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.
December 31, 1996 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 December 31, 1996 the number of shares of Common Stock, $.02 par value,
outstanding were 1,899,885.
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 December 31, 1996 and June 30, 1996 3
Statement of Operations:
Three months ended December 31, 1996 and December 31, 1995 4
Six months ended December 31, 1996 and December 31, 1995 5
Statement of Cash Flows:
Six months ended December 31, 1996 and December 31, 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9-11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
EXHIBIT 11 - Computation of Earnings Per Share 13
Original Italian Pasta Products Co. Inc.
Balance Sheet
(Unaudited)
Assets December 31, June 30,
1996 1996
----------- ------------
Current Assets:
Cash and Cash Equivalents $ 117,000 $ 195,000
Accounts Receivable, net 603,000 665,000
Inventories (Note 3) 773,000 745,000
Prepaid expenses and other 9,000 62,000
----------- -----------
Total current assets 1,502,000 1,667,000
Property and equipment, net 1,338,000 1,382,000
Other assets, net 52,000 131,000
----------- -----------
Total Assets $ 2,892,000 $ 3,180,000
=========== ===========
Liabilities and Shareholders Equity
Current Liabilities:
Current maturities of long-
term debt and capital lease $ 184,000 $ 284,000
Accounts Payable 1,352,000 1,056,000
Accrued Expenses 1,154,000 1,072,000
----------- -----------
Total current liabilities 2,690,000 2,412,000
Long-term debt and capital lease 214,000 183,000
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 (3,962,000) (3,365,000)
Total Shareholder's
Equity $ (12,000) $ 585,000
------------ -----------
Total Liabilities and
Equity $ 2,892,000 $ 3,180,000
=========== ===========
See accompanying notes
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three months ended
December 31, December 31,
1996 1995
------------ ------------
Net sales $ 2,619,000 $ 4,894,000
Cost of goods sold 1,857,000 3,067,000
----------- -----------
Gross profit 762,000 1,827,000
Selling, general and
administrative expenses 1,144,000 1,421,000
Gain/(Loss) from operations
operations (382,000) 406,000
Other Expense/Income:
Interest income -- 1,000
Interest expense (8,000) (20,000)
Other income/(loss) (4,000) --
--------- --------
Net Income/(Loss) before taxes (394,000) 387,000
Provision for taxes -- (68,000)
Net Income/(Loss) after taxes $ (394,000) $ 319,000
Net income/(loss) per share
(Note 2), primary $ (0.21) $ 0.17
Net income/(loss) per share
(Note 2), fully diluted $ (0.21) $ 0.17
Weighted average shares
outstanding, primary 1,900,000 2,040,000
Weighted average shares
outstanding, fully diluted 1,900,000 2,040,000
See accompanying notes
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
STATEMENT OF OPERATIONS
(Unaudited)
Six months ended
December 31, December 31,
1996 1995
------------ ------------
Net Sales $ 5,398,000 $ 7,970,000
Cost of goods sold 3,782,000 5,008,000
----------- -----------
Gross profit 1,616,000 2,962,000
Selling, general and
administrative expenses 2,206,000 2,613,000
----------- -----------
Profit/(Loss) from
operations (590,000) 349,000
Other Expense/Income:
Interest income 1,000 1,000
Interest expense (17,000) (43,000)
Other income/(loss) 10,000 --
---------- ---------
Net Income/(Loss) before taxes (596,000) 307,000
Provision for taxes -- (68,000)
Net Income/(Loss)after taxes (596,000) 239,000
Net income/(loss) per share
(Note 2), primary $ (0.31) $ 0.15
Net income/(loss) per share
(Note 2), fully diluted $ (0.31) $ 0.15
Weighted average shares
outstanding, primary 1,900,000 2,030,000
Weighted average shares
outstanding, fully diluted 1,900,000 2,030,000
See accompanying notes
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
Cash flows from operating December 31, December 31,
activities: 1996 1995
------------ ------------
Net Income $ (596,000) $ 239,000
Adjustments to reconcile
net income to net cash used
in operating activities:
Depreciation and Amortization 293,000 308,000
(Increase) Decrease in
accounts receivable 62,000 (635,000)
(Increase) Decrease in
inventories (28,000) (33,000)
(Increase) Decrease in prepaid
expenses and other 53,000 --
(Decrease) Increase in
accounts payable 296,000 (21,000)
Increase (Decrease) in
accrued expenses 82,000 335,000
Increase (Decrease) in
tax provision -- 2,000
(Increase) Decrease in
other assets 78,000 (10,000)
-------- --------
Net cash provided by
operating activities 240,000 185,000
Cash flows from investing
activities:
Purchase of property and
equipment 250,000 --
Sale of warrants -- --
-------- --------
Net cash used by
investing activities 250,000 --
Cash flows from financing
activities:
Proceeds from negotiations -- 100,000
Proceeds from debt 100,000 --
Principal payments on debt (169,000) (205,000)
--------- ---------
Net cash used by
financing activities (69,000) (105,000)
--------- ---------
Net increase (decrease) in cash
and cash equivalents (79,000) 80,000
Cash - beginning of period 195,000 98,000
--------- ---------
Cash - end of period $ 116,000 $ 178,000
========= =========
See accompanying notes
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 six month period ended December
31, 1996 are not necessarily indicative of the results that may be expected
for the year ending June 30, 1997.
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, 1996.
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:
December 31, June 30,
1996 1996
------------ ----------
Raw Materials $ 132,000 $ 184,000
Packaging Materials 309,000 304,000
Finished Goods 332,000 257,000
------------ ----------
Total $ 773,000 $ 745,000
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 December 31, 1996 compared to
the quarter ended December 31, 1995.
Net sales for the quarter ended December 31, 1996 were $2,619,000 versus
$4,894,000 for the same period last year. This decrease of 46% is mainly
attributable to decreased sales to warehouse club customers.
Gross profit for the quarter ended December 31, 1996 came in at 29% of
net sales or $762,000. Last years gross profit was at 37% of net sales or
$1,827,000. Gross profit is down as the result of lower sales volume.
Selling, General and Administrative expenses decreased to $1,144,000 or
44% of net sales from $1,421,000 or 29% for the quarter ended December 31,
1995. This decrease is due to lower advertising and other marketing costs.
Loss from operations for the quarter ended December 31, 1996 was
$382,000 or 15% of net sales as compared to a gain from operations of
$406,000 or 8% of net sales for the same quarter ended last year.
Interest expense was $8,000 or 0% of net sales for the quarter ended
December 31, 1995 versus $20,000 or 0% for the same period last year.
Net loss per common share, primary was $0.21 for the three months ended
December 31, 1996 compared to a net income per common share, primary of $0.17
for the same period last year.
RESULTS OF OPERATIONS: For the six months ended December 31, 1996 compared to
the six month period ended December 31, 1995.
Net Sales for the six months ended December 31, 1996 were $5,398,000
versus $7,970,000 for the same period last year. This decrease of 32% is
attributable to lower warehouse club and retail store sales.
Gross profit for the six months ended December 31, 1996 is 30% of net
sales or $1,616,000. Last years gross profit was 37% of net sales or
$2,962,000.
Selling, General and Administrative expenses decreased to $2,206,000 or
41% of net sales from $2,613,000 or 33% for the period ended December 31,
1995. This decrease of $407,000 is mainly attributable to lower sales and
marketing expenses.
Loss from operations for the six month period ended December 31, 1996
was $590,000 or 11% of net sales as compared to a profit from operations of
$349,000 or 4% of net sales for the same period last year.
Interest expense was $17,000 or 0% of net sales for the six months ended
December 31, 1996 versus $43,000 or 1% for the same period last year.
Net loss per common share, primary was $0.31 for the six months ended
December 31, 1996 compared to a net income per common share of $0.15 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 December 31, 1996, the Company's current liabilities exceed current
assets by $1,188,000.
The Company has a line of credit available from its primary bank lenders
(the "Bank"). As of December 31, 1996, the Company has drawn down $100,000
of the remaining $125,000 available at June 30, 1996. In addition, the Bank
has agreed to loan the company an additional $75,000. This loan will be for
a period of twenty-four months with a monthly principal payment of $3,125.
Payments will commence in February 1997. The Company must repay the $250,000
currently drawn on the line of credit by making principal payments of $7,083
per month with all such principal to be repaid on or before December of 1999.
The Company is no longer in technical default on this loan.
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 1997. The Company is in technical default on
this loan. As of January 31, 1997, there remains approximately $3,000
outstanding on this loan.
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. The Company is in technical default on this loan.
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. Although this debt
was scheduled to be paid off in December 1996, Katy Industries has been asked
to delay principal payments until March 1997. Approximately $35,000 remains
outstanding on this loan.
The current operating plans indicate that the Company's losses will
continue at a reduced rate. 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. In
addition, the Company is undergoing plant renovations which will require
increased funding. The Company will attempt to provide working capital
through operations and (as necessary) through loans from financial
institutions. The Company can provide no assurances that these efforts will
be successful in raising the capital necessary to continue its operations.
The plant expansion was essentially completed in January 1997.
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.
I. 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 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 is 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 Trio's sought damages, declatory 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 recipies. Finally, the Company
sought a declration 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.
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 grouds 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 has filed a Sur Reply. A decision by the
Appeals Court is expected in the next six months.
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 10-KSB 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 10-KSB 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] 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 10-KSB) 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 judgment
seeking to dismiss all of the Trios' claims on the 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 10-KSB 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 Judgment. The Court heard oral argument on the Company's
summary judgment motion on August 16, 1996. The court entered judgment on
September 27, 1996 in the Company's favor on its summary judgment motion,
dismissing all counts of the Trios' complaint. The Trios have filed an
appeal.
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
14 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
February 12, 1997 /s/Peter Stevens
Date Peter Stevens
Chief Financial Officer
Treasurer
EXHIBIT 11
ORIGINAL ITALIAN PASTA PRODUCTS CO. INC.
CALCULATION OF EARNINGS PER SHARE
Six months ended December 31, 1996
PRIMARY FULLY DILUTED
----------- -------------
Net Income $ (596,000) $ (596,000)
Interest reduction (assumed) -- --
Adjusted net income (596,000) (596,000)
========== ==========
Common shares outstanding 1,900,000 1,900,000
Earnings per share $ (0.31) $ (0.31)
========= =========
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