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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
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Packaging Resources Incorporated
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3321568
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Conway Park, 100 Field Drive, Suite 300, Lake Forest, Illinois 60045
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(Address of principal executive offices) (Zip code)
(847)295-6100
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(Registrant's telephone number, including area code)
Indicate by check mark whether 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.
[ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the amount outstanding of each of the issuer's classes of common stock,
as of the latest practicable date.
As of July 1, 1996, the issuer had outstanding 1,000 shares of Common
Stock, $.01 par value per share.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKAGING RESOURCES INCORPORATED
STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
May 31
------------------------
1996 1995
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Net Sales $31,316 $36,335
Cost of goods sold 25,356 30,142
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Gross Profit 5,960 6,193
Selling, general & administrative
expenses 1,848 1,796
Amortization of intangibles and
other assets 174 599
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Operating income 3,938 3,798
Interest expense 2,416 2,769
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Income before income taxes and 1,522 1,029
extraordinary item
Income tax expense 654 422
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Income before extraordinary item 868 607
Extraordinary item -- write-off of
unamortized deferred financing
cost, net of tax 1,064 0
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Net income(loss) ($196) $607
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See accompanying notes to financial statements.
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PACKAGING RESOURCES INCORPORATED
BALANCE SHEETS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
May 31, February 29,
1996 1996
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,179 $ 398
Account receivable, net 11,670 10,719
Inventories 20,778 21,394
Prepaid expenses 960 690
Deferred income taxes 922 922
-------- --------
Total current assets 38,509 34,123
Property, plant, and equipment, net 52,433 52,352
Intangibles, net 20,281 20,454
Other assets 5,658 3,754
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$116,881 $110,683
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 550 $ 10,350
Accounts payable 6,514 2,615
Accrued expenses 4,886 4,196
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Total current liabilities 11,950 17,161
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Long-term debt, excluding current
maturities 110,700 67,174
Deferred income taxes 7,923 8,083
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Total liabilities $130,573 $ 92,418
Stockholders' equity:
Common stock, $.01 par value.
1,000 shares authorized,
issued, and outstanding - -
Additional paid-in capital (11,483) 20,278
Retained earnings (accumulated
deficit) (2,209) (2,013)
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Total stockholders' equity ($13,692) $ 18,265
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$116,881 $110,683
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See accompanying notes to financial statements.
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PACKAGING RESOURCES INCORPORATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
May 31
--------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) ($196) $607
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,413 2,879
Deferred income taxes (160) 1,382
Change in assets and liabilities:
Change in current assets (605) 1,321
Change in current liabilities 4,589 (2,278)
Write-off of unamortized deferred financing
costs 1,867 0
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Net cash provided by operating activities 7,908 3,911
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Cash flows from investing activities:
Proceeds from sale of property, plant, and
equipment 0 26
Capital expenditures (1,942) (740)
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Net cash used in investing activities (1,942) (714)
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Cash flows from financing activities:
Payments under credit agreement (2,250) (1,000)
Payments of promissory notes (550) (800)
Repayment of indebtedness under old credit
agreement (73,474) 0
Proceeds from senior secured notes, net 105,850 0
Dividends paid (31,761) 0
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Net cash used in financing activities (2,185) (1,800)
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Net increase in cash 3,781 1,397
Cash at beginning of period 398 232
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Cash at end of period $4,179 $1,629
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- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information -
cash paid for:
Interest $1,593 $2,465
Income taxes $28 $8
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- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
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PACKAGING RESOURCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
1) BASIS OF PRESENTATION
The balance sheet as of May 31, 1996 and the statements of operations
and cash flows for the three month periods ended May 31, 1996 and 1995 have
been prepared by the Company. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the financial statements for the interim periods
included herein have been made. The results of operations for the three-
month period ended May 31, 1996 are not necessarily indicative of the
results to be expected for the full year.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Packaging Resources Incorporated (PRI or the Company) is a wholly
owned subsidiary of Packaging Resources Group, Inc (Group). Group is
a wholly owned subsidiary of HPH Industries, Ltd (HPH).
The primary business of PRI is the manufacture and sale of
plastic packaging for the food, dairy, and pharmaceutical industries
and promotional beverage cups. PRI has manufacturing facilities in
Coleman, Michigan; Fort Worth, Texas; Kansas City, Missouri; Mt.
Carmel, Pennsylvania; and New Vienna, Ohio.
(b) INVENTORIES
Inventories are stated at the lower of first-in, first-out cost
or net realizable value.
(c) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation
on plant and equipment is calculated on the straight-line method over
the following estimated useful lives of the assets:
Furniture and fixtures . . . . . . . . . . 5 years
Molds . . . . . . . . . . . . . . . . 3-5 years
Machinery and equipment . . . . . . . . . . 13 years
Buildings and improvements . . . . . . . . . 25 years
Land improvements . . . . . . . . . . . . 35 years
Leasehold improvements are amortized ratably over the shorter of
the lease term or estimated useful life of the assets.
(d) INTANGIBLES
Intangibles consists of patent costs and the excess of the cost
over the fair value of net assets purchased. The intangibles are
amortized on a straight-line basis over their useful lives of 14 years
to 40 years. Accumulated amortization was $3,865 and $4,038 at
February 29, 1996 and May 31, 1996, respectively.
At each balance sheet date, PRI evaluates the realizable value of
intangibles on the basis of whether the intangibles are fully
recoverable from projected, undiscounted net cash flows. Based on
its most recent analysis, PRI believes no impairment of the carrying
values of intangibles exists.
(e) OTHER ASSETS
The debt issuance costs included in other assets are amortized
over their respective useful lives on the straight-line method.
(f) RETIREMENT PLANS
PRI has two defined contribution retirement plans covering
substantially all of its employees. PRI s Money Purchase Retirement
Plan is funded entirely by employer contributions based upon a
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defined percentage of participating employees compensation. PRI also
has a 401(k) plan where participants elect to have a designated
percentage of their salary withheld and contributed to the plan.
(g) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3) INVENTORIES
Inventories consist of the following at February 29, 1996 and May
31, 1996:
February 29, May 31,
1996 1996
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Finished goods. . . . . . . . . $13,065 $11,635
Raw materials . . . . . . . . . 4,407 5,017
Supplies and mold materials . . . . 3,922 4,126
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Total . . . . . . . . . . $21,394 $20,778
4) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following at
February 29, 1996 and May 31, 1996:
February 29, May 31,
1996 1996
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Land . . . . . . . . $ 309 $ 309
Buildings. . . . . . . 10,156 10,156
Machinery, equipment, and
fixtures . . . . . . 80,271 80,271
Leasehold improvements . . 157 157
Construction in progress. . 1,562 3,504
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92,455 94,397
Less allowance for depreciation
and amortization. . . . (40,103) (41,964)
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Total . . . . . . $ 52,352 $ 52,433
Construction in progress includes machinery and equipment which
have not yet been placed in service and molds which are in the process
of being manufactured. Depreciation expense for the three months
ending May 31, 1995 and May 31, 1996 was $1,865 and 1,869,
respectively.
5) OTHER ASSETS
Other assets consist of the following at February 29, 1996 and
May 31, 1996:
February 29, May 31,
1996 1996
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Debt issuance cost, net . . . . $ 2,213 $ 4,125
Leased equipment, net. . . . . 1,479 1,469
Other . . . . . . . . . . 62 64
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$ 3,754 $ 5,658
The debt issuance costs as of February 29, 1996, were incurred in
connection with the revolving credit loan, the 12.5% senior
subordinated notes issued by Group, and the term loan described in
note 8. These cost were written-off in May 1996. The debt issuance
costs as of May 31, 1996 were incurred in connection with the 11 5/8%
Senior Secured Notes due 2003 and are being amortized over the
remaining life of the debt. Amortization of the deferred financing
costs was $415 and $370 for the three months ended May 31, 1995 and
May 31, 1996, respectively.
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6) LEASES
PRI has several noncancelable operating leases for substantial
portions of the Company's plant and office facilities and machinery
and equipment. Leased plant and office facilities generally contain
renewal options. Rental expense for operating leases for the three
months ended May 31, 1995 and May 31, 1996 aggregated $539 and $456,
respectively.
Additionally, PRI has several facilities which are being subleased.
7) ACCRUED EXPENSES
Accrued expenses consist of the following at February 29, 1996
and May 31, 1996:
February 29, May 31,
1996 1996
---- ----
Interest. . . . . . . . . . . . . . . $ 27 467
Vacation. . . . . . . . . . . . . . . 1,056 1,056
Pension . . . . . . . . . . . . . . . 985 1,192
Other . . . . . . . . . . . . . . . . 2,128 2,171
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$ 4,196 4,886
8) LONG-TERM DEBT
On March 31, 1995, PRI restructured their credit facility and
debt covenants. In conjunction with this restructuring, PRI received
a waiver for noncompliance with certain debt covenants through March
31, 1995. Thereafter, PRI was in compliance with all restructured
debt covenants.
On May 17, 1996, PRI issued $110 million in 11 5/8% Senior
Secured Notes due 2003. The funds from this issuance were used to
repay all outstanding borrowings of the existing senior secured credit
facility of $73.5 million and to fund a dividend to Group of $31.7
million. At this time the Company also entered into a credit
agreement that provides for a $20.0 million revolving loan facility.
Long-term debt consist of the following at February 29, 1996 and
May 31, 1996:
February 29, May 31,
1996 1996
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Revolving credit loan, interest at Base Rate
during, 1995, paid off May 17, 1996 . . . . $15,000 0
Term loan, interest at prime rate plus 1.5%,
payable in quarterly installments, paid off
May 17, 1996. . . . . . . . . . . . 60,724 0
Promissory note, interest at prime plus 0.75%
and effective March 12, 1995, interest at
prime plus 2.0%, payable in installments
semiannually through July, 1997 . . . . . 1,500 1,250
Promissory note, interest-bearing at prime plus
1.5% beginning January 1995; $800 payable in
April, 1995 and $300 payable in March, 1996 . 300 0
Senior Secured Notes, interest at 11 5/8% paid
semi-annual on May 1 and November 1; notes
due May 1, 2003. . . . . . . . . . . 0 110,000
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77,524 111,250
Less current maturities of long-term debt. . . 10,350 550
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67,174 110,700
9) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, cash equivalents, receivables, accounts payable and accrue
expenses: The carrying amounts approximate fair value due to the
short maturity of these instruments.
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Notes payable: The carrying amounts approximate fair value as a
majority of the obligations incur interest at a market rate. In
addition, the significant terms of fixed rate obligations do not
differ materially from those currently available to PRI.
10) RETIREMENT PLAN
PRI has a defined contribution retirement plan covering
substantially all employees and contributions are based upon a
defined percentage of compensation. Provisions for the plan s
contributions amounted to $196 and $207 for the three months ended May
31, 1995 and May 31, 1996, respectively. Provisions of the plan
include 20% vesting per year.
11) RELATED-PARTY TRANSACTIONS
PRI has various transactions with Group and HPH. These
transactions include management fees and reimbursements to HPH of $167
and $162 for the three months ended May 31, 1995 and May 31, 1996,
respectively.
12) BUSINESS AND CREDIT CONCENTRATIONS
PRI's business is substantially dependent on a limited number of
large customers. In the three months ended May 31, 1995 and May 31,
1996, PRI's ten largest customers accounted for approximately 79% and
78%, respectively, of its nets sales. PRI's largest customers are
General Mills (including Yoplait), Dannon, and Ross Labs, which
represented approximately 25.4%, 20.6%, and 14.7%, respectively, of
PRI's net sales for the three months ended May 31, 1996. No customer
other than General Mills, Dannon, or Ross Labs accounted for more than
5% of PRI's net sales during the three months ended May 31, 1996.
Accounts Receivable from General Mills, Dannon, and Ross Labs totaled
$5,976 and $5,902 at February 29, 1996 and May 31, 1996,
respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES: Net sales decreased $5.0 million, or 13.8%, from $36.3 million
in the first quarter of fiscal 1996 to $31.3 million in the first quarter of
fiscal 1997. Packaging sales decreased $.4 million, or 1.4%, from $27.9 million
in the first quarter of fiscal 1996 to $27.5 million in the first quarter of
fiscal 1997. Net sales to Yoplait increased $.9 million in the first quarter
of fiscal 1997 compared to the first quarter of fiscal 1996, primarily
reflecting higher unit volume. This increase was offset with a decrease in net
sales to Ross Labs and Dannon of $.4 million and $.3 million, respectively,
primarily reflecting lower unit volume and the pass through of lower resin cost.
Packaging sales were also adversely impacted by the Company s loss of certain
lower margin accounts. Promotional sales decreased $4.6 million, or 55.0%, from
$8.4 million in the first quarter of fiscal 1996 to $3.8 million in the first
quarter of fiscal 1997. This decrease is primarily due to a major promotion
that occurred during the first quarter of fiscal 1996 but was not repeated
during the comparable period of fiscal 1997.
GROSS PROFIT: Gross profit decreased $.2 million, from $6.2 million in the
first quarter of fiscal 1996 to $6.0 million in the first quarter of fiscal
1997. Gross margins improved from 17.0% in the first quarter of fiscal 1996 to
19.0% in the first quarter of fiscal 1997. This increase in gross margin
reflects a favorable shift in product mix to higher margin products and the
lower costs of resin used in promotional beverage containers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses remained flat at $1.8 million in the first quarter of
fiscal 1996 and the first quarter of fiscal 1997 but increased as a percentage
of net sales from 4.9% to 5.9% due to lower net sales.
AMORTIZATION EXPENSE: Amortization expense decreased $.4 million, from $.6
million in the first quarter of fiscal 1996 to $.2 million in the first quarter
of fiscal 1997. The decrease is primarily attributable to the non-compete
agreement related to the purchase of Miner Container being fully amortized in
fiscal 1996.
OPERATING INCOME: Operating income increased $.1 million, from $3.8
million, or 10.5% of net sales, in the first quarter of fiscal 1996 to $3.9
million, or 12.6% on net sales, in the first quarter of fiscal 1997, reflecting
the favorable change in product mix and decreased amortization expense noted
above.
INTEREST EXPENSE: Interest expense decreased $.4 million, from $2.8
million in the first quarter of fiscal 1996 to $2.4 million in the first quarter
of fiscal 1997. The decrease is primarily due to lower average debt balances.
Interest expense will increase in future periods as a result of the issuance of
the Senior Secured Notes (as defined below).
INCOME TAXES: Income taxes increased $.2 million, from $.4 million in the
first quarter of fiscal 1996 to $.6 million in the first quarter of fiscal 1997
due to higher earnings. The Company's effective state and Federal tax rate was
41% in the first quarter of fiscal 1996 and 43% in the first quarter of fiscal
1997.
INCOME BEFORE EXTRAORDINARY ITEM: For the reasons noted above, income
before extraordinary item increased $.3 million, from $.6 million in the first
quarter of fiscal 1996 to $.9 million in the first quarter of fiscal 1997.
EXTRAORDINARY ITEM, NET OF TAX: In the first quarter of fiscal 1997, the
Company recorded an extraordinary write-off net of taxes of $1.1 million for
unamortized deferred financing costs related to bank debt which was repaid in
May 1996.
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LIQUIDITY AND CAPITAL RESOURCES
Packaging Resources Incorporated issued $110.0 million in Senior Secured Notes
due 2003 (the "Senior Secured Notes") in the first quarter of fiscal 1997. The
net proceeds from this issuance were used to repay all outstanding borrowings of
the existing senior secured credit facility of $73.5 million and to fund a
dividend of $31.7 million to the sole stockholder of the Company. In
conjunction with this transaction, the Company also entered into a credit
agreement (the "Credit Agreement") that, subject to certain borrowing conditions
and limitation, provides for borrowings of up to $20.0 million. As of May 31,
1996, there were no outstanding borrowings under the Credit Agreement.
Cash provided by operating activities increased to $7.9 million in the first
quarter of fiscal 1997 from $3.9 million in the comparable quarter of fiscal
1996. The increase primarily reflects a $4.6 million increase in current
liabilities that was primarily due to the timing of trade payables. Other
assets increased $1.9 million primarily due to the deferral of $4.1 million of
financing costs related to the issuance of Senior Secured Notes. This was
partially offset by the write-off of $1.9 million of deferred financing cost
related to certain bank debt that was paid off in May, 1996. The deferred
financing costs will be amortized over the life of the notes. Stockholders'
equity decreased $31.7 million due to the dividend payment to the sole
stockholder of the Company.
Capital expenditures were $.7 million and $1.9 million for the first quarter of
fiscal 1996 and 1997, respectively. PRI s estimated capital expenditures for
the balance of fiscal 1997 are expected to range from $7.0 million to $8.0
million. These expenditures, which are intended to further expand production
capacity and reduce costs, include (i) the engineering and manufacture of new
production molds, (ii) the installation of automated packaging and handling
systems, and (iii) the expansion of the Company's warehouse space.
Although there can be no assurances, the Company anticipates that its operating
cash flow along with the borrowings available under the Credit Agreement, will
be sufficient to meet its operating expenses, projected capital expenditures and
debt service requirements as they become due.
Instruments relating to the Company's indebtedness, including the Credit
Agreement and the indenture governing the Senior Secured Notes, contain
financial and other covenants that restrict, among other things, the Company s
ability to incur additional indebtedness, incur liens, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, merge or consolidate with any other person
or sell, assign, transfer, lease, convey or otherwise dispose of substantially
all of the assets of the Company. Such limitations, together with the highly
leveraged nature of the Company, could limit corporate and operating activities,
including the Company's ability to respond to market conditions to provide for
unanticipated capital investments or to take advantage of business
opportunities.
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Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
In June 1996, Dannon extended through December 31, 1999 the agreement
whereby the Company will continue to supply all of Dannon's eight
ounce yogurt containers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
The following exhibit is included in this Report on Form 10-Q:
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K:
The Company did not file any reports on Form 8-K during the three
months ended May 31, 1996.
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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.
PACKAGING RESOURCES INCORPORATED
Registrant
Date July 15, 1996 /s/ Jerry J. Corirossi
--------------------- ------------------------------
Jerry J. Corirossi
Vice President, Finance and Administration
and Chief Financial Officer and duly
authorized officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> MAY-31-1996
<CASH> 4,179
<SECURITIES> 0
<RECEIVABLES> 11,799
<ALLOWANCES> (129)
<INVENTORY> 20,778
<CURRENT-ASSETS> 38,509
<PP&E> 94,396
<DEPRECIATION> (41,963)
<TOTAL-ASSETS> 116,881
<CURRENT-LIABILITIES> 11,950
<BONDS> 110,700
0
0
<COMMON> 0
<OTHER-SE> (13,692)
<TOTAL-LIABILITY-AND-EQUITY> 116,881
<SALES> 31,316
<TOTAL-REVENUES> 31,316
<CGS> 25,356
<TOTAL-COSTS> 25,356
<OTHER-EXPENSES> 174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,416
<INCOME-PRETAX> 1,522
<INCOME-TAX> 654
<INCOME-CONTINUING> 868
<DISCONTINUED> 0
<EXTRAORDINARY> 1064
<CHANGES> 0
<NET-INCOME> (196)
<EPS-PRIMARY> 0
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