<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1996
REGISTRATION NO. 33-95318
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PORTOLA PACKAGING, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3089 94-1582719
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of classification code number) identification
incorporation or organization) no.)
</TABLE>
------------------------
890 FAULSTICH COURT, SAN JOSE, CALIFORNIA 95112
(408) 453-8840
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
ROBERT R. STRICKLAND
CHIEF FINANCIAL OFFICER
PORTOLA PACKAGING, INC.,
890 FAULSTICH COURT, SAN JOSE, CALIFORNIA 95112
(408) 453-8840
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
TIMOTHY TOMLINSON, ESQ.
CYNTHIA M. LOE, ESQ.
Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, 2nd Floor
Palo Alto, California 94306
(415) 325-8666
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PORTOLA PACKAGING, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors; Selected Historical
Condensed Consolidated Financial Data
4. Use of Proceeds...................................... Status of the Offering, Use of Proceeds and Related
Matters; Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside and Inside Front Cover Pages; Underwriting;
Outside Back Cover Page
9. Description of Securities to be Registered........... Description of the Notes
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Status of the Offering, Use of Proceeds and Related
Matters; Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use of Proceeds;
Capitalization; Selected Historical Condensed
Consolidated Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal Stockholders; Description of
the New Credit Facility; Description of the Notes;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
PORTOLA PACKAGING, INC.
10 3/4% SENIOR NOTES DUE 2005
SUPPLEMENT DATED JUNE 25, 1996
TO PROSPECTUS DATED SEPTEMBER 27, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Status of the Offering, Use of Proceeds and Related Matters................................................ 1
Summary Historical Condensed Financial Data................................................................ 1
Business................................................................................................... 4
Management................................................................................................. 5
Certain Transactions....................................................................................... 12
Principal Stockholders..................................................................................... 14
Selected Historical Condensed Consolidated Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 19
Experts.................................................................................................... 25
Index to Financial Statements.............................................................................. F-1
</TABLE>
This Supplement to the Prospectus of Portola Packaging, Inc. (the "Company"
or "Portola") may be used by Chase Securities, Inc., an affiliate of the
Company, in connection with offers and sales related to market making
transactions in the 10 3/4% senior notes due 2005 (the "Notes"). Chase
Securities, Inc. may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of sale.
Chase Securities, Inc. will not confirm such sales to any accounts over which it
exercises discretionary authority without the prior specific written approval of
the customer.
Chase Securities, Inc. and Salomon Brothers Inc (the "Underwriters")
presently intend to make a market in the Notes; however, they are under no
obligation to do so and may discontinue any market making activities at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Notes or that an active public market will develop or, if
developed, will continue.
THIS SUPPLEMENT IS PART OF AND MUST BE ACCOMPANIED OR PRECEDED BY
THE PROSPECTUS DATED SEPTEMBER 27, 1995
<PAGE>
This Supplement is a part of and should be read in conjunction with the
Prospectus dated September 27, 1995. Capitalized terms used in this Supplement
and not otherwise defined in this Supplement shall have the meanings set forth
in the Prospectus dated September 27, 1995 (the "Prospectus").
The Prospectus is hereby supplemented as follows:
STATUS OF THE OFFERING, USE OF PROCEEDS AND RELATED MATTERS
On October 2, 1995, the Company completed its offering of $110 million of
Notes that mature on October 1, 2005 and bear interest at the rate of 10.75% per
annum. Interest is payable semi-annually on April 1 and October 1 of each year.
The Company paid interest in the aggregate amount of approximately $5,880,000 to
holders of record of the Notes on April 1, 1996. The Notes are unsecured general
obligations of the Company. The Notes were issued pursuant to and are governed
by the terms of the Indenture between the Company and American Bank National
Association, as trustee. Reference is made to the section of the attached
Prospectus entitled "Description of the Notes" for a more complete description
of the Notes.
The net proceeds of the Note offering, after deducting expenses related to
the offering, including underwriting discounts and commissions in the amount of
approximately $3.2 million, were approximately $106 million. Of the $106 million
net proceeds of the offering, $83 million was used to retire the Company's debt
then outstanding under its senior term loans, revolving facility and senior
subordinated notes, and the balance was reserved for working capital and general
corporate purposes, including capital expenditures. Subsequent to the closing of
the Note offering, $7.2 million of the net proceeds was used to purchase the San
Jose facilities previously leased by the Company, $10.8 million of the net
proceeds was used to purchase machinery and equipment, $3 million of the net
proceeds was used to make a loan to the Company's 50% joint venture in Mexico,
and $2 million of the net proceeds was used for working capital needs.
Concurrent with the closing of the Note offering on October 2, 1995, the
Company entered into a new five year senior revolving credit facility (the "New
Credit Facility") with Heller Financial, Inc., a lender of certain of the debt
retired with the net proceeds of the Note offering. The New Credit Facility
provides for revolving loans to the Company in an aggregate amount not to exceed
$35 million, subject to a borrowing base of eligible receivables, inventory,
property, plant and equipment, which serve as collateral for the line. Loans
made pursuant to the terms of the New Credit Facility constitute senior secured
indebtedness of the Company. As of the date of this Supplement, the Company had
no outstanding indebtedness under the New Credit Facility, leaving the entire
facility available for draw. Reference is made to the section of the attached
Prospectus entitled "Description of the New Credit Facility" for a more complete
description of the terms of the New Credit Facility.
SUMMARY HISTORICAL CONDENSED FINANCIAL DATA
The information included in the sections of the Prospectus entitled "Summary
Historical and Pro Forma As Adjusted Condensed Company -- Only Financial Data"
and "-- Summary Historical and Pro Forma As Adjusted Condensed Consolidated
Financial Data" is superseded in its entirety by the information set forth in
the table below. The following table sets forth certain summary historical
financial data for the Company. The summary historical statement of operations
and balance sheet data for each of the fiscal years in the three year period
ended August 31, 1995 and at the end of each such fiscal year have been derived
from, and are qualified by reference to, the Company's audited consolidated
financial statements included in this Supplement to the Prospectus. The summary
historical statement of operations and balance sheet data for the six months
ended February 28, 1995 and February 29, 1996 and at such dates have been
derived from the unaudited consolidated financial statements of the Company
included in this Supplement to the Prospectus. The table should be read
1
<PAGE>
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements of the Company
and related notes and other financial information appearing elsewhere in this
Supplement to the Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
AUGUST 31, ----------------------------
----------------------------------------- FEB. 28, FEB. 29,
1993 1994 (A) 1995 1995 1996
----------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................. $ 58,286 $ 70,284 $ 124,650 $ 55,585 $ 73,877
Gross profit........................... 15,607 18,614 32,678 14,055 18,020
Income from operations................. 6,180 7,004 10,623 4,983 6,574
Interest expense, net.................. 3,044 3,899 8,483 3,931 5,696
Amortization of debt financing costs... 479 433 447 269 261
Income before extraordinary item,
cumulative effect of change in
accounting principle and income
taxes................................. 2,719 2,195 1,434 961 555
Net income (loss)...................... 309 225 140 231 (1,465)
Earnings (loss) per share.............. 0.02 (0.02) (0.04) 0.00 (0.16)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................ $ 7,109 $ 11,049 $ 14,758 $ 16,910 $ 32,354
Total assets........................... 50,896 110,820 130,326 109,150 156,557
Total debt............................. 38,140 77,467 91,912 82,723 117,798
Redeemable warrants (b)................ 2,600 3,055 3,665 3,055 4,088
Total shareholders' equity............. 2,597 5,393 6,694 8,775 4,822
CASH FLOW DATA:
Net cash provided by (used in)
operating activities.................. $ 6,768 $ 9,351 $ 8,422 $ (1,759) $ 8,559
Net cash used in investing
activities............................ (9,119) (38,418) (24,648) (4,505) (16,010)
Net cash provided by financing
activities............................ 3,538 30,099 14,785 4,559 21,214
OPERATING AND OTHER DATA:
Closure unit volume (in millions)...... 3,980 4,893 8,476 4,008 4,549
Closure unit volume growth (c)......... 5.8% 22.9% 73.2% 10.5% 13.5%
EBITDA (d)............................. $ 12,883 $ 14,728 $ 23,588 $ 11,395 $ 14,330
Depreciation and amortization.......... 6,845 8,357 12,789 5,824 8,072
Capital expenditures................... 9,564 6,159 11,302 4,703 16,372
Ratio of earnings to fixed charges
(e)................................... 1.3x 1.2x 1.2x 1.2x --
</TABLE>
- ------------------------
(a) Includes ten months of operations before the Nepco acquisition on June 30,
1994 and two months of operations after the acquisition. Nepco is now a
division of Portola.
(b) The redeemable warrants entitle the holders thereof to purchase an aggregate
of 2,492,741 shares of the Company's Common Stock. If the Company does not
complete an initial public offering of its Common Stock by June 30, 1999
(for certain warrants) or August 1, 2001 (for other warrants), the holders
may require the Company to repurchase the warrants at the higher of current
market value or an amount computed under the warrants.
2
<PAGE>
(c) These results reflect closure unit volume growth of the Company including
Nepco after June 30, 1994. On a pro forma combined basis, the closure unit
volume growth for Portola and Nepco was 11.6% for the fiscal year ended
August 31, 1994.
(d) EBITDA represents, for any relevant period, income (loss) before income
taxes, extraordinary item, cumulative effect of change in accounting
principle, depreciation of property, plant and equipment, interest expense,
net, amortization of intangible assets and non-recurring legal expenses
associated with the Company's litigation with Scholle Corporation through
October 2, 1995. See "Business -- Litigation" in this Supplement to the
Prospectus. EBITDA is not intended to represent and should not be considered
more meaningful than, or an alternative to, net income, cash flow or other
measures of performance in accordance with generally accepted accounting
principles. EBITDA data and the related ratios are included because the
Company understands that such information is used by certain investors as
one measure of an issuer's historical ability to service debt and because
certain restrictive covenants in the Indenture are based on a term very
similar to the Company's EBITDA.
(e) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs and the portion of lease expense which management believes
is representative of the interest component of lease expense. The ratio of
earnings to fixed charges for the six months ended February 29, 1996
resulted in a deficiency of $1.6 million.
3
<PAGE>
BUSINESS
The information included in the section of the Prospectus entitled
"Business" is supplemented as set forth below. Please see the section of the
Prospectus entitled "Business" for a more complete description of the Company's
products, markets and business strategies.
OVERVIEW
Since the Company was acquired from the founding family in 1986 by a group
led by Jack L. Watts, the Company's current Chairman of the Board and Chief
Executive Officer, the size of the Company as measured by sales and closure unit
volume has increased from $26.1 million in sales and 2.1 billion in units for
fiscal 1987 to $124.7 million in sales and 8.5 billion in units for the fiscal
year ended August 31, 1995. The size of the Company as measured by sales and
closure unit volume was $100.5 million in sales and 6.1 billion in units for the
eight months ended April 30, 1996. Mr. Watts and other members of senior
management owned or controlled 29.1%, on a fully diluted basis (calculated on
the basis of exercise of all outstanding options, vested and unvested, and
conversion of the Class A Common Stock, which is non-voting stock, into voting
stock), of the Common Stock of the Company as of June 18, 1996.
BUSINESS STRATEGY
The Company has continued to pursue various expansion opportunities,
including its program of seeking to acquire domestic and foreign businesses
serving similar customers using proprietary product and process technologies
that offer opportunities to improve costs or extend the Company's product lines.
The Company's international export sales were approximately $18.7 million for
the fiscal year ended August 31, 1995 and approximately $9.2 million for the six
months ended February 29, 1996, of which $6.7 million and $1.4 million,
respectively, represented sales of PortaPlants (see "Business -- Products --
PortaPlants" in the attached Prospectus).
PROPERTIES
On February 9, 1996, the Company completed its acquisition of the Company's
headquarters and manufacturing facilities located in San Jose, California, which
facilities were previously leased by the Company. The purchase price paid in
connection with such acquisition was approximately $7.2 million. The disclosures
included on page 40 of the attached Prospectus are hereby amended accordingly to
reflect the purchase by the Company of its San Jose facilities. The Company is
currently negotiating an 18 to 24 month extension of the term of the lease for
its facilities located in Clifton Park, New York, which facilities are reflected
in the table included on page 40 of the attached Prospectus. The Company's
Canadian subsidiary, Portola Packaging Canada Ltd., is now leasing the 43,000
square foot facility in Edmonton, Alberta, Canada that is described in the
footnotes to the table included on page 40 of the attached Prospectus.
SALES, MARKETING AND CUSTOMER SERVICE
The Company's customer base includes more than 3,000 accounts. The Company's
top ten customers and buying groups accounted for approximately 19% of the
Company's sales during the six months ended February 29, 1996, and none
accounted for more than 5% of sales during that period.
LITIGATION
As described in greater detail in the attached Prospectus, the Company has
been engaged in patent infringement litigation with Scholle Corporation
("Scholle"), which commenced an action against the Company in the United States
District Court, Northern District of California in July 1992 alleging that the
Company infringed upon certain patents of Scholle relating to five gallon
non-spill closures. In February 1995, the jury rendered a verdict adverse to the
Company and in favor of Scholle, which verdict was entered by the court on
January 2, 1996. All further motions were denied by the court upon entry of the
jury verdict, making the Company liable for damages of $0.01 per closure unit
sold. The Company is likely to have to pay $0.01 per closure unit in damages,
totaling approximately
4
<PAGE>
$1.4 million on sales through April 30, 1996, as well as on sales occurring
thereafter. These amounts have been and will continue to be accrued in the
Company's financial statements in the periods in which sales occurred or
continue to occur.
The Company is currently in the process of negotiating a settlement
agreement with Scholle, the terms of which are expected to provide for the grant
by Scholle of a non-exclusive license to use certain of its patents and the
payment by the Company of a royalty in the amount of $0.01 per five gallon non-
spill closure unit. It is anticipated that the Company would remain liable for
damages of $0.01 per closure unit sold prior to the date of execution and
delivery of the proposed form of settlement agreement. Interest at the rate of
10%, currently approximately $175,000, would be payable to Scholle on all past
due amounts under the proposed agreement.
The Company is also a party to a number of other lawsuits and claims arising
out of the normal course of business. Management does not believe that the final
disposition of these matters will have a material adverse effect on the
financial condition or operations of the Company.
MANAGEMENT
The information included under the headings entitled "Executive Officers and
Directors," "Director Compensation," "Executive Compensation," "Employee Benefit
Plans" and "Compensation Committee Interlocks and Insider Participation" in the
section of the Prospectus entitled "Management" is hereby superseded in its
entirety as set forth below. No changes have occurred with respect to the
disclosures included under the heading entitled "Indemnification of Directors
and Officers" included in the section of the Prospectus entitled "Management."
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE COMPANY POSITION
- -------------------------------- --- --------------- --------------------------------------------------------------
<S> <C> <C> <C>
Jack L. Watts 48 10 Chairman of the Board and Chief Executive Officer
Robert Plummer 37 2 President - Nepco Division
Dannie K. Martz 44 0 President - Cap Snap Division
Douglas L. Cullum 41 10 President - Packaging Division
Robert R. Strickland 52 4 Vice President - Finance, CFO and Assistant Secretary
E. Scott Merritt 40 1 Vice President - Manufacturing Technology
Laurie D. Bassin 47 9 Vice President - Corporate Development
Rodger A. Moody 42 20 Vice President, Managing Director - International Division
Patricia Voll 38 0 Vice President - Finance and Accounting
David A. Keefe 42 10 Corporate Controller
Timothy Tomlinson (1) 46 10 Secretary and Director
Larry C. Williams (1)(2) 46 7 Director
Martin R. Imbler (2) 48 7 Director
Christopher C. Behrens 35 2 Director
Jeffrey Pfeffer, Ph.D. (1) 49 0 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Watts has been Chairman of the Board and Chief Executive Officer of the
Company since January 1986. From 1982 to 1985, he was Chairman of the Board of
Faraday Electronics, a supplier of integrated circuits and board level
microprocessors.
5
<PAGE>
Mr. Plummer has been Vice President and General Manager - Equipment Division
from May 1994 to April 1996. In addition, he assumed responsibilities as
President - Nepco Division in September 1995, a position he still currently
holds. From May 1989 to May 1994, he was employed by General Motors Corporation:
as an Assembly Advisor for New United Motor Manufacturing, Inc., an automobile
manufacturing joint venture between General Motors and Toyota from February 1993
to May 1994 and as Product Manager of the Harrison Division of General Motors
Corporation, which produces automotive engine cooling and heating, ventilating,
and air conditioning systems, from May 1989 to February 1993.
Mr. Martz has been President - Cap Snap Division since September 1995. From
March 1995 to September 1995, he was Senior Vice President of Cymer Laser
Technologies, a laser manufacturer. From January 1992 to March 1995, he was Vice
President and General Manager of the Varian - TEL Products Division of Varian
Associates, Inc., a manufacturer of semiconductor equipment, electrical devices,
instruments and other electronics products, and from October 1986 to January
1992, he was employed by KLA Instruments Corporation, a company involved in the
factory automation, manufacturing, photonics, and test and measurement
industries, most recently as Vice President and General Manager, Automated Test
Systems Division.
Mr. Cullum has been President - Packaging Division since April 1996. He was
Vice President - Manufacturing Technology of the Company from November 1994 to
April 1996. He joined the Company in 1986 and became Vice President - Operations
of the Cap Snap Division in April 1987.
Mr. Strickland has been Vice President - Finance and Chief Financial Officer
of the Company since July 1991. From September 1990 to July 1991, he served as
Senior Vice President and Chief Financial Officer at Personics Corporation, a
company that manufactured a system of producing audio cassette tapes in retail
record stores. From February 1988 to June 1990, he was employed by Lucky Stores,
Inc., a supermarket chain, most recently as Vice President Finance and
Administration.
Mr. Merritt has been Vice President - Manufacturing Technology since April
1996. He was Vice President and General Manager - Fitment Equipment from
February 1995 until April 1996. From August 1992 to February 1995, he was an
Advisor, General Assembly for New United Motor Manufacturing, Inc., an
automobile manufacturing joint venture between General Motors and Toyota. From
1978 to August 1992, he was employed by General Motors of Canada, Ltd., where he
held various positions, most recently as Manufacturing Superintendent -
Components Plant.
Ms. Bassin has been Vice President - Corporate Development of the Company
since February 1993. From August 1986 to February 1993, she was Director of
Marketing of the Company. Prior to that time, she was employed in the Consumer
Service and Marketing Department of Collagen Corporation, a biomedical company.
Mr. Moody has been Vice President - Managing Director - International
Division of the Company since October 1994. He has been with the Company since
1975 and has worked in a variety of functional areas, including production,
administration, marketing/sales, equipment and general management.
Ms. Voll joined the Company in April 1996 as Vice President, Finance and
Accounting. From February 1993 to September 1995, she was employed by Trinzic
Corporation, a software company, most recently as Vice President, Finance, Chief
Financial Officer, Treasurer and Secretary. From June 1991 to January 1993, she
was employed by Pyramid Technology, Inc., a computer hardware manufacturer, as
Director of Accounting. From 1986 to 1991, she was employed by Ingres
Corporation, a software company, where she held various management positions,
most recently as Corporate Controller.
Mr. Keefe has been Corporate Controller of the Company since February 1986.
6
<PAGE>
Mr. Tomlinson has been Secretary and a director of the Company since January
1986. He also serves as a director of Oak Technology, Inc., a designer and
marketer of multimedia semiconductors and related software. He has been a
partner in the law firm of Tomlinson Zisko Morosoli & Maser LLP since 1983.
Mr. Williams has been a director of the Company since January 1989. He
founded The Breckenridge Group, Inc., an investment banking firm in Atlanta,
Georgia, in April 1987 and is one of its principals.
Mr. Imbler has been a director of the Company since March 1989. He has been
President, Chief Executive Officer and a director of Berry Plastics Corporation
("Berry"), a manufacturer of plastic packaging, since January 1991. He has also
served as a director of BPC Holding Corporation, an entity affiliated with
Berry, since 1991. From July 1987 to January 1991, he was President and Chief
Executive Officer of Risdon Corporation, a cosmetic packaging company.
Mr. Behrens has been a director of the Company since June 1994. He has been
an officer of The Chase Manhatten Bank, N.A. ("Chase Bank") since 1986 and an
officer of Chase Capital Partners ("Chase Capital") since 1990. Mr. Behrens is a
director of The Pantry, Inc. and numerous private companies.
Dr. Pfeffer has been a director of the Company since May 1996. He has been a
professor in the Graduate School of Business at Stanford University since 1979,
except for the 1981-1982 academic year, when he served as the Thomas Henry
Carroll-Ford Foundation Visiting Professor of Business Administration at the
Harvard Business School, and currently holds the Thomas D. Dee Professor of
Organizational Behavior chair.
Each director listed above, except Dr. Pfeffer, was elected at the Company's
Annual Meeting of Shareholders held in January 1996 and will serve until his
successor has been elected and qualified or until his earlier resignation or
removal. Dr. Pfeffer was elected by Unanimous Written Consent of the Board of
Directors of the Company effective as of May 19, 1996 and will serve until his
successor has been elected or qualified or until his earlier resignation or
removal. Executive officers are chosen by, and serve at the discretion of, the
Board.
DIRECTOR COMPENSATION
Each of Dr. Pfeffer and Messrs. Imbler, Tomlinson and Williams receives as
compensation for his services as a director $2,500 per quarter, and $2,000 for
each meeting of the Board attended, and is reimbursed for his reasonable
expenses in attending Board meetings. None of the other Board members is
compensated as such. See "Management -- Compensation Committee Interlocks and
Insider Participation" in this Supplement to the Prospectus. Each of Messrs.
Imbler and Williams receives an annual retainer for his services as a member of
the Audit Committee of the Board in the amount of $4,000 paid on a quarterly
basis. Mr. Tomlinson receives an annual retainer for his services as an
alternate member of the Audit Committee of $4,000 paid on a quarterly basis.
Each of Dr. Pfeffer and Messrs. Tomlinson and Williams receives an annual
retainer for his services as a member of the Compensation Committee of the Board
of Directors in the amount of $4,000 paid on a quarterly basis.
EXECUTIVE COMPENSATION
The following table summarizes all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the fiscal
years ended August 31, 1995 and 1994 by the Company's Chief Executive Officer
and the Company's six other most highly compensated executive officers during
fiscal 1995 (together, the "Named Officers"). The table includes one executive
officer who has resigned and one executive officer who is currently involved
only in special projects.
7
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
----------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2) OPTIONS COMPENSATION (3)
- -------------------------------------- --------- ----------- ----------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts 1995 $ 232,280 $ 62,502 $ 50,251 -- $ 3,015
Chairman of the Board and 1994 201,093 150,000 50,373 -- 6,999
Chief Executive Officer
John L. Lemons (4) 1995 235,171 283,398 -- -- 8,570
President 1994 215,913 78,000 8,188 -- 7,839
Robert Plummer (5) 1995 167,955 13,900 -- -- 2,260
President - Nepco 1994 36,346 5,700 -- -- --
Division
Howard R. Girbach (6) 1995 162,011 2,040 7,200 -- 3,015
Corporate Vice 1994 149,261 29,300 7,200 -- 2,404
President
Robert R. Strickland 1995 150,974 2,040 -- -- 3,015
Vice President - 1994 133,443 57,500 -- -- 2,404
Finance and Chief
Financial Officer
Douglas L. Cullum (7) 1995 143,042 9,940 -- -- 3,015
President - Packaging 1994 136,839 16,300 -- -- 2,404
Division
Roger A. Moody 1995 116,328 29,940 2,300 -- 2,848
Vice President, 1994 120,038 18,000 1,349 -- 2,404
Managing Director
- International
</TABLE>
- ------------------------
(1) With respect to 1995, includes bonuses paid during fiscal 1996 for services
rendered during fiscal 1995, but not bonuses paid during fiscal 1995 for
services rendered during fiscal 1994. With respect to 1994, includes bonuses
paid during fiscal 1995 for services rendered during fiscal 1994, but not
bonuses paid during fiscal 1994 for services rendered during fiscal 1993.
(2) Includes automobile and gas allowances and, with respect to Mr. Watts,
$41,800 in consulting fees paid in both fiscal 1995 and 1994 to PPI
Management, Inc., a corporation of which Mr. Watts is the sole shareholder
and employee.
(3) Represents insurance premiums on term life insurance of $4,595 for Mr. Watts
for fiscal 1994 and insurance premiums on term life insurance of $6,470 and
$5,435 for Mr. Lemons for fiscal 1995 and 1994, respectively. In addition,
represents a Company profit-sharing contribution of $2,100 and $2,304 for
fiscal 1995 and 1994, respectively, and a Company 401(k) matching
contribution of $100 for each of the Named Officers (except for Mr. Plummer)
for fiscal 1994, and a Company 401(k) matching contribution of up to 1% of
salary, depending on the employee's contribution to the plan for fiscal
1995.
(4) Mr. Lemons resigned as President and a director of the Company effective as
of October 10, 1995.
(5) Mr. Plummer joined the Company in May 1994.
8
<PAGE>
(6) As of fiscal year end 1995, Mr. Girbach was President - Packaging Division.
He resigned from such position in April 1996 and is currently a Corporate
Vice President working on special projects.
(7) As of fiscal year end 1995, Mr. Cullum was Vice President - Manufacturing
Technology. He became President of the Packaging Division in April 1996.
The following table sets forth information concerning individual grants of
stock options made during fiscal year 1995 to the Named Officers.
OPTION/SAR GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)(3)
- --------------------------------- ------------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert Plummer................... 54,000 15.5% $ 4.00 8/25/2005 $ 135,841 $ 344,248
</TABLE>
- ------------------------
(1) There are no stock appreciation rights. The options vest according to the
following schedule: 10,800 shares vested as of June 1, 1996, and 2,700
shares vest upon the first day of each calendar quarter thereafter until
June 1, 2000, at which time these options will be fully vested.
(2) The exercise price on the date of grant was equal to 100% of the fair market
value on the date of grant.
(3) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
The following table sets forth certain information regarding option
exercises during fiscal year 1995 and the number of shares covered by both
exercisable and unexercisable stock options as of August 31, 1995 for each of
the Named Officers.
AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT AUGUST 31, 1995 AUGUST 31, 1995 (1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts.................... -- $ -- -- -- $ -- $ --
John L. Lemons (2)............... -- -- -- -- -- --
Robert Plummer................... 10,000 -- 10,000 84,000 15,000 45,000
Howard R. Girbach (3)............ -- -- 48,000 92,000 72,000 138,000
Robert R. Strickland............. -- -- 64,000 16,000 144,000 36,000
Douglas L. Cullum................ 25,000 84,750 55,000 -- 186,450 --
Roger A. Moody................... -- -- 40,000 -- 135,600 --
</TABLE>
- ------------------------
(1) The value of an "in-the-money" option represents the difference between the
estimated fair market value of the underlying securities at August 31, 1995
of $4.00 per share, as determined by the Company's Board of Directors, minus
the exercise price of the options.
(2) Mr. Lemons resigned as President and as a director of the Company effective
as of October 10, 1995.
(3) Mr. Girbach resigned as President of the Packaging Division in April 1996
and is currently a Corporate Vice President working on special projects.
9
<PAGE>
EMPLOYEE BENEFIT PLANS
1988 STOCK OPTION PLAN. The 1988 Stock Option Plan (the "1988 Plan") was
adopted by the Board in September 1988 and approved by the Company's
shareholders in May 1989. The 1988 Plan has been terminated, although options
granted under the 1988 Plan remain outstanding.
As of June 18, 1996, a total of 1,154,010 shares of Class B Common Stock,
Series 1 were subject to issuance with respect to outstanding options granted
under the 1988 Plan. Options were granted under the 1988 Plan to officers, key
employees and independent contractors of the Company, or any subsidiary of the
Company. Options granted under the 1988 Plan were incentive stock options
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or nonqualified stock options ("NQSOs"); however, only
employees of the Company, or of a parent or subsidiary of the Company, could
have been granted ISOs. Generally, options under the 1988 Plan expire ten years
after the date of grant (generally subject to shortened exercisability periods
for terminated employees).
The 1988 Plan may be administered by the Board or by a committee appointed
by the Board. The 1988 Plan is currently administered by the Board.
The exercise price of an option granted under the 1988 Plan may not be less
than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair
market value of the Company's Class B Common Stock, Series 1 on the date of
grant, except that, for an ISO granted to a person holding 10% or more of the
total combined voting power of all classes of stock of the Company or any parent
or subsidiary of the Company, the exercise price must be not less than 110% of
such fair market value. Options generally become exercisable as to 20% of the
shares one year after the vesting start date and as to an additional 5% of the
shares for each full quarter thereafter that the optionee renders services to
the Company.
1994 STOCK OPTION PLAN. The 1994 Stock Option Plan (the "1994 Plan") was
adopted by the Board and the Company's shareholders in November 1994. The 1994
Plan will terminate on November 17, 2004 (although options granted under the
1994 Plan may be exercised subsequent to such date) or such earlier time as all
of the shares of Class B Common Stock, Series 1 reserved thereunder have been
issued.
A total of 1,000,000 shares of Class B Common Stock, Series 1 has been
reserved for issuance under the 1994 Plan. As of June 18, 1996, a total of 4,300
shares of Class B Common Stock, Series 1 had been issued pursuant to option
exercises under the 1994 Plan, a total of 601,500 shares of Class B Common
Stock, Series 1 were subject to issuance with respect to options granted under
the 1994 Plan and a total of 394,200 shares remained available for future grants
under the 1994 Plan. Options may be granted under the 1994 Plan to officers, key
employees and independent contractors of the Company, or any subsidiary of the
Company. Options granted under the 1994 Plan may be ISOs within the meaning of
Section 422 of the Code, or NQSOs; however, only employees of the Company, or of
a parent or subsidiary of the Company, may be granted ISOs. Generally, options
under the 1994 Plan expire ten years after the date of grant (subject to
shortened exercisability periods for terminated employees). The 1994 Plan allows
a maximum term of ten years from the date the option is granted (or five years
in the case of any option granted to the holder of 10% or more of the shares of
the Company).
The 1994 Plan may be administered by the Board or by a committee appointed
by the Board, which has discretion to select optionees and to establish the
terms and conditions of the options, subject to the provisions of the 1994 Plan.
The 1994 Plan is currently administered by the Compensation Committee.
The exercise price of an option granted under the 1994 Plan may not be less
than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair
market value of the Company's Class B Common Stock, Series 1 on the date of
grant, except that, for an ISO granted to a person holding 10% or more of the
total combined voting power of all classes of stock of the Company or any parent
or subsidiary of the Company, the exercise price must be not less than 110% of
such fair market value.
10
<PAGE>
Options generally become exercisable as to 20% of the shares one year after the
vesting start date and as to an additional 5% of the shares for each full
quarter thereafter that the optionee renders services to the Company.
As of June 18, 1996, under both the 1988 and 1994 Plans, options to purchase
an aggregate of 1,621,490 shares of Class B Common Stock, Series 1 had been
exercised, directors, officers, consultants and other employees held
non-qualified stock options to purchase an aggregate of 1,154,010 shares, with a
weighted average exercise price of $1.32, and directors, officers and other
employees held incentive stock options to purchase an aggregate of 601,500
shares, with a weighted average exercise price of $4.18.
401(K) PLAN. In 1987, the Company's Board of Directors adopted a profit
sharing plan that is intended to qualify under Section 401(k) of the Code (the
"401(k) Plan"). Each employee of the Company who is at least 21 years of age,
has completed one year of service and is not covered by a collective bargaining
agreement is eligible to participate in the 401(k) Plan. A participating
employee may make pre-tax contributions of up to 10% of such employee's
compensation that does not exceed the Social Security Wage Base ("Eligible
Compensation Base") in effect at the end of the plan year. The Company makes
matching contributions that, beginning in fiscal 1995, are 20% of the employee's
contribution, up to a maximum employee contribution of 5% of salary. In
addition, the Company may, at the discretion of the Board of Directors, make
profit-sharing contributions. In fiscal 1993, fiscal 1994 and fiscal 1995, the
Company contributed 3.0%, 4.0% and 3.0%, respectively, of each participant's
Eligible Compensation Base as profit sharing contributions for those years.
1996 EMPLOYEE STOCK PURCHASE PLAN. The Company's Board of Directors has
authorized the adoption of an Employee Stock Purchase Plan that is intended to
qualify under Section 423 of the Code (the "Purchase Plan"). It is anticipated
that the Purchase Plan will incorporate the provisions described below. The
maximum number of shares to be issued under the Purchase Plan will be 750,000
shares of Class B Common Stock, Series 1. Participation will be available to all
employees of the Company (other than certain part-time and seasonal employees
and employees possessing 5% or more of the total combined voting power or value
of all classes of the Company's stock) who have been with the Company at least
one month prior to the commencement of an offering under the Purchase Plan. The
Purchase Plan will be implemented through consecutive offerings of twelve months
duration commencing on January 1 of each year, except for the initial offering
period. Eligible employees may participate only through payroll withholding. At
the employee's election, from 1% to 10% of the employee's compensation will be
withheld. The price at which employees will purchase shares will be 85% of the
lower of the fair market value of the stock at the beginning of the offering
period (January 1 of the applicable year, except for the initial offering
period) or the fair market value of the stock at the end of the offering period
(December 31 of the applicable year). No employee will be entitled to purchase
shares at a rate which exceeds $25,000 in fair market value for each calendar
year in which the employee participates in the Purchase Plan. Implementation of
the Purchase Plan is subject to approval by the Compensation Committee and to
stockholder approval.
1996 EMPLOYEE PERFORMANCE UNIT BONUS PLAN. The Company's Board of Directors
has authorized the adoption of the 1996 Employee Performance Unit Bonus Plan
(the "Bonus Plan") pursuant to which units representing hypothetical shares of
the stock of the Company are credited to an employee's account. Cash or stock
dividends and splits attributable to such are also credited to the employee's
account. Upon a specified date or the happening of a certain event, the employee
is entitled to receive an amount equal to the excess (if any) of the fair market
value of the hypothetical stock represented by the units over the value of such
stock on the date on which the units were awarded. The Bonus Plan provides for
the issuance of up to 1,000,000 units thereunder. The Board has authorized the
issuance of 100,000 units to Mr. Watts, with each unit having a value of $4.50.
Implementation of the Bonus Plan is subject to approval of the Compensation
Committee.
11
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Timothy Tomlinson, Larry C. Williams and Jeffrey Pfeffer, Ph.D.
Mr. Tomlinson is also the Company's Secretary.
In 1989, the Company granted to Mr. Tomlinson and TZM Investment Fund, of
which Mr. Tomlinson is a general partner, options to purchase 124,026 shares of
Class B, Series 1 Common Stock for $1.00 per share. A portion of those options
were exercised during the period from December 1989 to September 1991, for
66,000 shares of Class B, Series 1 Common Stock and, during the period from
January through April 1995, for 28,042 shares of Class B, Series 1 Common Stock.
TZM Investment Fund continues to hold the balance of the options. In 1991, TZM
Investment Fund received from the Company, and continues to hold, options to
purchase 90,000 shares of the Company's Common Stock for $1.75 per share. In
1989, the Company granted to Mr. Williams and other principals of The
Breckenridge Group, Inc. ("Breckenridge"), an investment banking firm of which
Mr. Williams is a principal, options to purchase 124,026 shares of Class B,
Series 1 Common Stock for $1.00 per share (Mr. Williams received options to
purchase 33,720 of such shares). Such principals of Breckenridge have exercised
a portion of those options, purchasing, during the period from December 1989 to
September 1991, 66,000 shares of Class B, Series 1 Common Stock (17,670 of which
were purchased by Mr. Williams), and such principals continue to hold the
balance of the options (Mr. Williams continues to hold options to purchase
16,050 shares).
The Company retains as its general counsel the law firm of Tomlinson Zisko
Morosoli & Maser LLP, of which Mr. Tomlinson is a general partner. For legal
services rendered during fiscal 1993, 1994 and 1995, the Company paid Mr.
Tomlinson's law firm $451,000, $420,000 and $333,000, respectively, including
expenses.
In March 1992, the Company engaged Breckenridge to act as investment banker
in a possible equity financing and as a finder for the purposes of introducing
the Company to one or more financial institutions to provide a senior financing
loan package. In fiscal 1992, the Company paid Breckenridge a $350,000 fee for
assistance in preparing a confidential private placement memorandum for a
possible equity offering and in evaluating the offering. In fiscal 1993, the
Company paid Breckenridge a $200,000 finder's fee, plus expense reimbursement of
$11,000, in connection with the closing of a new senior financing loan package.
In fiscal 1996, Breckenridge acted as a finder in the sale of Common Stock of
the Company held by certain insiders of the Company. Breckenridge received fees
and expenses in the amount of $495,865 from the proceeds of the sale.
For additional information regarding Messrs. Tomlinson and Williams and
their respective affiliates, see the sections entitled "Management -- Executive
Officers and Directors" and "Principal Stockholders" included in this Supplement
to the Prospectus. Reference is also made to the section entitled "Certain
Transactions -- Transactions with Entities Affiliated with Directors" included
in this Supplement and in the attached Prospectus.
CERTAIN TRANSACTIONS
The information included in the section of the Prospectus entitled "Certain
Transactions" is hereby supplemented as follows:
LOANS TO EMPLOYEES
The Board of Directors of the Company has agreed to extend until January
1997 the due date of all principal and accrued interest owing to the Company by
Jack L. Watts under the terms of that certain loan made by the Company to Mr.
Watts in the original principal amount of $250,000. Reference is made to the
attached Prospectus for a description of the terms of this loan and the terms of
the loans extended to other employees of the Company.
12
<PAGE>
TRANSACTIONS WITH ENTITIES AFFILIATED WITH DIRECTORS
Expenditures in the amount of $5,000 were made in fiscal 1995 for mold
development, engineering or manufacturing services performed by Berry Plastics
Corporation, the President and Chief Executive Officer of which is Martin
Imbler, who also serves as a director of the Company.
Since June 1988, Chase Bank had held the Company's Senior Subordinated Notes
in the principal amount of $10.0 million and due June 30, 2002. The Senior
Subordinated Notes were repaid in full with the net proceeds of the Note
offering October 2, 1995. Such payment included $10 million of principal, $7,500
of interest, a prepayment premium of $147,800 and $1,500 of other fees and
expenses. In each of fiscal 1993, 1994 and 1995, the Company paid Chase Bank
interest on this indebtedness of $1.35 million. The Company paid refinancing
amendment and advisory fees of approximately $1 million and $258,000 to Chase
Bank during fiscal 1993 and 1994, respectively. No such payments were made in
fiscal 1995. Chase Bank is an affiliate of Chase Securities, Inc., Chase Capital
and Chase Manhattan Capital Corporation, which, together with other related
parties, owns approximately 24% of the Company's outstanding voting capital
stock. Chase Bank was one of the Underwriters in the offering of the Notes, and
currently makes a market in the Notes. Christopher C. Behrens, a director of the
Company, is also a Vice President of Chase Bank and Chase Capital. See also the
section entitled "Principal Stockholders" set forth in this Supplement.
In October 1995, Breckenridge acted as a finder in the sale of Class A
Common Stock of the Company by Jack Watts, John Lemons, LJL Cordovan Partners,
L.P., and Robert Fleming Nominees Limited (collectively, the "Sellers") to an
unrelated third party. Breckenridge received fees and expenses in the amount of
$495,865 from the proceeds of the sale. Just prior to the sale, portions of the
Sellers' individual holdings of Class B Common Stock, Series 1 and Series 2,
were exchanged for Class A Common Stock of the Company. The Class A Common Stock
of the Company is nonvoting and convertible only in the event that shares of the
Class B, Series 1 Common Stock of the Company are sold in a public offering or
there is a capital reorganization or reclassification of the capital stock of
the Company. Reference is made to the section entitled "Management --
Compensation Committee Interlocks and Insider Participation" in this Supplement
and to the section entitled "Certain Transactions" in the attached Prospectus
for additional information regarding transactions involving the Company and
Breckenridge.
For information concerning certain transactions between the Company and
Timothy Tomlinson, Larry C. Williams or their respective affiliates, see
"Management -- Compensation Committee Interlocks and Insider Participation" in
this Supplement to the Prospectus. Messrs. Tomlinson and Williams are directors
of the Company and are also members of the Compensation Committee of the Board
of Directors.
13
<PAGE>
PRINCIPAL STOCKHOLDERS
Reference is made to the section of the Prospectus entitled "Principal
Stockholders," which is superseded in its entirety as set forth below.
The following table sets forth certain information with respect to
beneficial ownership of each class of the Company's voting securities as of June
18, 1996 by (i) each person known by the Company to be the beneficial owner of
more than 5% of such class, (ii) each director, (iii) each Named Officer and
(iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
TITLE OF CLASS (1) NAME OF BENEFICIAL OWNER (2) OWNERSHIP (3) CLASS (3)
- -------------------------------------- ----------------------------------------- ------------------ -------------
<S> <C> <C> <C>
Class B Common Stock, Series 1 Jack L. Watts (4) 3,898,021 40.3%
Class B Common Stock, Series 2 Robert Fleming Nominees Limited, a United 355,715 3.4%
Kingdom Corporation (5)
Class B Common Stock, Series 1 Christopher C. Behrens (6) 1,552,333 16.0%
Class B Common Stock, Series 1 Chase Manhattan Capital Corporation (7) 1,552,333 16.0%
Class B Common Stock, Series 2 Christopher C. Behrens (6) 815,715 8.4%
Class B Common Stock, Series 2 Chase Manhattan Capital Corporation (7) 815,715 8.4%
Class B Common Stock, Series 1 Gary L. Barry (8) 607,965 6.3%
Class B Common Stock, Series 1 Timothy Tomlinson (9) 245,984 2.5%
Class B Common Stock, Series 1 Howard Girbach (10) 124,000 1.3%
Class B Common Stock, Series 1 Roger A. Moody (11) 106,650 1.1%
Class B Common Stock, Series 1 Robert R. Strickland (12) 100,000 1.0%
Class B Common Stock, Series 1 Douglas L. Cullum (13) 70,000 *
Class B Common Stock, Series 1 Larry C. Williams (14) 66,371 *
Class B Common Stock, Series 1 Robert Plummer (15) 40,800 *
Class B Common Stock, Series 1 Martin R. Imbler (16) 20,000 *
Class B Common Stock, Series 1 Jeffrey Pfeffer, Ph.D. (17) 15,000 *
Class B Common Stock, Series 1 All executive officers and directors as a 7,341,786 72.1%
and Series 2 group (16 persons) (18)
</TABLE>
- ------------------------
* Less than one percent
(1) The Company's Class B Common Stock, Series 1 and Class B Common Stock,
Series 2 have the same voting rights, each share being entitled to one vote.
The Class B Common Stock, Series 2 has a liquidation preference equal to
$0.60 on each distributed dollar in the event that the value of the
Company's assets available for distribution is less than $1.75 per share.
Each share of Class B Common Stock, Series 2 is convertible at any time at
the option of the holder into one share of Class B Common Stock, Series 1
and will be automatically converted into one such share (i) in the event
that shares of Class B Common Stock, Series 1 shall be sold in a firm
commitment public offering in which the aggregate public offering price is
not less than $10,000,000 or (ii) immediately prior to the effectiveness of
a merger or consolidation in which the Company is not the surviving entity
and in which the value of the property to be received by the stockholders
shall be not less than $1.75 per share. As of June 18, 1996, there were
9,678,070 shares of Class B Common Stock issued and outstanding, consisting
of 8,506,640 shares of Class B Common Stock, Series 1 and 1,171,430 shares
of Class B Common Stock, Series 2. As of June 18, 1996, there were 2,134,992
shares of Class A Common Stock issued and outstanding. Additionally,
immediately exercisable warrants to purchase 2,492,741 shares of Class A
Common Stock were outstanding. Chase Capital holds 2,052,526 of such
warrants and Heller Financial, Inc. holds 440,215 of such warrants. The
Class A Common Stock is non-voting and each share of Class A Common Stock
may be converted into one share of Class B Common Stock, Series 1 in the
event that shares of Class B
14
<PAGE>
Common Stock, Series 1 shall be sold in a firm commitment public offering in
which the aggregate public offering price is not less than $10,000,000 or
there is a capital reorganization or reclassification of the capital stock
of the Company.
(2) Mr. Lemons is not included in the table because he sold all of his holdings
of the capital stock of the Company upon his resignation as an officer and a
director of the Company on October 10, 1995.
(3) In accordance with the rules of the Securities and Exchange Commission,
shares are beneficially owned by the person who has or shares voting or
investment power with respect to such shares. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable. Shares of Common Stock subject to
options that are exercisable within 60 days of June 18, 1996 are deemed to
be outstanding and to be beneficially owned by the person holding such
option for the purpose of computing the percentage ownership of such person
but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(4) Includes 529,712 shares held by LJL Cordovan Partners, L.P., of which Mr.
Watts is the general partner, and 52,132 shares held by trusts for the
benefit of Mr. Watts' children. Mr. Watt's address is 890 Faulstich Court,
San Jose, California 95112.
(5) Includes 1,756 shares of Class B Common Stock, Series 2 held by Lochside
Nominees Limited. The address of this shareholder is c/o Robert Fleming &
Co. Ltd., 25 Copthall Avenue, London, England EC2R 7DR.
(6) Mr. Behrens is a principal of Chase Capital Partners, an affiliate of Chase
Manhattan Capital Corporation. Does not include warrants held by Chase
Manhattan Capital Corporation to purchase 2,052,526 shares of Class A Common
Stock at $0.60667 per share, which shares are non-voting. Mr. Behrens
disclaims beneficial ownership of the 1,552,333 shares of Class B Common
Stock, Series 1 and the 815,715 shares of Class B Common Stock, Series 2
owned by Chase Manhattan Capital Corporation and affiliates. The address of
this shareholder is Chase Capital Partners, 380 Madison Avenue, New York,
New York 10017.
(7) With respect to Class B Common Stock, Series 1, includes 149,047 shares
held by Archery Partners and 99,800 shares held by Baseball Partners,
affiliates of Chase Manhattan Capital Corporation. With respect to Class B
Common Stock, Series 2, includes 39,620 shares held by Archery Partners and
50,000 shares held by Baseball Partners. Does not include warrants held by
Chase Manhattan Capital Corporation to purchase 2,052,526 shares of Class A
Common Stock at $0.60667 per share, which shares are non-voting. The address
of this shareholder is Chase Capital Partners, 380 Madison Avenue, New York,
New York 10017.
(8) Mr. Barry's address is 640 Menlo Avenue, Suite 5, Menlo Park, California
95025.
(9) Includes 40,000 shares held by First TZMM Investment Partnership, of which
Mr. Tomlinson is a general partner, 66,000 shares held by TZM Investment
Fund of which Mr. Tomlinson is a general partner and 119,984 shares subject
to options held by TZM Investment Fund that are exercisable within 60 days
of June 18, 1996. Mr. Tomlinson's address is 200 Page Mill Road, Second
Floor, Palo Alto, California 94306.
(10) Includes 64,000 shares subject to options exercisable within 60 days of
June 18, 1996. Mr. Girbach's address is 890 Faulstich Court, San Jose,
California 95112.
(11) Includes 40,000 shares subject to options exercisable within 60 days of
June 18, 1996. Mr. Moody's address is 890 Faulstich Court, San Jose,
California 95112.
(12) Includes 80,000 shares subject to options exercisable within 60 days of
June 18, 1996. Mr. Strickland's address is 890 Faulstich Court, San Jose,
California 95112.
15
<PAGE>
(13) Includes 55,000 shares subject to options exercisable within 60 days of
June 18, 1996. Mr. Cullum's address is 890 Faulstich Court, San Jose,
California 95112.
(14) Includes 16,050 shares subject to options exercisable within 60 days of
June 18, 1996. Does not include (i) 123,756 shares and (ii) 41,976 shares
subject to options exercisable within 60 days of June 18, 1996, held in the
individual names of four other principals of The Breckenridge Group, Inc.
Mr. Williams' address is Resurgens Plaza, Suite 2100, 945 E. Paces Ferry
Road, Atlanta, Georgia 30326.
(15) Includes 30,800 shares subject to options exercisable within 60 days of
June 18, 1996. Mr. Plummer's address is 890 Faulstich Court, San Jose,
California 95112.
(16) Mr. Imbler's address is 101 Oakley Street, Evansville, Indiana 47706-0959.
(17) Dr. Pfeffer's address is Graduate School of Business, Stanford University,
Stanford, California 94305-5015.
(18) Includes all of the shares shown as included in footnotes (4), (6), and (9)
through (17).
16
<PAGE>
SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA
The information included in the section of the Prospectus entitled "Selected
Historical Condensed Consolidated Financial Data" is superseded in its entirety
by the information set forth below.
The selected historical condensed consolidated statement of operations and
balance sheet data set forth in the table below for, and at the end of, each of
the fiscal years in the five year period ended August 31, 1995 have been derived
from, and are qualified by reference to, the consolidated financial statements
of the Company which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The selected historical condensed consolidated statement of
operations and balance sheet data for the six months ended February 28, 1995 and
February 29, 1996, and at February 28, 1995 and February 29, 1996, are derived
from unaudited consolidated financial statements of the Company and, in the
opinion of the management of the Company, reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations of the interim periods. Results for
the six months ended February 28, 1995 and February 29, 1996 are not necessarily
indicative of the results that may be expected for the full fiscal year. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the consolidated
financial statements of the Company and the accompanying notes thereto and other
financial information appearing elsewhere in this Supplement to the Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, ----------------------
---------------------------------------------------------- FEB 28 FEB 29
1991 1992 1993 1994(A) 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales..................................... $ 48,204 $ 52,152 $ 58,286 $ 70,284 $ 124,650 $ 55,585 $ 73,877
Cost of sales............................. 34,658 37,676 42,679 51,670 91,972 41,530 55,857
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............................ 13,546 14,476 15,607 18,614 32,678 14,055 18,020
Selling, general and administrative....... 5,522 6,046 7,207 8,821 16,649 6,986 8,245
Research and development.................. 557 915 820 764 1,682 521 1,007
Amortization of intangibles (b)........... 1,440 1,421 1,400 2,025 3,724 1,565 2,194
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations.................. 6,027 6,094 6,180 7,004 10,623 4,983 6,574
Other (income) expenses, net (c).......... (35) 632 (62) 477 259 (178) 62
Interest expense, net..................... 3,888 3,147 3,044 3,899 8,483 3,931 5,696
Amortization of debt financing costs...... 418 365 479 433 447 269 261
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary item,
cumulative effect of change in
accounting principle and income
taxes.................................. 1,756 1,950 2,719 2,195 1,434 961 555
Income taxes (d).......................... 1,301 1,287 1,521 1,095 1,294 730 755
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................... 455 663 1,198 1,100 140 231 (200)
Extraordinary item, net (e)............... -- -- 889 790 -- -- 1,265
Cumulative effect of change in accounting
principle (d)............................ -- -- -- 85 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 455 $ 663 $ 309 $ 225 $ 140 $ 231 $ (1,465)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) per share............... $ 0.04 $ 0.05 $ 0.02 $ (0.02) $ (0.04) $ 0.00 $ (0.16)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................... $ 2,867 $ 2,920 $ 7,109 $ 11,049 $ 14,758 $ 16,910 $ 32,354
Total assets.............................. 40,502 44,031 50,896 110,820 130,326 109,150 156,557
Total debt................................ 30,681 30,611 38,140 77,467 91,912 82,723 117,798
Redeemable warrants (f)................... 1,683 2,483 2,600 3,055 3,665 3,055 4,088
Total shareholders' equity................ 2,746 2,719 2,597 5,393 6,694 8,775 4,822
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, ----------------------
---------------------------------------------------------- FEB 28 FEB 29
1991 1992 1993 1994(A) 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by (used in) operating
activities............................... $ 4,666 $ 7,699 $ 6,768 $ 9,351 $ 8,422 $ (1,759) $ 8,559
Net cash used in investing activities..... (4,931) (8,947) (9,119) (38,418) (24,648) (4,505) (16,010)
Net cash provided by financing
activities............................... 934 229 3,538 30,099 14,785 4,559 21,214
OPERATING AND OTHER DATA:
Closure unit volume (in millions)......... 3,376 3,763 3,980 4,893 8,476 4,008 4,549
Closure unit volume growth (g)............ 8.9% 1.5% 5.8% 22.9% 73.2% 10.5% 13.5%
EBITDA (h)................................ $ 11,180 $ 11,085 $ 12,883 $ 14,728 $ 23,588 $ 11,395 $ 14,330
Depreciation and amortization (i)......... 5,536 5,920 6,845 8,357 12,789 5,824 8,072
Capital expenditures...................... 4,204 8,089 9,564 6,159 11,302 4,703 16,372
Ratio of earnings to fixed charges (j).... 1.4x 1.4x 1.3x 1.2x 1.2x 1.2x --
</TABLE>
- ------------------------------
(a) Includes ten months of operations before the Nepco acquisition on June 30,
1994 and two months of operations after the acquisition. Nepco is now a
division of Portola.
(b) Includes amortization of patents, goodwill and covenants not to compete.
(c) Other expenses include financing costs and other expenses, net.
(d) The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" in the fiscal year ended August 31, 1994. The
cumulative effect on prior years is shown in such period.
(e) Extraordinary item refers to extinguishment of certain debt, net of income
tax benefit.
(f) The redeemable warrants entitle the holders thereof to purchase an aggregate
of 2,492,741 shares of the Company's Common Stock. If the Company does not
complete an initial public offering of its Common Stock by June 30, 1999
(for certain warrants) or August 1, 2001 (for other warrants), the holders
may require the Company to repurchase the warrants at the higher of current
market value or an amount computed under the warrants.
(g) These results reflect closure unit volume growth of the Company including
Nepco after June 30, 1994. On a pro forma combined basis, the closure unit
volume growth for Portola and Nepco was 11.6% for the fiscal year ended
August 31, 1994.
(h) EBITDA represents, for any relevant period, income (loss) before income
taxes, extraordinary item, cumulative effect of change in accounting
principle, depreciation of property, plant and equipment, interest expense,
net, amortization of intangible assets and non-recurring legal expenses
associated with the Company's litigation with Scholle Corporation through
October 2, 1995. See "Business -- Litigation" in this Supplement to the
Prospectus. The non-recurring legal expenses associated with the Scholle
Corporation litigation for the fiscal years ended August 31, 1993, 1994 and
1995 were $275,000, $277,000 and $882,000, respectively; for the six months
ended February 28, 1995 and February 29, 1996, they were $679,000 and
$7,000, respectively. EBITDA is not intended to represent and should not be
considered more meaningful than, or an alternative to, net income, cash flow
or other measure of performance in accordance with generally accepted
accounting principles. EBITDA data is included because the Company
understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt and because
certain restrictive covenants in the Indenture will be based on a term very
similar to the Company's EBITDA.
(i) Includes amortization of debt financing costs.
(j) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs and the portion of lease expense which management believes
is representative of the interest component of lease expense. The ratio of
earnings to fixed charges for the six months ended February 29, 1996
resulted in a deficiency of $1.6 million.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to the section of the Prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
is superseded in its entirety to read as follows:
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of the Company's sales represented by certain income and expense items in its
statement of operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------- -------------
<S> <C> <C>
Sales............................................................. 100.0% 100.0%
Cost of sales..................................................... 74.7 75.6
----- -----
Gross profit.................................................. 25.3 24.4
Selling, general and administrative............................... 12.6 11.1
Research and development.......................................... 0.9 1.4
Amortization of intangibles....................................... 2.8 3.0
----- -----
Income from operations........................................ 9.0 8.9
Other (income) expense, net....................................... (0.3) 0.1
Interest expense, net............................................. 7.1 7.7
Amortization of debt financing costs.............................. 0.5 0.4
----- -----
Income before income taxes.................................... 1.7 0.7
Income taxes...................................................... 1.3 1.0
----- -----
Income (loss) before extraordinary item....................... 0.4 (0.3)
Extraordinary item, net........................................... 0.0 1.7
----- -----
Net income (loss)................................................. 0.4% (2.0)%
----- -----
----- -----
</TABLE>
SIX MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO SIX MONTHS ENDED FEBRUARY 28,
1995
Sales increased $18.3 million, or 32.9%, from $55.6 million for the six
months ended February 28, 1995 to $73.9 million for the six months ended
February 29, 1996. Of the increase, $10.2 million was attributable to sales from
domestic closure operations, $2.1 million was attributable to an increase in
equipment sales, primarily equipment to attach fitments to gabletop paperboard
containers, and $6.0 million was due to sales from operations in the United
Kingdom and Canada that were acquired since the second quarter of last year. The
$10.2 million increase in sales from domestic closure operations is an increase
of 20% from the prior year, and resulted from strong late summer sales,
increased demand in core product lines, and increased export sales.
Gross profit increased $4.0 million or 28.2%, to $18.0 million for the six
months ended February 29, 1996, as compared to $14.0 million for the six months
ended February 28, 1995. Gross profit as a percentage of sales decreased from
25.3% for the six months ended February 28, 1995 to 24.4% for the six months
ended February 29, 1996. The absolute increase in gross profit was due to
increased sales levels over the prior year. The margin decrease was due to the
mix of sales, with higher sales of relatively low margin equipment and sales
from the recently acquired Canadian and UK operations, each of which have had
relatively low margins as well. Margins in the domestic closure business were up
slightly for the first half of fiscal 1996 as compared with the same period of
the prior year.
Selling, general and administrative expense increased $1.2 million or 18.0%,
to $8.2 million for the six months ended February 29, 1996, as compared to $7.0
million for the six months ended February 28, 1995, and decreased as a
percentage of sales from 12.6% for the six months ended February 28, 1995 to
11.1% for the six months ended February 29, 1996. Selling expenses increased
19
<PAGE>
$1.4 million due primarily to the higher sales levels, partially offset by a
$0.2 million decrease in general and administrative expenses due primarily to
reduced legal expenses as compared to the prior year.
Research and development expense increased $486,000, or 93.2%, to $1.0
million for the six months ended February 29, 1996, as compared to $521,000 for
the six months ended February 28, 1995, and increased as a percentage of sales
from 0.9% in the six months ended February 28, 1995 to 1.4% in the six months
ended February 29, 1996. The absolute increase in research and development
expense was due primarily to increased staffing to address expanded new product
development opportunities.
Amortization of intangibles (consisting of amortization of patents, goodwill
and covenants not to compete) increased $629,000, or 40.2%, to $2.2 million for
the six months ended February 29, 1996, as compared to $1.6 for the six months
ended February 28, 1995. The increase was primarily due to the amortization of
goodwill and covenants not to compete resulting from the acquisition of Portola
Packaging Canada Ltd. ("Portola Canada") in June 1995.
Income from operations increased $1.6 million, or 31.9%, to $6.6 million for
the six months ended February 29, 1996, as compared to $5.0 million for the six
months ended February 28, 1995, and decreased as a percentage of sales from 9.0%
for the six months ended February 28, 1995 to 8.9% for the six months ended
February 29, 1996. These changes were due to the factors summarized above.
Other (income) expense, net declined from income of $178,000 for the six
months ended February 28, 1995 to expense of $62,000 for the six months ended
February 29, 1996. Amortization of debt financing costs decreased $8,000 to
$261,000 for the six months ended February 29, 1996, as compared to $269,000 for
the six months ended February 28, 1995.
Interest expense, net increased $1.8 million to $5.7 million for the six
months ended February 29, 1996, as compared to $3.9 million for the six months
ended February 28, 1995. Of the increase, $0.5 million was incurred by Portola
Canada as a result of acquisition financing and working capital loans to finance
operations, $1.9 million resulted from replacement of prior debt with the
issuance on October 2, 1995 of $110 million of the Notes, with the increase
partially offset by increased interest income of $0.6 million.
Income taxes increased $25,000 to $755,000 for the six months ended February
29, 1996, as compared to $730,000 for the six months ended February 28, 1995.
Income before extraordinary item decreased $431,000 to a loss of $200,000
for the six months ended February 29, 1996, as compared to income of $231,000
for the six months ended February 28, 1995. Net income decreased $1.7 million to
a loss of $1.5 million for the six months ended February 29, 1996, as compared
to income of $231,000 for the six months ended February 28, 1995. An
extraordinary charge of $1.3 million net of taxes was recorded for the six
months ended February 29, 1996, as loan fees and other costs were expensed in
connection with an early extinguishment of debt resulting from the $110 million
senior note issue.
20
<PAGE>
The following table sets forth, for the periods indicated, the percentages
of the Company's sales represented by certain income and expense items in its
statement of operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................................................ 100.0% 100.0% 100.0%
Cost of sales.................................................................... 73.2 73.5 73.8
----- ----- -----
Gross profit................................................................... 26.8 26.5 26.2
Selling, general and administrative.............................................. 12.4 12.5 13.4
Research and development......................................................... 1.4 1.1 1.3
Amortization of intangibles...................................................... 2.4 2.9 3.0
----- ----- -----
Income from operations......................................................... 10.6 10.0 8.5
Other (income) expense, net...................................................... (0.1) 0.7 0.2
Interest expense, net............................................................ 5.2 5.6 6.8
Amortization of debt financing costs............................................. 0.8 0.6 0.4
----- ----- -----
Income before income taxes..................................................... 4.7 3.1 1.1
Income taxes..................................................................... 2.6 1.6 1.0
----- ----- -----
Income before extraordinary item and cumulative effect of accounting change.... 2.1 1.5 0.1
Extraordinary item, net.......................................................... 1.6 1.1 0.0
Cumulative effect of accounting change......................................... 0.0 0.1 0.0
----- ----- -----
Net income....................................................................... 0.5% 0.3% 0.1%
----- ----- -----
----- ----- -----
</TABLE>
FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994
Sales increased $54.4 million, or 77.3%, from $70.3 million for fiscal 1994
to $124.6 million for fiscal 1995. Of the increase, $41.1 million was
attributable to sales from Northern Engineering & Plastics Corp. ("Nepco")
operations acquired by the Company on June 30, 1994. Of the remainder, $5.5
million was attributable to an increase in equipment sales, primarily due to
international sales of PortaPlants and equipment to attach fitments to gabletop
paperboard containers, $3.9 million resulted from closure price increases
primarily driven by higher resin costs and $2.5 million was due to increased
unit sales of 5-gallon and widemouth closures.
Gross profit increased $14.1 million or 75.6%, to $32.7 million for fiscal
1995, as compared to $18.6 million for fiscal 1994. Gross profit as a percentage
of sales decreased slightly from 26.5% for fiscal 1994 to 26.2% for fiscal 1995.
The absolute increase in gross profit was primarily due to the Nepco acquisition
and, to a lesser extent, to increased sales in other product lines. The margin
decline was due to increased sales of low-margin fitment attachment equipment
and to increases in resin costs that, although offset by price increases in
approximately the same amounts, had the effect of decreasing gross profit
margins.
Selling, general and administrative expense increased $7.8 million or 88.7%,
to $16.6 million for fiscal 1995, as compared to $8.8 million for fiscal 1994,
and increased as a percentage of sales from 12.6% for fiscal 1994 to 13.4% for
fiscal 1995. Of the absolute increase, approximately $3.7 million was due to a
full year of selling, general and administrative expenses at Nepco in fiscal
1995, approximately $2.7 million represented increased general and
administrative expenses due primarily to the increased size of the corporation
and resulting infrastructure increases, $835,000 represented increased
commissions due to higher sales revenues and $576,000 was due to increased legal
expenses primarily associated with the Scholle patent infringement lawsuit.
Research and development expense increased $918,000, or 120.2%, to $1.7
million for fiscal 1995, as compared to $764,000 for fiscal 1994, and increased
as a percentage of sales from 1.1% in fiscal 1994
21
<PAGE>
to 1.3% in fiscal 1995. Of the absolute increase in research and development
expense, $525,000 was due primarily to increased staffing and the balance was
the result of increased expenditures for new product prototypes and patent
expenses.
Amortization of intangibles (consisting of amortization of patents, goodwill
and covenants not to compete) increased $1.7 million, or 83.9%, to $3.7 million
for fiscal 1995, as compared to $2.0 million for fiscal 1994. Of the increase,
$938,000 was due to goodwill amortization resulting from the Nepco acquisition
and $729,000 resulted from the amortization of the covenants not to compete
which relate to the acquisition of Nepco.
Income from operations increased $3.6 million, or 51.7%, to $10.6 million
for fiscal 1995, as compared to $7.0 million for fiscal 1994, but decreased as a
percentage of sales from 10.0% for fiscal 1994 to 8.5% for fiscal 1995. These
changes were due to the factors summarized above.
Other expense, net declined $218,000 to $259,000 for fiscal 1995, as
compared to $477,000 for fiscal 1994.
Interest expense, net increased $4.6 million to $8.5 million for fiscal
1995, as compared to $3.9 million for fiscal 1994, primarily as a result of
increased borrowings to fund the Nepco acquisition and higher working capital
requirements associated with increased sales levels. Income taxes increased
$199,000 to $1.3 million for fiscal 1995, as compared to $1.1 million for fiscal
1994.
Amortization of debt financing costs increased $14,000 to $447,000 for
fiscal 1995, as compared to $433,000 for fiscal 1994.
Income before extraordinary item and cumulative effect of change in
accounting principle decreased $960,000 to $140,000 for fiscal 1995, as compared
to $1.1 million for fiscal 1994. Net income decreased $85,000 to $140,000 for
fiscal 1995, as compared to $225,000 for fiscal 1994. An extraordinary charge of
$790,000 net of taxes was recorded for fiscal 1994, as loan fees and other costs
were expensed in connection with an early extinguishment of debt resulting from
the Nepco acquisition. During fiscal 1994, the Company adopted SFAS 109, which
resulted in a cumulative charge against earnings of $85,000.
FISCAL YEAR ENDED AUGUST 31, 1994 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1993
Sales increased $12.0 million, or 20.6%, to $70.3 million for fiscal 1994,
as compared to $58.3 million for fiscal 1993. Of the increase, $7.3 million was
attributable to the Nepco acquisition on June 30, 1994 and represents Nepco's
sales from closing to the end of the fiscal year. Of the $4.7 million remainder,
$1.9 million was attributable to an increase in equipment sales, primarily due
to international sales of PortaPlants and equipment to attach fitments to
gable-top paperboard containers, $1.7 million was due to increased sales of five
gallon closures and $693,000 resulted from increased sales of small closures,
with a shift in product mix from the snap cap to the new snap-screw cap.
Gross profit increased $3.0 million, or 19.3%, to $18.6 million for fiscal
1994, as compared to $15.6 million for fiscal 1993. Gross profit as a percentage
of sales decreased from 26.8% for fiscal 1993 to 26.5% for fiscal 1994. The
absolute increase in gross profit was primarily due to the increase in sales
volume. The modest decline in gross margins was primarily due to increased
depreciation and rent expenses principally associated with opening the new
Batavia, Illinois plant at the beginning of fiscal 1994.
Selling, general and administrative expense increased $1.6 million, or
22.4%, to $8.8 million for fiscal 1994, as compared to $7.2 million for fiscal
1993, and increased as a percentage of sales from 12.4% in fiscal 1993 to 12.5%
in fiscal 1994. While selling expenses increased $550,000, they declined from
7.8% of sales in fiscal 1993 to 7.3% in fiscal 1994 primarily because
promotional equipment expenses were reduced by $400,000 in fiscal 1994. General
and administrative expenses increased $1.2 million, with the increases primarily
due to the inclusion of Nepco for the last two months of fiscal 1994, bonus and
profit-sharing accruals and audit fee accruals.
22
<PAGE>
Research and development expense decreased $56,000, or 6.8%, to $764,000 for
fiscal 1994 as compared to $820,000 for fiscal 1993 and decreased as a
percentage of sales from 1.4% in fiscal 1993 to 1.1% in fiscal 1994. The
decreases were primarily attributable to the allocation of research and
development personnel to operations for work on current product enhancement
projects.
Amortization of intangibles increased $625,000, or 44.6%, to $2.0 million in
fiscal 1994 from $1.4 million in fiscal 1993. Of the increase, $342,000 was due
to the write-up of certain patent assets in fiscal 1994 in connection with the
adoption of SFAS 109, $121,000 was due to amortization of non-compete payments
and $162,000 was due to goodwill amortization in fiscal 1994 resulting from the
Nepco acquisition and related financing activities. There was no amortization of
goodwill in fiscal 1993.
Income from operations increased $824,000, or 13.3%, to $7.0 million for
fiscal 1994, as compared to $6.2 million for fiscal 1993, and declined slightly
from 10.6% of sales in 1993 to 10.0% of sales in fiscal 1994. These changes were
due to the factors summarized above.
Other (income) expense, net increased $539,000 to expense of $477,000 in
fiscal 1994 as compared to income of $62,000 in fiscal 1993, primarily due to
fiscal 1994 write-offs totaling $625,000 as a result of financing activities
that were postponed.
Interest expense, net increased $855,000, or 28.1%, to $3.9 million in
fiscal 1994 from $3.0 million in fiscal 1993, due to the Company incurring $39.1
million of additional debt primarily to fund the Nepco acquisition. Income taxes
decreased $426,000 to $1.1 million in fiscal 1994 as compared to $1.5 million in
fiscal 1993.
Amortization of debt financing costs decreased $46,000 to $433,000 in fiscal
1994, as compared to $479,000 in fiscal 1993.
Income before extraordinary item and cumulative effect of change in
accounting principle decreased $98,000 to $1.1 million in fiscal 1994 as
compared to $1.2 million in fiscal 1993. Net income decreased $84,000 to
$225,000 in fiscal 1994 as compared to $309,000 in fiscal 1993. In connection
with the early extinguishment of debt, loan fees and other costs were expensed,
resulting in an extraordinary charge for fiscal 1994 of $790,000 net of taxes.
In October 1992, the Company refinanced its debt to provide additional capacity
for growth, resulting in an extraordinary charge for fiscal 1993 of $889,000 net
of taxes. During fiscal 1994, the Company adopted SFAS 109, which resulted in a
cumulative charge against earnings of $85,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash from operations, supplemented as
necessary from time to time by borrowings from financial institutions and sales
of Common Stock, to finance its operations, repay long-term indebtedness and
fund capital expenditures and acquisitions. At February 29, 1996, primarily as a
result of the Note offering in October 1995, the Company had cash, cash
equivalents and short-term investments of $14.5 million, an increase of $12.7
million from August 31, 1995.
Cash provided by operations totaled $8.6 million for the six months ended
February 29, 1996, a $10.4 million increase from the $1.8 million used by
operations for the six months ended February 28, 1995. Accounts receivable and
inventories provided funds of $0.4 million in the six months ended February 29,
1996, as opposed to using funds of $5.4 million in the same period of the prior
year. Additions to property were $16.4 million for the six months ended February
29, 1996, as compared to $4.7 million for the six months ended February 28,
1995. The increase included the acquisition, for $7.2 million, of the Company's
headquarters and manufacturing facilities in San Jose, California, on February
9, 1996. The balance of the increase in capital expenditures is primarily for
increased production capacity for fitments, push-pull and snap-screw closures,
replacement molds and a reconfiguration of the New Castle, Pennsylvania plant
layout for increased efficiency. Capital expenditures,
23
<PAGE>
excluding the San Jose plant purchase, are currently expected to be
approximately $18.0 million for fiscal 1996 and should be financed through cash
from operations. This also excludes potential expansion activity in Canada and
the United Kingdom.
On October 2, 1995, the Company completed the $110 million offering of Notes
that mature on October 1, 2005 and bear interest at the rate of 10.75% per
annum. Interest is payable semi-annually on April 1 and October 1 of each year,
commencing on April 1, 1996. The net proceeds of the Note offering were
approximately $106 million, of which $83 million was used to retire the
Company's debt then outstanding under its senior term loans, revolving facility
and senior subordinated notes. Subsequent to the closing of the Note offering,
$7.2 million was used to purchase the Company's San Jose facilities, $11 million
was used to purchase machinery and equipment, $3 million was used to make a loan
to the Company's 50% joint venture in Mexico, and $2 million was used for
working capital needs.
The Company has been the defendant in litigation with Scholle Corporation
("Scholle") related to alleged patent infringement on five-gallon non-spill caps
(see Note 9 of the financial statements included as part of this report). On
January 2, 1996, the court denied further motions and entered the jury's verdict
making the Company liable for damages of $0.01 per closure unit sold. The
Company is likely to have to pay $0.01 per closure unit in damages, totalling
approximately $1.4 million on sales through April 30, 1996, as well as on sales
occurring thereafter. These amounts have been and will continue to be accrued in
the Company's financial statements in the periods in which sales occurred or
continue to occur.
At February 29, 1996, the Company had $14.5 million in cash and cash
equivalents as well as borrowing capacity under the revolving credit facility
which was unused as of the date of this Supplement to the Prospectus. Management
believes that these resources, together with anticipated cash flow from
operations, will be adequate to fund the Company's operations, debt service
requirements and capital expenditures into fiscal 1997.
INFLATION
Most of the Company's closures are priced based in part on the cost of the
plastic resins from which they are produced. Historically, the Company has been
able to pass on increases in resin prices directly to its customers on a timely
basis. In recent years, the Company has benefited from relatively stable or
declining prices for raw materials other than plastic resins. In the event
significant inflationary trends were to resume, management believes that the
Company would generally be able to offset the effects thereof through a
combination of continuing improvements in operating efficiencies and price
increases.
SEASONALITY
The Company's sales and earnings reflect a seasonal pattern as a result of
greater sales volumes during the summer months. For example, in fiscal 1995,
excluding the acquisition of Portola Canada which occurred in June 1995, 45% of
sales occurred in the first half of the year (September through February) while
55% of sales were generated in the second half (March through August). The
effect of seasonality on income from operations is usually somewhat more
pronounced, although in fiscal 1995 49% of income from operations was generated
in the first half of the year and 51% was generated in the second half.
INCOME TAXES
Effective September 1, 1993, the Company adopted SFAS 109, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Prior years' financial statements were not restated to apply the
provisions of SFAS No. 109; however, prior year business combinations were
restated as of September 1, 1993 under SFAS No. 109. Under this method, deferred
tax assets and
24
<PAGE>
liabilities are determined based on the difference between the financial
statement and tax bases of such assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Prior to September 1, 1993, the provision for income taxes was based on
income and expense included in the accompanying consolidated statements of
operations. Differences between taxes so computed and taxes payable under
applicable statutes and regulations were classified as deferred taxes arising
from timing differences.
Income tax expense does not bear a normal relationship to income before
income taxes primarily due to nondeductible goodwill arising from the Nepco
acquisition.
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121), which requires the Company to review for
impairment long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This statement
requires impairment losses to be recognized for assets that do not have
realizable carrying values. SFAS 121 will be effective for the Company's fiscal
year 1997. The Company is currently studying the implications of the statement
to determine its impact on the Company's financial condition and results of
operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. The Company is currently following the requirements of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" while it studies the
implications of SFAS No. 123 and evaluates the effect, if any, on the financial
condition and results of operations of the Company. SFAS No. 123 will be
effective for the Company's fiscal year 1997.
EXPERTS
The information included in the section of the Prospectus entitled "Experts"
is superseded in its entirety as set forth below.
The consolidated balance sheets as of August 31, 1994 and 1995, and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended August 31, 1995, of the Company
included in this Supplement to the Prospectus have been included herein in
reliance on the report, which includes an explanatory paragraph regarding
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," and restated fiscal 1994 earnings (loss) per share in accordance with
EITF 88-9, of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following financial statements supersede in their entirety the financial
statements included in the attached Prospectus.
Portola Packaging, Inc. and Subsidiaries
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Operations.................................................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Consolidated Statements of Shareholders' Equity.......................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1994 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended August 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, effective
September 1, 1993, the Company adopted Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" and restated fiscal 1994
earnings (loss) per share in accordance with EITF 88-9.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 1, 1995
F-2
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1994 1995
----------- ----------- FEBRUARY 29,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 2,219 $ 763 $ 14,526
Short term investments.................................................. 1,000
Accounts receivable, net of allowance for doubtful accounts of $389,
$813 and $660, respectively............................................ 15,626 20,323 20,267
Inventories............................................................. 8,441 9,833 10,193
Other current assets.................................................... 1,736 2,300 3,117
Deferred income taxes................................................... 738 2,248 2,068
----------- ----------- ------------
Total current assets................................................ 28,760 36,467 50,171
Investments............................................................... 1,000
Notes receivable.......................................................... 281 518 284
Property, plant and equipment, net........................................ 47,147 53,132 64,059
Goodwill, net of accumulated amortization of $162, $1,314 and $2,148,
respectively............................................................. 16,303 21,580 22,050
Patents, net of accumulated amortization of $8,922, $10,413 and $11,157,
respectively............................................................. 9,014 7,607 6,863
Covenants not to compete, net of accumulated amortization of $313, $1,393
and $1,666, respectively................................................. 3,631 5,295 5,022
Debt financing costs, net of accumulated amortization of $79, $526 and
$261, respectively....................................................... 2,392 1,937 3,286
Other assets.............................................................. 2,292 3,790 4,822
----------- ----------- ------------
Total assets........................................................ $ 110,820 $ 130,326 $ 156,557
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
(CONTINUED ON NEXT PAGE)
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES, REDEEMABLE WARRANTS, COMMON
STOCK AND OTHER SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1994 1995
----------- ----------- FEBRUARY 29,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Current portion of long term debt....................................... $ 3,179 $ 5,668 $ 819
Accounts payable........................................................ 7,511 7,796 5,504
Accrued liabilities..................................................... 6,312 7,449 6,521
Accrued interest........................................................ 709 796 4,973
----------- ----------- ------------
Total current liabilities........................................... 17,711 21,709 17,817
Long-term debt, less current potion....................................... 74,288 86,244 116,979
Other long term obligations............................................... 3,126 3,911 4,905
Deferred income taxes..................................................... 7,247 8,103 7,946
----------- ----------- ------------
Total liabilities................................................... 102,372 119,967 147,647
----------- ----------- ------------
Commitments and contingencies (Note 9)....................................
Redeemable warrants to purchase Class A common stock...................... 3,055 3,665 4,088
----------- ----------- ------------
Common stock and other shareholders' equity:
Class A convertible common stock of $.001 par value:
Authorized: 2,503 shares;.............................................
Issued and outstanding: 2,135 at February 29, 1996; none at August 31,
1995 and 1994........................................................ 2
Class B, Series 1, common stock of $.001 par value:
Authorized: 17,715 shares;............................................
Issued and outstanding: 8,679 shares in 1994, 9,225 shares in 1995 and
8,492 shares in 1996................................................. 8 9 9
Class B, Series 2, convertible common stock of $.001 par value:
Authorized: 2,571 shares;.............................................
Issued and outstanding: 2,571 shares in 1994 and 1995, and 1,171
shares in 1996....................................................... 3 3 1
Additional paid-in capital................................................ 7,351 9,205 9,213
Notes receivable from shareholders........................................ (286) (362) (362)
Cumulative foreign currency translation adjustments....................... (8)
Accumulated deficit....................................................... (1,683) (2,153) (4,041)
----------- ----------- ------------
Total common stock and other shareholders' equity................... 5,393 6,694 4,822
----------- ----------- ------------
Total liabilities, redeemable warrants, common stock and other
shareholders' equity............................................... $ 110,820 $ 130,326 $ 156,557
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, --------------------------
------------------------------- FEBRUARY 28, FEBRUARY 29,
1993 1994 1995 1995 1996
--------- --------- --------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.................................................. $ 58,286 $ 70,284 $ 124,650 $ 55,585 $ 73,877
Cost of sales.......................................... 42,679 51,670 91,972 41,530 55,857
--------- --------- --------- ------------ ------------
Gross profit....................................... 15,607 18,614 32,678 14,055 18,020
--------- --------- --------- ------------ ------------
Selling, general and administrative.................... 7,207 8,821 16,649 6,986 8,245
Research and development............................... 820 764 1,682 521 1,007
Amortization of intangibles............................ 1,400 2,025 3,724 1,565 2,194
--------- --------- --------- ------------ ------------
9,427 11,610 22,055 9,072 11,446
--------- --------- --------- ------------ ------------
Income from operations............................. 6,180 7,004 10,623 4,983 6,574
--------- --------- --------- ------------ ------------
Other (income) expense:
Interest income...................................... (84) (97) (175) (72) (684)
Interest expense..................................... 3,128 3,996 8,658 4,003 6,380
Amortization of financing costs...................... 479 433 447 269 261
Financing costs...................................... 625
Other (income) expense, net.......................... (62) (148) 259 (178) 62
--------- --------- --------- ------------ ------------
3,461 4,809 9,189 4,022 6,019
--------- --------- --------- ------------ ------------
Income before extraordinary item, cumulative effect
of change in accounting principle and income
taxes............................................. 2,719 2,195 1,434 961 555
Income taxes........................................... 1,521 1,095 1,294 730 755
--------- --------- --------- ------------ ------------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle......................................... 1,198 1,100 140 231 (200)
Extraordinary item -- loss on extinguishment of debt,
net income tax benefit of $592, $539 and $844 (Note
7).................................................... 889 790 1,265
Cumulative effect of change in accounting principle
(Note 13)............................................. 85
--------- --------- --------- ------------ ------------
Net income (loss)...................................... $ 309 $ 225 $ 140 $ 231 $ (1,465)
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Net income (loss) for common shareholders.............. $ 309 $ (230) $ (470) $ (48) $ (1,888)
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Earnings (loss) per common share:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................... $ 0.10 $ 0.06 $ (0.04) $ 0.00 $ (0.05)
Cumulative effect of change in accounting
principle........................................... $ 0.01
Net income (loss).................................... $ 0.02 $ (0.02) $ (0.04) $ 0.00 $ (0.16)
Number of shares used in computing per share amount.... 12,554 11,087 11,393 11,255 11,585
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, ---------------------------
------------------------------- FEBRUARY 28, FEBRUARY 29,
1993 1994 1995 1995 1996
--------- --------- --------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 309 $ 225 $ 140 $ 231 $ (1,465)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 6,845 8,357 12,789 5,824 8,072
Extraordinary loss on extinguishment of debt....... 1,481 1,329 2,109
Deferred income taxes.............................. 369 (320) (707) (605) 23
Loss on property and equipment dispositions........ 8 147
Provision for doubtful accounts.................... 39 16 420 75 (154)
Tax benefit of option exercise..................... 700
Changes in working capital:
Accounts receivable.............................. (1,143) (1,526) (3,953) (2,969) 755
Inventories...................................... (685) (908) (784) (2,403) (314)
Other current assets............................. (331) 600 (269) 768 (726)
Accounts payable................................. (1,165) (712) (585) (2,675) (2,876)
Accrued liabilities.............................. 309 1,987 1,137 (65) (1,042)
Accrued interest................................. 32 303 87 60 4,177
--------- --------- --------- ------------- ------------
Net cash provided by operating activities...... 6,768 9,351 8,422 (1,759) 8,559
--------- --------- --------- ------------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment........... (9,564) (6,159) (11,302) (4,703) (16,372)
Proceeds from sale of property, plant and
equipment........................................... 49 47 162
Payments for acquisition of Nepco net of cash
acquired of $173.................................... (30,774)
Payments for Canadian acquisition net of cash
acquired of $232.................................... (11,506)
Payments for UK acquisition, net of cash acquired of
$18................................................. (1,445)
Issuance of notes receivable......................... (75) (237)
Proceeds from short term investments................. 1,000
Repayment of notes receivable........................ 13 31
(Increase) decrease in other assets.................. 458 (1,563) (1,765) 198 807
--------- --------- --------- ------------- ------------
Net cash used in investing activities.......... (9,119) (38,418) (24,648) (4,505) (16,010)
--------- --------- --------- ------------- ------------
Cash flows from financing activities
Decrease in bank overdraft........................... (349)
Borrowings under debt arrangements................... 46,787 54,214 29,284 10,168 4,146
Repayments of debt arrangements...................... (39,771) (24,619) (15,208) (4,816) (88,260)
Payment of loan fees................................. (2,410) (2,472) (297) (4,019)
Prepayment penalty................................... (157)
Issuance of warrants................................. 210
Sales of common stock................................ 843 3,025 1,855
Proceeds from public debt offering................... 110,000
Repayment of notes receivable from shareholders...... 1 15
Increase in other receivable from shareholders....... (91)
Repurchase of common stock........................... (1,722)
Payments on covenants not to compete................. (50) (50) (1,070) (496) (496)
--------- --------- --------- ------------- ------------
Net cash provided by financing activities...... 3,538 30,099 14,785 4,559 21,214
--------- --------- --------- ------------- ------------
Effect of exchange rate changes on cash................ (15)
Increase (decrease) in cash and cash
equivalents................................. 1,187 1,032 (1,456) (1,705) 13,763
--------- --------- --------- ------------- ------------
Cash and cash equivalents at beginning of period....... 1,187 2,219 2,219 763
--------- --------- --------- ------------- ------------
Cash and cash equivalents at end of period............. $ 1,187 $ 2,219 $ 763 $ 514 $ 14,526
--------- --------- --------- ------------- ------------
--------- --------- --------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(INFORMATION FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------------------
CLASS B
-------------------------------------
CLASS A SERIES 1 SERIES 2
------------------------ ------------------------ -----------
SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, August 31, 1992.............................. 7,183 $ 720 2,571
Issuance of Class B, Series 1 common stock at $1.00
per share........................................... 11 11
Exercise of stock options at $0.61 per share......... 1,363 832
Repurchase of Class B, Series 1, common stock at
$2.50 per share..................................... (688) (1,721)
Tax benefit of stock option exercise................. 700
Payment of note receivable from shareholders.........
Increase in value of stock purchase warrants.........
Net income...........................................
----- ----------- -----------
Balances, August 31, 1993.............................. 7,869 542 2,571
Issuance of Class B common stock at $3.75 per
share............................................... 800 3,000
Exercise of stock options at $2.50 per share......... 10 25
Reincorporation into a Delaware corporation.......... (3,559)
Payment of note receivable from shareholders.........
Increase in value of stock purchase warrants.........
Net income...........................................
----- ----------- -----------
Balances, August 31, 1994.............................. 8,679 8 2,571
Exercise of stock options at $0.61, $1.00 and $4.00
per share........................................... 96 1
Increase in notes and other receivable from
shareholders........................................
Issuance of Class B common stock at $4.00 per share,
net of issuance costs of $23........................ 450
Increase in value of stock purchase warrants.........
Foreign currency translation adjustment..............
Net income...........................................
----- ----------- -----------
Balances, August 31, 1995.............................. 9,225 9 2,571
Conversion of Class B shares to Class A.............. 2,135 $ 2 (735) (1,400)
Exercise of stock options at $4.50 per share......... 2
Increase in value of stock purchase warrants.........
Foreign currency translation adjustment..............
Net loss.............................................
----- --- ----- ----------- -----------
Balances, February 29, 1996............................ 2,135 $ 2 8,492 $ 9 1,171
----- --- ----- ----------- -----------
----- --- ----- ----------- -----------
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL NOTES AND OTHER CURRENCY
PAID-IN RECEIVABLE FROM TRANSLATION ACCUMULATED
AMOUNT CAPITAL SHAREHOLDERS ADJUSTMENTS DEFICIT
----------- ----------- --------------- --------------- -------------
<S> <C>
Balances, August 31, 1992.............................. $ 3,795 $ (291) $ (1,755)
Issuance of Class B, Series 1 common stock at $1.00
per share...........................................
Exercise of stock options at $0.61 per share.........
Repurchase of Class B, Series 1, common stock at
$2.50 per share.....................................
Tax benefit of stock option exercise.................
Payment of note receivable from shareholders......... 4
Increase in value of stock purchase warrants......... (7)
Net income........................................... 309
----------- ------ -------------
Balances, August 31, 1993.............................. 3,795 (287) (1,453)
Issuance of Class B common stock at $3.75 per
share...............................................
Exercise of stock options at $2.50 per share.........
Reincorporation into a Delaware corporation.......... (3,792) $ 7,351
Payment of note receivable from shareholders......... 1
Increase in value of stock purchase warrants......... (455)
Net income........................................... 225
----------- ----------- ------ -------------
Balances, August 31, 1994.............................. 3 7,351 (286) (1,683)
Exercise of stock options at $0.61, $1.00 and $4.00
per share........................................... 78
Increase in notes and other receivable from
shareholders........................................ (76)
Issuance of Class B common stock at $4.00 per share,
net of issuance costs of $23........................ 1,776
Increase in value of stock purchase warrants......... (610)
Foreign currency translation adjustment.............. $ (8)
Net income........................................... 140
----------- ----------- ------ --- -------------
Balances, August 31, 1995.............................. 3 $ 9,205 (362) (8) (2,153)
Conversion of Class B shares to Class A.............. (2)
Exercise of stock options at $4.50 per share......... 8
Increase in value of stock purchase warrants......... (423)
Foreign currency translation adjustment.............. 8
Net loss............................................. (1,465)
----------- ----------- ------ --- -------------
Balances, February 29, 1996............................ $ 1 $ 9,213 $ (362) $ -- $ (4,041)
----------- ----------- ------ --- -------------
----------- ----------- ------ --- -------------
<CAPTION>
TOTAL COMMON
STOCK AND
OTHER
SHAREHOLDERS'
EQUITY
-------------
Balances, August 31, 1992.............................. $ 2,469
Issuance of Class B, Series 1 common stock at $1.00
per share........................................... 11
Exercise of stock options at $0.61 per share......... 832
Repurchase of Class B, Series 1, common stock at
$2.50 per share..................................... (1,721)
Tax benefit of stock option exercise................. 700
Payment of note receivable from shareholders......... 4
Increase in value of stock purchase warrants......... (7)
Net income........................................... 309
-------------
Balances, August 31, 1993.............................. 2,597
Issuance of Class B common stock at $3.75 per
share............................................... 3,000
Exercise of stock options at $2.50 per share......... 25
Reincorporation into a Delaware corporation.......... --
Payment of note receivable from shareholders......... 1
Increase in value of stock purchase warrants......... (455)
Net income........................................... 225
-------------
Balances, August 31, 1994.............................. 5,393
Exercise of stock options at $0.61, $1.00 and $4.00
per share........................................... 79
Increase in notes and other receivable from
shareholders........................................ (76)
Issuance of Class B common stock at $4.00 per share,
net of issuance costs of $23........................ 1,776
Increase in value of stock purchase warrants......... (610)
Foreign currency translation adjustment.............. (8)
Net income........................................... 140
-------------
Balances, August 31, 1995.............................. 6,694
Conversion of Class B shares to Class A.............. --
Exercise of stock options at $4.50 per share......... 8
Increase in value of stock purchase warrants......... (423)
Foreign currency translation adjustment.............. 8
Net loss............................................. (1,465)
-------------
Balances, February 29, 1996............................ $ 4,822
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION:
Portola Packaging, Inc. and Subsidiaries (the Company) operates in one
industry segment. The Company designs, manufactures and markets proprietary
tamper evident plastic closures for containers for the food and beverage
industries and related capping and filling equipment used on bottling lines by
the food and beverage industries.
2. ACQUISITIONS:
On September 1, 1995, the Company completed the acquisition of the 50%
interest it had not previously owned in Cap Snap (UK) Ltd, now known as Portola
Packaging Ltd. ("Cap Snap (UK)") for a purchase price of approximately $1.5
million. Cap Snap (UK) is a British corporation engaged in manufacturing and
distributing small closures in the United Kingdom. The transaction has been
accounted for as a purchase and the results of operations subsequent to the
acquisition date have been consolidated with the Company. Cap Snap (UK) is being
operated as an "unrestricted subsidiary". Accordingly, amounts that may be
invested by the Company in Cap Snap (UK) are subject to limitations pursuant to
the terms of the Indenture pertaining to the senior notes issued in October 1995
(see Note 16).
Consideration for the acquisition was allocated as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Total consideration paid................................................................... $ 1,463
Fair value of net assets acquired.......................................................... 159
-----------
Goodwill............................................................................... $ 1,304
-----------
-----------
</TABLE>
Effective June 16, 1995, the Company completed the acquisition of Alberta
Plastic Industries Ltd., B.C. Plastic Industries Ltd., the remaining 50%
interest of the Company's joint venture, Canada Cap Snap Corporation, and
certain production equipment of Allwest Industries Incorporated. The acquired
companies and assets operate in Canada as Portola Packaging Canada Ltd.
The Canadian acquisition has been accounted for as a purchase and the
results of operations of Portola Packaging Canada Ltd. have been consolidated
with those of the Company commencing June 16, 1995. The total purchase price,
including cash consideration and a noncompete agreement, amounted to $13,572.
Cash consideration paid by the Company was $11,738. In addition, the Company
entered into a noncompete agreement under which an intangible asset totaling
$2,560 was recorded at the present value of the payments (using a discount rate
of 8.75%). A liability was recorded of $1,834, which represents the net present
value of the payments less the initial payment made upon the closing of the
Canadian acquisition.
Consideration for the acquisition was allocated as follows:
<TABLE>
<S> <C>
Total consideration paid................................................. $ 11,738
Fair value of net assets acquired........................................ 5,464
-----------
Goodwill............................................................. $ 6,274
-----------
-----------
</TABLE>
F-8
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. ACQUISITIONS: (CONTINUED)
Pro forma financial statements as if the Canadian acquisition had taken
place at the beginning of each period presented is as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1994 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Sales.......................................................................... $ 74,853 $ 132,165
Gross profit................................................................... 20,286 35,638
Operating income............................................................... 7,610 11,597
Net income (loss).............................................................. (214) 400
Net income (loss) per share.................................................... (0.06) (0.02)
</TABLE>
Effective June 30, 1994, the Company acquired all of the outstanding stock
of Northern Engineering & Plastics Corp. and Northern Engineering and Plastics
Corp. -- West (collectively "Nepco"). Concurrent with the acquisition of Nepco,
the Company also purchased, from parties related to the owners of Nepco, certain
real property located in Sumter, South Carolina.
Nepco designs, manufactures and markets tamper evident plastic closures in
markets similar to those served by the Company. The real property acquired in
Sumter, South Carolina is a location where Nepco maintains substantial
manufacturing operations.
The acquisition of Nepco has been accounted for as a purchase and the
results of operations of Nepco have been consolidated with those of the Company
commencing July 1, 1994. The total purchase price, including cash consideration,
repayment of existing indebtedness and noncompete agreements, amounted to
$43,650. Cash consideration paid by the Company for the acquisition was $30,947.
In addition, the Company assumed, and subsequently repaid, Nepco indebtedness of
$9,058, and entered into a noncompete agreement under which an intangible asset
and a liability totaling $3,645 were recorded at the present value of the
payments (using a discount rate of 11%).
The Company financed its payments for the acquisition and Nepco indebtedness
which aggregated $40,005, through a series of term senior and revolving notes as
described in Note 7.
The cash consideration paid by the Company comprised the following:
<TABLE>
<S> <C>
Cash paid to the former shareholders of Nepco............................. $ 28,500
Cash paid for the purchase of real property............................... 1,872
Cash paid for certain closing costs....................................... 575
---------
$ 30,947
---------
---------
</TABLE>
Cash consideration for the acquisition was allocated as follows:
<TABLE>
<S> <C>
Total consideration paid.................................................. $ 30,947
Fair value of net assets acquired......................................... 14,482
---------
Goodwill.............................................................. $ 16,465
---------
---------
</TABLE>
In connection with the acquisition, the Company entered into noncompete and
bonus agreements with the former owners of Nepco. The noncompete and bonus
agreements have a five-year term with annual payments of $800 and $200,
respectively.
F-9
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. ACQUISITIONS: (CONTINUED)
Pro forma financial statements as if the acquisition of Nepco had taken
place at the beginning of each period presented is as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1993 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Sales.......................................................................... $ 89,143 $ 101,415
Gross profit................................................................... 23,230 22,246
Operating income............................................................... 4,517 5,175
Net income (loss).............................................................. (2,295) (2,908)
Net income (loss) per share.................................................... (0.18) (0.30)
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
INTERIM FINANCIAL STATEMENTS:
The interim financial statements included herein have been prepared by the
Company without audit and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) considered necessary for fair
presentation. Interim results are subject to significant seasonal variations and
the results of operations for the six months period ended February 29, 1996 are
not necessarily indicative of the results to be expected for the full year.
REVENUE RECOGNITION:
The Company recognizes revenue upon product shipment.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
INVESTMENTS:
Investments at August 31, 1995 consisted of a certificate of deposit whose
cost approximates fair market value. Investments are generally considered to be
available-for-sale and therefore are carried at fair market value. Unrealized
holding gains and losses on such securities, when material, are reported net of
related taxes as a separate component of common stock and other shareholders'
equity. Realized gains and losses on sales of all such investments are reported
in earnings and computed using the specific cost identification method.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost and depreciated on the
straight-line basis over estimated useful lives, which range from three to
thirty-five years. Leasehold improvements are amortized on a straight-line basis
over their useful lives or the lease term, whichever is shorter
F-10
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(generally five to ten years). When assets are disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting gains
or losses are included in the results of operations.
JOINT VENTURES:
The Company maintains joint venture and license arrangements in Mexico. This
investment, which is included in other assets, is accounted for by the equity
method. The Company's total investment and related income have not been
significant and are not separately presented.
INTANGIBLE ASSETS:
Patents and covenants not-to-compete are valued at cost and are amortized on
a straight-line basis over the lesser of their remaining useful or contractual
lives (generally five to thirteen years). Goodwill recorded in connection with
acquisitions of Nepco and of Portola Packaging Canada Ltd. (Note 2) is amortized
on a straight-line basis over 15 and 25 years, respectively.
DEBT FINANCING COSTS:
Debt financing costs are amortized using the interest method over the term
of the related loans.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are charged to operations as incurred.
INCOME TAXES:
Effective September 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of such assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse (See
Note 13).
Prior to September 1, 1993, the Company accounted for income taxes pursuant
to Accounting Principles Board Opinion No. 11, "Income Taxes." Prior year
financial statements have not been restated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
investments and trade receivables. The Company's cash and cash equivalents and
investments are concentrated in three United States banks and one Canadian bank.
At times, such deposits may be in excess of insured limits. Management believes
that the financial institutions which hold the Company's investments are
financially sound and, accordingly, minimal credit risk exists with respect to
these financial instruments.
F-11
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company's products are principally sold to entities in the food and
beverage industries in the United States and Canada. Ongoing credit evaluations
of customer financial condition are performed and collateral is generally not
required. The Company maintains reserves for potential credit losses which, on a
historical basis, have not been significant.
The Company has made an accrual of the estimated costs associated with its
Scholle patent infringement litigation (Note 9), the final outcome of which is
uncertain. The Company has significant intangible assets including goodwill,
patents and covenants not to compete which are subject to periodic review by the
Company.
FOREIGN CURRENCY TRANSLATION:
The Company's foreign subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at year-end exchange
rates. Items of income and expense are translated at average exchange rates for
the relevant year. Translation gains and losses are not included in determining
net income (loss) but are accumulated as a separate component of stockholders'
equity (deficit). Net gains and losses arising from foreign currency
transactions were not material in fiscal 1993, 1994 and 1995.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARES:
Earnings (loss) per common share and common equivalent share are computed by
dividing income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. Except as discussed
below, the number of common shares is increased by the number of shares issuable
on the exercise of options and warrants when the market price of the common
stock exceeds the exercise price of the options and warrants. This increase in
the number of common shares is reduced by the number of common shares which are
assumed to have been purchased with the proceeds from the exercise of the
options and warrants; these purchases are assumed to have been made at the
average price of the common stock during that part of the period when the market
price of the common stock exceeds the exercise price of the options and
warrants.
Since the Company's warrants include a put provision, Emerging Issues Task
Force (EITF) Consensus 88-9 requires computation of earnings (loss) per share
using the lower of the amount computed assuming conversion, as described above,
or the amount computed assuming exercise of the put option feature of the
warrants. Earnings (loss) per share computed using the put option feature is the
more dilutive of the calculations in fiscal 1994 and 1995, and results in a loss
per share since the accretion of the warrants of $455 and $610 for fiscal 1994
and 1995, respectively, is deducted from earnings. Earnings (loss) per share for
fiscal 1994, as previously reported, has been restated to use the more dilutive
of the two calculations, which resulted in a decrease in earnings (loss) per
share of $.04 from that originally reported. There was no impact on the
previously reported earnings per share for 1993 or on the financial position,
net income or cash flows as previously reported for any period presented.
CARRYING VALUE OF LONG-LIVED ASSETS:
The Company reduces the carrying value of long-lived assets to the extent to
which future undiscounted operating cash flows are not sufficient to recover the
carrying value of such assets over their remaining estimated useful lives.
RECENT ACCOUNTING PRONOUNCEMENTS:
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of"
F-12
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(SFAS 121), which requires the Company to review for impairment long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. This statement requires impairment losses to be
recognized for assets that do not have realizable carrying values. SFAS 121 will
be effective for the Company's fiscal year 1997. (The Company is currently
studying the implications of the statement to determine its impact on the
Company's financial condition and results of operations.)
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. The Company is currently following the requirements of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" while it studies the
implications of SFAS No. 123 and evaluates the effect, if any, on the financial
condition and results of operations of the Company. SFAS No. 123 will be
effective for the Company's fiscal year 1997.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation. These reclassifications had no
effect on net income.
4. SUPPLEMENTAL CASH FLOW DISCLOSURES:
The Company paid $74, $835 and $1,688 in income taxes during the years ended
August 31, 1993, 1994 and 1995, respectively.
The Company paid $3,257, $3,694 and $8,571 in interest during the years
ended August 31, 1993, 1994 and 1995, respectively.
During fiscal year 1993, the Company received 688 shares of its Class B
common stock from an officer and director in settlement of stock options
exercised and related federal and state withholding tax obligations.
During fiscal year 1994, the Company reincorporated into a Delaware
corporation, which resulted in a reclassification of $7,351 Class B common stock
into additional paid-in capital.
During fiscal year 1994, the Company acquired $8 of equipment under capital
lease.
During fiscal 1994, the Company adopted SFAS No. 109 under which fixed
assets and patents were grossed up $1,322 and $1,906, respectively, consistent
with the gross-up of the deferred tax liability.
During fiscal 1994 and 1995, the Company wrote off fully depreciated
property, plant and equipment totaling $3,233 and $2,561, respectively.
5. INVENTORIES:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1994 1995
--------- --------- FEBRUARY 29,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................................. $ 3,695 $ 4,850 $ 5,800
Work in process............................................ 1,667 1,455 929
Finished goods............................................. 3,079 3,528 3,464
--------- --------- ------------
$ 8,441 $ 9,833 $ 10,193
--------- --------- ------------
--------- --------- ------------
</TABLE>
F-13
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
6. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Buildings and land................................................... $ 11,989 $ 10,655
Machinery and equipment.............................................. 53,831 66,628
Leasehold improvements............................................... 2,472 3,052
---------- ----------
68,292 80,335
Less accumulated depreciation and amortization....................... (21,145) (27,203)
---------- ----------
$ 47,147 $ 53,132
---------- ----------
---------- ----------
</TABLE>
Depreciation charged to operations was $4,946, $5,903 and $8,619 for the
years ended August 31, 1993, 1994 and 1995, respectively.
7. DEBT:
CURRENT PORTION OF LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Term Loan Note A................................................................... $ 3,000 $ 4,000
Equipment Note..................................................................... 85 63
Development Note................................................................... 15 17
Capital Lease Obligations.......................................................... 64
Unsecured Notes.................................................................... 15
Canadian Term Loan Note............................................................ 744
Canadian Revolver Loan Note........................................................ 844
--------- ---------
$ 3,179 $ 5,668
--------- ---------
--------- ---------
</TABLE>
LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Term Loan Note A................................................................. $ 27,000 $ 23,000
Term Loan Note B................................................................. 30,000 30,000
Senior Subordinated Notes........................................................ 10,000 10,000
Revolving Loan Note.............................................................. 7,116 15,711
Canadian Term Loan Note.......................................................... 7,442
Equipment Note................................................................... 63
Development Note................................................................. 109 91
--------- ---------
$ 74,288 $ 86,244
--------- ---------
--------- ---------
</TABLE>
SUBSEQUENT DEBT ISSUANCE (UNAUDITED):
In connection with the Company's Note offering in October 1995, as described
in Note 16, substantially all existing indebtedness, exclusive of the
Development Note and the Canadian Term Loan and Revolver, has been repaid by the
Company. At February 29, 1996, long term debt totalled $117.0 million and
primarily consisted of $110.0 million of Senior Notes issued in October 1995 and
F-14
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
$6.9 million outstanding under the Canadian Term Loan Note. Current portion of
long term debt totalled $819 and consisted primarily of $548 under the Canadian
Term Loan Note and $183 under the Canadian Revolver Loan Note.
TERM LOAN NOTES:
Principal payments for Term Loan Note A were due quarterly in the amount of
$750 through July 1, 1995, then increasing every fifth quarter to $1,000,
$1,500, $2,000 and $2,250 with the final payment on July 1, 1999. Interest was
payable monthly based on London Interbank Offered Rate (LIBOR) or the highest
prime rate of selected reference banks, plus an applicable margin. At August 31,
1995, the interest rate was 9.14% (LIBOR, plus 3.25%).
Principal payments for Term Loan B were due quarterly beginning on October
1, 1999 and ending on July 1, 2001 in the amount of $3,750. Interest was payable
monthly based on LIBOR or the highest prime rate of selected reference banks,
plus an applicable margin At August 31, 1995, the interest rate was 9.64%
(LIBOR, plus 3.75%).
The Term Loan Notes were subject to a Credit and Security Agreement in which
the Company had granted a security interest in all of its assets. The Agreement
required the Company to maintain certain specified coverage levels on interest
expense and total debt service requirements. It also prohibited cash dividends
and principal payments on subordinated debt, and limited new indebtedness and
investments. The Company was in violation of certain covenants under the Term
Loan Notes in the last quarter of 1995. Waivers and amendments were not obtained
as the Company replaced all such indebtedness with new long-term, senior notes
as described in Note 16. The Company's existing debt has been classified in
accordance with its original terms since the new long-term indebtedness was
obtained prior to issuance of the Company's financial statements.
SENIOR SUBORDINATED NOTES:
The Company's Senior Subordinated Notes bore interest at 13.5% payable
quarterly. The full principal amount of the Senior Subordinated Notes was due on
June 30, 2002; however the Senior Subordinated Notes could be prepaid in part or
in full at any time, plus a premium based on yield differentials if the
prepayment occurred prior to June 30, 1996.
REVOLVING LOAN NOTE:
The revolving credit facility was maintained to finance working capital
requirements, and expired no later than July 1, 2001. The facility provided for
borrowings based on eligible accounts receivable and inventories up to the
commitment amount of $18,000. No amounts were due to be repaid until July 1,
2001, subject to collateral requirements; however the Company was permitted to
prepay any portion thereof without penalty. Interest was payable monthly based
on the highest prime rate of selected reference banks, plus an applicable margin
and/or LIBOR plus an applicable margin. At August 31, 1995 the interest rate was
9.14% (LIBOR rate plus 3.25%) for approximately $14.0 million and 10.5% (prime
rate plus 1.75%) for approximately $1.7 million. The Revolving Loan Note was
subject to the same Credit and Security Agreement as the Term Loan Notes
discussed above.
EQUIPMENT NOTE:
The Equipment Note was obtained to acquire machinery and equipment for the
Company's Sumter, South Carolina facility. Interest is payable monthly based on
a variable rate established as
F-15
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
67% of the prime lending rate (8.75% at August 31, 1995). Principal is payable
monthly in the amount of $7 with the final installment due on June 1, 1996. The
Equipment Note is collateralized by the machinery and equipment that was
purchased with the proceeds.
DEVELOPMENT NOTE:
The Company has a Development Note with the Bi-State Regional Commission.
The Development Note bears interest at 4% with the final monthly payment due in
May 2001.
CANADIAN TERM LOAN NOTE:
Principal payments for the Term Loan Note are due quarterly beginning on
November 30, 1995 in the amount of $186, then increasing every fifth quarter to
$372, $465, $512 and $512 with the final payment on August 31, 2000. The note
agreement requires interest payments monthly based on the Canadian prime rate
and/or Bankers Acceptances'. At August 31, 1995, the interest rate was 10.0%.
The note agreement, also calls for mandatory prepayments after August 31,
1996, based upon financial calculations including excess cash flow.
CANADIAN REVOLVING LOAN NOTE:
The revolving credit facility is maintained to finance working capital
requirements. The facility provides for borrowings based on eligible accounts
receivable and inventories up to the commitment amount of $3,000. The principal
is payable upon demand. Interest is payable monthly based on the Canadian prime
rate overdraft and/or Bankers Acceptance. At August 31, 1995, the interest was
9.25%.
CAPITAL LEASE OBLIGATIONS:
The Company has a plant located in New Castle, Pennsylvania under a lease
agreement with the local Industrial Development Authority. Lease payments were
payable monthly in the amount of $5 through September 1994. In addition, the
Company acquired certain equipment under noncancelable capital leases. The
balance sheet includes the following items held under capital lease obligations:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Building................................................................................ $ 438 $ 438
Land.................................................................................... 65 65
Equipment............................................................................... 64 64
--------- ---------
567 567
Less accumulated amortization........................................................... (6) (63)
--------- ---------
$ 561 $ 504
--------- ---------
--------- ---------
</TABLE>
EXTRAORDINARY ITEMS FISCAL 1993 AND 1994:
In connection with the Company's early extinguishment of debt in June 1994,
certain costs, consisting primarily of loan fees of approximately $1,329 were
written-off. These transactions have been reported as an extraordinary item in
the statement of operations, net of an income tax benefit of approximately $539.
In connection with the Company's October 1992 refinancing activities,
certain costs, consisting of advisory fees of approximately $373, were incurred
by the Company related to the early extinguishment of debt. In addition to these
amounts, loan fees related to the extinguished debt of approximately
F-16
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
$694, and the unamortized portion of the warrant discount attributed to the
original $10,000 Senior Subordinated Notes of approximately $414 were expensed
in connection with this early extinguishment of debt. These transactions have
been reported as an extraordinary item in the statement of operations, net of an
income tax benefit of approximately $592.
EXTRAORDINARY ITEM FISCAL 1996 (UNAUDITED):
In connection with the Company's Note offering in October 1995, certain
costs of approximately $2,109, consisting primarily of loan fees were expensed
in connection with an early extinguishment of debt. This transaction has been
reported as an extraordinary item in the statement of operations, net of an
income tax benefit of approximately $844.
FINANCING COSTS:
In connection with debt offerings which were commenced but not completed,
the Company expensed costs amounting to $625 in fiscal 1994.
AGGREGATE MATURITIES OF LONG-TERM DEBT:
The aggregate maturities of long-term debt as of August 31, 1995 are as
follows:
<TABLE>
<CAPTION>
TERM LOAN EQUIPMENT CANADIAN
NOTES AND SENIOR NOTE AND TERM LOAN
REVOLVING SUBORDINATED DEVELOPMENT AND REVOLVER
FISCAL YEARS ENDED AUGUST 31 LOAN NOTE NOTES NOTE LOANS NOTE TOTAL
- ----------------------------------------------- --------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1996........................................... $ 4,000 $ 80 $ 1,588 $ 5,668
1997........................................... 6,000 18 1,488 7,506
1998........................................... 8,000 19 1,860 9,879
1999........................................... 9,000 19 2,047 11,066
2000........................................... 30,711 20 2,047 32,778
Thereafter..................................... 15,000 $ 10,000 15 25,015
--------- ------------ ----- ------------ ---------
$ 72,711 $ 10,000 $ 171 $ 9,030 $ 91,912
--------- ------------ ----- ------------ ---------
--------- ------------ ----- ------------ ---------
</TABLE>
8. OTHER LONG-TERM OBLIGATIONS:
The Company has incurred certain liabilities in connection with agreements
entered into with former owners, which include provisions for guaranteed bonuses
and covenants not-to-compete, as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Covenants under the acquisition of Nepco........................................... $ 3,694 $ 3,068
Covenants under the purchase of Portola Packaging Canada Ltd....................... 2,125
Other covenants.................................................................... 100 50
--------- ---------
Total obligations.............................................................. 3,794 5,243
Current portion (included in accrued liabilities).................................. 668 1,332
--------- ---------
$ 3,126 $ 3,911
--------- ---------
--------- ---------
</TABLE>
F-17
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
9. COMMITMENTS AND CONTINGENCIES:
The Company leases certain office, production and warehouse facilities under
operating lease agreements expiring on various dates through 2007. Under the
terms of the facilities' leases, the Company is responsible for common area
maintenance expenses which include taxes, insurance, repairs and other operating
costs.
At August 31, 1995 future minimum rental commitments under agreements with
terms in excess of twelve months were as follows:
<TABLE>
<CAPTION>
LEASED FROM
THREE SISTERS OTHER
FISCAL YEARS ENDED AUGUST 31, (NOTE 15) LEASES TOTAL
- --------------------------------------------------------------------- --------------- --------- ---------
<S> <C> <C> <C>
1996................................................................. $ 719 $ 1,062 $ 1,781
1997................................................................. 276 961 1,237
1998................................................................. 842 842
1999................................................................. 853 853
2000................................................................. 803 803
Thereafter........................................................... 3,192 3,192
----- --------- ---------
$ 995 $ 7,713 $ 8,708
----- --------- ---------
----- --------- ---------
</TABLE>
Base rent expense for the years ended August 31, 1993, 1994 and 1995 totaled
$886, $1,395 and $1,381, respectively, of which $619, $696 and $720, was paid to
Three Sisters (Notes 15 and 16) for the years ended August 31, 1993, 1994 and
1995, respectively.
The Company is engaged in litigation related to alleged patent infringement
on five-gallon non-spill caps. On February 1995, a jury rendered an adverse
verdict against the Company, which verdict was entered by the court on January
2, 1996. All further motions were denied by the court upon entry of the jury
verdict, making the Company liable for damages of $0.01 per closure unit sold.
The Company is likely to have to pay $0.01 per closure unit in damages, totaling
approximately $1,410 on sales through August 31, 1995, as well as on sales
occurring thereafter. These amounts have been and will continue to be accrued in
the Company's financial statements in the period in which sales occurred or
continue to occur.
The Company is also a party to a number of other lawsuits and claims arising
out of the normal course of business. Management does not believe the final
disposition of these matters will have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
The financial statements include costs related to the litigation, including
accruals for damages and attorney costs of $410, $603 and $1,382 for the years
ended August 1993, 1994, and 1995, respectively.
10. REDEEMABLE WARRANTS:
The Company has outstanding two warrants to purchase an aggregate of 2,493
shares of its Class A common stock which were issued to the Company's previous
subordinated and senior lenders. A warrant to purchase 2,053 shares of common
stock is exercisable, in whole or in part, through June 30, 2004 at sixty and
two-third cents per share, subject to certain antidilution provisions. After
June 30, 1999, if the Company has not completed an initial public offering of
its common stock, the lender may require the Company to purchase the warrant at
a price equal to the higher of the current fair value per share of the Company's
common stock or an amount computed under an earnings formula in the warrant
agreement. The purchase obligation may be suspended under certain circumstances
including restrictions on such payments as specified in the senior and
subordinated credit
F-18
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
10. REDEEMABLE WARRANTS: (CONTINUED)
agreements. After December 31, 2001, the Company has the right to repurchase the
warrant at a price equal to the higher of the fair value per share of the
Company's common stock or an amount computed under an earnings formula in the
warrant agreement. The earnings formula is based on income before interest,
taxes and debt outstanding to calculate an estimated value per share. At August
31, 1994 and 1995, the accretion was determined using the fair market value of
the common stock.
A second warrant to purchase 440 shares of Class A common stock may be
exercised at any time until its expiration on June 30, 2004. After August 1,
2001, if the Company has not completed an initial public offering of its common
stock, the senior lender may require the Company to purchase its warrant at a
price equal to the higher of the current fair value price per share of the
Company's common stock or the net book value price per share of the Company's
common stock or the net book value per share as computed under a valuation
formula set forth in the warrant. The purchase obligation may be suspended under
certain circumstances including restriction on such payments as specified in the
senior and subordinated credit agreements. After December 31, 1997, the Company
has the right to repurchase the warrant at a price equal to the higher of the
current fair value per share of the Company's common stock or the net book value
per share. The earnings formula is based on earnings before interest and taxes
and debt outstanding to calculate an estimated value per share. At August 31,
1994 and 1995, the put value was determined using the current fair value of the
common stock.
Both warrants were amended and restated in connection with the Company's
June 1994 refinancing activities, which resulted in no change to their carrying
value.
Generally accepted accounting principles require that an adjustment of the
warrant from the value assigned at the date of issuance to the highest
redemption price of the warrant be accreted over the period of the warrant. At
August 31, 1995, the estimated redemption value of the warrants exceeds their
carrying value. The difference is being charged to accumulated deficit over the
period from the date of issuance to the earliest put date of the warrants.
Charges to accumulated deficit related to the warrants amounted to $7, $455 and
$610 during the years ended August 31, 1993, 1994 and 1995, respectively.
11. SHAREHOLDERS' EQUITY:
REINCORPORATION:
In June 1994, the Company was reincorporated from California to Delaware, at
which time the Company's outstanding common stock was exchanged on a one share
of the California corporation common stock for one share of the Delaware
corporation common stock.
CLASS A AND B COMMON STOCK:
The Company has authorized 2,503 shares of Class A common stock for the
warrants described in Note 10. Class A common shareholders are not entitled to
elect members of the Board of Directors. In the event of an aggregate public
offering exceeding $10,000, the Class A and Class B, Series 2 common stock is
automatically converted into Class B, Series 1 common stock, based on the
appropriate conversion formula. The Class B common shareholders have the right
to elect members of the Board of Directors, with the holders of Series 1 having
one vote per share, and the holders of Series 2 having a number of votes equal
to the number of shares into which the Series 2 shares are convertible into
Series 1 shares.
In the event of liquidation or dissolution in which the value of the Company
is less than $1.75 per share of common stock, the holders of Class B, Series 2
will receive 60% of the proceeds until they have
F-19
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
received $1.75 per share. All other amounts available for distribution shall be
distributed to the Class B, Series 1 and Series 2 holders pro rata based on the
number of shares outstanding. If the value of the Company is greater than or
equal to $1.75 per share, the holders of all classes of common stock are
entitled to a pro rata distribution based on the number of shares outstanding.
The Company is required to reserve shares of Class B, Series 1 stock for the
conversion of Class A and Class B, Series 2 into Class B, Series 1 common stock.
DIRECTORS' AGREEMENTS:
The Company entered into the Directors' Agreements dated September 1989 and
amended in January 1990, with certain directors who are also shareholders of the
Company. The agreements provided that the Company is to pay up to $22 per year
to each individual for serving as a director, and granted each director the
right to purchase up to 22 shares per year of Class B, Series 1 common stock at
$1.00 per share. In October 1990, the Company entered into a Director's
Agreement with another director, who is also a shareholder of the Company. The
agreement provided that the Company pay up to $22 per year for services as a
director. During the years ended August 31, 1993, 1994 and 1995, the Company
paid $81, $82 and $64, respectively, in director fees and related expenses.
During the year ended August 31, 1993, the Company issued 11 shares of Class B,
Series 1 common stock pursuant to the stock purchase agreements.
STOCK OPTION PLANS:
The Company has reserved 2,866 and 1,000 shares of Class B, Series 1 common
stock for issuance under the Company's 1988 and 1994 stock option plans,
respectively. Under both plans, stock options are granted by the Board of
Directors at prices not less that 85% of fair market value of the Company's
stock at the date of grant.
<TABLE>
<CAPTION>
OPTION PRICE AVAILABLE OUTSTANDING
PER SHARE FOR GRANT SHARES AMOUNT
STOCK OPTIONS -------------- ----------- ----------- ---------
(NOT
THOUSANDS)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
August 31, 1992.............................................. $0.61-$2.50 300 2,415 $ 1,945
Granted.................................................... $2.50 (160) 160 400
Exercised.................................................. $0.61-$1.00 (1,363) (832)
----- ----------- ---------
August 31, 1993.............................................. $0.61-$2.50 140 1,212 1,513
Granted.................................................... $2.50 (70) 70 175
Exercised.................................................. $2.50 (10) (25)
Canceled................................................... $1.75 25 (25) (44)
----- ----------- ---------
August 31, 1994.............................................. $0.61-$2.50 95 1,247 1,619
Reservation of shares...................................... 1,000
Granted.................................................... $3.75-$4.00 (370) 370 1,456
Exercised.................................................. $0.61-$4.00 (96) (78)
Canceled................................................... $4.00 9 (9) (36)
----- ----------- ---------
August 31, 1995.............................................. $0.61-$4.00 734 1,512 $ 2,961
----- ----------- ---------
----- ----------- ---------
</TABLE>
At August 31, 1995, approximately 1,011 options were exercisable at an
average exercise price of $1.24 per share.
F-20
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
12. EMPLOYEE BENEFIT PLANS:
On December 31, 1994, the Company merged its Profit Sharing Plan and its
Retirement and Savings Plan with those of a subsidiary company, establishing a
single defined contribution plan. The employee benefits plan covers all full
time employees of the Company who are age twenty one or older, have completed
one year of service and are not covered by a collective bargaining agreement.
Contributions are at the discretion of the Board of Directors and amounted to
$360 for the year ended August 31, 1995. Expense in connection with the Plan
amounted to $23 for the year ended August 31, 1995.
The Company incurred expense related to prior employee benefit plans of $224
and $248 for the years ended August 31, 1993 and 1994, respectively.
13. INCOME TAXES:
The provision for income taxes, excluding extraordinary items, for the three
years ended August 31, 1995 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal...................................................... $ 721 $ 1,013 $ 1,677
State........................................................ 260 344 300
Foreign...................................................... (29)
--------- --------- ---------
981 1,357 1,948
--------- --------- ---------
Deferred:
Federal...................................................... 456 (176) (605)
State........................................................ 84 (86) (86)
Foreign...................................................... 37
--------- --------- ---------
540 (262) (654)
--------- --------- ---------
$ 1,521 $ 1,095 $ 1,294
--------- --------- ---------
--------- --------- ---------
</TABLE>
As discussed in Note 3, "Summary of Significant Accounting Policies," the
Company adopted SFAS No. 109 effective September 1, 1993. Prior years' financial
statements have not been restated to apply the provisions of SFAS No. 109;
however, prior year business combinations have been restated as of September 1,
1993 under SFAS No. 109.
A reconciliation setting forth the differences between the effective tax
rate of the Company and the U.S. federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate........................................... 34.0% 34.0% 34.0%
State taxes...................................................... 8.4 6.6 14.9
Nondeductible amortization and depreciation...................... 13.3 7.4 26.0
Nondeductible permanent items.................................... 7.0
Other............................................................ 0.2 1.9 8.3
--- --- ---
Effective income tax rate........................................ 55.9% 49.9% 90.2%
--- --- ---
--- --- ---
</TABLE>
F-21
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
13. INCOME TAXES: (CONTINUED)
The components of the net deferred tax liabilities:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Federal credits........................................................ $ 651 $ 651
State tax credits...................................................... 360 360
Accounts receivable...................................................... 158 313
Other liabilities........................................................ 580 924
--------- ---------
Total assets......................................................... 1,749 2,248
--------- ---------
Deferred tax liabilities:
Property, plant, and equipment......................................... 7,227 7,354
Intangible assets...................................................... 1,031 712
Foreign taxes, net..................................................... 37
--------- ---------
Total liabilities.................................................... 8,258 8,103
--------- ---------
Net deferred tax liabilities....................................... $ 6,509 $ 5,855
--------- ---------
--------- ---------
</TABLE>
14. EXPORT SALES:
Export sales to unaffiliated customers were $6,674, $8,071 and $18,658 for
the years ended August 31, 1993, 1994 and 1995, respectively. Export sales are
predominantly to North America, the Middle East and the Pacific Rim. During
fiscal 1995, export sales to North America, the Middle East and the Pacific Rim
accounted for 46%, 7%, and 16% of total export sales, respectively.
15. RELATED PARTY TRANSACTIONS:
The Company paid $183, $162 and $5 for the years ended August 31, 1993, 1994
and 1995, respectively, to a company for prototype mold development and mold
engineering work. A director and officer of the aforementioned company is also a
director of the Company.
The Company paid $451, $420 and $333 for the years ended August 31, 1993,
1994 and 1995, respectively, to a law firm for legal services rendered. A
general partner of the aforementioned firm is also a director of the Company.
The Company paid $42 for the years ended August 31, 1993, 1994 and 1995 to a
corporation for management fees. A shareholder of the aforementioned corporation
is also a director and significant shareholder of the Company.
The Company paid $211 for the year ended August 31, 1993 to an investment
banking firm for fees and expenses, a director of which is a director of the
Company.
The Company had debt outstanding with a financial institution of $10,000 at
August 31, 1993, 1994 and 1995 on which the Company paid interest of
approximately $1,350 for each of the last three fiscal years. The Company also
paid $220 and $258 for the years ended August 31, 1993 and 1994, respectively,
to the same financial institution for ongoing corporate advice and in connection
with the refinancing in fiscal years 1993 and 1994.
The Company has amounts receivable from non-consolidated affiliated
companies which amounted to $156, $421 and $736 as of August 31, 1993, 1994 and
1995, respectively.
F-22
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
15. RELATED PARTY TRANSACTIONS: (CONTINUED)
The Company leases certain office, production and warehouse facilities from
Three Sisters Ranch Enterprises (Three Sisters). Certain general partners in
Three Sisters are also minority shareholders in the Company. The Company owed
$156 and $15 at August 31, 1993 and 1994, respectively, in the form of unsecured
notes due to Three Sisters. The notes were repaid in fiscal 1995.
16. SUBSEQUENT EVENTS:
On October 2, 1995 the Company completed an offering of $110,000 of senior
notes that mature on October 1, 2005 and bear interest at 10.75%. Interest is
payable semi-annually on April 1 and October 1 of each year, commencing on April
1, 1996. In connection with the offering, the Company repaid outstanding debt
under its Term Loan Notes A and B, Senior Subordinated Notes and Revolving Loan
Note. The Company incurred an extraordinary loss due to the write-off of
approximately $1.9 million of unamortized debt financing costs. The senior notes
have restrictive covenants which limit the payment of dividends and restrict
certain investment transactions.
Concurrently with the offering, the Company entered into a new five-year
senior revolving credit facility of up to $35 million, subject to a borrowing
base of eligible receivables, inventory, property, plant and equipment, which
serve as collateral for the line. The credit facility contains convenants and
provisions that restrict, among other things, the Company's ability to: (i)
incur additional indebtedness, (ii) incur liens on its property, (iii) make
investments, (iv) enter into guarantees and other contingent obligations, (v)
merge or consolidate with or acquire another person or engage in other
fundamental changes, (vi) engage in certain sales of assets, (vii) engage in
certain transactions with affiliates and (viii) make restricted junior payments.
SUBSEQUENT EVENTS (UNAUDITED):
Of the approximately $106 million net proceeds of the offering, $83 million
was used to retire the Company's outstanding debt under its senior term loans,
revolving facility and senior subordinated notes. Subsequent to the closing of
the offering, $7.2 million of the proceeds was used to purchase the Company's
San Jose facilities, $10.8 million was used to purchase machinery and equipment,
$3 million was used to make a loan to the Company's 50% joint venture in Mexico,
and $2 million was used for working capital needs.
F-23
<PAGE>
PROSPECTUS
$110,000,000
PORTOLA PACKAGING, INC.
10 3/4% SENIOR NOTES DUE 2005
[LOGO]
------------------
The 10 3/4% Senior Notes due 2005 (the "Notes") are being offered by Portola
Packaging, Inc. (the "Company" or "Portola"). Interest on the Notes will be
payable semiannually on April 1 and October 1 of each year, commencing April 1,
1996. The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after October 1, 2000, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the date of
redemption. In addition, on or prior to October 1, 1998, the Company may redeem
up to $33.0 million principal amount of the Notes with the proceeds of one or
more Public Equity Offerings at 110.75% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
redemption; PROVIDED that Notes having an aggregate principal amount of at least
$77.0 million remain outstanding immediately after any such redemption. Upon the
occurrence of a Change of Control, each holder of Notes may require the Company
to repurchase all or a portion of such holder's Notes at 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of repurchase. Under certain circumstances, an event constituting a Change of
Control will result in an event of default under the Company's New Credit
Facility. See "Description of the Notes."
The Notes will be unsecured senior obligations of the Company and will rank
PARI PASSU in right of payment with all other existing and future senior
indebtedness of the Company and senior in right of payment to any future
subordinated indebtedness of the Company. The Notes, however, will be
effectively subordinated to senior secured indebtedness of the Company with
respect to the assets securing such indebtedness, including any indebtedness
that may be incurred from time to time under the Company's New Credit Facility.
As of May 31, 1995, after giving effect to the sale of the Notes offered hereby
and the application of net proceeds to repay certain indebtedness, the Company
would have had $0.2 million of senior indebtedness outstanding (other than the
Notes) and would have had, subject to certain restrictions, the ability to draw
up to $23.7 million of the $35.0 million committed under the New Credit
Facility.
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" ON PAGE 10.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Note.............................................. 100.0% 2.875% 97.125%
Total................................................. $110,000,000 $3,162,500 $106,837,500
</TABLE>
- ------------------------------
(1) Plus accrued interest, if any, from October 2, 1995.
(2) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses estimated at $750,000, payable by the Company.
------------------------------
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, and subject to approval of
certain legal matters by counsel for the several Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery will be made in New York, New York on or about October 2, 1995.
This Prospectus may be used by Chase Securities, Inc. in connection with
offers and sales related to market making transactions in the Notes. Chase
Securities, Inc. may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of sale.
Chase Securities, Inc. will not confirm such sales to any accounts over which it
exercises discretionary authority without the prior specific written approval of
the customer.
CHASE SECURITIES, INC. SALOMON BROTHERS INC
September 27, 1995.
<PAGE>
The Company's small and widemouth closures are used to cap many well known
beverage and food products.
The Company's five gallon and five gallon non-spill closures are used to cap
glass and plastic returnable water cooler bottles.
New products added by the Company to its product line include fitments and
push-pull closures used to cap a variety of beverage products.
This page contains three color photographs displaying the Company's products on
various types of plastic bottles and other plastic containers.
------------------------
Cap Snap-Registered Trademark-, Snap Cap-Registered Trademark-, Cap Snap
Seal-Registered Trademark-, Portola Packaging-Registered Trademark-,
Nepco-Registered Trademark-, Non-Spill-Registered Trademark- and the Portola
logo are registered trademarks of the Company. All other product names of the
Company are trademarks of the Company. The use of any trademark herein is in an
editorial fashion only, and to the benefit of the owner thereof, with no
intention of commercial use or infringement of the trademark.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, CONSOLIDATED FINANCIAL
STATEMENTS AND PRO FORMA AND AS ADJUSTED FINANCIAL INFORMATION OF THE COMPANY,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERMS "COMPANY" AND "PORTOLA" REFER TO PORTOLA
PACKAGING, INC., A DELAWARE CORPORATION, ITS PREDECESSOR, PORTOLA PACKAGING,
INC., A CALIFORNIA CORPORATION, AND ITS SUBSIDIARIES. THE COMPANY CURRENTLY HAS
TWO OPERATING SUBSIDIARIES, ONE IN CANADA AND ONE IN THE UNITED KINGDOM, BOTH OF
WHICH ARE UNRESTRICTED SUBSIDIARIES UNDER THE INDENTURE GOVERNING THE NOTES (THE
"INDENTURE"). ALL REFERENCES HEREIN TO FISCAL YEAR ARE TO THE COMPANY'S FISCAL
YEAR ENDED AUGUST 31.
THE COMPANY
The Company is a leading designer, manufacturer and marketer of tamper
evident plastic closures and related equipment used for packaging applications
in dairy, fruit juice, bottled water, sports drinks, institutional food products
and other non-carbonated beverage products. The Company's principal closure
product lines include (i) small closures used to cap blowmolded plastic bottles
("small closures"), (ii) closures for five gallon returnable glass and plastic
water cooler bottles ("five gallon closures") and (iii) widemouth closures for
institutional food products ("widemouth closures"). Portola also designs,
manufactures and supplies high speed capping equipment and complete turnkey
water bottling systems, which are marketed by the Company primarily under the
name "PortaPlant." Portola's closure products are manufactured domestically
through a technologically advanced, high speed injection molding process at ten
modern strategically located manufacturing facilities. Management believes that
the Company is a leader in a majority of the markets it serves and that it is
the sole or the largest supplier of plastic closures for a majority of its
customers. The Company sells over 8 billion closures annually under the names
Cap Snap, Nepco, Portola and other brand names to over 3,000 customers. Most of
the Company's customers have been doing business with the Company for more than
ten years. The Company's products are used to cap such well known consumer
products as Borden milk, Dole juices, Procter & Gamble's Sunny Delight juice
drink, Poland Spring bottled water, Pepsi-Cola fountain syrups and Kraft
barbecue sauce. Many features of the Company's closure products are proprietary,
and Portola holds more than 50 patents on the design of container closures and
compatible bottle necks.
During the past decade, the plastic closure market has grown faster than the
overall closure market in the United States. This growth is primarily due to the
distinct advantages that plastic closures have over metal closures, including
greater performance and design flexibility, the growing demand for tamper
evident packaging and the comparatively lower cost and lighter weight of plastic
closures, an important factor in the packaging industry, where transportation
costs are a significant portion of overall product costs. Demand for plastic
closures has also grown with the increased use of plastic containers and the
conversion of paperboard containers to plastic containers. A 1994 study by
Technomic Consultants International, an international marketing consulting firm
which specializes in the food and packaging industries, indicates that the
market for plastic closures in the United States grew from approximately 48% of
total closures in 1990 to approximately 59% of total closures in 1993. The study
also indicates that the average annual growth rate from 1993 through 1996 for
plastic closures is expected to be 4.4%, while demand for metal closures during
this period is expected to increase at a significantly lower rate.
Since Portola was acquired from the founding family in 1986 by a group led
by Jack L. Watts, the Company's current Chairman of the Board and Chief
Executive Officer, the size of the Company as measured by sales and closure unit
volume has increased from $26.1 million in sales and 2.1 billion in units sold
for fiscal 1987 to $112.1 million in sales and 8.1 billion in units sold for the
twelve months ended May 31, 1995, respectively. Mr. Watts and other members of
senior management own or control 34.3%, on a fully diluted basis, of the common
stock of the Company. Portola's senior management has significant experience in
the plastic packaging business and an average tenure of eight years at the
Company.
The Company's principal offices are located at 890 Faulstich Court, San
Jose, California 95112. The Company's telephone number is (408) 453-8840.
3
<PAGE>
COMPETITIVE STRENGTHS
The Company believes that it has a strong competitive position attributable
to a number of factors, including the following:
-HIGH QUALITY, INNOVATIVE PRODUCTS. Management believes that Portola's
leading position in niche product applications is in part the result of the
Company's long-standing commitment to research and development, which has
led to innovative product development and application improvements,
including designs for tamper evident tear strips and breakaway bands which
have become industry standards.
-STRONG REPUTATION FOR CUSTOMER SERVICE AND SUPPORT. Portola markets its
products together with ongoing service and support as "total product
solutions" designed to meet its customers' complete capping requirements,
enabling it to develop a reputation as a leader in quality and service.
-LOW COST MANUFACTURING CAPABILITIES. The Company's manufacturing operations
emphasize minimizing raw material and production costs and, with the
acquisition and integration of Northern Engineering & Plastics Corp. and
certain related companies and assets (collectively, "Nepco"), the Company
has also derived significant cost savings through improved raw material
purchasing and increased production efficiencies.
BUSINESS STRATEGY
The Company's primary strategy is to increase cash flow by maintaining and
extending its leading position in niche product applications within the plastic
closure and bottling industry. To support this strategy, the Company focuses on
(i) advancing research and development and product engineering, (ii) providing
dedicated customer support and total product solutions for customers, (iii)
continuing to enhance its low cost manufacturing capabilities, (iv) expanding
sales in international markets where significant growth opportunities exist and
(v) where appropriate, seeking strategic acquisitions that will strengthen the
Company's competitive position.
Consistent with the Company's objective to expand through strategic
acquisitions, on June 30, 1994, the Company acquired Nepco for a purchase price
of $40.0 million (plus $3.6 million related to noncompetition agreements). The
acquisition of Nepco has enabled the Company to establish new customer
relationships, diversify and expand its product offering and customer base and
benefit from Nepco's proprietary product designs. The Company has realized and
expects to achieve additional cost savings and synergies associated with the
integration of Nepco, primarily from reduced costs achieved through sharing and
adoption of improved technology and manufacturing processes, lower raw material
costs through volume purchasing economies, marketing efficiencies and
elimination of duplicative administrative and financial staff positions. On June
16, 1995, the Company purchased for C$14.6 million (plus C$3.4 million related
to noncompetition agreements) the 50% interest it had not previously owned in
Canada Cap Snap Corporation, a British Columbia corporation engaged in
manufacturing and distributing small closures in western Canada, together with
all the capital stock of two affiliated plastic bottle manufacturers (the
"Canadian Acquisition"). Management anticipates that the Canadian Acquisition
will enable the Company to establish a position in the Canadian bottle
manufacturing marketplace and to advance its position in the Canadian closure
marketplace.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered...... $110,000,000 aggregate principal amount of 10 3/4% Senior Notes
due 2005.
Maturity Date........... October 1, 2005.
Interest Payment
Dates.................. April 1 and October 1 of each year, commencing April 1, 1996.
Optional Redemption..... The Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after October 1, 2000, at the
redemption prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In addition,
on or prior to October 1, 1998, the Company may redeem up to $33.0
million principal amount of the Notes with the proceeds of one or
more Public Equity Offerings at 110.75% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the
date of redemption; PROVIDED that Notes having an aggregate
principal amount of at least $77.0 million remain outstanding
immediately after any such redemption. See "Description of the
Notes -- Optional Redemption."
Change of Control....... Upon the occurrence of a Change of Control, each holder of Notes
may require the Company to repurchase all or a portion of such
holder's Notes at 101% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of
repurchase. There can be no assurance that the Company will have
sufficient funds to pay the repurchase price for Notes tendered
upon a Change of Control. See "Risk Factors -- Limitations on
Repurchase of Notes"; "Description of the Notes -- Repurchase at
the Option of Holders -- Change of Control."
Ranking................. The Notes will be unsecured senior obligations of the Company and
will rank PARI PASSU in right of payment with all other existing
and future senior indebtedness of the Company and senior in right
of payment to any future subordinated indebtedness of the Company.
The Notes, however, will be effectively subordinated to senior
secured indebtedness of the Company with respect to the assets
securing such indebtedness, including any indebtedness that may be
incurred from time to time under the Company's New Credit
Facility. As of May 31, 1995, after giving effect to the sale of
the Notes and the application of net proceeds to repay certain
indebtedness, the Company would have had $0.2 million of senior
indebtedness outstanding (other than the Notes) and would have
had, subject to certain restrictions, the ability to draw up to
$23.7 million of the $35.0 million committed under the New Credit
Facility. See "Capitalization" and "Description of the New Credit
Facility."
Certain Covenants....... The Indenture will contain certain covenants, including
limitations on the incurrence of indebtedness, the making of
restricted payments, transactions with affiliates, the existence
of liens, disposition of proceeds of asset sales, transfers and
issuances of stock of subsidiaries, the imposition of certain
payment restrictions on restricted subsidiaries and certain
mergers and sales of assets. See "Description of the Notes --
Certain Covenants."
Use of Proceeds......... The net proceeds from the sale of the Notes (estimated to be
approximately $106.1 million) will be used (i) to repay all
outstanding indebtedness under the Company's current revolving
credit and term loan facilities, (ii) to redeem existing
subordinated indebtedness and (iii) for working capital and
general corporate purposes, including capital expenditures and the
possible purchase of certain facilities currently leased (as well
as certain real property adjacent thereto) by the Company.
</TABLE>
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA AS ADJUSTED CONDENSED COMPANY-ONLY FINANCIAL
DATA
The following table sets forth certain summary historical and pro forma as
adjusted condensed financial data for the Company, giving no effect to the
Canadian Acquisition ("Company-only" data). The summary historical statement of
operations and balance sheet data for each of the fiscal years in the three year
period ended August 31, 1994 and at the end of each such fiscal year have been
derived from, and are qualified by reference to, the Company's audited
consolidated financial statements. The summary historical statement of
operations and balance sheet data for the nine months ended May 31, 1994 and
1995 and at such dates, have been derived from the unaudited consolidated
financial statements of the Company. The table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of the Company and related
notes and other financial information appearing elsewhere in this Prospectus.
The summary unaudited pro forma as adjusted condensed Company-only statement
of operations data for the fiscal year ended August 31, 1994 give effect to (i)
the acquisition of Nepco and (ii) the sale of the Notes and the application of
net proceeds to repay certain indebtedness, as if such transactions had occurred
on September 1, 1993. The summary unaudited as adjusted condensed Company-only
statement of operations data for the nine months ended May 31, 1995 and for the
twelve months ended May 31, 1995 give effect to the sale of the Notes and the
application of net proceeds to repay certain indebtedness as if such
transactions had occurred on September 1, 1994 and June 1, 1994, respectively.
The summary unaudited as adjusted condensed Company-only balance sheet data at
May 31, 1995 give effect to the sale of the Notes and the application of the net
proceeds to repay certain indebtedness and for working capital as if such
transactions had occurred on such date. The pro forma as adjusted and as
adjusted Company-only data should be read in conjunction with "Unaudited Pro
Forma As Adjusted Condensed Consolidated Financial Data" appearing elsewhere in
this Prospectus. Such data are not necessarily indicative of the results that
would have occurred if the Nepco acquisition and the sale of the Notes had been
consummated on the assumed dates and are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
COMPANY-ONLY
PRO FORMA
FISCAL YEAR ENDED AUGUST 31, AS ADJUSTED NINE MONTHS ENDED
FISCAL YEAR ENDED MAY 31,
-------------------------------- AUGUST 31, --------------------
1992 1993 1994 1994(A)(B) 1994(C) 1995(C)
--------- --------- ---------- -------------------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales..................................... $ 52,152 $ 58,286 $ 70,284 $ 101,415 $ 44,624 $ 86,462
Gross profit.............................. 14,476 15,607 18,614 22,246 11,641 20,788
Income from operations.................... 6,094 6,180 7,004 5,175 4,540 7,325
Interest expense, net..................... 3,147 3,044 3,899 11,904 2,464 6,131
Amortization of debt financing costs...... 365 479 433 390 309 360
Income (loss) before extraordinary item,
cumulative effect of change in accounting
principle and income taxes............... 1,950 2,719 2,195 (7,360) 1,773 894
Net income (loss)......................... 663 309 225 (7,062) 915 377
Earnings (loss) per share................. $ 0.05 $ 0.02 $ 0.02 $ (0.53) $ 0.07 $ 0.03
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................... $ 2,920 $ 7,109 $ 11,049 -- $ 4,633 $ 14,776
Total assets.............................. 44,031 50,896 110,820 -- 54,706 112,422
Total debt................................ 30,611 38,140 77,467 -- 35,634 82,335
Redeemable warrants(f).................... 2,483 2,600 3,055 -- 2,747 3,512
Total shareholders' equity................ 2,719 2,597 5,393 -- 3,366 5,395
CASH FLOW DATA:
Net cash provided by operating
activities............................... $ 7,699 $ 6,768 $ 9,351 -- $ 7,450 $ 2,920
Net cash used in investing activities..... (8,947) (9,119) (38,418) -- (5,458) (8,989)
Net cash provided by (used in) financing
activities............................... 229 3,538 30,099 -- (2,556) 4,355
OPERATING AND OTHER DATA:
Closure unit volume (in millions)......... 3,763 3,980 4,893 7,967 2,953 6,170
Closure unit volume growth(h)............. 11.5% 5.8% 22.9% 11.6%(i) 2.1% 108.9%
EBITDA(j)................................. $ 11,085 $ 12,883 $ 14,728 $ 16,432 $ 9,763 $ 16,960
Depreciation and amortization............. 5,920 6,845 8,357 11,611 5,271 9,089
Capital expenditures...................... 8,089 9,564 6,159 11,550 4,212 8,247
Ratio of earnings to fixed charges(k)..... 1.4x 1.3x 1.2x -- 1.6x 1.1x
Ratio of EBITDA to interest expense,
net......................................
Ratio of total debt to EBITDA.............
(FOOTNOTES ON
FOLLOWING PAGE)
<CAPTION>
COMPANY-ONLY AS
COMPANY-ONLY AS ADJUSTED TWELVE
ADJUSTED NINE MONTHS ENDED MAY
MONTHS ENDED MAY 31,
31, 1995(A)(D) 1995(A)(D)(E)
---------------- ----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales..................................... $ 86,462 $ 112,122
Gross profit.............................. 20,788 27,761
Income from operations.................... 7,325 9,789
Interest expense, net..................... 8,973 11,865
Amortization of debt financing costs...... 292 390
Income (loss) before extraordinary item,
cumulative effect of change in accounting
principle and income taxes............... (1,880) (2,889)
Net income (loss)......................... (3,335) (3,233)
Earnings (loss) per share................. $ (0.24) $ (0.23)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................... $ 42,900 $ 42,900
Total assets.............................. 137,722 137,722
Total debt................................ 110,197 110,197
Redeemable warrants(f).................... 3,512 3,512
Total shareholders' equity................ 3,858(g) 3,858(g)
CASH FLOW DATA:
Net cash provided by operating
activities............................... -- --
Net cash used in investing activities..... -- --
Net cash provided by (used in) financing
activities............................... -- --
OPERATING AND OTHER DATA:
Closure unit volume (in millions)......... -- 8,110
Closure unit volume growth(h)............. -- 100.6%
EBITDA(j)................................. $ 16,960 $ 21,924
Depreciation and amortization............. 9,021 12,081
Capital expenditures...................... 8,247 10,194
Ratio of earnings to fixed charges(k)..... -- --
Ratio of EBITDA to interest expense,
net...................................... 1.9x 1.8x
Ratio of total debt to EBITDA............. -- 5.0x
</TABLE>
6
<PAGE>
(a) The Company believes that "Company-only" data is relevant to potential
investors in the Notes because (i) the Company's Canadian subsidiary is
separately financed by indebtedness that is non-recourse to the Company
(except that the Company has pledged the capital stock of the Canadian
subsidiary as security for the loans), (ii) the Canadian subsidiary is
subject to significant restrictions on its ability to pay dividends or make
other cash distributions or payments to the Company and (iii) the Canadian
subsidiary will be operated as an Unrestricted Subsidiary for purposes of
the Indenture and, as a result, amounts permitted to be invested by the
Company in its Canadian subsidiary will be subject to significant
limitation.
(b) The Company-only pro forma as adjusted data reflect the historical
operating data for the fiscal year ended August 31, 1994 as if the Nepco
acquisition, the sale of the Notes and the application of net proceeds to
repay certain indebtedness had occurred at the beginning of the period. For
information regarding the pro forma adjustments, see "Pro Forma As Adjusted
Condensed Consolidated Statement of Operations (Unaudited) for the Fiscal
Year Ended August 31, 1994."
(c) The nine months ended May 31, 1994 reflect operations before the Nepco
acquisition on June 30, 1994, and the nine months ended May 31, 1995
reflect operations after the acquisition.
(d) The Company-only as adjusted statement of operations and operating and
other data give effect to the sale of the Notes and the application of net
proceeds to repay certain indebtedness as if such transactions had occurred
at the beginning of the period. See "Pro Forma As Adjusted Condensed
Consolidated Statement of Operations (Unaudited) for the Nine Months Ended
May 31, 1995." The Company-only as adjusted balance sheet data are adjusted
as if the sale of the Notes and the application of the net proceeds
therefrom to repay certain indebtedness and for working capital had
occurred on May 31, 1995.
(e) Includes one month of operations before the Nepco acquisition on June 30,
1994 and eleven months of operations after the acquisition. The
Company-only as adjusted statement of operations and operating and other
data for the twelve month period ended May 31, 1995 are included because
this is the first twelve month period for which data is available during
which substantially all the Company's actual (rather than pro forma)
results reflect the Company's operation of the business conducted by Nepco
prior to the acquisition. The data for the twelve month period were
calculated by combining (i) unaudited data for the three month period ended
August 31, 1994, and (ii) the unaudited data for the nine month period
ended May 31, 1995 set forth elsewhere herein.
(f) The redeemable warrants entitle the holders thereof to purchase an
aggregate of 2,492,741 shares of the Company's common stock. If the Company
does not complete an initial public offering of its common stock by June
30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the
holders may require the Company to repurchase the warrants at the higher of
current market value or an amount computed under the warrant agreement.
(g) Total shareholders' equity, on an as adjusted basis, has been decreased to
reflect the prepayment premium and the write-off of deferred financing
costs associated with the repayment of the Company's existing subordinated
indebtedness and the write-off of deferred financing costs associated with
the repayment of the Company's current revolving credit and term loan
facilities, all of which will be accounted for as an extraordinary loss on
early extinguishment of debt.
(h) Except as indicated in note (i) below, these results reflect closure unit
volume growth of the Company including Nepco after June 30, 1994. On a pro
forma combined basis, the closure unit volume growth for Portola and Nepco
was 11.6%, 7.1% and 4.1% for the fiscal year ended August 31, 1994, the
nine months ended May 31, 1995 and the twelve months ended May 31, 1995,
respectively.
(i) Reflects the percentage increase in the sales of closure units by the
Company for the fiscal year ended August 31, 1994 as compared to the fiscal
year ended August 31, 1993, computed on a pro forma basis as if the Nepco
acquisition had occurred at the beginning of the respective fiscal years.
(j) EBITDA represents, for any relevant period, income (loss) before income
taxes, extraordinary item, cumulative effect of change in accounting
principle, depreciation of property, plant and equipment, interest expense,
net, amortization of intangible assets and non-recurring legal expenses
associated with the Company's litigation with Scholle Corporation. See
"Business -- Litigation." EBITDA is not intended to represent and should
not be considered more meaningful than, or an alternative to, net income,
cash flow or other measures of performance in accordance with generally
accepted accounting principles. EBITDA data and the related ratios are
included because the Company understands that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt and because certain restrictive covenants in the Indenture
will be based on the Company's EBITDA.
(k) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs and the portion of lease expense which management believes
is representative of the interest component of lease expense. On a pro
forma basis, as adjusted for (i) the acquisition of Nepco and (ii) the sale
of the Notes offered hereby and the application of net proceeds to repay
certain indebtedness, as if such transactions had occurred on September 1,
1993, September 1, 1994 and June 1, 1994, respectively, the ratio of
earnings to fixed charges for the fiscal year ended August 31, 1994, the
nine months ended May 31, 1995 and the twelve months ended May 31, 1995
would result in a deficiency of earnings to fixed charges in the amount of
$10.6 million, $5.3 million and $4.9 million, respectively.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED FINANCIAL
DATA
The following table sets forth certain summary historical and pro forma as
adjusted condensed consolidated financial data of the Company, giving effect to
the Canadian Acquisition ("consolidated" data). The summary unaudited pro forma
as adjusted consolidated statement of operations and other data for the fiscal
year ended August 31, 1994 give effect to (i) the acquisition of Nepco, (ii) the
sale of the Notes and the application of net proceeds to repay certain
indebtedness and (iii) the Canadian Acquisition, as if such transactions had
occurred on September 1, 1993. The pro forma as adjusted consolidated statement
of operations and other data for the nine months ended May 31, 1995 give effect
to (i) the sale of the Notes and the application of net proceeds to repay
certain indebtedness and (ii) the Canadian Acquisition, as if such transactions
had occurred on September 1, 1994. The pro forma as adjusted consolidated
balance sheet data for the nine months ended May 31, 1995 give effect to (i) the
sale of the Notes and the application of the net proceeds to repay certain
indebtedness and for working capital and (ii) the Canadian Acquisition, as if
such transactions had occurred on such date. The pro forma as adjusted condensed
consolidated financial data should be read in conjunction with "Unaudited Pro
Forma As Adjusted Condensed Consolidated Financial Data" appearing elsewhere in
this Prospectus. Such data are not necessarily indicative of the results that
would have occurred if the acquisition of Nepco, the sale of the Notes and the
Canadian Acquisition had been consummated on the assumed dates and are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
PRO FORMA AS PRO FORMA
FISCAL YEAR ENDED AUGUST 31, ADJUSTED NINE MONTHS ENDED MAY AS ADJUSTED
FISCAL YEAR 31, NINE MONTHS
------------------------------- ENDED AUGUST ---------------------- ENDED MAY 31,
1992 1993 1994 31, 1994(A) 1994(B) 1995(B) 1995(C)
--------- --------- --------- ------------- ----------- --------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS AND OTHER DATA:
Sales....................................... $ 52,152 $ 58,286 $ 70,284 $ 107,658 $ 44,624 $ 86,462 $ 93,964
Gross profit................................ 14,476 15,607 18,614 24,155 11,641 20,788 23,099
Income from operations...................... 6,094 6,180 7,004 6,011 4,540 7,325 7,985
Interest expense, net....................... 3,147 3,044 3,899 13,055 2,464 6,131 9,817
Amortization of debt financing costs........ 365 479 433 390 309 360 292
Income (loss) before extraordinary item,
cumulative effect of change in accounting
principle and income taxes................. 1,950 2,719 2,195 (7,599) 1,773 894 (1,367)
Net income (loss)........................... 663 309 225 (7,286) 915 377 (3,415)
Net income (loss) per share................. $ 0.05 $ 0.02 $ 0.02 $ (0.55) $ 0.07 $ 0.03 $ (0.25)
Ratio of earnings to fixed charges (d)...... 1.4x 1.3x 1.2x -- 1.6x 1.1x --
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................. $ 2,920 $ 7,109 $ 11,049 -- $ 4,633 $ 14,776 $ 43,718
Total assets................................ 44,031 50,896 110,820 -- 54,706 112,422 152,349
Total debt.................................. 30,611 38,140 77,467 -- 35,634 82,335 119,952
Redeemable warrants(e)...................... 2,483 2,600 3,055 -- 2,747 3,512 3,512
Total shareholders' equity.................. 2,719 2,597 5,393 -- 3,366 5,395 5,658(f)
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
8
<PAGE>
(a) The pro forma as adjusted data reflect the historical operating data for
the fiscal year ended August 31, 1994 as if (i) the Nepco acquisition, (ii)
the sale of the Notes and the application of net proceeds to repay certain
indebtedness and (iii) the Canadian Acquisition had occurred at the
beginning of the period. For information regarding the pro forma
adjustments, see "Pro Forma As Adjusted Condensed Consolidated Statement of
Operations (Unaudited) for the Fiscal Year Ended August 31, 1994."
(b) The nine months ended May 31, 1994 reflect operations before the Nepco
acquisition on June 30, 1994, and the nine months ended May 31, 1995
reflect operations after the acquisition.
(c) The consolidated pro forma as adjusted statement of operations data give
effect to (i) the sale of the Notes and the application of net proceeds to
repay certain indebtedness and (ii) the Canadian Acquisition as if such
transactions had occurred at the beginning of the period. See "As Adjusted
Condensed Consolidated Statement of Operations (Unaudited) for the Nine
Months Ended May 31, 1995." The consolidated pro forma as adjusted balance
sheet data are adjusted as if (i) the sale of the Notes and the application
of the net proceeds therefrom to repay certain indebtedness and for working
capital and (ii) the Canadian Acquisition, as if each had occurred on May
31, 1995.
(d) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs and the portion of lease expense which management believes
is representative of the interest component of lease expense. On a pro
forma basis as adjusted for (i) the acquisition of Nepco, (ii) the sale of
the Notes and the application of net proceeds to repay certain indebtedness
and (iii) the Canadian Acquisition, the ratio of earnings to fixed charges
for the fiscal year ended August 31, 1994 and the nine months ended May 31,
1995 would result in a deficiency of earnings to fixed charges in the
amount of $10.8 million and $5.3 million, respectively.
(e) The redeemable warrants entitle the holders thereof to purchase an
aggregate of 2,492,741 shares of the Company's common stock. If the Company
does not complete an initial public offering of its common stock by June
30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the
holders may require the Company to repurchase the warrants at the higher of
current market value or an amount computed under the warrant agreement.
(f) Total shareholders' equity, on a pro forma as adjusted basis, has been
adjusted to reflect the sale for $1.8 million of 450,000 shares of the
Company's common stock to finance in part the Canadian Acquisition and to
reflect the prepayment premium and the write-off of deferred financing
costs associated with the repayment of the Company's existing subordinated
indebtedness and the write-off of deferred financing costs associated with
the repayment of the Company's current revolving credit and term loan
facilities, all of which will be accounted for as an extraordinary loss on
early extinguishment of debt.
9
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE
PURCHASING THE NOTES OFFERED HEREBY.
SUBSTANTIAL LEVERAGE; LIMITATIONS ASSOCIATED WITH RESTRICTIVE COVENANTS
As of May 31, 1995, after giving effect to the sale of the Notes and the
application of the net proceeds therefrom, the Company would have had $110.2
million in indebtedness outstanding (including the indebtedness under the Notes)
and would have had, subject to certain restrictions, the ability to draw up to
$23.7 million of the $35.0 million committed under the New Credit Facility. Such
indebtedness would have been substantially in excess of the Company's total
shareholders' equity of $3.9 million. See "Use of Proceeds" and
"Capitalization." As of May 31, 1995, approximately 16% of the Company's total
assets was comprised of covenants not to compete and goodwill, and there can be
no assurance that the carrying values of these assets will be recoverable.
The degree to which the Company is leveraged could have important
consequences to the holders of Notes, including the following: (i) the Company's
ability to obtain financing for future working capital needs or for acquisitions
or other purposes may be limited; (ii) a substantial portion of the Company's
cash flow from operations will be dedicated to debt service, thereby reducing
funds available for operations; (iii) certain of the Company's borrowings,
including borrowings under the Company's New Credit Facility, will be at
variable rates of interest, which could cause the Company to be vulnerable to
increases in interest rates; and (iv) the substantial indebtedness and the
restrictive covenants to which the Company is subject under the terms of its
indebtedness may make the Company more vulnerable to economic downturns, may
reduce its flexibility to respond to changing business conditions and
opportunities and may limit its ability to withstand competitive pressures. The
Company's ability to make scheduled payments of the principal of and interest
on, or to refinance, its indebtedness will depend upon its future operating
performance and cash flows which are subject to prevailing economic conditions,
market conditions in the packaging industry, prevailing interest rates and
financial, competitive, business and other factors, many of which may be beyond
the Company's control.
The New Credit Facility will contain numerous restrictive covenants that may
limit the Company's operational and financing flexibility. A failure to comply
with the obligations contained in the New Credit Facility or any agreements with
respect to future indebtedness could result in an event of default under such
agreements that could permit acceleration of the related debt and acceleration
of debt under other agreements that may contain cross-acceleration or
cross-default provisions. Other indebtedness of the Company that may be incurred
in the future may contain financial or other covenants more restrictive than
those applicable to the Notes or the New Credit Facility. See "Description of
the New Credit Facility" and "Description of the Notes."
EFFECTIVE SUBORDINATION OF NOTES IN CERTAIN CIRCUMSTANCES
The Notes will not be secured by any of the Company's assets. The Indenture
will permit the Company to incur certain secured indebtedness, including
indebtedness under the New Credit Facility. If the Company becomes insolvent or
is liquidated, or if payment under the New Credit Facility or other secured
indebtedness is accelerated, the lenders under the New Credit Facility and the
holders of any other secured indebtedness would be entitled to exercise the
remedies available to them as secured creditors under applicable laws and
pursuant to instruments governing such indebtedness. Accordingly, such secured
indebtedness would have a prior claim on the collateral and would effectively be
senior to the Notes to the extent that the value of such collateral is
sufficient to satisfy the indebtedness secured thereby. To the extent that the
value of such collateral is not sufficient to satisfy the secured indebtedness,
amounts remaining outstanding on such indebtedness would be entitled to share
with holders of Notes and other claims on the Company with respect to any other
assets of the Company. In either event, because the Notes will not be secured by
any of the Company's assets, it is possible that there would be insufficient
assets remaining from which claims of the holders of the Notes could be
satisfied.
10
<PAGE>
In addition, as of the date of the Indenture the Notes will be obligations
of the Company and not of any subsidiary, although the Indenture does require
that any Restricted Subsidiary of the Company having assets with an aggregate
fair market value in excess of $100,000 execute a guarantee in respect of the
Notes. Currently, the Company's only material operating subsidiary is its
Canadian subsidiary, which is being operated as an Unrestricted Subsidiary and
which, as a result, will not guarantee the Company's obligations under the
Notes. Upon liquidation of the Canadian subsidiary, as well as any other
Unrestricted Subsidiary, such obligations would be effectively subordinated to
claims of such subsidiary's creditors upon its assets. Moreover, the Canadian
subsidiary is separately financed by indebtedness that is non-recourse to the
Company (except that the Company has pledged the capital stock of the Canadian
subsidiary as security for the loans) and, under the terms of such indebtedness,
the Canadian subsidiary is subject to significant restrictions on its ability to
pay dividends or make other cash distributions or payments to the Company. It is
likely that this will also be the case for other Unrestricted Subsidiaries that
the Company may form in the future. If in the future a Restricted Subsidiary is
formed that guarantees the Company's obligations under the Notes, there can be
no assurance that the guarantee would not be subject to avoidance as a
fraudulent transfer or for other reasons.
COMPETITION
The Company faces direct competition in each of its product lines from a
number of companies, some of which have financial and other resources that are
substantially greater than those of the Company. As the Company broadens its
product offerings, it can expect to meet increased competition from additional
competitors with entrenched positions in those product lines. The Company also
faces some direct competition from bottling companies and other food and
beverage providers that elect to produce their own closures rather than purchase
them from outside sources. In addition, the packaging industry has numerous
well-capitalized competitors, and there is a risk that these companies will
expand their product offerings, either through internal product development or
acquisitions of any of the Company's direct competitors, to compete in the niche
markets that are currently served by the Company. These competitors, as well as
existing competitors, could introduce products or establish prices for their
products in a manner that could adversely affect the Company's ability to
compete. Because of the Company's product concentration, an increase in
competition or any technological innovations with respect to the Company's
specific product applications, such as the introduction of lower-priced
competitive products or products containing technological improvements over the
Company's products, could have a significant adverse effect on the Company's
financial condition and results of operations.
GOVERNMENTAL REGULATION
The Company's products are subject to governmental regulation, including
regulation by the Federal Food and Drug Administration and other agencies with
jurisdiction over effectiveness of tamper-resistant devices and other closures
for dairy and other food and beverage products. A change in government
regulation could adversely affect the Company. For example, certain regulators
have considered developing test protocols to determine whether closures for milk
bottles conform to specific regulatory requirements. There can be no assurance
that federal or state authorities will not develop protocols in the future that
would materially increase the Company's costs of manufacturing certain of its
products.
The Company's plastic closures and most of the containers for which the
Company's closures are designed are made of non-biodegradable materials.
Federal, state and local governments may enact laws or regulations concerning
environmental matters that would increase the cost of producing, or otherwise
adversely affect the demand for, plastic products, including those of the
Company. If widely adopted, such prohibitions and restrictions could impose
substantial additional costs on the Company. Moreover, if as a result of
pressure from consumers or legislative action, the packaging industry were to
shift to different types of packaging materials or different styles of
containers, the Company's results of operations could be adversely affected.
11
<PAGE>
PATENT INFRINGEMENT LITIGATION
The Company has recently received an adverse jury verdict in litigation
brought by Scholle Corporation ("Scholle") asserting that the Company's five
gallon non-spill closure product infringed upon certain of Scholle's patents.
The jury verdict, if entered by the court, would hold the Company liable for
damages in the amount of $0.01 per closure. For the period beginning January
1992, when the product was introduced, through May 31, 1995, such damages would
be approximately $800,000, which amount the Company has accrued in its financial
statements. In addition, the Company incurred during this period legal fees and
other legal expenses of approximately $1.5 million in connection with the
Scholle litigation. The Company's total sales of the product involved in the
litigation were $4.0 million during the twelve month period ended May 31, 1995.
The Company is continuing to produce and sell the product and accrue damages in
the amount of $0.01 per closure. There is a risk that Scholle may seek to enjoin
the Company from producing and selling the product in the future and may seek to
recover damages in excess of $0.01 per closure (up to $0.03 per closure) for
sales of the product after May 31, 1995. If such an injunction were granted, or
if the Company were required to pay treble damages (thereby substantially
reducing or eliminating the Company's profit on the product in question), the
Company anticipates that it would change its five gallon non-spill product to a
design that the Company believes will not infringe upon any Scholle patent,
although it can be anticipated that additional tooling costs will be incurred
and market disruption may result from changing to the new product design. See
"Business -- Litigation." In addition, there can be no assurance that other
infringement litigation will not be brought in the future against the Company,
that any such litigation will not be expensive and protracted or that, as a
result of such litigation, the Company will not be required to terminate a
business practice or seek to obtain a license to the intellectual property of
others.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY
The Company has a number of patents covering various aspects of the design
and construction of its products. The Company believes that protection afforded
by its patents is less significant to its future success than factors such as
the knowledge, ability and experience of its personnel, new product development,
product enhancements and ongoing customer service. There can be no assurance
that the Company's patents will withstand challenge in litigation, and patents
do not ensure that competitors will not develop competing products or infringe
upon the Company's patents. The Company now markets its products
internationally, and the protection offered by the patent laws of foreign
countries may be less than the protection offered by the United States patent
laws. The Company also relies on trade secrets and know-how to maintain its
competitive position. While the Company enters into confidentiality agreements
with employees and consultants who have access to proprietary information, there
can be no assurance that these measures will prevent the unauthorized disclosure
or use of such trade secrets and know-how.
POSSIBLE ADVERSE EFFECT OF CHANGES IN RESIN PRICES
The Company's products are molded from various plastic materials, primarily
low density polyethylene ("LDPE") resin. LDPE resin accounts for approximately
30% of the Company's cost of sales for closures. Plastic resins, including LDPE,
are subject to substantial price fluctuations, resulting from shortages in
supply, changes in the prices of natural gas, crude oil and other petrochemical
products from which resins are produced and other factors. Significant increases
in resin prices, coupled with an inability to promptly pass such increases on to
customers, would have a material adverse effect on the Company's financial
condition and results of operations. Moreover, even if the full amount of such
price increases are passed on to customers, the increases would have the effect
of reducing gross margins. Similarly, if resin prices decrease, customers would
typically expect rapid pass-through of the decrease, and there can be no
assurance that the Company would be able to maintain its margins. See "Business
- -- Raw Materials and Production."
12
<PAGE>
UNCERTAINTY WITH RESPECT TO NEW PRODUCTS AND MARKETS
The Company believes that the domestic markets for its traditional products
have become relatively mature and that, in order to continue to grow in a manner
consistent with recent results, the Company will increasingly rely on new
products, such as the fitment and 28mm push-pull cap, as well as expansion into
international markets. Developing new products and expanding into new markets
will require a substantial investment and involve additional risks, and there
can be no assurance that the Company's efforts to achieve such development and
expansion will be successful.
The Company's international operations are subject to certain risks
associated with doing business in foreign countries, including the possibility
of adverse governmental regulation, additional taxation and exchange rate
fluctuations. Having recently acquired two bottle manufacturing companies in
Canada, the Company is now embarking upon the plastic bottle manufacturing and
distribution business in western Canada, a business in which the Company has not
previously engaged, and one that may present new and unanticipated challenges.
There can be no assurance that the Canadian operations will be successful or
will not require additional funding. Since the Company's Canadian operations
will be conducted through an Unrestricted Subsidiary, the Indenture will impose
significant limitations upon the Company's ability to fund those operations.
DEPENDENCE UPON MANAGEMENT
The Company's success depends in part on certain key management employees.
If, for any reason, such key personnel do not continue to be active in the
Company's management, operations could be adversely affected. See "Management --
Executive Officers and Directors."
INTEREST OF UNDERWRITER'S AFFILIATE IN SALE OF NOTES
A portion of the net proceeds from the sale of the Notes is being used to
redeem existing subordinated indebtedness of the Company in the principal amount
of $10.0 million, plus an applicable prepayment premium ($613,000 at May 31,
1995). This subordinated indebtedness is held by The Chase Manhattan Bank, N.A.,
an affiliate of Chase Securities, Inc. (one of the Underwriters). Chase
Manhattan Capital Corporation, which is also an affiliate of Chase Securities,
Inc., holds, together with related parties, approximately 20% of the Company's
outstanding voting capital stock. See "Certain Transactions," "Principal
Stockholders" and "Underwriting."
LIMITATIONS ON REPURCHASE OF NOTES
Upon a Change of Control (as defined), each holder of Notes will have
certain rights to require the Company to repurchase all or a portion of such
holder's Notes. If a Change of Control were to occur, there can be no assurance
that the Company would have sufficient funds to pay the repurchase price for all
Notes tendered by the holders thereof. In addition, a Change of Control would
constitute a default under the New Credit Facility and, since indebtedness under
the New Credit Facility will effectively rank senior in priority to indebtedness
under the Notes, the Company would be obligated to repay indebtedness under the
New Credit Facility in advance of indebtedness under the Notes. See "Effective
Subordination of Notes in Certain Circumstances." The Company's repurchase of
Notes as a result of the occurrence of a Change of Control may be prohibited or
limited by, or create an event of default under, the terms of other agreements
relating to borrowings which the Company may enter into from time to time,
including agreements relating to secured indebtedness. Failure by the Company to
make or consummate a Change of Control offer would constitute an immediate Event
of Default under the Indenture, thereby entitling the Trustee or holders of at
least 25% in principal amount of the then outstanding Notes to declare all of
the Notes to be due and payable immediately; provided that so long as any
indebtedness permitted to be incurred pursuant to the New Credit Facility is
outstanding, such acceleration shall not be effective until the earlier of (i)
an acceleration of any such indebtedness under the New Credit Facility or (ii)
five business days after receipt by the Company of written notice of such
acceleration. In the event all of the Notes are declared due and payable, the
Company's ability to repay the Notes would be subject to the limitations
referred to above. See "Description of the Notes -- Repurchase at Option of
Holders -- Change of Control."
13
<PAGE>
ABSENCE OF PUBLIC MARKET
There has been no prior market for the Notes, and there can be no assurance
that a market will develop. The Company does not intend to apply for listing of
the Notes on any national securities exchange or for quotation of the Notes
through the National Association of Securities Dealers Automated Quotation
System ("Nasdaq"). The Company has been advised by the Underwriters that,
following the completion of the Offering, the Underwriters presently intend to
make a market in the Notes; however, they are under no obligation to do so and
may discontinue any market-making activities at any time without notice. If the
Notes are traded after their initial issuance, they may trade at a discount from
their initial offering price, depending upon prevailing interest rates, the
market for similar securities, the performance of the Company and other factors.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Notes
offered hereby, estimated to be $106.1 million (after deducting approximately
$3.9 million in underwriting discount and other estimated offering expenses),
(i) to repay all outstanding indebtedness under the Company's current revolving
credit facilities (the "Current Revolving Credit Facility") and under its term
loans (the "Current Term Loan Facility" and, together with the Current Revolving
Credit Facility, the "Current Credit Facility") in the aggregate amount of $72.1
million and (ii) to redeem existing subordinated indebtedness (the "Senior
Subordinated Notes") in the amount of $10.0 million, plus an applicable
prepayment premium ($613,000 at May 31, 1995). The balance of the net proceeds
will be available for working capital and general corporate purposes, including
capital expenditures and the possible purchase of certain facilities currently
leased (as well as certain real property adjacent thereto) by the Company.
At May 31, 1995, the weighted average interest rate on the Current Revolving
Credit Facility was 9.55% per annum, and the weighted average interest rate on
the Current Term Loan Facility was 9.57% per annum. Availability under the
Current Revolving Credit Facility expires no earlier than July 1, 1999. At May
31, 1995, the Company had drawn $14.4 million against the Current Revolving
Credit Facility and had the ability to draw up to an additional $3.6 million.
The Current Term Loan Facility requires quarterly principal payments through
July 1, 2001.
The Senior Subordinated Notes bear interest at 13.5% per annum and are due
June 30, 2002. See "Certain Transactions," "Principal Stockholders" and
"Underwriting."
14
<PAGE>
CAPITALIZATION
The following table sets forth the historical current portion of long-term
debt and capitalization of the Company as of May 31, 1995 and the as adjusted
capitalization of the Company as of such date after giving effect to the sale of
the Notes and the application of net proceeds to repay certain indebtedness. See
"Use of Proceeds." The table should be read in conjunction with the "Unaudited
Pro Forma As Adjusted Combined Consolidated Financial Data" and the historical
financial statements and related notes thereto of the Company included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF MAY 31, 1995
----------------------------
HISTORICAL AS ADJUSTED(A)
----------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Current portion of long-term debt.................................................... $ 3,851 $ 101
----------- ---------------
----------- ---------------
Long-term debt, excluding current portion:
Current Revolving Credit Facility.................................................. $ 14,388 $ --
Current Term Loan Facility......................................................... 54,000 --
New Credit Facility (b)............................................................ -- --
10 3/4% Senior Notes due 2005...................................................... -- 110,000
Senior Subordinated Notes.......................................................... 10,000 --
Note payable....................................................................... 96 96
----------- ---------------
Total long-term debt, excluding current portion.................................. 78,484 110,096
Redeemable warrants (c).............................................................. 3,512 3,512
Class A Common Stock, $.001 par value; 2,503,000 shares authorized; no shares issued
and outstanding..................................................................... -- --
Class B Common Stock, $.001 par value; 20,285,715 shares authorized; 11,343,762
shares issued and outstanding....................................................... 11 11
Additional paid-in-capital........................................................... 7,418 7,418
Notes receivable from shareholders................................................... (271) (271)
Accumulated deficit (d).............................................................. (1,763) (3,300)
----------- ---------------
Total shareholders' equity....................................................... 5,395 3,858
----------- ---------------
Total capitalization........................................................... $ 87,391 $ 117,466
----------- ---------------
----------- ---------------
</TABLE>
- ------------------------
(a) Does not include pro forma adjustments to give effect to the Canadian
Acquisition. For information as to such adjustments, see "Unaudited Pro
Forma As Adjusted Condensed Consolidated Financial Data -- Pro Forma As
Adjusted Condensed Consolidated Balance Sheet."
(b) Concurrently with the sale of the Notes, the Company will enter into the New
Credit Facility under which the Company will have the ability to draw up to
$35.0 million of senior secured indebtedness, subject to a borrowing base
and certain other restrictions. As of May 31, 1995, after giving effect to
the sale of the Notes offered hereby and the application of net proceeds to
repay certain indebtedness, the Company would have had the ability to draw
up to $23.7 million under the New Credit Facility. The New Credit Facility
will have a term of five years and will bear interest at a rate equal to the
London Interbank Offered Rate ("LIBOR") plus 2.25% or the Base Rate plus
1.25%. For additional information on the New Credit Facility, see
"Description of the New Credit Facility."
(c) The redeemable warrants entitle the holders thereof to purchase an aggregate
of 2,492,741 shares of the Company's common stock. If the Company does not
complete an initial public offering of its common stock by June 30, 1999
(for certain warrants) or August 1, 2001 (for other warrants), the holders
may require the Company to repurchase the warrants.
(d) Accumulated deficit on an as adjusted basis has been increased to reflect
prepayment premiums and write-off of deferred financing costs associated
with the repayment of the Company's existing Senior Subordinated Notes and
write-off of deferred financing costs associated with the repayment of the
Current Revolving Credit Facility and the Current Term Loan Facility, all of
which will be accounted for as an extraordinary loss on early extinguishment
of debt.
15
<PAGE>
UNAUDITED PRO FORMA AS ADJUSTED
CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma as adjusted condensed consolidated
financial data has been derived by making certain pro forma adjustments and
other adjustments to the financial statements of the Company. The unaudited pro
forma as adjusted condensed consolidated statement of operations data for the
fiscal year ended August 31, 1994 give effect to (i) the acquisition of Nepco,
(ii) the sale of the Notes and the application of net proceeds to repay certain
indebtedness and (iii) the Canadian Acquisition, as if such transactions had
occurred on September 1, 1993. The unaudited pro forma as adjusted condensed
consolidated statement of operations data for the nine months ended May 31, 1995
give effect to (i) the sale of the Notes and the application of net proceeds to
repay certain indebtedness and (ii) the Canadian Acquisition, as if such
transactions had occurred on September 1, 1994. The unaudited pro forma as
adjusted condensed consolidated balance sheet data for the nine months ended May
31, 1995 give effect to (i) the sale of the Notes and the application of the net
proceeds to repay certain indebtedness and for working capital and (ii) the
Canadian Acquisition, as if such transactions had occurred on such date. The
unaudited pro forma and other adjustments which are described in the
accompanying notes are based on available information and certain assumptions
that the Company believes are reasonable.
Although the unaudited pro forma as adjusted condensed consolidated
financial data give effect to the Canadian Acquisition, the Company's Canadian
subsidiary will be operated as an Unrestricted Subsidiary pursuant to the
Indenture. As a result, amounts permitted to be invested by the Company in its
Canadian subsidiary will be subject to significant limitations. See "Description
of the Notes -- Restricted Payments." In addition, the Canadian subsidiary is
separately financed by indebtedness that is non-recourse to the Company (except
that the Company has pledged the capital stock of the Canadian subsidiary as
security for the loans) and, under the terms of such indebtedness, the Canadian
subsidiary is subject to significant restrictions on its ability to pay
dividends or make other cash distributions or payments to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The unaudited pro forma as adjusted statements should be read in conjunction
with the separate historical financial statements of the Company, the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. The unaudited pro
forma as adjusted statements are based on available information and certain
assumptions that the Company believes are reasonable. Such statements do not
purport to represent what the Company's financial position or results of
operations would actually have been if the aforementioned transactions in fact
had occurred on such dates or at the beginning of the period indicated or to
project the Company's financial position or results of operations at any future
date or for any future period.
16
<PAGE>
PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FISCAL YEAR ENDED AUGUST 31, 1994
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NEPCO PRO FORMA
COMPANY TEN MONTHS ADJUSTMENTS COMPANY- ADJUSTMENTS COMPANY- ONLY
YEAR ENDED AUGUST ENDED FOR NEPCO ONLY PRO FOR SALE OF PRO FORMA AS
31, 1994 JUNE 30, 1994 ACQUISTION FORMA NOTES ADJUSTED
----------------- --------------- -------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 70,284 $ 31,131 $ -- $ 101,415 $ -- $ 101,415
Sales............................
51,670 27,313 186(a) 79,169 -- 79,169
Cost of sales....................
-------- --------------- ------- ----------- ------- ------------
18,614 3,818 (186) 22,246 -- 22,246
Gross profit...................
8,821 4,281 46(a) 12,638 -- 12,638
Selling, general and
administrative..................
(510)(b)
764 142 -- 906 -- 906
Research and development.........
2,025 5 890(c) 3,527 -- 3,527
Amortization of intangibles......
607(d)
-------- --------------- ------- ----------- ------- ------------
7,004 (610) (1,219) 5,175 -- 5,175
Income (loss) from
operations....................
3,899 380 2,100(e) 6,605 5,299(i) 11,904
Interest (income) expense, net...
226(d)
433 -- (124)(f) 309 81(j) 390
Amortization of debt financing
costs...........................
477 (236) -- 241 -- 241
Other (income) expense, net......
-------- --------------- ------- ----------- ------- ------------
2,195 (754) (3,421) (1,980) (5,380) (7,360)
Income (loss) before income
taxes, extraordinary item and
cumulative effect of change in
accounting principle..........
1,095 (240) (1,012)(g) (157) (2,152)(k) (2,309)
Income taxes (benefit)...........
-------- --------------- ------- ----------- ------- ------------
$ 1,100 $ (514) $ (2,409)(h) $ (1,823) $ (3,228)(l) $ (5,051)
Income (loss) before
extraordinary item and
cumulative effect of change in
accounting principle..........
-------- --------------- ------- ----------- ------- ------------
-------- --------------- ------- ----------- ------- ------------
$ 0.08 $ (0.14) $ (0.38)
Income (loss) before
extraordinary item per
share.......................
-------- ----------- ------------
-------- ----------- ------------
<CAPTION>
CANADA PRO FORMA CONSOLIDATED
TWELVE MONTHS ADJUSTMENTS COMPANY PRO
ENDED FOR CANADIAN FORMA AS
AUGUST 31, 1994 ACQUISITION ADJUSTED
----------------- -------------- -------------
<S> <C> <C> <C>
$ 6,243 $ 107,658
Sales............................
5,357 $ (1,408)(m) 83,503
Cost of sales....................
385(n)
------- ------- -------------
886 1,023 24,155
Gross profit...................
954 (745)(o) 12,847
Selling, general and
administrative..................
-- 906
Research and development.........
-- 240(p) 4,391
Amortization of intangibles......
624(q)
------- ------- -------------
(68) 904 6,011
Income (loss) from
operations....................
(29) 976(r) 13,055
Interest (income) expense, net...
204(q)
-- -- 390
Amortization of debt financing
costs...........................
(76) -- 165
Other (income) expense, net......
------- ------- -------------
37 (276) (7,599)
Income (loss) before income
taxes, extraordinary item and
cumulative effect of change in
accounting principle..........
-- (15)(s) (2,324)
Income taxes (benefit)...........
------- ------- -------------
$ 37 $ (261) $ (5,275)
Income (loss) before
extraordinary item and
cumulative effect of change in
accounting principle..........
------- ------- -------------
------- ------- -------------
$ (0.39)
Income (loss) before
extraordinary item per
share.......................
-------------
-------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
NOTES TO PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) FOR THE FISCAL YEAR ENDED AUGUST 31, 1994.
PRO FORMA ADJUSTMENTS FOR NEPCO ACQUISITION
(a) Adjusts the historical results of operations of the Company for the
additional depreciation and amortization expense related to the revaluation
of Nepco property, plant and equipment. A total of $186,000 additional
depreciation was added to cost of sales and $46,000 was added to selling,
general and administrative expense.
(b) Reduces the historical compensation of former owners by $510,000 to
contractual levels consistent with the noncompetition agreements described
under note (d) below.
(c) Increases the goodwill amortization for the period from July 1, 1994 to
August 31, 1994 to the amortization for a full year assuming that the Nepco
acquisition had occurred on September 1, 1993. Goodwill as of September 1,
1993 was assumed to have been $15.8 million and is amortized over a period
of 15 years.
(d) Adjusts the historical results of operations of the Company for the costs
associated with noncompetition agreements entered into in connection with
the Nepco acquisition. Includes the cost of amortization of $607,000 and
effective interest cost of $226,000 related to the agreements for a full
year.
(e) Increases the interest expense for the Company for the year ended August
31, 1994 by $2.1 million assuming that the debt to fund the Nepco
acquisition was outstanding on September 1, 1993 at a rate of 8.0%.
(f) Decreases the historical amortization of loan fees of the Company based
upon the elimination of historical loan fee amortization of $433,000 and
inclusion of amortization expense for the debt incurred in connection with
the Nepco acquisition of $309,000 for the fiscal year ended August 31,
1994.
(g) Adjusts the historical tax expense of the Company for the deductible
portion of adjustments described in notes (a) through (f) above, at an
assumed effective tax rate of 40%.
(h) Net loss for the period would be $2.9 million, $210,000 of which is
attributable to the assumed increase in the write-off of historical
deferred financing costs, at an assumed effective tax rate of 40%.
ADJUSTMENTS FOR SALE OF NOTES
(i) Assumes that the Notes offered hereby were issued September 1, 1993 at an
interest rate of 10.75% and that net proceeds of the Notes were used to
repay certain indebtedness.
(j) Increases loan fee amortization based upon the inclusion of amortization
expense for the assumed underwriting discount and offering expenses of $3.9
million related to the Notes, and net of the pro forma amortization of loan
fees.
(k) Adjusts the pro forma tax expense of the Company and Nepco for the tax
benefit of the adjustments in notes (i) and (j) above, at an assumed
effective tax rate of 40%.
(l) Net loss for the period would be $7.1 million, $926,000 of which is
attributable to the assumed prepayment premium as of September 1, 1993 of
$1.5 million on the Senior Subordinated Notes at an assumed effective tax
rate of 40%. The prepayment premium on the Senior Subordinated Notes
decreases from the date of issuance and would have been $613,000 at May 31,
1995.
PRO FORMA ADJUSTMENTS FOR CANADIAN ACQUISITION
(m) Adjusts the historical operations results of the Company to eliminate the
rental expense paid to a related party for the machinery and equipment
purchased as discussed in note (n).
(n) Adjusts the historical operations results of the Company for the additional
depreciation and amortization expense related to the purchase of the
Canadian machinery and equipment.
(o) Reduces the historical compensation of the former owners by $745,000 to
contractual levels.
(p) Adjusts the historical results of operations of the Company for the
goodwill amortization expense assuming the Canadian Acquisition had
occurred on September 1, 1993. Goodwill as of September 1, 1993 was assumed
to have been $6.0 million and is amortized over a period of 25 years.
(q) Adjusts the historical results of operations of the Company for the costs
associated with noncompetition agreements entered into in connection with
the Canadian Acquisition. Includes the cost of amortization of $624,000 and
effective interest costs of $204,000 related to the agreements for a full
year (using a discount rate of 11%).
(r) Increases the interest expense for the Company for the year ended August
31, 1994 by $976,000 assuming that the debt to finance the Canadian
Acquisition was outstanding on September 1, 1993 at an annual rate of 10%.
(s) Adjusts the historical tax expense of the Company for the deductible
portion of adjustments described in notes (m) through (r) at an assumed
effective tax rate of 40%.
18
<PAGE>
PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED MAY 31, 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY NINE ADJUSTMENTS CANADA ADJUSTMENTS
MONTHS ENDED FOR SALE OF COMPANY-ONLY AS NINE MONTHS ENDED FOR CANADIAN
MAY 31, 1995 NOTES ADJUSTED MAY 31, 1995 ACQUISITION
------------- ------------- --------------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Sales...................................... $ 86,462 $ -- $ 86,462 $ 7,502 $ --
Cost of sales.............................. 65,674 -- 65,674 6,110 (1,208)(f)
289(g)
------------- ------------- --------------- ------- -------------
Gross profit............................. 20,788 -- 20,788 1,392 919
Selling, general and administrative........ 9,973 -- 9,973 1,507 (504)(h)
Research and development................... 943 -- 943 -- --
Amortization of intangibles................ 2,547 -- 2,547 -- 180(i)
468(j)
------------- ------------- --------------- ------- -------------
Income (loss) from operations............ 7,325 -- 7,325 (115) 775
Interest (income) expense, net............. 6,131 2,842(a) 8,973 (41) 732(k)
153(j)
Amortization of debt financing costs....... 360 (68)(b) 292 -- --
Other (income) expense, net................ (60) -- (60) (132) --
------------- ------------- --------------- ------- -------------
Income (loss) before income taxes and
extraordinary item...................... 894 (2,774) (1,880) 58 (110)
Income taxes (benefit)..................... 517 (1,110)(c) (593) -- 28(l)
------------- ------------- --------------- ------- -------------
Income (loss) before extraordinary
item.................................... $ 377 $ (1,664)( (e) $ (1,287) $ 58 $ (138)
------------- ------------- --------------- ------- -------------
------------- ------------- --------------- ------- -------------
Income (loss) before extraordinary item
per share............................... $ 0.03 $ (0.09)
------------- ---------------
------------- ---------------
<CAPTION>
CONSOLIDATED
COMPANY PRO
FORMA AS
ADJUSTED
-------------
<S> <C>
Sales...................................... $ 93,964
Cost of sales.............................. 70,865
-------------
Gross profit............................. 23,099
Selling, general and administrative........ 10,976
Research and development................... 943
Amortization of intangibles................ 3,195
-------------
Income (loss) from operations............ 7,985
Interest (income) expense, net............. 9,817
Amortization of debt financing costs....... 292
Other (income) expense, net................ (192)
-------------
Income (loss) before income taxes and
extraordinary item...................... (1,932)
Income taxes (benefit)..................... (565)
-------------
Income (loss) before extraordinary
item.................................... $ (1,367)
-------------
-------------
Income (loss) before extraordinary item
per share............................... $ (0.10)
-------------
-------------
</TABLE>
NOTES TO PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) FOR THE NINE MONTHS ENDED MAY 31, 1995.
ADJUSTMENTS FOR SALE OF NOTES
(a) Increases interest expense, net based upon an assumed interest rate of
10.75% on the Notes offered hereby and the use of net proceeds to repay
certain indebtedness.
(b) Decreases historical loan fee amortization for the nine months ended May
31, 1995 for the amortization, on a pro forma basis, of assumed loan fees
and underwriting discount of $3.9 million.
(c) Decreases the pro forma tax expense of the Company for the tax benefit of
deductible pro forma adjustments in notes (a) and (b) above, at an assumed
effective tax rate of 40%.
(d) Net loss for the period would be $3.3 million, $1.4 million of which is
attributable to the assumed write-off of deferred financing costs of $2.4
million at an assumed effective tax rate of 40% and after giving effect to
the adjustment in note (e).
(e) Net loss for the period would be $3.3 million, $612,000 of which is
attributable to the assumed prepayment premium of $1.0 million on the
Senior Subordinated Notes at an assumed effective tax rate of 40% (after
giving effect to the adjustment in note (d)).
PRO FORMA ADJUSTMENTS FOR CANADIAN ACQUISITION
(f) Adjusts the historical results of operations of the Company to eliminate
the rental expense paid to a related party for the machinery and equipment
purchased as discussed in note (g).
(g) Adjusts the historical results of operations of the Company for the
additional depreciation and amortization expense related to the purchase of
the Canadian machinery and equipment.
(h) Reduces the historical compensation of the former owners by $504,000 to
contractual levels.
(i) Adjusts the historical results of operations of the Company for the
goodwill amortization expense assuming the Canadian Acquisition had
occurred on September 1, 1994. Goodwill as of September 1, 1994 was assumed
to have been $6.0 million and is amortized over a period of 25 years.
(j) Adjusts the historical results of operations of the Company for the costs
associated with noncompetition agreements entered into in connection with
the Canadian Acquisition. Includes the cost of amortization of $468,000 and
effective interest costs of $153,000, related to the agreements for the
nine months (using a discount rate of 11%).
(k) Increases the interest expense for the Company for the nine months ended
May 31, 1995 by $732,000, assuming that the debt to finance the Canadian
Acquisition was outstanding on September 1, 1994 at an annual rate of 10%.
(l) Adjusts the historical tax expense of the Company for the deductible
portion of adjustments described in notes (f) through (k) above, at an
assumed effective tax rate of 40%.
19
<PAGE>
PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MAY 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS ADJUSTMENTS
FOR SALE OF COMPANY-ONLY AS CANADA MAY 31, FOR CANADIAN
MAY 31, 1995 NOTES ADJUSTED 1995(C) ACQUISITION
------------- ------------ --------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 505 $ 23,349(a) $ 23,854 $ 306 $ --
Short term investments................... 1,000 -- 1,000 -- --
Accounts receivable, net................. 17,046 -- 17,046 1,327 --
Inventories.............................. 11,219 -- 11,219 602 --
Other current assets..................... 962 -- 962 74 --
Deferred income taxes.................... 731 -- 731 107 --
------------- ------------ --------------- -------- -------------
Total current assets................... 31,463 23,349 54,812 2,416 --
Notes receivable........................... 454 -- 454 -- --
Property, plant and equipment, net......... 48,903 -- 48,903 3,581 --
Goodwill, net.............................. 15,478 -- 15,478 6,011 --
Patents, net............................... 7,979 -- 7,979 -- --
Covenants not to compete, net.............. 3,048 -- 3,048 2,496 --
Debt financing costs, net.................. 1,949 1,951(a) 3,900 123 --
Other assets............................... 3,148 -- 3,148 -- --
------------- ------------ --------------- -------- -------------
Total assets........................... $ 112,422 $ 25,300 $ 137,722 $ 14,627 $ --
------------- ------------ --------------- -------- -------------
------------- ------------ --------------- -------- -------------
Liabilities, redeemable warrants and total
shareholders' equity
Current liabilities:
Current portion of long-term debt........ $ 3,851 $ (3,750)(a) $ 101 $ 654 $ --
Accounts payable......................... 5,601 -- 5,601 830 --
Accrued liabilities...................... 6,484 (1,025)(b) 5,459 114 --
Accrued Interest......................... 751 -- 751 -- --
------------- ------------ --------------- -------- -------------
Total current liabilities.............. 16,687 (4,775) 11,912 1,598 --
Long-term debt, less current portion....... 78,484 31,612(a) 110,096 7,994 1,107(d)
Other long-term liabilities................ 2,531 -- 2,531 2,128 --
Deferred income taxes...................... 5,813 -- 5,813 -- --
------------- ------------ --------------- -------- -------------
Total liabilities...................... 103,515 26,837 130,352 11,720 1,107
Redeemable warrants........................ 3,512 -- 3,512 -- --
Common stock............................... 11 -- 11 2,907 (2,907)(e)
1(d)
Additional paid-in capital................. 7,418 -- 7,418 -- 1,799(d)
Less notes receivable from shareholders.... (271) -- (271) -- --
Accumulated deficit........................ (1,763) (1,537)(b) (3,300) -- --
------------- ------------ --------------- -------- -------------
Total shareholders' equity............. 5,395 (1,537) 3,858 2,907 (1,107)
------------- ------------ --------------- -------- -------------
Total liabilities, redeemable warrants
and total shareholders' equity........ $ 112,422 $ 25,300 $ 137,722 $ 14,627 $ --
------------- ------------ --------------- -------- -------------
------------- ------------ --------------- -------- -------------
<CAPTION>
CONSOLIDATED
COMPANY PRO
FORMA AS
ADJUSTED
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 24,160
Short term investments................... 1,000
Accounts receivable, net................. 18,373
Inventories.............................. 11,821
Other current assets..................... 1,036
Deferred income taxes.................... 838
-------------
Total current assets................... 57,228
Notes receivable........................... 454
Property, plant and equipment, net......... 52,484
Goodwill, net.............................. 21,489
Patents, net............................... 7,979
Covenants not to compete, net.............. 5,544
Debt financing costs, net.................. 4,023
Other assets............................... 3,148
-------------
Total assets........................... $ 152,349
-------------
-------------
Liabilities, redeemable warrants and total
shareholders' equity
Current liabilities:
Current portion of long-term debt........ $ 755
Accounts payable......................... 6,431
Accrued liabilities...................... 5,573
Accrued Interest......................... 751
-------------
Total current liabilities.............. 13,510
Long-term debt, less current portion....... 119,197
Other long-term liabilities................ 4,659
Deferred income taxes...................... 5,813
-------------
Total liabilities...................... 143,179
Redeemable warrants........................ 3,512
Common stock............................... 12
Additional paid-in capital................. 9,217
Less notes receivable from shareholders.... (271)
Accumulated deficit........................ (3,300)
-------------
Total shareholders' equity............. 5,658
-------------
Total liabilities, redeemable warrants
and total shareholders' equity........ $ 152,349
-------------
-------------
</TABLE>
20
<PAGE>
NOTES TO PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MAY 31, 1995.
ADJUSTMENTS FOR SALE OF NOTES
(a) Adjusts the May 31, 1995 balance sheet of the Company for the assumed sale
of the Notes offered hereby. The Company intends to use the proceeds of the
sale of the Notes, net of estimated offering expenses and underwriting
discount of $3.9 million, to repay certain indebtedness and for working
capital as follows:
<TABLE>
<CAPTION>
Repayment of:
<S> <C>
(IN THOUSANDS)
--------------
Current Revolving Credit Facility................................... $ 14,388
Current Term Loan Facility.......................................... 57,750
Senior Subordinated Notes........................................... 10,000
--------------
Total............................................................. 82,138
Prepayment premium.................................................... 613
Working capital....................................................... 23,349
Underwriting discounts and offering expenses.......................... 3,900
--------------
Total............................................................. $ 110,000
--------------
--------------
</TABLE>
(b) Total shareholders' equity, on an as adjusted basis, has been decreased to
reflect prepayment premium and the write-off of deferred financing costs
associated with the repayment of the Company's existing Senior Subordinated
Notes and the write-off of deferred financing costs associated with the
repayment of the Current Revolving Credit Facility and the Current Term
Loan Facility, all of which will be accounted for as an extraordinary loss
on early extinguishment of debt, net of applicable income tax benefits.
PRO FORMA ADJUSTMENTS FOR CANADIAN ACQUISITION
(c) Adjustments to the balance sheet of the Canadian subsidiary, as of June 16,
1995 (the date of the Canadian Acquisition), reflect addition of debt
incurred in the Canadian Acquisition totaling $7.3 million, purchase of
machinery and equipment of approximately $3.5 million and goodwill recorded
of $6.0 million. In addition, an intangible asset, related to a
noncompetition agreement, has been recorded for the discounted net present
value of payments using an assumed discount rate of 11%. Long-term debt was
increased for the initial yearly payment made upon closing, totaling
$727,000. Other long-term obligations were increased by $1.8 million for
the discounted three remaining payments.
(d) Adjusts the historical balance sheet for the financing of the Company's
equity investment into the Canadian subsidiary by sale of 450,000 shares of
common stock totaling $1.8 million and borrowing under the Current
Revolving Credit Facility of $1.1 million.
(e) Adjustment to effect the elimination of the equity in the subsidiary.
21
<PAGE>
SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA
The selected historical condensed consolidated statement of operations and
balance sheet data set forth in the table below for, and at the end of, each of
the fiscal years in the five year period ended August 31, 1994 have been derived
from, and are qualified by reference to, the consolidated financial statements
of the Company which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The selected historical condensed consolidated statement of
operations and balance sheet data for the nine months ended May 31, 1994 and
1995, and at May 31, 1994 and 1995, are derived from unaudited consolidated
financial statements of the Company and, in the opinion of the management of the
Company, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations of the interim periods. Results for the nine months ended
May 31, 1994 and 1995 are not necessarily indicative of the results that may be
expected for the full fiscal year. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements of the Company
and the accompanying notes thereto and other financial information appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED AUGUST 31, ENDED MAY 31,
----------------------------------------------------- ----------------------
1990 1991 1992 1993 1994(A) 1994(B) 1995(B)
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.................................... $ 42,841 $ 48,204 $ 52,152 $ 58,286 $ 70,284 $ 44,624 $ 86,462
Cost of sales............................ 31,213 34,658 37,676 42,679 51,670 32,983 65,674
--------- --------- --------- --------- --------- ----------- ---------
Gross profit........................... 11,628 13,546 14,476 15,607 18,614 11,641 20,788
Selling, general and administrative...... 5,071 5,522 6,046 7,207 8,821 5,526 9,973
Research and development................. 273 557 915 820 764 521 943
Amortization of intangibles (c).......... 1,307 1,440 1,421 1,400 2,025 1,054 2,547
--------- --------- --------- --------- --------- ----------- ---------
Income from operations................. 4,977 6,027 6,094 6,180 7,004 4,540 7,325
Other (income) expense, net (d).......... (115) (35) 632 (62) 477 (6) (60)
Interest expense, net.................... 4,586 3,888 3,147 3,044 3,899 2,464 6,131
Amortization of debt financing costs..... 460 418 365 479 433 309 360
--------- --------- --------- --------- --------- ----------- ---------
Income before extraordinary item,
cumulative effect of change in
accounting principle and income
taxes................................. 46 1,756 1,950 2,719 2,195 1,773 894
Income taxes (e)......................... 525 1,301 1,287 1,521 1,095 773 517
--------- --------- --------- --------- --------- ----------- ---------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle.................. (479) 455 663 1,198 1,100 1,000 377
Extraordinary item, net (f).............. -- -- -- 889 790 -- --
Cumulative effect of change in accounting
principle (e)........................... -- -- -- -- 85 85 --
--------- --------- --------- --------- --------- ----------- ---------
Net income (loss)........................ ($ 479) $ 455 $ 663 $ 309 $ 225 $ 915 $ 377
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
Net income (loss) per share.............. $ (0.04) $ 0.04 $ 0.05 $ 0.02 $ 0.02 $ 0.07 $ 0.03
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.......................... $ 1,683 $ 2,867 $ 2,920 $ 7,109 $ 11,049 $ 4,633 $ 14,776
Total assets............................. 39,056 40,502 44,031 50,896 110,820 54,706 112,422
Total debt............................... 33,904 30,681 30,611 38,140 77,467 35,634 82,335
Redeemable warrants (g).................. 883 1,683 2,483 2,600 3,055 2,747 3,512
Total shareholders' equity (deficit)..... (761) 2,746 2,719 2,597 5,393 3,366 5,395
CASH FLOW DATA:
Net cash provided by operating
activities.............................. 5,926 4,666 7,699 6,768 9,351 7,450 2,920
Net cash used in investing activities.... (2,770) (4,931) (8,947) (9,119) (38,418) (5,458) (8,989)
Net cash provided by (used in) financing
activities.............................. (3,556) 934 229 3,538 30,099 (2,556) 4,355
OPERATING AND OTHER DATA:
Closure unit volume (in millions)........ 3,101 3,376 3,763 3,980 4,893 2,953 6,170
Closure unit volume growth (h)........... 14.1% 8.9% 11.5% 5.8% 22.9% 2.1% 108.9%
EBITDA (i)............................... $ 9,923 $ 11,180 $ 11,085 $ 12,883 $ 14,728 $ 9,763 $ 16,960
Depreciation and amortization (j)........ 5,291 5,536 5,920 6,845 8,357 5,271 9,089
Capital expenditures..................... 2,782 4,204 8,089 9,564 6,159 4,212 8,247
Ratio of earnings to fixed charges (k)... 1.0x 1.4x 1.4x 1.3x 1.2x 1.6x 1.1x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
22
<PAGE>
(a) Includes ten months of operations before the Nepco acquisition on June 30,
1994 and two months of operations after the acquisition.
(b) The nine months ended May 31, 1994 reflect operations before the Nepco
acquisition on June 30, 1994, and the nine months ended May 31, 1995
reflect operations after the acquisition.
(c) Includes amortization of patents, goodwill and covenants not to compete.
(d) Other expenses include financing costs and other expenses, net.
(e) The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" in the fiscal year ended August 31, 1994 and
the nine months ended May 31, 1994. The cumulative effect on prior years is
shown in such periods.
(f) Extraordinary item refers to extinguishment of certain debt, net of income
tax benefit.
(g) The redeemable warrants entitle the holders thereof to purchase an
aggregate of 2,492,741 shares of the Company's common stock. If the Company
does not complete an initial public offering of its common stock by June
30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the
holders may require the Company to repurchase the warrants at the higher of
current market value or an amount computed under the warrant agreement.
(h) These results reflect closure unit volume growth of the Company including
Nepco after June 30, 1994. On a pro forma combined basis, the closure unit
volume growth for Portola and Nepco was 11.6% and 7.1% for the fiscal year
ended August 31, 1994 and the nine months ended May 31, 1995, respectively.
(i) EBITDA represents, for any relevant period, income (loss) before income
taxes, extraordinary item, cumulative effect of change in accounting
principle, depreciation of property, plant and equipment, interest expense,
net, amortization of intangible assets and non-recurring legal expenses
associated with the Company's litigation with Scholle Corporation. See
"Business -- Litigation." The non-recurring legal expenses associated with
the Scholle Corporation litigation for the fiscal year ended August 31,
1992, 1993 and 1994 were $68,000, $275,000 and $277,000, respectively; for
the nine months ended May 31, 1994 and 1995, were $255,000 and $846,000,
respectively; and for the twelve months ended May 31, 1995 were $867,000.
EBITDA is not intended to represent and should not be considered more
meaningful than, or an alternative to, net income, cash flow or other
measure of performance in accordance with generally accepted accounting
principles. EBITDA data is included because the Company understands that
such information is used by certain investors as one measure of an issuer's
historical ability to service debt and because certain restrictive
covenants in the Indenture will be based on the Company's EBITDA.
(j) Includes amortization of debt financing costs.
(k) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs and the portion of lease expense which management believes
is representative of the interest component of lease expense.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was acquired in 1986 through a leveraged acquisition led by Jack
L. Watts, the Company's current Chairman of the Board and Chief Executive
Officer. Since the acquisition, management has focused its efforts on four
principal areas: (i) continuing growth by converting new customers to its
plastic closures, (ii) developing new products and improving existing products,
(iii) achieving productivity improvements in its manufacturing and material
handling operations and (iv) seeking strategic acquisitions, including the
acquisition of Nepco and certain companies in Canada.
On June 30, 1994, the Company acquired Nepco for a purchase price of $40.0
million (plus $3.6 million payable pursuant to noncompetition agreements). The
acquisition has been accounted for as a purchase, and the results of Nepco's
operations have been consolidated with those of the Company commencing July 1,
1994. In connection with the Nepco acquisition, the Company entered into
noncompetition and bonus agreements with Nepco's two shareholders under which
the Company will pay $5.0 million in the aggregate over five years, with total
annual payments of $1.0 million. The noncompetition payments are conditioned on
the sellers meeting the requirements of the agreements. As a result of the Nepco
acquisition, Portola has derived significant cost savings through raw material
purchasing and production efficiencies. With respect to raw materials, the
Company has reduced costs by (i) combining the volume of its purchases with
Nepco's purchases, (ii) taking advantage of Portola's purchasing relationships
in making Nepco's purchases and (iii) standardizing grades of resin used by
Nepco. More importantly, the Company has increased overall production efficiency
through shared technology and adoption of improved manufacturing processes.
Although the Company's gross margins for the nine months ended May 31, 1995 have
declined from historical levels, the Company's combined gross margins have
improved as compared to the pro forma combined gross margins before the
acquisition. For the fiscal year ended August 31, 1994, the Company's combined
gross margin on a Company-only pro forma basis was 21.9%, and for the nine
months ended May 31, 1995, the Company's gross margin was 24.0%. Management is
continuing to evaluate the relative strengths of the operations acquired from
Nepco as compared to the Company's other manufacturing operations and plans to
further develop strategies for improving production efficiency by adopting their
respective strengths throughout the enterprise.
On June 16, 1995, the Company consummated the Canadian Acquisition in which
the Company purchased for C$14.6 million (plus C$3.4 million payable pursuant to
noncompetition agreements) the 50% interest it had not previously owned in
Canada Cap Snap Corporation, a British Columbia corporation engaged in
manufacturing and distributing small closures in western Canada, together with
all the capital stock of two affiliated plastic bottle manufacturers. In
connection with the acquisition, the Company has obtained noncompetition
agreements from the sellers under which its Canadian subsidiary has paid C$1.0
million and will be obligated to pay an additional C$3.0 million in annual
installments over the next three years, subject to the sellers meeting the
requirements of these agreements. Management anticipates that the Canadian
acquisition will enable the Company to establish a position in the Canadian
plastic bottle marketplace and to advance its position in the Canadian closure
marketplace. Under the terms of the Indenture relating to the Notes, the
Canadian operations will be operated as an Unrestricted Subsidiary and, as a
result, the incurrence by the Canadian subsidiary of indebtedness that is
recourse to the Company, as well as investments by the Company in the Canadian
subsidiary, are subject to significant limitation. See "Description of the
Notes."
The Company's sales and income from operations have grown consistently since
fiscal 1990. Sales have grown at a compound average annual growth rate of 22.5%
from $42.8 million in fiscal 1990 to $112.1 million for the twelve months ended
May 31, 1995, while income from operations has grown at a compound average
annual growth rate of 15.5% from $5.0 million in fiscal 1990 to $9.9 million for
the twelve months ended May 31, 1995. Sales have increased primarily as a result
of the Company's ability
24
<PAGE>
to increase market share and through new product introductions such as plastic
fitments for paperboard containers and PortaPlants and product enhancements such
as the snap-on, screw-off closure (the "snap-screw cap"). Traditionally, the
majority of the Company's sales increases have related to closure unit volume
which increased from 3.1 billion in fiscal 1990 to 8.1 billion for the twelve
months ended May 31, 1995. Income from operations has increased at a rate lower
than sales primarily because of changes in product mix, capacity expansions not
yet fully utilized, the Nepco acquisition at the end of fiscal 1994 and the
increase in amortization of intangibles.
The Company is dependent on a single raw material, LDPE resin, for
manufacture of many of its closure products. Plastic resins, including LDPE, are
subject to significant price fluctuations. Since May 1994, resin prices
increased by approximately 40%. Although the Company passed on to its customers
substantially all of this price increase, and has historically been able to pass
on most of the prior price increases in resin, there can be no assurance that
the Company will be able to do so in the future. Significant increases in resin
prices, coupled with the Company's inability to promptly pass such increases on
to its customers, would have a material adverse effect on the Company's
financial condition and results of operations. Moreover, even if the full amount
of such price increases are passed on to customers, the increase would have the
effect of reducing gross margins. Similarly, if resin prices decrease, customers
would typically expect rapid pass-through of the decrease, and there can be no
assurance that the Company would be able to maintain its margins. See "Risk
Factors -- Possible Adverse Effect of Changes in Resin Prices."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of the Company's sales represented by certain income and expense items in its
statement of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY
FISCAL YEAR ENDED AUGUST 31, 31,
------------------------------------- ------------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 72.2 73.2 73.5 73.9 76.0
----- ----- ----- ----- -----
Gross profit............................................ 27.8 26.8 26.5 26.1 24.0
Selling, general and administrative....................... 11.6 12.4 12.5 12.4 11.5
Research and development.................................. 1.8 1.4 1.1 1.2 1.1
Amortization of intangibles............................... 2.7 2.4 2.9 2.3 2.9
----- ----- ----- ----- -----
Income from operations.................................. 11.7 10.6 10.0 10.2 8.5
Other (income) expense, net............................... 1.2 (0.1) 0.7 -- --
Interest expense, net..................................... 6.0 5.2 5.6 5.5 7.1
Amortization of debt financing costs...................... 0.7 0.8 0.6 0.7 0.4
----- ----- ----- ----- -----
Income before income taxes.............................. 3.8 4.7 3.1 4.0 1.0
Income taxes.............................................. 2.5 2.6 1.6 1.8 0.6
----- ----- ----- ----- -----
Income before extraordinary item and cumulative effect
of accounting change................................... 1.3 2.1 1.5 2.2 0.4
Extraordinary item, net................................... -- 1.6 1.1 -- --
Cumulative effect of accounting change................ -- -- 0.1 0.1 --
----- ----- ----- ----- -----
Net income.............................................. 1.3% 0.5% 0.3% 2.1% 0.4%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
NINE MONTHS ENDED MAY 31, 1995 COMPARED TO NINE MONTHS ENDED MAY 31, 1994
Sales increased $41.9 million, or 93.8%, from $44.6 million for the nine
months ended May 31, 1994 to $86.5 million for the nine months ended May 31,
1995. Of the increase, $34.6 million was attributable to sales from Nepco
operations acquired by the Company. Of the remainder, $3.0 million was
attributable to an increase in equipment sales, primarily due to international
sales of PortaPlants and, to a lesser
25
<PAGE>
extent, sales of equipment to attach fitments to gable-top paperboard
containers, $2.4 million resulted from closure price increases primarily driven
by higher resin costs and $1.9 million was due to increased unit sales of five
gallon and widemouth closures.
Gross profit increased $9.2 million, or 78.6%, to $20.8 million for the nine
months ended May 31, 1995, as compared to $11.6 million for the nine months
ended May 31, 1994. Gross profit as a percentage of sales decreased from 26.1%
for the nine months ended May 31, 1994 to 24.0% for the nine months ended May
31, 1995. The absolute increase in gross profit was primarily due to the Nepco
acquisition and to a lesser extent, to increased sales of other closure
products. Of the 2.1% decline in gross profit margins, 1.0% was due to the
increased sales of lower-margin equipment and Nepco closures. The balance was
primarily due to the increases in resin costs that, although offset by price
increases in approximately the same amounts, had the effect of decreasing gross
profit margins.
Selling, general and administrative expense increased $4.5 million, or
80.5%, to $10.0 million for the nine months ended May 31, 1995, as compared to
$5.5 million for the nine months ended May 31, 1994, and decreased as a
percentage of sales from 12.4% of sales for the nine months ended May 31, 1994
to 11.5% for the nine months ended May 31, 1995. Of the absolute increase, $2.4
million was due to the selling expenses at Nepco, $1.0 million represented
increased general and administrative expenses due primarily to staffing
increases to support the larger corporation and $694,000 was due to increased
legal expenses primarily associated with the Scholle patent infringement
lawsuit. Excluding the legal expenses associated with the Scholle litigation,
selling, general and administrative expense would have accounted for 10.7% of
sales for the nine months ended May 31, 1995, as compared to 12.4% for the nine
months ended May 31, 1994.
Research and development expense increased $422,000, or 81.0%, to $943,000
for the nine months ended May 31, 1995, as compared to $521,000 for the nine
months ended May 31, 1994, but decreased slightly as a percentage of sales from
1.2% for the nine months ended May 31, 1994 to 1.1% for the nine months ended
May 31, 1995. Of the absolute increase in research and development expense,
$278,000 was due primarily to increased staffing, $112,000 represented increased
expenditures for new product prototypes and $74,000 was the result of higher
patent application expenses.
Amortization of intangibles (consisting of amortization of patents, goodwill
and covenants not to compete) increased $1.5 million, or 141.7%, to $2.5 million
for the nine months ended May 31, 1995, as compared to $1.0 million for the nine
months ended May 31, 1994. Of the increase, $825,000 was due to goodwill
amortization resulting from the Nepco acquisition and related financing
activities, $567,000 was due to amortization of non-compete payments related to
the acquisition of Nepco and $100,000 was due to the restatement of certain
patent assets in connection with the adoption of Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes ("SFAS 109").
Income from operations increased $2.8 million, or 61.3%, to $7.3 million for
the nine months ended May 31, 1995, as compared to $4.5 million for the nine
months ended May 31, 1994, but decreased as a percentage of sales from 10.2% for
the nine months ended May 31, 1994 to 8.5% for the nine months ended May 31,
1995. These changes were due to the factors summarized above.
Other (income) expense, net improved $54,000 to income of $60,000 for the
nine months ended May 31, 1995, as compared to income of $6,000 for the nine
months ended May 31, 1994.
Interest expense, net increased $3.6 million, or 148.8%, to $6.1 million for
the nine months ended May 31, 1995, as compared to $2.5 million for the nine
months ended May 31, 1994, primarily as a result of increased borrowings to fund
the Nepco acquisition and higher working capital requirements associated with
increased sales levels. Income taxes decreased $256,000 to $517,000 for the nine
months ended May 31, 1995, as compared to $773,000 for the nine months ended May
31, 1994.
Amortization of debt financing costs increased $51,000 to $360,000 for the
nine months ended May 31, 1995, as compared to $309,000 for the nine months
ended May 31, 1994.
26
<PAGE>
Income before cumulative effect of change in accounting principle decreased
$623,000 to $377,000 for the nine months ended May 31, 1995, as compared to $1.0
million for the nine months ended May 31, 1994. Net income decreased by $538,000
to $377,000 for the nine months ended May 31, 1995, as compared to $915,000 for
the nine months ended May 31, 1994. During fiscal 1994, the Company adopted SFAS
109, which resulted in a cumulative charge against earnings of $85,000.
FISCAL YEAR ENDED AUGUST 31, 1994 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1993
Sales increased $12.0 million, or 20.6%, to $70.3 million for fiscal 1994,
as compared to $58.3 million for fiscal 1993. Of the increase, $7.3 million was
attributable to the Nepco acquisition on June 30, 1994 and represents Nepco's
sales from closing to the end of the fiscal year. Of the $4.7 million remainder,
$1.9 million was attributable to an increase in equipment sales, primarily due
to international sales of PortaPlants and equipment to attach fitments to
gable-top paperboard containers, $1.7 million was due to increased sales of five
gallon closures and $693,000 resulted from increased sales of small closures,
with a shift in product mix from the snap cap to the new snap-screw cap.
Gross profit increased $3.0 million, or 19.3%, to $18.6 million for fiscal
1994, as compared to $15.6 million for fiscal 1993. Gross profit as a percent of
sales decreased from 26.8% for fiscal 1993 to 26.5% for fiscal 1994. The
absolute increase in gross profit was primarily due to the increase in sales
volume. The modest decline in gross margins was primarily due to increased
depreciation and rent expenses principally associated with opening the new
Batavia, Illinois plant at the beginning of fiscal 1994.
Selling, general and administrative expense increased $1.6 million, or
22.4%, to $8.8 million for fiscal 1994, as compared to $7.2 million for fiscal
1993, and increased as a percentage of sales from 12.4% in fiscal 1993 to 12.5%
in fiscal 1994. While selling expenses increased $550,000, they declined from
7.8% of sales in fiscal 1993 to 7.3% in fiscal 1994 primarily because
promotional equipment expenses were reduced by $400,000 in fiscal 1994. General
and administrative expenses increased $1.2 million, with the increases primarily
due to the inclusion of Nepco for the last two months of fiscal 1994, bonus and
profit-sharing accruals and audit fee accruals.
Research and development expense decreased $56,000, or 6.8%, to $764,000 for
fiscal 1994 as compared to $820,000 for fiscal 1993 and decreased as a
percentage of sales from 1.4% in fiscal 1993 to 1.1% in fiscal 1994. The
decreases were primarily attributable to the allocation of research and
development personnel to operations for work on current product enhancement
projects.
Amortization of intangibles increased $625,000, or 44.6%, to $2.0 million in
fiscal 1994 from $1.4 million in fiscal 1993. Of the increase, $342,000 was due
to the write-up of certain patent assets in fiscal 1994 in connection with the
adoption of SFAS 109, $121,000 was due to amortization of non-compete payments
and $162,000 was due to goodwill amortization in fiscal 1994 resulting from the
Nepco acquisition and related financing activities. There was no amortization of
goodwill in fiscal 1993.
Income from operations increased $824,000, or 13.3%, to $7.0 million for
fiscal 1994, as compared to $6.2 million for fiscal 1993, and declined slightly
from 10.6% of sales in 1993 to 10.0% of sales in fiscal 1994. These changes were
due to the factors summarized above.
Other (income) expense, net increased $539,000 to expense of $477,000 in
fiscal 1994 as compared to income of $62,000 in fiscal 1993, primarily due to
fiscal 1994 write-offs totaling $625,000 as a result of financing activities
that were postponed.
Interest expense, net increased $855,000, or 28.1%, to $3.9 million in
fiscal 1994 from $3.0 million in fiscal 1993, due to the Company incurring $39.1
million of additional debt primarily to fund the Nepco acquisition. Income taxes
decreased $426,000 to $1.1 million in fiscal 1994 as compared to $1.5 million in
fiscal 1993.
Amortization of debt financing costs decreased $46,000 to $433,000 in fiscal
1994, as compared to $479,000 in fiscal 1993.
27
<PAGE>
Income before extraordinary item and cumulative effect of change in
accounting principle decreased $98,000 to $1.1 million in fiscal 1994 as
compared to $1.2 million in fiscal 1993. Net income decreased $84,000 to
$225,000 in fiscal 1994 as compared to $309,000 in fiscal 1993. In connection
with the early extinguishment of debt, loan fees and other costs were expensed,
resulting in an extraordinary charge for fiscal 1994 of $790,000 net of taxes.
In October 1992, the Company refinanced its debt to provide additional capacity
for growth, resulting in an extraordinary charge for fiscal 1993 of $889,000 net
of taxes. During fiscal 1994, the Company adopted SFAS 109, which resulted in a
cumulative charge against earnings of $85,000.
FISCAL YEAR ENDED AUGUST 31, 1993 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1992
Sales increased $6.1 million, or 11.8%, to $58.3 million for fiscal 1993, as
compared to $52.2 million for fiscal 1992. Of the increase, $2.9 million was
attributable to an increase in sales of small closures primarily resulting from
the conversion of new customers to the Company's snap-screw cap; $1.2 million
represented an increase in sales of five gallon closures; $910,000 represented
an increase in equipment sales, primarily due to international sales of
PortaPlants; and $871,000 was due to an increase in sales of a newly introduced
widemouth closure.
Gross profit increased $1.1 million, or 7.8%, to $15.6 million for fiscal
1993, as compared to $14.5 million for fiscal 1992. Gross profit as a percentage
of sales decreased from 27.8% in fiscal 1992 to 26.8% in fiscal 1993. Of the
increase, $1.7 million was attributable to the increase in sales and $295,000
resulted from a reduction in repair and maintenance expenses. The increase was
partially offset by $1.0 million in higher depreciation charges resulting from
the capital investment program initiated in 1992 and continued through 1993.
Selling, general and administrative expense increased $1.2 million, or
19.2%, to $7.2 million for fiscal 1993, as compared to $6.0 million for fiscal
1992, and increased as a percentage of sales from 11.6% in fiscal 1992 to 12.4%
in fiscal 1993. Of the increase, $385,000 was attributable to increased
commissions due to higher sales, $351,000 was the result of increased legal
expenses primarily related to patent infringement lawsuits and $304,000 was due
to greater expenditures for international travel and trade shows as the Company
increased promotion of its product lines overseas.
Research and development expense decreased $95,000, or 10.4%, to $820,000
for fiscal 1993, as compared to $915,000 for fiscal 1992, and decreased as a
percentage of sales from 1.8% in fiscal 1992 to 1.4% in fiscal 1993. The
decreases were primarily attributable to reduced outside consulting on new
product design and a reduction in new product prototype costs.
Amortization of intangibles (consisting primarily of amortization of
patents) decreased $21,000 to $1,400,000 in fiscal 1994 from $1,421,000 in
fiscal 1993.
Income from operations increased $86,000, or 1.4%, to $6.2 million for
fiscal 1993, as compared to $6.1 million for fiscal 1992, and decreased as a
percentage of sales from 11.7% in fiscal 1992 to 10.6% in fiscal 1993. The
absolute increase was primarily the result of higher sales levels, and the
decrease as a percentage of sales was caused primarily by increases in
depreciation and selling, general and administrative expense.
Other (income) expense, net improved $694,000 to income of $62,000 for
fiscal 1993, as compared to expense of $632,000 for fiscal 1992, with the
improvement attributable to write-off of financing expenses in the prior year.
Interest expense, net decreased $103,000 to $3.0 million for fiscal 1993,
primarily as a result of declining interest rates. Amortization of debt
financing costs increased $114,000 to $479,000 for fiscal 1993. Income taxes
increased $234,000 to $1.5 million for fiscal 1993.
Income before extraordinary item increased $535,000 to $1.2 million for
fiscal 1993, as compared to $663,000 for fiscal 1992. Net income decreased
$354,000 to $309,000 for fiscal 1993, as compared to $663,000 for fiscal 1992.
An extraordinary item of $889,000, net of an income tax benefit of $592,000, was
recorded in fiscal 1993 to reflect fees and expenses associated with
extinguishment of debt.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash from operations, supplemented as
necessary from time to time by borrowings from financial institutions and sales
of common stock, to finance its operations, repay long-term indebtedness and
fund capital expenditures and acquisitions. At August 31, 1994, the Company had
cash and cash equivalents of $2.2 million, an increase of $1.0 million over
1993. Cash provided by operating activities totaled $9.4 million in fiscal 1994
and $6.1 million in fiscal 1993. For the nine months ended May 31, 1995, cash
provided from operating activities was $2.9 million.
At May 31, 1995, the Company's total indebtedness of $82.3 million included
$14.4 million under the Current Revolving Credit Facility and $57.7 million
under the Current Term Loan Facility. The Current Credit Facility was
established by the Company on June 30, 1994 to fund the acquisition of Nepco and
to provide capital for operations. Additionally, in conjunction with the Nepco
acquisition, the Company sold 800,000 shares of Class B Common Stock, Series 1,
for proceeds of $3.0 million. The Current Credit Facility bears interest based
on LIBOR or the highest prime rate of selected reference banks, plus a specified
margin, and is subject to an agreement under which the loans are secured by a
senior security interest in substantially all the Company's assets.
At May 31, 1995, the Company also had outstanding $10.0 million of Senior
Subordinated Notes, as well as $197,000 in additional notes. The Senior
Subordinated Notes, which were issued in 1988, are subject to a prepayment
premium if repaid before June 30, 1996. The estimated prepayment premium at May
31, 1995 was approximately $613,000.
Approximately $82.8 million of the net proceeds of the Notes offering will
be used to repay in full the Current Credit Facility and the Senior Subordinated
Notes. Concurrently with the offering, the Company will enter into the New
Credit Facility which consists of a five year, senior secured revolving credit
facility of up to $35.0 million, subject to a borrowing base and certain other
restrictions. As of May 31, 1995, after giving effect to the sale of the Notes
offered hereby and the application of net proceeds to repay certain
indebtedness, the Company would have had the ability to draw up to $23.7 million
under the New Credit Facility. The New Credit Facility will bear interest at
floating rates based on, at the Company's option, either a base rate or LIBOR
plus, in each case, a specified margin. The New Credit Facility will contain
covenants and provisions that will restrict, among other things, the Company's
ability to: (i) incur additional indebtedness; (ii) incur liens on its property;
(iii) make investments; (iv) enter into guarantees and other contingent
obligations; (v) merge or consolidate with or acquire another person or engage
in other fundamental changes; (vi) engage in certain sales of assets; (vii)
engage in certain transactions with affiliates; and (viii) make restricted
junior payments. The New Credit Facility will also require maintenance of a
specified ratio of indebtedness to consolidated cash flow on a trailing twelve
month basis, and will require the repayment of loans under the New Credit
Facility with proceeds of certain sales of assets. See "Description of the New
Credit Facility."
In June 1995, the Company established credit facilities to finance
approximately C$11.6 million of the C$15.6 million required at closing to
finance the Canadian Acquisition. The Company made an equity investment of C$4.0
million to finance the balance of the purchase. The Company raised $1.8 million
of this investment (C$2.5 million) from the sale of 450,000 shares of Class B
Common Stock, Series 1. The credit facilities are secured by assets of the
Canadian subsidiary, which was formed by the amalgamation of a wholly-owned
subsidiary of the Company, Canada Cap Snap Corporation, and the two bottle
manufacturing companies. The facilities are non-recourse to the Company except
that the Company has pledged the capital stock of the Canadian subsidiary as
security for the loans. These credit facilities prohibit the Canadian subsidiary
from paying dividends or making other cash distributions to the Company unless
certain financial covenants are satisfied. In addition, the credit facilities
limit the amount of any such dividends or distributions to an amount not to
exceed advances (including advances in the form of debt) previously made by the
Company to the Canadian subsidiary. The credit facilities also require the
Canadian subsidiary to apply a substantial portion of its annual "excess cash
flow" (as defined in the credit facilities) to repay amounts outstanding under
the credit facilities. In light of these restrictions, it is possible that no
dividends or other distributions will be paid by the Canadian subsidiary to the
Company for the foreseeable future. The Canadian subsidiary will be operated as
an
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<PAGE>
Unrestricted Subsidiary pursuant to the Indenture and, accordingly, amounts that
may be invested by the Company in its Canadian subsidiary are subject to
limitations. See "Description of the Notes -- Restricted Payments."
The manufacture of plastic closures is a capital-intensive business, and the
Company has traditionally made substantial capital expenditures. Beginning in
fiscal 1992, the Company implemented a capital investment program to invest in
cost reduction and productivity improving equipment and to build the capacity
necessary for new product introductions. Capital expenditures were $8.1 million
in fiscal 1992, $9.6 million in fiscal 1993 and $6.2 million in fiscal 1994.
During fiscal 1992, $6.0 million was spent for additional injection molding
machines, new product molds and decorating equipment, and an expansion of the
Kingsport, Tennessee plant. In fiscal 1993, $6.1 million was spent for
additional injection molding machines and molds, plus leasehold improvements for
the new plant in Batavia, Illinois. In fiscal 1994, $2.0 million was spent for
new product production molds and to complete the construction of a new plant in
Bettendorf, Iowa, acquired as part of the acquisition of Nepco. The balance of
the capital expenditures in each year were primarily for sustaining investments,
including the replacement of worn-out tooling, amounting to $2.1 million, $3.5
million and $4.2 million for fiscal 1992, fiscal 1993 and fiscal 1994,
respectively.
Capital expenditures have been higher than historic levels following the
Nepco acquisition as the Company now operates ten plants in the United States
compared to four before the acquisition. Capital expenditures were $8.2 million
for the first nine months of fiscal 1995, consisting primarily of $2.8 million
in sustaining capital expenditures and $5.4 million in capacity additions for
new products, principally fitments and push-pull closures. The Company
anticipates that, for fiscal 1995 and fiscal 1996, capital expenditures will be
approximately $9 million and $15 million, respectively. Of the capital budget
for fiscal 1996, approximately $10 million has been allocated for discretionary
projects. Capital expenditures for the Company's Canadian subsidiary are
expected to be funded entirely from the operations and non-recourse borrowings
of that subsidiary. Routine capital expenditures for the Canadian subsidiary are
expected to be approximately C$1.0 million to C$1.5 million in the ordinary
course, although the amount of such expenditures could increase due to
unforeseen contingencies.
In addition to the Company's future capital expenditure requirements, the
Company is also subject to certain future obligations regarding noncompetition
and bonus arrangements arising in connection with certain acquisitions. As part
of the Nepco acquisition, the Company agreed to make payments under
noncompetition and bonus arrangements with certain former Nepco stockholders of
$800,000 and $200,000, respectively, per annum (plus an additional amount
representing the difference between the federal ordinary income tax rate and the
capital gains tax rate) for a period of five years following the acquisition,
subject to the stockholders satisfying their respective obligations under such
arrangements. As of May 31, 1995, the Company had paid a total of $669,600
pursuant to these arrangements. Moreover, as part of the Canadian Acquisition,
the Company's Canadian subsidiary agreed pursuant to noncompetition agreements
to pay certain former principal stockholders of such businesses a total of C$4.0
million of which C$1.0 million was paid at closing and up to an additional C$3.0
million will be paid through June 1998, subject to the stockholders satisfying
their respective obligations under such agreements.
The Company has recently received an adverse jury verdict in litigation
brought by Scholle asserting that certain of Scholle's patents are infringed
upon by the Company's five gallon non-spill closure product, a product which the
Company introduced in January 1992 and continues to produce and sell. The jury
verdict, if entered by the court, would hold the Company liable for damages in
the amount of $0.01 per closure, and there is a risk that Scholle may seek and
be awarded treble damages on closure sales after May 31, 1995. The Company has
accrued damages of $800,000, at the rate of $0.01 per closure, from January 1992
through May 31, 1995, which includes approximately $450,000 during the twelve
months ended May 31, 1995. Should Scholle seek and obtain an award of treble
damages, or an injunction prohibiting further sales of the product in question,
the Company anticipates that it would introduce an alternative product that it
believes will not infringe upon the Scholle patents, thereby terminating further
liability for damages. Although the introduction of the new product may entail
30
<PAGE>
additional tooling costs and marketing costs, the Company does not anticipate
that these costs or payment of the damages that may be awarded in the litigation
will have a material adverse impact upon the Company's liquidity. See "Risk
Factors -- Patent Infringement Litigation."
The Company would have had a deficiency of earnings to fixed charges for the
fiscal year ended August 31, 1994 of $10.8 million on an as adjusted pro forma
basis giving effect to (i) the Nepco acquisition, (ii) the sale of the Notes and
the application of net proceeds to repay certain indebtedness and (iii) the
Canadian Acquisition, as if those transactions had occurred at the beginning of
the period. Management has worked to successfully integrate Nepco with the
Company's operations in fiscal 1995, and the deficiency of earnings to fixed
charges declined to $5.3 million for the nine months ended May 31, 1995 as
adjusted for (i) the sale of the Notes and application of net proceeds to repay
certain indebtedness and (ii) the Canadian Acquisition, as if those transactions
had occurred at the beginning of the period. A substantial portion of these
deficiencies results from the non-cash amortization of intangibles, amounting to
$4.4 million and $3.2 million for the pro forma as adjusted fiscal 1994, and the
pro forma as adjusted nine months ended May 31, 1995, respectively. In the
future, management plans to address any continuing deficiency of earnings to
fixed charges through continued attention to cost reduction opportunities
provided by the Nepco acquisition, as well as increasing sales and cash flow by
emphasizing new products with significant near-term market potential. See
"Business -- New Product Lines and Applications."
Should the new product introductions be less successful than anticipated,
the Company may elect to reduce discretionary capital expenditures, thereby
improving its cash position. (As indicated above, the Company anticipates that
its discretionary capital expenditures will be approximately $10.0 million for
fiscal 1996.) In addition, the Company will have a significant amount of cash
reserves upon the sale of the Notes, including $23.3 million of excess proceeds
as well as borrowing capacity under the New Credit Facility. Management believes
that cash on hand, together with anticipated cash flow from operations, net
proceeds from the sale of the Notes not applied to the repayment of certain
indebtedness and available capacity under the New Credit Facility, will be
adequate to fund the Company's operations, debt service requirements and capital
expenditures for the next several years.
INFLATION
Most of the Company's closures are priced based in part on the cost of the
plastic resins from which they are produced. Since May 1994, resin prices have
increased by approximately 40%. Historically, the Company has been able to pass
on increases in resin prices directly to its customers on a timely basis. In
recent years, the Company has benefited from relatively stable or declining
prices for raw materials other than plastic resins. In the event significant
inflationary trends were to resume, management believes that the Company would
generally be able to offset the effects thereof through a combination of
continuing improvements in operating efficiencies and price increases. There can
be no assurance, however, that any such cost increases can continue to be passed
through to the Company's customers. See "Risk Factors -- Possible Adverse Effect
of Changes in Resin Prices."
SEASONALITY
The Company's sales and earnings reflect a seasonal pattern as a result of
greater sales volumes during the summer months. For example, in fiscal 1994, on
a Company-only pro forma basis, giving effect to the Nepco acquisition as if it
had occurred on September 1, 1993, 44.1% of sales occurred in the first half of
the fiscal year (September through February) while 55.9% of sales were generated
in the second half of the fiscal year (March through August). The effect of
seasonality on income from operations is more pronounced. For example, 34.3% of
fiscal 1994 Company-only pro forma income from operations was generated in the
first half and 65.7% was generated in the second half.
INCOME TAXES
Effective September 1, 1993, the Company adopted SFAS 109, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Prior years' financial statements were not restated to apply the
provisions of SFAS No. 109; however, prior year business combinations were
restated as of
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<PAGE>
September 1, 1993 under SFAS No. 109. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of such assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Prior to September 1, 1993, the provision for income taxes was based on
income and expense included in the accompanying consolidated statements of
operations. Differences between taxes so computed and taxes payable under
applicable statutes and regulations were classified as deferred taxes arising
from timing differences.
Income tax expense does not bear a normal relationship to income before
income taxes primarily due to nondeductible goodwill arising from the Nepco
acquisition.
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121") which requires the Company to review for
impairment long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The statement
requires impairment losses to be recognized for assets that do not have
realizable carrying values. SFAS 121 will be effective for the Company's fiscal
year 1997. The Company has studied the implications of the statement, and, based
on its initial evaluation, does not expect it to have a material impact on the
Company's financial condition or results of operations.
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<PAGE>
BUSINESS
OVERVIEW
The Company is a leading designer, manufacturer and marketer of tamper
evident plastic closures and related equipment used for packaging applications
in dairy, fruit juice, bottled water, sports drinks, institutional food products
and other non-carbonated beverage products. The Company's principal closure
product lines include (i) small closures, (ii) five gallon closures and (iii)
widemouth closures. Portola also designs, manufactures and supplies high speed
capping equipment and complete turnkey water bottling systems, which are
marketed by the Company primarily under the tradename "PortaPlant." Portola's
closure products are manufactured domestically through a technologically
advanced, high speed injection molding process at ten modern manufacturing
facilities strategically located throughout the United States. Management
believes that the Company is a leader in a majority of the markets it serves and
that the Company is the sole or largest supplier of plastic closures for a
majority of its customers. The Company sells over 8 billion closures annually
under the names Cap Snap, Nepco, Portola and other brand names to over 3,000
customers. Most of the Company's customers have been doing business with the
Company for more than ten years. The Company's products are used to cap such
well known consumer products as Borden milk, Dole juices, Procter & Gamble's
Sunny Delight juice drink, Poland Spring bottled water, Pepsi-Cola fountain
syrups and Kraft barbecue sauce. Many features of the Company's closure products
are proprietary, and Portola holds more than 50 patents on the design of
container closures and compatible bottle necks.
During the past decade, the plastic closure market has grown faster than the
overall closure market in the United States. This growth is primarily due to the
distinct advantages that plastic closures have over metal closures, including
greater performance and design flexibility, the growing demand for tamper
evident packaging and the comparatively lower cost and lighter weight of plastic
closures, an important factor in the packaging industry, where transportation
costs are a significant portion of overall product costs. Demand for plastic
closures has also grown with the increased use of plastic containers and the
conversion of paperboard containers to plastic containers. A 1994 study by
Technomic Consultants International, an international marketing consulting firm
which specializes in the food and packaging industries, indicates that the
market for plastic closures in the United States grew from approximately 48% of
total closures in 1990 to approximately 59% of total closures in 1993. The study
also indicates that the average annual growth rate from 1993 through 1996 for
plastic closures is expected to be 4.4%, while demand for metal closures during
this period is expected to increase at a significantly lower rate.
Since Portola was acquired from the founding family in 1986 by a group led
by Jack L. Watts, the Company's current Chairman of the Board and Chief
Executive Officer, the size of the Company as measured by sales and closure unit
volume has increased from $26.1 million in sales and 2.1 billion in units for
fiscal 1987 to $112.1 million in sales and 8.1 billion in units for the twelve
months ended May 31, 1995, respectively. Mr. Watts and other members of senior
management own or control 34.3%, on a fully diluted basis, of the common stock
of the Company. Portola's senior management has significant experience in the
plastic packaging business and an average tenure of eight years at the Company.
COMPETITIVE STRENGTHS
The Company believes that it has a strong competitive position attributable
to a number of factors, including the following:
-HIGH QUALITY, INNOVATIVE PRODUCTS. Management believes that Portola's
leading position in niche product applications is in part the result of the
Company's long-standing commitment to research and development. This
commitment has led to innovative product development and application
improvements, including closure products that incorporate tamper evident
designs with tear strips and breakaway bands. These features have become
accepted industry standards for food and non-carbonated beverage products.
The Company has also built strong customer loyalty by devoting substantial
resources to product engineering, enabling the Company to make continuing
improvements in product performance, manufacturing procedures and process
controls that are responsive to the specific and changing needs of its
customers.
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-STRONG REPUTATION FOR CUSTOMER SERVICE AND SUPPORT. The Company strives to
maintain a high level of comprehensive customer service and support.
Portola markets its products together with ongoing service and support as
"total product solutions" designed to meet its customers' complete capping
requirements. By focusing on both product development and "total product
solutions," Portola has developed a reputation as a leader in quality and
service.
-LOW COST MANUFACTURING CAPABILITIES. The Company's manufacturing operations
emphasize minimizing raw material and production costs. Portola believes
that it is able to negotiate favorable prices from its resin suppliers due
to its purchases of large volumes of LDPE resin. Portola's manufacturing
facilities are strategically located throughout the country near major
customer concentration areas to minimize transportation costs. With the
acquisition and integration of Nepco, the Company has also derived
significant cost savings through improved raw material purchasing and
increased production efficiencies.
BUSINESS STRATEGY
The Company's primary strategy is to increase cash flow by maintaining and
extending its leading position in niche product applications within the plastic
closure and bottling industry. To support this strategy, the Company focuses on
(i) advancing research and development and product engineering, (ii) providing
dedicated customer support and total product solutions for customers, (iii)
continuing to enhance low cost manufacturing capabilities, (iv) expanding sales
in international markets where significant growth opportunities exist and (v)
where appropriate, seeking strategic acquisitions that will strengthen the
Company's competitive position.
EMPHASIZING RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING. The Company
is continuing its commitment to research and development, a commitment that has
led to significant product innovations. These innovations include the original
snap cap design and the five gallon closure, the "tear strip" feature that has
become a standard tamper evident mechanism for food and non-carbonated beverage
products and, more recently, an improved recloseable plastic dispensing fitment
for gable-top fruit juice and milk cartons and the snap-screw cap. The Company
also intends to continue its traditional emphasis on building strong customer
loyalty by devoting substantial resources to product engineering in response to
specific customer needs. Portola's staff of design engineers continually
develops and enhances the Company's existing product lines, offering new
features attractive to consumers and improved designs that enable customers to
save costs in the capping process or in shipping. The Company believes that, by
leveraging its design and engineering expertise and the production techniques it
has developed in its traditional product areas, it will have the opportunity to
expand its product lines into new product applications.
EMPHASIZING CUSTOMER SUPPORT AND TOTAL PRODUCT SOLUTIONS. Portola seeks to
preserve its long-term relationships with customers and attract new customers by
providing superior on-time delivery and technical service and support and by
marketing its products as "total product solutions." The total solution approach
includes providing plastic closures designed to meet customer specifications,
compatible container necks and neck inserts, capping and filling equipment and
on-going service and support.
CONTINUING TO ENHANCE LOW COST MANUFACTURING CAPABILITIES. The Company's
operations emphasize minimizing production and raw materials purchasing costs.
Portola's manufacturing facilities are strategically located throughout the
country near major customer concentration areas to minimize transportation costs
and are equipped with high speed injection molding machinery capable of
producing up to 250 plastic closures per minute with minimal down time. The
Company has a continuing productivity improvement program designed to further
automate its production flow, streamline its workforce and upgrade its molds,
equipment and systems. The Company believes it is able to negotiate favorable
prices on LDPE resin due to the large volume of resin it purchases. The Nepco
acquisition has led to further cost savings, as Nepco operations are streamlined
and additional economies in purchasing are achieved. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
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EXPANDING SALES IN INTERNATIONAL MARKETS. The Company expects significant
growth in international markets for plastic closures and capping and filling
equipment, as bottled water and other non-carbonated water companies in Europe,
the Far East, Latin America and elsewhere adopt more advanced packaging
materials and techniques. The Company is seeking to capitalize on the
opportunity for expansion into international markets through the formation of
joint ventures with local bottle manufacturers and distributors, and by
increasing export sales of closures and capping and filling equipment. To date,
the Company has consummated the Canadian Acquisition, has purchased for
approximately L900,000 the 50% interest it had not previously owned in Cap Snap
(U.K.) Ltd. (the "U.K. Acquistion") and has entered into a joint venture in
Mexico. See "-- New Product Lines and Applications -- Fitments" and "--
International Sales and Joint Ventures."
SEEKING STRATEGIC ACQUISITIONS. Portola plans to continue its program of
seeking to acquire businesses serving similar customers using proprietary
product and process technology that offer opportunities to improve costs or
extend the Company's product lines. Portola has realized and expects to achieve
additional cost savings and synergies associated with the integration of Nepco,
primarily by sharing and adopting improved technology and manufacturing
processes, lowering raw material costs through volume purchasing economies,
achieving marketing efficiencies and eliminating duplicative administrative and
financial staff positions. Primarily as a result of these production
efficiencies and cost savings, the Company's gross margins have increased. For
the fiscal year ended August 31, 1994, the Company's combined gross margin on a
Company-only pro forma basis was approximately 21.9%, and, for the twelve months
ended May 31, 1995, the gross margin was approximately 24.8%. More recently, the
Company has consummated the Canadian Acquisition and the U.K. Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
PLASTIC CLOSURE MARKET
Portola competes in the closure segment of the worldwide container packaging
industry, focusing specifically on proprietary tamper evident plastic closure
applications. Container closure devices have various applications with designs
engineered to meet specific use requirements. Major product applications for
container closures include food, beverages, toiletries and cosmetics, and drugs
and pharmaceuticals.
Closure design is a function of the type of container and its contents.
Products which are carbonated, perishable, highly acidic or susceptible to
tampering all require specialized capping applications. In many instances, it
may be necessary for the container to be resealable, or it may be preferable for
the contents to be dispensed through the closure without the closure being
removed. Subject to these and other packaging requirements, container closures
can be made from either plastic or metal.
Demand for plastic closures has expanded with the increase in demand for
plastic containers. Over the past several years, rigid and flexible plastic
containers have experienced significant growth in market share at the expense of
other materials such as glass and metal. Plastic containers have several
advantages over glass and metal in that they are relatively inexpensive as well
as flexible and light weight -- important factors in the
transportation-sensitive packaging industry. Since the process used to produce
plastic closures differs substantially from that used to produce plastic
containers, many manufacturers of plastic products have focused on either
closures or containers but not on both types of products.
The use of plastic closures has also grown with the trend toward tamper
evident packaging. A tamper evident feature is highly valued by the food and
beverage market and the pharmaceutical market, and tamper evident features are
experiencing growth in most segments of the closure market. While certain tamper
evident devices can be incorporated into metal closures, the most sophisticated
devices have been developed for plastic closures. Portola innovated the original
snap-on cap design as well as the "tear strip" feature with breakaway bands for
plastic closures, which provided the standard tamper evidency mechanism for the
food and non-carbonated beverage industries.
Historically, demand for the Company's products has been a function of
population growth, increasing concerns by the public about the sanitation of
packaged food and beverage products and the
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<PAGE>
continued increase in the use of plastic containers, as opposed to glass or
metal, throughout the packaged food industry. For juice and bottled water
markets, demand is also a function of seasonal climate variations, warm weather
being responsible for increased consumption. See "-- Products" and "-- New
Product Lines and Applications."
PRODUCTS
Portola designs, manufactures and markets a wide array of tamper evident
plastic closures for applications in dairy, fruit juice, bottled water, sport
drinks, institutional food products and other non-carbonated beverage products.
The Company also designs, manufactures and markets (i) high speed capping
equipment for use by its plastic closure customers in their bottling and
packaging operations and (ii) complete turnkey bottling systems which it markets
primarily under the name "PortaPlant."
The Company's sales of plastic closures represented approximately 89%, 90%
and 90% of its total sales for the fiscal year ended August 31, 1994, the nine
month period ended May 31, 1995 and the twelve month period ended May 31, 1995,
respectively. The following table sets forth sales for each of the Company's
principal lines of plastic closure products and equipment during that period,
and include sales from Nepco's operations from the date of the acquisition on
June 30, 1994.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, NINE MONTHS ENDED TWELVE MONTHS ENDED MAY 31,
1994 MAY 31, 1995 1995
------------------------------ ------------------------------ ------------------------------
SALES % OF TOTAL SALES SALES % OF TOTAL SALES SALES % OF TOTAL SALES
--------- ------------------- --------- ------------------- --------- -------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Small closures.................... $ 45,407 64.6% $ 63,744 73.7% $ 81,775 72.9%
Five gallon closures.............. 8,718 12.4 7,455 8.6 10,172 9.1
Widemouth closures................ 8,408 12.0 7,004 8.1 9,382 8.4
--------- ----- --------- ----- --------- -----
Subtotal for plastic closures... 62,533 89.0 78,203 90.4 101,329 90.4
Capping equipment and
PortaPlants...................... 7,486 10.6 8,034 9.3 10,485 9.4
Other............................. 265 0.4 225 0.3 308 0.2
--------- ----- --------- ----- --------- -----
Total....................... $ 70,284 100.0% $ 86,462 100.0% $ 112,122 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
PLASTIC CLOSURES
The Company's plastic closures are broadly grouped into three categories:
(i) small closures used to cap blowmolded plastic bottles, (ii) five gallon
closures and (iii) widemouth closures for institutional food products. The
Company offers a wide variety of plastic closures under each of its principal
product lines to satisfy specific market application and customer requirements.
Most of the Company's plastic closures offer its snap-on feature, a design
preferred by packagers because it reduces production costs and leakage. The
Company's plastic closures also incorporate tear strips, breakaway bands or
other visible tamper evidency, a feature that has become an industry standard
for food and non-carbonated beverage products. The Company's plastic closures
range in size from 28mm to 110mm, and conform with international packaging
standards. The Company offers over 36 individual closure products. The Company
also offers 33 standard colors, in addition to custom-blended colors, and
sophisticated printing, embossing and adhesive labeling capabilities to provide
product distinction for its customers.
36
<PAGE>
The following table describes the Company's principal plastic closure
product lines.
<TABLE>
<S> <C> <C> <C>
PRODUCT LINE DESCRIPTION MARKET APPLICATION SELECTED CUSTOMERS
- ------------------------ ---------------------------- ---------------------------- ----------------------------
Small closures Plastic closures for plastic Milk, fruit juice, bottled Procter & Gamble, Dean
blowmolded bottles water and vinegar Foods, Borden, Kroger,
Quality Chek'd, Winn Dixie,
Safeway, Flav-O-Rich
Five gallon closures Plastic closures for glass Water cooler bottles Perrier (Arrowhead, Great
and plastic returnable water Bear, Deer Park, Ozarka,
cooler bottles Poland Springs), Tyler Mt.
(Anita Springs, Rainbow),
McKesson (Alhambra,
Sparkletts), Suntory
(Crystal Springs), A.S.
Watson
Widemouth closures Plastic closures for Institutional foods Kraft, Mike Rose Foods, T.
widemouth plastic containers including condiments, Marzetti, Heinz, S.E. Rykoff
mayonnaise and salad
dressing
</TABLE>
CAPPING EQUIPMENT
The Company also designs, manufactures and markets capping equipment for use
in high speed bottling, filling and packaging production lines. A substantial
majority of the Company's plastic closure customers use the Company's capping
equipment. The Company's ability to supply capping equipment and technical
assistance along with its plastic closures represents an important competitive
advantage as customers are assured that the Company's plastic closures will be
applied properly to provide leakproof seals and that any capping problems will
be resolved quickly.
PORTAPLANTS
In addition to plastic closures and capping equipment, the Company also
designs, manufactures and markets turnkey five gallon water capping and filling
systems. The Company's most comprehensive five gallon water bottling system is
its PortaPlant system. The PortaPlant is a compact bottle washing, filling,
capping and conveying system for glass and plastic water bottles that can,
depending on size, process 150 to 2,000 bottles per hour. The PortaPlant's
modular design makes it ideal for new and small water bottling companies as well
as established companies whose growth requires integrated expansion. Sales of
PortaPlants totaled approximately $4.3 million, $4.7 million and $4.7 million in
fiscal 1993, fiscal 1994 and the first nine months of fiscal 1995, respectively.
Portola has focused its sales efforts for PortaPlants internationally as less
developed countries look for improved distribution of safe and reliable drinking
water.
PRODUCT DEVELOPMENT
The Company continues to be committed to product development and
engineering. Its research and development group and engineering staff provide a
range of design and development services, focusing primarily on (i) new products
and product enhancements, (ii) tooling and molds necessary for manufacturing
plastic closures and (iii) capping equipment compatible with the Company's
closures and its customers' containers.
Traditionally, the Company has built strong customer loyalty by devoting
substantial resources to product engineering, enabling the Company to make
continuing enhancements to the Company's existing product lines that improve
product performance and processing in response to the customers' specific and
changing needs. Portola's design engineers continually develop and enhance the
Company's existing products, offering new features attractive to customers and
improved designs that enable customers to save time and cost in the capping
process or in shipping.
37
<PAGE>
The Company has also made a substantial investment in developing new product
applications for existing markets as well as applications for new markets. To
facilitate the process of enhancing and developing new products and to ensure
ultimate market acceptance of such products, the Company encourages an on-going
exchange of ideas with customers, container manufacturers, machinery
manufacturers and sales and service personnel. This approach has enabled the
Company to identify new product opportunities, such as the five gallon non-spill
closure and the fitment, to design the necessary tooling for producing such
products and to assist with customer presentations and installations.
The Company's typical product development cycle has been less than one year.
However, successful introduction of a new closure product can take two to three
years, principally because customers who are comfortable with their existing
closure products are generally slow to switch to a new design, particularly in
light of the relatively small cost of the closure component to the overall
packaging unit.
The Company's product enhancements and new product developments reflect the
Company's expertise in plastic packaging design and manufacturing. Approximately
39% of the Company's sales for the nine months ended May 31, 1995 were
represented by products developed or redesigned by the Company within the past
five fiscal years.
NEW PRODUCT LINES AND APPLICATIONS
To improve and expand its established product lines, the Company continually
seeks to develop enhancements for existing products and to create new product
applications utilizing existing technology. Among the new product development
initiatives, management believes that three applications have significant
near-term market potential. They are: (i) fitments for gable-top containers
(i.e., conventional paperboard milk or juice cartons), (ii) 2.5 gallon
dispensing closures for bottled water and (iii) 28mm push-pull closures for
bottled water, flavored water and sports drinks. The following table describes
these new product initiatives.
<TABLE>
<S> <C> <C> <C>
PRODUCT LINE DESCRIPTION MARKET APPLICATION TARGETED CUSTOMERS
- ------------------------ ---------------------------- ---------------------------- ----------------------------
Fitments Recloseable plastic Orange juice, lemonade and Major domestic and
dispensing fitment for other juice products international dairy, juice
polyethylene-coated, and other beverage companies
gable-top paperboard cartons
2.5 gallon dispensing Tamper evident dispensing 2.5 gallon bottled water Bottled water companies
closures closure container with dispensing
feature
28mm push-pull closures Dual tamper evident closures Large market segment for North American beverage
with push-pull feature bottled water, flavored producers
water, sports drinks
</TABLE>
FITMENTS
Portola's fitment product line consists of recloseable, plastic dispensing
fitments for polyethylene-coated paperboard cartons. Designed to overcome
problems with conventional gable-top cartons (i.e. paperboard milk and juice
cartons), the fitment is a unique low-cost packaging enhancement. Fitments
represent a design change for paperboard cartons, providing consumers and
packagers with numerous advantages. For the consumer, the fitment provides (i)
easy opening and secure reclosure, (ii) sanitary dispensing (hands do not touch
pouring outlet), (iii) highly visible external (and optional internal) tamper
evidence and (iv) improved shelf life. For the packager, the fitment allows the
retention of graphics and product distinction as compared to high density
polyethylene ("HDPE"), polyethylene terephthalate ("PET") and LDPE jugs and
eliminates leakage problems associated with the "adhesive" concept. With fitment
application equipment developed by the Company, packagers can convert
conventional gable-top production lines to incorporate streamlined application
of the fitment closure. The resulting low manufacturing cost permits usage on
low margin products at costs competitive with polyethylene jugs.
38
<PAGE>
In March 1995, the Company entered into an agreement with an affiliate of
Tetra Laval, a leading worldwide packaging company, to supply fitment
application equipment. Under this agreement, as of September 21, 1995, the
Company has received orders from the Tetra Laval affiliate for 41 fitment
application machines of which 17 have been delivered and 24 are scheduled to be
delivered by January 1996. Under normal operating conditions -- five days per
week, one shift per day -- each machine can apply approximately 8 million
fitments per year. The Company anticipates that it will incur expenditures of
approximately $2.0 million through January 1996 to manufacture the equipment not
yet delivered. Under the agreement, the Company is required to supply the
equipment at cost. While these expenditures may reduce the Company's near term
gross profit margins for fitments and related equipment, the Company anticipates
that the agreement will give the Company the opportunity to sell fitments to be
used by Tetra Laval's substantial customer base and that such sales may increase
the Company's long term profitability.
2.5 GALLON DISPENSING CLOSURES
The Company has developed a tamper evident closure for the popular 2.5
gallon bottled water container with a dispensing feature allowing the user to
dispense water without lifting the container. Portola's design is an improvement
over existing dispensing closures, offering greater reliability and enhanced
performance features. Portola plans to market the 2.5 gallon dispensing closure
to its current customers who produce bottled water.
28MM PUSH-PULL CLOSURES
Portola has developed a 28mm push-pull closure for juice, water and isotonic
beverage applications. The closure is designed for use on single-serving, one
liter and smaller PET bottles with the standard 28mm neck finish. The Company
believes that 28mm bottles represent a significant market segment and that
customers are increasingly converting from a standard HDPE screw cap to the
push-pull closure. The push-pull closure allows the product to be squeezed from
the bottle, offering ease of use and quick reseal.
The push-pull is made of three components, an HDPE base for rigidity and
firmness in capping, an LDPE push-pull button or spout that is assembled with
the base, and a clear polypropylene dust cover to protect the closure from
contaminants. The 28mm push-pull provides a dual tamper evident, resealable
closure. The Company plans to market the 28mm push-pull to North American
beverage producers focusing on the bottled water, flavored water and isotonic
beverage markets. Production of the closure began in April 1995.
RAW MATERIALS AND PRODUCTION
The principal raw material for the Company's plastic closures is injection
molding grade LDPE resin, which accounts for approximately 65% of the cost of
all raw materials purchased for the Company's plastic closures. Giving effect to
the acquisition of Nepco, the Company purchased approximately 50 million and 59
million pounds of LDPE and other plastic resins during fiscal 1993 and fiscal
1994, respectively, and 45 million pounds during the first nine months of fiscal
1995. The Company believes that due to its volume purchases it is able to
negotiate attractive pricing with resin suppliers. The Company has not
experienced any significant difficulties over the past ten years in obtaining
sufficient quantities of LDPE resin, although prices for LDPE resin can
fluctuate over relatively short periods of time. In the past, the Company has
been able to pass substantially all resin price increases on to its customers on
a timely basis.
In order to produce plastic closures, the resin, which is delivered as small
pebble-size pellets to large storage silos, is conveyed through a pipeline
system to an injection molding machine, where it is melted into a thick liquid
state. Coloring agents are added as appropriate and the mixture is injected at
high pressure into a specially designed, multi-cavity mold. The principal
equipment in the Company's plants includes injection molding machines (the
Company operates a total of 184 molding machines ranging in size from 10 to 300
tons clamping pressure), finishing lines to print and label caps and line them
with foam or foil to meet customer requirements, and automated systems for
handling and processing raw materials and finished goods. By automating its
manufacturing opertions, the Company is able to limit its direct labor costs to
less than 5% of sales while meeting the strict sanitary requirements necessary
for producing food and beverage packaging products.
39
<PAGE>
In the past, the Company has designed and manufactured many of its own
molds. In recent years, the increasing size and complexity of certain molds for
new products have caused the Company to out-source these mold construction
needs. The Company maintains design control over these molds as well as the
molds it still builds. The Company believes its mold expertise has led to
reduced costs due to shorter molding cycle times and enhanced reliability and
longevity of its tooling.
As a result of the Nepco acquisition, Portola has derived significant cost
savings through various raw material purchasing and production efficiencies.
With respect to raw materials, the Company has reduced costs by (i) combining
the volume of its purchasing with Nepco's purchases, (ii) taking advantage of
Portola's purchasing relationships in making Nepco's purchases and (iii)
standardizing grades of resin and color used by Nepco. More importantly, the
Company has increased overall production efficiency through shared technology
and adoption of improved manufacturing processes. Since the Nepco acquisition,
management has continued to identify and evaluate the relative strengths of the
Nepco operations and the Company's other manufacturing operations. The strengths
of the Nepco operations include faster cycle times, as well as superior cooling
systems and tooling design and tooling materials that are well-suited to the
Nepco closures. The strengths of the Company's other
operations include automation, maintenance, process control, quality control and
minimizing scrap. Management plans to further develop strategies for improving
production efficiency by adopting the respective strengths of each of the
operations throughout the enterprise.
PROPERTIES
The Company owns or leases ten modern production facilities, which operate
five to seven days a week, 24 hours a day. In addition, the Company's Canadian
subsidiary leases two production facilities. The facilities are highly efficient
due to automation and frequently scheduled maintenance in the plants. The
Company believes that these facilities are well-maintained and in good operating
condition and anticipates that, although substantial capital expenditures will
be required to meet the production requirements for new and developing product
lines, the facilities themselves will be sufficient to meet the Company's needs
for the next several years. There can be no assurance, however, that
unanticipated developments will not occur that would require the Company to add
production facilities sooner than expected. The following table indicates the
locations, functions, square footage and nature of ownership of these
facilities.
<TABLE>
<CAPTION>
NATURE OF
LOCATION FUNCTIONS SQUARE FEET OWNERSHIP (1)
- ---------------------------------------- --------------------------------------------- ------------- --------------
<S> <C> <C> <C>
San Jose, CA Executive Office/Closure Mfg./Warehouse 74,000 leased(2)
Engineering/Research and
Development Facility 13,000 leased(2)
Equipment Division 23,000 leased(2)
Kingsport, TN Closure Mfg./Warehouse 76,000 owned
Clifton Park, NY Closure Mfg./Warehouse 54,000 leased
Batavia, IL Closure Mfg./Warehouse 70,000 leased
New Castle, PA Executive Office/Closure Mfg./Warehouse 46,000 owned
Sumter, SC Closure Mfg./Warehouse 45,000 owned
Chino, CA Closure Mfg./Warehouse 64,000 owned
Gresham, OR Closure Mfg./Warehouse 36,000 owned
Fort Worth, TX Closure Mfg./Warehouse 27,000 owned
Bettendorf, IA Closure Mfg./Warehouse 40,000 owned
Richmond, British Columbia, Canada Bottle & Closure Mfg./Warehouse 49,000 leased
Edmonton, Alberta, Canada Bottle Mfg./Warehouse 38,000 leased
</TABLE>
(1) The facilities shown as leased in the table above are subject to long-term
leases or lease options that extend for at least five years, except that (i)
the lease of the Clifton Park facility expires in 1996 and (ii) the Edmonton
facility is temporarily leased on a month-to-month basis pending completion
of a 43,000 square foot facility in Edmonton being constructed for the
Company's Canadian subsidiary.
(2) The Company has entered into a nonbinding letter of intent to purchase the
property covered by these leases (as well as certain real property adjacent
thereto) for $7.0 million.
40
<PAGE>
SALES, MARKETING AND CUSTOMER SERVICE
The Company markets its products through its internal sales department and
through a nationwide network of independent sales representatives. Calls on
customers by these salespersons and representatives, along with participation at
trade shows, are the primary means of customer contact. A number of the
Company's customers are large corporate clients with numerous production
facilities, each of which may make its own separate purchase decisions. The
Company's most significant customers are processors and packagers of fluid milk,
non-carbonated bottled water, chilled juice, other flavored drinks and
condiments for wholesale and institutional use. The Company's customer base
includes over 3,000 accounts. The Company's top ten customers and buying groups
accounted for approximately 26% of the Company's sales during the nine months
ended May 31, 1995, and none accounted for more than 6% of sales during that
period. Most of the Company's customers have been doing business with the
Company for more than ten years.
Attention to customer service is a critical component of the Company's
marketing effort. The Company's customers operate high-speed, high-volume
production lines, with many handling perishable products. In order to assure
that the production lines operate efficiently and avoid costly line stoppages,
customers rely on the Company's ability to provide reliable, on-time delivery of
its closure products and to maintain the uniform quality of those products. The
Company also provides technical assistance to its customers in the form of an
in-house service team that can be dispatched on short notice to solve a bottling
line problem throughout the country. Several of the Company's field service
representatives have extensive blowmolding technical expertise that is
especially important in resolving bottle leakage problems for customers.
INTERNATIONAL SALES AND JOINT VENTURES
Although the Company's sales are primarily domestic, the Company expects
significant growth in international sales, particularly in the market for water
cooler bottle closures and water bottle capping and filling equipment. The
United States bottled water industry, in general, uses more sophisticated
packaging materials and processes than bottled water companies use in the rest
of the world. The Company believes that bottled water companies and other
non-carbonated beverage companies in Europe, the Far East, Latin America and
elsewhere are beginning to adopt more advanced packaging materials and
techniques, and that, as they do, they will become potential customers for the
Company's plastic closure products and equipment.
The Company's international sales have in the past consisted of significant
sales of PortaPlants (see "-- Products -- PortaPlants"). In fiscal 1993, fiscal
1994 and the first nine months of fiscal 1995, international export sales were
$6.6 million, $8.4 million and $11.9 million, respectively, of which $3.2
million, $3.4 million and $4.6 million, respectively, represented sales of
PortaPlants. The principal plastic closure products exported by the Company
during these periods were five gallon plastic closures for water cooler bottles
and small closures for dairy and juice products.
In the last several years, the Company has utilized joint ventures with
bottle manufacturers and distributors to gain footholds in international
markets. By offering plastic closures, capping equipment and turnkey bottling
systems, the Company can provide joint venture partners with a complete solution
to their bottling and capping requirements. Until recently, the Company had
three international joint ventures: (i) a 50% interest in Canada Cap Snap
Corporation, a Canadian corporation formed in 1990 and engaged in manufacturing
and distributing 38mm bottle closures in Canada, (ii) a 50% interest in Cap Snap
(U.K.) Ltd., a corporation formed in the United Kingdom in 1992 with a local
bottle manufacturer to manufacture and sell 38mm caps, and (iii) a 50% interest
in Cap Snap Mexico, a joint venture formed in Mexico in 1993 with a local
producer of plastic bottles and closures. In June 1995, the Company consummated
the Canadian Acquisition by acquiring the remaining 50% interest in Canada Cap
Snap Corporation, together with a 100% interest in two affiliated plastic bottle
manufacturing companies. In September 1995, the Company consummated the U.K.
Acquisition by acquiring the remaining 50% interest in Cap Snap (U.K.) Ltd. See
"Business -- Business Strategy -- Expanding Sales in International Markets."
41
<PAGE>
In April 1995, the Company entered into an agreement with an affiliate of
Tetra Laval, one of the world's leading packaging distributors, to supply
certain fitment application equipment. The Company anticipates that through the
agreement it will have the opportunity to sell its fitments to Tetra Laval's
substantial customer base. See "New Product Lines and Applications -- Fitments."
COMPETITION
The Company believes that the most important factors in marketing container
closures to the food and beverage industry are price, product design, product
quality and reliability and customer service. Among the attributes that
distinguish the Company from other sellers of closure systems and provide a
competitive advantage are the Company's proprietary products; the Company's
ability to provide its customers with innovative, low-cost closures and complete
capping systems; the Company's reputation for quality, reliability and service;
and the Company's automated and strategically located production facilities and
in-house tool manufacturing capability.
While no single competitor offers products that compete with all of the
Company's product lines, the Company faces direct competition in each of its
product lines from a number of companies, many of which have financial and other
resources that are substantially greater than those of the Company. As the
Company broadens its product offerings, it can expect to meet increased
competition from additional competitors with entrenched positions in those
product lines. The Company also faces direct competition from bottling companies
and other food and beverage providers that elect to produce their own closures
rather than purchase them from outside sources. In addition, the packaging
industry has numerous well-capitalized competitors, and there is a risk that
these companies will expand their product offerings, either through internal
product development or acquisitions of any of the Company's direct competitors,
to compete in the niche markets that are currently served by the Company. These
competitors, as well as existing competitors, could introduce products or
establish prices for their products in a manner that could adversely affect the
Company's ability to compete. Because of the Company's product concentration, an
increase in competition or any technological innovations with respect to the
Company's specific product applications, such as the introduction of
lower-priced competitive products or products containing technological
improvements over the Company's products, could have a significant adverse
effect on the Company's financial condition and results of operations.
LITIGATION
The Company is currently engaged in patent infringement litigation with
Scholle Corporation ("Scholle"), which commenced an action against the Company
in the United States District Court, Northern District of California in July
1992 alleging that the Company infringed upon certain patents of Scholle
relating to five gallon non-spill closures. In February 1995, the jury rendered
a verdict adverse to the Company and in favor of Scholle, which verdict has not
yet been entered by the court. Post-trial motions have been filed and argued but
not yet ruled on by the court. If the jury verdict is entered by the court, the
Company intends to appeal. The jury verdict would hold the Company liable for
damages through May 31, 1995 in the amount of $0.01 per closure. For the period
beginning January 1992, when the product was introduced, through May 31, 1995,
such damages would be approximately $800,000, which the Company has accrued in
its financial statements. The Company's total non-recurring legal expenses
associated with the Scholle litigation (not including such accrued damages) for
the fiscal year ended August 31, 1992, 1993 and 1994 were $68,000, $275,000 and
$277,000, respectively; for the nine months ended May 31, 1994 and 1995, were
$255,000 and $846,000, respectively; and for the twelve months ended May 31,
1995 were $867,000. The Company's total sales of the product involved in the
litigation were $4.0 million during the twelve month period ended May 31, 1995.
The Company is continuing to produce and sell the product and is accruing
damages in the amount of $0.01 per closure. There is a risk that Scholle may
seek to enjoin the Company from producing and selling the product in the future
and may seek to recover damages in excess of $0.01 per closure (up to $0.03 per
closure) for sales of the product after May 31, 1995. However, Scholle might
elect not to seek such remedies since it does not produce a competing product
and since, if either or both of the remedies were granted, the Company would
likely introduce an alternative product which it has designed and which it
believes will not infringe upon the patents involved in the litigation. It can
be anticipated that additional tooling costs
42
<PAGE>
will be incurred and market disruption may result in the event that the Company
changes to the new product design. The Company does not anticipate that the
amount of damages that may be awarded in the litigation, or any product change
that may result from the litigation, will have a material adverse effect on its
future results of operations, although there can be no assurance that this will
be the case.
EMPLOYEES
As of July 31, 1995, the Company had 800 full-time employees, 32 of whom
were engaged in product development, 30 in marketing, sales and customer
support, 705 in manufacturing and 33 in finance and administration. The Company
uses seasonal and part time employees for training, vacation replacements and
other short term requirements. None of the Company's employees in the United
States are represented by any collective bargaining agreements (approximately 22
of the employees of the Company's recently-acquired Canadian subsidiary are
members of the Teamsters Union), and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE COMPANY POSITION
- ------------------------------- --- --------------- --------------------------------------------------------------
<S> <C> <C> <C>
Jack L. Watts 47 9 Chairman of the Board and Chief Executive Officer
John L. Lemons 57 7 President and Director
Howard R. Girbach 47 3 President -- Packaging Division
Robert Plummer 36 1 President -- Nepco Division, Vice President and General
Manager -- Equipment Division
Dannie K. Martz 43 0 President -- Cap Snap Division
Robert R. Strickland 51 4 Vice President -- Finance, CFO and Assistant Secretary
Douglas L. Cullum 40 9 Vice President -- Manufacturing Technology
Laurie D. Bassin 46 9 Vice President -- Corporate Development
David A. Keefe 41 9 Corporate Controller
Rodger A. Moody 42 20 Vice President, Managing Director -- International Division
Timothy Tomlinson (1) 45 9 Secretary and Director
Larry C. Williams (1)(2) 45 6 Director
Martin R. Imbler (2) 47 6 Director
Christopher C. Behrens 34 1 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Watts has been Chairman of the Board and Chief Executive Officer of the
Company since January 1986. From 1982 to 1985, he was Chairman of the Board of
Faraday Electronics, a supplier of integrated circuits and board level
microprocessors.
Mr. Lemons has been President of the Company since June 1988 and a member of
its Board of Directors since February 1986. He was President and Chief Executive
Officer of Faraday Electronics from 1983 to 1988. Mr. Lemons intends to resign
as President and as a director of the Company in October 1995.
Mr. Girbach has been President - Packaging Division of the Company since
August 1995. From August 1992 to August 1995, he was President - Cap Snap
Division of the Company. From June 1975 to July 1992, he was employed by FMC
Corporation, a manufacturer of chemicals and equipment, most recently as
Director of Operations for the Ground Systems Division from February 1990 to
July 1992 and Division General Manager of the Fire Apparatus Division from April
1988 to February 1990.
Mr. Plummer has been Vice President and General Manager - Equipment Division
of the Company since May 1994. In June 1995, it was announced that Mr. Plummer
will assume additional responsibilities as President of the Nepco Division. From
May 1989 to May 1994 he was employed by General Motors Corporation, as an
Assembly Advisor for New United Motor Manufacturing, Inc., an automobile
manufacturing joint venture between General Motors and Toyota from February 1993
to May 1994 and as Product Manager of the Harrison Division of General Motors
Corporation, which produces automotive engine cooling and heating, ventilating,
and air conditioning systems, from May 1989 to February 1993.
Mr. Martz has been President - Cap Snap Division since September 1995. From
March 1995 to September 1995, he was Senior Vice President of Cymer Laser
Technologies, a laser manufacturer.
44
<PAGE>
From January 1992 to March 1995, he was Vice President and General Manager of
the Varian - TEL Products Division of Varian Associates, Inc., a manufacturer of
semiconductor equipment, electrical devices, instruments and other electronics
products, and from October 1986 to January 1992, he was employed by KLA
Instruments Corporation, a company involved in the factory automation,
manufacturing, photonics, and test and measurement industries, most recently as
Vice President and General Manager, Automated Test Systems Division.
Mr. Strickland has been Vice President - Finance and Chief Financial Officer
of the Company since July 1991. From September 1990 to July 1991, he served as
Senior Vice President and Chief Financial Officer at Personics Corporation, a
company that manufactured a system of producing audio cassette tapes in retail
record stores. From February 1988 to June 1990, he was employed by Lucky Stores,
Inc., a supermarket chain, most recently as Vice President Finance and
Administration.
Mr. Cullum has been Vice President - Manufacturing Technology of the Company
since November 1994. He joined the Company in 1986 and became Vice President -
Operations of the Cap Snap Division in April 1987.
Mr. Moody has been Vice President - Managing Director - International
Division of the Company since October 1994. He has been with the Company since
1975 and has worked in a variety of functional areas, including production,
administration, marketing/sales, equipment and general management.
Ms. Bassin has been Vice President - Corporate Development of the Company
since February 1993. From August 1986 to February 1993, she was Director of
Marketing of the Company. Prior to that time, she was employed in the Consumer
Service and Marketing Department of Collagen Corporation, a biomedical company.
Mr. Keefe has been Corporate Controller of the Company since February 1986.
Mr. Tomlinson has been Secretary and a director of the Company since January
1986. He also serves as a director of Oak Technology, Inc., a designer and
marketer of multimedia semiconductors and related software. He has been a
partner in the law firm of Tomlinson Zisko Morosoli & Maser since 1983.
Mr. Williams has been a director of the Company since January 1989. He
founded The Breckenridge Group, Inc., an investment banking firm in Atlanta,
Georgia, in April 1987 and is one of its principals.
Mr. Imbler has been a director of the Company since March 1989. He has been
President, Chief Executive Officer and a director of Berry Plastics Corporation
("Berry"), a manufacturer of plastic packaging, since January 1991. He has also
served as a director of BPC Holding Corporation, an entity affiliated with
Berry, since 1991. From July 1987 to January 1991, he was President and Chief
Executive Officer of Risdon Corporation, a cosmetic packaging company.
Mr. Behrens has been a director of the Company since June 1994. He has been
an officer of The Chase Manhattan Bank, N.A. ("Chase Bank") since 1986 and an
officer of Chase Manhattan Investment Holdings, Inc. ("Chase Manhattan
Investment Holdings") and Chase Manhattan Capital Corporation ("Chase Capital"),
since 1990. From 1990 to 1993, he was a Vice President in the Merchant Banking
Group. Prior to 1990, Mr. Behrens was an associate in the Mezzanine Finance
Group. Mr. Behrens also serves as a director of Covenant Care, Inc., an operator
of skilled nursing centers, and Pennant Foods, Inc., a franchisee of Wendy's
International, Inc. quick service restaurants.
Each director listed above was elected at the Company's Annual Meeting of
Shareholders held in January 1995 and will serve until his successor has been
elected and qualified or until his earlier resignation or removal. Executive
officers are chosen by, and serve at the discretion of, the Board of Directors
of the Company (the "Board").
45
<PAGE>
DIRECTOR COMPENSATION
Each of Messrs. Imbler, Tomlinson and Williams receives as compensation for
his services as a director $2,500 per quarter, and $2,000 for each meeting of
the Board attended, and is reimbursed for his reasonable expenses in attending
Board meetings. None of the other Board members is compensated as such. See
"Compensation Committee Interlocks and Insider Participation."
EXECUTIVE COMPENSATION
The following table summarizes all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the fiscal
year ended August 31, 1994 by the Company's Chief Executive Officer and the
Company's four other most highly compensated executive officers during fiscal
1994 (together, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------- -------------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION (2) UNDERLYING OPTIONS COMPENSATION (3)
- ------------------------------ ----------- ----------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Jack L. Watts
Chairman of the Board and
Chief Executive Officer.... $ 201,093 $ 150,000 $ 50,373 -- $ 6,999
John L. Lemons
President................... $ 215,913 $ 78,000 $ 8,188 -- $ 7,839
Howard R. Girbach
President - Packaging
Division................... $ 149,261 $ 29,300 $ 7,200 -- $ 2,404
Robert R. Strickland
Vice President - Finance and
Chief Financial Officer.... $ 133,443 $ 57,500 -- -- $ 2,404
Douglas L. Cullum
Vice President -
Manufacturing Technology... $ 136,839 $ 16,300 -- -- $ 2,404
</TABLE>
- ------------------------
(1) Includes bonuses paid during fiscal 1995 for services rendered during fiscal
1994, but not bonuses paid during fiscal 1994 for services rendered during
fiscal 1993.
(2) Includes automobile and gas allowances and, with respect to Mr. Watts,
$41,800 in consulting fees paid to PPI Management, Inc., a corporation of
which Mr. Watts is the sole shareholder and employee.
(3) Represents insurance premiums on term life insurance of $5,435 for Mr.
Lemons and $4,595 for Mr. Watts, a Company profit-sharing contribution of
$2,304 and a Company 401(k) matching contribution of $100 for each of the
Named Officers.
No stock options were granted to any of the Named Officers during fiscal
1994 or thereafter.
46
<PAGE>
The following table sets forth certain information regarding option
exercises during fiscal 1994 and the number of shares covered by both
exercisable and unexercisable stock options as of August 31, 1994 for each of
the Named Officers.
AGGREGATE OPTION EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AUGUST 31, 1994 AT AUGUST 31, 1994 (1)
SHARES ACQUIRED ---------------------------- ----------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------------- ------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts................... -- -- -- -- $ -- $ --
John L. Lemons.................. -- -- -- -- -- --
Howard R. Girbach............... -- -- 47,000 93,000 58,750 116,250
Robert R. Strickland............ -- -- 48,000 32,000 96,000 64,000
Douglas L. Cullum (2)........... -- -- 80,000 -- 251,200 --
</TABLE>
- ------------------------
(1) The value of an "in-the-money" option represents the difference between the
estimated fair market value of the underlying securities at August 31, 1994
of $3.75 per share, as determined by the Company's Board of Directors, minus
the exercise price of the options.
(2) The table does not reflect options exercised by Mr. Cullum on April 6, 1995
to purchase 25,000 shares of Common Stock.
EMPLOYEE BENEFIT PLANS
1988 STOCK OPTION PLAN. The 1988 Stock Option Plan (the "1988 Plan") was
adopted by the Board in September 1988 and approved by the Company's
shareholders in May 1989. The 1988 Plan has been terminated, although options
granted under the 1988 Plan remain outstanding, as indicated below.
A total of 1,154,010 shares of Class B Common Stock, Series 1 is subject to
issuance with respect to outstanding options granted under the 1988 Plan.
Options may be granted under the 1988 Plan to officers, key employees and
independent contractors of the Company, or any subsidiary of the Company.
Options granted under the 1988 Plan may be incentive stock options ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or nonqualified stock options ("NQSOs"); however, only
employees of the Company, or of a parent or subsidiary of the Company, may be
granted ISOs. Generally, options under the 1988 Plan expire ten years after the
date of grant (subject to shortened exercisability periods for terminated
employees).
The 1988 Plan may be administered by the Board or by a committee appointed
by the Board, which has discretion to select optionees and to establish the
terms and conditions of the options, subject to the provisions of the 1988 Plan.
The 1988 Plan is currently administered by the Board.
The exercise price of an option granted under the 1988 Plan may not be less
than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair
market value of the Company's Class B Common Stock, Series 1 on the date of
grant, except that, for an ISO granted to a person holding 10% or more of the
total combined voting power of all classes of stock of the Company or any parent
or subsidiary of the Company, the exercise price must be not less than 110% of
such fair market value. Options generally become exercisable as to 20% of the
shares one year after the vesting start date and as to an additional 5% of the
shares for each full quarter thereafter that the optionee renders services to
the Company.
1994 STOCK OPTION PLAN. The 1994 Stock Option Plan (the "1994 Plan") was
adopted by the Board and the Company's shareholders in November 1994. The 1994
Plan will terminate on November 17, 2004 or such earlier time as all of the
shares of Class B Common Stock, Series 1 reserved thereunder have been issued.
47
<PAGE>
A total of 1,000,000 shares of Class B Common Stock, Series 1 has been
reserved for issuance under the 1994 Plan. Options may be granted under the 1994
Plan to officers, key employees and independent contractors of the Company, or
any subsidiary of the Company. Options granted under the 1994 Plan may be ISOs
within the meaning of Section 422 of the Code, or NQSOs; however, only employees
of the Company, or a parent or subsidiary of the Company, may be granted ISOs.
Generally, options under the 1994 Plan expire 10 years after the date of grant
(subject to shortened exercisability periods for terminated employees). The 1994
Plan allows a maximum term of 10 years from the date the option is granted (or
five years in the case of any option granted to the holder of 10% or more of the
shares of the Company).
The 1994 Plan may be administered by the Board or by a committee appointed
by the Board, which has discretion to select optionees and to establish the
terms and conditions of the options, subject to the provisions of the 1994 Plan.
The 1994 Plan is currently administered by the Board.
The exercise price of an option granted under the 1994 Plan may not be less
than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair
market value of the Company's Class B Common Stock, Series 1 on the date of
grant, except that, for an ISO granted to a person holding 10% or more of the
total combined voting power of all classes of stock of the Company or any parent
or subsidiary of the Company, the exercise price must be not less than 110% of
such fair market value. Options generally become exercisable as to 20% of the
shares one year after the vesting start date and as to an additional 5% of the
shares for each full quarter thereafter that the optionee renders services to
the Company.
As of May 31, 1995, under both the 1988 and 1994 Plans, options to purchase
an aggregate of 1,617,190 shares of Class B Common Stock, Series 1, had been
exercised, directors, officers, consultants and other employees held
non-qualified stock options to purchase an aggregate of 1,154,010 shares, with a
weighted average exercise price of $1.34 and directors, officers, and other
employees held incentive stock options to purchase an aggregate of 230,000
shares, with a weighted average exercise price of $3.90. An additional 770,000
shares remain available for future grants under the 1994 Plan.
401(K) PLAN. In 1987, the Company's Board of Directors adopted a profit
sharing plan that is intended to qualify under Section 401(k) of the Code (the
"401(k) Plan"). Each employee of the Company who is at least 21 years of age,
has completed one year of service and is not covered by a collective bargaining
agreement is eligible to participate in the 401(k) Plan. A participating
employee may make pre-tax contributions of up to 10% of such employee's
compensation that does not exceed the Social Security Wage Base ("Eligible
Compensation Base") in effect at the end of the plan year. In addition, the
Company may, at the discretion of the Board of Directors, make contributions. In
fiscal 1992, fiscal 1993 and fiscal 1994, the Company contributed 3.0%, 3.0% and
4.0%, respectively, of each participant's Eligible Compensation Base.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Timothy Tomlinson and Larry C. Williams. Mr. Tomlinson is also the
Company's Secretary.
In 1989, the Company granted to TZM Investment Fund, of which Mr. Tomlinson
is a general partner, options to purchase 124,026 shares of Class B, Series 1
Common Stock for $1.00 per share. TZM Investment Fund has exercised a portion of
those options, purchasing, during the period from December 1989 to September
1991, 66,000 shares of Class B, Series 1 Common Stock and, during the period
from January through April 1995, 28,042 shares of Class B, Series 1 Common
Stock. TZM Investment Fund continues to hold the balance of the options. In
1989, the Company also granted to Mr. Williams and other principals of The
Breckenridge Group, Inc. ("Breckenridge"), an investment banking firm of which
Mr. Williams is a principal, options to purchase 124,026 shares of Class B,
Series 1 Common Stock for $1.00 per share (Mr. Williams received options to
purchase 33,720 of such shares). Such principals of Breckenridge have exercised
a portion of those options, purchasing, during the period from December 1989 to
September 1991, 66,000 shares of Class B, Series 1 Common Stock (17,670 of which
48
<PAGE>
were purchased by Mr. Williams), and such principals continue to hold the
balance of the options (Mr. Williams continues to hold options to purchase
16,050 shares). In 1991, TZM Investment Fund received from the Company, and
continues to hold, options to purchase 90,000 shares of the Company's Common
Stock for $1.75 per share.
The Company retains as its general counsel the law firm of Tomlinson Zisko
Morosoli & Maser, of which Mr. Tomlinson is a general partner. For legal
services rendered during fiscal 1992, 1993 and 1994, the Company paid Mr.
Tomlinson's law firm $267,000, $451,000 and $420,000, respectively, including
expenses.
In March 1992, the Company engaged Breckenridge to act as investment banker
in a possible equity financing and as a finder for the purposes of introducing
the Company to one or more financial institutions to provide a senior financing
loan package. In fiscal year 1992, the Company paid Breckenridge a $350,000 fee
for assistance in preparing a confidential private placement memorandum for a
possible equity offering and in evaluating the offering. In fiscal 1993, the
Company paid Breckenridge a $200,000 finder's fee, plus expense reimbursement of
$11,000, in connection with the closing of a new senior financing loan package.
For additional information regarding Messrs. Tomlinson and Williams and
their affiliates, see "Management -- Executive Officers and Directors," "Certain
Transactions -- Transactions with Entities Affiliated with Directors" and
"Principal Stockholders."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent permitted by the Delaware
General Corporation Law, (ii) the Company may indemnify its other officers,
employees and agents as set forth in the Delaware General Corporation Law, (iii)
to the fullest extent permitted by the Delaware General Corporation Law, the
Company is required to advance expenses, as incurred, to its directors and
executive officers in connection with a legal proceeding (subject to certain
exceptions), (iv) the rights conferred in the Bylaws are not exclusive and (v)
the Company is authorized to enter into indemnification agreements with its
directors, officers, employees and agents.
The Company has entered into indemnification agreements with each of its
current directors, (except Christopher Behrens) and certain of its executive
officers to give such directors and officers additional contractual assurances
regarding the scope of the indemnification set forth in the Company's Bylaws and
to provide additional procedural protections. The indemnification agreements
generally provide for the indemnification, to the fullest extent permitted by
law, of the director or officer for liability and expenses incurred in
connection with legal proceedings brought against such director or officer in
his capacity as agent for the Company, with certain exceptions. At present,
there is no pending litigation or proceeding involving a director, officer or
employees of the Company regarding which indemnification is sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification.
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors of monetary damages for breach of fiduciary duty as a
director except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends or redemptions or (iv) for any transaction from which the
director derived an improper personal benefit.
49
<PAGE>
CERTAIN TRANSACTIONS
LOANS TO EMPLOYEES
In November 1991, the Company loaned Daniel Luch, Vice President of Research
and Development, $109,000 towards the purchase of a home. The loan is
represented by a nonrecourse promissory note secured by a deed of trust. The
note may be prepaid in full in one or more installments on or before the sixth
anniversary of the date of the note. Prepayment must include accrued interest at
the rate of 6%. If the note has not been prepaid, satisfaction of the note is
limited to proceeds from sale of the home in accordance with a formula outlined
in the loan agreement.
In January 1992, the Company loaned Jack L. Watts, Chairman of the Board and
Chief Executive Officer, $250,000 represented by a secured promissory note. The
Company received a security interest in certain shares of Class B Common Stock,
Series 1 owned by Mr. Watts. Interest accrues at a rate equal to 2.0% above the
Company's borrowing rate under its Current Revolving Credit Facility. The note
plus accrued interest was originally due and payable in January 1993 but the due
date has been extended to January 1996 by the Board.
In September 1992, the Company loaned Howard R. Girbach, President --
Packaging Division, $75,000 towards the purchase of a home. The loan is
represented by a nonrecourse promissory note secured by a deed of trust. The
note may be prepaid in full in one or more installments on or before the sixth
anniversary of the date of the note. Prepayment must include accrued interest at
the rate of 6.0%. If the note has not been prepaid, satisfaction of the note is
limited to proceeds from sale of the home in accordance with a formula outlined
in the loan agreement.
TRANSACTIONS WITH ENTITIES AFFILIATED WITH DIRECTORS
The Company utilizes Berry Plastics Corporation for mold development,
engineering and manufacturing services. Martin Imbler is a director of the
Company and President and Chief Executive Officer of Berry Plastics Corporation.
During fiscal 1992, 1993 and 1994, the Company paid Berry Plastics Corporation
$63,000, $183,000 and $162,000, respectively, for mold development.
Since June 1988, Chase Bank has held the Company's Senior Subordinated Notes
in the principal amount of $10.0 million and due June 30, 2002. The Senior
Subordinated Notes will be repaid in full with the net proceeds of this
offering, together with a prepayment premium (estimated to be $613,000 at May
31, 1995). In each of fiscal 1992, 1993 and 1994, the Company paid Chase Bank
interest on this indebtedness of $1.35 million. The Company paid refinancing
amendment and advisory fees of approximately $1.0 million and $258,000 to Chase
Bank during fiscal 1993 and fiscal 1994, respectively. Chase Bank is an
affiliate of Chase Securities, Inc., one of the Underwriters in this offering,
and Chase Capital, which, together with related parties, owns approximately 20%
of the Company's outstanding voting capital stock. See "Principal Stockholders."
Christopher C. Behrens, a director of the Company, is also a Vice President of
Chase Bank and Chase Capital.
In June 1994, Chase Capital purchased for $3.75 per share (i) 800,000 shares
of Class B Common Stock, Series 1 from the Company, (ii) 80,000, 80,000 and
93,333 shares of Class B Common Stock, Series 1 from Jack L. Watts, LJL Cordovan
Partners and John L. Lemons, respectively, and (iii) 280,000 shares of Class B
Common Stock, Series 2 from Robert Fleming Nominees, Ltd. ("RFNL"). In
connection with these purchases, Chase Capital, RFNL and Heller Financial, Inc.,
the lender under the Current Credit Facility, received certain demand and
piggyback registration rights. Chase Capital became a participant in an earlier
agreement between the Company and RFNL under which (i) the Company has the right
of first offer to purchase any shares of the Company's capital stock that either
shareholder proposes to sell to any nonrelated party and (ii) each shareholder
has a right of first offer to purchase any Class B Common Stock, Series 1 that
the Company proposes to sell. Chase Capital is also a party to certain
shareholders agreements providing for certain rights of first refusal as
described below. See "-- Shareholders Agreements." In addition, the parties to
these shareholders agreements have granted to Chase Capital certain co-sale
rights to participate in the sale by any such shareholders of more than 25.0% of
the outstanding shares of the Company's common stock. One of the shareholders
agreements
50
<PAGE>
also provides that the Company is prohibited from (i) entering into any merger,
consolidation or repurchase of capital stock, (ii) making certain amendments to
its Bylaws or Certificate of Incorporation or (iii) entering into certain other
significant transactions, without the approval of Chase Capital. Pursuant to
that agreement, Jack L. Watts, RFNL and their permitted transferees have agreed
to vote their shares in favor of a nominee of Chase Capital as a director of the
Company. Mr. Behrens is Chase Capital's current nominee.
In April 1995, Chase Capital purchased for $4.00 per share (i) 265,000
shares of the Company's Class B Common Stock, Series 1 from various shareholders
of the Company (including 110,000, 57,614, 25,000 and 7,500 shares that were
sold by Jack L. Watts, John L. Lemons, Douglas Cullum (and their affiliates) and
TZM Investment Fund, respectively) and (ii) 250,000 shares of the Company's
Class B Common Stock, Series 2 from RFNL. In June 1995, pursuant to an agreement
reached in April 1995, the Company sold for $4.00 per share 200,000 shares of
Class B Common Stock, Series 1 to Chase Capital, and Chase Capital purchased
34,000 shares of Class B Common Stock, Series 1 for $4.00 per share from various
shareholders.
For information concerning certain transactions between the Company and
Timothy Tomlinson, Larry C. Williams or their respective affiliates, see
"Management -- Compensation Committee Interlocks and Insider Participation."
Messrs. Tomlinson and Williams are directors of the Company and the members of
the Compensation Committee of the Board of Directors.
The Company's policy is that it will not make loans to, or enter into other
transactions with, directors, officers or other affiliates unless such loans or
transactions are approved by a majority of the Company's disinterested
directors, may reasonably be expected to benefit the Company and, except to the
extent that loans to officers of the Company have been entered into in part in
recognition of the value of the officers' services to the Company, are on terms
no less favorable to the Company than could be obtained in arms'-length
transactions with unaffiliated third parties.
SHAREHOLDERS AGREEMENTS
A majority of the Company's shares, including shares held by Jack L. Watts,
are subject to shareholders agreements under which the Company has a right of
first refusal in the event of a proposed transfer of such shares of the
Company's common stock to a transferee not related to the shareholder. In the
event the Company does not exercise its right of first refusal, the other
shareholders that are parties to the agreements have similar first refusal
rights.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of each class of the Company's voting securities as of
September 21, 1995 by (i) each person known by the Company to be the beneficial
owner of more than 5% of such class, (ii) each director, (iii) each Named
Officer and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
TITLE OF CLASS (1) NAME OF BENEFICIAL OWNER OWNERSHIP (2) CLASS (2)
- --------------------------------------- --------------------------------------- ------------------- -------------
<S> <C> <C> <C>
Class B Common Stock, Series 1 Jack L. Watts (3) 4,058,021 34.4%
Class B Common Stock, Series 2 Robert Fleming Nominees Limited, a 1,755,715 14.9%
United Kingdom Corporation (4)
Class B Common Stock, Series 1 Christopher C. Behrens (5) 1,552,333 13.2%
Class B Common Stock, Series 1 Chase Manhattan Capital Corporation (6) 1,552,333 13.2%
Class B Common Stock, Series 2 Christopher C. Behrens (5) 815,715 6.9%
Class B Common Stock, Series 2 Chase Manhattan Capital Corporation(6) 815,715 6.9%
Class B Common Stock, Series 1 Gary L. Barry (7) 607,965 5.2%
Class B Common Stock, Series 1 John L. and Mary Ann Lemons 574,992 4.9%
Class B Common Stock, Series 1 Timothy Tomlinson (8) 245,984 2.1%
Class B Common Stock, Series 1 Howard R. Girbach (9) 127,000 1.0%
Class B Common Stock, Series 1 Robert R. Strickland (10) 88,000 *
Class B Common Stock, Series 1 Douglas L. Cullum (11) 70,000 *
Class B Common Stock, Series 1 Larry C. Williams (12) 66,371 *
Class B Common Stock, Series 1 Martin R. Imbler 20,000 *
Class B Common Stock, Series 1 All executive officers and directors as 8,021,978 65.4 %
a group
(14 persons)(13)
</TABLE>
- ------------------------
* Less than one percent
(1)The Company's Class B Common Stock, Series 1 and Class B Common Stock,
Series 2 have the same voting rights, each share being entitled to one vote.
The Class B Common Stock, Series 2 has a liquidation preference equal to
$0.60 on each distributed dollar in the event that the value of the
Company's assets available for distribution is less than $1.75 per share.
Each share of Class B Common Stock, Series 2 is convertible at any time at
the option of the holder into one share of Class B Common Stock, Series 1
and will be automatically converted into one such share (i) in the event
that shares of Class B Common Stock, Series 1 shall be sold in a firm
commitment public offering in which the aggregate public offering price is
not less than $10,000,000 or (ii) immediately prior to the effectiveness of
a merger or consolidation in which the Company is not the surviving entity
and in which the value of the property to be received by the stockholders
shall be not less than $1.75 per share. No shares of Class A Common Stock
are issued or outstanding, although immediately exercisable warrants to
purchase 2,492,741 of such shares are outstanding. Chase Capital holds
2,052,526 of such warrants. The Class A Common Stock is non-voting and each
share of Class A Common Stock may be converted into one share of Class B
Common Stock, Series 1, at the option of the holder, in the event that
shares of Class B Common Stock, Series 1 shall be sold in a firm commitment
public offering in which the aggregate public offering price is not less
than $10,000,000.
52
<PAGE>
(2)In accordance with the rules of the Commission, shares are beneficially
owned by the person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of Common Stock subject to options that are
exercisable within 60 days of September 21, 1995 are deemed to be
outstanding and to be beneficially owned by the person holding such option
for the purpose of computing the percentage ownership of such person but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(3)Includes 614,712 shares held by LJL Cordovan Partners, L.P., of which Mr.
Watts is the General Partner and 52,132 shares held by trusts for the
benefit of Mr. Watts' children. Mr. Watt's address is 890 Faulstich Court,
San Jose, California 95112.
(4)The address of this shareholder is c/o Robert Fleming & Co. Ltd., 25
Copthall Avenue, London, EC2R 7DR.
(5)Represents shares held by Chase Capital and related parties. Mr. Behrens is
a Vice President of Chase Capital. Does not include warrants held by Chase
Capital to purchase 2,052,526 shares of Class A Common Stock at $0.60667 per
share, which shares are non-voting. Mr. Behrens disclaims beneficial
ownership of the 1,303,486 shares of Class B Common Stock, Series 1 and the
776,095 shares of Class B Common Stock, Series 2 owned by Chase Capital. The
address of this shareholder is One Chase Manhattan Plaza, New York, New York
10081.
(6)Represents shares held by Chase Capital and related parties. Does not
include warrants to purchase 2,052,526 shares of Class A Common Stock at
$0.60667 per share, which shares are non-voting. The address of this
shareholder is One Chase Manhattan Plaza, New York, New York 10081.
(7)Mr. Barry's address is 2180 Sand Hill Road, Suite 350, Menlo Park,
California 95025.
(8)Includes 40,000 shares held by First TZMM Investment Partnership, of which
Mr. Tomlinson is a general partner, 66,000 shares held by TZM Investment
Fund of which Mr. Tomlinson is a general partner and 119,984 shares subject
to options held by TZM Investment Fund that are exercisable within 60 days
of September 21, 1995.
(9)Includes 67,000 shares subject to an option exercisable within 60 days of
September 21, 1995. Also includes 12,000 shares held by Cupertino National
Bank, Custodian, Howard Girbach IRA.
(10)Includes 68,000 shares subject to options exercisable within 60 days of
September 21, 1995.
(11)Includes 55,000 shares subject to options exercisable within 60 days of
September 21, 1995.
(12)Includes 16,050 shares subject to options exercisable within 60 days of
September 21, 1995. Does not include (i) 123,756 shares and (ii) 41,976
shares subject to options exercisable within 60 days of September 1, 1995,
held in the individual names of four other principals of The Breckenridge
Group, Inc.
(13)Includes all of the shares shown as included in footnotes (3), (5) and (8)
through (12).
53
<PAGE>
DESCRIPTION OF THE NEW CREDIT FACILITY
GENERAL
Concurrently with this offering, the Company will enter into the New Credit
Facility with Heller Financial, Inc., the lender under the Company's Current
Revolving Credit Facility and Current Term Loan Facility. The New Credit
Facility will provide for revolving loans to the Company in an aggregate amount
not to exceed $35.0 million. The loans will constitute senior secured
indebtedness of the Company. The consummation of this offering is contingent
upon the closing of the New Credit Facility.
The information set forth herein relating to the New Credit Facility is
qualified in its entirety by reference to the complete text of the documents
entered into or to be entered into in connection therewith, proposed forms of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
AVAILABILITY
Borrowings under the New Credit Facility will be subject to a borrowing base
of 85% of "Eligible Accounts," plus 60% of "Eligible Inventory" and 40% of
"Eligible PPE" (generally, the net book value of the Company's property, plant
and equipment), as those terms are defined in the New Credit Facility. Given the
Company's current levels of Eligible Accounts, Eligible Inventory and Eligible
PPE and the operation of financial ratios contained in the New Credit Facility,
the Company expects to be able to draw up to approximately $23.7 million of the
$35.0 million committed under the New Credit Facility at the closing of this
offering or shortly thereafter, assuming compliance with certain ministerial
post-closing conditions; however, the Company does not presently intend to make
any draw under the New Credit Facility at closing. The Company's ability to
borrow under the New Credit Facility in the future will be subject to the size
of its borrowing base as well as compliance with covenants and financial ratios
contained in the New Credit Facility.
INTEREST
The interest rate will be (i) Base Rate plus 1.25% or (ii) LIBOR plus 2.25%,
at the Company's option. The Base Rate is a variable rate of interest per annum
calculated daily on the basis of a 360 day year equal to the rate of interest
from time to time published by the Board of Governors of the Federal Reserve
System in Federal Reserve statistical release H.15(519) entitled "Selected
Interest Rates" as the Bank prime loan rate. The LIBOR option is available for
interest periods of one, two, three or six months. On LIBOR loans as to which
the interest period is six months, and on Base Rate loans, interest will be
payable quarterly in arrears. On LIBOR loans as to which the interest period is
one, two or three months, interest will be payable at the end of the interest
period. Interest will be calculated daily on the basis of a 360-day year for the
actual number of days elapsed.
Repayment of LIBOR loans on any day other than the last day of the
applicable interest periods, or failure to borrow any amount on the date
scheduled for borrowing, will require compensation for breakage costs.
A fee of 0.375% per annum will be charged on the average daily unused
portion of the New Credit Facility, payable quarterly in arrears.
MATURITY
The New Credit Facility will mature on the fifth anniversary of the closing.
SECURITY
The New Credit Facility will be secured by a first priority security
interest on substantially all of the Company's and its Restricted Subsidiaries'
real and personal property of every type and description, whether owned at the
time of closing or subsequently acquired, including a pledge of all capital
stock of any Restricted Subsidiary of the Company. If in the future the
Company's capital stock is beneficially owned or controlled by one or more
holding companies, then the lender will require a continuing guaranty from the
holding company, which guaranty must be secured by all the assets of the holding
company, including a pledge of all the Company's capital stock.
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PAYMENT TERMS
The New Credit Facility will pay interest only as indicated above until
maturity. Upon maturity, principal and all remaining accrued interest will be
payable. The Company may prepay any borrowings under the New Credit Facility at
any time (subject to any applicable LIBOR breakage costs; see "-- Interest"
above).
COVENANTS
The New Credit Facility will contain covenants and provisions that will
restrict, among other things, the Company's ability to: (i) incur additional
indebtedness; (ii) incur liens on its property; (iii) make investments; (iv)
enter into guarantees and other contingent obligations; (v) merge or consolidate
with or acquire another person or engage in other fundamental changes; (vi)
engage in certain sales of assets; (vii) engage in certain transactions with
affiliates; and (viii) make restricted junior payments. The New Credit Facility
will also require maintenance of a specified ratio of indebtedness to
consolidated cash flow on a trailing twelve month basis and will require the
repayment of loans under the New Credit Facility with proceeds of certain sales
of assets.
EVENTS OF DEFAULT
The New Credit Facility will contain events of default customary for working
capital financings.
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company and American Bank National Association, as trustee (the "Trustee").
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
holders of Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the Indenture
does not purport to be complete and is qualified in its entirety by reference to
the Indenture, including the definitions therein of certain terms used below. A
copy of the proposed form of Indenture described below will be made available to
prospective investors upon request. The definitions of certain terms used in the
following summary are set forth below under "-- Certain Definitions."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be unsecured general obligations of the Company, limited in
aggregate principal amount to $110,000,000. The Notes will mature on October 1,
2005. Interest on the Notes will accrue at the rate of 10.75% per annum and will
be payable semiannually on April 1 and October 1 of each year, commencing April
1, 1996, to holders of record ("Holders") on the immediately preceding March 15
and September 15. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. The Notes will be payable as to principal,
premium, if any, and interest at the office or agency of the Company maintained
for such purpose within the City and State of New York or, in certain
circumstances set forth in the Indenture, payment of interest may be made by
check mailed to the Holders of the Notes at their respective addresses set forth
in the register of Holders of Notes. Until otherwise designated by the Company,
the Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in registered form,
without coupons, and in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Except as set forth in the next paragraph, the Notes will not be redeemable
at the Company's option prior to October 1, 2000. Thereafter, the Notes will be
redeemable at the option of the Company, in whole
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or in part, upon not less than 30 nor more than 60 days notice, at the following
redemption prices (expressed as percentages of principal amount) if redeemed
during the twelve-month period beginning on October 1 of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------------------------------------------------------- ------------
<S> <C>
2000.................................................................. 105.375%
2001.................................................................. 103.583%
2002.................................................................. 101.791%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest to the redemption date. Notwithstanding the
foregoing, at any time prior to October 1, 1998, the Company may redeem up to
$33.0 million principal amount of the Notes with the proceeds of one or more
Public Equity Offerings at 110.75% of the aggregate principal amount thereof,
together with accrued and unpaid interest, if any, to the date of redemption;
PROVIDED that such redemption shall occur within 60 days of the date of the
closing of any such Public Equity Offering; AND FURTHER PROVIDED that Notes
having an aggregate principal amount of at least $77.0 million remain
outstanding immediately after any such redemption.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate, PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Notes.
RANKING
The indebtedness evidenced by the Notes will be unsecured senior obligations
of the Company and will rank PARI PASSU in right of payment with all existing
and future senior Indebtedness of the Company and senior in right of payment to
any future subordinated Indebtedness of the Company. The Notes, however, will be
effectively subordinated to senior secured Indebtedness of the Company with
respect to the assets securing such Indebtedness, including any Indebtedness
that may be incurred from time to time under the New Credit Facility. See "Risk
Factors -- Effective Subordination of Notes in Certain Circumstances." As of May
31, 1995, after giving effect to the sale of the Notes and the application of
net proceeds to repay certain Indebtedness, the Company would have had $0.2
million of senior Indebtedness outstanding (other than the Notes) and no
subordinated Indebtedness outstanding and would have had, subject to certain
restrictions, the ability to draw up to $23.7 million of the $35.0 million
committed under the New Credit Facility. See "Capitalization."
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash
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equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest to the date of purchase (the "Change of Control Payment"). Within 30
days following any Change of Control, the Company will mail a notice to each
Holder stating: (1) that the Change of Control Offer is being made pursuant to
the covenant entitled "Offer to Repurchase Upon Change of Control" and that all
Notes tendered will be accepted for payment; (2) the purchase price and the
purchase date, which will be no earlier than 30 days nor later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"); (3) that
any Note not tendered will continue to accrue interest; (4) that, unless the
Company defaults in the payment of the Change of Control Payment, all Notes
accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest after the Change of Control Payment Date; (5) that Holders
electing to have any Notes purchased pursuant to a Change of Control Offer will
be required to surrender the Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) that Holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the second Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of Notes delivered
for purchase, and a statement that such Holder is withdrawing his election to
have such Notes purchased; and (7) that Holders whose Notes are being purchased
only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple thereof. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes in
connection with a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (2) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all Notes or portions thereof so
tendered and (3) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount of the Notes or portions thereof being purchased by the Company. The
Paying Agent will promptly mail to each Holder of Notes so accepted the Change
of Control Payment for such Notes, and the Trustee will promptly authenticate
and mail to each Holder a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered, if any; PROVIDED that each such new Note will
be in a principal amount of $1,000 or an integral multiple thereof. The Company
will send to the Trustee and the Holders on or as soon as practicable after the
Change of Control Payment Date a notice setting forth the results of the Change
of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Notes to require the Company to repurchase such Notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Company to another person may be uncertain.
In the event of a Change of Control, there can be no assurance that the
Company would have sufficient funds to pay the repurchase price for Notes
tendered by the holders thereof. In addition, a Change of Control would
constitute a default under the New Credit Facility and, since Indebtedness under
the New Credit Facility will effectively rank senior in priority to Indebtedness
under the Notes, the Company would be obligated to repay Indebtedness under the
New Credit Facility in advance of Indebtedness under the Notes. See "Risk
Factors -- Effective Subordination of Notes in Certain Circumstances." The
Company's repurchase of Notes as a result of the occurrence of a Change of
Control may be prohibited or limited by, or create an event of default under,
the terms of other agreements relating to borrowings which the Company may enter
into from time to time, including agreements relating to secured Indebtedness.
Failure by the Company to make or consummate a Change of Control Offer
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would constitute an immediate Event of Default under the Indenture, thereby
entitling the Trustee or holders of at least 25% in principal amount of the then
outstanding Notes to declare all of the Notes to be due and payable immediately;
PROVIDED that so long as any Indebtedness permitted to be incurred pursuant to
the New Credit Facility is outstanding, such acceleration shall not be effective
until the earlier of (i) an acceleration of any such Indebtedness under the New
Credit Facility or (ii) five business days after receipt by the Company of
written notice of such acceleration. In the event all of the Notes are declared
due and payable, the Company's ability to repay the Notes would be subject to
the limitations referred to above.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
"CHANGE OF CONTROL" as used herein, means (a) any sale, lease, exchange or
transfer (in one transaction or in a series of related transactions) of all or
substantially all the assets of the Company to any Person or group of related
Persons (other than Permitted Investors), (b) the merger or consolidation of the
Company with or into another corporation or the merger of another corporation
into the Company with the effect that immediately after such transaction the
stockholders of the Company immediately prior to such transaction hold less than
50% of the total voting power of all securities generally entitled to vote in
the election of directors, managers or trustees of the Person surviving such
merger or consolidation, (c)(x) prior to the Company's first Public Equity
Offering, the acquisition by any "person" or "group" (as those terms are used in
Sections 13(d) and 14(d) of the Exchange Act (other than the Permitted
Investors) of the ultimate "beneficial ownership" as defined in Rules 13d-3 and
13d-5 under the Exchange Act) of more than 50% of the voting power of all
securities of the Company generally entitled to vote in the election of
directors of the Company and (y) after the Company's first Public Equity
Offering, the acquisition by any person or group (defined as set forth in clause
(x) above) (other than the Permitted Investors) of more than the greater of (i)
40% of the voting power of all securities of the Company generally entitled to
vote in the election of directors of the Company or (ii) the total percentage of
the voting power of all securities of the Company generally entitled to vote in
the election of directors of the Company held by the Permitted Investors in the
aggregate at the time of determination, (d) during any period of twenty-four
consecutive months, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election by such Board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the members of the Board of Directors of the
Company, or (e) the stockholders of the Company shall approve any plan for the
liquidation or dissolution of the Company.
"PERMITTED INVESTORS" means Jack L. Watts, Chase Manhattan Capital
Corporation, Fleming Mercantile Investment Trust PLC, Fleming American
Investment Trust PLC, LJL Cordovan Investors and Related Parties of any of the
foregoing.
"RELATED PARTY" with respect to any Permitted Investor means (A) any
controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of such Permitted Investor or (B) a
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Permitted Investor and/or such
other persons referred to in the immediately preceding clause (A).
ASSET SALES
The Indenture will provide that the Company will not conduct, and will not
permit any of its Restricted Subsidiaries to conduct, an Asset Sale (as defined
below) unless (x) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee prior to the consummation of
the Asset Sale) of the assets sold or otherwise disposed of, and (y) at least
80% of the consideration therefor received by the Company or
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such Restricted Subsidiary is in the form of cash or Cash Equivalents; PROVIDED,
HOWEVER, that the amount of (A) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet or in the notes thereto),
of the Company or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Notes or the Subsidiary Guarantees, if any, that
are assumed by the transferee of any such assets, and (B) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
Within 180 days after any Asset Sale, the Company may apply the Net Proceeds
from such Asset Sale at its option (a) to permanently reduce debt outstanding
under the Credit Facility (and to make corresponding reductions to the
commitments in respect thereof) or (b) to make an investment in a business or
capital expenditure or other long-term assets of the Company or its Restricted
Subsidiaries. Pending the final application of any such Net Proceeds, the
Company may invest such Net Proceeds in Cash Equivalents. Any Net Proceeds from
the Asset Sale that are not applied or invested as provided in the first
sentence of this paragraph will be deemed to constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall
make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of purchase, in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less
than the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, even if Notes less than the Excess
Proceeds are tendered for purchase, the amount of Excess Proceeds shall be reset
to zero.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any property or assets of the Company or any Restricted Subsidiary (including by
way of a sale-and-leaseback) other than sales of inventory (including equipment
held as inventory) and obsolete equipment or redundant properties in the
ordinary course of business consistent with past practice (provided that the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Company will be governed by the provisions of the Indenture
described above under the caption "-- Change of Control" and/or the provisions
described below under the caption "-- Merger, Consolidation or Sale of Assets"
and not by the provisions of this covenant), or (ii) the issuance of Equity
Interests by any of its Restricted Subsidiaries, or the sale of Equity Interests
by the Company or any of its Restricted Subsidiaries in any of its Subsidiaries,
in the case of either clause (i) above or this clause (ii), whether in a single
transaction or a series of related transactions, (a) that have an aggregate fair
market value in excess of $250,000, or (b) for aggregate net proceeds in excess
of $250,000. For purposes of this definition, the term "Asset Sale" shall not
include any issuance of Equity Interests by the Company, any transfer of assets
permitted pursuant to the covenant entitled "Restricted Payments" or pursuant to
clause (d) or (e) of the definition of "Permitted Investments" or the transfer
of assets or Equity Interests by the Company to a Restricted Subsidiary of the
Company or by a Restricted Subsidiary of the Company to the Company or to
another Restricted Subsidiary of the Company.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and, will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any distribution on account of the Company's or any of
its Restricted Subsidiaries' Equity Interests (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
person making such dividend or distribution, or dividends or distributions
payable to the Company or any Restricted Subsidiary); (ii) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the Company or any
Restricted Subsidiary or other Affiliate of the Company (other than any such
Equity Interests owned by
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the Company or any Restricted Subsidiary of the Company or except in connection
with a Permitted Investment made pursuant to clause (d) or (e) of the definition
thereof); (iii) purchase, redeem, repay, defease, pay any amount of principal of
or otherwise acquire or retire for value any Indebtedness that is subordinated
to the Notes prior to the scheduled principal payment, sinking fund payment or
maturity thereof; (iv) make any Investment in any Person (other than Permitted
Investments) or (v) guarantee any Indebtedness of any Affiliate of the Company
other than a Restricted Subsidiary of the Company or pursuant to a Guarantee
that constitutes a Permitted Investment pursuant to clause (d) or clause (e) of
the definition thereof (all such payments and other actions set forth in clauses
(i) through (v) above being collectively referred to as "Restricted Payments"),
unless, at the time of such Restricted Payment and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company and its Restricted Subsidiaries would, at the time of
such Restricted Payment and after giving pro forma effect thereto as
if such Restricted Payment had been made at the beginning of the applicable
four-quarter period, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (including Restricted Payments
permitted by the next succeeding paragraph), is less than the sum, without
duplication, of (i) 50% of the cumulative Consolidated Net Income of the
Company for the period (taken as one accounting period) from the date of the
Indenture to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
loss, 100% of such loss), plus (ii) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale since the date of the
Indenture of Equity Interests of the Company or of debt securities of the
Company that have been converted into such Equity Interests (other than
Equity Interests (or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or debt securities that have
been converted into Disqualified Stock), plus (iii) 100% of any dividends or
interest actually received in cash by the Company or a Restricted Subsidiary
that is a Guarantor after the date of the Indenture from an Unrestricted
Subsidiary, a Person that is not a Subsidiary or a Person that is accounted
for on the equity method plus (iv) $5.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock),
PROVIDED, that the amount of any such net cash proceeds used therefor shall be
excluded from clause (c)(ii) of the preceding paragraph to the extent otherwise
included therein; (iii) the defeasance, redemption or repurchase of subordinated
Indebtedness with the net proceeds from an incurrence of Permitted Refinancing
Indebtedness or in exchange for or out of the proceeds of a substantially
concurrent sale (other than to a Subsidiary of the Company) of Equity Interests
of the Company (other than Disqualified Stock) or upon the conversion of
subordinated Indebtedness into Equity Interests of the Company (other than
Disqualified Stock), PROVIDED, that the amount of any such net cash proceeds
used therefor shall be excluded from clause (c)(ii) of the preceding paragraph
to the extent otherwise included therein; (iv) the repurchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
or any Restricted Subsidiary of the Company held by any member of the Company's
(or any of its Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the date of the
Indenture or entered into thereafter in the ordinary course of business;
PROVIDED, HOWEVER, that the aggregate price
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paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $1.0 million, plus the aggregate cash proceeds received by the
Company from any reissuance of Equity Interests by the Company to members of
management of the Company and its Subsidiaries; and no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction. For purposes of the preceding sentence, payment of the option
exercise price of stock options held by members of management by the tender of
shares of the Company's common stock shall not be deemed to constitute a
repurchase, redemption, acquisition or retirement of Equity Interests held by
members of management. A tender of the Company's common stock by members of
management in payment of withholding taxes shall be a repurchase, redemption,
acquisition or retirement of Equity Interests held by members of management only
to the extent that the amount of withholding taxes the Company pays on behalf of
such member of management exceeds the reduction in the Company's state and
federal taxes caused by the exercise of the stock option to which the
withholding payment relates.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated made on or after the date of the Indenture will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such Investments will be deemed to constitute Investments in an amount equal
to the greatest of (x) the net book value of such Investments at the time of
such designation, (y) the fair market value of such Investments at the time of
such designation and (z) the original fair market value of such Investments at
the time they were made. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
may be based upon the Company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable with respect
to (collectively, "incur") any Indebtedness (including Acquired Debt) and that
the Company will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; PROVIDED,
HOWEVER, that the Company or any Subsidiary may incur Indebtedness or the
Company may issue shares of Disqualified Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have
been at least 2.00 to 1.0 if such Indebtedness is incurred or such
Disqualified Stock is issued, after giving pro forma effect to the
incurrence or issuance thereof, on or before October 1, 1997 or at least
2.25 to 1.00 if such Indebtedness is incurred or such Disqualified Stock is
issued after October 1, 1997; and
(ii)if such Indebtedness is subordinated in right of payment to the
Notes, the final stated maturity of such Indebtedness is later than
the final stated maturity of the Notes and the Weighted Average Life to
Maturity of such Indebtedness is greater than the remaining Weighted Average
Life to Maturity of the Notes.
The foregoing limitations will not apply to the incurrence by the Company or
its Subsidiaries of Permitted Indebtedness, which means:
(a) The Notes or any Subsidiary Guarantee;
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(b) the incurrence by the Company of Indebtedness under the Credit
Facility (and guarantees thereof by the Company's Restricted
Subsidiaries) in an aggregate principal amount at any time outstanding not
to exceed the greater of (i) $35.0 million or (ii) the Borrowing Base, less
(y) the aggregate amount of all Net Proceeds of Asset Sales applied to
reduce permanently the commitment with respect to such Indebtedness pursuant
to the covenant described under the caption "Asset Sales" and (z) the
aggregate principal amount of mortgage financing incurred pursuant to clause
(l) below to the extent not repaid from operating cash flow;
(c) any Indebtedness of the Company and its Restricted Subsidiaries
(other than under the Credit Facility and the Notes) in existence on
the date of original issuance of the Notes (after giving effect to the
application of the net proceeds of the sale of the Notes);
(d) the incurrence of Indebtedness by the Company or its Restricted
Subsidiaries pursuant to letters of credit in an aggregate principal
amount not to exceed $1.0 million (such letters of credit being deemed to
have a principal amount equal to the maximum potential liability
thereunder);
(e) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness pursuant to letters of credit or Guarantees for the
benefit of Persons in which the Company or a Restricted Subsidiary may make
Permitted Investments pursuant to clause (d) or clause (e) of the definition
thereof, provided that for purposes of calculating the amount permitted to
be invested pursuant to such clause (d) or (e), any such letter of credit or
Guarantee shall be deemed to represent an Investment in such Person by the
Company or Restricted Subsidiary in the amount of the maximum potential
liability thereunder;
(f) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness which also constitutes an Investment permitted to be
made under the covenant entitled "Restricted Payments";
(g) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage
financing or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of the Company
or such Restricted Subsidiary in an aggregate principal amount not to exceed
$1.0 million at any one time outstanding;
(h) intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries;
(i) the incurrence by the Company or its Restricted Subsidiaries of (i)
Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the Indenture to be outstanding; (ii)
Currency Agreements and (iii) Commodity Agreements;
(j) the incurrence of Permitted Refinancing Indebtedness by the Company
or its Restricted Subsidiaries in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
(k) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness
ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event
shall be deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(l) the incurrence by the Company or its Restricted Subsidiaries of
mortgage financing used to acquire headquarters, manufacturing and/or
warehouse facilities leased by the Company on the Issuance Date (as well as
certain real property adjacent thereto) located in San Jose, California in
an aggregate principal amount not to exceed $7.0 million; and
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(m) the incurrence of Indebtedness by the Company or its Restricted
Subsidiaries (in addition to Indebtedness permitted by any other
clause of this paragraph) in an aggregate principal amount at any time
outstanding not to exceed $5.0 million.
For purposes of the foregoing provision, the cash flow generated by any
Person, business, property or asset acquired during the immediately preceding
four fiscal quarter period (or subsequent to the end thereof and on or prior to
the Calculation Date) shall be determined on the same basis provided in the
definition of Consolidated Cash Flow plus there shall be taken into account, to
the extent permitted by GAAP (and Regulation S-X under the Securities Act and
interpretations thereof by the staff of the Commission) (y)(i) the savings in
cost of sales reasonably expected to result from the acquisition of such Person,
business, property or assets and (ii) other savings in or eliminations of
selling and distribution expenses and general and administrative expenses
reasonably expected to result from the acquisition of such Person, business,
property or assets, minus (z) the incremental expenses that reasonably would be
expected to be included in cost of sales, selling and distribution expenses and
general and administrative expenses as a result of the operation of the acquired
Person, business, property or assets by the Company and its Restricted
Subsidiaries. In addition, for purposes of the Fixed Charge Coverage Ratio test
set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock," Consolidated Cash Flow and Fixed Charges shall be calculated
after giving effect on a pro forma basis for the period of such calculation to
the incurrence of any Indebtedness at any time during the period commencing on
the first day of the four full fiscal quarter period that precedes the
Calculation Date and ending on and including the Calculation Date (and that is
outstanding on the Calculation Date), including without limitation the
incurrence of the Indebtedness giving rise to the need to make such calculation,
in each case as if such incurrence occurred and the proceeds therefrom had been
applied on the first day of such four full fiscal quarter period. Further, for
purposes of the Fixed Charge Coverage Ratio test set forth in the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock,"
Consolidated Interest Expense attributable to any Indebtedness (whether existing
or being incurred) bearing a floating interest rate shall be computed on a pro
forma basis at an assumed rate equal to the higher of (i) the actual rate in
effect on the date of computation under the instrument governing such
Indebtedness, or (ii) the average of the floating rate for such Indebtedness for
the one-year period immediately prior to the date of computation, as if such
assumed rate had been the applicable rate for the entire period.
NEGATIVE PLEDGE
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien, other than Permitted Liens, on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, unless all payments due under the
Indenture and the Notes (including any Subsidiary Guarantee thereof given by
such Restricted Subsidiary) are secured by a Lien on such property that is (i)
equal and ratable with such Lien or (ii) in the case of Indebtedness which is
subordinated in right of payment to the Notes (or such Subsidiary Guarantee),
the Notes (or such Subsidiary Guarantee) are secured by a Lien on such asset
that is senior to such Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (a)(i) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest
or participation in, or measured by, its profits, or (ii) pay any Indebtedness
owed to the Company or any of its Restricted Subsidiaries, (b) make loans or
advances to the Company or any of its Restricted Subsidiaries or (c) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reasons of (i) indebtedness as in effect on the date of the Indenture, (ii) the
Credit Facility as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
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refundings, replacements or refinancings thereof, PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Credit
Facility as in effect on the date of the Indenture, (iii) the Indenture and the
Notes, (iv) applicable law, (v) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, PROVIDED that the Consolidated
Cash Flow of such Person is not taken into account in determining whether such
acquisition was permitted by the terms of the Indenture, (vi) customary
non-assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices, (vii) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (c) above on the property so
acquired, (viii) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (ix) encumbrances or restrictions
arising under Liens created pursuant to clause (g) of the definition of
Permitted Liens, or (x) the Subsidiary Guarantees (if any).
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee; (iii) immediately before and, on a PRO FORMA basis, immediately
after giving effect to such transaction no Default or Event of Default exists;
(iv) the Company or any entity or Person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have Consolidated
Net Worth (immediately after the transaction but prior to any purchase
accounting adjustments resulting from the transaction) equal to or greater than
the Consolidated Net Worth of the Company immediately preceding the transaction
and (B) will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock;"
and (v) the Company shall have delivered to the Trustee an officers' certificate
that items (i) to (iv) have been satisfied and a legal opinion as to certain
legal matters.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person and (b) the
Company delivers to the Trustee (i) with respect to any Affiliate Transaction
involving aggregate payments in excess of $2.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (a) above and such Affiliate
Transaction is approved by a
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majority of the members of the Board of Directors and (ii) with respect to any
Affiliate Transaction involving aggregate payments in excess of $5.0 million, an
opinion as to the fairness to the Company or such Restricted Subsidiary from a
financial point of view issued by an investment banking firm of national
standing; PROVIDED, HOWEVER, that (i) any employment, stock option, stock
purchase or stock grant agreement entered into by the Company or any of its
Restricted Subsidiaries with officers and employees in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, (ii) transactions between or among the Company and/or its Restricted
Subsidiaries; (iii) transactions permitted by the provisions of the Indenture
described above under the covenant "Restricted Payments" or pursuant to clause
(d) or (e) of the definition of "Permitted Investments"; and (iv) loans and
advances to officers and employees of the Company or any of its Restricted
Subsidiaries in the ordinary course of business in an amount not to exceed $1.5
million at any one time outstanding, in each case, shall not be deemed Affiliate
Transactions.
SUBSIDIARY GUARANTEES
As of the date of the Indenture, no Subsidiary of the Company or other
business entity in which the Company owns an interest will act as a Guarantor in
respect of the Notes or will be required to do so under the terms of the
Indenture, and the Company does not presently anticipate that any Subsidiaries
or other business entities will guarantee the Notes following completion of this
offering. However, if in the future a "Restricted Subsidiary" of the Company
exists with assets, businesses, divisions, real property or equipment having an
aggregate fair market value (as determined in good faith by the Board of
Directors) in excess of $100,000, it will be required under the Indenture to
execute and deliver to the Trustee a supplemental indenture in form and
substance reasonably satisfactory to the Trustee pursuant to which such
Restricted Subsidiary shall jointly and severally guarantee all of the Company's
obligations under the Notes (each, a "Subsidiary Guarantee") and to deliver an
opinion of counsel as to certain legal matters, in accordance with the terms of
the Indenture. The Company will furnish financial information with respect to
such Restricted Subsidiary in accordance with the Company's reporting
requirements under the Indenture and the Securities Exchange Act of 1934, as
amended. The obligations of a Guarantor under its Subsidiary Guarantee will be
limited so as not to constitute a fraudulent conveyance under applicable law.
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
Person, whether or not affiliated with such Guarantor (other than the Company or
a Restricted Subsidiary of the Company that is a Guarantor), unless (i) the
Person formed by or surviving any such consolidation or merger (if other than
such Guarantor) assumes all obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under its Subsidiary Guarantee, the Notes and the Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) such Guarantor, or any Person formed by or surviving
any such consolidation or merger, (A) would have Consolidated Net Worth
(immediately after giving effect to such transaction but prior to any purchase
accounting adjustments resulting from the transaction), equal to or greater than
the Consolidated Net Worth of such Guarantor immediately preceding the
transaction and (B) the Company would be permitted by virtue of the Company's
pro forma Fixed Charge Coverage Ratio to incur, immediately after giving effect
to such transaction, at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant entitled "Incurrence
of Indebtedness and Issuance of Preferred Stock."
The Indenture will provide that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition of
all of the capital stock of such Guarantor) or the corporation acquiring the
assets (in the event of a sale or other disposition of all of the assets, by way
of merger, consolidation or otherwise, of such Guarantor) will be released and
relieved of any obligations under its Subsidiary Guarantee; PROVIDED that the
Net Proceeds of such sale or other disposition are applied in accordance with
the applicable provisions of the Indenture. See "Repurchase the Option of
Holders -- Asset Sales."
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The Company presently conducts all of its business directly, other than
business conducted through Portola Packaging Canada Ltd. and Cap Snap (U.K.)
Ltd., each of which is being designated as an "Unrestricted Subsidiary" as of
the date of the Indenture, and the Company's Mexican joint venture, which does
not presently qualify as a "Subsidiary" for purposes of the Indenture. In the
event that the Mexican joint venture becomes a Subsidiary, it is expected that
the resulting entity would be immediately designated as an "Unrestricted
Subsidiary" for purposes of the Indenture. Accordingly, none of the foregoing
entities is acting or is expected to act as a Guarantor of the Notes, and each
of them is not subject to many of the restrictive covenants set forth in the
Indenture. The Company presently intends to conduct its business either
directly, through Unrestricted Subsidiaries or through joint ventures that do
not qualify as Subsidiaries, although the Indenture has been structured to
permit the Company to form Restricted Subsidiaries subject to compliance with
certain requirements, including the execution and delivery by a Restricted
Subsidiary of a Subsidiary Guarantee under the circumstances described above.
REPORTS
Whether or not required by the rules and regulations of the Securities and
Exchange Commission (the "Commission"), so long as any Notes are outstanding,
the Company (and any Guarantor, if applicable) will furnish to the Trustee and
to the Holders of Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its Subsidiaries on a consolidated basis and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all reports that would be required to be filed
with the Commission on Form 8-K if the Company (and/or any Guarantor, if
applicable) were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports, and any other information required by
Section 13 or 15(d) of the Exchange Act, with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
Concurrently with the delivery of the reports required to be delivered
pursuant to the preceding paragraph, the Company shall deliver to the Trustee
and to each Holder annual and quarterly financial statements with appropriate
footnotes of the Company and its Restricted Subsidiaries, all prepared and
presented in a manner substantially consistent with those of the Company and its
Subsidiaries on a consolidated basis required by the preceding paragraph.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal or of premium, if any,
on the Notes; (iii) failure by the Company to make or consummate a Change of
Control Offer or an Asset Sale Offer or to comply with the provisions described
under the covenants "Restricted Payments," "Incurrence of Indebtedness and
Issuance of Preferred Stock" and "Merger, Consolidation or Sale of Assets;" (iv)
failure by the Company or a Restricted Subsidiary for 60 days after notice from
the Trustee or the holders of at least 25% in principal amount of the Notes then
outstanding to comply with any of its other agreements in the Indenture or the
Notes or of any Guarantor to perform any of its other covenants under its
Subsidiary Guarantee; (v) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
Restricted Subsidiary) whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by failure
to pay principal of or premium, if any, or interest on such Indebtedness prior
to the expiration of the grace period provided in such Indebtedness on the date
of such default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness
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under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $2.0 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries to pay final judgments aggregating in excess
of $2.0 million, which judgments are not paid, discharged, bonded or stayed for
a period of 60 days; (vii) any Holder of at least $2.0 million of secured
Indebtedness of the Company or secured Indebtedness of any Restricted
Subsidiary, after a default with respect to such secured Indebtedness, shall
commence proceedings or take any action to retain or collect, in satisfaction of
such secured Indebtedness, assets of the Company or any Restricted Subsidiary
having a fair market value in excess of $2.0 million; (viii) any Subsidiary
Guarantee of a Significant Subsidiary (or group of Subsidiaries that, taken
together, constitutes a Significant Subsidiary) shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be in
full force and effect or any Guarantor that is a Significant Subsidiary (or
group of Guarantors that, taken together, constitute a Significant Subsidiary),
or any Person acting on behalf of any such Guarantor or Guarantors, shall deny
or disaffirm its obligations under its Subsidiary Guarantee; or (ix) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately; provided, that so long as any
Indebtedness permitted to be incurred pursuant to the Credit Facility shall be
outstanding, such acceleration shall not be effective until the earlier of (i)
an acceleration of any such Indebtedness under the Credit Facility or (ii) five
business days after receipt by the Company of written notice of such
acceleration. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Under certain circumstances, the
Holders of at least a majority in principal amount of the outstanding Notes may
rescind any acceleration with respect to the Notes and its consequences. Holders
of the Notes may not enforce the Indenture or the Notes except as provided in
the Indenture. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or a Guarantor, as such, shall have any liability for any obligations of the
Company or such Guarantor under the Notes, the Indenture or a Subsidiary
Guarantee or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its and
the Guarantors' obligations discharged with respect to the outstanding Notes
("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes
to receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (ii) the Company's and the
Guarantors' obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's and the Guarantors' obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time,
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elect to have the obligations of the Company and the Guarantors released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in United States dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the incurrence of Indebtedness all or a portion of which will be
used to defease the Notes pursuant to the Indenture concurrently with such
incurrence) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company or
the Guarantors, if any, with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or any such Guarantors; and (viii) the
Company shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel as to matters of law, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of such Note
for all purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraphs, the Company and the
Trustee may amend or supplement the Indenture or the Notes with the consent of
the Holders of at least a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder of Notes): (i) reduce
the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults, waiver of
certain covenants, supplemental indentures requiring the consent of Holders, or
the rights of Holders of Notes to receive payments of principal of or premium,
if any, or interest on the Notes, (vii) waive a redemption or purchase payment
with respect to any Note (other than a payment required by one of the covenants
described above under the caption "Repurchase at the Option of Holders"), (viii)
impair the right of any Holder to institute suit for the enforcement of any
payment under any Note after the maturity thereof; (ix) release any Guarantor
other than in accordance with the Indenture, or change any Guarantee in any
manner that would adversely affect the Holders, or (x) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for any supplemental indenture required by the covenant described under
the caption "Subsidiary Guarantees," to provide for the assumption of the
Company's obligations to Holders of the Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, the Guarantors or any Affiliate of
the Company, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
The Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of his or her own affairs. Subject to such provisions,
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the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Portola Packaging, Inc., 890 Faulstich Court, San
Jose, California 95112, Attention: Robert Strickland, Chief Financial Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (ii) Indebtedness encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"BORROWING BASE" means, as of any date, an amount equal to the sum of (a)
85% of the Eligible Accounts owned by the Company and its Restricted
Subsidiaries, (b) 60% of the Eligible Inventory owned by the Company and its
Restricted Subsidiaries and (c) 40% of the Eligible PPE owned by the Company and
its Restricted Subsidiaries, PROVIDED, that the Borrowing Base shall be adjusted
to give pro forma effect to the acquisition of any Person, property or assets by
the Company or by any Restricted Subsidiary of the Company that is a Guarantor,
so long as (i) such acquisition is consummated on or prior to the date of
calculation of the Borrowing Base and (ii) in the case of an acquisition of a
Person, such Person (y) becomes a Restricted Subsidiary of the Company and a
Guarantor or (z) is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Restricted Subsidiary of the Company that is a Guarantor.
"CALCULATION DATE" means the date on which the calculation of the Fixed
Charge Coverage Ratio is made.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock, including, without
limitation, with respect to partnerships, partnership interests (whether general
or limited) and any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, such partnership.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the Credit
Agreement or with any domestic commercial bank having capital and surplus in
excess of $500 million, (iv) repurchase obligations with a term of not more than
seven days for
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underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above and (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within six months after the date of acquisition.
"COMMODITY AGREEMENT" means any commodity futures contract, commodity option
or other similar agreement or arrangement entered into by the Company or any
Subsidiary designed to protect the Company or any of its Subsidiaries against
fluctuations in the price of commodities actually used in the ordinary course of
business of the Company and its Subsidiaries.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (a) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing Consolidated
Net Income), plus (b) provision for taxes based on income or profits of such
Person for such period, to the extent such provision for taxes was included in
computing Consolidated Net Income, plus (c) consolidated interest expense of
such Person for such period, whether paid or accrued and whether or not
capitalized (including amortization of original issue discount, non-cash
interest payments and the interest component of any payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred with respect to letters of credit and bankers' acceptance financing and
net payments (if any) pursuant to Hedging Obligations), to the extent such
expense was deducted in computing Consolidated Net Income, plus (d)
depreciation, amortization (including amortization of goodwill and other
intangibles) and other non-cash charges (excluding any such non-cash charge to
the extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person for such period to the extent such depreciation,
amortization and other non-cash charges were deducted in computing Consolidated
Net Income, plus (e) all amounts accrued or paid on or prior to the Issuance
Date in respect of litigation costs incurred by the Company pursuant to the
conduct of its patent infringement litigation with Scholle Corporation, in each
case, on a consolidated basis and determined in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP,
PROVIDED, that (i) the Net Income of any Person that is not a Subsidiary or that
is accounted for by the equity method of accounting shall be excluded, whether
or not distributed to the Company or one of its Subsidiaries, (ii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, (iii) the Net
Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Subsidiaries, and (iv) the cumulative
effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Restricted Subsidiary of such
Person, and (y) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
"CREDIT FACILITY" means that certain Second Amended and Restated Credit and
Security Agreement, dated as of October 2, 1995 by and among the Company and
Heller Financial, Inc., providing for credit
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borrowings, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time
(regardless of whether Heller Financial, Inc. or any Affiliate thereof is a
lender thereunder).
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries against fluctuation in the values of the
currencies of the countries (other than the United States) in which the Company
or its Subsidiaries conduct business.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to a date
that is one year after the date on which the Notes mature.
"ELIGIBLE ACCOUNTS" has the meaning assigned to such term in the Second
Amended and Restated Credit and Security Agreement dated October 2, 1995 between
the Company and Heller Financial, Inc., as in effect on the Issuance Date,
PROVIDED that references to "Agent" in the definition of such term shall include
any agent performing similar functions under a successor credit facility.
"ELIGIBLE INVENTORY" has the meaning assigned to such term in the Second
Amended and Restated Credit and Security Agreement dated October 2, 1995 between
the Company and Heller Financial, Inc., as in effect on the Issuance Date,
PROVIDED that references to "Agent" in the definition of such term shall include
any agent performing similar functions under a successor credit facility.
"ELIGIBLE PPE" has the meaning assigned to such term in the Second Amended
and Restated Credit and Security Agreement dated October 2, 1995 between the
Company and Heller Financial, Inc., as in effect on the Issuance Date, PROVIDED
that references to "Agent" in the definition of such term shall include any
agent performing similar functions under a successor credit facility.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for Capital Stock).
"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(a) consolidated interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued, to the extent such expense was
deducted in computing Consolidated Net Income (including amortization of
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations and net payments (if any) pursuant to
Hedging Obligations), (b) commissions, discounts and other fees and charges
incurred with respect to letters of credit and bankers' acceptances financing,
(c) consolidated interest expense of such person and its Restricted Subsidiaries
that was capitalized during such period, (d) any interest expense on
Indebtedness of another Person that is Guaranteed by such Person or any of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or any of
its Restricted Subsidiaries (other than on the Capital Stock of Unrestricted
Subsidiaries) and (e) preferred stock dividend requirements on any series of
preferred stock of such Person or any of its Restricted Subsidiaries times a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person and its Restricted Subsidiaries, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period (exclusive of amounts attributable to
discontinued operations, as determined in accordance with GAAP, or operations
and businesses disposed of prior to the Calculation Date) to the Fixed Charges
of such Person and its
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Restricted Subsidiaries for such period (exclusive of amounts attributable to
discontinued operations, as determined in accordance with GAAP, or operations
and businesses disposed of prior to the Calculation Date, but only to the extent
that the obligations giving rise to such Fixed Charges would no longer be
obligations contributing to such Person's Fixed Charges subsequent to the
Calculation Date).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness,
"GUARANTOR" means each subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and its respective successors
and assigns.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien on
any asset of such Person (whether or not such indebtedness is assumed by such
Person) and, to the extent not otherwise included, the Guarantee by such Person
of any indebtedness of any other Person.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
Guarantees), letters of credit (or reimbursement agreements in respect thereof),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business), or
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"ISSUANCE DATE" means the closing date for the sale and original issuance of
the Notes.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant
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to sale and leaseback transactions), or (b) the disposition of any securities or
the extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries, and (ii) all extraordinary gains or losses (together with any
related tax provision pertaining to such extraordinary items).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness, other than Indebtedness the incurrence of which also constitutes
an Investment permitted to be made under the covenant entitled "Restricted
Payments" or pursuant to clause (d) or (e) of the definition of "Permitted
Investments"), (b) is directly or indirectly liable (as a guarantor or
otherwise, other than pursuant to a Guarantee which also constitutes an
Investment permitted to be made under the covenant entitled "Restricted
Payments" or pursuant to clause (d) or (e) of the definition of "Permitted
Investments"), or (c) constitutes the lender, other than pursuant to loans that
also constitute an Investment permitted to be made under the covenant entitled
"Restricted Payments" or pursuant to clause (d) or (e) of the definition of
"Permitted Investments"; and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries (other than the capital stock of one or more Unrestricted
Subsidiaries).
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means (a) any Investments in the Company or in a
Restricted Subsidiary of the Company that is a Guarantor; (b) any Investments in
Cash Equivalents; (c) Investments by the Company or any Subsidiary of the
Company in a Person, if as a result of such Investments (i) such Person becomes
a Restricted Subsidiary of the Company and a Guarantor, or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company that is a Guarantor; (d) any Investments
made on or after the Issuance Date in Persons primarily engaged in the packaging
business not to exceed $10.0 million in aggregate amount at any one time
outstanding (measured by the fair market value of such Investments as of the
date made); and (e) Investments in or on behalf of Portola Packaging Canada Ltd.
or any successor thereto in an annual amount not to exceed the lesser of C$1.0
million and U.S.$1.0 million in each of calendar years 1996, 1997 and 1998. For
purposes of calculating the aggregate amount of Permitted Investments permitted
to be outstanding at any one time pursuant to clause (d) of the preceding
sentence, (i) to the extent the consideration for any such Investment consists
of Equity Interests (other than Disqualified Stock) of the Company, the value of
the Equity Interests so issued will be ignored in determining the amount of such
Investment, (ii) the aggregate amount of such Investments made by the Company
and its Restricted Subsidiaries on or after the Issuance Date will be decreased
(but not below zero) by an amount equal to the lesser of (y) the cash return of
capital to the Company or a Restricted Subsidiary with respect to such
Investment that is sold for cash or otherwise liquidated or repaid for cash
(less, in each case, the cost of disposition, including applicable taxes, if
any) and (z) the initial amount of such investment and (iii) in the case of
Investments made by issuing letters of credit (or reimbursement agreements in
respect thereof), the aggregate amount of such Investments will be decreased by
the amount remaining unpaid thereunder upon termination of the Company's (or a
Restricted Subsidiary's) obligations thereunder.
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"PERMITTED LIENS" means (a) purchase money Liens securing trade payables;
(b) Liens existing on the date of the Indenture; (c) Liens on assets of
Unrestricted Subsidiaries or Liens on Equity Interests in Unrestricted
Subsidiaries, in either case, that secure Non-Recourse Debt of Unrestricted
Subsidiaries; (d) Liens securing Indebtedness incurred under the Credit Facility
in an aggregate principal amount at any time outstanding not to exceed the
amount permitted to be incurred under clause (b) of the second paragraph of the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock";
(e) Liens securing Capitalized Lease Obligations or purchase money Indebtedness
otherwise permitted under the Indenture; (f) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; PROVIDED that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (g)
Liens (including extensions and renewals thereof) upon property or assets
(including Equity Interests) acquired after the Closing Date; PROVIDED that (x)
such Lien is created solely for the purpose of securing Indebtedness incurred
(A) to finance the cost (including the cost of improvement or construction ) of
the item of property or assets (including Equity Interests) subject thereto and
such Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the commencement of
full operation of such property or (B) to refinance any Indebtedness previously
so secured, (y) the principal amount of Indebtedness secured by such Lien does
not exceed 100% of such cost and (z) any such Lien shall not
extend to or cover any property or assets other than such item of property or
assets and any improvements of such item (it being expressly understood and
acknowledged that any such Lien may extend to or cover items of property or
assets (and any improvements of such items) owned by an entity whose Equity
Interests are acquired by the Company or a Restricted Subsidiary and which
becomes a Restricted Subsidiary concurrently with such acquisition); and (h) any
Lien securing Acquired Debt created prior to (and not created in connection
with, or in contemplation of) the incurrence of such Indebtedness by the Company
or any Restricted Subsidiary, in each case which Indebtedness is permitted under
the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock;" PROVIDED that any such Lien only extends to the assets that were subject
to such Lien securing such Acquired Debt prior to the related transaction by the
Company or its Restricted Subsidiaries; (i) statutory Liens of landlords,
carriers, warehousemen, mechanics, materialmen and other similar Liens imposed
by law that are incurred in the ordinary course of business for sums not more
than thirty (30) days delinquent or that are being contested in good faith,
provided that a reserve or other appropriate provision shall have been made
therefor; (j) Liens (other than Liens imposed under the Employee Retirement
Income Security Act of 1974, as amended) incurred or deposits made in the
ordinary course of business (including workers' compensation, unemployment
insurance, social security, bonds, leases, and other similar obligations)
(exclusive of obligations for the payment of borrowed money); (k) deposits, in
an aggregate amount not to exceed $500,000, made in the ordinary course of
business to secure liabilities to insurance carriers; and (l) easements,
rights-of-way, restrictions, and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries and not lessening in any
material respect the value of such property being encumbered. At the election of
the Company evidenced by a resolution of the Board of Directors of the Company
at or prior to the time of acquisition of Equity Interests in an entity which
thereupon becomes a Restricted Subsidiary, Permitted Liens created pursuant to
clause (g) of this definition may also extend to after-acquired property of such
Restricted Subsidiary; PROVIDED, that after such election and for as long as a
Lien on such after-acquired property exists, such a Restricted Subsidiary shall
be treated, on a pro forma basis after giving effect to any Investment made in
connection with such acquisition, as an Unrestricted Subsidiary for purposes of
the definition of "Permitted Investments" hereunder.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
PROVIDED that: (1) the principal amount of such indebtedness does not exceed the
principal amount of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses incurred in
connection therewith); (2) such Indebtedness has a
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Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (3) such Indebtedness is subordinated in right
of payment to the Notes on terms at least as favorable to the Holders of Notes
as those, if any, contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (4)
such Indebtedness is incurred by the Company or the Restricted Subsidiary who is
the obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"PUBLIC EQUITY OFFERING" means a bona fide underwritten sale of common stock
of the Company pursuant to a registration statement (other than on Form S-8 or
any other form relating to securities issuable under any benefit plan of the
Company or its Subsidiaries) that is declared effective by the Securities and
Exchange Commission.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the referent Person that is
not an Unrestricted Subsidiary.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X promulgated
pursuant to the Securities Act, as such regulation is in effect on the date
hereof, except that, for purposes of this definition, all references to "10
percent" in such definition shall be deemed to be references to "five percent."
"SUBSIDIARY" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other Subsidiaries of that Person or a combination thereof.
"UNRESTRICTED SUBSIDIARY" means (i) Portola Packaging Canada Ltd., Cap Snap
(U.K.) Ltd. and any other Subsidiary of the Company which at the time of
determination is designated an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary as an Unrestricted Subsidiary so long as (a) neither the Company
nor any Restricted Subsidiary is directly or indirectly liable for any
Indebtedness of such Subsidiary (except as permitted by clause (c) below), (b)
no default with respect to any Indebtedness of such Subsidiary would permit
(upon notice, lapse of time or both) any holder of any Indebtedness of the
Company or a Restricted Subsidiary to declare a default on such Indebtedness of
the Company or a Restricted Subsidiary or cause the payment thereof to be
accelerated or payable prior to the stated maturity of the Notes, if such
declaration of default, acceleration or payment would constitute an Event of
Default under the Indenture and (c) neither the Company nor any Unrestricted
Subsidiary shall have made any loan or advance to or an Investment in such
Subsidiary in an amount that, at the date of designation, could not have been
made in another Person pursuant to the covenant entitled "Restricted Payments"
or pursuant to clause (d) or (e) of the definition of "Permitted Investment" (it
being understood that any such loan, advance or Investment existing at the date
of designation shall be deemed to be a Restricted Payment or a Permitted
Investment under clause (d) or (e) of the definition thereof, as the case may
be, made as of such date). Any such designation by the Board of Directors shall
be evidenced by a resolution of the Board of Directors filed with the Trustee.
The Board of Directors of the Company may designate any Unrestricted Subsidiary
as a Restricted Subsidiary at any time in the same manner as it would designate
a Subsidiary as an Unrestricted Subsidiary, so long as immediately after such
designation as a Restricted Subsidiary, there would be no Default or Event of
Default under the Indenture and the Company could incur $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock."
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (b) the then outstanding principal
amount of such Indebtedness.
76
<PAGE>
UNDERWRITING
Chase Securities, Inc. ("Chase Securities") and Salomon Brothers Inc
(together, the "Underwriters") have each agreed, subject to the terms and
conditions set forth in an underwriting agreement (the "Underwriting Agreement")
between the Company and the Underwriters, to purchase the principal amount of
the Notes set forth opposite its name below. Pursuant to the Underwriting
Agreement, the Underwriters will be obligated to purchase all of the Notes if
they purchase any of them.
<TABLE>
<CAPTION>
UNDERWRITERS PRINCIPAL AMOUNT
- ------------------------------------------------------------------------ ----------------
<S> <C>
Chase Securities, Inc................................................... $ 77,000,000
Salomon Brothers Inc.................................................... 33,000,000
----------------
Total................................................................. $ 110,000,000
----------------
----------------
</TABLE>
The several Underwriters propose to offer the Notes to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of 1.4375% of the
principal amount of the Notes. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of 0.25% of the principal amount of the Notes
to certain other dealers. After the initial public offering, the public price,
concession and discount may be changed.
There is no public market for the Notes and the Company does not intend to
apply for listing of the Notes on any national securities exchange or for
quotation of the Notes through Nasdaq. The Company has been advised by the
Underwriters that, following the completion of the offering of the Notes, the
Underwriters presently intend to make a market in the Notes; however, they are
under no obligation to do so and may discontinue any market making activities at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Notes or that an active public market will develop or, if
developed, will continue. If an active public market does not develop or is not
maintained, the market price and liquidity of the Notes may be adversely
affected.
The Underwriters will not confirm sales of the Notes to any accounts over
which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed that, without the prior written consent of Chase
Securities, it will not for a period of 180 days after the date of this
Prospectus issue or sell debt securities, other than the Notes.
Under Schedule E of the By-Laws ("Schedule E") of the National Association
of Securities Dealers, Inc. (the "NASD") and under the Rules of Fair Practice of
the NASD, when either (i) more than 10% of the proceeds of a public offering of
debt securities is to be paid to members of the NASD or affiliates thereof who
are participating in the distribution of such securities or (ii) a member of the
NASD that participates in the distribution of a public offering of debt
securities is deemed to have a "conflict of interest" (as defined in Schedule E)
with the issuer of such securities, the yield at which the debt securities are
distributed to the public must be no lower than that recommended by a "Qualified
Independent Underwriter" as defined in Section 2(o) of Schedule E. Since June
1988, Chase Bank, an affiliate of Chase Securities, has held the Company's
Senior Subordinated Notes in the principal amount of $10.0 million. The Senior
Subordinated Notes will be repaid in full (together with the applicable
prepayment premium) with the proceeds of this offering. Depending on the amount
of the prepayment premium related to the Senior Subordinated Notes and the
actual expenses incurred by the Company in connection with the offering, Chase
Bank may in the aggregate receive more than 10% of the net proceeds from the
offering of the Notes. In addition, under Schedule E, Chase Securities is deemed
to have a conflict of interest with the Company because Chase Bank owns more
than 10% of the Company's outstanding subordinated debt and because Chase
Capital, an affiliate of Chase Securities, owns more than 10% of the Company's
common equity. Schedule E also provides that, when a member of the NASD that is
an affiliate of an issuer of debt securities participates in the distribution of
a public offering of such securities, the yield at which the debt securities are
distributed to the public must be no lower than that recommended by a Qualified
Independent Underwriter. Chase Securities is presumed to be an
77
<PAGE>
affiliate of the Company because Chase Capital owns more than 10% of the
Company's voting stock. Christopher C. Behrens, a director of the Company, is a
Vice President of Chase Bank and Chase Capital. See "Certain Transactions" and
"Principal Stockholders."
To satisfy the requirements of Schedule E, Salomon Brothers Inc has agreed
to act as the Qualified Independent Underwriter in connection with the offering
of the Notes. The yield on the Notes, when sold to the public at the public
offering price set forth on the cover of the Prospectus, will be no lower than
that recommended by Salomon Brothers Inc. As the Qualified Independent
Underwriter, Salomon Brothers Inc has performed due diligence with respect to
the information contained herein pursuant to the applicable requirements of the
NASD and has participated in the preparation of the Registration Statement of
which this Prospectus is a part.
This Prospectus may be used by Chase Securities in connection with offers
and sales related to market making transactions in the Notes. Chase Securities
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale. Chase Securities
will not confirm such sales to any accounts over which it exercises
discretionary authority without the prior specific written approval of the
customer.
LEGAL MATTERS
The legality of the Notes offered hereby will be passed upon for the Company
by Fenwick & West, Palo Alto, California. Certain legal matters in connection
with the offering of the Notes will be passed upon for the Underwriters by
Latham & Watkins, Washington, D.C.
EXPERTS
The consolidated balance sheets as of August 31, 1993 and 1994 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended August 31, 1994 of the Company
included in this Prospectus have been included herein in reliance on the report,
which includes an explanatory paragraph regarding the adoption of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The combined balance sheet as of August 31, 1993 and the combined statements
of income, retained earnings and cash flows for the year then ended of Nepco
included in this Prospectus have been included herein in reliance on the report,
which includes an explanatory paragraph regarding the adoption of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The combined balance sheet as of March 31, 1995 and the combined statements
of income, retained earnings and changes in Financial Position for the year then
ended of Portola Packaging Canada Ltd. included in this Prospectus have been
included herein in reliance on the report of Coopers & Lybrand (Canada),
Auditors, given on the authority of that firm as experts in accounting and
auditing.
The combined balance sheet as of August 31, 1992 and the combined statements
of income, retained earnings and cash flows for each of the two years then ended
of Nepco included in this Prospectus have been included herein in reliance on
the report of Carbis Walker & Associates LLP, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act
with respect to the Notes offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Notes
offered hereby, reference is made to the Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement and the exhibits thereto may be inspected without
78
<PAGE>
charge at the offices of the Commission at Judiciary Plaza, 450 Fifth Street,
Washington, D.C. 20549, and copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 upon the payment of the fees prescribed by the
Commission.
Under the Indenture, whether or not required by the rules and regulations of
the Commission, the Company is required to provide the Holders of the Notes and
the Trustee with certain reports, including all quarterly and annual financial
information, and management's discussion with respect thereto, that would be
required to be contained in filings with the Commission on Forms 10-Q and 10-K
if the Company were required to file such forms (and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants) and all reports on Form 8-K that would be required to be filed with
the Commission if the Company were required to file such reports. In addition,
the Indenture requires the Company to file a copy of all such information and
reports, and any other information required by Section 13 or 15(d) of the
Exchange Act, with the Commission for public availability (unless the Commission
will not accept such a filing) and to make such information available to
securities analysts and prospective investors upon request. See "Description of
the Notes -- Certain Covenants -- Reports."
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
Report of Independent Accountants....................................................................... F-2
Consolidated Balance Sheets............................................................................. F-3
Consolidated Statements of Operations................................................................... F-4
Consolidated Statements of Cash Flows................................................................... F-5
Consolidated Statements of Shareholders' Equity......................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
NORTHERN ENGINEERING AND PLASTICS CORPORATION
Report of Independent Accountants....................................................................... F-22
Combined Balance Sheets................................................................................. F-24
Combined Statements of Operations....................................................................... F-25
Combined Statements of Retained Earnings................................................................ F-26
Combined Statements of Cash Flows....................................................................... F-27
Notes to Combined Financial Statements.................................................................. F-28
PORTOLA PACKAGING CANADA LTD.
Auditor's Report........................................................................................ F-36
Combined Balance Sheet.................................................................................. F-37
Combined Statement of Retained Earnings................................................................. F-38
Combined Statement of Income............................................................................ F-39
Combined Statement of Changes in Financial Position..................................................... F-40
Notes to Combined Financial Statements.................................................................. F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1993 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended August 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1993 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, effective
September 1, 1993, the Company adopted Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes."
COOPERS & LYBRAND L.L.P.
San Jose, California
November 22, 1994, except as to information
presented in Notes 9 and 16, for which
the date is July 7, 1995.
F-2
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1993 1994
--------- --------- MAY 31,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,187 $ 2,219 $ 505
Short-term investments...................................................... 1,000
Accounts receivable, net of allowance for doubtful accounts of $206, $389
and $536, respectively..................................................... 8,516 15,626 17,046
Inventories................................................................. 4,840 8,441 11,219
Other current assets........................................................ 608 1,736 962
Deferred income taxes....................................................... 326 738 731
--------- --------- -----------
Total current assets.................................................... 15,477 28,760 31,463
Investments................................................................... 1,000
Notes receivable.............................................................. 312 281 454
Property, plant and equipment, net............................................ 23,993 47,147 48,903
Goodwill, net of accumulated amortization of none, $162 and $987,
respectively................................................................. 16,303 15,478
Patents, net of accumulated amortization of $7,100, $8,922 and $10,039,
respectively................................................................. 8,712 9,014 7,979
Covenants not to compete, net of accumulated amortization of $142, $313 and
$896, respectively........................................................... 158 3,631 3,048
Debt financing costs, net of accumulated amortization of $377, $79 and $439,
respectively................................................................. 1,584 2,392 1,949
Other assets.................................................................. 660 2,292.... 3,148
--------- --------- -----------
Total assets............................................................ $ 50,896 $ 110,820 $ 112,422
--------- --------- -----------
--------- --------- -----------
LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK
AND OTHER SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 2,904 $ 3,179 $ 3,851
Accounts payable............................................................ 2,685 7,511 5,601
Accrued liabilities......................................................... 2,372 6,312 6,484
Accrued interest............................................................ 407 709 751
--------- --------- -----------
Total current liabilities............................................... 8,368 17,711 16,687
Long-term debt, less current portion.......................................... 35,236 74,288 78,484
Other long term obligations................................................... 100 3,126 2,531
Deferred income taxes......................................................... 1,995 7,247 5,813
--------- --------- -----------
Total liabilities....................................................... 45,699 102,372 103,515
--------- --------- -----------
Commitments and contingencies (Note 9)
Redeemable warrants to purchase Class A common stock.......................... 2,600 3,055 3,512
--------- --------- -----------
Common stock and other shareholders' equity:
Class A convertible common stock of $.001 par value:
Authorized: 2,503,000 shares;
Issued and outstanding: none
Class B, Series 1, common stock of $.001 par value:
Authorized: 17,714,285 shares;
Issued and outstanding: 7,869,290 shares in 1993, 8,679,290 shares in 1994
and 8,772,332 shares in 1995............................................. 542 9 9
Class B, Series 2, convertible common stock of $.001 par value:
Authorized: 2,571,430 shares;
Issued and outstanding: 2,571,430 shares in 1993, 1994 and 1995........... 3,795 2 2
Additional paid-in capital.................................................... 7,351 7,418
Notes receivable from shareholders............................................ (287) (286) (271)
Accumulated deficit........................................................... (1,453) (1,683) (1,763)
--------- --------- -----------
Total common stock and other shareholders' equity....................... 2,597 5,393 5,395
--------- --------- -----------
Total liabilities, redeemable warrants, common stock and other
shareholders' equity................................................... $ 50,896 $ 110,820 $ 112,422
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
YEAR ENDED AUGUST 31,
------------------------------------------- ----------------------------
1992 1993 1994 1994 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales...................................... $ 52,152 $ 58,286 $ 70,284 $ 44,624 $ 86,462
Cost of sales.............................. 37,676 42,679 51,670 32,983 65,674
------------- ------------- ------------- ------------- -------------
Gross profit........................... 14,476 15,607 18,614 11,641 20,788
------------- ------------- ------------- ------------- -------------
Selling, general and administrative........ 6,046 7,207 8,821 5,526 9,973
Research and development................... 915 820 764 521 943
Amortization of intangibles................ 1,421 1,400 2,025 1,054 2,547
------------- ------------- ------------- ------------- -------------
8,382 9,427 11,610 7,101 13,463
------------- ------------- ------------- ------------- -------------
Income from operations................. 6,094 6,180 7,004 4,540 7,325
------------- ------------- ------------- ------------- -------------
Other (income) expense:
Interest income.......................... (53) (84) (97) (15) (104)
Interest expense......................... 3,200 3,128 3,996 2,479 6,235
Amortization of financing costs.......... 365 479 433 309 360
Financing costs.......................... 604 -- 625 -- --
Other (income) expense, net.............. 28 (62) (148) (6) (60)
------------- ------------- ------------- ------------- -------------
4,144 3,461 4,809 2,767 6,431
------------- ------------- ------------- ------------- -------------
Income before extraordinary item,
cumulative effect of change in
accounting principle and income
taxes................................. 1,950 2,719 2,195 1,773 894
Income taxes............................... 1,287 1,521 1,095 773 517
------------- ------------- ------------- ------------- -------------
Income before extraordinary item and
cumulative effect of change in
accounting principle.................. 663 1,198 1,100 1,000 377
Extraordinary item -- extinguishment of
debt, net of income tax benefit of $592
and $539 (Note 7)......................... 889 790
Cumulative effect of change in accounting
principle (Note 13)....................... 85 85
------------- ------------- ------------- ------------- -------------
Net income............................. $ 663 $ 309 $ 225 $ 915 $ 377
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Earnings per share:
Income before extraordinary item and
cumulative effect of change in
accounting principle.................... $0.05 $0.10 $0.08 $0.08 $0.03
Cumulative effect of change in accounting
principle............................... $0.01 $0.01
Net income............................... $0.05 $0.02 $0.02 $0.07 $0.03
Number of shares used in computing per
share amount.............................. 13,019,028 12,554,053 13,366,327 12,598,173 13,911,667
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED AUGUST 31, ENDED MAY 31,
---------------------------------- --------------------
1992 1993 1994 1994 1995
---------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 663 $ 309 $ 225 $ 915 $ 377
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 5,920 6,845 8,357 5,271 9,089
Extraordinary loss on extinguishment of debt.............. 1,481 1,329
Deferred income taxes..................................... 601 369 (320) (1,005) (1,426)
Loss (gain) on property and equipment dispositions........ (13) 8
Provision for losses on accounts receivable............... 5 39 16 33 147
Tax benefit of option exercise.............................. 700
Changes in working capital:
Accounts receivable..................................... (1,446) (1,143) (1,526) (1,213) (1,567)
Inventories............................................. 269 (685) (908) 217 (2,778)
Other current assets.................................... 5 (331) 600 229 774
Accounts payable........................................ 2,042 (1,165) (712) 881 (1,910)
Accrued liabilities..................................... (197) 309 1,987 2,127 172
Accrued interest........................................ (150) 32 303 (5) 42
---------- ---------- ---------- --------- ---------
Net cash provided by operating activities............. 7,699 6,768 9,351 7,450 2,920
---------- ---------- ---------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment.................. (8,089) (9,564) (6,159) (4,212) (8,247)
Proceeds from sale of property, plant and equipment......... 95 49 47 45 287
Payments for Acquisition net of cash acquired
of $173.................................................... (30,774)
Issuance of notes receivable................................ (412) (75) (173)
Repayment of notes receivable............................... 70 13 31 26
(Increase) decrease in other assets......................... (611) 458 (1,563) (1,317) (856)
---------- ---------- ---------- --------- ---------
Net cash used in investing activities................. (8,947) (9,119) (38,418) (5,458) (8,989)
---------- ---------- ---------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in bank overdraft....................... 349 (349)
Borrowings under long-term debt arrangements................ 42,110 46,787 54,214 5,953 14,322
Repayments under long-term debt arrangements................ (42,290) (39,771) (24,619) (8,460) (9,454)
Payment of loan fees........................................ (2,410) (2,472)
Warrants.................................................... 210
Sales of common stock....................................... 110 843 3,025 67
Repayment of notes receivable from shareholders............. 1 1 15
Repurchase of common stock.................................. (1,722)
Repayment of covenants...................................... (50) (50) (50) (50) (595)
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) financing activities... 229 3,538 30,099 (2,556) 4,355
---------- ---------- ---------- --------- ---------
Increase (decrease) in cash and cash equivalents...... (1,019) 1,187 1,032 (564) (1,714)
Cash and cash equivalents at beginning of period.............. 1,019 1,187 1,187 2,219
---------- ---------- ---------- --------- ---------
Cash and cash equivalents at end of period.................... $ -- $ 1,187 $ 2,219 $ 623 $ 505
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(INFORMATION FOR THE NINE MONTHS ENDED MAY 31, 1995 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------
CLASS B
----------------------------------------------
SERIES 1 SERIES 2 ADDITIONAL NOTES
---------------------- ---------------------- PAID-IN RECEIVABLE FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT
----------- --------- ----------- --------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, August 31, 1991.......... 7,122 $ 610 2,571 $ 3,795 $ (41) $ (1,618)
Issuance of Class B, Series 1
common stock at $1.00 and $2.50
per share....................... 42 98
Exercise of stock options at $.61
per share....................... 19 12
Advance to shareholder........... (250)
Increase in value of stock
purchase warrants............... (800)
Net income....................... 663
----- --------- ----- --------- ------ -------------
Balances, August 31, 1992.......... 7,183 720 2,571 3,795 (291) (1,755)
Issuance of Class B, Series 1
common stock at $1.00 per
share........................... 11 11
Exercise of stock options at
$0.61 per share................. 1,363 832
Repurchase of Class B, Series 1,
common stock at $2.50 per
share........................... (688) (1,721)
Tax benefit of stock option
exercise........................ 700
Payment of note receivable from
shareholders.................... 4
Increase in value of stock
purchase warrants............... (7)
Net income....................... 309
----- --------- ----- --------- ------ -------------
Balances, August 31, 1993.......... 7,869 542 2,571 3,795 (287) (1,453)
Issuance of Class B common stock
at $3.75 per share.............. 800 3,000
Exercise of stock options at
$2.50 per share................. 10 25
Reincorporation into a Delaware
corporation..................... (3,558) (3,793) $ 7,351
Payment of note receivable from
shareholders.................... 1
Increase in value of stock
purchase warrants............... (455)
Net income....................... 225
----- --------- ----- --------- ----------- ------ -------------
Balances, August 31, 1994.......... 8,679 9 2,571 2 7,351 (286) (1,683)
Exercise of stock options at
$0.61 and $1.00 per share....... 93 67
Payment of note receivable from
shareholders.................... 15
Increase in value of stock
purchase warrants............... (457)
Net income....................... 377
----- --------- ----- --------- ----------- ------ -------------
Balances, May 31, 1995............. 8,772 $ 9 2,571 $ 2 $ 7,418 $ (271) $ (1,763)
----- --------- ----- --------- ----------- ------ -------------
----- --------- ----- --------- ----------- ------ -------------
<CAPTION>
TOTAL COMMON
STOCK AND
OTHER
SHAREHOLDERS'
EQUITY
--------------
<S> <C>
Balances, August 31, 1991.......... $ 2,746
Issuance of Class B, Series 1
common stock at $1.00 and $2.50
per share....................... 98
Exercise of stock options at $.61
per share....................... 12
Advance to shareholder........... (250)
Increase in value of stock
purchase warrants............... (800)
Net income....................... 663
-------
Balances, August 31, 1992.......... 2,469
Issuance of Class B, Series 1
common stock at $1.00 per
share........................... 11
Exercise of stock options at
$0.61 per share................. 832
Repurchase of Class B, Series 1,
common stock at $2.50 per
share........................... (1,721)
Tax benefit of stock option
exercise........................ 700
Payment of note receivable from
shareholders.................... 4
Increase in value of stock
purchase warrants............... (7)
Net income....................... 309
-------
Balances, August 31, 1993.......... 2,597
Issuance of Class B common stock
at $3.75 per share.............. 3,000
Exercise of stock options at
$2.50 per share................. 25
Reincorporation into a Delaware
corporation..................... --
Payment of note receivable from
shareholders.................... 1
Increase in value of stock
purchase warrants............... (455)
Net income....................... 225
-------
Balances, August 31, 1994.......... 5,393
Exercise of stock options at
$0.61 and $1.00 per share....... 67
Payment of note receivable from
shareholders.................... 15
Increase in value of stock
purchase warrants............... (457)
Net income....................... 377
-------
Balances, May 31, 1995............. $ 5,395
-------
-------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION:
Portola Packaging, Inc. and Subsidiaries, formerly Cap Snap Co., (the
"Company") operates in one industry segment. The Company designs, manufactures
and markets proprietary tamper evident plastic closures for containers for the
food and beverage industries and related capping and filling equipment used on
bottling lines by the food and beverage industries.
During fiscal year 1994, the Company reincorporated in the state of
Delaware.
2. ACQUISITION:
Effective June 30, 1994, the Company acquired all of the outstanding stock
of Northern Engineering & Plastics Corp. and Northern Engineering and Plastics
Corp. -- West (collectively "Nepco"). Concurrent with the acquisition of Nepco,
the Company also purchased, from parties related to the owners of Nepco, certain
real property located in Sumter, South Carolina. Collectively, these purchases
are referred to as the Acquisition.
Nepco designs, manufactures and markets tamper evident plastic closures in
markets similar to those served by the Company. The real property acquired in
Sumter, South Carolina is a location where Nepco maintains substantial
operations.
The Acquisition has been accounted for as a purchase and the results of
operations of Nepco have been consolidated with those of the Company commencing
July 1, 1994. The total purchase price, including cash consideration, repayment
of existing indebtedness and non-compete agreements, amounted to $43,650. Cash
consideration paid by the Company for the Acquisition was $30,947. In addition,
the Company assumed, and subsequently paid, Nepco indebtedness of $9,058 and
entered into a non-compete agreement under which an intangible asset and a
liability totaling $3,645 were recorded at the present value of the payments
(using a discount rate of 11%).
The Company financed its payments for the Acquisition and Nepco indebtedness
which aggregated $40,005, through a series of new term senior and revolving
notes as described in Note 7.
The cash consideration paid by the Company comprised the following:
<TABLE>
<S> <C>
Cash paid to the former shareholders of Nepco............. $ 28,500
Cash paid for the purchase of real property............... 1,872
Cash paid for certain closing costs....................... 575
---------
$ 30,947
---------
---------
</TABLE>
Cash consideration for the Acquisition was allocated as follows:
<TABLE>
<S> <C>
Total consideration paid.................................. $ 30,947
Fair value of net assets acquired......................... 14,482
---------
Goodwill................................................ $ 16,465
---------
---------
</TABLE>
In connection with the Acquisition, the Company entered into non-compete and
bonus agreements with the former owners of Nepco. The non-compete and bonus
agreements have a five-year term with annual payments of $800 and $200,
respectively.
F-7
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
2. ACQUISITION: (CONTINUED)
Pro forma financial statements as if the Acquisition had taken place at the
beginning of each period presented is as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1993 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Sales................................................................ $ 89,143 $ 101,415
Gross profit......................................................... 23,230 22,246
Operating income..................................................... 4,517 5,175
Net income (loss).................................................... (2,295) (2,908)
Net income (loss) per share.......................................... $ (0.18) $ (0.22)
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries, Cap Snap, Inc., Cap Snap Seal,
Inc., Cap Snap Co. and Northern Plastics Corporation -- Puerto Rico. All
material intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION:
The Company recognizes revenue upon product shipment.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
INVESTMENT:
The Company has an investment in a certificate of deposit maturing in
September 1995. The investment is carried at cost, which approximates market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost and depreciated on the
straight-line basis over estimated useful lives, which range from three to
thirty-five years. Leasehold improvements are amortized on a straight-line basis
over their useful lives or the lease term, whichever is shorter (generally five
to ten years). When assets are disposed of, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or losses are
included in the results of operations.
JOINT VENTURES:
The Company maintains joint venture and license arrangements in Canada, the
United Kingdom and Mexico. These investments, which are included in other
assets, are accounted for by the equity method. The Company's total investment
and related income has not been significant and is not separately presented.
F-8
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTANGIBLE ASSETS:
Patents and covenants not-to-compete are valued at cost and are amortized on
a straight-line basis over the lesser of their remaining useful or contractual
lives (generally five to thirteen years). Goodwill was recorded in connection
with the Acquisition (Note 2) and is amortized on a straight-line basis over
fifteen years.
DEBT FINANCING COSTS:
Debt financing costs are amortized using the interest method over the term
of the related loans.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are charged to operations as incurred.
INCOME TAXES:
Effective September 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of such assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse (See
Note 13).
Prior to September 1, 1993, the Company accounted for income taxes pursuant
to Accounting Principles Board Opinion No. 11, Income Taxes. Prior year
financial statements have not been restated.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
investments and trade receivables. The Company's cash and cash equivalents and
investments are concentrated in three United States banks at August 31, 1994. At
times, such deposits may be in excess of insured limits. Management believes
that the financial institutions which hold the Company's investments are
financially sound and, accordingly, minimal credit risk exists with respect to
these financial instruments.
The Company's products are principally sold to entities in the food and
beverage industries in the United States. Ongoing credit evaluations of customer
financial condition are performed and collateral is generally not required. The
Company maintains reserves for potential credit losses which, on a historical
basis, have not been significant.
EARNINGS PER SHARE:
Earnings per common share and common equivalent share are computed by
dividing income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. The number of common
shares is increased by the number of shares issuable on the exercise of options
and warrants when the market price of the common stock exceeds the exercise
price of the options and warrants. This increase in the number of common shares
is reduced by the number of common shares which are assumed to have been
purchased with the proceeds from the exercise of the options and warrants; these
purchases are assumed to have been made at the average price of the common stock
during that part of the period when the market price of the common stock exceeds
the exercise price of the options and warrants.
F-9
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CARRYING VALUE OF LONG-LIVED ASSETS:
The Company reduces the carrying value of long-lived assets to the extent to
which future undiscounted operating cash flows are not sufficient to recover the
carrying value of such assets over their remaining estimated useful lives.
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"), which requires the Company to review for
impairment long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This statement
requires impairment losses to be recognized for assets that do not have
realizable carrying values. SFAS 121 will be effective for the Company's fiscal
year 1997. The Company has studied the implications of the statement, and, based
on its initial evaluation, does not expect it to have a material impact on the
Company's financial condition or results of operations, at this time.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation. These reclassifications had no
effect on net income.
INTERIM RESULTS (UNAUDITED)
The accompanying Consolidated Balance Sheet at May 31, 1995, the
Consolidated Statement of Operations and Consolidated Statement of Cash Flows
for the nine months ended May 31, 1994 and 1995, and the Consolidated Statement
of Shareholders' Equity for the nine months ended May 31, 1995 are unaudited. In
the opinion of management, these statements have been prepared on the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the results of the interim periods. The data disclosed in these
notes to the consolidated financial statements for these periods are unaudited.
4. SUPPLEMENTAL CASH FLOW DISCLOSURES:
The Company paid $725, $74 and $835 in income taxes during the years ended
August 31, 1992, 1993 and 1994, respectively.
The Company paid $3,183, $3,257 and $3,693 in interest during the years
ended August 31, 1992, 1993 and 1994, respectively.
During fiscal year 1993, the Company received 688 shares of its Class B
common stock from an officer and director in settlement of stock options
exercised and related federal and state withholding tax obligations.
During fiscal year 1994, the Company reincorporated into a Delaware
corporation, which resulted in a reclassification of $7,351 Class B common stock
into additional paid-in capital.
During fiscal year 1994, the Company acquired $8 of equipment under capital
lease.
During fiscal year 1994, the Company adopted SFAS No. 109 under which fixed
assets and patents were grossed up $1,322 and $1,906, respectively, consistent
with the gross-up of the deferred tax liability.
F-10
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
4. SUPPLEMENTAL CASH FLOW DISCLOSURES: (CONTINUED)
During fiscal 1994, the Company wrote off fully depreciated property, plant
and equipment totaling $3,233.
5. INVENTORIES:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1993 1994
--------- --------- MAY 31,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................................. $ 2,404 $ 3,695 $ 5,027
Work in process............................................ 471 1,667 2,962
Finished goods............................................. 1,965 3,079 3,230
--------- --------- -----------
$ 4,840 $ 8,441 $ 11,219
--------- --------- -----------
--------- --------- -----------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1993 1994
---------- ---------- MAY 31,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Building and land...................................... $ 2,947 $ 11,989 $ 11,634
Machinery and equipment................................ 37,617 53,831 61,729
Leasehold improvements................................. 2,010 2,472 2,904
---------- ---------- -----------
42,574 68,292 76,267
Less accumulated depreciation and amortization....... (18,581) (21,145) (27,364)
---------- ---------- -----------
$ 23,993 $ 47,147 $ 48,903
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Depreciation charged to operations was $3,901, $4,946 and $5,903 for the
years ended August 31, 1992, 1993 and 1994, respectively.
7. DEBT:
CURRENT PORTION OF LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1993 1994
--------- --------- MAY 31,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Term Loan Note A........................................... $ 3,000 $ 3,750
Term Loan Note............................................. $ 2,750
Deed of Trust Note......................................... 13
Equipment Note............................................. 85 85
Development Note........................................... 15 16
Capital Lease Obligations.................................. 64
Unsecured Notes............................................ 141 15
--------- --------- -----------
$ 2,904 $ 3,179 $ 3,851
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-11
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1993 1994
--------- --------- MAY 31,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Term Loan Note A......................................... $ 27,000 $ 24,000
Term Loan Note B......................................... 30,000 30,000
Term Loan Note........................................... $ 14,094
Senior Subordinated Notes................................ 10,000 10,000 10,000
Revolving Loan Note...................................... 4,778 7,116 14,388
Capex Loan Note.......................................... 6,245
Deed of Trust Note....................................... 104
Equipment Note........................................... 63
Development Note......................................... 109 96
Unsecured Notes.......................................... 15
--------- --------- -----------
$ 35,236 $ 74,288 $ 78,484
--------- --------- -----------
--------- --------- -----------
</TABLE>
TERM LOAN NOTES:
The Term Loan Note outstanding at August 31, 1993 was repaid from proceeds
of a new term note (Term Loan Note A) of $30,000 issued in June 1994. Principal
payments for Term Loan Note A are due quarterly in the amount of $750 through
July 1, 1995, then increasing every fifth quarter to $1,000, $1,500, $2,000 and
$2,250 with the final payment on July 1, 1999. Interest is payable monthly based
on London Interbank Offered Rate (LIBOR) or the highest prime rate of selected
reference banks, plus an applicable margin. At August 31 1994, the interest rate
was 7.75% (LIBOR, plus 3.25%).
The Term Loan Note B of $30,000 was issued in June 1994. Principal payments
are due quarterly beginning on October 1, 1999 and ending on July 1, 2001 in the
amount of $3,750. Interest is payable monthly based on LIBOR or the highest
prime rate of selected reference banks, plus an applicable margin. At August 31,
1994, the interest rate was 8.25% (LIBOR, plus 3.75%).
The Term Loan Notes are subject to a Credit and Security Agreement in which
the Company has granted a security interest in all of its assets. The Agreement
requires the Company to maintain certain specified coverage levels on interest
expense and total debt service requirements. It also prohibits cash dividends
and principal payments on subordinated debt, and limits new indebtedness and
investments. The Agreement calls for mandatory prepayments after December 1995
based upon financial calculations including excess cash flow.
SENIOR SUBORDINATED NOTES:
The previous Senior Subordinated Notes were extinguished and replaced as of
June 30, 1994 by new Senior Subordinated Notes. This transaction was recorded as
an early extinguishment of debt as discussed under Extraordinary Items below.
The interest rate is 13.5% payable quarterly, and the full principal amount is
due on June 30, 2002. The Senior Subordinated Notes may be prepaid in part or in
full at any time, plus a premium based on yield differentials if the prepayment
is prior to June 30, 1996. On June 30, 1996, the lenders have the option to
convert the loan to a floating rate, at either LIBOR or prime, plus an
applicable margin.
F-12
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
REVOLVING LOAN NOTE:
The revolving credit facility is maintained to finance working capital
requirements, and expires on July 1, 2001. The facility provides for borrowings
based on eligible accounts receivable and inventories up to the commitment
amount of $18,000. No amounts are due to be repaid until July 1, 2001, subject
to collateral requirements; however the Company may prepay any portion thereof
without penalty. Interest is payable monthly based on the highest prime rate of
selected reference banks, plus an applicable margin. At August 31, 1994 the
interest rate was 7.75% (LIBOR rate plus 3.25%) for approximately $5.0 million
and 9.5% (prime rate plus 1.75%) for approximately $2.1 million. The Revolving
Loan Note is subject to the same Credit and Security Agreement as the Term Loan
Notes discussed above.
CAPEX LOAN NOTE:
In October 1992, the Company obtained a capital expenditure facility (the
Capex Loan Note). The Company may draw on this facility to fund 80% of eligible
capital expenditures up until its repayment, in aggregate not to exceed $10,000.
Through August 31, 1993, the Company had drawn $6,245 against the facility. The
Capex Loan Note is subject to the same Credit and Security Agreement as the
prior Term Loan Note. Interest expense options are the same as the prior Term
Loan Note, and the interest rate was 6.7% (LIBOR, plus 3.5%) at August 31, 1993.
In June 1994, the Company repaid the Capex Loan Note in connection with the
Company's debt refinancing as discussed under Extraordinary Items below.
DEED OF TRUST NOTE:
The Deed of Trust Note is payable in annual installments of $13 plus accrued
interest of 9% on the unpaid principal balance. The note was repaid during
fiscal 1994.
EQUIPMENT NOTE:
The Equipment Note was obtained to acquire machinery and equipment for the
Company's Sumter, South Carolina facility. Interest is payable monthly based on
a variable rate established as 67% of the prime lending rate (7.25% at August
31,1994). Principal is payable monthly in the amount of $7 with the final
installment due on June 1, 1996. The Equipment Note is collateralized by the
machinery and equipment that was purchased with the proceeds.
DEVELOPMENT NOTE:
The Company has a Development Note with the Bi-State Regional Commission.
The Development Note bears interest at 4% with the final monthly payment due in
May 2001.
F-13
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
CAPITAL LEASE OBLIGATIONS:
The Company has a plant located in New Castle, Pennsylvania under a lease
agreement with the local Industrial Development Authority. Lease payments are
payable monthly in the amount of $5 through September 1994. In addition, the
Company acquired certain equipment under noncancelable capital leases. The
balance sheet includes the following items held under capital lease obligations.
<TABLE>
<CAPTION>
AUGUST 31,
1994
-------------
<S> <C>
Building..................................................... $ 438
Land......................................................... 65
Equipment.................................................... 64
-----
567
Less accumulated amortization.............................. (6)
-----
$ 561
-----
-----
</TABLE>
UNSECURED NOTES:
The Unsecured Notes, with interest at 12%, are due in varying quarterly
installments through December 1994.
EXTRAORDINARY ITEMS:
In connection with the Company's early extinguishment of debt in June 1994,
certain costs, consisting primarily of loan fees of approximately $1,329, were
expensed. These transactions have been reported as an extraordinary item in the
statement of operations, net of an income tax benefit of approximately $539.
In connection with the Company's October 1992 refinancing activities,
certain costs, consisting of advisory fees of approximately $373, were incurred
by the Company related to the early extinguishment of debt. In addition to these
amounts, loan fees related to the extinguished debt of approximately $694, and
the unamortized portion of the warrant discount attributed to the original
$10,000 Senior Subordinated Notes of approximately $414 were expensed in
connection with this early extinguishment of debt. These transactions have been
reported as an extraordinary item in the statement of operations, net of an
income tax benefit of approximately $592.
FINANCING COSTS:
In connection with debt offerings which were commenced but not completed,
the Company
expensed costs amounting to $604 and $625 in fiscal 1992 and 1994, respectively.
F-14
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
AGGREGATE MATURITIES OF LONG-TERM DEBT:
The aggregate maturities of long-term debt as of August 31, 1994 are as
follows:
<TABLE>
<CAPTION>
UNSECURED
TERM LOAN NOTES AND
NOTES AND SENIOR EQUIPMENT NOTE CAPITAL
FISCAL YEARS REVOLVING SUBORDINATED AND DEVELOPMENT LEASE
ENDED AUGUST 31, LOANS NOTES NOTE OBLIGATIONS TOTAL
- ---------------------------------- ----------- ------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1995.............................. $ 3,000 $ 100 $ 79 $ 3,179
1996.............................. 4,000 78 4,078
1997.............................. 6,000 15 6,015
1998.............................. 8,000 15 8,015
1999.............................. 9,000 15 9,015
Thereafter........................ 37,116 $ 10,000 49 47,165
----------- ------------- ----- ----------- ---------
$ 67,116 $ 10,000 $ 272 $ 79 $ 77,467
----------- ------------- ----- ----------- ---------
----------- ------------- ----- ----------- ---------
</TABLE>
8. OTHER LONG-TERM OBLIGATIONS:
The Company has incurred certain liabilities in connection with agreements
entered into with former owners, which include provisions for guaranteed bonuses
and covenants not-to-compete, as follows:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------- MAY 31,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Covenants under Nepco acquisition................................ $ 3,694 $ 3,231
Other covenants.................................................. $ 150 100 50
--------- --------- ---------
Total obligations.............................................. 150 3,794 3,281
Current portion.................................................. 50 668 750
--------- --------- ---------
$ 100 $ 3,126 $ 2,531
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company leases certain office, production and warehouse facilities under
operating lease agreements expiring on various dates through 2007. Under the
terms of the facilities' leases, the Company is responsible for common area
maintenance expenses which include taxes, insurance, repairs and other operating
costs.
At August 31, 1994 future minimum rental commitments under agreements with
terms in excess of twelve months were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS LEASED FROM THREE
ENDED AUGUST 31, SISTERS RANCH OTHER LEASES TOTAL
- ---------------------------------------------- -------------------- ------------- ---------
<S> <C> <C> <C>
1995.......................................... $ 670 $ 930 $ 1,600
1996.......................................... 250 957 1,207
1997.......................................... 849 849
1998.......................................... 470 470
1999.......................................... 450 450
Thereafter.................................... 3,601 3,601
------- ------------- ---------
$ 920 $ 7,257 $ 8,177
------- ------------- ---------
------- ------------- ---------
</TABLE>
F-15
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Base rent expense for the years ended August 31, 1992, 1993 and 1994 totaled
$880, $886 and $1,395, respectively, of which $716, $619 and $696 was paid to
Three Sisters for the years ended August 31, 1992, 1993 and 1994, respectively.
The Company is engaged in litigation related to alleged patent infringement
on five-gallon non-spill caps. On February 1995, a jury rendered an adverse
verdict against the Company which would hold the Company liable for damages of
$0.01 per cap. The jury verdict, which has not yet been entered by the court,
would render the Company liable for approximately $800; however, the Company
intends to appeal the verdict if so entered. The financial statements as of
August 31, 1994 include an accrual of approximately $480, which approximates the
aforementioned $0.01 damages per cap on five-gallon non-spill caps sold through
August 31, 1994. An additional $320 was reserved during the nine month period
ended May 31, 1995 (unaudited). Non-spill caps produced after May 1995 may be
subject to treble damages of $0.03 per cap. Management believes that a material
adverse result is not probable.
The Company is also a party to a number of other lawsuits and claims arising
out of the normal course of business. Management does not believe the final
disposition of these matters will have a material adverse affect on the
financial position, results of operations or cash flows of the Company.
The financial statements include costs related to the litigation, including
accruals for damages and attorney costs, of $77, $410 and $603 for the years
ended August 1992, 1993 and 1994, respectively, and $475 and $1,166 for the nine
months ended May 31, 1994 and 1995 (unaudited), respectively.
10. REDEEMABLE WARRANTS:
The Company has outstanding two warrants to purchase an aggregate of 2,493
shares of its Class A common stock which are held by the Company's subordinated
and senior lenders. A warrant to purchase 2,053 shares of common stock is
exercisable, in whole or in part, through June 30, 2004 at sixty and two-third
cents per share, subject to certain antidilution provisions. After June 30,
1999, if the Company has not completed an initial public offering of its common
stock, the lender may require the Company to purchase the warrant at a price
equal to the higher of the current fair value per share of the Company's common
stock or an amount computed under an earnings formula in the warrant agreement.
The purchase obligation may be suspended under certain circumstances including
restrictions on such payments as specified in the senior and subordinated credit
agreements. After December 31, 2001, the Company has the right to repurchase the
warrant at a price equal to the higher of the fair value per share of the
Company's common stock or an amount computed under an earnings formula in the
warrant agreement. The earnings formula is based on income before interest,
taxes and debt outstanding to calculate an estimated value per share. At August
31, 1993 and 1994 and May 31, 1995 the accretion was determined using the fair
market value of the common stock.
A second warrant to purchase 440 shares of Class A common stock may be
exercised at any time until its expiration on June 30, 2004. After August 1,
2001, if the Company has not completed an initial public offering of its common
stock, the senior lender may require the Company to purchase its warrant at a
price equal to the higher of the current fair value price per share of the
Company's common stock or the net book value per share as computed under a
valuation formula set forth in the warrant. The purchase obligation may be
suspended under certain circumstances including restriction on such payments as
specified in the senior and subordinated credit agreements. After December 31,
1997, the Company has the right to repurchase the warrant at a price equal to
the higher of the current fair value per share of the Company's common stock or
the net book value per share. The earnings formula is
F-16
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
10. REDEEMABLE WARRANTS: (CONTINUED)
based on earnings before interest and taxes and debt outstanding to calculate a
estimated value per share. At August 31, 1993 and 1994 and May 31, 1995, the put
value was determined using the current fair value of the common stock. The
earnings formula is based on income before interest, taxes and debt outstanding
to calculate an estimated value per share. At August 31, 1993 and 1994 and May
31, 1995 the accretion was determined using the fair value of the common stock.
Both warrants were amended and restated in connection with the Company's
June 1994 refinancing activities, which resulted in no change to their carrying
value.
Generally accepted accounting principles require that an adjustment of the
warrant from the value assigned at the date of issuance to the highest
redemption price of the warrant be accreted over the period of the warrant. At
August 31, 1994, the estimated redemption value of the warrants exceeds their
carrying value. The difference is being charged to accumulated deficit over the
period from the date of issuance to the earliest put date of the warrants.
Charges to accumulated deficit related to the warrants amounted to $800, $7 and
$455 during the years ended August 31, 1992, 1993 and 1994, respectively.
11. SHAREHOLDERS' EQUITY:
REINCORPORATION:
In June 1994, the Company was reincorporated from California to Delaware, at
which time the Company's outstanding common stock was exchanged on a one share
of the California corporation common stock for one share of the Delaware
corporation common stock.
CLASS A AND B COMMON STOCK:
The Company's Class B common stock, consists of 20,286 authorized shares,
and is divided into two series: Series 1, consisting of 17,715 authorized
shares, and Series 2, consisting of 2,571 authorized shares. As of August 31,
1994, there were 8,679 shares of Class B, Series 1 common shares issued and
outstanding, and 2,571 shares of Class B, Series 2 common shares issued and
outstanding.
The Company has authorized 2,503 shares of Class A common stock for the
warrants described in Note 10. Class A common shareholders are not entitled to
elect members of the Board of Directors. In the event of an aggregate public
offering exceeding $10,000, the Class A and Class B, Series 2 common stock is
automatically converted into Class B, Series 1 common stock, based on the
appropriate conversion formula. The Class B common shareholders have the right
to elect members of the Board of Directors, with the holders of Series 1 having
one vote per share, and the holders of Series 2 having a number of votes equal
to the number of shares into which the Series 2 shares are convertible into
Series 1 shares.
In the event of liquidation or dissolution in which the value of the Company
is less than $1.75 per share of common stock, the holders of Class B, Series 2
will receive 60% of the proceeds until they have received $1.75 per share. All
other amounts available for distribution shall be distributed to the Class B,
Series 1 and Series 2 holders pro rata based on the number of shares
outstanding. If the value of the Company is greater than or equal to $1.75 per
share, the holders of all classes of common stock are entitled to a pro rata
distribution based on the number of shares outstanding.
The Company is required to reserve shares of Class B, Series 1 stock for the
conversion of Class A and Class B, Series 2 into Class B, Series 1 common stock.
F-17
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
DIRECTORS' AGREEMENTS:
The Company entered into Directors' Agreements dated September 1989 and
amended in January 1990, with certain directors who are also shareholders of the
Company. The agreements provided that the Company is to pay up to $22 per year
to each individual for serving as a director, and granted each director the
right to purchase up to 22 shares per year of Class B, Series 1 common stock at
$1.00 per share. In October 1990, the Company entered into a Director's
Agreement with another director, who is also a shareholder of the Company. The
agreement provided that the Company pay up to $22 per year for services as a
director. During the years ended August 31, 1993 and 1994, respectively, the
Company paid $81 and $82 in director fees and related expenses, and issued 11
and 42 shares of Class B, Series 1 common stock pursuant to the stock purchase
agreements.
STOCK OPTION PLAN:
The Company has reserved 2,866 and 1,000 shares of Class B, Series 1 common
stock for issuance under the Company's 1988 and 1994 nonqualified stock option
plans, respectively. Under both plans, stock options are granted by the Board of
Directors at prices not less than 85% of fair market value of the Company's
stock at the date of grant.
<TABLE>
<CAPTION>
OUTSTANDING
-------------------- AVAILABLE
STOCK OPTIONS SHARES AMOUNT EXERCISABLE FOR GRANT
- ---------------------------------------- OPTION PRICE PER --------- --------- ------------- -----------
SHARE
----------------
(NOT THOUSANDS)
<S> <C> <C> <C> <C> <C>
August 31, 1991......................... $0.61-$1.75 2,404 $ 1,806 1,983 330
Granted............................... $1.75-$2.50 70 175 (70)
Became exercisable.................... 204
Exercised............................. $0.61 (19) (12) (19)
Canceled.............................. $0.61 (40) (24) (20) 40
--------- --------- ------ -----
August 31, 1992......................... $0.61-$2.50 2,415 1,945 2,148 300
Granted............................... $2.50 160 400 (160)
Became exercisable.................... 131
Exercised............................. $0.61 (1,363) (832) (1,363)
--------- --------- ------ -----
August 31, 1993......................... $0.61-$2.50 1,212 1,513 916 140
Granted............................... $2.50 70 175 (70)
Became exercisable.................... 123
Exercised............................. $2.50 (10) (25) (10)
Canceled.............................. $1.75 (25) (44) (16) 25
--------- --------- ------ -----
August 31, 1994......................... $.061-$2.50 1,247 1,619 1,013 95
Reservation of shares................. 1,000
Granted............................... $3.75-$4.00 230 898 (230)
Became exercisable.................... 64
Exercised............................. $0.61-$1.00 (93) (69) (93)
--------- --------- ------ -----
May 31, 1995............................ $0.61-$4.00 1,384 $ 2,448 984 865
--------- --------- ------ -----
--------- --------- ------ -----
</TABLE>
F-18
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of May 31, 1995 and for the nine
months ended May 31, 1995 and 1994 is unaudited)
(in thousands)
12. EMPLOYEE BENEFIT PLANS:
PROFIT SHARING PLAN:
The Company has a Profit Sharing Plan that covers substantially all
employees. Contributions are at the discretion of the Board of Directors and
amounted to $228, $245 and $221 for the years ended August 31, 1992, 1993 and
1994, respectively.
RETIREMENT AND SAVINGS PLAN:
The Company also maintains a Retirement and Savings Plan which is a defined
contribution plan covering all full-time employees of the Company who are age
twenty-one or older, have completed one year of service and are not covered by a
collective bargaining agreement. Expense in connection with the Retirement and
Savings Plan amounted to $11 for the year ended August 31, 1992 and $6 for the
years ended August 31, 1994 and 1993.
13. INCOME TAXES:
The provision for income taxes for the three years ended August 31, 1994
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................ $ 501 $ 721 $ 1,013
State.............................................. 185 260 344
--------- --------- ---------
686 981 1,357
Deferred:
Federal............................................ 452 456 (176)
State.............................................. 149 84 (86)
--------- --------- ---------
601 540 (262)
--------- --------- ---------
$ 1,287 $ 1,521 $ 1,095
--------- --------- ---------
--------- --------- ---------
</TABLE>
As discussed in Note 3, Summary of Significant Accounting Policies, the
Company adopted SFAS No. 109 effective September 1, 1993. Prior years' financial
statements have not been restated to apply the provisions of SFAS No. 109;
however, prior year business combinations have been restated as of September 1,
1993 under SFAS No. 109.
A reconciliation setting forth the differences between the effective tax
rate of the Company and the U.S. federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate................................. 34.0% 34.0% 34.0%
State taxes............................................ 9.6 8.4 6.6
Nondeductible amortization and depreciation............ 20.6 13.3 7.4
Other.................................................. 1.8 0.2 1.9
--- --- ---
Effective income tax rate............................ 66.0% 55.9% 49.9%
--- --- ---
--- --- ---
</TABLE>
F-19
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
13. INCOME TAXES: (CONTINUED)
The components of the net deferred tax liabilities as of August 31, 1994:
<TABLE>
<S> <C>
Deferred tax assets:
Federal credits.......................................... $ 651
State tax credits........................................ 360
Accounts receivable...................................... 158
Other liabilities........................................ 580
---------
Total assets........................................... 1,749
---------
Deferred tax liabilities:
Property, plant and equipment............................ 7,227
Intangible assets........................................ 1,031
---------
Total liabilities...................................... 8,258
---------
Net deferred tax liabilities........................... $ 6,509
---------
---------
</TABLE>
14. EXPORT SALES:
Export sales to unaffiliated customers were $5,240, $6,674 and $8,071 for
the years ended August 31, 1992, 1993 and 1994, respectively. Export sales are
predominantly to North America, the Middle East and the Pacific Rim. During
fiscal 1994, export sales to North America, the Middle East and the Pacific Rim
accounted for 44%, 18% and 8% of total export sales, respectively.
15. RELATED PARTY TRANSACTIONS:
The Company paid $63, $183 and $162 for the years ended August 31, 1992,
1993 and 1994, respectively, to a company for prototype mold development and
mold engineering work. A director of the aforementioned company is also an
officer and director of the Company.
The Company paid $267 and $451 and $420 for the years ended August 31, 1992,
1993 and 1994, respectively, to a law firm for legal services rendered. A
general partner of the aforementioned firm is also a director of the Company.
The Company paid $42 for the years ended August 31, 1992, 1993 and 1994 to a
corporation for management fees. A shareholder of the aforementioned corporation
is also a director and significant shareholder of the Company.
The Company paid $350 and $211 for the years ended August 31, 1992 and 1993,
respectively, to a partnership for investment banking finder fees and expenses,
a partner of which is a director of the Company.
The Company had debt outstanding with a financial institution of $10,000 at
August 31, 1993 and 1994 on which the Company paid interest of approximately
$1,350 for the last two fiscal years. The Company also paid $401, $220 and $258
for the years ended August 31, 1992, 1993 and 1994, respectively, to the same
financial institution for ongoing corporate advice and in connection with the
refinancing in fiscal years 1993 and 1994.
The Company has amounts receivable from non-consolidated affiliated
companies which amounted to $28, $156 and $421 as of August 31, 1992, 1993 and
1994, respectively.
F-20
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE
MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED)
(IN THOUSANDS)
15. RELATED PARTY TRANSACTIONS: (CONTINUED)
The Company leases certain office, production and warehouse facilities from
Three Sisters Ranch Enterprises (Three Sisters). Certain general partners in
Three Sisters are also minority shareholders in the Company. The Company owed
$488, $156 and $15 at August 31, 1992, 1993 and 1994, respectively, in the form
of unsecured notes due to Three Sisters.
16. SUBSEQUENT EVENTS (UNAUDITED):
Effective June 15, 1995, the Company completed the acquisition of Alberta
Plastic Industries Ltd., B.C. Plastic Industries Ltd., the remaining 50%
interest of the Company's joint venture, Canada Cap Snap Corporation, and
certain production equipment of Allwest Industries Incorporation. This
acquisition is to be recorded as a purchase. The total purchase price amounted
to approximately $14.6 million Canadian dollars (approximately $10.6 million
United States dollars).
In addition, the Company entered into a separate non-compete with a former
shareholder of the acquired entities in the amount of $4.0 million Canadian
(approximately $2.9 million United States dollars).
In June 1995, the Company sold 450 shares (200 of the shares were sold to a
related party) of its common stock for a total of $1,800.
In September 1995, the Company completed the acquisition of Cap Snap (U.K.)
Ltd. (the remaining 50% of the Company's joint venture). This acquisition is to
be recorded as a purchase. The total purchase price amounted to 900 pounds
sterling (approximately $1.4 million U.S. dollars).
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Northern Engineering and Plastics Corporation:
We have audited the accompanying combined balance sheet of the Northern
Engineering and Plastics Corporation as of August 31, 1993, and the related
combined statements of operations, retained earnings, 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. The combined financial statements of
the Northern Engineering and Plastics Corporation as of August 31, 1992 and for
the years ended August 31, 1992 and 1991 were audited by other auditors, whose
report dated November 20, 1992, expressed an unqualified opinion on those
statements.
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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Northern Engineering and Plastics Corporation at August 31, 1993, and the
combined results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 10 to the combined financial statements, in 1993 the
Company changed its method of accounting for income taxes.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
June 1, 1994, except as to the information
presented in Note 11, for which
the date is June 30, 1994
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors
Northern Engineering and Plastics Corp.
New Castle, Pennsylvania
We have audited the accompanying consolidated balance sheets of Northern
Engineering and Plastics Corp. and subsidiary as of August 31, 1992 and 1991,
and the related consolidated statements of income, retained earnings, and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements 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 Northern
Engineering and Plastics Corp. and subsidiary as of August 31, 1992 and 1991,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Carbis Walker & Associates LLP
Certified Public Accountants
New Castle, Pennsylvania
November 20, 1992
F-23
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1992 1993
--------- --------- JUNE 30,
1994
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 812 $ 918 $ 173
Accounts and notes receivable, net of allowance for doubtful accounts of $34
in 1992, $43 in 1993 and $54 in 1994....................................... 3,442 4,826 5,360
Due from related parties.................................................... 179 296 240
Inventories................................................................. 2,352 1,987 2,450
Prepaid income taxes........................................................ 150 227 24
Deferred income taxes....................................................... -- 44 86
Deposits on equipment....................................................... 228 354 1,153
Other current assets........................................................ 210 74 273
--------- --------- -----------
Total current assets.................................................... 7,373 8,726 9,759
Certificate of deposit........................................................ 1,000 1,000 1,000
Notes receivable, less current portion........................................ 70 70 70
Notes receivable from related parties......................................... 142 142 142
Patents, net of accumulated amortization of $118 in 1992, $122 in 1993 and
$127 in 1994................................................................. 50 63 88
Property and equipment, net................................................... 10,621 13,011 16,956
--------- --------- -----------
Total assets............................................................ $ 19,256 $ 23,012 $ 28,015
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit.................................................... $ -- $ 1,500 $ 1,500
Current portion of long-term debt and note payable.......................... 503 532 507
Accounts payable............................................................ 1,781 4,199 5,538
Payable to related parties.................................................. 346 329 302
Accrued expenses............................................................ 369 235 288
--------- --------- -----------
Total current liabilities............................................... 2,999 6,795 8,135
Long-term debt, less current portion.......................................... 3,157 2,947 7,616
Notes payable to related party................................................ 202 173 --
Deferred income taxes......................................................... 1,028 885 566
--------- --------- -----------
Total liabilities....................................................... 7,386 10,800 16,317
Commitments and contingencies (Note 8)
Shareholders' equity:
Northern Engineering and Plastics Corporation, Inc. 7% non-cumulative
preferred stock, $40 par value. Authorized: 100,000 shares; issued and
outstanding: 1,045 shares.................................................. 42 42 42
Northern Engineering and Plastics Corporation, Inc. common stock, $1 par
value, authorized: 100,000 shares, issued and outstanding: 27,610 shares... 28 28 28
NEPCO-West common stock, $10 par value authorized: 100,000 shares; issued
and outstanding: 1,000 shares.............................................. 10 10 10
Additional paid-in capital.................................................. 2,161 2,161 2,161
Retained earnings........................................................... 9,629 9,971 9,457
--------- --------- -----------
Total shareholders' equity.............................................. 11,870 12,212 11,698
--------- --------- -----------
Total liabilities and shareholders' equity............................ $ 19,256 $ 23,012 $ 28,015
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1991 1992 1993
--------- --------- --------- TEN MONTHS
ENDED JUNE 30,
---------------
1994
---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales........................................................ $ 27,026 $ 25,308 $ 30,857 $ 31,131
Cost of sales................................................ 21,216 19,514 22,922 27,313
--------- --------- --------- ---------------
Gross profit............................................. 5,810 5,794 7,935 3,818
--------- --------- --------- ---------------
Selling and warehousing...................................... 2,264 2,739 4,819 2,446
Administrative............................................... 2,409 2,689 2,969 1,835
Research and development..................................... 64 86 282 142
Amortization of patents...................................... 2 4 5 5
--------- --------- --------- ---------------
4,739 5,518 8,075 4,428
--------- --------- --------- ---------------
Income (loss) from operations............................ 1,071 276 (140) (610)
--------- --------- --------- ---------------
Other income (expense):
Interest income............................................ 237 206 134 50
Interest expense........................................... (346) (308) (320) (430)
Other, net................................................. 585 455 702 236
--------- --------- --------- ---------------
476 353 516 (144)
--------- --------- --------- ---------------
Income (loss) before income taxes, extraordinary item and
cumulative effect of change in accounting principle..... 1,547 629 376 (754)
--------- --------- --------- ---------------
Income taxes (benefit)....................................... 606 289 138 (240)
--------- --------- --------- ---------------
Income (loss) before extraordinary item and the
cumulative effect of change in accounting principle..... 941 340 238 (514)
--------- --------- --------- ---------------
Extraordinary item, reduction of income taxes arising from
carryforward of prior year's net operating loss............. 28 -- -- --
Cumulative effect of change in accounting principle.......... -- -- 104 --
--------- --------- --------- ---------------
Net income (loss)........................................ $ 969 $ 340 $ 342 $ (514)
--------- --------- --------- ---------------
--------- --------- --------- ---------------
Income (loss) per common share:
Before extraordinary item and cumulative effect of change
in accounting principle................................... $ 32.89 $ 11.88 $ 8.32 $ (17.97)
Extraordinary item......................................... 0.98 -- -- --
Cumulative effect of change in accounting principle........ -- -- 3.63 --
--------- --------- --------- ---------------
Net income (loss) per common share....................... $ 33.87 $ 11.88 $ 11.95 $ (17.97)
--------- --------- --------- ---------------
--------- --------- --------- ---------------
Number of shares used in computing per share amount.......... 28,610 28,610 28,610 28,610
--------- --------- --------- ---------------
--------- --------- --------- ---------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
COMBINED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED AUGUST 31, ENDED JUNE 30,
------------------------------- ---------------
1991 1992 1993 1994
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Balance, beginning............................................... $ 8,423 $ 9,292 $ 9,629 $ 9,971
Net income (loss)................................................ 969 340 342 (514)
Dividend on common stock, $3.62 per share........................ (100) -- -- --
7% preferred stock dividend...................................... -- (3) -- --
--------- --------- --------- -------
Balance, ending.................................................. $ 9,292 $ 9,629 $ 9,971 $ 9,457
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
-------------------------------
1991 1992 1993
--------- --------- --------- TEN MONTHS
ENDED JUNE 30,
1994
---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 969 $ 340 $ 342 $ (514)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 985 1,129 1,290 1,449
Cumulative effect of change in accounting principle....... -- -- (104) --
Provision for losses on accounts receivable............... 160 50 150 11
Gain on sale of equipment and securities.................. (38) (196) (88) 1
Deferred income taxes..................................... 45 85 (35) (361)
Changes in assets and liabilities:
Accounts and notes receivable........................... 143 268 (1,534) (545)
Due from related parties................................ 43 (105) (117) 56
Inventories............................................. (52) (638) 365 (463)
Accounts payable........................................ 111 (23) 2,418 1,339
Payable to related parties.............................. (108) 203 (46) (27)
Accrued expenses........................................ 335 (440) (134) 53
Other................................................... 38 (253) (126) (795)
--------- --------- --------- -------
Net cash provided by operating activities..................... 2,631 420 2,381 204
--------- --------- --------- -------
Cash flows from investing activities:
Additions to property and equipment......................... (1,608) (2,457) (3,678) (5,391)
Proceeds from sale of equipment and securities.............. 152 315 102 1
Purchase of patents......................................... (18) (7) (18) (30)
Other....................................................... 4 2 --
--------- --------- --------- -------
Net cash used in investing activities......................... (1,470) (2,147) (3,594) (5,420)
--------- --------- --------- -------
Cash flows from financing activities:
Net borrowings from line of credit.......................... -- -- 1,500 --
Proceeds from long-term borrowings.......................... -- 579 221 4,669
Payments on long-term borrowings............................ (419) (424) (402) (198)
Cash dividend on common stock............................... (100) -- -- --
Cash dividend on preferred stock............................ -- (3) -- --
--------- --------- --------- -------
Net cash provided by (used in) financing activities........... (519) 152 1,319 4,471
--------- --------- --------- -------
Increase (decrease) in cash and cash equivalents.............. 642 (1,575) 106 (745)
Cash and cash equivalents, beginning of period................ 1,745 2,387 812 918
--------- --------- --------- -------
Cash and cash equivalents, end of period...................... $ 2,387 $ 812 $ 918 173
--------- --------- --------- -------
--------- --------- --------- -------
Supplemental disclosures:
Income taxes paid........................................... $ 198 $ 644 $ 289 $ 52
--------- --------- --------- -------
--------- --------- --------- -------
Interest paid............................................... $ 347 $ 312 $ 311 $ 380
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Northern Engineering and Plastics Corporation (NEPCO) and Northern
Engineering and Plastics Corporation -- West (NEPCO-West) design, manufacture
and market tamper-evident plastic closures principally for the dairy and juice
industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION:
The accompanying combined financial statements include the accounts of NEPCO
and its subsidiaries and NEPCO-West, all of which are under common management
(hereinafter the combined entity is referred to as the Company). Following is a
summary of the organizations included in the combined financial statements:
<TABLE>
<CAPTION>
ENTITY RELATIONSHIP
- ------------------------------------- -------------------------------------------------------
<S> <C>
NEPCO Parent Corporation
Northern Plastics Corporation Wholly-owned subsidiary of NEPCO
Northern Plastics Corporation -- Wholly-owned subsidiary of NEPCO
Puerto Rico
NEPCO-West 100% owned by marital trust for which NEPCO
shareholders are trustees
</TABLE>
The shareholders of NEPCO hold a 51% interest in Molinero Tool and Die,
Incorporated, an organization that produces and fabricates equipment that is
used to place the plastic closures onto the bottles. This equipment is purchased
by the Company and provided to customers as an incentive to purchase the
Company's closures. Also, the shareholders of NEPCO are each 50% partners in CHR
Enterprises, a partnership that purchases and retains real estate for investment
purposes. These two organizations are not included in the combined financial
statements.
All significant intercompany transactions and balances have been eliminated
in combination.
INVENTORIES:
All inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for raw materials, supplies
and manufactured finished goods inventories at NEPCO, which comprise
approximately 86% and 85% of all inventories at August 31, 1992 and 1993,
respectively. The first-in, first-out method is used for all remaining
inventories.
PROPERTY AND EQUIPMENT:
Property and equipment, including significant betterments, are stated at
cost less accumulated depreciation and amortization. Depreciation charges are
computed over the estimated useful lives, ranging from 5 to 45 years, using
accelerated methods of depreciation. Maintenance and repairs are charged to
expense as incurred. When assets are retired, sold or disposed of, the costs and
related accumulated depreciation or amortization are removed from the accounts
and the resulting gains or losses are included in the results of operations.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are charged to operations as incurred.
PATENTS:
Patents are valued at cost and amortized over their estimated lives on a
straight line basis.
REVENUE RECOGNITION:
The Company recognizes revenue upon product shipment.
F-28
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH EQUIVALENTS:
Investments and cash held in money market accounts with original maturities
of three months or less are considered to be cash equivalents.
DEFERRED INCOME TAXES:
Certain items of income and expense are included in one reporting period for
financial accounting purposes and another for income tax purposes. Deferred
income taxes are provided to recognize the future tax effects of these temporary
differences.
NET INCOME PER COMMON SHARE:
Net income per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during each period. For the
purposes of calculating the combined weighted average number of common shares,
the common shares of NEPCO and NEPCO-West are combined and treated as if they
are equivalent in class.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of risk consist principally of cash and cash equivalents and
trade receivables. The Company's cash and cash equivalents are invested in
institutions that are insured by the FDIC. NEPCO's cash held at a FDIC insured
institution at August 31, 1993 exceeded the FDIC insured limits. Management
believes that the financial institutions which hold the Company's cash and cash
equivalents are financially sound and, accordingly, minimal credit risk exists
with respect to these assets.
The Company's products are principally sold to entities in the dairy and
juice industries in the United States. Ongoing credit evaluations of customer's
financial condition are performed and collateral is generally not required. The
Company maintains reserves for potential credit losses which, on a historical
basis, have not been significant. In 1993, one customer accounted for
approximately 11% of total sales made by the Company.
INTERIM RESULTS (UNAUDITED)
The accompanying Combined Balance Sheet at June 30,1994, the Combined
Statement of Operations and Combined Statement of Cash Flows for the ten months
ended June 30, 1994 and the Combined Statement of Retained Earnings for the ten
months ended June 30, 1994 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the results of the
interim periods. The data disclosed in these notes to the consolidated financial
statements for these periods are unaudited.
<TABLE>
<CAPTION>
TEN MONTHS ENDED TWO MONTHS ENDED
JUNE 30, 1993 AUGUST 31, 1994
------------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................................ $ 24,523 $ 7,245
Gross Profit............................................................ 6,334 1,961
</TABLE>
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation. These reclassifications had no
effect on net income.
F-29
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1992 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............................................................................... $ 1,081 $ 1,053
Raw materials and supplies................................................................... 1,271 934
--------- ---------
$ 2,352 $ 1,987
--------- ---------
--------- ---------
</TABLE>
If the FIFO inventory valuation method had been used exclusively, inventories
would have been $318,000 and $255,000 higher at August 31, 1992 and 1993,
respectively.
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1992 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements................................................................. $ 734 $ 734
Buildings and improvements................................................................. 4,941 4,978
Machinery and equipment.................................................................... 13,450 16,812
--------- ---------
19,125 22,524
Less accumulated depreciation and amortization............................................. 8,504 9,513
--------- ---------
$ 10,621 $ 13,011
--------- ---------
--------- ---------
</TABLE>
Depreciation charged to operations was $983,000, $1,125,000 and $1,285,000
in 1991, 1992 and 1993, respectively.
5. REVOLVING LINE OF CREDIT:
NEPCO has a revolving line of credit of $1,500,000 which has been fully
drawn down at August 31, 1993. The line of credit is due within one year and
bears interest at a fixed rate of 6%. The line of credit is collateralized by
accounts receivables and other assets of NEPCO. See Note 6, Subsequent Revolving
Debt Facility, for the amended terms of the line of credit.
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1992 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Mortgage note................................................................................ $ 2,582 $ 2,349
Equipment note............................................................................... 317 233
Notes payable................................................................................ 579 800
Capital lease obligation..................................................................... 118 63
Other........................................................................................ 64 34
--------- ---------
3,660 3,479
Less current portion......................................................................... 503 532
--------- ---------
$ 3,157 $ 2,947
--------- ---------
--------- ---------
</TABLE>
MORTGAGE NOTE:
The mortgage note was obtained to acquire the plant that NEPCO-West
utilizes. Principal payments are due in monthly installments of $20,000 with the
final payment due on September 1, 1995. Interest is
F-30
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION: (CONTINUED)
payable monthly on the outstanding balance at a fixed rate of 7.5% on the first
$1,000,000 and 9% on the remaining balance. The note is collateralized by the
land, building and equipment at the plant location acquired with the mortgage.
In addition, NEPCO has assigned as collateral a $1,000,000 certificate of
deposit to the bank related to this mortgage which is reflected in the balance
sheet as a non-current asset.
EQUIPMENT NOTE:
The equipment note was obtained to acquire machinery and equipment for
NEPCO's Sumter, South Carolina facility. Interest is payable monthly based on a
variable rate established as 67% of the prime lending rate (6% at August 31,
1993). Principal is payable monthly in the amount of $7,000 with the final
installment due on June 1, 1996. The note is collateralized by the machinery and
equipment that was purchased with the proceeds. In addition, the shareholders of
NEPCO have personally guaranteed this note.
NOTES PAYABLE:
The notes were issued in conjunction with the opening of the Fort Worth,
Texas plant operated by NEPCO. The total note is structured into two separate
payment structures: payments of $11,000 are payable monthly on $579,000 of the
notes through 1997 and payments of $3,000 are payable monthly on $221,000 of the
notes through 2000. Interest is payable monthly at a fixed rate of 6%. The note
is collateralized by inventory and equipment located in the Fort Worth, Texas
plant.
CAPITAL LEASE OBLIGATION:
NEPCO acquired a plant located in New Castle, Pennsylvania under a lease
agreement with the local Industrial Development Authority. Lease payments are
payable monthly in the amount of $5,000 through September 1994. The combined
balance sheet includes the following items held under capital lease obligations:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1992 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Building.......................................................................................... $ 900 $ 900
Land.............................................................................................. 65 65
--------- ---------
965 965
Less accumulated amortization..................................................................... 396 432
--------- ---------
$ 569 $ 533
--------- ---------
--------- ---------
</TABLE>
Under the provisions of the lease agreement, NEPCO will make minimum annual
payments of $61,000 in 1994 and $5,000 in 1995. Interest on the future minimum
payments will be $3,000. At August 31, 1993, $58,000 is included as a current
liability.
SUBSEQUENT REVOLVING DEBT FACILITY:
On December 28, 1993 the Company obtained a $9,000,000 revolving credit
facility that was used to finance additional plant construction and refinance
substantially all previous debt obligations. The credit is structured into three
facilities:
-$1,500,000 revolving credit facility that matures December 28, 1994 with an
option to renew the facility on a year-to-year basis, at the option of the
bank; interest is payable monthly at the prime lending rate.
F-31
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION: (CONTINUED)
-$3,700,000 revolving facility that matures on December 31, 1994 at which
time the outstanding balance converts to a term loan payable monthly
through December 1, 2000, with interest payable at a fixed rate of 7.75%
through December 31, 1998, and at either a variable rate based on prime
plus 0.5% or a fixed rate based on the current two year Treasury Bill rate
plus 3%, selected by the Company through maturity. The facility provides
for a penalty, based on the interest rates at the time of the prepayment,
if the debt is prepaid prior to December 31, 1998.
-$3,800,000 revolving facility that matures on December 31, 1994 at which
time the outstanding balance converts to a term loan payable monthly
through December 1, 2000, with interest payable at a fixed rate of 7.75%
through December 31, 1998, and at either a variable rate based on prime
plus 0.5% or a fixed rate based on the current two year Treasury Bill rate
plus 3%, selected by the Company through maturity. The facility provides
for a penalty, based on the interest rates at the time of the prepayment,
if the debt is prepaid prior to December 31, 1998.
The credit facilities are collateralized by all assets of the Company.
The credit facilities have various covenants, including the maintenance of
minimum levels of net worth, certain financial ratios, and restrictions on the
amount of capital expenditures, additional indebtedness and dividends with which
NEPCO and NEPCO-West must comply on a combined basis. These covenants became
applicable in January 1994. At February 28, 1994, approximately $1,000,000 was
available to pay dividends on preferred or common stock.
The following table provides the maturities that are due on the long-term
debt outstanding at August 31, 1993:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1994.............................................................................................. $ 532
1995.............................................................................................. 460
1996.............................................................................................. 2,089
1997.............................................................................................. 156
1998.............................................................................................. 169
Thereafter........................................................................................ 73
-------
$ 3,479
-------
-------
</TABLE>
7. RELATED PARTY TRANSACTIONS:
Included in the current due from related parties at August 31, 1992 and 1993
is $125,000 and $241,000, respectively, that was advanced to the shareholders'
of NEPCO at various times over the past several years. The advances were made
for various purposes, and do not have a note or a payment schedule attached to
the advance. The shareholders intend to repay the advances over the next 12
months, thus the amounts have been classified as current assets at August 31,
1993.
Also included in the current due from related parties for all periods
presented is $45,000, which is owed to NEPCO by CHR Partnership. The advances
resulted from NEPCO providing funds to CHR Partnership to make certain
improvements to a building held as an investment by CHR Partnership. There are
no payment terms, however, the shareholders of NEPCO intend to repay the amount
due within the next 12 months, thus the receivable is classified as a current
asset at August 31, 1993.
Non-current note receivable from related parties for all periods presented
is $142,000, which is owed to NEPCO by the marital trust that is the sole
shareholder of NEPCO-West. These funds were advanced to the marital trust to be
used for investment purposes. This receivable is supported by a note with
interest payable annually at 11%.
F-32
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
Included in the current due to related parties at August 31, 1992 and 1993
is $29,000 which is owed to the Estate of Clem Crisci. At August 31, 1992 and
1993, $202,000 and $173,000, respectively, are included in non-current due to
related parties. Amounts are paid in annual installments of $29,000 with
interest calculated at a fixed rate of 6% through June 30, 2000.
Certain equipment that is used in placing the Company's closures onto the
customers' containers is custom made for, and given to, certain customers by the
Company. The Company utilizes Molinero Tool and Die, Incorporated (Molinero) to
fabricate a significant portion of this equipment. Total purchases from Molinero
in 1991, 1992 and 1993 were $202,000, $358,000 and $1,036,000, respectively. At
August 31, 1992 and 1993, $191,000 and $246,000 is included in payable to
related parties, respectively, to Molinero.
Molinero shares part of NEPCO's New Castle, PA plant and pays NEPCO a
monthly rental payment under a lease agreement. For the years ended August 31,
1991, 1992 and 1993, $17,000, $18,000 and $18,000, respectively was recorded as
other income by NEPCO related to this agreement. At August 31, 1992 and 1993,
$9,000 and $10,000, respectively, is included in due from related parties.
NEPCO leases two facilities from CHR Partnership. The first lease is for a
facility located in Sumter, South Carolina that requires NEPCO to make monthly
lease payments of $10,000 through 1997, as well as additional amounts to pay for
all taxes, insurance and maintenance on the property. The second lease is for a
facility located in New Castle, PA, and requires NEPCO to make monthly lease
payments of $1,000 through 1997, as well as additional amounts to pay for all
taxes, insurance and maintenance on the property. Future minimum rental
commitments on the leases is $528,000, comprised of $132,000 per year through
1997.
As part of the agreement between NEPCO and CHR Partnership, NEPCO also makes
the monthly mortgage payments to a financial institution on behalf of CHR
Partnership. At August 31, 1992 and 1993, the Company has recorded a net payable
to CHR of $126,000 and $54,000, respectively, related to the Sumter, South
Carolina plant location.
8. COMMITMENTS AND CONTINGENCIES:
NEPCO has a month to month lease for its plant located in Fort Worth, Texas
that requires payments of $6,000 per month. The lease contains a purchase option
for the building equal to the fair market value plus $50,000, in addition to the
silos which can be purchased for $60,000. NEPCO has exercised this option and
completed the purchase for approximately $500,000 in February 1994.
Total rent expense included in the operating results for 1991, 1992 and
1993, respectively was $144,000, $197,000 and $205,000, of which $132,000 was
paid to CHR Partnership annually.
At August 31, 1992 and 1993, the Company has committed to purchase $462,000
and $1,139,000, respectively, of molds that will be used in the operations of
the Company. Payment on these purchases is expected to be made within six months
of the financial statement date.
The Company was named in a lawsuit regarding a patent infringement at August
31, 1993. At August 31, 1993, the case was in the discovery stage and,
therefore, no determination could be made of the outcome or the range of the
possible loss, if any, should the outcome be unfavorable. Concurrent with the
signing of the stock purchase agreement in March 1994, the case against the
Company was terminated. See Note 11 for discussion of the subsequent merger
agreement.
F-33
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS:
The company maintains a profit sharing plan for those employees who meet the
eligibility requirements set forth in the Plan. Contributions to the Plan are
determined annually by the Company's Board of Directors. The Company contributed
$150,000 and $0 to the Plan for the years ended August 31, 1992 and 1993,
respectively.
In 1993 the Company instituted a 401(k) plan for those employees who meet
the eligibility requirements set forth in the Plan. The Company matches amounts
contributed to the Plan by the eligible employees. The Company contributed
$17,000 to the Plan in 1993.
10. INCOME TAXES:
Effective September 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The statement
requires the use of the asset and liability approach for financial accounting
and reporting for income taxes. The cumulative effect of the change in
accounting principle of $104,000 has been included in determining net income for
the current year. Financial statements for prior years have not been restated.
The following table summarizes the provision for U.S. Federal and State
income taxes.
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31,
-------------------------------
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Current:
U.S. Federal Tax....................................................................... $ 447 $ 176 $ 128
State Tax.............................................................................. 114 58 45
--------- --------- ---------
561 234 173
Deferred:
U.S. Federal Tax....................................................................... 43 61 (43)
State Tax.............................................................................. 2 (6) 8
--------- --------- ---------
45 55 (35)
--------- --------- ---------
Total tax provision.................................................................. $ 606 $ 289 $ 138
--------- --------- ---------
--------- --------- ---------
</TABLE>
The 1992 deferred tax assets and liabilities are comprised principally of
alternative minimum tax credits that are available to reduce future tax
liabilities and depreciation, respectively.
The 1993 tax provision benefited from an increase in deferred tax assets
related to alternative minimum tax credits of $113 and other future deductible
amounts of $57. The provision was reduced $127 due to an increase in deferred
tax liabilities related to excess tax depreciation.
The differences between the U.S. federal statutory tax rate and the NEPCO's
combined effective tax rate at August 31, 1993 is as follows:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
U.S. Federal statutory rate................................................................ 34.0% 34.0% 34.0%
State income taxes, net.................................................................... 4.8 6.1 2.9
Other...................................................................................... 0.4 5.8 (0.2)
--- --- ---
39.2% 45.9% 36.7%
--- --- ---
--- --- ---
</TABLE>
F-34
<PAGE>
NORTHERN ENGINEERING AND PLASTICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES: (CONTINUED)
The deferred tax (assets) and deferred tax liabilities recorded on the
balance sheet as of August 31, 1993 are as follows:
<TABLE>
<S> <C>
Deferred assets:
Benefit plans..................................................................... $ (44)
AMT Tax credit carry forwards..................................................... (188)
Operating loss carry forwards..................................................... (18)
---------
Gross deferred tax assets......................................................... (250)
Deferred liabilities:
Depreciation...................................................................... 1,091
---------
Net deferred liabilities............................................................ $ 841
---------
---------
</TABLE>
At August 31, 1993, $188,000 of AMT credits were available. These credits do
not expire and may be used to reduce future taxes payable.
11. SUBSEQUENT MERGER AGREEMENT:
In March of 1994, NEPCO entered into a stock purchase agreement whereby
Portola Packaging
(d/b/a Cap Snap) of San Jose, California would acquire all of the capital stock
of NEPCO and NEPCO-West for a purchase price of $28,500,000 plus additional
commitments related to employment, non-compete and technology transfer
agreements. The purchase was completed on June 30, 1994.
12. OTHER, NET:
Other, net consists of gains from asset sales, accounts payable discounts,
and other nonoperating items.
F-35
<PAGE>
AUDITORS' REPORT
To the Directors of Portola Packaging Canada Ltd.
We have audited the combined balance sheet of Portola Packaging Canada Ltd.
as at March 31, 1995 and the combined statements of income, retained earnings
and changes in financial position 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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of Portola Packaging Canada Ltd. as at
March 31, 1995 and the results of its operations and the changes in its
financial position for the year then ended in accordance with Canadian generally
accepted accounting principles.
COOPERS & LYBRAND
Vancouver, B.C.
August 3, 1995
F-36
<PAGE>
PORTOLA PACKAGING CANADA LTD.
COMBINED BALANCE SHEET
AS AT MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash......................................................................... $ 965,653
Accounts receivable --
Trade...................................................................... 1,741,847
Affiliated companies....................................................... 70,409
Commissions (note 5)....................................................... 67,026
Fire claim receivable (note 9)............................................... 250,365
Inventories (note 3)......................................................... 580,750
Lease deposit................................................................ 8,533
----------
3,684,583
Goodwill....................................................................... 1
Fixed Assets (note 4).......................................................... 90,974
Equity in Canada Cap Snap Corporation (note 8)................................. 310,005
----------
$4,085,563
----------
----------
LIABILITIES
Current Liabilities
Accounts payable --
Trade...................................................................... $ 645,664
Affiliated companies....................................................... 14,742
Bonus (note 5)............................................................. 1,291,092
Allwest Industries Incorporated (note 5)................................... 199,580
----------
2,151,078
Advances from Allwest Industries Incorporated (note 5)......................... 680,947
Loans from Related Parties (note 5)............................................ 1,218,141
----------
4,050,166
----------
SHAREHOLDERS' EQUITY
Share Capital (note 6)......................................................... 501
Retained Earnings.............................................................. 34,896
----------
35,397
----------
$4,085,563
----------
----------
Contingency (note 9)
Commitments (note 11)
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE>
PORTOLA PACKAGING CANADA LTD.
COMBINED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<S> <C>
Deficit -- Beginning of Year................................................... $ (198,022)
Net Income for the Year........................................................ 232,918
----------
Retained Earnings -- End of Year............................................... $ 34,896
----------
----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE>
PORTOLA PACKAGING CANADA LTD.
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<S> <C>
Sales (note 5)................................................................ $11,084,321
Cost of Sales
Opening inventory........................................................... 489,485
Materials (note 5).......................................................... 5,618,623
Plant labour and benefits................................................... 1,279,779
Heat, light and power....................................................... 319,403
-----------
7,707,290
Less: Closing inventory (note 3)............................................ 580,750
-----------
7,126,540
-----------
Gross Profit.................................................................. 3,957,781
-----------
Plant Expenses
Rental -- Equipment (note 5)................................................ 1,472,113
Building (note 5).................................................. 248,122
Trailer............................................................ 52,651
Depreciation and amortization............................................... 59,494
Repairs and maintenance..................................................... 251,522
Property taxes.............................................................. 31,010
Insurance................................................................... 45,876
Scavenging.................................................................. 2,281
-----------
2,163,069
-----------
Administrative Expenses
Salaries and benefits....................................................... 1,560,121
Interest (note 5)........................................................... 62,597
Travel...................................................................... 43,413
Professional fees........................................................... 48,459
Office...................................................................... 35,693
Other....................................................................... 42,565
-----------
1,792,848
-----------
Income Before the Following: 1,864
-----------
Other Income
Commission (note 5)......................................................... 67,026
Interest.................................................................... 63,023
Miscellaneous............................................................... 20,203
Equity in income of Canada Cap Snap Corporation (note 8).................... 80,802
-----------
231,054
-----------
Income Before Income Taxes.................................................... 232,918
-----------
Income Taxes (note 7)
Current..................................................................... 77,000
Income taxes recovered through utilization of tax losses carried forward.... (77,000)
-----------
Nil
-----------
Net Income for the Year....................................................... $ 232,918
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE>
PORTOLA PACKAGING CANADA LTD.
COMBINED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<S> <C>
CASH PROVIDED BY (USED IN)
Operating Activities
Net income for year........................................................... $ 232,918
Items not affecting cash --
Depreciation................................................................ 59,494
Equity in net income of Canada Cap Snap Corporation......................... (80,802)
---------
211,610
---------
Changes in non-cash working capital --
Accounts receivable......................................................... (666,357)
Inventories................................................................. (91,265)
Accounts payable............................................................ 306,288
---------
(451,334)
---------
(239,724)
---------
Financing Activities
Loans from related parties.................................................... 556,875
Due to Allwest Industries Incorporated........................................ 5,997
---------
562,872
---------
Investing Activities
Leasehold improvements........................................................ (57,700)
Purchase of automobile........................................................ (12,490)
Fire claim receivable......................................................... (58,279)
Fire claim insurance proceeds................................................. 100,000
---------
(28,469)
---------
Increase in Cash................................................................ 294,679
Cash -- Beginning of Year....................................................... 670,974
---------
Cash -- End of Year............................................................. $ 965,653
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE>
PORTOLA PACKAGING CANADA LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
1. BASIS OF ACCOUNTING PRESENTATION
On June 16, 1995, 3154823 Canada Inc., a wholly owned subsidiary of Portola
Packaging, Inc., acquired 100% of the shares of B.C. Plastic Industries Ltd. and
Alberta Plastic Industries Ltd. and 50% of the shares of a joint venture, Canada
Cap Snap Corporation (the remaining 50% thereof already being owned by Portola
Packaging, Inc.).
The acquired shares were previously held under common control and,
accordingly, these financial statements reflect the financial position and
results of operations of the acquired companies on a combined historical cost
basis, with the 50% joint venture interest in Canada Cap Snap Corporation being
accounted for using the equity method. Transactions amongst the combining
companies have been eliminated.
On June 16, 1995, 3154823 Canada Inc., B.C. Plastic Industries Ltd., Alberta
Plastic Industries Ltd. and Canada Cap Snap Corporation were amalgamated under
the name Portola Packaging Canada Ltd.
2. ACCOUNTING POLICIES
These combined financial statements have been prepared in accordance with
Canadian generally accepted accounting principles.
INVENTORIES
Inventories are recorded at the lower of cost and net realizable value. Cost
is determined on a first-in, first-out basis.
FIXED ASSETS
The automobile is recorded at cost and is depreciated on a 30% declining
balance basis.
Under the terms of the company's lease agreements with Allwest Industries
Incorporated (Allwest), the company is responsible for installing all leased
equipment. The installation costs are capitalized as leasehold improvements.
Leasehold improvements are recorded at cost and amortization is provided on the
straight-line basis over five years.
3. INVENTORIES
<TABLE>
<S> <C>
Materials--
Raw.................................................... $ 339,698
Packaging.............................................. 75,426
Finished goods........................................... 165,626
---------
$ 580,750
---------
---------
</TABLE>
4. FIXED ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
----------- ------------- ---------
<S> <C> <C> <C>
Leasehold improvements...................... $ 130,886 $ 50,528 $ 80,358
Automobile.................................. 12,490 1,874 10,616
----------- ------------- ---------
$ 143,376 $ 52,402 $ 90,974
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
F-41
<PAGE>
PORTOLA PACKAGING CANADA LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
5. RELATED PARTY TRANSACTIONS
Canada Cap Snap Corporation and Canadian Miraclean Products Ltd. are
affiliated companies. Allwest Industries Incorporated (Allwest) is the parent of
B.C. Plastic Industries Ltd. and 322597 B.C. Limited is a shareholder of Canada
Cap Snap Corporation.
COMMISSION INCOME
Commission income of $67,026 is due from Canada Cap Snap Corporation.
SALES
Sales to affiliates are as follows:
<TABLE>
<S> <C>
Canada Cap Snap Corporation.............................. $ 377,583
Canadian Miraclean Products Ltd.......................... 47,304
---------
$ 424,887
---------
---------
</TABLE>
MANAGEMENT AND ADMINISTRATION FEES
During the year Canada Cap Snap Corporation paid management fees amounting
to $65,625 to Portola Packaging, Inc. and 322597 B.C. Limited, and
administration fees of $13,800 to Canadian Miraclean Products Ltd.
EQUIPMENT AND BUILDING RENTAL EXPENSES
The company rented its premises and equipment from Allwest. Rental payments
to Allwest included in equipment and building rental expense for the year
amounted to $1,708,444.
MATERIAL PURCHASES
Purchases of finished goods and materials from Canada Cap Snap Corporation
for the year amounted to $11,407
ACCOUNTS PAYABLE
Accounts payable to Allwest are non-interest bearing and arise from current
rental charges.
ADVANCES FROM ALLWEST INDUSTRIES INCORPORATED
Advances from Allwest bear interest at prime plus 2% and have no stated
terms of repayment. Interest expense on these advances amounted to $62,597
during the year.
LOANS FROM RELATED PARTIES
The loans are unsecured and interest free with no fixed terms of repayment.
The loans are from:
<TABLE>
<S> <C>
322597 B.C. Ltd........................................ $ 500
Allwest................................................ 615,205
Directors of the combined companies.................... 602,436
----------
$1,218,141
----------
----------
</TABLE>
BONUS
The bonus is payable to directors of the Company.
OTHER RELATED PARTY TRANSACTIONS
Other related party transactions are disclosed in notes 9 and 11.
F-42
<PAGE>
PORTOLA PACKAGING CANADA LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
6. SHARE CAPITAL
Share capital of the combined companies consists of the following:
<TABLE>
<S> <C>
Alberta Plastic Industries Ltd. --
Authorized --
Unlimited Class A common shares without par value
500 Class B common shares, without par value
500 First preferred shares, 0-5% non-cumulative
redeemable at $929.714 per share, without par
value
500 Second preferred shares, 0-8% non-cumulative
redeemable at $2,570.29 per share, without
par value
Issued --
500 Class A common shares........................ $ 5
500 First preferred shares....................... 150
500 Second preferred shares...................... 345
---------
500
---------
B.C. Plastic Industries Ltd. --
Authorized --
1,000,000 Class A non-voting preferred shares, with a
par value of $0.01, redeemable at $50,000
per share and entitled to a 10%
non-cumulative dividend
100,000 Class B voting common shares without par
value
Issued--
100 Class A shares............................... 1
1 Class B share................................ --
---------
1
---------
501
---------
---------
</TABLE>
7. INCOME TAXES
The company has income tax loss carryforwards available to offset future
taxable income of approximately $366,500. Unless utilized to reduce taxable
income, these losses will expire as follows:
<TABLE>
<S> <C>
2000..................................................... $ 171,000
2001..................................................... 195,500
---------
$ 366,500
---------
---------
</TABLE>
The income tax loss carryforwards are represented by accounting losses of
$254,500 and by timing differences of $112,000. The income tax benefit of the
accounting losses has not been recorded.
F-43
<PAGE>
PORTOLA PACKAGING CANADA LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 31, 1995
(EXPRESSED IN CANADIAN DOLLARS)
8. INVESTMENT IN CANADA CAP SNAP CORPORATION
The combined companies' 50% joint venture interest in Canada Cap Snap
Corporation at March 31, 1995 comprised the following:
<TABLE>
<S> <C>
Equity in retained earnings--beginning of year........... $ 229,203
50% of earnings for the year............................. 80,802
---------
Equity in retained earnings--end of year................. $ 310,005
---------
---------
</TABLE>
The combined companies pro rated share of the joint ventures' operations and
financial position are as follows:
<TABLE>
<S> <C>
Assets................................................... $ 528,000
---------
---------
Liabilities.............................................. $ 161,000
---------
---------
Revenues................................................. $ 730,000
---------
---------
Expenses................................................. $ 650,000
---------
---------
</TABLE>
9. CONTINGENCY
During the year ended March 31, 1994, the building owned by Allwest and
leased by Alberta Plastic Industries Ltd. for its operations was fire damaged.
Both Allwest and the company expect to be fully compensated for any related
damages; however, as yet no settlement has been reached with the insurance
company. On June 15, 1995, the fire claim receivable was acquired by Allwest and
directors for consideration in the amount of $250,365.
10. SECURITY FOR OPERATING LINE FACILITY
B.C. Plastic Industries Ltd. has provided a general security covering all
assets of the company and specific security covering the company's inventory in
favour of the company's bankers as security for its operating line facility to a
maximum of $350,000.
11. COMMITMENTS
As at March 31, 1995, Alberta Plastic Industries Ltd. has monthly lease
obligations related to its premises and its equipment of $12,000 and $49,400
respectively. The company is leasing temporary operating premises and is
attempting to obtain a new permanent plant facility to be owned by Allwest.
As at March 31, 1995, B.C. Plastic Industries Ltd. has monthly lease
obligations to Allwest related to its premises and equipment of $12,144 and
$76,631 respectively.
F-44
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY
BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO
MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
Use of Proceeds................................ 14
Capitalization................................. 15
Unaudited Pro Forma As Adjusted Condensed
Consolidated Financial Data................... 16
Selected Historical Condensed Consolidated
Financial Data................................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business....................................... 33
Management..................................... 44
Certain Transactions........................... 50
Principal Stockholders......................... 52
Description of the New Credit Facility......... 54
Description of the Notes....................... 55
Underwriting................................... 77
Legal Matters.................................. 78
Experts........................................ 78
Additional Information......................... 78
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL DECEMBER 26, 1995, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$110,000,000
[LOGO]
PORTOLA PACKAGING, INC.
10 3/4% SENIOR NOTES DUE 2005
---------------------
PROSPECTUS
---------------------
CHASE SECURITIES, INC.
SALOMON BROTHERS INC
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities of the
Registrant (or its predecessors) sold by the Registrant (or its predecessors)
since June 1, 1993.
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SHARES PURCHASE PRICE CONSIDERATION
- --------------------------------------- ------------------ -------------------- --------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Chase Manhattan Capital Corporation June 9, 1995 Class B Common 200,000 $ 800,000.00 cash
Stock, Series 1
June 30, 1994 Warrant to purchase -- 1,245,205.95 (1)
2,052,526 shares of
Class A Common Stock
June 30, 1994 Class B Common 800,000 3,000,000.00 cash
Stock, Series 1
Heller Financial, Inc. June 9, 1995 Class B Common 250,000 1,000,000.00 cash
Stock, Series 1
June 30, 1994 Warrant to purchase -- 1,100,537.50 (2)
440,215 shares of
Class A Common Stock
Jack L. Watts, John L. Lemons, Mary Ann October 10, 1995 Class A Common Stock 2,134,992 (3) (3)
Lemons, LJL Cordovan Partners, L.P.
and Robert Fleming Nominees Limited
Jeffrey Pfeffer, Ph.D. June 18, 1996 Class B Common 15,000 67,500 cash
Stock, Series 1
Exercise of stock options granted under June 1, 1993 - Class B Common 848,732 563,002.40 cash
stock option plans by 13 optionees June 18, 1996 Stock, Series 1
(Stock Options)
</TABLE>
- ------------------------------
(1) Exchanged for Warrant to purchase 2,052,526 shares of Class A Common Stock
issued October 9, 1992.
(2) Exchanged for Warrant to purchase 440,215 shares of Class A Common Stock
issued October 9, 1992.
(3) Issued in exchange for 734,992 shares of Class B Common Stock, Series 1 of
the Company and 1,400,000 shares of Class B Common Stock, Series 2 of the
Company. The recipients of the Class A Common Stock then sold such shares to
an unrelated third party and its affiliate.
All sales of common stock made pursuant to the exercise of stock options
granted under the stock option plans of the Registrant or its predecessors were
made pursuant to the exemption from the registration requirements of the
Securities Act of 1993, as amended (the "Securities Act"), afforded by Rule 701
promulgated under the Securities Act.
The sales of securities to Chase Manhattan Capital Corporation, Heller
Financial, Inc. and Dr. Pfeffer were made in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities Act. The
securities were sold to a limited number of people with no general solicitation
or advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate the investment and represented to the
issuer that the shares were being acquired for investment.
The exchange of securities with Jack L. Watts, John L. Lemons, Mary Ann
Lemons, LJL Cordovan Partners, L.P. and Robert Fleming Nominees Limited was made
pursuant to the exemption from the registration requirements of the Securities
Act afforded by Section 3(a)(9) of the Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.01 Certificate of Incorporation (filed with Secretary of State of Delaware on April 29, 1994, as amended
and filed with Secretary of State of Delaware on October 4, 1995).*
4.01 Indenture, dated as of October 2, 1995, by and between the Registrant and American Bank National
Association, as trustee (including form of Note).*
5.01 Opinion of Fenwick & West regarding legality of the Notes.**
10.24 Second Amended and Restated Credit and Security Agreement, dated as of October 2, 1995, by and between
the Registrant and Heller Financial, Inc.*
10.25 Stock Purchase Agreement, dated October 10, 1995, by and among the Registrant, Jack L. Watts, John L.
Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees Limited, Suez Equity
Investors, L.P. and SEI Associates.*
10.26 Amendment to Investors' Rights Agreements, dated as of October 10, 1995, by and among the Registrant,
Jack L. Watts, John L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees
Limited, Suez Equity Investors, L.P., SEI Associates and Chase Manhattan Capital Corporation.*
10.27 Third Amended and Restated Registration Rights Agreement, dated as of October 10, 1995, by and among the
Registrant, Heller Financial, Inc., Chase Manhattan Capital Corporation, Robert Fleming Nominees
Limited, Suez Equity Investors, L.P. and SEI Associates.*
10.28 1988 Stock Option Plan and related documents.*
10.29 1994 Stock Option Plan and related documents.*
10.30 1996 Special Management Bonus Plan.*
10.31 1996 Management Bonus Plan.*
10.32 Description of provisions of 1996 Senior Executive Bonus Plans.*
10.33 Faulstich Court Property Agreement of Purchase and Sale, dated as of January 17, 1996, by and between
the Registrant and Three Sisters Ranch Enterprises.***
11.01 Computation of Net Income Per Share.
12.01 Computation of Ratio of Earnings to Fixed Charges.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Fenwick & West (included in Exhibit 5.01).**
23.05 Consent of Coopers & Lybrand L.L.P.
27.01 Financial Data Schedule
</TABLE>
- ------------------------
*Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange Commission on
January 16, 1996.
**Previously filed as Exhibit 5.01 to pre-effective Amendment No. 2 to this
Registration Statement on Form S-1, as filed with the Securities and Exchange
Commission on September 25, 1995.
***Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the period ended
February 29, 1996, as filed with the Securities and Exchange Commission on
April 15, 1996.
(b) The following financial statement schedule is filed herewith:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER SCHEDULE TITLE
- -------------- --------------------------------------------------------------------------------------------------
<S> <C>
Schedule II Valuation and Qualifying Accounts.
</TABLE>
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Post-Effective Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Jose, State of California, on the 25th day of June, 1996.
PORTOLA PACKAGING, INC.
By: /s/ JACK L. WATTS
-----------------------------------
Jack L. Watts
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ JACK L. WATTS Chief Executive Officer,
------------------------------------------- Chairman of the Board and a June 25, 1996
Jack L. Watts Director
PRINCIPAL FINANCIAL OFFICER:
/s/ ROBERT R. STRICKLAND
------------------------------------------- Vice President -- Finance and June 25, 1996
Robert R. Strickland Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ DAVID A. KEEFE
------------------------------------------- Corporate Controller June 25, 1996
David A. Keefe
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
ADDITIONAL DIRECTORS:
/s/ CHRISTOPHER C. BEHRENS
- ------------------------------------------- Director June 25, 1996
Christopher C. Behrens
/s/ MARTIN R. IMBLER
- ------------------------------------------- Director June 25, 1996
Martin R. Imbler
/s/ TIMOTHY TOMLINSON
- ------------------------------------------- Secretary and Director June 25, 1996
Timothy Tomlinson
/s/ LARRY C. WILLIAMS
- ------------------------------------------- Director June 25, 1996
Larry C. Williams
/s/ JEFFREY PFEFFER, Ph.D.
- ------------------------------------------- Director June 25, 1996
Jeffrey Pfeffer, Ph.D.
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Portola Packaging, Inc. and Subsidiaries as of August 31, 1994 and 1995, and for
each of the three years in the period ended August 31, 1995, which financial
statements are included in the registration statement, we have also audited the
financial statement schedule listed in Item 16(b) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 1, 1995
S-1
<PAGE>
PORTOLA PACKAGING, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS BEG BAL EXPENSE OTHER DEDUCTIONS (2) END BAL
- ------------------------------------------------------ ----------- ----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
August 31, 1993....................................... $ 167 $ 90 $ -- $ 51 $ 206
August 31, 1994....................................... 206 173 (167)(1) 157 389
August 31, 1995....................................... 389 892 468 813
</TABLE>
- ------------------------
(1) Amount of valuation allowance established as part of the acquisition of
NEPCO.
(2) Write-off bad debts.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.01 Certificate of Incorporation (filed with Secretary of State of Delaware on April 29, 1994, as amended
and filed with Secretary of State of Delaware on October 4, 1995).*
4.01 Indenture, dated as of October 2, 1995, by and between the Registrant and American Bank National
Association, as trustee (including form of Note).*
5.01 Opinion of Fenwick & West regarding legality of the Notes.**
10.24 Second Amended and Restated Credit and Security Agreement, dated as of October 2, 1995, by and between
the Registrant and Heller Financial, Inc.*
10.25 Stock Purchase Agreement, dated October 10, 1995, by and among the Registrant, Jack L. Watts, John L.
Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees Limited, Suez Equity
Investors, L.P. and SEI Associates.*
10.26 Amendment to Investors' Rights Agreements, dated as of October 10, 1995, by and among the Registrant,
Jack L. Watts, John L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees
Limited, Suez Equity Investors, L.P., SEI Associates and Chase Manhattan Capital Corporation.*
10.27 Third Amended and Restated Registration Rights Agreement, dated as of October 10, 1995, by and among the
Registrant, Heller Financial, Inc., Chase Manhattan Capital Corporation, Robert Fleming Nominees
Limited, Suez Equity Investors, L.P. and SEI Associates.*
10.28 1988 Stock Option Plan and related documents.*
10.29 1994 Stock Option Plan and related documents.*
10.30 1996 Special Management Bonus Plan.*
10.31 1996 Management Bonus Plan.*
10.32 Description of provisions of 1996 Senior Executive Bonus Plans.*
10.33 Faulstich Court Property Agreement of Purchase and Sale, dated as of January 17, 1996, by and between
the Registrant and Three Sisters Ranch Enterprises.***
11.01 Computation of Net Income Per Share.
12.01 Computation of Ratio of Earnings to Fixed Charges.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Fenwick & West (included in Exhibit 5.01).**
23.05 Consent of Coopers & Lybrand L.L.P.
27.01 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange Commission on
January 16, 1996.
** Previously filed as Exhibit 5.01 to pre-effective Amendment No. 2 to this
Registration Statement on Form S-1, as filed with the Securities and
Exchange Commission on September 25, 1995.
*** Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the period ended
February 29, 1996, as filed with the Securities and Exchange Commission on
April 15, 1996.
<PAGE>
EXHIBIT 11.01
PORTOLA PACKAGING, INC.
COMPUTATION OF NET INCOME PER SHARE (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
YEAR ENDED AUGUST 31, --------------------------
------------------------------- FEBRUARY 28, FEBRUARY 29,
1993 1994 1995 1995 1996
--------- --------- --------- ------------ ------------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Weighted average common shares outstanding for the
period 9,976 11,087 11,393 11,255 11,585
Common equivalent shares assuming conversion of
stock options and warrants under the treasury
stock method...................................... 2,578
--------- --------- --------- ------------ ------------
Shares used in per share calculation............... 12,554 11,087 11,393 11,255 11,585
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle......................................... $ 1,198 $ 1,100 $ 140 $ 231 $ (200)
Less the increase in the put value of warrants..... (455) (610) (279) (423)
--------- --------- --------- ------------ ------------
$ 1,198 $ 645 $ (470) $ (48) $ (623)
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Cumulative effect of change in accounting
principle......................................... $ 85
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Extraordinary item................................. $ 1,265
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Net income (loss).................................. $ 309 $ 225 $ 140 $ 231 $ (1,465)
Less the increase in the put value of warrants..... (455) (610) (279) (423)
--------- --------- --------- ------------ ------------
$ 309 $ (230) $ (470) $ (48) $ (1,888)
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Net income (loss) per share before extraordinary
item and cumulative effect of change in accounting
principle......................................... $ 0.10 $ 0.06 $ (0.04) $ 0.00 $ (0.05)
Cumulative effect of change in accounting
principle......................................... $ 0.01
Effect of extraordinary item per share............. $ (0.11)
Net income (loss) per share........................ $ 0.02 $ (0.02) $ (0.04) $ 0.00 $ (0.16)
</TABLE>
- ------------------------
(1) There is no difference between primary and fully diluted net income (loss)
per share for all periods presented.
<PAGE>
EXHIBIT 12.01
PORTOLA PACKAGING, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, --------------------------
----------------------------------------------------------- FEBRUARY 28, FEBRUARY 29,
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense........ $ 3,972 $ 3,200 $ 3,128 $ 3,996 $ 8,658 $ 4,003 $ 6,380
Debt financing costs.... 418 969 479 1,058 447 269 261
Rent expense............ 269 284 295 465 499 240 344
--------- --------- --------- ------- --------- ------------ ------------
Total interest........ 4,659 4,453 3,902 5,519 9,604 4,512 6,985
Total fixed charges....... 4,659 4,453 3,902 5,519 9,604 4,512 6,985
Less: Capitalized
interest................. -- -- -- -- -- -- --
--------- --------- --------- ------- --------- ------------ ------------
Net fixed charges....... $ 4,659 $ 4,453 $ 3,902 $ 5,519 $ 9,604 $ 4,512 $ 6,985
--------- --------- --------- ------- --------- ------------ ------------
--------- --------- --------- ------- --------- ------------ ------------
Earnings:
Net income (loss)....... $ 455 $ 663 $ 309 $ 225 $ 140 $ 231 $ (1,465)
Income tax benefit from
extraordinary item..... -- -- (592) (539) -- -- (844)
Cumulative effect of
adopting SFAS No.
109.................... -- -- -- 85 -- -- --
Provision for taxes..... 1,301 1,287 1,521 1,095 1,294 730 755
Net fixed charges....... 4,659 4,453 3,902 5,519 9,604 4,512 6,985
--------- --------- --------- ------- --------- ------------ ------------
Total earnings.......... $ 6,415 $ 6,403 $ 5,140 $ 6,385 $ 11,038 $ 5,473 $ 5,431
--------- --------- --------- ------- --------- ------------ ------------
--------- --------- --------- ------- --------- ------------ ------------
Calculation of ratio of
earnings to fixed
charges:
Total earnings.......... $ 6,415 $ 6,403 $ 5,140 $ 6,385 $ 11,038 $ 5,473 $ 5,431
Total fixed charges..... 4,659 4,453 3,902 5,519 9,604 4,512 6,985
Ratio of earnings to
fixed charges.......... 1.38 1.44 1.32 1.16 1.15 1.21
Deficiency of earnings
to fixed charges....... (1,554)
</TABLE>
<PAGE>
EXHIBIT 21.01
SUBSIDIARIES OF PORTOLA PACKAGING, INC., A DELAWARE CORPORATION
Portola Packaging Canada Ltd., a Canadian federal corporation (operating)
Portola Packaging Ltd., a U.K. corporation (formerly Cap Snap Limited, a
U.K. corporation, which was formerly Cap Snap (U.K.) Ltd.) (operating but
not significant pursuant to Item 601 of Regulation S-K)
<PAGE>
EXHIBIT 23.05
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this post-effective amendment number one to the
registration statement on Form S-1 (File No. 33-95318) of our report dated
November 1, 1995, on our audits of the financial statements and financial
statement schedule of Portola Packaging, Inc. We also consent to the reference
to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
San Jose, California
June 24, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> AUG-31-1995 AUG-31-1996
<PERIOD-START> SEP-01-1994 SEP-01-1995
<PERIOD-END> AUG-31-1995 FEB-29-1996
<CASH> 763 14526
<SECURITIES> 1000 0
<RECEIVABLES> 20323<F1> 20267<F1>
<ALLOWANCES> 813 660
<INVENTORY> 9833 10193
<CURRENT-ASSETS> 36467 50171
<PP&E> 53132<F2> 64059<F2>
<DEPRECIATION> 27203 0
<TOTAL-ASSETS> 130326 156557
<CURRENT-LIABILITIES> 21709 17817
<BONDS> 86244 116979
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 6682 4810
<TOTAL-LIABILITY-AND-EQUITY> 130326 156557
<SALES> 124650 73877
<TOTAL-REVENUES> 124650 73877
<CGS> 91972 55857
<TOTAL-COSTS> 110303 65109
<OTHER-EXPENSES> 3983 2256
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9105 6641
<INCOME-PRETAX> 1434 555
<INCOME-TAX> 1294 755
<INCOME-CONTINUING> 140 (200)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 1265
<CHANGES> 0 0
<NET-INCOME> 140 (1465)
<EPS-PRIMARY> (0.04) (0.16)
<EPS-DILUTED> (0.04) (0.16)
<FN>
<F1>SHOWN NET OF ALLOWANCE
<F2>SHOWN NET OF DEPRECIATION
</FN>
</TABLE>
