================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1999
/ / 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
------------------------
PORTOLA PACKAGING, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-1582719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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)
------------------------
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.
12,075,896 shares of Registrant's $.001 par value Common Stock, consisting
of 2,134,992 shares of nonvoting Class A Common Stock and 9,940,904 shares in
the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were
outstanding at October 29, 1999.
Documents incorporated by reference: None
================================================================================
<PAGE>
PORTOLA PACKAGING, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
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- TWIST & SPOUT
- -Registered Trademark-, Cap Profile Logo-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.
<PAGE>
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 and tooling 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". The
Company's Canadian and Mexican operations, as well as a domestic joint
venture, also manufacture a wide variety of blow molded plastic bottles
for food and industrial applications. Portola's closure products are
primarily manufactured through a technologically advanced, high speed
injection molding process at seven modern manufacturing facilities
strategically located throughout the United States, three facilities
located in Canada, one facility located in the United Kingdom, one
facility located in Mexico and through joint venture manufacturing and
distribution operations located in China and Europe. 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 12.2
billion closures annually under the names Cap Snap, Nepco, Portola
Packaging 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 75 patents on the design of container closures and compatible bottle
necks.
History
The Company was incorporated in California in 1964, and
reincorporated in Delaware in April 1994. Portola (formerly known as Cap
Snap Seal, Inc.) was acquired from the founding family in 1986 by a group
led by Jack L. Watts, the Company's current Chairman of the Board and
Chief Executive Officer. Since Portola was acquired from the founding
family, the size of the Company as measured by sales and closure unit
volume has increased from $26.1 million in sales and 2.1 billion in units
sold for fiscal 1987 to $190.7 million in sales and 12.2 billion in units
sold for fiscal year 1999. Portola's senior management has significant
experience in the plastic packaging business and an average tenure of
eight years at the Company.
Consistent with the Company's objective to expand through strategic
acquisitions, on June 30, 1994, the Company acquired Northern Engineering
& Plastic Corp. and certain related companies and assets (collectively,
"Nepco") for a purchase price of $43.7 million. The acquisition of Nepco,
a designer, manufacturer and marketer of tamper evident plastic closures
in markets similar to those served by Portola, has enabled the Company to
establish new customer relationships, diversify and expand its product
offerings and customer base and benefit from Nepco's proprietary product
designs. 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." and were recently continued under the laws of the Yukon Territory.
On September 1, 1996, the Company purchased for $2.1 million Rapid Plast
J-P. Inc. (Rapid Plast), a company headquartered in Montreal, Quebec (the
"Eastern Canadian Acquisition"). Rapid Plast now operates under the name
"Portola Packaging Ltd." and is engaged in manufacturing and distributing
plastic bottles, primarily in eastern Canada and recently continued under
the laws of the Yukon Territory. The Canadian acquisitions have enabled
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 completed the acquisition
of the 50% interest it had not previously owned in Cap Snap (U.K.) Ltd.,
now known as Portola Packaging Ltd. (U.K.) for a purchase price of
approximately $1.5 million. Portola Packaging Ltd. (U.K.) is a British
corporation engaged in manufacturing closures for distribution primarily
in the United Kingdom with some exports to Europe.
On March 31, 1999, Portola Allied Tool, Inc. (Portola Allied), a
wholly-owned subsidiary of the Company, purchased certain operating and
intangible assets and paid off certain liabilities of Allied Tool, Inc.,
for a total purchase price of $2.2 million. Portola Allied is a
Delaware corporation headquartered in Michigan and is engaged primarily
in the manufacture and sale of tooling and molds used in the blowmolding
industry. Effective July 27, 1999, the Company completed the
acquisition of the remaining interest in Portola Packaging Inc. Mexico,
S.A. de C.V. (PPI Mexico) for a purchase price of $3.0 million. At
December 1, 1998, the Company had increased its equity interest in PPI
Mexico from 50% to 75% as a result of the Company's claim against its
joint venture partner for 50% of the joint venture partner's interest in
PPI Mexico (i.e., a 25% interest in PPI Mexico) in connection with the
foreclosure by a Mexican lender on a loan to PPI Mexico, for which this
25% interest served as part of the collateral for the loan. The Company
paid the lender $1.5 million pursuant to a collateral agreement
supporting the promissory note payable by PPI Mexico, and converted $1.5
million of debt to equity in PPI Mexico. PPI Mexico is engaged in the
manufacture and distribution of plastic water bottles and plastic
closures.
Disclosures Regarding Forward-Looking Statements
This report 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 the "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.
Certain statements, including, without limitation, statements containing
the words "believes," "anticipates," "estimates," "expects," "plans,"
and words of similar import, constitute forward-looking statements.
Readers are referred to the sections of this Report entitled "Risk
Factors", "Plastic Closure Market", "Raw Materials and Production" and
"Competition". These sections describe risks which could cause actual
results to differ materially from such 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.
Business Strategy
The Company's primary strategy is to increase cash flow by
maintaining and extending its leading position in product applications
within the plastic closure and bottling industry. To support this
strategy, the Company focuses on (i) advancing research and development
and product engineering, (ii) providing dedicated customer support and
total product solutions for customers, (iii) continuing to improve
production efficiencies and enhance low cost manufacturing capabilities,
(iv) expanding sales in international markets where significant growth
opportunities exist and (v) where appropriate, seeking strategic
acquisitions that will strengthen the Company's competitive position.
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, improved
recloseable plastic dispensing fitments 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 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 joint ventures in Europe and China and has acquired the
remaining 50% interest of the Company's joint ventures in Mexico, Canada
and the United Kingdom. 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. The Company may
also expand its acquisition strategy to include businesses that serve
other customer bases as well. Since fiscal 1994, the Company has
acquired Nepco, its Mexican, Canadian and United Kingdom operations, the
assets of Allied Tool, Inc., and entered into joint ventures domestically
as well as in China and 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.
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 evident mechanism for the food and
non-carbonated beverage industries.
Historically, demand for the Company's products has been a function
of population growth, increasing concerns by the public about the
sanitation of packaged food and beverage products, and the continued
increase in the use of plastic containers, as opposed to glass or metal,
throughout the packaged food industry. For juice, dairy and bottled water
markets, demand is also a function of seasonal climate variations, warm
weather being responsible for increased consumption. In addition, demand
is a function of general economic conditions and business cycles. 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, (ii) tooling and molds used
in the blowmolding industry (iii) customized bottling systems for
returnable water cooler bottles which it markets primarily under the name
"PortaPlant", and (iv) blow molded bottles for use in the dairy, water,
juice and industrial markets. The Company's sales of plastic closures
represented approximately 83%, 86% and 88% of total sales in fiscal years
1999, 1998 and 1997, respectively. In fiscal year 1999, the balance of
the sales were for equipment (6%), bottles (10%) and other (1%).
Plastic Closures
The Company's plastic closures are broadly grouped into five
categories: (i) small closures used to cap blow-molded 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 or snap-screw feature,
designs preferred by packagers because they reduce production costs and
leakage. The Company's plastic closures also incorporate tear strips,
breakaway bands or other visible tamper evident devices, 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 42 individual closure products. The Company also offers 23
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.
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION MARKET APPLICATION
- -------------------------------- -------------------------------- ----------------------------------
<S> <C> <C>
Small closures................. Plastic closures for plastic Milk, fruit juices, bottled water
blowmolded bottles and vinegar
Five gallon closures........... Plastic closures for glass and Water cooler bottles
plastic returnable water
cooler bottles
Widemouth closures............. Plastic closures for widemouth Institutional foods, including
plastic containers condiments, mayonnaise and
salad dressing
Fitments....................... Recloseable plastic dispensing Orange juice, lemonade, other
fitment for polyethylene- juice products and dairy
coated gable-top paperboard
cartons
Push-pull dispensing closures.. Dual tamper evident closures Bottled water, flavored water,
with push-pull feature sports drinks
</TABLE>
Capping Equipment and Tooling
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.
With the recent acquisition by Portola Allied Tool, Inc., a wholly-
owned subsidiary of the Company, of the assets of Allied Tool the
Company is now engaged in the manufacture and sale of high quality
tooling and molds used in the blowmolding industry.
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 225 to
3,000 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 and Mexico, in addition to marketing closures, the Company
produces a wide variety of blow molded plastic bottles for use in the
dairy, water and juice industries. The ability to market the closures
and bottles together enables the Canadian and Mexican operations to
provide their customers with a complete packaging system.
During fiscal year 1999, the Company also formed two joint ventures,
one of which produces and sells five gallon PET water bottles
domestically from existing Company plants and one of which produces and
sells five gallon polycarbonate bottles in the European marketplace.
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 years 1999, 1998 and
1997 were $2.7 million, $3.4 million, and $3.3 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, including improved closures developed for the fitment and
institutional foods industries.
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 low density polyethylene (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 better 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, coupled with an inability to promptly pass such increases on to
customers, would have a material adverse effect on the Company's
financial condition and results of operations.
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. The Company uses a similar, highly automated process in the
production of its bottles. 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.
Backlog
Production and delivery cycles for closures is very short and the
Company's backlog for closures is generally cancelable on short notice.
Backlog for closures is generally two to three weeks of orders, and is
relatively constant from period to period. Contracts for equipment
purchases generally include cancellation penalties. 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.
Sales, Marketing and Customer Service
The Company markets its products through its internal sales
department and through domestic and international networks of sales
representatives. Calls on customers by these salespersons and
representatives, along with participation at trade shows, are the primary
means of customer contact. A number of the Company's customers are large
corporate clients with numerous production facilities, each of which may
make its own separate purchase decisions. The Company's most significant
customers are processors and packagers of fluid milk, non-carbonated
bottled water, chilled juice, other flavored drinks and condiments for
wholesale and institutional use. The Company's customer base includes
over 3,000 accounts. The Company's top ten customers and buying groups
accounted for approximately 28% of the Company's sales during the fiscal
year ended August 31, 1999, and none accounted for more than 5% 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
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 world. Several of the Company's field service
representatives have extensive blow-molding technical expertise that is
especially important in resolving bottle leakage problems for customers.
International Sales and Joint Ventures
Although the Company's sales are primarily domestic, the Company has
experienced growth in international sales. International sales have
increased to $70.3 million in 1999 from $46.3 million and $41.2 million
in 1998 and 1997, respectively, due to bottled water companies and other
non-carbonated beverage companies in Europe, the Far East, Latin America
and elsewhere adopting more advanced packaging materials and techniques.
For the fiscal years ended August 31, 1999, 1998, and 1997, export
closure sales from the United States to unaffiliated customers were $10.0
million, $9.4 million, and $12.0 million, respectively. The Company's
export closure sales from the United States have generally declined as
the United Kingdom, Mexican 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. Subsidiaries in Mexico, Canada and the United Kingdom, now
wholly-owned by Portola, began as joint ventures in which the Company was
a venture partner. The Company also maintains a joint venture agreement
with the Shanghai Aquarius Drinking Water Company (Aquarius) to
manufacture and sell closures and bottles for the Asian marketplace.
Aquarius is a leading bottled water company in the Shanghai Province of
China. During fiscal year 1999, the Company formed a new joint venture
with Greiner A.G. of Austria to sell five gallon water caps and to
produce and sell five gallon water bottles for the European and Middle
Eastern marketplaces.
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 increase in competition or any
technological innovations with respect to the Company's specific product
applications, such as the introduction of lower-priced competitive
products or products containing technological improvements over the
Company's products, could have a significant adverse effect on the
Company's financial condition and results of operations.
Employees
As of August 31, 1999, the Company had 1,210 full-time employees, 37
of whom were engaged in product development, 89 in marketing, sales and
customer support, 980 in manufacturing and 104 in finance and
administration. The Company uses seasonal and part-time employees for
training, vacation replacements and other short term requirements. None
of the Company's employees in the United States are represented by any
collective bargaining agreements; approximately 42 of the employees of
one of the Company's Canadian subsidiaries are members of the Teamsters
Union. The Company has never experienced a work stoppage and believes
that it has good employee relations.
Risk Factors
The following risk factors, in addition to the risks described
elsewhere in the description of the Company's business in this report,
including, without limitation, those described under the captions
"Plastic Closure Market", "Raw Materials and Production" and
"Competition" may cause actual results to differ materially from those
in any forward-looking statements contained in such business description
or elsewhere in this report or made in the future by the Company or its
representatives:
Substantial Leverage; Limitations Associated with Restrictive Covenants
At August 31, 1999, the Company had indebtedness outstanding of
approximately $137 million. $110 million of this amount represented the
principal amount of the senior notes issued by the Company in October
1995, which is due in 2005; $26 million of the balance remaining
represented funds drawn under the Company's $35 million line of credit;
the remaining amount of the indebtedness was principally comprised of
foreign subsidiary loans.
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to
obtain financing for future working capital needs or for acquisitions or
other purposes is limited and from time to time in the future may be
limited; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to debt service, thereby reducing funds
available for operations; (iii) certain of the Company's borrowings,
including borrowings under the Company's credit facility, will be at
variable rates of interest, which could cause the Company to be
vulnerable to increases in interest rates; and (iv) the substantial
indebtedness and the restrictive covenants to which the Company is
subject under the terms of its indebtedness may make the Company more
vulnerable to economic downturns, may reduce its flexibility to respond
to changing business conditions and opportunities and may limit its
ability to withstand competitive pressures. The Company's ability to
make scheduled payments of the principal of and interest on, or to
refinance, its indebtedness will depend upon its future operating
performance and cash flows which are subject to prevailing economic
conditions, market conditions in the packaging industry, prevailing
interest rates and financial, competitive, business and other factors,
many of which may be beyond the Company's control.
Dependence on New Business Development and International Expansion
The Company believes that the domestic markets for its traditional
products have become relatively mature and that, in order to grow, the
Company has relied, and will increasingly rely, on new products, such as
fitments and non-spill closures, as well as expansion into international
markets. Developing new products and expanding into new markets will
require a substantial investment and involve additional risks such as
assessing the values, strengths, weaknesses and potential profitability
of acquisition candidates. There can be no assurance that the Company's
efforts to achieve such development and expansion will be successful.
There are additional risks of potential adverse effects on the Company's
operating results, such as the diversion of management's attention, the
loss of key personnel and the risks of unanticipated problems and
liabilities. Moreover, as described above, the Company's debt
instruments impose significant restrictions under certain circumstances
on the ability of the Company to make investments.
The Company's international operations are subject to certain risks
associated with doing business in foreign countries, including the
possibility of adverse governmental regulation, additional taxation,
exchange rate fluctuations and other potential risks. There can be no
assurance that the Company's foreign operations will be successful or
will not require additional funding.
Consumer Complaints; Governmental Regulation
Many of the Company's products are used to cap food and beverage
products. It is possible that some of the Company's products, if used
improperly, could cause injury to consumers of food and beverage
products capped with the Company's closures. In such event, the Company
could incur substantial costs in responding to complaints or litigation
related to its products, which could materially adversely affect the
financial condition and operations of the Company. In addition, if any
of the Company's products were found to be defective, the Company could
incur significant costs in correcting any product deficiencies, in
addition to suffering the loss of revenues derived from such products.
From time to time, customers have claimed that defects in their products
have been due to defects in the Company's products. To date, no such
claims have been adjudicated adversely to the Company, however, the
Company has had to pay amounts in settlement to avoid litigation and has
incurred and may be expected to incur significant litigation costs in
the future, not all of which have been or will be covered by insurance.
The Company's products are subject to governmental regulation,
including regulation by the Federal Food and Drug Administration and
other agencies with jurisdiction over effectiveness of tamper-resistant
devices and other closures for dairy and other food and beverage
products. A change in government regulation could adversely affect the
Company. There can be no assurance that federal or state authorities
will not develop protocols in the future that would materially increase
the Company's costs of manufacturing certain of its products.
Direct Competition
The Company faces direct competition in each of its product lines
from a number of companies, some of which have financial and other
resources that are substantially greater than those of the Company. As
the Company broadens its product offerings, it can expect to meet
increased competition from additional competitors with entrenched
positions in those product lines. The Company also faces some direct
competition from bottling companies and other food and beverage
providers that elect to produce their own closures rather than purchase
them from outside sources. In addition, the packaging industry has
numerous well-capitalized competitors, and there is a risk that these
companies will expand their product offerings, either through internal
product development or acquisitions of any of the Company's direct
competitors, to compete in the niche markets that are currently served
by the Company. These competitors, as well as existing competitors,
could introduce products or establish prices for their products in a
manner that could adversely affect the Company's ability to compete.
Because of the Company's product concentration, an increase in
competition or any technological innovations with respect to the
Company's specific product applications, such as the introduction of
lower-priced competitive products or products containing technological
improvements over the Company's products, could have a significant
adverse effect on the Company's financial condition and results of
operations.
Limited Protection of Intellectual Property
The Company has a number of patents covering various aspects of the
design and construction of its products. The Company presently is a
party to two lawsuits challenging the validity of certain of its
patented technology, and in one lawsuit which was settled in 1996 agreed
to pay royalties to another company for a closure product manufactured
by the Company that was alleged to have infringed on certain patents of
the other company. There can be no assurance that the Company will be
successful in protecting its proprietary technology from third party
infringement or that the Company's products will not be found to
infringe upon the proprietary technology of others. Furthermore, patents
do not ensure that competitors will not develop competing products.
The Company now markets its products internationally, and the
protection offered by the patent laws of foreign countries may be less
than the protection offered by the United States patent laws. The
Company also relies on trade secrets and know-how to maintain its
competitive position. While the Company enters into confidentiality
agreements with employees and consultants who have access to proprietary
information, there can be no assurance that these measures will prevent
the unauthorized disclosure or use of such trade secrets and know-how.
Dependence Upon Key Personnel
The Company believes that its future success is dependent upon
factors such as the knowledge, ability and experience of its personnel,
new product development, product enhancements and ongoing customer
service. The loss of key personnel responsible for managing the Company
or for advancing its product development could adversely affect the
Company's business and financial condition.
Absence of a Public Market for the Company's Securities
There is no public market for the Company's common stock, and it is
not expected that one will develop. In addition, there are substantial
restrictions on the ability of a holder of the Company's common stock to
transfer shares of such stock. Accordingly, it is difficult for a
stockholder of the Company to divest itself of its investment in the
Company. Furthermore, the Company historically has not paid dividends
to its stockholders.
Item 2. PROPERTIES
The Company currently owns or leases nine modern production facilities
located in the United States, seven of which operate five to seven days
a week, 24 hours a day. The Company closed its Fort Worth, Texas
facility in October 1998 and has entered into a preliminary agreement
of sale. The Company's western Canadian subsidiary leases two
production facilities in Richmond, British Columbia, Canada and
Edmonton, Alberta, Canada and the Company's eastern Canadian subsidiary
leases one production facility in Montreal, Quebec, Canada. In
addition, the Company leases a manufacturing facility located in
Doncaster, South Yorkshire, England for use by its United Kingdom
subsidiary and leases a manufacturing facility in Guadalajara, Mexico
for use by its Mexican 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 year or two. There can be no assurance, however, that
unanticipated developments will not occur that would require the
Company to add production facilities sooner than expected. The
following table indicates the locations, functions, square footage and
nature of ownership of the Company's current facilities.
<TABLE>
<CAPTION>
Nature
of
Square Owner-
Location Functions Feet ship(1)
- ----------------------------- -------------------------------- -------- --------
<S> <C> <C> <C>
San Jose, CA................ Executive Office/Closure Mfg./
Warehouse/Engineering/
Research and Development
Facility and Equipment
Division 154,000 owned
Kingsport, TN............... Bottle & Closure Mfg./Warehouse 89,000 owned
Clifton Park, NY............ Bottle & Closure Mfg./Warehouse 54,000 leased
Batavia, IL................. Closure Mfg./Warehouse 78,000 leased
New Castle, PA.............. Executive Office/Closure
Mfg./Warehouse/Fabrication Shop 54,000 owned
Sumter, SC.................. Closure Mfg./Warehouse 34,000 owned
Chino, CA................... Bottle & Closure Mfg./Warehouse 65,000 owned
Fort Worth, TX.............. Closure Mfg./Warehouse 27,000 owned(2)
Michigan Center, MI......... Tool Manufacturing 13,000 leased
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
Guadalajara, Mexico......... Bottle & Closure Mfg./Warehouse 52,000 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 expired in
November 1998 and has been extended on a monthly basis until an
extension is finalized; the leases for the Richmond and Edmonton,
Canada facilities expire in 2001.
(2) The Company announced the closing of this facility effective October
1998 and has entered into a preliminary agreement of sale.
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is currently engaged in patent infringement litigation
with two separate parties who are seeking to have the court declare
certain patents owned by the Company invalid. These parties have also
included allegations of anti-trust violations in their complaints. The
Company believes that its patents are valid and is contesting these
allegations vigorously. The Company is also subject to other legal
proceedings and claims arising out of the normal course of business.
Based on the facts currently available, management believes that the
ultimate amount of liability beyond reserves provided, if any, for any
pending actions will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company. However,
the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material impact on the
results of operations or liquidity of the Company in a particular
period.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
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. 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 October 29, 1999, 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 October 29,
1999, there were approximately 170 holders of record of the 8,769,474
outstanding shares of Class B Common Stock, Series 1 and 12 holders of
record of the 1,171,430 outstanding shares of Class B Common, Series 2.
See Note 10 of the Notes to Consolidated Financial Statements for
additional information on stock and warrants.
The Company has not paid dividends on its Common Stock and presently
intends to continue this policy in order to retain 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. Prior
to being paid off in May 1999 the Canadian loan agreements prohibited
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,
1999 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 statements of the Company and the accompanying notes thereto
and other financial information appearing elsewhere in this report on
Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
--------- ---------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................ $190,661 $176,234 $170,443 $159,462 $124,650
Cost of sales................................ 143,792 135,420 130,227 117,592 91,972
--------- --------- --------- --------- ---------
Gross profit............................... 46,869 40,814 40,216 41,870 32,678
Selling, general and administrative.......... 27,941 23,564 23,915 22,035 16,649
Research and development..................... 2,717 3,425 3,349 2,156 1,682
Amortization of intangibles(a)............... 2,583 3,074 3,322 5,207 3,724
Write-off of intangibles(b).................. -- -- -- 7,292 --
Restructuring costs.......................... -- 3,084 4,114 -- --
--------- --------- --------- --------- ---------
Income from operations..................... 13,628 7,667 5,516 5,180 10,623
Other (income) expense, net(c)............... (212) (1,132) 208 158 259
Interest expense, net........................ 14,262 13,297 12,792 11,842 8,483
Amortization of debt financing costs......... 546 484 559 492 447
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item and income taxes.................... (968) (4,982) (8,043) (7,312) 1,434
Income tax provision (benefit)............... (352) (571) (632) 865 1,294
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item..................................... (616) (4,411) (7,411) (8,177) 140
Extraordinary item, net(d)................... -- -- -- 1,265 --
--------- --------- --------- --------- ---------
Net income (loss)............................ ($616) ($4,411) ($7,411) ($9,442) $140
========= ========= ========= ========= =========
Net income (loss) per common share........... ($0.05) ($0.37) ($0.63) ($0.80) $0.01
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.............................. $17,005 $14,662 $7,315 $21,370 $13,747
Total assets................................. 157,444 148,860 148,286 152,227 129,315
Total debt................................... 137,095 130,708 122,172 117,913 91,912
Redeemable warrants(e)....................... 12,222 7,959 5,675 4,560 3,665
Total common stock and other
shareholders' equity (deficit).............. (26,017) (21,405) (13,049) (3,801) 6,694
CASH FLOW DATA:
Net cash provided by operating activities.... 11,612 9,073 14,744 18,795 8,422
Net cash used in investing activities........ (21,435) (16,378) (20,841) (31,271) (24,648)
Net cash provided by financing activities.... 8,725 7,350 1,795 19,511 14,785
OPERATING AND OTHER DATA:
Closure unit volume (in millions)(unaudited). 12,236 11,447 10,800 9,606 8,476
Closure unit volume growth(unaudited)........ 6.9% 6.0% 12.4% 13.3% 73.2%
EBITDA(f).................................... $31,356 $24,809 $20,349 $20,491 $22,706
Adjusted EBITDA(f)........................... 31,416 27,179 24,463 27,783 23,588
Depreciation and amortization(g)............. 18,060 16,494 15,600 15,961 12,789
Capital expenditures......................... 16,604 21,436 23,101 27,194 11,302
Deficiency of earnings to fixed charges(h)... (968) (4,982) (8,043) (9,422) --
Ratio of earnings to fixed charges(h)........ -- -- -- -- 1.2x
</TABLE>
- -------------------------
(footnotes on following page)
<PAGE>
(a) Includes amortization of patents, goodwill and covenants not to
compete.
(b) The Company adopted 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" in the fiscal year
ended August 31, 1996.
(c) Other (income) expense in 1998 includes gain from the sale of
securities of $750,000, gains from the sale of fixed assets of
$714,000 net of other expenses of $332,000.
(d) Extraordinary item refers to the loss on extinguishment of certain
debt, net of income tax benefit.
(e) The redeemable warrants entitle the holders thereof to purchase an
aggregate of 2,492,741 shares of the Company's Class A common
stock. A warrant to purchase 2,052,526 shares of common stock is
exercisable, in whole or in part, through June 30, 2004. Effective
June 30, 1999, this warrant became redeemable at the option of the
holder upon 60 days prior written notice to the Company. The
obligation of the Company to redeem the warrant is calculated based
on the higher of current market value or an amount computed under
the warrant agreement and may be suspended if the redemption of the
warrant would cause a default or event of default under the
Company's credit facilities. At August 31, 1999, the Company's
credit facilities did not permit redemption of the warrant. Were
the warrant holder able to exercise its put option to have the
warrant redeemed, the cost to the Company is estimated to be
approximately $11.6 million. If the Company does not complete an
initial public offering of its common stock by August 1, 2001 (for
the purpose of another warrant), the holder of the other
outstanding warrant may require the Company to repurchase the
warrant at the higher of current market value or an amount computed
under the warrant agreement. This other warrant is presently
exercisable at any time until its expiration on June 30, 2004.
(f) EBITDA represents, for any relevant period, income (loss) before
income taxes, extraordinary item, cumulative effect of change in
accounting principle, depreciation of property, plant, and
equipment, net interest expense and amortization of intangible
assets. Adjusted 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, net interest expense, 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 for the fiscal year ended August 31, 1995
were $882,000. In addition, in 1999 and 1998, the Company's equity
share of its Mexican joint venture's EBITDA prior to consolidation
of the Mexican joint venture, approximately $176,000 and $417,000,
respectively, is included as a separate component of the Adjusted
EBITDA calculation. EBITDA and Adjusted EBITDA are not intended to
represent and should not be considered more meaningful than, or an
alternative to, net income, cash flow or other measures of
performance in accordance with generally accepted accounting
principles. EBITDA and Adjusted EBITDA data are included because
the Company understands that such information is used by certain
investors as one measure of an issuer's historical ability to
service debt and because certain restrictive covenants in the
Indenture will be based on a term very similar to the Company's
Adjusted EBITDA.
(g) Includes amortization of debt financing costs.
(h) For the purpose of calculating the ratio of earnings to fixed
charges, "earnings" represents income before provision for income
taxes and fixed charges. "Fixed charges" consists 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, 1999, 1998, 1997 and 1996
resulted in deficiencies of $1.0 million, $5.0 million, $8.0
million, and $9.4 million, respectively.
<PAGE>
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 leveraged acquisition led by Jack L. Watts,
the Company's current Chairman of the Board and Chief Executive Officer.
The Company currently has five wholly-owned operating subsidiaries;
one of which is domestic, two of which are located in Canada, one of
which is located in the United Kingdom and one of which is located in
Mexico. The two Canadian subsidiaries are Portola Packaging Canada Ltd.
(located in western Canada) and Portola Packaging Ltd. (located in
eastern Canada); the United Kingdom subsidiary is Portola Packaging Ltd.
(U.K.); the Mexico subsidiary is Portola Packaging Inc. Mexico, S.A. de
C.V. (PPI Mexico); the Company's sole domestic subsidiary is Portola
Allied Tool, Inc., located in Michigan. In April 1997, the Company's
United Kingdom subsidiary and eastern Canadian subsidiary were converted
to "restricted subsidiary" status (See Note 2 of the Notes to
Consolidated Financial Statements). In May 1999, the Company's western
Canadian subsidiary was converted to "restricted subsidiary" status. In
March 1999, the Company formed a new subsidiary named Portola Allied
Tool, Inc. to acquire the assets of Allied Tool, Inc., a corporation
headquartered in Michigan, and elected "restricted subsidiary" status for
Portola Allied Tool. In July 1999, the Company acquired the remaining
interest in the Mexican joint venture in which it had held a 50% interest
and elected "restricted subsidiary" status at that time. This allows
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, 1999 Compared to Fiscal Year Ended
August 31, 1998
Sales increased $14.5 million, or 8.2%, from $176.2 million for
fiscal 1998 to $190.7 million for fiscal 1999. Of the increase, $7.9
million was attributable to the addition of sales from the consolidation
of the Company's Mexico operations, $5.4 million was attributable to
increased closure sales in the United Kingdom, $3.6 million was
attributable to an increase in sales from the Canadian operations
(increased bottle sales of $1.9 million and increased closure sales of
$1.7 million), and $1.6 million was attributable to sales from the
Company's new subsidiary, Portola Allied Tool. Also contributing to the
sales increases was a $400,000 sales increase from the equipment division
and sales from two newly operational joint ventures in China and the
United States in the amounts of $600,000 and $500,000, respectively. The
increases in sales in the United Kingdom and Canada resulted mainly from
increased unit shipments and a shift of sales to more profitable product
lines. The sales increases were partially offset by a $5.5 million
decrease in domestic closure sales due in part to consolidation in the
dairy industry causing downward pressure on domestic average selling
prices. The Company's international operations continue to comprise a
larger percentage of the Company's sales volume as they increase market
share.
Gross profit increased $6.1 million, or 14.8%, to $46.9 million for
fiscal 1999, as compared to $40.8 million for fiscal 1998 and increased
slightly as a percentage of sales from 23.2% in 1998 to 24.5% in 1999.
The margin increase was due primarily to improving margins in the United
Kingdom of $2.4 million, margin improvements in domestic closures and
Canada of $1.0 million and $1.5 million, respectively, and the addition
of $1.8 million in gross profit from Mexico. These increases were
partially offset by a $900,000 margin decrease in the equipment division
resulting mainly from increased raw material costs in fiscal year 1999, a
decrease in fitment applicator sales and due to fiscal 1998 margins being
inflated by a one time payment received for the settlement of a pricing
contract dispute with a former customer. The margin increase in domestic
closures and Canada is primarily the result of improved cost control
efforts and the benefits of a restructuring completed in the fall of
1998. The increase in domestic gross margin was impacted by an increase
in resin costs associated with a worldwide increase in oil prices in the
fourth quarter that, due to timing and competitive issues, the Company
was unable to immediately pass on to all customers. The United Kingdom
margins improved in fiscal year 1999 as compared to prior years resulting
from a more profitable product mix and a shift from using outside
subcontractors and imported caps to manufacturing more closures in their
own facility. Canadian margins should continue to improve due to the
discontinuance of less profitable product lines in eastern Canada during
fiscal year 1999. Overall, fiscal year 1999 direct materials, labor and
overhead costs represented 40%, 16% and 23% of sales, respectively, which
are comparable with prior years.
Selling, general and administrative expense increased from $23.6
million in fiscal year 1998 to $28.0 million in fiscal 1999 and increased
as a percentage of sales from 13.4% for fiscal 1998 to 14.7% for fiscal
1999. These increases are primarily due to additional expenses related
to the China, Mexico and Sand Hill Systems operations (Sand Hill Systems
having been wholly-owned by the Company at the end of fiscal year 1999,
although the Company currently has a less than 25% interest in Sand Hill
Systems), and to increased expenses in the United Kingdom resulting
primarily from increased personnel levels. Domestically, increased bonus
costs and legal expenses also contributed to the increase.
Research and development expenses decreased from $3.4 million and
1.9% of sales in fiscal year 1998 to $2.7 million and 1.4% of sales in
fiscal year 1999. The decrease in research and development expenses was
primarily due to reduced expenditures for external consulting expenses
and prototype costs.
Amortization of intangibles (consisting of amortization of patents
and technology licenses, goodwill, customer lists and covenants not to
compete) totaled $2.6 million for fiscal year 1999 as compared to $3.1
million for fiscal 1998. The decrease is primarily a result of certain
covenants of the Canadian operations becoming fully amortized at the end
of fiscal year 1998 offset somewhat by increased goodwill amortization
related to the purchase of the assets of Allied Tool and the remaining
interest in PPI Mexico.
Due to the effect of the factors summarized above, income from
operations increased $5.9 million, or 77.8%, to $13.6 million for fiscal
1999, as compared to $7.7 million for fiscal 1998, and increased as a
percentage of sales from 4.4% in fiscal 1998 to 7.2% in fiscal 1999.
Interest income decreased to $181,000 in fiscal year 1999 from
$498,000 in fiscal year 1998 due to generally lower levels of excess cash
available for investment.
Interest expense increased $648,000 to $14.4 million in fiscal 1999
as compared to $13.8 million for fiscal 1998. The increase was due to
increased borrowings under the Company's line of credit to finance
acquisitions and to payoff certain debt balances related to the Company's
western Canadian subsidiary and the addition of interest from PPI Mexico
operations.
Amortization of debt financing costs increased $62,000 to $546,000 in
fiscal 1999 as compared to $484,000 for the same period in fiscal 1998.
The increase was due to the write-off of the western Canada debt financing
costs resulting from the May 1999 payoff of the Canadian term loan note
and the Canadian revolver loan note. Debt financing costs are
attributable to the $110 million senior notes issued in October 1995 and
debt financing costs incurred in western Canada.
Net loss decreased to $.6 million in fiscal 1999 compared to a $4.4
million loss in fiscal 1998.
Fiscal Year Ended August 31, 1998 Compared to Fiscal Year Ended
August 31, 1997
Sales increased $5.8 million, or 3.4%, from $170.4 million for fiscal
1997 to $176.2 million for fiscal 1998. Of the increase, $4.1 million
was attributable to increased sales of closures in the United Kingdom and
$3.6 million was due to increased sales from the Canadian operations
(increased bottle sales of $9.0 million offset by a decrease in closures
sales of $5.4 million). Domestic closure operations also contributed a
$1.7 million increase in sales offset by a decrease of $3.6 million in
equipment sales. The increase in domestic sales was due mainly to price
increases in most product lines offset by sales volume decreases in
fitment and widemouth closures. In the United Kingdom and Canada, sales
fluctuations were primarily the result of sales volume increases rather
than pricing.
Gross profit increased $598,000, or 1.5%, to $40.8 million for fiscal
1998, as compared to $40.2 million for fiscal 1997 and decreased slightly
as a percentage of sales from 23.6% in 1997 to 23.2% in 1998. The margin
increase was due primarily to improving margins in the United Kingdom of
$1.5 million and the equipment division in the United States of $2.4
million, offset by decreases in Canadian and domestic closures margins.
The Company expects its United Kingdom and Canadian operations to
continue to comprise a larger percentage of its sales volume as they
increase market share and become more self sufficient. The United
Kingdom margins improved in fiscal year 1998 as compared to prior years
due to a shift from using outside subcontractors and imported caps to
manufacturing more closures in its own facility. Equipment margins were
low in fiscal year 1997 and increased in 1998 due mainly to the
favorable settlement of a pricing contract dispute in 1998 with a former
customer. Domestic closures margins decreased approximately $800,000 for
fiscal year 1998 as compared to fiscal year 1997 due primarily to
increases in labor costs and depreciation. Overall, direct materials
and overhead costs remained constant at about 42% and 20% of sales,
respectively, and labor costs have increased $2.7 million from fiscal
year 1997 to fiscal year 1998.
Selling, general and administrative expense decreased slightly from
$23.9 million in fiscal year 1997 to $23.6 million in fiscal 1998 and
decreased as a percentage of sales from 14.0% for fiscal 1997 to 13.4%
for fiscal 1998. These decreases were primarily due to the decrease in
bonus costs in fiscal 1998 as compared to 1997 as a result of not
achieving certain operating results, offset by increases in consulting
and legal fees and relocation expenses.
Research and development expenses remained constant at approximately
$3.4 million and 2.0% of sales for fiscal year 1998 and fiscal year 1997.
These costs were affected by increased expenditures for patent and
consulting fees for new product development, offset by a reduction in
prototype costs.
Amortization of intangibles (consisting of amortization of patents
and technology licenses, goodwill, customer lists and covenants not to
compete) totaled $3.1 million for fiscal year 1998 as compared to $3.3
million for fiscal 1997. The decrease was primarily due to a decrease in
goodwill and covenant amortization due to the write-off of $1.7 million
of goodwill in 1997.
The Company took measures to improve productivity and quality in its
core business starting in December 1996 when it implemented 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. In fiscal year 1998, the Company took further measures to
improve profitability and announced staffing reductions and the closing
of its Fort Worth, Texas facility effective October 30, 1998. The
Company recorded a charge of $3.1 million in 1998 related to this
restructuring, which consisted primarily of a write-off of intangible
assets of $1.3 million, employee related costs of $1.2 million and
facility writedown and maintenance costs of $500,000.
Due to the effect of the factors summarized above, income from
operations increased $2.2 million, or 39.0%, to $7.7 million for fiscal
1998, as compared to $5.5 million for fiscal 1997, and increased as a
percentage of sales from 3.2% in fiscal 1997 to 4.4% in fiscal 1998.
Interest income decreased slightly to $498,000 in fiscal year 1998
from $587,000 in fiscal year 1997 due to generally lower levels of excess
cash available for investment.
Interest expense increased $416,000 to $13.8 million in fiscal 1998
as compared to $13.4 million for fiscal 1997. The increase was due to
increased borrowings under the Company's line of credit.
Amortization of debt financing costs decreased $75,000 to $484,000 in
fiscal 1998 as compared to $559,000 for the same period in fiscal 1997.
Debt financing costs were attributable to the $110 million senior notes
issued in October 1995 and to a lesser extent, debt financing incurred in
western Canada.
Net loss decreased to $4.4 million in fiscal 1998 compared to a $7.4
million loss in fiscal 1997.
Liquidity and Capital Resources
Fiscal Year Ended August 31, 1999 Compared to Fiscal Year Ended
August 31, 1998
The Company has relied primarily upon cash from operations and
borrowings from financial institutions and, to a lesser extent, sales of
its common stock to finance its operations, repay long-term indebtedness
and fund capital expenditures and acquisitions. On October 2, 1995,
the Company completed a $110 million senior notes offering that mature
on October 1, 2005 and bear interest at the rate of 10.75% per annum.
The net proceeds 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 credit facility and
senior subordinated notes. At August 31, 1999, the Company had cash and
cash equivalents of $2.4 million, a decrease from $3.6 million at
August 31, 1998.
Cash provided by operations totaled $11.6 million and $9.1 million
in fiscal years 1999 and 1998, respectively. Net cash provided by
operations for both fiscal years was the result of a net loss offset
primarily by non-cash charges for depreciation and amortization.
Working capital increased $2.3 million in fiscal 1999 to $17.0 million,
as compared to $14.7 million in fiscal 1998, primarily as a result of a
decrease in current portion of long-term debt, accrued liabilities and
accrued compensation partially offset by an increase in accounts
payable.
Cash used in investing activities was $21.4 million in fiscal year
1999 as compared to $16.4 million in fiscal year 1998. This consisted
primarily of additions to property, plant and equipment of $16.6 million
and $21.4 million in fiscal years 1999 and 1998, respectively. Fiscal
year 1999 also included the acquisition of the remaining interest in PPI
Mexico and the acquisition of the assets of Allied Tool by the Company's
newly formed subsidiary, Portola Allied Tool, for approximately $3.0
million and $2.2 million, respectively. Cash used in investing
activities was reduced by $945,000 in 1999 and $2.4 million in 1998 by
proceeds from the sale of property, plant and equipment, primarily
related to the disposition of the Company's Bettendorf, Iowa facilities
in 1999 and its Portland, Oregon facilities in 1998. Cash used in
investing activities in fiscal year 1998 was also reduced by $1.7
million in proceeds from the sale of marketable securities related to
the Company's investment in Suncoast, Inc.
At August 31, 1999, the Company had total indebtedness of $137.1
million, $110 million of which was attributable to the Company's senior
notes. Of the remaining indebtedness, $26 million was attributable to
the Company's senior credit facility and the remainder was principally
comprised of foreign subsidiary loans. In October 1995, the Company
entered into a five-year senior secured revolving credit facility of up
to $35.0 million, subject to a borrowing base of eligible receivables,
inventory, plus property plant and equipment, net. 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,
or in certain sales of assets, (vi) engage in certain transactions with
affiliates, (vii) make restricted junior payments, and (viii) declare or
pay dividends. On August 11, 1999 the Company signed a letter of intent
to enter into a new five-year senior secured credit facility of up to
$50.0 million for operating purposes with an additional $15.0 million
available for acquisition purposes, subject to a borrowing base and
covenants similar to those in the existing senior credit facility.
At August 31, 1999, the Company had $2.4 million in cash and cash
equivalents as well as unused borrowing capacity of approximately $9.1
million under the revolving credit facility. Management believes that
these resources and increased resources from the new credit facility,
together with anticipated cash flows from operations, will be adequate
to fund the Company's operations, debt service requirements and capital
expenditures through fiscal year 2000. However, there can be no
assurance that additional capital beyond the amounts currently
forecasted by the Company will not be required or that any such required
additional capital will be available on reasonable terms, if at all, at
such time or times as required by the Company.
Fiscal Year Ended August 31, 1998 Compared to Fiscal Year Ended
August 31, 1997
The Company relied primarily upon cash from operations and
borrowings from financial institutions and, to a lesser extent, sales of
its common stock to finance its operations, repay long-term indebtedness
and fund capital expenditures and acquisitions. On October 2, 1995,
the Company completed a $110 million senior notes offering that mature
on October 1, 2005 and bear interest at the rate of 10.75% per annum.
The net proceeds 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 credit 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, 1998, the Company had cash and cash equivalents
of $3.6 million, a slight increase from $3.5 million at August 31,
1997.
Cash provided by operations totaled $9.1 million and $14.7 million
in fiscal years 1998 and 1997, respectively. Net cash provided by
operations for both fiscal years was the result of a net loss offset
primarily by non-cash charges for depreciation and amortization.
Working capital increased $3.0 million in fiscal 1998 to $14.7 million,
as compared to $11.7 million in fiscal 1997, primarily as a result of a
decrease in accounts payable and increases in inventories and deferred
income taxes partially offset by an increase in accrued expenses.
Cash used in investing activities was $16.4 million in fiscal year
1998 as compared to $20.8 million in fiscal year 1997. This consisted
primarily of additions to property, plant and equipment of $21.4 million
and $23.1 million in fiscal years 1998 and 1997, respectively, and for
fiscal year 1997, also included the acquisition of the Company's eastern
Canadian subsidiary (formerly Rapid Plast and now named Portola
Packaging, Ltd.) for approximately $2.1 million. Cash used in investing
activities was reduced by $2.4 million in 1998 and $2.5 million in 1997
in proceeds from the sale of property, plant and equipment, primarily
related to the disposition of the Portland, Oregon facilities in 1998.
Cash used in investing activities in fiscal year 1998 was also reduced
by $1.7 million in proceeds from the sale of marketable securities
related to the Company's investment in Suncoast, Inc. In addition, the
Company was subject to certain future obligations regarding noncompete
and bonus arrangements as a result of the Nepco acquisition. At August
31, 1998, the present value of these obligations was $1.1 million.
Until fiscal year 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 royalties 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, 1998, the Company had total indebtedness of $130.7
million. In October 1995, the Company entered into a five-year senior
secured revolving credit facility of up to $35.0 million, subject to a
borrowing base of eligible receivables, inventory, plus property plant
and equipment, net. 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, 1998, the Company had $3.6 million in cash and cash
equivalents as well as unused borrowing capacity of approximately $19.6
million under the revolving credit facility.
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. However, during the fourth quarter of
fiscal year 1999, the Company experienced a rapid increase in resin
costs that it was unable to immediately pass on to all customers. In
recent years, the Company has benefited from relatively stable 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. In fiscal
1999, 46% of sales occurred in the first half of the year (September
through February) while 54% of sales were generated in the second half
(March through August). The effect of seasonality on income from
operations is usually somewhat more pronounced.
Income Taxes
The relationship of income tax expense to income before income taxes
is affected by nondeductible goodwill and other intangibles arising
from the Company's acquisitions (see Note 13 to Consolidated Financial
Statements).
Recent Accounting Pronouncements
In fiscal year 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 130 established
standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements (see
Note 3 to Consolidated Financial Statements). SFAS No. 131 supercedes
SFAS No. 14, "Financial reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the
"management approach". The management approach designates the internal
organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable
segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of both
SFAS No. 130 and SFAS No. 131 did not effect results of operations or
financial position, however SFAS No. 131 did effect the disclosure of
segment information (see Note 14 to Consolidated Financial Statements).
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 established accounting and reporting
standards for derivative instruments and hedging activities and requires
the recognition of all derivatives in the balance sheet at their fair
market values. The implementation date of this standard was recently
delayed by the issuance of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133" and it is not effective for the Company until
fiscal year 2001. The impact of adopting this statement on the
Company's current financial statements would not be material.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits, rather than four, to define the applicable year.
Software programs and hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations causing disruptions of operations, including a temporary
inability to engage in normal business activities.
The Company has substantially completed all four phases of its Year
2000 resolution process (assessment, remediation, implementation and
testing) related to its material systems, including: software systems,
communication systems, machinery used in the production process and
systems that interface directly with outside parties. Except for the
completion of certain tasks related to the integration of new accounting
systems at two foreign locations and a new domestic subsidiary, which are
to be completed in November 1999, these systems are all Year 2000 ready.
However, there are no assurances that all corrective measures necessary
have been identified or all issues resolved.
The Company has also queried its important suppliers, service
providers and customers and except for a potential increase in demand
towards the end of the calendar year, has not been made aware of any
issues that may materially impact its results of operations, liquidity or
capital. However, contingency plans have been developed that include
steps to deal with these issues as well as other problems that may arise
with suppliers or with internal systems.
The Company has used mainly internal personnel to resolve its Year
2000 issues and has funded total project costs through operating cash
flows. Of the total estimated project costs of $400,000, approximately
$350,000 was attributable to external costs which have been capitalized.
Any remaining budgeted amounts have been or will be expensed as
incurred.
The Company has modified or replaced portions of hardware and
software so that its systems properly recognize dates beyond December 31,
1999 and believes that with these modifications and replacements, the
Year 2000 issue will be mitigated. The Company also believes the
contingency plans developed will allow it to appropriately address any
unforeseen Year 2000 issues that may arise. However, the operational
effectiveness of the Company in the Year 2000 will be partly based on the
ability of its suppliers and customers to successfully complete their
Year 2000 resolution processes. While the Company believes it has taken
reasonable steps to mitigate supplier shortages, the failure of suppliers
to deliver raw materials on time or for customers to buy product in
normal quantities and frequencies could have a material impact on the
Company's financial results.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of August 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
August 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended August 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Portola Packaging, Inc. and its Subsidiaries at
August 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended August 31,
1999, in conformity with generally accepted accounting principles.
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 of
these statements in accordance with generally accepted auditing
standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
November 11, 1999
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
August 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $2,372 $3,570
Accounts receivable, net of allowance for doubtful
accounts of $1,366 and $1,727, respectively....... 26,151 22,887
Inventories......................................... 13,363 11,260
Other current assets................................ 799 1,356
Deferred income taxes............................... 1,952 2,516
--------- ---------
Total current assets.............................. 44,637 41,589
Property, plant and equipment, net.................... 91,637 85,874
Goodwill, net of accumulated amortization of
$5,953 and $4,620, respectively................... 15,402 12,086
Patents, net of accumulated amortization of
$4,992 and $4,722, respectively................... 2,417 1,814
Covenants not to compete, net of accumulated
amortization of $6,021 and $5,286, respectively... 86 607
Debt financing costs, net of accumulated
amortization of $1,867 and $1,332, respectively... 2,508 2,982
Other assets, net of accumulated amortization
of $1,370 and $1,115, respectively................ 757 3,908
--------- ---------
Total assets...................................... $157,444 $148,860
========= =========
LIABILITIES, REDEEMABLE WARRANTS,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt................... $820 $2,772
Accounts payable.................................... 10,063 8,138
Book overdraft...................................... 3,338 --
Accrued liabilities................................. 6,139 7,353
Accrued compensation................................ 2,138 3,440
Accrued interest.................................... 5,134 5,224
--------- ---------
Total current liabilities......................... 27,632 26,927
Long-term debt, less current portion.................. 136,275 127,936
Other long term obligations........................... 917 777
Deferred income taxes................................. 5,295 6,666
--------- ---------
Total liabilities................................. 170,119 162,306
--------- ---------
Commitments and contingencies (Notes 9 and 10)
Minority interest..................................... 1,120 --
Redeemable warrants to purchase Class A common stock.. 12,222 7,959
--------- ---------
Common stock and other shareholders' deficit:
Class A convertible common stock of $.001 par value:
Authorized: 5,203 shares; Issued and
outstanding: 2,135 shares in 1999 and 1998...... 2 2
Class B, Series 1, common stock of $.001 par value:
Authorized: 17,715; Issued and outstanding:
8,769 shares in 1999 and 8,636 shares in
1998............................................. 8 8
Class B, Series 2, convertible common stock of
$.001 par value:
Authorized: 2,571 shares; Issued and
outstanding: 1,171 shares in 1999 and 1998....... 1 1
Additional paid-in capital............................ 8,171 7,797
Notes receivable from shareholders.................... (375) (463)
Accumulated other comprehensive loss.................. (1,234) (1,039)
Accumulated deficit................................... (32,590) (27,711)
--------- ---------
Total common stock and other shareholders'
equity (deficit)................................ (26,017) (21,405)
--------- ---------
Total liabilities, redeemable warrants, common
stock and other shareholders' equity (deficit).. $157,444 $148,860
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended August 31,
---------- ----------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales................................... $190,661 $176,234 $170,443
Cost of sales........................... 143,792 135,420 130,227
---------- ---------- ----------
Gross profit.......................... 46,869 40,814 40,216
---------- ---------- ----------
Selling, general and administrative..... 27,941 23,564 23,915
Research and development................ 2,717 3,425 3,349
Amortization of intangibles............. 2,583 3,074 3,322
Restructuring costs..................... -- 3,084 4,114
---------- ---------- ----------
33,241 33,147 34,700
---------- ---------- ----------
Income from operations................ 13,628 7,667 5,516
---------- ---------- ----------
Other (income) expense:
Interest income....................... (181) (498) (587)
Interest expense...................... 14,443 13,795 13,379
Amortization of debt financing costs.. 546 484 559
Minority interest..................... (97) -- --
Gain from sale of securities.......... -- (750) --
Loss (gain) from sale of property,
plant and equipment................. 82 (714) 88
Other (income) expense, net........... (197) 332 120
---------- ---------- ----------
14,596 12,649 13,559
---------- ---------- ----------
Loss before income taxes............... (968) (4,982) (8,043)
Income tax benefit...................... (352) (571) (632)
---------- ---------- ----------
Net loss................................ ($616) ($4,411) ($7,411)
========== ========== ==========
Number of shares used in computing
per share amounts..................... 11,960 11,792 11,766
========== ========== ==========
Basic and diluted loss per common
share................................. ($0.05) ($0.37) ($0.63)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ....................................... ($616) ($4,411) ($7,411)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization................. 18,060 16,494 15,600
Write-off of intangibles and impairment losses -- 1,658 1,720
Deferred income taxes......................... (612) (846) (764)
Loss (gain) on property and equipment
dispositions................................ 82 (714) 88
Gain on sale of marketable securities......... -- (750) --
Provision for doubtful accounts............... (16) 379 823
Provision for excess and obsolete inventories. 149 (115) 32
Minority interest............................. (97) -- --
Changes in working capital:
Accounts receivable......................... (1,652) (322) 267
Inventories................................. (1,310) (1,363) 1,956
Other current assets........................ (876) (378) 477
Accounts payable............................ (73) (3,980) (508)
Accrued liabilities and compensation........ (1,337) 3,156 2,485
Accrued interest............................ (90) 265 (21)
--------- --------- ---------
Net cash provided by operating activities... 11,612 9,073 14,744
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment...... (16,604) (21,436) (23,101)
Proceeds from sale of property, plant and
equipment...................................... 945 2,410 2,500
Payment for Portola Packaging, Inc. Mexico
acquisition.................................... (3,049) -- --
Payment for Allied Tool, Inc. acquisition....... (2,204) -- --
Payment for Rapid Plast acquisition............. -- -- (2,138)
Proceeds from short term investments............ -- 1,744 --
Additions to intangible assets.................. (861) -- --
Repayment of notes receivable................... 12 127 117
Decrease in other assets............. 326 777 1,781
--------- --------- ---------
Net cash used in investing activities......... (21,435) (16,378) (20,841)
--------- --------- ---------
Cash flows from financing activities:
Increase in book overdraft...................... 3,338 -- --
Borrowings under long-term debt arrangements.... 10,870 11,473 15,551
Repayments of long-term debt arrangements....... (5,533) (2,554) (11,727)
Payment of loan fees............................ (50) -- (47)
Issuance of common stock........................ 200 313 319
Decrease (increase) in notes receivable
from shareholders............................. 88 (23) (15)
Payments on covenants not to compete
agreements.................................... (167) (682) (1,347)
Repurchase of common stock...................... (21) (1,177) (939)
--------- --------- ---------
Net cash provided by financing activities..... 8,725 7,350 1,795
--------- --------- ---------
Effect of exchange rate changes on cash........... (100) 54 (24)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents.. (1,198) 99 (4,326)
Cash and cash equivalents at beginning of year.... 3,570 3,471 7,797
--------- --------- ---------
Cash and cash equivalents at end of year.......... $2,372 $3,570 $3,471
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Total
Common
Stock
Notes Accumu- and
Class B Receiv- lated Other
----------------------------- Addi- able Other Share- Total
Class A Series 1 Series 2 tional from Compre- Accumu- holders' Compre-
-------------- -------------- -------------- Paid-in Share- hensive lated Equity hensive
Shares Amount Shares Amount Shares Amount Capital holders Loss Deficit (Deficit) Loss
------- ------ ------- ------ ------- ------ --------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1996. 2,135 $2 8,507 $9 1,171 $1 $9,280 ($425) ($178) ($12,490) ($3,801)
Repurchases of common
stock................. -- -- (178) (1) -- -- (938) -- -- -- (939)
Exercise of stock
options............... -- -- 152 -- -- -- 319 -- -- -- 319
Increase in value
of stock purchase
warrants.............. -- -- -- -- -- -- -- -- -- (1,115) (1,115)
Increase in notes
receivable from
shareholders.......... -- -- -- -- -- -- -- (15) -- -- (15)
Net loss............... -- -- -- -- -- -- -- -- -- (7,411) (7,411) ($7,411)
Other comprehensive
loss.................. -- -- -- -- -- -- -- -- (87) -- (87) (87)
------- ------ ------- ------ ------- ------ --------- -------- -------- --------- --------- --------
Balance, August 31, 1997. 2,135 2 8,481 8 1,171 1 8,661 (440) (265) (21,016) (13,049) (7,498)
Repurchases of common
stock................. -- -- (223) -- -- -- (1,177) -- -- -- (1,177)
Issuance of common
stock................. -- -- 19 -- -- -- 94 -- -- -- 94
Exercise of stock
options............... -- -- 359 -- -- -- 219 -- -- -- 219
Increase in value
of stock purchase
warrants.............. -- -- -- -- -- -- -- -- -- (2,284) (2,284)
Increase in notes
receivable from
shareholders.......... -- -- -- -- -- -- -- (23) -- -- (23)
Net loss............... -- -- -- -- -- -- -- -- -- (4,411) (4,411) (4,411)
Other comprehensive
loss.................. -- -- -- -- -- -- -- -- (774) -- (774) (774)
------- ------ ------- ------ ------- ------ --------- -------- -------- --------- --------- --------
Balance, August 31, 1998. 2,135 2 8,636 8 1,171 1 7,797 (463) (1,039) (27,711) (21,405) (5,185)
Repurchases of common
stock................. -- -- (4) -- -- -- (21) -- -- -- (21)
Issuance of common
stock................. -- -- 9 -- -- -- 41 -- -- -- 41
Exercise of stock
options............... -- -- 128 -- -- -- 354 -- -- -- 354
Increase in value
of stock purchase
warrants.............. -- -- -- -- -- -- -- -- -- (4,263) (4,263)
Decrease in notes
receivable from
shareholders.......... -- -- -- -- -- -- -- 88 -- -- 88
Net loss............... -- -- -- -- -- -- -- -- -- (616) (616) (616)
Other comprehensive
loss.................. -- -- -- -- -- -- -- -- (195) -- (195) (195)
------- ------ ------- ------ ------- ------ --------- -------- -------- --------- --------- --------
Balance, August 31, 1999. 2,135 $2 8,769 $8 1,171 $1 $8,171 ($375) ($1,234) ($32,590) ($26,017) ($811)
======= ====== ======= ====== ======= ====== ========= ======== ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Operations:
Portola Packaging, Inc. and Subsidiaries (the "Company") designs,
manufactures and markets tamper-evident plastic closures and related
equipment used for packaging applications in dairy, fruit juice, bottled
water, institutional foods and other non-carbonated beverage products.
The Company's Canadian and Mexican subsidiaries also design, manufacture
and market plastic bottles. The Company has production facilities
throughout the United States, Canada, the United Kingdom and Mexico.
The Company also has facilities in China and Europe through joint
venture agreements.
Principles of Consolidation:
The consolidated financial statements of the Company include the
financial statements of Portola Packaging, Inc. and subsidiaries that
are controlled by the Company. Investments in entities, generally joint
venture companies over which Portola has significant influence, are
accounted for by the equity method and are included in other assets.
The Company's share of income or loss from joint ventures is included in
the results of operations and is not material for fiscal year 1999. All
material intercompany accounts and transactions between consolidated
entities have been eliminated.
Consistent with a plan to modify the reporting structure of the
Company's international operations, in May 1999, a Dutch holding company
known as Portola Packaging Holding B.V. (Portola BV) was established in
the Netherlands. The Company plans to transfer its ownership of all
foreign subsidiaries and joint ventures to Portola BV, which will then
be consolidated with the domestic operations of the Company. As of
August 31, 1999, only Portola Packaging, Inc.'s 50% ownership interest
in Cap Snap Europe Gmbh (Cap Snap Europe), its Austrian joint venture,
had been transferred to Portola BV.
Revenue Recognition:
The Company recognizes revenue upon product shipment.
Cash Equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Investments:
Investments at August 31, 1997 consisted of equity securities in one
company. The investments were considered to be available-for-sale and
therefore were carried at fair market value. Unrealized holding gains
and losses on such securities were reported net of related taxes as a
separate component of common stock and other shareholders' equity
(deficit). Realized gains and losses on sales of all such investments
were reported in earnings and computed using the specific cost
identification method. The Company realized a gain of $750,000 on the
sale of securities in March 1998.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and depreciated on
the straight-line basis over estimated useful lives, which range from
three to thirty-five years. The cost of maintenance and repairs is
charged to income as incurred. 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.
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 three to thirteen years). During
fiscal year 1999, the Company capitalized approximately $860,000 of
litigation costs related to the successful defense of certain patents
used in products marketed by its UK subsidiary, Portola Packaging Ltd.
(U.K.). These costs are being amortized on a straight line basis over
the remaining useful life of the related patents. Goodwill,
representing the excess of cost over the net tangible and identifiable
intangible assets, recorded in connection with acquisitions of Nepco,
Portola Packaging Canada Ltd., Portola Packaging Ltd., Portola Packaging
Ltd. (U.K.), Portola Packaging, Inc. Mexico, and the assets of Allied
Tool acquired by Portola Allied Tool, Inc., is amortized on a straight-
line basis over periods ranging from 3 to 25 years, respectively.
Debt Financing Costs:
Debt financing costs are amortized using the interest method over the
term of the related loans.
Book Overdraft:
Under the Company's cash management system, checks issued but not
presented to banks resulting in overdraft balances for accounting
purposes are classified as "book overdrafts" in the accompanying
consolidated balance sheet.
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 that deferred taxes be computed annually on an asset and
liability basis 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 financial instruments are
financially sound and, accordingly, minimal credit risk exists with
respect to these financial instruments.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's products are principally sold to entities in the food
and beverage industries in the United States, Canada, the United
Kingdom, Europe and Mexico. Ongoing credit evaluations of customers'
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.
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 common stock and shareholders' equity (deficit).
Net losses arising from foreign currency transactions for the years
ended August 31, 1999, 1998, and 1997 totaled $165,000, $380,000, and
$120,000, respectively, and are included in "Other (income) expense" in
the accompanying consolidated statements of operations.
Computation of Loss Per Common Shares:
Basic loss per share is computed as net loss divided by the weighted
average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and other
convertible securities. Common equivalent shares are excluded from the
computation of net loss per share as their effect is anti-dilutive.
The following is a reconciliation of the net loss and the number
of shares used in the basic and diluted loss per share calculations (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year ended August 31,
---------- ---------- ----------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss................................. ($616) ($4,411) ($7,411)
========== ========== ==========
Shares used in per share calculations.... 11,960 11,792 11,766
========== ========== ==========
Basic and diluted loss per share......... ($0.05) ($0.37) ($0.63)
========== ========== ==========
</TABLE>
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 fiscal year-end 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosure About
Segments of an Enterprise and Related Information". SFAS No. 130
established standards for reporting and displaying comprehensive income
and its components in a full set of general purpose financial statements
(Note 3). SFAS No. 131 supercedes SFAS No. 14, "Financial reporting for
Segments of a Business Enterprise", replacing the "industry segment"
approach with the "management approach". The management approach
designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of
the Company's reportable segments. SFAS 131 also requires disclosures
about products and services, geographic areas, and major customers. The
adoption of both SFAS No. 130 and SFAS No. 131 did not affect results of
operations or financial position, however SFAS No. 131 did affect the
disclosure of segment information (Note 14).
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133
established accounting and reporting standards for derivative
instruments and hedging activities and requires the recognition of all
derivatives in the balance sheet at their fair market values. The
implementation date of this standard was recently delayed by the
issuance of SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133" and it is not effective for the Company until fiscal year 2001.
The impact of adopting this statement on the Company's current
financial statements would not be material.
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 long term debt except for the
senior notes, approximates fair value. The fair value of the senior
notes is estimated to be approximately $104.1 million (Note 7).
Reclassifications:
Certain prior year balances have been reclassified to conform with
the current year financial statement presentation.
2. New Business Activity:
In January 1999, a wholly-owned subsidiary of the Company, Sand Hill
Systems, Inc. (SHS), commenced operations. SHS' purpose is to develop
technology that facilitates internet based commerce between businesses.
Subsequent to the end of fiscal year 1999, the Company's interest in
SHS was reduced to less than 25% (Note 18). The Company currently
provides SHS with office space and various other services in connection
with a service agreement entered into by SHS and the Company on July 1,
1999 (Note 9). During fiscal year 1999, the Company acquired 65%
interests in two newly formed limited liability companies, Associated
Sales Group, LLC (ASG) and Leonard S. Slaughter and Associates, LLC
(LSA). ASG and LSA employ sales representatives of the Company and
generate commissions based on sales made primarily to the Company's
customers.
Joint Ventures
In April 1999, the Company entered into a joint venture with Kimex
Group, LLC (Kimex) to form Sterling Containers, LLC (Sterling), a 50%
owned company that produces and sells five gallon PET water bottles out
of three of Portola's domestic plants. Sterling leases the bottle
making machinery from Kimex and plant space and support equipment from
the Company.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 1998, the Company entered into a joint venture with
Greiner A.G. of Austria to form Cap Snap Europe Gmbh (CSE), a 50% owned
venture located in Austria. CSE currently sells closures for five
gallon water bottles that are produced primarily by the Company's United
Kingdom subsidiary. CSE also has a 50% ownership interest in Watertek,
a joint venture in Turkey which produces and sells five gallon water
bottles for the European and Middle Eastern market places (Note 9).
The Company maintains a 55% ownership interest in Shanghai Portola
Packaging LLC (SHPPC), a joint venture located in the Shanghai province
of China that manufactures and sells closures for the Asian
marketplace.
Acquisitions
Effective July 27, 1999, the Company completed the acquisition of
the remaining interest in PPI Mexico for a purchase price of $3.0
million. At December 1, 1998, the Company had increased its equity
interest in PPI Mexico from 50% to 75% as a result of the Company's
claim against its joint venture partner for 50% of the joint venture
partner's interest in PPI Mexico (i.e., a 25% interest in PPI Mexico) in
connection with the foreclosure by a Mexican lender on a loan to PPI
Mexico, for which this 25% interest served as part of the collateral for
the loan. The Company paid the lender $1.5 million pursuant to a
collateral agreement supporting the promissory note payable by PPI
Mexico, and converted $1.5 million of debt to equity in PPI Mexico. PPI
Mexico is engaged in the manufacture and distribution of plastic water
bottles and plastic closures. The transaction has been accounted for as
a purchase and the results of operations have been consolidated with the
Company. Consideration for the acquisition was allocated to goodwill in
total.
On March 31, 1999, Portola Allied Tool, Inc. (Portola Allied), a
wholly-owned subsidiary of the Company, purchased certain operating and
intangible assets and paid off certain liabilities of Allied Tool, Inc.,
for a total purchase price of $2.2 million. Portola Allied is a
Delaware corporation headquartered in Michigan and is engaged primarily
in the manufacture and sale of tooling and molds used in the blowmolding
industry. The acquisition was accounted for as a purchase and
accordingly, the purchase price has been allocated to the underlying
assets acquired and liabilities based on their respective estimated fair
values with the excess purchase price over the estimated fair values of
$441,000 allocated to goodwill.
On September 1, 1996, the Company completed the acquisition of Rapid
Plast for a purchase price of $2.1 million. Rapid Plast was amalgamated
with the company formed to acquire the capital stock of Rapid Plast, and
now operates under the name Portola Packaging Ltd. Portola Packaging
Ltd. is engaged in manufacturing and distributing plastic bottles,
primarily in eastern Canada. The transaction was accounted for as a
purchase and the excess purchase price over the estimated fair values of
the underlying assets acquired of $554,000 was allocated to goodwill.
The results of operations subsequent to the acquisition date have been
consolidated with the Company.
PPI Mexico, Portola Allied and Portola Packaging Ltd. are being
operated as "restricted subsidiaries" pursuant to the terms of the
Senior Revolving Credit Facility and the Senior Note Indenture, each of
which was entered into in October 1995.
On the basis of a proforma consolidation of the results of
operations as if the acquisitions had occurred at the beginning of
the applicable fiscal years, proforma revenues and proforma net loss
would not have been materially different from the reported amounts.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Other Comprehensive Loss:
Other comprehensive loss is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Change in net unrealized loss
on marketable securities.............. $ -- $92 $78
Cumulative translation adjustment.......... (195) (866) (165)
--------- --------- ---------
Other comprehensive loss................... ($195) ($774) ($87)
========= ========= =========
</TABLE>
4. Restructuring:
The Company took measures to improve productivity and quality in its
core business starting in December 1996 when it implemented 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 its Bettendorf, Iowa plant in July 1997. The
Company recorded a restructuring charge of $4.1 million in fiscal 1997,
which consisted primarily of employee severance, impairment loss on
intangible assets, including $1.7 million of goodwill, and loss on
property, plant and equipment in connection with this restructuring
plan.
In fiscal year 1998, the Company took further measures to improve
profitability and announced staffing reductions and the closure of its
Fort Worth, Texas facility effective October 1998. The Company recorded
a restructuring charge of $3.1 million in fiscal year 1998, which
consisted primarily of impairment loss on intangible assets of $1.3
million, loss on property, plant and equipment and employee severance
costs.
5. Inventories (in thousands):
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Raw materials........................... $7,300 $5,429
Work in process......................... 1,145 1,606
Finished goods.......................... 4,918 4,225
----------- -----------
$13,363 $11,260
=========== ===========
</TABLE>
6. Property, Plant and Equipment (in thousands):
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Building and land....................... $22,124 $21,146
Machinery and equipment................. 133,109 116,569
Leasehold improvements.................. 5,168 4,204
----------- -----------
160,401 141,919
Less accumulated depreciation and
amortization.......................... (68,764) (56,045)
----------- -----------
$91,637 $85,874
=========== ===========
</TABLE>
Depreciation charged to operations was $15.0, $12.9 million
and $11.8 million for the years ended August 31, 1999, 1998 and 1997,
respectively.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Debt:
Current Portion of Long-Term Debt (in thousands):
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
United Kingdom Term Loan Note........... $380 $370
Canadian Term Loan Note................. -- 1,753
Canadian Revolver Loan Note............. -- 311
Canadian Regional Development Loan...... 54 51
Mexican Equipment Note.................. 139 --
Capital Lease Obligations............... 247 287
----------- -----------
$820 $2,772
=========== ===========
</TABLE>
Long-Term Debt (in thousands):
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Senior Notes............................ $110,000 $110,000
Senior Revolving Credit Facility........ 25,910 15,450
United Kingdom Term Loan Note........... -- 370
Canadian Term Loan Note................. -- 1,754
Canadian Regional Development Loan...... 54 103
Mexican Equipment Note.................. 42 --
Other................................... 54 --
Capital Lease Obligations............... 215 259
----------- -----------
$136,275 $127,936
=========== ===========
</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 payments of approximately $5.9 million are due semi-
annually on April 1 and October 1 of each year, commencing on April 1,
1996. The senior notes' indenture contains covenants and provisions
that restrict, among other things, the Company's ability to: (i) incur
additional indebtedness, (ii) incur liens on its property, (iii) make
investments, (iv) enter into guarantees and other contingent
obligations, (v) merge or consolidate with or acquire another person or
engage in other fundamental changes, (vi) engage in certain sales of
assets, (vii) engage in certain transactions with affiliates, (viii)
make restricted junior payments and (ix) declare or pay dividends.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Revolving Credit Facility:
Concurrently with the offering of senior notes, in October 1995, the
Company entered into a new five-year senior revolving credit facility of
up to $35.0 million, subject to a borrowing base of eligible
receivables, inventory, plus net property, plant and equipment, which
serve as collateral for the line. The credit facility, which expires
September 30, 2000, contains covenants and provisions that restrict,
among other things, the Company's ability to: (i) incur additional
indebtedness, (ii) incur liens on its property, (iii) make investments,
(iv) enter into guarantees and other contingent obligations, (v) merge
or consolidate with or acquire another person or engage in other
fundamental changes, or in certain sales of assets, (vi) engage in
certain transactions with affiliates, (vii) make restricted junior
payments, and (viii) declare or pay dividends. An unused fee is payable
on the facility based on the total commitment amount less 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. At August 31, 1999, the LIBOR loan rate was applied to the first
$15 million outstanding under the facility and the Bank Prime Loan rate
was applied to the balance.
At August 31, 1999, the Bank Prime Loan rate and the LIBOR loan rate
were 9.50% and 7.625%, respectively. On August 11, 1999, the Company
signed a letter of intent to enter into a new five-year senior secured
credit facility of up to $50.0 million for operating purposes with an
additional $15.0 million available for acquisition purposes, subject to
a borrowing base and covenants similar to those in the existing senior
credit facility.
United Kingdom Term Loan Note:
Portola Packaging Ltd. (U.K.) entered into a term loan agreement on
November 29, 1996 in connection with a joint venture closure development
project. The first principal payment was paid on November 29, 1997 in
the amount of $400,000. The final principal payment of $380,000 is due
in fiscal year 2000. The term note bears interest at 9%.
Canadian Term Loan Note:
On June 16, 1995, Portola Packaging Canada Ltd. entered into a $7.0
million term note agreement. Principal payments for the term note were
due quarterly. Interest was payable monthly based on the Canadian prime
rate and/or bankers acceptances. At August 31, 1998, the interest rate
was 9.0%. The loan agreement called for mandatory prepayments after
August 31, 1996, based upon financial calculations including excess cash
flow calculations. As of August 31, 1998, based upon the financial
calculations, no prepayments were required under the agreement. The
agreement also restricted the payment of cash dividends and principal
amounts on subordinated debt. In May 1999, the Company completed an
early redemption of the term notes using borrowings from the senior
revolving credit facility totaling $2.8 million.
Canadian Revolver Loan Note:
Concurrently with entering into the Canadian term loan note, Portola
Packaging Canada Ltd. entered into a revolving credit facility to
finance working capital requirements. The facility, which was to have
expired August 31, 2000, provided for borrowings based on eligible
accounts receivable and inventories up to the commitment amount of $1.9
million. The principal was payable upon demand. A standby fee was
payable on the facility based upon the total commitment amount less the
balance outstanding at a variable standby fee rate. The standby fee
rate at August 31, 1998 was 0.25% per year. In addition, interest was
payable monthly based on the Canadian prime rate and/or bankers
acceptances. At August 31, 1998, the interest rate was 8.75%. In May
1999, the Company completed an early redemption of the revolving credit
facility using borrowings from the senior revolving credit facility
totaling $1.3 million.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Canadian Regional Developmental Loan:
On September 1, 1996, Portola Packaging Ltd. assumed a $215,800
development loan from the Federal Office of Regional Development in
conjunction with the acquisition of Rapid Plast. The note is non-
interest bearing and is payable in eight semi-annual equal payments of
$26,975 beginning in February 1998.
Mexico Equipment Note:
On September 25, 1998, PPI Mexico entered into a $321,000 note
agreement related to the purchase of plant machinery. The note provides
for quarterly principal and interest payments of $27,000 through
September 25, 2002. The equipment note bears interest at 10.5%.
Capital Lease Obligations:
The Company acquired certain machinery and office equipment under
noncancelable capital leases. Property, plant and equipment includes
the following items held under capital lease obligations (in thousands):
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Equipment............................... $1,101 $975
Less accumulated amortization........... (334) (283)
----------- -----------
$767 $692
=========== ===========
</TABLE>
Aggregate Maturities of Long-Term Debt:
The aggregate maturities of long-term debt as of August 31, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ending August 31, Total
- ------------------------------------------ -----------
<S> <C>
2000................................... $820
2001................................... 26,224
2002................................... 46
2003................................... 5
2004................................... --
Thereafter............................. 110,000
-----------
$137,095
===========
</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 (in
thousands):
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Covenants under the acquisition of Nepco.. $ -- $1,064
Covenants under the acquisition of the
assets of Allied Tool, Inc.............. 97 --
United Kingdom Development Grant.......... 820 609
----------- -----------
Total obligations......................... 917 1,673
Less current portion (included in
accrued liabilities).................... -- (896)
----------- -----------
$917 $777
=========== ===========
</TABLE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
At August 31, 1999, future minimum rental commitments under
agreements with terms in excess of twelve months were as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Years Ending August 31, Total
- ------------------------------------------ -----------
<S> <C>
2000................................... $1,640
2001................................... 1,190
2002................................... 1,158
2003................................... 1,079
2004................................... 927
Thereafter............................. 6,083
-----------
$12,077
===========
</TABLE>
Base rent expense for the years ended August 31, 1999, 1998 and 1997
totaled $2.2 million, $1.7 million and $1.9 million, respectively.
On July 1, 1999, the Company entered into an agreement with SHS to
provide a total of $3.5 million in support services, retroactive to the
commencement of operations of SHS. The agreement terminates at the
earlier of March 31, 2000 or at that time when the services provided
under the agreement have reached an aggregate value of $3.5 million.
The Company received a promissory note for $3.5 million from SHS, which
bears interest at a rate equal to the base rate used in the Company's
Senior Revolving Credit facility less one-half of one percent. All
outstanding principal and interest amounts due on the note are payable
in full on the earlier date of July 1, 2003 or the occurrence of one of
the following events: nine months after a public offering equal to or
exceeding $20 million in the aggregate; the sale of all or
substantially all of the assets of SHS; or an event of default under
the note. As of August 31, 1999, the Company had not received any
payments related to the note, and as such, no income related to the
services agreement had been recognized. All intercompany transactions
between the Company and SHS have been eliminated in consolidation.
Subsequent to the end of fiscal year 1999, the Company's interest in SHS
was reduced from 100% to less than 25% (Note 18).
The Portola Allied Tool assets acquisition agreement, dated March
31, 1999, provides for contingent consideration of up to a maximum of
$700,000 to be paid over three years based on the achievement of future
sales growth targets, as measured on the anniversary date of the
acquisition. As of August 31, 1999, no contingent consideration had
been earned.
The Company has guaranteed $300,000 of a loan related to the
purchase of machinery for CSE's 50% owned Turkish joint venture,
Watertek (Note 2). The Company has also guaranteed additional loans of
$400,000 and committed to an additional investment of $200,000 for the
purchase of machinery for the Company's United Kingdom facility related
to the expansion of CSE's operations.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal
The Company is currently engaged in patent infringement litigation
with two separate parties who are seeking to have the court declare
certain patents owned by the Company invalid. These parties have also
included allegations of anti-trust violations in their complaints. The
Company believes that its patents are valid and is contesting these
allegations vigorously The Company is also subject to other legal
proceedings and claims arising out of the normal course of business.
Based on the facts currently available, management believes that the
ultimate amount of liability beyond reserves provided, if any, for any
pending actions will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company. However,
the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material impact on the
results of operations or liquidity of the Company in a particular
period.
10. Redeemable Warrants:
The Company has outstanding two warrants to purchase an aggregate of
2,492,741 shares of its Class A Common Stock which are held by certain
shareholders and senior lenders of the Company. A warrant to purchase
2,052,526 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 anti-dilution provisions. Effective June 30, 1999, this warrant
became redeemable at the option of the holder upon 60 days prior written
notice to the Company. The obligation of the Company to redeem the
warrant may be suspended if the redemption of the warrant would cause a
default or event of default under the Company's credit facilities. At
August 31, 1999, the Company's credit facilities did not permit
redemption of the warrant. Were the warrant holder able to exercise its
put option to redeem the warrant, the cost to the Company is estimated
to be approximately $11.6 million at August 31, 1999, based on the fair
value per share of the Company's common stock. After December 31, 2001,
the Company has the right to repurchase the warrant at a price equal to
the higher of the fair value per share of the Company's common stock or
an amount computed under an earnings formula in the warrant agreement.
A second warrant to purchase 440,215 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 per share as computed under a valuation formula set
forth in the warrant. The purchase obligation may be suspended under
certain circumstances 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.
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, 1999, the estimated redemption value of the
warrants exceeded their carrying value. The difference is being charged
to accumulated deficit over the period from the date of issuance to the
earliest put date of the warrants. Charges to accumulated deficit
related to the warrants amounted to $4.3 million, $2.3 million and $1.1
million during the years ended August 31, 1999, 1998 and 1997,
respectively. At August 31, 1999, 1998 and 1997, the accretion was
determined using the fair market value of the common stock.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Shareholders' Equity (Deficit):
Class A and B Common Stock:
The Company has authorized 5,203,000 shares of Class A Common Stock,
of which 2,492,741 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 million, the Class A and Class B, Series 2 Common Stock is
automatically converted into Class B, Series 1 Common Stock, based on a
one to one ratio. 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 a liquidation or dissolution in which the value of
the Company is less than $1.75 per share of common stock, the holders of
Class B, Series 2 will receive 60% of the proceeds until they have
received $1.75 per share. All other amounts available for distribution
shall be distributed to the Class B, Series 1 and Series 2 holders pro
rata based on the number of shares outstanding. If the value of the
Company is greater than or equal to $1.75 per share, the holders of all
classes of common stock are entitled to a pro rata distribution based on
the number of shares outstanding.
The Company is required to reserve shares of Class B, Series 1 stock
for the conversion of Class A and Class B, Series 2 into Class B,
Series 1 Common Stock.
Directors' Agreements:
The Company entered into Directors' Agreements dated September 1989,
as amended in January 1990 and August 1991, with certain directors who
are also shareholders of the Company. The agreements provide that the
Company is to pay up to $22,000 per year to each individual for serving
as a director, and granted each director the right to purchase up to
22,000 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 provides that the Company is to pay up to
$22,000 per year for services as a director. In January 1996, the
Company began paying an additional $4,000 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,
providing for the payment by the Company of up to $22,000 per year for
such individual's services as a director. During the years ended August
31, 1999, 1998 and 1997, the Company paid $114,000, $223,000 and
$230,000, respectively, in director fees and related expenses.
Stock Option Plan:
At August 31, 1998, the Company had reserved 2,866,200 and 2,000,000
shares of Class B, Series 1 Common Stock for issuance under the
Company's 1988 and 1994 stock option plans, respectively. During fiscal
year 1999, the Board of Directors and shareholders approved the
reservation of an additional 1,500,000 shares of Class B, Series 1
Common Stock for issuance under the Company's 1994 stock option plan.
As of August 31, 1999, a total of 3,500,000 shares of Class B Series 1
Common Stock were reserved for issuance under the 1994 stock option
plan. 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-statutory options and not
less than 100% of the fair market value of the Company's stock at the
date of grant for incentive options.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate option activity is as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Options Outstanding
-----------------------
Weighted
Average
Available Number of Exercise
for Grant Shares Price
----------- ----------- -----------
<S> <C> <C> <C>
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
Granted................................ (764) 764 $5.29
Exercised.............................. -- (359) $0.61
Canceled............................... 234 (234) $2.85
----------- -----------
Balances, August 31, 1998................ 748 1,985 $4.14
Reservation of shares.................. 1,500 --
Granted................................ (995) 995 $5.28
Exercised.............................. -- (128) $1.23
Canceled............................... 326 (326) $5.21
----------- -----------
Balances, August 31, 1999................ 1,579 2,526 $4.64
=========== ===========
</TABLE>
At August 31, 1999, 1998 and 1997, vested options to purchase
approximately 1.0 million, 0.8 million, and 1.1 million shares,
respectively, were unexercised.
During fiscal year 1998, eight employees of the Company, including
three executive officers, Laurie D. Bassin, Douglas L. Cullum and Rodger
A. Moody, exercised an aggregate of 359,000 stock options at an exercise
price of $0.61 per share under the Company's 1988 Stock Option Plan.
Ms. Bassin and Messrs. Cullum and Moody exercised 40,000, 55,000 and
40,000 option shares, respectively. Pursuant to a procedure authorized
by the Board of Directors for select holders of options granted under
the 1988 Stock Option Plan, the option holders elected a cashless
exercise of the options whereby shares previously owned by the optionees
or shares acquired by the optionees upon exercise of the options were
surrendered to satisfy withholding taxes and the exercise cost of the
shares.
The following table summarizes information about fixed stock options
outstanding at August 31, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
- --------------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.61 - $1.75 185 1.02 $1.30 185 $1.30
$2.50 - $3.75 180 3.87 2.84 178 2.84
$4.00 - $5.78 2,161 8.41 5.08 618 4.77
</TABLE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has adopted the disclosure-only provisions of the 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 1999, 1998 and
1997 consistent with the provisions of SFAS No. 123, the pro forma net
loss would have been reported as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported...................... ($616) ($4,411) ($7,411)
Net loss--proforma........................ ($1,021) ($4,696) ($7,561)
Net loss per share as reported............ ($0.05) ($0.37) ($0.63)
Net loss per share--proforma.............. ($0.09) ($0.40) ($0.64)
</TABLE>
These results are not likely to be representative of the effects on
reported net income (loss) for future years.
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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
- Risk-free Interest Rate.......... 5.04% 5.62% 6.13%
- Expected Life.................... 5 years 5 years 5 years
- Volatility....................... n/a n/a n/a
- Dividend Yield................... -- -- --
</TABLE>
The weighted average fair value per share of those options
granted in 1999, 1998 and 1997 was $4.13, $4.02 and $3.62, respectively.
12. Employee Benefit Plans:
The Company maintains a defined contribution plan which covers all
full-time domestic 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. Employer contributions are made at
the discretion of the Board of Directors and amounted to $96,000,
$117,000 and $203,000 for the years ended August 31, 1999, 1998 and
1997, respectively. Administrative expense in connection with the plan
amounted to $7,000, $10,000 and $16,000 for the years ended August 31,
1999, 1998 and 1997, respectively.
In fiscal 1996, the Board of Directors approved an Employee Stock
Purchase Plan (the ESPP) under which 750,000 shares of Class B, Series 1
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 ESPP shall continue until terminated
by the Board of Directors, until all of the shares reserved for issuance
under the ESPP have been issued or until January 1, 2007, whichever
shall first occur. Shares purchased under the ESPP are issued by the
Company once a year, at calendar year end. On December 31, 1998, 9,153
shares were issued to employees under the ESPP at a purchase price of
$40,822 bringing the total shares issued under the ESPP to 22,356 for an
aggregate purchase price of $100,000.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes:
Income tax benefit for each of the three years ended August 31,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................... ($78) $237 $118
State................................. 32 38 14
Foreign............................... 306 -- --
----------- ----------- -----------
260 275 132
----------- ----------- -----------
Deferred:
Federal............................... (128) (737) (522)
State................................. (28) (109) (242)
Foreign............................... (456) -- --
----------- ----------- -----------
(612) (846) (764)
----------- ----------- -----------
($352) ($571) ($632)
=========== =========== ===========
</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>
Years Ended August 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate (benefit)........ (34.0%) (34.0%) (34.0%)
State taxes............................. (4.8%) (4.0%) (5.2%)
Nondeductible amortization and
depreciation.......................... 45.1% 19.0% 13.3%
Nondeductible permanent items........... 8.8% 2.0% 0.9%
Foreign losses (with) without tax
benefit............................... (54.8%) 3.0% 12.2%
Other................................... 3.7% 3.0% 4.9%
----------- ----------- -----------
Effective income tax rate............... (36.0%) (11.0%) (7.9%)
=========== =========== ===========
</TABLE>
The components of the net deferred tax liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Federal credits..................... $235 $240
Accounts receivable................. 303 362
Intangible assets................... 769 561
Foreign taxes,net................... 382 --
Net operating loss.................. 306 --
Other liabilities................... 1,865 2,376
----------- -----------
Total assets...................... 3,860 3,539
----------- -----------
Deferred tax liabilities:
Property, plant and equipment....... 7,203 7,615
Foreign taxes, net.................. -- 74
----------- -----------
Total liabilities................. 7,203 7,689
----------- -----------
Net deferred tax liabilities........ $3,343 $4,150
=========== ===========
</TABLE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Segment Information:
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Prior period
amounts have been restated in accordance with the requirements of the
new standard.
The Company's reportable operating businesses are organized
primarily by geographic region. The United States and United Kingdom
segments offer the Company's principal closure product lines, and the
Company's Canada segment offers both closure and bottle product lines.
The Company evaluates the performance of its segments and allocates
resources to them based on earnings before interest, taxes,
depreciation, amortization and other miscellaneous non-operating gains
and losses. Certain Company businesses and activities, including the
equipment division, Portola Allied Tool and general corporate costs, do
not meet the definition of a reportable operating segment and have been
aggregated into "Other". Certain corporate expenses related to the
domestic closure operations, including human resources, finance, selling
and information technology costs, have been allocated to the United
States segment for purposes of determining Adjusted EBITDA. A
description of operating segments for the Company can be found in Notes
1 and 2. The accounting policies of the segments are the same as those
policies described in Note 1.
The table below presents information about reported segments for the
years ending August 31, (in thousands):
<TABLE>
<CAPTION>
United United
States Canada Kingdom Other Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................... 1999 $123,618 $23,704 $22,139 $21,200 $190,661
1998 129,172 20,138 16,767 10,157 176,234
1997 127,446 16,484 12,704 13,809 170,443
Adjusted EBITDA............ 1999 32,499 3,034 4,358 (8,475) 31,416
1998 32,284 1,257 2,870 (9,232) 27,179
1997 27,968 968 743 (5,216) 24,463
</TABLE>
Intersegment revenues of $6.9 million, $5.8 million and $2.8 million
have been eliminated from the segment totals presented above for fiscal
years 1999, 1998 and 1997, respectively. Foreign revenue is determined
based on the country where the sale originates.
The table below presents a reconciliation of total segment Adjusted
EBITDA to total consolidated income before income taxes, for the years
ended August 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Total Adjusted EBITDA - for reportable
segments.............................. $31,416 $27,179 $24,463
Depreciation and amortization.............. (18,060) (16,494) (15,600)
Interest expense, net...................... (14,262) (13,297) (12,792)
Restructuring costs........................ -- (3,084) (4,114)
Gain(loss)from sale of property, plant and
equipment............................. (82) 714 (88)
Gain from sale of securities............... -- 750 --
Other...................................... 20 (750) 88
----------- ----------- -----------
Consolidated loss before income taxes...... ($968) ($4,982) ($8,043)
=========== =========== ===========
</TABLE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents revenues by product line for the years
ending August 31, (in thousands):
<TABLE>
<CAPTION>
Closures Bottles Equipment Other Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1999 $157,538 $19,589 $12,542 $992 $190,661
1998 150,712 14,208 10,624 690 176,234
1997 150,690 5,273 14,272 208 170,443
</TABLE>
During fiscal years 1999,1998 and 1997 none of the Company's
customers accounted for more than 5% of sales.
The following is a breakdown of sales and long-lived assets by
geographic region as of and for the years ended August 31, (in
thousands):
<TABLE>
<CAPTION>
United
States Foreign Total
--------- --------- ---------
<S> <C> <C> <C>
Sales
1999 $136,332 $54,329 $190,661
1998 139,329 36,905 176,234
1997 141,255 29,188 170,443
Long-lived assets
1999 $79,534 $33,273 $112,807
1998 86,916 20,355 107,271
1997 88,007 20,034 108,041
</TABLE>
15. Related Party Transactions:
During fiscal 1999, TZM Investment Fund, of which Timothy Tomlinson is
a general partner, and Larry C. Williams, each exercised options granted
under the Company's 1988 Stock Option Plan (the "1988 Plan") to purchase
29,984 and 16,050 shares, respectively, of the Company's Class B common
stock, Series 1, at an exercise price of $1.00 per share. Messrs.
Tomlinson and Williams are members of the Board of Directors of the
Company. In addition, four other principals of The Breckenridge Group,
Inc., of which Mr. Williams is a principal, exercised options granted
under the Company's 1988 Plan to purchase an aggregate of 41,976 shares,
at an exercise price of $1.00 per share.
On November 17, 1998, the Compensation Committee of the Board of
Directors approved the grant to certain directors of the Company of non-
qualified stock options pursuant to the terms of the 1994 Stock Option
Plan (the "1994 Plan"). Options may be granted under the 1994 Plan to
officers, key employees, directors and independent contractors of the
Company, or any subsidiary of the Company. Dr. Pfeffer and Messrs.
Behrens, Tomlinson and Williams each received options to purchase 5,000
shares of Class B Common Stock, Series 1 of the Company, with an exercise
price of five dollars and twenty-five cents ($5.25) per share. The non-
qualified stock options granted to such directors will expire ten (10)
years from the date of grant and will vest twenty percent (20%) one year
after the vesting start date of November 17, 1998 and five percent (5%)
for each calendar quarter that such individual continues to serve as a
member of the Board of Directors or is employed by the Company. Mr.
Behrens assigned his options to Chase Manhattan Capital, L.P., an entity
with which he is affiliated, and Mr. Tomlinson assigned his options to
TZM Investment Fund, of which he is a general partner.
In addition to a base salary of $12,000, the Company paid $238,000,
$253,000 and $146,000 for the years ended August 31, 1999, 1998 and
1997, respectively, to Themistocles G. Michos, Vice President and
General Counsel of the Company, for legal services rendered.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company paid $442,000, $249,000 and $608,000, for the years
ended August 31, 1999, 1998 and 1997, respectively, to a law firm for
legal services rendered. A general partner of the aforementioned firm,
Timothy Tomlinson, is also a director and secretary of the Company.
The Company paid $41,800 for the years ended August 31, 1999, 1998
and 1997 to a corporation for management fees. The sole shareholder of
the aforementioned corporation, Jack L. Watts, is also an officer, a
director and significant shareholder of the Company.
The Company had a note receivable from an officer and director, Jack
L. Watts, at an interest rate of 6%. As of August 31, 1999, 1998 and
1997, the balance due from the officer, including accrued and unpaid
interest, amounted to $367,000, $463,000 and $424,000, respectively.
Pursuant to Mr. Watts' bonus agreement, during fiscal year 1999 the
Company forgave the repayment of certain principal and interest amounts
due on the note totaling approximately $105,000.
The Company had amounts receivable from its non-consolidated
affiliated companies which amounted to $734,000, $729,000 and $85,000 as
of August 31, 1999, 1998 and 1997, respectively.
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 D. Pfeffer, Ph.D., a director of the Company, at a
price per share of $5.25.
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.
16. Supplemental Cash Flow Disclosures:
The Company paid $156,000, $48,000 and $1.7 million in income taxes
during the years ended August 31, 1999, 1998 and 1997, respectively.
The Company paid $14.3 million, $13.1 million and $13.1 million in
interest during the years ended August 31, 1999, 1998 and 1997,
respectively.
During fiscal years 1999, 1998 and 1997, the Company acquired
$301,000, $328,000, and $436,000, respectively, of equipment under
capital lease.
During fiscal 1999, 1998 and 1997, the Company wrote-off fully
depreciated property, plant and equipment totaling $0.8 million, $1.9
million and $2.6 million, respectively.
Effective December 1, 1998, the Company increased its equity
interest in PPI Mexico from 50% to 75% as a result of the Company's
claim against its joint venture partner for 50% of the joint venture
partner's interest in PPI Mexico (i.e., a 25% interest in PPI Mexico) in
connection with the foreclosure by a Mexican lender on a loan to PPI
Mexico, for which this 25% interest served as part of the collateral for
the loan. The Company paid the lender $1.5 million pursuant to a
collateral agreement supporting the promissory note payable by PPI
Mexico, and converted $1.5 million of debt to equity in PPI Mexico.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Subsidiaries
Under the terms of the indenture governing the senior notes and the
Company's senior credit facility (Note 7), the Company must designate
subsidiaries as restricted or unrestricted subsidiaries. Included in
the indenture and the senior credit facility are formulas required to be
met prior to reclassification of a subsidiary from unrestricted
subsidiary status to restricted subsidiary status. Unrestricted
subsidiaries do not guarantee the senior notes under the indenture 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 under the indenture 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. Portola
Allied Tool and Portola B.V. were designated restricted subsidiaries in
connection with their formation during fiscal year 1999; Portola
Packaging Canada Ltd. was designated a restricted subsidiary in
connection with the repayment in May 1999 of all amounts due to a
Canadian bank; PPI Mexico was designated a restricted subsidiary in
connection with the purchase by the Company in July 1999 of the
remaining interest in PPI Mexico. The following joint ventures and
subsidiaries were designated as unrestricted subsidiaries in fiscal year
1999: Shanghai Portola Packaging, Inc., Associated Sales Group, LLC;
Leonard S. Slaughter and Associates, LLC; and Sand Hill Systems, Inc.
Portola Packaging Ltd. (eastern Canada) and Portola Packaging Ltd.
(U.K.) have been restricted subsidiaries since fiscal year 1997.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below provides consolidating financial information for the
years ended August 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Re- Unre-
stricted stricted Total
Parent Subsi- Subsi- Elimina- Consol-
Company diaries Subtotal diares tions idated
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Sales .................... 1999 $140,697 $36,718 $177,415 $20,142 ($6,896) $190,661
1998 145,098 24,194 169,292 12,711 (5,769) 176,234
1997 144,010 18,777 162,787 10,411 (2,755) 170,443
Gross profit............... 1999 38,010 5,271 43,281 3,588 -- 46,869
1998 38,094 1,538 39,632 1,182 -- 40,814
1997 37,069 1,527 38,596 1,620 -- 40,216
Income (loss) from
operations............... 1999 11,413 1,563 12,976 652 -- 13,628
1998 7,745 143 7,888 (221) -- 7,667
1997 6,816 (841) 5,975 (459) -- 5,516
Balance sheet data:
Cash and cash equivalents.. 1999 -- 1,947 1,947 425 -- 2,372
1998 2,376 1,996 4,372 (802) -- 3,570
Current assets............. 1999 31,215 18,124 49,339 2,141 (6,843) 44,637
1998 35,637 9,545 45,182 2,654 (6,247) 41,589
Total assets............... 1999 130,034 45,273 175,307 11,944 (29,807) 157,444
1998 134,552 24,911 159,463 7,643 (18,246) 148,860
Current liabilities........ 1999 (6,304) 38,136 31,832 2,643 (6,843) 27,632
1998 6,662 19,348 26,010 7,164 (6,247) 26,927
Total liabilities.......... 1999 134,949 39,316 174,265 5,134 (9,280) 170,119
1998 138,968 20,594 159,562 8,991 (6,247) 162,306
Cash flow data:
Operating activities....... 1999 (178) 4,943 4,765 6,847 -- 11,612
1998 1,044 6,780 7,824 1,249 -- 9,073
Investing activities....... 1999 (13,534) (5,089) (18,623) (2,812) -- (21,435)
1998 (10,643) (5,896) (16,539) 161 -- (16,378)
Financing activities....... 1999 11,335 (10) 11,325 (2,600) -- 8,725
1998 9,447 (477) 8,970 (1,620) -- 7,350
</TABLE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsequent Event:
On September 17, 1999, the Company released SHS from its obligation
to repay a $3.5 million promissory note entered into in conjunction with
a services agreement dated July 1, 1999 (Note 9). The release of the
obligation was concurrent with Portola Company IV LLC's (Portola IV)
agreement to assume the note from SHS in exchange for 7,000,000 shares
of SHS common stock. Portola IV is a limited liability company
controlled by Jack L. Watts (the Chief Executive Officer of the Company)
and in which the Company has no direct financial interest. The
obligation of Portola IV under the promissory note is secured by a
pledge of 500,000 shares of Portola Packaging, Inc., common stock
contributed to the capital of Portola IV by the investors in Portola IV.
Portola IV has also agreed to be bound by any restrictions and
agreements governing common stock of the Company serving as collateral
for payment on the note. The principal investors in Portola IV are Jack
L. Watts, a director and Chief Executive Officer of the Company, and
Laurie D. Bassin, an executive officer of the Company, with Mr. Watts
and Ms. Bassin respectively contributing to the capital of Portola IV
283,000 and 177,000 shares of the Company's common stock. Concurrent
with the above described transactions, Larry C. Williams, a director of
the Company, made an investment in Portola IV by contributing 21,429
shares of the Company's common stock to the capital of Portola IV, and a
cash investment in the common stock of SHS in the amount of
approximately $100,000. In addition, First TZMM Investment Partnership,
in which Timothy Tomlinson, a director and Secretary of the Company, is
a general partner, invested $120,000 in the common stock of SHS. An
additional investment in the amount of $30,000 was made by a partner of
the law firm with which Mr. Tomlinson is associated. It is anticipated
that further investments in the common stock of SHS will be made my
Messrs. Williams and Tomlinson in the near term future, and that Jeffrey
Pfeffer, Ph.D., also a director of the Company, will make an investment
in SHS common stock. In addition, options to purchase shares of SHS
common stock have been granted to certain officers, directors and
employees of the Company.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
<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
Com-
Name Age pany Position
- -------------------------- ---- ----- ------------------------------------------
<S> <C> <C> <C>
Jack L. Watts............. 51 13 Chairman of the Board and Chief Executive
Officer
James A. Taylor........... 53 1 President and Chief Operating Officer
Laurie D. Bassin.......... 50 13 Vice President, Corporate Development
E. Scott Merritt.......... 44 4 Vice President, U.S. Closures and Equipment
Themistocles G. Michos.... 67 3 Vice President and General Counsel
Rodger A. Moody........... 46 24 Vice President, International Sales
Robert L. Plummer......... 40 5 President, International Division
Dennis L. Berg............ 50 0 Vice President, Finance, Chief Financial
Officer
Christopher C. Behrens.... 38 5 Director
Jeffrey Pfeffer, Ph.D.(1). 53 3 Director
Timothy Tomlinson(1)(2)... 49 13 Secretary and Director
Larry C. Williams(1)(2)... 50 10 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Watts has been Chairman of the Board and Chief Executive Officer
of the Company since January 1986 and until July 1999, he also served as
President of the Company. From 1982 to 1985, he was Chairman of the
Board of Faraday Electronics, a supplier of integrated circuits and board
level microprocessors.
Mr. Taylor has been President and Chief Operating Officer of the
Company since July 1999. He joined the Company in July 1998 as Vice
President and Chief Financial Officer. From February 1996 to July 1998,
he was Vice President, Finance and Treasurer at Seagate Technology, Inc.,
an international manufacturer and distributor of computer disk drives.
He joined Seagate Technology following its acquisition of Conner
Peripherals, Inc. where he had been Vice President and Treasurer from
December 1993 through February 1996. Conner also manufactured and
distributed computer disk drives globally.
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. Merritt has been Vice President, US Closures and Equipment since
July 1999. From July 1997 to July 1999, he was the Vice President, US
Operations. 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.
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;
from February 1993 to May 1994, as an Assembly Advisor for New United
Motor Manufacturing, Inc., an automobile manufacturing joint venture
between General Motors and Toyota, and from May 1989 to February 1993, as
Product Manager of the Harrison Division of General Motors Corporation,
which produces automotive engine cooling and heating, ventilating, and
air conditioning systems.
Mr. Berg has been Vice President and Chief Financial Officer of the
Company since July 1999. He joined the Company in February 1999 as Vice
President, Finance. Prior to joining the Company, Mr. Berg was employed
by Seagate Technology, Inc., from February 1988 to February 1999 in
various financial management positions, most recently as Senior Director
of Financial Planning and Analysis.
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. and numerous private companies.
Dr. Pfeffer has been a director of the Company since May 1996. He has
been a professor in the Graduate School of Business at Stanford
University since 1979, except for the 1981-1982 academic year, when he
served as the Thomas Henry Carroll-Ford Foundation Visiting Professor of
Business Administration at the Harvard Business School, and currently
holds the Thomas D. Dee Professor of Organizational Behavior chair. Dr.
Pfeffer is a director of SonoSight, a publicly traded company, and
Resumix, a privately held company.
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;
VeriSign, Inc. a provider of digital certificate services and products
for electronic commerce; and SmartDisk Corporation, a designer and
developer of products that enable consumers to share digital data among
advanced consumer electronic products, personal computers and the
Internet. Mr. Tomlinson is 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 March 1999 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.
Accordingly, no persons are presently required to file reports with the
Securities and Exchange Commission pursuant to Section 16(a) of the
Exchange Act.
<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, 1999, 1998 and 1997 by the Company's Chief
Executive Officer and the Company's five other most highly compensated
executive officers during fiscal 1999 (together, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation Awards
----------------------
Annual Compensation Other All
---------------------------- Annual Securities Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus(1) sation(2) Options sation(3)
- ---------------------------------------- -------- --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts ......................... 1999 $299,998 $150,000 $41,800 50,000 $104,750
Chairman of the Board and 1998 299,988 13,125 41,800 50,000 --
Chief Executive Officer 1997 294,820 86,418 41,800 -- 2,850
James A. Taylor ....................... 1999 200,000 60,000 -- 187,500 --
President and Chief Operating 1998 15,385 25,000 -- -- --
Officer(4)
Robert L. Plummer ..................... 1999 165,006 37,500 -- 36,250 --
President, International Division 1998 164,319 3,375 -- -- --
1997 159,581 10,000 -- -- 3,550
E. Scott Merritt ...................... 1999 151,299 30,000 -- 27,500 --
Vice President, U.S. Closures 1998 150,330 2,625 -- 30,000 --
and Equipment 1997 143,077 20,000 -- -- 2,850
Laurie D. Bassin ...................... 1999 147,500 33,750 -- 19,250 --
Vice President, Corporate 1998 139,235 2,625 -- -- --
Development 1997 131,154 20,000 -- -- 2,850
Douglas L. Cullum...................... 1999 210,019 75,000 -- 18,496 --
President, North American 1998 203,893 37,500 -- 56,736 --
Operations(5) 1997 166,347 35,000 -- 50,000 2,850
</TABLE>
- ------------------------
(1) With respect to each fiscal year, bonuses paid each year are for
services rendered in the prior fiscal year. With respect to fiscal
years 1998 and 1999, all bonuses relate to profit sharing
distributions, except for $25,000 related to a signing bonus for Mr.
Taylor and $30,000 related to Mr. Cullum in fiscal year 1998.
(2) With respect to each fiscal year, other annual compensation 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.
(3) With respect to fiscal 1999, all other compensation represents
forgiveness of certain principal and interest on a note receivable
from Jack L. Watts. With respect to fiscal 1997, represents a Company
profit-sharing contribution of up to $2,100 and a Company 401(k)
matching contribution of up to $1,500. Also includes $700 travel
allowance with respect to Mr. Plummer for fiscal 1997.
(4) Mr. Taylor served as the Chief Financial Officer of the Company until
July 1999, at which time he was promoted to President and Chief
Operating Officer.
(5) Mr. Cullum left the employment of the Company in October 1999.
The following table sets forth information concerning individual grants
of stock options made during fiscal year 1999 to the Named Officers.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
% of
Total Potential Realizable
Options Value at Assumed
Number of Granted Annual Rates of Stock
Securities to Exercise Price Appreciation for
Underlying Employees or Base Expir- Option Term
Options in Fiscal Price ation ---------------------
Name Granted(1) Year ($/Sh)(2) Date 5%($) 10%($)(3)
- ------------------------- ---------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts .......... 50,000 5.08% $5.78 11/17/08 $138,835 $392,107
James A. Taylor ........ 187,500 18.85% 5.25 03/25/09 619,067 1,568,840
Robert L. Plummer ...... 36,250 3.69% 5.25 12/18/08 119,687 303,309
E. Scott Merritt ....... 27,500 2.79% 5.25 12/18/08 90,797 230,096
Laurie D. Bassin ....... 19,250 1.95% 5.25 12/18/08 63,558 161,068
Douglas L. Cullum ...... 18,496 1.88% 5.25 11/17/08 61,068 154,759
</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
individuals identified in the table received incentive and/or
nonstatutory stock option grants.
(2) Except for Mr. Watts, 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. Mr. Watts' options were granted at
110% of fair market value or $5.78.
(3) The 5% and 10% assumed rates of appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of the future common stock price.
The following table sets forth certain information regarding option
exercises during fiscal year 1999 and the number of shares covered by
both exercisable and unexercisable stock options as of August 31, 1999
for each of the Named Officers.
Aggregated Option Exercises in Fiscal 1999 and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options
on Options at August 31, 1999 at August 31, 1999(1)
Exercise Value --------------------------- ---------------------------
Name (2) Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- --------- --------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Watts.......... -- $ -- 77,500 122,500 $86,312 $91,187
James A. Taylor........ -- -- 29,999 157,501 29,999 157,501
Robert L. Plummer...... -- -- 92,000 48,750 260,725 65,400
E. Scott Merritt....... -- -- 54,750 62,750 105,500 77,000
Laurie D. Bassin....... -- -- 13,705 48,366 17,830 51,741
Douglas L. Cullum...... -- -- 50,807 94,425 59,807 100,425
</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, 1999 of $6.25 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. Tomlinson and Williams receives as
compensation for his services as a director $2,500 per quarter and $2,000
for each meeting of the Board attended, up to $22,000 per year, and is
also reimbursed for reasonable expenses in attending Board meetings.
None of the other Board members is compensated as such. Messrs. Williams
and Tomlinson receive annual retainers for their services as members of
the Audit Committee of the Board in the amount of $4,000 each, paid on a
quarterly basis. Each of Dr. Pfeffer and Messrs. Tomlinson and Williams
receives an annual retainer for his services as a member of the
Compensation Committee of the Board of Directors in the amount of $4,000
paid on a quarterly basis. Certain Directors also received grants of
stock options as described below.
On November 17, 1998, the Compensation Committee of the Board of
Directors approved the grant to certain directors of the Company of non-
qualified stock options pursuant to the terms of the 1994 Stock Option
Plan (the "1994 Plan"). Options may be granted under the 1994 Plan to
officers, key employees, directors and independent contractors of the
Company, or any subsidiary of the Company. Each of Dr. Pfeffer and
Messrs. Behrens, Tomlinson and Williams received options to purchase
5,000 shares of Class B Common Stock, Series 1 of the Company, with an
exercise price of five dollars and twenty-five cents ($5.25) per share.
The non-qualified stock options granted to such directors will expire ten
(10) years from the date of grant and will vest twenty percent (20%) one
year after the vesting start date of November 17, 1998 and five percent
(5%) for each calendar quarter that such individual continues to serve as
a member of the Board of Directors or is employed by the Company. Mr.
Behrens assigned his options to Chase Manhattan Capital, L.P., an entity
with which he is affiliated, and Mr. Tomlinson assigned his options to
TZM Investment Fund, of which he is a general partner.
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 in control," as defined in
such stock option agreements. In this regard, certain options granted to
Dr. Pfeffer, Chase Manhattan Capital, L.P., and each of
Messrs. Tomlinson, Watts, Williams and Taylor in fiscal year 1999 and in
prior years, 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.
<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 October 29, 1999 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.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class(1) Beneficial Owner Ownership(2) Class(2)
- -------------------------------------- ----------------------------- ------------ ---------
<S> <C> <C> <C>
Class B Common Stock, Series 1..... Jack L. Watts(3) 4,035,331 40.2%
Class B Common Stock, Series 1..... Christopher C. Behrens(4) 1,555,333 15.6%
Class B Common Stock, Series 1..... Chase Manhattan Capital
Corporation(5) 1,555,333 15.6%
Class B Common Stock, Series 2..... Christopher C. Behrens(6) 815,715 8.2%
Class B Common Stock, Series 2..... Chase Manhattan Capital
Corporation(7) 815,715 8.2%
Class B Common Stock, Series 1..... Gary L. Barry(8) 607,965 6.1%
Class B Common Stock, Series 1..... Portola Company IV LLC(9) 488,965 5.0%
Class B Common Stock, Series 1..... Timothy Tomlinson(10) 252,984 2.5%
Class B Common Stock, Series 1..... Robert L. Plummer(11) 113,675 1.1%
Class B Common Stock, Series 1..... E. Scott Merritt(12) 69,750 *
Class B Common Stock, Series 1..... Larry C. Williams(13) 54,442 *
Class B Common Stock, Series 1..... James A. Taylor (14) 44,999 *
Class B Common Stock, Series 1..... Douglas L. Cullum(15) 37,768 *
Class B Common Stock, Series 1..... Jeffrey Pfeffer, Ph.D.(16) 34,500 *
Class B Common Stock, Series 1..... Laurie D. Bassin(17) 21,287 *
Class B Common Stock, Series 2..... Jack L. Watts(18) 11,035 *
Class B Common Stock, Series 2..... Portola Company IV LLC(9) 11,035 *
Class B Common Stock, Series 1 All executive officers and 7,098,580 68.2%
and Series 2..................... directors as a group
(12 persons)(19)
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding
shares of a class of the Company's issued and outstanding stock.
(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 million 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 shareholders shall be not less than $1.75 per share.
As of October 29, 1999, there were 9,940,904 shares of Class B Common
Stock issued and outstanding, consisting of 8,769,474 shares of
Class B Common Stock, Series 1 and 1,171,430 shares of Class B Common
Stock, Series 2. As of October 29, 1999, 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 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 million 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 issuable upon exercise of
outstanding options identified in the footnotes to this table and
exercisable on October 29, 1999 or within 60 days thereafter are
included, and 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 95,000 shares subject to options that are exercisable
within 60 days of October 29, 1999. Also includes (i) 488,965 shares
held of record by Portola Company IV LLC, of which Mr. Watts is the
general manager; and (ii) 424,474 shares held of record by LJL
Cordovan Partners, L.P., of which Mr. Watts is the general partner.
The shares listed do not include 52,312 shares held in the name of
trusts for the benefit of Mr. Watts' children, due to the fact that
Mr. Watts does not exercise voting or investment control over such
trusts. Mr. Watts' 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. Includes 1,552,333
shares held of record by Chase Manhattan Capital Corporation and
affiliates, and 3,000 shares subject to options held by Chase
Manhattan Capital, L.P., an affiliate of Chase Manhattan Capital
Corporation, that are exercisable within 60 days of October 29, 1999.
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. Behren's
disclaims beneficial ownership of the 1,555,333 shares of Class B
Common Stock, Series 1 owned by Chase Manhattan Capital Corporation
and affiliates. The address of this shareholder is Chase Capital
Partners, 380 Madison Avenue, 12th Floor, New York, New York 10017.
(5) With respect to Class B Common Stock, Series 1, includes (i) 149,047
shares held by Archery Partners, (ii) 99,800 shares held by Baseball
Partners, and (iii) 3,000 shares subject to options that are
exercisable within 60 days of October 29, 1999 and are held by Chase
Manhattan Capital, L.P., all such entities being affiliates 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. The address of this shareholder is Chase Capital
Partners, 380 Madison Avenue, 12th Floor, New York, New York 10017.
(6) Mr. Behrens is a principal of Chase Capital Partners, an affiliate of
Chase Manhattan Capital Corporation. Comprised of 726,095 shares
held of record by Chase Manhattan Capital Corporation, 39,620 shares
held of record by Archery Partners and 50,000 shares held of record
by Baseball Partners, affiliates 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 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, 12th Floor, New York, New York 10017.
(7) With respect to Class B Common Stock, Series 2, includes 39,620
shares held of record by Archery Partners and 50,000 shares held of
record by Baseball Partners, such entities being affiliates 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. The address of this shareholder is Chase Capital Partners,
380 Madison Avenue, 12th Floor, New York, New York 10017.
(8) Mr. Barry's address is 640 Menlo Avenue, Suite 5, Menlo Park,
California 94025.
(9) The address of this shareholder is National Agents, Inc., 400 West
King Street, Carson City, Nevada 89703.
(10) Mr. Tomlinson is a general partner in the following entities: (a)
Tomlinson Zisko Morosoli & Maser LLP ("TZMM"); (b) First TZMM
Investment Partnership; and (c) TZM Investment Fund. The shares
listed include (i) 26,000 shares held of record by First TZMM
Investment Partnership, (ii) 92,484 shares held of record by TZM
Investment Fund, (iii) 4,000 shares held by trusts for the benefit of
Mr. Tomlinson's children, over which trusts Mr. Tomlinson acts as
trustee; (iv) 10,000 shares held by trusts for the benefit of the
children of William E. Zisko, a partner in TZMM, over which trusts
Mr. Tomlinson acts as trustee; and (v) 99,500 shares subject to
options held by TZM Investment Fund that are exercisable within 60
days of October 29, 1999. Mr. Tomlinson disclaims beneficial
ownership of the shares held in the name of the Zisko children's
trusts. It also excludes shares held in the individual names of two
partners in TZMM. Mr. Tomlinson's address is 200 Page Mill Road,
Second Floor, Palo Alto, California 94306.
(11) Includes 103,675 shares subject to options that are exercisable
within 60 days of October 29, 1999. Mr. Plummer's address is 1902
New Butler Road, New Castle, Pennsylvania 16107.
(12) Comprised of 5,000 shares held by a trust for the benefit of Mr.
Merritt's family and 64,750 shares subject to options that are
exercisable within 60 days of October 29, 1999. Mr. Merritt's
address is 890 Faulstich Court, San Jose, California 95112.
(13) Includes 9,500 shares subject to options that are exercisable within
60 days of October 29, 1999. Excludes 165,732 shares held in the
individual names of four other principals of The Breckenridge Group,
Inc., of which Mr. Williams is a principal. Mr. William's address is
Resugens Plaza, Suite 2100, 945 East Paces Ferry Road, Atlanta,
Georgia 30326.
(14) Comprised entirely of shares subject to options that are exercisable
within 60 days of October 29, 1999. Mr. Taylor's address is 890
Faulstich Court, San Jose, California 95112.
(15) Mr. Cullum was an Executive Officer of the Company at August 31,
1999. He resigned from the Company effective October 1, 1999, on
which date his options were terminated and ceased vesting. Mr.
Cullum's address is 1099 November Drive, Cupertino, California 95014.
(16) Includes 9,500 shares subject to options that are exercisable within
60 days of October 29, 1999. Dr. Pfeffer's address is Graduate
School of Business, Stanford University, Palo Alto, California 94305.
(17) Includes 19,696 shares subject to options that are exercisable within
60 days of October 29, 1999. Ms. Bassin's address is 890 Faulstich
Court, San Jose, California 95112.
(18) Consists entirely of shares held of record by Portola Company IV LLC,
of which Mr. Watts is the general manager.
(19) Comprised of the shares shown as included in footnotes 3, 4, 6, 10
through 14, and 16 through 18. Excluded from the calculation are
shares held by Mr. Cullum, who left the employment of the Company in
October 1999.
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, $250,000 represented by a secured
promissory note. The note plus accrued interest was originally due in
January 1993, and originally accrued interest at a rate equal to 2% above
the Company's borrowing rate on its revolving credit facility. In
January 1997, the rate was changed to equal the Short Term Applicable
Federal Rate for January 1997 compounded annually. In November 1998, the
Board of Directors agreed to extend until January 17, 2000 the due date
of all principal and accrued interest owing to the Company. Also, in
November 1998, the Board of Directors agreed to have the Company forgive
the repayment of certain principal and interest amounts due on the note
totaling $105,000. In November 1999, the Board of Directors agreed to
extend until January 17, 2001 the due date of all principal and accrued
interest owing to the Company. The loan is secured by a pledge of
certain shares of Class B Common Stock, Series 1 owned by Mr. Watts. The
principal plus accrued interest outstanding at August 31, 1999 was
approximately $367,000.
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.
Transactions with Executive Officers and Directors
During fiscal 1999, TZM Investment Fund, of which Timothy Tomlinson
is a general partner, and Larry C. Williams, each exercised options
granted under the Company's 1988 Stock Option Plan (the "1988 Plan") to
purchase 29,984 and 16,050 shares, respectively, of the Company's Class B
Common Stock, Series 1, at an exercise price of $1.00 per share. Messrs.
Tomlinson and Williams are members of the Board of Directors of the
Company. In addition, four other principals of The Breckenridge Group,
Inc., of which Mr. Williams is a principal, exercised options granted
under the Company's 1988 Plan to purchase an aggregate of 41,976 shares,
at an exercise price of $1.00 per share.
For a description of the options granted to directors during fiscal
1999, please see "Director Compensation" under Item 11 of this report on
Form 10-K.
Transactions with Entities Affiliated with Directors
In June 1994, Chase Manhattan Capital Corporation ("Chase Capital")
purchased shares of Class B Common Stock, Series 1 from the Company and
certain insiders of the 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 1999, the Company paid
Mr. Tomlinson's law firm fees and expenses in the aggregate amount of
$442,000. Mr. Tomlinson is corporate Secretary, a director of the
Company, a member of the Compensation Committee and a member of the Audit
Committee.
In addition to a base salary of $12,000, the Company paid its Vice
President and General Counsel, Themistocles G. Michos, $238,000 in fiscal
year 1999 for legal services rendered.
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.
<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:
Report of Independent Accountants
Consolidated Balance Sheets as of August 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
August 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended August 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules. The following financial
statement schedules are filed herewith and should be read in conjunction
with the consolidated financial statements:
Report of Independent Accountants on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
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:
Exhibit
Number Exhibit Title
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 Firstar Trust Company (formerly known as 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 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(4)
10.02 Shareholders Agreement, dated as of June 30, 1994, by and among
the Registrant, Chase Manhattan Capital Corporation, and certain
shareholders and warrant holders(5)
Exhibit
Number Exhibit Title
10.03 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(6)
10.04 $109,000 Non-Recourse Promissory Note, dated November 13,
1991, made by Daniel Luch and Mary Jeanne Luch in favor of the
Registrant(7)
10.05 $250,000 Secured Promissory Note, dated January 17, 1992,
made by Jack L. Watts in favor of the Registrant(8)
10.06 Director's Agreement, dated October 5, 1990, by and between
the Registrant and Martin Imbler(9)
10.07 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(10)
10.08 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(11)
10.09 Stock Purchase Agreement, dated October 17, 1990, by and
among the Registrant, Robert Fleming Nominees, Ltd., Jack Watts,
John Lemons and LJL Cordovan Partners(12)
10.10 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(13)
10.11 Master Supply Agreement, dated March 29, 1995, by and
between the Registrant and Tetra Rex Packaging Systems, Inc.(14)
10.12 Form of Subscription Agreement by and between the Registrant
and the related director or officer (said form being substantially
similar to the form of Subscription Agreement utilized by the
Registrant for certain officers and directors of the
Registrant)(15)
10.13 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)(16)
10.14 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.(17)
10.15 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.(18)
10.16 Second Amended and Restated Credit and Security Agreement,
dated as of October 2, 1995, by and between the Registrant and
Heller Financial, Inc.(19)
10.17 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(20)
Exhibit
Number Exhibit Title
10.18 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(21)
10.19 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(22)
10.20 1988 Stock Option Plan and related documents(23)
10.21 1994 Stock Option Plan, as amended, and related
documents(24)
10.22 Settlement Agreement, dated July 1, 1996, by and between the
Registrant and Scholle Corporation(25)
10.23 Director's Agreement, dated as of May 20, 1996, by and
between the Registrant and Jeffrey Pfeffer(26)
10.24 Form of Indemnification Agreement by and between the
Registrant and the related director or officer(27)
10.25 Form of Amendment to Indemnification Agreement by and
between the Registrant and certain directors and officers of the
Registrant(28)
10.26 Registrant's 1996 Employee Stock Purchase Plan, together
with related documents(29)
10.27 Registrant's Management Deferred Compensation Plan Trust
Agreement(30)
10.28 Registrant's Management Deferred Compensation Plan(31)
10.29 Summary Description of Company Bonus Plan and Company Profit
Sharing Plan(32)
12.01 Computation of Ratio of Earnings to Fixed Charges
21.01 Subsidiaries of the Registrant
23.01 Consent of PricewaterhouseCoopers LLP
24.01 Power of Attorney (included as part of the signature page to
this report)
27.01 Financial Data Schedule
_____________________
(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 10.02 included on 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.
Exhibit
Number Exhibit Title
(5) Incorporated herein by reference to exhibit 10.03 included on 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 10.07 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 10.08 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 exhibit 10.10 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.
(9) Incorporated herein by reference to exhibit 10.12 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.
(10) Incorporated herein by reference to exhibit 10.13 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.
(11) Incorporated herein by reference to exhibit 10.14 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.
(12) Incorporated herein by reference to exhibit 10.15 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.
(13) Incorporated herein by reference to exhibit 10.16 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.
(14) Incorporated herein by reference to exhibit 10.19 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.
(15) Incorporated herein by reference to exhibit 10.20 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.
(16) Incorporated herein by reference to exhibit 10.21 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.
(17) Incorporated herein by reference to exhibit 10.22 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.
(18) Incorporated herein by reference to exhibit 10.23 included in pre-
effective Amendment No. 2 to the Registrant's Registration Statement
on Forms S-1 (Commission File No. 33-95318), as filed with the
Securities and Exchange Commission on September 25, 1995.
Exhibit
Number Exhibit Title
(19) Incorporated herein by reference to exhibit 10.24 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.
(20) Incorporated herein by reference to exhibit 10.25 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.
(21) Incorporated herein by reference to exhibit 10.26 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.
(22) Incorporated herein by reference to exhibit 10.27 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.
(23) Incorporated herein by reference to exhibit 10.28 to the
Registrant's Quarterly Report on Form10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(24) Incorporated herein by reference to exhibit 4.04 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-82125), as filed with the Securities and Exchange Commission on
July 1, 1999.
(25) Incorporated herein by reference to exhibit 10.34 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.
(26) Incorporated herein by reference to exhibit 10.36 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.
(27) Incorporated herein by reference to exhibit 10.37 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.
(28) Incorporated herein by reference to exhibit 10.38 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.
(29) 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.
(30) 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.
(31) Incorporated herein by reference to exhibit 10.44 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.
(32) 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, 1998, as filed with the Securities and Exchange
Commission on January 4, 1999.
<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.
PORTOLA PACKAGING, INC.,
a Delaware Corporation
November 22, 1999 By: /s/ JACK L. WATTS
-----------------------------------------
Jack L. Watts
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Jack L. Watts, James A. Taylor 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 OFFICERS:
/s/ JACK L. WATTS November 22, 1999
-------------------------------------------
Jack L. Watts
CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD AND
A DIRECTOR
/s/ JAMES A. TAYLOR November 22, 1999
-------------------------------------------
James A. Taylor
PRESIDENT AND CHIEF OPERATING OFFICER
(former Chief Financial Officer)
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
/s/ DENNIS L. BERG November 22, 1999
-------------------------------------------
Dennis L. Berg
VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL
OFFICER
DIRECTORS:
/s/ CHRISTOPHER C. BEHRENS November 22, 1999
-------------------------------------------
Christopher C. Behrens
/s/ JEFFREY PFEFFER, PH.D. November 22, 1999
-------------------------------------------
Jeffrey Pfeffer, Ph.D.
/s/ TIMOTHY TOMLINSON November 22, 1999
-------------------------------------------
Timothy Tomlinson
/s/ LARRY C. WILLIAMS November 22, 1999
-------------------------------------------
Larry C. Williams
</TABLE>
<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.
<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 24 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 70 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.
PricewaterhouseCoopers LLP
November 11, 1999
<PAGE>
PORTOLA PACKAGING, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Allowance for Doubtful Beginning Additions/ Deduc- Ending
Accounts Balance Expense Other(1) tions(2) Balance
- ----------------------------- --------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
August 31, 1999............. $1,727 ($16) ($182) $163 $1,366
August 31, 1998............. 1,170 379 678 500 1,727
August 31, 1997............. 817 823 -- 470 1,170
Beginning Additions/ Deduc- Ending
Restructuring Reserve Balance Expense Other tions(3) Balance
- ----------------------------- --------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
August 31, 1999............. $1,111 $ -- $ -- $1,111 $ --
August 31, 1998............. 273 1,426 -- 588 1,111
August 31, 1997............. -- 2,394 -- 2,121 273
</TABLE>
- ------------------------
(1) Reclassification of various amounts into reserve balances
(2) Write off of bad debts
(3) Restructuring items charged against reserve
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
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 Firstar Trust Company (formerly known as 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 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(4)
10.02 Shareholders Agreement, dated as of June 30, 1994, by and
among the Registrant, Chase Manhattan Capital Corporation, and
certain shareholders and warrant holders(5)
10.03 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(6)
10.04 $109,000 Non-Recourse Promissory Note, dated November 13,
1991, made by Daniel Luch and Mary Jeanne Luch in favor of the
Registrant(7)
10.05 $250,000 Secured Promissory Note, dated January 17, 1992
made by Jack L. Watts in favor of the Registrant(8)
10.06 Director's Agreement, dated October 5, 1990, by and between
the Registrant and Martin Imbler(9)
10.07 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(10)
10.08 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(11)
10.09 Stock Purchase Agreement, dated October 17, 1990, by and
among the Registrant, Robert Fleming Nominees, Ltd., Jack Watts,
John Lemons and LJL Cordovan Partners(12)
10.10 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 (13)
10.11 Master Supply Agreement, dated March 29, 1995, by and
between the Registrant and Tetra Rex Packaging Systems, Inc.(14)
10.12 Form of Subscription Agreement by and between the Registrant
and the related director or officer (said form being substantially
similar to the form of Subscription Agreement utilized by the
Registrant for certain officers and directors of the
Registrant)(15)
Exhibit
Number Exhibit Title
10.13 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)(16)
10.14 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.(17)
10.15 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.(18)
10.16 Second Amended and Restated Credit and Security Agreement,
dated as of October 2, 1995, by and between the Registrant and
Heller Financial, Inc.(19)
10.17 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(20)
10.18 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(21)
10.19 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(22)
10.20 1988 Stock Option Plan and related documents(23)
10.21 1994 Stock Option Plan, as amended, and related
documents(24)
10.22 Settlement Agreement, dated July 1, 1996, by and between the
Registrant and Scholle Corporation(25)
10.23 Director's Agreement, dated as of May 20, 1996, by and
between the Registrant and Jeffrey Pfeffer(26)
10.24 Form of Indemnification Agreement by and between the
Registrant and the related director or officer(27)
10.25 Form of Amendment to Indemnification Agreement by and
between the Registrant and certain directors and officers of the
Registrant(28)
10.26 Registrant's 1996 Employee Stock Purchase Plan, together
with related documents(29)
10.27 Registrant's Management Deferred Compensation Plan Trust
Agreement(30)
10.28 Registrant's Management Deferred Compensation Plan(31)
10.29 Summary Description of Company Bonus Plan and Company Profit
Sharing Plan(32)
12.01 Computation of Ratio of Earnings to Fixed Charges
21.01 Subsidiaries of the Registrant
Exhibit
Number Exhibit Title
23.01 Consent of PricewaterhouseCoopers LLP
24.01 Power of Attorney (included as part of the signature page to
this report)
27.01 Financial Data Schedule
_____________________
(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 10.02 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.
(5) Incorporated herein by reference to exhibit 10.03 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.
(6) Incorporated herein by reference to exhibit 10.07 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 10.08 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 exhibit 10.10 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.
(9) Incorporated herein by reference to exhibit 10.12 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.
(10) Incorporated herein by reference to exhibit 10.13 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.
(11) Incorporated herein by reference to exhibit 10.14 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.
(12) Incorporated herein by reference to exhibit 10.15 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.
Exhibit
Number Exhibit Title
(13) Incorporated herein by reference to exhibit 10.16 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.
(14) Incorporated herein by reference to exhibit 10.19 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.
(15) Incorporated herein by reference to exhibit 10.20 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.
(16) Incorporated herein by reference to exhibit 10.21 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.
(17) Incorporated herein by reference to exhibit 10.22 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.
(18) Incorporated herein by reference to exhibit number 10.23 included
in pre-effective Amendment No. 2 to the Registrant's Registration
Statement on Forms S-1 (Commission File No. 33-95318), as filed with
the Securities and Exchange Commission on September 25, 1995.
(19) Incorporated herein by reference to exhibit 10.24 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.
(20) Incorporated herein by reference to exhibit 10.25 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.
(21) Incorporated herein by reference to exhibit 10.26 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.
(22) Incorporated herein by reference to exhibit 10.27 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.
(23) Incorporated herein by reference to exhibit 10.28 to 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.
(24) Incorporated herein by reference to exhibit 4.04 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-82125), as filed with the Securities and Exchange Commission on
July 1, 1999.
(25) Incorporated herein by reference to exhibit 10.34 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.
(26) Incorporated herein by reference to exhibit 10.36 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.
Exhibit
Number Exhibit Title
(27) Incorporated herein by reference to exhibit 10.37 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.
(28) Incorporated herein by reference to exhibit 10.38 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.
(29) 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.
(30) 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.
(31) Incorporated herein by reference to exhibit 10.44 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.
(32) 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, 1998, as filed with the Securities and Exchange
Commission on January 4, 1999.
<PAGE>
EXHIBIT 12.01
PORTOLA PACKAGING, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------- ---------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest expense.............................. $14,443 $13,795 $13,379 $13,084 $8,658
Debt financing costs.......................... 546 484 559 492 447
Rent expense.................................. 740 564 638 635 499
--------- --------- --------- --------- ---------
Total interest.............................. 15,729 14,843 14,576 14,211 9,604
Total fixed costs............................... 15,729 14,843 14,576 14,211 9,604
Less: Capitalized interest...................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net fixed charges........................... $15,729 $14,843 $14,576 $14,211 $9,604
========= ========= ========= ========= =========
Earnings:
Net income (loss)............................. ($616) ($4,411) ($7,411) ($9,442) $140
Income tax benefit from extraordinary item.... -- -- -- (845) --
Income tax provision (benefit)................ (352) (571) (632) 865 1,294
Net fixed charges............................. 15,729 14,843 14,576 14,211 9,604
--------- --------- --------- --------- ---------
Total earnings.............................. $14,761 $9,861 $6,533 $4,789 $11,038
========= ========= ========= ========= =========
Calculation of ratio of earnings to
fixed charges:
Total earnings................................ $14,761 $9,861 $6,533 $4,789 $11,038
Total fixed charges........................... $15,729 $14,843 $14,576 $14,211 $9,604
Ratio of earnings to fixed charges............ -- -- -- -- 1.15
Deficiency of earnings to fixed charges....... ($968) ($4,982) ($8,043) ($9,422) --
</TABLE>
<PAGE>
Exhibit 21.01
SUBSIDIARIES OF PORTOLA PACKAGING, INC.
Portola Packaging Canada Ltd., a Yukon Territory corporation (operating)
Portola Packaging Ltd. (U.K.), a United Kingdom corporation (formerly Cap
Snap Limited, a U.K. corporation, which was formerly Cap Snap (U.K.)
Ltd.) (operating)
Portola Packaging Ltd. (also known as Emballages Portola Ltee), a Yukon
Territory corporation (operating but not significant pursuant to Item 601
of Regulation S-K)
Portola Packaging Inc. Mexico, S.A. de C.V., a Mexican corporation
(operating but not significant pursuant to Item 601 of Regulation S-K)
Portola Allied Tool, Inc., a Delaware corporation (operating but not
significant pursuant to Item 601 of Regulation S-K)
Portola Packaging Holding B.V., a Netherlands corporation (operating but
not significant pursuant to Item 601 of Regulation S-K)
<PAGE>
Exhibit 23.01
Consent of Independent Accountants
We hereby consent to the inclusion in this annual report on Form 10-K
and to the incorporation by reference in the Registration Statements on
Form S-8 (No's. 333-82125 and 333-17533) of Portola Packaging, Inc., of
our reports dated November 11, 1999 on our audits of the consolidated
financial statements and financial statement schedule of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1999, 1998 and 1997
and for each of the three years in the period ended August 31, 1999,
which reports are included in this annual report on Form 10-K.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
November 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED AUGUST 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<PERIOD-TYPE> 12-MOS
<CASH> 2,372
<SECURITIES> 0
<RECEIVABLES> 27,517
<ALLOWANCES> 1,366
<INVENTORY> 13,363
<CURRENT-ASSETS> 44,637
<PP&E> 160,401
<DEPRECIATION> 68,764
<TOTAL-ASSETS> 157,444
<CURRENT-LIABILITIES> 27,632
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (26,028)
<TOTAL-LIABILITY-AND-EQUITY> 157,444
<SALES> 190,661
<TOTAL-REVENUES> 190,661
<CGS> 143,792
<TOTAL-COSTS> 143,792
<OTHER-EXPENSES> 33,241
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,443
<INCOME-PRETAX> (968)
<INCOME-TAX> (352)
<INCOME-CONTINUING> (616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (616)
<EPS-BASIC> ($0.05)
<EPS-DILUTED> ($0.05)
</TABLE>
