SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended: October 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Transition Period From ______________ to ______________
Commission File Number: 0-18252
ULTRA PAC, INC.
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1581031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
21925 Industrial Boulevard, Rogers, Minnesota 55374
(Address of principal executive offices) Zip Code
(612) 428-8340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. __X__ Yes _____ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock No Par Value 3,788,015
Class of Common Stock Shares outstanding as of
November 22, 1996
ULTRA PAC, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of October 31, 1996 and
January 31, 1996 3
Statements of Operations for the three
and nine months ended October 31, 1996
and 1995 5
Statements of Cash Flows for the nine
months ended October 31, 1996 and 1995 6
Notes to Interim Financial Statements 7
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on
Form 8-K 20
Ultra Pac, Inc.
BALANCE SHEETS
ASSETS
October 31, January 31,
1996 1996
----------- -----------
(unaudited)
CURRENT ASSETS
Cash $ 500 $ 345,906
Accounts receivable - trade, less
allowances for doubtful receivables,
sales discounts and returns of
$426,981 at October 31 and $305,000
at January 31 3,476,355 4,706,477
Refundable income and sales taxes 22,335 1,534,500
Inventories
Raw materials 1,733,082 2,089,444
Work in process 1,520,654 2,077,652
Finished goods 3,891,532 5,432,419
Deferred income taxes 727,000 264,000
Other current assets 238,555 153,803
----------- -----------
Total current assets 11,610,013 16,604,201
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Building and improvements 3,492,768 3,491,268
Manufacturing equipment 21,725,992 22,592,367
Extrusion equipment 12,355,550 12,270,044
Other equipment and furnishings 990,138 1,868,806
Leasehold improvements 945,219 945,219
----------- -----------
39,509,667 41,167,704
Less accumulated depreciation and
amortization 11,893,963 9,837,213
----------- -----------
27,615,704 31,330,491
Deposits on manufacturing equipment 9,375 --
Land 737,317 737,317
----------- -----------
28,362,396 32,067,808
OTHER
Security deposits 501,099 495,955
Leasehold costs
less accumulated amortization
of $42,583 at October 31
and $24,333 at January 31 322,416 340,668
Investment in affiliate 224,326 143,215
Deferred income taxes -- 722,000
Other 334,507 207,391
----------- -----------
1,382,348 1,909,229
----------- -----------
$41,354,757 $50,581,238
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31, January 31,
1996 1996
----------- -----------
(unaudited)
CURRENT LIABILITIES
Bank Overdraft $ 216,403 $ --
Current maturities of long-term
obligations 12,320,231 1,900,220
Accounts payable - principally trade 6,455,214 10,437,204
Accrued liabilities
Salaries and commissions 1,029,453 843,922
Interest and other 478,705 737,481
Income taxes payable 32,465 --
----------- -----------
Total current liabilities 20,532,471 13,918,827
LONG-TERM OBLIGATIONS, less current
maturities 9,720,918 27,235,076
DEFERRED INCOME TAXES 385,000 --
SHAREHOLDERS' EQUITY
Common stock - authorized, 10,000,000
shares of no par value; issued and
outstanding, 3,788,015 at October 31,
and 3,766,215 shares at January 31 7,697,697 7,631,572
Additional contributed capital 1,360,334 1,213,000
Retained earnings 1,658,337 582,763
----------- -----------
10,716,368 9,427,335
----------- -----------
$41,354,757 $50,581,238
=========== ===========
See accompanying notes to interim financial statements.
<TABLE>
<CAPTION>
Ultra Pac, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended Nine months ended
October 31, October 31,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 14,305,170 $ 15,374,008 $ 49,035,997 $ 52,511,986
Cost of products sold 9,147,884 13,479,547 34,283,065 41,563,203
------------ ------------ ------------ ------------
Gross profit 5,157,286 1,894,461 14,752,932 10,948,783
Operating expenses
Marketing and sales expense 2,488,893 2,775,201 8,085,185 8,754,784
Administrative expense 822,066 689,421 2,347,618 2,061,677
------------ ------------ ------------ ------------
3,310,959 3,464,622 10,432,803 10,816,461
------------ ------------ ------------ ------------
Operating profit (loss) 1,846,327 (1,570,161) 4,320,129 132,322
Other (expense)
Interest expense (613,611) (665,529) (1,888,331) (1,847,534)
Write down of recycling
equipment (50,000) -- (509,638) --
Equity in net loss of
affiliate (42,635) -- (69,635) --
Other (40,008) (13,070) (60,951) (15,506)
------------ ------------ ------------ ------------
(746,254) (678,599) (2,528,555) (1,863,040)
------------ ------------ ------------ ------------
Earnings(loss) before income taxes 1,100,073 (2,248,760) 1,791,574 (1,730,718)
Income tax provision (benefit) 423,000 (805,000) 716,000 (610,000)
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ 677,073 $ (1,443,760) $ 1,075,574 $ (1,120,718)
============ ============ ============ ============
Earnings (loss) per common and
common equivalent share $ .18 $ (.38) $ .28 $ (.30)
============ ============ ============ ============
Weighted average number of
shares outstanding 3,795,364 3,766,215 3,784,700 3,766,215
============ ============ ============ ============
See accompanying notes to interim financial statements.
</TABLE>
<TABLE>
<CAPTION>
Ultra Pac, Inc.
STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
October 31
Increase (Decrease) in Cash 1996 1995
----------- ------------
<S> <C> <C>
Cash flows provided by operating activities
Net earnings (loss) $ 1,075,574 $(1,120,718)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Depreciation 3,148,328 2,605,649
Amortization of warrants 48,430 --
Issuance of employee stock grants 54,325 --
Write down of recycling equipment 509,638 --
Equity in undistributed net loss of affiliates 69,635 --
Gain on sale of equipment, net (31,540) (8,297)
Deferred Income Taxes 644,000 (198,475)
Change in assets and liabilities:
Accounts receivable 1,079,376 (191,195)
Refundable income and sales taxes 1,512,165 (639,955)
Inventories 2,454,247 (431,627)
Other current assets 15,248 (161,174)
Accounts payable (3,981,990) 2,827,584
Accrued Liabilities (73,245) (171,404)
Income taxes payable 32,465 (322,054)
----------- -----------
Net cash provided by operating activities 6,556,656 2,188,334
Cash flows from investing activities
Capital expenditures (236,014) (9,067,868)
Investment in affiliate -- (151,500)
Proceeds from sale of assets 215,000 200,500
Security deposits and other (15,104) (149,795)
----------- -----------
Net cash used in investing activities (36,118) (9,168,663)
Cash flows from financing activities
Bank overdraft 216,403 107,323
Proceeds from long-term obligations 2,600,000 9,005,265
Principal payments under long-term obligations (9,694,147) (2,277,490)
Exercise of stock options 11,800 --
----------- -----------
Net cash provided by (used in) financing
activities (6,865,944) 6,835,098
----------- -----------
Net change in cash (345,406) (145,231)
Cash at beginning of period 345,906 145,731
----------- -----------
Cash at end of period $ 500 $ 500
=========== ===========
See accompanying notes to interim financial statements.
</TABLE>
Ultra Pac, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
October 31, 1996
(unaudited)
(1) Basis of Presentation
The interim financial statements presented herein are unaudited, but in
the opinion of management reflect all adjustments necessary for a fair
presentation of results for such periods. The results of operations for
any interim period are not necessarily indicative of results for the full
year. Information as of January 31, 1996 was taken from the Company's
Annual Report to Shareholders on Form 10-K for the year ended January 31,
1996. These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual
Report to Shareholders on Form 10-K for the year ended January 31, 1996.
(2) Write Down of Recycling Equipment
Pursuant to Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets To Be Disposed Of",
the Company wrote down its recycling equipment by $50,000 in October 1996
and $459,638 in July 1996, to its estimated net realizable value. The
$459,638 writedown was recorded after it became apparent that a planned
joint venture to utilize such assets would not happen. This writedown, as
well as an additional $50,000 writedown taken to reflect diminished
interest in the equipment, was based on the estimated fair value as
determined by management and is included in other expense in the Statement
of Operations for the three and nine months ended October 31, 1996.
(3) Long Term Obligations
In June 1996, the Company received an additional $2,600,000 from its
principal lender pursuant to a new term note due May 31, 1997.
Additionally, the Company modified certain terms of its existing revolving
credit facility and term note with its principal lender and certain
equipment notes with its other lenders. Prior to May 31, 1997, the Company
will be required to refinance or renew its existing $9,500,000 revolving
credit facility and $6,846,000 of existing term notes and a mortgage.
Management believes that the above will be refinanced or renewed on
similar terms. However, if the Company is unable to secure a timely
replacement, renewal or satisfactory extension of the maturity dates of
these facilities, or raise sufficient additional equity, there could be a
material adverse effect on the Company's financial condition and business.
(4) Shareholders' Equity
The following table summarizes stock option activity for the nine
months ended October 31, 1996:
<TABLE>
<CAPTION>
Outside
Grant Expiration Exercise Total 1996 1991 Directors
Recipient Date Date Price Shares Plan Plan Plan Other
--------- ----- ---------- -------- ------- ------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS OUSTANDING AS OF JANUARY 31, 1996 211,500 - 70,500 19,000 122,000
OPTIONS GRANTED:
Directors July 1996 July 2001 $3.00 5,500(1) - - 5,500 -
President/CEO September 1996 September 2001 3.25 20,000(1) 20,000 - - -
Former COO May 1996 May 2001 3.38 25,000(2) - 25,000 - -
Former COO May 1996 May 2001 3.38 75,000(1)(3) 75,000 - - -
CFO September 1996 September 2001 3.25 10,000(1) - 10,000 - -
Employees April 1996 March 2001 2.94 76,000(1) 76,000 - - -
OPTIONS EXPIRED OR FORFEITED:
President/CEO - - - (20,000) - - - (20,000)
Former COO - - - (75,000) (75,000) - - -
Directors - - - (2,500) - - (2,500) -
Employees - - - (35,000) (13,000) (22,000) - -
OPTIONS EXERCISED:
Employees - - 2.94 (4,000) (4,000) - - -
------ ------ ------ ------ -------
OPTIONS OUTSTANDING AND EXERCISABLE AS OF OCTOBER 31, 1996 286,500 79,000 83,500 22,000 102,000
======= ====== ====== ====== =======
</TABLE>
(1) Non statutory stock options.
(2) Incentive stock options.
(3) Subsequently forfeited.
In November 1996, the Company's Board of Directors granted non qualified
stock options to purchase 15,000 shares of common stock to the acting COO
and 10,000 shares of common stock to employees at an exercise price of
$2.75 per share. These options, which vest immediately, were issued under
the Company's 1996 Stock Option Plan and expire in November 2001.
In June 1996, the Company issued warrants to purchase 185,000 shares of
common stock to certain of its lenders at an exercise price of $3.00 per
share. These warrants will expire in June 2006. The exercise price is
subject to reduction under certain circumstances. These warrants were
issued in connection with the financing discussed in Note(3) above and
have certain registration rights. Pursuant to applicable accounting
principles, the Company will record $147,334 as additional interest
expense over the term of such notes, equal to the estimated fair value of
these warrants at time of issuance. A significant portion of such interest
expense will be recognized from the date of issuance through May 31, 1997.
A total of $28,696 and $48,430 of this additional interest was recognized
during the three and nine months ended October 31, 1996, respectively.
At the time of employment, the former COO was issued compensation in the
form of 5,000 shares of the Company's common stock.
In August 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Capital Stock from 5,000,000
to 10,000,000 shares, as approved by the Company's shareholders at the
July 17, 1996, Annual Shareholders meeting.
(5) Income Taxes
As of October 31, 1996 the Company recorded net deferred tax assets of
$342,000 primarily resulting from the benefit of net operating loss carry
forwards, which expire in varying amounts between the years ending January
31, 2008 and 2012. Gross deferred tax assets of $3,839,000 are offset by
deferred tax liabilities of $3,497,000 resulting principally from
accelerated depreciation.
The Company is not required to record valuation allowances for deferred
tax assets where management believes it is more likely than not that the
tax benefit will be realized. Valuation allowances were not recorded as
the deferred tax assets are offset by existing taxable temporary
differences, principally depreciation, expected to reverse within the
carryforward period and management believes future operating income will
exceed the remaining amount of deferred tax benefits, which belief is
reinforced by the results of operations for the nine months ended October
31, 1996. The Company will continue to review for the appropriateness of a
valuation allowance on a quarterly basis and make adjustments as
necessary.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
Ultra Pac, Inc. designs, manufactures, markets and sells plastic containers and
packaging to the food industry, including supermarkets, distributors of food
packaging, wholesale bakery companies, fruit and vegetable growers,
delicatessens, processors and retailers of prepared foods, and foodservice
providers. The Company's packaging is primarily made from virgin or recycled
polyethylene terephthalate ("PETE") which is extruded into plastic sheet and
thermoformed into various shapes.
Management believes that future sales and earnings could be affected by
variations in markets served, fluctuations in the cost of its primary raw
materials and a variety of other factors. These include: (1) market demand for
PETE raw material and the resulting impact on the Company's raw material costs;
(2) competitive pressures in the marketplace for the Company's products; (3) the
impact of weather conditions on the seasonal production of fresh produce and the
resulting demand for plastic packaging; and, (4) fixed overhead and borrowing
costs.
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Statements of Operations of the Company expressed as a percentage of
net sales.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
October 31, October 31,
----------------- -----------------
1996 1995 1996 1995
----- ---- ----- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 64.0 87.6 69.9 79.1
----- ----- ----- ----
Gross profit 36.0 12.4 30.1 20.9
Operating expenses
Marketing and sales 17.4 18.1 16.5 16.7
Administrative 5.7 4.5 4.7 3.9
---- ---- ---- ----
23.1 22.6 21.2 20.6
---- ---- ---- ----
Operating profit (loss) 12.9 (10.2) 8.9 .3
Other expense
Write down of recycling equipment .3 - 1.0 -
Interest expense and other 4.9 4.4 4.2 3.5
---- ---- ---- ----
5.2 4.4 5.2 3.5
---- ---- ---- ----
Earnings(loss) before income taxes 7.7 (14.6) 3.7 (3.2)
Income tax provision (benefit) 3.0 (5.2) 1.5 (1.1)
---- ---- ---- ----
NET EARNINGS (LOSS) 4.7% (9.4)% 2.2% (2.1)%
==== ==== ==== ====
</TABLE>
Net Sales:
Net sales decreased 7.0% from $15,374,008 to $14,305,170 for the three months
ended October 31, 1996, as compared to the three months ended October 31, 1995,
and 6.6% from $52,511,986 to $49,035,997 for the nine months ended October 31,
1996, as compared to the nine months ended October 31, 1995.
The decrease in sales during both periods is in part a result of the Company
focusing on margin improvement rather than on growing sales. The Company also
believes that the market for bakery and produce containers has become
increasingly competitive due to new entrants into the markets served and pricing
pressures from competitors who use lower-cost, non-PETE resins such as oriented
polystyrene.
The decrease in sales was offset in part by an increase in sales of the
Company's line of Ultra Lite Bakeable products and its line of food service
products. The Company anticipates a sales decline in the fourth quarter of
fiscal 1997 as compared to the third quarter of fiscal 1997 and as compared to
the fourth quarter of fiscal 1996. This anticipated decline in the fourth
quarter of fiscal 1997 as compared to the third quarter of fiscal 1997 reflects
the typical slowness in sales in the fourth quarter, as seen in previous years.
The anticipated decline in the fourth quarter of fiscal 1997 as compared to the
fourth quarter of fiscal 1996 also reflects the Company's strategy as discussed
above.
Management continues its efforts to identify and analyze long term market
trends, competitive strategies, and other factors that influence market
conditions or result in competitive pressures. Management believes that this
activity will assist the Company in developing future markets, product and price
strategies, as well as improving its production planning process. In connection
with its efforts in this area, the Company hired a Director of Sales and
Marketing in August 1996.
Gross Profit:
Gross profit margins improved from 12.4% to 36.0% for the three months ended
October 31, 1996, as compared to the three months ended October 31, 1995, and
from 20.9% to 30.1% for the nine months ended October 31, 1996, as compared to
the nine months ended October 31, 1995. The improvement in gross profit margins
can be attributed to lower prices of PETE resin and of other raw materials, to
the Company's ability to supply all PETE sheet needs from in-house extrusion
facilities and to a decline in production labor costs coupled with improved
manufacturing efficiencies and related manufacturing costs.
As previously discussed in the Company's Form 10-K for the fiscal year ended
January 31, 1996 and previously filed fiscal 1997 Forms 10Q, the Company
negotiated, late in fiscal 1996, a three-year supply agreement for a major
portion of its virgin PETE resin needs. Minimum resin quantities are required to
be purchased at a fixed price (adjusted annually). As previously announced, this
agreement has been informally amended to allow pricing to float with market
conditions subject to limits on the amount by which prices may change. The
Company believes the price it pays continues to be favorable under current
market conditions. Prices for PETE resin declined dramatically during the second
and third quarters due in part to increased capacity of refiners and the lower
cost of paraxylene, a major component of PETE resins. The Company anticipates
that PETE resin prices will remain flat during the balance of fiscal 1997 and
does not anticipate any significant increases in the foreseeable future. The
decline of PETE resin prices has been significantly greater in fiscal 1997 than
the increase in fiscal 1996.
With the installation of its fifth and sixth extrusion lines in fiscal 1996, the
Company has been able to supply all its PETE sheet needs for fiscal 1997 and
expects to be able to do so during fiscal 1998. In fact, at various times, the
Company extrudes PETE sheet at less than its full production capacity, and on
occasion, extrudes plastic sheet for other manufacturers. The cost of plastic
sheet extruded by the Company has been significantly lower than the cost of
plastic sheet purchased from outside sources.
The Company has significantly reduced its workforce from approximately 415 in
October 1995 to less than 280 in October 1996 reflecting improved productivity
in thermoforming operations. Due to these factors and anticipated lower sales,
the Company believes it will require a smaller workforce for the balance of
fiscal 1997. As a result, the Company expects its labor costs will remain lower
during fiscal 1997, as compared to fiscal 1996.
With the anticipated decline in sales during the fourth quarter of fiscal 1997,
the Company expects its gross margin percentage to have a moderate decline from
its current level due to fixed overhead costs, which are anticipated to decline
at a slower rate than sales. However, the factors discussed above are expected
to continue to have a positive impact on gross margins for the balance of fiscal
1997 and into fiscal 1998.
Operating Expenses:
Marketing and sales expense decreased from $2,775,201 or 18.1% of net sales, to
$2,488,893 or 17.4% of net sales during the three months ended October 31, 1996,
as compared to the three months ended October 31, 1995, and decreased from
$8,754,784 or 16.7% of net sales to $8,085,185 or 16.5% of net sales for the
nine months ended October 31, 1996, as compared to the nine months ended October
31, 1995. The decrease in marketing and sales expense was primarily due to lower
sales levels resulting in a reduction in freight and commission expense.
However, a reduction in commission expense, in both dollars and as a percentage
of sales, was partially due to a reduction in the commission rate.
Administrative expense increased from $689,421 or 4.5% of net sales to $822,066
or 5.7% of net sales during the three months ended October 31, 1996, as compared
to the three months ended October 31, 1995, and increased from $2,061,677 or
3.9% of net sales to $2,347,618 or 4.7% of net sales for the nine months ended
October 31, 1996, as compared to the nine months ended October 31, 1995. The
increase in administrative expense was primarily due to increased legal costs
associated with certain litigation matters arising in the normal conduct of the
Company's business. The Company believes that ultimate resolution of such
litigation will not have a material adverse impact on the Company's financial
condition. In addition, administrative expenses also increased due to the May
1996 addition and October separation of a Chief Operating Officer. The Company
also added Gregory Nelson as its Director of Management Information Systems in
August 1996.
Interest Expense and Other:
Interest expense decreased from $665,529 or 4.3% of net sales to $613,611 or
4.3% of net sales for the three months ended October 31, 1996, as compared to
the three months ended October 31, 1995 and increased from $1,847,534 or 3.5% of
net sales to $1,888,331 or 3.9% of net sales for the nine months ended October
31, 1996, as compared to the nine months ended October 31,1995. The increase for
the nine month period was principally due to higher debt levels, primarily in
the first and second quarters of this year, from the financing of additional
property, equipment and improvements acquired during the second and third
quarters of fiscal 1996 and the losses incurred during the third and fourth
quarters of fiscal 1996. The increase was also due in part to an increase in
interest rates resulting from the refinancing of its bank debt in June 1996 as
discussed under Liquidity and Capital Resources. The decrease for the three
month period is due to lower debt levels reflecting the improved earnings and
cash flow performance of the Company over the past six months.
During the three and nine months ended October 31, 1996 respectively, $50,000
and $459,638 of other expenses resulted from the writedown, to the estimated net
realizable value, of the Company's recycling equipment. While the Company has
not operated this equipment since August 1995, it was planning to use the
equipment in connection with a joint venture. The joint venture discussions were
terminated during the quarter ended July 31, 1996. Since then the Company has
been actively searching for a buyer of this equipment, but currently has no
ongoing substantive discussions with any potential purchasers.
Income Taxes:
As of October 31, 1996, the Company has $342,000 of net deferred tax assets. See
Footnote (5) of the "Notes to Interim Financial Statements" as of October 31,
1996, for information regarding asset realizability.
Net Earnings:
As a result of the factors discussed above, net earnings for the three months
ended October 31, 1996 were $677,073 or $.18 per share as compared to a loss of
$1,443,760 or $.38 per share for the three months ended October 31, 1995. Net
earnings were $1,075,574 or $.28 per share for the nine months ended October 31,
1996 as compared to a loss of $1,120,718 or $.30 per share for the nine months
ended October 31, 1995.
The Company believes inflation has not significantly affected its results of
operations.
Liquidity and Capital Resources
The Company's business is highly capital intensive. The Company has
traditionally relied heavily on bank and other debt financing to fund its
capital requirements. As of October 31, 1996, the Company had borrowed
$1,441,773 under its $9,500,000 revolving credit facility, leaving $8,058,227
potentially available. However, under the Company's borrowing base, only
$4,312,378 of the $8,058,227 was in fact available at October 31, 1996.
As of January 31, 1996, and during the first quarter of fiscal 1997, the Company
was in default on virtually all of its long-term obligations due to financial
covenant violations and failure to make certain required payments, including
repayment of excess borrowings under its revolving credit facility. In April
1996, the Company received waivers for the existing defaults from such lenders
and commitments to amend certain financial covenants. The covenants were amended
in June 1996 and the Company has and continues to believe it will be able to
comply with such amended covenants.
In June 1996, the Company received from its principal lender an additional
$2,600,000 pursuant to a new term note. The proceeds were used to pay down its
existing revolving credit facility, including excess borrowings under such
facility. The term note bears interest at 3% over the bank's base rate with
monthly installments of $75,000 plus interest with the remaining balance of
$1,281,453 due May 31, 1997. Additionally, the terms of such facility and the
existing term note with its principal lender were modified to (i) increase the
interest rate differentials on both the facility and existing term note by 1%
and .875%, respectively and (ii) reduce the Company's borrowing base under the
facility by $1,000,000.
In addition to the new agreements with its principal lender, certain of the
Company's equipment lenders amended their equipment notes to defer approximately
$2,250,000 in principal payments due during fiscal 1997. Pursuant to the
amendments, the deferred principal payments are due with the last payment of
each respective equipment note. Additionally, the Company may be required,
subject to certain restrictions, to repay a portion of the deferred principal
over the next two fiscal years to the extent there is availability under the
Company's revolving credit facility as determined on January 31, 1997 and 1998.
The Company anticipates that it may be required to make deferred principal
payments of approximately $300,000 in the months of February and April 1997.
In connection with the above, the Company issued warrants to certain lenders to
purchase 185,000 shares of the Company's common stock. Such warrants are
exercisable at $3.00 per share, representing the market price existing at time
of issuance, and will expire June 2006. The issuance of these warrants resulted
in $147,334 of additional interest to be recognized over the term of the
respective credit facilities and notes.
The Company believes its existing revolving credit facility is adequate to
support its operations through the term of such facility. However, the Company
will be required to renew or refinance up to $13,500,000 related to its existing
revolving credit facility of $9,500,000 and existing term note of $4,000,000
prior to their expiration in May 1997. This is in addition to $1,281,453 due on
May 31, 1997 pursuant to the new term note, discussed above and $884,256 due
under a real estate mortgage. Because of the Company's operating losses in
fiscal 1996 and the first quarter of fiscal 1997, and its high debt levels, such
debt renewal or refinancing may be more difficult to secure than in the past,
may be more costly than its current credit facility, and may require covenants
or restrictions more difficult to comply with than those previously or currently
imposed. Additionally, renewal or refinancing will be dependent upon the Company
meeting its operating plans and managing its financial performance, among other
things. No assurance can be given that the Company will be able to renew or
refinance its existing credit facility or term notes or that it will be able to
do so on acceptable terms. The Company may also explore equity financing but has
not entered into any agreement or negotiations related thereto.
If the Company is unable to secure a timely replacement, renewal or satisfactory
extension of the maturity dates of these facilities, or raise sufficient
additional equity, there could be a material adverse effect on the Company's
financial condition and business.
Working capital decreased from $2,685,374 on January 31, 1996 to a deficit of
$8,922,458 on October 31, 1996. This decrease is primarily due to an increase in
current maturities of long term obligations as discussed above. Contributing to
the decrease in working capital were reductions in accounts receivable,
inventories and refundable income and sales taxes, offset by a decrease in
accounts payable. Accounts receivable declined from $4,706,477 on January 31,
1996 to $3,476,355 on October 31, 1996 due in part to the reduction in net
sales. Inventories decreased from $9,599,515 on January 31, 1996 to $7,145,268
on October 31, 1996 due to a decrease in the levels of raw materials and work in
process and lower costs of inventories due to lower raw material and conversion
costs.
For the nine months ended October 31, 1996, $6,556,656 of cash was provided by
operating activities as compared to $2,188,334 for the nine months ended October
31, 1995. This reflects a decrease in accounts receivable, refundable income and
sales taxes and inventories, and other funds generated through operations,
offset in part by a decrease in accounts payable.
As of October 31, 1996, the Company had outstanding capital commitments of
$350,000 and was reviewing only minimal capital expenditures related to
improving manufacturing efficiencies and expenditures on molds for new products.
The Company anticipates that capital expenditures for fiscal 1997 will be
approximately $500,000, as compared to $9,600,000 incurred in fiscal 1996. The
Company believes the current level of production equipment and facilities is
sufficient to meet anticipated fiscal 1997 and 1998 requirements. The fiscal
1997 expenditures will be financed from funds available through the Company's
credit facility and funds generated from operations.
Seasonality of Sales and Operating Profits
With the introduction of its line of produce containers during 1992, the Company
has progressively received a greater portion of its sales during the first half
of its fiscal year. Historically, sales during the fourth quarter have declined
from the third quarter. The Company expects this trend to continue for the
foreseeable future.
In a stable cost environment, the lower sales level in the second half of the
Company's fiscal year would be expected to result in lower gross margin and
operating profits during such period. However, in the current year, with raw
material costs declining through the second and third quarters and manufacturing
costs reduced, the gross margin and gross margin percentage actually increased
in the third quarter as compared to the second quarter, while operating profits
were moderately lower, primarily as a result of the lower sales volume. The
gross margin is expected to decline moderately in the fourth quarter of the
current year, from the third quarter, as a result of the anticipated sales
decline discussed earlier.
PART II
OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits: None
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED: December 2, 1996 ULTRA PAC, INC.
---------------
(Registrant)
/s/ Calvin Krupa
--------------------------------------
Calvin Krupa, President and
Chief Executive Officer
/s/ Bradley Yopp
--------------------------------------
Bradley Yopp, Chief Financial
Officer
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 500
<SECURITIES> 0
<RECEIVABLES> 3,900,297
<ALLOWANCES> 426,982
<INVENTORY> 7,145,268
<CURRENT-ASSETS> 11,610,013
<PP&E> 40,256,359
<DEPRECIATION> 11,893,963
<TOTAL-ASSETS> 41,354,757
<CURRENT-LIABILITIES> 20,532,471
<BONDS> 9,720,918
0
0
<COMMON> 7,697,697
<OTHER-SE> 1,360,334
<TOTAL-LIABILITY-AND-EQUITY> 10,716,368
<SALES> 49,035,997
<TOTAL-REVENUES> 49,035,997
<CGS> 34,283,065
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<OTHER-EXPENSES> 10,432,803
<LOSS-PROVISION> 110,000
<INTEREST-EXPENSE> 1,888,331
<INCOME-PRETAX> 1,791,574
<INCOME-TAX> 716,000
<INCOME-CONTINUING> 1,075,574
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