Total number of pages: 35
Exhibit Index Page: 12
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, 1997 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 organization) identification number)
32 AUBURN STREET, CHELSEA, MA. 02150
(Address of principal Executive Offices) (Zip Code)
(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: $9,889,000 for the
fiscal year ended June 30, 1997.
Aggregate market value of the registrant's voting stock held by non-
affiliates as of September 12, 1997: Common Stock, $.02 par value:
$831,200.
Number of shares outstanding of each of the registrant's classes of
common stock, as of September 12, 1997: 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 October 1, 1996
for the Company's fiscal year ended June 30, 1996, 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 1997, the Company experienced
a decrease in sales due to the loss of sales to Warehouse Club customers.
The Company experienced a net loss during fiscal 1997 and fiscal 1995,
although it was profitable in fiscal 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 46,478 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 1997)
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-nine 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 sauces, 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 12 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 15
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.
MARKETING. The Company's products are sold principally through
brokers and distributors to supermarket chains, and to independent
supermarkets, delicatessens and clubs 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 foreseeable 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. Current year net losses as
well as those incurred in previous years are impairing the Company's
ability to continue its operation because those losses have been funded,
in part, by debt, which must be repaid out of current cash flows.
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, 1997, two customers represented 51% of net sales. 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,
1997.
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 pastas
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 September 18, 1997 the Company employed 71
full-time employees including four in sales, two in administration, three
in distribution and sixty-two 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 46,478 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
$178,000.
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 $ 66,000 per year for the year ended June
30, 1997.
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 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. 91-2680A.
On June 6, 1997, the Massachusetts Appeals Court issued a
decision affirming the trial court's judgment rejecting the Trios' claim
that they could terminate the License Agreement dated July 12, 1985,
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 that the Company was entitled to deduct promotional
expenses and freight before computing "Net Sales" for purposes of
computing the royalty, and 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. The
Trios petitioned the Supreme Judicial Court for further appellate review
of only that part of the Appeals Court's decision that held that the Trios
could not terminate the License Agreement and revoke the licenses. The
Trios' petition was denied on July 31, 1997, formally ending the case.
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 Trios
seek an as yet unspecified amount of monetary damages, as well as interest,
costs and reasonable attorneys fees for slander, libel, injurious falsehoods,
malicious interference with a contractual right and fraud.
The primary allegation is the language which appears in the "Legal
Proceedings" section of the Forms 10-KSB attached to the Company's 1992
and 1994 Annual Reports constitutes libel. 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 counter-
claims in the 1991 lawsuit. 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 has asserted, 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.
On September 27, 1996, after the Company moved for summary
judgment, the Court entered judgment in the Company's favor, dismissing
all counts of the Trios' complaint. That ruling is presently on appeal by
the Trios.
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
- ---------- ------- ------ ----------------
09/30/95 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
09/30/96 1 3/8 1 1/16 1 3/8 1
12/31/96 1 1/4 3/8 1 5/8 3/4
03/31/97 1/2 1/4 11/16 7/16
06/30/97 3/8 1/4 5/8 10/16
2. HOLDERS OF COMMON STOCK. As of September 24, 1997 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
1997 1996 199 1994
------- ------ ------ --------
Net Sales $9,889 $15,306 $13,988 $16,436
Net Income
or (Loss) (897) 555 (798) 919
Net Income
(Loss) Per
Share - (0.47) 0.28 (0.42) 0.46
Weighted Average
Shares
Outstanding 1,889,000 2,137,000 1,899,000 2,159,000
Working Capital
Deficiency (1,577) (745) (1,196) (65)
Total Assets 2,490 3,180 3,020 4,057
Long Term
Obligations
Net of Current
Portion 36 183 117 1,675
Shareholders'
Equity (Deficit) (312) 585 30 35
Book Value
Per Weighted
Average Shares
Outstanding (0.16) 0.27 0.02 0.02
Fiscal Year Ending June 30
1997 1996 1995 1994
------- ------- ------- -------
(Decrease)
Increase
in Net
Sales (35%) 9% (15%) 42%
Gross
Profit
as a
Percentage
of Net
Sales 30% 37% 35% 39%
Selling,
General &
Administrative
Expense as a
Percentage
of Net Sales 39% 33% 40% 32%
Income (Loss)
from Operations
as a Percentage
of Net Sales (10%) 4% (5%) 7%
Interest
Expense as a
Percentage of
Net Sales 1% 0% 1% 1%
RESULTS OF OPERATIONS:
Year ended June 30, 1997 as compared to the Year ended June 30, 1996
- --------------------------------------------------------------------------
Net Sales for the year ended June 30, 1996 were $9,889,000 versus
$15,306,000 for the same period last year. Management believes that this
decrease of 35% is attributable to lower sales to Warehouse Club stores
due to the loss of a significant warehouse club customer.
Gross margin for the year ended June 30, 1997 was 30% of net sales as
compared to 37% for the year ended June 30, 1996. The Company
attributes this decrease in gross profit margin to its decreased sales
volume thus it is utilizing its production facilities less efficiently.
Selling, general and administrative expenses decreased to $3,906,000
from $5,033,000 for the year ended June 30, 1996, and increased as a
percentage of net sales to 39% from 33% in fiscal year 1996. The
percentage increased due to lower revenues even though the actual
dollar amount decreased mainly due to decreased promotional,
advertising and other discretionary costs.
Loss from operations for the year ended June 30, 1997 was $948,000
or 10% of net sales compared to income from operations of $681,000
or 4%, for the year ended June 30, 1996.
Interest expense was $58,000 or 1% of net sales, for the year ended June
30, 1997 versus $72,000 or 0% for the same period last year. This dollar
decrease resulted from repayment of part of the Company's debt.
Net loss per common share was at $0.47 for the year ended June 30, 1997
versus net income of $0.28 per common share for the year ended June 30,
1996.
Year ended June 30, 1995 as compared to the year ended June 30, 1994
- ----------------------------------------------------------------------------
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 efficiently.
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 absence 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,
996 versus ($0.42) per common share for the year ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES:
Intense competition and the resulting loss of certain customers have
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 30,1997, the Company's current liabilities exceed current assets
by $1,577,000.
The Company has a line of credit available from its primary bank lenders
(the "Bank"). As of March 31, 1997, the Company had drawn down the
remaining $125,000 available at June 30, 1996. In addition, the Bank has
agreed to loan the Company an additional $75,000. Of this amount, the
company has drawn down $50,000 in the current year. This loan will be
for a period of twenty four months with a monthly principal payment of
$3,125. Payments commenced 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 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. The entire amount was forfeited to the Company in August
1995 when Waterbury Holdings, Inc. discontinued these negotiations and
has been recorded as income in the current year.
In April 1997, the Company entered into an agreement with MBDC, a
Massachusetts development agency, to provide up to $400,000 to the
Company for the purchase of equipment and machinery, leasehold
improvements, trade payables, and working capital. The Company
has expended $327,070 as of September 3, 1997. This loan is payable in
equal monthly installments of principal. Interest is payable at prime plus
2 3/4% adjusted monthly. Due to cross-default provisions in the loan
agreement, the Company is in technical default on this loan.
As described above, although the Company has violated certain
requirements of its debt agreements primarily due to not making timely
payments. Its lenders have not declared the Company in default and have
allowed the Company to remain in violation of these agreements. The
Company has engaged an investment banker and is considering various
alternatives, including the sale of certain assets or the sale of common
shares to raise funds for debt repayments.
The Company continues to work toward reducing discretionary operating
expenses, such as expenses relating to advertising, product demonstrations,
and promotions. The current operating plans indicate that the Company
will experience initial losses before improvement. The sum of cumulative
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. The Company will attempt to provide working
capital through operations and (as necessary) additional debt financing.
The Company can provide no assurances that these efforts will be
successful in raising the capital necessary to continue to meet its working
capital requirements.
ITEM 7. FINANCIAL STATEMENTS
- -------------------------------------------------
Index to Financial Statements
Report of Independent Accountants 18
Balance Sheet as of June 30, 1997 and 1996 19
Statement of Operations - Years ended June 30, 1997, 20
1996 and 1995
Statement of Shareholders' Equity - Years ended 21
June 30, 1997, 1996 and 1995
Statement of Cash Flows - Years ended 22
June 30, 1997, 1996 and 1995
Notes to Financial Statements 23-35
(a) 1. Financial Statements:
The following documents are filed as part of this report:
Report of Independent Accountants.
Balance Sheet - As of June 30, 1997 and 1996.
Statement of Operations - Years ended June 30, 1997, 1996 and 1995.
Statement of Shareholder's Equity - Years ended June 30, 1997, 1996
and 1995.
Statement of Cash Flows - Years ended June 30, 1997, 1996 and 1995.
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
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 Account
Representative 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.
Walter Wekstein resigned as a Director of the Company effective
January 1, 1997.
Peter Stevens resigned as the Treasurer and Chief Financial Officer of
the Company effective May 9, 1997. He remains an employee of the
Company.
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:
applicable.
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,
1997) (hereafter referred to as the "named executive officers") for the
fiscal year ended June 30, 1997. Only officers earning annual cash
compensation, including salary and bonus, in excess of $100,000 are
listed.
Summary Compensation Table Long Term
Compensation
Name and Annual Compensation Awards Securities
Principal Underlying
Position Year Salary ($) Bonus ($) Options/SARs (#)
- ------------ ------ ------------ ------------ ----------------------
Paul K. 1997 119,000 0 0
Stevens,
Chairman 1996 124,000 10,000 100,000
of the 1995 103,533 25,000 0
Board, CEO
President
The following table sets forth certain information concerning the
unexercised options held as of June 30, 1997 by the named executive
officers; no options/SARs were exercised by name executive officers
during the fiscal year ended June 30, 1997:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
Number of
securities Value of
underlying unexercised In-
unexercised the-Money
Options/SARs Options/SARs
at fiscal at Fiscal
year end (#) Year end ($)
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 24,1997. 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
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 the
person or group.
(2) Includes 170,000 shares subject to currently exercisable 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 warrants.
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
remises 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-KSB filed with the
Commission on September 27, 1988.
(5) Incorporated by reference to Form 10-KSB filed with the
Commission on October 12, 1989.
(6) Incorporated by reference to Form 10-KSB filed with the
Commission on October 26, 1990.
(7) Incorporated by reference to Form 10-KSB filed with the
Commission on October 30, 1991.
(8) Incorporated by reference to Form 10-KSB filed with the
Commission on September 28, 1992.
(9) Incorporated by reference to Form 10-KSB 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 9, 1997
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 9,1997
By:/s/Steven S. Zenlea Director
Steven S. Zenlea October 9,1997
EXHIBIT INDEX
- -----------------------
No. Description Page No.
Report of Independent Accountants
September 4, 1997
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 (deficit) and of cash flows present
fairly, in all material respects, the financial position of Original Italian
Pasta Products Co., Inc. at June 30, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, 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 incurred cumulative losses and as
a result has a shareholders' deficit and a working capital deficiency as of
June 30, 1997, which raise 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.
BALANCE SHEET
June 30,
1997 1996
------- -------
Assets
Current assets
Cash and cash equivalents $ 70,000 $ 195,000
Accounts receivable, net of
allowance for doubtful accounts
and returns of $144,000 and
$167,000 at June 30, 1997
and 1996, respectively 483,000 665,000
Inventories 603,000 745,000
Prepaid expenses and other current assets 33,000 62,000
------------ ------------
Total current assets 1,189,000 1,667,000
Property and equipment, net 1,254,000 1,382,000
Deposits 47,000 131,000
------------ -------------
Total assets $2,490,000 $3,180,000
========== ==========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities
Current portion of long-term debt $ 570,000 $ 238,000
Current portion of capital leaseobligations29,000 46,000
Accounts payable 1,296,000 1,056,000
Accrued expenses 871,000 1,072,000
------------- -------------
Total current liabilities 2,766,000 2,412,000
Long-term debt - 112,000
Capital lease obligations 36,000 71,000
------------ -------------
Total liabilities 2,802,000 2,595,000
Commitments and contingent liability (Notes 8 and 9)
Shareholders' equity (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 - 1,899,000 shares at June
30, 1997 and 1996 38,000 38,000
Additional paid-in capital 3,912,000 3,912,000
Accumulated deficit (4,262,000) (3,365,000)
-------------- --------------
Total shareholders' equity (deficit) (312,000) 585,000
Total liabilities and shareholders'
equity (deficit) $2,490,000 $3,180,000
========== ==========
STATEMENT OF OPERATIONS
Year ended June 30,
1997 1996 1995
--------- --------- ----------
Net sales $ 9,889,000 $ 15,306,000 $ 13,988,000
Cost of goods sold 6,931,000 9,592,000 9,038,000
----------- ----------- ------------
2,958,000 5,714,000 4,950,000
Selling, general, and administrative
906,000 5,033,000 5,589,000
----------- ----------- ------------
Income (loss) from operations(948,000) 681,000 (639,000)
Other income (expense):
Interest income 2,000 2,000 1,000
Interest expense (58,000) (72,000) (148,000)
Other income 112,000 1,000
----------- ---------- ------------
Income (loss) before income taxes
(892,000) 612,000 (786,000)
Provision for income taxes 5,000 57,000 12,000
--------- -------- ---------
Net income (loss) $ (897,000) $ 555,000 $ (798,000)
========= ======== ========
Income (loss) per common share $(.47) $ .28 $ (.42)
========= ======== ========
Weighted average common shares
and equivalents outstanding1,899,000 2,137,000 1,899,000
========= ======== ========
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Additional
Common Common paid-in Accumulated
shares stock capital deficit Total
-------------------------------------------------------------------------
Balance, June 30, 1994 1,446,000 $29,000 $3,128,000 $(3,122,000) $35,000
Exercise of warrants 453,000 9,000 784,000 793,000
Net loss (798,000) (798,000)
--------- -------- ---------- ----------- -----------
Balance, June 30, 1995 1,899,000 38,000 3,912,000 (3,920,000) 30,000
Net income 555,000 555,000
-------- -------- ---------- ----------- ---------
Balance, June 30, 1996 1,899,000 38,000 3,912,000 (3,365,000) 585,000
Net loss (897,000) (897,000)
--------- -------- ------------ ----------- ---------
Balance, June 30, 1997 1,899,000 $ 38,000 $ 3,912,000 (4,262,000) $(312,000)
========= ======== ========= ========= ==========
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended June 30,
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net (loss) income $ (897,000) $ 555,000 $ (798,000)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 438,000 422,000 645,000
Decrease in accounts receivable 182,000 89,000 348,000
Decrease in inventories 142,000 73,000 41,000
Decrease (increase) in prepaid expenses and
other current assets 29,000 (55,000) 19,000
Decrease (increase) in other assets 84,000 (78,000) -
Increase (decrease) in accounts payable240,000 (394,000) 208,000
(Decrease)increase in accrued expenses(201,000) 407,000 (40,000)
----------- --------- --------
Net cash provided by operating activities
17,000 1,019,000 423,000
Cash flows from investing activities:
Cash received on sale of equipment 28,000
Purchase of property and equipment (336,000) (514,000) (194,000)
----------- ----------- ----------
Net cash used by investing activities (308,000) (514,000) (194,000)
Cash flows from financing activities:
Borrowings 438,000 - -
Principal repayments on capital lease
obligations (52,000) (48,000) (70,000)
Principal repayments on long-term debt(220,000) (360,000) (356,000)
Net cash provided by (used for) -------- --------- ---------
financing activities 166,000 (408,000) (426,000)
-------- --------- ---------
Net (decrease)increase in cash and cash(125,000) 97,000 (197,000)
Cash and cash equivalents at beginning
of period 195,000 98,000 295,000
Cash and cash equivalents at end of
period $ 70,000 $ 195,000 $ 98,000
======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 58,000 $ 69,000 $ 150,000
Cash paid during the year for income taxes$ 4,000 $ 65,000 $ 48,000
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 in the United States.
The accompanying financial statements have been prepared on
a basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has experienced
cumulative losses and, as a result, has an accumulated deficit and working
capital deficiency. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The future viability of
the Company is dependent upon its ability to continue to obtain necessary
external financing and generate sufficient cash from operations.
Management intends to seek additional financing and to improve
profitability.
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.
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
------------------------------
Per share amounts are computed by dividing (i) 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 (ii) 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 and
1997 computations due to their antidilutive effect during these periods.
Primary and fully diluted earnings (loss) per share are the same for all
periods reported.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 128 ("FAS 128"),
Earnings per Share. FAS 128, which is effective for both interim and
annual periods ending after December 15, 1997, requires the disclosure
of basic and diluted earnings per share as well as certain other disclosures.
Basic and diluted earnings per share, as computed under the new standard,
are not materially different from the Company's current presentation of
earnings per share and, accordingly, pro forma disclosure is not presented
herein.
Advertising Expense
-------------------------
The Company expenses the cost of advertising as incurred. For
the years ended June 30, 1997, 1996, and 1995, total advertising expense
was $0, $81,000, and $188,000, respectively.
Use 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,
1997 1996
------ -------
Raw materials $ 101,000 $ 184,000
Packaging 218,000 304,000
Finished goods 284,000 257,000
--------- ----------
$ 603,000 $ 745,000
======== =========
3. Property and Equipment
- ------------------------------------------
Property and equipment are summarized as follows:
Estimated June 30,
useful lives 1997 1996
------------ -------- ---------
Machinery and equipment 3-10 years $ 3,122,000 $ 3,064,000
Leasehold improvements Term of lease 1,234,000 989,000
Transportation equipment 3 years 128,000 140,000
Furniture and office equipment 2-7 years 144,000 128,000
----------- -----------
4,628,000 4,321,000
Accumulated depreciation and amortization (3,374,000) (2,939,000)
------------ ------------
$1,254,000 $1,382,000
========== ==========
Depreciation expense related to equipment not held under capital
leases was $412,000, $377,000, and $602,000 for the years ended June 30,
1997, 1996 and 1995, respectively.
Property and equipment held under capital leases included in the
above listing are summarized as follows:
June 30,
1997 1996
----- -----
Machinery and equipment $ 80,000 $ 181,000
Transportation equipment 87,000 101,000
--------- ----------
167,000 282,000
Accumulated amortization (97,000) (173,000)
---------- -----------
$ 70,000 $ 109,000
========= ========
Amortization expense related to equipment held under these
leases was $26,000, $45,000, and $43,000 for the years ended June 30,
1997, 1996 and 1995, respectively.
4. Accrued Expenses
- ------------------------------------
Accrued expenses are summarized as follows:
June 30,
1997 1996
----- -----
Salaries, wages, and bonuses $ 53,000 $ 90,000
Workers' compensation 200,000 220,000
Product demonstration costs 145,000 225,000
Advertising and promotions 90,000 148,000
Other 383,000 389,000
---------- -----------
$ 871,000 $1,072,000
========== ===========
5. Long-Term Debt
- ---------------------------------
Long-term debt consists of the following:
June 30,
1997 1996
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 was payable at 1 3/4% over prime
rate (8.25% at June 30, 1996), adjusted quarterly. Final
payment was made January 1, 1997. $ - $26,000
Subordinated note payable: The original agreement
called for interest at 9 3/4% 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 $18,750, plus interest, until December
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 12.) 35,000 110,000
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 1/4% 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. The Company is in default of
payments on this loan; thus, the entire outstanding balance
is classified as a current liability at June 30, 1997. 239,000 188,000
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. The Company is in default of payments
on this loan; thus, the outstanding balance is classified as a
current liability at June 30, 1997. 2,000 26,000
Note payable in monthly installments of principal and
interest through January 1999. Principal payments in the
amount of $3,125 are due monthly. Interest is payable at
2% over the bank's prime rate (8.5% at June 30, 1997).
The note is collateralized by all Company assets. The
Company is in default of payments on this loan; thus,
the outstanding balance is classified as a current liability
at June 30, 1997. 41,000 -
Massachusetts Business Development Corporation. Note
payable in monthly installments of principal and interest
through March 2004. Monthly principal payments of $4,762.
Interest is payable at 2.75% over the prime rate (8.5% at June
30, 1997). The note is collateralized by a blanket security
interest in all the Company's assets. The Company is in
cross-default on this loan thus the entire outstanding
balance is classified as a current liability at June 30, 1997.
253,000 -
-------- --------
570,000 350,000
Less - current portion of long-term debt 570,000 238,000
-------- --------
$ - $112,000
6. Income Taxes
- -------------------------------
The provision for income taxes is comprised of the following:
Year ended June 30,
1997 1996 1995
----- ----- -----
Current:
Federal $ - $ 21,000 $ -
State 5,000 36,000 12,000
------- -------- -------
Total current 5,000 57,000 12,000
Deferred:
Federal (371,000) 250,000 (277,000)
State (61,000) 14,000 (48,000)
-------- ------- --------
(432,000) 264,000 (325,000)
Deferred tax asset
valuation allowance
adjustment 432,000 (264,000) 325,000
--------- ---------- --------
Total deferred - - -
Total provision for
income taxes $ 5,000 $ 57,000 $ 12,000
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.
The changes in the valuation allowance for deferred tax assets
primarily relate to the generation of net operating losses during 1997
and 1995 and the utilization of loss carryforwards to offset taxable
income during 1996.
Deferred tax assets and liabilities consist of the following:
June 30,
1997 1996
---- -----
Loss carryforwards $ 1,068,000 $ 738,000
Accrued expenses 84,000 219,000
Property and equipment 246,000 6,000
Other 141,000 144,000
------------ ---------
Gross deferred tax assets 1,539,000 1,107,000
Deferred tax asset valuation allowance (1,539,000) (1,107,000)
Net deferred tax assets - -
Deferred tax liabilities - -
$ - $ -
====== ======
In view of the significant cumulative losses, the Company
has determined that it is more likely that the entire deferred tax asset
will not be realized and, accordingly, has provided a full valuation
allowance.
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 (loss) as a result of the following:
Year ended June 30,
1997 1996 1995
------ ----- -----
Statutory federal tax rates $ (351,000) $ 214,000 $ (275,000)
Increase (decrease) resulting from:
State taxes, net of federal effect(92,000) 50,000 (40,000)
Valuation allowance adjustment 432,000 (264,000) 325,000
Nondeductible items 2,000 13,000 2,000
Other 14,000 44,000 -
------- -------- ---------
Provision for income taxes $ 5,000 $ 7,000 $ 12,000
======= ====== ========
As of June 30, 1997, the Company had net 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
2012 804,000
---------------
$ 2,888,000
===============
In addition, the Company has approximately $919,000 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 in
future periods.
7. Shareholders' Equity
- ----------------------------------------
Stock Purchase Warrants
At June 30, 1997, the following warrants to purchase the
Company's common stock were outstanding:
Shares issuable Exercise price Year of expiration
15,000 $ 2.00 2004
33,000 $ 3.58 2004
16,000 $ 3.25 2004
------
64,000
======
No value has been ascribed to these warrants for financial
reporting purposes as such value was considered immaterial.
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 72,000,
41,000 and 28,000 at June 30, 1997, 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.
There are also outstanding non-statutory, non-qualified stock
options to purchase a total of 481,000 shares of common stock of the
Company expiring August 1, 2000 through December 22, 2005. These
options were granted during fiscal years 1992 through 1997 to key
employees and consultants to the Company.
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (FAS) No. 123, "Accounting
for Stock-Based Compensation." This new standard defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue
to measure compensation using the intrinsic value approach under
Accounting Principles Board (APB) Opinion No. 25, the former
standard. If the former standard for measurement is elected, FAS No.
123 requires supplemental disclosure to show the effects of using the
new measurement criteria.
The Company has elected to continue using APB Opinion No.
25 to measure compensation cost. Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation cost
been measured based upon the provisions of FAS No. 123, net earnings
per share would not be materially affected. In making this determination,
the fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants during fiscal 1996 and 1997:
dividend yield of 0.0%; expected volatility of 270.0%; risk-free interest
rate of 6.3%; expected lives of 10 years. Additionally, a 5.0% forfeiture
rate was utilized when determining the affect on net income and
earnings per share.
Information regarding option under these plans for 1997, 1996 and 1995
is as follows:
1995 1996 1997
------------------- ------------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
---------- -------- -------- ------ -------- --------- ----------
Outstanding at
beginning of
year 512,000 $ 1.724 45,000 $ 1.77 667,000 $ 1.27
Granted 85,000 2.12 49,000 0.50 55,000 0.46
Exercised 0 - 0 - 0 -
Expired (152,000) 2.19 (27,000) 2.55 (138,000) 1.02
Outstanding at
end of -------- ------- --------
year 445,000 1.77 67,000 1.25 84,000 1.24
========= ======= =======
Options
exercisable
at year-end 424,000 411,000 403,000
Weighted-
average fair
value of
options
granted
during the
year $ .21 $ .46
The following table summarizes information about stock options
outstanding at June 30, 1997:
Options Outstanding Options Exercisable
------------------------------------ ------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercisable
Exercise Prices at 06/30/97 Life Price at 06/30/97 Price
- ------------------ ----------- ----------- -------- ----------- ---------
$0.38 to .50 241,000 8.78 years 0.47 65,000 0.50
$0.75 to 1.00 159,000 5.31 years 0.97 159,000 0.97
$1.13 to 1.25 6,000 9.16 years 1.23 1,000 1.13
$2.00 to 2.86 161,000 3.14 years 2.26 161,000 2.26
$3.00 to 3.25 17,000 4.54 years 3.03 17,000 3.03
---------- --------
$0.38 to 3.25 584,000 6.16 years 403,000
========= ========
8. Commitments
- ------------------------------
Future minimum lease payments under noncancellable leases
with terms in excess of one year are as follows:
Capital Operating
leases leases
---------- ------------
1998 $ 34,000 $ 178,000
1999 26,000 231,000
2000 12,000 249,000
2001 - 256,000
2002 - 265,000
Thereafter - 1,229,000
--------- ---------
Total minimum lease payments 72,000 $ 2,408,000
============
Less - amount representing interest 7,000
---------
65,000
Less - current maturities of obligations under
capital leases 29,000
Long-term obligations under capital --------
leases $ 36,000
========
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 was renewed as of April 1, 1996. The
renewal agreement provided for the landlord to make certain improvements
to the property. Upon completion of these improvements, a ten year lease
term with escalating lease payments commenced (ranging from $132,000
to $266,000). These improvements were completed as of January 31,
1997. Accordingly, the ten year lease term commenced on February 1,
1997. Based upon the escalating lease payments, rental expense is being
recognized by the Company on a straight-line basis over the term of the
lease.
Total rental expense under operating leases excluding property
taxes, insurance and utilities was approximately $157,000, $163,000,
and $176,000 for the years ended June 30, 1997, 1996 and 1995
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 years 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 totaled approximately
$121,000, $195,000, and $176,000 for the years ended June 30, 1997,
1996, and 1995, 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. On September 27, 1996, after the Company moved for summary
judgment, the Court entered judgment in the Company's favor, dismissing
all counts of the licensor's complaint. That ruling is presently on appeal
by the licensor.
The Company believes that an adverse outcome on these lawsuits
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, 1997, two customers represented 51% of net sales.
For the year ended June 30, 1996, two customers represented 61% 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. Effective January 1, 1996, the Company enacted
an amendment to the Plan eliminating the Company's matching
contribution requirement. Matching contributions made by the Company
in accordance with the Plan's provisions, prior to the amendment, totaled
$2,000 and $4,000 during the years ended June 30, 1996 and 1995,
respectively. The Company did not make a matching contribution for
the year ended June 30, 1997.
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,
1997, 1996 and 1995, the Company has a note payable for $35,000,
$110,000 and $336,000, respectively, outstanding and due to this
creditor (Note 5).
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