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: April 30, 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 3,784,015
--------------------------- --------------------------
Class of Common Stock Shares outstanding as of
May 31, 1996
ULTRA PAC, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Balance Sheets as of April 30,
1996 and January 31, 1996 3
Statements of Operations for the
three months ended April 30, 1996
and 1995 5
Statements of Cash Flows for the
three months ended April 30, 1996
and 1995 6
Notes to Interim Financial
Statements 7
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on
Form 8-K 17
Ultra Pac, Inc.
BALANCE SHEETS
ASSETS
April 30, January 31,
1996 1996
----------- -----------
(unaudited)
CURRENT ASSETS
Cash $ 160,048 $ 345,906
Accounts receivable - trade, less
allowance for doubtful receivables
of $335,000 at April 30 and $305,000
at January 31 5,842,140 4,706,477
Refundable income and sales taxes 475,784 1,534,500
Inventories
Raw materials 2,091,671 2,089,444
Work in process 2,066,762 2,077,652
Finished goods 4,962,817 5,432,419
Deferred income taxes 264,000 264,000
Other current assets 170,817 153,803
----------- -----------
Total current assets 16,034,039 16,604,201
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Building and improvements 3,491,268 3,491,268
Manufacturing equipment 22,653,867 22,592,367
Extrusion equipment 12,352,887 12,270,044
Other equipment and furnishings 1,868,806 1,868,806
Leasehold improvements 945,219 945,219
----------- -----------
41,312,047 41,167,704
Less accumulated depreciation 10,900,845 9,837,213
----------- -----------
30,411,202 31,330,491
Deposits on manufacturing equipment 2,413 --
Land 737,317 737,317
----------- -----------
31,150,932 32,067,808
OTHER
Security deposits and leasehold costs
less accumulated amortization of
leasehold costs of $30,417 at April
30 and $24,333 at January 31 829,233 836,623
Investments in affiliates 141,529 143,215
Deferred income taxes 850,528 722,000
Other 213,445 207,391
----------- -----------
2,034,735 1,909,229
$49,219,706 $50,581,238
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
April 30, January 31,
1996 1996
----------- -----------
(unaudited)
CURRENT LIABILITIES
Current maturities of long-term
obligations $ 2,650,974 $ 1,900,220
Accounts payable - principally trade 9,942,455 10,437,204
Accrued liabilities
Salaries and commissions 710,765 843,922
Interest and other 1,116,022 737,481
----------- -----------
Total current liabilities 14,420,216 13,918,827
LONG-TERM OBLIGATIONS, less current
maturities 25,698,751 27,235,076
SHAREHOLDERS' EQUITY
Common stock - authorized, 5,000,000
shares of no par value; issued and
outstanding, 3,766,215 shares 7,631,572 7,631,572
Additional contributed capital 1,213,000 1,213,000
Retained earnings 256,167 582,763
----------- -----------
9,100,739 9,427,335
----------- -----------
$49,219,706 $50,581,238
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
April 30,
----------------------------
1996 1995
------------ ------------
Net Sales $ 15,760,404 $ 17,098,464
Cost of products sold 12,155,317 12,605,899
------------ ------------
Gross profit 3,605,087 4,492,565
Operating expenses
Marketing and sales 2,641,186 2,778,963
Administrative 741,525 668,008
------------ ------------
3,382,711 3,446,971
Operating profit 222,376 1,045,594
Interest expense and other 658,972 575,242
------------ ------------
Earnings (loss) before income taxes (436,596) 470,352
Income tax provision (benefit) (110,000) 177,000
------------ ------------
NET EARNINGS (LOSS) $ (326,596) $ 293,352
============ ============
Earnings (loss) per common share $ (.09) $ .08
============ ============
Weighted average number of shares
outstanding 3,766,215 3,766,791
============ ============
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows provided by operating activities
Net earnings (loss) $ (326,596) $ 293,352
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation 1,063,632 792,914
Equity in undistributed net loss of affiliate 17,000 --
Deferred income taxes (128,528) 62,600
Change in assets and liabilities:
Accounts receivable (1,135,663) (1,471,419)
Refundable income and sales taxes 1,058,716 231,913
Inventories 478,265 (875,917)
Other current assets (17,014) (206,379)
Accounts payable (494,749) 1,768,366
Accrued liabilities 245,384 (8,784)
Income taxes payable -- (320,099)
----------- -----------
Net cash provided by operating
activities 760,447 266,547
Cash flows from investment activities
Capital expenditures (146,756) (3,524,531)
Security deposits and other 1,336 (76,037)
Investments in affiliates (15,314) --
----------- -----------
Net cash used in investing activities (160,734) (3,600,568)
Cash flows from financing activities
Proceeds from long-term obligations -- 4,385,184
Principal payments under long-term obligations (785,571) (608,535)
----------- -----------
Net cash provided by (used in) financing
activities (785,571) 3,776,649
----------- -----------
Net change in cash (185,858) 442,628
Cash at beginning of period 345,906 145,731
----------- -----------
Cash at end of period $ 160,048 $ 588,359
=========== ===========
</TABLE>
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
April 30, 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 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 on Form 10-K for the year ended January 31, 1996.
(2) Long Term Obligations
The Company has a commitment to receive, in June 1996, an additional
$2,600,000 from its principal lender pursuant to a new term note.
Additionally, the Company has a commitment to modify certain terms of
its existing revolving credit facility and term note with its principal
lender and certain equipment notes with some of its lenders.
(3) Stock Options and Warrants
In April 1996, the Company's Board of Directors granted non-qualified
stock options to purchase 75,000 shares of common stock at an exercise
price of $2.94 per share. These options were issued under the Company's
1996 Stock Option Plan and expire in March, 2001.
In May 1996, the Company's Board of Directors granted an incentive
stock option to purchase 25,000 shares of common stock to the Company's
new Chief Operating Officer. The option has an exercise price of $3.38
per share. This option was issued under the Company's 1991 Stock Option
Plan and will expire in May 2001. Additionally, in May 1996, such
person was also granted non-qualified stock options to purchase 75,000
shares of common stock at an exercise price of $3.38 per share which
will expire in May 2001. The vesting of such options is subject to
acceleration based on the Company's annual net earnings. These options
were issued under the Company's 1996 Stock Option Plan.
In June 1996, a non-qualified stock option to purchase 20,000 shares of
common stock at an exercise price of $11.50 expired.
In June 1996, the Company expects to issue warrants to purchase 185,000
shares of common stock exerciseable at the market price existing at
time of issuance. The exercise price is subject to reduction under
certain circumstances. These warrants are expected to be issued in
connection with the financing discussed in (2) above and will have
certain registration rights. Pursuant to applicable accounting
principles, the Company will be required to recognize additional
interest expense, over the term of such notes, equal to the fair value
of these warrants at time of issuance. A significant portion of such
interest expense will be recognized from date of issuance through May
31, 1997. The fair value of such warrants has yet to be determined.
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 food industry retailers and distributors, including supermarkets,
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.
Because of the markets the Company serves, as well as fluctuations in the cost
of its primary raw materials, management believes that future sales and earnings
could be impacted by a variety of 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; (3) the impact weather conditions
can have 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.
Three Months Ended
April 30
------------------
1996 1995
----- -----
Net sales 100.0% 100.0%
Cost of products sold 77.1 73.7
----- -----
Gross profit 22.9 26.3
Marketing and sales expense 16.8 16.3
Administrative expense 4.7 3.9
----- -----
21.5 20.2
----- -----
Operating profit 1.4 6.1
Interest expense and other 4.2 3.4
----- -----
Earnings (loss) before income taxes (2.8) 2.7
Income tax provision (benefit) ( .7) 1.0
----- -----
NET EARNINGS (LOSS) (2.1)% 1.7%
===== =====
Net Sales:
Net sales decreased 7.8% from $17,098,464 to $15,760,404 for the three months
ended April 30, 1996, as compared to the three months ended April 30, 1995. The
decrease in net sales was primarily due to a decline of approximately 20% in
sales of the Company's line of bakery containers. This decline in bakery sales
has occurred primarily because of the increasingly competitive nature of the
marketplace that has been caused in part by aggressive pricing practices by
competitors. The Company believes this is particularly the case with competitors
who use lower-cost, non-PETE resins such as oriented polystyrene. This cost
disparity increased significantly during fiscal 1996. The decrease in bakery
sales was offset in part by an increase in sales of the Company's line of deli
products and a line of food service products such as plastic snack and dinner
boxes. While sales of the Company's line of produce containers and line of Ultra
Lite Bakeables during the three months ended April 30, 1996 were flat as
compared to the same period last year, the Company does expect growth in these
products for the balance of fiscal 1997 as compared to fiscal 1996.
Management has initiated an effort 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 market, product and price
strategies, as well as improve its production planning process.
Gross Profit:
Gross profit margins decreased from 26.3% to 22.9% for the three months ended
April 30, 1996 as compared to the three months ended April 30, 1995. The
decrease in gross profit margins is primarily attributed to a higher level of
fixed overhead costs in relationship to production output as compared to the
same period last year. In fiscal 1996, primarily after April 30, 1995, the
Company significantly increased its overhead cost structure by purchasing over
$7,000,000 of capital equipment. The Company acquired this additional
thermoforming and extrusion equipment, molds and leased facilities to increase
manufacturing capacity based on anticipated significant sales growth in fiscal
1996 and beyond. The Company did not achieve such anticipated sales growth in
fiscal 1996 and does not anticipate achieving that expected sales growth in
fiscal 1997.
The Company has taken a number of actions intended to improve gross profit
margins on a long term basis. With the installation of its fifth and sixth
extrusion lines in fiscal 1996, the Company expects to be able to supply all its
PETE sheet needs for fiscal 1997. In fact, at various times during the year, the
Company anticipates it will be extruding PETE sheet at less than its full
production capacity. The cost of plastic sheet which is extruded by the Company
has been significantly lower than the cost of plastic sheet purchased from
outside sources. The Company will continue to purchase polystyrene sheet from
outside suppliers as it has in the past.
Also, 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) that is favorable
to the Company under current market conditions. While the Company believes that
such supply agreement will have a positive impact on the Company's gross profit
margins for the balance of fiscal 1997, the favorable pricing may not offset
resin price increases that the Company experienced during fiscal 1996. Further,
in the event the market price of virgin PETE resin declines between annual price
adjustments, the advantage derived from this pricing agreement may diminish and
may even require the Company to pay a higher price for PETE resin than the
market price existing at that time.
Additionally, the Company reduced its workforce significantly from approximately
620 in June 1995 to approximately 350 in May 1996. Combined with its efforts to
improve efficiencies and reduce costs in its thermoforming and extrusion
operations, the Company believes it will require a smaller workforce in fiscal
1997 while maintaining production levels comparable to fiscal 1996. As a result,
the Company expects its labor costs will decline during fiscal 1997, as compared
to fiscal 1996.
Operating Expenses:
Marketing and sales expense was $2,641,186, or 16.8% of net sales in the three
months ended April 30, 1996 as compared to $2,778,963, or 16.3% of net sales in
the three months ended April 30, 1995. The decrease in marketing and sales
expense was primarily due to lower sales levels resulting in a reduction in
freight and commission expense. The increase in marketing and sales expense as a
percentage of net sales is primarily attributable to the decline in sales
without a corresponding percentage decline in certain other marketing and sales
expenses, excluding freight and commission costs.
Administrative expenses were $741,525, or 4.7% of net sales in the three months
ended April 30, 1996 compared to $668,008, or 3.9% of net sales in the three
months ended April 30, 1995. The increase in administrative expenses 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.
Interest Expense and Other:
Interest expense and other as a percentage of net sales increased from 3.4% to
4.2% for the three months ended April 30, 1996 as compared to the three months
ended April 30, 1995. The increase was principally due to higher debt levels.
The increase in debt levels was primarily a result of the financing of
additional property, equipment and improvements which occurred primarily during
the second and third quarters of fiscal 1996 and to finance the losses incurred
primarily in the third and fourth quarters of fiscal 1996.
Income Taxes:
The Company recognized an income tax benefit of $110,000 for operating losses
incurred during the three months ended April 30, 1996. As of April 30, 1996, the
Company has approximately $1,115,000 of net deferred tax assets primarily
resulting from net operating loss and other tax credit carryforwards of
approximately $4,000,000. Realization of these tax carryforwards is dependent on
generating sufficient taxable income prior to expiration of the net operating
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the deferred tax assets will be realized.
The amount of the deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
Net Earnings:
As a result of the factors discussed above, the Company incurred a net loss of
$326,596 for the three months ended April 30, 1996 as compared to net income of
$293,352 for the three months ended April 30, 1995.
The Company believes inflation has not significantly affected its results of
operations.
Liquidity and Capital Resources
Because the Company's business is highly capital intensive, it has traditionally
relied heavily on bank and other debt financing to fund its capital
requirements. As of April 30, 1996, the Company had borrowed $8,580,156 under
its $9,500,000 revolving credit facility, leaving $919,844 available. See
discussion below regarding the commitments for an additional $2,600,000 of new
term note financing and modifications of other obligations.
As of, or subsequent to, January 31, 1996, 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 Company believes it will be able to
comply with such amended covenants at least through the current fiscal year.
In April 1996, the Company received a commitment from its principal lender for
an additional $2,600,000 pursuant to a new term note. Such borrowing is expected
to be completed in June 1996. The Company intends to use the proceeds to pay
down its existing revolving credit facility, including the excess borrowings
under such facility. The term note will bear interest at 3% over the bank's base
rate with monthly installments of $75,000 plus interest, with the remaining
balance of $1,625,000 due May 31, 1997. Additionally, the terms of such facility
and the existing term note with its principal lender will be 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 commitments from its principal lender, the Company has
received commitments from certain of the Company's equipment lenders to amend
their equipment notes to defer approximately $2,250,000 in principal payments
due during fiscal 1997. Pursuant to the amendments, the deferred principal
payments will be due with the last payment of each respective equipment note.
Additionally, pursuant to such amendments, 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.
In connection with all of the above, the Company has agreed to issue warrants to
the lenders to purchase 185,000 shares of the Company's common stock. Such
warrants will be exerciseable at the market price existing at time of issuance.
The Company believes, subject to the changes discussed above, that its existing
revolving credit facility will be 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
($9,500,000) and existing term note ($4,000,000) prior to their expiration in
May 1997. This is in addition to the $1,625,000 due on May 31, 1997 pursuant to
the new term note as discussed above. 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 cash flow forecasts 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 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.
Working capital decreased from $2,685,374 on January 31, 1996 to $1,613,823 on
April 30, 1996. This decrease is primarily due to a decrease in refundable
income and sale taxes. Accounts receivable increased from $4,706,477 on January
31, 1996 to $5,842,140 on April 30, 1996. This increase is primarily due to the
increase in net sales. Inventories decreased from $9,599,515 on January 31, 1996
to $9,121,250 on April 30, 1996. This decrease was principally due to a decrease
in the levels of finished goods.
For the three months ended April 30, 1996, $760,447 of cash was provided by
operating activities. This reflects a decrease in refundable income and sales
taxes and inventories and other funds generated through operations offset in
part by an increase in accounts receivable and a decrease in accounts payable.
As of April 30, 1996, the Company had minimal outstanding capital commitments
and was reviewing only minimal capital expenditures related to improving
manufacturing efficiencies and reducing costs, as well as expenditures on molds
for new products. Because the Company believes that its current level of
production equipment and facilities are sufficient to meet its anticipated
fiscal 1997 requirements, its capital expenditures for fiscal 1997 will be
substantially less than the $9,600,000 expended in fiscal 1996. The fiscal 1997
expenditures will be financed from funds available through the Company's credit
facility and funds generated from operations.
The Company intends to dispose of certain assets which have not met its
operational objectives. These include tooling related to its line of floral
packaging as well as machinery and equipment used in its PETE flake recycling
plant which was closed in August 1995.
Seasonality of Sales and Earnings
During the past three years, the Company's product mix has become increasingly
seasonal. From late in the fourth quarter through almost all of the second
quarter, a higher percentage of the Company's production capacity was dedicated
to long production runs of berry containers for the produce-grower's market. In
the third quarter, the Company gradually re-directed the greatest share of its
production capacity toward bakery and deli containers. Historically, the average
gross profit margin for all bakery and deli containers sold during this period
was lower than the gross profit margins on the Company's berry containers.
However, beginning in fiscal 1996, with increasing competition among producers
of berry containers and the resulting competitive pressure on pricing, gross
profit margins for berry containers no longer exceeded the average gross profit
margin for bakery and deli containers.
Additionally, during the fourth quarter of recent years, the Company has been
increasing fixed manufacturing overhead costs as it prepared to accommodate
substantially higher customer demand anticipated in the next fiscal year.
However, the Company believes that during the fiscal year ending January 31,
1997, its fixed overhead costs will grow at a much slower rate than during the
fiscal years ended January 31, 1996 and 1995.
PART II
OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits: None
27.0 Financial Data Schedule
(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: June 13, 1996 ULTRA PAC, INC.
---------------
(Registrant)
Calvin Krupa
---------------
Calvin Krupa, President and
Chief Executive Officer
Bradley Yopp
---------------
Bradley Yopp, Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> APR-30-1996
<CASH> 160,048
<SECURITIES> 0
<RECEIVABLES> 5,773,706
<ALLOWANCES> 335,000
<INVENTORY> 9,121,250
<CURRENT-ASSETS> 16,034,039
<PP&E> 42,051,777
<DEPRECIATION> 10,900,845
<TOTAL-ASSETS> 49,219,706
<CURRENT-LIABILITIES> 14,420,216
<BONDS> 25,698,751
0
0
<COMMON> 7,631,572
<OTHER-SE> 1,213,000
<TOTAL-LIABILITY-AND-EQUITY> 49,219,706
<SALES> 15,760,404
<TOTAL-REVENUES> 15,760,404
<CGS> 12,155,317
<TOTAL-COSTS> 12,155,317
<OTHER-EXPENSES> 3,382,711
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 626,582
<INCOME-PRETAX> (419,596)
<INCOME-TAX> (110,000)
<INCOME-CONTINUING> (326,596)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (326,596)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
