UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11426
PACKAGING RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF COLORADO 84-0750762
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2582 South Tejon Street, Englewood, Colorado 80110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (303) 936-2363
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 _____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
As of November 19, 1996 there were 3,095,405 shares of Common Stock outstanding.
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 ........ 3
Consolidated Statements of Operations -
Three and Nine Months Ended
September 30, 1996 and 1995 . .................. 5
Consolidated Statements of Cash Flows -
Nine Months Ended
September 30, 1996 and 1995 . .................. 7
Notes to Consolidated Financial Statements....... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .....................................18
Part II. Other Information ..............................23
2
<PAGE>
<TABLE>
<CAPTION>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1996 1995
------ ------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................. $ 77,000 $ 806,000
Accounts receivable, net of allowance
for doubtful accounts and returns of
$18,000 and $16,000 at September 30, 1996
and December 31, 1995, respectively ..... 484,000 695,000
Inventories, net .......................... 2,489,000 2,137,000
Prepaid expenses and other ................ 10,000 46,000
----------- ----------
Total current assets ............. 3,060,000 3,684,000
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Machinery and equipment ................... 230,000 225,000
Furniture and fixtures .................... 439,000 437,000
Test and demonstration equipment .......... 770,000 926,000
Leasehold improvements .................... 244,000 244,000
Vehicles .................................. 11,000 11,000
----------- ----------
1,694,000 1,843,000
Less - Accumulated depreciation
and amortization ........................ (1,205,000) (1,172,000)
----------- ----------
Net property, plant and equipment ......... 489,000 671,000
----------- ----------
OTHER ASSETS:
Deferred loan and offering costs .......... 303,000 372,000
Net non current assets of
discontinued operation ................... 3,122,000 12,198,000
----------- ----------
3,425,000 12,570,000
----------- ----------
Total assets .............................. $ 6,974,000 $ 16,925,000
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable and accrued
expenses ............................ $ 784,000 $ 552,000
Convertible debentures due 1999 ....... 1,791,000 0
Bank note payable ..................... 1,001,000 0
Vendor notes payable guaranteed by PRC 1,029,000 569,000
Net current liabilities
of discontinued operation ........... 5,765,000 2,988,000
Other accrued liabilities ............. 1,109,000 685,000
------------ ------------
Total current liabilities .... 11,479,000 4,794,000
------------ ------------
LONG-TERM DEBT
Convertible debentures due 1999 ....... 0 1,791,000
Vendor notes payable .................. 0 36,000
------------ ------------
Total long-term debt ......... 0 1,827,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
25,000,000 shares authorized;
3,095,405 shares issued and out-
standing at September 30, 1996
and December 31, 1995, respectively . 28,000 31,000
Additional paid-in capital ............ 12,702,000 12,699,000
Accumulated deficit (re-adjusted to
reflect quasi-reorganization
effective January 1, 1995 ........... (17,235,000) (2,426,000)
------------ ------------
Total shareholders' equity (deficit) .. (4,505,000) 10,304,000
------------ ------------
Total liabilities and
shareholders' equity (deficit) ...... $ 6,974,000 $ 16,925,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Precision equipment sales and service $1,106,000 $3,446,000 $3,019,000 $ 5,620,000
COST OF GOODS SOLD .................... 544,000 2,024,000 1,743,000 3,326,000
---------- ----------- ----------- -----------
Gross profit ................. 562,000 1,422,000 1,276,000 2,294,000
---------- ----------- ----------- -----------
OPERATING EXPENSES:
General and administrative .......... 419,000 393,000 1,491,000 1,277,000
Selling and marketing ............... 83,000 115,000 372,000 384,000
Research and development ............ 0 12,000 27,000 51,000
---------- ----------- ----------- -----------
502,000 520,000 1,890,000 1,712,000
---------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS ......... 60,000 902,000 (614,000) 582,000
OTHER INCOME (EXPENSE):
Interest expense, net ............... (82,000) (88,000) (306,000) (221,000)
Other income ........................ 0 0 2,000 0
---------- ----------- ----------- -----------
Total other income (expense) . (82,000) (88,000) (304,000) (221,000)
---------- ----------- ----------- -----------
INCOME TAXES .......................... $ 0 $ 0 $ 0 $ 0
---------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS .......................... (22,000) 814,000 (918,000) 361,000
---------- ----------- ----------- -----------
DISCONTINUED OPERATION
Loss from operations of discontinued
pasta sauce business .............. (419,000) (414,000) (1,168,000) (1,408,000)
---------- ----------- ----------- -----------
Loss on disposal of pasta sauce
business including provision of
$500,000 for operating losses
during phase out period ........... (12,723,000) 0 (12,723,000) 0
---------- ----------- ----------- -----------
NET INCOME (LOSS) ..................... $(13,164,000) $ 400,000 $(14,809,000) $(1,047,000)
============ =========== ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS) PER COMMON SHARE:
From continuing operations ............. $ (.007) $ .33 $ (.30) $ .15
========== ======== ========== ========
From discontinued pasta
sauce operations ..................... $ (.14) $ (.17) $ (.38) $ (.57)
========== ======== ========== ========
From loss on disposal of
pasta sauce business ............. $ (4.11) $ N/A $ (4.11) $ N/A
========== ======== ========== ========
NET INCOME ................................ $ (4.25) $ .16 $ (4.78) $ (.42)
========== ======== ========== ========
FULLY DILUTED INCOME PER COMMON SHARE:
From continuing operations ............. $ N/A $ .26 $ N/A $ .11
========== ======== ========== ========
From discontinued pasta
sauce operation ...................... $ N/A $ N/A $ N/A $ N/A
========== ======== ========== ========
From loss on disposal of
pasta sauce business ................. $ N/A $ N/A $ N/A $ N/A
========== ======== ========== ========
NET INCOME ................................ $ N/A $ .13 $ N/A $ N/A
========== ======== ========== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary .......................... 3,095,405 2,488,753 3,095,405 2,488,753
========== ======== ========== ========
Fully diluted .................... N/A 3,165,115 N/A 3,165,115
========== ======== ========== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ............................................ $(14,809,000) $(1,047,000)
Adjustments to reconcile net loss to net
cash used by operating activities:
Loss on disposal of discontinued operation .. 12,723,000 0
Depreciation and amortization ............... 266,000 246,000
Provision for obsolescence and warranty
reserves .............................. 61,000 70,000
Provision for losses on accounts receivable . 14,000 10,000
Changes in assets and liabilities -
(Increase) decrease in accounts and
affiliate receivables ............... 225,000 (329,000)
(Increase) decrease in inventory ...... (316,000) (87,000)
(Increase) decrease in prepaid
expenses and other assets .......... 36,000 123,000
Increase (decrease) in accounts payable
and accrued liabilities ............. 613,000 988,000
Net cash used in operating activities
of discontinued operation ........... (740,000) (133,000)
------------ ------------
Net cash used in operating activities (1,927,000) (159,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to discharge MRI debt ................ 0 (3,000,000)
Proceeds from disposal of assets ............... 97,000 45,000
Capital expenditures ........................... (20,000) (202,000)
Cash paid for acquisition of MRI ............... 0 (388,000)
------------ ------------
Net cash used in investing activities .......... 77,000 (3,545,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from short-term borrowings ....... 0 777,000
Repayments of short-term borrowings ............ 0 (557,000)
Proceeds from acquisition of minority interest . 20,000 0
Proceeds from bank financing ................... 3,559,000 2,815,000
Repayment of bank financing .................... (2,558,000) (1,670,000)
Proceeds from debtor-in-possession
financing .................................... 100,000 0
------------ ------------
Net cash provided by financing activities ...... 1,121,000 1,365,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............... (729,000) (2,339,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......... 806,000 2,633,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................ $ 77,000 $ 294,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
1996 1995
<S> <C> <C>
Cash paid during the period for:
Interest expense (none capitalized) $ 72,000 $259,000
Interest income ................... -- --
Income taxes ...................... -- --
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
8
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. Basis of Presentation
The accompanying consolidated financial statements at September 30,
1996 and December 31, 1995, and for the three and nine month periods
ended September 30, 1996 and 1995, have been prepared from the books
and records of Packaging Research Corporation ("PRC" or the "Company")
and its 97.4 percent owned subsidiary, Mama Rizzo's, Inc. ("MRI"),
without audit. All intercompany accounts and transactions have been
eliminated in consolidation. The statements reflect all normal
recurring adjustments which, in the opinion of management, are
necessary for the fair presentation of financial position, results of
operations and cash flows for the periods presented.
Certain information and disclosures normally included in financial
statements have been omitted under Securities and Exchange Commission
regulations. It is suggested that the accompanying financial statements
be read in conjunction with the annual report on Form 10-KSB for the
year ended December 31, 1995. The results of operations for the period
ended September 30, 1996, are not necessarily indicative of the
operating results for the full year.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. Organization and Corporate Acquisition
Organization
Prior to February 17, 1995, the Company was primarily engaged in the
business of designing, manufacturing, marketing and servicing a
complete line of standard and customized precision, high-speed filling,
forming and pumping equipment for a wide assortment of processed and
non-processed food and non-food applications. The Company's equipment
is manufactured exclusively in the United States and marketed and sold
throughout the world.
Effective February 17, 1995, the Company expanded its business to
include the manufacturing and distributing of a premium pasta sauce.
Corporate Acquisition
1995 Acquisition
On February 17, 1995, the Company, through MRI, consummated the
9
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
purchase of the assets and certain liabilities of Mama Rizzo's,
Inc. and M.A. Yamin, Inc. ("Mama Rizzo's"), both Texas
corporations, collectively engaged in the business of manufacturing
and distributing pasta sauce under the name "Mama Rizzo's."
As consideration for the purchase, the Company issued 152,152 shares of
the Company's common stock (valued at approximately $950,000 based upon
the quoted market price on the date of closing) to M.A. Yamin, Inc. and
assumed through its subsidiary approximately $16.5 million in
liabilities including $2,000,000 owed to the Company. The Company
negotiated a settlement with Mama Rizzo's principal creditor ("Ms.
Peterson") who was owed approximately $12.2 million for monies borrowed
over time including accrued interest thereon. In satisfaction for the
discharge of this debt, the Company paid approximately $6.3 million in
cash with the remaining balance of $5.9 million discharged through the
issuance of 913,152 shares of the Company's common stock at $6.50 per
share, the fair market value on such date.
Ms. Peterson also owns 100,000 shares from a settlement with Yamin. At
the end of 1995, and September 30, 1996, Ms. Peterson has a total of
1,013,152 shares of the 3,095,405 issued and outstanding stock, or
32.7%. Until June 30, 1997, Ms. Peterson has agreed to vote her shares
in accordance with the recommendations to shareholders by management of
PRC on all matters submitted for a shareholder vote, if in her good
faith discretion she reasonably determines that any such management
recommendation is in the best interests of PRC. This acquisition was
accounted for under the purchase method of accounting. The Company
recorded approximately $13,950,000 of goodwill in connection with the
acquisition.
Because the Company assumed substantial liabilities when it purchased
Mama Rizzo's, management recognized that a significant amount of
capital would be required to discharge these liabilities and to achieve
profitable operations. Commitments for capital were received by the
Company from Oren Benton, its principal shareholder. However, Mr.
Benton filed for Chapter 11 bankruptcy protection shortly after the
acquisition and has not met such capital commitments. The Company has
filed a substantial claim in the Benton Bankruptcy in connection with
such commitments with respect to which recovery is uncertain. In the
meantime, MRI's operations have not been profitable and it has been
unable to raise sufficient capital to service those obligations, some
of which have been guaranteed by the Company.
10
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
3. Discontinued Operation
On August 12, 1996, the Board of Directors approved the sale and
liquidation of MRI. The net losses of MRI prior to August 12, 1996, are
included in the consolidated statements of operations under "loss from
operations of discontinued pasta sauce business." While there is no
present contract of sale, management expects the business to be sold
prior to December 31, 1996. Any sale of the business would require
confirmation of the United States Bankruptcy Court for the District of
Colorado (see discussion below).
The pasta sauce business has been accounted for as a discontinued
operation, and the prior period's financial statements have been
restated to reflect discontinuance of the business. Revenues for such
operations were $1,036,000 and $4,492,000, respectively, for the three
and nine months ended September 30, 1996 as compared with $1,488,000
and $7,427,000 for the three and nine months ended September 30, 1995.
Certain expenses have been allocated to the discontinued operation,
including general and administrative expense and interest expense on
debt directly related to the discontinued operation.
The provision for loss on disposal reflected in the consolidated
statement of operations includes the write-down of the assets of MRI to
estimated net realizable values and the estimated costs of disposing of
the business. No tax benefits are anticipated from the disposition. The
assets held for sale, net of applicable liabilities, have been
reclassified as either current or non-current in the Consolidated
Balance Sheets. Net assets of the discontinued operation at September
30, 1996 and December 31, 1995 consisted of the Company's manufacturing
facility in Houston, Texas, which continues operations while it is held
for sale (classified as "net non current assets of discontinued
operation" in the Consolidated Balance Sheets).
4. Petition for Relief Under Chapter 11
On August 23, 1996, MRI filed a petition for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for
the District of Colorado. Under Chapter 11, certain claims against MRI
in existence prior to the filing of the petition are stayed while MRI
continues business operations as debtor-in- possession. These claims,
"liabilities subject to compromise", are included in "net current
liabilities of discontinued operation" in the Consolidated Balance
Sheets. Total liabilities of the discontinued operation at September
30, 1996 were $6,331,000 and
11
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
consisted of the following:
Liabilities subject to compromise $3,131,000
Secured claims 3,200,000
---------
$6,331,000
==========
Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of executory
contracts, including leases, and from the determination by the court
(or agreed to by parties in interest) of allowed claims for
contingencies and other disputed amounts. Claims secured against MRI's
assets ("secured claims") are also stayed, although the holders of such
claims have the right to move the court for relief from the stay.
Secured claims are secured by liens on all of MRI's assets, real
and intangible.
5. DEBT
Convertible Subordinated Debentures
In 1993, the Company issued 3,910 units, each unit consisting of one 8%
convertible subordinated debenture of $1,000 due December 31, 1999, and
100 three-year warrants, each for the purchase of one share of the
Company's common stock at an exercise price of $6.50 per share. The
warrants expired September 28, 1996 and were not extended. The
debentures are convertible at any time prior to maturity, unless
earlier redeemed, into common stock at a conversion price of $5.00 per
share. As of both December 31, 1995 and September 30, 1996, $2,119,000
of debentures had been converted by the debenture holders into 424,000
shares of the Company's common stock.
In the event of a default in the payment of principal or interest of
senior indebtedness, the debentures shall immediately be due and
payable but no amounts may be paid by the Company with respect to
principal and interest of these debentures until the defaults under the
senior indebtedness are cured or waived, or until the principal and
interest of the senior indebtedness has been paid in full. At September
30, 1996, the Company was in default under financial covenants and also
the payment of interest due under senior indebtedness, which defaults
had not been waived or cured (see discussion below). As a result, the
Company was unable to make the semi-annual interest payment due
September 1, 1996, and the debentures have thus been reclassified to
current liabilities at September 30, 1996.
12
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
Although the Company anticipates that principal and interest of the
senior indebtedness will be paid in full upon sale of the pasta sauce
business, thereby permitting the Company to cure the payment default
under the convertible subordinated debentures, there are no assurances
that the proceeds of such sale will be sufficient to fully pay the
senior indebtedness or that following such sale the Company will have
sufficient cash to cure such defaults.
Convertible Debenture Loan
In December, 1995, the Company entered into a loan agreement with
Renaissance Capital Growth & Income Fund III, Inc. ("Renaissance"), for
$3,200,000, at an interest rate of 9%, convertible into common stock at
$1.50 per share, subject to adjustment of conversion price at January
1, 1997 if the market price of PRC stock for a specified period prior
to that date is less than $1.50. If not reduced or converted prior, the
debentures will mature on January 1, 2003, although mandatory principal
payments will commence on January 1, 1999. The loan is secured by all
the assets of the Company. The loan agreement limits the amount of
additional indebtedness incurred by the Company and also requires that
certain financial performance ratios be met. At September 30, 1996, the
Company was in default for failure to meet the minimum current ratio
required by the agreement and for failure to make required payments of
interest. These events permit Renaissance to exercise various remedies
including collection of the entire unpaid principal and accrued
interest, but to date it had not elected to exercise any of these
rights or remedies. Thus, at September 30, 1996, the debentures are
classified as current liabilities and included in "liabilities of
discontinued operations" in the Consolidated Balance Sheets. Management
anticipates that principal and interest of the Renaissance debentures
will be paid in full upon sale of the pasta sauce business. However,
there are no assurances that the proceeds of such sale will be
sufficient to fully satisfy such indebtedness.
Bank Financing
In July, 1995, the Company entered into an asset based lending
agreement with Norwest Business Credit, Inc. The agreement provided a
line of credit up to $2,000,000, based upon collateral, inventory,
equipment and receivables, at a rate of prime plus 4% and extended
through July, 1998. On December 19, 1995, the loan was paid off with
the proceeds of the Renaissance financing, but $2,000,000 remained
available as a facility for working capital. A fee of .5% per annum is
payable monthly on the unused amount of
13
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
the facility. At September 30, 1996, $1,001,000 was outstanding under
the line of credit. The loan is secured by all of the assets of the
Company, and the loan agreement requires that certain financial
covenants be met. Because the Company is in default for failure to
comply with these covenants, the bank elected to exercise its right to
increase the interest rate to prime plus 7%, and effective November 1,
1996 the credit limit will be decreased to $1,200,000. Other
remedies upon default are available to the bank, including acceleration
of the entire unpaid principal and accrued interest, but to date it had
not elected to exercise any of those rights or remedies. At September
30, 1996, the bank note payable was reclassified as a current
liability. Management has instituted measures which it believes will
improve revenues from the precision equipment sales and service
business and contribute towards achieving profitability, thereby
permitting the Company to cure the financial covenants of the bank
agreement. However, there are no assurances that these measures will be
successful or that the defaults will be waived or cured.
Vendor Notes Payable
MRI assumed certain liabilities of Mama Rizzo's which represented trade
payables due at the time of purchase. The Company has also agreed under
certain circumstances to indemnify Stephen and MaryAnn Yamin, the
former owners of Mama Rizzo's and M.A. Yamin, Inc. for any personal
liability or expenses they may incur in connection with defending Mama
Rizzo's liabilities, trade payables and accrued liabilities not assumed
by MRI. In several cases the amount due has been agreed to and
supported by notes payable over a period of time. Terms range from
several months to 24 months, with interest ranging from none to 11% per
annum. At September 30, 1996, MRI was in default for failure to make
required payments of principal and interest under several of the notes,
some of which have been guaranteed by the Company. Thus, at September
30, 1996, the vendor notes payable were classified as current
liabilities. The amount of $571,000 is subject to compromise and
included in "liabilities of discontinued operations" in the
Consolidated Balance Sheets. Management anticipates that proceeds from
the sale of the pasta sauce business will be utilized to retire this
debt. However, there are no assurances that the proceeds of such sale
will be sufficient to accomplish this plan.
Factoring of Receivables
In June 1996, MRI entered into a factoring agreement with EAR Capital
Group, LLC ("EAR"), for the purchase and sale of certain
14
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
MRI accounts receivable. Robert A. Fillingham, Chief Executive Officer
and President of the Company, is one of the principal owners of EAR.
Pursuant to the agreement, EAR is entitled to receive minimum
consideration not to exceed ten percent (10%) of the highest level of
purchase price of the receivables outstanding during the term of the
Agreement. At September 30, 1996, EAR had purchased receivables for a
net purchase price of $427,000. Prior to entering into the factoring
agreement with EAR, the Company pursued without success all other
alternatives for obtaining additional working capital for MRI,
including Renaissance and Norwest Business Credit. The Company also
sought without success financing from a factoring firm previously
utilized by Mama Rizzo's. The factoring terms between the Company and
EAR are more favorable to MRI than those of the prior factoring
arrangement and such terms were approved by the independent Directors
of the Company and MRI.
Debtor in Possession Financing
On September 20, 1996, the United States District Court for the
District of Colorado approved emergency borrowing by MRI to be secured
by first and prior a lien on all of the assets of MRI. Pursuant
thereto, Renaissance and EAR have each loaned MRI $50,000, which loan
bears interest at fifteen percent (15%) per annum, payable at maturity.
Said loan is due upon the earlier of February 28, 1997 or the closing
of the sale of substantially all of the assets of MRI.
6. Earnings Per Share
Earnings (loss) per common share is computed by dividing income (loss)
by the weighted average number of shares outstanding. For primary
earnings per share, the weighted average impact of the common stock
issued in connection with the acquisition of MRI was included in the
calculation. There is no 1996 fully diluted computation as the effect
is anti-dilutive.
7. Commitments and Contingencies
Mama Rizzo's Debt Extinguishment
The Company has become aware that a $2,970,000 note payable from Mama
Rizzo's to Ms. Peterson that was to be assigned to the Company is no
longer held by her but is held by a third party. The Company believes
that the third party is not a holder in due course of the note and,
therefore, should be unable to assert the note against
15
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
the Company or MRI because it was past due at the time of the third
party's acquisition. Ms. Peterson remains liable for a prior
representation and warranty in favor of the Company assuring it of
her ownership of the above described note.
Litigation
In the acquisition by the Company's subsidiary MRI of the assets and
certain of the liabilities of Mama Rizzo's, certain liabilities and
claims were not assumed. Some of those creditors have filed suit for
the collection of their claims against P.S.M.S., Inc., the Texas
corporation formally known as Mama Rizzo's Inc., i.e., against the
Corporation which owned the Mama Rizzo's business acquired by the
Company's subsidiary. P.S.M.S., Inc. does not intend to defend those
claims. The Company has been advised by counsel that neither the
Company nor its subsidiary should have liability for those claims or
for judgments emanating therefrom. The Company has, however, agreed
under certain circumstances to indemnify Stephen and MaryAnn Yamin, the
former owners of Mama Rizzo's and MAY, for any personal liability or
expenses they may incur in connection with those unassumed liabilities
as well as MAY.
To date, four creditors of P.S.M.S., Inc., which liabilities were not
assumed by the Company or its subsidiary in the acquisition of Mama
Rizzo's, have commenced lawsuits against the Company. Two of these
claims have been settled for approximately one-third of the unassumed
liabilities, principally payable over approximately two years. The
aggregate amount payable in these settlements is $230,000. The
liability for these amounts is classified as "vendor notes payable
guaranteed by PRC" in the Consolidated Balance Sheets.
The third and fourth claims with respect to a Mama Rizzo's unassumed
liabilities remain unresolved. The claims involve liabilities of
approximately $415,000 and suits have been brought against the Company
and its subsidiary for the collection thereof. The Company has
commenced negotiations for the settlement of these claims on a basis
comparable to the settlements of the other two claims.
Benton Bankruptcy
As previously discussed, Oren L. Benton, a significant shareholder of
the Company, filed for Chapter 11 bankruptcy protection on February 23,
1995. The Company has conducted business with Mr.
16
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
Benton and his affiliates in the past. Management does not expect the
bankruptcy of Mr. Benton to have a material adverse effect on the
future operations of the Company other than as discussed in Note 2.
17
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
At September 30, 1996, the Company's cash balance was $77,000,
compared to $806,000 at December 31, 1995. Net cash used in
operating activities was $1,927,000 for the nine months ended
September 30, 1996, compared to net cash used in operating
activities of $159,000 during the same period in 1995.
During the first nine months of 1996, $77,000 of cash was
generated by investing activities. As previously discussed,
during the first quarter of 1995, the Company completed its
acquisition of the assets and certain liabilities of Mama
Rizzo's. The Company used $3,000,000 during the first quarter
of 1995 in connection with the acquisition.
In 1993, the Company issued 3,910 units, each unit consisting
of one 8% convertible subordinated debenture of $1,000 due
December 31, 1999, and 100 three-year warrants, each for the
purchase of one share of the Company's common stock at an
exercise price of $6.50 per share. The warrants expired
September 28, 1996 and were not extended. In the event of a
default in the payment of principal or interest of senior
indebtedness, the debentures shall immediately be due and
payable but no amounts may be paid by the Company with respect
to principal and interest of these debentures until the
defaults under the senior indebtedness are cured or waived, or
until the principal and interest of the senior indebtedness
has been paid in full. At September 30, 1996, the Company was
in default under financial covenants and also the payment of
interest due under the senior indebtedness, which defaults had
not been waived or cured. Although the Company anticipates
that principal and interest of the senior indebtedness will be
paid in full upon sale of the pasta sauce business, thereby
permitting the Company to cure the payment default under the
convertible subordinated debentures, there are no assurances
that the proceeds of such sale will be sufficient to fully pay
the senior indebtedness or that following such sale the
Company will have sufficient cash to cure such defaults.
In July, 1995, the Company entered into an asset based lending
agreement with Norwest Business Credit, Inc. The agreement
provided a line of credit up to $2,000,000, based upon
collateral, inventory, equipment and receivables, at a rate of
prime plus 4% and extended through July, 1998. On December 19,
1995, the line was paid down with the Renaissance
18
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
financing, but $2,000,000 remained available as a facility for
working capital. Because the Company is in default for failure
to comply with certain financial covenants, the bank elected
to exercise its right to increase the interest rate to prime
plus 7%, and effective November 1, 1996, the credit limit will
be decreased to $1,200,000. During the nine months of 1996,
net cash flow of $1,001,000 was generated from borrowings
under the line of credit. Management has instituted measures
which it believes will improve revenues from the precision
equipment sales and service business and contribute towards
achieving profitability, thereby permitting the Company to
cure the financial covenants of the bank agreement. However,
there are no assurances that these measures will be successful
or that the defaults will be waived or cured.
In December, 1995, the Company entered into a loan agreement
with Renaissance for $3,200,000, at an interest rate of 9%,
convertible into common stock at $1.50 per share, subject to
adjustment of conversion price at January 1, 1997 if the
market price of PRC stock for a period prior to that date is
less than $1.50. If not reduced or converted prior, the
debentures will mature on January 1, 2003. Management
anticipates that principal and interest of the Renaissance
debentures will be paid in full upon sale of the pasta sauce
business. However, there are no assurances that the proceeds
of such sale will be sufficient to fully satisfy such
indebtedness.
In June 1996, MRI entered into a Purchase and Sale Agreement
with EAR Capital Group, LLC ("EAR"), for the purchase and sale
of certain MRI accounts receivable. Pursuant to the agreement,
EAR is entitled to receive minimum consideration not to exceed
ten percent (10%) of the highest level of purchase price of
the receivables outstanding during the term of the agreement.
At September 30, 1996, EAR had purchased receivables in the
aggregate amount of $569,000 for a net purchase price of
$427,000.
MRI assumed certain liabilities of Mama Rizzo's which
represent trade payables due at the time of purchase. The
Company has also agreed under certain circumstances to
indemnify Stephen and MaryAnn Yamin, the former owners of Mama
Rizzo's and MAY, for any personal liability or expenses they
may incur in connection with defending Mama Rizzo's
liabilities not assumed by MRI. Trade payables and accrued
liabilities include amounts due to those vendors, and in
several cases the amount due has been agreed to and supported
19
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
by notes payable over a period of time. Terms ranged from
several months to 24 months, with interest ranging from none
to 11% per annum. At September 30, 1996, MRI was in default
for failure to make required payments of principal and
interest under several of the notes, some of which have been
guaranteed by the Company. Management anticipates that
proceeds from the sale of the pasta sauce business will be
utilized to retire this debt. However, there are no assurances
that the proceeds of such sale will be sufficient to
accomplish this plan.
The Company has been unable to make required payments of
principal and interest under various debt obligations. As a
result, on August 12, 1996, the Board of Directors approved
the sale and liquidation of MRI through a Chapter 11
bankruptcy proceeding. Proceeds of any such sale would be
utilized to retire debt of its secured and unsecured creditor
including PRC.
At September 30, 1996, there were no material commitments for
capital expenditures.
Results of Operations
The following discussion pertains to the operating results of
the food processing equipment business ("PRC") exclusive of
operations of the discontinued pasta sauce business. Results
of operations for prior periods have been restated to reflect
only PRC operations. (see Note 3)
A net loss of $918,000 was recorded by PRC for the nine months
ended September 30, 1996 compared to net income of $361,000
for the same period of the prior year. Revenues decreased
$2,601,000 between periods and operating expense and net
interest expense increased $178,000 and $74,000 respectively.
Nine Months Ended September 30, 1996 and September 30, 1995
An operating loss of $614,000 was recorded by PRC for the
period ended September 30, 1996, as compared to an operating
profit of $582,000 for the same period of the prior year. The
primary reason for the increased loss was a decrease in
revenues and an increase in operating expense.
PRC revenues decreased $2,601,000, or 47%, between periods and
gross profit decreased $1,018,000, or 44%. Management believes
the decrease in revenues is primarily the result of adverse
economic conditions which affected PRC's domestic
20
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
customers. The decrease in gross profit was primarily the
result of decreased revenues. As a percent of sales, cost of
goods sold decreased 2% between periods.
General and administrative expense increased $214,000, or 17%,
between periods. This increase was primarily the result of
increased contract labor, payroll and employee benefit
expenses. PRC's general and administrative expense was 49% of
revenue for the period ended September 30, 1996, as compared
to 23% for the prior year.
Selling and marketing expense decreased $12,000, or 3%,
between periods as the result of staff reductions. PRC's
selling and marketing expense was 12% of revenue for the
period ended September 30, 1996 as compared with 7% for the
prior year.
Three Months Ended September 30, 1996 and September 30, 1995
PRC recorded an operating profit of $60,000 for the three
months ended September 30, 1996, compared to an operating
profit of $902,000 for the same period of the prior year. The
primary reason for the decrease in profit was a reduction in
gross profit as a result of decreased revenue.
Revenues decreased $2,340,000, or 68%, for the three months
ended September 30, 1996, as compared to the prior year.
Management believes the decrease in revenues is primarily the
result of adverse economic conditions which affected PRC's
domestic customers.
The gross margin percentage for the three months ended
September 30, 1996 was 51% compared to 41% for the same period
of the prior year. Management attributes this improvement to
efficiencies in manufacturing. As a percent of sales, cost of
goods sold decreased 9% between periods.
General and administrative expenses decreased $26,000 for the
three months ended September 30, 1996 compared to the same
period of the prior year. General and administrative expenses
were 38% of revenues for the three months ended September 30,
1996 compared to 11% for the three months ended September 30,
1995.
Selling and marketing expenses decreased $32,000, or 28%, for
the three months ended September 30, 1996 compared to the same
period of the prior year. The decrease in such costs is
primarily due to a decrease in fixed expense as the result of
21
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
the reduction of the sales staff. Selling and marketing
expenses were 7% of revenue for the three months ended
September 30, 1996, compared to 3% for the three months ended
September 30, 1995.
Research and development costs remained constant between
years.
22
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
PART II - OTHER INFORMATION
Items 1-5 - Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Not applicable
(b) Reports of Form 8-K
1. Report on Form 8-K dated August 23, 1996 reporting a 97.4% owned
subsidiary of Packaging Research Corporation filed a voluntary
petition seeking relief under Chapter 11 of Title 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the
District of Colorado. The Company is debtor in possession
effective August 23, 1996.
2. Report on Form 8-K dated September 26, 1996 reporting the Company
was unable to make the semi-annual interest payment on its
subordinated convertible debentures due to defaults under senior
indebtedness.
23
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
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.
PACKAGING RESEARCH CORPORATION
Registrant
Dated: November 19, 1996 By:/s/ TIMOTHY G. PHILLIPS
-----------------------
Timothy G. Phillips
President
(Principal Executive Officer)
Dated: November 19, 1996 By:/s/ K. SUE LEMONS
-----------------
K. Sue Lemons
Controller
24
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<ALLOWANCES> (18,000)
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