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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 33-95318
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PORTOLA PACKAGING, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 94-1582719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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890 FAULSTICH COURT
SAN JOSE, CALIFORNIA 95112
(Address of principal executive offices, including zip code)
(408) 453-8840
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Registrant's voting stock is privately held and the aggregate market value
of the voting stock held by non-affiliates is not calculable.
11,762,956 shares of Registrant's $.001 par value Common Stock, consisting
of 2,134,992 shares of nonvoting Class A Common Stock and 9,627,964 shares in
the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were
outstanding at November 13, 1997.
Documents incorporated by reference: None
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PORTOLA PACKAGING, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business...................................................................................... 2
Item 2. Properties.................................................................................... 9
Item 3. Legal Proceedings............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........................................... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 11
Item 6. Selected Financial Data....................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 19
Item 8. Financial Statements and Supplementary Data................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 44
PART III
Item 10. Directors and Executive Officers of Registrant................................................ 45
Item 11. Executive Compensation........................................................................ 47
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 50
Item 13. Certain Relationships and Related Transactions................................................ 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 54
Signatures.................................................................................... 59
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Trademark acknowledgments
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 Portola Packaging, Inc. (the "Company"). All
other product names of the Company are trademarks of the Company.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Portola Packaging, Inc. (together with its subsidiaries referred to
hereinafter as the "Company" or "Portola") 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 and (v) push-pull
dispensing closures. Portola also designs, manufactures and supplies high speed
capping equipment and complete turnkey water bottling systems, which are
marketed by the Company primarily under the tradename "PortaPlant". Portola's
closure products are primarily manufactured domestically through a
technologically advanced, high speed injection molding process at eight modern
manufacturing facilities strategically located throughout the United States,
three facilities located in Canada and one facility located in the United
Kingdom. 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 10.8
billion closures annually under the names Cap Snap, Nepco, Portola and other
brand names to over 3,000 customers. Most of the Company's customers have been
doing business with the Company for more than ten years. The Company's products
are used to cap such well known consumer products as Borden milk, Dole juices,
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 70 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.
HISTORY
The Company was incorporated in California in 1964, and reincorporated in
Delaware in June 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 closure units sold for fiscal 1987 to $170.4 million in
sales and 10.8 billion in closure units sold for fiscal 1997. 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 executive 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) investing in advanced 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,
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(iv) expanding sales in international markets where significant growth
opportunities exist and (v) where appropriate, seeking strategic acquisitions
that will strengthen the Company's competitive position.
EMPHASIZING RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING. The Company
is continuing its commitment to research and development, a commitment that has
led to significant product innovations. These innovations include the original
snap cap design and the five gallon closure, the "tear strip" feature that has
become a standard tamper evident mechanism for food and non-carbonated beverage
products and, 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, bottlers, 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 signed a
joint venture agreement on November 14, 1997 with the Shanghai Aquarius Drinking
Water Company of Shanghai, China to produce and sell caps and bottles for the
Asian marketplace. 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, completed its Canadian and United Kingdom acquisitions, and entered into
joint ventures in Mexico and China.
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 designed
to streamline its organization by eliminating multiple reporting channels and
duplicative personnel in manufacturing and other functions, and to implement
other cost savings measures. The restructuring included a reduction in
management and other personnel positions and closure of its Portland, Oregon and
Bettendorf, Iowa manufacturing facilities. The Portland, Oregon facility was
recently sold and the Bettendorf, Iowa facility has been listed for sale. As
described under the heading entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company recorded a
restructuring charge during the year of $2.4 million and a write-off of
intangibles of $1.7 million.
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
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(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 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 $2.1 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 Limited" (the "U.K. Acquisition"). The Company recently leased a
manufacturing facility located in Doncaster, South Yorkshire, England which is
being used by Portola Packaging Ltd. to manufacture closures for distribution
primarily in the United Kingdom, with some exports to Europe.
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, which are important factors in the
transportation-sensitive packaging industry.
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
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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% of total sales
for each of the 1995 through 1997 fiscal years. In the most recent year, 1997,
the balance of sales were for equipment (8%) and bottles (3%).
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 34 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.
The following table describes the Company's principal plastic closure
product lines.
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PRODUCT LINE DESCRIPTION MARKET APPLICATION
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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
fitment for polyethylene- other juice products
coated gable-top paperboard
cartons
Push-pull dispensing closures...... Dual tamper evident closures Bottled water, flavored water,
with push-pull feature sports drinks
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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.
PLASTIC BOTTLES
In Canada, the Company also produces plastic bottles.
PRODUCT DEVELOPMENT
The Company continues to be committed to product development and
engineering. Its research and development group and engineering staff provide a
range of design and development services, focusing primarily on (i) new products
and product enhancements, (ii) tooling and molds necessary for manufacturing
plastic closures and (iii) capping equipment compatible with the Company's
closures and its customers' containers. Research and development expenditures
for fiscal 1997, 1996 and 1995 were $2.4 million, $2.2 million and $1.7 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.
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 although prices for LDPE resin can fluctuate
substantially over relatively short periods of time. The Company has not
experienced any significant difficulties over the past ten years in obtaining
sufficient quantities of LDPE resin. 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,
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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.
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.
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.
SALES, MARKETING AND CUSTOMER SERVICE
The Company markets its products through its internal sales department and
through domestic and international networks 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
purchasing 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 40% of the Company's
sales during the fiscal year ended August 31, 1997, and none accounted for more
than 9% of sales during that period. Most of the Company's customers have been
doing business with the Company for more than ten years.
Attention to customer service is a critical component of the Company's
marketing effort. The Company's customers operate high-speed, high-volume
production lines, with many handling perishable products. In order to assure
that the production lines operate efficiently and avoid costly line stoppages,
customers rely on the Company's ability to provide reliable, on-time delivery of
its closure products and to maintain the uniform quality of those products. The
Company also provides technical assistance to its customers in the form of an
in-house service team that can be dispatched on short notice to solve a bottling
line problem throughout the country. Several of the Company's field service
representatives have extensive blowmolding technical expertise that is
especially important in resolving bottle leakage problems for customers.
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EXPORT SALES AND JOINT VENTURES
Although the Company's sales are primarily domestic, the Company expects
significant growth in international sales, particularly in the market for water
cooler bottle closures and water bottle capping and filling equipment. The
United States bottled water industry, in general, uses more sophisticated
packaging materials and processes than bottled water companies use in the rest
of the world. The Company believes that bottled water companies and other
non-carbonated beverage companies in Europe, the Far East, Latin America and
elsewhere are beginning to adopt more advanced packaging materials and
techniques, and that, as they do, they will become potential customers for the
Company's plastic closure products and equipment. For the fiscal years ended
August 31, 1997, 1996 and 1995, export sales to unaffiliated customers were
$12,018,000, $17,568,000 and $18,658,000, respectively. The Company's export
sales have declined as the UK and Canadian subsidiaries have produced and sold
product locally. Sales are growing in these regions but through local
manufacture.
In the last several years, the Company has utilized joint ventures with
bottle manufacturers, bottlers and distributors to gain footholds in
international markets. By offering plastic closures, capping equipment and
turnkey bottling systems, the Company can provide joint venture partners with a
complete solution to their bottling and capping requirements. In fiscal year
1996, the Company had three international joint ventures: (i) a 50% interest in
Canada Cap Snap Corporation, a Canadian corporation formed in 1990 and engaged
in manufacturing and distributing 38mm bottle closures in Canada, (ii) a 50%
interest in Cap Snap (U.K.) Ltd., a corporation formed in the United Kingdom in
1992 with a local bottle manufacturer to manufacture and sell 38mm caps, and
(iii) a 50% interest in Cap Snap Mexico, a joint venture formed in Mexico in
1993 with a local producer of plastic bottles and closures. In June 1995, the
Company consummated the Western Canadian Acquisition by acquiring the remaining
50% interest in Canada Cap Snap Corporation, together with a 100% interest in
two affiliated plastic bottle manufacturing companies. In September 1995, the
Company consummated the U.K. Acquisition by acquiring the remaining 50% interest
in Cap Snap (U.K.) Ltd. On November 14, 1997, the Company signed a joint venture
agreement, commiting to invest $1.65 million, with the Shanghai Aquarius
Drinking Water Company to manufacture and sell closures and bottles for the
Asian marketplace. Aquarius is a leading bottled water company in the Shanghai
Province of 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 adversely affect the
Company's ability to compete. Because of the Company's product concentration, an
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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 material
adverse effect on the Company's financial condition and results of operations.
EMPLOYEES
As of October 31, 1997, the Company had 899 full-time employees, 25 of whom
were engaged in product development, 74 in marketing, sales and customer
support, 725 in manufacturing and 75 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 25
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 believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company currently owns or leases nine modern production facilities,
located in the United States, which operate five to seven days a week, 24 hours
a day. One of the nine production facilities was closed in July, 1997 and has
been listed for sale. The Company's western Canadian subsidiary leases two
production facilities and the Company's eastern Canadian subsidiary leases one
production facility. In addition, the 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 frequently scheduled maintenance throughout the plants. The
Company believes that these facilities are well-maintained and in good operating
condition and anticipates that, although substantial capital expenditures will
be required to meet the production requirements for new and developing product
lines, the facilities themselves will be sufficient to meet the Company's needs
for the next several years. There can be no assurance, however, that
unanticipated developments will not occur that would require the Company to
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add 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)
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<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
Fort Worth, TX............................. Closure Mfg./Warehouse 27,000 owned
Bettendorf, IA............................. Closure Mfg./Warehouse 40,000 owned(2)
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 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 and the
leases for the Richmond and Edmonton facilities expire in 2000.
(2) The Company closed this facility in July of 1997. This property has been
listed for sale.
ITEM 3. LEGAL PROCEEDINGS.
The plastic closure industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company and certain
of its subsidiaries are engaged in patent infringement litigation with various
parties who are seeking to have the court declare certain patents owned by the
Company and such subsidiaries invalid. Some of these parties have also included
allegations of anti-trust violations in their complaints. The Company believes
that its patents and the patents of its subsidiaries are valid and is contesting
these allegations vigorously. There can be no assurance, however, that the
Company or its subsidiaries will be successful in their 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 or its
subsidiaries, that any such litigation will not be expensive and protracted or
that, as a result of such litigation, the Company or its subsidiaries will not
be required to terminate a business practice or seek to obtain a license to the
intellectual property of others.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's equity securities are privately held and no class of voting
securities is registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended. There is no established trading market for any class of the
Company's common equity.
The Company has two classes of common equity, Class A Common Stock and Class
B Common Stock, Series 1 and 2. Shares of Class A Common Stock are not entitled
to vote. 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.
As of November 13, 1997, there were two holders of record of the 2,134,992
outstanding shares of Class A Common Stock. Additionally, there were two holders
of record of immediately exercisable warrants to purchase 2,492,741 shares of
Class A Common Stock. As of November 13, 1997, there were approximately 139
holders of record of the 8,456,534 outstanding shares of Class B Common Stock,
Series 1 and 5 holders of record of the 1,171,430 outstanding shares of Class B
Common Stock, Series 2.
The Company has not paid dividends on its Common Stock in recent fiscal
years. It presently intends to continue this policy in order to retain any
earnings for the development of the Company's business. Furthermore, certain of
the Company's credit agreements, including the senior notes issued on October 2,
1995 and the senior revolving credit facility entered into on October 2, 1995,
restrict the Company's ability to pay dividends. In addition, the Canadian loan
agreements prohibit the western Canadian subsidiary from paying dividends to the
parent company.
ITEM 6. SELECTED FINANCIAL DATA
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, 1997 have been derived
from, and are qualified by reference to, the consolidated financial statements
of the Company. The information below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial
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<PAGE>
statements of the Company and the accompanying notes thereto and other financial
information appearing elsewhere in this report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
--------------------------------------------------------
1997 1996 1995 1994(A) 1993
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................ $ 170,443 $ 159,462 $ 124,650 $ 70,284 $ 58,286
Cost of sales........................................ 135,318 117,592 91,972 51,670 42,679
---------- ---------- ---------- --------- ---------
Gross profit....................................... 35,125 41,870 32,678 18,614 15,607
Selling, general and administrative.................. 19,745 22,035 16,649 8,821 7,207
Research and development............................. 2,428 2,156 1,682 764 820
Amortization of intangibles(b)....................... 3,322 5,207 3,724 2,025 1,400
Write-off of intangibles(c).......................... 1,720 7,292 -- -- --
Restructuring costs.................................. 2,394 -- -- -- --
---------- ---------- ---------- --------- ---------
Income from operations............................. 5,516 5,180 10,623 7,004 6,180
Other (income) expense, net(d)....................... 208 158 259 477 (62)
Interest expense, net................................ 12,792 11,842 8,483 3,899 3,044
Amortization of financing costs...................... 559 492 447 433 479
---------- ---------- ---------- --------- ---------
Income (loss) before extraordinary item, cumulative
effect of change in accounting principle and
income taxes..................................... (8,043) (7,312) 1,434 2,195 2,719
Income tax provision (benefit)(c).................... (632) 865 1,294 1,095 1,521
---------- ---------- ---------- --------- ---------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................ (7,411) (8,177) 140 1,100 1,198
Extraordinary item, net(e)........................... -- 1,265 -- 790 889
Cumulative effect of change in accounting
principle(c)....................................... -- -- -- 85 --
---------- ---------- ---------- --------- ---------
Net income (loss).................................... $ (7,411) $ (9,442) $ 140 $ 225 $ 309
---------- ---------- ---------- --------- ---------
Net income (loss) per common share................... $ (0.72) $ (0.88) $ (0.04) $ (0.02) $ 0.02
---------- ---------- ---------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital...................................... $ 7,315 $ 21,370 $ 13,747 $ 11,049 $ 7,109
Total assets......................................... 148,057 152,227 129,315 110,820 50,896
Total debt........................................... 121,943 117,913 91,912 77,467 38,140
Redeemable warrants(f)............................... 5,675 4,560 3,665 3,055 2,600
Total shareholders' equity (deficit)................. (13,049) (3,801) 6,694 5,393 2,597
CASH FLOW DATA:
Net cash provided by operating activities............ 14,744 18,795 8,422 9,351 6,768
Net cash used in investing activities................ (20,841) (31,271) (24,648) (38,418) (9,119)
Net cash provided by financing activities............ 1,566 19,511 14,785 30,099 3,538
OPERATING AND OTHER DATA:
Closure unit volume (in millions).................... 10,800 9,606 8,476 4,893 3,980
Closure unit volume growth(g)........................ 12.4% 13.3% 73.2% 22.9% 5.8%
EBITDA(h)............................................ $ 24,463 $ 27,783 $ 23,588 $ 14,728 $ 12,883
Depreciation and amortization(i)..................... 15,600 15,961 12,789 8,357 6,845
Capital expenditures................................. 23,101 27,194 11,302 6,159 9,564
Ratio of earnings to fixed charges(j)................ -- -- 1.2x 1.2x 1.3x
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
12
<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) The Company adopted Statement of Financial Accounting Standard (SFAS) No.
109 "Accounting for Income Taxes" in the fiscal year ended August 31, 1994
and SFAS No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of," in the fiscal year ended August 31,
1996.
(d) Other expenses in fiscal 1994 includes write-off of financing costs in
connection with a debt offering commenced but not completed and other
expenses, net.
(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. The
non-recurring legal expenses associated with the Scholle Corporation
litigation were $882,000, $277,000, and $275,000 for the fiscal years ended
August 31, 1995, 1994, and 1993, 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. EBITDA as computed by the Company may not be comparable to
similarly titled performance measurements 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 (loss) 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 years ended August 31, 1997 and
1996 resulted in a deficiency of $8,043,000 and $9,422,000, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Portola Packaging, Inc. 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, sports drinks and other
non-carbonated beverage products. The Company was acquired in 1986 through a
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<PAGE>
leveraged acquisition led by Jack L. Watts, the Company's current Chairman of
the Board and Chief Executive Officer. Since the acquisition, management has
focused its efforts on four principal areas: (i) continuing growth by converting
new customers to its plastic closures, (ii) developing new products and
improving existing products, (iii) achieving productivity improvements in its
manufacturing and material handling operations and (iv) seeking strategic
acquisitions including the acquisition of Northern Engineering & Plastics Corp.
("Nepco") and certain companies in Canada and the United Kingdom.
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 approximately $1.5 million, the
remaining 50% interest it had not previously owned in Cap Snap (U.K.) Ltd., now
known as "Portola Packaging Limited." 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 $2.1 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.
In April 1997, the Company's U.K. and eastern Canadian subsidiaries were
converted to "restricted subsidiary" status to allow greater flexibility in
funding the operations of these subsidiaries under the terms of the indenture
governing the senior notes issued by the Company in October 1995 and under the
terms of the Company's senior credit facility.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1996
Sales increased $11.0 million, or 6.9%, from $159.5 million for fiscal 1996
to $170.4 million for fiscal 1997. Of the increase, $6.2 million was
attributable to increased sales volume from the Canadian operations and $7
million was attributable to increased sales volume from the U.K. operations.
Sales from domestic closure operations remained relatively constant while
equipment sales decreased by $2.4 million. The majority of the increase in
sales, $7.6 million, was due to increases in closures sales volumes, consisting
principally of $4.2 million in increased sales of small closures, $1.9 million
in increases in sales of fitments and $1.5 million in increases in sales of
5-gallon and widemouth closures. These sales increases were primarily the result
of increased unit sales, and price increases were not a factor.
Gross profit decreased $6.7 million, or 16.1%, to $35.1 million for fiscal
1997, as compared to $41.9 million for fiscal 1996. Gross profit as a percentage
of sales decreased from 26.3% for fiscal 1996 to 20.6% in fiscal 1997. The
margin decrease was due to the mix of sales, with a higher sales volume in units
coming from the Canadian and U.K. operations, all of which have experienced
relatively low margins. The Company anticipates sales from its Canadian and U.K.
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
14
<PAGE>
margins from these operations will improve. U.K. margins will improve as the
U.K. subsidiary begins to manufacture products in its own production facility as
opposed to relying on subcontractors. Canadian margins will increase with
planned increased volume and better pricing with these subsidiaries' largest
customers. The gross margin in the equipment business was down as compared with
the same period last year. In addition, the margins in the domestic closure
business were down slightly from fiscal 1997 to fiscal 1996. Direct materials
remained constant at approximately 41% of sales and labor and overhead costs
have increased year on 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 and the closure of its Bettendorf, Iowa facility in July 1997. The
Company recorded a restructuring charge of $2.4 million and wrote off goodwill
of $1.7 million in connection with this restructuring plan in fiscal 1997.
Selling, general and administrative expense decreased $2.3 million, or
10.4%, to $19.7 million for fiscal 1997, as compared to $22.0 million for fiscal
1996, and decreased as a percentage of sales from 13.8% for fiscal 1996 to 11.6%
for fiscal 1997. These decreases were primarily due to the decrease in bonus
payments from fiscal 1996 to fiscal 1997 as well as a reduction in staff
positions as a result of the restructuring that occurred during fiscal 1997.
Research and development expenses increased slightly, to $2.4 million for
fiscal 1997, as compared to $2.2 million for fiscal 1996, and has remained
relatively constant as a percentage of sales at 1.4% in both years. The absolute
increase in research and development expenses was due primarily to increased
staffing to address expanded new product development opportunities and increased
expenditures for patent expenses.
Amortization of intangibles (consisting of amortization of patents and
technology licenses, goodwill and covenants not to compete) decreased $1.9
million, or 36.2%, to $3.3 million for fiscal 1997, as compared to $5.2 million
for fiscal 1996. The decrease was primarily due to a decrease in patent
amortization due to the write-down of patent costs in fiscal 1996.
In February 1997, the Company wrote off goodwill of $1.7 million in
connection with the closure of its Portland, Oregon plant.
Total restructuring charges of $2.4 million were recorded in fiscal 1997. In
February 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 accordance with its restructuring
plan. In addition, the Company recorded a restructuring charge of $1.3 million
in connection with the closure of its Bettendorf, Iowa facility in July 1997.
Income from operations increased $336,000, or 6.5%, to $5.5 million for
fiscal 1997, as compared to $5.2 million for fiscal 1996, and stayed relatively
flat as a percentage of sales at 3.2% for both fiscal 1996 and fiscal 1997.
These changes were due to the factors summarized above.
Interest income decreased $655,000 to $587,000 for fiscal 1997 from $1.2
million 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 $295,000 to $13.4 million in fiscal 1997 as
compared to $13.1 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.
Amortization of debt financing costs increased $67,000 to $559,000 in fiscal
1997 as compared to $492,000 for the same period in fiscal 1996. Debt financing
costs are primarily attributable to the
15
<PAGE>
$110 million senior notes issued in October 1995 and, to a lesser extent, debt
financing incurred in western Canada.
Income (loss) before extraordinary item improved to a $7.4 million loss in
fiscal 1997 compared to an $8.2 million loss in fiscal 1996. Net loss improved
to a $7.4 million loss in fiscal 1997 as compared to a $9.4 million loss in
fiscal 1996.
An extraordinary item of $1.3 million, net of taxes, was recorded during
fiscal 1996, as loan fees and other costs 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 U.K.
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 5-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 U.K. 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 an
increase in commission expense. The remaining increases were primarily due to
the increased size 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 and approximately $315,000 resulted from the 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.
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
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<PAGE>
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.
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 decreased to a loss of $8.2 million
in fiscal 1996 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash from operations and borrowings
from financial institutions and sales of common stock, to finance its
operations, repay long-term indebtedness and fund capital expenditures and
acquisitions. On October 2, 1995, the Company completed its offering of a $110
million senior notes offering (the "Notes") that mature on October 1, 2005 and
bear interest at the rate of 10.75% per annum. The net proceeeds of the Notes
offering were approximately $106 million, of which $83 million was used to
retire the Company's debt then outstanding under its senior term loans,
revolving facility and senior subordinated notes. Subsequent to the closing of
the Notes offering, $7.2 million was used to purchase the Company's San Jose
facilities, $11 million was used to purchase machinery and equipment, $3 million
was used to collateralize a loan made by a bank to the Company's 50% joint
venture in Mexico, and $2 million was used for working capital needs. At August
31, 1997, the Company had cash and cash equivalents of $3.2 million, a decrease
of $4.6 million from August 31, 1996.
Cash provided by operations totaled $14.7 million in fiscal 1997, a $4.1
million decrease from $18.8 million in fiscal 1996. Working capital decreased
$14.1 million in fiscal 1997 to $7.3 million, as compared to $21.4 million in
fiscal 1996, primarily as a result of increases in the current portion of long
term debt and accrued liabilities, and decreases in inventories and cash.
Capital expenditures were $23.1 million in fiscal 1997 compared to $27.2
million in fiscal 1996, which in fiscal 1996 included $7.2 million related to
the purchase of the Company's San Jose facilities. The Company anticipates that
capital expenditure levels for fiscal 1998 will be approximately $12 million to
$16 million. In addition, the Company is subject to certain future obligations
regarding noncompete and bonus arrangements as a result of certain acquisitions.
At August 31, 1997 the present value of the covenants not to compete under the
Nepco and Western Canadian Acquisitions were $1.6 million and $0.7 million,
respectively.
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In March 1997, the Company was advised that the prospectus used by an
affiliate of the Company in connection with secondary market sales of
approximately $14 million of the Company's Notes did not contain current
financial information about the Company. The Notes sold during this period by
the Company's affiliate may be subject to rescission, which may result in
liability for the Company for any loss incurred in connection with a rescission.
No liability has been accrued in the financial statements as of August 31, 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.
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.
In September 1996 the Company completed the acquisition of Rapid Plast J-P.
Inc., a Canadian federal company headquartered in Montreal, Quebec, for a total
purchase price of approximately $2.1 million. Rapid Plast was amalgamated with
the wholly-owned subsidiary formed by the Company to make the acquisition and
was renamed Portola Packaging Ltd. ("Portola Canada Ltd."). Portola Canada 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.
Until fiscal 1996, the Company had been the defendant in litigation with
Scholle Corporation ("Scholle") related to alleged patent infringement on
five-gallon non-spill caps. 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
amounts had been accrued in the Company's financial statements.
At August 31, 1997, the Company had total indebtedness of $121.9 million. In
October 1995 the Company completed its offering of the Notes and repaid all
outstanding debt under its senior term loans, revolving facility and senior
subordinated notes. Concurrently with the offering, the Company entered into a
new five-year senior secured revolving credit facility of up to $35.0 million,
subject to a borrowing base of eligible receivables and inventory. This 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.
At August 31, 1997 the Company had $3.2 million in cash and cash
equivalents, as well as unused borrowing capacity of approximately $31 million
under its revolving credit facility. 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
through fiscal 1998.
INFLATION
Most of the Company's closures are priced based in part on the cost of the
plastic resins from which they are produced. Historically, the Company has been
able to pass on increases in resin prices directly to its customers on a timely
basis. In recent years, the Company has benefited from relatively stable or
declining prices for raw materials other than plastic resins.
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 1997, 47%
of sales occurred in the first half of the year
18
<PAGE>
(September through February) while 53% of sales were generated in the second
half (March through August). The effect of seasonality on income from operations
is usually somewhat more pronounced in the second half of the fiscal year.
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 and
other acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 128, "Earnings per Share." SFAS 128 is
effective for quarterly periods ending after December 15, 1997. SFAS 128
requires presentation and calculation of a simplified earnings per share and
that prior periods be restated to conform to that revised presentation and
calculation.
In February 1997, the Financial Accounting Standards Board issued SFAS 129,
"Disclosure of Information about Capital Structure." SFAS 129 requires
disclosure about an entity's capital structure and contains no change in
disclosure requirements for entities that were subject to the previously
existing requirements SFAS 129 is effective for the Company's fiscal year 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. It is effective for the Company's fiscal
year 1999.
In June 1997 the Financial Accounting Standards board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS 131
changes current practice under SFAS 14 by establishing a new framework on which
to base segment reporting (referred to as the "management" approach) and also
requires interim reporting of segment information. It is effective for the
Company's fiscal year 1999.
The Company is currently studying the implications of these statements and
has not yet determined the impact of their adoption.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K, 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 report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE IN FORM
10-K
---------------
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants..................................................................... 21
Consolidated Balance Sheets as of August 31, 1997 and 1996............................................ 22
Consolidated Statements of Operations for the Years Ended August 31, 1997, 1996, and 1995............. 23
Consolidated Statements of Cash Flows for the Years Ended August 31, 1997, 1996, and 1995............. 24
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended August 31, 1997, 1996,
and 1995............................................................................................ 25
Notes to Consolidated Financial Statements............................................................ 27
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts......................................................... 63
</TABLE>
20
<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, 1997 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, 1997. 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, 1997 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, 1997 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.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 19, 1997
21
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 3,242 $ 7,797
Investments................................................................................ 841 710
Accounts receivable, net of allowance for doubtful accounts of $1,170 and $813,
respectively............................................................................. 23,339 23,835
Inventories................................................................................ 9,918 11,650
Other current assets....................................................................... 1,644 2,061
Deferred income taxes...................................................................... 1,032 1,307
--------- ---------
Total current assets..................................................................... 40,016 47,360
Notes receivable from employees.............................................................. 139 256
Property, plant and equipment, net........................................................... 79,779 69,773
Goodwill, net of accumulated amortization of $3,451 and $2,697, respectively................. 15,044 17,564
Patents, net of accumulated amortization of $4,512 and $11,923, respectively................. 2,024 2,235
Covenants not to compete, net of accumulated amortization of $4,179 and $2,996,
respectively............................................................................... 2,183 3,699
Debt financing costs, net of accumulated amortization of $881 and $413, respectively......... 3,433 3,853
Other assets................................................................................. 5,439 7,487
--------- ---------
Total assets............................................................................. $ 148,057 $ 152,227
--------- ---------
--------- ---------
LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK AND OTHER SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt.......................................................... $ 6,784 $ 1,805
Accounts payable........................................................................... 9,908 10,029
Accrued liabilities........................................................................ 8,870 6,046
Accrued compensation....................................................................... 2,161 3,111
Accrued interest........................................................................... 4,978 4,999
--------- ---------
Total current liabilities................................................................ 32,701 25,990
Long-term debt, less current portion......................................................... 115,159 116,108
Other long term obligations.................................................................. 1,543 2,303
Deferred income taxes........................................................................ 6,028 7,067
--------- ---------
Total liabilities........................................................................ 155,431 151,468
--------- ---------
Commitments and contingencies (Note 9)
Redeemable warrants to purchase Class A common stock......................................... 5,675 4,560
--------- ---------
Common stock and other shareholders' deficit:
Class A convertible common stock of $.001 par value:
Authorized: 5,203 shares in 1997 and 1996; Issued and outstanding: 2,135 shares in 1997
and 1996................................................................................ 2 2
Class B, Series 1, common stock of $.001 par value:
Authorized: 17,715 shares in 1997 and 1996; Issued and outstanding: 8,481 shares in 1997
and 8,507 shares in 1996................................................................ 8 9
Class B, Series 2, convertible common stock of $.001 par value:
Authorized: 2,571 shares; Issued and outstanding: 1,171 shares in 1997 and 1996.......... 1 1
Additional paid-in capital................................................................... 8,661 9,280
Notes receivable from shareholders........................................................... (440) (425)
Cumulative foreign currency translation adjustments.......................................... (173) (8)
Net unrealized loss on marketable securities................................................. (92) (170)
Accumulated deficit.......................................................................... (21,016) (12,490)
--------- ---------
Total common stock and other shareholders' deficit....................................... (13,049) (3,801)
--------- ---------
Total liabilities, redeemable warrants, common stock and other shareholders' deficit..... $ 148,057 $ 152,227
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales........................................................................ $ 170,443 $ 159,462 $ 124,650
Cost of sales................................................................ 135,318 117,592 91,972
---------- ---------- ----------
Gross profit............................................................... 35,125 41,870 32,678
---------- ---------- ----------
Selling, general and administrative.......................................... 19,745 22,035 16,649
Research and development..................................................... 2,428 2,156 1,682
Amortization of intangibles.................................................. 3,322 5,207 3,724
Write-off of intangibles..................................................... 1,720 7,292
Restructuring costs.......................................................... 2,394
---------- ---------- ----------
29,609 36,690 22,055
---------- ---------- ----------
Income from operations..................................................... 5,516 5,180 10,623
---------- ---------- ----------
Other (income) expense:
Interest income............................................................ (587) (1,242) (175)
Interest expense........................................................... 13,379 13,084 8,658
Amortization of financing costs............................................ 559 492 447
Other expense, net......................................................... 208 158 259
---------- ---------- ----------
13,559 12,492 9,189
---------- ---------- ----------
Income (loss) before extraordinary item and income taxes................... (8,043) (7,312) 1,434
Income tax provision (benefit)............................................... (632) 865 1,294
---------- ---------- ----------
Income (loss) before extraordinary item.................................... (7,411) (8,177) 140
Extraordinary item-loss on extinguishment of debt, net of income tax benefit
of $845 (Note 7)........................................................... 1,265
---------- ---------- ----------
Net income (loss)............................................................ $ (7,411) $ (9,442) $ 140
---------- ---------- ----------
---------- ---------- ----------
Net loss attributable to common shareholders................................. $ (8,526) $ (10,337) $ (470)
---------- ---------- ----------
---------- ---------- ----------
Number of shares used in computing per share amounts......................... 11,766 11,800 11,393
---------- ---------- ----------
---------- ---------- ----------
Loss per common share:
Loss before extraordinary item............................................. $ (0.72) $ (0.77) $ (0.04)
Net loss..................................................................... $ (0.72) $ (0.88) $ (0.04)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ (7,411) $ (9,442) $ 140
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................. 15,600 15,961 12,789
Write-off of intangibles.................................................. 1,720 7,292
Extraordinary loss on extinguishment of debt.............................. 1,781
Deferred income taxes..................................................... (764) 19 (707)
Loss on property and equipment dispositions............................... 88 171 147
Provision for doubtful accounts........................................... 823 450 892
Provision for excess and obsolete inventories............................. 32 26 78
Provision for restructuring............................................... 541
Changes in working capital:
Accounts receivable..................................................... 267 (3,425) (4,425)
Inventories............................................................. 1,956 (1,810) (862)
Other current assets.................................................... 477 451 (269)
Accounts payable........................................................ (508) 1,653 (585)
Accrued liabilities..................................................... 1,944 1,465 1,137
Accrued interest........................................................ (21) 4,203 87
---------- ---------- ----------
Net cash provided by operating activities............................... 14,744 18,795 8,422
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment.................................. (23,101) (27,194) (11,302)
Proceeds from sale of property, plant and equipment......................... 2,500 646 162
Payments for Canadian acquisition net of cash acquired of $232.............. (11,506)
Payment for UK acquisition.................................................. (1,463)
Payment for Rapid Plast acquisition......................................... (2,138)
Proceeds from short term investments........................................ 1,000
Payment for short term investments.......................................... (994)
Issuance of notes receivable................................................ (237)
Repayment of notes receivable............................................... 117 262
Increase (decrease) in other assets......................................... 1,781 (3,528) (1,765)
---------- ---------- ----------
Net cash used in investing activities..................................... (20,841) (31,271) (24,648)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings under debt arrangements.......................................... 15,322 115,212 29,284
Repayments of debt arrangements............................................. (11,727) (89,922) (15,208)
Payment of loan fees........................................................ (47) (4,189)
Sales of common stock....................................................... 319 75 1,855
Repayment of notes receivable from shareholders............................. 15
Increase in notes receivable from shareholders.............................. (15) (63) (91)
Payments on covenants not to compete........................................ (1,347) (1,602) (1,070)
Repurchase of common stock.................................................. (939)
---------- ---------- ----------
Net cash provided by financing activities................................. 1,566 19,511 14,785
---------- ---------- ----------
Effect of exchange rate changes on cash....................................... (24) (1) (15)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents............................ (4,555) 7,034 (1,456)
Cash and cash equivalents at beginning of period.............................. 7,797 763 2,219
---------- ---------- ----------
Cash and cash equivalents at end of period.................................... $ 3,242 $ 7,797 $ 763
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------
CLASS A SERIES 1 SERIES 2
---------------------- ---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1994................................. 8,679 $ 8 2,571 $ 3
Exercise of stock options.............................. 96 1
Increase in notes receivable from shareholders.........
Issuance of Class B common stock at $4.00 per share,
net of issuance costs of $23......................... 450
Increase in value of stock purchase warrants...........
Foreign currency translation adjustment................
Net income.............................................
----- --------- ----- --------- --------- ---------
Balance, August 31, 1995................................. 9,225 9 2,571 3
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
Exercise of stock options.............................. 2
Increase in value of stock purchase warrants...........
Increase in notes receivable from shareholders.........
Net unrealized loss on marketable securities...........
Net loss...............................................
----- --------- ----- --------- --------- ---------
Balance, August 31, 1996................................. 2,135 2 8,507 9 1,171 1
Repurchases of common stock............................ (178) (1)
Exercise of stock options.............................. 152
Net loss...............................................
Increase in value of stock purchase warrants...........
Increase in notes receivable from shareholders.........
Change in net unrealized loss on marketable
securities...........................................
Cumulative translation adjustment......................
----- --------- ----- --------- --------- ---------
Balance, August 31, 1997................................. 2,135 $ 2 8,481 $ 8 1,171 $ 1
----- --------- ----- --------- --------- ---------
----- --------- ----- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
<TABLE>
<CAPTION>
TOTAL COMMON
NOTES AND CUMULATIVE UNREALIZED STOCK AND
OTHER FOREIGN HOLDING OTHER
ADDITIONAL RECEIVABLE CURRENCY LOSSES ON SHAREHOLDERS'
PAID-IN FROM TRANSLATION MARKETABLE ACCUMULATED EQUITY
CAPITAL SHAREHOLDERS ADJUSTMENTS SECURITIES DEFICIT (DEFICIT)
- ----------- ------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 7,351 $ (286) $ (1,683) $ 5,393
78 79
(76) (76)
1,776 1,776
(610) (610)
$ (8) (8)
140 140
- ----------- ----- ----- ----- ------------ --------------
9,205 (362) (8) (2,153) 6,694
67 67
8 8
(895) (895)
(63) (63)
$ (170) (170)
(9,442) (9,442)
- ----------- ----- ----- ----- ------------ --------------
9,280 (425) (8) (170) (12,490) (3,801)
(938) (939)
319 319
(7,411) (7,411)
(1,115) (1,115)
(15) (15)
78 78
(165) (165)
- ----------- ----- ----- ----- ------------ --------------
$ 8,661 $ (440) $ (173) $ (92) $ (21,016) ($ 13,049)
- ----------- ----- ----- ----- ------------ --------------
- ----------- ----- ----- ----- ------------ --------------
</TABLE>
26
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 foods and other non-carbonated beverage products. The Company has
production facilities in the United States, Canada, United Kingdom 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, 1997 and 1996 consisted of equity securities in
one company. 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' deficit. 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 are depreciated on the
straight-line basis over their 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 income (loss) from the joint venture is
reflected in operations and is not material.
27
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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
Limited (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:
The Company accounts for income taxes under the liability method which
requires deferred taxes be computed on an asset and liability method and
adjusted when new tax laws or rates are enacted. Deferred tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that will be in effect when 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
28
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 shareholders'
equity (deficit). Net gains and losses arising from foreign currency
transactions were not material for any periods presented.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARES:
Earnings (loss) per common share and common equivalent share is computed by
dividing income (loss) by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Except as discussed
below, the number of common shares is increased by the number of shares issuable
on the exercise of options and warrants when the market price of the common
stock exceeds the exercise price of the options and warrants. This increase in
the number of common shares is reduced by the number of common shares which are
assumed to have been purchased with the proceeds from the exercise of the
options and warrants; these purchases are assumed to have been made at the
average price of the common stock during that part of the period when the market
price of the common stock exceeds the exercise price of the options and
warrants.
Since the Company's warrants include a put provision, Emerging Issues Task
Force (EITF) Consensus 88-9 requires computation of earnings (loss) per share
using the lower of the amount computed assuming conversion, as described above,
or the amount computed assuming exercise of the put option feature of the
warrants. Earnings (loss) per share computed using the put option feature is the
more dilutive of the calculations in fiscal 1997, 1996 and 1995. The accretion
of the warrants of $1,115, $895 and $610 for fiscal 1997, 1996 and 1995
respectively, is deducted from earnings to derive earnings (loss) per share.
CARRYING VALUE OF LONG-LIVED ASSETS:
Long-lived assets, including goodwill related to those assets and goodwill
unrelated to specific 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:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 128, "Earnings per Share." SFAS 128 is
effective for quarterly periods ending after December 15, 1997. SFAS 128
requires presentation and calculation of a simplified earnings per share and
that prior periods be restated to conform to that revised presentation and
calculation.
In February 1997, the Financial Accounting Standards Board issued SFAS 129,
"Disclosure of Information about Capital Structure." SFAS 129 requires
disclosure about an entity's capital structure and contains no change in
disclosure requirements for entities that were subject to the previously
existing requirements. SFAS 129 is effective for the Company's fiscal year 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. It is effective for the Company's fiscal
year 1999.
29
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In June 1997, the Financial Accounting Standards board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS 131
changes current practice under SFAS 14 by establishing a new framework on which
to base segment reporting (referred to as the "management" approach) and also
requires interim reporting of segment information. It is effective for the
Company's fiscal year 1999.
The Company is currently studying the implications of these statements and
has not yet determined the impact of their adoption.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts payable and other liabilities approximate
fair value due to their short maturities. 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. These reclassifications had no
effect on net income (loss) or total assets.
2. ACQUISITIONS:
On September 1, 1996, the Company completed the acquisition of Rapid Plast
J-P Inc., a Canadian federal corporation, for a purchase price of $2,138. 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.
Portola Packaging Ltd. is being operated as a "restricted subsidiary"
pursuant to the terms of the Indenture pertaining to the Senior Notes issued in
October 1995.
Consideration for the acquisition was allocated as follows:
<TABLE>
<S> <C>
Total consideration paid.......................... $ 2,138
Fair value of assets acquired..................... 1,584
-----------
Goodwill.......................................... $ 554
-----------
-----------
</TABLE>
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 Limited ("Portola Packaging (UK)") for a purchase price of
approximately $1,500. Portola Packaging (UK) is a United Kingdom 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 a "restricted subsidiary"
pursuant to the terms of the Indenture pertaining to the Senior Notes issued in
October 1995.
30
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 Incorporation. The acquired
companies and assets operate in Canada as Portola Packaging Canada Ltd.
The Canadian acquisition has been accounted for as a purchase and the
results of operations of Portola Packaging Canada Ltd. have been consolidated
with those of the Company commencing June 16, 1995. The total purchase price,
including cash consideration and a noncompete agreement, amounted to $13,572.
Cash consideration paid by the Company was $11,738. In addition, the Company
entered into a noncompete agreement under which an intangible asset totaling
$2,560 was recorded at the present value of the payments (using a discount rate
of 8.75%). A liability was recorded of $1,834, which represents the net present
value of the payments less the initial payment made upon the closing of the
Canadian acquisition.
Consideration for the acquisition was allocated as follows:
<TABLE>
<S> <C>
Total consideration paid........................................... $ 11,738
Fair value of net assets acquired.................................. 5,464
---------
Goodwill........................................................... $ 6,274
---------
---------
</TABLE>
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 (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" 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 in 1996, the Company evaluated portions of its goodwill recorded in
connection with its previous acquisitions and recorded impairment losses of $421
and $2,332, related to goodwill 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 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
31
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
resulted in a writedown of $4,539 in fiscal 1996. 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 fiscal 1996 expenses of $7,292. Consistent with the provisions of SFAS 121,
the additional expense related to adoption is included in fiscal 1996 results of
operations. This writedown had no effect on cash flows from operations or cash
available for debt service.
In 1997, the Company also recorded a write-off of $1,720 of goodwill related
to its Portland, Oregon facility, which was closed in February 1997.
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. RESTRUCTURING:
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 and its Bettendorf, Iowa plant in
July 1997. The Company recorded a restructuring charge of approximately $2,394,
which consists primarily of employee severance and loss on property, plant and
equipment, in fiscal 1997 in connection with this restructuring plan.
5. INVENTORIES:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Raw materials............................................................ $ 5,251 $ 6,023
Work in process.......................................................... 442 858
Finished goods........................................................... 4,225 4,769
--------- ---------
$ 9,918 $ 11,650
--------- ---------
--------- ---------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Building and land..................................................... $ 21,403 $ 19,865
Machinery and equipment............................................... 100,739 81,126
Leasehold improvements................................................ 3,713 3,132
---------- ----------
125,855 104,123
Less accumulated depreciation and amortization........................ (46,076) (34,350)
---------- ----------
$ 79,779 $ 69,773
---------- ----------
---------- ----------
</TABLE>
Depreciation charged to operations was $11,784, $10,261 and $8,619 for the
years ended August 31, 1997, 1996 and 1995 respectively.
32
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. DEBT:
CURRENT PORTION OF LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Senior Revolver............................................................ $ 4,358 $
United Kingdom Term Loan Note.............................................. 400
Development Note........................................................... 16
Canadian Term Loan Note.................................................... 1,802 1,460
Canadian Revolver Loan Note................................................ 233
Capital Lease Obligations.................................................. 224 96
--------- ---------
$ 6,784 $ 1,805
--------- ---------
--------- ---------
</TABLE>
LONG-TERM DEBT:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Senior Notes.......................................................... $ 110,000 $ 110,000
Canadian Revolver Loan Note........................................... 233
United Kingdom Term Loan Note......................................... 654
Canadian Term Loan Note............................................... 3,963 5,840
Development Note...................................................... 74
Capital Lease Obligations............................................. 309 194
---------- ----------
$ 115,159 $ 116,108
---------- ----------
---------- ----------
</TABLE>
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 of Senior Notes, the Company entered into a
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
33
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
engage in other fundamental changes, engage in certain sales of assets, (vii)
engage in certain transactions with affiliates (viii) make restricted junior
payments and (ix) declare or pay dividends. An unused 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 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 9.75% at August 31, 1997. During fiscal
1997, the Company was out of compliance with certain financial covenants
relating to maintenance of a ratio of indebtedness to EBITDA. The Company has
received a waiver for these incidents of non-compliance.
UNITED KINGDOM TERM NOTE:
The Company entered into a term loan agreement in connection with a joint
venture closure development project. The first principal payment is due on
November 29, 1997 in the amount of $400. Annual payments of $327 are due in 1998
and 1999. This term note bears interest at 9%.
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, 1997 and 1996, the interest rate was 7.0% and 7.5%
respectively. The Company is out of compliance with certain financial covenants.
The Company is out of compliance with certain financial covenants. The Company
has received a waiver for these incidents of noncompliance and an amendment to
the credit agreement that has changed the formulas for determining compliance in
the future.
CANADIAN REVOLVER LOAN NOTE:
The revolving credit facility is maintained to finance working capital
requirements. The facility provides for borrowings based on eligible accounts
receivable and inventories up to the commitment amount of $3,600. The principal
is payable upon demand. Interest is payable monthly based on the Canadian prime
rate overdraft and/or Bankers Acceptances. At August 31, 1997 and 1996, the
interest rate was 6.0% and 8.75% respectively. The Company is out of compliance
with certain financial covenants. The Company has received a waiver for these
incidents of noncompliance and an amendment to the credit agreement that has
changed the formulas for determining compliance in the future.
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,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment..................................................................... $ 663 $ 346
Less accumulated amortization................................................. (144) (62)
--------- ---------
$ 519 $ 284
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EXTRAORDINARY ITEMS:
In connection with the Company's early extinguishment of debt in fiscal
1996, 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.
AGGREGATE MATURITIES OF LONG-TERM DEBT:
The aggregate maturities of long-term debt as of August 31, 1997 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS TOTAL
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1998.............................................................................. $ 6,784
1999.............................................................................. 2,733
2000.............................................................................. 2,402
2001.............................................................................. 24
2002..............................................................................
Thereafter........................................................................ 110,000
----------
$ 121,943
----------
----------
</TABLE>
8. OTHER LONG-TERM OBLIGATIONS:
The Company has incurred certain liabilities in connection with agreements
entered into, which include provisions for guaranteed bonuses and covenants
not-to-compete, and development grants as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Covenants under the acquisition of Nepco................................. $ 1,634 $ 2,358
Covenants under the purchase of Portola Packaging Canada, Ltd............ 660 1,283
United Kingdom Development Grant......................................... 693
--------- ---------
Total obligations........................................................ 2,987 3,641
Less current portion (included in accrued liabilities)................... (1,444) (1,338)
--------- ---------
$ 1,543 $ 2,303
--------- ---------
--------- ---------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company leases certain office, production and warehouse facilities under
operating lease agreements expiring on various dates through 2021. 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.
35
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
At August 31, 1997 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>
1998............................................................................... $ 1,086
1999............................................................................... 1,128
2000............................................................................... 1,223
2001............................................................................... 1,139
2002............................................................................... 725
Thereafter......................................................................... 7,213
---------
$ 12,514
---------
---------
</TABLE>
Base rent expense for the years ended August 31, 1997, 1996 and 1995 totaled
$1,860, $1,793 and $1,381, respectively, of which $0, $291 and $720 was paid to
Three Sisters Ranch Enterprises (Note 15) for the years ended August 31, 1997,
1996 and 1995, respectively.
The Company is engaged in patent litigation with various 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. In some of these cases the Company has a claim against it
for alleged violations of the antitrust laws.
The Company is also a party to a number of other lawsuits and claims arising
out of the normal course of business. The total claimed damages, in the cases in
which damages are specified, total approximately $1,500. The Company believes it
has meritorious defenses, intends to contest these claims vigorously, and may
have insurance to cover potential losses. 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.
In March 1997, the Company was advised that the prospectus used by an
affiliate of the Company in connection with secondary market sales of
approximately $14 million of the Company's Senior Notes did not contain current
financial information about the Company. The Senior Notes sold during this
period by the Company's affiliate may be subject to rescission, which may result
in liability for the Company for any loss incurred in connection with a
rescission. No liability has been accrued in the financial statements as of
August 31, 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. 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.
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 and senior lenders. A warrant to purchase 2,053 shares of common
stock is exercisable, in whole or in part, through June 30, 2004 at sixty and
two-third cents per share, subject to certain antidilution provisions. After
June 30, 1999, if the Company has not completed an initial public offering of
its common stock, the 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
36
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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. For fiscal years ended August 31, 1997, 1996 and 1995 the
accretion was determined using the fair market value of the common stock.
A second warrant to purchase 440 shares of Class A common stock may be
exercised at any time 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 for in the warrant. The purchase obligation may be
suspended under certain circumstances including restriction on such payments as
specified in the Company's 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 an estimated value per
share. For fiscal years ended August 31, 1997, 1996 and 1995, 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, 1997, the estimated redemption value of the warrants exceeds their
carrying value. The difference is being charged to accumulated deficit over the
period from the date of issuance to the earliest put date of the warrants.
Charges to accumulated deficit related to the warrants amounted to $1,115, $895
and $610 during the years ended August 31, 1997, 1996 and 1995, respectively.
11. SHAREHOLDERS' DEFICIT:
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 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 common stock
for the conversion of Class A common stock and Class B, Series 2 common stock
into Class B, Series 1 common stock.
37
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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, 1997, 1996 and
1995, the Company paid $230, $96 and $64, 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 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. The fair value of each option grant is estimated at the date of grant
using the Black-Scholes pricing model with the following weighted average
assumptions for grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
- Risk-free Interest Rate.......................................... 6.13% 6.12%
- Expected Life.................................................... 5 years 5 years
- Volatility....................................................... n/a n/a
- Dividend Yield................................................... -- --
</TABLE>
38
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Aggregate option and warrant activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------- --------------- -----------------
<S> <C> <C> <C>
Balances, August 31, 1994........................ 95 1,247 $ 1.30
Reservation of shares.......................... 1,000
Granted........................................ (370) 370 $ 3.94
Exercised...................................... (96) $ 0.81
Canceled....................................... 9 (9) $ 4.00
----- -----
Balances, August 31, 1995........................ 734 1,512 $ 1.96
Granted........................................ (622) 622 $ 4.60
Exercised...................................... (2) $ 4.00
Canceled....................................... 48 (48) $ 4.31
----- -----
Balances, August 31, 1996........................ 160 2,084 $ 2.69
Reservation of shares.......................... 1,000
Granted........................................ (242) 242 $ 4.87
Exercised...................................... (152) $ 2.10
Canceled....................................... 360 (360) $ 3.94
----- -----
Balances, August 31, 1997........................ 1,278 1,814 $ 2.78
----- -----
----- -----
</TABLE>
At August 31, 1997 and August 31, 1996, vested options to purchase
approximately 1,141 and 1,124 shares respectively were unexercised. The weighted
average fair value per share of those options granted in 1997 and 1996 was $3.62
and $3.42, respectively.
The following table summarizes information about fixed stock options
outstanding at August 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
- -----------------------------------------------
WEIGHTED EXERCISABLE
AVERAGE --------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- -------------------- ------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
$0.61 - $1.75 816 1.30 $0.98 816 $0.98
$2.50 - $3.75 180 5.82 2.85 141 2.75
$4.00 - $5.25 818 8.67 4.58 184 4.35
</TABLE>
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based
Compensation." Accordingly, no compensation expense has been recognized for the
Company's stock plans. Had compensation expense for the stock plans been
determined based on the fair value at the grant date for options granted in 1997
and 1996
39
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
consistent with the provisions of SFAS No. 123, the pro forma net loss would
have been reported as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Net loss attributable to common shareholders--as reported............... $ (8,526) $ (10,337)
Net loss attributable to common shareholders--proforma.................. $ (8,676) $ (10,382)
Net loss per share attributable to common shareholders--as reported..... $ (0.72) $ (0.88)
Net loss per share attributable to common shareholders-- proforma....... $ (0.74) $ (0.88)
</TABLE>
These results are not likely to be representative of the effects on reported
net income (loss) for future years.
12. EMPLOYEE BENEFIT PLANS:
The Company maintains a defined contribution plan which 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 $203, $661 and $493, for the year ended August 31, 1997, 1996 and
1995, respectively. Administrative expense in connection with the Plan amounted
to $16, $47 and $23, for the years ended August 31, 1997, 1996 and 1995,
respectively.
The Board of Directors approved 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 price is 85% of the lower of the fair market value at the
beginning or the end of the offering period. 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.
40
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. INCOME TAXES:
Income tax provision (benefit), excluding extraordinary items, for the three
years ended August 31, 1997 consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................................... $ 118 $ 747 $ 1,677
State............................................................. 14 187 300
Foreign........................................................... -- 26 (29)
--------- --------- ---------
132 960 1,948
--------- --------- ---------
Deferred:
Federal........................................................... (522) (392) (605)
State............................................................. (242) 260 (86)
Foreign........................................................... -- 37 37
--------- --------- ---------
(764) (95) (654)
--------- --------- ---------
$ (632) $ 865 $ 1,294
--------- --------- ---------
--------- --------- ---------
</TABLE>
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,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate (benefit)................................ (34.0)% (34.0)% 34.0%
State taxes..................................................... (5.2) (5.1) 14.9
Nondeductible amortization and depreciation..................... 13.3 46.2 26.0
Nondeductible permanent items................................... 0.9 0.7 7.0
Foreign losses without tax benefit.............................. 12.2
Other........................................................... 4.9 4.0 8.3
--------- --------- ---
Effective income tax rate....................................... (7.9)% 11.8% 90.2%
--------- --------- ---
--------- --------- ---
</TABLE>
41
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The components of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Federal credits.......................................................... $ 309 $ 404
State tax credits........................................................ 578 7
Accounts receivable...................................................... 417 317
Intangible assets........................................................ 710 574
Other liabilities........................................................ 615 990
--------- ---------
Total assets........................................................... 2,629 2,292
--------- ---------
--------- ---------
Deferred tax liabilities:
Property, plant and equipment............................................ 7,550 7,977
Foreign taxes, net....................................................... 75 75
--------- ---------
Total liabilities...................................................... 7,625 8,052
--------- ---------
Net deferred tax liabilities............................................. $ 4,996 $ 5,760
--------- ---------
--------- ---------
</TABLE>
14. EXPORT SALES AND GEOGRAPHICAL INFORMATION:
Export sales from the United States to unaffiliated customers were $12,018,
$17,568 and $18,658, for the years ended August 31, 1997, 1996 and 1995,
respectively. Export sales are predominantly to North America, Europe, the
Middle East and the Pacific Rim. During fiscal 1997, export sales to North
America, South America, Europe, the Middle East and the Pacific Rim accounted
for 28%, 21%, 29%, 6% and 16% of total export sales, respectively.
Summarized data by geographic area for fiscal 1997 is as follows:
<TABLE>
<CAPTION>
UNITED
FISCAL 1997 STATES CANADA EUROPE ELIMINATIONS TOTAL
- ------------------------------- ------------ --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 144,010 $ 16,484 $ 12,704 $ (2,755) $ 170,443
Income (loss) from
operations................... 6,817 (992) (309) -- 5,516
Identifiable assets............ 130,600 14,887 14,126 (11,556) 148,057
</TABLE>
15. RELATED PARTY TRANSACTIONS:
As of August 31, 1997 and 1996, the Company maintained $3,000 in a U.S. bank
to collateralize a bank loan to the Company's 50% joint venture in Mexico.
The Company paid $608, $618 and $333, for the years ended August 31, 1997,
1996 and 1995, respectively, to a law firm for legal services rendered. A
general partner of the aforementioned firm is also a director of the Company.
The Company paid $42 for the years ended August 31, 1997, 1996 and 1995 to a
corporation for management fees. A shareholder of the aforementioned corporation
is also a director and significant shareholder of the Company.
The Company paid $37 for the year ended August 31, 1996, to an investment
banking firm for fees and expenses, a director of which is a director of the
Company.
42
<PAGE>
PORTOLA PACKAGING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company had debt outstanding with a financial institution of $10,000 at
August 31, 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 $113 and $1,350 for each of years, ended August 31, 1996 and 1995,
respectively. An officer of the financial institution is a director of the
Company.
The Company had amounts receivable from an officer at an interest rate of
10% which amounted to $424, $404 and $361 as of August 31, 1997, 1996 and 1995.
The Company has amounts receivable from non-consolidated affiliated
companies which amounted to $85, $358 and $736, as of August 31, 1997, 1996 and
1995, respectively.
In fiscal year 1996, the Company purchased its San Jose facilities from
Three Sisters Ranch Enterprises (Three Sisters) for $7.2 million. Certain
general partners in Three Sisters are also minority shareholders in the Company
(less than 5%).
16. SUPPLEMENTAL CASH FLOW DISCLOSURES:
The Company paid $1,684 and $1,688 in income taxes during the years ended
August 31, 1996 and 1995, respectively. The Company was refunded $36 of income
taxes during the year ended August 31, 1997.
The Company paid $13,084, $9,601 and $8,571 in interest during the years
ended August 31, 1997, 1996 and 1995, respectively.
During fiscal year 1997 and 1996, the Company acquired $436 and $346
respectively, of equipment under capital lease.
During fiscal 1997, 1996 and 1995 the Company wrote off fully depreciated
property, plant and equipment totaling $2,588, $3,285 and $2,561, respectively.
17. SUBSIDIARIES:
Under the terms of the indenture governing the Senior Notes (Note 7), the
Company must designate subsidiaries as restricted or unrestricted subsidiaries.
Included in the indenture are formulas required to be met prior to
reclassification of a subsidiary. Unrestricted subsidiaries do not guarantee the
Senior Notes and are allowed to borrow money from third parties, but there are
restrictions on the funds that the Company can transfer to or guarantee on
behalf of these subsidiaries. Restricted subsidiaries guarantee the Senior Notes
and have some restrictions on borrowing money, but there are fewer restrictions
on the funds that the Company can transfer to or guarantee on behalf of these
subsidiaries. The table below provides consolidating financial information.
<TABLE>
<CAPTION>
PARENT UNRESTRICTED RESTRICTED TOTAL
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Revenue.................................... $ 144,010 $ 10,411 $ 18,777 $ (2,755) $ 170,443
Gross Profit............................... 31,978 1,620 1,527 -- 35,125
Operating profit (loss).................... 6,816 (459) (841) -- 5,516
Balance sheet data:
Cash and cash equivalents.................. 2,528 (878) 1,592 -- 3,242
Current assets............................. 31,037 1,424 7,555 -- 40,016
Total Assets............................... 143,219 9,420 8,035 (11,556) 149,118
Current Liabilities........................ 15,222 5,719 12,445 -- 33,386
Total Liabilities.......................... 133,191 9,766 14,186 -- 157,143
</TABLE>
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
44
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE COMPANY POSITION
- ------------------------------------ --- --------------- ---------------------------------------------------------
<S> <C> <C> <C>
Jack L. Watts....................... 49 11 Chairman of the Board and Chief Executive Officer
Laurie D. Bassin.................... 48 11 Vice President Corporate Development
Douglas L. Cullum................... 43 11 President, North American Operations
Joseph T. Mayernick................. 48 0 Vice President and Chief Financial Officer
E. Scott Merritt.................... 42 2 Vice President, U.S. Operations
Themistocles G. Michos.............. 65 1 Vice President and General Counsel
Rodger A. Moody..................... 44 22 Vice President, International Sales
Robert Plummer...................... 38 2 President, International Division
Christopher C. Behrens.............. 36 3 Director
Martin R. Imbler(2)................. 49 8 Director
Jeffrey Pfeffer, Ph.D.(1)........... 51 1 Director
Timothy Tomlinson(1)(2)............. 47 11 Secretary and Director
Larry C. Williams(1)(2)............. 48 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 Development of the Company
since February 1993. From August 1986 to February 1993, she was Director of
Marketing of the Company. Prior to that time, she was employed in the Consumer
Service and Marketing Department of Collagen Corporation, a biomedical company.
Mr. Cullum has been President, North American Operations 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. Mayernick, the Vice President and Chief Financial Officer of the
Company, has been with the Company since August 1997. From December 1992 to
August 1997 he was Vice President and Chief Financial Officer of Paramount
Packaging an international manufacturer of flexible packaging. From 1986 to 1992
Mr. Mayernick was employed by Hanson PLC, most recently as Vice President,
Finance for that Company's Housewares Group.
Mr. Merritt has been Vice President, U.S. Operations since July 1997. He was
Vice President of Manufacturing Technology from April 1996 to July 1997. 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, he was employed by
General Motors of Canada, Ltd., where he held various positions, most recently
as Manufacturing Superintendent Components Plant.
45
<PAGE>
Mr. Michos has been Vice President and General Counsel since November 1996.
Prior to that time, he was a partner in the law firm of Collette & Erickson LLP.
Mr. Moody has been Vice President, International Sales since January of
1997. He was Managing Director International Division of the Company from
October 1994 to January 1997. 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 of the International Division since July
1997. He was President Dispensing Closure Products and U.S. Closure
Manufacturing Division from August 1996 to July 1997. 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. Behrens has been a director of the Company since June 1994. He has been
an officer of The Chase Manhattan Bank, N.A. since 1986 and an officer of Chase
Capital Partners (the private equity affiliate of Chase Manhattan Corp.) since
1990. Mr. Behrens is a director of The Pantry, Inc., Details, 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, and currently holds the Thomas D. Dee Professor of
Organizational Behavior chair.
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.
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.
COMPLIANCE UNDER SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company does not have a class of equity securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Accordingly, no persons are presently required to file reports with the
Commission pursuant to Section 16(a) of the Exchange Act.
46
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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, 1997, 1996 and 1995 by the Company's Chief Executive
Officer and the Company's four other most highly compensated executive officers
during fiscal 1997 (together, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------- SECURITIES
--------------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) OPTIONS COMPENSATION(4)
- --------------------------------------- --------- ---------- ---------- -------------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts ......................... 1997 $ 294,820 $ 86,418 $ 41,800 -- $ 2,850
Chairman of the Board and 1996 269,348 37,500 50,493 100,000 3,600
Chief Executive Officer 1995 232,280 62,502 50,251 -- 3,015
Douglas L. Cullum ..................... 1997 166,347 35,000 -- 50,000 2,850
President, North American Operations 1996 149,093 7,500 -- 20,000 3,600
1995 143,042 9,940 -- -- 3,015
Robert Plummer ........................ 1997 159,581 10,000 -- -- 3,550
President, International Division 1996 152,137 8,750 -- 10,500 3,600
1995 133,850 13,900 28,721 54,000 2,260
E. Scott Merritt(5) ................... 1997 143,077 20,000 -- -- 2,850
Vice President, U.S. Operations 1996 154,631 11,650 -- 20,000 1,500
1995 97,719 -- 28,578 40,000 100
Rodger A. Moody ....................... 1997 134,038 20,000 -- -- 4,250
Vice President, International 1996 124,269 39,940 -- -- 1,500
Sales 1995 120,099 16,640 -- -- 100
</TABLE>
- ------------------------
(1) Includes $7,200 and $14,400 in housing allowance with respect to Mr. Merritt
for the fiscal years 1996 and 1995, respectively.
(2) With respect to each fiscal year, bonuses paid each year are for services
rendered in the prior fiscal year.
(3) 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
and employee. Also includes automobile and gas allowances with respect to
Mr. Watts for fiscal 1995 and 1994. Includes relocation payments with
respect to Mr. Plummer for fiscal 1995 and Mr. Merritt for fiscal 1995.
(4) Represents a Company profit-sharing contribution of up to $2,100 for fiscal
1997, 1996 and 1995, respectively, and a Company 401(k) matching
contribution of up to $1,500 for fiscal 1997 and 1996, and 1% of salary for
fiscal 1995, depending on the employee's contribution to the plan.
(5) Mr. Merritt joined the Company in February 1995.
The following table sets forth information concerning individual grants of
stock options made during fiscal year 1997 to the Named Officers.
47
<PAGE>
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PRICE APPRECIATION FOR
UNDERLYING % OF TOTAL OPTIONS EXERCISE OR OPTION TERM
OPTIONS GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)(4)
- --------------------------- ----------- ----------------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglas L. Cullum.......... 50,000 20.7% $ 5.25 07/16/2007 $ 165,085 $ 418,357
</TABLE>
- ------------------------
(1) The 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 the
individual's employment thereafter. The individual identified in the table
received incentive stock options.
(2) No options were granted to non-employee directors during fiscal 1997 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.
(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.
The following table sets forth certain information regarding option
exercises during fiscal year 1997 and the number of shares covered by both
exercisable and unexercisable stock options as of August 31, 1997 for each of
the Named Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT AUGUST 31, 1997 AUGUST 31, 1997(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts..................... -- -- 20,000 80,000 $ 6,000 $ 24,000
Douglas L. Cullum................. -- -- 59,000 66,000 258,200 12,000
E. Scott Merritt.................. -- -- 18,000 42,000 22,500 42,500
Roger A. Moody.................... -- -- 40,000 -- 185,600 --
Robert Plummer.................... -- -- 49,700 54,800 100,075 85,300
</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, 1997
of $5.25 per share, as determined by the Company's Board of Directors, minus
the exercise price of the option.
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 up to
$12,000 annually for attendance at Board meetings, 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
48
<PAGE>
annual retainer for his services as a member of the Compensation Committee of
the Board of Directors in the amount of $4,000 paid on a quarterly basis.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
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, certain options granted to Dr. Pfeffer and each of
Messrs. Imbler, Tomlinson, Watts and Williams in fiscal years prior to fiscal
1997 provide for acceleration of vesting upon a change of control of the
Company.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
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.
For a description of transactions between the Company and members of the
Compensation Committee and entities affiliated with such members, please see
"Certain Relationships and Related Transactions" under Item 13 of this report on
Form 10-K and Note 15 to the consolidated financial statements included under
Item 8 of this report on Form 10-K.
49
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of each class of the Company's voting securities as of
November 13, 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
OF BENEFICIAL PERCENT OF
TITLE OF CLASS(1) NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(2) CLASS(2)
- ----------------------------------------------- ------------------------------------ ------------------ -----------
<S> <C> <C> <C>
Class B Common Stock, Series 1................. Jack L. Watts(3) 3,817,783 39.7%
Class B Common Stock, Series 1................. Christopher C. Behrens(4) 1,552,333 16.1%
Class B Common Stock, Series 1................. Chase Manhattan Capital
Corporation(5) 1,552,333 16.1%
Class B Common Stock, Series 2................. Christopher C. Behrens(4) 815,715 8.5%
Class B Common Stock, Series 2................. Chase Manhattan Capital
Corporation(5) 815,715 8.5%
Class B Common Stock, Series 1................. Gary L. Barry(6) 607,965 6.3%
Class B Common Stock, Series 1................. Timothy Tomlinson(7) 245,984 2.6%
Class B Common Stock, Series 1................. Roger A. Moody (8) 106,650 1.1%
Class B Common Stock, Series 1................. Douglas L. Cullum(9) 75,000 *
Class B Common Stock, Series 1................. Larry C. Williams(10) 68,871 *
Class B Common Stock, Series 1................. Robert Plummer(11) 67,625 *
Class B Common Stock, Series 1................. E. Scott Merritt(12) 29,000 *
Class B Common Stock, Series 1................. Jeffrey Pfeffer, Ph.D.(13) 27,500 *
Class B Common Stock, Series 1................. Martin R. Imbler(14) 22,500 *
7,031,873 70.16%
Class B Common Stock, Series 1 and Series 2.... All executive officers and directors
as a group
(13 persons)(15)
</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 November 13, 1997, there were
9,627,964 shares of Class B Common Stock issued and outstanding, consisting
of 8,456,534 shares of Class B Common Stock, Series 1 and 1,171,430 shares
of Class B Common Stock, Series 2. As of November 13, 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 Manhattan Capital
Corporation 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
50
<PAGE>
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 November 13, 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, 62,500 shares held by TZM Investment
Fund of which Mr. Tomlinson is a general partner, 5,000 shares held by The
Allison A. Zisko 1996 Trust and 5,000 shares held by The Natalie L. Zisko
1996 Trust, the trustee of each of which is Mr. Tomlinson, 4,000 shares
held by trusts for the benefit of Mr. Tomlinson's children and 122,484
shares subject to options held by TZM Investment Fund that are exercisable
within 60 days of November 13, 1997. Mr. Tomlinson's address is 200 Page
Mill Road, Second Floor, Palo Alto, California 94306.
(8) Includes 40,000 shares subject to options exercisable within 60 days of
November 13, 1997. Mr. Moody's address is 890 Faulstich Court, San Jose, CA
95112.
(9) Includes 60,000 shares subject to options exercisable within 60 days of
November 13, 1997. Mr. Cullum's address is 890 Faulstich Court, San Jose,
California 95112.
(10) Includes 18,550 shares subject to options exercisable within 60 days of
November 13, 1997. Does not include (i) 123,756 shares and (ii) 41,976
shares subject to options exercisable within 60 days of November 13, 1997,
held in the individual names of four other principals of The Breckenridge
51
<PAGE>
Group, Inc. Mr. Williams' address is Resurgens Plaza, Suite 2100, 945 E.
Paces Ferry Road, Atlanta, Georgia 30326.
(11) Includes 57,625 shares subject to options exercisable within 60 days of
November 13, 1997. Mr. Plummer's address is 106 Heather Glen Estates, New
Castle, Pennsylvania 16105.
(12) Includes 5,000 shares of Class B Common Stock, Series 1 held by a trust
for the benefit of Mr. Merritt's family and 24,000 shares subject to
options exercisable within 60 days of November 13, 1997. Mr. Merritt's
address is 890 Faulstich Court, San Jose, California 95112.
(13) Includes 2,500 shares subject to options exercisable within 60 days of
November 13, 1997. Dr. Pfeffer's address is Graduate School of Business,
Stanford University, Stanford, California 94305.
(14) Includes 2,500 shares subject to options exercisable within 60 days of
November 13, 1997. Mr. Imbler's address is 101 Oakley Street, Evansville,
Indiana 47706.
(15) Includes all of the shares shown as included in footnotes (3), (4), and
(7) through (14).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 of the Company, $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 for January, 1997 compounded
annually. 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 August 31, 1997 was approximately $424,000. Subsequent to the end of fiscal
1997, the Board of Directors agreed to further extend until January 17, 1999,
the due date of all principal and accrued interest owed to the Company by Mr.
Watts under the terms of the loan.
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 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, formerly Vice President-Operations,
$100,000 towards the purchase of a home. Mr. Jahn left the employ of the Company
in connection with the restructuring plan implemented by the Company in fiscal
1997. The loan to Mr. Jahn was forgiven by the Company in September 1997, in
payment of certain severance amounts payable to Mr. Jahn by the Company.
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.
52
<PAGE>
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.
In June 1994, Chase Manhattan Capital Corporation 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 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.
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 1997, the Company paid Mr. Tomlinson's law firm
fees and expenses in the aggregate amount of $608,610. Mr. Tomlinson is a
director of the Company, a member of the Compensation Committee and an alternate
member of the Audit Committee.
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.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of Portola Packaging, Inc. and
the Report of Independent Accountants are filed herewith:
<TABLE>
<CAPTION>
PAGE IN FORM
10-K
---------------
<S> <C>
Report of Independent Accountants..................................................................... 21
Consolidated Balance Sheets as of August 31, 1997 and 1996............................................ 22
Consolidated Statements of Operations for the Years Ended August 31, 1997, 1996 and 1995.............. 23
Consolidated Statements of Cash Flows for the Years Ended August 31, 1997, 1996 and 1995.............. 24
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended August 31, 1997, 1996
and 1995............................................................................................ 25
Notes to Consolidated Financial Statements............................................................ 27
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are filed herewith and should be read in conjunction with the
consolidated financial statements:
<TABLE>
<CAPTION>
PAGE IN FORM
10-K
---------------
<S> <C>
Report of Independent Accountants on Financial Statement Schedule..................................... 62
Schedule II--Valuation and Qualifying Accounts........................................................ 63
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown on the consolidated financial statements or notes
thereto.
(a)(3) EXHIBITS.
The following exhibits are filed as part of, or incorporated by reference
into, this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.01 Certificate of Incorporation (filed with Secretary of State of Delaware on April 29, 1994, as amended
and filed with Secretary of State of Delaware on October 4, 1995)(1)
3.02 Bylaws(2)
4.01 Indenture, dated as of October 2, 1995, by and between the Registrant and American Bank National
Association, as trustee (including form of Note)(1)
4.02 Form of Stock Certificate evidencing ownership of Registrant's Class B Common Stock, Series 1(3)
10.01 Underwriting Agreement(4)
10.02 Shareholders Agreement, dated as of June 23, 1988, by and among the Registrant, Chase Manhattan
Investment Holdings, Inc. and certain shareholders and warrant holders, 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 warrant holders(2)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.04 Stock Purchase Agreement, dated as of March 19, 1994, by and among the Registrant, Nepco, Robert Crisci
and Harry Crisci(5)
10.05 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(6)
10.06 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(7)
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 $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)
10.12 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 Nominess, 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 Packaging Canada Ltd.) 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 (said
form being substantially identical to the form of Subscription Agreement utilized by the Registrant
for certain officers and directors of the Registrant)(2)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.21 Form of Indemnification Agreement by and between the Registrant and the related director or officer
(said form being substantially similar to the form of Indemnification Agreement utilized by the
Registrant for certain officers and directors of the Registrant)(2)
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.(9)
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,
Ltd.(9)
10.24 Second Amended and Restated Credit and Security Agreement, dated as of October 2, 1995, by and between
the Registrant and Heller Financial, Inc.(1)
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, Ltd., Suez Equity
Investors, L.P. and SEI Associates.(1)
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,
Ltd., Suez Equity Investors, L.P. SEI Associates and Chase Manhattan Capital Corporation.(1)
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,
Ltd., Suez Equity Investors, L.P. and SEI Associates.(1)
10.28 1988 Stock Option Plan and related documents(10)
10.29 1994 Stock Option Plan and related documents(11)
10.30 1996 Special Management Bonus Plan(1)
10.31 1996 Management Bonus Plan(1)
10.32 Description of provisions of 1996 Senior Executive Bonus Plans(1)
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(12)
10.34 Settlement Agreement, dated June 1996, by and between the Registrant and Scholle Corporation(13)
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 Registrant's 1996 Employee Stock Purchase Plan, together with related documents(14)
10.40 Registrant's Senior Executive Bonus Plan for fiscal year 1997(15)
10.41 Registrant's Management Incentive Plan for fiscal year 1997(16)
10.42 Registrant's Management Deferred Compensation Plan Trust Agreement(17)
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.43 Registrant's Management Deferred Compensation Plan(18)
10.44 First Amending Agreement, dated November 26, 1997, to Credit Agreement, dated as of June 16, 1995, by
and among Portola Packaging Canada Ltd., Registrant and Canadian Imperial Bank of Commerce, as Lender
and agent
10.45 Support Agreement, dated as of November 26, 1997, by and among Registrant, Portola Packaging Canada Ltd.
and Canadian Imperial Bank of Commerce, as agent
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
23.01 Consent of Coopers & Lybrand L.L.P.
24.01 Power of Attorney (included as part of the signature page to this report)
27.01 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(2) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Registration Statement on Form S-1 (Commission
File No. 33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(3) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
(4) Incorporated herein by reference to exhibit 1.01 included in pre-effective
Amendment No. 2 to the Registrant's Registration Statement on Form S-1
(Commission File No. 33-95318), as filed with the Securities and Exchange
Commission on September 25, 1995.
(5) Incorporated herein by reference to exhibit 2.01 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on August
1, 1995.
(6) Incorporated herein by reference to exhibit 2.02 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on August
1, 1995.
(7) Incorporated herein by reference to exhibit 2.03 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on August
1, 1995.
(8) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Annual Report on Form 10-K for the period
ended August 31, 1996, as filed with the Securities and Exchange Commission
on November 25, 1996.
(9) Incorporated herein by reference to the exhibit with the same number
included in pre-effective Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-95318), as filed with the
Securities and Exchange Commission on September 25, 1995.
57
<PAGE>
(10) Incorporated herein by reference to exhibit 4.03 to the Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as
filed with the Securities and Exchange Commission on December 10, 1996.
(11) Incorporated herein by reference to exhibit 4.04 to the Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as
filed with the Securities and Exchange Commission on December 10, 1996.
(12) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended February 29, 1996, as filed with the Securities and Exchange
Commission on April 15, 1996.
(13) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended May 31, 1996, as filed with the Securities and Exchange Commission
on July 11, 1996.
(14) Incorporated herein by reference to exhibit 4.05 to the Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as
filed with the Securities and Exchange Commission on December 10, 1996.
(15) Incorporated herein by reference to exhibit 10.41 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended November
30, 1996, as filed with the Securities and Exchange Commission January 13,
1997.
(16) Incorporated herein by reference to exhibit 10.42 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended November
30, 1996, as filed with the Securities and Exchange Commission on January
13, 1997.
(17) Incorporated herein by reference to exhibit 10.43 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended November
30, 1996, as filed with the Securities and Exchange Commission on January
13, 1997.
(18) Incorporated herein by reference to exhibit with the same number included
in Post-Effective Amendment No. 2 to Registrant's Registration Statement
on Form S-1 (Commission File No. 33-95318), as filed with the Securities
and Exchange Commission on March 11, 1997.
(b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the last
quarter of the period covered by this report.
(c) EXHIBITS--See (a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES--See (a)(2) above.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
PORTOLA PACKAGING, INC.,
a Delaware Corporation
By: /s/ JACK L. WATTS
-----------------------------------------
Jack L. Watts
November 28, 1997 CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Jack L. Watts, Joseph T. Mayernick and Timothy
Tomlinson, and each of them, his true and lawful attorneys-in-fact, each with
full power of substitution, for him in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ JACK L. WATTS
-------------------------------------------
Jack L. Watts November 28, 1997
CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD AND
A DIRECTOR
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ JOSEPH T. MAYERNICK
-------------------------------------------
Joseph T. Mayernick November 28, 1997
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
DIRECTORS:
/s/ CHRISTOPHER C. BEHRENS
------------------------------------------- November 28, 1997
Christopher C. Behrens
/s/ MARTIN R. IMBLER
------------------------------------------- November 28, 1997
Martin R. Imbler
/s/ JEFFREY PFEFFER, PH.D.
------------------------------------------- November 28, 1997
Jeffrey Pfeffer, Ph.D.
</TABLE>
59
<PAGE>
<TABLE>
<S> <C>
/s/ TIMOTHY TOMLINSON
------------------------------------------- November 28, 1997
Timothy Tomlinson
/s/ LARRY C. WILLIAMS
------------------------------------------- November 28, 1997
Larry C. Williams
</TABLE>
60
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT
No annual report for the Registrant's last fiscal year or proxy material has
been sent to security holders of the Registrant. If any such report or proxy
material is sent to Registrant's security holders subsequent to the filing of
this report on Form 10-K, the Registrant shall supplementally furnish copies of
any such material to the Commission when it is sent to security holders. Any
such material shall not be deemed to be "filed" with the Commission or otherwise
subject to the liabilities of Section 18 of the Securities Exchange Act of 1934,
as amended.
61
<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 21 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule on page 63 of this Form 10-K.
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
November 19, 1997
62
<PAGE>
PORTOLA PACKAGING, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BEGINNING ADDITIONS/ ENDING
ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE EXPENSE OTHER DEDUCTIONS(1) BALANCE
- --------------------------------------------------------- ----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
August 31, 1995.......................................... $ 389 $ 892 $ 468 $ 813
August 31, 1996.......................................... 813 450 446 817
August 31, 1997.......................................... 817 823 470 1,170
</TABLE>
- ------------------------
(1) Write off of bad debts
63
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.01 Certificate of Incorporation (filed with Secretary of State of Delaware on April 29, 1994, as amended
and filed with Secretary of State of Delaware on October 4, 1995)(1)
3.02 Bylaws(2)
4.01 Indenture, dated as of October 2, 1995, by and between the Registrant and American Bank National
Association, as trustee (including form of Note)(1)
4.02 Form of Stock Certificate evidencing ownership of Registrant's Class B Common Stock, Series 1(3)
10.01 Underwriting Agreement(4)
10.02 Shareholders Agreement, dated as of June 23, 1988, by and among the Registrant, Chase Manhattan
Investment Holdings, Inc. and certain shareholders and warrant holders, 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 warrant holders(2)
10.04 Stock Purchase Agreement, dated as of March 19, 1994, by and among the Registrant, Nepco, Robert Crisci
and Harry Crisci(5)
10.05 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(6)
10.06 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(7)
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 $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)
10.12 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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.16 Stock Purchase Agreement, dated as of June 30, 1994, by and among the Registrant, Jack L. Watts, LJL
Cordovan Partners, Robert Fleming Nominess, 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 Packaging Canada Ltd.) 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 (said
form being substantially identical to the form of Subscription Agreement utilized by the Registrant
for certain officers and directors of the Registrant)(2)
10.21 Form of Indemnification Agreement by and between the Registrant and the related director or officer
(said form being substantially similar to the form of Indemnification Agreement utilized by the
Registrant for certain officers and directors of the Registrant)(2)
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.(9)
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,
Ltd.(9)
10.24 Second Amended and Restated Credit and Security Agreement, dated as of October 2, 1995, by and between
the Registrant and Heller Financial, Inc.(1)
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, Ltd., Suez Equity Investors, L.P. and SEI Associates.(1)
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,
Ltd., Suez Equity Investors, L.P. SEI Associates and Chase Manhattan Capital Corporation.(1)
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,
Ltd., Suez Equity Investors, L.P. and SEI Associates.(1)
10.28 1988 Stock Option Plan and related documents(10)
10.29 1994 Stock Option Plan and related documents(11)
10.30 1996 Special Management Bonus Plan(1)
10.31 1996 Management Bonus Plan(1)
10.32 Description of provisions of 1996 Senior Executive Bonus Plans(1)
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(12)
10.34 Settlement Agreement, dated June 1996, by and between the Registrant and Scholle Corporation(13)
10.35 Resignation Agreement, dated October 28, 1996, by and between the Registrant and Howard R. Girbach(8)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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 Registrant's 1996 Employee Stock Purchase Plan, together with related documents(14)
10.40 Registrant's Senior Executive Bonus Plan for fiscal year 1997(15)
10.41 Registrant's Management Incentive Plan for fiscal year 1997(16)
10.42 Registrant's Management Deferred Compensation Plan Trust Agreement(17)
10.43 Registrant's Management Deferred Compensation Plan(18)
10.44 First Amending Agreement, dated November 26, 1997, to Credit Agreement, dated as of June 16, 1995, by
and among Portola Packaging Canada Ltd., Registrant and Canadian Imperial Bank of Commerce, as Lender
and agent
10.45 Support Agreement, dated as of November 26, 1997, by and among Registrant, Portola Packaging Canada Ltd.
and Canadian Imperial Bank of Commerce, as agent
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
23.01 Consent of Coopers & Lybrand L.L.P.
24.01 Power of Attorney (included as part of the signature page to this report)
27.01 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(2) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Registration Statement on Form S-1 (Commission
File No. 33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(3) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
(4) Incorporated herein by reference to exhibit 1.01 included in pre-effective
Amendment No. 2 to the Registrant's Registration Statement on Form S-1
(Commission File No. 33-95318), as filed with the Securities and Exchange
Commission on September 25, 1995.
(5) Incorporated herein by reference to exhibit 2.01 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on August
1, 1995.
(6) Incorporated herein by reference to exhibit 2.02 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on August
1, 1995.
(7) Incorporated herein by reference to exhibit 2.03 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on August
1, 1995.
<PAGE>
(8) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Annual Report on Form 10-K for the period
ended August 31, 1996, as filed with the Securities and Exchange Commission
on November 25, 1996.
(9) Incorporated herein by reference to the exhibit with the same number
included in pre-effective Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-95318), as filed with the
Securities and Exchange Commission on September 25, 1995.
(10) Incorporated herein by reference to exhibit 4.03 to the Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as
filed with the Securities and Exchange Commission on December 10, 1996.
(11) Incorporated herein by reference to exhibit 4.04 to the Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as
filed with the Securities and Exchange Commission on December 10, 1996.
(12) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended February 29, 1996, as filed with the Securities and Exchange
Commission on April 15, 1996.
(13) Incorporated herein by reference to the exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the period
ended May 31, 1996, as filed with the Securities and Exchange Commission
on July 11, 1996.
(14) Incorporated herein by reference to exhibit 4.05 to the Registrant's
Registration Statement on Form S-8 (Commission File No. 333-17533), as
filed with the Securities and Exchange Commission on December 10, 1996.
(15) Incorporated herein by reference to exhibit 10.41 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended November
30, 1996, as filed with the Securities and Exchange Commission on January
13, 1997.
(16) Incorporated herein by reference to exhibit 10.42 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended November
30, 1996, as filed with the Securities and Exchange Commission on January
13, 1997.
(17) Incorporated herein by reference to exhibit 10.43 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended November
30, 1996, as filed with the Securities and Exchange Commission on January
13, 1997.
(18) Incorporated herein by reference to exhibit with the same number included
in Post-Effective Amendment No. 2 to Registrant's Registration Statement
on Form S-1 (Commission File No. 33-95318), as filed with the Securities
and Exchange Commission on March 11, 1997.
(b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the last
quarter of the period covered by this report.
(c) EXHIBITS--See (a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES--See (a)(2) above.
<PAGE>
PORTOLA PACKAGING CANADA LTD.
AS BORROWER
- AND -
PORTOLA PACKAGING, INC.
AS GUARANTOR
- AND -
THE LENDERS NAMED ON THE SIGNATURE PAGES HEREOF
AS LENDERS
- AND -
CANADIAN IMPERIAL BANK OF COMMERCE
AS AGENT
- -------------------------------------------------------------------------------
FIRST AMENDING AGREEMENT
TO
CREDIT AGREEMENT DATED AS OF JUNE 16, 1995
- -------------------------------------------------------------------------------
DATED AS OF NOVEMBER 26, 1997
<PAGE>
FIRST AMENDING AGREEMENT
First Amending Agreement dated as of November 26, 1997 among Portola
Packaging Canada Ltd., a corporation incorporated and existing under the laws
of Canada, as Borrower, Portola Packaging, Inc., as Guarantor and Canadian
Imperial Bank of Commerce, as Lender and Canadian Imperial Bank of Commerce,
as Agent (and such other Persons as may from time to time become Lenders
under the Credit Agreement, as hereinafter defined).
WHEREAS pursuant to a credit agreement dated as of June 16, 1995 among
3154823 Canada Inc., the Lenders (as defined therein) and the Agent (the
"Original Credit Agreement"), the Lenders agreed to extend to the Borrower
certain credit facilities in the aggregate amount of up to Cdn. $14,000,000;
AND WHEREAS Portola Packaging Ltd. is the successor by amalgamation of
3154823 Canada Inc. and Portola Packaging Ltd. is now the borrower under the
Credit Agreement;
AND WHEREAS the Borrower, the Guarantor, the Lenders and the Agent desire
to amend certain covenants contained in the Credit Agreement;
NOW THEREFORE, in consideration of the foregoing premises, the sum of
$10.00 in lawful money of Canada and for other good and valuable
consideration, the receipt and sufficiency whereof is hereby acknowledged,
the parties hereto agree as follows:
ARTICLE 1
INTERPRETATION
SECTION 1.1. DEFINITIONS. In this First Amending Agreement and the
recitals hereto, unless there is something in the subject matter or context
inconsistent therewith or unless otherwise expressly provided, all
capitalized terms used herein shall have the meaning ascribed thereto under
the Credit Agreement; and "HEREIN", "HEREBY", "HEREOF", and similar
expressions mean or refer to this First Amending Agreement; and the
expressions "ARTICLE" and "SECTION" followed by numbers or letters mean and
refer to the specified Article or Section of this First Amending Agreement
unless otherwise specified.
SECTION 1.2. INCORPORATION OF CREDIT AGREEMENT. This First Amending
Agreement is supplemental to and shall henceforth be read in conjunction with
the Credit Agreement and the Credit Agreement, as amended by this First
Amending Agreement shall henceforth have effect so far as practicable as if
all the provisions thereof and hereof were contained in one instrument. In
this First Amending Agreement and the recitals hereto, unless there is
something in the subject matter or context inconsistent therewith, or unless
so stated to the contrary in this First Amending Agreement, the words and
expressions herein contained which are defined in the Credit Agreement shall
have the meanings given to such words and expressions in the Credit Agreement.
<PAGE>
-2-
SECTION 1.3. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. On and
after the date hereof, each reference in the Credit Agreement to "this
Agreement", "hereunder", "hereof, "herein", or words of like import, and each
reference to the Credit Agreement in the other Credit Documents and any other
agreements, documents and instruments delivered by all or any one or more of
the Borrower, the Lenders and the Agent and any other Person shall mean and
refer to the Credit Agreement as amended by this First Amending Agreement.
Except as specifically amended by this First Amending Agreement, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed. All amendments to the Credit Agreement contained in this First
Amending Agreement shall be effective as of the date of this First Amending
Agreement.
SECTION 1.4. INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division
of this First Amending Agreement into Articles and Sections and the insertion
of headings are for convenience of reference only and shall not affect the
construction or interpretation thereof.
ARTICLE 2
AMENDMENTS TO THE CREDIT AGREEMENT
SECTION 2.1. DELETION OF SECTIONS 8.03(A) AND SECTIONS 8.03(B). Sections
8.03(a) and 8.03(b) are hereby deleted.
SECTION 2.2. AMENDMENTS TO SECTION 8.03(C). Section 8.03(c) is hereby
deleted and replaced by the following:
"Maintain (i) for the three month period ended November 30, 1997; (ii)
for the six month period ended February 28, 1998; (iii) for the nine
month period ended May 30, 1998, (iv) for the twelve month period
ended August 31, 1998; and (v) for each twelve month period ended on
the last day of any Financial Quarter ending after August 31, 1998, a
ratio of Consolidated EBDIT to Consolidated Interest Charges of not
less than 4.0:1."
SECTION 2.3. AMENDMENTS TO SECTION 8.03(D). Section 8.03(d) is hereby
deleted and replaced by the following:
(d) MAINTENANCE OF FIXED CHARGE COVERAGE. Maintain (i) for the three
month period ended November 30, 1997; (ii) for the six month period
ended February 28, 1998; (iii) for the nine month period ended May 30,
1998; (iv) for the twelve month period ending August 31, 1998; and (v)
for each twelve month period ended on the last day of a Financial
Quarter ended after August 31, 1998, a ratio of
<PAGE>
-3-
Consolidated EBDIT to Consolidated Fixed Charges of not less than
1.10:1.
SECTION 2.4. AMENDMENTS TO SECTION 8.03(E). Section 8.03(e) is hereby
deleted and replaced by the following:
(e) MAINTENANCE OF CURRENT RATIO. Maintain, as of the last day of
each Financial Quarter, a ratio of Consolidated Current Assets to
Consolidated Current Liabilities (excluding the current portion of
long term debt) of not less than 1.25:1.
SECTION 2.5. AMENDMENT TO SCHEDULE 4. Schedule 4 is hereby amended by
adding thereto under the heading "Security from Portola" the following as item
(c),
"the support agreement entered into by Portola in favour of the Agent
and the Lenders dated as of November 26, 1997"
and by deleting the word "and" at the end of item (a) and by replacing the
period at the end of item (b) with a semicolon followed by the word "and".
SECTION 2.6. WAIVERS. The Agent and the Lenders hereby waive any Default
or Event of Default arising under Section 8.03 in respect of any period ended
prior to September 1, 1997.
SECTION 2.7. AMENDMENT FEE. The Borrower shall pay to the Agent an
amendment fee of $40,000 contemporaneously with the execution thereto.
ARTICLE 3
GENERAL
SECTION 3.1. CONFIRMATION BY BORROWER. The Borrower hereby confirms and
acknowledges that all Security granted by it to and in favour of the Agent or
the Lenders or both or to the Agent for and on behalf of the Lenders
continues to secure, among other things, all Obligations of the Borrower
under or with respect to the Credit Agreement, as amended by this First
Amending Agreement.
SECTION 3.2. CONFIRMATION BY GUARANTOR. The Guarantor hereby consents
to the within amendments and confirms and agrees that the guarantee and the
security entered into by it to and in favour of the Agent or the Lenders or
both or to the Agent for and on behalf of the Lenders remains in full force
and effect.
SECTION 3.3. COSTS AND EXPENSES. The Borrower shall pay all reasonable
costs and expenses of the Agent and the Lenders associated with the
preparation, execution and delivery of this First Amending Agreement and all
documentation contemplated hereby and delivered in connection herewith,
including the reasonable legal fees of counsel.
<PAGE>
-4-
SECTION 3.4. GOVERNING LAW. This First Amending Agreement shall be
governed by and construed in accordance with the laws of the Province of British
Columbia and the laws of Canada applicable therein.
SECTION 3.5. COUNTERPARTS. This First Amending Agreement may be executed
in any number of counterparts and all such counterparts taken together shall be
deemed to constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have caused this First Amending
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
PORTOLA PACKAGING CANADA LTD.
Per: /s/ George Noroian
-----------------------------------------
Authorized Signing Officer
THE LENDER
CANADIAN IMPERIAL BANK OF COMMERCE
Per: /s/ Rocco Calarco
-----------------------------------------
Authorized Signing Officer
THE AGENT
CANADIAN IMPERIAL BANK OF COMMERCE
Per: /s/ Rocco Calarco
-----------------------------------------
Authorized Signing Officer
(signatures continue on the next page)
(signatures continue from the previous page)
<PAGE>
-5-
THE GUARANTOR
PORTOLA PACKAGING, INC.
Per: /s/ Joseph T. Mayernick
-----------------------------------------
Authorized Signing Officer
<PAGE>
PORTOLA PACKAGING, INC.
Portola U.S.
- and -
PORTOLA PACKAGING CANADA LTD.
as Borrower
- and -
CANADIAN IMPERIAL BANK OF COMMERCE
as Agent
- -------------------------------------------------------------------------------
SUPPORT AGREEMENT
- -------------------------------------------------------------------------------
Dated as of November 26, 1997
<PAGE>
SUPPORT AGREEMENT
SUPPORT AGREEMENT made as of the 26th day of November, 1997 made by
PORTOLA PACKAGING, INC. ("Portola U.S."), a corporation existing under the
laws of Delaware, PORTOLA PACKAGING CANADA LTD. (the "Borrower"), a
corporation existing under the laws of Canada and CANADIAN IMPERIAL BANK OF
COMMERCE (the "Agent"), a Canadian chartered bank, as Agent under the Credit
Agreement.
WHEREAS:
A. The Borrower, the financial institutions parties thereto (the "Lenders")
and the Agent on behalf of the Lenders are parties to a credit agreement
dated as of June 16, 1995, (such credit agreement as it may be supplemented,
amended or restated from time to time being referred to as the "Credit
Agreement");
B. The Lenders have requested that in consideration for continuing to
provide financial accommodations under the Credit Agreement to the Borrower
this Agreement be executed and delivered by the parties hereto;
NOW THEREFORE in consideration of the sum of $10 now paid by the Agent to
and for other good and valuable consideration (the receipt and sufficiency of
which are hereby acknowledged), and in consideration of the premises and the
mutual covenants, agreements and conditions herein contained, it is hereby
agreed as follows:
1. DEFINITIONS. For the purpose of this Agreement, all capitalized terms
used but not defined herein shall have the meanings specified in the Credit
Agreement, and the following terms shall have the following meanings:
"DEFICIENCY" means, for any relevant period (as set out in Section
8.03(d) of the Credit Agreement) for which the Fixed Charge Coverage Ratio of
the Borrower was less than 1.10:1, the amount by which Consolidated EBITD was
less than the Consolidated EBITD that would have been required for such
period to satisfy the aforementioned Fixed Charge Coverage Ratio.
"FIXED CHARGE COVERAGE RATIO" means the ratio of Consolidated EBITD to
Consolidated Fixed Charges.
"LENDERS INDEBTEDNESS" means all present and future indebtedness and
other liabilities and obligations, contingent or absolute, matured or
unmatured, at any time due or accruing due, owing by the Borrower (whether
alone or with another or others and whether as principal or surety) to the
Agent and the Lenders pursuant to the Credit Documents.
"NOTICE OF DEFICIENCY" has the meaning specified in paragraph 2 hereof.
"SUBORDINATED INDEBTEDNESS" has the meaning specified in paragraph 5
<PAGE>
-2-
hereof.
2. NOTICE OF DEFICIENCY. As soon as possible and in any event not less than
two Business Days before any day on which a Deficiency is anticipated by the
Borrower or Portola U.S. or, in the case of a Deficiency that was not
anticipated, on the Business Day on which such Deficiency occurs, the
Borrower shall give notice in writing (which notice, and any such notice
given pursuant to paragraph 3 hereof, is herein called a "Notice of
Deficiency") to Portola U.S. and the Agent specifying the details and amount
of such Deficiency.
3. RIGHT OF THE AGENT TO GIVE NOTICE OF DEFICIENCY. If a Deficiency shall
occur the Agent may forthwith give a Notice of Deficiency to Portola U.S.
(whether or not a Notice of Deficiency has been given by the Borrower
pursuant to paragraph 2 hereof).
4. DEFICIENCY ACTIONS. (1) Subject to paragraph 4(2), if at any time a
Deficiency shall be anticipated by the Borrower or Portola U.S., or Portola
U.S. shall receive a Notice of Deficiency, Portola U.S. shall provide for
such Deficiency by making payment to the Borrower of an amount in Cdn.
Dollars equal to such Deficiency (any such payment is herein called a
"Deficiency Payment"). Each Deficiency Payment shall be made, in the case of
a Deficiency that is anticipated by the Borrower or Portola U.S., not later
than the day on which such Deficiency is anticipated to occur and, in any
other case, not later than one Business Day after the related Deficiency
Notice is received by Portola U.S.
(2) Portola U.S. shall not be required to make any Deficiency Payment
hereunder if that action would constitute an event of default by Portola U.S.
(i) under that certain Second Amended and Restated Credit and Security
Agreement with Heller Financial, Inc., a Delaware corporation, dated as of
October 2, 1995, (ii) with respect to its issuance of $110,000,000, 10 3/4%
Senior Notes under an indenture entered into with America Bank National
Association, Firstar Trust Company, successor trustee, dated as of October 2,
1995, (collectively, the "Loan Agreements"); provided that to the extent that
Portola U.S. is entitled or permitted under the Loan Agreements to make
loans, investments or payments of any kind (collectively, the "Permitted
Payments") to any Person, Portola U.S. shall use its best efforts to make
Deficiency Payments when required in priority to Permitted Payments to any
other Person.
(3) Should Portola U.S. fail to make any Deficiency Payment required by
Section 4(1) hereof (and whether or not Portola U.S. is excused from making such
payment by Section 4(2)) then (1) such non payment shall constitute an Event of
Default under the Credit Agreement (without prejudice of any other default or
Event of Default arising thereunder), and (2) Portola U.S. shall forthwith, and
from time to time, take or refrain from taking such actions, exercise such
powers and make such elections or designations under the Loan Agreements as may
be required by the Agent in order to eliminate or mitigate any impediment under
the Loan Agreements to the ability of Portola
<PAGE>
-3-
U.S. to address the Deficiency and repay the amounts outstanding under the
Credit Agreement (such actions to include, if required by the Agent, making
the Borrower a "Restricted Subsidiary" under the Loan Agreements on terms
acceptable to the Agent and, simultaneously, repaying, or causing to be
repaid, all amounts outstanding under the Credit Agreement) and Portola U.S.
shall thereafter, to the extent then permitted by the Loan Agreements, and as
required by the Agent, make the Deficiency Payment or pay the amounts
outstanding by the Borrower to the Agent and the Lenders, provided that
Portola U.S. shall not be required to take any action pursuant to this
Section 4(3) which would cause or constitute an Event of Default under either
of the Loan Agreements.
(4) Portola U.S. will not consent to any amendments to the Loan
Agreements which create further or more restrictive limitations upon its
ability to undertake any of the actions referred to in Sections 4(1) and 4(3)
and any such further or more restrictive limitations entered into after the
date hereof shall not be taken into account in determining the obligations of
Portola U.S. pursuant to Sections 4(1) and 4(3).
(5) If it is determined that the consent of a lender or lenders under
either or both of the Loan Agreements is required pursuant to the Loan
Agreements in respect of any matter provided for in Sections 4(1) and 4(3).
Portola U.S. shall, upon request of the Agent, use its best efforts to obtain
such consent and shall advise the Agent of its progress in obtaining the
consent.
5. PAYMENT FOR EQUITY OR SUBORDINATED DEBT. (1) A Deficiency Payment shall
constitute payment by Portola U.S. to the Borrower of the issue price of
shares of capital stock of the Borrower having such terms and conditions as
may be agreed upon by Portola U.S. and the Borrower, and the Borrower agrees
to duly authorize and issue such shares to Portola U.S. concurrently with the
related Deficiency Payment being made hereunder by Portola U.S. For greater
certainty, however, failure by Portola U.S. and the Borrower to agree upon
the terms and conditions of any such shares of failure by the Borrower to
duly authorize or issue any such shares, shall not discharge, impair or
otherwise affect the obligation of Portola U.S. to make any Deficiency
Payment as herein required. Portola U.S. hereby authorizes and directs the
Borrower to deliver certificates evidencing all shares issues as contemplated
by this paragraph directly to the Agent, to be held by the Agent pursuant to
the share pledge agreement dated as of June 16, 1995 entered into between
Portola U.S. and the Agent with respect to the Borrower.
(2) A Deficiency Payment may constitute a loan by Portola U.S. to the
Borrower and Portola U.S. acknowledges that such loan and any interest or
fees thereon (collectively, such loan, interest and fees is hereinafter
inferred to as the "Subordinated Indebtedness") shall for all purposes be,
and at all times remain inferior, junior and subordinated to the Lenders
Indebtedness. Except as expressly agreed to by the Agent in writing, all of
the Lenders Indebtedness shall be paid or repaid in full before any payment
on account of, or, in respect of, the Subordinated Indebtedness (whether as
principal, interest, fees or otherwise) is paid or repaid.
<PAGE>
-4-
6. RIGHT TO ENFORCE THIS AGREEMENT. The parties hereto acknowledge and
declare that this Agreement is being entered into for the joint and several
benefit of the Borrower, the Agent and the Lenders, each of which shall be
severally entitled to bring proceedings to enforce the obligations of Portola
U.S. hereunder.
7. OBLIGATIONS UNCONDITIONAL. The obligations of Portola U.S.
hereunder are absolute and unconditional under any and all circumstances and
no such obligation shall, to any extent or in any way, be discharged,
impaired or otherwise affected except by the due performance of such
obligation as herein contemplated. Without limitation of the foregoing, the
obligations of Portola U.S. hereunder shall not be limited or lessened by the
financial condition or solvency of the Borrower at any time.
8. NO SET-OFF, ETC. The obligations of Portola U.S. hereunder and the
rights of the Borrower and the Agent to enforce such obligations, whether by
action at law, suit in equity or otherwise, shall not be subject to any
reductions, limitation, impairment or termination, by reason of any claim of
any character whatsoever including, without limitation, claims of waiver,
release, surrender, alteration or compromise, and shall not be subject to any
defence, set-off, counterclaim, recoupment, rescission or termination, and
Portola U.S. hereby expressly and irrevocably waives for all purposes of this
Agreement each and every such claim, waiver, release, surrender, alteration
and compromise and each and every such defence, set-off, counterclaim,
recoupment, rescission or termination in respect of its obligations under
this Agreement.
9. FAILURE TO ACT, ETC. No failure on the part of the Borrower or the
Lenders in exercising any right or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right or remedy
preclude any other or further exercise thereof or the exercise of any other
right or remedy at law or in equity or otherwise.
10. NOTICES, ETC. Any notice, direction or other instrument required or
permitted to be given hereunder shall, except as otherwise permitted hereunder,
be in writing and given by delivering it or sending it by telecopy or other
similar form of communication addressed, if to the Borrower to it at: 12431
Horseshoe Way, Richmond, British Columbia V7A 4X6, Attention: President,
Telephone: (614) 272-4700, Telecopier: (604) 272-5200, with copies to Portola
U.S. at 890 Faulstich Court, San Jose, California 95112, Attention: President,
Telephone: (408) 453-8840, Telecopier: (408) 453-8462, and to Tomlinson Zisko
Morosoli & Maser, 200 Page Mill Road, Second Floor, Palo Alto, California 94306,
Attention: Timothy Tomlinson, Esq., Telephone (415) 325-8666, Telecopier:
(415) 324-1808; if to the Agent, to it at: Commerce Court West, 3rd Floor,
Toronto, Ontario M5L 1A2, Attention: Manager, Corporate Finance, Telephone
(416) 980-7353, Telecopier: (416) 980-7377, and, if to the Lender, at the
addresses shown on the signature pages of the Credit Agreement. Any such
notice, direction or other instrument shall be deemed to have been effectively
given, if sent by telecopier or other similar form of telecommunication, on the
next Business Day following such transmission or, if delivered, to have been
received on the date of
<PAGE>
-5-
such delivery. Any party may change its address for service from time to
time by notice given in accordance with the foregoing and any subsequent
notice shall be sent to the party at its changed address.
11. AMENDMENT AND WAIVER. This Agreement shall not be amended in any
manner otherwise than by an instrument in writing, executed by duly
authorized representatives of the parties hereto. No obligation of any party
hereto may be waived except with the written consent of the Agent.
12. GOVERNING LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the Province of British Columbia and the laws of
Canada applicable therein and shall be treated in all respects as a British
Columbia contract, and the parties hereto attorn to the non-exclusive
jurisdiction of the courts of such Province.
13. FURTHER ASSURANCES. The Borrower and Portola U.S. shall do all such
further acts and execute and deliver all such further documents as may be
reasonably necessary or desirable in order to fully perform and carry out the
purpose and intent of this Agreement.
14. INDEMNITY. The Borrower and Portola U.S. shall be jointly and
severally liable for, and shall jointly and severally indemnify and save the
Agent and the Lenders harmless of and from, all manner of actions, causes of
action, demands, claims, losses, costs, damages and expenses of any and every
nature whatsoever which the Agent and the Lenders may sustain, pay or incur
in respect of or in connection with any default by Portola U.S. or the
Borrower in the payment or performance of their obligations and liabilities
under this Agreement.
15. INVALIDITY OF PROVISIONS. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision hereof, and any such invalid provision shall be deemed
to be severable.
16. HEADINGS. The headings of the various paragraphs of this Agreement
are intended solely for convenience, are not intended to be full or accurate
description of the contents thereof and are not to be considered part of this
Agreement.
17. SUCCESSORS AND ASSIGNS. This Agreement shall enure to the benefit
of the Borrower and the Agent (on behalf of the Lenders) and their respective
successors and assigns. This Agreement shall not be assigned by Portola U.S.
or the Borrower without the prior written consent of the Lenders but shall be
binding upon any successors of Portola U.S. and the Borrower, whether such
succession results by way or a reorganization, amalgamation, merger,
consolidation, sale or otherwise.
<PAGE>
-6-
18. COUNTERPARTS. This Agreement maybe executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
PORTOLA PACKAGING, INC.
By: /s/ Joseph T. Mayernick
--------------------------------------------
Name: Joseph T. Mayernick
Title: Vice President and
Chief Financial Officer
PORTOLA PACKAGING CANADA LTD.
By: /s/ George Noroian
--------------------------------------------
Name: George Noroian
Title: President
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ Rocco Calarco
--------------------------------------------
Name: Rocco Calarco
Title: Senior Manager, Corporate Finance
<PAGE>
EXHIBIT 11.01
PORTOLA PACKAGING, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding for the period....................... 11,766 11,800 11,393
--------- ---------- ---------
Shares used in per share calculation............................................ 11,766 11,800 11,393
--------- ---------- ---------
--------- ---------- ---------
Income (loss) before extraordinary items........................................ $ (7,411) $ (8,177) $ 140
Less the increase in the put value of warrants.................................. (1,115) (895) (610)
--------- ---------- ---------
Loss before extraordinary item.................................................. $ (8,526) $ (9,072) $ (470)
--------- ---------- ---------
--------- ---------- ---------
Net income (loss)............................................................... $ (7,411) $ (9,442) $ 140
Less the increase in the put value of warrants.................................. (1,115) (895) (610)
--------- ---------- ---------
Net loss attributable to common shareholders.................................... $ (8,526) $ (10,337) $ (470)
--------- ---------- ---------
--------- ---------- ---------
Net loss per share before extraordinary item.................................... $ (0.72) $ (0.77) $ (0.04)
--------- ---------- ---------
--------- ---------- ---------
Net loss per share.............................................................. $ (0.72) $ (0.88) $ (0.04)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
- ------------------------
(1) There is no difference between primary and fully diluted net income (loss)
per share for all periods presented.
<PAGE>
EXHIBIT 12.01
PORTOLA PACKAGING, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest expense......................................... $ 13,379 $ 13,084 $ 8,658 $ 3,996 $ 3,128
Debt financing costs..................................... 559 492 447 1,058 479
Rent expense............................................. 638 635 499 465 295
--------- --------- --------- --------- ---------
Total interest......................................... 14,576 14,211 9,604 5,519 3,902
Total fixed costs.......................................... 14,576 14,211 9,604 5,519 3,902
Less: Capitalized interest.................................
--------- --------- --------- --------- ---------
Net fixed charges...................................... $ 14,576 $ 14,211 $ 9,604 $ 5,519 $ 3,902
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings:
Net income (loss)........................................ $ (7,411) $ (9,442) $ 140 $ 225 $ 309
Income tax benefit from extraordinary item............... (845) (539) (592)
Cumulative effect of adopting SFAS No. 109............... 85
Income tax provision (benefit)........................... (632) 865 1,294 1,095 1,521
Net fixed charges........................................ 14,576 14,211 9,604 5,519 3,902
--------- --------- --------- --------- ---------
Total earnings......................................... $ 6,533 $ 4,789 $ 11,038 $ 6,385 $ 5,140
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Calculation of ratio of earnings to fixed charges:
Total earnings........................................... $ 6,533 $ 4,789 $ 11,038 $ 6,385 $ 5,140
Total fixed charges...................................... $ 14,576 $ 14,211 $ 9,604 $ 5,519 $ 3,902
Ratio of earnings to fixed charges....................... 1.15 1.16 1.32
Deficiency of earnings to fixed charges.................. $ (8,043) $ (9,442)
</TABLE>
<PAGE>
EXHIBIT 21.01
SUBSIDIARIES OF PORTOLA PACKAGING, INC.
Portola Packaging Canada Ltd., a Canadian federal corporation (operating)
Portola Packaging Limited., a United Kingdom corporation (formerly Cap Snap
Limited, a U.K. corporation, which was formerly Cap Snap (U.K.) Ltd.) (operating
but not significant pursuant to Item 601 of Regulation S-K)
Portola Packaging Ltd. (also known as Emballages Portola Ltee), a Canadian
federal corporation (operating but not significant pursuant to Item 601 of
Regulation S-K)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this annual report on Form 10-K and to the
incorporation by reference in the registration statement of Portola Packaging,
Inc. on Form S-8 (File No. 333-17533) of our reports dated November 19, 1997,
which include an explanatory paragraph on the adoption of a newly established
standard for the impairment of long-lived assets, on our audits of the
consolidated financial statements and financial statement schedule of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1997 and 1996 and for the
three years in the period ended August 31, 1997 which reports are included in
this annual report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 3242
<SECURITIES> 841
<RECEIVABLES> 24509
<ALLOWANCES> (1170)
<INVENTORY> 9918
<CURRENT-ASSETS> 40016
<PP&E> 125855
<DEPRECIATION> (46076)
<TOTAL-ASSETS> 148057
<CURRENT-LIABILITIES> 32701
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (13060)
<TOTAL-LIABILITY-AND-EQUITY> 148057
<SALES> 170443
<TOTAL-REVENUES> 170443
<CGS> 135318
<TOTAL-COSTS> 29609
<OTHER-EXPENSES> (379)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13938
<INCOME-PRETAX> (8043)
<INCOME-TAX> (632)
<INCOME-CONTINUING> (7411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8526)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
