U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File No.
September 30, 1995 0-16161
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
36 AUBURN STREET
CHELSEA, MA 02150
TELEPHONE (617) 884-5211
State of Incorporation I.R.S. Employer Identification No.
Massachusetts 04-2877789
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 twelve
months (or 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 [ ]
As of September 30, 1995 the number of shares of Common Stock,
$.02 par value, outstanding were 1,899,885.
1
Original Italian Pasta Products Co. Inc.
INDEX
PAGE
NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: (Current years results are
unaudited)
Balance Sheets - As at September 30, 1995 and June 30, 1995 3
Statement of Operations:
Three months ended September 30, 1995 and September 30, 1994 4
Statement of Cash Flows:
Three months ended September 30, 1995 and September 30, 1994 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9-12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT 11 - Computation of Earnings Per Share 14
2
Original Italian Pasta Products Co. Inc.
Balance Sheet
(Unaudited)
Asset September 30, June 30,
1995 1995
Current Assets:
Cash and Cash Equivalents $ 102,000 $ 98,000
Accounts Receivable, net 982,000 754,000
Inventories (Note 3) 952,000 818,000
Prepaid expenses and other 6,000 7,000
--------- ----------
Total current assets 2,042,000 1,677,000
Property and equipment, net 1,138,000 1,290,000
Other assets, net 70,000 53,000
--------- ----------
Total Assets $3,250,000 $3,020,000
========== ==========
Liabilities and Shareholders
Equity
Current Liabilities:
Current maturities of long-
term debt and capital lease $ 669,000 $ 758,000
Accounts Payable 1,692,000 1,450,000
Accrued Expenses 834,000 665,000
---------- ----------
Total current liabilities 3,195,000 2,873,000
---------- ----------
Long-term debt and capital lease 106,000 117,000
---------- ----------
Shareholders' Deficit
Preferred stock - $.01 par
value. Authorized - 1,000,000
shares. Issued and
outstanding - None. -- --
Common Stock - $.02 par value
Authorized - 6,000,000 shares.
Issued and outstanding -
1,899,885 shares. 38,000 38,000
Additional paid-in capital 3,912,000 3,912,000
Accumulated deficit (4,001,000) (3,920,000)
---------- ----------
Total Shareholder's
Equity $ (51,000) $ 30,000
---------- ----------
Total Liabilities and
Equity $3,250,000 $3,020,000
========== ==========
See accompanying notes
3
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three months ended
September 30, September 30,
1995 1994
---------- ----------
Net sales $3,076,000 $3,927,000
Cost of goods sold 1,941,000 2,512,000
---------- ----------
Gross profit 1,135,000 1,415,000
Selling, general and
administrative expenses 1,193,000 1,443,000
----------- -----------
Loss from operations
operations (58,000) (28,000)
Other Expense:
Interest income 1,000 1,000
Interest expense (23,000) (51,000)
Other income (loss) -- (1,000)
---------- -----------
Net Loss before taxes (80,000) (79,000)
Provision for taxes -- --
Net Loss after taxes $ (80,000) $ (79,000)
=========== ==========
Net loss per share
(Note 2), primary $ (0.04) $ (0.04)
========== =========
Net loss per share
(Note 2), fully diluted $ (0.04) $ (0.04)
========== ==========
Weighted average shares
outstanding, primary 2,026,000 2,187,000
========= =========
Weighted average shares
outstanding, fully diluted 2,026,000 2,187,000
========= =========
See accompanying notes
4
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
September 30, September 30,
1995 1994
Cash flows from operating
activities:
Net Income $ (80,000) $ (79,000)
Adjustments to reconcile
net income to net cash used
in operating activities:
Depreciation and Amortization 154,000 200,000
Increase in accounts receivable (228,000) (225,000)
Decrease (Increase) in
inventories (134,000) 55,000
(Increase) Decrease in prepaid
expenses and other 1,000 (13,000)
Increase in accounts payable 242,000 75,000
Increase (Decrease) in
accrued expenses 154,000 36,000
Increase (Decrease) in
tax provision 15,000 (30,000)
(Increase) Decrease in
other assets (120,000) 281,000
----------- -----------
Net cash provided by
operating activities 4,000 300,000
Cash flows from investing
activities:
Purchase of property and
equipment -- (320,000)
------------ -----------
Net cash used by
investing activities -- (320,000)
Cash flows from financing
activities:
Proceeds from negotiations 100,000 --
Principal payments on debt (100,000) (98,000)
---------- ----------
Net cash used by
financing activities -- (98,000)
---------- ----------
Net increase (decrease) in cash
and cash equivalents 4,000 (118,000)
Cash - beginning of period 98,000 295,000
---------- ----------
Cash - end of period $ 102,000 $ 177,000
========== ==========
See accompanying notes
5
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting solely
of normal recurring adjustments) considered necessary for a fair
presentation have been included. Results from operations for the
three month period ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the year
ending June 30, 1996.
For further information, refer to the financial statements and
the footnotes included in the Company's annual report on Form 10-
KSB for the year ended June 30, 1995.
NOTE 2: NET INCOME (LOSS) PER COMMON SHARE:
Net income per common share is computed by dividing the net
income by the weighted average number of shares of common stock
and, if any, common stock equivalents outstanding during each
period.
Net loss per common share is computed by dividing the net loss by
the weighted average number of shares of common stock and, if
any, common stock equivalents outstanding during each period.
NOTE 3: INVENTORIES:
Inventories, stated at the lower of cost or market, on a first-
in, first-out basis, are comprised of the following:
September 30, June 30,
1995 1995
------------- ----------
Raw Materials $ 159,000 $ 154,000
Packaging Materials 333,000 339,000
Finished Goods 460,000 325,000
---------- ----------
Total $ 952,000 $ 818,000
========== ==========
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and operating results during the periods included in
the accompanying financial statements.
RESULTS OF OPERATIONS: For the quarter ended September 30, 1995
- --------------------- compared to the quarter ended September
30, 1994.
Net sales for the quarter ended September 30, 1995 were
$3,076,000 versus $3,927,000 for the same period last year.
This decrease of 22% is mainly due to lower warehouse club
sales.
Gross profit for the quarter ended September 30, 1995 came
in at 37% of net sales or $1,135,000. Last years gross profit
was at 36% of net sales or $1,415,000. Gross profit is up as a
result of cost reductions in manufacturing overhead.
Selling, General and Administrative expenses decreased to
$1,193,000 or 39% of net sales from $1,443,000 or 37% for the
quarter ended September 30, 1994. This decrease is due to lower
advertising and other marketing costs.
Loss from operations for the quarter ended September 30,
1995 was $58,000 or 2% of net sales as compared to $28,000 or 1%
for the same quarter ended last year.
Interest expense was $23,000 or 1% of net sales for the
quarter ended September 30, 1995 versus $51,000 or 1% for the
same period last year.
Net loss per common share, primary was $0.04 for the three
months ended September 30, 1995 compared to $0.04 per common
share, primary for the same period last year.
Liquidity and Capital Resources:
- -------------------------------
Intense competition and the Company's attempt to expand its
customer base has affected the Company's profit and loss as well
as cash flow. The Company is finding it difficult to generate
sufficient working capital to meet current demands.
At September 30, 1995, the Company's current liabilities
exceed current assets by $1,153,000.
The Company has a line of credit available from its primary
bank lenders (the "Bank"); $125,000 remains available to the
Company under the line of credit. The Company must repay the
7
$235,000 currently drawn on the line of credit by making
principal payments of $5,000 per month with all such principal to
be repaid on or before December of 1999. Although the Company has
continued to make payments on this line of credit, payments have
been made beyond the agreed upon due dates. These payment
delays have technically caused the loan to be in default.
In July 1995, the Company engaged in discussions with
Waterbury Holdings, Inc. concerning the acquisition of the
Company. As a condition of negotiation, Waterbury Holdings, Inc.
provided the Company with $100,000. This sum was to be recorded
as debt if the negotiations continued. In the event Waterbury
Holdings discontinued the negotiations, the amount ($100,000) was
forfeited in August 1995 when Waterbury Holdings, Inc.
discontinued these negotiations.
In December, 1993 the Company entered into an agreement with
Economic Stabilization Trust, a Massachusetts public
instrumentality, to borrow $150,000. This loan was used to
finance equipment and is secured by the equipment purchased.
This loan is payable in equal monthly installments of principal.
Interest is payable at prime plus 1 3/4% adjusted quarterly.
Final payment is scheduled for January 1, 1997. Due to payment
delays this loan is also technically in default.
In August 1991, the Company entered into an agreement with
MPDC, a Massachusetts development agency, to provide up to
$160,000 to the Company for the development in Massachusetts of
several new products. By June 30, 1993 the Company had expended
the entire amount available under the agreement and repaid
$80,000 to MPDC. The Company must repay $120,000 in 60 equal
monthly installments of $2,000 (which includes imputed interest)
which began in August, 1992. Due to payment delays this loan is
also technically in default.
In December 1989, the Company entered into an agreement with
Katy Industries to borrow $1,350,000. On October 15, 1991
accrued interest of $173,000 was added to the principal to be
repaid. This debt bears interest at 9.75% with monthly principal
payments of $18,750 commencing April 11, 1994 with a final
payment of all unpaid principal and interest on June 11, 1996.
On December 11, 1994 Katy Industries exercised warrant agreements
for the purchase of 453,585 shares of the Company's common stock.
The Company's debt to Katy was reduced by the purchase price or
$793,774.
The current operating plans indicate that the Company's
losses will continue but diminish. Nevertheless, the sum of
prior years' net losses are impairing the Company's ability to
continue its operation because these losses were funded, in part,
by debt which must be repaid out of current cash flows. The
8
Company will attempt to provide working capital through
operations and (as necessary) additional advances on its line of
credit. The Company can provide no assurances that these efforts
will be successful in raising the capital necessary to continue
its existence.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS:
The Company publishes this Section for the purpose of
fulfilling its legal duty to notify Shareholders and the
Securities and Exchange Commission ("SEC") of legal proceedings
in which it currently is involved.
1. The Trio's 1991 lawsuit Against the Company
-------------------------------------------
Anthony Trio and Genevieve Trio, d/b/a Trio's v. Original
---------------------------------------------------------
Italian Pasta Products Co., Inc. and Paul K. Stevens.
-----------------------------------------------------
Suffolk Superior Court (Boston, Massachusetts), C.A. No.
91-2680-A.
On April 21, 1994, following trial, the Superior Court
entered a Memorandum of Decision and Order for Judgment of
Court. On August 23, 1994, judgment was entered. The Trio's
have appealed from the judgment and, as a result of that
appeal, the Company has cross-appealed.
The Trio's complaint had alleged that the Company had
committed multiple breaches of the License Agreement (the
"Agreement") dated July 12, 1985, with Anthony and Genevieve
Trio (the "Trio's"). The Agreement grants to the Company
the fundamental right to use the Trio name in the
advertising and sale of certain products of the Trios,
derivative products or other products. For those rights,
the Company pays to the Trios a royalty calculated on "Net
Sales" by type of product category. The complaint had
charged the Company with: (1) failure to protect against
unauthorized sales of the Company's products within the
Boston North End, an area designated as exclusive for the
Trios under the Agreement,(2) sale of pasta products and
sauces under private label which allegedly forbidden by
the Agreement, (3) failure to provide audited reports of
royalties, (4) underpayment of royalties because of
miscategorization of products and miscalculation of
"Net Sales" and (5) failure to pay royalty amounts to a
third-party pursuant to an assignment by the Trios and to
the Internal Revenue Service pursuant to a tax
9
levy. For all of these violations, the Trios sought
damages, declaratory relief, and termination of the
Agreement.
In light of these claims, the Company filed counterclaims
against the Trios. The Company prayed for a declaration of
its rights and obligations under the Agreement with respect
to the computation of "Net Sales", the proper categorization
of both new and existing products, the offset of past
overpayments of royalties, and the right to sell the
Company's products under private label. In addition, the
Company brought counterclaims for abusive process,
interference with business relations, and unfair and
deceptive trade practices. The abusive process claim arose
from the Trios' earlier 1989 lawsuit and from the Trios'
institution of this new litigation only one month after
trial of the 1989 lawsuit, which had resulted in judgment
for the Company. The allegation in the abusive process
claim has become the subject of a third lawsuit by the Trios
and is described below. In addition, the Trios' daughter,
Catherine Cremaldi, had published a cookbook with recipes
which were, in part, attributed to her parents. The Company
accordingly counterclaimed for the Trios' breach of the
provisions in the Agreement which required the Trios to keep
confidential their recipes. Finally, the Company sought a
declaration that the Trio's remedies under the Agreement
were limited to money damages, and that the Trios had no
right to terminate the Agreement, which by its very language
is irrevocable.
In its judgment, the Court made detailed findings. On the
Trios' claims for breach of contract, with two minor
exceptions, the Court found for the Company. As it
pertained to the Company's ability to continue its
operations, to classify products, to compute new sales,
and to sell at private label, the Court found for the
Company. Specifically, the Court rejected the Trios' claim
that they could terminate the Agreement, finding that the
Trios were not entitled to terminate the Agreement or revoke
the licenses solely on account of the Company's failure to
pay all royalties owed. The Court found that the Company
was entitled to deduct promotional expenses and freight
before computing "Net Sales" for purposes of computing the
royalty. Significantly, the Court agreed with the Company
that the Company had the right to distribute at private
label derivative products that were either flour based or
sauces and other products that were not flour based and
found that all products presently sold by the Company fell
into one of the two categories.
10
However, the Court did find that the Company was in
technical breach of the Agreement because its products were
located in one store in the Trio's exclusive territorial
area in the North End of Boston, but awarded only nominal
damages of $1.00. The Court also concluded that the Company
could not sell under private label "other products" which
are flour based and, with respect to the Company's other
counterclaims, including its claim for abuse of process, the
Court found against the Company on the grounds that the
Company had failed to establish these claims.
In computing royalties owed, the Court declined to permit
the Company to adjust its royalty payments retroactively
before April 1, 1992. The Court's findings therefore
required an adjustment of royalties paid for fiscal year
1992 and 1993 in the amount of $39,881, which has been paid
by the Company.
II. Trios File Libel Lawsuit Against the Company in 1994
----------------------------------------------------
Genevieve Trio and Anthony Trio v. Original Italian Pasta
---------------------------------------------------------
Products Co., Inc. and Paul K. Stevens. Middlesex Superior
------------------------------------
Court (Cambridge, Massachusetts), C.A. No. 94-6910.
On December 5, 1994 the Trios filed their third lawsuit
against the Company and Paul K. Stevens. The complaint
alleges that the Company and Mr. Stevens libeled the Trios
by sending shareholders a document, typed on official
stationary, which states that the Trios sought to extort
money from the Company.
The Trios claim that the documents accuse them of having
committed a crime and constitute libel per se.
The investigation by the Company to date shows that the
allegations in the Trios' complaint rely on language which
appears in the "Legal Proceedings" section of the Forms 10K
attached to the Company's 1992 and 1994 Annual Reports.
Each of those Forms describes the allegations in, and the
status at year's end of, the Trios' 1991 lawsuit against the
Company. The Form 10K language, which the Trios allege is
defamatory, is found in a paragraph describing the Company's
counterclaims in the 1991 lawsuit. It is capitalized below:
The Company filed its answer and counterclaim on
February 25, 1992. In its counterclaim, the Company
sought a declaration of its rights and obligations
under the Agreement as they pertain to payment of
royalties with respect to both new and existing
products and to the sale of products under private
11
label. In addition, the Company sought damages for
abusive process, interference with business relations,
and unfair and deceptive trade practices, alleging that
THE TRIOS' ACTIONS IN PURSUING PAST AND PRESENT
LITIGATION ARE A MALICIOUS ATTEMPT TO EXERT THEIR
INFLUENCE AND CONTROL OVER THE OPERATIONS OF THE
COMPANY AND TO EXTORT ADDITIONAL MONEY TO WHICH THEY
ARE NOT ENTITLED.
The contested language is taken directly from statements
contained in the legal pleadings which the Company filed
with the Court in the 1991 lawsuit. The Company's answer
and counterclaim in the 1991 litigation refers to the Trios'
1989 lawsuit against the Company, contend that the suit
lacked any basis in fact or in law, and aver that the Trios
maintained the 1989 action for the "ulterior purpose [of
enabling] the Trios to exert control of the manufacturing
operations of the Company and [extracting] from the Company
additional monies because of the Trios' dissatisfaction with
the royalty payments they were receiving under the
agreement" and that the Trios' complaint, "like the previous
litigation, is without basis in fact or in law. Like its
predecessor, it is in furtherance of the Trios' malicious
and ulterior purpose of exerting their influence and control
over the operations of the company and extorting additional
monies from the company to which the Trios' are not
entitled."
The Company filed its answer on December 23, 1994. In its
answer, the Company asserts, among other defenses, that the
statement at issue was one of opinion and not a statement
that the Trios had committed a criminal act, was made in an
official document issued in compliance with the law (the
SEC requires the Company to report and describe the previous
litigation in its Form 10K) and was privileged because it
related to and was contained within legal pleadings filed
with the Court.
The Trios seek an as yet unspecified amount of monetary
damages, as well as interest, costs and reasonable attorneys
fees, for slander, libel, injurious falsehood, malicious
interference with a contractual right, and fraud.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None filed
Exhibits as part of this report are listed below:
Exhibit Number Description
11 Computation of Earnings
per share
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant had duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
Registrant
October 26, 1995 Peter Stevens
Date Peter Stevens
Chief Financial Officer
Treasurer
13
EXHIBIT 11
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
CALCULATION OF EARNINGS PER SHARE
Three months ended September 30, 1995
PRIMARY FULLY DILUTED
------- -------------
Net loss $ 80,000 $ 80,000
Interest reduction (assumed) -- --
--------- ---------
Adjusted net loss 80,000 80,000
========= =========
Common shares outstanding 1,900,000 1,900,000
Weighted average options and
warrants outstanding 506,000 506,000
Limitation assumed purchases 20% 380,000 380,000
--------- ---------
2,026,000 2,026,000
========= =========
Earnings per share $ (0.04) $ (0.04)
========= =========
14