AIRP
----
Annual Report 1999
<PAGE>
AIRP
----
Air Packaging Technologies
Incorporated
The Company
A leading proactive developer and manufacturer of inflatable packaging, Air
Packaging Technologies Inc. has positioned itself in the global marketplace by
marketing its range of patented, environmentally sound and award-winning
solutions for the safe transportation, shipping, protection, storage and
promotional display of products.
Headquartered in Valencia, California, USA, the Company has established its
presence in international markets through its sales offices in the UK, Europe,
and Singapore, Asia.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Headquarters in California, USA... ...Presence in Cyberspace: www.airbox.com
Mission Statement
The goal of Air Packaging Technologies Inc. is to be the clear international
leader in specialized, inflatable packaging for both the high value and
lower-priced markets.
Public Listing
Air Packaging Technologies Inc. is a publicly-listed entity on the NASD OTC
Bulletin Board, USA, and its shares are traded under the stock symbol AIRP.
1
<PAGE>
Chairman's Statement
1999: Developing 21st Century Alternatives to Conventional Packaging Materials
Upon my confirmation as President and CEO of the Company in June 1999, I met
immediately with my management team and fellow members of the Board of Directors
to determine how best to maximize the Company's sales opportunities and the
commercial exploitation of its products.
While the Company's Air Box (TM) and SDS Air Box (TM) protective packaging
solutions have been accepted as reliable, economically competitive and
environmentally-sound packaging alternatives in a number of high-tech markets
such as the electronics industry, and we continue to make progress in the
packaging of such items as silicon wafers, the Company's management determined
that the maximization of sales and profitability, and the enhancement of
shareholder value, required a broader sales perspective.
Consequently, we are now pursuing an aggressive four-pronged strategy which we
are confident will permit Air Packaging Technologies to realize its full
economic potential. This strategy includes:
o seeking additional penetration in the protective packaging market
for the Air Box and SDS Air Box. In addition to our continuing
efforts in the semiconductor, medical and dental markets, we are
constantly seeking new high-end packaging applications for which
the Air Box is suitable
o aggressively targeting the promotional packaging market. Unlike
the protective packaging market in which the exclusive function of
our product is to protect its contents, in the promotional market
we are seeking to take advantage of the unique appearance and
transparency of the Air Box which we believe draws attention to,
and enhances, the appearance of the customer's product inside
o focusing on the lower priced, higher volume packaging market with
new products like the Suspend-A-Pak(TM) packaging system which,
because of its reduced material costs, can compete effectively
against lower priced traditional packaging materials
o developing entirely new products using both our own and related
technologies which can be efficiently manufactured on our existing
equipment
While we continued throughout 1999 to seek new sales opportunities in our
traditional protective packaging markets, we have devoted much of our time and
energies to expanding into those new markets which we believe are the keys to
our long-term profitability. We are pleased to report that those efforts have
begun to bear fruit during our current fiscal year.
The sale of $1.5 million in convertible debentures during 1999 and their
subsequent conversion, coupled with the Company's new investment banking
agreement with Givigest Fiduciaria SA will, in Management's opinion, allow the
Company to exploit the new sales opportunities which we are pursuing.
We believe that during 1999 we have provided the foundation for Air Packaging
Technologies' long-term profitability and are optimistic that the year 2000 will
mark the turning point in the Company's fortunes.
Sincerely yours,
/s/ Donald M. Ochacher
Donald M. Ochacher
President and CEO
2
<PAGE>
Company Profile
Air Packaging Technologies Inc. is an award-winning developer and manufacturer
of inflatable protective and promotional packaging. Its Air Box is proven to
safeguard expensive and fragile industrial products in the semiconductor,
medical and dental industries, amongst others. The Company has recently
broadened its sales approach by adapting its products as promotional packaging
for use in the business premium and in-store display markets to take advantage
of the products' unique, attention-grabbing appearance and has developed a
series of new products utilizing the Company's patented technology.
Markets
Protective Packaging Market
This has been Air Packaging Technologies' traditional market and one in which
the Company focused on packaging opportunities for high value products in the
semiconductor, medical and dental industries. While progress continues to be
made in these target areas and the Company remains confident that it can
generate substantial new business, growth has not been as rapid as originally
envisaged. During 1999, Management became convinced that emphasis solely on the
packaging of such high-end products would unduly restrict sales growth and, so,
the Company has worked to develop packaging with a broader market appeal.
Management believes that the Company's new Suspend-A-Pak packaging system, which
has excellent protective qualities and utilizes substantially less material than
our conventional Air Box and thus can be priced far more competitively, has the
potential for wide acceptance from a variety of high volume products. We believe
that Suspend-A-Pak is ideal packaging for such products as laptop computers and
similar electronic devices and we intend in the current fiscal year to target
sales opportunities in these areas.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
WOW!:pack, protect AND promote! Suspend-A-Pak: competitively priced protection
The Promotional Packaging Market and `The WOW Factor'
While the Air Box was originally created as a safe, efficient means of packaging
high-value, fragile goods, the Company has always believed that its product has
great visual appeal in its ability to draw attention to the product inside, and
thus give that product a value-added look. When people first see an Air Box,
their immediate reaction invariably is to say some variation of "Wow, isn't that
amazing!" This is what the Company terms `The Wow Factor.'
3
<PAGE>
While the Air Box had from time to time been used for promotional packaging in
addition to its primary protective function, during 1999 Management determined
to begin to capitalizing on `The Wow Factor' and to develop the promotional
packaging market as a major source of long-term business growth. The Company is
very pleased with the early success which the Air Box has had in both the
promotional packaging and in-store display markets. For the 1999 holiday season,
Nordstrom's Department Store (USA) ran a highly successful promotion in its
Brass Plum Junior Division utilizing a highly stylized and brightly colored Air
Box for both in-store display and as a gift box. Gymboree Stores (USA), a
children's clothing retailer, used the Air Box to display new products
throughout its 600-store chain and Redken Labs, the internationally established
hair care company, introduced a new line of hair spray to its 35,000 beauty
salon customers using the Air Box. These are but a few examples and the Company
is hopeful that `The Wow Factor' will continue to catch fire and have a major
impact on sales volume and profitability.
Marketing Strategy
Strategic Partnerships
The packaging market is simply too vast for a company of Air Packaging
Technologies' size to address it adequately with its own in-house sales force.
Consequently, we are actively seeking strategic partners who can effectively
penetrate those markets for which the Company's products are suitable.
Management continues to hold on-going discussions with major packaging
distributors and similar companies to encourage such enterprises to offer the
Company's products on an exclusive or non-exclusive basis. One of the major
goals for the current fiscal year is to enter into several strategic agreements
pursuant to which our products can obtain the type of exposure and sales efforts
that will maximize revenue growth.
Product Growth Strategies
The Company believes that its future success lies in a dual emphasis on the
protective and promotional packaging markets. In addition, efforts continue in
seeking new ways in which its patented technology and equipment can be utilized.
One of the most innovative new products which the Company has helped develop is
the PneuSplint(TM), an inflatable splint for use in the immobilization of
injured limbs and which would replace conventional corrugated wrap-around
splints. As exclusive manufacturer of this product, the Company is hopeful that
the PneuSplint will be a major contributor to sales in the current fiscal year,
and in years to come.
Management also believes that there is a major opportunity for the Company's
products in the explosive e-commerce market and, in seeking ways to take
advantage of this exciting platform, it has identified two distinct markets: the
mass market for packaging items sold by businesses over the Internet and the
packaging of specific fragile items sold by individuals. The Company also seeks
to establish strategic partnerships in pursuing both of these e-commerce sales
opportunities.
Research and Development
Patented Innovation and Design
Innovation
As technology advances, packaging must rapidly evolve to keep pace. The
Company's packaging development staff excels in rapidly creating, designing and
testing custom packages to meet diverse customer packaging requirements. The new
Suspend-A-Pak packaging system is a perfect example of how quickly the Company
can create an entirely new packaging system to meet a customer's unique needs
and specifications.
4
<PAGE>
Products
The development and re-design of packaging is an on-going process within the
Company as it strives to take advantage of the natural cushioning properties of
packaging using the patented Air Box technology and to expand the Company's
sales opportunities. Recent examples of new and improved product development
include the Suspend-A-Pak packaging system, the development of a more
puncture-resistant inner liner for the Air Box which will allow a wider variety
of products to be safely packaged in an Air Box, the ability to manufacture an
Air Box in a variety of shapes and continuing efforts to improve the clarity and
transparency of the outer liner for improved product appearance and visibility.
In addition, Air Packaging Technologies works with other companies to develop
new products which can be manufactured on the Company's equipment, the most
recent example being its development of prototypes of a new form of medical
splint called the PneuSplint which is scheduled for launch in the current fiscal
year.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Suspend-A-Pack: quality innovation and design Air Box: patented protection
Patents
The Company owns U.S. product patents and 15 foreign patents as well as a number
of U.S. and foreign patents pending, including the Company's new Suspend-A-Pak
system. It is the policy of the Company to seek patent protection in all cases
in which it is deemed appropriate.
Packaging Industry Recognition: International Awards
The Company's skill in the development of innovative packaging products was
again rewarded in 1999 with a series of prestigious national and international
packaging awards. The Company received two `Best Of' category awards in the
Ameristar World Packaging competition; one in the Electronic Packaging category
for its photomask Air Box, and the second in the Medical Device category for its
dental shipper. Both packages received similar awards from the Flexible
Packaging Association. These awards demonstrate the growing acceptance which the
Company's products are finding in the marketplace and that the concept of
packaging in air has come of age.
Engineering and Quality Control (ISTA logo, Al?)
Air Packaging Technologies has a state-of-the-art laboratory facility with the
ability to perform all required testing of new products and raw materials
necessary to ensure products of the highest quality and to respond quickly to a
customer's packaging requirements..
5
<PAGE>
The product development section of the laboratory is fully equipped for package
testing and is certified to perform International Safe Transit Association
(ISTA) testing procedures and certify compliance with ISTA specifications. In
addition, the laboratory has the capacity to perform all necessary altitude and
environmental tests as part of the product development process.
The keys to providing product excellence are sound manufacturing practices and a
suitable quality control system. The Company has a complete traceability system
in place which identifies and documents the raw materials used in all finished
product. Laboratory tests are carried out on all raw materials before use,
ensuring that products are made to exacting standards. Finished products are
tested at regular intervals during the production process. In addition, each AIR
BOX is inspected during the manufacturing process.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Ameristar Awards: industry recognition Worldstar Awards: industry recognition
Inventory Control
The Company has in place a system to track raw materials and finished goods
throughout the manufacturing process. This system carefully monitors existing
inventories and allows proactive material ordering and manufacturing to
efficiently respond to sales increases.
Environmental Awareness & Responsibility
The Air Box is designed to be either reusable or single-use packaging. In its
reusable form, its environmental advantages are overwhelming. Even as single-use
packaging, the Air Box accounts for substantially less waste than competitive
materials. Moreover, the manufacture of the Air Box requires substantially fewer
natural resources than other forms of protective packaging and the Company's
ability to manufacture the Air Box totally from polyethylene could be of great
value in Europe since the Air Box, when manufactured in this manner, is entirely
recyclable. We believe that, particularly in European and Asian markets, the
environmental advantages of our products will act a stimulus to sales.
6
<PAGE>
Sales and Marketing
Air Packaging Technologies has an ongoing market research program to identify
products for which the Air Box is appropriate packaging. This effort includes
participation in specific industry and general packaging trade shows. Target
markets are those currently utilizing polyurethane foam materials for damage
protection during shipment. The Air Box is designed to provide lower g-forces
with a less bulky package than polyurethane foams provide, potentially offering
the customer savings in both packaging and shipment costs. The development of
the Company's Suspend-A-Pak system, with its markedly lower material costs, has
enabled Management to explore opportunities in the lower-end packaging market as
a substitute for Styrofoam and bubble-wrap packaging.
Management believes that the global market potential for products created by its
patented technology is enormous. The Air Box is an ideal packaging solution in
virtually any industry producing costly, fragile items. In addition, growing
environmental sensitivity around the world should also contribute to sales
growth as governments mandate reduced packaging waste, recyclability and
reusability.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Dental and medical protection... ...and hair care promotions
The Company is now pursuing an aggressive four-pronged strategy to maximize
commercial exploitation of its products by:
o continually seeking additional penetration for its Air Box in the
semiconductor, medical and dental markets, as well as other high-end
packaging applications for which its products are suitable
o targeting the promotional packaging market in which the unique
appearance and transparency of its products attracts attention to, and
enhances, the appearance of the customer's product inside
o focusing on the lower-priced, high-volume market with new products like
its Suspend-A-Pak packaging system which, because of its lower material
cost, can compete effectively against traditional packaging
o developing new products, such as its PneuSplint, which have high-volume
potential and can be easily manufactured on existing equipment
The Company believes that this four-pronged strategy will maximize its sales
volumes and profitability.
7
<PAGE>
Key Personnel: Officers, Directors and Management
Air Packaging Technologies' management team and business, financial and
engineering experts are proactive problem solvers with decades of experience
providing innovative and effective solutions in the packaging industry.
Donald M. Ochacher, President, Chairman and Chief Executive Officer
Holding his current positions with the Company since June 1999, Mr. Ochacher has
been a member of the New York bar since 1960, having graduated from Cornell
University and the New York University School of Law. Specializing in corporate
and tax law, he was engaged in private practice until 1973, when he became
General Counsel and Chief Financial and Administrative Officer of the Newark
Group Ltd., a large privately-owned paper company which grew from $10 million to
$350 million. Since 1985, Mr. Ochacher 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 August 1997 to August 1998, he was Chief
Financial Officer of Electric Entertainment Corp.
Janet Maxey, Chief Financial Officer
An employee of the Company since May 1991, Ms. Maxey became Chief Financial
Officer of Air Packaging Technologies Inc. in July 1997. A graduate of
California State University, Northridge, where she earned a Bachelor of Science
Degree in Business Administration, she is also a licensed Certified Public
Accountant (CPA) since September 1990 and prior to joining the Company was
Senior Auditor with BDO Seidman, LLP, Accountants and Consultants.
Elwood C. Trotter, Vice President of Sales
Mr. Trotter has been an employee of the Company since April 1989 and became Vice
President, Special Projects in February 1996. Before joining the Company, Mr.
Trotter was Senior Operations Manager of Shoppers Drug Mart, one of the largest
drug chains in Canada, and a partner/owner of a local drug store chain of six
retail outlets whose business grew from $250,000 to $15 million in 10 years. Mr.
Trotter attended Simon Frazer University in British Columbia, Canada.
Garry Newman - Vice President of Manufacturing and Engineering
Prior to taking up his current position in June 1997, Mr. Newman was
Engineering & Quality Assurance Manager for Richmond Technology from October
1994. Attending University of California, Davis, he earned a Bachelor of Science
Degree in Chemical Engineering and is a member of the Society for Plastic
Engineers, the American Institute of Chemical Engineers, the International Safe
Transit Association, the Technology Association for the Paper and Pulp
Industries and the State Board of Registration for Professional Engineers.
Carl Stadelhofer - Director
Attorney with Rinderknecht Klein & Stadelhofer in Switzerland since July 1990,
Mr. Stadelhofer is a French and Swiss citizen who attended the following
educational establishments: Zurich and Berne University Law Schools; the Harvard
Law School, Massachusetts; and Georgetown University, Washington, D.C. Mr.
Stadelhofer specializes in banking and financing, mergers and acquisitions,
investment funds, international securities transactions and international legal
assistance.
8
<PAGE>
Wayne Case - Director
A Director of the Company since November 1998, Mr. Case is President and
Chairman of the Board of Schmitt Industries Inc., a publicly-listed company on
the Nasdaq Small Cap Market and headquartered in Portland Oregon. Mr. Case
possesses over 30 years of manufacturing and marketing experience and assists
the Company with manufacturing and marketing issues.
Marco Calmes - Director
Since March 2000, Mr. Calmes has been co-ordinator of portfolio management at
SCF Societa di Consulenza Finanziaria SA, Switzerland. From 1990 until 2000 he
had been employed by Banca Adamas Lugano as a portfolio manager and responsible
for the development of institutional clients. He has been in the banking
business in Switzerland since 1978. In 1968 he received a Bachelors degree. In
1969 he received a Masters in Business Administration from Michigan State
University.
Market Price and Dividends on Registrant's Common Stock Equity and Related
Stockholder Matters
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 $0.14 US.
The Company's Common Stock trades on the NASD Bulletin Board, under the symbol
"AIRP". The closing sales price on December 31, 1999 was $0.08 at a pre-reverse
stock split price.
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 at prices prior to the January, 2000 1 for 10 reverse stock split.
The quotations below reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. 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.
High Low
Period Bid Bid
---------------- ------ -----
4th Quarter 1999 $0.12 $0.10
3rd Quarter 1999 0.17 0.17
2nd Quarter 1999 0.17 0.17
1st Quarter 1999 0.26 0.17
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
At May 30, 2000 the Company had approximately 557 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.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1. Results of Operations
General Marketing Efforts
In 1999, the Company achieved sales of $959,712, which was a 33% increase over
its 1998 total sales of $722,268.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales for the year ended December 31, 1999 were $959,712 compared to $722,268
for the fiscal year ended December 31, 1998. This represents an increase of
$237,444 or 33% during fiscal 1999. The net increase is due to the increase in
sales of the Company's Dental Air Box and the overall increase in sales of the
SDS Air Box as a result of repeat orders and further expansion of its customer
ase.
Cost of sales for the year ended December 31, 1999 was $1,012,083 or 105% of
sales compared to $566,837 or 78% of sales for the year ended December 31, 1998.
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 operated at a deficit. The increase also is due to the
related increase in sales of the SDS Air Box product line, which is sold with a
higher standard cost of sales than the Company's Air Box product line. The
Company also had an increase in labor and overheads in the manufacturing process
which resulted in additional period costs during fiscal 1999 from the comparable
period of the preceding year.
Selling, general and administrative expenses decreased by $170,804 or 9% during
fiscal 1999 as compared to fiscal 1998. The decrease is due to decreases in
salaries, consulting fees, travel expenses, legal expenses and a reserve for a
potential liability partially offset by increases in sales and marketing,
general office expenses, casual labor and accounting fees.
The net decrease in salaries of $83,856 is partially due to the decrease in the
salary level of the president of the Company as a result of the change in
presidents which occurred in June 1999. The decrease is also attributable to a
salary adjustment recorded during fiscal 1998 of $81,000 for a former president
for which a similar type of adjustment was not recorded during fiscal 1999. The
decrease in consulting fees of $118,086 during fiscal 1999 is due to the
decrease in stock based consulting expense recorded which is partially offset by
an increase in consulting fees paid to a former president. The decrease in
travel expenses of $35,680 is primarily due to the change in presidents in June
1999. The decrease in legal expenses of $39,956 is due to a reduction in the use
of services by two of the Company's attorneys partially offset by an increase in
legal fees regarding a claim by a former employee.
The decrease in selling, general and administrative expenses includes a reserve
recorded during fiscal 1998 for a claim by a former employee of $101,500 for
alleged breach of an employment contract. The net decreases in selling, general
and administrative expenses during fiscal 1999 are partially offset by increases
in four categories. The net increase in sales and marketing expenses of $41,572
is primarily due to increases in trade show fees and related show expenses and
travel and is partially offset by a decrease in public relations as the Company
did not utilize a public relations company during 1999. The increase in general
office expenses is due to a general increase in business. The increase in casual
labor of $39,162 is primarily due to the Company's increase in utilizing
employees from temporary agencies for staffing needs for the engineering and
quality control departments during 1999. The increase in accounting fees of
$41,337 is primarily due to the initial Form 10 filing with the Securities and
Exchange Commission during fiscal 1999 and the subsequent quarterly filings.
10
<PAGE>
Research and development expenses decreased by $1,952 or 26% during fiscal 1999.
Interest and other income were $32,350 for fiscal 1999 as compared to $5,676 for
fiscal 1998. The increase of 470% in fiscal 1999 is due primarily to the
increase in cash placed in an interest earning account.
Interest expense decreased by $123,026 for fiscal 1999 as compared to fiscal
1998 as the Company recorded interest expense of $126,073 due to the revaluation
of its warrants in November 1998. This transaction was not repeated during
fiscal 1999.
The Company did not have an Extraordinary Item during fiscal 1999. 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 during fiscal 1998. This was not
repeated during fiscal 1999.
The Company is currently in a loss carryforward position. The net operating loss
carryforwards balance as of December 31, 1999 was approximately $18,200,000
compared to $16,400,000 as of December 31, 1998. The net operating loss
carryforward is available to offset future taxable income through 2019. 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.
As of December 31, 1999, the Company had a deferred tax asset of approximately
$7,400,000 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 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 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, 997, 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 expense 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.
11
<PAGE>
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 expenses 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.
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 carryforward position. The net operating loss
carryforwards 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
carryforward is available to offset future taxable income through 2018. 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.
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.
2. Liquidity and Capital Resources
The Company's primary need for capital has been to purchase raw materials,
upgrade machinery and continue to develop and enhance patents and trademarks.
12
<PAGE>
As of December 31, 1999, the Company's working capital was $1,416,212 compared
to $430,546 as of December 31, 1998. The increase is primarily due to the cash
infusion of $1,328,598 which resulted from the exercise of 895,000 warrants
during fiscal 1999 and the cash infusion of $1,500,000 from the Convertible
Debenture during the last half of fiscal 1999.
The net receivables at December 31, 1999 were $57,603 compared to $96,852 at
December 31, 1998.
Net inventory at December 31, 1999 was $577,389 compared to $408,643 at December
31, 1998. The net increase of $168,746 is due to the increase in raw materials
purchased for upcoming orders and anticipation of any Year 2000 issues and an
increase in finished goods manufactured for upcoming orders.
Advances and prepaids at December 31, 1999 and December 31, 1998 were $41,895
and $75,134, respectively. The decrease is due to a prepayment made in 1998 for
materials of $57,892, which was received in 1999. The prepayment is partially
offset by normal recurring advance and prepaid transactions for a net decrease
of $31,632.
The Company recognized a negative gross profit of 5% during 1999 compared to
gross profit of 22% during 1998. The decrease during fiscal 1999 is due to the
increase in labor and overhead in the manufacturing process which resulted in
additional period costs, and therefore decreased gross margin, during the year
ended December 31, 1999 from the comparable period of the preceding year. The
decrease during 1999 is also attributable to the increased in sales of the SDS
Air Box product line 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 a low margins until sales increases
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 and urgent need for an 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 and fourth quarters of
fiscal 1999 of $1,500,000 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 $1,465,588 from operating activities for the
1999 fiscal year compared to cash outflows of $1,635,054 for the 1998 fiscal
year. The change in net outflows of $169,466 from operating activities between
1999 and 1998 primarily resulted from the following items. There was a decrease
in trade receivables of $84,035, a decrease in inventory of $113,565, a decrease
in advances and prepaids of $103,711 and a decrease in other liabilities of
$39,500. The total decreases were partially offset by the increase in accounts
payable and accrued expenses of $26,221 combined with the increase in the net
loss from operations after adjustments for non-cash items of $141,441 during
fiscal 1999.
Net cash used in investing activities was $189,018 during the fiscal year
compared to $447,429 during the 1998 fiscal year. The decrease is due to a
reduction in property and equipment expenditures during 1999.
Cash flows from financing activities were $2,678,958 during the 1999 fiscal year
compared to $2,148,820 during fiscal 1998. The change is primarily due to
increased proceeds from the exercise of warrants and notes payable of
$1,564,331, which was partially offset by a decrease in proceeds from private
placements of $924,593.
13
<PAGE>
The Company has suffered recurring losses from operations and has an accumulated
deficit of ($19,809,992) at December 31, 1999, which raises substantial doubt
about its ability to continue as a going concern. The auditor's report includes
an explanatory paragraph on the uncertainty of the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. 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.
On March 24, 2000, the Board of Directors of the Company approved a temporary
reduction in the conversion price on the 7% Senior Convertible Debentures into
common stock. The conversion price was reduced from $1.50 to the average bid
price of the Company's common stock for the twenty-five trading days immediately
prior the receipt of a notice of conversions, with minimum conversion price of
$0.50. The notice of conversion for the temporary reduction must be received by
April 30, 2000 and must include all accrued interest through May 31, 2000. As a
result, the Company will record an expense related to reduction in conversion
price.
On March 24, 2000, the Board of Directors also approved a temporary reduction in
the exercise price of all warrants and options outstanding. The exercise price
was reduced from $1.50 to the average bid price of the Company's common stock
for the twenty-five trading days immediately prior to the receipt of a notice of
conversion, with a minimum conversion price of $0.50. The notice of exercises
must be received by April 30, 2000. As a result of this temporary reduction, the
Company will record compensation expense for the difference between original
exercise price and reduced exercise price multiplied by the number of
outstanding warrants and options.
Subsequent to December 31, 1999, the Company cancelled 100,000 stock options
outstanding to officers and issued an additional 335,000 stock options, which
expire December 31, 2004 and are subject to certain vesting terms. Any
applicable compensation expense will be recorded in 2000.
On March 27, 2000, the Company entered into a one-year investment banking
agreement with Givigest Fiduciaria SA, "Givigest", to raise additional equity
capital for and to provide various services to the Company. During the month of
April 2000, Givigest raised $225,000 through a private placement of common
shares of the Company.
3. 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.
14
<PAGE>
Air Packaging
Technologies Inc.
And Subsidiary
--------------------------------------------------------------------------------
Consolidated Financial Statements
Years Ended December 31, 1999, 1998, 1997
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Statements of Operations
--------------------------------------------------------------------------------
Contents
Report of Independent Certified Public Accountants 3
Independent Auditor's Report 4
Consolidated Financial Statements
Balance Sheets as of December 31, 1999 and 1998 5-6
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 7
Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 8
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 9-10
Notes to Consolidated Financial Statements 11-27
2
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Statements of Operations
--------------------------------------------------------------------------------
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 sheets of Air Packaging
Technologies Inc. and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1999. We have
also audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
The accompanying consolidated financial statements and schedule 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 and schedule do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Los Angeles, California
March 3, 2000, except for Note 17
as to which the date is March 27, 2000
3
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Statements of Operations
--------------------------------------------------------------------------------
Independent Auditor's Report
The Stockholders and Board of Directors
Air Packaging Technologies Inc.
Valencia, CA
We have audited the 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
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 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 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 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
4
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Balance Sheets
--------------------------------------------------------------------------------
December 31, 1999 1998
--------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $1,150,151 $1,125,799
Trade receivables, net of allowance for doubtful
accounts of $22,630 and $5,130 (Note 15) 57,603 96,852
Inventories, net (Note 4) 577,389 408,643
Advances and prepaids 41,895 75,134
Total Current Assets 1,827,038 706,428
Property and Equipment, net (Note 5) 714,186 810,458
Intangible Assets, net (Note 6) 229,378 233,609
Deferred Financing Costs, net of accumulated
amortization of $10,416 139,583 -
Deposits 60,100 60,100
Total Assets $2,970,285 $1,810,595
5
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Balance Sheets
--------------------------------------------------------------------------------
--------------------------
December 31, 1999 1998
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable (Note 11) $ 316,861 $ 191,025
Accrued expenses (Note 11) 93,965 84,857
----------- -----------
Total current liabilities 410,826 275,882
----------- -----------
Long term liabilities
Senior convertible notes (Note 10) 1,500,000 -
----------- -----------
Total long term liabilities 1,500,000 -
----------- -----------
Total liabilities 1,910,826 275,882
----------- -----------
Commitments and contingencies (Note 14)
Stockholders' equity (Notes 7, 8, 9, 12, 14 and 16)
Common stock, $.01 par value, 50,000,000 shares
authorized; 7,966,408 and 7,071,408 shares issued
and outstanding 79,664 70,714
Additional paid-in capital 20,789,787 19,420,979
Accumulated deficit (19,809,992) (17,956,980)
----------- -----------
Total stockholders' equity 1,059,459 1,534,713
----------- -----------
Total liabilities and stockholders' equity $ 2,970,285 $ 1,810,595
----------- -----------
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Statements of Operations
----------------------------------------------------------------------------------------------------------------
------------------------------------------------------
1999 1998 1997
Years ended December 31,
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales (Note 15) $ 959,712 $ 722,268 $ 340,624
Cost of sales 1,012,083 566,837 592,544
--------------- --------------- ---------------
Gross profit (loss) (52,371) 155,431 (251,920)
--------------- --------------- ---------------
Operating expenses:
Sales, general and administrative 1,797,128 1,967,932 1,572,619
Research and development 5,419 7,371 3,322
--------------- --------------- ---------------
Total operating expenses 1,802,547 1,975,303 1,575,941
--------------- --------------- ---------------
Loss from operations (1,854,918) (1,819,872) (1,827,861)
--------------- --------------- ---------------
Other income (expense):
Interest expense (30,444) (153,470) (17,934)
Interest income 20,900 3,433 2,010
Other income 11,450 2,243 19,586
--------------- --------------- ---------------
Total other income (expense) 1,906 (147,794) 3,662
--------------- --------------- ---------------
Loss before extraordinary item - (1,967,666) (1,824,199)
Extraordinary item - gain on
restructuring of payables (Note 11) - 244,019 -
--------------- --------------- ---------------
Net loss
$ (1,853,012) $ (1,723,647) $ (1,824,199)
--------------- --------------- ---------------
Loss per common share - Basic and Diluted
Loss before extraordinary item
$ (.25) $ (.43) $ (.59)
Extraordinary item
$ - $ .05 $ -
Net loss
$ (.25) $ (.38) $ (.59)
Weighted average number of common shares
outstanding - Basic and Diluted 7,249,585 4,506,608 3,069,362
--------------- ---------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Statements of Stockholders' Equity
----------------------------------------------------------------------------------------------------------------
Common Stock
-----------------------------
Additional
Paid-In Accumulated
Shares Amount Capital Deficit Total
--------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 2,796,952 $ 27,970 $12,812,355 $(14,409,134) $ (1,568,809)
Net cash proceeds from private
placements (Note 12) 1,037,504 10,376 1,580,343 - 1,590,719
Debt for equity exchange (Notes 7
and 12) 180,958 1,809 285,477 - 287,286
Conversion of debenture (Note 9) 230,000 2,300 1,247,700 - 1,250,000
Exercise of options (Note 12) 5,750 58 8,089 - 8,147
Exercise of warrants (Note 12) 225,000 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 4,476,164 44,762 16,321,392 (16,233,333) 132,821
Net cash proceeds from private
placements (Note 12) 1,011,250 10,113 914,480 - 924,593
Debt for equity exchange
(Notes 7, 8, 9 and 12) 1,063,994 10,639 1,073,534 - 1,084,173
Exercise of warrants (Notes 9 and
12) 520,000 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 7,071,408 70,714 19,420,979 (17,956,980) 1,534,713
Exercise of warrants (Notes 9 and
12) 895,000 8,950 1,320,008 - 1,328,958
Stock-based compensation (Note 12) - - 48,800 - 48,800
Net loss - - - (1,853,012) (1,853,012)
----------------------------- -------------- --------------- ------------
Balance, December 31, 1999 7,966,408 $ 79,664 20,789,787 $ (19,809,992) $1,059,459
----------------------------- -------------- --------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
------------------------------------------------
Years ended December 31, 1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,853,012) (1,723,647) (1,824,199)
$
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 299,938 219,064 150,400
Provision for doubtful accounts 17,500 - 2,037
Inventory reserve (30,123) - 97,202
Stock-based compensation 48,800 247,073 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 21,749 (62,286) 3,730
Inventories (138,623) (252,188) (123,211)
Advances and prepaids 33,239 (70,472) 356
Deposits - 6,774 (51,594)
Accounts payable and accrued liabilities 133,085 159,306 171,981
Accrued officers' salaries 1,859 (1,232) (24,794)
Due to related party - - 126,000
Other liabilities - (39,500) -
------------- ------------- -------------
Net cash used in operating activities (1,465,588) (1,635,054) (1,435,384)
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of property and equipment - - 7,000
Purchases of property and equipment (129,126) (413,765) (528,193)
Patent expenditures (59,892) (33,664) (37,788)
------------- ------------- -------------
Net cash used in investing activities (189,018) (447,429) (558,981)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from private placements - 924,593 1,590,719
Net proceeds from exercise of warrants 1,328,958 743,627 346,227
Net proceeds from exercise of options - - 8,147
Deferred costs (150,000) - -
Proceeds from loan payable - related party - - 38,128
Proceeds from senior convertible notes 1,500,000 521,000 50,000
Payment on note payable - (33,000) (31,000)
Costs associated with debt conversion - (7,400) -
------------- ------------- -------------
Net cash provided by financing activities 2,678,958 2,148,820 2,002,221
------------- ------------- -------------
Net increase in cash 1,024,352 66,337 7,856
Cash, at beginning of year 125,799 59,462 51,606
------------- ------------- -------------
------------- ------------- -------------
Cash, at end of year $ 1,150,151 $ 125,799 $ 59,462
------------- ------------- -------------
</TABLE>
9
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
The Company paid interest in the amount of $237, $0 and $43,205 during 1999,1998
and 1997, respectively. The Company paid income taxes in the amount of $800,
$800 and $800 during 1999, 1998 and 1997, respectively.
During 1997, $3,528 of interest was capitalized for construction of property and
equipment.
During 1998 and 1997, the Company exchanged $1,084,173 and $287,286,
respectively, of debt for 1,063,995 and 180,958 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 230,000 shares of common stock of the Company at the exercise
price of $5.40 per share and 230,000 detachable nontransferable warrants (see
Note 9).
During the years ended December 31, 1999, 1998 and 1997, the Company recorded
$22,750, $187,073 and $43,450, respectively, representing stock-based
compensation in conjunction with stock options granted to non employees (see
Note 12).
During 1998, the Company issued 81,000 shares to an employee in satisfaction of
accrued compensation in the amount of $81,000 (Note 12).
During 1999, the Company's board of directors revalued 435,000 outstanding
options to their fair value. As a result, stock-based compensation of $16,050
was recorded in the current year for options held by non employees (see Note
12).
During 1998, the Company's Board of Directors changed the exercise price of
2,248,754 outstanding warrants to their fair value. As a result, an expense of
$126,073 was recorded in the 1998 year (see Note 12).
During the years ended December 31, 1999 and 1998, the Company recorded
stock-based compensation of $10,000 and $60,000 related to employee options.
These amounts represent the excess fair market price of the Company' stock at
the date of grant over the exercise price.
See accompanying notes to consolidated financial statements.
10
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1 - Nature of Operations
Air Packaging Technologies Inc. (the "Company") and Subsidiary develops,
manufactures and distributes 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. The Company was
incorporated in the State of Delaware on November 9, 1989.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Air Packaging
Technologies Inc. and its wholly-owned foreign subsidiary. All significant
inter-company balances and transactions have been eliminated in consolidation.
The foreign subsidiary currently has no operations, therefore has no foreign
translation adjustment.
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.
Inventory
Inventory, which consists of raw material, work in progress, and finished goods,
is valued at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method.
Property and Equipment
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 property, and
equipment 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.
11
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
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 evaluates and assesses the overall recoverability of its intangible
assets by determining if the unamortized balance can be recovered through
undiscounted future operating cash flows.
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.
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.
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.
Stock-based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), 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.
12
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Stock-based Compensation (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 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.
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, 1999 and 1998 as a result of their short term nature,
or due to the interest rates approximating the Company's effective borrowing
rates.
At December 31, 1999, the fair value of the Senior Convertible Notes, is
estimated to be $978,807 based on the quoted market prices using an interest
rate of 10.5%.
13
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Earnings (Loss) Per Share
Statement of Financial Accounting Standards No.128 ("SFAS 128"), "Earnings Per
Share," 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 ended December 31, 1999, 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 575,000, 2,215,754 and 2,170,032 shares were
outstanding during the years ended 1999, 1998 and 1997, respectively, but were
not included in the computation of diluted loss per common share because the
effect would be antidilutive.
The Company has 446,042 shares in escrow included in the number of shares
outstanding in each of the three years ended 1999. However, these shares have
been excluded from the computation of basic and diluted loss per share for each
of the three years ended 1999 as the necessary conditions have not been
satisfied (see Note 14).
Comprehensive Income
Statement of Financial Accounting Standards No.130, "Reporting Comprehensive
Income," ("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, 1999, 1998 and
1997.
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, 1999 and 1998, the Company did not report any
segment information as operations and business activity are considered one unit.
Adoption of SFAS 131 did not have an impact on the Company's financial position,
results of operations and cash flows.
14
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
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.
Reclassifications
Certain reclassifications have been made to the prior year statements to conform
to the 1999 presentation. Such reclassifications had no effect on the previously
reported net loss.
Note 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
continue as a going concern because of the magnitude of its losses during the
past three years, ($1,853,012), ($1,723,647) and ($1,824,199) in 1999, 1998 and
1997 and an accumulated deficit of ($19,809,992) at December 31, 1999.
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.
Management 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.
15
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 4 - Inventories
Inventories consist of the following at:
--------------------------------
December 31, 1999 1998
---------------- -------------
Raw materials $ 450,583 $ 350,147
Work-in-process 21,385 23,703
Finished goods 105,421 34,793
---------------- -------------
$ 577,389 $ 408,643
---------------- -------------
The above balances are presented net of total inventory reserves of
approximately $33,000 and $63,000 in 1999 and 1998, respectively. During the
year ended December 31, 1997, the Company wrote down inventory by approximately
$97,000, respectively, to reflect lower of cost or market pricing.
Note 5 - Property and Equipment
Property and equipment consist of the following:
------------------------------------
December 31, 1999 1998
---------------- --------------
Manufacturing equipment $ 1,710,269 $ 1,639,469
Dies and molds 187,375 166,866
Computer equipment 92,494 62,673
Quality control lab 102,035 102,035
Office equipment 108,232 100,237
Vehicles 12,730 12,730
---------------- --------------
2,213,135 2,084,010
Less accumulated depreciation 1,498,949 1,273,552
---------------- --------------
$ 714,186 $ 810,458
---------------- --------------
16
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
Note 5 - Property and Equipment (Continued)
Depreciation and amortization expense for property and equipment charged to
operations for the years ended December 31, 1999, 1998 and 1997 was $225,397,
$143,967 and $80,160, respectively.
Note 6 - Intangible Assets
Intangible assets consist of the following at:
------------------------------
1999 1998
December 31,
-------------- ------------
Patents $ 711,543 $657,142
Trademarks 3,649 3,157
Rights to patent and trademark royalties 90,146 85,146
-------------- ------------
805,338 745,445
Less accumulated amortization 575,960 511,836
-------------- ------------
$ 229,378 $233,609
-------------- ------------
Amortization expense for intangible assets charged to operations for the years
ended December 31, 1999, 1998 and 1997 was $64,124, $75,097 and $70,240,
respectively.
Note 7 - Related Party Transactions
A former employee of the Company, who resigned effective June 4, 1999 entered
into a one year consulting agreement that expires May 31, 2000 to provide
consulting services at a fee of $5,000 per month.
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 86,310 shares of common stock. In 1998,
additional fees of $31,500 were incurred, and all remaining outstanding debt was
settled in exchange for 256,671 shares at $1.00 per share.
17
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
Note 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 43,529 shares at a value of $1.00 per
share in full settlement of the outstanding debt plus accrued interest.
Note 9 - Convertible Subordinated Debenture and Notes Payable
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 230,000 shares of common stock
of the Company and 230,000 detachable nontransferable warrants. Two warrants
entitle the lender to purchase one additional common share of the Company. The
exercise price of each warrant is $5.40 for the first year ended May 29, 1998
and $6.20 for the second year ended May 29, 1999.
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 $1.50 per share up to the
expiration date (see Note 12).
In December 1998, the lender exercised the entire 230,000 warrants at the
amended price of $1.50 per share.
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 56,800 shares at a value of $1.00 per share
in full settlement of the interest-bearing note payable, plus accrued interest
(see Note 12).
18
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
Note 10 - Senior Convertible Notes
During the year ended December 31, 1999, the Company issued $1,500,000 in Senior
Convertible Notes with interest payable annually on June 30 at 7% per annum. The
Senior Convertible Notes are unsecured and due on September 30, 2003. At the
option of the holder, the holder may convert the principal amount of such Note
at any time before September 30, 2003, into shares of common stock. The
conversion price is equal to or greater than the fair value of the stock on the
date the Senior Convertible Notes were issued.
At the holder's option, the holder may elect to receive any annual interest
payment in common stock of the Company at a 20% discount. The difference between
the fair market value of the stock on date of conversion and the conversion
price, will be recorded as additional interest expense.
In conjunction with these Notes, the Company paid a finder's fee of $150,000 and
other financing costs, which is being amortized over the life of the Notes.
Note 11 - Extraordinary Item
During the fourth quarter of 1998, 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 $.05
per share. There was no income tax effect due to the Company's current year net
loss and related valuation allowance.
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.
Note 12 - Stockholders' Equity
Common Stock
During the year ended December 31, 1999, 895,000 warrants were exercised
resulting in proceeds of $1,328,958.
In connection with the reverse stock split discussed below, the Company amended
its Articles of Incorporation to reduce the authorized common shares from
100,000,000 at $0.001 par value to 50,000,000 at $0.01 par value.
19
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
Note 12 - Stockholders' Equity (Continued)
During 1998, the Company completed six private placements for a total of
1,011,250 shares and received total net proceeds of approximately $925,000, net
expense of $81,423.
During 1997, the Company issued 1,037,504 shares of common stock through private
placements, receiving net proceeds of approximately $1,600,000 after expenses.
In 1998 and 1997, the Company issued a total of 1,063,994 and 180,958 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 and $287,000.
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 Split
In January 2000, the Board of Directors declared a one-to-ten reverse stock
split. All stock related data in the consolidated financial statements reflect
the stock split for all periods presented.
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.
Option activity is as follows:
Weighted Average
Number of
Shares Exercise Price
-------------- ---------------
Outstanding at January 1, 1997 96,750 $ 2.30
Granted 297,750 1.70
Exercised (5,750) 1.40
Expired/canceled (9,000) 2.70
-------------- ---------------
Outstanding at December 31, 1997 379,750 1.80
Granted 283,000 1.80
Exercised - -
Expired/canceled (275,750) 1.60
-------------- ---------------
Outstanding at December 31, 1998 387,000 1.90
Granted 570,000 1.50
Exercised - -
Expired/canceled 522,000 2.00
-------------- ---------------
Outstanding at December 31, 1999 435,000 $ 1.50
-------------- ---------------
Exercisable at December 31, 1999 435,000 $ 1.50
-------------- ---------------
20
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Stock Options (Continued)
Information relating to stock options at December 31, 1999 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-----------------------------------------------------------------------------
Weighted Average Weighted Average
-----------------------------------------------------------------------------
Exercise Price Remaining Life
Per Share (Months) Exercise Exercise
Shares Price Shares Price
------------------- --------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
$1.50 435,000 39 $ 1.50 435,000 $ 1.50
------------------- --------------- ------------ ------------- ----------
</TABLE>
In June 1999, the Company's board of directors revalued 435,000 common stock
shares, based on the fair value of the stock, and amended the exercise price to
$1.50 per share.
During the years ended December 31, 1999, 1998 and 1997, the Company recorded
$22,750, $187,073 and $43,450, respectively, related to stock-based compensation
in conjunction with stock options granted to non-employees.
During 1999, the Company's Board of Directors revalued 435,000 outstanding
options to their fair value. As a result, stock-based compensation of $16,050
was recorded in the current year for options held by non-employees.
During the years ended December 31, 1999 and 1998, the Company recorded
stock-based compensation of $10,000 and $60,000 related to employee options.
These amounts represent the excess fair market price of the Company' stock at
the date of grant over the exercise price.
21
<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, 1999 1998 1997
------------- ------------ --------------
<S> <C> <C> <C>
Net loss, as reported $ (1,843,012) (1,723,647) (1,824,199)
Net loss, pro forma (1,935,285) (1,900,179) (2,265,081)
Loss per common share - basic and diluted, as reported $ (.25) (.38) (.59)
Loss per common share - basic and diluted, pro forma $ (.27) (.42) (.74)
</TABLE>
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 27%, 106% and 130% in 1999, 1998 and 1997,
respectively, an expected life of five and a half years in 1999, five years in
1998, and two years in 1997, no dividends would be declared during the expected
term of the options, risk-free interest rate of 5.81%, 5.01% and 6.1% for 1999,
1998 and 1997, respectively.
The weighted average fair value of stock options granted to employees during
1999, 1998 and 1997 was $1.50, $1.60 and $1.60, respectively.
22
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Warrants
During 1998 and 1997, the Company issued 1,011,250 and 1,037,504 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 1999, 1998 and 1997, the Company issued a total of 895,000, 520,000 and
225,000 shares in connection with the exercise of warrants by various
shareholders, amounting to approximately $1,329,000, $744,000 and $346,000,
respectively.
In November 1998, the Company's Board of Directors revalued 2,248,754
outstanding warrants based on the fair value of the stock, and amended the
exercise price to $1.50 per share. As a result, interest expense of $126,073 was
recognized in the 1998 year.
Outstanding and exercisable warrants at December 31, 1999 to acquire the
Company's stock, held primarily by existing stockholders, are as follows:
Warrants Exercise Price Expiration Date
--------------- ----------------------- -----------------------------------
140,000 $1.50 October 3, 2000
Note 13 - Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109. At December 31,
1999, the Company has a net operating loss carryforward (NOL) of approximately
$18,200,000 for federal tax purposes. At December 31, 1999, the Company has a
deferred tax asset of approximately $7,400,000, 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:
Year ending December 31, Amount
------------------------------- -------------------------------
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
2019 1,800,000
-------------------------------
Total $ 18,200,000
-------------------------------
23
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 13 - Income Taxes (continued)
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.
Note 14 - Commitments and Contingencies
Lease Commitments
Minimum lease commitments under noncancelable operating lease agreements are as
follows:
Year ending
December 31, Amount
------------------------------- ---------------------
2000 $ 130,354
2001 134,625
2002 134,625
2003 134,625
2004 132,656
Thereafter 55,000
---------------------
Total $ 721,885
---------------------
Rent expense was $151,131, $142,987 and $140,788 for the years ended December
31, 1999, 1998 and 1997, respectively.
Royalty Agreements
The Company is required to pay royalties related to certain patents and
trademarks. Total expense related to these agreements was $4,324 in 1999, $3,991
in 1998 and $1,726 in 1997.
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 were placed in escrow. The shares were 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 were in escrow,
the stockholders waived their rights to receive dividends or participate in the
distribution of assets upon a winding up of the Company. Per the agreement, any
shares remaining in escrow at December 31, 1999 would be cancelled by the
Company. As of December 31, 1999 as the shares were not actually cancelled by
the Company's Transfer Agent until January 2000, all such shares remain in
escrow. These shares are included in the number of shares outstanding in each of
the three years ended 1999. However, these shares have been excluded from the
computation of basic and diluted loss per share for each of the three years
ended 1999.
24
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Employment Agreements
The Company entered into an employment agreement with one employee in August
1994 and two five-year employment agreements with employees of the Company in
July 1998. In June 1999, two of the contracts were amended and expired May 31,
2000. The current salaries under these agreements are $96,000 and $43,000 per
annum for each employee. Upon termination, the employees will receive the
salaries earned to the date of termination. The employee related to the third
contract, resigned effective June 4, 1999 and entered into a one year consulting
agreement to provide consulting services at a fee of $5,000 per month, for its
term that expires May 31, 2000.
Potential Liability
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 during
2000. The Company has established a liability for the entire amount.
Note 15 - Significant Concentrations 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 unaffiliated
customers which represent more than 10% of the Company's net sales for 1999,
1998 and 1997 were as follows:
December 31,
-------------------------------------------
1999 1998 1997
-------------------------------------------
Customer
A 16 % 15 % 22
B - - % 13
C 17 % 31 % - %
D 24 % 18 -
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, 1999 and 1998, approximately $41,162 or 84%, and
$69,400 or 72% of the Company's accounts receivable were due from three
customers, respectively.
25
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 16 - Related Party Transactions
The Company issued 475,833 shares of common stock to a related party through a
private placement for net proceeds of $635,769 during 1997 (See also Note 7).
During 1997, the Company issued 350,000 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, 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 81,000 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.
The President and Chairman of the Board of Schmitt Industries, Inc., who is also
a director of the Company, acquired an aggregate of 1,208,000 shares of common
stock in 1998 from another principal shareholder.
Note 17 - Subsequent Events
On March 24, 2000, the Board of Directors of the Company approved a temporary
reduction in the conversion price on the 7% Senior Convertible Debenture into
common stock. The conversion price was reduced from $1.50 to the average bid
price of the Company's common stock for the twenty-five trading days immediately
prior to the receipt of a notice of conversion, with a minimum conversion price
of $.50. The notice of conversion for the temporary reduction must be received
by April 30, 2000 and must include all accrued interest through May 31, 2000. As
a result, the Company will record an expense related to the reduction in
conversion price.
On March 24, 2000, the Board of Directors also approved a temporary reduction in
the exercise price of all warrants and options outstanding. The exercise price
was reduced from $1.50 to the average bid price of the Company's common stock
for the twenty-five trading days immediately prior to the receipt of a notice of
conversion with a minimum conversion price of $.50. The notice of exercises must
be received by April 30, 2000. As a result of this temporary reduction, the
Company will record compensation expense for the difference between original
exercise price and reduced exercise price multiplied by the number of
outstanding warrants and options.
26
<PAGE>
Air Packaging Technologies Inc.
And Subsidiary
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 17 - Subsequent Events (Continued)
Subsequent to December 31, 1999, the Company cancelled 100,000 stock options
outstanding to officers and issued an additional 335,000 stock options, which
expire December 31, 2004 and are subject to certain vesting terms. Any
applicable compensation expense will be recorded in 2000.
On March 27, 2000, the Company entered into a one year investment banking
agreement with Givigest Fiduciaria SA, "Givigest", to raise equity capital. On
March 27, 2000, the Company and Givigest agreed to raise up to $500,000 on or
before April 30, 2000. There are no assurances that the Company will be able to
raise any proceeds under this agreement.
Schedule II - Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Column B Column C Column D Column E
-------------------------------------------------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and at End of
Description of year Expenses Deductions Year
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>>
Allowance for possible losses on
receivables
Year ended December 31,
1999 $ 5,130 $ 17,500 $ - $ 22,630
1998 3,878 1,252 - 5,130
1997 1,842 2,576 (540) 3,878
Allowance for inventory reserve
Year ended December 31,
1999 $ 63,066 $ - $ (30,123)(a) $ 32,943
1998 153,637 - (90,571)(a) 63,066
1997 361,393 97,202 (304,958)(a) 153,637
(a) Write-off of obsolete inventory.
</TABLE>
27
<PAGE>
AIRP
---- Annual Meeting
Air Packaging Technologies
Incorporated The annual meeting of shareholders
of AIRP will be held on Monday,
July 17, 2000 at 2.00 pm in the
Corporate Offices Corporate Offices.
Air Packaging Technologies Inc.
25620 Rye Canyon Road Stock Listing
Valencia, CA 91355
USA Nasdaq OTC Bulletin Board
Stock Symbol: AIRP
Affiliate Offices
The Air Packaging Company (Europe) Ltd.
Corporate House
Cranborne Road
Potters Bar, Herts EN63JN
England Investor Relations
C-Pak Pte. E-Mail: [email protected]
2304 Bedok Reservoir Road, #04-01 Fax: + 661-294-0947
Dou Yee Building Tel: + 661-294-2222
Bedok Industrial Park C
Singapore 479223
Trade Enquiries
Transfer Agent and Registrar
E-Mail: [email protected]
Interwest Transfer Co., Inc. Fax: + 661-294-0947
Salt Lake City, Utah Tel: + 661-294-2222
Banking Reference Forward Looking Statements
Bank of America This Annual Report contains certain
Valencia, CA forward-looking statements that
USA anticipate future trends or events.
These statements are based on certain
Certified Public Accountants assumptions that may prove to be
erroneous and are subject to certain
BDO Seidman, LLP risks including but not limited to
Los Angeles, CA the uncertainties of the Company's
USA new product introductions, the risks
of increased competition and
Annual Report technological change in the Company's
industry and other risks detailed
A copy of the Company Annual in the Company's Securities and
Report 2000 is available to Exchange Commission filings.
shareholders at no charge by Accordingly,actual results may differ,
e-mailing our Investor Relations possibly materially, from the
Department at [email protected] predictions contained herein.
or calling the Company's Toll Free
number at 1-800-424-7269 Corporate Website
www.airbox.com
28
