SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15 (d) of the
- ------ Securities Exchange Act of 1934
For the Quarterly Period Ended: April 30, 1997
Transition Report Pursuant to Section 13 or 15 (d) of the
- ------ Securities Exchange Act of 1934
For the Transition Period From ______________ to _______________
Commission File Number: 0-18252
ULTRA PAC, INC.
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1581031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
21925 Industrial Boulevard, Rogers, Minnesota 55374
(Address of principal executive offices) Zip Code
(612) 428-8340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. __X__ Yes ____ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock No Par Value 3,838,265
Class of Common Stock Shares outstanding as of
May 15, 1997
ULTRA PAC, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of April 30,
1997 and January 31, 1997 3
Statements of Operations for the
three months ended April 30, 1997
and 1996 5
Statements of Cash Flows for the
three months ended April 30, 1997
and 1996 6
Notes to Interim Financial
Statements 7
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on
Form 8-K 17
Ultra Pac, Inc.
BALANCE SHEETS
ASSETS
April 30, January 31,
1997 1997
----------- -----------
(unaudited)
CURRENT ASSETS
Cash $ 538,513 $ 663,072
Accounts receivable
Principally trade, less allowance for
doubtful receivables and sales discounts
of $370,661 and $312,854 at April 30,
1997 and January 31, 1996 respectively 3,787,987 3,422,970
Refundable sales taxes 22,750 22,335
Inventories
Raw materials 1,765,669 1,783,640
Work in process 1,635,980 1,379,856
Finished goods 3,894,042 3,708,934
Deferred income taxes 1,896,000 1,822,000
Other current assets 211,623 216,086
----------- -----------
Total current assets 13,752,564 13,018,893
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Building and improvements 3,492,768 3,492,768
Manufacturing equipment and tooling 21,916,384 21,957,017
Extrusion equipment 12,370,370 12,355,550
Other equipment and furnishings 1,095,701 1,029,281
Leasehold improvements 962,440 957,738
----------- -----------
39,837,663 39,792,354
Less accumulated depreciation and
amortization 13,814,826 12,851,061
----------- -----------
26,022,837 26,941,293
Deposits on manufacturing equipment 67,500 --
Land 737,317 737,317
----------- -----------
26,827,654 27,678,610
OTHER
Security deposits 500,530 499,186
Leasehold costs
less accumulated amortization
of $54,750 at April 30
and $48,667 at January 31 310,250 316,333
Investments in affiliates 206,115 232,350
Other 229,194 283,215
----------- -----------
1,246,089 1,331,084
----------- -----------
$41,826,307 $42,028,587
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
April 30, January 31,
1997 1997
----------- -----------
(unaudited)
CURRENT LIABILITIES
Current maturities of long-term
obligations $ 5,105,433 $ 4,819,961
Accounts payable - principally trade 5,321,218 5,838,416
Accrued liabilities
Compensation 1,321,679 1,140,975
Interest and other 1,035,587 883,638
Income taxes payable 195,465 65,465
----------- -----------
Total current liabilities 12,979,382 12,748,455
LONG-TERM OBLIGATIONS, less current
maturities 14,134,558 15,977,599
DEFERRED INCOME TAXES 2,192,000 1,775,000
SHAREHOLDERS' EQUITY
Common stock - authorized, 10,000,000
shares of no par value; issued and
outstanding, 3,835,865 at April 30,
and 3,814,015 shares at January 31 7,873,415 7,784,972
Additional contributed capital 1,360,334 1,360,334
Retained earnings 3,286,618 2,382,227
----------- -----------
12,520,367 11,527,533
----------- -----------
$41,826,307 $42,028,587
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
April 30,
------------------------------
1997 1996
------------ ------------
Net Sales $ 14,950,282 $ 15,760,404
Cost of products sold 9,200,205 12,155,317
------------ ------------
Gross profit 5,750,077 3,605,087
Operating expenses
Marketing and sales 2,929,475 2,641,186
Administrative 832,044 649,612
------------ ------------
3,761,519 3,290,798
------------ ------------
Operating profit 1,988,558 314,289
Other income(expense)
Interest expense (505,607) (626,582)
Equity in net loss of
affiliates (26,236) (17,000)
Other 7,676 (107,303)
------------ ------------
(524,167) (750,885)
------------ ------------
Earnings(loss) before income taxes 1,464,391 (436,596)
Income tax provision (benefit) 560,000 (110,000)
------------ ------------
NET EARNINGS (LOSS) $ 904,391 $ (326,596)
============ ============
Earnings (loss) per common share $ .23 $ (.09)
============ ============
Weighted average number of
shares outstanding 3,967,656 3,766,215
============ ============
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
April 30,
Increase (Decrease) in Cash 1997 1996
----------- -----------
Cash flows provided by operating activities
Net earnings (loss) $ 904,391 $ (326,596)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Depreciation 1,023,765 1,063,632
Amortization of warrants 29,058 --
Non cash compensation to employees 28,125 --
Equity in undistributed net loss of affiliates 26,235 17,000
Net deferred income taxes 343,000 (128,528)
Change in operating assets and liabilities:
Accounts receivable (365,432) (76,947)
Inventories (423,261) 478,265
Other current assets 4,463 (17,014)
Accounts payable (517,198) (494,749)
Accrued liabilities 383,909 245,384
Income taxes payable 130,000 --
----------- -----------
Net cash provided by operating
activities 1,567,055 760,447
Cash flows from investing activities
Capital expenditures (172,809) (146,756)
Investments in affiliates -- (15,314)
Security deposits and other 29,702 1,336
----------- -----------
Net cash used in investing activities (143,107) (160,734)
Cash flows from financing activities
Principal payments under long-term obligations (1,557,569) (785,571)
Exercise of stock options 9,062 --
----------- -----------
Net cash used in financing
activities (1,548,507) (785,571)
----------- -----------
Net change in cash (124,559) (185,858)
Cash at beginning of period 663,072 345,906
----------- -----------
Cash at end of period $ 538,513 $ 160,048
=========== ===========
See accompanying notes to interim financial statements.
Ultra Pac, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
April 30, 1997
(unaudited)
(1) Basis of Presentation
The interim financial statements presented herein are unaudited, but in
the opinion of management reflect all adjustments necessary for a fair
presentation of results for such periods. The results of operations for
any interim period are not necessarily indicative of results for the full
year. Information as of January 31, 1997 was taken from the Company's
Annual Report on Form 10-K for the year ended January 31, 1997. These
financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report on
Form 10-K for the year ended January 31, 1997.
(2) Shareholders' Equity
The following table summarizes stock option activity for the three months
ended April 30, 1997:
Outside
Grant Expiration Exercise Total 1996 1991 Directors
Recipient Date Date Price Shares Plan Plan Plan Other
--------- ----- ---------- -------- ------ ---- ---- --------- -----
OPTIONS OUSTANDING AS OF JANUARY 31, 1997 361,500 145,500 66,500 14,500 135,000
GRANTED
COO March 1997 March 2002 $ 5.63 25,000(1) - 25,000 - -
EXPIRED OR FORFEITED
Employees - - - (4,000) - (4,000) - -
EXERCISED
Employees - - 2.94 (2,950) (2,950) - - -
------- ------- ------ ------ -------
OPTIONS OUTSTANDING AS OF APRIL 30, 1997 379,550 142,550 87,500 14,500 135,000
======= ======= ====== ====== ======
OPTIONS EXERCISABLE AS OF APRIL 30, 1997 294,550 132,550 87,500 14,500 60,000
======= ======= ====== ====== ======
(1) Non statutory stock options.
At the time of employment, the Company's new Chief Operating Officer was
issued compensation in the form of 5,000 shares of the Company's common
stock.
In August 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Capital Stock from 5,000,000
to 10,000,000 shares, as approved by the Company's shareholders at the
July 17, 1996, Annual Shareholders meeting.
(3) Recently Issued Accounting Standard
During February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This pronouncement provides a different
method of calculating earnings per share than is currently used in
accordance with APB No. 15, "Earnings per Share." SFAS 128 provides for
the calculation of basic and diluted earnings per share. Basic earnings
per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share.
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require restatement of prior
year's earnings per share. The Company will adopt this statement for its
fourth quarter and year ending January 31, 1998. Assuming that SFAS 128
had been implemented, basic earnings per share would have been $.24 per
share for the three months ended April 30, 1997 versus primary earnings
per share of $.23 per share as reported. Basic earnings per share would
have been the same as previously reported primary earnings per share for
the three months ended April 30, 1996. Dilutive earnings per share would
have been the same as previously reported primary earnings per share for
the three months ended April 30, 1997 and 1996.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Information
THE FOLLOWING DISCUSSION CONTAINS CERTAIN STATEMENTS WHICH REFLECT THE COMPANY'S
CURRENT EXPECTATIONS REGARDING FUTURE RESULTS OF OPERATIONS AND PERFORMANCE OF
THE COMPANY. WHEN USED IN THIS REPORT, THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THOSE SET FORTH IN SUCH
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO THOSE DISCUSSED BELOW AS WELL AS ELSEWHERE IN THIS DOCUMENT AND IN
THE COMPANY'S ANNUAL REPORT ON FORM 10-K. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. THE COMPANY IS NOT OBLIGATED TO UPDATE OR REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT NEW EVENTS OR CIRCUMSTANCES.
Background
Ultra Pac, Inc. designs, manufactures, markets and sells plastic containers and
packaging to the food industry, including supermarkets, distributors of food
packaging, 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 virgin and recycled
polyethylene terephthalate ("PETE") which the Company extrudes into plastic
sheet and thermoforms into various shapes.
Management believes that future sales and earnings could be affected by various
factors. These include: supply and demand for PETE raw material (including both
virgin and recycled material) and the resulting impact on the Company's raw
material costs; competitive pressures in the marketplace for the Company's
products both from existing competitors and new entrants into the market place
and from competitors who use lower-cost non PETE resins such as OPS (oriented
polystyrene); weather conditions during the growing season of fresh produce and
the resulting impact on the demand for plastic packaging, principally during the
Company's first, second and third quarters; the Company's ability to estimate
future sales and react to any significant unforeseen increases or decreases in
sales and the impact on its fixed overhead cost structure including the possible
need for significant capital expenditures; and the cost, availability and amount
of debt financing.
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Statements of Operations of the Company expressed as a percentage of
net sales.
Three Months
Ended
April 30,
----------------
1997 1996
----- -----
Net sales 100.0% 100.0%
Cost of products sold 61.5 77.1
----- -----
Gross profit 38.5 22.9
Operating expenses
Marketing and sales 19.6 16.8
Administrative 5.6 4.1
----- -----
25.2 20.9
----- -----
Operating profit 13.3 2.0
Interest expense and other 3.5 4.8
----- -----
Earnings (loss) before income taxes 9.8 (2.8)
Income tax provision (benefit) 3.8 (.7)
----- -----
NET EARNINGS (LOSS) 6.0% (2.1)%
===== =====
Net Sales:
Net sales decreased 5.1% from $15,760,404 to $14,950,282 for the three months
ended April 30, 1997, as compared to the three months ended April 30, 1996. The
decrease in net sales is primarily due to a significant decline in sales of
produce containers. The Company believes this decline is primarily due to the
recent hepatitis alert related to frozen strawberries. While the Company's
containers are used for packaging of fresh strawberries, it believes that
consumers decreased purchases of fresh strawberries as a result of the publicity
surrounding the hepatitis outbreak, which resulted in strawberry growers selling
a higher percentage of their crop for use in frozen applications and preserves.
The decrease in produce container sales was offset in part by an increase in
sales of the Company's line of bakery containers, Ultra Lite Bakeable products
and the manufacture of plastic sheet for others. While the Company expects sales
to increase over the prior year, it does not expect this growth to materialize
until the third and fourth quarters of fiscal 1998. The Company expects this
growth to come in its Ultra Lite Bakeable products, including the recently
introduced Reservations series of plastic food containers for the rapidly
expanding home meal replacement and food service markets.
Management continues its efforts to identify and analyze long term market trends
and opportunities, 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 future markets, developing
product and price strategies, as well as improving its production planning
process. In connection with its efforts in this area, during the last half of
fiscal 1997 the Company hired a Director of Sales, in addition to expanding its
sales and marketing support staff.
Gross Profit:
Gross profit margins improved from 22.9% to 38.5% for the three months ended
April 30, 1997, as compared to the three months ended April 30, 1996. The
improvement in gross profit margins can be primarily attributed to lower prices
of PETE resin and of other raw materials and improved manufacturing efficiencies
and related manufacturing costs, and also to the manufacture of plastic sheet
for others.
Prices for virgin PETE resin and recycled material declined dramatically during
the second and third quarters of fiscal 1997 due in part to increased capacity
of refiners and lower market prices for paraxylene, a major component of PETE
resins. These prices remained relatively flat during the fourth quarter of
fiscal 1997 and increased slightly late in the first quarter of fiscal 1998.
However, material prices remain relatively low historically.
The Company has a resin supply agreement through December 31, 1997 which
provides for pricing to float with market conditions, subject to limits on the
amount by which prices may increase, with no limit on price decreases. Under
this agreement, the Company is required to purchase minimum resin quantities
which will supply a major portion of its virgin PETE resin needs.
The Company has received notification that its virgin PETE resin pricing will
increase to the maximum price allowable under the agreement, effective June 1997
(approximately a 6% increase from April 30, 1997 prices). This pricing will
remain in effect through December 31, 1997 unless the Company receives
notification of a price decrease. The Company anticipates that its prices for
recycled PETE materials will also increase slightly during the second quarter
ending July 31, 1997, however, it has obtained commitments for a major portion
of its recycled material requirements for such quarter at current market prices.
Since the installation of its fifth and sixth extrusion lines in fiscal 1996,
the Company has been able to supply all its PETE sheet needs and expects to be
able to do so during all of fiscal 1998. In fact, at various times, the Company
has and expects to extrude PETE sheet at less than its full production capacity.
The Company has also been extruding plastic sheet for other manufacturing firms.
The cost of plastic sheet extruded by the Company has been significantly lower
than the cost of plastic sheet purchased from outside sources.
The Company expects its gross margin percentage to improve slightly for the
second quarter as compared to prior year levels due to the factors discussed
above.
Operating Expenses:
Marketing and sales expense increased from $2,641,186 or 16.8% of net sales, to
$2,929,475 or 19.6% of net sales during the three months ended April 30, 1997,
as compared to the three months ended April 30, 1996. The increase was primarily
due to increased salaries as a result of the hiring of a Director of Sales and
additional sales and marketing support personnel in the last half of fiscal
1997. The increase was also attributable to increased freight costs and
commissions. The increase as a percentage of sales was primarily due to lower
sales and the increase in marketing and sales expense as discussed above. The
increase in commission expense in both dollars and as a percentage of sales, was
a result of an increase in the commission rate paid, effective February 1997.
Administrative expense increased from $649,612 or 4.1% of net sales to $832,044
or 5.6% of net sales during the three months ended April 30, 1997, as compared
to the three months ended April 30, 1996. The increase in administrative expense
was due in part to an increase in administrative salaries primarily from the
hiring of a Director of Management Information Systems and other administrative
support personnel during the third and fourth quarters of last year and the
hiring of a Chief Operating Officer in March 1997. In addition, employee benefit
costs increased as a result of the Company's reinstatement of its practice of
matching a portion of employee contributions to its 401k plan.
Interest Expense and Other:
Interest expense decreased from $626,582 or 4.0% of net sales to $505,607 or
3.4% of net sales for the three months ended April 30, 1997, as compared to the
three months ended April 30, 1996. The decrease was principally due to lower
debt levels and lower interest rates. The Company anticipates a decrease in
interest expense for the remainder of fiscal 1998 as compared to fiscal 1997 as
a result of lower debt levels and lower interest rates resulting from the
refinancing of its bank debt in February 1997, as discussed in Liquidity and
Capital Resources.
During the quarter ended April 30, 1996, other expense was $107,303 or .7% of
sales, while during the quarter ended April 30, 1997, other income was $7,676 or
.1% of sales. Legal costs associated with the Company's claim for patent
infringement, incurred in the first quarter of last year, were reclassified from
"Administrative Expense" to "Other Income and Expense". The Company received a
settlement related to this litigation in January 1997.
Inflation:
The Company believes inflation has not significantly affected its results of
operations.
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. While the Company expects to continue to rely on bank and other
debt financing, it anticipates that its debt levels will continue to decrease
during fiscal 1998 due to its improved operating performance and modest planned
capital expenditures for the balance of fiscal 1998. As of April 30, 1997, the
Company had borrowed $2,353,732 under its $8,000,000 revolving credit facility,
leaving $5,646,268 potentially available. However, under the Company's borrowing
base, only $2,831,200 of the $5,646,268 was in fact available at April 30, 1997.
In February 1997, the Company amended its credit facility and term note with its
principal lender to reduce the interest rate differentials on both by 1%, to
extend the maturity date to May 31, 1999 and to reduce the amount available
under the revolving credit facility by $1,500,000 to $8,000,000 reflecting the
Company's decreased credit needs.
The Company believes its existing revolving credit facility is adequate to
support its operations through the term of such facility.
Working capital increased from $270,438 on January 31, 1997 to $773,182 on April
30, 1997. This increase is primarily due to an increase in accounts receivable
and inventories and a decrease in accounts payable partially offset by increases
in current maturities of long-term obligations and accrued liabilities. Accounts
receivable increased from $3,422,970 on January 31, 1997 to $3,787,987 on April
30, 1997 primarily due to an increase in net sales during the first quarter of
fiscal 1998 as compared to the fourth quarter of fiscal 1997. Inventories
increased from $6,872,430 on January 31, 1997 to $7,295,691 on April 30, 1997
due to an increase in the levels of work in process and finished goods
inventories related to anticipated sales growth.
For the three months ended April 30, 1997, $1,567,055 of cash was provided by
operating activities as compared to $760,447 for the three months ended April
30, 1996 primarily due to improved earnings.
As of April 30, 1997, the Company had outstanding capital commitments of
$1,010,000 for thermoforming equipment and molds and was reviewing $365,000 of
additional capital expenditures. The Company anticipates that capital
expenditures for fiscal 1998 will be approximately $1,500,000, as compared to
$570,000 incurred in fiscal 1997. The Company believes the current level of
production equipment and facilities along with the committed capital
expenditures will be sufficient to meet anticipated fiscal 1998 requirements.
The fiscal 1998 expenditures will be financed from funds available through the
Company's credit facility, capital expenditure term note facility and funds
generated from operations.
Seasonality of Sales and Operating Profits
Historically, the Company's sales were highest during the third quarter and
declined in the fourth quarter. Since the introduction of its line of produce
containers during 1992, the percentage of the Company's sales occurring during
the first two quarters has progressively increased and the Company expects this
trend to continue.
Because the Company's sales have historically declined during the fourth quarter
while its fixed overhead costs have remained relatively constant, the Company's
gross margins and operating profit have generally been lowest during the fourth
quarter. Since the introduction of the Company's line of produce containers,
this has also impacted the third quarter gross margins and operating profit.
Prices for virgin PETE resin and recycled material increased significantly
during fiscal 1996 and declined significantly in fiscal 1997, however the
Company believes that as refiners continue to expand capacity, the supply of
PETE will exceed the increase in demand and there will be a more stable pricing
environment. As a result, the relationship of gross margins from quarter to
quarter should be more consistent with historical results.
PART II
OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 1996 Stock Option Plan dated May 10, 1996
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED: June 4, 1997 ULTRA PAC, INC.
By: /s/ Calvin Krupa
-----------------------
Calvin Krupa
Its: President and Chief
Executive Officer
/s/ Bradley Yopp
-----------------------
Bradley Yopp
Chief Financial Officer