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, 1997 0-16161 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. 32 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, 1997 the number of shares of Common Stock, $.02 par value, outstanding were 1,899,885. 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, 1997 and June 30, 1996 			3 Statement of Operations: 	Three months ended March 31, 1997 and March 31, 1996 	4 	 	Nine months ended March 31, 1997 and March 31, 1996 	5 Statement of Cash Flows: 	Nine months ended March 31, 1997 and March 31, 1996 	6 	Notes to Financial Statements 			7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 				7-9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 				9-12 Item 6. Exhibits and Reports on Form 8-K 			12 SIGNATURES 				12 EXHIBIT 11 - Computation of Earnings Per Share 			13 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. Balance Sheet (Unaudited) Assets 		 March 31, 		 June 30, 		 		 	1997 		 1996 Current Assets: Cash and Cash Equivalents 	 $ 82,000 	 	$ 195,000 Accounts Receivable, net 	 421,000 665,000 Inventories (Note 3) 	 726,000 745,000 Prepaid expenses and other 11,000 62,000 --------- --------- Total current assets 		 1,240,000 1,667,000 Property and equipment, net 	 1,218,000 			 1,382,000 Other assets, net 52,000 131,000 Total Assets 		 $ 2,510,000 		$ 3,180,000 Liabilities and Shareholders Equity Current Liabilities: Current maturities of long- term debt and capital lease 	$ 203,000 $ 284,000 Accounts Payable 	 1,319,000 			 1,056,000 Accrued Expenses 	 1,110,000 1,072,000 --------- --------- Total current liabilities 		 2,632,000 			 2,412,000 Long-term debt and capital lease 	 216,000 			 183,000 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 	 (4,287,000) 			(3,365,000) Total Shareholder's Equity $ (338,000) 	 $ 585,000 Total Liabilities and Equity 		$ 2,510,000 	$ 3,180,000 See accompanying notes ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. Statement of operations (Unaudited) Three months ended March 31, March 31, 				 1997 	 1996 Net sales $ 2,286,000 		$ 4,210,000 Cost of goods sold 	 1,652,000 	 2,586,000 --------- --------- Gross profit 			 634,000 	 1,624,000 Selling, general and administrative expenses 953,000 	 1,354,000 Gain/(Loss) from operations operations (319,000) 	 270,000 Other Expense/Income: Interest income 		 --- 	 1,000 Interest expense 		 (11,000) 	 (17,000) Other income/(loss) 		 4,000 	 --- Net Income/(Loss) before taxes (326,000) 	 254,000 Provision for taxes --- 	 (57,000) Net Income/(Loss) after taxes $ (326,000) 	 $ 197,000 Net income/(loss) per share (Note 2), primary 	 $ (0.17) 	 $ 0.10 Net income/(loss) per share (Note 2), fully diluted $ (0.17) 	 $ 0.10 Weighted average shares outstanding, primary 	 1,900,000 2,045,000 Weighted average shares outstanding, fully diluted 1,900,000 	 2,045,000 See accompanying notes ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. Statement of operations (Unaudited) Nine months ended 				 March 31, 	 March 31, 		 1997 	 1996 Net Sales $ 7,684,000 		$ 12,180,000 Cost of goods sold 5,434,000 		 7,594,000 --------- --------- Gross profit 		 2,250,000 		 4,586,000 Selling, general and administrative expense 	 3,159,000 		 3,968,000 Profit/(Loss) from operations 		 (909,000) 		 618,000 Other Expense/Income: Interest income 	 1,000 		 2,000 Interest expense (28,000) 		 (60,000) Other income/(loss) 14,000 1,000 --------- ------- Net Income/(Loss) before taxes (922,000) 	 561,000 Provision for taxes 	 	---		 (125,000) Net Income/(Loss)after taxes 	 (922,000) 		 436,000 Net income/(loss) per share (Note 2), primary $ (0.49) 		 $ 0.24 Net income/(loss) per share (Note 2), fully diluted $ (0.49) 		 $ 0.24 Weighted average shares outstanding, primary 	 1,900,000 		 2,104,000 Weighted average shares outstanding, fully diluted 1,900,000 		 2,104,000 See accompanying notes ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. Statement of cash flows (Unaudited) Nine months ended Cash flows from operating 	 March 31, 		 March 31, activities: 	 1997 		 1996 Net Income 	 $ (922,000) 		 $ 436,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and Amortization 437,000 		 463,000 (Increase) Decrease in accounts receivable 	 244,000 		 (240,000) (Increase) Decrease in inventories 	 20,000 	 (114,000) (Increase) Decrease in prepaid expenses and other 	 51,000 (8,000) (Decrease) Increase in accounts payable 	 253,000 		 (423,000) Increase (Decrease) in accrued expenses 	 57,000 		 683,000 Increase (Decrease) in tax provision (4,000) 59,000 (Increase) Decrease in other assets 	 69,000 		 (243,000) Net cash provided by operating activities 	 205,000 		 613,000 Cash flows from investing activities: Purchase of property and equipment 		 (273,000) 		 	 --- Sale of warrants 	 	 --- --- Net cash used by investing activities 	 (273,000) --- Cash flows from financing activities: Proceeds from negotiations --- 	 100,000 Proceeds from debt		 175,000		 --- Principal payments on debt (220,000) 		 (406,000) Net cash used by financing activities 	 (45,000) (306,000) Net increase (decrease) in cash and cash equivalents 	 (113,000) 307,000 Cash - beginning of period 	 195,000 		 98,000 Cash - end of period 	 $ 82,000 $ 405,000 See accompanying notes ORIGINAL ITALIAN PASTA PROCUDTS 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, 1997 are not necessarily indicative of the results that may be expected for the year ending June 30, 1997. 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, 1996. 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, 	 1997 	 1996 Raw Materials 	$ 135,000 	$ 184,000 Packaging Materials 241,000 	 304,000 Finished Goods 350,000 257,000 ------- ------- Total 	 	$ 726,000 $ 745,000 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, 1997 compared to the quarter ended March 31, 1996. Net sales for the quarter ended March 31, 1997 were $2,286,000 versus $4,210,000 for the same period last year. This decrease of 46% is mainly attributable to decreased sales to warehouse club customers. Gross profit for the quarter ended March 31, 1997 came in at 28% of net sales or $634,000. Last years gross profit was at 39% of net sales or $1,624,000. Gross profit is down as the result of lower sales volume. Selling, General and Administrative expenses decreased to $953,000 or 42% of net sales from $1,354,000 or 32% for the quarter ended March 31, 1996. This decrease is due to lower advertising and other marketing costs. Loss from operations for the quarter ended March 31, 1997 was $319,000 or 14% of net sales as compared to a gain from operations of $270,000 or 6% of net sales for the same quarter ended last year. Interest expense was $11,000 or 0% of net sales for the quarter ended March 31, 1997 versus $17,000 or 0% for the same period last year. Net loss per common share, primary was $0.17 for the three months ended March 31, 1997 compared to a net gain per common share of $0.10, primary for the same period last year. RESULTS OF OPERATIONS: For the nine months ended March 31, 1997 compared to the nine month period ended March 31, 1996. Net Sales for the nine months ended March 31, 1997 were $7,684,000 versus $12,180,000 for the same period last year. This decrease of 63% is primarily attributable to lower warehouse club sales. Gross profit for the nine months ended March 31, 1997 is 29% of net sales or $2,250,000. Last years gross profit was 37% of net sales or $4,586,000. Selling, General and Administrative expenses decreased to $3,159,000 or 41% of net sales from $3,968,000 or 33% for the period ended March 31, 1996. This decrease of $809,000 is mainly attributable to lower sales and marketing expenses. Loss from operations for the nine month period ended March 31, 1997 was $909,000 or 12% of net sales as compared to a gain from operations of $618,000 or 5% of net sales for the same period last year. Interest expense was $28,000 or 0% of net sales for the nine months ended March 31, 1997 versus $60,000 or 0% for the same period last year. Net loss per common share, primary was $0.49 for the nine months ended March 31, 1997 compared to a net gain per common share of $0.24 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, 1997, the Company's current liabilities exceed current assets by $1,392,000. The Company has a line of credit available from its primary bank lenders (the "Bank"). As of March 31, 1997, the Company has drawn down the remaining $125,000 available at June 30, 1996. In addition, the Bank has agreed to loan the company an additional $75,000. Of this amount, the company has drawn down $25,000. This loan will be for a period of twenty four months with a monthly principal payment of $3,125. Payments commenced in February 1997. The Company must repay the $250,000 currently drawnon the line of credit by making principal payments of $7,083 per month with all such principal to be repaid on or before December of 1999. 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. The Company is in technical default on this loan. As of March 31, 1997, there remains approximately $3,000 outstanding on this loan. A payment for the outstanding amount was made in May 1997. 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 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. Although this debt was scheduled to be paid off in December 1996, Katy Industries has been asked to delay principal payments until June 1997. Approximately $35,000 remains outstanding on this loan. In April 1997, the Company entered into an agreement with MBDC, a Massachusetts development agency, to provide up to $400,000 to the Company for the purchase of equipment and machinery, leasehold improvements, trade payables, and working capital. The Company has expended $254,625 as of May 14, 1997. This loan is payable in equal monthly installments of principal. Interest is payable at prime plus 2 3/4% adjusted monthly. The current operating plans indicate that the Company's losses will continue at a reduced rate. 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 has undergone plant renovations which required increased funding. The Company will attempt to provide working capital through operations and (as necessary) through loans from financial institutions. The Company can provide no assurances that these efforts will be successful in raising the capital necessary to continus operations. The plant expansion was essentially completed in January 1997, at which time it became USDA certified. 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. I. The Trio's 1991 lawsuit Against the Company Anthony Trio and Genevieve Trio, d/b/a Trio's v. Original Italian Pasta Products Co., Inc. and Paul K. Stevens. Suffolk Superior Court (Boston, Massachusetts), C.A. No. 91-2680-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 is 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. 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 business practices. The abusive process claim arose from the Trio's earlier 1989 lawsuit and from the Trio's 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 license 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 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. Both parties' appellate briefs were filed in April and August 1996, respectively. The Trios filed a reply Brief to the Company's cross appeal on August 5, 1996 and the Company has filed a Sur Reply. A decision by the Appeals Court is expected in the next three months. 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 10-KSB 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 10-KSB 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 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 Trio's dissatisfaction with the royalty payments they were receiving under the agreement" and that the Trio's complaint, "like the previous litigation, is without any 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 10-KSB) 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 contractural right, and fraud. On June 17, 1996, the Company filed a motion for summary judgment seeking to dismiss all of the Trios' claims on the grounds that they were barred by the doctrine of res judicata, that they constitute absolutely privileged statements made in conjunction with the pending court proceeding, and that the Company's republication in its Forms 10-KSB of allegations made in legal pleadings is non-actionable hyperbole, privileged opinion protected by the First Amendments. The Trios filed an Opposition to the Company's Motion for Summary Judgment. The Court heard oral argument on the Company's summary judgment motion, dismissing all counts of the Trios' complaint. The Trios have filed an appeal. 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 MAY 14, 1997 /s/Paul K. Stevens Date 		Paul K. Stevens 			President 	Chief Executive Officer EXHIBIT 11 ORIGINAL ITALIAN PASTA PRODUCTS CO. INC. Calculation of earnings per share Nine months ended March 31, 1997 		PRIMARY FULLY DILUTED Net Income 	$ (921,000) 	$ (921,000) Interest reduction (assumed) --- --- Adjusted net income 	 (921,000) 	 (921,000) Common shares outstanding 1,900,000 1,900,000 Earnings per share $ (0.48) $ (0.48)