assets. All of our future tax benefits have valuation allowances against them due to past losses which increases the likelihood that the deferred tax assets may not be realized in the foreseeable future. Our deferred tax assets include significant amounts of net operating losses (“NOLs”). The amount of the valuation allowance is significantly dependant on our historical performance and assumptions regarding future taxable income and the availability of these NOLs to offset future taxable income. Changes in estimates relating to assumptions regarding future taxable income and valuation allowance may have a significant impact on net income (loss). We have a valuation allowance against deferred tax assets of $9.8 million as of June 30, 2009. For business combinations, we must record deferred taxes and liabilities relating to the book versus tax basis differences of acquired assets and liabilities. Generally, such business combinations result in deferred tax liabilities as the book values are reflected at fair value whereas the tax basis is carried over from the acquired company. Such deferred taxes initially are estimated based on preliminary information and are subject to change as valuations and tax returns are finalized.


8.	Stockholders’ Equity

We report our earnings in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 128, “Earnings per Share.” Basic net income per common share is based on the weighted average number of shares outstanding during the period. Diluted net income per common share is based on the weighted average number of shares outstanding during the period, including common stock equivalents. Stock options account for any difference between basic average common shares outstanding and diluted average common shares outstanding.

During the three months ended June 30, 2009, no stock purchase plan shares were issued. During the six months ended June 30, 2009, 15,229 employee stock purchase plan shares were issued with proceeds of $10,000.

No other shares of common stock were issued during the six months ending June 30, 2009.

Earnings per Share Calculation

The reconciliation of the share denominator used in the basic and diluted net income per share computations is as follows:


	Three Months Ended				Six Months Ended

	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008


Weighted average common shares outstanding used in basic net income per share computation		16,781,700		16,838,981		16,778,993		16,934,987

Dilutive effect of common stock equivalents, using the treasury stock method		23,342		—		436		—


Shares used in dilutive net income per share computation		16,805,042		16,838,981		16,779,429		16,934,987

For the three month period ended June 30, 2009, 1,728,004 options were excluded as their effect was anti-dilutive in the period. For the six month period ended June 30, 2009, 2,019,500 options were excluded as their effect was anti-dilutive in the period. Because the Company reported a loss for the three and six month period ending June 30, 2008, all outstanding options to purchase 1,854,369 shares of common stock were excluded from the diluted net income per share computation as their effect on loss per share have been anti-dilutive.

Stock Repurchase Plan

On December 10, 2007 our Board of Directors authorized a stock repurchase program whereby up to 750,000 shares of our Common Stock may be repurchased. In authorizing the repurchase program, our Board of Directors expressed its continued confidence in our near- and long-term financial and operating performance and its commitment to enhancing shareholder value. The duration of the repurchase program is open-ended. Under the program, we are able to purchase shares of common stock through open market transactions at prices deemed appropriate. The timing and amount of repurchase transactions under this program depend on market conditions and corporate and regulatory considerations. The program was suspended indefinitely by the Board of Directors on June 26, 2008. As of June 30, 2009, we had repurchased 624,871 shares of our common stock. No shares have been repurchased in 2009.

Stock-Based Compensation Expense

We account for stock option grants in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” “SFAS 123(R)”. Stock-based compensation expense recognized under SFAS 123(R) for employees, directors, and outside consultants is as follows:


	Three Months Ended				Six Months Ended

	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008


Stock based compensation expense:
Recorded in cost of sales	$	9,000	$	16,000	$	18,000	$	32,000
Recorded in selling, general and administrative		122,000		89,000		161,000		160,000

Total stock based compensation	$	131,000	$	105,000	$	179,000	$	192,000


Estimated fair value of options granted to employees and directors	$	34,000	$	202,000	$	35,000	$	202,000

The main reason for the decrease in stock-based compensation in 2009 compared to 2008 is that the share price of our stock has declined and therefore the Black-Scholes model generates a lesser value on the more recently issued stock options. These reductions are offset by the fact that the most recent options issued to Board members vest immediately upon issuance and therefore the entire value of the option is expensed immediately while management options vest over three years and therefore are expensed over three years.

During the six months ending June 30, 2009, 40,000 stock options (right to purchase stock) were issued to outside board members. The assumptions used to value these options were as follows:


	Three Months Ended				Six Months Ended

	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008


Volatility	58.52	%	40.58	%	57.87	%	40.58	%
Risk-Free Interest Rates	2.76	%	2.95	%	2.69	%	2.95	%
Expected Lives in Years	5.26		5.11		5.26		5.11
Dividend Yield	—		—		—		—
Forfeiture rate	14.7	%	16.7	%	14.7	%	16.7	%

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards to employees and directors on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations.

As stock-based compensation expense recognized in the Consolidated Statements of Operations for the three and six months ended June 30, 2009 and the three and six months ended June 30, 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Shareholder Protection Rights Plan

On July 1, 2008, we announced that we had entered into a Shareholder Protection Rights Agreement (the “Rights Agreement”) with Corporate Stock Transfer, Inc., as Rights Agent (“Rights Agent”). The Rights Agreement expires on July 1, 2018.

Pursuant to the Rights Agreement, we distributed to each shareholder of record of our common stock as of July 11, 2008, one Right per each share of common stock outstanding to purchase one one-hundredth share of the company’s Series A Junior Participating Preferred Stock at the price, subject to later adjustment, of $11.70 per one one-hundredth share. Subject to certain exceptions, the Rights will be exercisable if any person or group, without the approval of our Board of Directors, acquires or makes a tender offer for 20% or more of the outstanding shares of common stock of the company.

Under certain circumstances, the Rights may be exercisable for twice their value of shares of common stock, valued at its market price at the time of exercise. In addition, under certain conditions the Rights are redeemable by the company at the price of $0.001 per Right, subject to adjustment, or may be exchanged for common shares.

The Plan is required to be re-evaluated by a committee of independent members of the board not less frequently than every three years in order to determine whether the Plan should be modified or the Rights redeemed in the best interests of the company, its stockholders and other relevant constituencies.


9.	Segment Reporting

During 2008, we disclosed segment enterprise-wide information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

On March 20, 2008, we reviewed the low margins and dwindling revenues being generated from the Sonoma Cheese products and determined, among other strategic actions, to dedicate sales resources specifically to Sonoma Cheese products, and to buy out the minority interest and the employment contracts of the minority shareholders. In order to make this decision, we reviewed discrete financial information for the Sonoma Cheese Products. As a result, we concluded that Sonoma Cheese constitutes an operating segment and reporting unit and therefore, we are reporting Sonoma Cheese products as a separate reporting segment.

At the December 4, 2008, meeting of the Board of Directors, the Board agreed with management to look for a buyer for the further processed protein products sold under the Casual Gourmet brand. In addition, management presented to the Board discrete financial information for the further processed protein products currently being sold under the Casual Gourmet brand. The Board agreed with management to separate out these products for future Board meetings as these products were not a “core competency”. The Board further determined that if we could not sell this segment, then we would by year end proceed to wind down and close all operations associated with this segment. As a result, certain trademark rights were transferred to Monterey Gourmet Foods, Inc. from Casual Gourmet Foods, Inc. and all operations ceased during February 2009 and therefore, this reporting unit is now being reported as a discontinued operation.

Accordingly, as of December 31, 2008 we operated in three segments, Gourmet Foods Products, Sonoma Cheese Products, and Further Processed Protein Products. However, for six months ended June 30, 2009, we are operating in two segments because of the discontinued operation. We use operating income as the profit measure for each reporting segment.

Gourmet Foods Products: These products are developed from sophisticated recipes designed to enhance the eating experience. These products include ravioli, tortelloni, borsellini, pasta sauces, dips, hummus, salsa and other like products. The products are sold in various forms, flavors and sizes, are marketed to domestic food retailers, and are mostly produced in one of our three plant locations at Salinas, California, Kent, Washington, or Eugene, Oregon.

Sonoma Cheese Products: Packaged cheese operations include all products sold under the Sonoma Cheese brand. These products are co-packed by cheese producers mostly in California, are sold to consumers as slices, shredded, or as eight or six ounce blocks, and are marketed to domestic food retailers.

Information on segments and reconciliation to operating income are as follows (in thousands):

MONTEREY GOURMET FOODS
SEGMENT REPORTING


	Three Months Ended					Six Months Ended

	June 30, 2009		June 30, 2008			June 30, 2009		June 30, 2008


Net Revenues
Gourmet Foods Products		17,809		20,052			37,401		42,595
Sonoma Cheese Products	$	1,471	$	1,591		$	2,854	$	3,004


Total Net Revenues	$	19,280	$	21,643		$	40,255	$	45,599


Operating Income (Loss):
Gourmet Foods Products		117		535			865		907
Sonoma Cheese Products	$	67	$	(95	)	$	112	$	(2,678	)


Total Operating Income (Loss)	$	184	$	440		$	977	$	(1,771	)


	June 30, 2009		December 31, 2008

Assets
Gourmet Foods Products		34,104		34,033
Sonoma Cheese Products	$	1,656	$	1,522

Total Assets	$	35,760	$	35,555


10.	New Accounting Pronouncements

In May 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 165, “Subsequent Events” This standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for fiscal years and interim periods ended after June 15, 2009. We adopted this standard effective June 15, 2009 and have evaluated any subsequent events through the date of this filing. We do not believe there are any material subsequent events which would require further disclosure.

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (FSP SFAS 107-1). FSP SFAS 107-1 amends SFAS No. 107, “Disclosures about Fair Values of Financial Instruments” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosures about fair value of financial instruments in interim financial statements. FSP SFAS 107-1 is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. There was no significant impact on our consolidated financial statements for the three months ended June 30, 2009.


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 us in any future period.

Other than the historical facts contained herein, this Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements relating to our expectations relating to, among other things, our results of operations, future plans and growth strategies. Our actual results regarding such matters may vary materially as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see our Annual Report on Form 10-K for the year ended December 31, 2008.

Background

Our 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. We have since expanded our operations to provide a variety of gourmet refrigerated food products to grocery and club stores throughout the United States, selected regions in Canada, the Caribbean, Latin America and Asia Pacific. Our overall strategic plan is to enhance the value of our brands by distributing our gourmet products through multiple channels of distribution.

Our product distribution to grocery and club stores increased from approximately 25 stores as of December 1989, to over 11,000 stores by June 30, 2009. During recent years we added retail and club distribution through internal growth and through Isabella’s Kitchen, Emerald Valley Kitchen, CIBO Naturals, and Sonoma Cheese acquisitions. In 2004, our shareholders approved the change of the name of the Company to Monterey Gourmet Foods, Inc. The name change was made to more accurately define our strategic direction. The name change also announces to the investor community, our customers and consumers, our strategic direction to become a complete supplier of gourmet refrigerated foods.

Since 2004, we have launched many new product lines outside its core pasta/sauce business, including gourmet refrigerated entrees, fresh tamales, dips, spreads, and frozen One-Step meal entrees. We have also been able to increase distribution by introducing whole wheat, organic, and made with organic pastas which are higher in dietary fiber, have a favorable glycemic index, and are made with whole grains and organic items.

In January 2004, we acquired CIBO Naturals, a maker of sauces, dips and spreads. In January 2005 we acquired Casual Gourmet Foods, Inc. and we recently announced that we have shuttered this operation due to lack of sales and lack of profits. Sonoma Foods, Inc. acquired in April 2005, markets a line of refrigerated specialty cheese products that features its flagship line of traditional and flavored Sonoma Jack cheeses which have earned numerous awards over the years. We believe that the convenient gourmet food segment is growing rapidly as time-starved consumers seek high quality quick-meal solutions and that we, with our staff of culinary personnel, our food consultants, and our flexible manufacturing facilities, are well positioned to bring new products to these consumers.

In 2006, we focused on expanding distribution of our current products, consolidating production facilities in Salinas, improving the quality of our current products, hiring experts in product development and creativity to better utilize our production equipment, improving the synergies between our different brands, and reorganizing our brands into one operating unit. Also in September 2006, the Board of Directors of the Company appointed Eric Eddings as President and Chief Executive Officer of our Company.

In 2007, we focused on strategic growth, improving the synergies that are possible with one sales force for all brands, one marketing department, one finance department, one information systems department, one manager in charge of all our production plants, and one unified goal to improve our profitability. We focused on brand building with an emphasis on natural and/or organic products by expanding our product offerings of organic or made with organic ingredients as these products are being well received in the market place.

In 2008, we addressed the capacity and efficiency constraints of our fragmented Seattle Washington facility by securing a ten year lease on a new facility in Kent, Washington, approximately 20 miles from the former location. We spent approximately $4.5 million preparing this new facility and moving equipment into it before occupancy in December 2008. The improvements added capacity to our sauce production and made other important changes in our production processes. In addition, we saw increases in the prices of many of our raw ingredients such as cheese, eggs, corn, flour, oil, pine nuts, and dairy products, and in our transportation costs, but we were not able to increase our prices sufficiently to offset these increased costs during the year.

Also during 2008, we launched new items across all product lines, with the main focus on organic and made with organic products. Our goal is to gain incremental distribution points as soon as possible using promotional and sampling programs as vehicles. We also focused on Sonoma Foods and Casual Gourmet Foods because these two brands have lost significant amounts of money during the last two years. In March 2008, we reviewed the low margins and decreasing revenues being generated from the Sonoma Cheese products and determined, among other things, to buy out the minority interest and the employment contracts of the minority shareholders.

In 2009, we finished shuttering the Further Processed Protein reporting segment as it had declining sales and has not been able to generate a profit for several years. For the six months ending June 30, 2009, we recorded an income before tax loss of $42,000 to dispose of the remaining inventory and other expenses attributed to its closure. During 2009 we have focused on cost reduction initiatives including reducing employee counts, reducing costs, and discontinuing unprofitable products. We have also reacted to the current economic downturn by freezing wages, eliminating our 401K’s matching contribution and taking other cost cutting initiatives.

The success of our efforts to increase revenue will depend on several key factors: (1) whether grocery and club store chains will continue to increase the number of their stores offering our products, (2) whether we can continue to increase the number of grocery and club store chains offering our products, (3) whether we can continue to introduce new products that meet consumer acceptance, (4) whether we, by diversifying into other complementary businesses through new product offerings or acquisitions can leverage our strengths and continue to grow revenues at levels attractive to our investors, (5) whether our acquisitions perform as we planned, (6) whether we can maintain and increase the number of items we are selling to our two largest customers, and (7) whether we can fend off new competitors entering the U.S. retail market from international sources. 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 our product will continue to do so in the future.

We believe that access to capital resources and increasing sales to offset higher fixed overhead, coupled with continued reduction of its administrative and production costs as a percent of sales revenue, will be key requirements in our efforts to enhance our competitive position and increase our market share. In order to support our expansion program, we continue to develop new products for consumers and revise advertising and promotional activities for our retail grocery and club store accounts. There can be no assurance that we will be able to increase our net revenues from grocery and club stores. Because we will continue to make expenditures associated with the expansion of our business, our results of operations may be affected.

Our overall objective is to be the nationally recognized leader in distinctively-flavored, premium-quality gourmet foods. The key elements of our strategy include the following targeted goals:


	·	Expand market share through same-store revenue growth, addition of new grocery and club stores, geographic diversification, and product line expansion, including creation of additional meal solutions using Monterey Gourmet Foods products.

	·	Introduce new products on a timely basis to maintain customer interest and to respond to changing consumer tastes. In order to maximize our margins, we will design new products that can be manufactured and distributed out of our Salinas, California, Eugene, Oregon, or Seattle, Washington facilities or through co-packer arrangement where we can introduce new products quickly to meet customer requests.

	·	Ensure that we have the proper and sufficient staff to accomplish our goals in a timely manner including the enhancement of our marketing department.

	·	Reduce operating costs as a percentage of sales through continual evaluation of administrative and production staffing and procedures and consolidation of back office functions. We will consider additional capital improvements in order to increase production efficiencies and capacities, and to reduce our cost of goods on a per unit basis.

	·	Except for the Sonoma Cheese Products, operate as one reporting unit with a centralized sales force, marketing department, finance department and operational management.

	·	Create brand awareness by communicating to the consumer that we provide flavorful and nutritious lines of products, and promote repeat business by reinforcing positive experiences.

	·	Utilize the existing distribution, customer service and selling capabilities we have for the products of new acquisitions in order to grow sales and maximize the results of all brands.

We will continue to direct our advertising and promotional activities to specific programs customized to suit our retail grocery and club store accounts as well as to reach target consumers. These will include in-store demonstrations, coupon programs, temporary price reduction promotions, and other related activities. There can be no assurance that we will be able to increase our net revenues from grocery and club stores.

Results of Operations

Net revenues from operations were as follows (in thousands):


	Three Months Ended						Six Months Ended

	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008


Net Revenues	$	19,280		$	21,643		$	40,255		$	45,599
Percent Change in Net Revenues from prior period		-11	%		-3	%		-12	%		-2	%

These results and comparisons are for continuing operations only. The quarterly decrease in second quarter 2009 revenues compared with second quarter 2008 revenues is due to a 38% decline in tamale revenues as a result of additional competition, together with a 34% decline in sales to our second largest customer, and a 22% reduction in our revenues to our retail customers. These reductions in revenues are offset by a 17% increase from our co-branded and private label brands. We are also experiencing increases in our foodservice revenues.

The decrease in first six months of 2009 revenues compared with the first six months of 2008 revenues is due to a 39% decline in tamale revenues as a result of additional competition, together with a 31% decline in sales to our second largest customer.

Gross profit and gross margin were as follows (in thousands):


	Three Months Ended						Six Months Ended

	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008

Gross profit	$	5,039		$	6,150		$	10,889		$	11,850

Gross margin percent		26.1	%		28.4	%		27.1	%		26.0	%

Gross margin percent for the year ended December 31, 2008 was 24.9%. The gross margin for the second quarter of 2009 decreased compared to the second quarter of 2008 due to an eleven percent reduction in net revenues. The decrease in gross margin percentage is due to our fixed production costs being spread over lower revenue volume flowing through our plants, especially our pasta revenue to our second largest customer. These higher per unit costs were partially offset by lower raw material costs and the cost reduction initiatives we have taken.

The gross margin percent for the first six months of 2009 increased compared to the first six months of 2008. This increase in gross margin percentage is due to lower raw material costs and the cost reduction initiatives we have taken. The reduced costs are partially offset by lower revenues which reduced the plant overhead absorption rate.

Selling, general and administrative expenses or SG&A were as follows (in thousands):


	Three Months Ended						Six Months Ended

	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008

SG&A Expense	$	4,865		$	5,702		$	9,922		$	12,007

SG&A Expense as a percent of net revenues		25.2	%		26.3	%		24.6	%		26.3	%

For the calendar year ended December 31, 2008, SG&A expenses were 27.6% of net revenues. SG&A as a percent of net revenues for the three months ended June 30, 2009 was 25.2% which is down from 26.3% for the three months ended June 30, 2008. The decrease compared to the second quarter of 2008 is related to reduced costs from our initiatives to reduce costs and lower freight costs. SG&A expense in dollars was reduced by 15% or $837,000. The main components of the SG&A decrease are reductions in costs of freight ($391,000) and salaries and benefits ($448,000).

SG&A as a percent of net revenues for the six months ended June 30, 2009 was 24.6%. The decrease compared to the first six months of 2008 is related to reduced costs from our initiatives to reduce costs and lower freight costs. SG&A expense in dollars was reduced by 17% or $2.1 million. The main components of the SG&A decrease are reductions in costs of freight ($964,000); legal fees ($107,000); salaries and benefits ($1,228,000); and travel costs ($121,000).

Freight to customers is included in SG&A costs. Our freight costs for the three months and six months ended June 30, 2009 were $803,000 and $1,585,000. Our freight costs for the three months and six months ended June 30, 2008 were $1,195,000 and $2,549,000.

Depreciation and amortization expense, included in cost of sales and SG&A, was $1,556,000 or 3.9% of net revenues for the six months ended June 30, 2009 compared to $1,498,000 or 3.3% of net revenues for the six months ended June 30, 2008. The increase in depreciation expense in 2009 is associated with additional equipment and leasehold improvements associated with the new production facility in Kent, Washington.

Net interest income was $1,000 for the quarter ended June 30, 2009, compared to net interest income of $22,000 for the same quarter in 2008. For the six months ended June 30, 2009, net interest income was $2,000 compared to net interest income of $48,000 for the same period in 2008. The reduced income is a result of the lower interest rate being paid on the Company’s excess cash.

Income taxes for the second quarter of 2009 reflect a tax expense of $9,000, which reflects a 4% tax rate compared with income tax expense of $757,000 or approximately 133% of pretax income for the same period in 2008. Income taxes for the first six months of 2009 reflect a tax expense of $41,000, which reflects a 4% tax rate compared with income tax expense of $3,000 for the same period in 2008. We determine our quarterly tax provision based on the expected annual effective tax rate by tax filing entities and jurisdictions. Overall we are projecting a profit for 2009 and because we have an NOL carryover, we will only pay Alternative Minimum Taxes for federal tax purposes. We will also pay certain state taxes in California and some other states mainly because California suspended the loss deduction in 2009 but California allows the tax to be offset by 50% of the tax credits.

We continue to have a valuation allowance of 100% of our deferred tax assets at June 30, 2009. The full valuation allowance was established during the fourth quarter of 2008 as a result of the reassessment of the realizability of deferred tax assets.

Segment Results:

We operate in two segments: Gourmet Foods Products and Sonoma Cheese Products.

Gourmet Foods Products Results:


	Three Months Ended						Six Months Ended

	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008

Gourmet Foods Products
Net Revenues	$	17,809		$	20,052		$	37,401		$	42,595
Gross Profit	$	4,635		$	5,916		$	10,224		$	12,016
Operating Profit	$	117		$	535		$	865		$	907

Gross profit percentage		26.0	%		29.5	%		27.3	%		28.2	%
SGA percentage		25.4	%		26.8	%		25.0	%		26.1	%

Highlights for the three months ended June 30, 2009:


	·	Our tamale sales declined 38% or $360,000 less than the same quarter last year. This is due to increased competition for our sales of this item to Costco
	·	Our pasta sales declined 20% partially due to our second largest customer switching from a branded product to a private labeled product. Our sales are down as they transition their product line up.
	·	The gross margin percentage of 26.0% for the three months ended June 30, 2009 decreased compared to 29.5% for the three months ended June 30, 2008 due mainly to lower production volume through our plants, especially our plant where our refrigerated pasta and our tamales are produced.
	·	SG&A as a percent of net revenues for the three months ended June 30, 2009 was 25.4% compared to 26.9% for the three months ended June 30, 2008. The decrease in SG&A as a percent of net revenues for 2009 compared to 2008 is due to lower salaries and operating costs associated with our cost reduction initiatives offset by a decline in net revenues.

Highlights for the six months ended June 30, 2009:


	·	Our tamale sales declined 39% or $934,000 less than the same six months last year. This is due to increased competition for our sales of this item to Costco
	·	Our pasta sales declined 16% partially due to our second largest customer switching from a branded product to a private labeled product. Our sales are down as they transition their product line up. The gross margin percentage of 27.3% for the six months ending June 30, 2009 decreased compared to 28.2% for the same six months of 2008 due mainly to lower net revenues and its impact on our overhead absorption.
	·	SG&A as a percent of net revenues for the six months ended June 30, 2009 was 25.0% compared to 26.1% for the six months ended June 30, 2008. The decrease in SG&A as a percent of net revenues for 2009 compared to 2008 is due to lower salaries and operating costs associated with our cost reduction initiatives offset by a decline in net revenues.

Sonoma Cheese Products results:


	Three Months Ended						Six Months Ended

	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008

Sonoma Cheese Products
Net revenues	$	1,471		$	1,591		$	2,854		$	3,004
Gross profit	$	404		$	234		$	665		$	(166	)
Impairment	$	—		$	—		$	—		$	(1,606	)
Operating profit (loss)	$	67		$	(95	)	$	112		$	(2,678	)

Gross profit percentage		27.4	%		14.7	%		23.3	%		-5.5	%
SGA percentage		22.9	%		20.7	%		19.4	%		30.1	%

Highlights for the three months ended June 30, 2009:


	·	Packaged cheese products revenues declined 7% when comparing the three months ended June 30, 2009 with the three months ended June 30, 2008. The decline is attributable to consumers purchasing lower priced items as opposed to specialty cheeses.
	·	The gross margin percentage of 27.4% for the quarter ended June 30, 2009 increased compared to 14.7% for the three months ended June 30, 2008, which reflects lower cheese and milk prices
	·	SG&A as a percent of net revenues for the three months ended June 30, 2009 was 22.9% compared to 20.7% for the same period ended June 30, 2008. The increase in SG&A for 2009 compared to 2008 is due to the fact that we received a legal settlement in June of 2008 that reimbursed us for certain legal expenses incurred over the previous year.

Highlights for the six months ended June 30, 2009:


	·	Packaged cheese products revenues declined 5% when comparing the six months ended June 30, 2009 with the six months ended June 30, 2008. The decline is attributable to consumers purchasing lower priced items as opposed to specialty cheeses.
	·	The gross margin percentage of 23.3% for the six months ended June 30, 2009 increased compared to (5.5)% for the six months ended June 30, 2008, which reflects lower cheese and milk prices. In addition, in March 2008, we set up inventory reserves for items from processed cheeses and lower margin items which we discontinued.
		SG&A as a percent of net revenues for the six months ended June 30, 2009 was 19.4% compared to 30.1% for the same period ended June 30, 2008. The decrease in SG&A for 2009 compared to 2008 is due to the fact that in 2008 we experienced higher selling expenses, higher freight costs, higher legal fees, accrual for severance payments, and lower sales.

Also, in the first quarter of 2008, we saw a significant reduction in sales in the Sonoma Cheese Products Segment. Due to the reduced sales in March and the accelerating losses from this segment, we determined that a triggering event under SFAS 142 occurred and therefore tested for the impairment of goodwill and other intangible assets during the first quarter of 2008. As a result of the impairment test, we recorded a pre-tax, non-cash charge of $1.1 million in the first quarter of 2008 related to the impairment of intangible assets associated with the Sonoma acquisition on April 7, 2005.

In addition, on April 18, 2008, the Company, Sonoma Foods, Inc., and the shareholders of Sonoma entered into an agreement amending the Purchase Agreement dated April 7, 2005, pursuant to which we acquired all of the outstanding shares of Sonoma. Pursuant to the amendment, our purchase of the remaining 20% of Sonoma’s outstanding shares not already owned by us was accelerated and the purchase price was set at $50,000, plus a potential earn-out based upon an agreed formula. At the same time, the Company and the shareholders terminated existing employment agreements with the shareholders and entered into severance arrangements which provide for payments and benefits substantially equivalent to those provided by the former employment agreements. From the purchase of minority interest, we recorded a gain of $109,000 in the three months ended June 30, 2008. The gain was reported in other income in our statement of operations.

Liquidity and Capital Resources

During the six months ended June 30, 2009, we provided $2,040,000 of cash from operations compared to $3,597,000 in cash provided by operations for the six months ended June 30, 2008. As illustrated in the following table, adjusting for working capital which was impacted by the timing of cash payments and cash receipts; we provided $2,686,000 cash from operating activities compared to $1,483,000 of cash for the same six months in 2008 which represents an 81% increase.


	Six Months Ended

	June 30, 2009			June 30, 2008

Cash flows from operating activities:
Net income (loss)	$	951		$	(1,704	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,556			1,498
Impairment and restructuring		—			1,606
Stock-based compensation		179			192
Gain on acquisition of minority interest		—			(109	)

Sub-Total		2,686			1,483


Adjustments related to changes in working capital and other		(646	)		2,114

Net cash provided by operating activities	$	2,040		$	3,597

Stock-based compensation expense accounted for $179,000 of non-cash expense for the six months ended June 30, 2009 compared to $192,000 for the six months ended June 30, 2008. Capital expenditures were $409,000 in the six months ended June 30, 2009. Capital spending in 2009 will be limited to projects deemed necessary to run or improve the business until we can grow our revenue sufficient to justify additional spending to support growth.

During the first six months of 2009, we issued 15,229 shares under our Employee Stock Purchase Plan and received cash of $10,000. No other additional shares were issued during in 2009.

During the first six months of 2008, we issued 5,612 shares under our Employee Stock Purchase Plan and received cash of $13,000. Additionally, 10,000 shares of common stock were issued during the same period as part of employee option exercises with proceeds of $12,000.

As of June 30, 2009 we had $3.8 million of cash recorded on our balance sheet. Cash is held in our checking account or in short-term money market accounts with no withdrawal restrictions. Cash accounts are FDIC insured up to the FDIC insurance limits. In addition, we had $11.1 million of working capital as of June 30, 2009.

We finance our operations and growth primarily with cash flows generated from operations. We have a $5.0 million working capital line of credit which is currently unused. The working capital line of credit commitment expires June 30, 2010. In addition, we have a letter of credit in the amount of $400,000 which is issued in favor of an insurance company to support the outstanding liabilities of a self-funded worker’s compensation program. The letter of credit expires January 2, 2010.

We believe that our existing credit facilities, existing cash, and cash flow from operations, are sufficient to meet our cash needs for normal operations including all anticipated capital expenditures for the next twelve months.

Contractual Obligations

We have no raw material contracts exceeding one year in duration. We lease production, warehouse and corporate office space as well as certain equipment under both month-to-month and non-cancelable operating lease agreements. All building leases have renewal options and all include cost of living adjustments. The following table summarizes the estimated annual obligations.


	Payments due by period

Contractual obligations (in thousands)	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

Operating leases	$	10,279	$	1,680	$	3,401	$	2,487	$	2,711

Total	$	10,279	$	1,680	$	3,401	$	2,487	$	2,711

We have a standby letter of credit in favor of an insurance company for $400,000 for Worker’s Compensation insurance which expires on January 2, 2010. We also purchase custom made finished products ready for sale from certain suppliers (“co-packers”). From time to time, these co-packers acquire raw materials that are specific to the products being manufactured for us. We have oral agreements with these co-packers that if we cease selling these products, we will purchase the residual inventory from the co-packers.

Stock Repurchase Program

We commenced a public repurchase program of our common stock in December 2007 and suspended the program on June 26, 2008. We may choose to continue purchases of our common stock in the future. For the program to date we have purchased 624,871 shares for $1,789,000 with an average purchase price of $2.86.

Critical Accounting Policies and Management Judgments

Accounts Receivable and Allowances

We provide allowances for estimated credit losses, product returns, spoilage, and adjustments at a level deemed appropriate to adequately provide for known and inherent risks related to such amounts. The allowances are based on reviews of the history of losses, returns, spoilage, and contractual relationships with customers, current economic conditions, and other factors which warrant consideration in estimating potential losses. While we use the best information available in making our determination, the ultimate recovery of recorded accounts, notes, and other receivables is also dependent on future economic and other conditions that may be beyond our control.

Income Taxes

For business combinations, we must record deferred taxes and liabilities relating to the book versus tax basis differences of acquired assets and liabilities. Generally, such business combinations result in deferred tax liabilities as the book values are reflected at fair value whereas the tax basis is carried over from the acquired company. Such deferred taxes initially are estimated based on preliminary information and are subject to change as valuations and tax returns are finalized.

Inventory Valuation

Inventories are stated at the lower of cost (using the first-in, first-out method) or market and consist principally of component ingredients to our refrigerated pasta and sauces, finished goods, and packaging materials. Many of the ingredients used in our products have a short shelf life and if not used in a certain amount of time may spoil. We estimate that the raw material will be used in a timely manner; however, we have established certain reserves for the potential of inventory obsolescence, especially for slow moving inventory. As of June 30, 2009, we reduced the carrying value of our inventory by $481,000. This write-down was made to cover certain refrigerated raw material inventory that is nearing its shelf-life, certain packaging labels for products that may be rotated out of the Club Store accounts, products that have already been rotated out of the Club Store accounts that may or may not be rotated back into the Club Store accounts, and products that have been discontinued especially certain items associated with Sonoma Cheese. The allowance is established based on our estimate of alternative usage or salvage value of obsolete inventory. We believe our estimates for spoiled and obsolete inventory is adequate given the current volume of business to our customers.

Revenue Recognition

We recognize revenues through sales of our products primarily to grocery and club store chains. Revenues are recognized once there is evidence of an arrangement (such as a customer purchase order), product has been shipped or delivered to the customer depending on the customer’s sales order and invoice documentation, the price and terms are fixed, and collectability is reasonably assured. Accordingly, sales are recorded when goods are shipped or delivered, at which time title and risk of loss have passed to the customer, consistent with the freight terms for most customers Potential returns, adjustments and spoilage allowances are recorded as a reduction in revenues and are provided for in accounts receivable allowances and accruals. We also use co-packers to process some of our purchase orders. We record the revenues from these sales on a gross basis as we have inventory risk and are the primary obligors. We record our shipping cost for products delivered to our customers in selling, general, and administrative expense. Any amounts charged to customers for freight and deliveries are included in revenues. Certain incentives granted to customers such as promotions, trade ads, slotting fees, terms discounts, and coupons are recorded as offsets to revenues.

Workers Compensation Reserve

Our California and Oregon locations entered into a self-insured worker’s compensation program with a stop loss provision for fiscal year 2003 and continued the program through December 31, 2007. This program was suspended for 2008 and we insured ourselves with a guaranteed fixed cost insurance program. Starting January 1, 2009, we returned to this self-insured worker’s compensation program. This program features a fixed annual payment, with a deductible on a per occurrence basis with a stop loss provision if a claim exceeds $350,000. The annual expense consists of a base fee paid to an insurance company to administer the program, direct cash expenses to pay for injuries, an estimate for potential injuries that may have occurred but have not been reported, an estimate by the insurance company of costs to close out each injury and an estimate for injury development. We have been on this self-insured program for just a few years and therefore we have limited history of claim resolution available to support our projected liabilities. Therefore we are using published industry actuarial data from an insurance carrier and reviewing each claim individually to determine the amount of reserves that should be established.

Valuation of Goodwill/Indefinite-lived Intangible Assets

Under SFAS 142, “Goodwill and Other Intangible Assets” goodwill and intangible assets with indefinite useful lives are to be tested for impairment at least annually and we tested these assets as of December 31, 2008. The primary identifiable intangible assets of each reporting unit with indefinite lives are trademarks, tradenames and goodwill acquired in business acquisitions. As of December 31, 2008, the net book value of tradename and trademarks and other identifiable indefinite-lived intangible assets was reduced by $501,000 to $1.3 million and such assets are now considered finite-lived assets and will be amortized prospectively over 20 years.

Goodwill is not amortized but is subject to periodic assessments of impairment at least as often as annually and as triggering events occur. Our annual impairment evaluation date is December 31 and the recoverability of goodwill is evaluated using a comparison of the fair value of a reporting unit with its carrying value. The fair value of the reporting unit is calculated based on the Market Approach and the Income Approach. We review and estimate a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon projected interest rates and the cost of capital at the relevant point in time. There are inherent uncertainties related to these factors and judgment is used in applying them to the analysis of goodwill impairment. In March 2008 as part of a triggering event, we impaired $1.0 of goodwill associated with the acquisition of Sonoma Foods. In December 2008, as a result of our annual impairment test, we impaired an additional $12.2 million of goodwill associated with all of the acquisitions made over the many years. Although all goodwill has been fully impaired, it is possible that assumptions underlying the impairment analysis will change in such a manner that further impairment of our other intangible assets may occur in the future.

Our impairment evaluations of both goodwill and other intangible assets included reasonable and supportable assumptions and projections and were based on estimates of projected future cash flows, historical performance and our current market capitalization. These estimates of future cash flows are based upon our experience, historical trends, estimates of future profitability and economic conditions. Future estimates of profitability and economic conditions require estimating such factors as sales growth, employment rates and the overall economics of the retail food industry for five to ten years in the future, and are therefore subject to variability, are difficult to predict and in certain cases, beyond our control. The assumptions utilized by us were consistent with those developed in conjunction with our long-range planning process. If the assumptions and projections underlying these evaluations prove to be incorrect, the amount of the impairment could be adversely affected.

As of June 30, 2009, we have no goodwill or indefinite lived assets recorded on our books.

Valuation of Plant and Equipment and finite-lived Intangible Assets

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), we review finite-lived long-lived assets, primarily consisting of plant and equipment and amortized intangible assets such as acquired recipes, customer lists and non-compete agreements, whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Intangible assets with finite useful lives continue to be amortized over their respective estimated useful lives. The estimated useful life of an identifiable intangible asset is based upon a number of factors, including the effects of demand, competition, and future cash flows. For these assets, if the total expected future undiscounted cash flows from the asset group are less than the carrying amount of the asset group, an impairment loss is recognized for the difference between the fair value and the carrying value of the asset group. The impairment test we performed as of December 31, 2008 required us to estimate the undiscounted cash flows and fair value of the asset groups. We performed a test on our Sonoma Cheese reporting unit in March 2008 and recorded an impairment of $32,000 for the non-compete agreement. In addition, based on our annual test in December 2008 we impaired an additional $581,000 of finite-lived intangible assets, with an aggregate 2008 impairment charge for such assets of $613,000. As of December 31, 2008, the net book value of finite-lived intangible assets was $3.3 million.

When analyzing finite, long-lived assets for potential impairment, significant assumptions are used in determining the undiscounted cash flows of the asset group, including the cash flows attributed to the asset group; future cash flows of the asset group, including estimates of future growth rates; and the period of time in which the assets will be held and used. We primarily determine fair values of the asset group using discounted cash flow models. In addition, to estimate fair value we are required to estimate the discount rate that incorporates the time value of money and risk inherent in future cash flows.

Accounting for Stock-Based Awards

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”). We adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method. As a result of adopting SFAS 123R, we recorded a pre-tax expense of $179,000 for stock-based compensation for the six months ended June 30, 2009 compared to $192,000 for the six months ended June 30, 2008.

The determination of fair value of share-based payment awards to employees and directors on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. We estimated the expected terms using the historical information and we have used historical data to estimate forfeitures. The risk-free rate is based on U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price.

Sales and Marketing

Our sales and marketing strategy is twofold and emphasizes sustainable growth in distribution of our products and introduction of innovative new products to keep us positioned as a leader in the marketplace.

Pasta is a staple of the North American diet. It is widely recognized that pasta is a convenient and nutritious food. The USDA places pasta on the foundation level of its pyramid of recommended food groups and pasta supports consumers’ lifestyle demands for convenient at-home meals.

We offer our customers distinctive packaging, which incorporates color graphics and product photography in a contemporary look. The packaging is created to communicate to our consumers (1) higher product quality, (2) ease and swiftness of preparation, and (3) appetite appeal to encourage point of sale purchase and to show a variety in product choice. We continue to improve our products to enhance the dining experience. Our package is designed to both strengthen our brand recognition and reinforce our positioning as a premium quality product.

We employ full-time chefs and have hired additional outside culinary consultants to develop new products. Recent introductions include a line of whole wheat fresh pastas, sauces, and dips. We were the first to introduce whole wheat pasta and all organic pasta in the refrigerated pasta category.

For the six months ended June 30, 2009, Costco Wholesale accounted for 55% and Sam’s Club accounted for 11% of our net revenues. For the six months ended June 30, 2008, Costco Wholesale and Sam’s Club, accounted for 51% and 15%, respectively, of our net revenues. No other customer accounted for greater than 10% of net revenues for the period.


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Market Risk Disclosure

We do not hold market risk-sensitive trading instruments, nor do we use financial instruments for trading purposes. Except as disclosed below in this item, all sales, operating items and balance sheet data are denominated in U.S. dollars; therefore, we have no significant foreign currency exchange rate risk.

In the ordinary course of our business we enter into commitments to purchase raw materials over a period of time, generally nine months to one year, at contracted prices. At June 30, 2009 these future commitments were not at prices in excess of current market, or in quantities in excess of normal requirements. We do not utilize derivative contracts either to hedge existing risks or for speculative purposes.

Interest Rate Risk

We invest excess cash in money market fund investments consisting of cash equivalents. The magnitude of the interest income generated by these cash equivalents is affected by market interest rates. There are no restrictions as to when we can access the funds from these accounts. We do not use marketable securities or 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. As of June 30, 2009, we do not have any loans with variable interest rates.

Currency Risk

During the three and six months ended June 30, 2009, we did not sell any product in currency other than US dollars.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (together the “Certifying Officers”), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009, the end of the period covered by this report. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of June 30, 2009 to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Certifying Officers, as appropriate, to allow for timely decisions regarding required disclosure.

Inherent Limitations on Effectiveness of Controls

We are responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management team and our Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition our assets that could have a material effect on the financial statements.

Our management personnel, including the Certifying Officers, recognize that our internal control over financial reporting cannot prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Controls

There has been no change during our quarter ended June 30, 2009 in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Item 4T.	Controls and Procedures

Inapplicable.

PART II. OTHER INFORMATION


Item 1A.	Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. We not aware of any other material changes to the risks described in our latest Annual Report on Form 10-K.


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


	(a) The Company’s annual stockholders’ meeting was held June 19, 2009.

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

Proposal 1 - Election of Directors


	For	Against	Abstain

Charles B. Bonner	9,763,673	3,902,003	0

Van Tunstall	9,885,062	3,780,614	0

Tammy G. Katz	13,565,450	100,226	0

John H. McGarvey	9,906,986	3,758,690	0

Walter L. Henning	9,749,454	3,916,222	0

Viji Sampath	9,746,654	3,919,022	0

Mark C. Frandsen	13,574,541	91,135	0

Eric C. Eddings	9,909,687	3,755,989	0

Scott S. Wheeler	9,910,687	3,754,989	0

Proposal 2 - To approve the selection of McGladrey & Pullen, LLP as the Company’s independent public accountants for the calendar year 2009.


For	Against	Abstain

13,600,509	41,269	23,898


Item 6.	Exhibits

See Index of Exhibits for all exhibits filed with this report.

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 GOURMET FOODS

Date: August 4, 2009
	By:	/s/ ERIC C. EDDINGS

		Eric C. Eddings
		Chief Executive Officer

	By:	/s/ SCOTT S. WHEELER

		Scott S. Wheeler
		Chief Financial Officer


	Index to Exhibits

	(Unless otherwise indicated, all exhibits incorporated by reference are filed under SEC file number 001-11177.)

3.1	Certificate of Incorporation dated August 1, 1996 (incorporated by reference from Exhibit B to the Company’s Definitive Proxy Statement for its August 1, 1996 Special Meeting of Shareholders filed June 27, 1996)
3.2	Amendments of Articles I and IV of Delaware Certificate of Incorporation (incorporated by reference from Exhibits 3 and 4 to the Company’s Definitive Proxy Statement for its 2004 Annual Meeting of Shareholders filed June 21, 2004)
3.3	Certificate of Designation of Series A Junior Participating Preferred Stock. (Incorporated by reference from Exhibit 3.3 filed with the Company’s Form 10-Q for the quarter ended June 30, 2008 filed with the Commission)
3.4	Bylaws of the Company, as amended. Incorporated by reference from Exhibit 3.3 filed with the Company’s Form 10-Q for the quarter ended September 30, 2005 filed with the Commission.
4.1	Form of Investor Warrant, issued by Monterey Gourmet Foods, Inc. to the investors in connection with the June 28, 2006 private offering. (incorporated by reference from Exhibit 10.31 filed with the Company’s Form 8-K on June 13, 2006)
4.2	Registration Rights Agreement (incorporated by reference from Exhibit 10.29 filed with the Company’s Form 8-K on June 13, 2006)
4.3	Shareholder Protection Rights Agreement between the Company and Corporate Stock Transfer dated July 1, 2008 (incorporated by reference from Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed July 2, 2008)
10.1*	2002 Stock Option Plan, as amended Incorporated by reference from Exhibit 10.1 filed with the Company’s Form 10-Q for the quarter ended June 30, 2008 filed with the Commission.
10.2*	1995 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.15 to the Company’s Form 10-K for the fiscal year ended January 1, 1995
10.3	Monterey County Production Facility Lease of the Company, as amended (incorporated by reference from Exhibit 10.03 to the Company’s Registration Statement on Form SB-2 filed with the Commission (the “SB-2) on August 29, 1993)
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 Company’s Form 10-K for the fiscal year ended December 31, 1995) filed April 1, 1996 (the “1995 Form 10-K”)
10.5	Amendment No. 3 dated September 12, 1997, and Amendment No. 4 dated February 6, 1998 to Monterey County Production Facility Lease of the Company (incorporated by reference from Exhibit 10.5 filed with the Company’s September 27, 1998 Quarterly Report on Form 10-Q filed November 4, 1998 (“1998 Q3 10-Q”))
10.6	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. 7*	Employment letter dated September 15, 2006 to Chief Executive Officer Eric C. Eddings (incorporated by reference from Exhibit 10.1 filed with the Company’s Form 8-K filed September 20, 2006)
10.8	Agreement for Handling and Storage Services between the Company and CS Integrated LLC dated February 5, 1999 (incorporated by reference to Exhibit 10.21 to the Company’s 1998 Form 10-K for the fiscal year ended December 27, 1998, filed March 17, 1999
10.9	Royalty agreement dated July 12, 1999 between Company and Chet’s Gourmet Foods, Inc. (incorporated by reference to Exhibit 10.25, in the Company’s September 26, 1999 Quarterly Report on Form 10-Q filed November 9, 1999 (“1999 Q3 10-Q”))
10.10	Storage Agreement Manufactured Products dated August 3, 1999 between the Company and Salinas Valley Public Warehouse (incorporated by reference to Exhibit 10.26, filed with the Company’s 1999 Q3 10-Q)
10.11	Commercial Lease dated August 10, 1999 between Company and Salinas Valley Public Warehouse (incorporated by reference to Exhibit 10.27, filed with the Company’s 1999 Q3 10-Q)
10.12	Commercial lease dated January 1, 2000 between the Company and PTF for Operating Engineers, LLC (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)
10.13	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)


10.14	Commercial lease dated August 23, 2002 between the Company and Mel Bankoff (incorporated by reference from Exhibit 10.43 filed with the Company’s Report on Form 8-K on August 30, 2002)
10.15	Commercial lease dated January 3, 2003 between the Company and Conrad Family Trust (incorporated by reference from Exhibit 10.44 filed with the Company’s Form 10-K for the fiscal year ended December 29, 2002, filed on February 14, 2003)
10.16	Third Lease modification to Commercial lease dated August 8, 2006 between the Company and PTF for Operating Engineers, LLC for storage space in Monterey County, California
10.17	Lease Extension and Modification Agreement between the Company and Kenneth Salma and Pattie Salma dated August 24, 2005 (incorporated by reference from Exhibit 10.18 filed with the Company’s September 30, 2005 Quarterly Report of Form 10-Q filed on November 14, 2005.)
10.18	Stock Purchase Agreement by and among Monterey Gourmet Foods, Inc., Sonoma Foods, Inc., and Its Shareholders dated April 7, 2005 (incorporated by reference from Exhibit 2.01 filed with the Company’s 8-K on April 13, 2005)
10.19	Amendment to Stock Purchase agreement dated April 18, 2008. (Incorporated by reference from Exhibit 10.1 to the Company’s current Report on Form 8-K filed April 24, 2008)
10.20	Third Modification to Business Loan Agreement between the Company and Comerica Bank dated January 5, 2005. (incorporated by reference to Exhibit 10.33 filed with the Company’s Form 10-K for the fiscal year ended December 26, 2004, filed on March 25, 2005
10.21	Fourth Modification to Business Loan Agreement between the Company and Comerica Bank dated April 11, 2005 (incorporated by reference from Exhibit 10.24 to the Company’s Form 10-Q for the quarter ended September 30, 2005 filed with the Commission).
10.22	Securities Purchase Agreement, dated as of June 12, 2006, (incorporated by reference from Exhibit 10.28 filed with the Company’s 8-K on June 13, 2006)
10.23*	Employment Agreement dated September 15, 2006 with Company Chief Executive officer Eric Eddings (incorporated by reference from Exhibit 10.1 filed with the Company’s Current Report on Form 8-K/A filed September 21, 2006)
10.24	Commercial Lease dated November 15, 2007 between the Company and RREEF America REIT II Corp II (incorporated by reference from Exhibit 10.27 filed with the Company’s report on Form 8-K on November 21, 2007.
10.25	Commercial lease extension dated December 24, 2007 between the Company and the McCabe Trust. Incorporate by reference from Exhibit 10.26 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
10.26*	Form of Change in Control Severance Agreement with Executive Officers. Incorporated by reference from Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed May 22, 2008 with the Commission.
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/or its subsidiaries.

** filed herewith