THIS DOCUMENT IS A COPY OF THE FORM 10KSB FILED ON
OCTOBER 16, 1996 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
Total number of pages: 42
Exhibit Index Page: 16
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
- --X-- Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 (Fee Required)
- ----- For the fiscal year ended June 30, 1996 or
Transition report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934. (No fee
required)
For the transition period ------- to -------
Commission file number 0-16161
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-2877789
(State or other jurisdiction (IRS Employer
of incorporation or identification
organization) number)
36 AUBURN STREET, CHELSEA, MA. 02150
(Address of principal (Zip Code)
Executive Offices)
(617) 884-5211
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of
the Act: NONE
Securities registered pursuant to Section 12 (g) of
the Act: NONE
COMMON STOCK, $.02 PAR VALUE
(Title of class)
Check whether the issuer: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the
Exchange Act during the past twelve 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 ninety days.
YES ---X-- NO ------
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in
this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in
Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year:
$15,306,00 for the fiscal year ended June 30, 1996.
Aggregate market value of the registrant's voting stock
held by non-affiliates as of September 16, 1996: Common Stock,
$.02 par value: $1,520,885
Number of shares outstanding of each of the registrant's
classes of common stock, as of September 16,1996: Common Stock,
$.02 par value: 1,899,885
shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Form S-18 Registration
Statement (File no. 0-16161) and Amendment Number 1 and
3 thereto, as well as portions of the Company's
FORM 10-KSB filed on September 27, 1995 for the
Company's fiscal year ended June 30, 1995, are
incorporated by reference in response to Part IV,
Item 14 (a) (3).
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CURRENT DEVELOPMENTS. ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
was incorporated and has been selling fresh pasta and sauce
products since 1985. During fiscal 1996, the Company experienced
an increase in sales due to the Sales to a New Warehouse Club
customer. Although the Company experienced a profit for the year
ended June 30,1996, the Company did lose sales of a division of
another warehouse club (in the fourth quarter of 1996). The financial
statements included in the reports provide information
regarding the performance of the Company. (See Part III,Item .)
GENERAL. The Company manufactures, markets and distributes high
quality Italian food products consisting of premium fresh pasta
products and fresh tomato-based (including marinara and
mushroom), pesto and alfredo sauces, and continues to evaluate
the feasibility of manufacturing, marketing and distributing
other pasta sauces, pasta entrees and side dishes.
The Company uses recipes developed over the past thirty years by
Geneveive Trio and members of her family and, in the case of its
tortellini pasta and alfredo sauce, recipes and processes
developed by Edward Tolini, a former chef at several noted Boston
area restaurants and a culinary arts instructor. Rosario Del
Nero developed the Company's tortelloni and ravioli products.
(SEE PART I, ITEM 1 - DESCRIPTION OF BUSINESS - LICENSE
AGREEMENT.)
Sales of the Company's products are made through brokers and
distributors, as well as direct to certain accounts. The Company
has a network of 12 food brokers who present the products to
retail supermarket chains. Sales of products are also made
through 15 distributors, which provide warehousing and delivery, to
a variety of supermarket chains, independent supermarkets, and
wholesale clubs along the east and west coasts and in the north
central, southeastern and southwestern states. Some products are
sold at the Trio family retail location in Boston and some
products are sold under private label for retailers. The Company
strives to increase its distribution based upon product quality
and unique, attractive packaging concepts which present the
products in fashionable, appealing formats.
The Company leases a 24,519 square foot manufacturing,
distribution and administrative facility in Chelsea,
Massachusetts. (SEE PART I, ITEM 2 - DESCRIPTION OF PROPERTY.)
LICENSE AGREEMENT. In July 1985, the Company entered into an
agreement with Anthony and Genevieve Trio (the "TRIO'S") which,
as amended, gives the Company the exclusive, perpetual and
irrevocable right and license to use at wholesale the recipes,
trade secrets, information, processes and methods (the "RECIPES")
used in producing a variety of pastas and sauces and prepared pasta entrees.
In addition, the Company received the exclusive right and license
to market and sell products which are based on the Recipes at
wholesale and to use the name "TRIO'S" in connection with the
promotion, advertising and sale of products at wholesale. In
exchange for the licenses and rights, the Trios receive royalties
equal to a percentage of the net sales of the products by the
Company. The royalty rate, originally 5% in the first year of the
agreement, is 2% through the year 2005. A reduced royalty rate
(1% in fiscal year 1996) applies to products sold under the
"TRIO'S" name, but made with recipes not provided by the Trios.
The Trios are subject to a non-competition provision except with
respect to the operation of retail stores, which the Trios may
expand, license or franchise. The Company is not aware of any
such licensed or franchised stores. The Company and the
Company's President are subject to a non-competition provision
which limits the Company's right to sell products at retail
except through a factory retail outlet at the Company's facility
in Chelsea, Massachusetts, and which restricts their ability to
sell the products on a wholesale basis in the area surrounding
the Trio's original retail store in Boston, Massachusetts. The
Trios have also agreed to hold all Recipes in confidence, to keep
them secret and not to use them, except to produce products for
sale in their retail store currently located in Boston,
Massachusetts, and in other retail stores which they may open in
the future. The Trio's have further agreed not to disclose the
Recipes to others, except to their employees or to licensees and
franchisees of the Trios which have retail operations, so long as
such employees, licensees and franchisees have executed and
delivered confidentiality agreements for the benefit of the Trios
and the Company. The agreement also requires that Genevieve,
Anthony and Louis Trio provide such consultation and assistance
to the Company as the Company may reasonably require to produce,
market and sell the products, subject to the Trios' reasonable
availability, in exchange for which the Trios received a fee of
$100,000 paid on August 24, 1987. (SEE PART I, ITEM 3 - LEGAL
PROCEEDINGS.)
PRODUCTS AND PRODUCT DEVELOPMENT. The Company currently
manufacturers thirty-seven pastas and pasta sauces at its Chelsea,
Massachusetts facility. The pasta products that the Company
currently produces include various flavors of cappellini (angel's
hair), linguine, fettuccine, tortellini, tortelloni and ravioli.
The Company continues to evaluate the feasibility of
manufacturing, marketing and distributing other pasta sauces,
pasta entrees and side dishes.
All of the Company's products require refrigeration and,
therefore, are transported in refrigerated containers. In
addition, all products are displayed for the consumer in
refrigerated cases.
DISTRIBUTION OPERATIONS. The Company has retained 14 food
brokers, who specialize in presenting the products for retail
supermarket distribution along the east and west coasts and in
the north central, southeast and southwestern states. The
Company also distributes its products through non-exclusive
distribution arrangements with 20 distributors who provide
warehousing and delivery to its customers. The Company also
sells its products on a direct basis to certain supermarket
customers and to wholesale clubs. Sales to Sam's Club, a
warehouse club, accounted for 39% of sales for the year ended
June 30, 1996.
MARKETING. The Company's products are sold principally through
brokers and distributors to 50 supermarket chains, and to
independent supermarkets, delicatessens and clubs which together
encompass approximately 3000 retail outlets located along the east
and west coasts and in the north central, midwestern,
southeastern and southwestern states. The Company seeks to
increase the distribution of existing and newly introduced
products in current markets as well as to expand distribution
into new geographic areas.
MANUFACTURING PROCESS. The Company's manufacturing facility is
comprised of leased space in Chelsea, Massachusetts. (SEE PART
I, ITEM 2 - DESCRIPTION OF PROPERTY.)
RAW MATERIALS AND SUPPLIES. The Company uses high quality flour,
eggs, tomatoes, garlic, cheeses and a blend of soybean and
imported olive oils and various spices in the manufacture of its
products.
There are ample supplies of all critical raw materials, and the
Company expects no raw material shortages in the forseeable
future. Seasonal factors do not affect the availability of raw
materials, but have periodically resulted in some price
increases, which have not had a material adverse impact on the
Company's gross margins. Should increases become substantial,
the Company would consider increasing its prices to its wholesale
customers.
PATENTS AND TRADEMARKS. The recipes and manufacturing processes
used by the Company (whether or not licensed from the Trios) are
not subject to patent protection. Although the recipes and
manufacturing processes are treated as proprietary trade
information and are being maintained as confidential, no
assurance can be given that confidentiality can or will be
maintained or that others cannot develop similar or superior
formulas or products or duplicate the Company's manufacturing
processes.
SEASONAL ASPECTS OF BUSINESS. The Company's business is not of a
seasonal nature.
WORKING CAPITAL. The Company's inventory turnover is rapid. The
Company rarely offers extended payment terms to customers.
Extended payment terms are not typical in the industry.
Accordingly, the Company has no extraordinary working capital requirements.
DEPENDENCE ON A SINGLE OR FEW CUSTOMERS. The Company sells its
products through distributors and food brokers and direct to
customers. (SEE PART 1, ITEM 1 - DESCRIPTION OF BUSINESS -
DISTRIBUTION OPERATIONS AND MARKETING.)
The Company's customer base includes supermarket chains,
independent supermarkets and wholesale clubs in the United
States. For the year ended June 30, 1996, two customers
represented 61% of net sales. For the year ended June 30,
1995, one customer represented 45% of net sales.
The Company does not have written contracts with its
distributors, and such contracts customarily are not obtained in
the trade. The Company does have written agreements with its
food brokers which specify, among other things, the rate of
commission, the territory covered and the term of the agreement.
BACKLOG. The Company ships all of its orders within five
working days of receipt. The perishable food industry does not
operate off a back load system. No backlog exists for orders
placed on or prior to June 30, 1996.
COMPETITION. The Company faces intense competition in all areas
of its business. The Company's products compete with established
brand name dried pasta products which are substantially less
expensive including Prince (TM), Ronzoni (TM), Mueller's (TM) and
Goodman's (TM). These competitors have much greater resources
than the Company, including greater advertising budgets and
easier access to supermarket shelf space.
In the fresh pasta products category, the Company competes with
Contadina's Pasta & Cheese (Long Island City, New York), from
Nestle, as well as DiGiorno (TM) from Kraft Corporation. The
fresh and dried pasta companies which are competitors also have
their own lines of pastsa sauces which compete with the Company's
sauces. The Company believes that the high quality of its
products and their attractive packaging allow the Company to
remain competitive.
EMPLOYEES. As of October 4, 1996 the Company employed 103 full-
time employees including eight in sales, five in administration, four in
distribution and 86 in manufacturing.
ENVIRONMENTAL AFFAIRS. Compliance with Federal, State and local
provisions regulating the discharge of materials into the
environment have no material effect on capital expenditures or
the operations of the Company.
FOREIGN OPERATIONS. The Company has no foreign operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's manufacturing, distribution and administrative
facility consists of 24,519 square feet of leased space in Chelsea,
Massachusetts with approximately 11,870 square feet devoted to
manufacturing, 6,059 square feet to warehousing, 1,990 square feet to
offices and 4,600 square feet to cold storage and distribution.
These facilities are occupied under a ten- year lease which
expired in March 1996. This lease has been extended for ten years.
The current annual rent under the lease is $132,595, until the
expansions by the landlord are completed. Then the rent will be
increased to $266,612 over the following 10 years. The expansions are
expected to be completed by November 1996.
The lease also provides that the Company must pay a
pro-rata share of the insurance, property taxes and other
operating costs of the premises in which the Company's facilities
are located; the Company's share of these costs is approximately
$ 31,000 per year for the year ended June 30, 1996.
The Company believes its premises are adequate for its current
needs.
The Company owns substantially all of the equipment at its
manufacturing facility. Substantially, all of the Company's
equipment serves as part of the collateral for the Company's
financing agreements.
ITEM 3. 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.
I. THE TRIOS' 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 Trios have appealed
from the judgment and, as a result of that appeal, the Company
has cross-appealed.
The Trios' 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
"Trios"). 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 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 product under
private label. In addition, the Company brought counterclaims
for abusive process, interference with business relations, and
unfair and deceptive trade pratices. 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 Trios' 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'
claim 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 these two categories.
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 Trios' 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.
Both parties' appellate briefs were filed in April and August 1996,
respectively. The Trios filed a Reply Brief to the Company's cross appeal
on August 5,1996 and the Company will file a Sur Reply. A date for oral
argument has not been scheduled, but is likely to occur within the next six
to twelve months. A decision by the Appeals Court could take as long as
one year or more.
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 stationery, 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 constitutes 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 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 previos litigation,
is without basis in fact or in law. Like its predecessor, it is 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.
On June 17,1996, the Company filed a motion for summary judgement seeking
to dismiss all of the Trios' claims on grounds that they were barred by the
doctrine of res judicata, that they constitute absolutely privileged statements
made in conjunction with the pending court proceeding, and that the Company's
republication in its Forms 10K of allegations made in legal pleadings is
non-actionable hyperbole, privileged opinion protected by the First
Amendments. The Trios filed an Opposition to the Company's Motion for Summary
Judgement. The Court heard oral argument on the Company's summary judgement
motion on August 16,1996. The court entered judgement on September 27,1996 in
the Company's favor on its summary judgement motion, dismissing all counts of
the Trios' complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1. MARKET INFORMATION. The Company's Common Stock is
traded in the over-the-counter market and is quoted on the OTC
bulletin board of the National Association of Securities Dealers,
Inc., under the symbol ORIG.
The following table reflects the high and low bid and ask
quotations for the periods indicated.
Quarter Bid Ask
Ended High Low High Low
- ------- ---- --- ---- ---
09/30/94 4 2 5 3/4 3 3/4
12/31/94 3 1/4 7/8 6 3
03/31/95 3 7/8 4 1/2 2 1/2
06/30/95 2 1/8 4 1
09/30/95 1 1/2 1/4 3 3/4
12/31/95 7/16 1/8 1 1/8 1/4
03/31/96 1 1/8 1/4 1 1/2 3/8
06/30/96 1 1/2 11/16 1 3/4 1
2. HOLDERS OF COMMON STOCK. As of September 13, 1996 there were
86 holders of record of the Company's Common Stock. The Company
believes that there are approximately 800 beneficial owners of
its common stock who hold their shares in street or nominee
names.
3. DIVIDEND POLICY. The Company has never paid a cash dividend
on its Common Stock. The present policy of the Company is to
retain all of the Company's earnings, if any, to provide funds
for the operation and expansion of its business. In addition,
under the terms of loan agreements with one of the Company's
institutional lenders, the Company may not declare or pay any
dividends so long as any of the Company's obligations with
respect to said loan are outstanding.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Financial Data
(In thousands, except share and per share amounts)
Fiscal Year Ending June 30
1996 1995 1994 1993
---- ---- ---- ----
Net Sales $15,306 $13,988 $16,436 $11,557
Net Income
or (Loss) 555 (798) 919 647
Net Income
(Loss) Per
Share -
Fully Diluted .27 (.42) .46 .37
Weighted Average
Shares
Outstanding 2,137,000 1,899,000 2,159,000 2,059,999
Working Capital
Reserve
(Deficiency) (745) (1,196) (65) (497)
Total Assets 3,180 3,020 4,057 3,724
Long Term
Obligations
Net of Current
Portion 183 117 1,675 1,932
Shareholders'
Equity (Deficit) 585 30 35 (884)
Book Value
Per Weighted
Average Shares
Outstanding .27 0.02 0.02 (0.43)
Fiscal Year Ending June 30
1996 1995 1994 1993
---- ---- ---- ----
(Decrease)
Increase
in Net
Sales 9% (15%) 42% 73%
Gross
Profit
as a
Percentage
of Net
Sales 37% 35% 39% 42%
Selling,
General &
Administrative
Expense as a
Percentage
of Net Sales 33% 40% 32% 34%
Income from
Operations
as a Percentage
of Net Sales 4% (5%) 7% 8%
Interest
Expense as a
Percentage of
Net Sales 0% 1% 1% 2%
RESULTS OF OPERATIONS:
Year ended June 30, 1996 as compared to the Year ended June
- ---------------------------------------------------------------
30, 1995.
- ---------
Net Sales for the year ended June 30, 1996 were $15,306,000
versus $13,988,000 for the same period last year. Management believes
that this increase of 9% is attributable to greater sales in the Company's
products to a new customer, Sam's Club (A Warehouse Club Retailer)
and partially offset by the loss of certain Price Costco stores.
Gross profit for the year ended June 30, 1996 was 37% of net sales
as compared to 35% for the year ended June 30, 1995. The Company
attributes this increase in gross profit margin to its increased sales volume
thus utilizing its production facilities more efficently.
Selling, general and administrative expenses decreased to $5,033,000 from
$5,589,000 for the year ended June 30, 1995, and declined as a percentage
of net sales to 33% from 40% in fiscal year 1995. This decrease was mainly
due to the abscence of legal costs relating to the Trios' lawsuit, as well as
decreased promotional, advertising and other discretionary costs.
Income from operations for the year ended June 30, 1996 was $681,000
or 4% of net sales compared to loss from operations of $639,000
or 5%, for the year ended June 30, 1995.
Interest expense was $72,000 or 0% of net sales, for the year
ended June 30, 1996 versus $148,000 or 1% for the same period
last year. This decrease resulted from repayment of part of the
Company's debt partially offset by increased interest rates.
Net income per common share was at $0.27 for the year ended June 30,
1996 versus ($0.42) per common share for the year ended June 30,
1995.
Year ended June 30, 1995 as compared to the year ended June
- ---------------------------------------------------------------
30, 1994.
- ---------
Net sales for year ended June 30, 1995 were $13,988,000 versus
$16,436,000 for the same period last year. Management believes
that this decrease of 15% is primarily attributable to
discontinuance of the Company's products in certain divisions of
PriceCostco.
Gross profit for the year ended June 30, 1995 was 35% of net
sales as compared to 39% for the year ended June 30, 1994. The
Company attributes this decline in gross profit margin to lower
warehouse club sales and higher spoilage from retail supermarket
sales.
Selling, general and administrative expenses increased to
$5,589,000 from $5,229,000 for the year ended June 30, 1994
increasing as a percentage of net sales to 40% from 32%. This
increase was mainly due to higher marketing expenses.
Loss from operations for the year ended June 30, 1995 was
$639,000 or 5% of net sales compared to income from operations of
$1,184,000 or 7% for the year ended June 30, 1994.
Interest expense was $148,000 or 1% of net sales, for the year
ended June 30, 1995 versus $217,000 or 1% of net sales for the
same period last year. The decrease resulted from repayment of
part of the Company's debt partially offset by increased interest
rates. Repayment of debt included the reduction of debt to Katy
Industries, Inc. due to their exercise of 453,585 warrants at
$1.75 per share reducing the principal by $793,774.
Net loss per common share was at $0.42 for the year ended June
30, 1995 versus $0.46 in net income per common share for the year
ended June 30, 1994.
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 June 30,1996, the Company's current liabilities exceed current
assets by $745,000.
The Company has a line of credit available from its primary bank
lender (the "BANK"); $125,000 remains available to the Company
under the line of credit. The Company must repay the $188,000
currently drawn on the line of credit by making principal
repayments of $6,250 and $8,333 per month, with all such principal
to be repaid on or before December 1999.
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 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.
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 sixty equal monthly
installments of $2,000 (which includes imputed interest) which
began in August 1992.
In December 1989, the Company entered into an agreement with Katy
Industries, Inc. 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 due on June 11,
1996. The agreement was amended again on May 16, 1996 to call for
monthly payments of $18,750, plus interest, until December 11, 1996
in lieu of the June 11, 1996 balloon payment. On December 11, 1994
Katy Industries, Inc. exercised warrants 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 will experience
initial losses before improvement. the sum of prior years' net losses are
impairing the Company's ability to continue its operation because those
losses were funded, in part, by debt which must be repaid out of current
cash flows. In addition, the Company is undergoing plant renovations to
meet production, new product and diversification demands, which will
require increased funding. The 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 expansion and
working capital requirements.
.
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Report of Independent Accountants 27
Balance Sheet As of June 30, 1996 and 1995 28
Statement of Operations - Years ended June 30, 1996, 29
1995 and 1994
Statement of Shareholders' Equity - Years ended 30
June 30, 1996, 1995 and 1994
Statement of Cash Flows - Years ended 31
June 30, 1996, 1995 and 1994
Notes to Financial Statements 32-42
(a) 1. Financial Statements:
The following documents are filed as part of this report:
Report of Independent Accountants.
Balance Sheet - As of June 30, 1996 and 1995.
Statement of Operations - Years ended June 30, 1996,
1995 and 1994.
Statement of Shareholder's Equity - Years ended June 30,
1996, 1995 and 1994.
Statement of Cash Flows - Years ended June 30, 1996,
1995 and 1994.
All financial statement schedules are omitted because they are not
applicable or are not required, or because the required
information is included in the financial statements or
the notes thereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
1. The Executive Officers and Directors of the Company
are as follows:
Name Age Position Since
---- --- -------- -----
Paul K. Stevens 50 Chairman 1985
of the
Board, CEO,
President
Steven S. Zenlea 40 Director 1994
Walter D. Wekstein 64 Clerk 1985
Director 1986
Peter Stevens 53 Treasurer 1990
Paul K. Stevens founded the Company in June 1985. From 1978 to
1985, Mr. Stevens was a partner in the management consulting firm
of Stevens, Brown & Company of Newburyport, Massachusetts, which
engaged in management consulting to high growth, privately held
small businesses on a contract basis.
Steven S. Zenlea was President of Original Italian Pasta Products Co. Inc.
He rejoined the Company as the Vice President of Manufacturing in June,
1992. From June 1991 through May 1992. Mr. Zenlea was an Acount
Respresentative for Herbert V. Shuster, Inc., a Quincy, MA foods research
facility. Mr. Zenlea had previously been employed by the Company from
February 1988 through May 1991. Mr. Zenlea tendered his resignation
effective October 11,1995. He was elected a Director at the last Annual Meeting.
Walker D. Wekstein was elected as the Clerk for the Company on
June 20, 1985. He bacame a Director of the Company in May 1986.
Mr. Wekstein is a partner in the law firm of Gadsby &
Hannah LLP, Boston, Massachusetts, which has been counsel to the
Company for more than five years.
Peter Stevens is the Treasurer and Chief Financial Officer of the
Company. Mr. Stevens worked as the Vice President and Controller
of the International Biotechnologies, Inc., a biotech company in
New Haven, Connecticut from 1984 through 1989. There is no
family relationship between Peter Stevens and Paul K. Stevens.
Each of the Company's Directors has been elected to serve until
the next annual meeting of shareholders and until his successor
has been elected and qualified. Officers are appointed annually
by the Company's Directors.
Pursuant to a consulting arrangement entered into between the
Company and Gro-Vest, Inc. ("GRO-VEST") in May 1986, Gro-Vest has
the right to nominate an individual to serve on the Company's
Board of Directors for whom Paul K. Stevens has agreed to vote.
To date, Gro-Vest has not exercised that right.
2. OTHER SIGNIFICANT EMPLOYEES:
None
3. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
Peter Stevens failed to timely file Form 5 to report one
transaction.
***************************
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information
concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the
other highly compensated executive officers of the Company
(determined as of June 30, 1996) (hereafter referred to as the
"named executive officers") for the fiscal year ended June 30,
1996. Only officers earning annual cash compensation, including
salary and bonus, in excess of $100,000 are listed.
Summary Compensation Table
Long Term
Compensation
Awards
Name and Annual Compensation Securities
Principal Underlying
Position Year Salary ($) Bonus ($) Options/SARs (#)
- -------- ---- ---------- --------- ----------------
Paul K. 1996 124,000 10,000 100,000
Stevens,
Chairman 1995 103,533 25,000 0
of the
Board, 1994 121,593 26,940 110,000
CEO,
President
Steven S. 1996 29,856 0 0
Zenlea,
President 1995 91,752 6,000 20,000
1994 84,640 18,000 30,000
The following table sets forth certain information concerning the
grant of stock options in the fiscal year ended June 30, 1996 to
the named executive officers under the Company's 1987 Incentive
Stock Option Plan:
Percent of
Number of Total
Securities Options/SARs
Underlying Granted to Excercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/SH) Date
- ---- ------------ ------------ ------------ ----------
Paul K. 1000,000 40% 0.50 12/02/05
Stevens
The following table sets forth certain information concerning the
unexercised options held as of June 30, 1996 by the named
executive officers; no options/SARs were exercised by name
executive officers during the fiscal year ended June 30, 1996:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
----------------------------------------------
YEAR AND FISCAL YEAR END OPTION/SAR VALUES
------------------------------------------
Number of
securities Value of
underlying unexercised In-
unexercised the-Money
Options/SARs Options/SARs
at fiscal at Fiscal
year end (#) Year end ($)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Paul K.
Stevens 170,000 100,000 $(29,550) $112,500
COMPENSATION OF DIRECTORS. No director receives any compensation
for his services.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Set forth below is information concerning ownership of the
Company's Common Stock by all persons who directly or
beneficially own more than 5% of the Company's Common Stock, and
by each Director and by all Officers and Directors as a group, as
of September 30,1996. All ownership is direct unless otherwise
noted.
Name and Address of Amount and Nature of Percent
Beneficial Owners Beneficial Ownership Owned (1)
- ------------------- -------------------- ---------
Katy Industries, Inc.
6300 So. Syracuse Way,
Suite 300
Englewood, CO 80111 453,585 19%
Paul K. Stevens,
Chairman of the Board, 445,700 (2) 19%
CEO, President
1088 Main Street
Hingham, MA 02043
Steven S. Zenlea, 60,000 (3) 3%
Director
3 Sawmill Pond Road
Sharon, MA 02067
Peter Stevens, 51,567 (4) 2%
Treasurer
130 Brookline Street
Needham, MA 02192
Walter D. Wekstein 10,000 (5) *
Clerk, Director
282 Beacon Street
Boston, MA 02116
All Officers and Directors 561,267 (2,3,4,5) (6) 24%
as a group ( persons)
* Less than one percent.
(1) Includes 1,899,885 shares issued and outstanding plus shares
subject to currently exercisable options and or warrants
held by th person or group.
(2) Includes 170,000 shares subject to currently exercisabl options.
(3) Includes 20,000 shares granted in fiscal year 1995 to replace expired
options. Includes buyback of the 10,000 shares by Company in
August, 1995. All shares are subject to currently exercisable options.
(4) Includes 36,567 shares subject to currently exercisable options, when used.
(5) Represents shares subject to currently exercisable options.
(6) Includes 282,567 shares subject to currently exercisable options and
warrents.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits:
NO. DESCRIPTION
- --- -----------
3.1 Articles of Organization of Registrant, as amended. (2)
3.2 By-laws of Registrant. (1)
4.1 Specimen Common Stock Certificate. (2)
4.2 Specimen Preferred Stock Certificate. (1)
4.3 Specimen Underwriter's Warrant Certificate. (2)
4.4 Form of Underwriter's Warrant Agreement. (4)
4.5 Articles of Organization of Registrant, as amended.
(See exhibit 3.1) (4)
4.7 Promissory Note from Registrant to Thrift Institutions
Fund for Economic Development, dated October 9, 1986 (1)
4.8 Form of Incentive Stock Option Agreement (1) *
4.9 Form of Non-Qualified Stock Option Agreement
(for Corporations). (1)
4.10 Form of Non-Qualified Stock Option Agreement
(for Individuals). (1) *
4.12 Promissory Note dated August 11, 1989 from Danvers
Savings Bank. (5)
4.13 Warrant Agreement dated August 11, 1989 with Danvers
Savings Bank. (5)
4.14 Warrant Agreement dated August 11, 1989 with the Thrift
Institutions Fund for Economic Development. (5)
10.1 Agreement dated July 21, 1985, as amended, between the
Registrant and Tony and Genevieve Trio. (1)(2)
10.2 Lease dated March 25, 1986 between the Registrant and
Admiral Hill Associates Limited Partnership, covering
the leased premises at 36 Auburn Street, Chelsea, MA
02150. (1)
10.5 Assignment Agreement dated May 19, 1987, assigning to
Gro-Vest, Inc. the rights of Registrant and Paul K.
Stevens, respectively, under the Call Agreement to
redeem and to purchase a certain percentage of
Registrant's issued and outstanding Common Stock. (2)
10.6 Agreement dated May 16, 1986 between the Registrant and
Gro-Vest, Inc. (1)
10.7 Consulting Agreement between the Registrant and Edward
Tolini and Susanna Harwell-Tolini. (2)
10.8 Agreement dated August 4, 1986 between the Registrant
and Catherine Cremaldi. (1)
10.9 Registrant's Incentive Stock Option Plan. (1) *
10.11 Loan Agreement dated October 9, 1986 between the
Registrant
10.12 Guaranty of Paul K. Stevens, dated October 15, 1985.
(See Exhibit 4.6) (4)
10.14 Agreement dated August 27, 1988 between the Registrant
and Rosario DelNero. (4)
10.15 Security Agreement dated August 11, 1989 regarding the
Line of Credit with Danvers Savings Bank. (5)
10.16 Credit Line Agreement dated August 11, 1989 with Danvers
Savings Bank. (5)
10.17 Warrants issued to Katy Industries, Inc., on December
11, 1989 as a condition of Loan Agreement. (5)
10.18 Katy Industries, Inc., Debt Restructuring Agreement
effective October 15, 1991. (7)
10.19 Warrants issued September, 1991 to Bank for restructuring
of Line of Credit to eight year term note draft. (8)
10.20 Agreement between Massachusetts Product Development
Corporation and the Company executed in August, 1991. (8)
10.21 Amendment to Massachusetts Product Development
Corporation and the Company executed August, 1992. (8)
10.22 Agreement between Registrar and Transfer Company and the
Company executed January, 1992. (8)
10.23 Amendment to property lease between Admiral Hill and the
Company. (9)
10.24 Amendment to debt agreement with Katy Industries, Inc.
(10)
10.25 Employment Agreement December 11, 1989 by and between
Original Italian Pasta Products Co. Inc., a Massachusetts
Corporation (the "Company"), and Paul K. Stevens (the
"Employee"). Document number eight of the $2,000,000
Note and Warrant Purchase Agreement with Katy Industries,
Inc. dated December 11, 1989. (10)
10.26 $2,000,000 Note and Warrant Purchase Agreement with Katy
Industries, Inc. dated December 11, 1989. (10)
11. Statement regarding computation of per share earnings.
(b) Reports on Form 8-K filed during the last quarter of the
period covered by this report: NONE
(1) Incorporated by reference to the Company's Registration
Statement on Form S-18 filed with the Commission on
June 16, 1987 (Reg. No. 33-15111-B).
(2) Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form S-18 filed with
the Commission on July 21, 1987 (Reg. No. 33-15111-B).
(3) Incorporated by reference to Amendment No. three to the
Company's Registration Statement on Form S-18 filed with
the Commission on August 4, 1987 (Reg. No. 33-15111-B).
(4) Incorporated by reference to Form 10-K filed with the
Commission on September 27, 1988.
(5) Incorporated by reference to Form 10-K filed with the
Commission on October 12, 1989.
(6) Incorporated by reference to Form 10-K filed with the
Commission on October 26, 1990.
(7) Incorporated by reference to Form 10-K filed with the
Commission on October 30, 1991.
(8) Incorporated by reference to Form 10-K filed with the
Commission on September 28, 1992.
(9) Incorporated by reference to Form 10-K filed with the
Commission on October 22, 1993 and Form 10-K/A filed on
March 7, 1994.
(10) Incorporated by reference to Form 10-KSB filed with the
Commission on September 15, 1994 and Form 10-KSB/A filed
on October 24, 1994.
(11) Filed as Exhibits to this Form 10-KSB.
* Management Contract or Compensatory Plan.
Signatures:
Pursuant to the requirements of Section 13 or 15 (d) 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.
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
/s/Paul K. Stevens
BY: ---------------------------------------
Paul K. Stevens, Chief Executive Officer
Date: October 11, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the date
indicated.
Signature Title Date
- ---------- ------ -----
By: /s/Paul K. Stevens
- ------------------- Chairman of the
Paul K. Stevens Board, CEO,
President October 11,1996
By: /s/Peter Stevens
- ------------------ Treasurer
Peter Stevens October 11,1996
By:/s/Steven S. Zenlea
- ------------------ Director
Steven S. Zenlea October 11,1996
By: /s/Walter D. Wekstein
- ------------------ Clerk, Director
Walter D. Wekstein October 11,1996
EXHIBIT INDEX
- -------------
No. Description Page No.
- --- ----------- --------
Original Italian Pasta Products Co., Inc.
Financial Statements
June 30, 1996
Report of Independent Accountants
October 11, 1996
To the Board of Directors and Shareholders of
Original Italian Pasta Products Co., Inc.
In our opinion, the accompanying balance sheet and the
related statements of operations, of shareholders' equity
and of cash flows present fairly, in all material respects, the
financial position of Original Italian Pasta Products Co.,
Inc. at June 30, 1996 and 1995 and the results of its operations
and its cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company
has an accumulated deficit and a working capital deficiency as of
June 30, 1996, which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to
these matters are also discussed in Note 1. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Price Waterhouse LLP
Original Italian Pasta Products Co. Inc.
Balance Sheet
- -----------------------------------------------------------------
June 30,
1996 1995
---- ----
ASSETS
- ------
Current Assets
Cash and cash equivalents $195,000 $98,000
Accounts Receivable, net of allowance
for doubtful accounts and returns of
$167,000 and $173,000 at June 30,
1996 and 1995, respectively. 665,000 754,000
Inventories 745,000 818,000
Prepaid expenses and other current 62,000 7,000
assets
-------- -------
Total current assets 1,667,000 1,677,000
Property and equipment, net 1,382,000 1,290,000
Other Assets 131,000 53,000
------- -------
Total assets $ 3,180,000 $ 3,020,000
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Current Liabilities
Current portion of long-term debt $ 238,000 $ 710,000
Current portion of capital lease 46,000 48,000
obligations
Accounts Payable 1,056,000 1,450,000
Accrued Expenses 1,072,000 665,000
Total current Liabilities 2,412,000 2,873,000
Long-term debt 112,000 -
Capital lease obligations 71,000 117,000
------ -----
Total liabilities 2,595,000 2,990,000
----- ----
Commitments and contingent liabilty (Note 8 and 9)
Shareholders' equity
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-
1,899,00 shares at June 30, 1996
and 1995 38,000 38,000
Additional paid-in capital 3,912,000 3,912,000
Accumulated deficit (3,365,000) (3,920,000)
Total shareholders' equity 585,000 30,000
Total liabilities and shareholders' $ 3,180,000 $ 3,020,000
equity
The accompanying notes are an integral
part of these financial statements.
Original Italian Pasta Products Co., Inc.
Statement of Operations
- ------------------------------------------------------------------
Year ended June 30,
1996 1995 1994
Net sales $ 15,306,000 $ 13,988,000 $ 16,436,000
Cost of goods sold 9,592,000 9,038,000 10,023,000
----- ----- -----
5,714,000 4,950,000 6,413,000
Selling, general, and
administrative expenses 5,033,000 5,589,000 5,229,000
---- ----- -----
Income (loss) from operations 681,000 (639,000) 1,184,000
Other (expense) income:
Interest income 2,000 1,000 2,000
Interest expense (72,000) (148,000) (217,000)
Other income 1,000 - -
---- ----- -----
Income (loss) before income
taxes 612,000 (786,000) 969,000
Provision for income taxes 57,000 12,000 50,000
---- ------ -----
Net income (loss) $ 555,000 $ (798,000) $ 919,000
Earnings (loss) per common
share Primary $ .28 $ (.42) $ .47
Fully diluted $ .27 $ (.42) $ .46
Common shares and equivalents
used in earnings (loss) per share
calculation 2,136,799 1,899,000 2,159,000
The accompanying notes are an integral
part of these financial statements.
Original Italian Pasta Products Co., Inc.
Statement of Shareholder' Equity
- --------------------------------------------------------------------
Aditional
Common Common paid-in Accumulated
Shares Stock Capital Deficit Total
June 30, 1993 1,446,000 $ 29,000 $ 3,128,000 $(4,041,000) $ (884,000)
Net income 919,000 919,000
------ -------
June 30, 1994 1,446,000 29,000 3,128,000 (3,122,000) 35,000
Exercise of
warrents 453,000 9,000 784,000 793,000
Net loss (798,000) (798,000)
------- ------ ------- -------- --------
June 30,1995 1,899,000 38,000 3,912,000 (3,920,000) 30,000
Net income 555,000 555,000
-------- -------
June 30,1996 1,899,000 $ 38,000 $ 3,912,000 $ (3,365,000) $ 585,000
------ ------
The accompanying notes are an integral
part of these financial statements.
Original Italian Pasta Products Co., Inc.
Statement of Cash Flows
Increase (decrease) in Cash and Cash Equivalents
- ------------------------------------------------------------------------------
Year ended June 30,
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 555,000 $ (798,000) $ 919,000
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 422,000 645,000 571,000
Decrease in net accounts receivable 89,000 348,000 90,000
Decrease (increase) in inventories 73,000 41,000 (30,000)
(Increase) decrease in prepaid expenses
and other current assets (55,000) 19,000 (11,000)
Increase in other assets (78,000) - (280,000)
(Decrease) increase in accounts payable (394,000) 208,000 383,000
Increase (decrease) in accrued expenses 407,000 (40,000) (12,000)
------ ------- ------
Net cash provided by operating
activities 1,019,000 423,000 864,000
------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment (514,000) (194,000) (500,000)
------- ------ -----
Net cash used by investing activities (514,000) (194,000) (500,000)
Cash flows from financing activities:
Proceeds from the issuance of debt - - 148,000
Principal repayment on capital lease
obligations (48,000) (70,000) (91,000)
Principal repayments om long-term debt(360,000) (356,000) (269,000)
----- ------- ------
Net cash used by financing activities (408,000) (426,000) (212,000)
------ ------ -----
Net (decrease) increase in cash and cash
equivalents 97,000 (197,000) 152,000
Cash and cash equivalents at
beginning of period 98,000 295,000 143,000
------ ------ -------
Cash and cash equivalents at
end of period $ 195,000 $ 98,000 $ 295,000
------ ------ ------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 69,000 $ 150,000 $ 225,000
Net cash paid during the year
for income taxes $ 65,000 $ 48,000 $ 40,000
During 1995, and 1994 capital lease obligations of $19,000, and $21,000,
respectively, were incurred when the Company entered into leases for
automobiles and equipment to be used in operations.
The accompanying notes are an integral
part of these financial statements
Notes to the Financial Statements
1. The Company and Significant Accounting Policies
Original Italian Pasta Products Co., Inc. (the "Company")
manufactures, markets, and distributes a variety of premium
pasta and pasta related products.
The Company has experienced recurring losses and as a result
has an accumulated deficit and working capital deficiency.
The Company anticipates an increase in sales during fiscal year
1997, and believes that an increase in sales volume will provide
sufficient liquidity for it to continue as a going concern.
Accordingly, the financial statements do not include any
adjustments relating to the recoverability and classification of
liabilities or any other adjustments that might be necessary
should the Company be unable to continue as a going concern.
A summary of significant accounting policies used by
the Company in the preparation of these financial statements
is as follows:
Cash and Cash Equivalents
For the purpose of reporting cash flows, the Company
considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
As of July 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115").
Under this standard, the Company is required to classify its
investments in debt and equity securities into one or more of
the following categories: held-to-maturity, trading or
available-for-sale. In accordance with FAS 115, securities
available-for-sale are recorded at fair market value and any
unrealized gains or losses are recorded as part of shareholders'
equity. At June 30, 1996, cash and cash equivalents include
investments in a money market account and a mutual fund
which are classified as available-for-sale and for which cost
approximates fair market value.
Inventories
Inventories are valued at the lower of cost or market.
Cost is determined by the first-in, first-out method.
Property and Equipment
Property and equipment are carried at cost.
Depreciation is computed using the straight-line method.
The cost of leasehold improvements is amortized over the
term of the lease. Equipment held under capital leases is
stated at the lesser of the fair market value of the
equipment or the present value of the minimum lease
payments at the inception of the lease. The cost recorded
for such equipment is amortized on a straight-line basis
over the asset's estimated useful life or the term of the lease,
whichever is shorter. Maintenance and repairs are charged to
expense as incurred; improvements and renewals are capitalized.
Earnings (Loss) Per Share
Primary and fully diluted per share amounts are computed
by dividing net income increased, when applicable, by pro-forma
reductions in interest expense (net of tax effects) resulting from
the assumed exercise of stock options and warrants and the
resulting assumed reduction of outstanding indebtedness, by the
weighted average number of common and common stock
equivalents outstanding during the period. The Company's
outstanding options and warrants are excluded from the fiscal
1995 computation due to their antidilutive effect during this period.
Advertising Expense
The Company adopted Statement of Position 93-7,
"Reporting on Advertising Costs," in fiscal year 1995. In
accordance with this Statement of Position, the Company
expenses the cost of advertising as incurred. For the years
ended June 30, 1996, 1995, and 1994, total advertising expense
was $81,000, $188,000 and $71,000, respectively.
Pervasiveness of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from these estimates.
2. Inventories
Inventories consist of the following:
June 30,
1996 1995
Raw materials $ 184,000 $ 154,000
Packaging 304,000 339,000
Finished goods 257,000 325,000
$ 745,000 $ 818,000
3. Property and Equipment
Property and equipment are summarized as follows:
Estimated June 30,
useful lives 1996 1995
Machinery and equipment 3-10 years $ 3,064,000 $ 2,926,000
Leasehold improvements Term of lease 989,000 631,000
Transportation equipment 3 years 140,000 122,000
Furniture and office equipment 2-7 years 128,000 128,000
4,321,000 3,807,000
Accumulated depreciation and amortization (2,939,000) (2,517,000)
$ 1,382,000 $ 1,290,000
Property and equipment held under capital leases included
in the above listing are summarized as follows:
June 30,
1996 1995
Machinery and equipment $ 181,000 $ 181,000
Transportation equipment 101,000 101,000
282,000 282,000
Accumulated amortization (173,000) (128,000)
$ 109,000 $ 154,000
Amortization expense related to equipment held under these
leases was $45,000, $43,000 and $65,000 for the years ended
June 30, 1996, 1995 and 1994, respectively.
4. Accrued Expenses
Accrued expenses are summarized as follows:
June 30,
1996 1995
Salaries, wages, and bonuses $ 90,000 $ 116,000
Workers' compensation 220,000 146,000
Product demonstration costs 225,000 60,000
Advertising and Promotions 148,000 100,000
Other 389,000 243,000
$ 1,072,000 $ 665,000
5. Long-Term Debt
Long-term debt consists of the following: June 30,
1996 1995
Note payable - Economic Stability Fund: Loan used
to finance equipment and is secured by the equipment purchased.
Payable in equal monthly installments of principal. Interest is
payable at 1 % over prime rate (8.25% at June 30, 1996), adjusted
quarterly. Final payment scheduled for January 1, 1997.
$26,000 $79,000
Subordinated note payable: The original agreement called for interest at
9 % to be paid quarterly in arrears on the unpaid principal. Quarterly
principal payments of $56,250 commenced December 11, 1993. On January 20,
1995, the agreement was amended to call for monthly principal payments of
$18,750, plus interest, in lieu of quarterly payments. A final balloon
payment of approximately $130,000 was due on June 11, 1996. The agreement
was amended again on May 16, 1996 to call for monthly payments of ecember 11,
1996 in lieu of the June 11, 1996 balloon payment. The agreement is
subordinate to all institutional financing and is collateralized by all
Company assets. The agreement prohibits declaration or payment of
dividends by the Company. (See Note 13.)
110,000 336,000
Note payable in monthly installments of principal and interest through
December 1999. Principal payments range from $4,167 to $8,333. Interest
is payable at 2% over the bank's prime rate (8.25% at June 30, 1996). The
note is collateralized by all Company assets and by a compensating balance
arrangement of 10% of the outstanding loan balance.
188,000 250,000
Massachusetts Business Development Corporation-
Product Funding Agreement: Borrowings under a maximum $160,000 product
funding agreement. Actual borrowings of $80,000 require a minimum
repayment of $120,000 (60 months at $2,000 per month through July 1997).
Interest and royalties are imputed at 12.5% and 13.4%, respectively.
The agreement is collateralized by all Company assets.
26,000 45,000
350,000 710,000
Less - current portion of long-term debt 238,000 710,000
$112,000 $ --
6. Income Taxes
The provision for income taxes is comprised of the following:
Year ended
June 30,
1996 1995 1994
Current:
Federal $ 21,000 $ -- $ 15,000
State 36,000 12,000 35,000
Total current 57,000 12,000 50,000
Deferred:
Federal 250,000 (277,000) 283,000
State 14,000 (48,000) 176,000
264,000 (325,000) 459,000
Deferred tax asset valuation
allowance adjustments (264,000) 325,000 (459,000)
Total deferred
Total provision for income taxes $ 57,000 $ 12,000 $ 50,000
The federal tax provision consists principally of alternative
minimum tax. The state tax provision is based upon the corporate
income tax rates in the states in which the Company files and includes
the non-income measured property tax. Although the current federal
income tax provision is reduced because of the utilization of net
operating losses, the available state net operating losses are substantially
smaller.
The changes in the valuation allowance for deferred tax assets
primarily relate to the utilization of loss carryforwards to offset
taxable income during 1996 and 1994 and the generation of a
net operating loss during 1995.
Deferred tax assets and liabilities consist of the following:
June 30,
1996 1995
Loss carryforwards $ 738,000 $ 1,212,000
Accrued expenses 219,000 83,000
Property and Equipment 6,000 --
Other 144,000 122,000
Gross deferred tax assets 1,107,000 1,417,000
Deferred tax asset valuation allowance (1,107,000) (1,371,000)
Net deferred tax assets -- 46,000
Property and equipment, net -- (46,000)
Deferred tax liabilities -- (46,000)
$ -- $ --
The provision for income taxes differs from the amount of
income tax determined by applying the applicable statutory
federal income tax rates to pretax income as a result of the
following:
Year ended
June 30,
1996 1995 1994
Statutory federal tax rates $ 214,000 $ (275,000) $ 339,000
Increase (decrease) resulting from:
State taxes, net of federal effect 50,000 (40,000) 198,000
Effect of federal statutory rate -- -- (35,000)
change valuation allowance adjustment (249,000) 325,000 (459,000)
Nondeductible items 13,000 2,000 3,000
Other 29,000 -- 4,000
Provision for income taxes $ 57,000 $ 12,000 $ 50,000
As of June 30, 1996, the Company had tax operating loss
carryforwards which may be used to offset future federal
taxable income as follows:
Year
expiring
2005 $ 1,115,000
2006 689,000
2007 111,000
2010 169,000
$ 2,084,000
In addition, the Company has approximately $136,000 of
state net operating loss carryforwards which expire through
2010.
Changes in the Company's ownership may cause an annual
limitation on the amount of the net operating loss
carryforward which can be utilized.
7. Shareholders' Equity
Stock Purchase Warrants
During fiscal year 1994, in connection with the royalty
litigation (see Note 10), the Company issued warrants to
its law firm and two lawyers at the firm to purchase 43,000
shares of its common stock at $3.25 - $3.58 per share subject
to certain anti-dilutive provisions contained in the warrant
agreement. The warrants are for a term of 10 years and
expire January 21, 2004. Additionally, the Company issued
warrants to a director to purchase 6,000 shares of its common
stock at $3.25 per share subject to certain anti-dilutive
provisions contained in the warrant agreement. The warrants
are for a term of 10 years and expire January 21, 2004. No value
has been ascribed to these warrants for financial reporting
purposes as such value was considered immaterial. These warrants
have not been exercised as of June 30, 1996.
At June 30, 1996, the following warrants to purchase the
Company's common stock were outstanding:
Shares issuable Exercise price Year of expiration
15,000 $ 2.00 2000
33,000 $ 3.58 2004
16,000 $ 3.25 2004
64,000
Stock Option Plan
Under the Company's incentive stock option plan, a total
of 175,000 shares of the Company's common stock has been
reserved for future issuance. Reserved shares available for
option grant were 41,000 and 28,000 at June 30, 1996 and
1995, respectively. The options vest over periods ranging
from the grant date to three years and are exercisable over
a period of three to ten years. The maximum value of shares
for which options may be granted to an employee in any
calendar year is $100,000. The exercise price of options granted
pursuant to the plan may not be less than the fair market value
of such shares on the date of grant, subject to certain adjustments.
However, in the event that an employee granted an option owns
more than 10% of the Company's common stock, then the option
price must be at least 110% of the fair market value of the stock
on the date of grant.
All employees of the Company, including officers and directors
who are salaried employees, are eligible to participate under
the plan. Activity related to these options is summarized as follows:
Number of Exercise price
shares per share
Outstanding at June 30, 1993 144,000 $ 2.00
Granted 120,000 $ 2.00- 4.50
Expired (112,000) $ 2.00
Outstanding at June 30, 1994 152,000 $ 2.00- 4.50
Granted 51,000 $ 0.75- 3.25
Expired (56,000) $ 2.00- 2.60
Outstanding at June 30, 1995 147,000 $ 0.75- 4.50
Granted 11,000 $ 0.45- 1.15
Expired (24,000) $ 2.00- 3.15
Outstanding at June 30, 1996 134,000
At June 30, 1996, options for approximately 116,000
shares were exercisable under the plan.
Non-Qualified Stock Options
There are also outstanding non-statutory, non-qualified stock
options to purchase a total of 533,000 shares of common
stock of the Company at exercise prices ranging between
$0.50 and $3.25 expiring August 1, 2000 through December 22,
2005. These options were granted during fiscal years 1992
through 1996 to key employees and consultants to the Company.
At June 30, 1996, approximately 295,000 shares were exercisable.
8. Commitments
Future minimum lease payments under noncancellable leases with
terms in excess of one year are as follows:
Capital Operating
leases leases
1997 $ 60,000 $ 135,000
1998 32,000 136,000
1999 26,000 136,000
2000 12,000 136,000
Thereafter 799,000
Total minimum lease payments 130,000 $ 1,342,000
Less - amount representing interest 13,000
117,000
Less - current maturities of obligations under
capital leases 46,000
Long-term obligations under capital leases $ 71,000
Capital leases consist principally of leases for machinery, office
equipment and vehicles. The terms of the leases range from
two to seven years and in some cases provide the Company
with the option to purchase at the end of the lease term.
The Company has operating leases primarily for its
manufacturing, distribution and administrative facility. The
manufacturing, distribution and administrative facility lease
has been renewed as of April 1, 1996. The new agreement
provides for the landlord to make certain improvements to
the property. Upon completion of these improvements, a ten
year lease term with escalating lease payments commences
(ranging from $132,000 to $266,000). As of June 30, 1996, these
improvements were not completed, as such, the minimum lease
payments for the facility are assumed to be $132,000 over the
next ten years. The improvements are expected to be completed
by November 1996.
Total rental expense under operating leases excluding property
taxes, insurance and utilities was approximately $163,000, $176,000,
and $127,000 for the years ended June 30, 1996, 1995 and 1994
respectively.
9. License Agreement and Litigation
The Company is party to a license agreement which, as
amended, grants the Company the exclusive, perpetual
and irrevocable right to use recipes, trade secrets, processes
and methods provided by the licensor in the production
of a variety of pastas, sauces and prepared foods. In addition,
the Company received the exclusive right and license to
market and sell the products at wholesale and to use the
name "Trios" in connection with the promotion, advertising
and sale of other products at wholesale.
In exchange for the grant of the license, the Company has
agreed to pay the licensor royalties of 2% of net sales of products
manufactured by the Company in conformance with the
recipes provided by the licensor. A reduced royalty rate applies
to products which are sold under the "Trios" name but which
are produced from recipes not provided by the licensor.
The licensor filed a complaint on April 24, 1991 alleging that
they had not received all of the royalties due them pursuant to
the license agreement. In addition, during 1992 and 1993 the
licensor alleged that the Company was selling within exclusive
and unauthorized territories, and that private label sales were in
violation of the license agreement. The licensor further attempted
to terminate the license agreement because of the alleged
underpayment of royalties.
A court order dated April 21, 1994 listed the court's findings
on the above matters. The Company was required to pay
$1.00 for technical breach of the agreement because the
products were located in one store in the licensor's exclusive
territorial area. The court found that the Company has the
right to sell products under private label. The court also held
that the licensor is not entitled to terminate the agreement as
the Company's right to use the recipes and the "Trios" name is
a perpetual and irrevocable license. Additionally, the court reclassified
certain products for purposes of calculating the royalty payment.
A recalculation of the amount of royalties due to the licensor for
fiscal year 1992 and 1993 was ordered by the court. An additional
payment of $40,000, plus interest, was computed and paid by the
Company and is included in the 1994 royalty expense. The licensor
has filed a notice of appeal.
Royalty expense under this agreement totalled approximately
$195,000, $176,000 and $251,000 for the years ended June 30, 1996,
1995, and 1994, respectively.
On December 5, 1994, a third lawsuit was filed against the Company
by the licensor, alleging libel. The Company filed its answer on
December 23, 1994 asserting, among other defenses, that the statement
was a statement of opinion. The licensor is seeking an unspecified
amount of monetary damages in addition to interest, costs and
reasonable attorney's fees. The Company believes that an adverse
outcome on this lawsuit is not probable and no possible loss can be
estimated at this time.
10. Concentrations of Credit Risk and Major Customers
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed, although collateral
is not required. In addition, the Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations.
The Company's customer base includes supermarket chains,
independent supermarkets and wholesale clubs in the United States.
For the year ended June 30, 1996, two customers represented 61%
of net sales. For the year ended June 30, 1995, one customer
represented 45% of net sales.
11. Benefit Plan
The Company initiated a defined contribution plan (the "Plan") on
January 1, 1994 which meets the requirements of Section 401(k) of
the Internal Revenue Code. All employees of the Company who
are at least 21 years of age, with at least twelve months of service,
are eligible to participate in the Plan. Under the Plan, employees
may contribute a portion of their wages on a pre-tax basis, within
limits prescribed by the Internal Revenue Code. Matching contributions
made by the Company in accordance with the Plan's provisions
totalled $2,000, $4,000 and $2,000 during the years ended June 30,
1996, 1995 and 1994, respectively.
12. Related Party Transaction
In December 1994, a creditor of the Company exercised warrants
for 453,000 shares of common stock. The exercise of these warrants,
combined with the Company's common stock already held by
this creditor, resulted in the creditor owning approximately 19%
of the Company's outstanding common stock. As of June 30,
1996 and 1995, the Company has a note payable for $110,000
and $336,000, respectively, outstanding and due to this creditor
(Note 6).
