U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended Commission File No. March 31, 1996 0-16161 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. 36 AUBURN STREET CHELSEA, MA 02150 TELEPHONE (617) 884-5211 State of Incorporation I.R.S. Employer Identification No. Massachusetts 04-2877789 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of March 31, 1996 the number of shares of Common Stock, $.02 par value, outstanding were 1,899,885. 1 Original Italian Pasta Products Co. Inc. INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements: (Current years results are unaudited) Balance Sheets - As at March 31, 1996 and June 30, 1995 3 Statement of Operations: Three months ended March 31, 1996 and March 31, 1995 4 Nine months ended March 31, 1996 and March 31, 1995 5 Statement of Cash Flows: Nine months ended March 31, 1996 and March 31, 1995 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11-14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBIT 11 - Computation of Earnings Per Share 16 2 Original Italian Pasta Products Co. Inc. Balance Sheet (Unaudited) Asset March 31, June 30, 1996 1995 Current Assets: Cash and Cash Equivalents $ 405,000 $ 98,000 Accounts Receivable, net 993,000 754,000 Inventories (Note 3) 933,000 818,000 Prepaid expenses and other 15,000 7,000 --------- ---------- Total current assets 2,346,000 1,677,000 Property and equipment, net 833,000 1,290,000 Other assets, net 289,000 53,000 --------- ---------- Total Assets $3,468,000 $3,020,000 ========== ========== Liabilities and Shareholders Equity Current Liabilities: Current maturities of long- term debt and capital lease $ 354,000 $ 758,000 Accounts Payable 1,027,000 1,450,000 Accrued Expenses 1,407,000 665,000 ---------- ---------- Total current liabilities 2,788,000 2,873,000 ---------- ---------- Long-term debt and capital lease 215,000 117,000 ---------- ---------- Shareholders' Deficit Preferred stock - $.01 par value. Authorized - 1,000,000 shares. Issued and outstanding - None. -- -- Common Stock - $.02 par value Authorized - 6,000,000 shares. Issued and outstanding - 1,899,885 shares. 38,000 38,000 Additional paid-in capital 3,912,000 3,912,000 Accumulated deficit (3,485,000) (3,920,000) ---------- ---------- Total Shareholder's Equity $ 465,000 $ 30,000 ---------- ---------- Total Liabilities and Equity $3,468,000 $3,020,000 ========== ========== See accompanying notes 3 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. STATEMENT OF OPERATIONS (Unaudited) Three months ended March 31, March 31, 1996 1995 ---------- ---------- Net sales $4,210,000 $3,273,000 Cost of goods sold 2,586,000 2,313,000 ---------- ---------- Gross profit 1,624,000 960,000 Selling, general and administrative expenses 1,354,000 1,411,000 ----------- ----------- Gain/(Loss) from operations operations 270,000 (451,000) Other Expense/Income: Interest income 1,000 1,000 Interest expense (17,000) (23,000) ---------- ----------- Net Income/(Loss) before taxes 254,000 (473,000) Provision for taxes (57,000) (5,000) Net Income/(Loss) after taxes $ 197,000 $(478,000) =========== ========== Net income/(loss) per share (Note 2), primary $ 0.10 $ (0.20) ========== ========= Net income/(loss) per share (Note 2), fully diluted $ 0.10 $ (0.20) ========== ========== Weighted average shares outstanding, primary 2,045,000 2,436,000 ========= ========= Weighted average shares outstanding, fully diluted 2,045,000 2,436,000 ========= ========= See accompanying notes 4 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. STATEMENT OF OPERATIONS (Unaudited) Nine months ended March 31, March 31, 1996 1995 ----------- ----------- Net Sales $12,180,000 $11,107,000 Cost of goods sold 7,594,000 7,209,000 ---------- ---------- Gross profit 4,586,000 3,898,000 Selling, general and administrative expenses 3,968,000 4,518,000 ---------- ---------- Profit/(Loss) from operations 618,000 (620,000) Other Expense/Income: Interest income 2,000 2,000 Interest expense (60,000) (122,000) Other income/(loss) 1,000 (1,000) -------- --------- Net Income/(Loss) before taxes 561,000 (741,000) ======== ========= Provision for taxes (125,000) (6,000) Net Income/(Loss)after taxes 436,000 (747,000) ======== ========= Net income/(loss) per share (Note 2), primary $ 0.24 $ (0.32) ======== ========= Net income/(loss) per share (Note 2), fully diluted $ 0.24 $ (0.32) ======== ========= Weighted average shares outstanding, primary 2,104,000 2,354,000 ========= ========= Weighted average shares outstanding, fully diluted 2,104,000 2,354,000 ========= ========= See accompanying notes 5 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. STATEMENT OF CASH FLOWS (Unaudited) Nine months ended Cash flows from operating March 31, March 31, activities: 1996 1995 Net Income $436,000 $ (747,000) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and Amortization 463,000 613,000 (Increase) Decrease in accounts receivable (240,000) 280,000 (Increase) Decrease in inventories (114,000) (103,000) (Increase) Decrease in prepaid expenses and other (8,000) 13,000 (Decrease) Increase in accounts payable (423,000) 541,000 Increase (Decrease) in accrued expenses 683,000 (216,000) Increase (Decrease) in tax provision 59,000 (43,000) (Increase) Decrease in other assets (243,000) 250,000 ----------- ----------- Net cash provided by operating activities 613,000 588,000 Cash flows from investing activities: Purchase of property and equipment -- (450,000) Sale of warrants -- 794,000 ------------ ----------- Net cash used by investing activities -- 344,000 Cash flows from financing activities: Proceeds from negotiations 100,000 -- Principal payments on debt (406,000) (1,092,000) ---------- ---------- Net cash used by financing activities (306,000) (1,092,000) ---------- ---------- Net increase (decrease) in cash and cash equivalents 307,000 (160,000) Cash - beginning of period 98,000 295,000 ---------- ---------- Cash - end of period $405,000 $ 135,000 ========== ========== See accompanying notes 6 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included. Results from operations for the nine month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending June 30, 1996. For further information, refer to the financial statements and the footnotes included in the Company's annual report on Form 10- KSB for the year ended June 30, 1995. NOTE 2: NET INCOME (LOSS) PER COMMON SHARE: Net income per common share is computed by dividing the net income by the weighted average number of shares of common stock and, if any, common stock equivalents outstanding during each period. Net loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock and, if any, common stock equivalents outstanding during each period. NOTE 3: INVENTORIES: Inventories, stated at the lower of cost or market, on a first- in, first-out basis, are comprised of the following: March 31, June 30, 1996 1995 ------------- ---------- Raw Materials $ 155,000 $ 154,000 Packaging Materials 356,000 339,000 Finished Goods 422,000 325,000 ---------- ---------- Total $ 933,000 $ 818,000 ========== ========== 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and operating results during the periods included in the accompanying financial statements. RESULTS OF OPERATIONS: For the quarter ended March 31, 1996 - --------------------- compared to the quarter ended March 31, 1995. Net sales for the quarter ended March 31, 1996 were $4,210,000 versus $3,273,000 for the same period last year. This increase of 29% is mainly attributable to increased sales to warehouse club customers. Gross profit for the quarter ended March 31, 1996 came in at 39% of net sales or $1,624,000. Last years gross profit was at 29% of net sales or $960,000. Gross profit is up as the result of greater sales volume. Selling, General and Administrative expenses decreased to $1,354,000 or 32% of net sales from $1,411,000 or 43% for the quarter ended March 31, 1995. This decrease is due to lower advertising and other marketing costs. Gain from operations for the quarter ended March 31, 1996 was $270,000 or 6% of net sales as compared to a loss from operations of $451,000 or 14% of net sales for the same quarter ended last year. Interest expense was $17,000 or 0% of net sales for the quarter ended March 31, 1996 versus $23,000 or 1% for the same period last year. Net income per common share, primary was $0.10 for the three months ended March 31, 1996 compared to a net loss per common share of $0.20, primary for the same period last year. Results of Operations: For the nine months ended March 31, - -------------------- 1996 compared to the nine month period ended March 31, 1995. Net Sales for the nine months ended March 31, 1996 were $12,180,000 versus $11,107,000 for the same period last year. This increase of 10% is attributable to higher warehouse club sales. Gross profit for the nine months ended March 31, 1996 is 38% of net sales or $4,586,000. Last years gross profit was 35% of net sales or $3,898,000. 8 Selling, General and Administrative expenses decreased to $3,967,000 or 33% of net sales from $4,518,000 or 41% for the period ended March 31, 1995. This decrease of $551,000 is mainly attributable to lower sales and marketing expenses. Profit from operations for the nine month period ended March 31, 1996 was $618,000 or 5% of net sales as compared to a loss from operations of $620,000 or 6% of net sales for the same period last year. Interest expense was $60,000 or 0% of net sales for the nine months ended March 31, 1996 versus $122,000 or 1% for the same period last year. Net income per common share, primary was $0.24 for the nine months ended March 31, 1996 compared to a net loss per common share of $0.32 for the same period last year. Liquidity and Capital Resources: - ------------------------------- Intense competition and the Company's attempt to expand its customer base has affected the Company's profit and loss as well as cash flow. The Company is finding it difficult to generate sufficient working capital to meet current demands. At March 31, 1996, the Company's current liabilities exceed current assets by $442,000. The Company has a line of credit available from its primary bank lenders (the "Bank"); $125,000 remains available to the Company under the line of credit. The Company must repay the $208,000 currently drawn on the line of credit by making principal payments of $6,250 per month with all such principal to be repaid on or before December of 1999. The Company is no longer in technical default on this loan. In July 1995, the Company engaged in discussions with Waterbury Holdings, Inc. concerning the acquisition of the Company. As a condition of negotiation, Waterbury Holdings, Inc. provided the Company with $100,000. This sum was to be recorded as debt if the negotiations continued. In the event Waterbury Holdings discontinued the negotiations, the amount ($100,000) was forfeited in August 1995 when Waterbury Holdings, Inc. discontinued these negotiations. In December, 1993 the Company entered into an agreement with Economic Stabilization Trust, a Massachusetts public instrumentality, to borrow $150,000. This loan was used to finance equipment and is secured by the equipment purchased. This loan is payable in equal monthly installments of principal. Interest is payable at prime plus 1 3/4% adjusted quarterly. Final payment is scheduled for January 1, 1997. The Company is no longer in technical default on this loan. 9 In August 1991, the Company entered into an agreement with MPDC, a Massachusetts development agency, to provide up to $160,000 to the Company for the development in Massachusetts of several new products. By June 30, 1993 the Company had expended the entire amount available under the agreement and repaid $80,000 to MPDC. The Company must repay $120,000 in 60 equal monthly installments of $2,000 (which includes imputed interest) which began in August, 1992. The Company is no longer in technical default on this loan. In December 1989, the Company entered into an agreement with Katy Industries to borrow $1,350,000. On October 15, 1991 accrued interest of $173,000 was added to the principal to be repaid. This debt bears interest at 9.75% with monthly principal payments of $18,750 commencing April 11, 1994 with a final payment of all unpaid principal and interest on June 11, 1996. On December 11, 1994 Katy Industries exercised warrant agreements for the purchase of 453,585 shares of the Company's common stock. The Company's debt to Katy was reduced by the purchase price or $793,774. The current operating plans indicate that the Company's profits will continue but at a modest rate. Nevertheless, the sum of prior years' net losses are impairing the Company's ability to continue its operation because these losses were funded, in part, by debt which must be repaid out of current cash flows. In addition, the Company is undergoing plant renovations to meet production, new product and diversification demands, which will require increased funding. The Company will attempt to provide working capital through operations and (as necessary) additional advances on its line of credit. The Company can provide no assurances that these efforts will be successful in raising the capital necessary to continue its expansion and working capital requirements. Subsequent Events: - ------------------ In April of 1996, the Company lost business in a division of a warehouse club customer. A competitor offered an extremely rich program to obtain this division. The Company is in the process of developing new customers to replace these sales. 10 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS: The Company publishes this Section for the purpose of fulfilling its legal duty to notify Shareholders and the Securities and Exchange Commission ("SEC") of legal proceedings in which it currently is involved. 1. The Trio's 1991 lawsuit Against the Company ------------------------------------------- Anthony Trio and Genevieve Trio, d/b/a Trio's v. Original --------------------------------------------------------- Italian Pasta Products Co., Inc. and Paul K. Stevens. ----------------------------------------------------- Suffolk Superior Court (Boston, Massachusetts), C.A. No. 91-2680-A. On April 21, 1994, following trial, the Superior Court entered a Memorandum of Decision and Order for Judgment of Court. On August 23, 1994, judgment was entered. The Trio's have appealed from the judgment and, as a result of that appeal, the Company has cross-appealed. The Trio's complaint had alleged that the Company had committed multiple breaches of the License Agreement (the "Agreement") dated July 12, 1985, with Anthony and Genevieve Trio (the "Trio's"). The Agreement grants to the Company the fundamental right to use the Trio name in the advertising and sale of certain products of the Trios, derivative products or other products. For those rights, the Company pays to the Trios a royalty calculated on "Net Sales" by type of product category. The complaint had charged the Company with: (1) failure to protect against unauthorized sales of the Company's products within the Boston North End, an area designated as exclusive for the Trios under the Agreement,(2) sale of pasta products and sauces under private label which allegedly forbidden by the Agreement, (3) failure to provide audited reports of royalties, (4) underpayment of royalties because of miscategorization of products and miscalculation of "Net Sales" and (5) failure to pay royalty amounts to a third-party pursuant to an assignment by the Trios and to the Internal Revenue Service pursuant to a tax levy. For all of these violations, the Trios sought damages, declaratory relief, and termination of the Agreement. 11 In light of these claims, the Company filed counterclaims against the Trios. The Company prayed for a declaration of its rights and obligations under the Agreement with respect to the computation of "Net Sales", the proper categorization of both new and existing products, the offset of past overpayments of royalties, and the right to sell the Company's products under private label. In addition, the Company brought counterclaims for abusive process, interference with business relations, and unfair and deceptive trade practices. The abusive process claim arose from the Trios' earlier 1989 lawsuit and from the Trios' institution of this new litigation only one month after trial of the 1989 lawsuit, which had resulted in judgment for the Company. The allegation in the abusive process claim has become the subject of a third lawsuit by the Trios and is described below. In addition, the Trios' daughter, Catherine Cremaldi, had published a cookbook with recipes which were, in part, attributed to her parents. The Company accordingly counterclaimed for the Trios' breach of the provisions in the Agreement which required the Trios to keep confidential their recipes. Finally, the Company sought a declaration that the Trio's remedies under the Agreement were limited to money damages, and that the Trios had no right to terminate the Agreement, which by its very language is irrevocable. In its judgment, the Court made detailed findings. On the Trios' claims for breach of contract, with two minor exceptions, the Court found for the Company. As it pertained to the Company's ability to continue its operations, to classify products, to compute new sales, and to sell at private label, the Court found for the Company. Specifically, the Court rejected the Trios' claim that they could terminate the Agreement, finding that the Trios were not entitled to terminate the Agreement or revoke the licenses solely on account of the Company's failure to pay all royalties owed. The Court found that the Company was entitled to deduct promotional expenses and freight before computing "Net Sales" for purposes of computing the royalty. Significantly, the Court agreed with the Company that the Company had the right to distribute at private label derivative products that were either flour based or sauces and other products that were not flour based and found that all products presently sold by the Company fell into one of the two categories. However, the Court did find that the Company was in technical breach of the Agreement because its products were located in one store in the Trio's exclusive territorial area in the North End of Boston, but awarded only nominal damages of $1.00. The Court also concluded that the Company 12 could not sell under private label "other products" which are flour based and, with respect to the Company's other counterclaims, including its claim for abuse of process, the Court found against the Company on the grounds that the Company had failed to establish these claims. In computing royalties owed, the Court declined to permit the Company to adjust its royalty payments retroactively before April 1, 1992. The Court's findings therefore required an adjustment of royalties paid for fiscal year 1992 and 1993 in the amount of $39,881, which has been paid by the Company. II. Trios File Libel Lawsuit Against the Company in 1994 ---------------------------------------------------- Genevieve Trio and Anthony Trio v. Original Italian Pasta --------------------------------------------------------- Products Co., Inc. and Paul K. Stevens. Middlesex Superior ------------------------------------ Court (Cambridge, Massachusetts), C.A. No. 94-6910. On December 5, 1994 the Trios filed their third lawsuit against the Company and Paul K. Stevens. The complaint alleges that the Company and Mr. Stevens libeled the Trios by sending shareholders a document, typed on official stationary, which states that the Trios sought to extort money from the Company. The Trios claim that the documents accuse them of having committed a crime and constitute libel per se. The investigation by the Company to date shows that the allegations in the Trios' complaint rely on language which appears in the "Legal Proceedings" section of the Forms 10K attached to the Company's 1992 and 1994 Annual Reports. Each of those Forms describes the allegations in, and the status at year's end of, the Trios' 1991 lawsuit against the Company. The Form 10K language, which the Trios allege is defamatory, is found in a paragraph describing the Company's counterclaims in the 1991 lawsuit. It is capitalized below: The Company filed its answer and counterclaim on February 25, 1992. In its counterclaim, the Company sought a declaration of its rights and obligations under the Agreement as they pertain to payment of royalties with respect to both new and existing products and to the sale of products under private 13 label. In addition, the Company sought damages for abusive process, interference with business relations, and unfair and deceptive trade practices, alleging that THE TRIOS' ACTIONS IN PURSUING PAST AND PRESENT LITIGATION ARE A MALICIOUS ATTEMPT TO EXERT THEIR INFLUENCE AND CONTROL OVER THE OPERATIONS OF THE COMPANY AND TO EXTORT ADDITIONAL MONEY TO WHICH THEY ARE NOT ENTITLED. The contested language is taken directly from statements contained in the legal pleadings which the Company filed with the Court in the 1991 lawsuit. The Company's answer and counterclaim in the 1991 litigation refers to the Trios' 1989 lawsuit against the Company, contend that the suit lacked any basis in fact or in law, and aver that the Trios maintained the 1989 action for the "ulterior purpose [of enabling] the Trios to exert control of the manufacturing operations of the Company and [extracting] from the Company additional monies because of the Trios' dissatisfaction with the royalty payments they were receiving under the agreement" and that the Trios' complaint, "like the previous litigation, is without basis in fact or in law. Like its predecessor, it is in furtherance of the Trios' malicious and ulterior purpose of exerting their influence and control over the operations of the company and extorting additional monies from the company to which the Trios' are not entitled." The Company filed its answer on December 23, 1994. In its answer, the Company asserts, among other defenses, that the statement at issue was one of opinion and not a statement that the Trios had committed a criminal act, was made in an official document issued in compliance with the law (the SEC requires the Company to report and describe the previous litigation in its Form 10K) and was privileged because it related to and was contained within legal pleadings filed with the Court. The Trios seek an as yet unspecified amount of monetary damages, as well as interest, costs and reasonable attorneys fees, for slander, libel, injurious falsehood, malicious interference with a contractual right, and fraud. Item 6. EXHIBITS AND REPORTS ON FORM 8-K None filed Exhibits as part of this report are listed below: Exhibit Number Description 11 Computation of Earnings per share 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. Registrant APRIL 30, 1996 Peter Stevens Date Peter Stevens Chief Financial Officer Treasurer 15 EXHIBIT 11 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. CALCULATION OF EARNINGS PER SHARE Nine months ended March 31, 1996 PRIMARY FULLY DILUTED ------- ------------- Net Income $436,000 $436,000 Interest reduction (assumed) 70,000 60,000 --------- --------- Adjusted net income 506,000 496,000 ========= ========= Common shares outstanding 1,900,000 1,900,000 Weighted average options and warrants outstanding 584,000 584,000 Limitation assumed purchases 20% 380,000 380,000 --------- --------- 2,104,000 2,104,000 ========= ========= Earnings per share $ 0.24 $ 0.24 ========= ========= 16