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 June 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 August 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 -
June 30, 1996 and December 31, 1995 . .......................... 3
Consolidated Statements of Operations -
Six and Three Months Ended
June 30, 1996 and 1995 . ...................................... 5
Consolidated Statements of Cash Flows -
Six Months Ended
June 30, 1996 and 1995 . ...................................... 6
Notes to Consolidated Financial Statements...................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................................15
Part II. Other Information .............................................20
2
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
------ June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ............ $ 2,000 $ 806,000
Accounts receivable, net of allowance
for doubtful accounts and returns of
$46,000 and $54,000 at June 30, 1996
and December 31, 1995, respectively 1,590,000 1,843,000
Inventory, net ....................... 2,867,000 2,708,000
Prepaid expenses and other ........... 178,000 63,000
------------ ------------
Total current assets ........ 4,637,000 5,420,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Machinery and equipment .............. 1,238,000 1,220,000
Furniture and fixtures ............... 598,000 596,000
Test and demonstration equipment ..... 767,000 926,000
Leasehold improvements ............... 1,164,000 1,164,000
Vehicles ............................. 11,000 11,000
------------ ------------
3,778,000 3,917,000
------------ ------------
Less - Accumulated depreciation
and amortization ................... (1,545,000) (1,496,000)
------------ ------------
Net property, plant and equipment .... 2,233,000 2,421,000
------------ ------------
OTHER ASSETS:
Deferred loan and offering costs ............ 327,000 372,000
Goodwill .................................... 13,470,000 13,648,000
------------ ------------
13,797,000 14,020,000
------------ ------------
Total assets ......................... $ 20,667,000 $ 21,861,000
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ------------------------------------ ------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable and accrued
expenses............................................ $ 2,489,000 $ 3,053,000
Customer deductions................................... 1,100,000 1,362,000
Convertible debentures due 1999-2003 ................. 3,200,000 -
Bank note payable .................................... 1,178,000 -
Vendor notes payable ................................. 1,737,000 1,181,000
Other accrued liabilities............................. 614,000 917,000
----------- -----------
Total current liabilities ................... 10,318,000 6,513,000
----------- -----------
LONG-TERM DEBT
Convertible debentures due 1999-2003.................. - 3,200,000
Convertible debentures due 1999....................... 1,791,000 1,791,000
Bank note payable .................................... - -
Vendor notes payable.................................. - 53,000
------------ -----------
Total long-term debt......................... 1,791,000 5,044,000
------------ -----------
MINORITY INTEREST ............................................. 221,000 -
------------ -----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
25,000,000 shares authorized;
3,095,405 (307,692 contingent) and
3,095,405 shares issued and outstanding
at June 30, 1996 and December 31, 1995,
respectively.......................................... 31,000 31,000
Additional paid-in capital 12,491,000 12,699,000
Accumulated deficit (re-adjusted to re-
flect quasi-reorganization effective
January 1, 1995 .................................... (4,185,000) (2,426,000)
------------- -----------
Total shareholders' equity ........................... 8,337,000 10,304,000
------------- -----------
Total liabilities and
shareholders' equity............................... $ 20,667,000 $21,861,000
============= ===========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
4
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
<CAPTION>
CONSOLIDATED STATMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Pasta sauce ............................. $ 1,358,000 $ 2,807,000 $ 3,456,000 $ 3,969,000
Precision equipment sales and service ... 745,000 947,000 1,913,000 2,174,000
----------- ----------- ----------- -----------
Total Revenue ........... 2,103,000 3,754,000 5,369,000 6,143,000
--------- ----------- ----------- -----------
COST OF GOODS SOLD
Pasta sauce ............................. 742,000 1,876,000 1,937,000 2,737,000
Precision equipment sales and service ... 506,000 470,000 1,199,000 1,302,000
--------- ----------- ----------- -----------
Total Cost of Goods Sold 1,248,000 2,346,000 3,136,000 4,039,000
--------- ----------- ----------- -----------
Gross profit ..................... 855,000 1,408,000 2,233,000 2,104,000
--------- ----------- ----------- -----------
OPERATING EXPENSES:
General and administrative .............. 1,027,000 898,000 1,963,000 1,507,000
Selling and marketing ................... 174,000 325,000 419,000 553,000
Advertising and promotion ............... 363,000 843,000 1,061,000 1,151,000
Amortization of goodwill ................ 86,000 79,000 171,000 116,000
Research and development ................ 12,000 23,000 27,000 39,000
--------- ----------- ----------- -----------
1,662,000 2,168,000 3,641,000 3,366,000
--------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS ............. (807,000) (760,000) (1,408,000) (1,262,000)
OTHER INCOME (EXPENSE):
Interest expense ........................ (174,000) (132,000) (363,000) (196,000)
Interest income ......................... 1,000 1,000 3,000 11,000
Miscellaneous ........................... 1,000 -- 2,000 --
--------- ----------- ----------- -----------
Total other income (expense) ..... (172,000) (131,000) (358,000) (185,000)
--------- ----------- ----------- -----------
INCOME TAXES .............................. -- -- -- --
--------- ----------- ----------- -----------
MINORITY INTEREST ......................... 7,000 -- 7,000 --
--------- ----------- ----------- -----------
NET INCOME (LOSS) ......................... $(972,000) $ (891,000) $(1,759,000) $(1,447,000)
========= =========== =========== ============
PRIMARY INCOME (LOSS) PER COMMON SHARE .... $ (.31) $ (.40) $ (.57) $ (.67)
========= =========== =========== ============
FULLY DILUTED INCOME PER COMMON SHARE: .... $ N/A $ N/A $ N/A $ N/A
========= =========== =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary .......................... 3,095,405 2,212,188 3,095,405 2,174,999
========= =========== =========== ============
Fully diluted .................... N/A N/A N/A N/A
========= =========== =========== ============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
5
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ...................................... $(1,759,000) $(1,447,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ................ 461,000 418,000
Provision for obsolescence and warranty
reserves ............................... 43,000 61,000
Provision for losses on accounts receivable .. 8,000 7,000
Changes in assets and liabilities -
Decrease in accounts receivable ........ 245,000 1,047,000
Increase in inventory .................. (130,000) (323,000)
Increase in prepaid expenses and
other assets ......................... (94,000) (4,000)
Decrease in accounts payable
and accrued liabilities .............. (746,000) (478,000)
Increase (decrease) in customer deposits (107,000) 833,000
----------- -----------
Net cash used in operating activities (2,079,000) 114,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Consideration paid for acquisition
of subsidiary ................................. -- (3,000,000)
Proceeds from disposal of assets ................ 97,000 --
Capital expenditures ............................ (20,000) (160,000)
Cash paid under loans, promissory note and
settlement agreement with Steve Yamin and MAY . -- (184,000)
----------- -----------
Net cash provided by investing activities ....... 77,000 (3,344,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing and
short-term borrowings ......................... 2,499,000 777,000
Repayment of bank financing and
short-term borrowings ......................... (1,321,000) (27,000)
Proceeds from exercise of stock
option of subsidiary .......................... 20,000 --
----------- -----------
Net cash provided by financing activities ....... 1,198,000 750,000
----------- -----------
NET DECREASE IN CASH ..................................... (804,000) (2,480,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........... 806,000 2,633,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................. $ 2,000 $ 153,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
6
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
1996 1995
--------- --------
Cash paid during the period for:
Interest .............. $ 62,000 $157,000
Income taxes .......... -- --
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
7
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
1. Basis of Presentation
The accompanying consolidated financial statements at June 30, 1996 and
December 31, 1995, and for the six and three month periods ended June
30, 1996 and 1995, have been prepared from the books and records of
Packaging Research Corporation ("PRC" or the "Company") and its wholly
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 June 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 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.
Acquisition
1995 Acquisition
On February 17, 1995, the Company, through MRI consummated the
purchase of the assets and certain liabilities of Mama Rizzo's, which
is engaged in the business of manufacturing and distributing pasta
sauce under the name "Mama Rizzo's."
8
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
As consideration for the purchase, the Company initially 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 to be
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,
$2,000,000 of which was contingent upon MRI achieving $15 million of
sales during the year ended December 31, 1995. Since sales did not
achieve that level, 307,692 shares were forfeitable on January 1, 1996.
In a separate transaction, the Board of Directors permitted Ms.
Peterson to have the benefit and voting rights of 307,692 option shares
which are issued shares through 1996, with the option to purchase the
shares at any time in 1996 for $1.50 per share. Ms. Peterson also owns
100,000 shares from a settlement from Yamin. At the end of 1995, and
June 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.
In acquiring Mama Rizzo's, management recognized that substantial
amounts of capital would be required in order to discharge the
liabilities of Mama Rizzo's and for it 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.
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. In view of Mama Rizzo's continued
poor financial performance, management has been seriously reviewing
various options, including the sale of Mama Rizzo's and seeking
bankruptcy protection against its creditors during the pendency of a
sale.
9
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
3. Pro Forma Statements
Prior to February 17, 1995, the Company was engaged in the
manufacturing, distribution and servicing of machines used in the food
processing industry. Effective February 17, 1995 (as described in Note
2), the Company acquired the assets and certain liabilities of Mama
Rizzo's, a company engaged in the business of manufacturing and
distributing a premium pasta sauce.
The following table sets forth condensed unaudited pro forma operating
results of the Company for the six months ended June 30, 1995. The pro
forma operating results assume that the acquisition of the assets and
certain liabilities of Mama Rizzo's had occurred on January 1, 1995,
instead of February 17, 1995. The condensed pro forma results are not
necessarily indicative of the results of operations had the acquisition
been consummated on January 1, 1995, and may not necessarily be
indicative of future performance.
Pro Forma
Six Months Ended
June 30, 1995
(unaudited)
------------
Revenues ..................... $ 8,113,000
Operating loss ............... (1,633,000)
Net loss ..................... (1,818,000)
Net loss per common share .... $ (.84)
===========
Weighted average common shares
outstanding ................ 2,174,999
===========
4. 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
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 June 30, 1996, $2,119,000 of
debentures had been converted by the debenture holders into 424,000
shares of the Company's common stock.
10
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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 June 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 monetary
payments of interest. These events permit Renaissance to exercise
various remedies including a collection of the entire unpaid principal
and accrued interest, but to date it had not elected to exercise any of
these rights or remedies.
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 remains
available as a facility for working capital. A fee of .5% per annum is
payable monthly on the unused amount of the facility. At June 30,
1996, $1,178,000 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 6%. 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.
11
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
Vendor Notes Payable
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 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 ranged from
several months to 24 months, with interest ranging from none to 11% per
annum. At June 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.
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 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 period ended August 31, 1996. At
June 30, 1996, EAR had purchased receivables for a net purchase price
of $99,000. 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.
5. Minority Interest
From the acquisition date of February 17, 1995 through yearend 1995,
Mama Rizzo's, Inc. had been a wholly owned subsidiary with 3,000,000
shares of common stock issued to the Company. At the time of the
acquisition, MRI options to purchase stock were granted to some of the
officers, directors and employees. Early in 1996, an exchange offer
was made to convert the MRI options to the Company's options and that
offer was accepted by all but three resigned employees who exercised
their rights and purchased 78,700 shares, resulting in a minority
interest of 2.56%.
12
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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 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.
13
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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.
Agreement has been reached, but not yet finalized, for the settlement
of a third such claim on the same basis. The aggregate amount payable
in these settlements is $246,770.
A fourth claim with respect to a Mama Rizzo's unassumed liability
remains unresolved. This claim involves a liability of approximately
$130,000 and suit has been brought against the Company and its
subsidiary for the collection thereof. The Company has commenced
negotiations for the settlement of this claim on a basis comparable to
the settlements of the other three 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. 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.
14
<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 June 30, 1996, the Company's cash balance was $2,000 compared to
$806,000 at December 31, 1995. Net cash used in operating activities
was $2,079,000 for the six months ended June 30, 1996, compared to net
cash provided by operating activities of $114,000 during the same
period in 1995. The decrease in net cash flow from operations between
periods is primarily due to decreases in receivable collections,
customer deposits, and reduction of accounts payable and accrued
liabilities.
During the first six 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 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 financing, but $2,000,000 was available as a facility
for working capital. During the six months of 1996, net cash flow of
$1,178,000 was generated from borrowings under the line of credit.
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.
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 period ended August 31, 1996. At June 30, 1996, EAR had purchased
receivables in the aggregate amount of $132,000 for a net purchase
price of $99,000.
15
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
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 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 June 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.
The Company has been unable to make required payments of principal and
interest under various debt obligations. As a result, management is
considering alternatives for the possible restructuring of its
businesses, including the possible sale of some assets. Proceeds of
any such restructuring would in part be utilized to retire debt of its
secured and unsecured creditors. Restructuring alternatives being
seriously considered by management include the sale of Mama Rizzo's
and its filing for Chapter 11 bankruptcy protection pending such sale.
At June 30, 1996, there were no material commitments for capital
expenditures.
Results of Operations
A net loss of $1,759,000 was recorded by the Company for the six
months ended June 30, 1996 compared to a net loss of $1,447,000 for
the same period of the prior year. Consolidated revenues decreased
$774,000 between periods and operating expense and interest expense
increased $275,000 and $167,000 respectively.
The following discussion pertains to the operating results of the
Company's two business segments. For purposes of this discussion, the
food processing equipment business is referred to as "PRC" while the
pasta sauce business is referred to as "MRI".
16
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
Six Months Ended June 30, 1996 and June 30, 1995
PRC Operating Results
An operating loss of $736,000 was recorded by PRC for the period ended
June 30, 1996, as compared to a net loss of $423,000 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 $261,000, or 12%, between periods and gross
profit decreased $158,000, or 18%. The decrease in gross profit was
primarily the result of increased cost of goods sold. As a percent of
sales, cost of goods sold increased 3% between periods.
General and administrative expense increased $147,000, or 15%, between
periods. This increase was primarily the result of increased contract
labor, payroll and employee benefit expenses. PRC's general and
administrative expense was 59% of revenue for the period ended June
30, 1996, as compared to 45% for the prior year.
MRI Operating Results
The following discussion pertains to the June 30, 1996 actual compared
to June 30, 1995 pro forma operating results.
MRI recorded a loss from operations of $673,000 for the six months
ended June 30, 1996 as compared to $1,210,000 for the same period of
the prior year. The decrease in loss of $537,000, or 44%, was
primarily the result of decreased operating expenses.
MRI revenues decreased $2,483,000, or 42%, between periods as a result
of decreased promotional efforts which had resulted in substantial
losses in the prior period. Gross profit decreased $322,000, or 17%
between periods. Cost of goods sold, as a percent of sales, was 56%
for the period ending June 30, 1996 and 69% for the same period in
1995.
MRI operating expenses decreased $859,000, or 28%, between periods.
The primary reason for this decrease was a decrease of $979,000, or
45%, in selling and marketing expense. General and administrative
expense increased $107,000, or 15%, between periods. MRI's general and
administrative expense was 24% of revenues for the period ended June
30, 1996 compared to 12% for the prior year. MRI's selling and
marketing expense was 34% of revenues for the period ended June 30,
1996 compared to 37% for the prior year.
17
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
Three Months Ended June 30, 1996 and June 30, 1995
PRC Operating Results
PRC recorded an operating loss of $547,000 for the three months ended
June 30, 1996, compared to an operating loss of $234,000 for the same
period of the prior year. The primary reason for the increase in loss
was a reduction in gross profit as a result of increased cost of goods
sold. Cost of goods sold was 68% of sales for the three months ended
June 30, 1996 as compared to 50% of sales for the same period of the
prior year.
Revenues decreased $202,000, or 21%, for the three months ended June
30, 1996, as compared to the prior year.
The gross margin percentage for the three months ended June 30, 1996
was 32% compared to 50% for the same period of the prior year.
General and administrative expenses increased $63,000, or 11%, for the
three months ended June 30, 1996 compared to the same period of the
prior year primarily due to increased payroll and insurance costs.
General and administrative expenses were 85% of revenues for the three
months ended June 30, 1996 compared to 60% for the three months ended
June 30, 1995.
Selling and marketing expenses increased $23,000, or 19%, for the
three months ended June 30, 1996 compared to the same period of the
prior year. The increase in such costs is primarily due to an increase
in fixed expense as the result of the addition of an additional
salesperson to the sales staff. Selling and marketing expenses were
19% of revenue for the three months ended June 30, 1996, compared to
13% for the three months ended June 30, 1995.
Research and development costs decreased $11,000, or 48%, between
years. In 1995, significant research and development costs were
incurred in the production of a new model pump which was completed
early in 1996.
MRI Operating Results
An operating loss of $260,000 was recorded for the three months ended
June 30, 1996, compared to an operating loss of $820,000 in the same
period of the prior year. The primary reason for the improvement of
$560,000, or 68%, is the reduction of MRI's selling and marketing
expenses both in absolute dollars and as a percentage of sales between
years.
18
<PAGE>
PACKAGING RESEARCH CORPORATION AND SUBSIDIARY
Revenues decreased $3,419,000, or 72%, for the three months ended June
30, 1996, compared to the prior year. The decrease in MRI's revenues
is due to fewer marketing programs during 1996 when compared to 1995.
The gross margin percentage for the three months ended June 30, 1996,
was 45% compared to 32% for the same period of the prior year. The
improvement between years is due to product cost improvements. Cost of
goods sold as a percent of sales was 55% for the three months ended
June 30, 1996, as compared to 68% for the same period of the prior
year.
General and administrative expenses decreased $102,000, or 20%, for
the three months ended June 30, 1996, compared to the same period of
the prior year. General and administrative expenses were 29% of
revenues for the three months ended June 30, 1996 compared to 10% for
the three months ended June 30, 1995.
Selling and marketing expenses decreased $1,389,000, or 78%, for the
three months ended June 30, 1996 compared to the same period of the
prior year. The decrease in such costs is primarily due to a reduction
in promotional efforts as compared to the prior year. Selling and
marketing expenses were 29% of revenue for the three months ended June
30, 1996 compared to 37% for the three months ended June 30, 1995.
19
<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) Not applicable
20
<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: August 19, 1996 By:/s/ ROBERT A. FILLINGHAM
------------------ ------------------------
Robert A. Fillingham
President
(Principal Executive Officer)
Dated: August 19, 1996 By:/s/ ROBERT H. PORTER
------------------ --------------------
Robert H. Porter
Chief Financial Officer
(Principal Financial Officer)
21
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