SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transaction 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 No.)
21925 Industrial Boulevard
Rogers, Minnesota 55374
(Address of Principal executive offices)
(612) 428-8340
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
As of March 31, 1996, 3,766,215 shares of Common Stock, no par value per
share, were outstanding, and the aggregate market value of the shares of Common
Stock (based upon the closing sales price on such date reported by NASDAQ) held
by nonaffiliates of the Registrant was approximately $9,556,815.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its Annual Meeting
of Shareholders to be held July 16, 1996, are incorporated by reference into
Part III.
PART I.
ITEM 1 - BUSINESS
Company Background
Ultra Pac, Inc., designs, manufactures, markets and sells plastic
containers and packaging to food industry retailers and distributors, including
supermarkets, wholesale bakery companies, fruit and vegetable growers,
delicatessens, processors and retailers of prepared foods, and foodservice
providers. The Company's packaging is primarily made from polyethylene
terephthalate ("PETE") plastic sheet or recycled PETE that the Company
thermoforms into various shapes.
Generally, food industry packaging buyers select plastic packaging as an
alternative to paper or other materials in order to achieve marketing and
merchandising objectives. Plastic packaging generally allows food to be more
attractively displayed than alternative packaging materials, and provides more
efficient use of shelf space. Also, plastic packaging often helps preserve
food's freshness and decreases spoilage by allowing more complete sealing of the
package to minimize the effects of outside air and moisture.
Products
The largest market segments for the Company's products are: bakery and
deli departments of supermarkets; wholesale bakeries (both fresh and frozen);
and growers of fresh fruit and produce. Food packaging has accounted for almost
all of the Company's net sales during the past three fiscal years.
The Company strives to serve as a single source of plastic packaging for
its customers by offering a wide variety of shapes, styles and sizes of
containers. The Company's products may be made from clear or colored plastic or
a combination of both clear and colored plastic. The Company's current product
offerings include both: (1) products manufactured and maintained in inventory
(enabling timely shipment to customers); and, (2) special products that require
a minimum order quantity and production lead time. A great majority of the
Company's sales are from products manufactured for inventory.
The Company's current product strategy is twofold: (1) to primarily
manufacture products that will inherently appeal to multiple, high-volume
customers, rather than to design custom products that can be sold to a single
customer or limited customer markets; and (2) to manufacture and inventory its
most popular products in sufficient quantities to facilitate timely shipments to
customers and satisfy customers' "Just-in-time" requirements.
Although some of the Company's products are designed for specific "niche"
markets, others are more versatile and may be used in several different
packaging applications. For example, even designs specially made for niche uses,
such as muffin containers and cake domes, generally have multiple potential
customers. Most designs, like clamshells and rectangular designs, may be used
for a broad range of applications such as cookies or mini-muffins by a bakery or
salads or cold cuts by a delicatessen. The Company has attempted to produce
designs in sizes and shapes that will permit its products to be used in multiple
applications, and has avoided developing and manufacturing customized,
proprietary designs for a single customer. However, from time to time, on a
non-exclusive basis, the Company will create inserts to existing molds in order
to satisfy individual customer requirements. For example, the Company may create
an insert for a mold that would allow a rectangular clamshell container to have
two compartments, rather than one.
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The Company produces its plastic products primarily from PETE and, to a
much lesser extent, polystyrene. A number of the Company's cake and pie bases,
and deli trays are made from either polystyrene or PETE while the balance of its
products are generally made exclusively from PETE. The Company believes that
packaging produced primarily from PETE is preferable to packaging produced from
polystyrene or other more rigid plastics, because PETE has superior flexibility
and is not prone to crack or chip like other plastic materials. The Company also
believes that PETE's distinctive characteristics benefit customers economically
through improved sales and lower food spoilage than alternative packaging
materials. PETE has also become the most widely recycled form of plastic
packaging in the United States, primarily as a result of its widespread usage in
plastic beverage bottles (see "Recycling and Recycled Products" below).
The Company offers a wide variety of bakery and deli containers. These
containers are of both the hinged clamshell-style, as well as two-piece designs
with domes and bases. Clamshells are most commonly used for pies, muffins,
cookies, donuts, rolls, salads, fruits, sandwiches, candies and nuts. The
two-piece container designs are typically used for cakes and pies, as well as
cookies, donuts and vegetables, fruit and snacks. While many of the Company's
bakery and deli containers are product-specific, the generic shapes of others
make them suitable for a wide variety of bakery and deli products.
In fiscal 1993, the Company introduced a line of produce containers which
are used by growers and distributors for shipping and displaying products such
as strawberries, blueberries, raspberries, tomatoes and other fruits and
vegetables. The Company manufactures many of these produce containers using
recycled PETE. The Company believes that consumers, producers and sellers of
fresh produce are becoming increasingly concerned about environmental issues
including the disposal of waste into landfills. The Company believes that its
consistent, ongoing use of recycled PETE in its produce containers appeals to
consumers, as well as producers and sellers of fresh produce.
During fiscal 1996, the Company recorded no sales from floral products
which had been introduced in fiscal 1993 and which, in fiscal 1995, had
accounted for only .2% of the Company's net sales.
During April 1994, the Company introduced its line of C-PET containers
that are suitable for baking in either conventional or microwave ovens. These
containers are primarily intended for use by commercial bakeries. This C-PET
material is extruded in-house in either a cellular form using a technology
licensed to the Company, or in a rigid form similar to the process used for
other PETE products. Compared to aluminum foil containers, these C-PET bakery
containers offer superior shape retention and durability. C-PET containers such
as the Company's, unlike aluminum foil containers, allow bakers and other food
processors to perform a detection process for metal contaminants. Currently,
wholesale bakeries and other food processors use these containers for both
baking and packaging angel food cakes, pizzas, cookies and muffins.
The Company routinely modifies existing container designs and develops new
designs. Such product development is based upon input from its customers and
distributors, as well as from ideas developed by Company staff. In certain
cases, customers may fund the cost of tooling or inserts related to the new
designs. The Company's development of new designs and marketing of existing
designs for new applications is an ongoing process. In fiscal 1993, the Company
began custom printing on certain of its
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products as a value-added service. In addition, the Company began labeling
certain of its produce containers with customer names and UPC codes. The Company
believes that its printing of certain containers, and to a lesser extent, its
customer labeling and UPC codes distinguish it from competitors and provide
customers with additional value. The Company intends to continue focusing its
primary product development and marketing efforts on bakery, deli and produce
packaging.
Most of the Company's molds are designed to produce various types of
containers by using different sizes and shapes of inserts in a particular mold.
This technique minimizes the time and expense of designing and producing tooling
for new containers, where applicable.
Manufacturing and Supply of Raw Materials
The Company's products are manufactured from rolled plastic sheet (either
extruded by the Company or purchased from outside sources) using a thermoforming
process. These rolls of plastic sheet are made by a process that involves
melting petroleum-based resin pellets and then extruding (forcing under
pressure) the material through a die to form a flat sheet.
The plastic sheet unwinds from a large roll at the beginning of the
60-foot thermoforming production line. The sheet is first heated to
approximately 300(degree) Fahrenheit and then molded into the desired shape
using vacuum and air pressure. The molds are multiple-cavity and product
specific, with the number of cavities determined by the size and shape of the
container specific to that mold. The plastic retains a rigid shape as the mold
cavities are cooled by water. The plastic sheet which has been formed into
containers continues down the production line to a trim press which cuts and
stacks the product in preparation for packing into corrugated shipping cartons.
At April 1, 1996, the Company had 34 thermoforming lines in operation.
Prior to fiscal 1992, 100% of the plastic sheet used by the Company,
including PETE, and polystyrene, was purchased from outside sources. During the
first quarter of fiscal 1992, the Company installed its first extrusion line to
produce PETE sheet in-house. The Company enjoys significant cost savings by
manufacturing its own PETE plastic sheet from both virgin resin material, and
recycled material. During fiscal 1992, the majority of the Company's PETE sheet
requirements were met by its initial extrusion line. With the addition of
extrusion lines in July 1992, October 1993, April 1994, May 1995 and September
1995 (to a total of six lines), the Company was able to extrude approximately
55%, 65% and 85% of its PETE sheet requirements during fiscal 1994, 1995 and
1996, respectively. With its current extrusion capacity, the Company expects to
be able to supply all its PETE sheet needs for fiscal 1997. In fact, at
various times during the year, the Company anticipates it will be extruding PETE
sheet at less than its full production capacity.
The PETE resin pellets used to make plastic sheet may be purchased from
several large suppliers, including Eastman Chemical Company, Shell Chemical
Company, and E I Dupont DeNemours & Co. While the available supply of PETE has
historically been considered adequate, during fiscal 1996, supplies of resin did
tighten and the Company 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 for the use of PETE
resin by apparel manufacturers and soft drink
4
bottlers, among other users, worldwide. Furthermore, changes in world oil prices
and availability of oil may affect the cost and availability of resins and
plastic sheet. The Company believes that, as refiners expand their capacity
during the next 18 months, the supply of PETE will increase. During fiscal 1996,
the Company executed a three-year supply agreement for a major portion of its
virgin resin needs with a major PETE resin supplier.
Marketing and Sales
In promoting its products, the Company relies primarily on direct sales
contacts and the displaying of its products at industry trade shows, rather than
extensive print advertising. The Company markets and sells its products through
regional sales managers and through approximately 50 independent manufacturers'
representatives or "brokers." The Company employs managers with territorial
and/or product line sales responsibility. These sales managers supervise the
brokers' activities and make selected direct sales calls. In addition, the
Company's President manages overall sales activities and maintains direct
contact with certain key customers. Typically, brokers have responsibility for
calling on existing and potential customers, such as grocery store chains, food
processors and distributors. Generally, the Company assigns a specific sales
territory to each broker.
Although the market for the Company's food packaging is generally
nationwide, some product sales are concentrated in certain geographic areas,
such as blueberry packaging in certain northern tier states and strawberry
packaging in California and Florida. During the past three years, the Company
has shipped to a small but growing number of customers in other countries. In
addition, the Company has ownership interest in two joint ventures and a product
licensing agreement which involve marketing or manufacturing, or both, outside
the United States.
The Company primarily uses common carriers to ship its products. The
Company, like many other packaging manufacturers, generally sells its bakery and
deli products at a price that includes shipment to the customer's location.
While the Company generally sells its produce containers with the customer
responsible for bearing shipment costs, there are certain customers where the
selling price includes freight. The freight costs for shipment to a customer's
location from the Company's warehouse in Rogers, Minnesota may be financially
significant because freight expense is generally a significant part of the
Company's cost of servicing its customers. With freight expense a partial
consideration, in the past, the Company has explored sites for future expansion
outside Rogers, Minnesota. For the foreseeable future however, the Company has
no plans to expand its domestic operations outside Minnesota.
Recycling and Recycled Products
Several factors, including regulation, general consumer awareness of the
benefits of recycling plastics and other natural resources, and consumer habits,
have influenced the popularity of recycling. These factors, combined with
increasing demand, have encouraged the growth of a recycling industry that
collects, reprocesses and markets PETE and other recycled materials.
Accordingly, commodity markets have developed for these recycled materials,
including PETE. The Company's cost of purchasing recycled PETE has, and will
continue to be, influenced by such commodity market pricing.
5
In October 1992, the Company purchased a 21,500 square foot facility to
house the Company's recycling equipment which was installed in March 1993. This
facility is adjacent to the Company's other manufacturing facilities.
During the past year, the Company 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 continues to evaluate 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 less costly
raw materials and labor.
Government Regulation
The United States Food and Drug Administration ("FDA") regulates packaging
that comes into contact with food, including packaging made from recycled
material. The Company sought, and subsequently obtained, the FDA staff's
acknowledgment that it does not object to the use of recycled PETE in the
produce line of containers manufactured by the Company. In addition, the Company
also sought and obtained the FDA staff's acknowledgment that it does not object
to the use of co-extruded PETE (i.e., Petewich(R)).
The plastic packaging industry (including the Company) is subject to
existing federal, state and local regulations and potential regulations in
connection with legislation designed to reduce solid waste. Proposed regulations
have ranged from requiring plastics to be degradable in landfills, to banning
specific products altogether. Current regulations, however, range from: (1)
simple labeling requirements, which aid in the recycling process, to (2) banning
certain materials unless subject to specified recycling/reuse programs, to (3)
imposing taxes or advance disposal fees on all containers on a per-unit basis,
with the fees being used to fund recycling programs. At the present time, the
Company believes it is in substantial compliance with all local, state and
federal laws designed to reduce solid waste entering landfills.
Customer Base
The Company has over 600 active customers located throughout the United
States, Canada, Australia, South America, Mexico and other countries. Only one
customer, Kroger, accounted for more than 10% of the Company's sales during
fiscal 1996. The loss of this customer may have a material adverse effect on the
Company's operations. With time and subject to additional growth of its
business, the Company expects its dependence on any single customer or small
number of customers will diminish.
6
Backlog
Although from time to time the Company receives advance orders for certain
of its produce containers, the Company does not believe that backlog is a
material aspect of its business.
Competition
The Company's products compete with non-plastic packaging alternatives,
including paper, aluminum and paper pulp or wood (as often used in produce
packaging), as well as with packaging products made from polystyrene, other
plastics, and PETE. The Company believes that its primary competitive advantages
include: (1) its ability to rapidly conceive, develop and produce innovative
packaging designs to meet customer needs; (2) its ability to rapidly fulfill
most customer orders; and, (3) the functional, environmental and merchandising
advantages that result from the majority of the Company's containers being
fabricated from PETE.
The Company competes with packaging manufacturers possessing substantially
greater financial resources and larger marketing and development staffs than it
possesses. Primary competitors who manufacture plastic packaging include Tenneco
Packaging, IVEX Packaging Corporation and InLine Packaging. These competitors
may be able to sell products similar to those of the Company's at a lower price
than the Company, because a significant portion of their plastic products are
manufactured using polystyrene plastic material which is lower in cost than
PETE. The Company believes that the price advantage held by competitors using
non-PETE resins is, in part, offset by the higher quality, greater versatility
and superior utility that result from the Company's products being made
primarily from PETE. However, the degree to which this price advantage may
benefit competitors using non-PETE plastic will fluctuate from time to time,
depending on the cost disparity between polystyrene and PETE resin prices. This
cost disparity has increased significantly during the past year, creating
additional competitive pressure on pricing of the Company's products.
Patents and Trademarks
The Company currently holds a number of design patents related to bakery
and produce containers. As the Company develops new and innovative container
designs, it applies for design patents where possible. Also, the Company has
obtained federal trademark registrations on the marks "Ultra Fresh(R)," "Ultra
Tub(R)", "Ultra Clam(R)", "Show-bowls(R)", "Snack Clam(R)", "Eco Clear(R)", and
"Petewich(R)" from the United States Patent and Trademark Office. The Company
believes that the loss of its right to use one or more of its trademarks would
not have a material adverse effect on the Company's business. The Company
believes that its continued success will depend primarily on its level of
customer service, product design and the management abilities of its officers,
directors, key employees and sales representatives, rather than on ownership of
patents or trademarks.
Employees
As of March 30, 1996, the Company had 46 salaried employees (including
eight whose positions were converted from hourly to salaried positions during
the preceding year) and 255 hourly employees, none of whom were represented by
labor unions or subject to collective bargaining agreements. Also at March 30,
1996, the Company had contracted the services of approximately 48 production
workers through
7
temporary agencies. Because the unemployment rate is currently low, from time to
time, the Company may have difficulty in attracting and retaining qualified
employees. The Company generally believes its relations with its employees are
good.
ITEM 2 - PROPERTIES
The Company utilizes approximately 466,000 square feet for its
manufacturing, warehousing and office facilities located in Rogers, Minnesota.
Of the 466,000 square feet, the Company owns approximately 109,000 square feet
and leases the remaining facilities under five separate operating lease
agreements. The square feet covered under each lease and the respective
expiration date is as follows:
Lease Square Feet Expiration Date
----- ----------- ---------------
1 166,000 December 1, 2008
2 65,000 March 1, 2010
3 56,000 March 1, 2010
4 58,000 December 1, 2002
5 12,000 May 31, 1996
(not intended to be renewed)
All of these leases, except for the lease for 12,000 square feet, provide
for renewal options and purchase options during the lease term.
Although the Company has significantly expanded its Rogers, Minnesota
facilities by arranging for construction of new facilities under lease or
purchase agreements, from time to time, management has explored sites for future
expansion outside Rogers, Minnesota. Currently, the Company does not anticipate
the need for additional facilities in the foreseeable future.
ITEM 3 - LEGAL PROCEEDINGS
The Company is a party to various litigation matters arising in the normal
course of its business. Management believes that the ultimate resolution of
these matters will not have a material adverse impact on the Company's financial
condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended January 31, 1996.
8
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock has been traded on the NASDAQ National Market
System under the symbol "UPAC" since January 7, 1992. The following table sets
forth, as reported by NASDAQ for the periods indicated, the range of high and
low sale prices of the Company's common stock.
HIGH LOW
FISCAL YEAR ENDED JANUARY 31, 1996
First Quarter $7-1/8 $5-3/8
Second Quarter 7-1/4 5-5/8
Third Quarter 6-1/8 3-7/8
Fourth Quarter 4-1/8 3-1/8
HIGH LOW
FISCAL YEAR ENDED JANUARY 31, 1995
First Quarter $7-1/2 $4-7/16
Second Quarter 7-1/2 5-1/4
Third Quarter 9 6-1/4
Fourth Quarter 7-1/4 4-1/2
As of April 16, 1996, there were approximately 314 holders of record, plus
approximately an additional 1,000 beneficial owners of the Company's common
stock.
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate payment of cash dividends in the foreseeable future. In addition, one
of the Company's current loan agreements prohibits the payment of dividends.
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ITEM 6 - SELECTED FINANCIAL DATA
Years ended January 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands, except for Earnings per Common Share)
Statements of Earnings Data
Net sales $ 66,129 $ 57,250 $ 41,189 $ 27,572 $ 18,254
Cost of products sold 54,187 41,625 30,521 19,688 11,648
-------- -------- -------- -------- --------
Gross profit 11,942 15,625 10,668 7,884 6,606
Operating expenses
Marketing and sales 11,481 10,066 8,202 5,287 3,269
Administrative 2,760 2,347 1,549 1,728 905
-------- -------- -------- -------- --------
14,241 12,413 9,751 7,015 4,174
-------- -------- -------- -------- --------
Operating profit (loss) (2,299) 3,212 917 869 2,432
Interest expense and other 2,581 1,507 842 413 398
-------- -------- -------- -------- --------
Earnings (loss) before income tax (4,880) 1,705 75 456 2,034
Income tax provision (benefit) (1,721) 654 16 186 755
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) $ (3,159) $ 1,051 $ 59 $ 270 $ 1,279
======== ======== ======== ======== ========
Earnings (loss) per common share
Primary $ (.84) $ .28 $ .02 $ .08 $ .42
======== ======== ======== ======== ========
Fully diluted $ N/A $ N/A $ N/A $ N/A $ .41
======== ======== ======== ======== ========
Common equivalent shares
Primary 3,766 3,766 3,768 3,587 3,082
======== ======== ======== ======== ========
Fully diluted N/A N/A N/A N/A 3,109
======== ======== ======== ======== ========
January 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Balance Sheet Data
Working capital $ 2,685 $ 6,771 $ 5,632 $ 5,084 $ 2,182
Total assets 50,581 44,322 32,801 23,503 11,743
Long-term obligations 27,235 20,227 13,652 6,564 3,464
Shareholders' equity 9,427 12,587 11,533 11,474 4,954
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
Ultra Pac, Inc., designs, manufactures, markets and sells plastic
containers and packaging to food industry retailers and distributors, including
supermarkets, wholesale bakery companies, fruit and vegetable growers,
delicatessens, processors and retailers of prepared foods, and foodservice
providers. The Company's packaging is primarily made from polyethylene
terephthalate ("PETE") plastic sheet or recycled PETE that the Company
thermoforms into various shapes.
Because of the markets the Company serves, as well as fluctuations in the
cost of its primary raw materials, management believes that future sales and
earnings will be impacted by a variety of factors. These include: (1) market
demand for PETE raw material and the resulting impact on the Company's raw
material costs; (2) competitive pressures in the marketplace for the Company's
products; (3) the impact that weather conditions can have on the seasonal
production of fresh produce and the resulting demand for plastic packaging; and,
(4) fixed overhead and borrowing costs.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Statements of Operations of the Company expressed as a
percentage of net sales.
Fiscal years ended January 31,
1996 1995 1994
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 81.9 72.7 74.1
----- ----- -----
Gross Profit 18.1 27.3 25.9
Marketing and sales expense 17.4 17.6 19.9
Administrative expense 4.2 4.1 3.8
----- ----- -----
21.6 21.7 23.7
----- ----- -----
Operating profit (loss) (3.5) 5.6 2.2
Interest expense and other 3.9 2.6 2.0
----- ----- -----
Earnings (loss) before income taxes (7.4) 3.0 .2
Income tax provision (benefit) (2.6) 1.2 .1
----- ----- -----
NET EARNINGS (LOSS) (4.8)% 1.8% .1%
===== ===== =====
Fiscal 1996 Compared To Fiscal 1995
Net Sales:
Net sales increased 15.5% from $57,249,979 to $66,128,723 for the year
ended January 31, 1996 (fiscal 1996), as compared to the year ended January 31,
1995 (fiscal 1995). The rate of sales growth during fiscal 1996 was
significantly lower than historical growth rates.
The increase in net sales during fiscal 1996 reflects increased unit
volume 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 each product line
category, unit volume of bakery and deli containers declined by approximately 6%
during fiscal 1996 as compared to fiscal 1995.
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The Company believes that the decline in unit volume of its bakery
containers and deli containers which may be used in bakery applications occurred
primarily due to the increasingly competitive nature of the marketplace that has
been caused by aggressive pricing practices by competitors. The Company believes
this is particularly the case with competitors who use lower-cost, non-PETE
resins such as oriented polystyrene. This cost disparity has increased
significantly during the past year, creating additional competitive pressure on
pricing of the Company's products. The Company has also seen 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 volume 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.
During fiscal 1997, the Company expects continuing growth in unit volume
of its line of produce containers, and believes that such growth will reflect
the produce industry's continuing 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 during fiscal
1996. The Company expects this increase in produce container sales to be offset
in part by a decline in bakery and deli product sales dollars.
Management has initiated an effort to identify and analyze long term
market trends, competitive strategies, and other factors that influence market
conditions or result in competitive pressures. Management believes that this
activity will assist the Company in developing market, product and price
strategies, as well as improve its production planning process.
Gross Profit:
Gross profit margins decreased from 27.3% during fiscal 1995 to 18.1%
during fiscal 1996. The decrease in gross profit margins during fiscal 1996 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 anticipated increase in sales that did not materialize; and (iii)
higher labor costs. The higher costs related to these three factors were not
fully offset by price increases to its customers.
The Company experienced significant increases in raw material costs from
its suppliers of virgin PETE resin and sources of recycled PETE material. The
purchase of resin material represents more than 50% of the Company's product
cost. Among other factors, these PETE raw material costs reflect increasing
demand for 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 continue to expand their capacity. While the
Company increased its prices to customers, such increases did not fully 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,
12
and, as described below, it also experienced significantly lower than
anticipated sales of produce containers during fiscal 1996.
At the beginning of the 1995 California berry season (i.e., during fiscal
1996), the Company began expanding its capacity to meet an anticipated increase
in demand for the Company's berry containers based on a significant anticipated
increase in the overall berry harvest. Despite heavy rains in California earlier
in the 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. In July 1995, as a result of this reduction in demand, management
significantly reduced its temporary workforce.
The Company incurred higher labor costs due to the combined effect of a
wage increase plan the Company implemented and the fact that production
efficiencies 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
and a more stable workforce.
The Company has taken a number of actions intended to improve gross profit
margins on a long-term basis. The most significant actions were 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. With its current extrusion capacity, the Company expects to be able to
supply all its PETE sheet needs for fiscal 1997. In fact, at various times
during the year, the Company anticipates it will be extruding PETE sheet at less
than its full production capacity. The Company will continue to purchase
polystyrene sheet from outside suppliers as it has in the past.
Also, the Company has negotiated a three-year supply agreement for a major
portion of its virgin PETE resin needs. Minimum resin quantities are required to
be purchased at a fixed price (adjusted annually) that is favorable to the
Company under current market conditions. While the Company believes that such
supply agreement will have a positive impact on the Company's gross profit
margins in the fiscal year ending January 31, 1997, the favorable pricing will
not offset resin price increases that the Company experienced during fiscal
1996. Further, in the event the market price of virgin PETE resin declines
between annual price adjustments, the advantage derived from this pricing
agreement may diminish and may even require the Company to pay a higher price
for PETE resin than the market price existing at that time.
During fiscal 1996, the Company's workforce declined from approximately
620 in June 1995, to approximately 355 in March 1996. This reduction primarily
resulted from the Company's layoff of personnel in production-related jobs in
July 1995 and January 1996.
13
Additionally, in January 1996, the Company engaged the services of an
outside manufacturing consultant to assist in improving efficiencies and
reducing costs in its thermoforming and extrusion operations and in its
distribution system. The Company believes that changes it has implemented in
these areas will allow for a smaller workforce during fiscal 1997, without a
dramatic loss of production capacity. As a result, the Company expects its labor
costs will decline during fiscal 1997, as compared to fiscal 1996.
The Company believes that during the fiscal year ending January 31, 1997,
its fixed overhead costs will grow at a much slower rate than during the fiscal
years ended January 31, 1996 and 1995. The Company believes its current level of
production equipment and facilities are sufficient to meet its anticipated
fiscal 1997 requirements. The Company's capital expenditures for fiscal 1997
will be substantially less than the $9,600,000 expended in fiscal 1996.
The Company believes these actions will result in an improvement in gross
profit margin performance in upcoming quarters. The Company does not expect to
realize much impact from these actions until at least the second quarter of
fiscal 1997, which ends July 31, 1996.
Operating Expenses:
Marketing and sales expense increased from $10,066,119, or 17.6% of net
sales, to $11,481,007 or 17.4% of net sales, during fiscal 1996, as compared to
fiscal 1995. The increase in marketing and sales expense during fiscal 1996 was
due in part to the increase in net sales, resulting in an increase in freight
and commission expense. Also, the Company incurred additional labor and
facilities costs to support its distribution operations. 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 $2,347,558, or 4.1% of net sales, to
$2,759,614 or 4.2% of net sales, during fiscal 1996, as compared to fiscal 1995.
The increase in administrative expense was to support the increase in net sales
and legal costs associated with certain litigation matters arising in the normal
conduct of its business. The Company believes that ultimate resolution of such
litigation will not have a material adverse impact on the Company's financial
condition.
Interest Expense and Other:
Interest expense and other increased from $1,506,820, or 2.6% of net
sales, to $2,581,852, or 3.9% of net sales, for fiscal 1996, as compared to
fiscal 1995. 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 an increase in the
differentials charged over the base rates.
Income Taxes:
The Company recognized an income tax benefit of $1,721,000 for operating
losses incurred during the fiscal year ended January 31, 1996. As of January 31,
1996, the Company has approximately $986,000 of net deferred tax assets
primarily resulting from net operating loss and other tax credit carryforwards
of $3,728,000. Realization of these tax carryforwards is dependent on generating
sufficient taxable income prior to expiration of the net operating loss
carryforwards. Although realization is not assured,
14
management believes it is more likely than not that all of the deferred tax
assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Extrusion Equipment Relocation Expense:
In its Form 10-Q for the quarter ended April 30, 1995, the Company
reported that it expected to incur expenses of approximately $600,000 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. Prior to that time, the Company had anticipated the
relocation of the four extrusion lines to take place during the third and fourth
quarters of fiscal 1996, but management has elected to delay the move
indefinitely.
Net Loss:
As a result of the factors discussed above, the Company incurred a net
loss of $3,152,397, or $.84 per share, during fiscal 1996 compared to net
earnings of $1,050,884, or $.28 per share, during fiscal 1995.
Fiscal 1995 Compared To Fiscal 1994
Sales:
Net sales for the fiscal year ended January 31, 1995 (fiscal 1995)
increased 39.0% to $57,249,979 from $41,189,297 for the fiscal year ended
January 31, 1994 (fiscal 1994). Such growth in net sales was most substantially
influenced by the ongoing increase in demand for the Company's line of produce
containers from new and existing customers. The Company also continued to see
increases in sales from its bakery and deli product lines. Net sales also
increased due to price increases implemented during April and October 1994.
Gross Profit:
Gross profit margin increased 1.4% from 25.9% of net sales in fiscal 1994
to 27.3% in fiscal 1995. Of the 1.4% increase, half was due to the manner in
which freight was handled with certain produce customers. The balance of the
improvement in gross margin was primarily due to several factors, including: (1)
favorable product mix (i.e., increased sales of certain produce containers which
have longer production runs); (2) implementation of price increases in April and
October 1994; and, (3) the installation of a fourth extrusion line in May 1994.
During fiscal 1995, the Company increased the selling price of produce
containers to certain customers with the Company bearing freight costs.
Typically, these freight costs are billed separately or paid directly by the
customer. The manner in which these freight charges are paid has changed and may
change from year to year.
Sales of produce containers, particularly berry containers, were strong in
fiscal 1995. Strong sales of berry containers resulted in longer production runs
and higher gross profit margins than most of the Company's other products. In
addition, the Company implemented price increases on certain products in April
and October 1994 in response to a general increase in costs.
15
Operating Expenses:
Marketing and sales expense increased from $8,202,048 to $10,066,119 for
fiscal 1995 as compared to fiscal 1994. The increase in marketing and sales
expense was primarily due to increased freight and sales commission expense
associated with higher net sales. Marketing and sales expense as a percentage of
net sales decreased from 19.9% to 17.6% for fiscal 1995 as compared to fiscal
1994. The decrease in marketing and sales expense as a percentage of net sales
was primarily attributable to a reduction in the cost of warehousing facilities
and sales increasing at a faster rate than marketing and sales expenses. The
reduction in warehousing facility costs resulted from the consolidation of
distribution facilities, beginning in December 1993, into the Company's leased
warehouse facility located adjacent to the Company's manufacturing facility.
Administrative expense increased from $1,548,942 to $2,347,558 for fiscal
1995 as compared to fiscal 1994. Administrative expense as a percentage of net
sales increased from 3.8% to 4.1% for fiscal 1995 as compared to fiscal 1994.
Both the increase in expenses and percentage increase were due to elevated
levels of staffing, higher recruiting costs, and increased consulting and
professional fees. Among other things, during fiscal 1995, the Company employed
a full-time Director of Human Resources, added several customer service
personnel, continued the implementation of its MIS system, and pursued patents
and trademarks on selected products.
Interest Expense and Other:
Interest expense and other, as a percentage of net sales, increased from
2.0% to 2.6% for fiscal 1995 as compared to fiscal 1994. The increase was
primarily due to higher debt levels, an increase in the lender's base rates, and
an increase in the differentials charged by the lender over its base rates,
offset in part by the increase in sales. The increase in debt levels was
primarily a result of financing additional property, equipment and improvements,
and an increase in working capital and other assets.
Net Earnings:
As a result of the factors discussed above, net earnings increased from
$58,503 to $1,050,884 for fiscal 1995 as compared to fiscal 1994.
Liquidity and Capital Resources
Because the Company's business is highly capital intensive, it has
traditionally relied heavily on bank and other debt financing to fund its
capital requirements. As of January 31, 1996, the Company had borrowed
$9,037,676 under its $9,500,000 revolving credit facility, leaving $462,324
available. In addition, the Company had borrowed all the available funds under
its $7,073,666 non-revolving equipment loan agreements for the purchase of the
fifth and sixth extrusion lines, additional thermoforming lines and molds. See
discussion below regarding an April 1996 commitment for an additional $2,600,000
of term note financing.
As of, or subsequent to, January 31, 1996, the Company was in default on
virtually all of its long-term obligations due to financial covenant violations
and failure to make certain required payments, including repayment of excess
borrowings under its revolving credit facility. In April 1996, the Company
received
16
waivers for the existing defaults from such lenders and commitments to amend
certain financial covenants. The Company believes it will be able to comply with
such amended covenants for at least the next fiscal year.
During April 1996, the Company received a commitment from its principal
lender for an additional $2,600,000 pursuant to a new term note. The proceeds
will be used to pay down its existing revolving credit facility, including the
excess borrowings under such facility. The term note will bear interest at 3%
over the bank's base rate with monthly installments of $75,000 plus interest
with the remaining balance of $1,625,000 due May 31, 1997. Additionally, the
terms of such facility and the existing term note with its principal lender will
be modified to (i) increase the interest rate differentials on both the facility
and existing term note by 1% and .875%, respectively and (ii) reduce the
Company's borrowing base under the facility by $1,000,000.
In addition to the commitments from its principal lender, certain of the
Company's equipment lenders have committed to defer approximately $2,250,000 in
principal payments due during fiscal 1997. Pursuant to the commitments from such
lenders, the deferred principal payments will be due with the last payment of
each respective equipment note. Additionally, the Company may be required,
subject to certain restrictions, to repay a portion of the deferred principal
over the next two fiscal years to the extent there is availability under the
Company's revolving credit facility.
In connection with all of the above commitments, the Company has agreed to
issue warrants to the lenders for purchase of 185,000 shares of the Company's
common stock. Such warrants will be exerciseable at the market price existing at
time of grant.
The Company believes its existing revolving credit facility is adequate to
support its operations through the term of such facility. However, the Company
will be required to renew or refinance up to an aggregate of $13,500,000 related
to its existing revolving credit facility ($9,500,000) and existing term note
($4,000,000) prior to their expiration in May 1997. This is in addition to the
$1,625,000 due on May 31, 1997 pursuant to the new term note as discussed above.
Because of the Company's operating loss in fiscal 1996 and its high debt levels,
such debt renewal or refinancing may be more difficult to secure than in the
past, may be more costly than its current credit facility, and may require
covenants or restrictions more difficult to comply with than those previously or
currently imposed. Additionally, renewal or refinancing will be dependent upon
the Company meeting its cash flow forecasts and managing its financial
performance, among other things. No assurance can be given that the Company will
be able to renew or refinance its existing credit facility or that it will be
able to do so on acceptable terms.
The Company may also explore equity financing but has not entered into any
agreement or negotiations related thereto.
See Note E to the Company's financial statements for additional
information regarding the Company's long-term obligations.
17
Working capital decreased $4,085,143 during fiscal 1996 from $6,770,517 to
$2,685,374. This decrease is primarily attributable to an increase in accounts
payable, a decrease in deferred income taxes and a decrease in inventories
offset in part by an increase in accounts receivable and a decrease in current
maturities of long-term obligations. Accounts receivable increased from
$4,386,376 on January 31, 1995 to $4,706,477 on January 31, 1996. This increase
is principally due to sales of plastic sheet to the Company's joint venture in
Chile, and product sales to the joint venture partner which are made with
payment terms longer than its standard payment terms. This foreign receivable
represents approximately 19% of trade receivables at January 31, 1996.
Inventories declined from $10,340,900 on January 31, 1995 to $9,599,515 on
January 31, 1996. This decrease is due to a reduction in inventory levels of raw
materials and work in process offset by an increase in finished goods inventory
levels. With the addition of the two extrusion lines this past year, the Company
was able to react more quickly to changes in demand for plastic sheet and
therefore was able to carry less raw material and work in process inventory. Its
finished goods inventory increased in part due to some carryover inventory from
last year's produce season and an increase in inventory of products manufactured
and maintained in inventory in order to provide a higher level of service to its
customer base. Accounts payable increased from $5,887,564 on January 31, 1995 to
$10,437,204 on January 31, 1996 primarily due to extended payment terms and
increased credit availability from the Company's largest vendor. The Company
negotiated with this vendor and others for extended payment terms during fiscal
1997.
For fiscal 1996, $3,563,404 of cash was provided by operating activities.
This reflects an increase in accounts payable and other funds generated through
operations, offset in part by an increase in accounts receivable.
Property, equipment and improvements increased from $26,576,873 on January
31, 1995 to $32,067,808 on January 31, 1996. The Company purchased $9,611,266 of
property and equipment, primarily during the first three quarters of fiscal
1996. These property and equipment purchases included the Company's fifth and
sixth extrusion lines, thermoforming equipment, molds, a building addition and
other manufacturing equipment. Many of these purchases were made to expand the
Company's manufacturing and extrusion capacity to support a significant increase
in anticipated sales that did not materialize.
As of January 31, 1996, the Company had no outstanding capital commitments
and was reviewing only minimal expenditures related to improving manufacturing
efficiencies and reducing costs, as well as expenditures on molds for new
products. Because the Company believes that its current level of production
equipment and facilities are sufficient to meet its anticipated fiscal 1997
requirements, its capital expenditures for fiscal 1997 will be substantially
less than the $9,600,000 expended in fiscal 1996. The fiscal 1997 expenditures
will be financed from funds available through the Company's credit facility and
funds generated from operations.
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 established a Chilean corporation ("Ultra Pac SudAmerica S.A.")
for the purpose of manufacturing, marketing and selling plastic packaging
18
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 intends to dispose of certain assets which have not met its
operational objectives. These include the tooling related to its line of floral
packaging, as well as, the machinery and equipment used in its PETE flake
recycling plant which was closed in August 1995.
Seasonality of Sales and Earnings
During the past three years, the Company's product mix has become
increasingly seasonal. From late in the fourth quarter through almost all of the
second quarter, a higher percentage of the Company's production capacity has
been dedicated to long production runs of berry containers for the
produce-grower's market. In the third quarter, the Company has gradually
re-directed the greatest share of its production capacity toward bakery and deli
containers. Historically, the average gross profit margin for all bakery and
deli containers produced during this period has been lower than the gross profit
margins on the Company's berry containers. However, beginning in fiscal 1996,
with increasing competition among producers of berry containers and the
resulting competitive pressure on pricing, gross profit margins for berry
containers no longer exceeded the average gross profit margin for bakery and
deli containers.
Additionally, during the fourth quarter of recent years, the Company has
been increasing fixed manufacturing overhead costs as it prepared to accommodate
substantially higher customer demand anticipated in the next fiscal year.
However, the Company believes that during the fiscal year ending January 31,
1997, its fixed overhead costs will grow at a much slower rate than during the
fiscal years ended January 31, 1996 and 1995.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Identified at Item 14 hereof and incorporated herein by reference are the
financial statements and schedules following Item 14 of this report.
ITEM 9 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III.
Items 10, 11, 12, and 13 of Part III are omitted because the Company
intends to file with the Securities and Exchange Commission within 120 days of
the close of the year ended January 31, 1996, a definitive proxy statement
containing information pursuant to Regulation 14A of the Securities Exchange Act
of 1934, and that such information shall be deemed to be incorporated herein by
reference from the date of filing such document.
19
PART IV.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
1. Financial Statements
The following financial statements of Ultra Pac, Inc. are included herein
at the indicated page numbers:
Page No.
Report of Independent Certified Public Accountants F-1
Balance Sheets at January 31, 1996 and 1995 F-2
Statements of Operations- Years ended January 31, 1996, 1995 and 1994 F-4
Statements of Shareholders' Equity - Years ended January 31, 1996,
1995, and 1994 F-5
Statements of Cash Flows - Years ended January 31, 1996, 1995,
and 1994 F-6
Notes to Financial Statements - January 31, 1996, 1995 and 1994 F-7
2. Financial Statement Schedule
The following financial statement schedule of Ultra Pac, Inc. is included
herein at the indicated page number:
Page No.
Report of Independent Certified Public Accountants on Schedule E-5
II. Valuation of Qualifying Accounts E-6
All other schedules of Ultra Pac, Inc. have been omitted since the
required information is not present or not present in an amount sufficient to
require submission of the schedule, or because the information required is
included in the financial statements or the notes thereto.
3. (a) Exhibits
The exhibits required to be a part of this Report are listed in the Index
to Exhibits which follows the Financial Statement Schedules. A copy of these
Exhibits will be furnished at a reasonable cost to any person who is a
shareholder of the Company as of May 17, 1996 upon receipt from any such person
of a written request for any such Exhibit. Such request should be sent to Ultra
Pac, Inc., 21925 Industrial Blvd., Rogers, Minnesota 55374, Attention: Chief
Financial Officer.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of the year ended January 31, 1996.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ULTRA PAC, INC.
Dated: April 26, 1996 By: /s/ Calvin Krupa
Calvin Krupa
Its: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Calvin Krupa President, Chief April 26, 1996
Calvin Krupa Executive Officer and
Director
/s/ Brad C. Yopp Chief Financial April 26, 1996
Brad C. Yopp Officer (Principal
Accounting Officer)
/s/ James A. Thole Secretary and April 26, 1996
James A. Thole Director
/s/ John F. DeBoer Director April 26, 1996
John F. DeBoer
/s/ Michael J. McGlynn Director April 26, 1996
Michael J. McGlynn
/s/ Frank I. Harvey Director April 26, 1996
Frank I. Harvey
No annual report or proxy materials have been sent to security holders. An
annual report for the Company's fiscal year ended January 31, 1996, will be
forwarded to shareholders.
22
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FORM 10-K
ULTRA PAC, INC.
FOR FISCAL YEAR ENDED JANUARY 31, 1996
Cover
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Ultra Pac, Inc.
We have audited the accompanying balance sheets of Ultra Pac, Inc. (a Minnesota
corporation) as of January 31, 1996 and 1995 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended January 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ultra Pac, Inc. as of January
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended January 31, 1996, in conformity with
generally accepted accounting principles.
St. Paul, Minnesota
April 13, 1996 (except for notes E and H, as
to which the date is April 26, 1996)
F-1
Ultra Pac, Inc.
BALANCE SHEETS
January 31, 1996 and 1995
ASSETS (Note E)
1996 1995
----------- -----------
CURRENT ASSETS
Cash (note C) $ 345,906 $ 145,731
Accounts receivable
Principally trade, less allowance for doubtful
receivables and sales discounts of $305,000
and $245,000 at January 31, 1996 and 1995,
respectively (notes C and D) 4,706,477 4,386,376
Refundable income and sales taxes 1,534,500 731,576
Inventories (notes A1 and B)
Raw materials 2,089,444 3,318,590
Work in process 2,077,652 3,389,893
Finished goods 5,432,419 3,632,417
Deferred income taxes (notes A1, A2, A4 and J) 264,000 1,094,833
Other current assets 153,803 170,607
----------- -----------
Total current assets 16,604,201 16,870,023
PROPERTY, EQUIPMENT AND IMPROVEMENTS - AT COST
Buildings and improvements (note K) 3,491,268 2,476,582
Manufacturing equipment (notes F and K) 22,592,367 18,523,467
Extrusion equipment 12,270,044 7,269,772
Other equipment and furnishings 1,868,806 1,647,035
Leasehold improvements (note F) 945,219 860,301
----------- -----------
41,167,704 30,777,157
Less accumulated depreciation and amortization
(notes A2 and B) 9,837,213 6,346,606
----------- -----------
31,330,491 24,430,551
Deposits on property and equipment -- 1,409,005
Land 737,317 737,317
----------- -----------
32,067,808 26,576,873
OTHER
Security deposits and leasehold costs less
accumulated amortization of
leasehold costs of $24,333 at January 31,
1996 (notes A2 and K) 836,623 781,529
Investments in affiliates (notes A3 and D) 143,215 4,800
Deferred income taxes (notes A1, A2, A4 and J) 722,000 --
Other 207,391 88,562
----------- -----------
1,909,229 874,891
----------- -----------
$50,581,238 $44,321,787
=========== ===========
The accompanying notes are an integral part of these statements.
F-2
Ultra Pac, Inc.
BALANCE SHEETS (CONTINUED)
January 31, 1996 and 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
----------- -----------
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,900,220 $ 2,525,272
Accounts payable - principally trade 10,437,204 5,887,564
Accrued liabilities
Salaries and commissions 843,922 781,782
Interest and other 737,481 582,834
Income taxes payable -- 322,054
----------- -----------
Total current liabilities 13,918,827 10,099,506
LONG-TERM OBLIGATIONS, less current maturities (note E) 27,235,076 20,227,316
DEFERRED INCOME TAXES (notes A1, A2, A4 and J) -- 1,408,233
COMMITMENTS AND CONTINGENCIES (notes E and G) -- --
SHAREHOLDERS' EQUITY
Common stock - authorized, 5,000,000 shares
of no par value; issued and
outstanding, 3,766,215 shares at January 31,
1996 and 1995 (notes E and H) 7,631,572 7,631,572
Additional contributed capital 1,213,000 1,213,000
Retained earnings 582,763 3,742,160
----------- -----------
9,427,335 12,586,732
----------- -----------
$50,581,238 $44,321,787
=========== ===========
F-3
Ultra Pac, Inc.
STATEMENTS OF OPERATIONS
Years ended January 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
Net sales (notes C and D) $ 66,128,723 $ 57,249,979 $ 41,189,297
Cost of products sold (notes B and K) 54,186,647 41,624,598 30,521,683
------------ ------------ ------------
Gross profit 11,942,076 15,625,381 10,667,614
Operating expenses (note K)
Marketing and sales 11,481,007 10,066,119 8,202,048
Administrative 2,759,614 2,347,558 1,548,942
------------ ------------ ------------
14,240,621 12,413,677 9,750,990
------------ ------------ ------------
Operating profit (loss) (2,298,545) 3,211,704 916,624
Other income (expense)
Interest expense (2,516,672) (1,507,495) (795,675)
Equity in net loss of affiliates (notes A3 and D) (8,585) -- (48,279)
Other (56,595) 675 1,833
------------ ------------ ------------
(2,581,852) (1,506,820) (842,121)
------------ ------------ ------------
Earnings (loss) before income taxes (4,880,397) 1,704,884 74,503
Income tax provision (benefit)
(notes A1, A2, A4 and J) (1,721,000) 654,000 16,000
------------ ------------ ------------
NET EARNINGS (LOSS) $ (3,159,397) $ 1,050,884 $ 58,503
============ ============ ============
Earnings (loss) per common share (note A7) $ (.84) $ .28 $ .02
============ ============ ============
Weighted average number of shares outstanding
(note A7) 3,766,215 3,766,144 3,767,621
============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
Ultra Pac, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY (Notes E and H)
Years ended January 31, 1996, 1995 and 1994
Common Stock Additional
-------------------- contributed Retained
Shares Amount capital earnings
------ ------ ------- --------
Balance - January 31, 1993 3,765,715 $ 7,628,322 $ 1,213,000 $ 2,632,773
Net earnings for the year ended
January 31, 1994 -- -- -- 58,503
----------- ----------- ----------- -----------
Balance - January 31, 1994 3,765,715 7,628,322 1,213,000 2,691,276
500 shares of common stock issued
for services 500 3,250 -- --
Net earnings for the year ended
January 31, 1995 -- -- -- 1,050,884
----------- ----------- ----------- -----------
Balance - January 31, 1995 3,766,215 7,631,572 1,213,000 3,742,160
Net loss for the year ended
January 31, 1996 -- -- -- (3,159,397)
----------- ----------- ----------- -----------
Balance - January 31, 1996 3,766,215 $ 7,631,572 $ 1,213,000 $ 582,763
=========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
F-5
Ultra Pac, Inc.
STATEMENTS OF CASH FLOWS (Note L)
Years ended January 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
Increase (Decrease) in Cash
Cash flows provided by operating activities
Net earnings (loss) $ (3,159,397) $ 1,050,884 $ 58,503
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization (notes A2 and B)
Property, equipment and improvements 3,896,560 2,777,982 1,761,546
Leasehold costs 24,333 -- --
Provision for doubtful receivables 60,000 (12,833) (108,277)
Net (gain) loss on asset disposal 16,971 (24,824) --
Non-cash compensation to employees 38,700 -- --
Equity in undistributed net loss of
affiliates 4,800 -- --
Net deferred income taxes (1,299,400) 306,300 (7,100)
Common stock issued for services -- 3,250 --
Change in assets and liabilities:
Accounts receivable (1,183,025) (1,420,130) (71,277)
Inventories 741,385 (2,640,451) (2,351,235)
Other current assets 16,804 (64,161) 1,937
Accounts payable 4,549,640 1,210,020 952,439
Accrued liabilities 178,087 396,948 388,722
Income taxes payable (322,054) 320,354 (2,830)
------------ ------------ ------------
Net cash provided by operating activities 3,563,404 1,903,339 622,428
Cash flows from investment activities
Capital expenditures (9,611,266) (8,881,457) (7,610,975)
Proceeds from sale of equipment 206,800 141,625 --
Security deposits and leasehold costs (79,427) (496,656) (295,079)
Investments in affiliates (143,215) (4,800) --
Other (118,829) (6,000) (8,031)
------------ ------------ ------------
Net cash used in investing activities (9,745,937) (9,247,288) (7,914,085)
Cash flows from financing activities
Bank overdraft -- -- (14,195)
Proceeds from long-term obligations 9,388,449 11,791,194 8,337,764
Principal payments under long-term obligations (3,005,741) (4,746,801) (587,125)
------------ ------------ ------------
Net cash provided by financing activities 6,382,708 7,044,393 7,736,444
------------ ------------ ------------
Net increase (decrease) in cash 200,175 (299,556) 444,787
Cash at February 1 145,731 445,287 500
------------ ------------ ------------
Cash at January 31 $ 345,906 $ 145,731 $ 445,287
============ ============ ============
The accompanying notes are an integral part of these statements.
F-6
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company designs and markets plastic containers in a wide range of sizes
and designs for use primarily in the food industry. In addition, the
Company had nominal sales to the floral industry through January 31, 1995;
however, the Company has stopped manufacturing for the floral industry and
has listed the related tooling for sale. The Company's products are
primarily manufactured by the Company in its vertically integrated
production facilities, located in Rogers, Minnesota, using both virgin and
recycled materials. Additionally, certain products are manufactured in
Chile by Ultra Pac SudAmerica S.A., a joint venture owned 49% by Ultra Pac,
Inc. Although sales are primarily within the continental United States, the
Company has some international sales, principally in Canada and South
America.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
1. Inventories
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method. Certain costs are expensed for
financial reporting purposes and capitalized for income tax reporting
purposes; deferred income taxes are provided for these timing differences.
Inventory categories consist of the following:
Raw materials which include virgin and recycled materials used in the
recycling and extrusion process, and packaging and shipping supplies.
Work in process which includes both purchased and internally extruded
plastic sheet used in the production of finished goods.
Finished goods which include completed, packaged products available
for shipment.
2. Depreciation and Amortization
For financial reporting purposes, depreciation of property and equipment is
provided using the straight-line method over the estimated useful lives of
the applicable assets while amortization of leasehold improvements is
provided over the lives of the respective leases or the service lives of
the improvements, whichever is shorter. Expenditures for maintenance and
repairs are charged to expense as incurred, whereas expenditures for
renewals and betterments are capitalized. The estimated useful lives used
to compute depreciation and amortization of property, equipment and
improvements are fifteen years for building and improvements and ten years
for all other depreciable property, equipment and improvements.
F-7
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
2. Depreciation and Amortization - Continued
Leasehold costs are amortized over 15 years, the term of the lease.
For income tax reporting purposes, other lives and methods may be used;
deferred income taxes are provided for these temporary differences.
3. Investments in Affiliates
Investments in the common stock of Ultra Pac SudAmerica, S.A. and Ultra Pac
Middle East EC are stated at cost plus equity in undistributed net earnings
(loss) since dates of acquisition.
4. Income Taxes
The Company provides for income taxes based on income reported for
financial reporting purposes. Certain charges to earnings differ as to
timing from those deducted for tax reporting purposes; these relate
primarily to accelerated depreciation and to net operating loss and
alternative minimum tax credit carryforwards. The tax effects of these
differences are recorded as deferred income taxes.
5. Accounting for Stock Based Compensation
The granting of all options and warrants were at 100% of market value, or
greater, on the dates of grant. No compensation cost or other accounting
recognition is given to stock options or stock purchase warrants until they
are exercised, at which time the proceeds are credited to common stock.
With respect to certain options currently outstanding, the Company may
recognize a tax benefit upon exercise of these options in an amount equal
to the difference between the exercise price and the fair market value of
the common stock if the fair market value exceeds the exercise price on the
day of the exercise.
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation," issued in October 1995 and effective for fiscal
years beginning after December 15, 1995, encourages, but does not require,
a fair value based method of accounting for employee stock options or
similar equity instruments. As permitted under the new standard, the
Company will continue to account for employee stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The pro forma disclosures required by this standard will be
adopted during the year ended January 31, 1997.
F-8
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
6. Accounting for the Impairment of Long-Lived Assets
On November 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of", which imposes a stricter criterion
for assets by requiring that such assets be probable of future recovery at
each balance sheet date. In connection with adopting this standard, the
Company provided an allowance of $100,000 during January 1996 in connection
with its decision to dispose of its tooling related to the floral industry
and its recycling equipment.
7. Earnings (Loss) Per Common Share
Earnings per share are based upon the weighted average number of common and
dilutive common equivalent shares outstanding.
NOTE B - USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company's manufacturing processes (thermoforming and extrusion) produce
trim and other scrap material that may be ground into flake and blended
with virgin raw material for reuse by the Company. Most of the scrap
material ("regrind") is reused by the Company in the ordinary course of
business. However, some of the Company regrind is not reusable due to the
color, composition or quantity of the material and is disposed of through
sale or other means. Regrind in inventory is reported by the Company in its
balance sheet as raw material and is valued at its estimated net realizable
value. During the year ended January 31, 1996, the Company experienced an
increase in its regrind material and adjusted its estimated net realizable
valued downward by approximately $250,000.
In connection with the Company's decision to dispose of its tooling related
to the floral industry and its recycling equipment, the Company has
provided allowances of $100,000 during the year ended January 31, 1996 for
disposition of such assets. In addition, allowances of $200,000 and
$142,000 were provided for other tooling during the years ended January 31,
1996 and 1995, respectively. These allowances less writeoffs of $73,000,
are included in accumulated depreciation and amortization of property,
equipment and improvements as of January 31, 1996 and 1995 and in
depreciation and amortization expense during the years ended January 31,
1996 and 1995. Management believes that the undepreciated value of these
assets as of January 31, 1996 is realizable.
See note J for discussion of deferred tax asset realization.
F-9
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE C - CONCENTRATIONS OF CREDIT RISK AND SALES
Trade receivables have significant concentrations of credit risk in the
retail packaged food sector in the United States. As of January 31, 1996,
substantially all trade receivables relate to this sector.
The Company had sales to one customer which accounted for 12.3%, 10.9% and
11.9% of net sales during the years ended January 31, 1996, 1995 and 1994,
respectively. Included in trade receivables at January 31, 1996 are
$1,204,537 of receivables from foreign customers, of which $640,255 have
been subsequently collected.
The Company maintains its cash balances in one financial institution
located in Minneapolis, Minnesota. These balances are insured by the
Federal Deposit Insurance Corporation up to $100,000.
NOTE D - INVESTMENTS IN AND TRANSACTIONS WITH AFFILIATES
Investments in affiliates as of January 31, are as follows:
1996 1995
---------- ---------
Ultra Pac SudAmerica, S.A. ("UPSA")
Common stock, 147,107 shares (49%) $ 143,215 $ --
Ultra Pac Middle East EC
Common stock, 800 shares (40%) -- 4,800
---------- ---------
$ 143,215 $ 4,800
========== =========
Equity in undistributed net earnings (loss) of Ultra Pac SudAmerica, S.A.
and Ultra Pac Middle East EC, since acquisition amounted to $(3,785) and
$(53,079), respectively, as of January 31, 1996.
Net sales to affiliates and to UPSA's majority shareholder were $569,502
and $490,966, respectively, during the year ended January 31, 1996. As of
January 31, 1996, $936,897 was receivable from UPSA and UPSA's majority
shareholder.
F-10
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE E - LONG-TERM OBLIGATIONS
Long-term obligations as of January 31, are as follows:
1996 1995
----------- -----------
Facility A
Interest payable monthly at 2.375% above the three month LIBOR
rate (effective rate of 8.00% and 8.63% as of January 31,
1996 and 1995, respectively) $ 5,000,000 $ 5,000,000
Interest payable at .5% above banks' base rate
(effective rate of 9% as of January 31, 1996 and 1995) 4,037,676 2,426,193
Facility B; interest payable monthly at .875% above the
bank's base rate (effective rate of 9.375% as of
January 31, 1996 and 1995) 4,899,683 5,580,928
Facilities D and E; interest payable monthly at 2.5% above
the three month LIBOR rate (effective rate of 8.125%
as of January 31, 1996 6,445,313 --
Equipment notes payable in monthly installments,
including interest from 8.0% to 10.87%; subject to
prepayment penalties 6,756,564 7,422,329
Real estate mortgage payable in monthly installments,
including interest to be adjusted each three year
anniversary to a rate equal to 3% over the three year
U.S. Treasury Securities Yield (effective rate of 8%
through May 1996) 949,907 1,037,115
Contracts for deed payable in monthly installments,
including interest from 8.00% to 9.00% 377,456 399,653
Capitalized leases (note F) 668,697 886,370
----------- -----------
29,135,296 22,752,588
Less current maturities 1,900,220 2,525,272
----------- -----------
$27,235,076 $20,227,316
=========== ===========
As of January 31, 1996, or subsequently, the Company was in default on
substantially all of its long-term obligations due to financial covenant
violations and its failure to make certain required payments under the
terms of the agreements. During April 1996, the Company received waivers of
the defaults from each of the respective lenders and commitments from its
lenders to modify the terms of their respective loan agreements, including
the following:
1. Defer approximately $2,250,000 of principal payments on Facilities D
and E and certain equipment notes from the year ending January 31,
1997 to later years
F-11
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE E - LONG-TERM OBLIGATIONS - CONTINUED
2. Accelerate approximately $750,000 of principal payments on the
equipment notes from the year ending January 31, 2004 to the year
ending January 31, 1998.
3. Provide an additional $2,600,000 term note ("Facility C") from its
bank due in monthly principal payments of $75,000 plus interest at 3%
above the banks' base rate with a final payment of $1,625,000 due May
31, 1997
4. Reduce the Company's borrowing base by $1,000,000 under Facility A
5. Increase the rate of interest on borrowings based on the bank's base
rate under Facilities A and B by 1% and .875%, respectively.
6. Repay up to an additional $600,000 to an equipment note holder during
each of the years ending January 31, 1997 and 1998, to the extent
available, as defined
7. Add or modify existing covenants and cross default provisions
8. Issue the lenders warrants to purchase 185,000 shares of the Company's
common stock: the warrants will be exercisable at the market price at
date of grant (closing); the term of the warrants has not been
determined
9. Pay $75,000 in agent and origination fees
10. Modify the prepayment penalty for Facilities A and B to 2%, as defined
The terms and maturities of the long-term obligations which follow, have
been adjusted for the impact of the above modifications.
The terms of the Company's credit and security agreement under Facilities
A, B and C include the following:
Facility A: $9,500,000 revolving note; interest at 1.5% above the
bank's base rate. The agreement provides for issuance of up to
$1,000,000 of letters of credit (none outstanding as of January 31,
1996). Borrowings are limited to a borrowing base of eligible accounts
receivable and inventory, less outstanding letters of credit. A
commitment fee of .25% per year is payable on the unused portion of
the revolving credit. Interest is payable monthly. A prepayment
penalty of 2% is provided for under certain circumstances. The note is
due on May 31, 1997.
Facility B: $6,000,000 non-revolving term note payable in monthly
installments of $66,667, plus interest at 1.75% above the bank's base
rate, through May 1997 with the remaining balance of approximately
$3,858,000 due on May 31, 1997.
F-12
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE E - LONG-TERM OBLIGATIONS - CONTINUED
Facility C: $2,600,000 non-revolving term note payable in monthly
installments of $75,000, plus interest at 3% above the bank's base
rate, with a final payment of $1,625,000 due on May 31, 1997.
During March 1995, the Company entered into a $7,073,666 non-revolving
equipment loan agreement with interest at 2.5% above the LIBOR rate. The
agreement provides for borrowings on specific equipment purchased subject
to the following terms:
Facility D: payable in monthly installments, plus interest, and
maturing at various dates during the year ending January 31, 2003.
Facility E: payable in monthly installments, plus interest, and
maturing at various dates during the year ending January 31, 1999.
The notes under Facilities D and E may be prepaid without penalty after
October 31, 1997.
The long-term obligations are collateralized by substantially all assets of
the Company and life insurance on the president of the Company. Certain
agreements contain covenants relating to financial performance, limitations
on payment of dividends, acquisitions, mergers, change in control,
investments, additional debt, capital expenditures, disposition of assets
and other matters. In addition, under the commitments, the respective
lending institutions have been provided cross defaults.
Aggregate maturities of long-term obligations for the four years following
January 31, 1997 are as follows: 1998, $17,509,075; 1999, $3,556,896; 2000,
$1,844,023; and 2001, $1,169,257.
NOTE F - CAPITALIZED LEASES
For financial reporting purposes, minimum lease rentals relating to certain
equipment and leasehold improvements have been capitalized.
The related assets and obligations have been recorded using the Company's
incremental borrowing rate at the inception of the leases. The leases,
which are noncancelable, expire at various dates through February 1999. The
following is a schedule of leased property under capital leases:
January 31,
------------------------
1996 1995
---------- ----------
Manufacturing equipment $ 744,808 $ 744,808
Leasehold improvements 301,756 301,756
---------- ----------
1,046,564 1,046,564
Less accumulated depreciation 211,808 107,151
---------- ----------
$ 834,756 $ 939,413
========== ==========
F-13
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE F - CAPITALIZED LEASES
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments at January 31, 1996.
Year ending January 31,
-----------------------
1997 $ 303,954
1998 274,102
1999 168,350
2000 9,085
----------
Total minimum lease payments 755,491
Less amount representing interest 86,794
----------
Present value of net minimum lease payments $ 668,697
==========
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company conducts a substantial portion of its operations in leased
facilities under noncancelable operating leases expiring at various dates
through 2008. At the end of the lease terms, substantially all of the
leases are renewable at the then fair rental value for periods of 3 to 15
years. Each of the leases provide that the Company pay property taxes,
maintenance, insurance and other occupancy expense applicable to leased
premises. Certain of the rents are subject to increases in proportion to
the increase in the Consumer Price Index and substantially all of the
leases contain purchase options.
Minimum rental commitments of non-cancelable operating leases are
approximately as follows:
Year ending January 31,
1997 $ 1,613,000
1998 1,514,000
1999 1,436,000
2000 1,365,000
2001 1,314,000
2002 and thereafter 8,744,000
-----------
$15,986,000
===========
Total rent expense for all operating leases for the years ended January 31,
1996, 1995 and 1994 was $2,294,579, $1,707,343 and $1,546,659,
respectively.
The Company has commitments to purchase equipment aggregating approximately
$110,000 at April 13, 1996.
F-14
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company has entered into two material supply agreements which will
fulfill a significant portion of its plastic resin and post consumer flake
needs. The agreements are for three and five year periods and call for
annual minimum purchase requirements. Pricing is reviewed and negotiated
annually in one of the agreements and prices on the other fluctuates with
market prices.
The Company is subject to certain lawsuits and other claims arising out of
the conduct of its business. In the opinion of management, all matters are
adequately provided for, are without merit or are of such a kind or involve
such amounts that they would not have a material effect on the financial
position or results of operations of the Company.
NOTE H - COMMON STOCK
On March 14, 1996, the Company adopted the 1996 Ultra Pac, Inc. Stock
Option Plan ("1996 Plan") which reserves 200,000 shares of common stock for
future issuance. During March 1996, options to purchase 75,000 shares of
common stock under the 1996 Plan were granted to employees at an exercise
price of $3.00 per share. These options expire March 31, 2001.
The 1991 Stock Option Plan ("1991 Plan"), reserves 100,000 shares of the
Company's authorized common stock for future issuance. Under the terms of
the 1991 Plan, the Company may grant to its employees and consultants
options to purchase shares with a term not to exceed ten years. No options
under the 1991 Plan have been exercised through January 31, 1996. Pursuant
to the 1991 Plan, the following non-qualified options were granted and
remain outstanding as of January 31, 1996:
Granted Expiring
during Common shares during
year ended covered by Exercise year ending
January 31, options price January 31,
----------- ------- ----- -----------
1996 15,000 $ 6.00 2001
1995 30,000 $ 5.13 to $ 8.00 2000
1994 11,000 $ 7.50 to $ 8.75 1999-2004
1993 8,000 $10.25 to $11.50 1998-2003
1992 18,500 $ 7.00 to $12.69 2002
---------
82,500
=========
Subsequent to January 31, 1996, options to purchase 17,000 shares of common
stock under the Plan were canceled.
F-15
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE H - COMMON STOCK - CONTINUED
The Outside Directors' Option Plan ("Directors' Plan"), reserves 100,000
shares of the Company's authorized common stock for future issuance. Under
the terms of the Outside Directors' Option Plan, the Company will grant to
its outside directors options to purchase shares with a term not to exceed
five years. No options under the Directors' Plan have been exercised
through January 31, 1996, however, options for 4,500 shares were canceled
during the year ended January 31, 1996. Pursuant to this plan, the
following non-qualified options were granted and remain outstanding as of
January 31, 1996:
Granted Expiring
during Common shares during
year ended covered by Exercise year ending
January 31, options price January 31,
----------- ------- ----- -----------
1996 5,500 $ 5.75 2001
1995 3,000 $ 7.25 2000
1994 3,000 $ 9.25 1999
1992 7,500 $12.69 1997
--------
19,000
========
In each of the four years ended January 31, 1993 through January 31, 1996,
the Company's Board of Directors granted non-qualified stock options to the
Company's Chief Executive Officer for 20,000 shares of common stock at
exercise prices ranging from $6.00 to $11.50 per share. These options each
have five year terms and remain outstanding at January 31, 1996.
In August 1991, the Company's Board of Directors granted a non-qualified
stock option for 50,000 shares of common stock at an exercise price of
$8.88 per share. This option was issued to the Company's principal
landlord, who is a former director of the Company, for past and future real
estate consulting services to the Company. This option was not exercised
and expired in August 1995.
In addition to the outstanding options to purchase common stock, the
Company issued warrants to purchase 30,000 shares of its common stock to an
Underwriter and certain of its employees in connection with the public
offering of the Company's common stock in May 1992. The warrants are
exercisable at prices ranging from $11.50 to $13.76 per share, depending
upon time of exercise. These warrants expire during the year ending January
31, 1998 and remain outstanding at January 31, 1996.
F-16
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE H - COMMON STOCK - CONTINUED
Transactions involving options and warrants are as follows:
Year ended January 31,
1996 1995 1994
-------- -------- --------
Outstanding at beginning of period 227,500 177,500 136,500
Granted 40,500 54,000 41,000
Exercised -- -- --
Expired/canceled (56,500) (4,000) --
-------- -------- --------
Outstanding at end of period 211,500 227,500 177,500
======== ======== ========
Exercisable 211,500 227,500 173,333
======== ======== ========
Option and warrant expiration dates as of January 31, 1996, and their
exercise price per share, are as follows:
Exercise
Year ending January 31, Shares Price
1997 27,500 $ 11.50 to $ 12.69
1998 32,000 $ 10.25 to $ 11.50
1999 34,000 $ 7.50 to $ 9.25
2000 53,000 $ 5.13 to $ 8.00
2001 40,500 $ 5.75 to $ 6.00
2002 18,500 $ 7.00 to $ 12.69
2003 6,000 $ 10.88 to $ 11.50
----------
211,500
==========
In connection with closing the debt restructuring (see note E), the Company
is to issue warrants for 185,000 shares of its common stock. The warrants
will be exercisable at the market price at date of grant (closing); the
term of the warrants has not been determined.
Effective April 1, 1996, the Company issued compensation in the form of
12,900 shares of its common stock to its hourly employees.
F-17
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE I - PROFIT-SHARING PLAN AND TRUST
During the year ended January 31, 1993, the Company implemented The Ultra
Pac, Inc. 401(k) Profit Sharing Plan and Trust which covers substantially
all of its employees. Participants may elect to enter into salary reduction
agreements with the Company for a portion of their compensation. The plan
authorizes the Board of Directors of the Company to annually authorize
contributions, out of earnings and profits, up to 50% of each participant's
contribution, not to exceed 2% of that participant's total compensation.
For the years ended January 31, 1996, 1995 and 1994, contributions to the
plan totaled $321,296, $219,135 and $159,806, respectively, of which
$78,262, $54,975 and $40,967, respectively, were contributed by the
Company.
NOTE J - INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Year ended January 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Current
Federal $ (421,600) $ 312,600 $ 21,100
State -- 35,100 2,000
----------- ----------- -----------
(421,600) 347,700 23,100
Deferred
Federal (1,119,400) 275,000 (7,600)
State (180,000) 31,300 500
----------- ----------- -----------
(1,299,400) 306,300 (7,100)
----------- ----------- -----------
$(1,721,000) $ 654,000 $ 16,000
=========== =========== ===========
A reconciliation of the difference between income tax expense and the
amount computed by applying the statutory federal income tax rates to
earnings (loss) before income taxes is as follows:
Year ended January 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
Income tax expense (benefit) at federal
statutory rate $(1,659,000) $ 580,000 $ 25,300
State taxes, less federal tax benefit (117,000) 44,000 1,600
Surtax exemption -- -- (11,600)
Tax effect of permanent financial statement/
tax differences 19,000 17,000 700
Other 36,000 13,000 --
----------- ----------- -----------
Income tax expense (benefit) $(1,721,000) $ 654,000 $ 16,000
=========== =========== ===========
F-18
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE J - INCOME TAXES - CONTINUED
Deferred income taxes are the result of temporary differences in
recognition of income and expense for financial statement and tax
reporting. The major sources of these differences and the tax effect of
each are as follows:
Year ended January 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Tax depreciation in excess of financial
statement depreciation $ 717,000 $ 799,000 $ 723,000
Net operating loss carryforwards (2,399,000) (113,000) (626,000)
Alternative minimum tax credit
carryforwards 439,000 (349,000) (24,000)
Allowance for doubtful receivables (22,000) 3,000 (39,000)
Inventories 35,000 17,000 (58,000)
Salaries (31,000) (26,000) --
Deferred gain (22,000) -- --
Real estate taxes 10,000 (10,000) --
Other (26,400) (14,700) 16,900
----------- ----------- -----------
$(1,299,400) $ 306,300 $ (7,100)
=========== =========== ===========
Deferred tax assets and liabilities consist of the following:
January 31,
1996 1995
----------- -----------
Deferred tax assets - current
Allowance for doubtful receivables $ 111,000 $ 89,000
Inventories 61,000 96,000
Salaries 57,000 26,000
Deferred gain 22,000 --
Real estate taxes -- 10,000
Net operating loss carryforwards -- 855,000
Other 13,000 18,833
----------- -----------
$ 264,000 $ 1,094,833
=========== ===========
January 31,
1996 1995
----------- -----------
Deferred tax assets (liabilities) - long-term
Depreciation of property, equipment and improvements $(3,002,000) $(2,304,000)
Net operating loss carryforwards 3,689,000 453,000
Alternative minimum tax credit carryforwards 39,000 478,000
Other (4,000) (35,233)
----------- -----------
$ 722,000 $(1,408,233)
=========== ===========
F-19
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE J - INCOME TAXES - CONTINUED
As of January 31, 1996, the Company has net operating loss carryforwards
which expire as follows:
Federal State
------- -----
Year ending January 31,
-----------------------
2007 $ 938,000 $ 761,000
2008 637,000 249,000
2009 1,624,000 624,000
2010 133,000 33,000
2011 6,717,000 2,547,000
----------- -----------
$10,049,000 $ 4,214,000
=========== ===========
The Company has recorded net deferred tax assets of $986,000, primarily
resulting from the benefit of net operating loss carryforwards, which
expire in varying amounts between the years ending January 31, 2007 and
2011. Realization is dependent on generating sufficient taxable income
prior to expiration of the net operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not
that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward
period are reduced.
NOTE K - RELATED PARTY TRANSACTIONS
The Company conducts a portion of its operations from facilities leased
(see note G) and purchased from an individual who was a director of the
Company through July 14, 1995. During the year ended January 31, 1995, the
Company reimbursed this former director $365,000 for his costs of moving
and business interruption in connection with an expansion of the Company's
manufacturing facilities which are leased from this former director. The
Company also purchases certain tooling and services from a company owned in
part by this former director. The following is a summary of rent expense,
building and land acquisition costs, leasehold costs and tooling and
services purchased from this individual while he was a director during the
years ended January 31, 1996, 1995 and 1994:
Year ended January 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Lease obligations $ 388,000 $ 464,000 $ 525,000
Building, land and land acquisition costs 16,000 4,000 1,776,000
Leasehold costs -- 365,000 --
Tooling and services 63,000 312,000 262,000
Deposits on building and land -- -- (450,000)
----------- ----------- -----------
$ 467,000 $ 1,145,000 $ 2,113,000
=========== =========== ===========
F-20
Ultra Pac, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1996, 1995 and 1994
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
Sales to a customer whose chief executive officer is a director of the
Company were $531,000 from July 14, 1995, when such person became a
director of the Company, through January 31, 1996.
See note D for transactions with affiliates.
NOTE L - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
Income
Year ended January 31, Interest taxes
---------------------- -------- -----
1996 $ 2,403,587 $ 421,438
1995 1,489,918 59,017
1994 769,864 96,241
During the years ended January 31, 1995 and 1994, the Company acquired
$745,930 and $305,521, respectively of manufacturing equipment and
leasehold improvements under capitalized leases.
NOTE M - FINANCIAL INSTRUMENTS
The financial statements include information about estimated fair values as
of January 31, 1996 and 1995, as required by FASB Statement 107. Such
information, which pertains to the Company's financial instruments, is
based on the requirements set forth in that Statement and does not purport
to represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
CASH: The carrying amount approximates fair value based on the demand
nature of the deposits.
RECEIVABLES: The carrying amount approximates fair value based on the
short maturity of these instruments.
LONG-TERM OBLIGATIONS: The carrying amount approximates fair value,
where significant, because the interest rates are indexed to market
value, or, due to the short maturity of these instruments.
NOTE N - RECLASSIFICATIONS
Certain amounts for the year ended January 31, 1995 have been reclassified
to conform with the financial statement presentation used for the year
ended January 31, 1996. These reclassifications had no effect on previously
reported net earnings or stockholders' equity.
F-21
3. (A) EXHIBITS
3.1 Restated Articles of Incorporation (Exhibit No. 3.1) (3)
3.2 Bylaws (Exhibit No. 3.2) (1)
10.2 Employment Agreement with Calvin Krupa, dated June 20, 1989 (Exhibit No. 10.2) (2)
10.3 First Amendment to Employment Agreement, dated March 31, 1990, with Calvin Krupa (Exhibit No. 10.17) (4)
10.4 Second Amendment to Employment Agreement, dated January 3, 1992, with Calvin Krupa (Exhibit No. 10.4) (9)
10.9 1991 Stock Option Plan (exhibit No. 10.3) (7)
10.15 Lease Agreement with Charles J. Van Heel for 21925 Industrial Boulevard, Rogers, Minnesota dated July 23,
1991 (Exhibit No. 10.2) (8)
10.16 Amendment dated July 23, 1991, to Lease Agreement with Charles J. Van Heel for 21925 Industrial
Boulevard, Rogers, Minnesota, dated July 23, 1991 (Exhibit No. 10.3) (8)
10.17 Outside Directors' Option Plan (Exhibit No. 10.17) (9)
10.19 Purchase Agreement and Contract For Deed with Clement L. Sharp dated October 29, 1992 (Exhibit 10.2) (10)
10.20 Purchase Agreement with Mr. Chuck Van Heel dated December 7, 1992 (Exhibit No. 10.3) (10)
10.22 Equipment Note Agreement with Norwest Equipment Finance, Inc., dated March 22, 1993 (Exhibit No. 10.22) (11)
10.23 Lease Agreement with MLH Partners, dated April 8, 1992 (Exhibit 10.23) (11)
10.24 Equipment Note Agreement with Norwest Equipment Finance Inc., dated April 14, 1993 (Exhibit 10.24) (11)
10.25 Letter of Intent for real estate mortgage agreement with AmeriBank dated March 17, 1993 (Exhibit 10.25) (11)
10.26 Amendment dated June 1, 1993, to Lease Agreement with Charles J. Van Heel for 21925
Industrial Boulevard, Rogers, Minnesota, N.A. dated May 26, 1992 (Exhibit No. 10.1) (12)
10.27 Real Estate Mortgage Agreement with AmeriBank dated June 1, 1993 (Exhibit No. 10.2) (12)
10.29 Assumption Agreement between Ultra Pac, Inc. and Charles J. Van Heel and Marilyn Van
Heel, dated June 3, 1993 and the Mortgage Note between Charles J. Van Heel and W.J.D. & Co.
(Exhibit No. 10.2) (13)
10.30 Equipment Lease Agreement with the CIT Group dated August 30, 1993 (Exhibit No. 10.1) (14)
10.31 Equipment Note Agreement with Norwest Equipment Finance, Inc., dated October 19, 1993 (Exhibit No. 10.2) (14)
10.32 Equipment Note Agreement with Norwest Equipment Finance, Inc., Dated November 8, 1993 (Exhibit No. 10.3) (14)
E1
10.33 Amendment dated December 1, 1993 to Lease Agreement with ML Limited Partnership dated April 8, 1993
(Exhibit 10.33) (15)
10.34 Patent, Technical Information and Technical Assistance Agreement with Shell Oil Company dated
May 28, 1993 (Exhibit 10.34) (15)
10.35 Interim Funding Agreement with Norwest Equipment Finance dated February 3, 1994 (Exhibit 10.35) (15)
10.37 Equipment Note Agreement with Norwest Equipment Finance, Inc. dated May 24, 1994 (Exhibit 10.1) (16)
10.38 Equipment Lease Agreement with the CIT Group dated February 1, 1994. (Exhibit 10.2) (16)
10.39 Credit and Security Agreement with Norwest Bank, Minnesota N.A. dated June 13, 1994. (Exhibit 10-3) (16)
10.40 Equipment Note Agreement with Norwest Equipment Finance, Inc. dated October 17, 1994 (Exhibit 10.1) (17)
10.41 Leasehold Lease Agreement with Linmark Financial Group, Inc. dated October 20, 1994 (Exhibit 10.2) (17)
10.42 Lease Agreement with Charles J. Van Heel, dated November 20, 1994, for 22101 Industrial Blvd., Rogers, Minnesota
(Exhibit 10.3) (17)
10.43 Lease Agreement with Charles J. Van Heel, dated November 20, 1994, for 22101 Industrial Blvd., Rogers, Minnesota
(Exhibit 10.4) (17)
10.44 Second Amendment dated November 2, 1994, to Lease Agreement with Charles J. Van Heel for 21925 Industrial Blvd.,
Rogers, Minnesota (Exhibit 10.5) (17)
10.45 Waiver dated December 14, 1994, related to Credit and Security Agreement with Norwest Bank, Minnesota N.A.
dated June 13, 1994 (Exhibit 10.6) (17)
10.46 Loan and Security Agreement with the CIT Group/Equipment Financing, Inc., dated March 10, 1995
(Exhibit 10.46) (18)
10.47 Amendment dated July 1, 1994 to the Credit and Security Agreement with Norwest Bank, Minnesota, N.A. dated
June 13, 1994 (Exhibit 10.47) (18)
10.48 Amendment dated March 7, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota, N.A. dated
June 13, 1994. (Exhibit 10.48) (18)
10.49 Waiver dated March 2, 1995, related to Credit and Security Agreement with Norwest Bank, Minnesota N.A. dated
June 13, 1994 (Exhibit 10.49) (18)
10.50 Waiver dated March 3, 1995, related to Real Estate Mortgage Agreement with AmeriBank, dated June 1, 1993
(Exhibit 10.50) (18)
10.51 Amendment dated June 1, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated
June 13, 1994. (Exhibit 10.1) (19)
10.52 Amendment dated June 30, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated
June 13, 1994. (Exhibit 10.1) (20)
10.53 Waiver dated September 7, 1995, related to the Credit and Security Agreement with Norwest Bank, Minnesota N.A.,
dated June 13, 1994. (Exhibit 10.2) (20)
E2
10.54 Amendment dated October 8, 1995 to the Credit and Security Agreement with Norwest Bank, Minnesota N.A., dated
June 13, 1994. (Exhibit 10.1) (21)
10.55 Waiver dated December 12, 1995 related to the Credit and Security Agreement with Norwest Bank, Minnesota N.A.,
dated June 13, 1994. (Exhibit 10.2) (21)
* 10.56 Material supply agreement with Eastman Chemical Company, dated January 2, 1996 (confidential treatment has been
requested with respect to selected portions of this exhibit).
* 10.57 Equipment note agreement with Wentworth Capital Corporation dated December 7, 1995.
* 10.58 Financing Commitment with Norwest Credit, Inc. dated April 25, 1996.
* 10.59 Financing Commitment with Norwest Bank Minnesota N.A. dated April 25, 1996.
* 10.60 Commitment Letter, dated April 25, 1996, to Amend the Security Agreement on Promissory Note with USL Capital
Corporation dated December 20, 1994.
* 10.61 Commitment Letter, dated April 25, 1996, to Amend the Loan and Security Agreement with The CIT Group/Equipment
Financing, Inc. dated March 10, 1995.
* 10.62 Commitment letter, dated April 25, 1996, to Amend the Equipment Note Agreement with Norwest Equipment Finance
dated May 24, 1994.
* 10.63 Commitment letter, dated April 26, 1996, to Amend the Equipment Note Agreements with Norwest Equipment Finance
dated March 22, 1993, April 14, 1993, October 19, 1993, November 8, 1993 and October 17, 1994 respectively.
* 10.64 Waiver dated April 26, 1996, related to the Credit and Security Agreement with Norwest Bank, Minnesota N.A.
dated June 13, 1994.
* 10.65 Waiver dated April 26, 1996, related to Real Estate Mortgage Agreement with AmeriBank, dated June 1, 1993.
- - ----------------------------------------------------------------
* Filed herewith
(1) Incorporated by reference to the specified exhibit to the Form S-18
Registration Statement, dated August 15, 1988, Registration No. 33-23631C.
(2) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended July 31, 1989.
(3) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended October 31, 1989.
(4) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended January 31, 1990.
(5) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended July 31, 1990.
E3
(6) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended April 30, 1991.
(7) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended July 31, 1991.
(8) Incorporated by reference to the specified exhibit to the Registration
Statement on Form S-2 dated April 3, 1992, Registration No. 33-46937.
(9) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended April 30, 1992.
(10) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended October 31, 1992.
(11) Incorporated by reference to the specified exhibit to the Form 10-K for the
year ended January 31, 1993.
(12) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended April 30, 1993.
(13) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended July 31, 1993.
(14) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended October 31, 1993.
(15) Incorporated by reference to the specified exhibit to the Form 10-K for the
year ended January 31, 1994.
(16) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended April 30, 1994.
(17) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended October 31, 1994.
(18) Incorporated by reference to the specified exhibit to the Form 10-K for the
year ended January 31, 1995.
(19) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended April 30, 1995.
(20) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended July 31, 1995.
(21) Incorporated by reference to the specified exhibit to the Form 10-Q for the
quarter ended October 31, 1995.
E4
Report of Independent Certified Public Accountants on Schedule
Board of Directors
Ultra Pac, Inc.
In connection with our audit of the financial statements of Ultra Pac, Inc.
referred to in our report dated April 13, 1996 (except for notes E and H as to
which the date is April 26, 1996) which is included in Part II of this Form
10-K, we have also audited Schedule II for the years ended January 31, 1996,
1995 and 1994.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
St. Paul, Minnesota
April 26, 1996
E-5
Ultra Pac, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended January 31, 1996, 1995 and 1994
Col. A Col. B Col. C Col. D Col. E Col. F
- - ---------------------------------------------------------------------------------------------------------
Additions
----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts - Deductions - End of
Description of period expenses Retirement Describe (1) Period
- - ---------------------------------------------------------------------------------------------------------
Allowance deducted from asset to which it applies:
Allowance for doubtful receivables, sales discounts and returns:
1996 $ 245,000 $ 123,000 $ -- $ 63,000 $ 305,000
1995 $ 257,833 $ 130,339 $ -- $ 143,172 $ 245,000
1994 $ 149,556 $ 119,082 $ -- $ 10,805 $ 257,833
(1) Uncollected receivables written off.
E-6