SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended: October 31, 1995
___ 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 3,766,215
Class of Common Stock Shares outstanding as of
December 1, 1995
ULTRA PAC, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Balance Sheets as of October 31, 1995
and January 31, 1995 3
Statements of Operations for the
three and nine months ended October
31, 1995 and 1994 5
Statements of Cash Flows for the
nine months ended October 31, 1995
and 1994 6
Notes to Interim Financial
Statements 7
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on
Form 8-K 22
Ultra Pac, Inc.
BALANCE SHEETS
ASSETS
October 31, January 31,
1995 1995
(unaudited)
CURRENT ASSETS
Cash $ 500 $ 145,731
Accounts receivable - trade, less
allowance for doubtful receivables
of $283,000 at October 31, 1995 and
$245,000 at January 31, 1995 4,577,571 4,386,376
Refundable sales and income taxes 1,371,531 731,576
Inventories
Raw materials 3,164,157 3,318,590
Work in process 2,364,596 3,389,893
Finished goods 5,243,774 3,632,417
Deferred income taxes 239,572 1,094,833
Other current assets 331,781 170,607
----------- -----------
Total current assets 17,293,482 16,870,023
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Building and improvements 3,302,872 2,476,582
Manufacturing equipment 22,334,792 18,523,467
Extrusion equipment 12,191,279 7,269,772
Other equipment and furnishings 1,835,391 1,647,035
Leasehold improvements 875,923 860,301
----------- -----------
40,540,257 30,777,157
Less accumulated depreciation 8,583,973 6,346,606
----------- -----------
31,956,284 24,430,551
Deposits on manufacturing equipment 153,288 1,409,005
Land 737,317 737,317
----------- -----------
32,846,889 26,576,873
OTHER
Security deposits and leasehold costs 992,286 842,491
Investments in affiliates and other 183,900 32,400
----------- -----------
1,176,186 874,891
----------- -----------
$51,316,557 $44,321,787
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31, January 31,
1995 1995
(unaudited)
CURRENT LIABILITIES
Bank overdraft $ 107,323 --
Current maturities of long-term
obligations 3,899,745 2,525,272
Accounts payable - principally trade 8,715,148 5,887,564
Accrued liabilities
Salaries and commissions 772,023 781,782
Interest and other 421,189 582,834
Income taxes payable -- 322,054
----------- -----------
Total current liabilities 13,915,428 10,099,506
LONG-TERM OBLIGATIONS, less current
maturities 25,580,618 20,227,316
DEFERRED INCOME TAXES 354,497 1,408,233
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 2,621,442 3,742,160
----------- -----------
11,466,014 12,586,732
----------- -----------
$51,316,557 $44,321,787
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended October 31, Nine months ended October 31,
1995 1994 1995 1994
Net Sales $15,374,008 $14,450,291 $52,511,986 $43,805,517
Cost of products sold 13,479,547 10,546,649 41,563,203 31,160,041
---------- ---------- ---------- ----------
Gross profit 1,894,461 3,903,642 10,948,783 12,645,476
Operating expenses
Marketing and sales expense 2,775,201 2,606,343 8,754,784 7,709,714
Administrative expense 689,421 617,328 2,061,677 1,685,735
---------- ---------- ---------- -----------
3,464,622 3,223,671 10,816,461 9,395,449
---------- ---------- ---------- -----------
Operating profit (loss) (1,570,161) 679,971 132,322 3,250,027
Interest expense and other 678,599 394,363 1,863,040 1,044,798
---------- ---------- ---------- -----------
Earnings (loss) before
income taxes (2,248,760) 285,608 (1,730,718) 2,205,229
Income tax provision (benefit) (805,000) 107,000 (610,000) 827,100
---------- ---------- ---------- ----------
NET EARNINGS (LOSS) $(1,443,760) $ 178,608 $(1,120,718) $ 1,378,129
========== =========== ========== ===========
Earnings (loss) per common and
common equivalent share $( .38) $ .05 $( .30) $ .37
========== =========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 3,766,215 3,768,093 3,766,215 3,766,203
========== ========== ========== ==========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
October 31,
1995 1994
Increase (Decrease) in Cash
Cash flows provided by (used in)
operating activities
Net earnings (loss) $(1,120,718) $1,378,129
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation of equipment, furnishings
and improvements 2,605,649 1,921,416
Deferred income taxes (198,475) 351,638
Sale of equipment, net (8,297) 3,250
Change in assets and liabilities:
Accounts receivable (191,195) (924,131)
Refundable sales and income taxes (639,955) (139,824)
Inventories (431,627) (2,407,711)
Other current assets (161,174) 12,374
Accounts payable 2,827,584 1,359,140
Bank overdraft 107,323 561,076
Accrued liabilities (171,404) 92,376
Income taxes payable (322,054) 450,686
---------- ----------
Net cash provided by
operating activities 2,295,657 2,658,419
Cash flows from investing activities
Capital expenditures (9,067,868) (6,731,158)
Investments in affiliates and other (151,500) (4,800)
Security deposits and leasehold costs (149,795) (59,924)
Proceeds from sale of equipment 200,500 --
--------- ----------
Net cash used in investing activities (9,168,663) (6,795,882)
Cash flows from financing activities
Proceeds from long-term obligations 9,005,265 5,010,981
Principal payments under long-term obligations (2,277,490) (1,318,305)
---------- ----------
Net cash provided by financing
activities 6,727,775 3,692,676
---------- ----------
Net change in cash (145,231) (444,787)
Cash at beginning of period 145,731 445,287
---------- ----------
Cash at end of period $ 500 $ 500
========== ==========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
October 31, 1995
(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, 1995 was taken from the Company's Annual
Report to Shareholders on Form 10-K for the year ended January 31, 1995.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report to
Shareholders on Form 10-K for the year ended January 31, 1995.
(2) Refundable Sales and Income Taxes
Refundable sales and income taxes consist of the following:
October 31, January 31,
1995 1995
--------- ---------
Sales taxes $ 737,821 $731,576
Income taxes 633,710 --
$1,371,531 $731,576
Refundable sales taxes represent sales tax paid on certain manufacturing
equipment used in Minnesota. The Company is allowed to file for this refund
up to twice a year.
(3) Investment in Affiliates
The Company's investment in affiliates includes 49% and 40% interests in
Ultra Pac SudAmerica, S.A. and Ultra Pac Middle East EC, respectively.
Ultra Pac SudAmerica, S.A. was formed for the purpose of manufacturing,
marketing and selling plastic packaging products in Chile and Ultra Pac
Middle East EC was formed for the purpose of marketing and selling plastic
packaging products in the Middle East.
(3) Investment in Affiliates-continued:
The Company's investments in affiliates are accounted for using the equity
method. As of October 31, 1995, the Company had outstanding receivables
from affiliates of $453,458.
(4) Long-Term Obligations
At January 31, 1995, the Company had an $8,000,000 revolving credit
facility with a bank. This credit facility was amended in March, June and
October 1995 to increase the amount available to $10,000,000 through
December 15, 1995 and $9,500,000 through May 31, 1997. In addition, certain
covenants relating to financial performance and capital expenditures were
also amended. The Company is in the process of renegotiating its credit
facility with this bank to: (i) increase the amounts available under the
current credit facility; (ii) address the potential violation of the
$9,500,000 credit facility limit which will be effected on December 15,
1995; and, (iii) re-write the covenants to address ongoing compliance.
At October 31, 1995, the Company was in violation of certain covenants with
its bank, related to certain financial performance ratios, which have
subsequently been waived.
In addition, the Company anticipates that, at January 31, 1996, it will be
in violation of some of its lending covenants with its lenders. At January
31, 1993, 1994 and 1995, the Company was also in violation of lending
covenants with its lenders related to certain financial performance ratios,
who had issued waivers of such covenant violations. While there is no
assurance that the Company's lenders will issue waivers of violations of
the Company's covenants in the future, the Company intends to work with its
lenders to achieve a status of ongoing compliance.
In connection with the purchase of two extrusion lines, additional
manufacturing equipment, and molds, the Company borrowed $7,073,666 on a
non-revolving equipment loan agreement with interest at 2.5% above the
LIBOR rate. The agreement provided for borrowings on specific equipment,
subject to the following terms:
Facility A: payable in monthly installments, including interest, over
a seven year period ($5,987,327 advanced through October 31, 1995);
Facility B: payable in monthly installments, including interest, over
a three year period ($1,086,339 advanced through October 31, 1995).
(5) Common Stock
In July 1995, the Company's Board of Directors granted non-qualified stock
options for 15,000 shares at an exercise price of $6.00 per share. These
options were issued under the Company's 1991 Incentive Stock Option Plan
and expire in July 2000. In July 1995, a non-qualified stock option for
50,000 shares at a purchase price of $8.88 expired.
In July 1995, the Company's Board of Directors granted a non-qualified
stock option for 20,000 shares to the Company's President and Chief
Executive Officer. The option has an exercise price of $6.00 per share and
expires in July 2000.
In July 1995, the Company granted options for 6,500 shares under the
Outside Directors' Option Plan at an exercise price of $5.75 per share.
These options expire in July 2000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Nine Months Ended
October 31, October 31,
----------- -----------
1995 1994 1995 1994
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 87.6 73.0 79.1 71.2
---- ---- ---- ----
Gross profit 12.4 27.0 20.9 28.8
Operating expenses
Marketing and sales 18.1 18.0 16.7 17.6
Administrative 4.5 4.3 3.9 3.8
---- ---- ---- ----
22.6 22.3 20.6 21.4
---- ---- ---- ----
Operating profit (loss) (10.2) 4.7 0.3 7.4
Interest expense and other 4.4 2.7 3.5 2.4
---- ---- ---- ----
Earnings (loss) before income taxes (14.6) 2.0 (3.2) 5.0
Income tax provision (benefit) (5.2) 0.8 (1.1) 1.9
---- ---- ---- ----
NET EARNINGS (LOSS) (9.4)% 1.2% (2.1)% 3.1%
==== ==== ==== ====
Net Sales:
Net sales increased 6.4% from $14,450,291 to $15,374,008 for the three months
ended October 31, 1995 as compared to the three months ended October 31, 1994
and 19.9% from $43,805,517 to $52,511,986 for the nine months ended October 31,
1995 as compared to the nine months ended October 31, 1994. The growth rate in
sales for both the three and nine month periods ended October 31, 1995 was
significantly lower than historical growth rates.
The increase in net sales during the three and nine month periods ended October
31, 1995 reflects increased sales of the Company's produce containers and line
of Ultra Lite Bakeables(TM) (which the Company first introduced during the
summer of 1994) in combination with several price increases the Company
implemented between October 1994 and April 1995. While sales dollars have
continued to grow in all product line categories, unit volume of bakery and deli
containers during the three and nine month periods ended October 31, 1995 was
less than during the same periods last year.
The Company believes that the decline in unit volume of its bakery containers
and selected deli containers which may be used in bakery applications primarily
occurred due to the increasingly competitive nature of the marketplace that has
been caused by aggressive pricing practices by competitors and an increase in
the number of packaging manufacturers serving the bakery/deli market. To a
lesser degree, the Company also believes that changing consumer buying habits,
including a shift from high-fat to low or non-fat products, may have accounted
for lower unit sales of certain bakery/deli containers. However, the Company
believes that its line of bakery and deli containers can accommodate bakery
products which satisfy such shifting consumer buying habits.
Based on sales activity through November 1995, the Company anticipates that net
sales in the fourth quarter will marginally exceed net sales recorded during the
fourth quarter last year. In addition, the Company expects continuing growth in
unit sales of its line of produce containers during the fiscal year ending
January 31, 1997, and believes that such growth will reflect the produce
industry's trend toward increasing use of plastic clamshell containers. The
Company's expectation regarding sales of produce containers assumes no
substantial, unforeseen weather conditions of the type that negatively affected
the Company's sales of produce containers earlier this year. The Company also
expects to see further increases in sales growth from its line of Ultra Lite
Bakeables.
Gross Profit:
Gross profit margins decreased from 27.0% to 12.4% for the three months ended
October 31, 1995 as compared to the three months ended October 31, 1994 and from
28.8% to 20.9% for the nine months ended October 31, 1995 as compared to the
nine months ended October 31, 1994.
The decrease in gross profit margins during the three months and nine months
ended October 31, 1995 was primarily due to the following three factors: (i)
higher raw material costs; (ii) higher fixed overhead costs that the Company
incurred to support a significant increase in anticipated sales that did not
materialize; and (iii) higher labor costs. The higher costs related to these
three factors could not be offset by price increases to the Company's customers.
The Company has experienced significant increases in raw material costs from its
suppliers of virgin PETE resin and sources of recycled PETE material. Among
other factors, these prices reflect increasing demand from the use of PETE resin
by apparel manufacturers and soft drink bottlers, among other users, worldwide.
The Company believes that the supply of PETE will increase, as refiners expand
their capacity during the next 12 months, and that market prices should
stabilize as a result. While the Company has increased its prices to customers,
such increases have not offset these increases in raw material costs.
Higher fixed overhead costs resulted primarily from the addition of
thermoforming and extrusion equipment, molds, and leased facilities to increase
manufacturing capacity based on anticipated sales. As described above, the
Company experienced lower than anticipated sales of bakery and deli containers
during the third quarter and nine months ended October 31, 1995 and, as
described below, it experienced lower than anticipated sales of produce
containers during the nine months ended October 31, 1995.
At the beginning of the California berry season, the Company began expanding its
capacity to meet an anticipated increase in demand for the Company's berry
containers based on an anticipated increase in the overall berry harvest.
Despite heavy rains in California earlier this year, indications were that,
although berry production might be delayed, it would still meet the Company's
earlier expectations. However, in mid-summer, berry growers also suffered an
extended period of 100 degree-plus heat which compounded the effect of the prior
excessive rainfall. These factors reduced the overall size of the berry crop and
caused a higher than normal percentage of the berry crop to be used for frozen
and other applications, rather than for fresh berry produce. This led to a
reduction in the demand for the Company's packaging. As a result of this
reduction in demand, management significantly reduced its temporary workforce.
However, the Company incurred higher labor costs due to the combined effect of a
wage increase plan the Company implemented and the fact that production
efficiency did not increase at the same rate as the increase in wages. Because
the Company had experienced an excessive level of employee turnover which it
believes was related to low wage rates, it implemented the wage increase plan to
become more competitive in the local labor market. Management continues to
believe the long-term effect of this action will be an increase in productivity.
The Company has taken a number of other actions which are intended to improve
gross margins on a long-term basis. The most significant actions are the
installation of a fifth extrusion line in May 1995 and a sixth extrusion line in
September 1995. 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. While the Company anticipates that its demand for PETE extruded sheet
in the fourth quarter may be less than its capacity to extrude, it still
anticipates having to purchase PETE extruded sheet from outside sources during
fiscal 1997. Although the Company believes that the fifth and sixth extrusion
lines will provide long-term cost savings, it does not anticipate realizing
significant savings since extrusion operations may run at less than full
capacity during the remainder of the fiscal year ending January 31, 1996.
Also, the Company is negotiating a three-year supply agreement for a major
portion of its virgin resin needs with a major PETE resin supplier. This supply
agreement will likely provide for minimum resin purchase quantities by the
Company at a fixed price that is intended to be favorable to the Company under
current market conditions. While the Company believes that such a supply
agreement would have a positive impact on the Company's gross profit margins in
the fiscal year ending January 31, 1997, the favorable pricing will not offset
resin price increases that the Company has experienced during the past year.
While the Company believes that the market price of PETE resin is expected to
stabilize during the next 12 months, in the event of a price decline, the
advantage derived from the fixed price arrangement will diminish and may even
require the Company to pay a higher price for PETE resin than the market price
then in effect.
The Company believes that during the fourth quarter ending January 31, 1996 and
during the fiscal year ending January 31, 1997, its fixed overhead costs will
grow at a slower rate than during the fiscal years ended January 31, 1993, 1994,
and 1995.
Although the Company believes these actions will result in an improvement in
gross profit margin performance in upcoming quarters, because of historical
seasonality of sales and earnings, the Company does not expect to realize much
impact from these actions until the second quarter ending July 31, 1996.
Operating Expenses:
Marketing and sales expense increased from $2,606,343, or 18.0% of net sales, to
$2,7775,201 or 18.1% of net sales, during the three months ended October 31,
1995 as compared to the three months ended October 31, 1994 and increased from
$7,709,714, or 17.6% of net sales to $8,754,784, or 16.7% of net sales, for the
nine months ended October 31, 1995 as compared to the nine months ended October
31, 1994. The increase in marketing and sales expense for both periods was
primarily due to the increase in net sales, resulting in an increase in freight
and commission expense. During the nine months ended October 31, 1995, the
decrease in marketing and sales expense as a percentage of net sales is
primarily the result of sales growing at a faster rate than marketing and sales
expense.
Administrative expense increased from $617,328, or 4.3% of net sales, to
$689,421, or 4.5% of net sales, for the three months ended October 31, 1995, as
compared to the three months ended October 31, 1994 and increased from
$1,685,735, or 3.8% of net sales, to $2,061,677, or 3.9% of net sales for the
nine months ended October 31, 1995 as compared to the nine months ended October
31, 1994. The increase in administrative expense during the three and nine month
periods ended October 31, 1995 was to support the increase in net sales.
Interest Expense and Other:
Interest expense and other increased from $394,363, or 2.7% of net sales, to
$678,599, or 4.4% of net sales, for the three months ended October 31, 1995, as
compared to the three months ended October 31, 1994 and increased from
$1,044,798, or 2.4% of net sales, to $1,863,040, or 3.5% of net sales for the
nine months ended October 31, 1995, as compared to the nine months ended October
31, 1994.
The increase was primarily due to higher debt levels and increases in the
average rate of interest paid by the Company. The increase in interest rates is
primarily due to an increase in base rates and in increase in the differentials
charged over the base rates.
Income Taxes:
The Company recognized an income tax benefit of $805,000 and $610,000 for
operating losses incurred during the three and nine months ending October 31,
1995, respectively. As of October 31, 1995, the Company has approximately
$2,930,000 of deferred tax liabilities offset by $2,576,000 of deferred tax
assets netting to $354,000. The Company believes that these deferred tax assets
are realizable based on future projected earnings and reversal of existing
deferred tax liabilities.
Extrusion Equipment Relocation Expense:
In its April 30, 1995 Form 10-Q, the Company reported that it expected to incur
expenses in connection with the relocation of four of its extrusion lines from
their existing locations into the newly constructed 83,000 square foot leased
facility completed in March 1995. Such extrusion equipment relocation expenses
do not pertain to installation of the fifth or sixth extrusion lines which were
installed in May and September 1995, respectively. The resulting consolidation
of all extrusion activities into a single location specifically designed to
optimize such operations is expected to improve efficiency, as well as to
increase extrusion capacity. These relocation expenses, estimated at $600,000,
will include dismantling the four extrusion lines, as well as moving, installing
and connecting the extrusion lines at the new facility. While the Company had
earlier anticipated the relocation of the four extrusion lines to take place
during the third and fourth quarters of fiscal 1996, management has elected to
delay the move until sometime in fiscal 1997. The decision to delay moving these
extrusion lines is primarily the result of two factors: (1) management's desire
to defer a significant one-time charge; and, (2) no immediate plans to purchase
additional thermoforming lines which, if purchased, would be installed in the
space to be vacated by the four extrusion lines. The relocation of the four
extrusion lines will be scheduled based on the Company's demand for extruded
plastic sheet and the desire to minimize the need to purchase sheet from outside
sources. The moving expenses will be charged to earnings as they are incurred.
Net Loss:
As a result of the factors discussed above, the Company incurred a net loss of
$1,443,760, or $.38 per share, for the three months ended October 31, 1995
compared to net earnings of $178,608, or $.05 per share for the three months
ended October 31, 1994. For the nine months ended October 31, 1995, the Company
incurred a net loss of $1,120,718, or $.30 per share, compared to net earnings
of $1,378,129, or $.37 per share, for the nine months ended October 31, 1994.
The Company has reported that it expects to report a net loss in the fourth
quarter and for the fiscal year ending January 31, 1996. The Company also
anticipates that the net loss in the fourth quarter ending January 31, 1996 will
be substantially larger than the net loss of $327,245 incurred during the fourth
quarter last year.
The Company believes inflation has not significantly affected its results of
operations.
Liquidity and Capital Resources:
Working capital decreased from $6,770,517 on January 31, 1995 to $3,378,054 on
October 31, 1995. This decrease is primarily due to increases in accounts
payable and current maturities of long term obligations and a decrease in
deferred income taxes, offset in part by increases in accounts receivable,
inventories, and refundable sales and income taxes.
Accounts receivable increased from $4,386,376 on January 31, 1995 to $4,577,571
on October 31, 1995. This increase is primarily due to the increase in net
sales. Inventories increased from $10,340,900 on January 31, 1995 to $10,772,527
on October 31, 1995. This increase was principally due to an increase in the
level of finished goods, offset in part by a decrease in work in progress. The
increase in finished goods is primarily due to the addition of inventories of
products that were introduced during the past year. The decrease in work in
progress was due to improved production planning.
For the nine months ended October 31, 1995, $2,295,657 of cash was provided by
operating activities. This reflects an increase in accounts payable and other
funds generated through operations, offset in part by increases in accounts
receivable, inventories, refundable sales and income taxes, and a decrease in
income taxes payable.
Property, equipment and improvements increased from $26,576,873 on January 31,
1995 to $32,846,889 on October 31, 1995. The Company purchased $9,067,868 of
property and equipment during the nine months ended October 31, 1995. These
equipment purchases included the Company's fifth and sixth extrusion lines,
thermoforming equipment, molds, a building addition and other manufacturing
equipment, as well as additional deposits of $153,288 on additional
manufacturing equipment.
As of October 31, 1995, the Company had borrowed $9,292,326 under its
$10,000,000 credit facility, leaving $707,674 available. In addition, the
Company borrowed all the available funds under its $7,073,666 non-revolving
equipment loan agreement for the purchase of the fifth and sixth extrusion
lines, additional thermoforming lines and molds.
At October 31, 1995, the Company was in violation of certain covenants with its
bank, related to certain financial performance ratios, which have subsequently
been waived.
In addition, the Company anticipates that, at January 31, 1996, it will be in
violation of some of its lending covenants with its lenders. At January 31,
1993, 1994 and 1995, the Company was also in violation of lending covenants with
its lenders related to certain financial performance ratios, who had issued
waivers of such covenant violations. While there is no assurance that the
Company's lenders will issue waivers of violations of the Company's covenants in
the future, the Company intends to work with its lenders to achieve a status of
ongoing compliance.
Because the Company's business is highly capital-intensive, it will rely heavily
on bank financing and other financing activities to fund its capital
requirements. Furthermore, because of the Company's operating losses through
October 31, 1995 and an increasing level of debt, the Company may find that
financing may be more difficult to secure, may be more costly than its current
credit facility, and may require covenants or restrictions more difficult to
comply with than are currently in effect.
As of October 31, 1995, the Company had outstanding capital expenditures of
approximately $454,000 and was reviewing additional capital expenditures of
approximately $274,000. On October 31, 1995, approximately $153,000 of cash
deposits had been made in connection with these outstanding commitments. Most of
the commitments and capital expenditures under review are for molds and other
manufacturing equipment. The Company expects that throughout the fiscal year
ending January 31, 1997, its anticipated capital expenditures will be
substantially lower than the now-expected $9,700,000 in capital expenditures
during the fiscal year ending January 31, 1996 due to no anticipated purchases
of extrusion equipment and modest expenditures in thermoforming.
In August 1995, the Company entered into a Shareholder's Joint Venture Agreement
with Integrity Investrading S.A. (a company located in Chile). This joint
venture will establish a Chilean corporation ("Ultra Pac SudAmerica S.A.") for
the purpose of manufacturing, marketing and selling plastic packaging in Chile.
The Company owns 49% and Integrity owns 51% of the newly formed corporation.
During August 1995, the Company contributed $147,000 and Integrity contributed
$153,000 to be used to equip the plant to begin manufacturing operations and as
initial startup capital. The Company sold to Ultra Pac SudAmerica a
thermoforming line and miscellaneous related equipment for $113,000. Although
the Company realized a $65,000 gain from the sale of this equipment, such gain
will be recognized over the depreciable life of the equipment.
The Company intends to dispose of certain assets which are not meeting
operational objectives. These include the tooling related to its line of floral
packaging, which the Company has recently listed with a sales agent, as well as
the machinery and equipment used in its resin recycling plant. During the past
12 months, the Company has experienced increasing difficulty in finding reliable
sources of post-consumer PETE for reprocessing in its recycling plant. As a
result, the Company shut down its recycling plant in August 1995. The Company is
evaluating the disposition of its recycling equipment through the formation of a
recycling joint venture with a party located in Mexico. As proposed, the Company
would initially purchase post-consumer PETE from the Mexican joint venture for
processing in its recycling plant. After the Company has had time to evaluate
the process and the joint venture has secured steady and reliable sources of
post-consumer material for reprocessing, the equipment would then be sold to the
joint venture and moved to the Company's partner's facilities in Mexico. The
Company believes the recycled material from this joint venture will be at a
lower cost than it currently pays outside suppliers primarily because the joint
venture partner has access to lower priced raw materials.
The Company intends to finance its operations and anticipated capital
expenditures through debt financing currently in place and being negotiated, as
previously discussed, and from cash flows from operations.
Seasonality of Sales and Earnings:
The Company's product mix has become increasingly seasonal since fiscal 1994.
From late in the fourth quarter through almost all of the second quarter, a
higher percentage of the Company's production capacity has been dedicated to
long production runs of berry containers for the produce-grower's market. In the
third quarter, the Company gradually re-directs the greatest share of its
production capacity toward bakery and deli containers. Because the Company's
extensive line of bakery and deli containers includes numerous products with
lower customer demand, production runs can be either long or short. As a result,
the cost of manufacturing certain bakery and deli containers is higher due to
shorter production runs and more frequent machine setup procedures, while other
bakery and deli products have long production runs and lower manufacturing
costs.
Since 1994, the average gross profit margin for all bakery and deli containers
produced during this period is lower than the gross profit margins on the
Company's berry containers because, 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. This has resulted in a loss in the fourth quarter in recent
years.
The Company does not anticipate substantial increases in fixed overhead costs
during the fourth quarter ending January 31, 1996, primarily because it will not
be increasing extrusion or thermoforming capacity substantially during the
quarter.
Although the Company expects to incur a loss in the fourth quarter ending
January 31, 1996, the loss will be primarily attributable to higher raw material
prices, higher fixed overhead costs, and higher labor costs, as previously
discussed, which resulted in a net loss for the third quarter and nine months
ended October 31, 1995, rather than the seasonality of sales and earnings
discussed above.
Future changes in these sales and earnings patterns will depend on the Company's
ability to increase sales in the fourth quarter of: (1) higher margin products;
or (2) existing products that would give the Company additional ability to
improve production output relative to cost.
PART II
OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 Amendment dated October 18, 1995 to the Credit and
Security Agreement with Norwest Bank, Minnesota N.A.,
dated June 13, 1994
10.2 Waiver dated December 12, 1995 related to Credit and
Security Agreement with Norwest Bank, Minnesota
N.A. dated June 13, 1994
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED: December 13, 1995 ULTRA PAC, INC.
---------------
(Registrant)
/s/Calvin Krupa
Calvin Krupa, President and
Chief Executive Officer
/s/Bradley Yopp
Bradley Yopp, Chief Financial
Officer