<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1997
REGISTRATION NO. 33-95318
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
---------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PORTOLA PACKAGING, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 3089 94-1582719
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial classification identification no.)
incorporation or code number)
organization)
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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:
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THEMISTOCLES G. MICHOS
General Counsel, Portola Packaging, CYNTHIA M. LOE, ESQ.
Inc. Tomlinson Zisko Morosoli & Maser LLP
1755 Embarcadero Road, Suite 200 200 Page Mill Road, 2nd Floor
Palo Alto, California 94303 Palo Alto, California 94306
(415) 354-3790 (415) 325-8666
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<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
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ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus.....................
2. Inside Front and Outside Back Cover Pages of Inside Front (Not Applicable) and Outside Back Cover
Prospectus......................................... Pages
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors; Selected Historical
Earnings to Fixed Charges.......................... Condensed Consolidated Financial Data
4. Use of Proceeds...................................... Outside Front Cover Page; Prospectus Summary
5. Determination of Offering Price...................... Not Applicable
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front and Back Cover Pages; Resales of the
Notes
9. Description of Securities to be Registered........... Description of the Notes
10. Interests of Named Experts and Counsel............... Legal Matters
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; 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 Credit Facility; Description of the Notes;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification Not Applicable
for Securities Act Liabilities.....................
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<PAGE>
[LOGO]
AMENDED AND RESTATED PROSPECTUS
$110,000,000
[LOGO] PORTOLA PACKAGING, INC.
10 3/4% SENIOR NOTES DUE 2005
------------------------
The 10 3/4% Senior Notes due 2005 (the "Notes") were initially offered by
Portola Packaging, Inc. (the "Company" or "Portola") pursuant to a Prospectus
dated September 27, 1995. The Company completed the Notes offering on October 2,
1995. The net proceeds from the sale of the Notes, after deducting expenses
related to the offering, including underwriting discounts and commissions in the
amount of approximately $3.2 million, were $106.0 million. Of the $106.0 million
net proceeds of the offering, $83.0 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 Notes 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, $3.0 million of the net
proceeds was used to collateralize a loan made by a bank to the Company's 50%
joint venture in Mexico, and $2.0 million of the net proceeds was used for
working capital needs.
The Notes were issued in October 1995 pursuant to the Indenture entered into
between the Company and Firstar Trust Company (formerly, American Bank National
Association), as Trustee. Interest on the Notes is payable semiannually on April
1 and October 1 of each year. The Company paid interest in the aggregate amount
of $5.9 million to holders of record of the Notes on each of April 1 and October
1, 1996 and on April 1, 1997. The Notes are unsecured senior obligations of the
Company and 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, are
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 Credit Facility. At
February 28, 1997, the Company had $121.2 million of senior indebtedness
outstanding (including indebtedness under the Notes) and had, subject to certain
restrictions, the ability to draw up to an additional $33.0 million of the $35.0
million committed under the Credit Facility. See "Prospectus Summary--The
Notes," "Description of the Notes" and "Description of the Credit Facility."
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" ON PAGE SIX.
---------------------
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.
------------------------
This Amended and Restated Prospectus ("Prospectus") may be used by Chase
Securities Inc. ("Chase Securities") in connection with offers and sales related
to market-making transactions in the Notes. See "Resales of 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 is affiliated with Chase Manhattan Capital Corporation, which owns
more than 10% of the Company's common equity and is deemed to be an affiliate of
the Company.
Chase Securities and Salomon Brothers Inc have previously engaged and may
again engage in market-making transactions in the Notes. They are under no
obligation to continue to do so, however, and may discontinue any market-making
activities at any time without notice.
May , 1997
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS 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 THREE OPERATING SUBSIDIARIES, TWO IN
CANADA AND ONE IN THE UNITED KINGDOM. ONE OF SUCH SUBSIDIARIES IS PRESENTLY
OPERATED AS AN UNRESTRICTED SUBSIDIARY UNDER THE INDENTURE GOVERNING THE NOTES
(THE "INDENTURE"). ALL REFERENCES HEREIN TO FISCAL YEAR ARE TO THE COMPANY'S
FISCAL YEAR ENDED AUGUST 31.
RISK FACTORS
These securities are subject to risks. These risks include the substantial
indebtedness of the Company and the restrictive covenants to which the Company
is subject under the terms of its indebtedness, the effective subordination of
the Notes in certain circumstances, the potential liability of the Company in
the event of rescission of certain recent sales of the Notes made by Chase
Securities, the threat of increased competition in the Company's product lines,
possible changes in governmental regulation, challenges to the protection
afforded by the Company's patents and other intellectual property, the possible
adverse effect of changes in resin prices, uncertainty with respect to new
products and markets, dependence upon performance of certain management
functions, the existence of certain limitations on repurchases of the Notes, and
the potential illiquidity of the Notes. Prospective investors should carefully
consider the risk factors described on pages six to ten before purchasing the
Notes offered hereby. See "Risk Factors."
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"), (iii) widemouth closures for
institutional food products ("widemouth closures"), (iv) fitments for gable-top
paperboard containers and (v) push-pull dispensing closures for bottled water,
flavored water and sports drinks. Portola also designs, manufactures and
supplies high speed capping equipment and customized water bottling systems
which are marketed by the Company primarily under the name "PortaPlant."
Portola's closure products are primarily manufactured domestically through a
technologically advanced, high speed injection molding process at nine modern
manufacturing facilities located in the United States. 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 9.6 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, 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 85 active patents on the
design of container closures and compatible bottle necks.
------------------------
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.
2
<PAGE>
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.
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 $159.5 million in sales and 9.6 billion in units sold for
fiscal 1996. Mr. Watts and other members of senior management own or control
26.6%, 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 seven years at the Company.
The Company's principal offices are located at 890 Faulstich Court, San
Jose, California 95112, and its telephone number is (408) 453-8840.
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 improve production efficiencies and 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.
Consistent with the Company's objective to improve production efficiencies
and enhance low cost manufacturing capabilities, as well as quality, in the
second quarter of fiscal 1997, the Company adopted a restructuring plan which
will streamline its organization by eliminating multiple reporting channels and
duplicative personnel, manufacturing and other functions. In furtherance of this
objective, the Company recently closed its Portland, Oregon manufacturing
facility, eliminated several management and other personnel positions, and
implemented other cost savings measures. As described in the section of this
Prospectus entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company recorded a restructuring charge of
approximately $1.1 million and a write-off of intangibles of approximately $1.7
million in the second quarter of fiscal 1997. In connection with this
restructuring plan, in March 1997 the Company announced the closure of its
Bettendorf, Iowa plant planned for July 1997. Additional restructuring costs
will be incurred in connection with the Bettendorf plant closure, although the
Company is not able to estimate the amount of such charge at this time.
Consistent with the Company's objective to expand through strategic
acquisitions, on June 30, 1994, the Company acquired Northern Engineering &
Plastic Corp. and certain related companies and assets (collectively, "Nepco")
for a purchase price of $43.7 million. The acquisition of Nepco, a designer,
manufacturer and marketer of tamper evident plastic closures in markets similar
to those served by Portola, 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 continue 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 $13.6 million the 50% interest it had
not previously owned in Canada Cap Snap Corporation, a British Columbia
corporation engaged in manufacturing and distributing small
3
<PAGE>
closures in western Canada, together with all the capital stock of two
affiliated plastic bottle manufacturers (the "Western Canadian Acquisition").
The companies acquired in the Western Canadian Acquisition were amalgamated and
now operate under the name "Portola Packaging Canada Ltd." On September 1, 1996,
the Company purchased for $3.0 million Rapid Plast J-P. Inc., a company
headquarted in Montreal, Quebec (the "Eastern Canadian Acquisition"). Rapid
Plast J-P. Inc. now operates under the name "Portola Packaging Ltd." and is
engaged in manufacturing and distributing plastic bottles, primarily in eastern
Canada. Management anticipates that the Canadian acquisitions will enable the
Company to establish a position in the Canadian bottle manufacturing marketplace
and to advance its position in the Canadian closure marketplace. On September 1,
1995, the Company purchased for $1.5 million the 50% interest it had not
previously owned in Cap Snap (U.K.) Ltd., now known as "Portola Packaging Ltd."
(the "U.K. Acquisition"). The Company recently leased a manufacturing facility
located in Doncaster, South Yorkshire, England which will be used by Portola
Packaging Ltd. to manufacture closures for distribution primarily in the United
Kingdom, with some exports to Europe.
THE NOTES
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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.
Optional Redemption............... The Notes are 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--Limita-
tions on Repurchase of Notes"; "Description of the
Notes-- Repurchase at the Option of Holders--Change of
Control."
Ranking........................... The Notes are unsecured senior obligations of the
Company and 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, are effectively subordinated to senior secured
indebtedness of the Company with respect to the assets
securing such indebtedness, including any indebtedness
that may
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4
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be incurred from time to time under the Company's Credit
Facility. At February 28, 1997, the Company had $121.2
million of senior indebtedness outstanding (including
indebtedness under the Notes) and had, subject to
certain restrictions, the ability to draw up to an
additional $33.0 million of the $35.0 million committed
under the Credit Facility. See "Description of the
Credit Facility."
Certain Covenants................. The Indenture contains 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, after
deducting expenses related to the offering, including
underwriting discounts and commissions in the amount of
approximately $3.2 million, were $106.0 million. Of the
$106.0 million net proceeds of the offering, $83.0
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 Notes 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, $3.0 million of the net
proceeds was used to collateralize a loan made by a bank
to the Company's 50% joint venture in Mexico, and $2.0
million of the net proceeds was used for working capital
needs.
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5
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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 February 28, 1997, the Company had $121.2 million in senior
indebtedness outstanding (including indebtedness under the Notes) and had the
ability to draw up to an additional $33.0 million of the $35.0 million committed
under the Credit Facility. Such indebtedness is substantially in excess of the
Company's total stockholders' deficit of $10.2 million at February 28, 1997. As
of February 28, 1997, approximately 12% 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 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 flow
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 Credit Facility contains numerous restrictive covenants that may limit
the Company's operational and financing flexibility. A failure to comply with
the obligations contained in the 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 Credit Facility. See "Description of the 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
permits the Company to incur certain secured indebtedness, including
indebtedness under the Credit Facility. If the Company becomes insolvent or is
liquidated, or if payment under the Credit Facility or other secured
indebtedness is accelerated, the lenders under the 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.
In addition, the Notes are 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
6
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market value in excess of $100,000 execute a guarantee in respect of the Notes.
Currently, the Company has only three operating subsidiaries, namely, Portola
Packaging Canada Ltd., its western Canadian subsidiary, Portola Packaging Ltd.,
its eastern Canadian subsidiary, and Portola Packaging Ltd., its United Kingdom
subsidiary. Portola Packaging Canada Ltd., the Company's western Canadian
subsidiary, is presently operated as an Unrestricted Subsidiary, and, as a
result, has not guaranteed the Company's obligations under the Notes. Upon
liquidation of such 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 western Canadian
subsidiary (the Company's only significant operating subsidiary) is separately
financed by indebtedness that is non-recourse to the Company (excepting that the
Company has pledged the capital stock of the western Canadian subsidiary as
security for the loans) and, under the terms of such indebtedness, the western
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.
The Company's eastern Canadian and United Kingdom subsidiaries became
Restricted Subsidiaries in early April 1997, and executed guarantees in respect
of the Notes in connection therewith. There can be no assurance that such
guarantees, or any guarantee delivered by a Restricted Subsidiary formed in the
future, would not be subject to avoidance as a fraudulent transfer or for other
reasons.
POTENTIAL RESCISSION LIABILITY
On March 19, 1997, the staff of the Securities and Exchange Commission (the
"Commission") informed the Company of its position that sales of the Notes made
after December 31, 1996 by Chase Securities Inc. ("Chase Securities"), which may
be an affiliate of the Company and which has made and in the future may make a
market in the Notes, were made without a current effective registration
statement being in effect. The Company believed that it had a current effective
registration statement at the time of such sales. However, the Company
immediately notified Chase Securities of the Commission staff's position and
Chase Securities ceased trading in the Notes. The Company has been informed by
Chase Securities that during the period from January 1, 1997 to March 20, 1997,
Chase Securities sold an aggregate of approximately $14 million of the Notes in
transactions at prices above the par value of the Notes. As of April 25, 1997,
the Notes were trading at a price slightly below par value.
At the request of the Commission staff, the Company will notify the buyers
of the Notes sold by Chase Securities in such transactions that in the view of
the Commission staff the sales of such Notes may be subject to rescission. Under
the terms of the underwriting arrangement entered into with Chase Securities in
1995, the Company may be required to indemnify Chase Securities for any loss
incurred by Chase Securities in connection with a rescission. To the extent that
rescissions were made, the Company's exposure generally would be equal to the
difference between the price at which the Notes were repurchased and the price
at which the Notes could be resold. The amount of the potential loss would
increase or decrease depending upon the then-current price of the Notes. The
Company believes that its cash resources are adequate to cover any such loss
without materially affecting the normal conduct of its business. See
"Management's Discussion and Analysis of Financial Condition."
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
7
<PAGE>
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. 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.
PATENT INFRINGEMENT LITIGATION
The Company is engaged in patent infringement litigation with two parties
who are seeking to have the court declare patents owned by the Company invalid.
The Company believes its patents are valid, and intends to contest these
allegations vigorously. There can be no assurance, however, that the Company
will be successful in its defense of these matters. 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. In this regard, the Company recently settled an
action brought against the Company by Scholle Corporation ("Scholle") in which
Scholle alleged that the Company had infringed upon certain patents of Scholle
relating to five-gallon non-spill closures. The terms of the settlement
agreement entered into between Scholle and the Company 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. The Company has also brought a declaratory relief action against
Scholle seeking judgment that a more recent Company product does not infringe
any Scholle patents. See "Business--Litigation."
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
8
<PAGE>
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 a significant
portion 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 pass such increases on to
customers promptly, 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 were to be 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."
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, the
Company will increasingly rely on new products, 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. In addition, since the Company's western Canadian
operations are currently conducted through an Unrestricted Subsidiary, the
Indenture imposes significant limitations upon the Company's ability to fund its
western Canadian operations. The Company's international operations also 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.
DEPENDENCE UPON PERFORMANCE OF KEY MANAGEMENT FUNCTIONS
The Company's success depends in part on performance of certain key
management functions. If, for any reason, certain personnel were not to continue
to be active in overseeing the Company's operations, its operations could be
adversely affected. The Company does not believe that any single individual is
critical to the operations of the Company, although the departure of either Jack
L. Watts, the Chief Executive Officer of the Company, or Douglas L. Cullum,
President--North American Operations, could be expected to cause some disruption
in the operations of the Company until either of such individuals was replaced.
The Company has not entered into an employment agreement with any management
employee.
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 Credit Facility and, since indebtedness under the
Credit Facility will effectively rank senior in priority to indebtedness under
the Notes, the Company would be obligated to repay indebtedness under the 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
9
<PAGE>
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 Credit Facility is 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. 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."
ABSENCE OF PUBLIC MARKET
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").
However, Chase Securities Inc. and Salomon Brothers Inc (the underwriters at the
time of the initial public offering of the Notes) have previously engaged and
may again engage in market-making transactions in the Notes. They are under no
obligation to continue to do so, however, and may discontinue any market-making
activities at any time without notice. The Notes 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.
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.
10
<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, 1996 have been derived
from, and are qualified by reference to, the consolidated financial statements
of the Company. Results for the six months ended February 29, 1996 and February
28, 1997 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 statments of the Company and the
accompanying notes thereto and other financial data appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, -------------------------------
------------------------------------------------------ FEBRUARY 29, FEBRUARY 28,
1992 1993 1994(a) 1995 1996 1996 1997
-------- -------- -------- --------- --------- -------------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Sales.................... $ 52,152 $ 58,286 $70,284 $ 124,650 $ 159,462 $ 73,877 $ 79,971
Cost of sales............ 37,676 42,679 51,670 91,972 117,592 55,857 65,089
-------- -------- -------- --------- --------- -------------- --------------
Gross profit........... 14,476 15,607 18,614 32,678 41,870 18,020 14,882
-------- -------- -------- --------- --------- -------------- --------------
Selling, general and
administrative......... 6,046 7,207 8,821 16,649 22,035 8,245 9,579
Research and
development............ 915 820 764 1,682 2,156 1,007 1,167
Amortization of
intangibles(b)......... 1,421 1,400 2,025 3,724 5,207 2,194 1,634
Write-off of
intangibles............ -- -- -- -- 7,292 -- 1,720
Restructuring costs...... -- -- -- -- -- -- 1,093
-------- -------- -------- --------- --------- -------------- --------------
Income (loss) from
operations........... 6,094 6,180 7,004 10,623 5,180 6,574 (311)
-------- -------- -------- --------- --------- -------------- --------------
Other (income) expense,
net(c)................. 632 (62) 477 259 158 62 11
Interest expense, net.... 3,147 3,044 3,899 8,483 11,842 5,696 6,250
Amortization of debt
financing costs........ 365 479 433 447 492 261 313
-------- -------- -------- --------- --------- -------------- --------------
Income (loss) before
extraordinary item,
cumulative effect of
change in accounting
principle and income
taxes................ 1,950 2,719 2,195 1,434 (7,312) 555 (6,885)
Income taxes(d).......... 1,287 1,521 1,095 1,294 865 755 (1,650)
-------- -------- -------- --------- --------- -------------- --------------
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ 663 1,198 1,100 140 (8,177) (200) (5,235)
Extraordinary item,
net(e)................. 889 790 1,265 1,265 --
Cumulative effect of
change in accounting
principle(d)........... -- -- 85 -- -- -- --
-------- -------- -------- --------- --------- -------------- --------------
Net income (loss)........ $ 663 $ 309 $ 225 $ 140 $ (9,442) $ (1,465) $ (5,235)
-------- -------- -------- --------- --------- -------------- --------------
-------- -------- -------- --------- --------- -------------- --------------
Income (loss) per share
before extraordinary
item and cumulative
effect of change in
accounting principle... $ (0.01) $ 0.10 $ 0.06 $ (0.04) $ (0.77) $ (0.05) $ (0.49)
-------- -------- -------- --------- --------- -------------- --------------
-------- -------- -------- --------- --------- -------------- --------------
Net income (loss) per
common share........... $ (0.01) $ 0.02 $ (0.02) $ (0.04) $ (0.88) $ (0.16) $ (0.49)
-------- -------- -------- --------- --------- -------------- --------------
-------- -------- -------- --------- --------- -------------- --------------
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital.......... $ 2,920 $ 7,109 $11,049 $ 13,747 $ 21,370 $ 32,354 $ 14,370
Total assets............. 44,031 50,896 110,820 129,315 152,227 156,557 148,180
Total debt............... 30,611 38,140 77,467 91,912 117,913 117,798 121,152
Redeemable warrants(f)... 2,483 2,600 3,055 3,665 4,560 4,088 5,086
Total shareholders'
equity (deficit)....... 2,719 2,597 5,393 6,694 (3,801) 4,822 (10,204)
CASH FLOW DATA:
Net cash provided by
operating activities... $ 7,699 $ 6,768 $ 9,351 $ 8,422 $ 18,795 $ 8,559 $ 2,976
Net cash used in
investing activities... (8,947) (9,119) (38,418) (24,648) (31,271) (16,010) (9,284)
Net cash provided by
financing activities... 229 3,538 30,099 14,785 19,511 21,214 839
OPERATING AND OTHER DATA:
U.S. Closure unit volume
(in millions).......... 3,763 3,980 4,893 8,476 9,606 4,549 4,503
U.S. Closure unit volume
growth(g).............. 11.5% 5.8% 22.9% 73.2% 13.3% 13.5% (1.0)%
EBITDA(h)................ $ 11,085 $ 12,883 $14,728 $ 23,588 $ 27,783 $ 14,323 $ 9,483
Depreciation and
amortization(i)........ 5,920 6,845 8,357 12,789 15,961 8,072 7,305
Capital expenditures..... 8,089 9,564 6,159 11,302 27,194 16,372 9,284
Ratio of earnings to
fixed charges(j)....... 1.4x 1.3x 1.2x 1.2x -- -- --
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
11
<PAGE>
- ------------------------------
(FOOTNOTES FROM PRECEDING PAGE)
(a) Includes ten months of operations before the Nepco acquisition on June 30,
1994 and two months of operations after the acquisition.
(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 fiscal 1994.
(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 warrant agreement.
(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, write-off of intangible assets, restructuring costs, 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
"Item 3-Legal Proceedings." 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.
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 are based on a term very similar to the Company's EBITDA.
EBITDA measures presented may not be comparable to similarly-titled
performance measures of other companies.
(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 year ended August 31, 1996 resulted in a
deficiency of $9.4 million, primarily as a result of the write-off of
intangible assets of $7.3 million, and for the six months ended February 29,
1996 and February 28, 1997, resulted in a deficiency of $1.6 million and
$6.9 million, respectively.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a major designer, manufacturer and marketer of tamper evident
plastic closures and related equipment used for packaging applications in dairy,
bottled water, fruit juice, sport drinks, institutional food products and other
non-carbonated beverage products. 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.
On June 30, 1994, the Company acquired Nepco for a purchase price of $43.7
million. This 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. On June 16, 1995, the Company consummated the Western
Canadian Acquisition in which the Company purchased for $13.6 million 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. These three companies were amalgamated in connection with
the closing of the acquisition and the combined entity now operates under the
name "Portola Packaging Canada Ltd." The Western Canadian Acquisition has been
accounted for as a purchase, and the results of the western Canadian operations
have been consolidated with those of the Company commencing June 16, 1995. On
September 1, 1995, the Company acquired, for a purchase price of $1.5 million,
the remaining 50% interest it had not previously owned in Cap Snap (U.K.) Ltd.,
now known as "Portola Packaging Ltd." The U.K. Acquisition has been accounted
for as a purchase, and the results of the U.K. operations have been consolidated
with those of the Company commencing September 1, 1995. On September 1, 1996,
the Company consummated the Eastern Canadian Acquisition in which the Company
purchased for $3.0 million all of the capital stock of Rapid Plast J-P. Inc.
Rapid Plast was amalgamated with the wholly-owned subsidiary formed by the
Company to make the acquisition and was renamed "Portola Packaging Ltd." The
Eastern Canadian Acquisition has been accounted for as a purchase, and the
results of the eastern Canadian operations have been consolidated with those of
the Company commencing September 1, 1996.
RESULTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO SIX MONTHS ENDED FEBRUARY 29,
1996
Sales increased $6.1 million, or 8.2%, from $73.9 million for the six months
ended February 29, 1996 to $80.0 million for the six months ended February 28,
1997. These increases were primarily due to increased sales volumes from
operations in the United Kingdom and Canada as these newer subsidiaries continue
to increase their operations. Sales from domestic operations remained relatively
constant, as declines in equipment sales were offset by increased volume in
closure sales. These sales increases were primarily the result of increased unit
sales, and price increases were not a factor.
Gross profit decreased $3.1 million, or 17.4%, to $14.9 million for the six
months ended February 28, 1997 from $18.0 million for the same period in fiscal
1996. Gross profit as a percentage of sales decreased from 24.4% for the six
months ended February 29, 1996 to 18.6% for the same period in fiscal 1997. The
margin decrease was due to the mix of sales, with higher sales from the Canadian
and United Kingdom operations, all of which have had relatively low margins. The
Company anticipates sales from its Canadian and United Kingdom operations to
continue to comprise a larger percentage of its total sales than has been the
case in the past, and in the near-term the margins from these operations are
anticipated to remain relatively low although the Company expects that over time
the margins from these operations will improve. In addition, margins in the
domestic closure business were down slightly for the six month period
13
<PAGE>
ended February 28, 1997 as compared with the same period of the prior year. The
Company has taken measures to improve productivity and quality in its core
business, and in December 1996 began implementing a restructuring plan which
consolidated its separate Closure, Packaging and Manufacturing divisions. This
restructuring plan included a reduction in staff positions and the closure of
its Portland, Oregon plant in February 1997. The Company recorded a
restructuring charge of approximately $1.1 million and wrote off goodwill of
$1.7 million in connection with this restructuring plan in the quarter ended
February 28, 1997. Additionally, in March 1997, the Company announced further
restructuring changes designed to improve productivity, and announced the
closure of its Bettendorf, Iowa plant scheduled to occur in July 1997.
Selling, general and administrative expenses were $9.6 million for the six
months ended February 28, 1997, an increase of $1.3 million, or 16.2%, from
expenses of $8.2 million for the same period in fiscal 1996. As a percentage of
sales for the six months ended February 28, 1997, selling, general and
administrative expenses were 12.0% as compared to 11.2% for the same period in
fiscal 1996. These increases are primarily due to increases in personnel in the
sales and marketing area, increases in personnel in the Company's United Kingdom
and Canadian operations as these companies continue to grow and as a result of
the acquisition of Rapid Plast in September 1996, and an increase in legal fees
primarily due to patent litigation.
Research and development expense was $1.2 million for the six months ended
February 28, 1997, an increase of $160,000, or 15.9%, from $1.0 million for the
same period in fiscal 1996. As a percentage of sales, research and development
expense was 1.5% for the six months ended February 28, 1997, as compared to 1.4%
for the same period in fiscal 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) decreased $560,000, or 25.5%, to $1.6 million for
the six months ended February 28, 1997 as compared to $2.2 million for the same
period in fiscal 1996. The decrease was primarily due to a decrease in patent
amortization due to the write-down of patent costs in August 1996.
In February 1997, the Company wrote off goodwill of $1.7 million in
connection with the closure of its Portland, Oregon plant in February 1997.
In the quarter ending February 28, 1997 the Company recorded a restructuring
charge of $1.1 million primarily for employee severance payments in connection
with the closure of its Portland, Oregon plant in February 1997 in connection
with its restructuring plan. In March 1997 the Company announced further
restructuring plans designed to improve productivity which include the closure
of its Bettendorf, Iowa plant scheduled for July 1997. The Company anticipates
it will record an additional restructuring charge in connection with this
restructuring plan in the quarter ending May 31, 1997, although it is not able
to estimate the amount of such charge at this time.
Interest income decreased $395,000 to $289,000 for the six months ended
February 28, 1997 from $684,000 for the same period in fiscal 1996. This decline
was primarily due to lower levels of invested cash in fiscal 1997 as compared to
fiscal 1996. Higher levels of cash were available for investment during fiscal
1996 due to completion of the $110 million senior notes financing in early
October 1995.
Interest expense increased $159,000 to $6.5 million for the six months ended
February 28, 1997 as compared to $6.4 million for the same period in fiscal
1996. These increases were primarily due to a higher level of debt in fiscal
1997 due to the issuance of $110 million of 10.75% senior notes due on October
2, 1995, and to a lesser extent to borrowings under the Company's line of credit
in fiscal 1997.
Amortization of debt financing costs increased $52,000 to $313,000 for the
six months ended February 28, 1997 as compared to $261,000 for the same period
in fiscal 1996. Debt financing costs are
14
<PAGE>
primarily attributable to the $110 million senior notes issued in October 1995
and to a lesser extent, debt financing incurred in western Canada.
Other expense for the six months ended February 28, 1997 was $11,000
compared to $62,000 for the same period in fiscal 1996.
The Company recorded a benefit from income taxes of $1.7 million for the six
months ended February 28, 1997 based on its pre-tax loss using an effective tax
rate of 24% in anticipation of its expected tax rate for the entire fiscal year.
The actual effective tax rate for the entire fiscal year could vary
substantially depending on actual results achieved. The Company had an effective
tax rate of 11.8% for fiscal 1996. Income tax expense does not bear a normal
relationship to income before income taxes primarily due to nondeductible
goodwill and other intangibles arising from the Company's acquisitions.
An extraordinary item of $1,265,000, 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 notes issue in October 1995.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995
Sales increased $34.8 million, or 27.9%, from $124.7 million for fiscal 1995
to $159.5 million for fiscal 1996. Of the increase, $8.1 million was
attributable to sales from western Canadian operations acquired by the Company
on June 16, 1995 and $5.7 million was attributable to sales from the United
Kingdom operations acquired by the Company on September 1, 1995. Equipment sales
increased $3.2 million, primarily due to an increase in sales of fitment
applicator equipment, somewhat offset by a decrease in sales of water and dairy
applicator equipment. The majority of the increase in sales, $18.5 million, was
due to increases in closures sales volumes, consisting principally of $10.3
million in increased sales of small closures, $5.7 million in increases in sales
of fitments and $2.5 million in increases in sales of five gallon and widemouth
closures.
Gross profit increased $9.2 million, or 28.1%, to $41.9 million for fiscal
1996, as compared to $32.7 million for fiscal 1995. Gross profit as a percentage
of sales remained constant at 26.2% for fiscal 1996 and 1995. The absolute
increase in gross profit was primarily due to increased sales in closure
products and, to a lesser extent, the June 1995 acquisition of the western
Canadian operations, offset by a loss from the United Kingdom operations
acquired in September 1995.
Selling, general and administrative expense increased $5.4 million, or
32.4%, to $22.0 million for fiscal 1996, as compared to $16.6 million for fiscal
1995, and increased as a percentage of sales from 13.4% for fiscal 1995 to 13.8%
for fiscal 1996. Of the absolute increase, approximately $1.6 million
represented increased commissions and approximately $785,000 was due to
increased advertising, public relations and marketing consulting expenses. The
higher level of sales in fiscal 1996 as compared to fiscal 1995 resulted in the
increase in commission expense. The remaining increases were primarily due to
the increased operations of the corporation and resulting infrastructure
increases.
Research and development expenses increased $474,000, or 28.2%, to $2.2
million for fiscal 1996, as compared to $1.7 million for fiscal 1995, and
increased as a percentage of sales from 1.3% in fiscal 1995 to 1.4% in fiscal
1996. The absolute increase in research and development expenses was due
primarily to increased expenditures for new product prototypes and patent
expenses.
Amortization of intangibles (consisting of amortization of patents and
technology licenses, goodwill and covenants not to compete) increased $1.5
million, or 39.8%, to $5.2 million for fiscal 1996, as compared to $3.7 million
for fiscal 1995. Of the increase, approximately $600,000 was due to an increase
in amortization of patents and acquired technology, primarily resulting from the
U.K. Acquisition, approximately $315,000 was due to an increase in amortization
of goodwill, primarily resulting from the Western Canadian and U.K.
Acquisitions, and approximately $550,000 of the increase related to amortization
of the covenant not to compete relating to the Western Canadian Acquisition.
15
<PAGE>
The write-off of intangibles of $7.3 million in fiscal 1996 related to the
adoption of Financial Accounting Standards Board Statement No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS 121) during fiscal 1996, 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 and requires valuation of impairments at the lowest
level of identifiable cash flows. Previously, the Company evaluated long-lived
assets on a divisional or group basis using undiscounted cash flows. Due to
changes in market conditions in certain markets and manufacturing facilities,
the Company evaluated portions of its goodwill recorded in connection with its
acquisitions of Nepco and Portola Packaging Canada Ltd. The Company recorded
impairment losses of $421,000 and $2,332,000 related to goodwill recorded in the
acquisition of Nepco and Portola Packaging Canada Ltd., respectively. The
Company also undertook a detailed study of its patents and began to evaluate
cash flows on an individual product family basis for impairment. Previously,
patents were evaluated on a group basis for impairment. This change in
methodology was implemented to be consistent with SFAS 121's requirement to
evaluate cash flows from intangibles at the lowest identifiable level and
resulted in a write-down of $4,539,000.
Income from operations decreased $5.4 million, or 51.2%, to $5.2 million for
fiscal 1996, as compared to $10.6 million for fiscal 1995, and decreased as a
percentage of sales from 8.5% for fiscal 1995 to 3.2% for fiscal 1996. These
changes were due to the factors summarized above and primarily reflect the
write-off of intangible assets of $7.3 million.
Net interest expense increased $3.3 million to $11.8 million for fiscal
1996, as compared to $8.5 million for fiscal 1995, primarily as a result of
increased borrowings to fund acquisitions, capital expenditures and higher
working capital requirements associated with increased sales levels.
Amortization of debt financing costs increased $45,000 to $492,000 for
fiscal 1996, as compared to $447,000 for fiscal 1995.
Other expense decreased $101,000 to $158,000 in fiscal 1996 as compared to
$259,000 in fiscal 1995.
Income taxes decreased $429,000 to $865,000 for fiscal 1996, as compared to
$1.3 million for fiscal 1995.
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle decreased to a loss of $8.2 million in fiscal 1996, as
compared to income of $140,000 in fiscal 1995. Net income (loss) decreased to a
loss of $9.4 million in fiscal 1996, as compared to income of $140,000 in fiscal
1995. In October 1995, the Company refinanced its debt to provide additional
capacity for growth, resulting in an extraordinary charge of $1.3 million, net
of taxes, relating to loan fees and other costs relating to the early
extinguishment of debt.
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 $124.7 million for fiscal 1995. Of the increase, $41.1 million was
attributable to sales from 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 five 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
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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 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.
Amortization of debt financing costs increased $14,000 to $447,000 for
fiscal 1995, as compared to $433,000 for fiscal 1994.
Income taxes increased $199,000 to $1.3 million for fiscal 1995, as compared
to $1.1 million 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash from operations, 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 28, 1997, the Company had cash and cash equivalents of $2.3 million, a
decrease of $5.5 million from August 31, 1996.
Cash provided by operations totaled $3.0 million for the six months ended
February 28, 1997, a $5.6 million decrease from the $8.6 million provided by
operations for the six months ended February 29,
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<PAGE>
1996. Other current assets used funds of $1.2 million in the six months ended
February 28, 1997, compared to using funds of $726,000 in the same period of the
prior year. Accounts payable used funds of $1.9 million in the first half of
fiscal 1997 compared to using funds of $2.9 million in the first half of fiscal
1996, and accrued expenses used funds of $50,000 in the first six months of
fiscal 1997 as compared to using funds of $1.0 million in the same period of
fiscal 1996. Accrued interest expense provided funds of $79,000 in the first
half of fiscal 1997 compared to providing funds of $4.2 million in the same
period of fiscal 1996.
Cash used in investing activities was $9.3 million for the three months
ended February 28, 1997, as compared to $16.0 million for the three months ended
February 29, 1997. This consisted primarily of additions to property and
equipment. The Company anticipates capital expenditures for fiscal 1997 will be
approximately $25 million, as a result of capital additions for the United
Kingdom facility and for newer products, principally fitments and push-pull
closures, and to support expanded operations through recently completed
acquisitions.
Cash provided by financing activities was $839,000 for the first half of
fiscal 1997 compared to $21.2 million for the first half of fiscal 1996. On
October 2, 1995 the Company completed an offering of $110 million of senior
notes that mature on October 1, 2005. The net proceeds of the offering were
approximately $106 million, of which $83 million was used to retire the
Company's outstanding debt under its senior term loans, revolving facility and
senior subordinated notes. As of February 28, 1997, the Company had borrowed $2
million under its $35 million revolving line of credit.
The Company had 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 Notes to Consolidated Financial Statements). 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. In June 1996, the
Company reached a settlement agreement with Scholle, whereby Scholle granted to
the Company a non-exclusive license to use certain of its patents, and the
Company agreed to pay a royalty to Scholle of $0.01 per five-gallon non-spill
closure unit sold. The Company remained liable for damages of $0.01 per closure
unit sold prior to the date of the settlement agreement, plus interest at a rate
of 10% on all past due amounts. The Company made a payment of $1.7 million to
Scholle on July 1, 1996 in settlement of all amounts due, including interest,
through May 31, 1996. Such amount had been accrued in the Company's financial
statements.
On March 19, 1997, the staff of the Securities and Exchange Commission (the
"Commission") informed the Company of its position that sales of the Notes made
after December 31, 1996 by Chase Securities Inc. ("Chase Securities"), which may
be an affiliate of the Company and which has made and in the future may make a
market in the Notes, were made without a current effective registration
statement being in effect. The Company believed that it had a current effective
registration statement at the time of such sales. However, the Company
immediately notified Chase Securities of the Commission staff's position and
Chase Securities ceased trading in the Notes. The Company has been informed by
Chase Securities that during the period from January 1, 1997 to March 20, 1997,
Chase Securities sold an aggregate of approximately $14 million of the Notes in
transactions at prices above the par value of the Notes. As of April 25, 1997,
the Notes were trading at a price slightly below par value.
At the request of the Commission staff, the Company will notify the buyers
of the Notes sold by Chase Securities in such transactions that in the view of
the Commission staff the sales of such Notes may be subject to rescission. Under
the terms of the underwriting arrangement entered into with Chase Securities in
1995, the Company may be required to indemnify Chase Securities for any loss
incurred by Chase Securities in connection with a rescission. To the extent that
rescissions were made, the Company's exposure generally would be equal to the
difference between the price at which the Notes were repurchased and the price
at which the Notes could be resold. The amount of the potential loss would
increase or decrease depending upon the then-current price of the Notes. The
ultimate loss, if any, incurred by the Company will be dependent upon the extent
to which Noteholders exercise their potential rescission rights and the
then-current market price of the Notes. The Company believes that its cash
resources, including its
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<PAGE>
borrowings under its line of credit, are adequate to cover any such loss without
materially affecting the normal conduct of its business. The Company has not
accrued a liability in its financial statements as of February 28, 1997 for the
possible rescission of certain sales of the Notes, since the Company has not
made a determination that it is probable that a loss on rescission will be
incurred by the Company. Moreover, the Company has been informed by Chase
Securities that all trades through February 28, 1997 were in excess of par
value, and believes that any such loss as of February 28, 1997 would not have
been material.
At February 28, 1997, the Company had $2.3 million in cash and cash
equivalents, as well as borrowing capacity under the revolving credit line (of
which $33 million was available for draw as of February 28, 1997 and $28 million
was available for draw as of April 18, 1997). 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 1998.
INFLATION
Resin comprises a significant portion of the Company's raw material costs.
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. 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." The Company has
not entered into any hedging arrangements to minimize the risk associated with
resin price fluctuations or interest rate fluctuations.
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 1996, 46%
of sales occurred in the first half of the year (September through February)
while 54% 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 1996 the Company recorded a loss from operations
in the second half of the year due to the write-down of intangible assets
previously discussed.
INCOME TAXES
Income tax expense does not bear a normal relationship to income before
income taxes primarily due to nondeductible goodwill arising from the Nepco
acquisition and other acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings per Share," and in March 1997 issued
Statement No. 129 (SFAS 129), "Disclosures of Information About Capital
Structure," both of which specify the computation, presentation and disclosure
requirements for Earnings per Share. SFAS 128 and SFAS 129 will become effective
for the
Company's 1998 fiscal year. The Company is currently studying the implications
of these statements and has not yet determined the impact of adopting such
statements on the Company's financial statements.
SUBSEQUENT EVENTS
In March 1997, the Company announced further restructuring changes designed
to provide productivity improvements in its core business. This phase of the
restructure includes an elimination of several
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<PAGE>
additional management positions and the closure of its Bettendorf, Iowa plant in
July 1997. The Bettendorf plant has been listed for sale. The Company expects to
record a restructuring charge in connection with this restructuring plan in the
quarter ending May 31, 1997, although it is not able to estimate the amount of
such charge at this time.
In April 1997, the Company designated its eastern Canadian subsidiary and
its United Kingdom subsidiary as "restricted" subsidiaries. These subsidiaries
had previously been designated "unrestricted subsidiaries." The Company's
western Canadian subsidiary continues to be operated as an "unrestricted
subsidiary." Under the terms of the Indenture pertaining to the senior notes
issued in October 1995, amounts that may be invested by the Company in its
unrestricted subsidiaries are subject to limitations.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Prospectus, including, without
limitation, statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" regarding the Company's
financing alternatives, financial position, business strategy, plans and
objectives of management of the Company for future operations and industry
conditions, are forward-looking statements. Although the Company believes that
the expectations reflected in any such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Any forward-looking statements herein are subject to certain risks
and uncertainties in the Company's business, including but not limited to,
competition in its markets and reliance on key customers, all of which may be
beyond the control of the Company. Any one or more of these factors could cause
actual results to differ materially from those expressed in any forward-looking
statement. All subsequent written and oral forward-looking statements
attributable to the Company or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements disclosed in this
paragraph and elsewhere in this Prospectus.
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BUSINESS
OVERVIEW
Portola Packaging, Inc. (together with its subsidiaries referred to as the
"Company" or "Portola") was incorporated in California in 1964, and
reincorporated in Delaware in April 1994. The Company (formerly known as Cap
Snap Seal, Inc.) 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. Since Portola was acquired from the founding family, 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 $159.5 million
in sales and 9.6 billion in units sold for fiscal 1996. Mr. Watts and other
members of senior management own or control 26.6%, 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 seven
years at 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, (ii) five gallon closures, (iii)
widemouth closures, (iv) fitments for gable-top paperboard containers and (v)
push-pull dispensing closures for bottled water, flavored water and sports
drinks. Portola also designs, manufactures and supplies high speed capping
equipment and customized water bottling systems, which are marketed by the
Company primarily under the tradename "PortaPlant". Portola's closure products
are primarily manufactured domestically using a technologically advanced, high
speed injection molding process at nine 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 9.6 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, 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 85 active 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
certain 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.
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 improve production efficiencies and enhance low cost manufacturing
capabilities, (iv) expanding sales in international markets where significant
growth opportunities exist and (v) 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.
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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.
EMPHASIZING CUSTOMER SUPPORT AND TOTAL PRODUCT SOLUTIONS. The Company 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 product solution
approach includes seeking at all times to provide 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.
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. See "--Raw Materials and Production."
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 entered into a joint venture in Mexico and has acquired its
Canadian and United Kingdom subsidiaries. In addition, the Company is currently
structuring a joint venture arrangement in Shanghai, China, although there can
be no assurance that such arrangement will be consummated. The Company has no
firm plans at this time for expansion into other international markets although
it will continue to evaluate other expansion opportunities as they arise. See
"--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. Since fiscal 1994, the Company has acquired
Nepco and completed its Canadian and United Kingdom acquisitions, entered into a
joint venture in Mexico and is currently structuring a joint venture arrangement
in China.
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, cosmetics, 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
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<PAGE>
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 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 invented 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 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 "--Product Development."
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) customized bottling systems for returnable water
cooler bottles which it markets primarily under the name "PortaPlant." The
Company's sales of plastic closures represented approximately 89%, 89% and 90%
of its total sales for the fiscal years ended August 31, 1994, 1995 and 1996,
respectively.
PLASTIC CLOSURES
The Company's plastic closures are broadly grouped into five categories: (i)
small closures used to cap blowmolded plastic bottles, (ii) closures for five
gallon returnable glass and plastic water cooler bottles, (iii) widemouth
closures for institutional food products, (iv) fitments for gable-top containers
(such as conventional paperboard milk and juice cartons) and (v) push-pull
dispensing closures for bottled water, flavored water and sports drinks. 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.
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<PAGE>
The following table describes the Company's principal plastic closure
product lines.
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION MARKET APPLICATION
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Small closures Plastic closures for plastic Milk, fruit juices, bottled water
blowmolded bottles and vinegar
Five gallon closures Plastic closures for glass and Water cooler bottles
plastic returnable water cooler
bottles
Widemouth closures Plastic closures for widemouth Institutional foods, including
plastic containers condiments, mayonnaise and salad
dressing
Fitments Recloseable plastic dispensing Orange juice, lemonade and other
fitment for polyethylene-coated juice products
gable-top paperboard cartons
Push-pull dispensing closures Dual tamper evident closures with Bottled water, flavored water,
push-pull feature sports drinks
</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 customized 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. Portola has
focused its sales efforts for PortaPlants internationally as less developed
countries look for improved distribution of safe and reliable drinking water.
BACKLOG
Production and delivery cycles for closures is very short and the Company's
backlog for closures is generally cancelable on short notice. Contracts for
equipment purchases generally include cancellation penalties. There is no
assurance that some portion of the backlog may not be canceled or that the level
of backlog at any particular time is an appropriate indicator of the future
operating performance of the Company. Due to the short production and delivery
cycles for closures, the Company does not believe backlog information is a
material factor in understanding its business. Backlog for closures is generally
two to three weeks of orders, and is relatively constant from period to period.
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
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<PAGE>
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. Research
and development expenditures for fiscal 1994, 1995 and 1996 were $764,000, $1.7
million and $2.2 million, respectively.
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.
RAW MATERIALS AND PRODUCTION
The principal raw material for the Company's plastic closures is injection
molding grade LDPE resin, which generally accounts for at least 50% of the cost
of all raw materials purchased for the Company's plastic closures. 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 substantially 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.
However, significant increases in resin prices, coupled with an inability to
pass such increases on to customers promptly, would have a material adverse
effect on the Company's financial condition and results of operations. See "Risk
Factors--Possible Adverse Effect of Changes in Resin Prices."
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, 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 operations, the Company is
able to limit its direct labor costs while meeting the strict sanitary
requirements necessary for producing food and beverage packaging products.
In the past, the Company designed and manufactured many of its own molds.
However, the increasing size and complexity of certain molds for new products
have caused the Company to out-source its 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.
PROPERTIES
The Company currently owns or leases ten modern production facilities
located in the United States, which operate five to seven days a week, 24 hours
a day. One of these production facilities was closed in February 1997, and a
second production facility is scheduled to be closed in July 1997. Both of these
facilities have been listed for sale. The Company's western Canadian subsidiary
leases two production facilities and the Company's eastern Canadian subsidiary
leases two production facilities (one of which will be abandoned by the Company
following expiration of the lease term in June 1997). In addition, the
25
<PAGE>
Company recently leased a manufacturing facility located in Doncaster, South
Yorkshire, England for use by its United Kingdom subsidiary. The Company's
facilities are highly efficient due to automation and continuous operation in
the plants. The Company believes that its 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 or eliminate more production facilities sooner than expected. The
following table indicates the locations, functions, square footage and nature of
ownership of the Company's current facilities.
<TABLE>
<CAPTION>
NATURE OF
LOCATION FUNCTIONS SQUARE FEET OWNERSHIP(1)
- -------------------------------------------- --------------------------------------- ----------- --------------
<S> <C> <C> <C>
San Jose, CA................................ Executive Office/Closure Mfg./ 154,000 owned
Warehouse Engineering/Research and
Development Facility and Equipment
Division
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./ 46,000 owned
Warehouse
Sumter, SC.................................. Closure Mfg./Warehouse 45,000 owned
Chino, CA................................... Closure Mfg./Warehouse 64,000 owned
Gresham (Portland), OR...................... Closure Mfg./Warehouse 36,000 owned(2)
Fort Worth, TX.............................. Closure Mfg./Warehouse 27,000 owned
Bettendorf, IA.............................. Closure Mfg./Warehouse 40,000 owned(3)
Richmond, British Columbia, Canada.......... Bottle & Closure Mfg./Warehouse 49,000 leased
Edmonton, Alberta, Canada................... Bottle Mfg./Warehouse 43,000 leased
Montreal, Quebec, Canada.................... Bottle Mfg./Warehouse 83,000 leased
Montreal, Quebec, Canada.................... Bottle Mfg./Warehouse 44,000 leased
Doncaster, South Yorkshire, England......... Closure Mfg./Warehouse 50,000 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 as
follows: the lease of the Clifton Park facility expires in 1998, the leases
for the Richmond and Edmonton facilities expire in 2000, and the lease for
the 83,000 square foot facility in Montreal expires in June 1997.
(2) The Company closed this facility in mid-February 1997. This property has
been listed for sale.
(3) The Company has announced that this facility will be closed in July 1997.
The property has been listed for sale.
SALES, MARKETING AND CUSTOMER SERVICE
The Company markets its products through its internal sales department and
through a nationwide and international 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 35% of the Company's sales during the
fiscal year ended August 31, 1996, and none accounted for more than 4% of sales
during that period. Most of the Company's customers have been doing business
with the Company for more than ten years.
26
<PAGE>
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 Canada and the United
Kingdom and 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. For fiscal years 1994, 1995 and 1996, export sales to unaffiliated
customers were $8.1 million, $18.7 million and $17.6 million.
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 customized bottling
systems, the Company can provide joint venture partners with a complete solution
to their bottling and capping requirements. The Company currently has only one
international joint venture, having acquired the remaining interests in two
joint ventures in which it previously participated through consummation of the
Western Canadian and U.K. Acquisitions. The Company holds a 50% interest in Cap
Snap Mexico, a joint venture formed in Mexico in 1993 with a local producer of
plastic bottles and closures. The Company anticipates that it will continue to
use joint ventures as a means of expanding production internationally and is
currently structuring a joint venture arrangement in Shanghai, China.
COMPETITION
The Company competes in marketing container closures to the food and
beverage industry on the basis of price, product design, product quality and
reliability, on-time delivery and customer service. Among the attributes that
the Company believes distinguish it 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.
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
27
<PAGE>
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 engaged in patent litigation with two parties who are seeking
to have the court declare certain patents owned by the Company invalid. These
parties have also included allegations of antitrust violations in their
complaints. The Company believes its patents are valid, and intends to contest
these allegations vigorously. However, there can be no assurance that the
Company will be successful in its defense of these matters.
Until recently, the Company had been engaged in patent infringement
litigation with Scholle Corporation ("Scholle"), which commenced an action
against the Company in July 1992 alleging that the Company infringed upon
certain patents of Scholle relating to five-gallon non-spill closures. In
February 1995, a jury rendered a verdict adverse to the Company and in favor of
Scholle, which verdict was entered by the court on January 2, 1996. In June
1996, the Company entered into a settlement agreement with Scholle, the terms of
which 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. The Company made a payment of $1.7
million to Scholle on July 1, 1996 in settlement of all amounts due, including
interest, through May 31, 1996. Such amount had been previously accrued in the
Company's financial statements. The Company has also brought a declaratory
relief action against Scholle seeking judgment that a more recent Company
product does not infringe any Scholle patents.
The plastic closure industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company and its
subsidiaries are party to various claims of this nature. The Company is also
party to a number of other lawsuits and claims arising out of the normal course
of business. Although the ultimate outcome of these matters is not presently
determinable, 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.
EMPLOYEES
As of March 1997, the Company had 880 full-time employees, 26 of whom were
engaged in product development, 53 of whom were engaged in marketing, sales and
customer support, 759 of whom were engaged in manufacturing and 42 of whom were
engaged 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 is represented by any
collective bargaining agreements (approximately 18 of the employees of one of
the Company's Canadian subsidiaries are members of the Teamsters Union), and the
Company has never experienced a work stoppage. The Company has historically
enjoyed good employee relations.
28
<PAGE>
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 11 Chairman of the Board and Chief Executive Officer
Laurie D. Bassin......................... 48 10 Vice President--Corporate and Organizational
Development
Douglas L. Cullum........................ 42 11 President--North American Operations
E. Scott Merritt......................... 41 2 Vice President--Manufacturing Technology
Themistocles G. Michos................... 64 0 Vice President and General Counsel
Rodger A. Moody.......................... 44 21 Vice President--International Sales
Robert Plummer........................... 37 2 President--U.S. Operations
Robert R. Strickland..................... 52 5 Vice President--Finance, CFO and Assistant Secretary
Patricia A. Voll......................... 38 1 Vice President--Finance and Accounting
Christopher C. Behrens................... 35 2 Director
Martin R. Imbler(2)...................... 48 8 Director
Jeffrey Pfeffer, Ph.D.(1)................ 50 1 Director
Timothy Tomlinson(1)(2).................. 47 11 Secretary and Director
Larry C. Williams(1)(2).................. 47 8 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee. Mr. Tomlinson serves as an alternate 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.
Ms. Bassin has been Vice President--Corporate and Organizational Development
of the Company since February 1997. From February 1993 to February 1997, she was
Vice President--Corporate Development of the Company. 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. Cullum has been President--North American Operations of the Company
since March 1997. From April 1996 to March 1997, he was President--Packaging
Division of the Company. 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. Merritt has been Vice President--Manufacturing Technology since April
1996. He was 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,
29
<PAGE>
he was employed by General Motors of Canada, Ltd., where he held various
positions, most recently as Manufacturing Superintendent--Components Plant.
Mr. Michos joined the Company as Vice President and General Counsel in
October 1996. Prior to that time, Mr. Michos was a partner in the law firm of
Collette & Erickson LLP.
Mr. Moody has been Vice President--International Sales since January 1997.
From October 1994 through January 1997, he was Vice President--Managing
Director--International Division of the Company. 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.
Mr. Plummer has been President--U.S. Operations since March 1997. From
August 1996 through March 1997, he was President--Dispensing Closure Products
and U.S. Closure Manufacturing Division. From May 1994 to April 1996, he was
Vice President and General Manager--Equipment Division of the Company. In
addition, he assumed responsibilities as President--Nepco Division in September
1995, a position he held through August 1996. 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. 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.
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. Behrens has been a director of the Company since June 1994. He has been
an officer of The Chase Manhattan Bank since 1986 and an officer of Chase
Capital Partners since 1990. Mr. Behrens is a director of The Pantry, Inc. and
numerous private companies.
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.
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. He currently holds the Thomas D. Dee Professor of
Organizational Behavior chair at the Stanford Graduate School of Business.
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, and as a director of
several private companies as well. He has been a partner in the law firm of
Tomlinson Zisko Morosoli & Maser LLP since 1983.
30
<PAGE>
Mr. Williams has been a director of the Company since January 1989. He
co-founded The Breckenridge Group, Inc., an investment banking firm in Atlanta,
Georgia, in April 1987 and is one of its principals.
Each director listed above was elected at the Company's Annual Meeting of
Shareholders held in January 1997 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").
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. 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 in the amount of $4,000 paid on a quarterly
basis. See "--Compensation Committee Interlocks and Insider Participation."
On August 27, 1996, the Compensation Committee of the Board of Directors
approved the grant to certain directors of the Company of non-qualified stock
options pursuant to the terms of the 1994 Stock Option Plan (the "1994 Plan").
Options may be granted under the 1994 Plan to officers, key employees, directors
and independent contractors of the Company, or any subsidiary of the Company.
Each of Dr. Pfeffer and Messrs. Imbler, Williams and Tomlinson received options
to purchase 10,000 shares of Class B Common Stock, Series 1 of the Company, with
an exercise price of $5.00 per share. The non-qualified stock options granted to
such directors will expire ten years from the date of grant and will vest 20%
one year after the vesting start date of August 27, 1996 and 5% for each
calendar quarter that such individual continues to serve as a member of the
Board of Directors or is employed by the Company. Mr. Tomlinson has assigned his
options to TZM Investment Fund, of which Mr. Tomlinson is a general partner.
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, 1996, 1995 and 1994 by the Company's Chief Executive
Officer and the Company's five other most highly compensated executive officers
during fiscal 1996 (together, the "Named Officers"). The table includes two
executive officers who have resigned.
31
<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) OPTION COMPENSATION(3)
- ------------------------------------------ --------- ---------- ---------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts ............................ 1996 $ 269,348 $ 37,500 $ 50,493 100,000 $ 3,600
Chairman of the Board and Chief 1995 232,280 62,502 50,251 -- 3,015
Executive Officer 1994 201,093 150,000 50,373 -- 6,999
Douglas L. Cullum ........................ 1996 149,093 7,500 -- 20,000 3,600
President--North American Operations 1995 143,042 9,940 -- -- 3,015
1994 136,839 16,300 -- -- 2,404
Howard R. Girbach(4)...................... 1996 162,323 11,250 7,200 -- 3,600
1995 162,011 2,040 7,200 -- 3,015
1994 149,261 29,300 7,200 -- 2,404
Dannie K. Martz(5)........................ 1996 155,481 11,250 6,600 72,000 --
1995 -- -- -- -- --
1994 -- -- -- -- --
Robert Plummer(6) ........................ 1996 152,137 8,750 -- 10,500 3,600
President--U.S. Operations 1995 133,850 13,900 28,721 54,000 2,260
1994 36,346 5,700 -- 50,000 --
Robert R. Strickland...................... 1996 156,770 10,000 -- -- 3,600
Vice President--Finance and Chief 1995 150,974 2,040 -- -- 3,015
Financial Officer 1994 133,443 57,500 -- -- 2,404
</TABLE>
- ------------------------
(1) With respect to fiscal 1996, includes bonuses paid during fiscal 1996 for
services rendered during fiscal 1996, but not bonuses paid during fiscal
1997 for services rendered during fiscal 1996. With respect to fiscal 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 fiscal 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 with respect to Mr. Watts, Mr.
Girbach and Mr. Martz. In addition, includes $41,800 in consulting fees with
respect to Mr. Watts paid to PPI Management Inc., a corporation of which Mr.
Watts is the sole shareholder. Also includes relocation payments with
respect to Mr. Plummer for fiscal 1995.
(3) Represents insurance premiums on term life insurance of $4,595 for Mr. Watts
for fiscal 1994. In addition, represents a Company profit-sharing
contribution of $2,304, $2,100 and $2,100 for fiscal 1994, 1995 and 1996,
respectively, and a Company 401(k) matching contribution of $100 in fiscal
1994, a Company 401(k) matching contribution of up to 1% of salary,
depending on the employee's contribution to the plan for fiscal 1995, and a
Company 401(k) matching contribution of $1,500 for fiscal 1996, for the
officers who participate in the plan.
(4) Mr. Girbach resigned as President of the Packaging Division in April 1996
and resigned all other officer positions in late October 1996.
(5) Mr. Martz left the employ of the Company in February 1997. Mr. Martz held
the title of President-- Closures Division and Portola Sales and Service
Divisions prior to his resignation.
(6) Mr. Plummer joined the Company in May 1994.
32
<PAGE>
The following table sets forth information concerning individual grants of
stock options made during fiscal year 1996 to the Named Officers.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERYING OPTIONS GRANTED EXERCISE OR OPTION TERM
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ----------------------
NAME GRANTED(1) IN FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)(4)
- ----------------------------------------- ----------- ------------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts............................ 100,000 17.2% $ 4.95 08/27/2006 $ 238,005 $ 672,165
Douglas L. Cullum........................ 20,000 3.4% $ 4.50 08/27/2006 $ 56,601 $ 143,433
Dannie K. Martz(5)....................... 72,000 12.4% $ 4.50 11/08/2005 $ 203,764 $ 516,359
Robert Plummer........................... 10,500 1.8% $ 4.50 08/27/2006 $ 29,715 $ 75,303
</TABLE>
- ------------------------
(1) All options were granted under the Company's 1994 Stock Option Plan. The
options become exercisable for 20% of the shares on the first anniversary of
the date of grant and the balance vests 5% for each calendar quarter of each
individual's employment thereafter. Vesting of Mr. Watts' options
accelerates upon a change in control. See "--Employment and Change of
Control Arrangements." Mr. Watts received non-qualified stock options; all
other individuals identified in the table received incentive stock options.
(2) Calculated by excluding as part of total options granted in fiscal 1996 any
options granted to non-employee directors during fiscal 1996 under the
Company's 1994 Stock Option Plan.
(3) The exercise price on the date of grant was equal to 100% of the fair market
value as determined by the Board of Directors on the date of grant, except
with respect to the exercise price of the options granted to Mr. Watts on
the date of grant which was equal to 110% of the fair market value
determined by the Board of Directors.
(4) 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.
(5) Mr. Martz resigned in February 1997.
33
<PAGE>
The following table sets forth certain information regarding option
exercises during fiscal year 1996 and the number of shares covered by both
exercisable and unexercisable stock options as of August 31, 1996 for each of
the Named Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
AUGUST 31, 1996 AT AUGUST 31, 1996(1)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ------------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts..................... -- -- -- 100,000 $ -- $ --
Douglas L. Cullum................. -- -- 55,000 20,000 213,950
Howard R. Girbach(2).............. -- -- 64,000 76,000 128,000 152,000
Dannie K. Martz(3)................ -- -- -- 72,000 -- --
Robert Plummer.................... -- -- 28,800 75,700 41,400 65,600
Robert R. Strickland.............. -- -- 80,000 -- 220,000 --
</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, 1996
of $4.50 per share, as determined by the Company's Board of Directors, minus
the exercise price of the option.
(2) Mr. Girbach resigned as President of the Packaging Division in April 1996
and resigned all other officer positions in late October 1996.
(3) Mr. Martz resigned in February 1997.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
In April 1996, Mr. Girbach resigned from his position as
President--Packaging Division of the Company and assumed the title of Corporate
Vice President working on special projects for Mr. Watts. Effective as of
October 28, 1996, Mr. Girbach resigned his position as an officer of the Company
and entered into a Resignation Agreement providing for severance payments in
connection with such resignation. Under the terms of such arrangement, Mr.
Girbach received a lump sum severance payment in the amount of $75,000 in
January 1997. His rights under the stock option agreements relating to the stock
options previously granted to him will continue until August 31, 1997.
Certain of the stock option agreements entered into pursuant to the 1994
Stock Option Plan provide for acceleration of vesting of options governed
thereby in the event of a "change of control," as defined in such stock option
agreements. In this regard, the options granted to Dr. Pfeffer and each of
Messrs. Watts, Imbler, Williams and Tomlinson on August 27, 1996 provide for
acceleration of vesting upon a change of control of the Company.
EMPLOYEE BENEFIT PLANS
1988 STOCK OPTION PLAN. The 1988 Stock Option Plan (the "1988 Plan") was
adopted by the Board of Directors in September 1988 and approved by the
Company's stockholders in May 1989. The 1988 Plan has been terminated, although
options granted under the 1988 Plan remain outstanding.
As of March 31, 1997, a total of 1,146,010 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
34
<PAGE>
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified 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
(subject to shortened exercisability periods for terminated employees).
The 1988 Plan may be administered by the Board of Directors or by a
committee appointed by the Board. The 1988 Plan is currently administered by the
Board of Directors.
The exercise price of an option granted under the 1988 Plan may not be less
than 85%, with respect to a 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 of Directors and the Company's stockholders in November
1994, and amended with the approval of the Company's stockholders in November
1996 to provide for an increase in the number of shares reserved for issuance
under the Plan. 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 2,000,000 shares of Class B Common Stock, Series 1 has been
reserved for issuance under the 1994 Plan. As of March 31, 1997, 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 971,500 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 1,024,200 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 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 of Directors 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 a 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 March 31, 1997, 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 1,286,010 shares, and
officers and other employees held incentive stock options to purchase an
aggregate of 831,500 shares.
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<PAGE>
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 1994, fiscal 1995 and fiscal 1996, the
Company contributed 4.0%, 3.0% and 3.0%, respectively, of each participant's
Eligible Compensation Base.
1996 EMPLOYEE STOCK PURCHASE PLAN. The Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Company's Board of Directors in May 1996 and
approved by the Company's stockholders in November 1996. The Purchase Plan is
intended to qualify under Section 423 of the Code. The Purchase Plan will
continue until terminated by the Board of Directors or until all of the shares
reserved for issuance under the Plan have been issued or until January 1, 2007,
whichever shall first occur.
A maximum of 750,000 shares of Class B Common Stock, Series 1 are available
for issuance under the Purchase Plan. Participation is 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
90 days prior to the commencement of an offering under the Purchase Plan. The
Purchase Plan may be administered by the Board of Directors or by the
Compensation Committee if appointed by the Board.
The Purchase Plan will be implemented through consecutive offerings of
twelve months duration commencing on January 1 of each year, the first such
offering having commenced on January 1, 1997. 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) 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.
MANAGEMENT DEFERRED COMPENSATION PLAN. The Management Deferred Compensation
Plan (the "Deferral Plan") was adopted by the Company's Board of Directors in
August 1996. Under the terms of the Deferral Plan, a select group of management
and other highly compensated employees of the Company may elect to defer a
specified percentage not to exceed 50% of their salary and up to 100% of their
bonus cash compensation. Any amounts so deferred by those employees eligible to
participate in the Deferral Plan are unfunded and unsecured general obligations
of the Company to pay in the future the value of the deferred compensation (and
any additional contributions made by the Company in its sole discretion),
adjusted to reflect deemed earnings measured by the performance, whether
positive or negative, of selected investment measurement options chosen by each
participant in the Deferral Plan, during the deferral period provided for in the
Plan. Any discretionary contributions made by the Company will vest at rates
determined by the Company for participants in the Deferral Plan.
The Deferral Plan is administered by the members of an Administrative
Committee comprised of members of management. The Administrative Committee may
adopt rules and procedures governing the Deferral Plan and has the authority to
give interpretive rulings with respect to the Deferral Plan, as well as to
select the funds or portfolios to be the investment measurement options under
the Plan. The Company is not required to actually invest deferred compensation
amounts (or additional contributions made by the Company) in the types of funds
specified by participants in the Deferral Plan.
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<PAGE>
The obligations of the Company to the participants in the Deferral Plan will
be distributed by the Company in accordance with the terms of the Plan, and may
be withdrawn by a participant under the terms governing hardship and other
withdrawals (subject to payment of any withdrawal penalties). The Company may
terminate the Deferral Plan at any time and for any reason whatsoever; provided,
that upon any such termination, any amounts credited to a participant's plan
account(s) (whether or not vested) must be distributed to the participant within
30 days following the date of termination of the Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Jeffrey Pfeffer, Ph.D, Timothy Tomlinson and Larry C. Williams.
Mr. Tomlinson is also the Company's Secretary.
In August 1996, each of Dr. Pfeffer and Messrs. Tomlinson and Williams
received options to purchase 10,000 shares of Class B, Series 1 Common Stock,
with an exercise price of $5.00 per share. Mr. Tomlinson has assigned his
options to TZM Investment Fund, of which Mr. Tomlinson is a general partner. The
options granted to such directors will vest 20% one year after the grant date
and 5% for each calendar quarter thereafter that such individual continues to
serve as a member of the Board of Directors or is employed by the Company.
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. 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 legal counsel the law firm of Tomlinson Zisko
Morosoli & Maser LLP, of which Mr. Tomlinson is a general partner. For legal
services rendered during fiscal 1994, 1995 and 1996, the Company paid Mr.
Tomlinson's law firm $420,000, $333,000 and $618,000, respectively, including
expenses.
In fiscal 1996, Breckenridge Securities Corporation, an affiliate of The
Breckenridge Group, Inc., an investment banking firm of which Larry C. Williams
is a principal, acted as a finder in connection with the sale of Common Stock of
the Company held by certain insiders of the Company. Breckenridge Securities
Corporation received $495,865 from the proceeds of the sale.
For additional information regarding Dr. Pfeffer and Messrs. Tomlinson and
Williams and their affiliates, see "--Executive Officers and Directors,"
"--Director Compensation," "--Employment and Change of Control Arrangements,"
"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
37
<PAGE>
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.
CERTAIN TRANSACTIONS
LOANS TO SENIOR MANAGEMENT AND OTHER EMPLOYEES
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
note plus accrued interest was originally due in January 1993, and accrued
interest at a rate equal to 2% above the Company's borrowing rate on its
revolving credit facility. In January 1997, the Board of Directors agreed to
extend until January 17, 1998 the due date of all principal and accrued interest
owing to the Company and changed the interest rate to a rate equal to the Short
Term Applicable Federal Rate. The loan is secured by a pledge of certain shares
of Class B Common Stock, Series 1 owned by Mr. Watts. Principal plus accrued
interest outstanding at January 31, 1997 was approximately $400,000.
In September 1992, the Company loaned Howard R. Girbach, formerly
President--Packaging Division, $75,000 towards the purchase of a home. The loan
was represented by a nonrecourse promissory note secured by a deed of trust. The
note provided for prepayment in full in one or more installments on or before
the sixth anniversary of the date of the note. Prepayment was to have included
accrued interest at the rate of 6.0%. If the note was not prepaid, satisfaction
of the note was limited to proceeds from the sales of the home in accordance
with a formula outlined in the loan agreement. In July 1996, Mr. Girbach sold
his home and prepaid the note, to the extent of the proceeds received from the
sale. The Company received a payment of principal in the amount of $75,000, and
agreed to discharge Mr. Girbach's remaining obligations under the note.
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. From time to time, the Company has
agreed to make loans to employees of the Company who are not members of senior
management to enable such employees
38
<PAGE>
to purchase their residences. In this regard, in November 1991, the Company
loaned Daniel Luch, Vice President of Research and Development, $109,000 towards
the purchase of a home, and in May 1996, the Company loaned Joseph F. Jahn, then
Vice President--Operations, $100,000 towards the purchase of a home.
TRANSACTIONS WITH DIRECTORS
Jeffrey Pfeffer, Ph.D., a director of the Company, purchased 15,000 shares
of Class B Common Stock, Series 1 on June 18, 1996, at a price per share of
$4.50. For a description of options granted to directors, including Dr. Pfeffer,
see "Management--Director Compensation" and "--Compensation Committee Interlocks
and Insider Participation."
TRANSACTIONS WITH ENTITIES AFFILIATED WITH DIRECTORS
On February 14, 1997, the Company redeemed 95,238 shares of Class B Common
Stock, Series 1 held of record by LJL Cordovan Partners, L.P., an entity
controlled by Jack L. Watts. The redemption price paid by the Company was $5.25
per share.
On March 31, 1997, LJL Cordovan Partners, L.P., an entity controlled by Jack
L. Watts, transferred 10,000 shares of Class B Common Stock, Series 1 to Jeffrey
Pfeffer, Ph.D., a director of the Company, at a price per share of $5.25.
Since June, 1988, The Chase Manhattan Bank ("Chase Bank") had held certain
Senior Subordinated Notes payable by the Company in the principal amount of
$10,000,000 that were due June 30, 2002. On October 2, 1995, the Company
completed the Notes offering, at which time the Senior Subordinated Notes held
by Chase Bank were repaid in full with the net proceeds of the offering of the
Notes. Such payment included $10,000,000 of principal, $7,500 of interest, a
pre-payment premium of $147,008 and $1,500 of other fees and expenses. In each
of fiscal 1994 and 1995, the Company paid Chase Bank interest on this
indebtedness of $1.35 million. In addition, the Company paid refinancing
amendment and advisory fees of approximately $258,000 to Chase Bank during
fiscal 1994. Chase Bank is an affiliate of Chase Securities Inc., Chase Capital
Partners and Chase Manhattan Capital Corporation ("Chase Capital"). Chase
Capital, together with certain related parties, owns approximately 24.7% of the
Company's outstanding voting stock. Chase Securities Inc. was one of the
underwriters in the offering of the Notes, and has previously made and may again
make a market in the Notes. Chase Securities Inc. received underwriting
discounts and commissions in connection with the offering of the Notes. Chase
Securities Inc. is not compensated by the Company for making a market in the
Notes, but is entitled to indemnification under certain circumstances pursuant
to the terms of the underwriting arrangement entered into with the Company.
Christopher C. Behrens, a director of the Company, is also a Vice President of
Chase Bank and Chase Capital Partners.
In June 1994, Chase Capital purchased shares of Class B Common Stock, Series
1 from the Company and certain insiders of Company, and 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 a credit facility entered into with the Company, received certain demand
and piggyback registration rights. In addition, 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 under the heading "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% of the outstanding shares of the Company's common
stock. One of the shareholders agreements also provides that the Company is
39
<PAGE>
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 and June 1995, Chase Capital purchased shares of the Company's
Class B Common Stock, Series 1 directly from the Company and from various
shareholders of the Company (including shares that were sold by Jack L. Watts,
John L. Lemons, Douglas Cullum (and their affiliates) and TZM Investment Fund),
and shares of the Company's Class B Common Stock, Series 2 from RFNL. The
purchase price paid per share was $4.00.
The Company has in the past utilized 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 1994 and 1995, the Company paid Berry Plastics
Corporation $162,000 and $5,000, respectively, for mold development. No amounts
were paid to Berry Plastics Corporation by the Company in fiscal 1996.
In October 1995, Breckenridge Securities Corporation, an affiliate of The
Breckenridge Group, Inc., an investment banking firm of which Larry C. Williams
is a principal, acted as finder in connection with the sale to an unrelated
third party of shares of the Company's Class A Common Stock held by Jack L.
Watts, John Lemons, LJL Cordovan Partners, L.P. and RFNL. Breckenridge
Securities Corporation received fees and expenses in the amount of $495,865 from
the proceeds of the sale. Mr. Williams is a director of the Company and a member
of the Compensation and Audit Committees.
The Company retains as its legal counsel the law firm of Tomlinson Zisko
Morosoli & Maser LLP, of which Timothy Tomlinson is a general partner. For legal
services rendered during fiscal 1994, 1995 and 1996, the Company paid Mr.
Tomlinson's law firm fees and expenses in the aggregate amount of $420,000,
$333,000 and $618,000, respectively. Mr. Tomlinson is a director of the Company,
a member of the Compensation Committee and an alternate member of the Audit
Committee.
For information concerning certain transactions between the Company and
Timothy Tomlinson, Larry C. Williams, Jeffrey Pfeffer, Ph.D. or their respective
affiliates, see "--Compensation Committee Interlocks and Insider Participation."
Dr. Pfeffer and Messrs. Tomlinson and Williams are directors of the Company and
the members of the Compensation Committee of the Board of Directors.
SHAREHOLDERS AGREEMENTS
A majority of the Company's shares, including shares held by Jack L. Watts
and his affiliates, 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.
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<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
March 31, 1997 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. The Company's
equity securities are privately-held and no class of voting securities of the
Company is registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS(1) OF BENEFICIAL OWNER OWNERSHIP(2) CLASS(2)
- -------------------------------------------------- ------------------------------ ------------------ -------------
<S> <C> <C> <C>
Class B Common Stock, Series 1.................... Jack L. Watts(3) 3,792,783 39.6%
Class B Common Stock, Series 1.................... Christopher C. Behrens(4) 1,552,333 16.2%
Class B Common Stock, Series 1.................... Chase Manhattan Capital 1,552,333 16.2%
Corporation(5)
Class B Common Stock, Series 2.................... Christopher C. Behrens(4) 815,715 8.5%
Class B Common Stock, Series 2.................... Chase Manhattan Capital 815,715 8.5%
Corporation(5)
Class B Common Stock, Series 1.................... Gary L. Barry(6) 607,965 6.3%
Class B Common Stock, Series 1.................... Timothy Tomlinson(7) 235,984 2.4%
Class B Common Stock, Series 1.................... Howard Girbach(8) 132,000 1.4%
Class B Common Stock, Series 1.................... Robert R. Strickland(9) 100,000 1.0%
Class B Common Stock, Series 1.................... Douglas L. Cullum(10) 70,000 *
Class B Common Stock, Series 1.................... Larry C. Williams(11) 66,371 *
Class B Common Stock, Series 1.................... Robert Plummer(12) 50,900 *
Class B Common Stock, Series 1.................... Jeffrey Pfeffer, Ph.D.(13) 25,000 *
Class B Common Stock, Series 1.................... Martin R. Imbler(14) 20,000 *
Class B Common Stock, Series 1.................... Dannie K. Martz(15) 18,000 *
Class B Common Stock, Series 1 7,073,648 70.7%
and Series 2.................................... All executive officers and
directors as a group (14
persons)(16)
</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 March 31, 1997, there were
9,582,832 shares of Class B Common Stock issued
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<PAGE>
and outstanding, consisting of 8,411,402 shares of Class B Common Stock,
Series 1 and 1,171,430 shares of Class B Common Stock, Series 2. As of
March 31, 1997, 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 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) 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 March 31, 1997
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. Percent of Class
computation reflects percentage ownership of Class B Common Stock, Series 1
and Class B Common Stock, Series 2 combined.
(3) Includes 424,474 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) 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.
(5) 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.
(6) Mr. Barry's address is 640 Menlo Avenue, Suite 5, Menlo Park, California
95025.
(7) Includes 26,000 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, 4,000 shares held by
trusts for the benefit of Mr. Tomlinson's children and 119,984 shares
subject to options held by TZM Investment Fund that are exercisable within
60 days of March 31, 1997. Mr. Tomlinson's address is 200 Page Mill Road,
Second Floor, Palo Alto, California 94306.
(8) Includes 72,000 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Girbach's address is 18115 Mountfield Drive, Houston,
Texas 77084.
(9) Includes 80,000 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Strickland's address is 890 Faulstich Court, San Jose,
California 95112.
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<PAGE>
(10) Includes 55,000 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Cullum's address is 890 Faulstich Court, San Jose,
California 95112.
(11) Includes 16,050 shares subject to options exercisable within 60 days of
March 31, 1997. Does not include (i) 123,756 shares and (ii) 41,976 shares
subject to options exercisable within 60 days of March 31, 1997, 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.
(12) Includes 40,900 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Plummer's address is 890 Faulstich Court, San Jose,
California 95112.
(13) Dr. Pfeffer's address is Graduate School of Business, Stanford University,
Stanford, California 94305.
(14) Mr. Imbler's address is 101 Oakley Street, Evansville, Indiana 47706.
(15) Includes 18,000 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Martz's address is 6540 Jeremie Drive, San Jose,
California 95120.
(16) Includes all of the shares shown as included in footnotes (4), (5), and (8)
through (16).
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DESCRIPTION OF THE CREDIT FACILITY
GENERAL
Concurrent with the closing of the Notes offering on October 2, 1995, the
Company entered into a revolving line of credit (the "Credit Facility") with
Heller Financial, Inc., the lender of certain of the debt retired with the net
proceeds of the debt offering. The Credit Facility provides for revolving loans
to the Company in an aggregate amount not to exceed $35.0 million. The loans
constitute senior secured indebtedness of the Company.
The information set forth herein relating to the Credit Facility is
qualified in its entirety by reference to the complete text of the documents
entered into in connection therewith, the forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
AVAILABILITY
Borrowings under the Credit Facility are 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 Credit Facility. As of February
28, 1997, the Company borrowed $2.0 million of the $35.0 million committed under
the Credit Facility. An additional $33.0 million was available for draw under
the Credit Facility as of February 28, 1997. (Approximately $28.0 million was
available for draw under the Credit Facility as of April 18, 1997.) The
Company's ability to borrow under the 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 Credit Facility.
INTEREST
The interest rate is (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 is be
payable quarterly in arrears. On LIBOR loans as to which the interest period is
one, two or three months, interest is payable at the end of the interest period.
Interest is 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, requires compensation for breakage costs.
A fee of 0.375% per annum is charged on the average daily unused portion of
the Credit Facility, payable quarterly in arrears.
MATURITY
The Credit Facility matures on October 2, 2000.
SECURITY
The Credit Facility is 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, 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
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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.
PAYMENT TERMS
The Credit Facility pays 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 Credit Facility at any time (subject
to any applicable LIBOR breakage costs; see "--Interest" above).
COVENANTS
The Credit Facility contains covenants 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. The Credit Facility also requires
maintenance of a specified ratio of indebtedness to consolidated cash flow on a
trailing twelve month basis and requires the repayment of loans under the Credit
Facility with proceeds of certain sales of assets.
EVENTS OF DEFAULT
The Credit Facility contains events of default customary for working capital
financings.
DESCRIPTION OF THE NOTES
GENERAL
The Notes were issued pursuant to an Indenture (the "Indenture") between the
Company and Firstar Trust Company (formerly, 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 Indenture
described below is available to prospective investors upon request. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions." Unless the context otherwise requires, the term
"Company" refers to Portola Packaging, Inc., a Delaware corporation.
PRINCIPAL, MATURITY AND INTEREST
The Notes are 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 accrues at the rate of 10.75% per annum and is
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 accrues 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 is computed on the basis of a 360- day year
comprised of twelve 30-day months. The Notes are 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
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the Trustee maintained for such purpose. The Notes are 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 are not 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 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 is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
RANKING
The indebtedness evidenced by the Notes represent unsecured senior
obligations of the Company and 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, are 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 Credit Facility. See "Risk
Factors--Effective Subordination of Notes in Certain Circumstances." At February
28, 1997, the Company (together with its subsidiaries) had $121.2 million of
senior Indebtedness outstanding (including
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indebtedness under the Notes) and had, subject to certain restrictions, the
ability to draw up to an additional $33.0 million of the $35.0 million committed
under the Credit Facility.
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 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.
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<PAGE>
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 Credit Facility and, since Indebtedness under the
Credit Facility will effectively rank senior in priority to Indebtedness under
the Notes, the Company would be obligated to repay Indebtedness under the 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 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 Credit Facility is 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. 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) 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 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).
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<PAGE>
ASSET SALES
The Indenture provides 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 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 RATAbasis. 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 are 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.
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CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides 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 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
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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 currently in effect or entered into hereafter in the ordinary
course of business; PROVIDED, HOWEVER, that the aggregate price 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 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 provides 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
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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;
(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;
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(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
(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 provides 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.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides 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, 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 provides 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
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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 provides 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
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
Currently, the Company has only three operating subsidiaries, namely,
Portola Packaging Canada Ltd., its western Canadian subsidiary, Portola
Packaging Ltd., its eastern Canadian subsidiary, and Portola Packaging Ltd., its
United Kingdom subsidiary. In early April 1997, the Company's eastern Canadian
and United Kingdom subsidiaries became Restricted Subsidiaries and each such
entity executed a Subsidiary Guarantee in respect of the Notes in connection
therewith. No other subsidiary of the Company or other business entity in which
the Company owns an interest presently acts as a Guarantor in respect of the
Notes or will be required to do so under the terms of the Indenture, unless the
Subsidiary or other business entity elects to become a Restricted Subsidiary. 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 provides 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
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(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 provides 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."
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 provides 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
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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 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
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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, 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
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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.
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
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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, 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 may obtain a copy of the Indenture without charge by writing to
Portola Packaging, Inc., 890 Faulstich Court, San Jose, California 95112,
Attention: 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.
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"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
Facility 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 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
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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 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).
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"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 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.
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"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 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.
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"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.
"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
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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 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.
66
<PAGE>
"UNRESTRICTED SUBSIDIARY" means (i) Portola Packaging Canada Ltd., Cap Snap
(U.K.) Ltd. [now known as Portola Packaging Ltd., and now a Restricted
Subsidiary, effective as of April 2, 1997] 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.
RESALES OF THE NOTES
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. However, Chase Securities Inc. ("Chase
Securities") and Salomon Brothers Inc (the underwriters at the time of the
initial public offering of the Notes) have previously engaged and may again
engage in market-making transactions in the Notes. They are under no obligation
to continue to do so, however, and may discontinue any market making activities
at any time without notice. The Notes 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. 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.
This Prospectus may be used by Chase Securities in connection with offers
and sales related to market-making transactions in the Notes, including the sale
of Notes, if any, acquired in a rescission. 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.
67
<PAGE>
Chase Securities is affiliated with Chase Manhattan Capital Corporation,
which owns more than 10% of the Company's common equity and is deemed to be an
affiliate of the Company. Also, Christopher C. Behrens, a director of the
Company, is an officer of The Chase Manhattan Bank and an officer of Chase
Capital Partners, entities affiliated with Chase Manhattan Capital Corporation
and Chase Securities.
Under certain circumstances, the Company is obligated to indemnify Chase
Securities and Salomon Brothers Inc against liabilities under the Securities Act
of 1933, as amended.
LEGAL MATTERS
The legality of the Notes issued pursuant to the Indenture has been passed
upon for the Company by Tomlinson Zisko Morosoli & Maser LLP, Palo Alto,
California. Timothy Tomlinson is a general partner of the law firm of Tomlinson
Zisko Morosoli & Maser LLP, and is also a director of the Company, a member of
the Compensation Committee of the Board of Directors of the Company, an
alternate member of the Audit Committee of the Board of Directors of the Company
and the beneficial owner, directly and indirectly, of shares of the Company's
Common Stock and options to purchase shares of the Company's Common Stock. See
"Management--Director Compensation," "--Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions--Transactions with Entities
Affiliated with Directors."
EXPERTS
The consolidated balance sheets as of August 31, 1996 and 1995 and the
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended August 31, 1996 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 a
newly established standard for the impairment of long-lived assets and 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.
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 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. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants who file
electronically with the Commission, including the Company.
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
68
<PAGE>
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 Securities Exchange Act
of 1934, as amended, 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."
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
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 (Deficit)............................ F-6
Notes to Consolidated Financial Statements........................................... F-7
</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, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended August 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements in fiscal
1996 the Company adopted a newly established standard for the impairment of
long-lived assets. As discussed in Note 1 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
October 22, 1996
F-2
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
-------------------- FEB. 28,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 763 $ 7,797 $ 2,326
Investments................................................................... 1,000 710 466
Accounts receivable, net of allowance for doubtful accounts of $813, $817 and
$1,114, respectively........................................................ 20,323 23,835 22,780
Inventories................................................................... 9,833 11,650 11,679
Other current assets.......................................................... 2,300 2,061 3,294
Deferred income taxes......................................................... 1,237 1,307 1,405
--------- --------- -----------
Total current assets........................................................ 35,456 47,360 41,950
Notes receivable from employees................................................. 518 256 248
Property, plant and equipment, net.............................................. 53,132 69,773 76,068
Goodwill, net of accumulated amortization of $1,314, $2,697 and $3,394,
respectively.................................................................. 21,580 17,564 15,683
Patents, net of accumulated amortization of $10,413, $11,923 and $12,028,
respectively.................................................................. 7,607 2,235 2,130
Covenants not to compete, net of accumulated amortization of $1,393, $2,996 and
$3,744, respectively.......................................................... 5,295 3,699 2,835
Debt financing costs, net of accumulated amortization of $526, $413 and $653,
respectively.................................................................. 1,937 3,853 3,670
Other assets.................................................................... 3,790 7,487 5,596
--------- --------- -----------
Total assets.................................................................. $ 129,315 $ 152,227 $ 148,180
--------- --------- -----------
--------- --------- -----------
LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term debt............................................. $ 5,668 $ 1,805 $ 4,468
Accounts payable.............................................................. 7,796 10,029 8,536
Accrued liabilities........................................................... 4,847 6,046 6,736
Accrued compensation.......................................................... 2,602 3,111 2,762
Accrued interest.............................................................. 796 4,999 5,078
--------- --------- -----------
Total current liabilities................................................... 21,709 25,990 27,580
Long-term debt, less current portion............................................ 86,244 116,108 116,684
Other long term obligations..................................................... 3,911 2,303 1,978
Deferred income taxes........................................................... 7,092 7,067 7,056
--------- --------- -----------
Total liabilities........................................................... 118,956 151,468 153,298
--------- --------- -----------
Commitments and contingencies (Note 9)
Redeemable warrants to purchase Class A common stock............................ 3,665 4,560 5,086
--------- --------- -----------
Common stock and other shareholders' equity (deficit):
Class A convertible common stock of $.001 par value:
Authorized: 2,503 shares in 1995 and 5,203 shares in 1996; Issued and
outstanding: none shares in 1995 and 2,135 shares in August and November
1996...................................................................... 2 2
Class B, Series 1, common stock of $.001 par value:
Authorized: 17,715 shares; Issued and outstanding: 9,225 shares in 1995 and
8,507 shares in August and November 1996.................................. 9 9 8
Class B, Series 2, convertible common stock of $.001 par value:
Authorized: 2,571 shares; Issued and outstanding: 2,571 shares in 1995 and
1,171 shares in August and November 1996.................................. 3 1 1
Additional paid-in capital...................................................... 9,205 9,280 8,781
Notes receivable from shareholders.............................................. (362) (425) (418)
Cumulative foreign currency translation adjustments............................. (8) (8) (10)
Unrealized holding losses on marketable securities.............................. (170) (317)
Accumulated deficit............................................................. (2,153) (12,490) (18,251)
--------- --------- -----------
Total common stock and other shareholders' equity (deficit)................. 6,694 (3,801) (10,204)
--------- --------- -----------
Total liabilities, redeemable warrants, common stock other shareholders'
equity (deficit)............................................................ $ 129,315 $ 152,227 $ 148,180
--------- --------- -----------
--------- --------- -----------
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, --------------------
--------------------------------- FEB. 29, FEB. 28,
1994 1995 1996 1996 1997
--------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................................... $ 70,284 $ 124,650 $ 159,462 $ 73,877 $ 79,971
Cost of sales........................................... 51,670 91,972 117,592 65,857 65,089
--------- ---------- ---------- --------- ---------
Gross profit.......................................... 18,614 32,678 41,870 18,020 14,882
--------- ---------- ---------- --------- ---------
Selling, general and administrative..................... 8,821 16,649 22,035 8,245 9,579
Research and development................................ 764 1,682 2,156 1,007 1,167
Amortization of intangibles............................. 2,025 3,724 5,207 2,194 1,634
Write-off of intangibles................................ -- -- 7,292 -- 1,720
Restructuring costs..................................... -- -- -- -- 1,093
--------- ---------- ---------- --------- ---------
11,610 22,055 36,690 11,446 15,193
--------- ---------- ---------- --------- ---------
Income (loss) from operations......................... 7,004 10,623 5,180 6,574 (311)
--------- ---------- ---------- --------- ---------
Other (income) expense:
Interest income....................................... (97) (175) (1,242) (684) (289)
Interest expense...................................... 3,996 8,658 13,084 6,380 6,539
Amortization of financing costs....................... 433 447 492 261 313
Financing costs....................................... 625 -- -- -- --
Other (income) expense, net........................... (148) 259 158 62 11
--------- ---------- ---------- --------- ---------
4,809 9,189 12,492 6,019 6,574
--------- ---------- ---------- --------- ---------
Income (loss) before extraordinary item, cumulative
effect of change in accounting principle and income
taxes............................................... 2,195 1,434 (7,312) 555 (6,885)
Provision for (benefit from) income taxes............... 1,095 1,294 865 755 (1,650)
--------- ---------- ---------- --------- ---------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle............ 1,100 140 (8,177) (200) (5,235)
Extraordinary item-loss on extinguishment of debt, net
of income tax benefit of $539 and $845 (Note 7)....... 790 -- 1,265 1,265 --
Cumulative effect of change in accounting principle
(Note 13)............................................. 85 -- -- -- --
--------- ---------- ---------- --------- ---------
Net income (loss)....................................... $ 225 $ 140 $ (9,442) $ (1,465) $ (5,235)
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
Net income (loss) attributable to common shareholders... $ (230) $ (470) $ (10,337) $ (1,888) $ (5,761)
Number of shares used in computing per share amounts.... 11,087 11,393 11,800 11,585 11,806
Earnings (loss) per common share:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle............ $ 0.06 $ (0.04) $ (0.77) $ (0.05) $ (0.49)
Cumulative effect of change in accounting principle... $ 0.01
Net (loss).............................................. $ (0.02) $ (0.04) $ (0.88) $ (0.16) $ (0.49)
</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>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, ----------------------
------------------------------- FEB. 29, FEB. 28,
1994 1995 1996 1996 1997
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 225 $ 140 $ (9,442) $ (1,465) $ (5,235)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................. 8,357 12,789 15,961 8,072 7,305
Write-off of intangibles................................... -- -- 7,292 -- 1,720
Extraordinary loss on extinguishment of debt............... 1,329 -- 1,781 2,109 --
Deferred income taxes...................................... (320) (707) 19 23 --
Loss (gain) on property and equipment dispositions......... -- 147 171 -- 70
Provision for (recovery of) doubtful accounts.............. 173 892 450 (154) 302
Provision for excess and obsolete inventories.............. -- 78 26 -- 519
Provision for restructuring................................ -- -- -- -- 279
Changes in working capital:
Accounts receivable...................................... (1,683) (4,425) (3,425) 755 1,347
Inventories.............................................. (908) (862) (1,810) (314) (292)
Other current assets..................................... 600 (269) 451 (726) (1,173)
Accounts payable......................................... (712) (585) 1,653 (2,876) (1,895)
Accrued liabilities...................................... 1,987 1,137 1,465 (1,042) (50)
Accrued interest......................................... 303 87 4,203 4,177 79
--------- --------- --------- --------- -----------
Net cash provided by operating activities................ 9,351 8,422 18,795 8,559 2,976
--------- --------- --------- --------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment................... (6,159) (11,302) (27,194) (16,372) (9,284)
Proceeds from sale of property, plant and equipment.......... 47 162 646 -- 261
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) -- -- --
Payment for UK acquisition................................... -- -- (1,463) (1,445) --
Payments for Rapid Plast acquisition net of cash acquired.... -- -- -- (2,134)
Proceeds from short term investments......................... -- -- 1,000 1,000 --
Payment for short term investments........................... -- -- (994) -- --
Issuance of notes receivable................................. -- (237) -- -- --
Repayment of notes receivable................................ 31 -- 262 -- --
(Increase) decrease in other assets.......................... (1,563) (1,765) (3,528) 807 1,873
--------- --------- --------- --------- -----------
Net cash used in investing activities.................... (38,418) (24,648) (31,271) (16,010) (9,284)
--------- --------- --------- --------- -----------
Cash flows from financing activities:
Borrowings under long-term debt arrangements................. 54,214 29,284 115,212 114,146 2,652
Repayments of long-term debt arrangements.................... (24,619) (15,208) (89,922) (88,260) (783)
Payment of loan fees......................................... (2,472) -- (4,189) (4,176) --
Sales of common stock........................................ 3,025 1,855 75 -- --
Repayment of notes receivable from shareholders.............. 1 15 -- -- 7
Repurchase of common stock................................... -- -- -- -- (500)
Increase in other receivable from shareholders............... -- (91) (63) -- --
Payments on covenants not to compete......................... (50) (1,070) (1,602) (496) (537)
--------- --------- --------- --------- -----------
Net cash provided by financing activities................ 30,099 14,785 19,511 21,214 839
--------- --------- --------- --------- -----------
Effect of exchange rate changes on cash........................ -- (15) (1) -- (2)
--------- --------- --------- --------- -----------
Increase (decrease) in cash and cash equivalents............. 1,032 (1,456) 7,034 13,763 (5,471)
Cash and cash equivalents at beginning of period............... 1,187 2,219 763 763 7,797
--------- --------- --------- --------- -----------
Cash and cash equivalents at end of period..................... $ 2,219 $ 763 $ 7,797 $ 14,526 $ 2,326
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</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 (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------------------------------
CLASS B
--------------------------------------------
CLASS A SERIES 1 SERIES 2
-------------------------- ---------------------- -------------------- ADDITIONAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL
----------- ------------- ----------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, August 31, 1993............ 7,869 $ 542 2,571 $ 3,795
Issuances 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) (3,792) $ 7,351
Payment of note receivable from
shareholders.....................
Increase in value of stock purchase
warrants.........................
Net income.........................
--
----------- --------- --------- --------- -------
Balance, August 31, 1994............. 8,679 8 2,571 3 7,351
Exercise of stock option at $0.61,
$1.00 and $4.00 per share........ 96 1 78
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 1,776
Increase in value of stock purchase
warrants.........................
Foreign currency translation
adjustment.......................
Net income.........................
--
----------- --------- --------- --------- -------
Balance, August 31, 1995............. 9,225 9 2,571 3 9,205
Conversion of Class B shares to
Class A.......................... 2,135 $ 2 (735) (1,400) (2)
Issuance of Class B Common Stock at
$4.50 per share.................. 15 67
Exercise of stock options at $4.50
per share........................ 2 8
Increase in value of stock purchase
warrants.........................
Increase in notes and other
receivable from shareholders.....
Net unrealized loss in securities
available for sale...............
Net loss...........................
--
----------- ----------- --------- --------- --------- -------
Balance, August 31, 1996............. 2,135 2 8,507 9 1,171 1 9,280
Repurchase of common stock......... (96) (1) (499)
Repayment of notes receivable from
shareholders.....................
Increase in value of stock purchase
warrants.........................
Net unrealized loss in securities
available for sale...............
Foreign currency translation
adjustment.......................
Net loss...........................
--
----------- ----------- --------- --------- --------- -------
Balance, February 28, 1997
(unaudited)......................... 2,135 $ 2 8,411 $ 8 1,171 $ 1 $ 8,781
--
--
----------- ----------- --------- --------- --------- -------
----------- ----------- --------- --------- --------- -------
<CAPTION>
CUMULATIVE UNREALIZED
NOTES AND OTHER FOREIGN CURRENCY HOLDING LOSSES
RECEIVABLE FROM TRANSLATION ON MARKETABLE ACCUMULATED
SHAREHOLDERS ADJUSTMENTS SECURITIES DEFICIT
----------------- ------------------- ---------------- -------------
<S> <C>
Balances, August 31, 1993............ $ (287) $ (1,453)
Issuances of Class B common stock
at $3.75 per share...............
Exercise of stock options at $2.50
per share........................
Reincorporation into a Delaware
corporation......................
Payment of note receivable from
shareholders..................... 1
Increase in value of stock purchase
warrants......................... (455)
Net income......................... 225
------- -------------
Balance, August 31, 1994............. (286) (1,683)
Exercise of stock option at $0.61,
$1.00 and $4.00 per share........
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.....................
Increase in value of stock purchase
warrants......................... (610)
Foreign currency translation
adjustment....................... $ (8)
Net income......................... 140
------- ------ -------------
Balance, August 31, 1995............. (362) (8) (2,153)
Conversion of Class B shares to
Class A..........................
Issuance of Class B Common Stock at
$4.50 per share..................
Exercise of stock options at $4.50
per share........................
Increase in value of stock purchase
warrants......................... (895)
Increase in notes and other
receivable from shareholders..... (63)
Net unrealized loss in securities
available for sale............... $ (170)
Net loss........................... (9,442)
------- ------ ------- -------------
Balance, August 31, 1996............. (425) (8) (170) (12,490)
Repurchase of common stock.........
Repayment of notes receivable from
shareholders..................... 7
Increase in value of stock purchase
warrants......................... (526)
Net unrealized loss in securities
available for sale............... (147)
Foreign currency translation
adjustment....................... (2)
Net loss........................... (5,235)
------- ------ ------- -------------
Balance, February 28, 1997
(unaudited)......................... $ (418) $ (10) $ (317) $ (18,251)
------- ------ ------- -------------
------- ------ ------- -------------
<CAPTION>
TOTAL COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY
(DEFICIT)
----------------------------
Balances, August 31, 1993............ $ 2,597
Issuances 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
----------
Balance, August 31, 1994............. 5,393
Exercise of stock option 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
----------
Balance, August 31, 1995............. 6,694
Conversion of Class B shares to
Class A..........................
Issuance of Class B Common Stock at
$4.50 per share.................. 67
Exercise of stock options at $4.50
per share........................ 8
Increase in value of stock purchase
warrants......................... (895)
Increase in notes and other
receivable from shareholders..... (63)
Net unrealized loss in securities
available for sale............... (170)
Net loss........................... (9,442)
----------
Balance, August 31, 1996............. (3,801)
Repurchase of common stock......... (500)
Repayment of notes receivable from
shareholders..................... 7
Increase in value of stock purchase
warrants......................... (526)
Net unrealized loss in securities
available for sale............... (147)
Foreign currency translation
adjustment....................... (2)
Net loss........................... (5,235)
----------
Balance, February 28, 1997
(unaudited)......................... $ (10,204)
----------
----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
Portola Packaging, Inc. and Subsidiaries (the "Company") designs,
manufactures and markets tamper-evident plastic closures and related equipment
used for packaging applications in dairy, fruit juice, bottled water,
institutional food products and other non-carbonated beverage products. The
Company has production facilities throughout the United States, Canada, and
Mexico (through a joint venture).
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.
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 as of August 31, 1995 and 1996 consisted of a certificate of
deposit and equity securities in one company, respectively. 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 (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 VENTURE:
The Company maintains a joint venture and license arrangement in Mexico.
This investment, which is included in other assets, is accounted for by the
equity method. The Company's share of the earnings (loss) of the joint venture
is reflected in expense and has not been material to date.
F-7
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. 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 recorded in connection with
acquisitions of Nepco, Portola Packaging Canada Ltd. and Portola Packaging (UK)
(Note 2) is amortized on a straight-line basis over 15, 25 and 5 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.
CONCENTRATIONS 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,
short term investments and trade receivables. The Company's cash and cash
equivalents and investments are concentrated primarily in several United States
banks. 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 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 majority of the Company's products are molded from various plastic
resins which comprise a significant portion of the Company's cost of sales.
These resins are subject to substantial price fluctuations, resulting from
shortages in supply, changes in prices in petrochemical products 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
impact on the Company.
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
F-8
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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 1994, 1995 and 1996.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARES:
Earnings (loss) per common share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of stock options and warrants
(using the treasury stock method for all periods presented).
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, 1995 and 1996. The accretion
of the warrants of $455, $610 and $895 for fiscal 1994, 1995 and 1996
respectively, is deducted from earnings to derive earnings (loss) per share.
CARRYING VALUE OF LONG-LIVED ASSETS:
Certain identifiable intangibles and goodwill related to those assets are
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
RECENT ACCOUNTING PRONOUNCEMENTS:
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "ACCOUNTING FOR STOCK-BASED COMPENSATION", which
establishes a fair value based method of accounting for stock-based compensation
plans. The Company has elected the disclosure provisions in SFAS 123. This
statement is effective for the Company's fiscal year 1997.
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings per Share", and in March 1997 issued
Statement No. 129 (SFAS 129), "Disclosures of Information About Capital
Structure", both of which specify the computation, presentation and disclosure
requirements for Earnings per Share. SFAS 128 and SFAS 129 will become effective
for the Company's 1998 fiscal year. The Company is currently studying the
implications of these statements and has not yet determined the impact of
adopting such statements on the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts payable and other accrued liabilities
approximate fair value due to their short maturities.
F-9
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of the long term debt approximates fair value.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation.
INTERIM RESULTS:
The accompanying Consolidated Balance Sheet at February 28, 1997, the
Consolidated Statement of Operations and Consolidated Statement of Cash Flows
for the six months ended February 29, 1996 and February 28, 1997, and the
Consolidated Statement of Shareholders' Equity for the six months ended February
28, 1997 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.
2. ACQUISITIONS:
On September 1, 1995 the Company completed the acquisition of the 50%
interest it had not previously owed in Cap Snap (UK) Ltd., now known as Portola
Packaging Ltd. ("Portola Packaging (UK)") for a purchase price of approximately
$1.5 million. Portola Packaging (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 results of operations
subsequent to the acquisition date have been consolidated with the Company.
Portola Packaging (UK) is being operated as an "unrestricted subsidiary".
Accordingly, amounts that may be invested by the Company in Portola Packaging
(UK) are subject to limitations pursuant to the terms of the Indenture
pertaining to the senior notes issued in October 1995 (see Note 7).
Consideration for the acquisition was allocated as follows:
<TABLE>
<S> <C>
Total consideration paid.................................... $ 1,463
Fair value of assets acquired............................... 1,294
---------
Goodwill.................................................... $ 169
---------
---------
</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
F-10
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
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>
Pro forma financial statements as if the Canadian acquisition had taken
place at the beginning of each period presented are as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1994 1995
----------- -----------
<S> <C> <C>
(UNAUDITED)
Sales....................................................... $ 74,853 $ 132,165
Gross profit................................................ 20,286 35,638
Operating income............................................ 7,610 11,597
Income before extraordinary item and cumulative effect of
change in accounting principle............................ 661 400
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 Corporation and Northern Engineering and
Plastics Corporation-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.
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>
F-11
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
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.
Pro forma financial statements as if the acquisition of Nepco had taken
place at the beginning of fiscal year 1994 are as follows:
<TABLE>
<CAPTION>
PRO FORMA
1994
-----------
(UNAUDITED)
<S> <C>
Sales.................................................................. $ 101,415
Gross profit........................................................... 22,246
Operating income....................................................... 5,175
Loss before extraordinary item and cumulative effect of change in
accounting principle................................................. (2,033)
Net loss............................................................... (2,908)
Net loss per share..................................................... $ (0.30)
</TABLE>
3. WRITE-OFF OF INTANGIBLES:
In the fourth quarter of fiscal 1996, the Company elected early adoption of
the provisions of Statement of Financial Accounting Standards Board (SFAS) No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" (SFAS 121) issued by the Financial Accounting
Standards Board in March 1995. SFAS 121 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, and requires valuation of impairments at
the lowest level of identifiable cash flows. Previously, the Company evaluated
long-lived assets on a divisional or group basis using undiscounted cash flows.
Due to changes in market conditions in certain markets and manufacturing
facilities, the Company evaluated portions of its goodwill recorded in
connection with its acquisitions of Nepco and Portola Packaging Canada Ltd.
The Company recorded impairment losses of $421 and $2,332, related to
goodwill identified with impaired assets, which was recorded in the acquisition
of Nepco and Portola Packaging Canada Ltd., respectively.
As a result of the adoption of SFAS 121, the Company undertook a detailed
study of its patents and began to evaluate cash flows on an individual product
family basis for impairment. Previously, patents were
F-12
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. WRITE-OFF OF INTANGIBLES: (CONTINUED)
evaluated on a group basis for impairment. This change in methodology was
implemented to be consistent with SFAS 121's requirement to evaluate cash flows
from intangibles at the lowest identifiable level and resulted in a writedown of
$4,539. The fair value of the patents was estimated using discounted cash flows.
The effect of adopting SFAS 121 on the financial statements was an increase
in expenses of $7,292. Consistent with the provisions of SFAS 121, the
additional expense related to adoption is included in results of operations.
This writedown had no effect on cash flows from operations or cash available for
debt service.
SFAS 121 requires on going evaluations of impairments whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. It is at least reasonably possible that future impairments could
occur, and those impairments could create a material effect on the financial
position and results of operations of the Company.
4. SUPPLEMENTAL CASH FLOW DISCLOSURES:
The Company paid $835, $1,688 and $1,684 in income taxes during the years
ended August 31, 1994, 1995 and 1996, respectively.
The Company paid $3,694, $8,571 and $8,881 in interest during the years
ended August 31, 1994, 1995 and 1996, respectively.
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 and 1996 and for the six months ended February 28,
1997, the Company acquired $8, $346 and $1,370, respectively, 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, the Company assumed indebtedness of $9,058 in connection
with its acquisition of Nepco.
During fiscal 1994, 1995 and 1996, the Company wrote off fully depreciated
property, plant and equipment totaling $3,233, $2,561 and $3,285, respectively.
5. INVENTORIES:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------- FEB. 28
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................... $ 4,850 $ 6,023 $ 5,442
Work in process............................................. 1,455 858 685
Finished goods.............................................. 3,528 4,769 5,552
--------- --------- -----------
$ 9,833 $ 11,650 $ 11,679
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-13
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
6. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------- FEB. 28,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Building and land........................................ $ 10,655 $ 19,865 $ 20,842
Machinery and equipment.................................. 66,628 81,126 92,405
Leasehold improvements................................... 3,052 3,132 3,203
---------- ---------- -----------
80,335 104,123 116,450
Less accumulated depreciation and amortization........... (27,203) (34,350) (40,382)
---------- ---------- -----------
$ 53,132 $ 69,773 $ 76,068
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Depreciation charged to operations was $5,903, $8,619 and $10,261 for the
years ended August 31, 1994, 1995 and 1996, respectively.
7. DEBT:
CURRENT PORTION OF LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------- FEB. 28,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving Line of Credit..................................... $ 2,000
Term Loan Note A............................................. $ 4,000
Equipment Note............................................... 63
Development Note............................................. 17 $ 16 16
Canadian Term Loan Note...................................... 744 1,460 1,681
Canadian Revolver Loan Note.................................. 844 233 663
Capital Lease Obligations.................................... 96 107
--------- --------- -----------
$ 5,668 $ 1,805 $ 4,468
--------- --------- -----------
--------- --------- -----------
</TABLE>
LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------- FEB. 28,
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Senior Notes.............................................. $ 110,000 $ 110,000
Term Loan Note A.......................................... $ 23,000
Term Loan Note B.......................................... 30,000
Senior Subordinated Notes................................. 10,000
Revolving Loan Note....................................... 15,711
Canadian Term Loan Note................................... 7,442 5,840 5,042
Development Note.......................................... 91 74 65
Canadian Regional Development Loan........................ 217
Capital Lease Obligations................................. 194 1,360
--------- ---------- -----------
$ 86,244 $ 116,108 $ 116,684
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
F-14
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
SENIOR NOTES:
On October 2, 1995 the Company completed an offering of $110 million 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. The senior notes contain covenants 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, (viii) make restricted junior payments and (ix) declare or pay
dividends.
SENIOR REVOLVING CREDIT FACILITY:
Concurrently with the offering, the Company entered into a new five-year
senior revolving credit facility of up to $35.0 million, subject to a borrowing
base of eligible receivables, inventory, property, plant and equipment, which
serve as collateral for the line. The credit facility, which expires September
30, 2000, contains covenants 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, (viii) make restricted
junior payments and (ix) declare or pay dividends. At August 31, 1996 no amounts
were outstanding under this credit facility and the full amount was available
for draw. An availability fee is payable on the facility based on the total
commitment amount and the balance outstanding at the rate of 0.375% per annum.
In addition, interest is payable is based on either the Bank Prime Loan rate or
the LIBOR loan rate. The interest rate on the facility based on the Bank Prime
Loan rate was 9.5% at August 31, 1996.
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 note are due quarterly beginning on November
30, 1995 in the amount of $183, then increasing every fifth quarter to $365,
$456, $502 and $502 with the final payment on August 31, 2000. Interest is
payable monthly based on the Canadian prime rate loan and/or Bankers
Acceptances. At August 31, 1995 and 1996, the interest rate was 10.0% and 7.5%
respectively.
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 $2,190. The principal
is payable upon demand. Interest is payable monthly based on the
F-15
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
Canadian prime rate overdraft and/or Bankers Acceptances. At August 31, 1995 and
1996, the interest rate was 9.25% and 8.75%, respectively.
REPAYMENT OF PRIOR OBLIGATIONS:
In connection with the October 2, 1995 Senior Notes offering, the Company
repaid amounts outstanding under the Term Loan Note A, Term Loan Note B, Senior
Subordinated Notes and Revolving Loan Note. The final installment of the
Equipment Note was paid in June 1996.
CANADIAN REGIONAL DEVELOPMENT LOAN
RapidPlast has development loan from the Federal Office of Regional
Development. The note is non-interest bearing, and is payable in eight
semi-annual equal payments beginning in February 1998.
CAPITAL LEASE OBLIGATIONS:
The Company acquired certain machinery and office equipment under
noncancelable capital leases. The balance sheet includes the following items
held under capital lease obligations:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Building...................................................................... $ 438
Land.......................................................................... 65
Equipment..................................................................... 64 $ 346
--------- ---------
567 346
Less accumulated amortization................................................. (63) (62)
--------- ---------
$ 504 $ 284
--------- ---------
--------- ---------
</TABLE>
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
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 early extinguishment of debt in October
1995, certain costs, consisting primarily of loan fees of approximately $2,110
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
$845.
FINANCING COSTS:
In connection with a debt offering which was commenced but not completed,
the Company expensed costs amounting to $625 in fiscal 1994.
F-16
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. DEBT: (CONTINUED)
AGGREGATE MATURITIES OF LONG-TERM DEBT:
The aggregate maturities of long-term debt as of August 31, 1996 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS END TOTAL
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1997.............................................................................. $ 1,805
1998.............................................................................. 1,939
1999.............................................................................. 2,089
2000.............................................................................. 2,053
2001.............................................................................. 27
Thereafter........................................................................ 110,000
----------
$ 117,913
----------
----------
</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,
-------------------- FEB. 28,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Covenants under the acquisition of Nepco......................................... $ 3,068 $ 2,358 $ 2,129
Covenants under the purchase of Portola Packaging Canada Ltd..................... 2,125 1,283 1,312
Other covenants.................................................................. 50
--------- --------- -----------
Total obligations................................................................ 5,243 3,641 3,441
Current portion (included in accrued liabilities)................................ 1,332 1,338 1,463
--------- --------- -----------
$ 3,911 $ 2,303 $ 1,978
--------- --------- -----------
--------- --------- -----------
</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.
F-17
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
At August 31, 1996 future minimum rental commitments under agreements with
terms in excess of twelve months were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
<S> <C>
1997................................................................................. $ 1,287
1998................................................................................. 1,091
1999................................................................................. 864
2000................................................................................. 767
2001................................................................................. 450
Thereafter........................................................................... 3,151
---------
$ 7,610
---------
---------
</TABLE>
Base rent expense for the years ended August 31, 1994, 1995 and 1996 totaled
$1,395, $1,381 and $1,793, respectively, of which $696, $720 and $291, was paid
to Three Sisters (Note 15) for the years ended August 31, 1994, 1995 and 1996,
respectively.
The Company has been engaged in patent 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, a jury rendered a verdict adverse to the
Company and in favor of Scholle, which verdict was entered by the court on
January 2, 1996, making the Company liable for damages of $0.01 per closure unit
sold. In June 1996, the Company entered into a settlement agreement with
Scholle, the terms of which 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. The
Company remained liable for damages of $0.01 per closure unit sold prior to the
date of execution and delivery of the settlement agreement, plus interest at a
rate of 10% on all past due amounts. The Company made a payment of $1.7 million
to Scholle on July 1, 1996 in settlement of all amounts due, including interest,
through May 31, 1996. Such amount had been previously accrued in the Company's
financial statements.
The Company is engaged in patent litigation with two other parties who are
seeking to have the court declare certain patents owned by the Company invalid.
The Company believes its patents are valid, and intends to vigorously contest
these actions. However, there can be no assurance that the Company will be
successful in its defense.
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.
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 certain of the Company's
shareholders. 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
F-18
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
10. REDEEMABLE WARRANTS: (CONTINUED)
not completed an initial public offering of its common stock, the warrant holder
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 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, 1994, 1995 and 1996 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 at $2.50 per share, 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 holder 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 credit agreements. On or after August 1, 2003, 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 a estimated value per share. At
August 31, 1994, 1995 and 1996, the accretion was determined using the fair
value of the common stock.
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, 1996, the estimated redemption value of the warrants exceeded 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 $455, $610
and $895 during the years ended August 31, 1994, 1995 and 1996, respectively.
11. SHAREHOLDERS' EQUITY:
REINCORPORATION:
In April 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 basis.
CLASS A AND B COMMON STOCK:
The Company has authorized 5,203 shares of Class A common stock, of which
2,493 shares are reserved 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
F-19
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
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.
DIRECTORS' AGREEMENTS:
The Company entered into Directors' Agreements dated September 1989 and
amended in January 1990 and August 1991, 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 through fiscal 1992. 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. In January 1996, the Company began
paying an additional $4 per year to directors who serve as members and
alternates of committees. The Board of Directors currently has two committees,
the audit committee and the compensation committee. In May 1996, the Company
entered into a Director's Agreement with another director, who is also a
shareholder of the Company. During the years ended August 31, 1994, 1995 and
1996, the Company paid $82, $64 and $96, respectively, in director fees and
related expenses.
STOCK OPTION PLAN:
The Company has reserved 2,866 and 2,000 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 than 85% of fair market value of the Company's
stock
F-20
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
at the date of grant for non-qualified options and not less than 100% of the
fair market value of the Company's stock at the date of grant for incentive
options.
<TABLE>
<CAPTION>
OUTSTANDING
----------------------
STOCK OPTIONS AVAILABLE FOR GRANT SHARES AMOUNT
- ---------------------------------------------------- OPTION PRICE PER SHARE ------------------- ----------- ---------
-----------------------
(NOT THOUSANDS)
<S> <C> <C> <C> <C>
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
Granted........................................... $ 4.50-$5.00 (622) 622 2,862
Exercised......................................... $ 4.50 (2) (8)
Canceled.......................................... $ 4.00-$4.50 48 (48) (207)
----- ----- ---------
August 31, 1996..................................... $ 0.61-$5.00 160 2,084 5,608
Reservation of shares............................. 1,000
Granted........................................... $ 4.50 (122) 122 549
Canceled.......................................... $ 2.50-$4.50 138 (138) (590)
----- ----- ---------
February 28, 1997 (unaudited)....................... $ 0.61-$5.00 1,176 2,068 $ 5,567
----- ----- ---------
----- ----- ---------
</TABLE>
At August 31, 1996, approximately 1,124 options were exercisable at an
average exercise price of $1.43 per share.
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"). 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. Profit sharing contributions are at the
discretion of the Board of Directors and amounted to $493 and $596 for the year
ended August 31, 1995 and 1996. Administrative expense in connection with the
Plan amounted to $23 and $47 for the years ended August 31, 1995 and 1996. The
Company incurred expense related to prior employee benefit plans of $360 for the
year ended August 31, 1994.
The Board of Directors has approved, subject to stockholder approval, an
Employee Stock Purchase Plan (the ESPP) under which 750,000 shares of Class B
common stock have been reserved for issuance to employees meeting minimum
employment criteria. Employees may participate through payroll deductions in
amounts related to their base compensation. The fair value of shares made
available to any employee for purchase under the ESPP may not exceed $25,000 in
any calendar year. The participant's purchase
F-21
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS: (CONTINUED)
price is 85% of the lower of the fair market value at the beginning or the end
of the offering period, as determined by the Board of Directors. The Plan, once
approved by the shareholders, shall continue until terminated by the Board,
until all of the shares reserved for issuance under the Plan have been issued or
until January 1, 2007, whichever shall first occur.
13. INCOME TAXES:
The provision for income taxes, excluding extraordinary items, for the three
years ended August 31, 1996 consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Current:
Federal................................................ $ 1,013 $ 1,677 $ 747
State.................................................. 344 300 187
Foreign................................................ (29) 26
--------- --------- ---------
1,357 1,948 960
--------- --------- ---------
Deferred:
Federal................................................ (176) (605) (392)
State.................................................. (86) (86) 260
Foreign................................................ 37 37
--------- --------- ---------
(262) (654) (95)
--------- --------- ---------
$ 1,095 $ 1,294 $ 865
--------- --------- ---------
--------- --------- ---------
</TABLE>
As discussed in Note 1, 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,
----------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ------------
Federal statutory rate (benefit).................................... 34.0% 34.0% (34.0)%
State taxes......................................................... 6.6 14.9 (5.1)
Nondeductible amortization and depreciation......................... 7.4 26.0 46.2
Nondeductible permanent items....................................... 7.0 0.7
Other............................................................... 1.9 8.3 4.0
--- --- -----
Effective income tax rate........................................... 49.9% 90.2% 11.8%
--- --- -----
--- --- -----
</TABLE>
F-22
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES: (CONTINUED)
The components of the net deferred tax liabilities:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Federal credits.......................................................... $ 651 $ 404
State tax credits........................................................ 360 7
Accounts receivable...................................................... 313 317
Intangible assets........................................................ -- 574
Other liabilities........................................................ 924 990
--------- ---------
Total assets............................................................. 2,248 2,292
--------- ---------
Deferred tax liabilities:
Property, plant and equipment............................................ 7,354 7,977
Intangible assets........................................................ 712 --
Foreign taxes, net....................................................... 37 75
--------- ---------
Total liabilities........................................................ 8,103 8,052
--------- ---------
Net deferred tax liabilities............................................... $ 5,855 $ 5,760
--------- ---------
--------- ---------
</TABLE>
14. EXPORT SALES AND GEOGRAPHICAL INFORMATION:
Export sales from the United States to unaffiliated customers were $8,071,
$18,658 and $17,568 for the years ended August 31, 1994, 1995 and 1996,
respectively. Export sales are predominantly to North America, Europe, the
Middle East and the Pacific Rim. During fiscal 1996, export sales to North
America, Europe, the Middle East and the Pacific Rim accounted for 24%, 33%,
12%, and 6% of total export sales, respectively.
Summarized data by geographic area for fiscal 1996 is as follows:
<TABLE>
<CAPTION>
UNITED
STATES CANADA EUROPE ELIMINATIONS TOTAL
------------ --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales..................................... $ 145,614 $ 10,303 $ 5,695 $ (2,150) $ 159,462
Income (loss) from operations............. 8,301 (1,476) (1,645) 5,180
Identifiable assets....................... $ 142,084 $ 11,040 $ 4,648 $ (5,545) $ 152,227
</TABLE>
15. RELATED PARTY TRANSACTIONS:
In fiscal 1996, the Company deposited $3,000 in a U.S. Bank to secure a loan
to its 50% joint venture in Mexico. This deposit has been recorded in Other
assets.
The Company paid $162 and $5 for the years ended August 31, 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 $420, $333 and $618 for the years ended August 31, 1994,
1995 and 1996, respectively, to a law firm for legal services rendered. A
general partner of the aforementioned firm is also a director of the Company.
F-23
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS: (CONTINUED)
The Company paid $42 for the years ended August 31, 1994, 1995 and 1996 to a
corporation for management fees. A shareholder of the aforementioned corporation
is also a director and significant shareholder of the Company.
The Company had debt outstanding with a financial institution of $10,000 at
August 31, 1994 and 1995, which was repaid by the Company in October 1995 along
with a debt prepayment penalty of approximately $149. The Company paid interest
of approximately $1,350, $1,350 and $113 for each of the three years,
respectively. The Company also paid $258 for the year ended August 31, 1994 to
the same related financial institution for ongoing corporate advice and in
connection with the refinancing in fiscal year 1994. An officer of the financial
institution is a director of the Company.
The Company has amounts receivable from non-consolidated affiliated
companies which amounted to $421, $736 and $358 as of August 31, 1994, 1995 and
1996, respectively.
The Company leased 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 (less than 5%). The
Company owed $15 at August 31, 1994 in the form of unsecured notes due to Three
Sisters. The notes were repaid in fiscal 1995. The Company purchased these
facilities for $7.2 million in fiscal 1996.
16. SUBSEQUENT EVENTS:
ACQUISITION:
On September 1, 1996 the Company completed the acquisition of Rapid Plast
J-P. Inc., a Canadian federal corporation, for a purchase price of approximately
$3.0 million. Rapid Plast was amalgamated with the company formed to acquire the
capital stock of Rapid Plast, and now operates under the name Portola Packaging
Ltd. Portola Packaging Ltd. is engaged in manufacturing and distributing plastic
bottles, primarily in eastern Canada. This transaction has been accounted for as
a purchase and therefore the results of operations subsequent to the acquisition
are consolidated with the Company.
RESTRUCTURING PLAN (UNAUDITED):
The Company has taken measures to improve productivity and quality in its
core business, and in December 1996 began implementing a restructuring plan
which consolidates its separate Closure, Packaging and Manufacturing divisions.
This restructuring plan includes a reduction in staff positions and the closure
of its Portland, Oregon plant in February 1997. The Portland facility has been
listed for sale. The Company recorded a restructuring charge of approximately
$1.1 million and a write-off of intangibles of approximately $1.7 million in
connection with this restructuring plan in the quarter ended February 28, 1997.
In March 1997, the Company announced the planned closure of its Bettendorf, Iowa
plant in July 1997. This facility has been listed for sale. The Company expects
to record an additional restructuring cost in the quarter ended May 31, 1997 in
connection with this plant closing, although it is not able to estimate the
amount of such charge at this time.
In April 1997, the Company designated its eastern Canadian subsidiary and
its United Kingdom subsidiary as "restricted" subsidiaries. These subsidiaries
had previously been designated "unrestricted subsidiaries." The Company's
western Canadian subsidiary continues to be operated as an "unrestricted
F-24
<PAGE>
PORTOLA PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS: (CONTINUED)
subsidiary." Under the terms of the Indenture pertaining to the senior notes
issued in October 1995, amounts that may be invested by the Company in its
unrestricted subsidiaries are subject to limitations.
CONTINGENCY (UNAUDITED):
On March 19, 1997, the staff of the Securities and Exchange Commission (the
"Commission") informed the Company of its position that sales of the Notes made
after December 31, 1996 by Chase Securities Inc. ("Chase Securities"), which
made and may again make a market in the Notes, were made without a current
effective registration statement being in effect. The Company believed that it
had a current effective registration statement at the time of such sales.
However, the Company immediately notified Chase Securities of the Commission's
position and Chase Securities ceased trading in the Notes. The Company has been
informed by Chase Securities that during the period from January 1, 1997 to
March 20, 1997, Chase Securities sold an aggregate of approximately $14 million
of the Notes in transactions at prices above the par value of the Notes. As of
April 25, 1997, the Notes were trading at a price slightly below par value.
At the request of the Commission staff, the Company will notify the buyers
of the Notes sold by Chase Securities in such transactions that in the view of
the Commission staff the sales of such Notes may be subject to rescission. Under
the terms of the underwriting arrangement entered into with Chase Securities in
1995, the Company may be required to indemnify Chase Securities for any loss
incurred by Chase Securities in connection with a rescission. To the extent that
rescissions were made, the Company's exposure generally would be equal to the
difference between the price at which the Notes were repurchased and the price
at which the Notes could be resold. The amount of the potential loss would
increase or decrease depending upon the then-current price of the Notes. The
Company believes that its cash resources, including its borrowings under its
line of credit, are adequate to cover any such loss without materially affecting
the normal conduct of its business. No liability has been accrued in the
financial statements of the Company as of February 28, 1997 in connection with
this matter since the Company has not made a determination that it is probable
that a loss on rescission will be incurred by the Company. Moreover, the Company
has been informed by Chase Securities that all trades through February 28, 1997
were in excess of par value, and believes that any such loss as of February 28,
1997 would not have been material. If all the Noteholders in the transactions
potentially subject to rescission had rescinded their purchases as of April 25,
1997, the Company would have been required to pay approximately $965,000 (the
difference between the purchase price in the original transactions and the
estimated fair market value on April 25, 1997). The ultimate loss, if any,
incurred by the Company will be dependent upon the extent to which Noteholders
exercise their potential rescission rights and the then-current market price of
the Notes.
F-25
<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. 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............................. 2
Risk Factors................................... 6
Selected Historical Condensed Consolidated
Financial Data................................ 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 13
Business....................................... 21
Management..................................... 29
Certain Transactions........................... 38
Principal Stockholders......................... 41
Description of the Credit Facility............. 44
Description of the Notes....................... 45
Resales of the Notes........................... 67
Legal Matters.................................. 68
Experts........................................ 68
Additional Information......................... 68
Index to Financial Statements.................. F-1
</TABLE>
------------------------
$110,000,000
[LOGO]
PORTOLA PACKAGING, INC.
10 3/4% SENIOR NOTES DUE 2005
---------------------
PROSPECTUS
---------------------
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for 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
which involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of
the Registrant provide that: (i) the Registrant is required to indemnify its
directors and executive officers to the fullest extent permitted by the Delaware
General Corporation Law; (ii) the Registrant may, in its discretion, indemnify
other officers, employees and agents as set forth in the Delaware General
Corporation Law; (iii) upon receipt of an undertaking to repay such advances if
indemnification is determined to be unavailable, the Registrant is required to
advance expenses, as incurred, to its directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law in connection
with a proceeding (except if a determination is reasonably and promptly made by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the proceeding or, in certain circumstances, by
independent legal counsel in a written opinion that the facts known to the
decision-making party demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation); (iv) the rights conferred
in the Bylaws are not exclusive and the Registrant is authorized to enter into
indemnification agreements with its directors, officers and employees and
agents; and (v) the Registrant may not retroactively amend the Bylaw provisions
relating to indemnity in a manner adverse to an indemnified person.
The Registrant's policy is to enter into indemnity agreements with certain
of its directors and executive officers. The indemnity agreements provide that
directors and executive officers will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by them in any action, suit or proceeding on account of
their services as directors, officers, employees or agents of the Registrant or
as directors, officers, employees or agents of any other company or enterprise
when they are serving in such capacities at the request of the Registrant.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and executive officers,
may be sufficiently broad to permit indemnification of the Registrant's
executive officers and directors for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act").
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
- ------------------------------------------------------------------------------------ ----------
<S> <C>
Underwriting Agreement.............................................................. 1.01
Registrant's Certificate of Incorporation........................................... 3.01
Registrant's Bylaws................................................................. 3.02
10.21
Form of Indemnification Agreement................................................... 10.38
</TABLE>
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all sales of
unregistered securities of the Registrant (or its predecessors) occurring since
April 1, 1994.
<TABLE>
<CAPTION>
AGGREGATE
CLASS OF NUMBER PURCHASE FORM OF
PURCHASERS(1) DATE OF SALE TITLE OF SECURITIES OF SHARES PRICE CONSIDERATION
- ----------------- ------------------ ------------------------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Chase Manhattan June 9, 1995 Class B Common Stock, 200,000 $800,000.00 Cash
Capital Series 1
Corporation
June 30, 1994 Warrant to purchase -- $1,245,205.95 (2)
2,052,526 shares of
Class A Common Stock
June 30, 1994 Class B Common Stock, 800,000 $3,000,000.00 Cash
Series 1
Heller Financial, June 9, 1995 Class B Common Stock, 250,000 $1,000,000.00 Cash
Inc. Series 1
June 30, 1994 Warrant to purchase -- $1,100,537.50 (3)
440,215 shares of
Class A Common Stock
Jack L. Watts, October 10, 1995 Class A Common Stock 2,134,992 (4) (4)
John L. Lemons,
Mary Ann Lemons,
LJL Cordovan
Partners, L.P.
and Robert
Fleming Nominees
Limited
Jeffrey Pfeffer, June 18, 1996 Class B Common Stock, 15,000 $67,500.00 Cash
Ph.D. Series 1
Grants of stock March 1, 1994- Class B Common Stock, 1,020,000 $2.50 - N/A
options under December 9, 1996 Series 1 (Shares $5.00
stock option (Stock Options) Underlying (Exercise
plans to 65 Options) Price)
optionees(5)
Exercise of stock March 1, 1994- Class B Common Stock, 107,342 $110,754.50 Cash
options granted December 9, 1996 Series 1
under stock (Stock Options)
option plans by
12 optionees
12 Members of (6) Interests in Management (6) (6) Compensation
Senior Management Deferred Compensation Plan Deferral
and Other Highly
Compensated
Employees
</TABLE>
- ------------------------------
(FOOTNOTES FOLLOW ON NEXT PAGE)
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (CONTINUED)
- ------------------------------
(FOOTNOTES FOR TABLE ON PRECEDING PAGE)
(1) The sales of securities to Chase Manhattan Capital Corporation, Heller
Financial, Inc. and Jeffrey Pfeffer, Ph.D. were made in reliance on Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act") and/or
Regulation D promulgated by the Commission thereunder. 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.
All grants of stock options under Registrant's or its predecessors' stock
option plans made to 21 optionees in the aggregate prior to September 27,
1995 were made in reliance on Rule 701 promulgated by the Commission under
the Securities Act; the grants of stock options under Registrant's stock
option plans made to 2 optionees on November 8, 1995, 23 optionees on
November 15, 1995, 3 optionees on January 12, 1996, 2 optionees on March 22,
1996 and 19 optionees on August 27, 1996 were made in reliance on Section
4(2) and/or Regulation D promulgated by the Commission thereunder. The
options granted in reliance on Section 4(2) or Regulation D were granted to
a limited number of people with no general solicitation or advertising.
Effective December 10, 1996, all options to purchase shares of Registrant's
Common Stock, and shares issuable upon exercise of such options, under
Registrant's stock option plans were registered with the Commission on
Registrant's Form S-8 (Commission File No. 333-17533) pertaining to
Registrant's securities under such plans.
All sales of Common Stock made pursuant to the exercise of stock options
granted under Registrant's or its predecessors' stock option plans,
occurring prior to December 10, 1996, were made in reliance on Rule 701
promulgated by the Commission under the Securities Act. Effective December
10, 1996, all shares issuable upon exercise of such options were registered
with the Commission on Registrant's Form S-8 (Commission File No. 333-17533)
pertaining thereto.
The sales of interests in Registrant's Management Deferred Compensation Plan
were made in reliance on Section 4(2) of 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.
(2) Exchanged for Warrant to purchase 2,052,526 shares of Class A Common Stock
issued October 9, 1992.
(3) Exchanged for Warrant to purchase 440,215 shares of Class A Common Stock
issued October 9, 1992.
(4) 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.
(5) The options were granted to employees and to members of Registrant's Board
of Directors under Registrant's 1988 and 1994 Stock Option Plans. The
options generally expire ten years from the date of grant and become
exercisable for 20% of the shares on the first anniversary of the date of
grant, with the balance generally vesting 5% for each calendar quarter of
each individual's employment or membership on the Board of Directors
thereafter. Vesting of certain options granted to one employee and to
certain members of the Board of Directors accelerate upon a change of
control of the Company. The exercise prices on the dates of grant were equal
to or greater than 100% of the fair market value as determined by
Registrant's Board of Directors (or the Compensation Committee of the Board
of Directors) on the dates of grant.
(6) The Company's Management Deferred Compensation Plan (the "Plan") was
implemented by the Company effective as of September 1, 1996. A total of 12
individuals initially elected to participate in the Plan. The aggregate
amount of compensation deferral for these 12 individuals was $45,698 at
February 28, 1997. It is anticipated that this aggregate amount will vary
during the course of the Company's fiscal year, increasing in the case of
those individuals who continue to participate in the Plan and decreasing in
the case of those individuals who elect not to continue to participate in
the Plan.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
1.01 Form of Underwriting Agreement.(1)
2.01 Stock Purchase Agreement, dated as of March 19, 1994, by and among the
Registrant, Nepco, Robert Crisci and Harry Crisci.(2)
2.02 Share Purchase Agreement, dated June 16, 1995, by and among 3154823 Canada
Inc. and Shareholders of B.C. Plastic Industries Ltd., Alberta Plastic
Industries Ltd. and Canada Cap Snap Corporation.(2)
2.03 Amalgamation Agreement, dated June 16, 1995, by and among 3154823 Canada
Inc., B.C. Plastic Industries Ltd., Alberta Plastic Industries Ltd. and
Canada Cap Snap Corporation.(2)
3.01 Certificate of Incorporation (filed with Secretary of State of the State
of Delaware on April 29, 1994, as amended and filed with Secretary of
State of the State of Delaware on October 4, 1995).(3)
3.02 Bylaws.(2)
4.01 Form of Indenture (including form of Note).(3)
5.02 Opinion of Tomlinson Zisko Morosoli & Maser LLP regarding legality of the
Notes.(10)
10.01 Lease, dated January 15, 1986, by and between Three Sisters Ranch
Enterprises ("TSRE") and the Registrant (concerning 890 Faulstich Court,
San Jose, Ca); Lease, dated February 28, 1994, by and between TSRE and
the Registrant (concerning 860 Faulstich Court); Lease, dated May 31,
1991, by and between TSRE and the Registrant (concerning 894-A Faulstich
Court); Lease, dated January 9, 1986, by and between TSRE and the
Registrant (concerning 894-B Faulstich Court); Lease, dated January 15,
1986, by and between TSRE and the Registrant (concerning 894-C Faulstich
Court) and Lease, dated January 15, 1986, by and between TSRE and the
Registrant (concerning 898-B Faulstich Court).(2)
10.02 Shareholders Agreement, dated as of June 23, 1988, by and among the
Registrant, Chase Manhattan Investment Holdings, Inc. and certain
shareholders and warrantholders, amended by Amendment to Shareholders
Agreement, dated as of May 23, 1989, further amended by Second Amendment
to Shareholders Agreement, dated November 29, 1989, and further amended
by Amendment to Shareholders Agreement, dated as of June 30, 1994.(2)
10.03 Shareholders Agreement, dated as of June 30, 1994, by and among the
Registrant, Chase Manhattan Capital Corporation, and certain
shareholders and warrantholders.(2)
10.04 Second Amended and Restated Senior Subordinated Loan Agreement, dated as
of June 30, 1994, by and between the Registrant and The Chase Manhattan
Bank, N.A., as amended by Amendment No. 1, dated as of June 16, 1995.(2)
10.05 Amended and Restated Credit and Security Agreement, dated as of June 30,
1994, by and between the Registrant and Heller Financial, Inc., as
amended by Amendment No. 1 to Amended and Restated Credit and Security
Agreement, dated as of August 23, 1994 and Amendment, Consent and Waiver
to Amended and Restated Credit and Security Agreement, dated as of June
16, 1995.(2)
</TABLE>
(FOOTNOTES FOLLOW)
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
10.06 Amended and Restated Registration Rights Agreement, dated as of June 30,
1994, by and among the Registrant, Heller Financial, Inc., Chase
Manhattan Investment Holdings, Inc., Chase Manhattan Capital Corporation
and Robert Fleming Nominees, Ltd.(2)
10.07 First Offer Agreement, dated as of October 17, 1990, by and among the
Registrant, Chase Manhattan Investment Holdings, Inc., Chase Manhattan
Capital Corporation and Robert Fleming Nominees, Ltd., as amended by
Amendment to First Offer Agreement, dated as of June 30, 1994.(2)
10.08 $109,000 Non-Recourse Promissory Note, dated November 13, 1991, made by
Daniel Luch and Mary Jeanne Luch in favor of the Registrant.(2)
10.09 $75,000 Non-Recourse Promissory Note, dated September 28, 1992, made by
Howard R. Girbach and Beverly Girbach in favor of the Registrant.(2)
10.10 $250,000 Secured Promissory Note, dated January 17, 1992, made by Jack L.
Watts in favor of the Registrant.(2)
10.11 Employment Memorandum, dated June 28, 1988, as amended January 9, 1991 to
John Lemons from Jack L. Watts on behalf of the Registrant.(2)
10.12 Director's Agreement, dated October 5, 1990, by and between the Registrant
and Martin Imbler.(2)
10.13 Director's Agreement, dated September 1, 1989, by and between the
Registrant and Larry C. Williams, as amended by Amendment to Director's
Agreement, dated January 16, 1990 and Amendment Number Two to Director's
Agreement, dated August 31, 1991.(2)
10.14 Director's Agreement, dated as of September 1, 1989, by and between the
Registrant and Timothy Tomlinson, as amended by Amendment to Director's
Agreement, dated January 16, 1990 and Amendment Number Two to Director's
Agreement, dated August 31, 1991.(2)
10.15 Stock Purchase Agreement, dated October 17, 1990, by and among the
Registrant, Robert Fleming Nominees, Ltd., Jack Watts, John Lemons and
LJL Cordovan Partners.(2)
10.16 Stock Purchase Agreement, dated as of June 30, 1994, by and among the
Registrant, Jack L. Watts, LJL Cordovan Partners, Robert Fleming
Nominees, Ltd., Chase Manhattan Capital Corporation, and certain other
selling shareholders.(2)
10.17 Credit Agreement, dated as of June 16, 1995, by and between 3154823 Canada
Inc. as borrower (subsequently amalgamated into Portola Plastics Canada,
Inc.) and Canadian Imperial Bank of Commerce as lender and agent.(2)
10.18 Limited Recourse Guarantee, dated as of June 16, 1995, between the
Registrant as guarantor and Canadian Imperial Bank of Commerce.(2)
10.19 Master Supply Agreement, dated March 29, 1995, by and between the
Registrant and Tetra Rex Packaging Systems, Inc.(2)
10.20 Form of Subscription Agreement by and between the Registrant and the
related director or officer.(2)
10.21 Form of Indemnification Agreement by and between the Registrant and the
related director or officer.(2)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
10.22 Stock Purchase Agreement, dated as of June 9, 1995, by and among the
Registrant, Oakley T. Hayden Corp., Lyn Leigers as Executor of the
Estate of Oakley T. Hayden, Chase Manhattan Capital Corporation and
Heller Financial, Inc.(1)
10.23 Second Amended and Restated Registration Rights Agreement, dated as of
June 9, 1995, by and among the Registrant, Heller Financial, Inc., Chase
Manhattan Capital Corporation and Robert Fleming Nominees Limited.(1)
10.24 Second Amended and Restated Credit and Security Agreement by and between
the Registrant and Heller Financial, Inc.(3)
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.(3)
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.(3)
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.(3)
10.28 1988 Stock Option Plan and related documents.(4)
10.29 1994 Stock Option Plan and related documents.(5)
10.30 1996 Special Management Bonus Plan.(3)
10.31 1996 Management Bonus Plan.(3)
10.32 Description of provisions of 1996 Senior Executive Bonus Plans.(3)
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.(6)
10.34 Settlement Agreement, dated June 1996, by and between the Registrant and
Scholle Corporation.(7)
10.35 Resignation Agreement, dated October 28, 1996, by and between the
Registrant and Howard R. Girbach.(8)
10.36 Director's Agreement, dated as of May 20, 1996, by and between the
Registrant and Jeffrey Pfeffer.(8)
10.37 Form of Indemnification Agreement by and between the Registrant and the
related director or officer.(8)
10.38 Form of Amendment to Indemnification Agreement by and between the
Registrant and certain directors and officers of the Registrant.(8)
10.39 100,000 Non-Recourse Promissory Note, dated May 28, 1996, made by Joseph
F. Jahn and Nancy L. Jahn in favor of the Registrant.(8)
10.40 1996 Employee Stock Purchase Plan and related documents.(9)
10.41 Senior Executive Bonus Plan for Fiscal Year 1997.(9)
10.42 Management Incentive Plan for Fiscal Year 1997.(9)
10.43 Management Deferred Compensation Plan Trust Agreement.(9)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
10.44 Registrant's Management Deferred Compensation Plan.(10)
11.01 Computation of Net Income (Loss) Per Share.
12.01 Computation of Ratio of Earnings to Fixed Charges.
21.01 Subsidiaries of the Registrant.(8)
23.08 Consent of Tomlinson Zisko Morosoli & Maser LLP.
23.09 Consent of Coopers & Lybrand L.L.P.
24.01 Power of Attorney (see signature pages hereto).
25.01 Statement of Eligibility on Form T-1 of American Bank National Association
as Trustee (bound separately).(2)
27.01 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Previously filed as exhibit with the same number in pre-effective Amendment
No. 2 to this Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission (the "Commission") on September 25, 1995.
(2) Previously filed as exhibit with the same number in the initial filing of
this Registration Statement on Form S-1, as filed with the Commission on
August 1, 1995.
(3) Incorporated herein by reference to the exhibit with the same number
included in Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Commission on January 16, 1996.
(4) Incorporated herein by reference to Exhibit 4.03 to Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as filed
with the Commission on December 10, 1996.
(5) Incorporated herein by reference to Exhibit 4.04 to Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as filed
with the Commission on December 10, 1996.
(6) Incorporated herein by reference to the exhibit with the same number filed
with Registrant's Quarterly Report on Form 10-Q for the period ended
February 29, 1996, as filed with the Commission on April 15, 1996.
(7) Incorporated herein by reference to the exhibit with the same number
included in Registrant's Quarterly Report on Form 10-Q for the period ended
May 31, 1996, as filed with the Commission on July 11, 1996.
(8) Incorporated herein by reference to the exhibit with the same number filed
with Registrant's Annual Report on Form 10-K for the period ended August 31,
1996, as filed with the Commission on November 25, 1996.
(9) Incorporated herein by reference to the exhibit with the same number filed
with Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1996, as filed with the Commission on January 13, 1997.
(10) Previously filed as exhibit with the same number in Post-Effective
Amendment No. 2 to this Registration Statement on Form S-1, as filed with
the Commission on March 11, 1997.
II-7
<PAGE>
(b) The following financial statement schedule is filed herewith:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER SCHEDULE TITLE
- ------------ ------------------------------------------------------------------------
<S> <C>
Schedule II Valuation and Qualifying Accounts.
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of Prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(c) To include any material information with respect to the plan of
distribution net previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
II-8
<PAGE>
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Post-Effective Amendment No. 3 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 30th day of April, 1997.
<TABLE>
<S> <C> <C>
PORTOLA PACKAGING, INC.
By: /s/ JACK L. WATTS
-----------------------------------------
Jack L. Watts
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Jack L. Watts, Patricia Voll and Timothy
Tomlinson, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all post-effective
amendments to this Registration Statement, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his or her or their substitute or substitutes, may lawfully do or cause
to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ JACK L. WATTS Chief Executive Officer,
- ------------------------------ Chairman of the Board April 30, 1997
Jack L. Watts and a Director
PRINCIPAL FINANCIAL OFFICER:
/s/ ROBERT R. STRICKLAND Vice President--Finance
- ------------------------------ and Chief Financial April 30, 1997
Robert R. Strickland Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ PATRICIA VOLL
- ------------------------------ Vice President--Finance April 30, 1997
Patricia Voll and Accounting
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
ADDITIONAL DIRECTORS:
/s/ CHRISTOPHER C. BEHRENS
- ------------------------------ Director April 30, 1997
Christopher C. Behrens
/s/ MARTIN R. IMBLER
- ------------------------------ Director April 30, 1997
Martin R. Imbler
/s/ TIMOTHY TOMLINSON
- ------------------------------ Secretary and Director April 30, 1997
Timothy Tomlinson
/s/ LARRY C. WILLIAMS
- ------------------------------ Director April 30, 1997
Larry C. Williams
/s/ JEFFREY PFEFFER
- ------------------------------ Director April 30, 1997
Jeffrey Pfeffer
</TABLE>
II-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:
Our report on the consolidated financial statements of Portola Packaging,
Inc. and Subsidiaries is included on page F-2 of this Registration Statement on
Form S-1. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule on page S-2 of this
Registration Statement on Form S-1.
In our opinion, the financial statement schedule referred to above, 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
October 22, 1996
S-1
<PAGE>
PORTOLA PACKAGING, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BEGINNING ENDING
BALANCE ADDITIONS/EXPENSE OTHER DEDUCTIONS(2) BALANCE
--------- ----------------- ----- ------------- --------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
August 31, 1994................................. $206 $173 $(167)(1) $157 $389
August 31, 1995................................. 389 892 468 813
August 31, 1996................................. 813 450 446 817
</TABLE>
- ------------------------
(1) Amount of valuation allowance established as part of the acquisition of
Nepco.
(2) Write-off of bad debts.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
11.01 Computation of Net Income (Loss) Per Share.
12.01 Computation of Ratio of Earnings to Fixed Charges.
23.08 Consent of Tomlinson Zisko Morosoli & Maser LLP.
23.09 Consent of Coopers & Lybrand L.L.P.
24.01 Power of Attorney (see signature pages).
27.01 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 11.01
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, --------------------
-------------------------------- FEB. 29, FEB. 28,
1994 1995 1996 1996 1997
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average common shares outstanding for the period... 11,087 11,393 11,800 11,585 11,806
--------- --------- ---------- --------- ---------
Shares used in per share calculation........................ 11,087 11,393 11,800 11,585 11,806
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle.................. $ 1,100 $ 140 $ (8,177) $ (200) $ (5,235)
Less the increase in the put value of warrants.............. (455) (610) (895) (423) (526)
--------- --------- ---------- --------- ---------
Income (loss) before extraordinary item..................... $ 645 $ (470) $ (9,072) $ (623) $ (5,761)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Cumulative effect of change in accounting principle......... $ 85
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Net income (loss)........................................... $ 225 $ 140 $ (9,442) $ (1,465) $ (5,235)
Less the increase in the put value of warrants.............. (455) (610) (895) (423) (526)
--------- --------- ---------- --------- ---------
Net income (loss)........................................... $ (230) $ (470) $ (10,337) $ (1,888) $ (5,761)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Net income (loss) per share before extraordinary item and
cumulative effect of change in accounting principle....... $ 0.06 $ (0.04) $ (0.77) $ (0.05) $ (0.49)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Cumulative effect of change in accounting priciple.......... $ 0.01
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Net income (loss) per share................................. $ (0.02) $ (0.04) $ (0.88) $ (0.16) $ (0.49)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</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
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, --------------------
----------------------------------------------------- FEB. 29, FEB. 28,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense....................... $ 3,200 $ 3,128 $ 3,996 $ 8,658 $ 13,084 $ 6,380 $ 6,539
Debt financing costs................... 969 479 1,058 447 492 261 313
Rent expense........................... 284 295 465 499 635 344 329
--------- --------- --------- --------- --------- --------- ---------
Total interest....................... 4,453 3,902 5,519 9,604 14,211 6,985 7,181
Total fixed charges...................... 4,453 3,902 5,519 9,604 14,211 6,985 7,181
Less:Capitalized interest................ -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net fixed charges.................... $ 4,453 $ 3,902 $ 5,519 $ 9,604 $ 14,211 $ 6,985 $ 7,181
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings:
Net income (loss)...................... $ 663 $ 309 $ 225 $ 140 $ (9,442) $ (1,465) $ (5,235)
Income tax benefit from extraordinary
item................................. -- (592) (539) -- (845) (845) --
Cumulative effect of adopting SFAS No.
109.................................. -- -- 85 -- -- -- --
Provision for taxes.................... 1,287 1,521 1,095 1,294 865 755 (1,650)
Net fixed charges...................... 4,453 3,902 5,519 9,604 14,211 6,985 7,181
--------- --------- --------- --------- --------- --------- ---------
Total earnings....................... $ 6,403 $ 5,140 $ 6,385 $ 11,038 $ 4,789 $ 5,430 $ 296
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Calcuation of ratio of earnings to fixed
charges:
Total earnings......................... $ 6,403 $ 5,140 $ 6,385 $ 11,038 $ 4,789 $ 5,430 $ 296
Total fixed charges.................... 4,453 3,902 5,519 9,604 14,211 6,985 7,181
Ratio of earnings to fixed charges..... 1.44 1.32 1.16 1.15
Deficiency of earnings to fixed
charges.............................. $ (9,422) $ (1,555) $ (6,885)
</TABLE>
2
<PAGE>
EXHIBIT 23.08
CONSENT OF TOMLINSON ZISKO MOROSOLI & MASER LLP
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus which is a part of Post-Effective Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 33-95318) of Portola Packaging,
Inc.
TOMLINSON ZISKO MOROSOLI & MASER LLP
Palo Alto, California
April 30, 1997
<PAGE>
EXHIBIT 23.09
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this post-effective amendment number three to
the Registration Statement on Form S-1 (File No. 33-95318) of our report dated
October 22, 1996, on our audits of the consolidated 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
April 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1997
<PERIOD-END> AUG-31-1996 FEB-28-1997
<CASH> 7,797 2,326
<SECURITIES> 710 466
<RECEIVABLES> 23,835<F1> 22,780<F1>
<ALLOWANCES> (817) 0
<INVENTORY> 11,650 11,679
<CURRENT-ASSETS> 47,360 41,950
<PP&E> 104,123 76,068<F2>
<DEPRECIATION> (34,350) 0
<TOTAL-ASSETS> 152,227 148,180
<CURRENT-LIABILITIES> 25,990 27,580
<BONDS> 116,108 116,684
0 0
0 0
<COMMON> 12 11
<OTHER-SE> (3,813) (10,215)
<TOTAL-LIABILITY-AND-EQUITY> 152,227 148,180
<SALES> 159,462 79,971
<TOTAL-REVENUES> 159,462 79,971
<CGS> 117,592 65,089
<TOTAL-COSTS> 141,783 75,835
<OTHER-EXPENSES> 12,657 4,458
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13,576 6,852
<INCOME-PRETAX> (7,312) (6,885)
<INCOME-TAX> 865 (1,650)
<INCOME-CONTINUING> (8,177) (5,235)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 1,265 0
<CHANGES> 0 0
<NET-INCOME> (9,442) (5,235)
<EPS-PRIMARY> (0.88) (0.49)
<EPS-DILUTED> (0.88) (0.49)
<FN>
<F1>Shown Net of Allowance for both periods.
<F2>Shown Net of Depreciation for three month period
</FN>
</TABLE>
