Monterey Gourmet Foods Reports Fourth Quarter and Year End 2008 Results

Market Wire, February, 2009

Monterey Gourmet Foods (NASDAQ: PSTA), a manufacturer and marketer of fresh gourmet refrigerated food products, reported results for its fourth quarter and twelve months ended December 31, 2008.

"As previously announced, fourth quarter results were below our expectations; however, we have taken action to position the company to meet the challenges of the economy, exceed our customers' expectations, and provide value to our shareholders," stated Eric C. Eddings, president and CEO of Monterey Gourmet Foods. "Our pasta sales under our Monterey Pasta Company brand continue to demonstrate its strength as its sales increased 15 percent for the quarter over the prior year and 19 percent for the full year. In addition, we are tightening our focus on our core competencies in natural foods and fresh pastas and are exiting non-core businesses. As such, in February we shuttered our Casual Gourmet production, but created a revenue stream by licensing the popular brand to Aidell's Sausage while retaining the brand rights for spreads and dips. We also continue to review options for Sonoma Cheese. Furthermore, we have reduced headcount, frozen wages, and cut other SG&A, which we expect will lower expenses by approximately $2 million in 2009."

Fourth Quarter 2008 Results Compared to Fourth Quarter 2007

Beginning in the fourth quarter of 2008, Monterey Gourmet Foods is reporting in three segments: Gourmet Foods, Further Processed Protein Products (Casual Gourmet brand) and Sonoma Cheese. The Casual Gourmet brand segment includes protein products such as chicken sausages and meatballs and is being reported separately as a result of the company's decision to exit this business.

-- Revenue was $24.5 million, compared to $26.8 million.
   - The Gourmet Foods segment net revenues were $22.3 million, compared to
     $23.1 million.
   - The Casual Gourmet brand segment net revenues were $0.6 million,
     compared to $1.3 million.
   - The Sonoma Foods segment net revenues were $1.6 million, compared to
     $2.4 million.
-- Gross margin was 21.3%, compared to 26.9%.
-- SG&A for the quarter was $7.1 million, compared to $6.7 million.
-- Impairment charges and write downs totaled $19.1 million in the fourth
   quarter 2008, which included goodwill impairment of $12.2 million, other
   intangible assets impairment of $1.1 million and deferred tax assets
   valuation allowance of $3.3 million.  The company also recorded $2.5
   million in the write-off of fixed assets and increase in inventory
   reserves.
-- The total net loss was $20.3 million, which included $19.1 million in
   aforementioned charges, compared to net income of $641,000.

Full Year 2008 Results Compared to Full Year 2007

Scott Wheeler, Monterey Gourmet Foods' CFO, stated, "During 2008, we implemented modest price increases; however, higher commodity costs reduced margins. Nonetheless, we generated $3.3 million in cash from operations in 2008."

"As announced earlier in February, we took some necessary non-cash charges that will not have an impact on the company's liquidity or normal business operations. We now have a $10.8 million valuation allowance reserve against our deferred tax assets. We want to point out to the extent we generate future income, the deferred tax assets such as our Net Operating Loss Carry-forwards are still available to be used to offset income taxes on that income and will result in a lower income tax rate in future years. Furthermore, we are maintaining a solid balance sheet with $2.2 million in cash and no debt," added Wheeler.

-- Revenue was $97.2 million compared to $100.5 million.
   - The Gourmet Foods segment net revenues were $84.9 million, compared
     to $86.6 million.
   - The Casual Gourmet brand segment net revenues were $6.1 million,
     compared to $5.7 million.
   - The Sonoma Foods segment net revenues were $6.2 million, compared to
     $8.3 million.
-- Gross margin was 24.9%, compared to 27.4%.
-- SG&A was $26.8 million, compared to $25.3 million.
-- Impairment charges and write downs for the year ended 2008 totaled
   $20.5 million, which included goodwill impairment of $13.2 million,
   other intangible assets impairment of $1.1 million and deferred tax
   assets valuation allowance of $3.3 million.   The company also recorded
   $2.9 million in the write-off of fixed assets and increase in inventory
   reserves.
-- The total net loss was $22.5 million, which included $20.6 million in
   aforementioned charges, compared to net income of $1.7 million.
-- Cash flow from operating activities for 2008 was $3.3 million compared
   to $4.2 million for 2007.

For the twelve months, cash from operations generated $3.3 million. At December 31, 2008, cash and cash equivalents equaled $2.2 million, compared to $5.5 million at December 31, 2007, reflecting cash paid to fund the company's facility in Kent, Washington and other capital improvements totaling $5.7 million.

Outlook

"We are encouraged that we will continue to grow our core business and receive accolades for our products. In the February 2009 issue of Good Housekeeping magazine, our Monterey Pasta Company brand was featured in an article titled '100 Meals in Minutes: Healthy, Taste-Tested and Kid Friendly.' In 2009, we are focusing on improving brand performance and building a stronger company overall. Our key initiatives include leveraging our core competencies and expertise to create value for our customers and shareholders; improving procurement to take advantage of lower commodity costs; consolidating facilities and sales teams; and strengthening customer relationships," Eddings concluded.