Registration No. 33-390953
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT No. 1
TO
Form S-1/A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
AIR PACKAGING TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 3089 95-4337254
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Identification Number)
Classification Number)
Donald Ochacher
Chief Executive Officer
25620 Rye Canyon Road, Valencia, California 91355
(661) 294-2222
----------------------------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
J. G. McAllister, Esq.
W. Sterling Mason, Esq.
1487 E. Thistle Downs Dr.
Sandy, Utah 84092
(801) 572-6610
Approximate date of proposed sale to the public:
As soon as practicable after the
Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check this box. [X]
CALCULATION OF REGISTRATION FEE
Title of each class
Of securities to be Amount to be Amount of
Registered Registered Price Per Share Registration Fee
Maximum Offering
Common Stock, $0.001 14,480,000 $0.10 $427.16
_______________________________________________________________________________
(1) Estimated for the purpose of calculating the registration fee pursuant to
Rule 457(c) on the basis of the high and low price of the Registrant's
Common Stock on November 10, 1999.
(2) The amount to be registered includes an indeterminate number of shares
issuable as a result of stock splits, stock dividends and antidilution
provisions in accordance with Rule 416.
(3) Estimated solely for the purpose of computing the amount of the registration
fee. The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PURSUANT TO ITEM 501 OF REGULATION S-K
And Sec. Rel. No. 7497
Showing Location in Prospectus of Information
Required by Part I Items of Form S-1
Item
No. Form S-1 Caption Page
- ---- ------------------ ----
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus. Cover
2. Inside Front Cover and
Outside Back Cover Pages. Cover
3. Prospectus Summary 5
Risk Factors 6
4. Use of Proceeds 13
5. Dilution 13
6. Selling Security Holders 43
7. Plan of Distribution 43
8. Interests of Named Experts and Counsel N/A
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities 46
10. Information with Respect to the Registrant
Prospectus Summary 5
Risk Factors 6
Selected Consolidated Financial Data 13
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14
Liquidity and Capital Resources 19
Year 2000 22
Business 23
Management 32
Security Ownership of Certain Beneficial
Owners and Management 36
Certain Transactions 37
Description of Securities of the Company 40
Market for the Company's Common Stock 41
<PAGE>
Subject to Completion, Dated November 12, 1999
PROSPECTUS
14,480,000 Shares
AIR PACKAGING TECHNOLOGIES, INC.
Common Stock, Par Value $.001 Pursuant Available Following Conversion of
Debenture
This Prospectus relates to the resale by the Selling Stockholders,
identified herein, of an aggregate of up to 14,850,000 shares of Common Stock of
the Air Packaging Technologies, Inc. (the "Company"), which are presently owned
or which may be acquired by certain of the Selling Stockholders upon the
conversion of certain Debentures held by said Selling Stockholders. See "Selling
Persons and Plan of Distribution." The Company has received the proceeds from
the payment for the Debentures and therefore will not receive any of the
proceeds from the sale of shares which will be issueable, if and when the
Debentures are converted by the Selling Shareholders.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" AT PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Common Stock of the Company is traded on the OTC Bulletin Board under
the symbol "AIRP" operated by NASD, Inc. On November 10, 1999 the last
reported sales price for the Company's Common Stock on the OTC Bulletin Board
was $0.10. See "Price Range of Common Stock."
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN A OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
STATE.
Subject to completion, dated November 12, 1999
The Date of this Prospectus is ____________________ , 1999.
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety.
This Prospectus contains forward looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus assumes the
Debentures have not been converted. See, "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Description of Securities",
and the Company's Consolidated Financial Statements and Notes thereto.
The Company
Since 1992, Air Packaging Technologies, Inc., a Delaware corporation
("herein referred to as "APTI" or the "Issuer" as the text may dictate) has been
engaged in the manufacturing, distribution, marketing, and continued development
of inflatable, protective packaging for use in shipment of higher value and
fragile products. It holds worldwide patents on a packaging system which
utilizes chambered packing material to provide a cushion of air around products
during shipment. Its Air Box system competes favorably against materials like
bubble wrap, urethane foam, etc., in terms of protection, ease of use and
storage, for shipment of higher value items throughout the world.
APTI's corporate offices are located at 25620 Rye Canyon Road, Valencia,
California 91355; its telephone number is (661) 294-2222; its facsimile number
is (661) 294-0947; its facsimile number is (661 294-0947
An investment in the shares of the Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
The Offering
Securities Offered by the
Company None
Securities Offered by the
Selling Stockholders up to 14,850,000 shares of Common Stock
Common Stock Outstanding prior
to the Offering (1) 79,664,087 shares
Common Stock Outstanding after
the Offering (1)(2) 89,664,087 shares
Use of proceeds The Company will not receive any
proceeds from the conversion of the
Debentures or the sale of Common Stock
by the Selling Shareholders.
Risk Factors The Common Stock offered by the
Selling Stockholders involves a high
degree of risk. See "Risk Factors."
Market Symbol (3) AIRP
______________________________
(1) Based upon the number of shares outstanding as of October 31, 1999 and does
not include options and warrants to purchase 6,464,209 shares of the Company's
common stock.
(2) Assumes the conversion of $1,500,000 Debentures and the resulting issuance
of the 10,000,000 Shares.
(3) The Common Stock of the Company is traded on the NASD, Inc. OTC Bulletin
Board under the symbol "AIRP".
_____________________
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. An investment in the Common
Stock offered hereby involves a high degree of risk and is not an appropriate
investment for persons who cannot afford the loss of their entire investment.
Prospective investors should be aware of the following risk factors and should
review carefully the financial and other information provided by the Company.
RISK FACTORS
Future Capital Requirements; Uncertainty of Additional Financing
The Company believes that current and future available capital resources,
including cash flow from operations, will be adequate to fund its working
capital requirements in the ordinary course of business for the 12 month period
following the date of this Prospectus. However, there can be no assurance that
future events will not cause the Company to seek additional capital sooner.
Historically, the Company has not been profitable nor has it been successful in
funding its operations from its operational cash flow. The Company sustained net
losses of approximately $1,724,000; $1,824,000; and $1,173,000 for the fiscal
years ended December 31, 1998, 1997, and 1996, respectively that have caused the
Company's Independent Certified Public Accountants to issue an explanatory
paragraph in their opinions which expresses substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company
intends to expand its business activities in the next 12 months, which will
require additional sources of funding. To the extent capital resources are
required by the Company, there can be no assurance that such funds will be
available on favorable terms, or at all. To the extent that additional capital
is raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to the Company's
shareholders. The unavailability of funds could have a material adverse effect
on the Company's financial condition, results of operations and the ability to
expand its operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Management of Growth
Management anticipates that the Company will be entering a period of
significant growth. This growth, if effected, will expose the Company to
increased competition, greater overhead, marketing, working capital, and support
costs and other risks associated with entry into new markets, development of new
products, and increased sales. To manage growth effectively, the Company will
need to continue to improve and expand its operational, financial and management
information systems and telecommunications systems and to hire and manage
additional personnel. There can be no assurance that the Company's management
team and other new personnel will be able to successfully manage the Company's
rapidly evolving business, and the failure to do so would have a material
adverse effect upon the Company's operating results.
Competition
The business of the Company is highly competitive. All aspects of its
business, including price, promptness of service, and product quality are
significant competitive factors and the ability of the Company to successfully
compete with respect to each factor is material to its profitability. The
Company competes with a number of other businesses that may have greater market
visibility and access. Such companies may develop products or services that may
be more effective than the Company's products or services and may be more
successful in marketing their products or services than the Company. Some of
the Company's current and potential competitors have significantly greater
market presence, name recognition and financial and technical resources than the
Company, and many have longstanding market positions and established brand names
in their respective markets. To the extent that current and potential
competitors compete on the basis of price, this could result in lower margins
for the Company's products. Although the Company places a high value upon its
demonstrated ability to provide a very high quality product in a specialized
niche, in order to be competitive in the market place, no assurance can be given
that the Company will be able to compete successfully in its markets, or to
compete successfully against current and new competitors as the Company's
markets continue to evolve.
Rapidly Changing Technology
The Company is engaged in businesses that have experienced tremendous
technological change over the past few years. The Company faces all risks
inherent in businesses that are subject to rapid technological advancement, such
as the possibility that a technology that the Company has invested heavily in,
may become obsolete. In that event, the Company may be required to invest in new
technology. The inability of the Company to identify, fund the investment in,
and commercially exploit such new technology could have an adverse impact on the
financial condition of the Company. The Company's ability to implement its
business plan and to achieve the results projected by Management will be
dependent, to some extent, upon Management's ability to predict technological
advances and implement strategies to take advantage of such changes. The
Company's future profitability will depend upon its ability to adjust to such
new developments.
Intellectual Property Claims and Litigation
The Company relies on a combination of patent laws, copyright and trademark
laws, trade secrets, software security measures, license agreements and
nondisclosure agreements to protect its proprietary products. Despite the
Company's precautions, it may be possible for unauthorized third parties to copy
aspects of, or otherwise obtain and use, the Company's products without
authorization. In addition, the Company cannot be certain that others will not
develop substantially equivalent or superseding products, thereby substantially
reducing the value of the Company's proprietary rights. Furthermore, there can
be no assurance that any confidentiality agreements between the Company and its
employees will provide meaningful protection for the Company's proprietary
information in the event of any unauthorized use or disclosure of such
proprietary information.
The Company is not aware that any of its products infringes on the
proprietary rights of third parties, and is not currently engaged in any
material intellectual property litigation or proceedings. In this respect, the
Company holds patents on its processes and related machines that should protect
it from such claims and provide some level of competitive edge. Nonetheless,
there can be no assurance that the Company will not become the subject of
infringement claims or legal proceedings by third parties with respect to
current or future products. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights. Any
such claims could be time-consuming, result in costly litigation, cause product
shipment delays or lead the Company to enter into royalty or licensing
agreements rather than disputing the merits of such claims. Moreover, an
adverse outcome in litigation or similar adversarial proceedings could subject
the Company to significant liabilities to third parties, require expenditure of
significant resources to develop non-infringing technology, require disputed
rights to be licensed from others or require the Company to cease the marketing
or use of certain products, any of which could have a material adverse effect on
the Company's business and operating results. To the extent the Company wishes
or is required to obtain licenses to patents or proprietary rights of others,
there can be no assurance that any such licenses will be made available on terms
acceptable to the Company, if at all.
Foreign Markets
The Company's growth strategy envisions supplying its product sales to
foreign customers and to domestic and foreign distributors of packaging products
to international markets. Accordingly, the Company may increase certain risks
generally associated with marketing products or services to different countries,
such as currency fluctuation, political instability and the political,
legislative and regulatory environment in foreign countries. The Company does
not believe any of such risks have had a material impact on its business
operations or financial condition, but there can be no assurance as to whether
such risks will have a material impact in the future.
Fluctuations in Operating Results
The Company's quarterly operating results may be affected by certain market
cycles and conditions that impact product shipments and economic fluctuations.
The Company's quarterly operating results may also fluctuate significantly
depending on other factors, including the introduction of new products by the
Company's competitors, market acceptance of the Company's products, adoption of
new technologies, and manufacturing costs and capabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
No Dividends Anticipated
Air Packaging Technologies, Inc. has never paid dividends on its Common
Stock and does not anticipate payment of dividends in the foreseeable future.
In this regard, the Company intends to retain earnings for the foreseeable
future for use in the operation and expansion of its business. See "Dividend
Policy".
Price Volatility
The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded development stage companies have in the past been, and can in
the future be expected to be, especially volatile. Announcements of new products
or technical innovations by the Company or its competitors, developments or
disputes concerning proprietary rights, publicity regarding actual or potential
results relating to products under development by the Company or its
competitors, and other external factors, as well as period to-period
fluctuations in the Company's financial results, may have a significant impact
on the market price of the Common Stock.
Potential Adverse Effect of Warrants, Options, and Convertible Debentures
As of October 31, 1999, the Company had outstanding 1,769,209 Common Stock
Warrants, options to purchase 4,695,000 shares of common stock, and $1,500,000
of convertible debentures, all of which are exercisable or convertible, as the
case may be, at $.15 per share. The holders thereof have, at nominal cost, the
opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as these securities remain
unexercised or not converted, as the case may be, the Company's ability to
obtain additional capital may be adversely affected. See "Description of
Securities."
Issuance of Additional Shares of Common Stock
The Articles of Incorporation of the Company currently authorize the Board
of Directors to issue up to 100,000,000 shares of Common Stock, par value $.001.
The power of the Board of Directors to issue shares of Common Stock or warrants
to purchase shares of Common Stock is subject to shareholder approval in only
limited instances. Accordingly, any additional issuance of the Company's Common
Stock may have the effect of further diluting the equity interest of
shareholders. See "Description of Securities."
Directors' and Officers' Liability Limited
Under Delaware law, the Company is required to indemnify its officers and
directors against liability to the Company or its stockholders in any proceeding
in which the officer or director wholly prevails on the merits. Generally, the
Company may indemnify its officers and directors against such liability if the
officer or director acted in good faith believing his or her actions to be in
the best interests of the Company, unless the director or officer is adjudged
to have breached his duty of loyalty to the corporation, or, not to have acted
in good faith or engaged in intentional misconduct or a knowing violation of the
law or derived an improper personal benefit from an action. See
"Management--Limitation on the Liability of Directors".
Lack of Liquidity for Stock; Penny Stock Rule
The Common Stock of the Company is currently traded on the OTC Bulletin
Board, operated by the NASD, Inc. The stock is subject to the "penny stock"
rules that impose additional sales practice and market making requirements on
broker-dealers who sell and/or make a market in such securities. Application of
this rule does, by its nature, adversely affect the ability or willingness of
the purchasers of Common Stock to sell their shares in the secondary market.
Unless and until the price of the Company's Common Stock is more than
$5.00 per share, such securities will likely be subject to the low priced
security or so-called "penny stock" rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors. For any transaction involving a
penny stock, unless exempt, the rule requires: (i) that a broker or dealer
approve a person's account for transactions in penny stocks; and (ii) the broker
or dealer receive from the investor a written agreement to the transaction,
setting forth the identity and quantity of the penny stock to be purchased. In
order to approve a person's account for transactions in penny stocks, the broker
or dealer must: (i) obtain financial information and investment experience and
objectives of the person; and (ii) make a reasonable determination that the
transactions in penny stocks are suitable for that person and that person has
sufficient knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks. The broker or dealer must
also deliver, prior to any transaction in a penny stock, a disclosure schedule
prepared by the Commission relating to the penny stock market, which, in
highlighted form: (i) sets forth the basis on which the broker or dealer made
the suitability determination; and (ii) that the broker or dealer received a
signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading, and about commissions payable to
both the broker-dealer and the investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.
Potential Rule 144 Sales
Of the 79,664,087 shares of Common Stock of the Company currently
outstanding 29,937,952 are "restricted securities," as that term is defined in
Rule 144 as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended. As restricted shares, these 29,937,952
Shares may be resold only pursuant to an effective registration or under the
requirements of Rule 144 or other applicable exemption from registration under
the Act as required under applicable State securities laws.
Rule 144 provides in essence that a person not affiliated with the issuer
who has held restricted securities for a period of one year, under certain
conditions, may sell every three months, in brokerage transactions, a number of
Shares which does not exceed the greater of one percent of a corporation's
outstanding Common Stock or the average weekly trading volume during the four
calendar weeks prior to the sale. There is no limit on the amount of restricted
securities that may be sold by a non-affiliate after the restricted securities
have been held by the owner for a period of two years. A sale under Rule 144 or
any other exemptions from the Act, if available, or subsequent registrations of
Common Stock of the current shareholders, may have a depressive effect upon the
price of the Common Stock in any market that may develop. See "Shares Eligible
for Future Sale."
Historical Financial History
During the Company's operating history it has yet to show a net profit
for any given fiscal year. The Company sustained net losses of approximately
$1,720,000; $1,824,000; and $1,173,000 for the fiscal years ended December 31,
1998, 1997, and 1996, respectively that have caused the Company's Independent
Certified Public Accountants to issue an explanatory paragraph in their opinions
which expresses substantial doubt about the Company's ability to continue as a
going concern. The Company has required periodic infusions of capital to survive
and remain solvent. There can be no assurance that the Company will continue to
be able to attract additional capital and there can be no assurance that the
Company will become profitable in the foreseeable future.
Limited Number of Products
The profitability and viability of the Company may depend, in part, upon
the Company's ability to expand its product line and the application of its
proprietary technology. Successful expansion of the product line may be
dependent on the marketing and exposure of the present product line to
additional industries which have not been targeted to date. The ability of the
Company to expand its marketing efforts and its product base may have a direct
impact upon the profitability and overall viability of the Company. No assurance
can be given that the Company will be successful in expanding its product line.
Dividend Policy
The Company did not pay any cash dividends during its last fiscal year and
the Board of Directors does not contemplate doing so in the near future. The
Company currently intends to retain all earnings, to finance the development and
expansion of its operations, and does not anticipate paying cash dividends on
its shares of Common Stock in the foreseeable future. The Company's future
dividend policy will be determined by its Board of Directors on the basis of
various factors, including results of operations, financial condition, business
opportunities and capital requirements. The payment of dividends will also be
subject to the requirements of Nevada Law, as well as restrictive financial
covenants which may be required in future credit agreements.
Year 2000 Risk
The Company has completed an evaluation of Year 2000 (Y2K) computer
information processing problems and Year 2000 program requirements for internal
operations and Company products. With proposed computer and software upgrades in
place by the third quarter of 1999, the Company does not expect to experience
Year 2000 problems in those areas. A survey analysis of external vendors has
been initiated to evaluate their Y2K preparedness. The Company's Year 2000
compliance evaluation will then be complete. The Company does not
believe it has significant exposure to Year 2000 problems with significant
vendors, customers and financial institutions and does not expect that the Year
2000 issue will have a material cost or impact on Company operations. However,
there can be no assurance that the systems of other companies on which the
Company relies will not have an adverse effect on the Company.
THE COMPANY
Air Packaging Technologies, Inc., a Delaware corporation ("APTI") is
engaged in the manufacturing, distribution, marketing, and continued development
of inflatable, protective packaging for use in shipment of higher end fragile
products. It holds worldwide patents on a packaging system which utilizes
chambered packing material to provide a cushion of air around products during
shipment. Its Air Box(R) system competes favorably against materials like bubble
wrap, urethane foam, etc., in terms of protection, ease of use and storage, for
shipment of higher value items throughout the world.
APTI's predecessor was organized as a Canadian corporation under the
British Columbia Company Act in 1985, under the name "MDE Exploration, Inc.".
MDE Exploration made an initial public offering in 1988 in Canada under the
auspices of the Vancouver Stock Exchange, and raised CDN$175,000 (net of
commissions) through the issuance of 500,000 shares of Common Stock at CDN$0.40
per share. In 1989, MDE Exploration, Inc. was reincorporated in Delaware,
and reorganized and combined with Puff Pac Hold Co. Inc., P&P Industries, Inc.,
and Puff Pac Ltd., under the name Puff Pac Industries, Inc. In September of 1992
Puff Pac Industries, Inc. changed its name to Air Packaging Technologies, Inc. I
n April of 1994, APTI's common stock commenced trading on the NASD Bulletin
Board.
Puff Pac Ltd., a California Limited Partnership, remains in existence due
to ownership by a small minority interest. APTI owns 99.13% of the beneficial
interest in Puff Pac Ltd.
APTI's corporate offices are located at 25620 Rye Canyon Road, Valencia,
California 91355; its telephone number is (661) 294-2222; its facsimile number
is (661) 294-0947.
APTI has one wholly-owned subsidiary: Puff Pac Industries Canada Inc.
("Canco"), a British Columbia corporation.
USE OF PROCEEDS
The Company will not realize any proceeds from the conversion of the
debentures to common stock to be registered hereunder. However, the Company's
financial position will improve in the event of such conversion by the removal
of debt and increase in equity.
DILUTION
As set-forth in Regulation S-K, no substantial disparity between the public
offering price and the effective cash cost to the insiders exists in this
transaction. Accordingly, no dilution will occur in this matter.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected financial data for the
periods presented for the Company. The data as of and for the years ended
December 31 1998, 1997 and 1996 should be read in conjunction with the more
detailed audited Consolidated Financial Statements and Notes thereto for such
years presented elsewhere herein. Information pertaining to September 30, 1999
and 1998 and for the periods then ended have been derived from the Company's
unaudited interim Consolidated Financial Statements and should be read in
conjunction with the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues $722,268 $340,624 $640,074 $453,107 $576,637
Loss: Continuing
Operations (1,723,647) (1,824,199) (1,172,840) (1,774,801) (2,785,941)
Net Loss:
Loss per Common Share:
Loss before
Extraordinary item (.04) (.06) (.06) (.10) (.16)
Extraordinary item (.01) -- -- -- --
Net loss (.04) (.06) (.06) (.10) (.16)
Dividends Per Share n/a n/a n/a n/a n/a
Weighted Average Shares
Outstanding 45,066,084 30,693,624 19,313,760 18,019,862 17,039,731
BALANCE SHEET DATA
Total Assets $1,810,595 $1,137,721 $643,062 $955,722 $2,232,424
Long-term Obligations -- 39,500 39,500 1,352,000 1,289,500
Total Liabilities 275,882 1,004,900 2,211,871 2,479,374 2,514,125
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
1999 1998
----------- ------------
<S> <C> <C>
Revenues $ 712,759 $ 456,107
Loss: Continuing
Operations (1,317,009) ( 998,680)
Net Loss:
Loss per Common Share:
Loss before
Extraordinary item (.02) (.02)
Extraordinary item -- --
Net loss (.02) (.02)
Dividends Per Share n/a n/a
Weighted Average Shares
Outstanding 71,747,437 43,615,930
BALANCE SHEET DATA
Total Assets $ 2,938,296 $ 1,864,079
Long-term Obligations 1,050,000 39,500
Total Liabilities 1,339,292 1,623,758
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes and "Selected Consolidated
Financial Data" included above in this Prospectus.
GENERAL
Air Packaging Technologies, Inc. (APTI) manufactures and markets a line of
industrial packaging products under the name "Air Box" (R). The Air Box (R)
provides reusable protective packaging during shipping and storage for a wide
range of higher value items. It provides vastly superior protection from ESD
(electro static discharge) damage and moisture. It also provides see-through
transparency for visual inspection of the product during shipment and upon
receipt.
The Company has an aggressive on-going plan to increase its sales activity
and achieve a profitable business level of sales. In past time periods, the
Company's sales activities have been limited by a lack of funds, incomplete
designs and poor manufacturing quality. Management believes it possesses the
necessary capital to build the sales levels to a profitable level in the year
2000. All of the known design and quality problems of the Company were resolved
successfully in the fourth quarter of fiscal 1998. It's only since January, 1999
that the Company has been able to concentrate on developing future sales with
major customers.
MARKET RISK - INTEREST RATE RISK
The Company's exposure to market risks for changes in interest rates
relates primarily to the Company's long term debt obligations. The Company has
no cash flow exposure on its long term obligations related to changes in market
interest rates. The Company primarily enters into long term debt obligations for
general corporate purposes, including the funding of capital expenditures and
larger acquisitions. The Company has not entered into any material derivative
financial instruments to hedge interest rate risk on these general corporate
borrowings.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998.
Net sales for the nine months ended September 30, 1999, increased by
$256,652 or 56% to $712,759 from $456,107 for the comparable period of the
preceding year. The increase in sales is due to an increase in sales of custom
orders, an increase in sales of the dental air box and an overall increase in
sales of the SDS Air Box , as a result of repeat orders and further expansion
of the customer base.
Cost of sales for nine months ended September 30, 1999, was $650,406
compared to $260,048 for the nine months ended September 30, 1998. The increase
is $390,358 for this period. The increase is primarily due to the increase in
sales of the SDS Air Box product line during the nine month period, which is
sold with a higher standard cost of sales and thus a lower gross margin than the
Company's Air Box product line. The net sales of the SDS Air Box product line
during the nine months ended September 30, 1999, were approximately $504,000,
compared with approximately $341,000 for the nine months ended September 30,
1998. However, the Company has not yet achieved sufficient sales to cover all of
its fixed operating costs, with the result that until sales increase
substantially, the Company will continue to operate at a deficit. In addition,
as sales increase, additional working capital is required to fund inventory and
work in process. At present, Management believes that current sales and revenues
coupled with recent added capital from the Debentures will be sufficient to
cover these projected costs.
General, administrative and selling expenses were $1,376,747 for the nine months
ended September 30, 1999, as compared to $1,172,684 for the comparable period of
the preceding year. The net increase during the nine month period was $224,063
which is due primarily to an increase in consulting fees (approximately
$62,000), an increase in accounting professional fees (approximately $30,000),
an annual increase in building rent (approximately $4,000), an increase in the
provision for doubtful accounts (approximately $18,000), an increase in
stock-based consulting expense (approximately $39,000), and a net increase in
sales and marketing expense (approximately $40,000).
Research and development expenses during the nine months ended September 30,
1999, were $1,177 compared with $6,676 for the comparable period of the
preceding year.
Interest expense (income) for the nine month period ended September 30,
1999, was $(5,409) compared to $15,379 during the comparable period of the prior
year. The decrease in interest expense during the nine months periods ended
September 30, 1999, is a result of the decrease in interest bearing debt of the
Company. The Company recorded interest expense during the nine months ended
September 30, 1998, on its interest bearing debt. The Company incurred debt
during the third quarter of fiscal 1999 and recorded the related interest
expense during the nine months ended September 30, 1999. Interest income
increased during fiscal 1999 as the Company had an increase in cash placed in an
interest earning account.
As a result of the above, the net loss for the three and nine month periods
ended September 30, 1999 increased by $271,461 and $331,482, respectively, to
$456,621 and $1,330,162 from $185,160 and $998,680, respectively, for the
comparable prior period.
The Company is currently in a loss carry-forward position. The net
operating loss carry-forwards balance as of September 30, 1999, was
approximately $17,700,000 compared to $16,400,000 as of December 31, 1998. The
net operating loss carry-forward is available to offset future taxable income
through 2019. The Company's net operating loss carry-forwards may be limited due
to ownership changes as defined under Section 382 of the Internal Revenue Code
of 1986.
At September 30, 1999, the Company had a deferred tax asset, which
primarily relates to the net operating losses. A 100% valuation allowance has
been established as management cannot determine whether it is more likely than
not that the deferred tax assets will be realized.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales for the year ended December 31, 1998, were $722,268 as compared to
$340,624 for the fiscal year ended December 31, 1997. This represents an
increase of $381,644 or 112% during fiscal 1998. The Company began pilot
programs with prospective customers of the SDS Air Box(R) late in the fourth
quarter of 1996. The positive results of these pilot programs resulted in the
increase in sales that occurred during 1998.
The inventory reserve at December 31, 1998, was approximately $63,000, or
13% of total inventory, compared to a reserve of approximately $154,000 or 50%
at December 31, 1997. The net decrease in the reserve from December 31, 1997, to
December 31, 1998 of $91,000 is due to the write-off of specific inventory items
reserved in prior years. The Company evaluated all inventory items for slow
movement and repair, and fully reserved for all items that did not move for at
least three months or that had been discontinued.
Cost of sales for the year ended December 31, 1998, was $566,837, or 78% of
sales, compared to $592,544 for the year ended December 31, 1997, or 174% of
sales. The decrease in cost of sales as a percentage of sales is partly due to
an additional inventory reserve of approximately $97,000 that was recorded
during 1997. A similar provision was not recorded in 1998, as by the end of
1998, the Company had written off those inventory items that had been fully
reserved in prior years.
Selling, general and administrative expenses increased by $395,313 or 25%
during fiscal 1998 as compared to fiscal 1997. The increase in selling, general
and administrative expenses is attributable primarily to increases in
professional fees, consulting fees, travel expenses, public company costs and a
reserve for a claim by a former employee.
The increase in professional fees is primarily due to an increase in legal
expenses of $69,228 during fiscal 1998. The Company de-listed from the Vancouver
Stock Exchange during mid-1998. As a result, the Company had several discussions
with both Canadian and U.S. attorneys to verify that the related issues were
properly handled. The Company also retained an additional attorney during fiscal
1998 specializing in compliance with labor laws. The increase in consulting fees
during fiscal 1998 of $48,811 is primarily due to consulting work performed to
assist the Company in the restructuring of the Company's debt through the
issuance of common shares of stock in settlement of debt. Travel expenses
increased during fiscal 1998 by $29,613 as a result of increased travel by an
officer of the Company who had previously resided in Canada. Public company
costs increased during fiscal 1998 by $68,635 as the Company expensed fees
associated with raising capital through the exercise of warrants and fees
associated with debt for equity transactions. The increase in selling, general
and administrative expense includes a reserve recorded during fiscal 1998 for a
claim by a former employee of $101,500 for alleged breach of an employment
contract. Based on the current status of this claim, the Company believes that
it has fully reserved for the highest potential liability related to this
claim.(See discussion under "Litigation").
Research and development expenses increased by $4,049 or 122% during fiscal
1998.
Interest and other income were $5,676 for fiscal 1998 as compared to
$21,596 for fiscal 1997. The decrease of 74% in fiscal 1998 is due to the gain
on the disposition of an asset recorded during fiscal 1997.
Interest expense increased by $135,536 for fiscal 1998 as compared to
fiscal 1997 as the Company recorded interest expense of $126,073 due to the
revaluation of its warrants in November 1998.
The Company recorded an Extraordinary Item during fiscal 1998 that was due
to the restructuring of certain outstanding payables and accrued expenses.
The Company paid approximately $190,000 in full settlement of accounts
payable and other accrued expenses during the fourth quarter of 1998. This
resulted in an extraordinary gain of approximately $244,000.
Depreciation and amortization expense increased by $68,664 or 46% during
fiscal 1998 as compared to fiscal 1997. The increase in depreciation expense of
$63,807 is attributable to the net increase in property and equipment during
fiscal 1998 of $818,416 compared to the net increase in property and equipment
during fiscal 1997 of $108,224. The increase in additional property and
equipment during 1998 is primarily due to the cost of the retrofit of one of the
manufacturing machines that approximated $726,500. Depreciation was calculated
beginning in June 1998 for approximately 91% of the additions; the balance which
was added during the last six months of fiscal 1998. The increase in
amortization of $4,857 is due to the increase in additional patent costs from
fiscal 1997 to fiscal 1998.
The Company is currently in a loss carry-forward position. The net
operating loss carry-forwards balance as of December 31, 1998, was approximately
$16,400,000 compared to $15,000,000 as of December 31, 1997. The net operating
loss carry-forward is available to offset future taxable income through 2018.
The Company's net operating loss carry-forwards may be limited due to ownership
changes as defined under Section 382 of the Internal Revenue Code of 1986.
At December 31, 1998, the Company had a deferred tax asset of approximately
$6,800,000, which primarily relates to the net operating losses. A 100%
valuation allowance has been established as management cannot determine whether
it is more likely than not that the deferred tax assets will be realized.
Year End December 31, 1997 Compared to Year End December 31, 1996
Sales for the year ended December 31, 1997, were $340,624 compared to
$640,074 for the fiscal year ended December 31, 1996. Net sales for fiscal 1996
are divided into sales and sales of discontinued products of $431,655 and
$208,419, respectively. The Company decided to focus on its commercial packaging
product line of Air Box(R). The gift wrap product line, known as Puff Pac, was
liquidated and the related inventory sold. The gift wrap sales related to the
liquidation during 1996 totaled $208,419, for which gross profit was 43%.
The inventory reserve at December 31, 1997, was approximately $154,000, or
50% of total inventory, compared to a reserve of approximately $361,000 or 73%
at December 31, 1996. The net decrease in the reserve is due to write-offs
during 1997 totaling approximately $305,000 for inventory provisions recorded in
prior years, partially offset by an additional provision for inventory of
$97,000 recorded in 1997.
Cost of sales for the year ended December 31, 1997, was $592,544, or 174%
of sales, compared to $705,707, or 110% of sales, for the year ended December
31, 1996. The increase in cost of sales as a percentage of sales is partly due
to an additional inventory reserve of approximately $97,000 that was recorded
during 1997, compared to a provision of approximately $73,000 that was recorded
during 1996.
During 1996 and 1997, the Company was operating at negative gross profit
margins, as the Company's sales volume was not sufficient to cover minimum fixed
costs. In 1998, however, margins turned positive as fixed costs remained
relatively the same while sales level increased.
Selling, general and administrative expenses increased by $570,469 or 57%
during fiscal 1997 as compared to fiscal 1996. The increases in selling, general
and administrative expenses were attributable to planned increased expenditures
for salaries, travel and related benefits of new salespeople and salaries for an
engineer, as well as increases in travel, printing and personnel recruitment
fees.
Research and development expenses decreased by $43,688 or 93% during fiscal
1997. There was consulting work performed during fiscal 1996 consisting of
designing new products, researching new materials and redesigning the Air Box
valve, which was not repeated during 1997.
Interest and other income was $21,596 for fiscal 1997 compared to $13,880
for fiscal 1996.
Interest expense decreased by $53,993 for fiscal 1997 as compared to fiscal
1996 as the Company had a decrease in related interest bearing debt during 1997.
Depreciation and amortization expense decreased by $58,724 or 28% during
fiscal 1997 as compared to fiscal 1996. The decrease in depreciation of $41,694
is attributable primarily to one asset that became fully depreciated in June
1997. The Company expensed the full annual amount during fiscal 1996 of $53,635
as compared to $22,348 that was expensed during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the Company's operating history it has yet to show a net profit for
any given fiscal year. The Company sustained net losses of approximately
$1,724,000; $1,824,000; and $1,173,000 for the fiscal years ended December 31,
1998, 1997, and 1996, respectively that have caused the Company's Independent
Certified Public Accountants to issue an explanatory paragraph in their opinions
which expresses substantial doubt about the Company's ability to continue as a
going concern. The Company has required periodic infusions of capital to survive
and remain solvent. There can be no assurance that the Company will continue to
be able to attract additional capital and there can be no assurance that the
Company will become profitable in the foreseeable future.
The Company's primary need for capital has been to purchase raw materials,
increase sales activities, upgrade machinery, fund operating losses, and
continue to develop and enhance patents and trademarks as well as to achieve
computer Y2K compliance.
At September 30, 1999, the Company's working capital was $1,544,202,
compared to working capital of $ 430,546 at December 31, 1998. The increase is
primarily due to the cash infusion of $1,342,500 which resulted from the
exercise of 8,950,000 warrants during the first nine months of fiscal 1999 and
the cash infusion of $1,050,000 from the convertible debentures placed during
the three months ended September 30, 1999.
The net receivables were $129,508 at September 30, 1999, compared to
$96,852 at December 31, 1998. The Company had four customers that accounted for
71% of accounts receivable as of September 30, 1999. The net increase of $32,656
is due to additional receivables recorded for sales during the third quarter of
1999 partially offset by payments on receivables at December 31, 1998. At
December 31, 1998 the Company had three customers that accounted for 72% of
accounts receivables.
Net inventory at September 30, 1999 was $607,519 compared to $408,643 at
December 31, 1998. The net increase of $198,876 is due to the increase in raw
materials purchased and finished goods manufactured for upcoming orders.
Inventories at December 31, 1998, were $408,643 compared to $156,455 at
December 31, 1997. The Company began a retrofit of one of its manufacturing
machines in October 1997 and it was completed in June 1998. The increase during
fiscal 1998 of $252,188 is due to the timing of the retrofit. Also, the Company
was preparing for first quarter sales in fiscal 1999 by purchasing additional
raw materials in December 1998 while in December 1997, the Company was in the
midst of a retrofit of the machine.
Advances and prepaids at September 30, 1999, and December 31, 1998, were
$32,289 and $75,134, respectively. The decrease is due to a prepayment made in
1998 for materials of $57,892. The prepayment is partially offset by normal
recurring advance and prepaid transactions, for a net decrease of $42,845.
Advances and prepaids were $75,134 at December 31, 1998, compared to $4,662
at December 31, 1997. The increase is due primarily to a prepayment made in 1998
for materials of $57,892. The balance of the increase is due to an increase in
insurance premium deposits and other advance and prepaid transactions.
Inventory is evaluated by reviewing on hand materials and related
quantities and confirming that the market for the respective materials is
continually present. The Company analyzes all inventory items for slow movement
and repair and fully reserves items that do not move for at least three months.
The days in inventory ratio increased by 18% from 182 at December 31, 1998,
to 214 at September 30, 1999. This is due to the increase in raw materials
inventory that was purchased for production orders for fourth quarter shipments.
The inventory turnover at December 31, 1998, was 2.01 compared with 1.71 at
September 30, 1999.
The Company recognized a 9% gross profit during the nine months ended
September 30, 1999, compared to 43% gross profit for the nine months ended
September 30, 1998. The decrease is primarily attributable to the increase in
sales of the SDS Air Box product line during the nine months ended September 30,
1999, which is sold with a lower gross margin than the Company's Air Box product
line. The Company has estimated that sales of $3,500,000 would be required to
cover operating costs and to achieve an overall gross margin of 40%. The Company
will continue to operate at low margins until sales increase substantially. In
addition, as sales increase, additional working capital is required to fund
inventory and work in process. As a result of these factors, the Company has an
ongoing need for infusion of additional working capital. This need was met in
fiscal 1998 by selling additional shares of the Company's Common Stock,
primarily offshore to overseas investors and has been met in fiscal 1999 by the
exercise of warrants to purchase additional shares of the Company's common stock
and the placement in the third quarter of $1,050,000 in convertible debentures.
The Company may continue to require an infusion of additional working
capital in order to develop its business. The source, timing and costs of such
infusion is uncertain, and there is no certainty that the Company will be
successful in raising additional working capital, either through the sale of
debt or equity securities, or through commercial banking lines of credit. The
Company currently has no banking lines of credit.
The Company had cash outflows of $1,346,314 from operating activities for
the nine months ended September 30, 1999, compared to cash outflows of
$1,018,291 for the nine months ended September 30, 1998. The net cash outflow in
both periods was primarily due to the Company's net loss. The change in net
outflows of $359,523 from operating activities between the two comparable
periods primarily resulted from the decrease in trade receivables of $32,291,
the decrease in deposits and other assets of $109,691, the decrease in accounts
payable and accrued liabilities of $84,617, the decrease in accrued officers'
salary of $79,768, the decrease in due to related party of $31,500 and the
decrease in net loss, after adjustments for non-cash items of $214,086 which was
partially offset by the increase in inventories of $91,507, the increase in
advances and prepaids of $92,833 and the increase in deferred revenue of $8,090.
Net cash used in investing activities was $107,807 for the nine months
ended September 30, 1999, compared to $405,712 for the nine months ended
September 30, 1998. Net property, plant and equipment was $706,214 at September
30, 1999 as compared to $822,787 at September 30, 1998. The net decrease is due
to the reduction in property and equipment expenditures partially offset by the
increase in patent expenditures during the first nine months of fiscal 1999.
Cash flows from financing activities were $2,392,500 during the nine months
ended September 30, 1999, compared to $1,510,680 during the comparable period
for the preceding year. The net increase is due to the proceeds from the
exercise of warrants of $1,217,025, the increase in proceeds from the placement
of convertible debentures of $1,050,000 and the decrease in payments of notes
payable of $31,500 that are partially offset by a decrease in proceeds from
private placements of $955,705 and by a decrease in proceeds from notes payable
of $461,000.
The Company has suffered recurring losses from operations and has an
accumulated deficit of ($19,287,142) at September 30, 1999. The Company
sustained net losses of approximately $1,330,000 for the nine months ended
September 30, 1999 and $1,724,000; $1,824,000; and $1,173,000 for the fiscal
years ended December 31, 1998, 1997, and 1996, respectively. The net losses
incurred for fiscal years ended December 31, 1998, 1997 and 1996 caused the
Company's Independent Certified Public Accountants to issue an explanatory
paragraph in their opinions which expresses substantial doubt about the
Company's ability to continue as a going concern. The Company's continued
existence is dependent upon its ability to raise substantial capital, to
increase sales, to significantly improve operations, and ultimately become
profitable. The Company believes that future investments and certain
sales-related efforts will provide sufficient cash flow for it to continue as a
going concern in its present form. However, there can be no assurance that the
Company will achieve such results.
SEASONALITY AND INFLATION
The Company's sales do not appear to be subject to any seasonal
fluctuations. The Company does not believe that inflation has had a material
impact on its operations.
YEAR 2000
The Company has completed an evaluation of the Year 2000 (Y2K) computer
information processing problems and Year 2000 program requirements for internal
operations and Company products. With proposed computer software upgrades in
place by the third quarter of 1999, the Company does not believe it will
experience Year 2000 problems in those areas. A survey analysis of external
vendors has been initiated to evaluate their Y2K preparedness. The Company's
Year 2000 compliance evaluation will then be complete. The Company does not
believe it has significant exposure to Year 2000 problems with significant
vendors, customers and financial institutions and does not expect that the Year
2000 issue will have a material cost or impact on Company operations. However,
there can be no assurance that the systems of other companies on which the
Company relies will not have an adverse effect on the Company.
The Company has spent considerable time and resources on Year 2000
compliant issues. The Company has reviewed all of its products and none of its
products utilize computer technology in the product itself. The Company's
products are Air Box (R) technology made from plastics that are formed together
into a self enclosing packaging system which is neither computer controlled nor
is it a computer chip carrying product.
In the second phase of its investigation, the Company reviewed all
manufacturing equipment within its facility, including inventory management
systems, accounting systems, sales order systems; in other words, all computer
or micro-controlled devices, and all manufacturing , accounting , sales and
inventory systems are currently believed to be Y2K compliant. Additionally, the
Company has sent specific questionnaires to all vendors who supply the Company
with components and these vendors have responded indicating that they believe
that they are Y2K compliant.
The Company has already spent in excess of $25,000 to become Y2K compliant.
The project is finished and the Company believes it is currently Y2K compliant.
Management does not believe that there are any future costs related to fixing
Y2K issues beyond the $25,000 that has already been expended. The Company's
product is a disposable item, which possibly can be used twice, or three times,
and does not utilize computer technology of any shape or form. The Company's
vendors are multi-national companies who have completed Y2K compliant
questionnaires for the Company. The Company believes that all existing Y2K
problems have been addressed.
As of December 31, 1998, $15,000 of the cost of Y2K compliance had been
expended. As of September 30, 1999, $10,000 had been expended.
A breakdown of Y2K compliant costs is as follows:
A. Manufacturing machine microprocessor changes $7,500
B. Manufacturing machinery software changes $7,500
C. Accounting inventory management systems-software $5,000
D. Accounting inventory management systems-hardware $5,000
The source of funds of Y2K cost of compliance came from general working
capital of the Company. The Company does not have a specific information
technology budget due to its small size. The Y2K compliance program was
specifically instituted in 1998 to assure that the Company would be compliant in
the year 1999 by no later that September 30, 1999. The Company has deducted
these expenditures along with other operating expenses from its income.
A worst case scenario for the Company would be the inability of its vendors
to provide raw materials to the Company so that the Company could not
manufacture its products. The Company believes that its internal operations are
unlikely to be negatively impacted by a problem with Y2K or an uncertainty in
relation to Y2K compliance. In dealing with outside vendors, the Company has
established a contingency plan that has identified at least two alternative
suppliers for all critical items supplied to the Company. Additionally, the
Company is currently building inventory of any specialized raw materials to
offset problems, if any, to assure that the Company can continue to manufacture
on an uninterrupted basis during the first quarter of the year 2000. This
contingency plan will increase the corporate raw materials inventory by
approximately $250,000 prior to December 31, 1999, to reduce the likelihood of
vendors interrupting the manufacturing flow.
Additionally, the Company has qualified alternative vendors and is prepared
to switch to these vendors if problems develop with existing primary vendors. As
the lead time from these vendors is approximately six weeks, the Company feels
assured that it has addressed all possible worst case scenarios in relation to
supply and materials for continued manufacturing.
The Company has extensively analyzed and checked all of its internal
manufacturing systems, accounting, sales, inventory, etc. and believes it has
adequately addressed the Y2K compliance issues.
The Company's contingency plan is detailed above and is fully operational
at this time.
BUSINESS
APTI manufactures and markets a line of industrial packaging products under
the name "Air Box"(R).
The Air Box(R) provides reusable protective packaging during shipping and
storage for a wide range of higher value items. It provides vastly superior
protection from ESD (electrostatic discharge) damage, and moisture. It also
provides see-through transparency for visual inspection of the product during
shipment and upon receipt.
The patented design suspends an item within a double-chambered envelope,
which when inflated, surrounds the item with a protective cushion of air,
protected by a double wall of transparent material, made out of a combination of
polyethylene and nylon.
Although not an inexpensive form of packaging, the Air Box provides a
cost-effective packaging solution for higher value items and is environmentally
superior to conventional packaging. When deflated and disposed of, use of the
Air Box reduces the amount of waste by up to 90%, compared with traditional
packaging. The packaging is also easily storable in deflated form, greatly
reducing warehouse space required to be devoted to package material storage.
Air Box(R) can be reusable, allowing the package to be deflated and reused.
In this manner, the Air Box can be designed for companies that have
substantial round-trip packaging and shipping requirements.
APTI has also developed and markets a Static Discharge Shielding (SDS) Air
Box(R). This product is designed for electronic products requiring
static-discharge protection (i.e., Wafers and Integrated Circuits). The SDS Air
Box(R) has two layers of anti-static coated film (inner and outer bags) that
dissipate static electricity while the package's air chamber provides full
static shielding. This provides one hundred times the protection of traditional
static shielding bags, and still provides cushion protection, all in one
package.
The SDS Air Box(R) also meets MIL B81705C Type II and Type III and EIA 541
specifications. The Electronics Industry Association (EIN) puts out the standard
which is titled packaging materials standard for Electro-state discharge
sensitive items. Motorola and other electronic semiconductor manufacturers are
presently using the SDS Air Box(R) for shipment of their wafer and integrated
circuits.
Air Box(R) products are made in five standard sizes, and are also available
in custom sizes as required by customers.
Air Box(R) quilting is an additional process developed by the Company which
allows the Air Box(R) to take up less space when inflated and to support heavier
items for shipping. Air Boxes can accommodate products up to 15 pounds in
weight.
APTI has created the Air Box(R) Shipping Center as a marketing tool. The
Center is designed for the miscellaneous shipping needs of small businesses. It
is portable, measuring 17"x22"x4", made of corrugated cardboard, and comes with
an assortment of one hundred and twenty (120) Air Boxes in eight different sizes
and a portable air pump. It offers packaging protection equivalent to a closet
full of Styrofoam. Note that conventional packaging requires as much as nine
times more material volume than the Air Box, which consists of 90 percent air
when inflated. Since the Air Boxes are stored flat, storage space requirements
are greatly reduced. Designed to be reused as often as five times per Air
Box, deflatable Air Box materials going into a landfill after use represent 45
times less waste material compared with existing materials.
The see-through film of the Air Box permits instant verification of
contents and allows a humidity indicator card to be read without opening the
package. In some styles bar codes can also be scanned directly through the Air
Box without opening it. In addition, the absence of corrugated dust permits the
product to remain sealed in the package in customer plants right up to point of
use; with other packing materials corrugated dust must be removed upon arrival
so as not to travel into clean rooms, eliminating a considerable degree of
protection during in-plant handling.
In a typical application, the two chambers contain air and are sealed
together at the edges, with the exception of an open end in which the product is
inserted along with a humidity indicator card. An operator applies pressurized
air from an inexpensive regulator, supplied by APTI to the bag's nozzle,
inflating the bag. During inflation, the two chambers, sealed together at the
edges, swell against one another, immobilizing the product trapped between.
The open end may then be vacuum-sealed using existing equipment. The
resulting product/package construction, consisting of film/air
gap/film/product/film/air gap/film, is what gives the package its strong static
shielding protection. The air gaps can range anywhere from 1/2 to 1 inch thick,
depending on the contents. The film is coated to provide the required static
dissapative properties, the polyethylene and nylon both provide enhancing
properties to resist puncture and a long shelf life.
After a variety of tests conducted under several different conditions,
independent testing laboratory Fowler Associates confirmed that the combination
of the material and the air gaps "provide a very good ESD package for
essentially all devices under essentially all conditions. In one test, the
package successfully withstood a 20,000 V discharge while containing integrated
circuits that were only rated at 150v maximum.
At the point of unpacking in the recipient's plant, Air Boxes are deflated
by pulling up the valve stem on the valve allowing air to escape through the
center of the valve, when the Air Box is ready for reuse the valve stem will be
pushed back down after inflation. Customers may ship used bags back to APTI, who
in turn will refurbish and test them, and return them to the customer.
In summary, the Company's Air Box(R) product has the following attributes
and advantages:
- A unique packaging system
- Patented products
- Superior drop and vibration protection
- Transparency
- ESD protection
- Custom shapes
- Custom printing
- Re-usable
- Cost effective
- Environmentally friendly
The product's disadvantage is its high unit cost. Further, in some
applications the product's moisture barrier does not meet certain Mil specs,
although the Company's research and development department is working to improve
such protection. The product is also relatively unknown, and there are limits to
size, shapes and weights.
MARKETING
The Company has identified and has focused upon four key industries which
management believes can immediately benefit from its products. These are:
- Static Discharge Shielding (SDS)
- Medical
- Dental
- Military
In addition, the Company is continually seeking additional commercial
opportunities for the sale of its Air Box(R) Products in all markets.
SDS
The SDS market is principally the semiconductor market. Manufacturers are
concerned with the shipment of silicon wafers used to manufacture integrated
circuits, and IC's packaged in a Tape and Reel for shipment and further
manufacture. This is a worldwide market. Management believes its products
are the only protective packaging with both static shielding and cushion
protection. The Air Box(R) provides superior static shielding, is cost
effective, requires less storage space, allows use of primary shipment
containers (Empak) (reusing the manufacturer's carrier provides additional cost
savings), and is more effective in reducing damage from drops and vibrations.
The product exceeds all ESD standards, all ISTA and ASTM compression and
transportation standards, and has passed all commercial airline altitude tests.
The product does not particulate - avoiding wafer contamination. The product is
environmentally friendly with 90% less waste going into the landfill after use
as compared to other packaging materials. The Company's customers report the Air
Box(R) is providing cost savings and freight savings, since there is less
shipment weight and the corrugated box is smaller when compared to traditional
cushion packaging.
Another part of the SDS market is the Photomask market. The Photomask has
no efficient nor cost-effective method of shipment, is extremely fragile, is
subject to transit damage, and is particularly sensitive to contamination. SDS
Air Box(R) can be sealed to eliminate contamination during transit and storage.
Prior to the SDS Air Box entering this market, the Photomask manufacturers had
no efficient way to ship their fragile Photomasks. They were experiencing
substantial damage during shipping and storage, causing them to use such
extremes as packaging them in a five gallon ammo can with bubble wrap or a full
size suitcase lined with polyurethane foam. If the Photomask was extremely
fragile, it had to be hand carried to the customer. In all cases, it was
substantially more expensive to ship the Photomask safely prior to the
introduction of the SDS Air Box. APTI has been selling the Photomask Air Box to
Photronics for one year, and recently began selling the SDS Air Box for
Photomasks to two other companies. These three companies control 60% of the
Photomask market.
Other markets for the SDS Air Box(R) include sensitive parts for wafer
making machines, high end disc drives, quartz glassware used in making
semiconductor wafers, and lightweight surface mount boards, among others.
The Company is still working to develop tape and reel SDS Air Box(R)
Products which meet MIL spec for MVTR (moisture vapor transmission rate), a
major requirement of this market.
Medical
APTI recently successfully designed and sold an Air Box to ship, from the
laboratory to the hospital, living human skin in a Petrie dish, combining a
temperature controlled environment with Air Box cushion packaging. This skin is
called Apligraf (R), and is made by Organogenises of New England.If the Apligraf
is subject to substantial vibration or shock during the trip to the hospital, it
will form a small bubble under the skin and die very quickly. Many forms of
packaging were tested and the Air Box design is the only FDA approved method of
shipping the Apligraf.
Dental Products
The Dental market is concerned with the shipment of dental impressions from
the dentist's office to the laboratory for the fabrication of dental plates and
apparatuses and the return trip to the Dentist. Deliveries inside of about 75
miles are now hand delivered, and do not need the Air Box. Dentists who are
outside the 75 mile radius of the laboratory must ship both ways by air courier.
APTI has replaced the corrugated box and foam interior with a simple reusable
Air Box that fits into an overnight courier bag. The laboratory is saving $1.00,
each way, per shipment on freight and plans to use the Air Box four times,
giving them additional savings. They also have their packages delivered up to
two hours earlier than if packaged in boxes and foam. In addition, the
environmental effect is positive and important to the industry; the Air Box is
95% less tonnage going into the land fill, and if used four times is 98% less
tonnage.
U.S. Military
APTI recently completed a series of ISTA (International Safe Transit
Association) transportation tests for the U S Military for several items with
excellent results. The U S Military has expressed an interest in purchasing the
Air Box to ship sensitive items for the Navy between the ships and repair
depots. APTI is pursuing this at the present time, and although the potential
opportunity is substantial, there is no guarantee APTI will obtain a contract
with the U S Military in the near future.
Discontinued Gift Wraps Line of Products
Formerly, APTI also manufactured a line of gift wrap, utilizing many of the
features of the Air Box(R), under the name "Puff Pac" Gift Wrap. The wrap was a
two-chambered inflatable packaging product resembling a mylar balloon, that
served as a unique alternative to conventional gift wrap. The gift was inserted
in a Puff Pac which was then inflated. As a result, the gift was suspended and
surrounded by air. Puff Pac Gift Wrap was produced in a number of colorful
designs, including holiday and special greetings.
In March of 1995, as a result of a comprehensive study by management and
outside consultants of APTI, its products, markets, patents and business plan,
management determined to terminate the Gift Wrap business, and to focus the
entire energies of the Company on the Air Box(R). In late 1996, APTI liquidated
its inventory of Gift Wrap, and realized nonrecurring sales and profits
therefrom.
MANUFACTURING
APTI purchases raw materials in the form of extruded or laminated webs of
thin flexible plastic films which have been printed or coated by outside
suppliers. These films are produced for the Company to the Company's film design
specifications and standards.
These films are then formed into the Company's various products on the
Company's custom designed and computer controlled modular converting machines,
which use heat sealing technology to join the multiple layers of plastic film
together. The specific sequence of operations and control parameters is
proprietary to the Company, and is covered by process patents. The Company
currently has two product fabrication converting machines which are capable of
producing a total of five (5) million units per year.
The Company fabricates its patented air inflation valve using extruded
printed thin plastic films which are heat sealed together to form the valve on a
custom designed fabrication machine. In the first half of 1998 APTI designed and
developed an industrially acceptable push-pull hard valve. Field tests were
completed with some of the Company's largest customers, and they
enthusiastically endorsed the change in valves. The new push-pull valve
eliminates the threat of air escaping through the valve. APTI is using the
push-pull valve in all Semiconductor applications and most custom design
applications.
The Company utilizes continuous process quality monitoring raw material,
production lot testing and other elements of Total Quality Management to produce
a high quality of product, which continues to hold air in all usual shipping
environments which may be encountered by the Company's customers in shipping
their products. The Company packages its products in boxes for shipment to
its many customers and distributors throughout the world. Some of the products
are "standard" items and are produced to forecast and warehoused for quick
response subsequent shipment, while other products are produced only upon
specific customer order for immediate shipment. On large special orders the
Company can provide products with custom printing to the customer's
requirements; all other orders are produced and shipped with the Company's
standard logo and patent information printed thereon.
SOURCES AND AVAILABILITY OF RAW MATERIAL
The Company has at least two suppliers fully qualified to produce each of
the raw material films required for its products and several companies qualified
to provide the printing required.
Basic raw materials required by us from our suppliers, such as Jefferson
Smurfitt and Huntsman, are produced and readily available to us. All of the film
raw materials used are produced in the millions of tons currently in other
industries. The Company has adopted industry standard processes to fabricate its
raw materials. As a result, supplies of raw materials are available to the
Company from many sources, though the lead time can be several weeks until
receipt of raw materials into the Company plant.
PATENTS, TRADEMARKS & LICENSES
The Company has a combination of products, process and application patents,
backed by proprietary and trade secret manufacturing technology. Management
believes the patents and trademarks provide a formidable barrier to competition.
They include 13 U.S. patents and 1 pending with 2 trademarks and 1 pending, with
13 foreign patents with 2 pending and 1 trademark pending - and further filings
continue to protect and strengthen the technology position. The U.S. and foreign
patents have various expiration dates from August 25, 2007 through September 15,
2014. As noted the Company believes that the patents represent a formidable
barrier to competition and are, as a result, important to the Company's
financial operations. Under 35 U.S.C. Section 382, United States Patents are
presumed to be valid and the Company is not aware of any facts or circumstances
which would bring this presumption into question. Under U.S. law, both
trademarks owned by the Company are of perpetual duration. The Company has no
reason to believe that its application for trademark protection for the name
"Airenviro" will not be granted but such protection is not, in the opinion of
the Company, of material importance. The Company is required to pay minor
royalties related to certain patents and trademarks, and in prior years had paid
royalties on both patents and the trademark "Puff Pac", which trademark is no
longer used. Total expense related to these agreements was $3,154 for the nine
months ending September 30, 1999, $3,991 for the year of 1998 and $0 for the
nine months ending September 30,1998, $1,726 for the year of 1997 and $7,674 for
the year of 1996. The continuing royalty payment on patents continues for the
life of the original patents, and is fixed at 2% of cost of goods sold on an
annual basis.
METHODS OF SALES
The Company has two full time sales employees. One is located in Virginia
Beach, Virginia and oversees marketing in the greater New York metropolitan
area. The other sales employee is located in Silicon Valley, California, and
represents APTI in the San Jose/Palo Alto, California areas, as well as the
Washington and Oregon areas. Air Box(R) is also marketed through two independent
distributors throughout Asia and Europe
Air Packaging (Europe) Ltd., England
Dou Yee Enterprises, Singapore
COMPETITION
APTI has two distinct types of competitors, one in the standard Air Box(R)
market and one in the SDS Air Box(R) market. The Standard Air Box(R) competes
against traditional cushion packaging such as die cut Styrofoam, loose fill,
bubble wrap, die cut corrugated, convoluted foam and other forms of packaging.
The Company's products are competitively priced with most of these competitors.
The Company's Air Box product performs better than all other cushion packaging
in transportation tests.
The second market is the static shielding market. Here, APTI competes
against anti-static foam cushion packaging. Most of the Company's competition is
multi-step packaging, compared to the one step method offered by SDS Air Box(R).
The Company's SDS Air Box(R) is competitively priced, and management expects to
increase its share of this market.
RESEARCH, DEVELOPMENT & LABORATORY
The Company maintains an ongoing research and development effort, striving
to develop more effective and efficient packaging products based around the Air
Box technology and design. The Company maintains two full time researchers,
assisted on a part time basis by other employees, and has established an ISTA
Certified testing laboratory within its manufacturing premises in order to aid
its research and development efforts. The Company also partners with its
customers or prospective partners in an effort to develop new and more creative
solutions to the customer's unique packaging needs.
For the years ended December 1998, 1997 and 1996, research and development
expenses were $7,371, $3,322 and $47,010 respectively. For the nine months ended
September 30 1999 and 1998, research and development expenses were $1,177 and
$6,676 respectively.
ENVIRONMENTAL FACTORS
The Company's manufacturing processes are environmentally "clean", as they
comprise only the use of electrically generated heat at modest temperatures (300
to 400F) to heat seal the layers of plastic films together. There are no
by-products created by the Company's manufacturing processes other than scrap
plastic films generated when the machines are set up or occasionally require
adjustment. There is no toxic or dangerous fumes emitted by the heat seal
processes as the materials are kept well below their boiling points.
PROPERTIES
The Issuer has corporate offices, manufacturing, research and distribution
facilities housed in its 17,280 square foot headquarters in Valencia,
California. All products are manufactured at this location. Management believes
its facility is adequate for the Company's current level of operation.
The facility is leased on a long term lease which expires May 31, 2000, at
a current rental of $10,145.00 per month, plus common area expenses. There are
currently similar facilities at similar long term rents available to the Company
in the adjacent area, and management does not anticipate a problem in replacing
this lease in 2000 if required.
EMPLOYEES
The Company has 19 full-time employees. Nine of these are in management,
sales, product development, or administration positions and ten are in
production/warehousing/shipping operations.
The production and packaging operations are supplemented by the addition of
temporary personnel when scheduling requires. The operation is a non-union shop
with staffing drawn from the Valencia and Los Angeles metroplex, California
areas. The production workers when hired are typically non-skilled or
semi-skilled, and are trained, by the Company in operation of its converting
fabrication equipment. The Company believes that its relationships with its
employees are good.
LEGAL PROCEEDINGS
A former employee of the Company is seeking a severance payment of $101,500
alleging he is entitled to such a payment under terms of an employment
agreement, which was voluntarily terminated in November 1998. The parties have
agreed to arbitration scheduled to take place on a future date. The Company
established a liability for the entire amount on December 31, 1998. The
Company's insurance carrier has undertaken a defense of the claim under a
reservation of their rights to deny the claim in the future. Management cannot,
as of this time, assess realistic liability from this action. Aside from this
claim, the Company is not a party to any litigation and is not aware of any
pending or threatened litigation that would have a material adverse effect upon
the Company's business, operations or financial condition.
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers and their respective ages are
as follows:
Name Age Position Since
- ---- --- -------- ----
Donald Ochacher* 62 Chairman, CEO & a Director 6/99
Janet Maxey 36 Chief Financial Officer 7/97
Garry Newman 49 Vice President 6/97
Elwood C. Trotter 57 Vice President 4/89
Wayne Case* 58 Director 11/98
Carl Stadelhofer 46 Director 11/98
_____________________
* Member Audit Committee
The Directors serve until the next annual meeting of shareholders, or until
their successors are elected.
DONALD M. OCHACHER - President and Chief Executive Officer and Chairman of
the Board of Directors of the Company since June, 1999. Mr. Ochacher has been a
member of the New York bar since 1960 and was engaged in the private practice of
law specializing in corporate and tax law until 1973 when he became General
Counsel and Chief Financial and Administrative Officer of The Newark Group Ltd.,
a large privately owned paper company. Since 1985, he has been both an attorney
and business consultant and at various times, has served as President of
privately owned companies engaged in the paper, hazardous waste, real estate and
long distance telephone resale industries. From May 1994 to the present, Mr.
Ochacher is President of The 800 Network, Inc. From August 1997 to August 1998,
he was Chief Financial Officer of Electric Entertainment Corp. Mr. Ochacher
graduated from the New York University School of Law in 1960, receiving a LL.B
degree and received his B.A. degree from Cornell University in 1957.
JANET MAXEY - Ms. Maxey has been an employee of the Company since May 1991,
and became Chief Financial Officer in July 1997. Ms. Maxey attended California
State University, Northridge, and earned a Bachelor of Science Degree in
Business Administration.
GARRY NEWMAN - Vice President of Manufacturing and Engineering since June
1997. Prior to that, Mr. Newman was Engineering & Quality Assurance Manager for
Richmond Technology from October 1994 until he joined the Company. Mr. Newman
attended University of California, Davis, and earned a Bachelor of Science
Degree in Chemical Engineering.
ELWOOD TROTTER - Mr. Trotter has been an employee of the Company since
April 1989 and recently was appointed Vice President of Sales. Mr. Trotter
attended Simon Frazer University in British Columbia, Canada.
WAYNE CASE - President and Chairman of the Board of Schmitt Industries,
Inc., since November 1986, when he founded Schmitt Industries, Inc. Mr. Case
holds a Bachelor of Arts Degree in Business and an MBA.
CARL STADELHOFER - Attorney with Rinderknecht Klein & Stadelhofer in
Switzerland since July 1990. Mr. Stadelhofer is a French and Swiss citizen;
admitted in Switzerland 1982. Education: Law Schools of Zurich and Berne
University (lic.jur1979); Harvard Law School, Massachusetts; Georgetown
University, Washington, D.C. Mr. Stadelhofer specializes in banking and
financing, mergers and acquisitions, investment funds, international securities
transactions and international legal assistance.
Compensation of Directors
None of the Company's Directors received any compensation during the most
recent fiscal year for serving in their position as a director. No plans have
been adopted to compensate Directors in the future. The Company's Board of
Directors may in the future, at its discretion, compensate Directors for
attending Board and Committee meetings and reimburse the Directors for
out-of-pocket expenses incurred in connection with attending such meetings.
Executive Compensation
None of the Company's Executive Officers received any compensation during
the most recent fiscal year for serving in their position as a Director. The
following table sets forth all cash compensation paid by the Company for
services rendered during the fiscal year ended December 31, 1998, to each of the
individuals who were executive officers of the Company during such fiscal year:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION
--------------------------------------------------
Restricted Securities
Name Stock Underlying
and Year Salary Award(s) Options/Payouts
Position ($)(3) ($) SARs(#)
- ------------ ------ ---------- -------- ---------
<S> <C> <C> <C> <C>
Garvin McMinn(1) 1998 162,154(2) -- 650,000
Former Chairman 1997 81,346 -- 150,000
of the Bd & CEO 1996 15,000 -- --
Elwood Trotter, 1998 104,260 -- 225,000
Vice President, 1997 97,200 -- 25,000
Special Projects, 1996 90,070 -- --
- -------------------------
Note: No bonuses, "other Annual Compensation" or Payouts were made.
(1) Garvin McMinn resigned as officer and director effective June 4, 1999 and
entered into an amendment to his employment contract shifting his status
to that of a consultant over a one year term at a flat agreed fee of
$5,000 per month, for its term.
(2) $81,000 was paid in stock through the issuance of 810,000 shares of Common
Stock of the Company.
(3) No other officers received compensation in excess of $100,000 during
the years 1996 through 1998.
</TABLE>
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Potential Realized Value
At Assumed Rates of Stock
Individual Price Appreciation for
Grants Option Term(a)
---------- --------------------------
No. Of Sec. % of Total
Underlying Options/SARs
Options/ Granted to Exercise
SARs Employees or Base
Granted In Fiscal Price Expiration
Name (#) Year ($/Sh) Date 5%($) 10%($)
- ---- ---------- ---------- -------- ----------- ------ ------
<S> <C> <C> <C> <C> <C>
Garvin McMinn
Former Chairman
of the Board
& CEO 250,000 8.8% $0.15 3/5/03 $ 2,400 $12,825
400,000 14.1% $0.15 6/22/03 $21,680 $43,080
Elwood Trotter
Vice President
Special Projects 25,000 0.9% $0.15 3/05/03 $ 240 $ 1,283
200,000 7.1% $0.15 6/22/03 $10,840 $21,540
(a) These amounts, based on assumed appreciation rates of 5% and 10% rates prescribed by the if any, of the
Company's stock price. The closing price at December 31, 1998 of the Company's Common Stock was $0.24
per share.
</TABLE>
<PAGE>
The following table sets forth the number of shares covered by exercisable
and unexercisable options held by such executives on December 31, 1998, as
adjusted for a blanket reduction in all exercise prices on all outstanding
options, to $0.15 per share exercise price per resolutions adopted by the Board
of Directors on June 4, 1999, and the aggregate gains that would have been
realized had these options been exercised on December 31, 1998, even though
these options were not exercised, and the unexercisable options could not have
been exercised, on December 31, 1998. The Company did not issue stock
appreciation rights.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTIONS/SAR VALUES
Number of Value of Unexercised
Securities Underlying in-the-Money
Unexercised Options/SARs
Shares Options/SARs at at Fiscal Year End(a)
Acquired on Value FY-End(#) ($)
Name Exercise $ Realized $ Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Garvin McMinn -- -- 800,000 -- 72,000 --
Elwood Trotter -- -- 400,000 -- 36,000 --
(a) Market value of shares covered by in-the-money options on December 31, 1998,
less option exercise price. Options are in-the-money if the market value of the
shares covered thereby is greater than the option exercise price based on the
last trading day in 1998 of $0.24 per share at a $0.15 per share exercise price.
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has written employment agreements with two individuals:
Elwood Trotter and Janet Maxey and a consulting agreement with Garvin McMinn.
Summaries of the provisions under the agreements follow.
Garvin McMinn resigned as officer and director effective June 4, 1999
and entered into a one year consulting agreement to provide consulting services
as needed at a flat agreed fee of $5,000 per month, for its term which expires
May 31, 2000.
Elwood Trotter has a one year employment contract that was amended
June 1999 and expires May 31, 2000. He receives $8,000 per month as
Vice-President Special Projects. In the event of his termination, he will
receive only the compensation earned up to the date of termination.
Janet Maxey has a one year employment contract that was amended June
1999 and expires May 31, 2000. She receives $3,574 per month as Chief Financial
Officer. In the event of her termination, she will receive only the compensation
earned up to the date of termination.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
as of October 31, 1999, of the Company's Common Stock, by any person who is
known to the Company to be the beneficial owner of more than 5% of the Company's
voting securities and by each officer or director and by officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL(1) PERCENTAGE
NAME AND ADDRESS OWNERSHIP OF CLASS(1)
- ---------------- --------- -----------
<S> <C> <C>
Donald Ochacher, Chairman, CEO and a Director 400,000(3) 0.4%
25620 Rye Canyon Road(2)
Valencia, California 91355
Janet Maxey, Chief Financial Officer 250,000(4) 0.3%
Garry Newman, Vice President 300,000(5) 0.3%
Elwood C. Trotter, Vice President 962,824(6) 1.0%
Wayne Case, Director 729,919(7) 0.8%
Carl Stadelhofer, Director 2,333,333(8) 2.3%
--------- ---
All current directors and
officers as a group (6 persons) 4,976,076 5.1%
========== ====
Garvin McMinn(10) 1,960,000(9) 2.0%
Schmitt Industries, Inc.(11) 13,757,156 14.3%
Finter Bank (12) 4,850,000 5.0%
(1) Assumes all outstanding stock options and all outstanding Warrants have been exercised,
$1,500,000 in convertible debentures have been placed and converted into common stock at
$.15 per share, and the subject shares have been issued and are outstanding.
(2) This address also applies to all persons listed.
(3) Includes 400,000 stock options outstanding and exercisable at 10/31/99.
(4) Includes 250,000 stock options outstanding and exercisable at 10/31/99.
(5) Includes 300,000 stock options outstanding and exercisable at 10/31/99.
(6) Includes 750,000 stock options outstanding and exercisable at 10/31/99.
(7) Includes 400,000 stock options outstanding and exercisable at 10/31/99.
(8) Includes 400,000 stock options outstanding and exercisable at 10/31/99.
(9) Includes 1,150,000 stock options outstanding and exercisable at 10/31/99.
(10) Garvin McMinn, former Chairman, CEO and a Director, left these positions
to pursue other interests on June 4, 1999.
(11) Wayne Case, a Director of the Company is a principal shareholder,
President, and Chairman of the Board of Schmitt Industries, Inc.
(12) Finter Bank holds these shares on behalf of various clients, none of which is an officer,
director, or affiliate of the Company. Under the laws of the country of Switzerland Finter
Bank may not divulge the names of its individual clients and, therefore, may be deemed the
beneficial owner of these shares, although Finter Bank disclaims any individual interest in
these shares.
</TABLE>
No director or executive officer serves pursuant to any arrangement or
understanding between him or her and any other person.
CERTAIN TRANSACTIONS
1. In September and October of 1999, the Company successfully undertook the
placement of $1,500,000 of 7% Senior Convertible Debentures due 2003. Each
debenture provides for 7% annual interest payable in annual payments beginning
June 30, 2000; are as a class senior in rights as to payment of interest and in
liquidation rights to all other debentures, whether presently outstanding or
issued in the future; are convertible into common stock of the Company at $.15
per share through and including September 30, 2001 and $.25 per share thereafter
until maturity; and are due and payable in full, if not converted prior to, on
September 30, 2003. The terms of the debentures also provide that, subject to
certain conditions, at the election of the holder, yearly interest payments may
be taken in common stock of the Company at a 20% discount to the average closing
price, as defined in the debenture, of the Company's common stock for the 30
days prior to a payment or record date. If the Company elects to file a
registration statement covering these shares there shall be no discount. The
Company also agreed to file an appropriate registration statement to register
the common shares issuable upon conversion and to maintain that registration
until certain events had taken place.
2. Wayne Case, a Director of the Company, also serves as the President and
Chairman of the Board of Schmitt Industries, Inc. Schmitt acquired during fiscal
1998, and the first quarter of 1999, an aggregate of 13,757,156 Shares of the
Company's Common Stock, from another principal shareholder. Shares of the
Company's Common Stock, on a fully diluted basis, represent 14.8% of the
Company's outstanding Common Stock.
3. In December 1998, the Company issued 810,000 shares of its common stock
in settlement of $81,000 of debt owed to Garvin McMinn.
4. The Company issued 1,312,500 shares of common stock, through a private
placement, to Variety Investments, Ltd., a company owned by Don Farrell (a
former principal shareholder) during 1998. In December of 1998, 2,566,706 shares
of common stock were issued in exchange for debt owed to Farrell Financial in
the amount of $282,887, a company owned by Don Farrell.
5. On June 4, 1999, the Board of Directors adopted a 1999 Non Qualified Key
Man Stock Option Plan. This Plan authorized the issuance of up to 5,000,000
options to acquire shares of the Company's common stock at an exercise price of
not less than 100% of fair market value at the date of grant, and with the
addition of such additional terms at the date of grant as the Board of Directors
determines.
6. The Company has written employment agreements with two individuals:
Elwood Trotter and Janet Maxey and a consulting agreement with Garvin McMinn.
Summaries of the provisions under the agreements follow.
Garvin McMinn resigned as officer and director effective June 4, 1999 and
entered into a one year consulting agreement to provide consulting services as
needed at a flat agreed fee of $5,000 per month, for its term which expires May
31, 2000.
Elwood Trotter has a one year employment contract that was amended June
1999 and expires May 31, 2000. He receives $8,000 per month as Vice-President
Special Projects. In the event of his termination, he will receive only the
compensation earned up to the date of termination.
Janet Maxey has a one year employment contract that was amended June 1999
and expires May 31, 2000. She receives $3,574 per month as Chief Financial
Officer. In the event of her termination, she will receive only the compensation
earned up to the date of termination.
7. Donald Ochacher was retained as President and Chief Executive Officer of
the Company on June 4, 1999 at a salary of $6,500 per month. In addition, the
Board of Directors authorized the issuance of 400,000 options to acquire shares
of the Company's common stock at an exercise price of $0.15 per share and with
other terms and conditions as provided in the Company's 1999 Non Qualified Key
Man Stock Options Plan. No formal written agreement has been entered into
between the Company and Don Ochacher.
8. Escrowed Shares. In 1991, 29 stockholders of the Company entered into an
escrow agreement under which a total of approximately 4.5 million shares of the
Company's common stock were placed in escrow, in exchange for an assignment by
the 29 stockholders of certain fractional rights they held in the original Air
Box patents to the Company. None of these 29 stockholders currently hold
significant shares, nor are they officers or directors. The shares are entitled
to be released from escrow based on the performance of the Company as measured
by cash flow (as defined by the agreement) and certain other conditions. The
agreement specifies that the shares are to be released from escrow on a pro rata
basis of the Company as measured by the Cumulative Cash Flow of the Company
since January 1, 1990 not previously applied towards a release, divided by the
earn-out price of $0.468 CDN. Cash flow is defined as net income or loss before
tax, adjusted to add back expenses including depreciation, amortization of
goodwill, expensed research and development costs and any other amounts
permitted or required by the Vancouver Stock Exchange. The Cumulative Cash Flow
is, at any time, the aggregate cash flow up to that time from a date no earlier
than the Company's financial year-end immediately preceding, and no later than
the company's financial year-end immediately following, the date the issuance of
the performance shares is finally accepted by the Vancouver Stock Exchange, net
of any negative cash flow. At the time that this agreement was entered into, the
Company's common stock was traded on the Vancouver Stock Exchange. The Company
de-listed itself from the Vancouver Stock Exchange and the last day it traded on
the Vancouver Stock Exchange was July 22, 1998. While the shares are in escrow,
the stockholders have waived their rights to receive dividends or participate in
the distribution of assets upon a winding up of the Company. Any shares
remaining in escrow at December 31, 1999 are to be canceled by the Company. As
of December 31, 1998, all such shares remain in escrow. These shares are
included in the number of shares outstanding in each of the two years ended
1998. However, management believes, although it cannot assure, that the
conditions required in order to release the shares from escrow will not occur
and that all of the shares will ultimately be canceled and returned to the
Company.
9. The Board of Directors proposed to the Company's shareholders and they
adopted at its Annual Meeting held on June 4, 1999, resolutions giving the Board
of Directors the authority and discretion to reverse split the Company's
outstanding Common Stock on a 1 for 10 basis, if and at such time over the
succeeding 12 months, as the Board of Directors determines such a reverse split
would be in the interest of the Company. In such event, the authorized capital
stock would change to 50,000,000 shares of common stock authorized and each 10
shares of the outstanding common stock would automatically convert into a single
share of new common stock.
10. The Value of Warrant Exercise Price. During 1998, 1997 and 1996, the
Company issued 10,112,500, 10,375,039 and 7,477,778 shares of Common Stock
through private placements. Each share issued had attached a share purchase
warrant to purchase one additional share of Common Stock for a period of two
years.
During 1998 and 1997, the Company issued a total of 5,200,000 and 2,250,000
shares at various per share prices upon the exercise of warrants by various
shareholders. In November 1998, the Company's Board of Directors revalued
22,487,539 outstanding warrants based on the fair value of the stock, and
amended the exercise price to $0.15 per share up to the expiration date. From
November 1998 to June 30, 1999, 13,150,000 Warrants were exercised.
11. Conversion of Related Party Debt to Equity. The Company in 1997
converted a debt owed to Donald Farrell, an offshore former Director and through
his offshore company, formerly a principal shareholder of the Company, in the
amount of $126,000, 863,100 shares of the Company's Common Stock. In 1998,
additional fees of $31,500 were incurred, and all remaining outstanding debt was
settled in exchange for 2,566,706 shares of the Company's Common Stock issued in
an offshore transaction, at $0.10 per share.
In January 1997, the Company entered into an agreement with Variety
Investments, Ltd., an offshore affiliate of Donald Farrell, by which the Company
could borrow up to $150,000. Interest payments at 8.5% per annum were due
monthly, and any borrowings are secured by the Company's assets. The outstanding
loan payable became due and payable on June 1, 1998. In December 1998, the
Company issued a total of 435,289 shares of its Common Stock at a value of $0.10
per share, in full settlement of the outstanding debt plus accrued interest, in
an offshore transaction.
12. During 1996, the Company issued 1,277,778 shares of common stock to a
related party through a private placement for net proceeds of $200,242. Also
during 1996, the Company accrued approximately $126,000 for fees due to a
related party related to private placements.
Other than discussed above, the Company has no knowledge of any transaction
or series of transactions, since January 1, 1996, or any currently proposed
transaction, or series of transactions, to which the Company was or is to be
party, in which the amount involved exceeds $60,000, involving management, any
person owning 10% or more of the common stock, or any member of the immediate
family of any of the foregoing persons.
Management believes that the transactions with related parties were on
terms as favorable as the Company would have obtained from unaffiliated parties.
DESCRIPTION OF SECURITIES OF THE COMPANY
Common Stock
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $0.001, of which 79,664,097 shares were outstanding
as of September 30, 1999.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the holders of Capital Stock.
Holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any preferred stock that might
be issued in the future. Holders of Common Stock have no preemptive or
subscription rights, and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of Common Stock are fully paid
and nonassessable.
The Board of Directors proposed to the Company's shareholders and they
adopted at its Annual Meeting held on June 4, 1999, resolutions giving the Board
of Directors the authority and discretion to reverse split the Company's
outstanding Common Stock on a 1 for 10 basis, if and at such time over the
succeeding 12 months, as the Board of Directors determines such a reverse split
would be in the interest of the Company. In such event, the authorized capital
stock would change to 50,000,000 shares of common stock authorized and each 10
shares of the outstanding common stock would automatically convert into a single
share of new common stock.
Options to Purchase Common Stock
The Company has issued options to purchase common stock to certain
officers, employees and others under various stock option plans for services
performed and to be performed. Some options require continued employment. As of
September 30, 1999 there were a total of 4,695,000 options outstanding each
entitling the holder to purchase one share of the common stock of the company at
$.15. The options expire at various dates beginning on December 18, 2000 and
ending on December 31, 2004.
Warrants
During 1998, 1997 and 1996 the Company issued 10,112,500, 10,375,039 and
7,477,778 shares of common stock through private placements. Each share issued
had attached a share purchase warrant to purchase one additional share of common
stock for a period of two years. In September of 1999 the majority of the
outstanding warrants were surrendered to the Company for cancellation by the
remaining warrant-holders as a condition for the Company placing the below
described debentures. As of October 31, 1999 there were a total of 1,769,209
warrants outstanding each of which gives the warrant-holder the right to
purchase one share of common stock of the Company at $.15 through October 3,
2000 (November 4, 1999 as to 369,209 of the warrants).
Debentures
In September and October of 1999, the Company successfully undertook the
placement of $1,500,000 of 7% Senior Convertible Debentures due 2003. Each
debenture provides for 7% annual interest payable in annual payments beginning
June 30, 2000; are as a class senior in rights as to payment of interest and in
liquidation rights to all other debentures, whether presently outstanding or
issued in the future; are convertible into common stock of the Company at $.15
per share through and including September 30, 2001 and $.25 per share thereafter
until maturity; and are due and payable in full, if not converted prior to, on
September 30, 2003. The terms of the debentures also provide that, subject to
certain conditions, at the election of the holder, yearly interest payments may
be taken in common stock of the Company at a 20% discount to the average closing
price, as defined in the debenture, of the Company's common stock for the 30
days prior to a payment or record date. If the Company elects to file a
registration statement covering these shares there shall be no discount. The
Company also agreed to file an appropriate registration statement to register
the common shares issuable upon conversion and to maintain that registration
until certain events had taken place.
In addition, each of the options, warrants, and debentures contain
anti-dilution provisions that protect the holders thereof against dilution in
certain events, including but not limited to stock dividends, stock splits,
reclassification, or merger.
MARKET FOR THE COMPANY'S COMMON STOCK
The Company's Common Stock traded on the Vancouver Stock Exchange in
Vancouver, British Columbia, under the symbol "APT" until July 23, 1998. The
symbol was changed on September 1, 1992 commensurate with a name change. The
closing sales price as of July 22, 1998, the last day traded on the Vancouver
Stock Exchange, was $0.14US
The Company's Common Stock trades on the NASD Bulletin Board, under the
symbol "AIRP". The closing sales price on October 29, 1999 was $0.13.
Set forth below is the high and low bid information in U.S. dollars for the
Company's Common Stock for each full quarterly period within the two most recent
fiscal years and the first three quarters of 1999. The information set forth
below was obtained from the OTC Bulletin Board and the Vancouver Stock Exchange,
the latter which was translated to U.S. dollars using the annual average
conversion rate. Quotations represent inter-dealer prices, do not include retail
markups, markdowns or commissions and may not represent actual prices at which
transactions have taken place.
High Low
Period Bid Bid
------ --- ---
3rd Quarter 1999 $0.20 $0.13
2nd Quarter 1999 0.20 0.13
1st Quarter 1999 0.26 0.17
High Low
Period Bid Bid
------ --- ---
4th Quarter 1998 0.29 0.07
3rd Quarter 1998 0.22 0.10
2nd Quarter 1998 0.24 0.12
1st Quarter 1998 0.26 0.11
4th Quarter 1997 0.46 0.20
3rd Quarter 1997 0.36 0.17
2nd Quarter 1997 0.22 0.16
1st Quarter 1997 0.23 0.15
At September 30, 1999, the Company had approximately 589 Shareholders of
record.
The Company has not paid a dividend since its incorporation, and management
does not anticipate the Company will pay dividends in the near future.
Dividend Policy
The Company did not pay any cash dividends during its last fiscal year
and the Board of Directors does not contemplate doing so in the near future. The
Company currently intends to retain all earnings, to finance the development and
expansion of its operations, and does not anticipate paying cash dividends on
its shares of Common Stock in the foreseeable future. The Company's future
dividend policy will be determined by its Board of Directors on the basis of
various factors, including results of operations, financial condition, business
opportunities and capital requirements. The payment of dividends will also be
subject to the requirements of Delaware Law, as well as restrictive financial
covenants which may be required in future credit agreements.
Transfer Agent
The transfer agent and registrar for the Common Stock and Warrants is
American Stock Transfer Co., Inc., 6201 15th Ave., Brooklyn, N.Y. 11219.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of September 30, 1999, the Company had 79,664,087 Common
Shares outstanding. The Company also have warrants, options, and debentures
issued and outstanding which, if exercised or converted in full, would require
the Company to issue up to an additional 16,464,209 Shares of its Common Stock
which would result in the Company having 96,128,296 Shares of its Common Stock
issued and outstanding. Of the outstanding shares on September 30, 1999
29,937,952 were restricted securities as discussed below. If all the options and
warrants above were exercised this would increase the number of restricted
securities by 6,464,209 to 36,402,161 shares. 4,850,000 of the restricted shares
are being registered for sale pursuant to this registration statement.
The shares of Common Stock which are "restricted securities" (as that
term is defined in Rule 144 promulgated under the Securities Act) may be
publicly sold only if registered under the Securities Act or if sold in
accordance with an applicable exemption from registration, such as Rule 144. In
general. In general, under Rule 144 as in effect commencing April 29, 1997,
beginning 90 days after the date of this Prospectus, subject to the satisfaction
of certain other conditions, a person, including an affiliate of the Company,
who has beneficially owned restricted securities for at least one year, is
entitled to sell (together with any person with whom such individual is required
to aggregate sales) within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the Common Stock is quoted on the Nasdaq Stock Market or
another national securities exchange, the average weekly trading volume during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements, and the
availability of current public information regarding the Company. A person who
has not been an affiliate of the Company for at least three months, and who has
beneficially owned restricted securities for at least two years, is entitled to
sell such restricted shares under Rule 144(k) ("Rule 144(k) Shares") without
regard to any of the limitations described above.
In addition, Rule 144A as currently in effect, in general, permits
unlimited resale's of certain restricted securities of any issuer provided that
the purchaser is an institution that owns and invests on a discretionary basis
at least $100 million in securities or is a registered broker-dealer that owns
and invests $10 million in securities. Rule 144A allows the existing
stockholders of the Company to sell their shares of Common Stock to such
institutions and registered broker-dealers without regard to any volume or other
restrictions. Unlike under Rule 144, restricted securities sold under Rule 144A
to nonaffiliates do not lose their status as restricted securities.
No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will have
on the market price of the Common Stock prevailing from time to time.
SELLING PERSONS AND PLAN OF DISTRIBUTION
All of the shares of Common Stock of the Company covered by this Prospectus
are being registered for sale for the account of the selling Persons named in
the table below under "Shares of Common Stock Offered by Selling Persons (the
"Selling Persons"). 10,000,000 of the shares being offered by the Selling
Persons assume that they choose to convert all of their debentures in common
stock of the Company and that said conversion is at $.15 per common share.
Although the Company will receive the benefit of exchanging long term debt for
equity in the event of conversion of the outstanding debentures, the Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders offered hereby. For further information regarding the terms of the
Debentures, see "Description of Securities."
The shares of Common Stock offered by the Selling Persons may be offered
for sale from time to time at market prices prevailing at the time of sale or at
negotiated prices, and without payment of any underwriting discounts or
commissions except for usual and customary selling commissions paid to brokers
or dealers. This Prospectus has been prepared so that future sales of the
shares of Common Stock by the Selling Persons will not be restricted other than
as set forth herein. In connection with any sales, the Selling Stockholders and
any brokers participating in such sales may be deemed to be "underwriters"
within the meaning of the Securities Act.
Pursuant to rules promulgated under the Exchange Act, a Selling Person
who is neither affiliated nor directly or indirectly acting in concert with the
issuer or with any other Selling Stockholder will be required to observe the
appropriate "cooling off" period and other restrictions only prior to the
individual Person's distribution and until such distribution ends or the shares
are withdrawn from registration. Conversely, a Selling Person who is affiliated
or acting in concert with the issuer or another Selling Person will be required
to observe the appropriate "cooling off" period and other restrictions under
Regulation M under the Exchange Act with respect to all offers and sales by
affiliated persons.
Except as described above or in the footnotes to the Selling Persons
Table below, no Selling Person has had any material relationship with the
Company or an affiliate of the Company, including its predecessors, within the
past three years.
The shares of Common Stock sold for the account of the Selling Persons
may be sold in one or more of the following transactions: (a) block trades in
which the broker or dealer so engaged will attempt to sell such shares as agent
but may position and resell a portion of the block as principal to facilitate
any transaction, (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus, (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers,
or (d) in private transactions. In effecting sales, brokers and dealers engaged
by Selling Persons may arrange for other brokers or dealers to participate.
Brokers or dealers will receive commissions or discounts from Selling Persons in
amounts to be negotiated (and, if such broker-dealer acts as agent for the
purchaser of such shares, from such purchaser). Broker-dealers may agree with
the Selling Persons to sell a specified number of such shares at a stipulated
price per share, and, to the extent such a broker-dealer is unable to do so
acting as agent for a Selling Person, to purchase as principal any unsold shares
at the price required to fulfill the broker-dealer commitment to such Selling
Person. Broker-dealers who acquire such shares as principals may thereafter
resell such shares from time to time in transactions (which may involve crosses
and book transactions and which may involve sales to and through other
broker-dealers, including transaction, of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated transactions or
otherwise, at market prices prevailing at the time of sale or at negotiated
prices, and in connection with such resales may pay to or receive from the
purchasers of such shares commissions as
described above.
Listed below are the names of each selling Person (the "Selling
Persons"), the total number of shares owned, assuming their debentures are
converted in full at $.15 per share, the number of shares to be sold in this
offering by each Selling Person, and the percentage of Common Stock owned by
each Selling Person after this Offering:
<TABLE>
<CAPTION>
Number of
Shares of
Common Shares of
Shares of Stock to be Common Stock
Common Stock Offered for Beneficially Owned
Beneficially Owned Selling After
Prior to Person's Completion of
Name Offering (3) Account (3) Offering
- ---- ------------- ------------- --------------
Number Percent
-------- --------
<S> <C> <C> <C> <C>
Fidulex Management Inc.. . . . . . . . 1,333,334 (1) 1,333,334 (1) - -
Innovative Investments Network Limited 1,666,667 (1) 1,666,667 (1) - -
OTC Opportunities, Inc.. . . . . . . . 1,666,667 (1) 1,666,667 (1) - -
SCF Societa Di Consulenza Finanziaria
SA . . . . . . . . . . . . . . . . . . 1,666,667 (1) 1,666,667 (1) - -
SG Ruegg Banca SA. . . . . . . . . . . 2,333,334 (1) 2,333,334 (1) - -
Strategic Investors Limited. . . . . . 1,333,334 (1) 1,333,334 (1) - -
Finter Bank. . . . . . . . . . . . . . 4,850,000 (2) 4,850,000 (2) - -
(1) Assumes the conversion of the total amount of debentures owned by a
Debenture-holder into common stock of the Company at $.15 per share.
(2) Finter Bank holds these shares on behalf of various clients, none of which
is an officer, director, or affiliate of the Company. Under the laws of the country of
Switzerland Finter Bank may not divulge the names of its individual clients and, therefore,
may be deemed the beneficial owner of these shares, although Finter Bank disclaims any
individual interest in these shares.
(3) Totals amount to 14,850,003 due to rounding of fractional shares.
</TABLE>
46
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law, under which the Company is
incorporated, gives a corporation the power to indemnify any of its directors,
officers, employees, or agents who are sued by reason of their service in such
capacity to the corporation provided that the director, officer, employee, or
agent acted in good faith and in a manner he believed to be in or not opposed to
the best interests of the corporation. With respect to any criminal action, he
must have had no reasonable cause to believe his conduct was unlawful.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT
OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF THE
REGISTRANT PURSUANT TO THE FOREGOING PROVISIONS OR OTHERWISE, THE REGISTRANT HAS
BEEN ADVISED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS,
THEREFORE, UNENFORCEABLE, IN THE EVENT THAT A CLAIM FOR INDEMNIFICATION AGAINST
SUCH LIABILITIES (OTHER THAN THE PAYMENT BY THE REGISTRANT OF EXPENSES INCURRED
OR PAID BY A DIRECTOR, OFFICER OR CONTROLLING PERSON OF THE REGISTRANT IN THE
SUCCESSFUL DEFENSE OF ANY ACTION, SUIT OR PROCEEDING) IS ASSERTED BY SUCH
DIRECTOR, OFFICER OR CONTROLLING PERSON IN CONNECTION WITH THE SECURITIES BEING
REGISTERED, THE REGISTRANT WILL, UNLESS IN THE OPINION OF ITS COUNSEL THE MATTER
HAS BEEN SETTLED BY CONTROLLING PRECEDENT, SUBMIT TO A COURT OF APPROPRIATE
JURISDICTION THE QUESTION WHETHER SUCH INDEMNIFICATION BY IT IS AGAINST PUBLIC
POLICY AS EXPRESSED IN THE ACT AND WILL BE GOVERNED BY THE FINAL ADJUDICATION OF
SUCH ISSUE.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company appointed BDO Seidman, LLP, as independent accountants and
dismissed its former accountants, Hein + Associates LLP on November 30, 1998.
Both the former auditor's report and the current auditor's report contain a
going concern qualification. There were no other disclaimers or qualifications.
The decision to change accountants was made by the Company's Board of
Directors.
During the Company's two most recent fiscal years, and any subsequent
interim period preceding such resignation of its former outside accountants,
there were no disagreements with such former accountant on any matter.
The Company did not consult with BDO Seidman, LLP regarding the application
of accounting principles to a specified transaction or the type of audit opinion
that might be rendered or any other accounting, auditing or financial reporting
issues during the Company's two most recent fiscal years and any subsequent
interim period prior to engaging BDO Seidman, LLP.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for the
Company by J. Garry McAllister, Esq., 1487 E. Thistle Downs Drive, Sandy, Utah
84092.
EXPERTS
The consolidated Financial Statements included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the period set forth in
their report (which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report upon the
authority of such firm as an expert in auditing and accounting.
The audited consolidated financial statements including the consolidated
balance sheet of the Company as of December 31, 1997, and the consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended December 31, 1997 and 1996, and the related financial statement
schedules included in this Prospectus and Registration Statement have been
audited by Hein & Associates, LLP, independent auditors as set forth in their
reports appearing elsewhere herein and have been included in this Registration
Statement in reliance upon such reports given upon the authority of that firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D. C. 20549, a Registration Statement on Form S-1 under the Act,
with respect to the securities to be registered hereunder. This Prospectus,
filed as a part of the Registration Statement, does not contain certain
information set forth in or annexed as exhibits to the Registration Statement,
and reference is made to such exhibits to the Registration Statement, as well as
to the Registration Statement previously filed by the Company on Form 10, and to
the Exhibits filed as a part thereof, which may be inspected at the office of
the Securities and Exchange Commission without charge, or copies thereof may be
obtained therefrom upon payment of a fee prescribed by the Securities and
Exchange Commission.
<PAGE>
INDEX TO
FINANCIAL STATEMENTS AND EXHIBITS
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
FINANCIAL STATEMENTS:
CONSOLIDATED FINANCIAL STATEMENTS
-December 31, 1998 and 1997 Page
----
Reports of Independent Public Accountants F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations (Loss) F-6
Consolidated Statement of Stockholders'
(deficit) Equity F-7
Consolidated Statement of Cash Flows F-8
Notes to consolidated Financial Statements F-10
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-September 30, 1999 and 1998
Consolidated Balance Sheets (Unaudited) F-42
Consolidated statement of Operations
(Loss) (Unaudited) F-43
Consolidated Statement of Cash
Flows (Unaudited) F-44
Notes to Consolidated Financials (Unaudited) F-45
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Air Packaging Technologies, Inc.
Valencia, California
We have audited the accompanying consolidated balance sheet of Air Packaging
Technologies, Inc. and Subsidiary as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Air Packaging
Technologies, Inc. and Subsidiary at December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO Seidman, LLP
Los Angeles, California
March 12, 1999
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Air Packaging Technologies, Inc.
Valencia, CA
We have audited the accompanying consolidated balance sheet of Air Packaging
Technologies, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended December 31, 1997 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 that 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 Air Packaging Technologies,
Inc. and subsidiaries as of December 31, 1997, and results of their operations
and their cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
/S/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
March 30, 1998
F-3
<PAGE>
<TABLE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 8)
CURRENT ASSETS
Cash and cash equivalents $ 125,799 $ 59,462
Trade receivables, net of allowance for doubtful
accounts of $5,130 and $3,900 (Note 15) 96,852 34,566
Inventories (Note 4) 408,643 156,455
Advances and prepaids 75,134 4,662
- ----------------------------------------------------------------------------------------
Total current assets 706,428 255,145
PROPERTY AND EQUIPMENT, net (Note 5) 810,458 540,660
INTANGIBLE ASSETS, net (Note 6) 233,609 275,042
DEPOSITS 60,100 66,874
- ----------------------------------------------------------------------------------------
Total assets $1,810,595 $1,137,721
========================================================================================
</TABLE>
F-4
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note 11) $ 275,882 $ 684,078
Accrued officers' salaries -- 1,232
Due to related party (Note 7) -- 160,462
Loan payable - related party (Note 8) -- 38,128
Current portion of notes payable (Note 10) -- 81,500
- ----------------------------------------------------------------------------------------------
Total current liabilities 275,882 965,400
- ----------------------------------------------------------------------------------------------
Other -- 39,500
- ----------------------------------------------------------------------------------------------
Total liabilities 275,882 1,004,900
- ----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY (Notes 12 and 14)
Common stock, $.001 par value, 100,000,000 shares
authorized; 70,714,087 and 44,761,639 shares
issued and outstanding 70,714 44,762
Additional paid-in capital 19,420,979 16,321,392
Accumulated deficit (17,956,980) (16,233,333)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 1,534,713 132,821
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,810,595 $ 1,137,721
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (Note 15)
Sales $ 722,268 $ 340,624 $ 431,655
Sales of discontinued products -- -- 208,419
- --------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 722,268 340,624 640,074
COST OF SALES 566,837 592,544 705,707
- --------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 155,431 (251,920) (65,633)
- --------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales, general and administrative 1,967,932 1,572,619 1,002,150
Research and development 7,371 3,322 47,010
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,975,303 1,575,941 1,049,160
- --------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,819,872) (1,827,861) (1,114,793)
- --------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (153,470) (17,934) (71,927)
Interest income 3,433 2,010 3,309
Other income 2,243 19,586 10,571
- --------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (147,794) 3,662 (58,047)
- --------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM (1,967,666) (1,824,199) (1,172,840)
EXTRAORDINARY ITEM - GAIN ON
RESTRUCTURING OF PAYABLES (Note 11) 244,019 -- --
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (1,723,647) $ (1,824,199) $ (1,172,840)
==========================================================================================================================
LOSS PER COMMON SHARE - BASIC AND DILUTED
Loss before extraordinary item $ (.04) $ (.06) $ (.06)
Extraordinary item $ .01 $ -- $ -
Net loss $ (.04) $ (.06) $ (.06)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC
AND DILUTED 45,066,084 30,693,624 19,313,760
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 20,181,178 $20,181 $11,692,461 $(13,236,294) $(1,523,652)
Net cash proceeds from private
placements (Note 12) 7,477,778 7,478 1,009,235 -- 1,016,713
Debt for equity exchange
(Note 12) 310,564 311 110,659 -- 110,970
Net loss -- -- -- (1,172,840) (1,172,840)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 27,969,520 27,970 12,812,355 (14,409,134) (1,568,809)
Net cash proceeds from private
placements (Note 12) 10,375,039 10,376 1,580,343 -- 1,590,719
Debt for equity exchange
(Notes 7 and 12) 1,809,580 1,809 285,477 -- 287,286
Conversion of debenture (Note 9) 2,300,000 2,300 1,247,700 -- 1,250,000
Exercise of options (Note 12) 57,500 58 8,089 -- 8,147
Exercise of warrants (Note 12) 2,250,000 2,249 343,978 -- 346,227
Stock-based compensation (Note 12) -- -- 43,450 -- 43,450
Net loss -- -- -- (1,824,199) (1,824,199)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 44,761,639 44,762 16,321,392 (16,233,333) 132,821
Net cash proceeds from private
placements (Note 12) 10,112,500 10,113 914,480 -- 924,593
Debt for equity exchange
(Notes 7, 8, 10 and 12) 10,639,948 10,639 1,073,534 -- 1,084,173
Exercise of warrants (Notes 9 and 12) 5,200,000 5,200 738,427 -- 743,627
Stock-based compensation (Note 12) -- -- 247,073 -- 247,073
Revaluation of warrants (Note 12) -- -- 126,073 -- 126,073
Net loss -- -- -- (1,723,647) (1,723,647)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 70,714,087 $70,714 $19,420,979 $(17,956,980) $ 1,534,713
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(1,723,647) $(1,824,199) $(1,172,840)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 219,064 150,400 209,124
Provision for doubtful accounts -- 2,037 (13,559)
Inventory reserve -- 97,202 73,000
Stock-based compensation expense 247,073 43,450 --
Expense on revaluation of warrants 126,073 -- --
Extraordinary gain on restructuring of payables (244,019) -- --
Gain on sale of property and equipment -- (6,742) --
Increase (decrease) from changes in:
Trade receivables (62,286) 3,730 (10,237)
Inventories (252,188) (123,211) 132,231
Advances and prepaids (70,472) 356 1,548
Deposits 6,774 (51,594) 1,696
Accounts payable and accrued liabilities 159,306 171,981 (81,058)
Accrued officers' salaries (1,232) (24,794) (56,536)
Due to related party -- 126,000 118,560
Other liabilities (39,500) -- --
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,635,054) (1,435,384) (798,071)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment -- 7,000 --
Purchases of property and equipment (413,765) (528,193) (29,811)
Patent expenditures (33,664) (37,788) (39,113)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (447,429) (558,981) (68,924)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placements 924,593 1,590,719 1,016,713
Net proceeds from exercise of warrants 743,627 346,227 --
Net proceeds from exercise of options -- 8,147 --
Proceeds from loan payable - related party -- 38,128 --
Proceeds from notes payable 521,000 50,000 --
Payment on note payable (33,000) (31,000) (137,500)
Costs associated with debt conversion (7,400) -- --
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,148,820 2,002,221 879,213
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 66,337 7,856 12,218
CASH, at beginning of year 59,462 51,606 39,388
- ----------------------------------------------------------------------------------------------------------------------
CASH, at end of year $ 125,799 $ 59,462 $ 51,606
======================================================================================================================
</TABLE>
F-8
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid interest in the amount of $0, $43,205 and $25,750 during 1998,
1997 and 1996, respectively. The Company paid income taxes in the amount of
$800, $800 and $2,400 during 1998, 1997 and 1996, respectively.
During 1997, $3,528 of interest was capitalized for construction of property and
equipment.
During 1998, 1997 and 1996, the Company exchanged $1,084,073, $287,286 and
$110,970, respectively, of debt for 10,639,948, 1,809,580 and 310,564 shares of
common stock (see Notes 7, 8, 10 and 12).
During 1997, the convertible debenture with a balance of $1,250,000 was
converted into 2,300,000 shares of common stock of the Company at the exercise
price of $0.54 per share and 2,300,000 detachable nontransferable warrants (see
Note 9).
During the years ended December 31, 1998 and 1997, the Company recorded $187,073
and $43,450, respectively, representing compensation in conjunction with stock
options (see Note 12).
During 1998, the Company issued 810,000 shares to an employee in satisfaction of
accrued compensation in the amount of $81,000 (Note 12).
During 1998, the Company's board of directors revalued 22,487,539 outstanding
warrants to their fair value. As a result, expense of $126,073 was recorded in
the current year (see Note 12).
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Air Packaging Technologies, Inc. (the
"Company") and Subsidiary develops,
manufactures and distributes
inflatable commercial packaging
systems and inflatable gift wrap
products. During 1992, the Company
changed its name from Puff Pac
Industries, Inc. to Air Packaging
Technologies, Inc. As of December 31,
1995, the Company decided to focus on
its commercial packaging product line
and therefore wrote down inventory
relating to gift wrap products to its
liquidation value as of December 31,
1995 and completed liquidating the
inventory during 1996.
2 SUMMARY OF SIGNIFICANT PRINCIPLES OF CONSOLIDATION
ACCOUNTING POLICIES
The consolidated financial statements
include the accounts of Air Packaging
Technologies, Inc. and its
wholly-owned foreign subsidiary. All
significant intercompany balances and
transactions have been eliminated in
consolidation.
BASIS OF PRESENTATION
The consolidated financial statements
have been prepared in accordance with
United States generally accepted
accounting principles (GAAP).
REVENUE RECOGNITION
Revenue is recognized upon shipment of
products.
CASH EQUIVALENTS
For purposes of the statements of cash
flows, the Company considers all
highly liquid investments purchased
with an original maturity of three
months or less to be cash equivalents.
F-10
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT PROPERTY AND EQUIPMENT
ACCOUNTING POLICIES (CONTINUED)
Property and equipment are stated at
cost. Depreciation of property and
equipment is calculated using the
straight-line method over the
estimated useful lives (ranging from 3
to 5 years) of the respective assets.
The cost of normal maintenance and
repairs is charged to operating
expenses as incurred. Material
expenditures which increase the life
of an asset are capitalized and
depreciated over the estimated
remaining useful life of the asset.
The cost of properties sold, or
otherwise disposed of, and the related
accumulated depreciation or
amortization are removed from the
accounts, and any gains or losses are
reflected in current operations.
INTANGIBLE ASSETS
Patents, trademarks, and rights to
patent and trademark royalties are
carried at cost less accumulated
amortization which is calculated on a
straight-line basis over ten years,
the estimated useful lives of the
assets. The Company periodically
reviews intangible assets for
impairment where the fair value is
less than the carrying value.
INCOME TAXES
The Company provides for income taxes
in accordance with Statement of
Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income
Taxes". SFAS 109 requires a company to
use the asset and liability method of
accounting for income taxes.
F-11
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the asset and liability method,
deferred income taxes are recognized
for the tax consequences of "temporary
differences" by applying enacted
statutory tax rates applicable to
future years to differences between
the financial statement carrying
amounts and the tax bases of existing
assets and liabilities. A valuation
allowance is provided when management
cannot determine whether it is more
likely than not that the deferred tax
asset will be realized. Under SFAS
109, the effect on deferred income
taxes of a change in tax rates is
recognized in income in the period
that includes the enactment date.
The reporting currency for the Company
is the United States dollar. All
amounts in the accompanying financial
statements and notes are in United
States dollars.
Non-U.S. assets and liabilities are
translated into U.S. dollars using the
year-end exchange rates except for
prepayments, property, other long-term
assets and stockholders' equity
accounts, which are translated at
rates in effect when these assets were
acquired. Revenues and expenses are
translated at average rates during the
year. Net translation gains (losses)
of approximately $(1,250), $700 and
$1,900 have been charged to operations
during 1998, 1997 and 1996,
respectively.
INVENTORY
Inventory, which consists of raw
material, work in progress, and
finished goods (which is comprised of
material cost, production and
packaging labor and overhead), is
F-12
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
valued at the lower of cost or market.
Cost is determined by the first-in,
First-out (FIFO) method. Management
periodically reviews the utility of
the Company's inventory and adjusts
the related reserves for slow
movement and/or obsolescence.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting
Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of,"
established guidelines regarding when
impairment losses on long-lived
assets, which include plant and
equipment and certain identifiable
intangible assets, should be
recognized and how impairment losses
should be measured. The Company
periodically reviews such assets for
possible impairments and expected
losses, if any, are recorded
currently.
STOCK-BASED COMPENSATION
The Company adopted Statement of
Financial Accounting Standards No.
123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as of
January 1, 1996, which establishes a
fair value method of accounting for
stock-based compensation plans. In
accordance with SFAS 123, the Company
has chosen to continue to account for
stock-based compensation utilizing the
intrinsic value method prescribed in
APB 25. Accordingly, compensation cost
for stock options is measured as the
excess, if any, of the fair market
price of the Company's stock at the
date of grant over the amount an
employee must pay to acquire the
stock.
F-13
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Also, in accordance with SFAS 123, the
Company has provided footnote
disclosure with respect to stock-based
employee compensation. The cost of
stock-based employee compensation is
measured at the grant date based on the
the value of the award and is
recognized over the service period.
The value of the stock-based award is
determined using a pricing model
whereby compensation cost is the
excess of the fair value of the stock
as determined by the model at grant
date or other measurement date over
the amount an employee must pay to
acquire the stock.
CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting
loss that would be recognized at the
reporting date if counterparties
failed completely to perform as
contracted. Concentrations of credit
risk (whether on or off balance sheet)
that arise from financial instruments
exist for groups of customers or
groups of counterparties when they
have similar economic characteristics
that would cause their ability to meet
contractual obligations to be
similarly effected by changes in
economic or other conditions described
below. In accordance with FASB
Statement No. 105, "Disclosure of
Information about Financial
Instruments with Off-Balance-Sheet
Risk and Financial Instruments with
Concentrations of Credit Risk," the
credit risk amounts shown in Note 15
do not take into account the value of
any collateral or security.
F-14
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for
financial instruments under Statement
of Financial Accounting Standards No.
107, "Disclosures about Fair Value of
Financial Instruments," are determined
at discrete points in time based on
relevant market information. These
estimates involve uncertainties and
cannot be determined with precision.
The estimated fair values of the
Company's financial instruments, which
includes all cash, accounts
receivables, accounts payable,
long-term debt, and other debt,
approximates the carrying value in the
consolidated financial statements at
December 31, 1998 and 1997 as a result
of their short term nature, or due to
the interest rates approximating the
Company's effective borrowing rates.
2. SUMMARY OF SIGNIFICANT EARNINGS (LOSS) PER SHARE
ACCOUNTING
POLICIES
The Company adopted Statement of
Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share,"
during 1997. SFAS 128 requires
presentation of basic and diluted
earnings per share. Basic earnings
(loss) per share is computed by
dividing income (loss) available to
common shareholders by the weighted
average number of common shares
outstanding for the reporting period.
Diluted earnings per share reflects
the potential dilution that could
occur if securities or other
contracts, such as stock options, to
issue common stock were exercised or
converted into common stock, but does
not include the impact of these
dilutive securities that would be
antidilutive. During the three years
F-15
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT EARNINGS (LOSS) PER SHARE
ACCOUNTING POLICIES
(CONTINUED)
ended December 31, 1998, these
dilutive securities were antidilutive.
All prior period weighted average and
per share information had no effect on
the amounts presented in accordance
with SFAS 128.
Options and warrants to purchase
22,157,539, 21,700,317 and 9,278,611
shares were outstanding during the
years ended 1998, 1997 and 1996,
respectively, but were not included in
the computation of diluted loss per
common share because the effect would
be antidilutive.
The Company has 4,460,423 shares in
escrow to be released upon the
satisfaction of certain conditions,
and are included in the number of
shares outstanding in each of the two
years ended 1998. However, these
shares have been excluded from the
computation of basic and diluted loss
per share for each of the three years
ended 1998 as the necessary conditions
have not been satisfied (see Note 14).
F-16
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT COMPREHENSIVE INCOME
ACCOUNTING POLICIES (CONTINUED)
During the year ended December 31,
1998, the Company adopted Statement of
Financial Accounting Standards No.
130, "Reporting Comprehensive Income,"
("SFAS 130") issued by the FASB as it
is effective for financial standards
with fiscal years beginning after
December 15, 1997. SFAS 130
establishes standards for reporting
and display of comprehensive income
and its components in a full set of
general-purpose financial statements.
Comprehensive income is comprised of
net income and all changes to
stockholders' equity except those due
to investments by owners and
distribution to owners. The Company
does not have any components of
comprehensive income for each of the
years ended December 31, 1998, 1997
and 1996. Adoption of SFAS 130 did not
have an impact on the Company's
financial position, results of
operations and cash flows.
SEGMENTS OF AN ENTERPRISE
During the year ended December 31,
1998, the Company adopted Statement of
Financial Accounting Standards No.
131, "Disclosures about Segments of an
Enterprise and Related Information,"
("SFAS 131") issued by the FASB and is
effective for financial statements
with fiscal years beginning after
December 15, 1997. SFAS 131 requires
that public companies report certain
information about operating segments,
products, services and geographical
areas in which they operate. At
December 31, 1998, the Company did not
report any segment information as
operations and business activity are
considered one unit. Adoption of SFAS
F-17
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
131 did not have an impact on the
Company's financial position, results
of operations and cash flows.
USE OF ESTIMATES IN THE PREPARATION OF
FINANCIAL STATEMENTS
The preparation of the Company's
consolidated financial statements in
conformity with generally accepted
accounting principles requires the
Company's 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.
F-18
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING
POLICIES Statement of Financial Accounting
(CONTINUED) Standards No. 132 ("SFAS 132"),
"Employers' Disclosures about Pensions
and Other Postretirement Benefits,"
issued by the Financial Accounting
Standards Board is effective for
financial statements with fiscal years
beginning after December 15, 1997.
This statement revises employers'
disclosures about pension and other
postretirement benefit plans. It does
not change the measurement or
recognition of those plans. Adoption
of SFAS 132 did not have an impact on
its financial position, results of
operations and cash flows.
Statement of Financial Accounting
Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments
and Hedging Activities," issued by the
Financial Accounting Standards Board
is effective for fiscal years
beginning after June 15, 1999. SFAS
133 requires companies to recognize
all derivative contracts as either
assets or liabilities in the balance
sheet and to measure them at fair
value. If certain conditions are met,
a derivative may be specifically
designated as a hedge, the objective
of which is to match the timing of
gain or loss recognition on the
hedging derivative with the
recognition of (i) the changes in the
fair value of the hedged asset or
liability that are attributable to the
hedged risk or (ii) the earnings
effect of the hedged forecasted
transaction. For a derivative not
designated as a hedging instrument,
the gain or loss is recognized in
income in the period of change. The
Company does not expect adoption of
F-19
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 133 to have an effect on its
financial position, or results of
operations and any effect will be
limited to the form and content of its
disclosures.
RECLASSIFICATIONS
Certain reclassifications have been
made to the prior year statements to
conform to the 1998 presentation. Such
reclassifications had no effect on the
previously reported net loss.
3. LIQUIDITY AND GOING CONCERN The accompanying consolidated
financial statements have been
prepared assuming that the Company
will continue as a going concern,
which contemplates the realization of
assets and the satisfaction of
liabilities in the normal course of
business. However, there is
substantial doubt about the Company's
ability to
F-20
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LIQUIDITY AND GOING CONCERN continue as a going concern because of
(CONTINUED) the magnitude of its losses during
the past three years, ($1,723,647),
($1,824,199) and ($1,172,840) in 1998,
1997 and 1996, and an accumulated
deficit of ($17,956,980) at December
31, 1998. The Company's continued
existence is dependent upon its
ability to raise substantial capital,
to increase sales, to significantly
improve operations, and ultimately
become profitable.
The Company believes that future
investments and certain sales-related
efforts will provide sufficient cash
flow for it to continue as a going
concern in its present form. However,
there can be no assurance that the
Company will achieve such results.
Accordingly, the consolidated
financial statements do not include
any adjustments related to the
recoverability and classification of
recorded asset amounts or the amount
and classification of liabilities or
any other adjustments that might be
necessary should the Company be unable
to continue as a going concern.
4. INVENTORIES
Inventories consist of the following at:
December 31, 1998 1997
- --------------------------------------------------------------------------------
Raw materials $350,147 $118,009
Work-in-process 23,703 14,974
Finished goods 34,793 23,472
- --------------------------------------------------------------------------------
$408,643 $156,455
================================================================================
The above balances are presented net
of total inventory reserves of
approximately $63,000 and $154,000 in
1998 and 1997, respectively.
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance activity is as follows:
Balance at January 1, 1997 $ 362,000
1997 Write-offs (305,000)
Additional reserve recorded 97,000
- -------------------------------------------------------------------------------
Balance at December 31, 1997 154,000
1998 Write-offs (91,000)
- -------------------------------------------------------------------------------
Balance at December 31, 1998 63,000
===============================================================================
In 1997 and 1996, the Company wrote
down inventory by approximately
$97,000 and $73,000, respectively, to
reflect lower of cost or market
pricing.
F-21
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY Property and equipment consist of the
AND EQUIPMENT following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Manufacturing equipment $1,639,469 $ 979,028
Dies and molds 166,866 153,399
Computer equipment 62,673 63,782
Quality control lab 102,035 --
Office equipment 100,237 56,654
Vehicles 12,730 12,730
Construction in Progress -- 404,652
- --------------------------------------------------------------------------------
2,084,010 1,670,245
Less accumulated depreciation 1,273,552 1,129,585
- --------------------------------------------------------------------------------
$ 810,458 $ 540,660
================================================================================
</TABLE>
Depreciation and amortization expense
for property and equipment charged to
operations for the years ended
December 31, 1998, 1997 and 1996 was
$143,967, $80,160 and $121,854,
respectively.
6. INTANGIBLE ASSETS Intangible assets consist of the
following at:
<TABLE>
<CAPTION>
December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Patents $657,142 $623,478
Trademarks 3,157 3,157
Rights to patent and trademark royalties 85,146 85,146
- --------------------------------------------------------------------------------
745,445 711,781
Less accumulated amortization 511,836 436,739
- --------------------------------------------------------------------------------
$233,609 $275,042
================================================================================
</TABLE>
F-22
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense for intangible
assets charged to operations for the
years ended December 31, 1998, 1997
and 1996 was $75,097, $70,240 and
$87,240, respectively.
F-23
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DUE TO RELATED PARTY
The amount due to related party
consists of fees payable to,
and non-interest bearing advances
from, a former director. During 1997,
$126,000 of the outstanding balance
was converted to 863,100 shares of
common stock. In 1998, additional fees
of $31,500 were incurred, and all
remaining outstanding debt was settled
in exchange for 2,566,706 shares at
$0.10 per share.
8. LOAN PAYABLE - RELATED PARTY
In January 1997, the Company entered
into an agreement with an affiliate of
a related party by which the Company
can borrow up to $150,000. Interest
payments at 8.5% per annum are due
monthly, and any borrowings are
secured by the Company's assets. The
outstanding loan payable became due
and payable on June 1, 1998. In
December 1998, the Company issued
435,289 shares at a value of $0.10 per
share in full settlement of the
outstanding debt plus accrued
interest.
9. CONVERTIBLE SUBORDINATED DEBENTURE
In 1991, the Company issued a
$1,500,000 convertible subordinated
debenture due October 31, 1996. In
February 1994, a principal payment of
$250,000 was made. On May 15, 1996
this debenture was modified and
extended to October 31, 1997.
On May 29, 1997, the debenture was
converted into 2,300,000 shares of
common stock of the Company and
2,300,000 detachable nontransferable
warrants. Two warrants entitle the
lender to purchase one additional
common share of the Company. The
exercise price of each warrant is
$0.54 for the first year ended May 29,
1998 and $0.62 for the second year
ended May 29, 1999.
F-25
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1998, the Company's board
of directors amended the warrants to
be convertible on a one for one basis
at a price of $0.15 per share up to
the expiration date (see Note 12).
In December 1998, the lender exercised
the entire 2,300,000 warrants at the
amended price of $0.15 per share.
F-26
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NOTES PAYABLE Notes payable consist of the
following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
$100,000 unsecured, non-interest bearing
installment note payable to an
insurance company with monthly
payments of $5,000 through December
10, 1997, principal is past due $ -- $ 31,500
$50,000 unsecured note bearing interest
at 8%, due May 1998 -- 50,000
- -------------------------------------------------------------------------
-- 81,500
Less current portion -- (81,500)
- -------------------------------------------------------------------------
$ -- $ --
=========================================================================
</TABLE>
During 1998, the Company paid $23,000
in full settlement of the outstanding
installment note payable and
recognized a gain of $8,500, which is
included in "Extraordinary Item" in
the consolidated statements of
operations (see Note 11).
In December 1998, the Company issued
568,000 shares at a value of $0.10 per
share in full settlement of the
interest-bearing note payable, plus
accrued interest (see Note 12).
11. EXTRAORDINARY During the fourth quarter of 1998,
ITEM the Company paid approximately
$190,000 in full settlement of various
accounts payables and other accrued
expenses totaling approximately
$434,000 and recognized an
extraordinary gain of $244,000, or
$0.01 per share. There was no income
tax effect due to the Company's
current year net loss and related
valuation allowance.
F-27
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company did not recognize any
gains or losses on the issuance of
stock in full settlement of debts as
described in Notes 7, 8, 10 and 12 as
the fair value of the equity interest
granted was equivalent to the carrying
amount of the settled debts.
F-28
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCKHOLDERS' EQUITY COMMON STOCK
During 1998, the Company completed six
private placements for a total of
10,112,500 shares and received total
net proceeds of approximately
$925,000, net of expenses of $81,423.
During 1997 and 1996, the Company
issued 10,375,039 and 7,477,778 shares
of common stock through private
placements, receiving net proceeds of
approximately $1,600,000 and
$1,000,000 after expenses.
In 1998, 1997 and 1996, the Company
issued a total of 10,639,948,
1,809,100 and 310,564 common shares,
which includes shares also disclosed
in Notes 7, 8 and 10, in full
settlement of various debts amounting
to approximately $1,084,000, $287,000
and $111,000. The Company did not
recognize any gains or losses on the
conversion as the fair value of the
equity interest granted was equivalent
to the carrying amount of the settled
debts.
STOCK OPTIONS
The Company has issued options to
purchase common stock to certain
officers, employees and others under
various stock option plans for
services performed and to be
performed. Some options require
continued employment.
F-29
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option activity is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 1,252,500 $ 0.22
Granted 565,000 0.25
Expired/canceled (850,000) 0.23
- ----------------------------------------------------------------------------
Outstanding at December 31, 1996 967,500 0.23
Granted 2,977,500 0.17
Exercised (57,500) 0.14
Expired/canceled (90,000) 0.27
- ----------------------------------------------------------------------------
Outstanding at December 31, 1997 3,797,500 0.18
Granted 2,830,000 0.18
Exercised -- --
Expired/canceled (2,757,500) 0.16
- -----------------------------------------------------------------------
Outstanding at December 31, 1998 3,870,000 $ 0.19
=======================================================================
Exercisable at December 31, 1998 3,515,000 $ 0.19
=======================================================================
</TABLE>
F-30
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 STOCKHOLDERS' EQUITY STOCK OPTIONS
(CONTINUED)
Information relating to stock options
at December 31, 1998 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------- ------------------------
Weighted Average Weighted Average
----------------------------------- ------------------------
Remaining
Exercise Price Life Exercise Exercise
Per Share Shares (Months) Price Shares Price
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.15 1,400,000 59 $ 0.15 1,400,000 $ 0.15
$ 0.16 225,000 43 $ 0.16 225,000 $ 0.16
$ 0.18 405,000 42 $ 0.18 50,000 $ 0.18
$ 0.19 32,500 41 $ 0.19 32,500 $ 0.19
$ 0.20 700,000 48 $ 0.20 700,000 $ 0.20
$ 0.21 730,000 54 $ 0.21 730,000 $ 0.21
$ 0.22 82,500 25 $ 0.22 82,500 $ 0.22
$ 0.23 180,000 50 $ 0.23 180,000 $ 0.23
$ 0.26 15,000 24 $ 0.26 15,000 $ 0.26
$ 0.39 100,000 47 $ 0.39 100,000 $ 0.39
- ---------------------------------------------------------------------------------
3,870,000 52 $ 0.19 3,515,000 $ 0.19
=================================================================================
</TABLE>
F-31
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA INFORMATION
In accordance with SFAS 123 and
described in Note 2, the Company
continues to account for stock-based
compensation utilizing the intrinsic
value method prescribed by APB 25. Had
compensation cost for stock options
issued to employees been determined
based on the fair value at grant dates
consistent with the method of SFAS
123, the Company's net loss and net
loss per share would have increased to
the pro forma amounts presented below:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss, as reported $ (1,723,647) $ (1,824,199) $ (1,172,840)
Net loss, pro forma (1,900,179) (2,265,081) (1,207,016)
Loss per common share - basic and
diluted, as reported $ (.04) $ (.06) $ (.06)
Loss per common share - basic and
diluted, pro forma $ (.04) $ (.07) $ (.06)
</TABLE>
F-32
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option is
estimated on the date of grant using
the Black-Scholes option-pricing model
using the following weighted-average
assumptions: expected volatility of
106%, 130% and 149% in 1998, 1997 and
1996, respectively, an expected life
of five years in 1998 and two years in
1997 and 1996, no dividends would be
declared during the expected term of
the options, risk-free interest rate
of 5.01%, 6.1% and 5.3% for 1998, 1997
and 1996, respectively.
The weighted average fair value of
stock options granted to employees
during 1998, 1997 and 1996 was $0.16,
$0.16 and $0.21, respectively.
WARRANTS
During 1998, 1997 and 1996 the Company
issued 10,112,500, 10,375,039 and
7,477,778 shares of common stock
through private placements. Each share
issued had attached a share purchase
warrant to purchase one additional
share of common stock for a period of
two years.
During 1998 and 1997, The Company
issued a total of 5,200,000 and
2,250,000 shares at various per share
prices upon the exercise of warrants
by various shareholders.
In November 1998, the Company's board
of directors revalued 22,487,539
outstanding warrants based on the fair
value of the stock, and amended the
exercise price to $0.15 per share up
to the expiration date. As a result,
interest expense of $126,073 was
recognized in the current year.
F-33
Outstanding and exercisable warrants
at December 31, 1998 to acquire the
Company's stock, held primarily by
existing stockholders, are as follows:
<TABLE>
<CAPTION>
Warrants Exercise Price Expiration Date
- ---------------------------------------------------------
<S> <C> <C>
276,053 $0.15 July 9, 1999
2,500,000 $0.15 September 18, 1999
1,529,777 $0.15 September 21, 1999
3,500,000 $0.15 October 28, 1999
369,209 $0.15 November 4, 1999
1,312,500 $0.15 January 28, 2000
4,000,000 $0.15 March 25, 2000
500,000 $0.15 October 3, 2000
800,000 $0.15 October 3, 2000
1,500,000 $0.15 October 3, 2000
2,000,000 $0.15 October 3, 2000
</TABLE>
F-34
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
Income taxes are accounted for in
accordance with SFAS No. 109. At
December 31, 1998, the Company has a
net operating loss carryforward (NOL)
of approximately $16,400,000 for
federal tax purposes. At December 31,
1998, the Company has a deferred tax
asset of approximately $6,800,000,
which primarily relates to net
operating losses. A 100% valuation
allowance has been established as
management cannot determine whether it
is more likely than not that the
deferred tax asset will be realized.
The NOLs expire as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------------------------------------------
<S> <C>
2007 $ 5,400,000
2008 2,000,000
2009 2,300,000
2010 1,400,000
2011 1,700,000
2012 2,200,000
2018 1,400,000
- ------------------------------------------------------------
Total $ 16,400,000
============================================================
</TABLE>
The Company's net operating loss
carryforwards may be limited due to
ownership changes as defined under
Section 382 of the Internal Revenue
Code of 1986.
F-35
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS
Minimum lease commitments under
noncancelable operating lease
agreements are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ----------------------------------------------------
<S> <C>
1999 $ 125,482
2000 54,384
2001 3,656
2002 2,438
- ----------------------------------------------------
Total $ 185,960
====================================================
</TABLE>
Rent expense was $142,987, $140,788
and $140,800 for the years ended
December 31, 1998, 1997 and 1996,
respectively.
F-36
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES ROYALTY AGREEMENTS
(CONTINUED)
The Company is required to pay
royalties related to certain patents
and trademarks. Total expense related
to these agreements was $3,991 in
1998, $1,726 in 1997 and $7,674 in
1996.
ESCROW AGREEMENT
In 1991, certain stockholders of the
Company entered into an escrow
agreement under which a total of
approximately 4.5 million shares of
the Company's common stock was placed
in escrow. The shares are entitled to
be released from escrow based on the
performance of the Company as measured
by cash flow (as defined by the
agreement) and certain other
conditions. While the shares are in
escrow, the stockholders waive their
rights to receive dividends or
participate in the distribution of
assets upon a winding up of the
Company. Any shares remaining in
escrow at December 31, 1999 will be
canceled by the Company. As of
December 31, 1998, all such shares
remain in escrow. These shares are
included in the number of shares
outstanding in each of the two years
ended 1998. However, these shares have
been excluded from the computation of
basic and diluted loss per share for
each of the three years ended 1998 as
the necessary conditions have not yet
been satisfied.
EMPLOYMENT AGREEMENTS
In August 1994, the Company entered
into an employment agreement with one
employee under which the Company is
obligated to pay 50 percent of base
F-37
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
salary plus insurance benefits for a
period of two years in case of
permanent disability. The annual base
salary is $72,000 plus 1 percent of
quarterly gross sales payables, in
addition to other benefits. In the
event the Company terminates the
agreement without cause, it will be
required to pay up to 15 months
compensation. In July 1998, the
Company entered into two 5-year
employment agreements with employees
of the Company. These agreements are
subject to the same conditions as
described above, except that severance
payments may be as much as up to 18
months' compensation. The current
salaries under these agreements are
$168,000 and $43,000 per annum for
each employee.
A former employee of the Company is
seeking a severance payment of
$101,500 per terms of his employment
agreement, which was voluntarily
terminated in November 1998. The
parties have agreed to arbitration
scheduled to take place on a future
date. The Company has established a
liability for the entire amount at
December 31, 1998.
15. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK,
OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER RISKS
AND UNCERTAINTIES
The Company operates primarily in one
industry segment: developing,
manufacturing and distributing of
inflatable commercial packaging
systems. The Company's sales are
primarily to companies producing
Silicon wafers and computer chips in
California, Arizona, Oregon, Colorado
and Texas in the United States,
Denmark and the U.K. in Europe, and
Singapore in Asia. Sales to
F-38
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unaffiliated customers which represent
more than 10% of the Company's net
sales for 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Customer
A 15% 22% --
B -- 13% --
C 31% --% 13%
D 18% -- --
</TABLE>
The following tables set forth below
information regarding the Company's
foreign operations:
Sales to Unaffiliated Customers
<TABLE>
<CAPTION>
YEAR
------------------------------------------
1998 1997 1996(1)
---------- ---------- -----------
<S> <C> <C> <C>
United States $366,177 $295,116 $ 547,391
Europe $223,619 $ 45,508 $ 80,629
Asia $132,472 -- $ 12,054
-------- -------- --------
$722,268 $340,624 $640,074
======== ======== ========
(1) In 1996, a discontinued inventory of Puff Pac Gift Wrap was sold in
connection with the discontinuance of this product, resulting in
nonrecurring sales of $208,419, which are included in this figure.
</TABLE>
Operating Loss
<TABLE>
<CAPTION>
YEAR
------------------------------------------
1998 1997 1996(1)
---------- ----------- -----------
<S> <C> <C> <C>
United States $ (928,135) $(1,590,239) $ (947,574)
Europe $ (564,160) $ (237,622) $ (144,923)
Asia $ (327,577) -- $ (22,296)
----------- ----------- -----------
$(1,819,872) $(1,827,861) $(1,114,793)
=========== =========== ===========
(1) In 1996, the entire inventory of Puff Pac Gift Wrap was sold in
connection with the discontinuance of this product, resulting in
nonrecurring sales of $208,419, which are included in this figure.
</TABLE>
F-39
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All identifiable Assets of the Company are located within the U.S.
Financial instruments that subject the
Company to credit risk consist
primarily of accounts receivable. The
Company frequently makes large credit
sales to customers. At December 31,
1998 and 1997, approximately $69,400
or 72% and $24,700 or 64% of the
Company's accounts receivable were due
from three customers, respectively.
16. RELATED PARTY TRANSACTIONS
The Company issued 4,758,330 and
1,277,778 shares of common stock to a
related party through a private
placement for net proceeds of $635,769
and $200,242 during 1997 and 1996,
respectively (See also Note 7).
During 1997, the Company issued
3,500,000 shares of common stock to an
affiliate of a related party through a
private placement for net proceeds of
$548,742 (See also Note 8).
During 1997 and 1996, the Company was
billed $126,000 for fees due to a
related party related to private
placements (See Note 7).
During 1998, the Company issued
810,000 shares of its common stock to
the Chief Executive Officer in
exchange for salary expenses of
$81,000. The transaction was based on
the fair value of the stock on the
date the services were rendered.
F-40
AIR PACKAGING TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The President and Chairman of the
Board of Schmitt Industries, Inc., who
is also a director of the company,
acquired an aggregate of 12,080,000
shares of common stock in 1998 from
another principal shareholder.
17. RECONCILIATION TO CANADIAN INCOME TAXES GAAP
Under Canadian GAAP, income taxes are
accounted for using the deferral
method. The Company's financial
statements are presented using the
liability method in accordance with
SFAS 109. There would be no material
differences in these financial
statements if the deferral method were
adopted.
STOCK-BASED COMPENSATION
Canadian GAAP does not specifically
address recognition of compensation
related to stock options, however, in
practice, no recognition is usually
given. The Company's financial
statements are presented using the
intrinsic value method and include pro
forma disclosures using the fair value
method in accordance with SFAS 123.
There would be no material differences
in these financial statements, except
that the pro forma information in Note
10 would not be included, if no
recognition of compensation were given
to stock options.
18. SUBSEQUENT EVENTS
Subsequent to year end, the Company
issued 2,500,000 shares at $0.15 per
share upon the exercise of warrants by
a shareholder.
F-41
AIR PACKAGING TECHNOLOGIES, INC. AND SUBISIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
NINE MONTHS
09/30/1999
(Unaudited)
-------------
<S> <C>
ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . 1,064,178
Trade receivables, net of allowance of $22,630. 129,508
Inventories, net of reserve of $33,000. . . . . 607,519
Advances and prepaids . . . . . . . . . . . . . 32,289
------------
TOTAL CURRENT ASSETS . . . . . . . . . . . 1,833,494
Property and equipment, net of depreciation
of $1,437,198 . . . . . . . . . . . . . . . 706,214
Intangible assets, net of amortization of
of $558,280 . . . . . . . . . . . . . . . . 235,571
Deposits and other assets . . . . . . . . . . . 163,017
------------
TOTAL ASSETS . . . . . . . . . . . . . . . 2,938,296
=============
CURRENT LIABILITIES
Accounts payable & accrued expenses . . . . . . 288,367
Deferred revenue. . . . . . . . . . . . . . . . 14,078
------------
TOTAL CURRENT LIABILITIES. . . . . . . . . 302,445
7% Convertible debenture. . . . . . . . . . . . 1,050,000
------------
TOTAL LONG TERM LIABILITIES. . . . . . . . 1,050,000
TOTAL LIABILITIES. . . . . . . . . . . . . 1,352,445
------------
Common stock, $.001 par value per share.
Issued and outstanding 79,664,087 at
September 30, 1999 . . . . . . . . . . . . . 79,664
Additional paid in capital. . . . . . . . . . . 20,793,329
Accumulated deficit . . . . . . . . . . . . . . (19,287,142)
------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . 1,585,851
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY . 2,938,296
============
</TABLE>
F-42
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
09/30/1999 09/30/1998
(Unaudited) (Unaudited)
-------------------- ------------------
<S> <C> <C>
Net sales. . . . . . . . . . . . . 712,759 456,107
Cost of sales. . . . . . . . . . . 650,406 260,048
-------------------- -------------------
GROSS PROFIT . . . . . . . . . . . 62,353 196,059
OPERATING EXPENSES:
General, administrative and
selling expenses. . . . . . . 1,396,747 1,172,684
Research and development . . . . . 1,177 6,676
-------------------- -------------------
Total operating expenses . . . . . 1,397,924 1,179,360
LOSS FROM OPERATIONS . . . . . . . (1,335,571) (983,301)
Interest expense/(income). . . . . (5,409) 15,379
-------------------- -------------------
NET LOSS . . . . . . . . . . . . . (1,330,162) (998,680)
================== ==================
LOSS PER COMMON SHARE:
BASIC . . . . . . . . . . . . $ (0.02) $ (0.02)
-------------------- -------------------
DILUTED . . . . . . . . . . . $ (0.02) $ (0.02)
-------------------- -------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
BASIC . . . . . . . . . . . . 71,747,437 43,615,930
-------------------- -------------------
DILUTED . . . . . . . . . . . 71,747,437 43,615,930
-------------------- -------------------
</TABLE>
F-43
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
09/30/1999 09/30/1998
(Unaudited) (Unaudited)
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . (1,330,162) (998,680)
Adjustments to reconcile net loss to net
cash used in operating activities:
Allowance for doubtful accounts. . . . . . . - -
Depreciation and amortization. . . . . . . . 210,089 148,630
-
Provision for doubtful accounts. . . . . . . 17,500 363
Stock based consulting expense . . . . . . . 38,800 -
Increase (decrease) from changes in:
Trade receivables. . . . . . . . . . . . . (50,156) (17,865)
Inventories. . . . . . . . . . . . . . . . (198,876) (290,383)
Advances and prepaids. . . . . . . . . . . 42,845 (49,988)
Deposits and other assets. . . . . . . . . (102,917) 6,774
(Decrease) increase in:
Accounts payable & accrued liabilities . . 18,473 103,090
Accrued officers' salary . . . . . . . . . - 79,768
Deferred revenue . . . . . . . . . . . . . 8,090 -
Due to related party . . . . . . . . . . . - 31,500
------------------- ------------------
Net cash used in operating activities. . . (1,346,314) (986,791)
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . (59,401) (374,830)
Patent expenditures . . . . . . . . . . . . . . (48,406) (30,882)
------------------- ------------------
Net cash used in investing activities. . . (107,807) (405,712)
------------------- ------------------
Cash flows from financing activities:
Net proceeds from private placements. . . . . . - 955,705
Proceeds from exercise of warrants. . . . . . . 1,342,500 125,475
Proceeds from convertible debenture . . . . . . 1,050,000 -
Proceeds from notes payable . . . . . . . . . . - 461,000
- (31,500)
------------------- ------------------
Net cash provided by financing activities. 2,392,500 1,510,680
------------------- ------------------
Net increase in cash. . . . . . . . . . . . . . . 938,379 118,177
Cash, beginning of period . . . . . . . . . . . . 125,799 59,462
------------------- ------------------
Cash, end of period . . . . . . . . . . . . . . . 1,064,178 177,639
================== ==================
Supplemental disclosure of
cash flow information:
Cash paid during the nine months for:
Income taxes . . . . . . . . . . . . . . . . 800 800
Interest . . . . . . . . . . . . . . . . . . - -
</TABLE>
F-44
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
--------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 1 - STATEMENT OF INFORMATION FURNISHED
- -------------------------------------------------
In the opinion of management the accompanying unaudited financial statements
contain all adjustments (consisting only of normal and recurring accruals)
necessary to present fairly the financial position as of September 30, 1999, and
the results of operations and cash flows for the nine month periods ended
September 30, 1999 and September 30, 1998. These results have been determined on
the basis of generally accepted accounting principles and practices applied
consistently with those used in the preparation of the Company's Annual Report
and the Form 10 for the fiscal year ended December 31, 1998.
The results of operations for the nine month period ended September 30, 1999 are
not necessarily indicative of the results to be expected for any other period or
for the entire year.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying financial statements should be
read in conjunction with the Company's audited financial statements and notes
thereto included in the Company's Annual Report on Form 10 for the year ended
December 31, 1998.
NOTE 2 - EARNINGS (LOSS) PER COMMON SHARE
- ------------------------------------------------
The Company computes loss per common share under SFAS No. 128, "Earnings Per
Share," which requires presentation of basic and diluted earnings (loss) per
share. Basic earnings (loss) per common share is computed by dividing income or
loss available to common shareholders by the weighted average number of common
shares outstanding for the reporting period. Diluted earnings (loss) per common
share reflects the potential dilution that could occur if securities or other
contracts, such as stock options and warrants, to issued common stock were
exercised or converted into common stock. Common stock options and warrants
were not included in the computation of diluted loss per common share for the
nine months ended September 30, 1999 and September 30, 1998 because the effect
would be antidilutive.
F-45
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
--------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 3 - EXERCISE OF WARRANTS
- ----------------------------------
During the nine months ended September 30, 1999, the Company received $1,342,500
of cash related to a shareholder exercising 8,950,000 warrants at an exercise
price of $0.15 per share. During the nine months ended September 30, 1998, the
Company received approximately $125,000 of cash related to a shareholders
exercising 1,000,000 warrants at an exercise price of $0.125 per share.
NOTE 4 - STOCK OPTIONS
- --------------------------
The Board of Directors adopted a 1999 Non Qualified Key Man Stock Options plan
on June 4, 1999. This Plan authorizes the issuance of up to 5,000,000 options
to acquire shares of the Company's common stock at an exercise price of not less
that 100% of fair market value at the date of grant, and with the addition of
such additional terms at the date of grant as the Board of Directors determines.
During the nine months ended September 30, 1999, the Company granted 1,350,000
stock options under this plan of which 1,000,000 were granted to officers of the
Company and 350,000 were granted to a non-employee and the related consulting
expense of $22,750 was recorded.
The Board of Directors also approved a blanket reduction in the exercise price
of all existing options which totalled 4,350,000, to an exercise price of $0.15
in June 1999. As a result, the Company recorded consulting expense of $16,050
for the re-pricing of options held by non-employees.
F-46
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
--------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 5 - CONVERTIBLE DEBENTURE
- ----------------------------------
During the nine months ended September 30, 1999 the Company issued $1,050,000
in four-year 7% convertible debentures. Subsequent to September 30, 1999, the
Company issued an additional $450,000 in four-year 7% convertible debentures.
Under the terms of the agreement, the debenture can be converted into shares of
the Company's Common Stock as follows:
(a) Convertible into common stock of the Company at anytime within two years
of issue date at $0.15 per share
(b) Convertible into common stock of the Company at anytime between the
first day of the third year and the last day of the fourth year after
issue date at $0.25 per share
(c) Conversion feature expires at 12:00 midnight Los Angeles, California on
the last day of the fourth year after the issue date
The debenture is payable in full if not converted upon surrender of debenture to
Company no sooner than the first day of the fifth year after issue date.
Interest at 7% is payable annually in arrears.
NOTE 6 - LIQUIDITY AND GOING CONCERN
- -------------------------------------------
The consolidated financial statements as of September 30, 1999 have been
prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. However, there is substantial doubt about the
Company's ability to continue as a going concern because of the magnitude of the
Company's losses during the past three years and during the nine months ended
September 30, 1999 of ($1,723,647), ($1,824,199) and ($1,172,840) in 1998, 1997,
and 1996 and ($1,330,162) respectively, and an accumulated deficit of
($19,287,142) at September 30, 1999. The Company's continued existence is
dependent upon its ability to raise additional capital, to increase sales, to
significantly improve operations, and ultimately become profitable.
The Company believes that future investments and certain sales-related efforts
will provide sufficient cash flow for it to continue as a going concern in its
present form. However, there can be no assurance that the Company will achieve
such results. Accordingly, the consolidated financial statements do not include
any adjustments related to the recoverability and classification of recorded
asset amounts or the amount and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as
a going concern.
F-47
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC
-------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 7 - INVENTORIES
- -----------------------
Inventories consists of the following at:
September 30,
1999
Raw materials $ 464,318
Work-in-process 23,594
Finished goods 119,607
----------
$ 607,519
=========
NOTE 8 - CANCELLATION OF WARRANTS
- --------------------------------------
During 1998, 1997 and 1996, the Company issued 10,112,500, 10,375,039 and
7,477,778 shares of common stock through private placements. Each share issued
had attached a share purchase warrant to purchase one additional share of common
stock for a period of two years. In September of 1999, the majority of the
outstanding warrants were surrendered to the Company for cancellation by the
remaining warrant-holders as a condition for the Company placing the four-year
7% convertible debentures. As of October 31, 1999, there were a total of
1,769,209 warrants outstanding each of which gives the warrant-holder the right
to purchase one share of common stock of the Company at $0.15 per share through
October 3, 2000, except for 369,209 of the warrants which expired November 4,
1999.
F-48
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 5
Forward Looking Statements 6
Risk Factors 6
The Company 12
Use of Proceeds 13
Dilution 13
Selected Consolidated Financial Data 13
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14
Business 23
Management 32
Security Ownership of Certain Beneficial
Owners and Management 36
Certain Transactions 37
Description of Securities of the Company 40
Market for the Company's Common Stock 41
Shares Eligible for Future Sales 42
Selling Persons and Plan of Distribution 43
Indemnification of Directors and Officers 45
Changes in and Disagreements with Accountants 46
Legal Matters 46
Experts 46
Additional Information 47
Financial Statements and Notes F-1
48
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Estimated expenses payable in connection with the sale of the Securities
covered hereby are as follows:
Registration fee $ 657.00
NASD filing fee $ -0-
Printing and engraving expenses $ 1,000.00
Legal fees and expenses $ 25,000.00
Accounting fees and expenses $ 5,000.00
Blue Sky fees and expenses
(including legal fees) -0-
Transfer agent and registrar
fees and expenses nil
Miscellaneous -0-
==========
Total $ 31,657.00
Item 14. Indemnification of Directors and Officers
Delaware General Corporation Law. The Registrant has statutory authority
to indemnify its officers and directors. The applicable portions of the
Delaware General Corporation Law (the "DOCL") state that, to the extent such
person is successful on the merits or otherwise, a corporation may indemnify any
person who was or is a party or who is threatened to be made a party to any
threatened, pending or completed action. suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation), by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise ("such
Person"), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such Person, if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding. had no reasonable cause to believe his conduct
was unlawful. In any threatened, pending or completed action by or in the right
of the corporation, a corporation also may indemnify any such Person for costs
actually and reasonably incurred by him in connection with that action's defense
or settlement, if he acted in good faith and in a manner
II-1
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
corporation; however, no indemnification shall be made with respect to any claim
or matter as to which such Person shall have been adjudged to be liable to the
corporation, unless and only to the extent that a court shall determine such
indemnity is proper.
Under the applicable provisions of the DGCI- any indemnification shall be
made by the Registrant only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct. Such determination shall be made:
(1) By the Board of Directors by a majority vote of a quorum consisting of
directors who are not parties to such action, suit or proceeding; or
(2) If such a quorum is not obtainable, or even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion; or
(3) By the affirmative vote of a majority of the shares entitled to vote
thereon.
Certificate of Incorporation and Bylaws. The Registrant's Certificate of
Incorporation eliminates the personal liability of the Registrant's directors
for monetary for breach of their fiduciary duty of care as directors to the
Registrant and its stockholders notwithstanding any provision of law imposing
such liability. The Registrant's Certificate of Incorporation, however, does
not eliminate liability of the Registrant's directors for (t) breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) for the unlawful payments of dividends or unlawful stock
repurchase or redemption as provided in Section 174 of the DGCI, or (iv) for any
transaction from which the director derived an improper personal benefit if such
persons are parties to, or are threatened to be made parties to, certain
proceedings by reason of their position as officers or directors of the
Registrant. Article IV of the Registrant's By-Laws provides for the
indemnification of the Registrant's directors, officers, employees and other
agents The Registrant's Certificate of Incorporation and By-Laws, which are
filed as Exhibit 3.1 and Exhibit 3.2 of the Registrant's Form 10, dated July 23,
1999, are hereby incorporated by reference.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
In September and October of 1999, the Company successfully undertook the
placement of $1,500,000 of 7% Senior Convertible Debentures due 2003. Each
debentures provides for 7% annual interest payable in annual payments beginning
June 30, 2000; are as a class senior in rights as to payment of interest and in
liquidation rights to all other debentures, whether presently outstanding or
issued in the future; are convertible into common stock of the Company at $.15
per share through and including September 30, 2001 and $.25 per share
II-2
<PAGE>
thereafter until maturity; and are due and payable in full, if not converted
prior to, on September 30, 2003. These securities were sold pursuant to an
exemption provided by Section 4(2) of the Securities Act of 1933, as amended,
and/or Regulation D and/or Regulation S promulgated thereunder. In addition to
the foregoing, the Company has sold the following unregistered securities:
<TABLE>
<CAPTION>
Class of Nature Amount
Amount Persons to of of Exemption
Dates Title Sold Whom Sold Consideration Consideration Claimed
- ----- ----- ---------- ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
6/11/99 Common 3,350,000 1 Offshore Cash $ 502,500 Reg S
Stock(3) Accredited
Investor
4/26/99 Common 1,600,000 1 Offshore Cash $ 240,000 Reg S
Stock(3) Accredited
Investor
1/28/99 Common 2,466,667 1 Offshore Cash $ 370,000 Rule 504
Stock(3) Accredited and/or
Investor Reg S
1/28/99 Common 33,333 1 Offshore Cash $ 5,000 Reg S
Stock Accredited
Investor
1/15/99 Common 1,500,000 1 Offshore Cash $ 150,000 Reg S
Stock & Accredited
Warrants Investors
(On a 1 for 1
basis)
1/15/99 Common 500,000 1 Accredited Cash $ 68,000 Section 4(2)
Stock & U.S. Investor
Warrants
(On a 1 for 1
basis)
- -------------------------------------------------------------------------------------------------------------
12/21/98 Common 4,200,000 1 Offshore Cash $ 630,000 Rule 504
Stock (3) Accredited
Investor
9/98 -
12/98 Common 10,431,561 Ten Conversion of $ 1,066,572 Reg S
Stock Offshore Debt to Equity
Accredited
Investors
9/98 Common 208,387 1 Accredited Conversion of $ 25,000 Section 4(2)
Stock U.S. Investor Debt to
Equity
9/11/98 Common 1,000,000 1 Offshore Cash $ 125,475 Reg S
Stock(3) Accredited
Investor
1/98 - Common 8,112,500 4 Offshore Cash $ 985,657 Reg S
12/98 Stock & Accredited
Warrants Investors
(On a 1 for 1
basis)
- ---------------------------------------------------------------------------------------------------------
11/4/97 Common 369,209 1 U.S. Cash $ 99,723 Section 4(2)
Stock & Accredited
Warrants(2) Investor
(On a 1 for 1
basis)
5/97 - Common 2,250,000 3 Offshore Cash $ 365,117 Reg S
11/97 Stock(3) Accredited
Investors
1/97 - Common 1,809,580 3 Offshore Conversion of $ 288,907 Reg S
7/97 Stock Accredited Debt to
Investors Equity
1/97 - Options to 57,500 4 Sophisticated Bonus $ 9,539 Section 4(2)
12/97 Acquire Employees Consideration
Common Stock to Employees
5/97 Convertible 2,300,000 1 Offshore Cash $ 1,250,000 Reg S
Debenture(1) Accredited
Investor
1/97 - Common 10,005,830 4 Offshore Cash $ 834,645 Reg S
11/97 Stock & Accredited
Warrants(2) Investors
(On a 1 for 1
basis)
- -------------------------------------------------------------------------------------------------------------
5/96 Common 7,477,778 8 Offshore Cash $ 1,235,638 Reg S
12/96 Shares (2) Accredited
and Warrants Investors
(On a 1 for 1
basis)
7/96 Common 293,743 2 Offshore Conversion of $ 108,555 Reg S
Stock Accredited Debt to Equity
Investors
(1) 1,250,000 of the debt was converted on May 29, 1997, to 2,300,000 shares
of Common Stock plus 2,300,000 Warrants exercisable at $0.15 per share,
and expiring on May 29, 1999.
(2) Each Warrant provides the right to acquire one share of Common Stock at
$0.15, and has a two year term.
(3) Issued in connection with the exercise of Warrants previously placed
with offshore investors.
</TABLE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
The following exhibits are submitted herewith or incorporated by reference
as indicated:
Exhibit
Number Description
- ------ -----------
3.1* - Articles of Incorporation
3.2* - Bylaws
4.1 - Included in Exhibits 3.1 and 3.2
4.2 - Form of Debenture
5.1** - Opinion Letter from J. Garry McAllister as to legality of shares
being registered.
10.1* - Lease Agreement for plant facilities
10.2* - (a) 1. Employment Agreement with Garvin McMinn
(a) 2. Amendment to Employment Contract with Garvin McMinn
(b) 1. Employment Contract with CFO Janet Maxey
(b) 2. Amendment to Employment Contract with CFO Janet
Maxey
(c) 1. Senior Executive Contract with Vice President
Elwood Trotter
(c) 2. Amendment to Employment Contract with Vice
President Elwood Trotter
10.3* - Form of Option Certificate delivered to certain Key
Employees in connection with the Grant of
Individual Options to said Employees
10.4* - Patent Royalty Agreement between Puff Pac, Ltd.
(the Company's predecessor), and Puff Pac People.
10.5* - 1999 Non-Qualified Key Man Stock Option Plan
16 - Letter re Change in Certifying Accountant
II-5
<PAGE>
22 - Subsidiaries of the Registrant
Name Domicile
Puff Pac Industries (Canada) Inc. (inactive) Canada
23.1 - Report and Consent Independent Auditors - Hein & Associates LLP
23.2 - Consent of Independent Certified Public Accountants - BDO Seidman LLP
23.3** - Consent of J. Garry McAllister (included in Exhibit 5.1)
24.1 - Power of Attorney is contained on Page II- 7 of the Registration
Statement.
- ------------------------------
* Documents previously filed by the Registrant on Amended Form 10, filed July
23, 1999, and incorporated by this reference.
** To be filed by amendment.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933. as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise. the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Act; (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change in such
information in the registration statement;
II-6
<PAGE>
(2) that, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(4) to provide to the Transfer Agent, upon conversion of the Convertible
Notes (Debentures) for common stock as specified in the Convertible Notes,
certificates in such denominations and registered in such names as required by
said Convertible Note so as to allow the Transfer Agent to promptly deliver
said certificates;
(5) that for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this registration statement as of the time it
was declared effective; and.
(6) that for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on Its
behalf by the undersigned, thereunto duly authorized in the City of Valencia,
State of California, on the 12th day of November, 1999.
/s/
__________________________
Donald Ochacher, President
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement hereby
constitutes and appoints Donald Ochacher and Janet Maxey, and each of them, with
full power to act without the other, his true and lawful attorney-in-fact and
agent, with full power of substitution and re-substitution, for him and in his
name, place and stead, in any and all capacities (until revoked in writing) to
sign any and all amendments (including post-effective amendments and amendments
thereto) to this Registration Statement on Form S- I of
II-7
<PAGE>
Air Packaging Technologies, Inc., and to file the same, with all exhibits
thereto and other documents In connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary fully to all Intents and purposes as he might or could
do in person thereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the Following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Donald Ochacher
____________________ President and Director November 12, 1999
Donald Ochacher
/s/ Janet Maxey
____________________ Chief Financial Officer November 12, 1999
Janet Maxey
Wayne Case/s/
____________________ Director November 12, 1999
Wayne Case
II-8
<PAGE>
EXHIBIT 4.2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), IN RELIANCE UPON EXEMPTIONS CONTAINED IN SECTION 4(2) OF THE ACT
AND/OR REGULATIONS D AND/OR S PROMULGATED PURSUANT THERETO, NOR HAS THIS NOTE
BEEN REGISTERED OR QUALIFIED IN ANY STATE IN RELIANCE UPON EXEMPTIONS FROM
REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS. ACCORDINGLY, THIS NOTE MAY
NOT BE RESOLD OR TRANSFERRED BY THE HOLDER UNLESS IT IS SUBSEQUENTLY REGISTERED
UNDER FEDERAL AND APPLICABLE STATE SECURITIES LAWS OR EXEMPTIONS FROM
REGISTRATION AND QUALIFICATION ARE AVAILABLE.
NUMBER AMOUNT
___________ $_____________
AIR PACKAGING TECHNOLOGIES,INC.
7% Secured Convertible Note Due 2003
AIR PACKAGING SYSTEMS, INC., a corporation duly organized and existing
under the laws of the State of Delaware (the "Company"), for value received,
hereby promises to pay to_____________________, or registered assigns, the
principal sum of _________________, Dollars on September 30, 2003, and to pay
interest thereon annually on June 30 (each an "Interest Payment Date") accruing
from and after the date of original issuance of this Note in each year,
commencing on June 30, 2003, at 7% per annum, until the principal hereof is paid
or made available for payment. Interest will be computed on the basis of a 365-
or 366- day year, as the case may be.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in the Indenture, be paid to the person
in whose name this Note is registered at the close of business on the regular
record date, which shall be the June 15 (whether or not a Business Day), as the
case may be, preceding such Interest Payment Date. Any such interest not so
punctually paid or duly provided for, and any interest payable on such defaulted
interest (to the extent lawful), will forthwith cease to be payable to the
Holder on such regular record date and shall be paid to the person in whose name
this Note is registered at the close of business on a special record date for
the payment of such defaulted interest fixed by the Company, notice of which
shall be given to Holders not less than 15 days prior to such special record
date. Payment of the principal of and interest on this Note will be made at the
principal corporate office of the Company and at any other office or agency
maintained by the Company for such purpose, in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that at the option of the
Company payment of interest may be made by check mailed to the address of the
person entitled thereto as such address shall appear in the Note register.
Reference is hereby made to the further provisions of this Note set forth
on the attached pages hereto, which further provisions shall for all purposes
have the same effect as if set forth at this place.
IN WITNESS WHEREOF, AIR PACKAGING TECHNOLOGIES, INC. has caused this
instrument to be executed in its corporate name by the signature of its
President and its Secretary and has caused its corporate seal to be affixed
hereunto or imprinted hereon.
Date of Original Issuance:
Date:
AIR PACKAGING TECHNOLOGIES, INC.
By:
---------------------------------
President
[SEAL]
By:
---------------------------------
Secretary
<PAGE>
ASSIGNMENT FORM
To assign this note, fill in form below:
For Value received, hereby sells, assigns and
------------------------
transfers this note to
- ------------------------------- ------------------------------
Assignee's name Social security or
taxpayer I.D. Number
- ------------------------------- -------------------------------
Assignee's mailing address City, State, Country, Zip
and does hereby irrevocably constitute and appoint
- ---------------------------------------- Attorney to transfer this note of the
books of the registrar with full power of substitution in the premises.
DATED this ,
----------------- ----------
---------------------------------------
Bondholder's Signature
---------------------------------------
Bondholder's Signature
SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THIS NOTE.
CONVERSION NOTICE
The Undersigned does hereby elect to convert this note (if only a partial
conversion state amount here $ ) into Common Stock of Air Packaging
---------
Technologies, Inc. and requests that the certificate(s) issuable upon
conversion be issued in my name or (if filled out) as below:
- ---------------------------------------- --------------------------------
Name Social security or taxpayer
I.D. Number
- ---------------------------------------- --------------------------------
Mailing address City, State, Country, Zip
---------------------------------------
Bondholder's Signature
---------------------------------------
Bondholder's Signature
SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THIS NOTE.
<PAGE>
AIR PACKAGING TECHNOLOGIES, INC.
7% CONVERTIBLE NOTES DUE 2003
ADDITIONAL TERMS AND CONDITIONS
1. GENERAL.
This Note is one of a duly authorized issue of Notes of the Company
designated as its 7% Convertible Notes Due 2003. The terms of the Notes include
those stated below. The Notes are general obligations of the Company limited to
$2,000,000 in aggregate principal amount. The Notes are unsecured but are
senior in rights to all other debentures issued by the Company, whether
presently outstanding or issued in the future.
2. PAYING AGENT, CONVERSION AGENT AND REGISTRAR.
Initially, the Company will act as its own Paying Agent, Conversion Agent
and Registrar. The Company may change any Paying Agent, Conversion Agent,
Registrar or co-registrar without notice.
3. DEFINITIONS.
"ACT" shall mean the Securities Act of 1933, as amended, and the Rules
promulgated thereunder.
"AVERAGE CLOSING PRICE" shall mean the average of the highest closing bid
prices of the Company's common stock for each of the thirty (30) business days,
immediately prior to Payment Date or Record Date, as the case may be, on the OTC
Bulletin Board or such other place that the Company's common stock may be
trading on payment date.
"BUSINESS DAY" shall mean Monday through Friday of each week, excluding any
day that is a legal holiday in the State of California.
"COMMON STOCK" shall mean the Common Stock, $0.001 par value, of the
Company, as designated on the date hereof, or shares of any class or classes of
Capital Stock resulting from reclassification or reclassification thereof.
"COMPANY" shall mean Air Packaging Technologies, Inc., a Delaware
Corporation.
"HOLDER" shall mean the person in whose name the Notes are registered on
the Company's books.
"INTEREST PAYMENT DATE" or "PAYMENT DATE" shall mean June 30 of each year.
"NOTES" shall mean the 7% Convertible Debentures Due 2003.
"SEC" shall mean the United States Securities and Exchange Commission.
4. HOLDER'S OPTION TO TAKE STOCK IN LIEU OF CASH INTEREST PAYMENT
At Holder's option, holder may elect to receive any annual interest payment
in common stock of the Company at a 20% discount to the Average Closing Price,
subject to the following:
(a) Company must receive from holder a written notice of Holder's election
a minimum of fifteen (15) days prior to the Payment Date.
(b) All stock to be issued shall be "restricted" as that term is generally
used under the Act and, as such, shall contain a legend thereon restricting
their sale, transfer, or hypothecation unless an effective registration
statement is in effect or an exemption from registration applies to the specific
instance.
(c) After notice of Holder's election, the Company may elect, within
fifteen (15) days, to register said dividend shares under an appropriate
registration statement to be filed with the SEC. If the Company makes this
election, the interest payment will be payable in common stock of the Company at
the Average Closing Price of the Company's common stock, with no discount
thereon and Company will use its best efforts to register said shares as soon as
practicable after such election.
(d) Notwithstanding anything to the contrary, the minimum price to be used
to compute the number of shares to be issued as an interest payment shall be
$0.15.
5. REGISTRATION RIGHTS.
Company undertakes to use its best efforts to register, for resale, the
Notes and/or the common stock issuable upon conversion of the notes, with the
SEC on an applicable registration form and to maintain said registration until
six (6) months after conversion of all of the debentures, expiration of the
conversion rights, or until the Company shall have received an opinion of
Counsel that the shares of the Common Stock issued or issuable upon conversion
of the Notes may be resold by the Holders thereof without an effective
registration statement under the Act pursuant to Rule 144 (k).
6. OPTIONAL CONVERSION.
Subject to the provisions contained herein, a Holder of a Note is entitled,
at his option, at any time on or before the close of business on September 30,
2003, to convert the principal amount of such Note or any portion of the
principal amount thereof which is $1,000 or an integral multiple of $1,000, into
shares of Common Stock of the Company at a Conversion Price as provided below
(or at the current adjusted Conversion Price if an adjustment has been made as
provided in Section 10 below "Adjustments to Conversion Price). No fractions of
shares or scrip representing fractions of shares will be issued on conversion of
a Note, but an adjustment in cash will be made for any fractional interest as
provided in the Indenture.
(a) The Conversion price shall be $0.15 per share through and including
September 30, 2001.
(b) The Conversion price shall be $0.25 per share from October 1, 2001 through
and including September 30, 2003.
(c) The minimum amount of debentures that may be converted by any holder at any
one time shall be $100,000 and must be in integral multiples of $1,000.
(d) To convert a Note, a Holder must (i) complete and sign the conversion
notice attached to the Note, (ii) surrender the Note with the conversion notice
to the Conversion Agent, (iii) furnish appropriate endorsements and transfer
documents if required by the Registrar or Conversion Agent, and (iv) pay any
transfer or similar tax, if required.
7. DENOMINATIONS, PAYMENT, TRANSFER, EXCHANGE.
The Notes are in registered form without coupons in denominations of $1,000
and integral multiples thereof. A Holder may transfer Notes in accordance with
the reasonable rules set forth by the Registrar. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law. The Registrar need not
transfer any Note until it has received an opinion of Counsel that the transfer
may be made pursuant to any effective registration or pursuant to an exemption
from registration. Holders must surrender Notes to a Paying Agent to receive
principal payments thereof.
8. PERSONS DEEMED OWNERS.
Prior to due presentment of this Note for registration of a transfer, the
Company, the Trustee and any agent of either may treat the registered Holder of
this Note as the owner of it for all purposes.
9. DEFAULTS AND RIGHTS TO PAYMENT.
Event of Default. An "Event of Default" with respect to any Security occurs
if:
(a) The Company defaults in the payment of interest on any Security when
the same becomes due and payable and the default continues for a period of 30
days; or
(b) The Company defaults in the payment of Principal of any Security when the
same becomes due and payable at maturity or otherwise; or
(c) The Company fails to comply with any other material agreement set forth in
the Securities and the default continues for a period of 30 days after notice of
such default is delivered to the Company by the Holder; provided,. however, that
if the default is such that it cannot, in the exercise of reasonable diligence
be corrected within such period, it shall not constitute an Event of Default
hereunder if corrective action is instituted promptly by the Company within said
period and is diligently pursued until the default is corrected; or
(d) A court of competent jurisdiction enters a judgment, decree or order for
relief in respect of the Company or any Subsidiary in an involuntary case or
proceeding under any Bankruptcy Law which shall (A) approve as properly filed a
petition seeking reorganization, arrangement, adjustment or .composition in
respect of the Company, (B) appoint a Custodian of the Company for all or
substantially all of the property of the Company; or (C) provide for the
winding-up or liquidation of the affairs of the Company; and such judgment,
decree or order shall remain unstayed and in effect for a period of 90
consecutive days; or any bankruptcy or insolvency petition or application is
filed, or any bankruptcy or insolvency proceeding is commenced against the
Company and such petition, application or proceeding is not dismissed within 90
days; or any warrant of attachment is issued against any substantial portion of
the property of the Company which is not released, bonded or stayed within 90
days of service;
(e) The Company shall (A) commence a voluntary case or proceeding under any
Bankruptcy Law, (B) consent to the entry of a judgment, decree or order for
relief in an involuntary case or proceeding under any Bankruptcy Law, (C)
consent to the institution of bankruptcy or insolvency proceedings against it,
or (D) apply for, consent to, or acquiesce in the appointment of or taking
possession by a Custodian of the Company or for any substantial part of the
property of the Company.
The term "Bankruptcy Law" means Title 11, U.S. Code, or any similar Federal
or state law for the relief of debtors. The term "Custodian" means any
custodian, receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
Acceleration. If an Event of Default (other than an Event of Default
specified in clauses (d) and (e) of Section 9) occurs and is continuing, the
Holder by notice to the Company, may declare the Principal of and accrued
interest on all the Securities to be due and payable. Upon any such declaration
such Principal and interest shall be due and payable immediately. If an Event
of Default specified in clause (4) or (5) of Section occurs, such amount shall
de facto become and be immediately due and payable without any declaration.
Rights of Holders to Receive Payment. Notwithstanding any other provision
of this debenture, the right of any Holder of a Security to receive payment of
Principal of or interest on the Security on or after the respective dates
expressed in the Security or after acceleration provided for herein or to bring
suit for the enforcement of any such payment on or after such respective dates,
or for the right to convert the Security, shall not be impaired or affected
without the consent of the Holder.
10. ADJUSTMENT OF CONVERSION PRICE
Adjustment of Conversion Price. The Conversion Price shall be subject to
adjustment from time to Time as follows:
(a) In case the Company shall (i) declare a dividend or make a distribution on
the outstanding shares of its Common Stock, (ii) subdivide or reclassify the
outstanding shares of its Common Stock into a greater number of shares, or (iii)
combine or reclassify the outstanding shares of its Common Stock into a smaller
number of shares, then the Conversion Price in effect at the time of,
respectively, the record date for such dividend or distribution or the effective
date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the Holder of any Security surrendered for
conversion after such time shall be entitled to receive the number of shares of
Common Stock which he would have owned or been entitled to receive had such
Security been converted immediately prior to such time. Any shares of Common
Stock issuable in payment of a dividend shall be deemed to have been issued
immediately prior to the time of the record date for such dividend for purposes
of calculating the number of outstanding shares of Common Stock under
subsections (b) and (c) below. Such adjustments shall be made successively
whenever any event specified above shall occur. In the event that any such
dividend, subdivision, reclassification or combination causing any such
adjustment does not thereafter occur, then the adjusted Conversion Price then in
effect shall be readjusted, effective as of the date when the Board of
Directors determines not to effect such dividend, subdivision, reclassification
or combination, to the Conversion Price which would then be in effect if such
record date or effective date had not been
(b) In case the Company shall fix a record date for the issuance of rights or
warrants to all holders of its Common Stock without any charge to such holders
entitling them (for a period expiring within 45 days after the record date
mentioned above) to subscribe for or purchase shares of its Common Stock (or
securities convertible into shares of its Common Stock) at a price per share (or
having an initial conversion price per share) less than the Current Market Price
(as defined) of the Common Stock on such record date, the Conversion Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Conversion Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares of Common Stock which
the aggregate offering price of the number of shares of such Common Stock so
offered for subscription or purchase (or the aggregate initial conversion price
of the convertible securities so offered) would purchase at the Current Market
Price per share, and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock so offered for subscription or purchase (or into which
the convertible securities so offered are initially convertible) . Shares of
Common Stock owned by or held for the Company shall not be deemed outstanding
for the purpose of any computation. Such adjustment shall be made successively
whenever such a record date is fixed. In the event that any such rights or
warrants (or convertible securities), as the case may be, to the Conversion
Price which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of shares of its Common Stock (i) of shares of any
class other than its Common Stock or (ii) of evidences of indebtedness of the
Company or any Subsidiary or (iii) of assets (excluding cash dividends or
distributions referred to in subsection (a) above) or (iv) of rights or warrants
(excluding those referred to in subsection (b) above), in each such case the
Conversion Price shall be adjusted immediately thereafter so that it shall equal
the price determined by multiplying the Conversion Price in effect immediately
prior thereto by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding on such record date multiplied by the Current
Market Price per share on such record date, less the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive,
and described in a Board Resolution filed with the Trustee) of said shares or
evidences of indebtedness or assets or rights or warrants so distributed, and of
which the denominator shall be the number of shares of Common Stock outstanding
on such record date multiplied by such Current Market Price per share. Such
adjustment shall be made successively whenever such a record date is fixed. In
the event that any such distribution is thereafter no so made, then the adjusted
Conversion Price then in effect shall be readjusted, effective as of the date
when the Board of Directors determines not to distribute such shares, evidences
of indebtedness, assets, rights or warrants, as the case may be, to the
Conversion Price which would then be in effect if such record date had not been
fixed.
(d) For the purpose of any computation under subsections (b) and (c) above, the
"Current Market Price" per share at any date shall be deemed to be the Average
Closing Price of the Company's common stock.
(e) In any case in which this Article X shall require that an adjustment shall
become effective immediately after a record date for an event, the Company may
defer until the occurrence of such event (i) issuing to the Holder of any
Security converted after such record date and before the occurrence of such
event the additional shares of Common Stock issuable upon such conversion by
reason of the adjustment required by such event over and above the shares of
Common Stock issuable upon such conversion before giving effect to such
adjustment and (ii) paying to such Holder any amount in cash in lieu of a
fractional share of Common Stock pursuant to Section 10.6; provided, however,
that the Company shall deliver to such Holder a due bill or other appropriate
instrument evidencing such Holder's rights to receive such additional shares of
Common Stock, and such cash, upon the occurrence of the event requiring such
adjustment.
(f) No adjustment in the Conversion Price shall be required with respect to
shares of Common Stock issued upon conversion of the Securities unless such
adjustment would require an increase or decrease in the amount equal to at least
one percent of such price; provided, however, that any such adjustment which is
not required to be made shall be carried forward and taken into account in any
subsequent adjustment made not later than three years after the happening of the
specified event or events.
(g) The Company from time to time may reduce the Conversion Price by any amount
for any period of time if the reduction is irrevocable during the period.
<PAGE>
(h) All calculations under this Article X shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be.
Whenever the Conversion Price is reduced, the Company shall mail to Holders
of the Securities a notice of the reduction. The Company shall mail the notice
at least 15 days before the date the reduced Conversion Price takes effect. The
notice shall state the reduced Conversion Price and the period for which it will
be in effect.
A reduction of the Conversion Price does not change or adjust the
Conversion Price otherwise in effect for purposes of this Section.
11. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER, SALE, LEASE OR
CONVEYANCE.
(a) In case of any consolidation with or merger of the Company into another
corporation (other than a merger or consolidation in which the Company is the
continuing corporation), or in case of any sale, lease or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, such successor, leasing or purchasing corporation, as the case may be,
shall execute a supplemental debenture providing that the Holder of each
Security then outstanding shall have the right thereafter to convert such
Security solely into the kind and amount of shares of stock, other securities,
property or cash or any combination thereof receivable -upon such consolidation,
merger, sale, lease or conveyance by a holder of the number of shares of Common
Stock into which such Security might have been converted immediately prior to
such consolidation, merger, sale, lease or conveyance.
(b) In case of any reclassification or change of the shares of Common Stock
issuable upon conversion of the Securities (other than a change in par value, or
from par value to no par value, or as a result of a subdivision or combination,
but including any change in the shares of Common Stock into two or more classes
or series of shares) or in the case of any consolidation or merger of another
corporation into the Company in which the Company is the continuing corporation
and in which there is a reclassification or change (including a change in the
right to receive cash or other property) of the shares of Common Stock (other
than a change in par value, or from par value to no par value, or as a result of
a subdivision or combination, but including any change in the shares of Common
Stock into two or more classes or series of shares), or any reorganization
within the meaning of Section 368 (a) (1) (B) of the Internal Revenue Code of
1986, as amended, the Company and the person obligated to deliver stock, other
securities, property or cash (or any combination thereof) upon the effectiveness
of such reorganization and the issuer of any stock or other securities so to be
delivered, if a different person, shall execute a supplemental debenture
providing that the Holder of each Security then outstanding shall have the right
thereafter to convert such Security solely into the kind and amount of shares of
stock, other securities, property or cash or any combination thereof receivable
upon such classification, change, consolidation or merger by a holder of the
number of shares of Common Stock into which such Security might have been
converted immediately prior to such reclassification, change, consolidation or
merger.
(c) Any supplemental debenture entered into pursuant to this Section shall (i)
where appropriate, state the Conversion Price in terms of one full share of
Common Stock or one full share of the Common Stock of any successor, leasing,
purchasing or affiliate corporation (as the case may be) and (ii) provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article. The Company shall cause notice of the
execution of each such supplemental debenture to be mailed to each Holder of
Securities at his address as the same appears in the Security register.
12. AMENDMENT, SUPPLEMENT, WAIVER.
Subject to certain exceptions contained herein, the Notes may not be
amended or supplemented without unanimous consent of the Holders of the Notes
then outstanding. Any such consent by the Holder of this Note shall be
conclusive and binding upon such Holder and upon all future Holders of this Note
and of any Note issued upon the registration of transfer hereof or in exchange
hereof or in lieu hereof, whether or not notation of such consent or waiver is
made upon this Note. Without the consent of any holder of a Note, the Company
may amend or supplement the Indenture or the Notes to cure any ambiguity, defect
or inconsistency or to provide for uncertificated Notes in addition to or in
place of certified Notes or to make any change that does not materially
adversely affect the rights of any Holder of a Note
<PAGE>
13. SENIOR NOTES.
The 7% Convertible Debentures Due 2003 shall be senior in all rights,
including but not limited to payment of principal and interest, to all other
debentures whether outstanding as of this date or issued in the future. This
senior right shall only apply to debentures issued by the Company and shall not
apply to secured debt nor general unsecured debt of the Company such as accounts
payable, bank lines of credit, or credit card debt.
14. ABBREVIATIONS.
Customary abbreviations may be used in the name of a Holder of a Note or an
assignee, such as TEN COM (=tenants in common) TENANT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=Custodian) and U/G/M/A (=Uniform Gifts to Minors
Act).
EXHIBIT 16
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 29549
Dear Sirs:
We have read the Section entitled "Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure" in the Prospectus of the Air Packaging
Technologies, Inc. Form S-1 dated November 12, 1999 and are in agreement with
the statements contained therein as they relate to us.
Very Truly Yours
/s/ Hein + Associates LLP
Hein + Associates LLP
Certified Public Accountants
Orange, California
November 12, 1999
EXHIBIT 23.1
REPORT AND CONSENT INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Air Packaging Technologies, Inc.
Valencia, CA
The audits referred to in our report dated March 30, 1998, included the related
financial statement schedules as of December 31, 1997, and for each of the years
in the two year period ended December 31, 1997 included in the registration
statement. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our report included herein and to reference to our firm
under the heading "Experts" in the prospectus.
/s/ Hein + Associates LLP
Hein + Associates LLP
Certified Public Accountants
Orange, California
November 11, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Air Packaging Technologies, Inc.
Valencia, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 12, 1999 relating to the
consolidated financial statements of Air Packaging Technologies, Inc., which is
contained in that Prospectus. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Los Angeles, California
November 11, 1999
